By Sayed Salahuddin – Tue Sep 7, 1:48 pm ET
KABUL (Reuters) – Afghanistan has frozen the assets of leading shareholders and borrowers at the country's top private bank, officials said on Tuesday, causing long queues of anxious depositors to throng its branches.

Signs of trouble at politically powerful Kabulbank threaten to add a financial crisis to the country's other woes.

Tens of thousands of soldiers, police and other state employees receive their salaries -- funded by the United States and other Western donors -- through accounts at the bank, which has 250,000 state employees as customers.

One of Karzai's brothers is a major shareholder, as is a brother of his first vice president.

The case has raised questions about the handling of funds from Western donor countries, channeled through a nascent commercial banking sector that the United States has encouraged Afghanistan to build and which is tied so closely to Karzai's family and members of his inner circle.

A widespread perception among Afghans that Karzai's government is corrupt will be a major issue at a September 18 parliamentary election. The United Nations estimates Afghans spend $2.5 billion a year -- a quarter of GDP -- on bribes.

Washington fears corruption is boosting the Taliban-led insurgency and complicating efforts to strengthen central government control so U.S. and other foreign troops can leave.

The central bank on Monday ordered frozen the assets of Kabulbank's former chairman, Sher Khan Farnood, and chief executive officer, Khalilullah Fruzi, together with those of several other shareholders and major borrowers.

"This basically stops the sale of their assets until the situation becomes clear," said Aimal Hashoor, the central bank's spokesman. He did not give a reason for the move.

It was announced last week that Farnood and Fruzi had resigned from the bank. U.S. media reported that the central bank had taken control of Kabulbank, forced the two men out and attempted to seize $160 million in luxury villas in Dubai that may have been bought with Kabulbank funds.

The central bank and other officials said the two men had resigned to comply with new financial regulations.

The Washington Post and other U.S. media have reported that luxury homes in Dubai, bought in Farnood's name, have been used as homes by various senior Afghan officials.

In Washington, a spokesman for the International Monetary Fund said Afghan authorities had asked to postpone a meeting with IMF officials set for Friday in the Afghan capital "to allow time to assess recent developments in the banking system."

An IMF mission is in Kabul to discuss progress under an economic program being supported by the Fund.

QUEUES AT BANK
Concern over the fate of Kabulbank sent jittery customers rushing to its branches last week. Long lines formed again on Tuesday as customers queued, sometimes for several hours, to withdraw funds before a three-day holiday to mark the end of the Muslim fasting month of Ramadan.

"I've been sweating in the sun for three hours," Abdullah, a Kabul man in his 40s, said as he rested on a walking stick.

"I can't afford to waste any more time. I will have to come back tomorrow."

At two Kabulbank branches in the capital, no customers who were served said they were unable to withdraw money.

Farnood and Fruzi each own separate 28 percent stakes in Kabulbank.

Karzai and Finance Minister Omar Zakhilwal, seeking to avert a run on the bank, said the pair had not been forced out but had stepped down because of new banking rules forbidding shareholders from holding senior management positions at banks.

An official, speaking on condition of anonymity, said Mahmoud Karzai, the president's brother and a major shareholder, was not subject to the central bank's asset freeze because he does not have property registered in his name. However, he said Mohammad Haseen, the brother of First Vice President Mohammad Qasim Fahim, was among those whose assets were frozen.

Last week, U.S. officials said the Treasury Department had sent a team to Kabul and that it supported the Afghan Central Bank's action in response to reports of fraud at Kabulbank.

The officials said the United States was not taking any steps to recapitalize Kabulbank.

(Additional reporting by Paul Eckert in Washington; Editing by Paul Tait and Peter Graff)
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U.S. Presses for Kabul Bank Probe
The Wall Street Journal - Asia By MATTHEW ROSENBERG And MARIA ABI-HABIB SEPTEMBER 7, 2010
KABUL - The U.S. is pressing Afghan authorities to investigate allegations of financial improprieties at Afghanistan's largest bank, fearing that anything short of a thorough inquiry will further undermine President Hamid Karzai's credibility.

The Karzai administration has deep ties to Kabul Bank, which depositors have thronged since last week, after news leaked that its two top executives—who are also its two largest shareholders—had resigned and been replaced by a central-bank official. The president's brother is Kabul Bank's third-largest shareholder.

Central Bank Governor Abdul Qadir Fitrat said Monday that the situation at the lender was returning to normal, despite long lines and heavy security at many of its branches for a fifth day.

