In the battle to rebuild war-torn Afghanistan, Kabulbank inserted itself as a key player, building the country’s largest deposit base and becoming the payment agent for many government enterprises. But a run on the bank in August led to the ousting of colourful poker-playing bank owner Sherkhan Farnood. What does this mean for the country’s banking sector? Eric Ellis reports
IN THESE CONNECTED days of social networking, the Linked-ins, Facebooks and Zoominfos are as good places as any for a preliminary check on the credentials of a far-flung banker or business partner.
Except, it seems, if that person is Sherkhan Farnood, the erstwhile chairman/owner/founder of Kabulbank, the troubled Afghan bank that is now in the intensive care of the country’s central bank after a crippling run on it in August.
To check out Farnood, and perhaps explain how the wayward Kabulbank came close to derailing the world’s $50 billion post-9/11 nation-building adventure in Afghanistan, a revealing place to look would be the websites of the world’s poker-playing community, where his exploits are legion.
Here’s what the colourful Farnood said about himself on the pokerpages.com site: “I belong to the most poor family of Afghanistan. I born in 1961 in Jamanchi village of Khanabad district of Kunduz province in Afghanistan. Due to my struggle and hard working, I become able to found a millions dollar and become chief director of Kabulbank.” Hobbies? “Cricket, football, playing cards, horse riding, listening to the rock music”. Farnood says his favourite place is “Sidney, Australiya”.
And this is what the Poker Database website had to say about Farnood when he first appeared on Euromoney’s radar in 2006 soon after he founded Kabulbank (see Afghanistan gets back to business, Euromoney, September 2006), where the most successful product is a lottery cloaked in the barely fitting robes of a deposit account: “Sherkhan has found his way to many final tables. He did a double in Australia last year, a double in Paris in September and a double in Walsall in November 2003.”
Another poker site, The Hendon Mob, describes a glittering international poker career for Farnood – playing tables in Amsterdam, Vienna, London, Las Vegas and Luton – that dates to 2002, when he was trading currencies in central Asian bazaars. “He likes to drink [Johnnie Walker] Blue Label,” the site solemnly noted. It’s not as if Farnood is hiding his poker skills under a bushel. His interviews on the YouTube links of big poker tournaments describe him as a post-9/11 “Afghan success story”.
Soviet-educated Farnood seems to be more than familiar with full houses, which would be the charitable way of describing the chaos that descended on his bank’s 60-odd branches through August, after reports rippled around the war-torn country that the bank was under investigation for corruption and fraud, and allegations of misappropriating bank funds for property purchases in Dubai for clients and shareholders.
Full house – and then some – is certainly what his bank endured for a desperate week in August as thousands of frantic Afghans rushed Kabulbank counters to retrieve what was left of their life savings. Some $300 million in cash was withdrawn, believed to be around a third of the bank’s assets, before government troops – themselves paid via Kabulbank – held off the mob at gunpoint to put up barricades and keep customers at bay. When the dust settled over Kabulbank, it was teetering on the edge of collapse, alive though barely breathing, as Da Afghanistan Bank (DAB), the country’s western-backed central bank, seized control.
Tallying the damage
DAB insists that Farnood and Kabulbank chief executive Khalilullah Fruzi, whose brother’s security company mans Kabulbank security, have been removed from Kabulbank management, as its bean-counters and their western advisers tally the damage, not just to Kabulbank but also to Afghanistan and the west’s attempt to build a nation from 30 years of rubble, corruption and maladministration.
It’s a mess, not least because Kabulbank is the vehicle used to pay as many as 300,000 Afghan government employees, mostly the military and police, the very same – and sometimes mutinous – local security forces that the western alliance trying to rebuild Afghanistan aims to hand its duties to.
As Kabulbank wavered, DAB governor Abdul Qadir Fitrat pointed fingers at the media for whipping up hysteria over Kabulbank.
Former finance minister and presidential candidate Ashraf Ghani says: “It shows again that institutions like the IMF provide wonderful laws on paper to countries like Afghanistan but then don’t have the capacity or inclination to translate those laws in a practical sense and create real institutions.”
Ghani, on whose 2003/04 watch came currency unification and the green shoots of a banking sector, says Kabulbank “is a failure of capacity and of oversight, and indicates the cronyism and lack of accountability in the political and economic system”.
