Kabul Bank run may pose more immediate threat than Afghan Taliban

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Even as it battles a resurgent and spreading Taliban, the beleaguered government of Afghan President Hamid Karzai is facing a more immediate threat: a run on the country’s largest banks.

This week, droves of depositors rushed offices of Afghanistan’s Kabul Bank, pulling out their money amid concerns that bank has lost millions of dollars. BBC News broadcast images of Hummers and SUV’s racing to the bank, a troubling sign of growing mistrust for Mr. Karzai’s already heavily criticized government.

By today, nearly $200 million in investor deposits were withdrawn, leaving the bank with only $300 million in cash, reported The Washington Post. While high, that amount in withdrawals was a more conservative estimate than the $300 million reported Wednesday by The New York Times and The Wall Street Journal.

In the aftermath, Afghanistan’s fledgling economy could be severely disrupted. On Friday, both Karzai and one of his six brothers, Mahmoud Karzai, a shareholder in the Kabul Bank, urged calm while simultaneously appealing to the United States to head off an economic collapse, reported The Washington Post.

In February, the Post ran a series of articles alleging deep-rooted corruption within Kabul Bank, the country’s largest. According to the Post, the Kabul Bank purchased over $150 million worth of luxury villas in Dubai and other properties for well-connected members of Karzai’s government. There were also reports of crippling feuds among the bank’s major shareholders.

On Aug. 31, the Central Bank of Afghanistan moved to take control of Kabul Bank, demanding that the bank forfeit $160 million worth of assets. Following the seizures, two top officials of the Kabul Bank resigned. One of the men who resigned, Sherkhan Farnood, is a world class poker player.

The fallout from Kabul Bank's problems could extend beyond the economy. The Post reported Thursday that "an unchecked run on Kabul Bank, which could spread alarm to other banks, would jeopardize not only depositors' savings but President Obama's Afghan strategy, which is built around efforts to rally the public against the Taliban."

American officials, security analysts, and Afghan businessmen also see it as a security threat. The US hopes a growing Afghan economy will lift living standards, undercut support for the Taliban, and increase confidence in Mr. Karzai. And the Kabul bank particularly plays a central role: it houses $1.3 billion in deposits from ordinary citizens, and also handles payments for teachers, soldiers, and police – the bedrock of a stable Afghan society.

The Post reported today:

The collapse of the bank would probably spread panic throughout the country's fledgling financial sector and wipe out nine years of effort by the United States to establish a sound Afghan banking system, seen as essential to the establishment of a functioning economy. This would give a big boost to a mostly unregulated "hawala" system, a network of informal money exchanges that, in addition to serving ordinary customers, also provides a secure and opaque channel through which drug traffickers and terrorists are believed to move their funds.

... Afghan businessmen and others, however, said that should Kabul Bank fall, the consequences would be catastrophic for both the economy and security of Afghanistan.

“If this goes on, we won’t survive,” Khalilullah Frozi, one of the two largest shareholders of Kabul Bank, told The New York Times. “If people lose trust in the banks, there will be a revolution in the financial system.”

The Times continued:

Most Afghans do not keep their money in the banking system, and Kabul Bank is tiny by international standards. But creating a credible and stable banking system is an important goal of the American-led effort in the country, which is seeking to help Afghanistan develop a modern economy.

Secretary of Defense Robert Gates, during a visit to Afghanistan on Thursday, struck a note of assurance, insisting that the Kabul Bank is operating normally. At his side, President Karzai urged calm and pledged to guarantee all deposits at Kabul Bank.

“The Kabul Bank is safe,” Karzai said, according to The Financial Times. “The government of Afghanistan is fully behind the bank ... We have got at least $4.8 billion in cash; even if the whole financial system in Afghanistan collapses we still have the money to support it.”

Outside of the press conference, however, panicked depositors formed long queues at Kabul Bank branches throughout the country, nearly every branch a staging ground of outrage against the government.