Mr. Fitrat declined to say how much money has left the bank—or how much remains. He blamed the bank's problems on "propaganda" carried in Western news reports.

Kabul Bank remains solvent, Mr. Fitrat said, and customers who wanted to withdraw money were getting it, despite accounts by depositors who had trouble getting cash over the past few days.

The central bank was ready to help the lender, if necessary, Mr. Fitrat said. But as of now, "they're still using Kabul Bank money, their own money," he told reporters.

A U.S. official in Kabul with knowledge of the investigations into the bank said Monday he wasn't happy with the efforts so far but declined to elaborate.

Other U.S. and Afghan officials caution that these are still early days. The investigations into Kabul Bank are slowly picking up pace, they say, building on continuing anti-corruption probes that touched on malfeasance at the lender.

U.S. and Afghan officials are focused on stabilizing the lender, which handles many of the government's accounts and distributes the salaries of hundreds of thousands of soldiers, police and teachers. There are widespread fears that Kabul Bank's woes could wreak political and economic havoc in Afghanistan just as U.S. and Afghan forces are preparing to ramp up operations against the Taliban in the insurgent's southern heartland.

U.S. officials said one positive sign was the move by the central bank to prohibit four major shareholders from selling property, much of it believed to have been purchased with still-unpaid loans from Kabul Bank.

But the order, sent to Kabul municipal officials, excluded Mr. Karzai's brother, Mahmood, the bank's third-largest shareholder. Mahmood Karzai, who holds a 7% stake in the lender, said in an interview this year that he owns no property in Afghanistan.

In that interview, Mr. Karzai said he has major interests in Afghanistan's only cement factory and a housing development outside the southern city of Kandahar, where U.S. and Afghan forces are making a push against the Taliban.

Some U.S. officials say problems at Kabul Bank—and the need for U.S. Treasury experts to help resolve them—could indirectly help combat the corruption that has hindered their efforts to restore confidence in Mr. Karzai's government, a pillar of the strategy to overcome the Taliban.

One official described the lender as a "piggybank" for people with ties to the Karzai administration, citing the bank's numerous loans—many made off-the-books—to its shareholders and politically connected Afghans

Neither Kabul Bank's former chairman, Sherkhan Farnood, nor its former chief executive, Khalilullah Fruzi, could be reached to comment. The bank's new management hasn't yet commented on its financial affairs.

In addition, an examination of Kabul Bank's books could further a number of separate U.S. and Afghan investigations already under way into possible misdeeds by Afghan officials, such as diverting foreign aid and reconstruction dollars, as well as opium trafficking, the U.S. official said.

Yet those investigations—which U.S. and some Afghan officials say are based on evidence they collected before the Kabul Bank crisis—also have raised concerns among U.S. officials that inquiries into the bank will be limited by senior Afghan officials fearful of seeing themselves implicated or of crossing President Karzai.

Many U.S. officials praise the abilities and willingness of the technocrats they are working with at the Afghan central bank. It is Afghanistan's political leadership they are concerned about. Anti-corruption investigations have often run into resistance from President Karzai and his inner circle, despite promises by the Afghan leader to combat graft.

His administration, for example, acted last month to exert more control over a pair of foreign backed anticorruption task forces after they arrested one of his aides.

The aide was allegedly caught on a wiretap negotiating a bribe to shut down an investigation into a money-transfer outfit, the New Ansari Exchange, that U.S. officials say quietly moved hundreds of millions of dollars out of Afghanistan for Kabul Bank, among other suspicious activities. The aide was quickly released and remains free.

The crisis appears to be denting the Afghan public's low confidence in their government.

Hamisha Gul, the 28-year-old owner of a transportation company, said she had $50,000 in Kabul Bank and wanted to close her account.

"But the bank has a limit now. We can withdraw only $10,000 at a time," she said, although it wasn't clear if the limit was ad hoc or formally imposed across all the bank's branches. "The government says everything is OK with Kabul Bank, so why I can't withdraw my money?"

Officials and major shareholders at Kabul Bank say the pace of withdrawals has slowed since Saturday, when the bank reopened after the Friday, the Muslim day of rest.

Mr. Fitrat, the central bank governor, said that between $11 million and $17 million had been deposited every day since the crisis began, holding up the deposits as a sign the bank's one million customers remain confident.

That money, however, is mostly from companies that regularly route payments through the bank, sometimes automatically, and had no immediate alternative, another Afghan central bank official said.

On Wednesday and Thursday depositors pulled at least $180 million from the bank—about a third of its total cash reserves—after news leaked about the shakeup. —Habib Khan Totakhil contributed to this article.

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