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‘Clearing’ Afghanistan’s Financial System

It is axiomatic in counterinsurgency warfare that things get worse before they get better. Immediately after troops enter an insurgent-infested area, there is much hard fighting before peace can be restored. Thus it would be a mistake to see the immediate spike in casualties as a sign of failure. The same is true in the realm of nation-building, where it may be necessary to force a crisis in order to resolve a corrosive problem.

Those thoughts are prompted by news that the Afghan Central Bank has seized control of Afghanistan’s largest private financial institution, Kabul Bank. Its management has long been a scandal, with all sorts of shady money transfers and loans involving well-connected political players funneling Afghanistan’s scant wealth to offshore accounts in Dubai. Its ousted chairman, Sherkhan Farnood, is a major backer of President Karzai, while two of the bank’s largest investors have familiar names — Mahmoud Karzai, the president’s brother, and Haseen Fahim, brother of Vice President (and notorious warlord) Mohammad Fahim.

Kabul Bank is at the center of a web of suspect relationships that also involve New Ansari, an Islamic money-transfer firm (hawala), and the country’s other major bank, Afghan United. There are persistent rumors that they are linked to both the Taliban and drug traffickers — a charge they naturally deny. All have been propped up by years of foreign aid; all the salaries that are paid to Afghan government employees, for instance, and that come primarily from the U.S. government are funneled through electronic-money transfers to Kabul Bank. This is supposed to decrease corruption by cutting the risk that cash will go astray, but it has had the perverse effect of floating a rotten institution.

The trick now will be to unravel the problems without causing a run on the banks and the collapse of a fragile financial system. I have no idea whether that will be possible to do, but I do know that it would have been impossible to leave these institutions to run as they did. Sooner or later, the whole rickety structure would have come tumbling down. It is to the credit of the Afghan officials, including President Karzai, that with American encouragement, they have moved to address this festering mess. The next few weeks and months won’t be pretty, however, because what we are seeing is, in financial terms, the “clear” phase of what in counterinsurgency operations is known as “clear, hold, and build.”