US-educated economist Hamidullah Farooqi, a former Karzai minister and chairman of the Afghanistan International Chamber of Commerce, says Afghanistan has received a “massive wake-up call” from the Kabulbank troubles. “It’s not just a lack of capacity in our institutions, there is a lack of laws and a lack of accountability, which is much more serious. It’s a case of the blind leading the blind. They are too young, they are babies.”
For the moment “things have calmed down,” says a relieved former DAB governor, Noorullah Delawari, who remains a member of the central bank’s supreme council. “We are now sorting out what the problems might be.” Farnood and his executives, Delawari says, have been “totally removed” from management. He says Kabulbank, for the time being at least, “is open for business, though under heavy restrictions as to what type of activities it can perform”.
At the height of the Kabulbank run in August, Delawari had described the politically influential Farnood and his partners as being like “wild horses” galloping through DAB regulations. Now, he tells Euromoney: “The horses are back in their stables.”
Delawari says he was aware of some of Kabul Bank’s more unconventional practices while serving as DAB governor but says he tended to tolerate them “to allow a banking sector to take root in this country”.
He continues: “But there were also many times when I had to sit down and tell them what they were doing was irregular. I think they were seeing if I was watching them.” Although rumours abounded, he insists he had no idea that Kabulbank was undertaking off-the-book property transactions, and sending money to Dubai.
Delawari says Kabulbank’s network as the civil service paymaster meant that DAB had little option but to step in and secure it. “To dismantle Kabulbank is not in the national interest,” he says. “There would be even more chaos than there was.” Kabulbank losses have been initially estimated at about $300 million to $500 million but Delawari admits: “At this point we don’t yet know precisely what we are dealing with.” The bank’s most recent accounts have it claiming assets of $1.01 billion and liabilities of around $990 million for 2009.
Delawari says the DAB has imposed a moratorium on new banking entrants to Afghanistan, telling Euromoney that “17 is more than enough for the time being”.
A setback to modernization
The tremors shaking Afghan banking create bigger headaches for the western officials trying to modernize Afghanistan and to anchor the nascent financial system. Since 9/11, they have tried to wean the region from its time-honoured method of money movement and storage, Islam’s hawala system.
This is where cash designated for a relative or a business deal is placed with a trusted broker in, say, a Karachi bazaar. He will inform an associate in his network elsewhere, say in Kandahar, who will pass on the amount to the intended recipient, with fees extracted en route. Based on trust, hawala is informal and paperless and has functioned for centuries across southern Asia and the Middle East, and on to the west via immigration and SMS. But Washington is suspicious of hawala, believing it was the way funds were moved to help finance the 9/11 terrorist attacks. It has striven to encourage Afghans away from hawala and the hawala barons into building more conventional commercial banks that Afghanistan didn’t really have before 9/11, thanks to the Taleban and the remnants of the Soviet-installed command economy.
Washington has tipped millions of dollars in aid and training via firms such as Bearing Point, which evolved from the ashes of the post-Enron Arthur Andersen. (Afghan analysts note ruefully that key government financial institutions are being advised by a company that sprang from a financial scandal and itself filed for bankruptcy in the US in 2009.)
Midst the gloom, Delawari insists that the general outlook for Afghan banking is “positive”. That might be wishful thinking. With 17 banks operating in the country, Afghanistan’s banking sector has total assets of about $2 billion. According to Delawari, Kabulbank officially accounted for $1.3 billion of this before the run. “No other bank has any kind of major problem that we know of,” he claims. But he also admits that a big problem in Afghan banking is a “lack of capacity”. That includes his own central bank, where advisers from Bearing Point have been installed for several years on a lucrative US government contract, a deal that has been much criticized by Afghanistan-watchers.
The network surrounding Farnood and Kabulbank also throws doubt on claims that Kabulbank will be transparently investigated. Indeed, as Washington justified its rescue of US financial institutions during the 2007-08 sub-prime crisis because they were “too big to fail”, so Kabulbank’s connections in one of the world’s most graft-ridden countries have led observers to posit that it is “too corrupt to fail”.
