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The Associated Press October 19, 2010, 10:37AM ET

Afghan banks to be audited

Independent auditors soon will comb the records of the embattled Kabul Bank and the rest of the nation's private financial institutions, the Afghan government said Tuesday.

The announcement is the latest bid to shore up confidence in the war-ravaged nation's financial sector, which was sorely shaken following a management shakeup and corruption scandal at Kabul Bank, Afghanistan's largest bank.

The Afghan Central Bank in mid-September took control of Kabul Bank, which is partly owned by President Hamid Karzai's brother, after the removal of two top executives sparked a run on the bank. Central bank officials are now reviewing the bank's loan portfolio and separating bad and good loans and assets.

"The government has decided that there will be an auditor coming to audit not only Kabul Bank's accounts, but also other private banks in Afghanistan," said Waheed Omar, a spokesman for the Afghan president.

Central Bank Gov. Abdul Qadir Fitrat discussed details of the audits, which the United States is being asked to help finance, while he was in Washington earlier this month attending the fall meeting of the International Monetary Fund and the World Bank.

"The auditors will come and look deeper into the documents to see how big the problem is," said Mohammad Mustafa Mastoor, deputy minister of finance.

Initially, two independent audits, costing an estimated $10 million, were planned for Kabul Bank and Azimi Bank, the second largest in Afghanistan. Later, Afghan officials decided it was important to have all banks audited to avert a repeat of the run on the Kabul Bank. But Mastoor said the audits should not alarm depositors at other banks.

The U.S. Treasury Department has declined to comment.

Earlier audits of Kabul Bank, done by a Pakistan-based affiliate of Price Waterhouse Coopers, an international accounting the consulting company, did not mention lending irregularities.

"Unfortunately, we were getting clean reports from PWC," the deputy finance minister said. "They submitted clean reports."

Kabul Bank's woes further underscore entrenched problems with cronyism, with millions of dollars allegedly lent to relatives and friends of the ruling elite.

Such scandals or corruption allegations are particularly troubling in Afghanistan because they are undermining current efforts to build an effective government that can regain the allegiance of Afghan citizens aligned with the Taliban.

The run on the bank began after its top two executives were removed from their positions amid allegations of mismanagement, unorthodox lending practices and risky investments in property in Dubai, where values plummeted during the global financial crisis. Central bank officials have not disclosed the amount of money that depositors withdrew from the bank.

Sherkhan Farnood, former chairman of Kabul Bank and a world class poker player who raised money for President Karzai's re-election campaign, and Khalilullah Ferozi, former chief executive officer, each own 28 percent of the bank's shares. The president's eldest brother, Mahmood Karzai, owns 7 percent of the bank.

Mahmood Karzai said the bank's former chairman has said that $155 million was invested in two business properties and 18 villas in Dubai. Farnood also took out $90 million in loans for his airline, Pamir Air, and about $70 million for natural gas operations for Hasseen Fahim, the brother of Afghanistan's first vice president, Mohammad Qasim Fahim, he said.

Mahmood Karzai recently told The Associated Press that he would quickly repay his $1 million loan from the bank. He said other shareholders were repaying loans too, as long as paying back the money did not threaten the survival of business enterprises.

He also said that the shareholders have tried to regain control, but the central bank wants to maintain control for about 18 months.

"We're trying, but we have gotten a very cold shoulder from the central bank," said Karzai, who predicted the bank will one day regain a solid standing in the country.

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