The collapse and failure of Kabul Bank was the result of so many factors and majority of these factors were not new. They included excessive desire and greed, corruption, nepotism, and when we narrow it to the business terms, we come up with incompetence, lack of proper control, negligence and absence of proper and standardized banking practices.
When the America-led coalition restored peace and democracy in 2001 in Afghanistan, the old and limited banking concept of the country had also eliminated and there was not present any bank functioning in the country. But there was an immediate need of a competent banking sector as foreign aid was flooding in for the reconstruction of the war-torn country that had lost each and everything in the three decades of war. Soon, the central bank of Afghanistan, Da Afghanistan Bank (DAB) was made functional and with this, many new private banks also started their work.
Kabul Bank was founded by a person named Sher Khan Farnood who was a businessman and a poker player and believed much in a sentence that ‘You need money to make more money’ and it was a golden chance for him to put his thoughts into practice. Along with him, Khalilullah Fruzi was given the charge of the administration of bank as its CEO. Soon, it emerged as the prime and flourishing bank of the country with as many as 143 branches in 19 provinces of country with 44 branches in the capital city of Kabul. It was responsible for disbursing the salaries of almost 80% of government employees like military and police personnel and teachers. It was possible as many of the bank’s shareholders were from strong political backgrounds and had close links with the ruling government’s top officials.
As Mr. Farnood was a businessman so he found a golden opportunity to invest the money of account-holders in his private businesses but he was not a banker. He was a businessman and was not much aware of the banking rules and regulations. In order to fill this gap, he hired a banking expert from India by the name of Johnson Malaikal Rappai, who was appointed as bank’s general manager two months after the bank was opened. It is worth-mentioning here that Johnson was fired from the Federal Bank of India in Kerala for taking bribe in approving a loan request.
When the bank was bustling with the money of account-holders, it was an opportunity to withdraw money for their private businesses but two banking restrictions were obstacles in their way. They were restrictions on large exposure loans which made the approval of large loans very difficult and soon it was noticed by the audit departments of the bank and the central bank and ‘related party lending’ which did not allow the shareholders of bank to withdraw money from the bank. To tackle these two problems, Johnson came up with the solution of ‘shell companies’. Many small fictitious companies were opened that existed only in papers and never existed in reality and small loans were issued to these companies. In this way, the money of Afghans was slowly drained into the accounts of these companies that were actually made by the prime criminals of the scandal. Later on, the money was pooled at one place. The chairman, the CEO and some top officials were involved in approving these loans and it looked a normal activity as if business loans were issued to the business organizations.
This setup was much successful till mid 2007 when a small problem disturbed the smooth functioning of these illegal loans. Kabul Bank’s internal audit department criticized the bank’s credit department about the inappropriate documentation of the issued loans.
Similar criticism was done by the audit department of the central bank that found that Kabul Bank loan files did not have active business licenses, memorandum and articles of association, audited balance sheets, or proof of invoices for purchased goods. The 2007 central bank audit was also critical, endangering Kabul Bank’s banking license, which if revoked by the central bank, would close down the bank.
To tackle this situation, a new arrangement was made. Amitava Basu was hired as Chief Credit Officer who was retired from the central bank of India, who came up with a clever idea. He developed an acquaintance with one of Fruzi’s relatives named Rabbani Yousufi and convinced him to start an accounting company to forge the documents needed by Kabul Bank for approving loans. Yousufi obtained license for an accounting company by the name of Naveed Sahar which arranged all the forged documents like the financial and statutory documents and even the business plans.
The setup kept working till mid 2010 when the war for authority and power inside the bank heated up in which Farnood was on one side while Fruzi with his accomplices on the other and when Farnood saw the bank slipping out of his hands, he took steps that resulted in the break out of this scandal.
Soon it was brought into the notice of President Karzai and it became the hot topic in media. The central bank took control of the bank and both Farnood and Fruzi were fired and kept under the house arrest. With this, a panic broke up in public resulting in the immediate withdrawal of their money from the Kabul Bank branches all across the country. The central bank warned the government that if the bank was not assisted, it would collapse and sink, endangering the nascent economy of the country. With this, government and US officials came to the rescue and the panic finished almost after a week.
Later on, the bank was re-established by the name of ‘New Kabul Bank’ and it was supported by the bail-out package of 870 million dollars and the story finished in a sense here.
Later on, an investigation committee was established and two prime criminals were charged with 5 years of imprisonment and fined with almost 900 million dollars while 21 other bank employees were sentenced with imprisonments ranging from 6 to 30 months and fined with varying amounts of money. It was claimed that many close relatives of top government officials were the shareholders of bank and had substantial share in the illegal loans issued by the bank but they were neither prosecuted nor punished.
At present, there is found complete silence in this regard but still there are present many questions that are in need of satisfactory answers. After the scandal came into surface, a list of shareholders and alleged criminals were given to the chief of Central bank, Abdul Qadir Fitrat, but it was never provided to the media or made public and till now, it is not sure if appropriate action has been taken against all the criminals or not.
In the same way, the economic experts criticize and suspect the bail-out package of 870 million dollars by the central bank as such huge amount of money was not needed. It is regarded as a step to save all the culprits and settle down their old accounts.
Later on, the governor of Central bank fled to America with an excuse of danger to his life and left behind all these questions unanswered.
In this whole scam of illegal loans, more than 900 million dollars of account-holders were plundered and till now, only 10% this money has been recovered and there are no signs that there would be any visible progress in this regard in future.
The whole scandal shows the weakness and lack of proper and strong banking practices as some limited number of people were busy in misusing the public money but the whole mechanism was not able to detect this and take necessary corrective measures. In the same way, it also brings the negligence and incompetence of central bank that failed to probe the issue when it was pointed out by its audit department three years before the scandal broke out. In the same way, the suspicious role of the authorities of central bank makes us think about the banking practices when the top officials made a cartel to protect their benefits and misused the banking facilities.
It also shows the need of more transparent and controlled banking practices so that some of the top officials should not use the money of public for their interests. At the same time, it shows the need of proper legislation and law-making in this regard.
It is also necessary that banks should be kept free of political interference and influences. The role of government was also suspicious when all the alleged criminals were not brought into justice and some of them were saved from prosecution.
Role of media is also questioned in this regard as why it could not make public some of the illegal and suspicious practices that were in progress inside the bank. The hiring of a corrupt banker (Johnson), the reports of internal audit of bank and central bank in 2007 that had criticized the bank’s credit department either missed the attention of media or media was too much afraid of strong hands behind them.
Though this scandal finished but similar threats are found about the present private banks and concerned authorities need to be more vigilant not to let the history repeat itself.