- Previous owners embezzled $825 million using fake loans
- `It's a risky investment in a country like Afghanistan'
For sale: One bank with 114 branches in war-torn country; defrauded out of almost all its money; occasional target of terrorists.
Ready to bid? That’s what Ashraf Ghani, president of Afghanistan, is hoping. He’s seeking a buyer for Kabul Bank, once the country’s largest. The government took it over in 2010 after its owners were accused of embezzling $825 million using fake loans and spending it on, among other things, 11 villas in Dubai and an airline they used to smuggle cash there. The privatization is a test for Ghani, who wants to show the foreign donors who provide most of his budget that he’s committed to fighting corruption.
The remains of a looted bank in a country devastated by decades of war would hardly seem a tempting takeover target. Afghanistan’s finance industry is tiny -- its 15 banks have just $632 million in outstanding loans. The U.S. has halted its troop withdrawal because of escalating Taliban attacks, and economic growth has stalled. But Mohammad Aqa Kohistani, director general of Afghanistan’s Treasury Department, said he has received four expressions of interest since starting the sales process in October, including three from foreign firms. He wouldn’t identify them.
New Kabul Bank, as it’s now called, isn’t exactly thriving. The bank has been barred from making loans since the scandal. U.S. investigators say it has lost $65 million over the past six years, though Aqa says the annual losses have been reduced to $500,000. A suicide bomber targeting customers outside a branch in Jalalabad killed 35 last year, and five militants raided another location in Kandahar in 2014, killing at least 10.
On the bright side, Kabul Bank will be delivered free from any fraudulent loans or other debts. It has $330 million in deposits, and it doesn’t have to pay any interest on them because that’s prohibited by Shariah law. Just 10 percent of Afghanistan’s 30 million citizens have a bank account, so there’s plenty of room to expand. And the bank has profitable contracts to transfer pay to government workers electronically.
“While it was totally a criminal operation, as far as the owners were concerned, it nonetheless had the best banking infrastructure of any bank in Afghanistan,” said Warren Coats, a now-retired economist sent by the International Monetary Fund to advise the central bank on the crisis in 2010.
That may not be saying much. On a recent morning, a branch in Kabul’s Baharistan neighborhood was guarded by five men in military uniforms armed with AK-47 assault rifles. Some of the dust-covered computers weren’t working. A customer trying to make a withdrawal waited for an hour and then was turned away.
“I keep hearing about their system failures,” said the customer, Atiqullah Wali. “It’s better to keep our cash inside our pillows like before.”
When the Taliban was driven out of Kabul in 2001, they left the financial system in disarray, fleeing with all but $30,000 of the central bank’s cash. Into the void stepped Sherkhan Farnood, who was wanted by Russian authorities for allegedly running an illegal money-transfer business. He founded Kabul Bank in 2004 and hired Khalil Ferozi as chief executive officer.
The banking industry boomed as foreign aid poured into Afghanistan, with assets expanding by more than 50 percent a year. Kabul Bank’s deposits soared to $1 billion by 2009 after it introduced a new kind of account that gave customers a chance to win a weekly lottery, according to the bank’s annual reports. Farnood amassed property in Dubai and competed in high-stakes poker tournaments in Europe.
The scheme unraveled in 2010, when the central bank learned of the fraud, ordered Farnood and Ferozi to resign and guaranteed the bank’s deposits to stop a run. An investigation by an independent anti-corruption committee commissioned by the Afghan government found that the executives had stolen an amount equivalent to about one-twelfth of the country’s GDP, mainly by giving loans to themselves and their friends that didn’t have to be repaid. One of the alleged beneficiaries was Mahmood Karzai, brother of then-President Hamid Karzai, who wasn’t charged and said he did nothing wrong.
Farnood and Ferozi were sentenced to 15 years in prison, though they were later spotted at restaurants around Kabul. Drago Kos, a member of the anti-corruption committee, said he resigned in protest in November, after Ferozi was introduced as an investor at the official unveiling of a $900 million “Smart City Township” project.
“There were expectations that the new government would do something against corruption, but after one year almost nothing has happened,” Kos said in a telephone interview.
Basir Azizi, a spokesman for Afghanistan’s attorney general, said the culprits are in jail now and the government is making progress collecting the missing money. Ferozi didn’t respond to a Facebook message and lawyers for the two men couldn’t be reached for comment.
The Karzai government said from the start that it wanted to sell the bank. The government took out an ad in the Economist in 2012 and organized an event in the United Arab Emirates, according to Aqa at the Treasury Department. Among those who expressed interest were Ehsan Bayat, who owns Afghanistan’s first mobile-phone network, and Canadian banker Stan Bharti. Neither wants to buy it now, their spokesmen said.
In 2013, the Finance Ministry announced it was accepting a $28.5 million bid from Dubai-based Kru Capital Partners, according to a U.S. report on Afghan reconstruction. Karzai’s cabinet rejected it over the objections of the IMF advisers. Kru didn’t respond to messages seeking comment.
“There are a number of people in the government who are very much against privatizing the bank,” Coats said. “Our assumption is they rejected the sale at that time because they wanted to keep that plum in their hands to play with.”
President Ghani has said the government is committed to privatizing the bank this time. Expressions of interest are due March 7. Bidders must have at least $20 million in cash and no connection to the previous owners. Yama Torabi, another member of the anti-corruption committee, said the ideal buyer would already have operations in a war zone.
“It’s a risky investment in a country like Afghanistan, but it can be profitable,” Torabi said. “There’s a huge potential in Afghanistan’s banking sector.”