Editor in Chief: Moh. Reza Huwaida Tuesday, November 20th, 2018

Kabul Bank Goes on Sale, Lessons to be Learnt

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Kabul Bank Goes on Sale, Lessons to be Learnt

Everyone knows that corruption is a particularly poignant problem in Afghanistan. Much has been said and discussed about the rage of corruption inside the government. From people having to pay bribes in order to get their smallest things done through the bureaucracy of an efficient government to the cases of embezzlement and theft of public money, pages of newspapers, shelves of the prosecutor office and ears of people are full of these stories. However, the interesting story of Kabul bank stands out in the midst of all this non-stop barrage of corruption stories. We all know that Kabul bank is in deep trouble and the government and Da Afghanistan Bank as the country's central bank have finally decided to sell the bank to prospective investors.

There is no disagreement that what brought down the Kabul Bank to the brink of total destruction was massive corruption. However, this corruption is of an entirely different type since the government officials had in reality nothing to do with what went wrong inside the bank. In other words, corruption in Afghanistan is not only rampant inside the government bureaucracy but unfortunately it is also present in some of our very large private sector companies like what happened in Kabul Bank. Kabul Bank was not a public sector bank; it was not owned by the government and the government did not own it. The majority of the capital of the bank was paid by private individuals and the same private individuals had the official right and responsibility to manage the affairs of the bank and the blame rightly rests at their feet.

Large-scale private sector enterprises and companies are absolutely new phenomena in Afghanistan. Afghanistan's large industries and companies have always been state (government) owned. In transition to a less government-controlled economy in recent years, Afghanistan needs to have the participation and contribution of the private sector. Therefore, creation of such large companies and enterprises by Afghan and foreign entrepreneurs are absolutely essential for the development of the country's economy. Already, the number of private banks in the country reaches 17 and will only grow in future. On the other hand, the country including its entrepreneurs who move to establish these companies and also the government lack the required experience and expertise to successfully manage these very large enterprises. The incentive and motivation for committing fraud and corruption like what happened in Kabul Bank is huge. In the years to come, we are going to see more cases such as Kabul Bank and as a consequence, it will be the general people and small investors and depositors who will lose their hard-earned savings.

Now the Da Afghanistan Bank as the country's Central Bank has announced it will put Kabul Bank for sale in order to bring fresh a set of investors and owners and in the process cover the huge losses that the bank incurred. Valuable lessons are here to be learnt from the events relating to Kabul Bank debacle. It is important to review the happenings and draw appropriate lessons in order to strengthen the internal governance mechanisms of these financial institutions and also refine and enrich the regulatory system that the government and the Central Bank are supposed to provide.

The major problem that contributed to this debacle is the poor state of "Corporate Governance" in Kabul Bank. Corporate Governance means managing the affairs of a company strictly according to the laid down rules and regulations in order to prevent abuse and misuse of funds and also to maintain profitability and sustainability of operations by the firm. Today, large companies the world over recognize the crucial importance of maintaining high standards of corporate governance in order to be a successful business enterprise. What was happening in Kabul Bank and how it was governed by its Board of Directors show a total disregard for this basic principle of running any large business corporation such as Kabul Bank.

Another basic principle of managing any large private sector company by its owners is the principle of separation of management and ownership of a corporation. The modern corporations have separated the functions of management and ownership of a firm. The executive directors who are appointed or elected to run the firms are distinctly separate from the owners of the firms. The Board of Directors acts in the best interest of the firm and the owners, who appoint these directors through elections, are given no right to interfere in the decisions made by the Board of Directors. Has this basic principle which is commonplace everywhere around the world been observed and adhered to in the case of Kabul Bank? The answer is unfortunately no.

The politically connected part-owners in Kabul Bank intervened massively in the running of the bank and diverted a large chunk of the firm's capital base for their own private investments in property markets of Dubai and also political maneuverings. This explicitly runs counter to this first and foremost principle of managing any public limited company that emphasizes a distinct dichotomy between the ownership and management. If the board of directors in Kabul Bank had acted professionally in running the bank which invariably involves resisting the interference of the owners, Kabul Bank would have never come to the edge of collapse.

Another lesson to be learnt from the Kabul Bank debacle is the need for a strong regulatory system which the government and Da Afghanistan Bank as the country's central bank are supposed to provide. A regulatory system provided by the government would have the responsibility for ensuring that the large private sector companies such banks strictly follow the rules and regulations. A regulatory system is also responsible for ensuring that the internal rule and regulations of these companies are laid down correctly and that they are observed and followed. We literally do not have this regulatory system in the country as of now. As it is true as for any other matter in the country, the large private sector companies act and behave as their owners please without any governmental oversight to keep them from the sins of themselves. In any case, if Afghanistan's economy is going to develop and modernize, these sets of changes are basic requirements. It is high time to place these issues on the priority list of the government.

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