DAB Public Statement on Kabul Bank
Actions taken so far
In early 2010, Da Afghanistan Bank (DAB) received information indicating that some Kabul Bank shareholders may have used depositorsí money for investments in Dubai properties. Subsequently, DAB Supreme Council passed a resolution banning shareholders from holding top management positions (Executive Board) in banks. At that time shareholders occupied senior executive positions in some commercial banks. In August 2010, DAB learned more about Kabul Bankís other investments in Pamir Airline, Gas Group, Kabul Naft, Zakhira, Gulbahar Center, and Gulbahar Towers. It turned out that most of these investments were made in violation of the Law of Banking in Afghanistan. Shortly after, DAB removed shareholders from their positions as the chairman of Supervisory Board and CEO of Kabul Bank.
In early September 2010, news about problems at Kabul Bank caused a run and the withdrawal of about US$ 600 million of deposits Ė almost half of the bankís deposit base Ė DAB placed Kabul Bank under conservatorship, thereby assuming control of its day to day operations. DAB removed the Chairman of the Supervisory Board and the CEO of the bank and appointed professionals to oversee Kabul bank operations and protect depositors. Furthermore, to stabilize the situation and ensure that all depositors would have access to their savings, the government of Islamic Republic of Afghanistan announced a full guarantee of Kabulbankís deposits and provided a US$400 million lender of last resort loan to Kabul Bank to enable it to discharge the deposit guarantee.
The conservatorship team conducted a detailed review and analysis of Kabul Bankís records, many of which had been withheld from DAB by the previous board and/or management of Kabul Bank. The conservatorís investigations of the operations and the loan portfolio of the bank revealed that during the past 6 years Kabul Bank has extended US$ 579 million of fraudulent and undocumented loans, mostly to its own shareholders and a limited amount to other borrowers. Adding interest to these fraudulent and currently non performing loans would raise the amount due to approximately US$ 909 million. However, to deceive DAB examiners during these years, Kabul Bank seemingly manipulated its balance sheet to hide the true beneficiary of most of these loans and show a fictitious profit, and even paid taxes based on these fabricated profit reports. The external and internal auditors and bank examiners of Kabul Bank, reportedly, failed to detect this massive fraud.
The conservatorship team took steps to secure and recover bank funds. Shortly after their appointment, the conservator team froze the accounts of those shareholders who had allegedly benefited from improper loans. With the efforts of the team, monthly expenses of the bank decreased from US$ 10 Million to US$ 3.5 Million, resulting in significant annual savings to the bank. In addition, the conservatorís team started investigations to identify fictitious loans made by the management of the bank through careful falsification of identities and collaterals. The conservator also tried to set up repayment agreements with the debtors and rescheduled the repayments. To date, debt agreements and repayment schedules have been prepared and signed for the amount of US$ 345 Million. However, the amounts acknowledged and the collaterals received are not deemed satisfactory, and therefore the receiver will be reopening negotiations on many of these agreements for a maximum period of one month to improve chances for asset recovery. As part of this process, some properties improperly purchased with bank funds, valued at US$ 110 Million, are being returned to Kabul Bank and US$ 47 Million in cash has been paid back by the shareholders and other customers of Kabul Bank to date.
The conservatorship team and DAB took steps to identify those responsible for the fraud and crimes, and bring them to justice. DABís investigations have discovered that a significant number of Kabul Bank shareholders and employees may have been involved in different kinds of irregularities and fraudulent activities including forgery, fraud and misrepresentation of facts.
To date, the Central bank has referred 19 cases of fraudulent activities to the attorney generalís office for further investigation and possibly prosecution. The Attorney Generalís Office has also launched independent investigations of other employees of the Kabul Bank. Investigations on other perpetrators are in progress and a credible process will be established by the government to investigate and prosecute those responsible for criminal activity at Kabul Bank. DAB will not comment or offer details on any ongoing legal proceedings, as those matters will be decided in due time and consistent with the laws of Afghanistan.
In addition, a special High Commission for Kabul Bank Inquiry has been created to look into the matter and inform the public about the details of what has happened in Kabul Bank and why. This process, including the preparation, conduct, and publishing of the inquiry report is expected to take about 9 months.
