For sale: The best bank in Afghanistan, not that that’s saying much

For sale: One bank with 114 branches in a war-torn country; defrauded out of almost all its money; occasional target of terrorists. Interested?

Ashraf Ghani, president of Afghanistan since 2014, is hoping someone takes this deal. 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 the money 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.

Afghanistan’s finance industry is tiny. Its 15 banks have only $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, says multiple buyers expressed interest, including foreign companies. After bidding closed on March 7, offers from a bank and an Afghan logistics company Kohistani didn’t name were being considered.

New Kabul Bank, as it’s been renamed, has been barred from making loans since the scandal. U.S. investigators say the bank has lost $65 million over the past six years, although Kohistani says 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, New Kabul Bank will be delivered free from any fraudulent loans or other debts. It has $330 million in deposits, on which it doesn’t have to pay interest because that’s prohibited by Shariah law. Only 10 percent of Afghanistan’s 30 million citizens have a bank account, so there’s room to expand.

And the bank has profitable contracts to transfer pay to government workers electronically, says Warren Coats, a now retired economist sent

Afghanistan tries to bring a looted lender back to life

“It’s better to keep our cash inside our pillows like before”

by the International Monetary Fund in 2010 to advise the Afghan central bank about Kabul Bank. He adds: “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.”

That may not be saying much. On a recent morning, a branch in Kabul’s Baharistan neighborhood is guarded by five men in military uniforms armed with AK-47 assault rifles. Some of the dust-covered computers aren’t working. A customer trying to make a withdrawal waits for an hour before being turned away. “I keep hearing about their system failures,” says the customer, Atiqullah Wali. “It’s better to keep our cash inside our pillows like before.”

When the Taliban were 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 moneytransfer 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 more than 50 percent a year. Kabul Bank’s deposits soared to $1 billion by 2009 after the bank introduced a new kind of account that gave customers a chance to win a weekly lottery, a way to attract money without paying interest. Farnood amassed property in Dubai and competed in high-stakes poker tournaments in Europe.

It all 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 anticorruption committee commissioned by the Afghan government found that executives had stolen an amount equivalent to about one-twelfth of the country’s gross domestic product, 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; he wasn’t charged and has said he did nothing wrong.

Ultimately, Farnood and Ferozi were sentenced to 15 years in prison, but they were later spotted at restaurants around Kabul. Drago Kos, a member of the anticorruption committee, says he resigned in protest in November after Ferozi was introduced as an investor at the official unveiling of a $900 million housing project. Kos says many expected the new Ghani government would do something about corruption. So far, “almost nothing has happened,” he says.

Basir Azizi, a spokesman for Afghanistan’s attorney general, says the culprits are in jail and the government has collected 50 percent of the missing money. Ferozi didn’t respond to a message seeking comment, and lawyers for the two men couldn’t be reached for comment.

The Karzai administration said it wanted to sell the bank but never did. In 2013 the Ministry of Finance 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 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,” says Coats, the former IMF economist. “Our assumption is they rejected the sale at that time because they wanted to keep that plum in their hands to play with.”

Ghani has said the government is committed to privatizing the bank. If the cabinet doesn’t approve the current bidders, the bank will go back up for sale. Bidders had to have at least $20 million in cash and no connection to the previous owners.

Yama Torabi, another member of the anticorruption committee, says 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,” he says. “There’s a huge potential in Afghanistan’s banking sector.” �Zeke Faux and Eltaf Najafizada

The bottom line Kabul Bank was Afghanistan’s most advanced, but it was undone by fraud. The government wants to put it back in private hands.

$632 million The amount of outstanding loans at Afghanistan’s 15 banks “There are a number of people in the government who are very much against privatizing the bank. … They wanted to keep that plum in their hands to play with.” ——Warren Coats, former IMF adviser