Corruption in Afghanistan (A Failed State and The Collapse of Kabul Bank)

The collapse of a bank does not always get the attention it deserves. In the case of Kabul Bank, the largest private bank in Afghanistan, the collapse reveals much about the governance challenges ahead for this failed state.

On November 28th, the Independent Joint Anti-Corruption Monitoring and Evaluation Committee released its report on the Kabul Bank collapse. Headed by the Slovenian Dragos Kos, the committee issued a stark and troubling picture of corruption at the highest levels of Hamid Karzai’s government.

The fraudulent scheme was relatively simple. Politically well-connected shareholders and executives – possibly including Karzai’s brother – issued huge loans to themselves under false pretenses. Over 90 percent of the bank’s loans – worth more than $860 million – were distributed to only a dozen individuals and their firms. At the same time, Kabul Bank officials kept a separate set of books that claimed the loans were issued to a longer and distinct set of borrowers. In the end, the fraudulent loans were put to very unproductive uses, such as the purchase of villas in Dubai. When details of the fraud began to leak in 2010, panic ensued and depositors began a run on the bank. The resulting bail-out – representing up to 6 percent of Afghanistan’s gross domestic product – is a financial and political scandal of massive proportions.

The Kos committee report evokes the gravity of the scandal:

The importance of the collapse of Kabul Bank cannot be overstated . . . Every citizen in Afghanistan will bear the [bail-out] cost of the hundreds of millions of dollars . . . This is real money from the annual budget of the government that could be much better spent on other priorities such as education, health care, infrastructure, or security . . . The cost of the Kabul Bank crisis should not only be understood in monetary terms . . . This [social] cost undermines the government and international community’s efforts to build viable institutions in Afghanistan.

As the Kos report makes clear, the most shocking aspect of the scandal is not the monetary scale of the bank’s collapse. Rather, it is the corruption and rot within the Karzai government that should get the headline. Electoral fraud, pervasive rent-seeking behavior, and crony capitalism are becoming the hallmarks of the government in Kabul. The story of Kabul Bank is just one more powerful reminder that the state building road in Afghanistan is long and winding, and filled with back-tracking.

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