Ongoing and Future Actions
Now after months of intensive assessment of the options available, reviewing all the legal and executive aspects of the matter, and after a series of consultation with H.E President and H.E Minister of Finance and the government of Afghanistan, the central bank of Afghanistan, has come to the conclusion that instituting receivership proceedings against Kabul Bank and setting up a bridge bank to house the ďgood bankĒ constitutes the best legal, optimal and reasonable approach. Through the receivership, all Kabul Bankís good assets and legitimate liabilities including performing loans , the peopleís deposits, offices, IT and liquid assets will be transferred to a new ďgoodĒ bank called New Kabul Bank, effective immediately The new bank will operate on restricted activities and will not undertake new lending and will be put up for sale to a suitable private sector owner within next 3 months or, if a satisfactory sale does not materialize, it will be downsized and/or merged into other financial institutions, but by September 2012 its existence as a separate bank will be terminated. Kabul bank, which constitutes the ďbad bankĒ will hold the debt of bankís former shareholders and other suspicious loans, for collection. Shares in Kabul Bank held by Kabul Bankís shareholders and their ownership rights and interests were extinguished by the formal of placing Kabul Bank into receivership through approval of the receivership application submitted to the Financial Dispute Resolution Commission (FDRC).
Kabul Bankís depositors can continue transacting with Kabul Bank normally as before. The ownership of the bank will go to the government temporarily and will be held by the MOF. The Oversight Committee of the bank will consist of three members: One member from MOF, one from DAB and one from the private sector preferably from the academic community. In addition, the following elements of the plan are detailed below.
1. Kabul Bank is put into receivership as of today, Wednesday 20 April 2011.
2. Nothing will change for Kabul bank depositors. Depositor will continue to have full access to their deposits, as before. The government, to safeguard the interest of the poor and vulnerable Afghan depositors, has guaranteed full amount of deposits of Kabul Bank customers. The DAB is backing this commitment with another US$ 425 million lender of last resort loan, sufficiently covering all deposits.
3. Since the shareholders have failed to respond to the capital call, thereby failing to pay for their committed shares, all their interest in Kabul Bank and its movable and immovable assets have now been extinguished.
4. As stated above, the ďgood bankĒ will continue to provide the services it provides now, but will not extend any new lending. The ďgood bankĒ will be put up for sale - if a satisfactory sale does not materialize, the ďgood bankĒ will be downsized and/or merged into other banks within 18 months, but, in any case, by September 2012 its existence as a separate bank will be terminated. This newly-licensed bank will be completely ďcleanĒ of the problems that faced the former Kabul Bank and will be dedicated to customer service and efficiency.
5. DAB and the Kabul Bank receiver, as its representative, under the supervision of the Financial Disputes Resolution Commission, will immediately take steps to recover the bad and problematic loans made to the shareholders and other borrowers by identifying their assets and properties through due legal process.
6. All Kabul Bank suspicious loans will continue to be investigated and, if evidence of violations of the law are found, responsible persons will be prosecuted by legal authorities
7. All relevant key parties previously involved in Kabul Bank, including shareholders who held executive positions in the bank, senior employees, and loan officers and other employees and DAB examiners responsible for examining Kabul Bank will be investigated for wrongdoing, including involvement in mismanagement, misrepresentation of facts and fraud, and will be prosecuted should relevant corroborating evidence be found.
8. As H.E President Karzai, announced in his press conference on Hamal 22 1390 / 11 April 2011, all debtors who have not already reached an agreement on repayment schedules must agree to a repayment plan or pay the full sum owed within one monthís time. In the case they refuse to cooperate with the KB receiver their case will be referred to relevant legal and judicial authorities and they will be dealt with the full force of the law.
9. The Ministry of Finance, as a financial representative of the government of Afghanistan, assumes financial responsibility for covering the cost of Kabul Bank resolution and will reimburse DAB for the loans extended to the bank in support of banking sector stability. These costs will be repaid by the Ministry over eight years, hopefully through vigorous recovery of Kabul Bankís misappropriated assets.
10. Da Afghanistan Bank, together with the Ministry of Finance, pledges to work to develop a prosperous financial system that protects the savings of all Afghan customers and fosters lending for investment and development.
11. A comprehensive Action Plan to effectively supervise the banks and strengthen the architecture of the Afghan financial sector has recently been developed and is currently being implemented, taking into account the lessons learned from the Kabul Bank failure.