At the heart of politics
Farnood inserted Kabulbank at the heart of Afghanistan politics. He owns a notional 28% of the bank and was an important financier of president Hamid Karzai’s recent re-election campaign, a poll that was riven with allegations of corruption and vote-buying. Karzai’s financial adviser during that campaign was the now ousted Kabulbank chief executive Khalilullah Fruzi. Karzai’s brother, Mahmoud, owns 7% of Kabulbank. He lived in a luxurious ocean-front villa in Dubai that was bought with loans from Kabulbank at the height of the Dubai property boom. But when that deal was exposed, Karzai said he would move his family out of the property. Now US press reports claim Mahmoud Karzai is under investigation by US tax authorities, although not by the Afghan authorities.
Another Kabulbank property in Dubai is the residence of the family of Ahmad Zia Massoud, Karzai’s former vice-president and an important familial link to the legacy of his warlord brother, Ahmad Shah Massoud, long the crucial ally of the US in the Afghan Mujahedeen war to oust the Soviet occupiers of the 1980s. Massoud, killed by Al-Qaeda suicide bombers three days before the 9/11 attacks in the US, headed the US-funded Northern Alliance, Washington’s vehicle to topple the Taleban in 2001. Another key Kabulbank player is 3% shareholder Haseem Fahim, whose brother is Mohammed Fahim, Ahmad Shah Massoud’s successor as Northern Alliance commander and a former Afghan defence minister and vice-president in the post 9/11 Karzai government.
In mid-October, the Afghan government moved to audit all 17 private banks operating in the country in the wake of the Kabulbank crisis. “The government has decided that there will be an audit firm, coming not only to audit Kabulbank’s account, but other private banks in Afghanistan,” says Waheed Omer, president Karzai’s spokesman.
To many Afghan observers, it was hardly surprising that Kabulbank should find itself in turmoil. In these austere post-sub-prime days when bankers must be on their best fiduciary behaviour, Kabulbank would lure customers with a pledge that they could “win thousands of fabulous prizes” – like a toaster, or a washing machine. Toasters and washing machines are just some of the inducements Kabulbank and its main competitor, Azizi Bank, offer to generate business – gifts all the more bizarre given that as well as a credible banking sector, another thing that Afghanistan lacks is a reliable power supply.
A bank like no other
Then again, just as corruption-plagued Afghanistan doesn’t much resemble an economy, Kabulbank isn’t really a bank as the rest of the world would know it, and operates in an equally unrecognizable financial system. Its biggest customers seem to be its owners, who bought $200 million-worth of Dubai properties at the height of the boom using Kabulbank funds. Its most popular product is a lottery, called Bakht, which means “fortune”. Touted as “the easiest way to make a million”, it involves gamblers buying tickets by depositing Af5,000 – about $115 – in a Bakht account. A lucky draw for Af1 million is held periodically and beamed live around the country on state TV. Prominent Afghans, such as Farnood, pull the winning tickets from a tub. Kabulbank’s deposit base quadrupled after it introduced Bakht. Naturally, when its competitors saw deposits rushing to Kabulbank, they introduced similar products. Azizi Bank, which was Afghanistan’s second-biggest privately owned bank after Kabulbank, operates a lottery-style product called Qismat, the local Dari word for “fate” or “destiny”. Its closest approximation in English usage is “kismet”.
Gambling is forbidden in Islam – and Kabul is, after all, the capital of the Islamic Republic of Afghanistan. But Kabulbank and Azizi pass off their lottery products as “Islamic banking” because neither involve interest – “haram” (forbidden) in Islam. In 2006, Kabulbank’s then chief executive told Euromoney that its Bakht accounts were “an Islamic banking product coinciding with religious sentiments”. Losing tickets qualify for the next draw, so long as a minimum Af5,000 is maintained in an account. “No, you cannot say it is a lottery,” the executive insisted. “Here you don’t lose your money, you are getting an incentive by way of luck.”
Ex-minister Hamidullah Farooqi says he admired Farnood’s “entrepreneurism” when Kabulbank started up in the mid-2000s. “They were very positive and we needed banks like this to get our economy moving,” he says. “But it’s clear the management is not professional or suitable; they were making careless deals and they lost control of the bank.” As for the off-books Dubai property dealings, Farooqi says: “Maybe there was no room for them to invest in the economy so they had to go outside the country.”
Former finance minister Ghani says the “great tragedy” that might arise from the banking scandal “would be that it hindered and discouraged the great entrepreneurial tendency and the will to build a normal, functioning and successful economy among Afghans.”