x Abu Dhabi, UAEFriday 19 January 2018

Dubai investments fell Kabul Bank chiefs

Afghanistan's financial system is bracing for further shocks after the ouster of the country's largest private-sector bank's leaders.

Mahmood Karzai, the elder brother of Afghan president Hamid Karzai, addresses media representatives.
Mahmood Karzai, the elder brother of Afghan president Hamid Karzai, addresses media representatives.

Afghanistan's financial system was braced for further shocks yesterday after the top two executives of the country's largest private-sector bank were ousted. They were removed because of corporate governance failures and soured Dubai property investments.

Sherkhan Farnood, the chairman of Kabul Bank, and Khalilullah Ferozi, the chief executive, resigned on Monday following an inquiry into more than US$140 million (Dh514.2m) worth of property investments in villas on the Palm Jumeirah and land in Business Bay. "They were improper transactions," said Mahmoud Karzai, the brother of Afghanistan's president Hamid Karzai and the third-largest shareholder in Kabul Bank, during an interview in Dubai. "Whether [Mr Farnood and Mr Ferozi] will be investigated more, I don't know. They were removed ? People make mistakes."

Neither Mr Farnood nor Mr Ferozi were available for comment. Mr Karzai said yesterday he had attended the meeting where the central bank of Afghanistan ordered them to appear and to resign. They were forced out under new rules introduced because of "mistakes that these guys have done", he said. The central bank appointed one of its own officials as the chairman of Kabul Bank while it looks for an independent replacement.

Mr Farnood and Mr Ferozi are the top two shareholders of Kabul Bank, with 28.16 per cent each. More banks across Afghanistan are likely to be affected in the coming weeks as the central bank enforces new regulations that prevents them from lending to shareholders or lending more than 15 per cent of their equity to a single borrower, Mr Karzai said. Many of these banks are also exposed to the property market in Dubai.

"All other banks will have to go through this," he said. "Kabul Bank is not the only one with this situation." The number of withdrawals rose by more than 10 per cent as customers sought to recover their money after the regulatory moves but Mr Karzai said the company was well capitalised with $1.3 billion in deposits, $500m in cash and $700m in loans. The Washington Post, which first revealed in February details of alleged improper investments made by Kabul Bank, reported that customers lined up outside bank branches for hours to withdraw their savings, worried that the bank might become insolvent after facing financial losses.

Mr Karzai dismissed claims it had losses of $300m as "sensationalist". "I don't see any problems with Kabul Bank," Mr Karzai said. "Some of the practices of the bank were a problem." Nonetheless, the central bank governor Abdul Qadir Fitrat was forced to announce its support to prevent a collapse caused by a run on the banks. "The central bank, the government of Afghanistan, is standing behind Kabul Bank and will never allow it to collapse," said Mr Fitrat, according to Agence France-Presse. "Kabul Bank has no liquidity problems. Right now the Kabul Bank is functioning all over the country. Kabul Bank will never have liquidity problems in the future, inshallah."

A US state department spokesman applauded the central bank's action and said it was a "unique opportunity for the Afghan government to take a strong stand against corruption". Afghanistan's private banking industry was set up in 2004, almost three years after the beginning of the invasion of the country by US-led forces in 2001. Some of these banks invested in Dubai property when prices began to rise rapidly.

"Our banks went into the real estate market in Dubai at a very bad time, right before the financial crisis," Mr Karzai said, adding that because Afghan banks were so small, a multimillion-dollar loss in property in Dubai could have a greater impact on the financial system than in other countries. Kabul Bank, he said, was likely to be able to recover the principal of the loans that Mr Farnood issued for Dubai property investments, but it was unlikely the interest payments would paid.

As part of Mr Farnood's resignation, he signed over the deeds of the properties back to Kabul Bank, Mr Karzai said. The villas would be rented out and provide a recurring revenue for the bank. Mr Karzai said he was also moving out of a villa on the Palm Jumeirah that Mr Farnood had rented to him because staying there could be misconstrued by observers. "I'm moving to another property," he said. "Regardless if I paid rent or not, it would not be reported correctly."