Afghan central bank chief focuses on Kabul Bank fix

WASHINGTON (Reuters) - In the late 1980s, an Afghanistan-born banker working in California watched as U.S. regulators struggled to cope with a deepening savings-and-loan banking crisis.

Now he is attempting a similar feat in Kabul with the added challenges of widespread corruption, still rampant violence and a major crisis of confidence in Afghanistan's banking system.

Noorullah Delawari, who was re-appointed last month as head of the country's central bank, has put fixing troubled Kabul Bank, one of the country's largest commercial banks, at the top of his list of priorities.

While U.S. bank regulators in the 1980s struggled to stem a plunge in property values as hundreds of lenders failed, the stakes are even higher for Afghanistan and for Delawari.

"My immediate goal is to reinstate confidence in the banking system of Afghanistan," he told Reuters during an interview.

Without that, the country's economy could continue to function largely outside the formal banking system, hobbling monetary and economic policy makers who are struggling to enact change in the war-torn nation where institutions remain weak.

Delawari's predecessor quit the central bank suddenly this year and fled from Afghanistan, saying he feared for his life after trying to tackle corruption.

The Afghan government spent $825 million trying to rescue the private lender Kabul Bank after an embezzlement scandal involving its top shareholders, including President Hamid Karzai's brother, broke in September 2010.

With total official economic output in 2010 worth only about $15 billion, Afghanistan's finances couldn't handle the full cost of the bailout and the country turned to the International Monetary Fund for support, securing a $134 million loan.

By restructuring bad loans and selling real estate seized from the embezzlers, Delawari hopes to recover 80 percent of the $825 million within five years.

"Eighty percent recovery of a failed bank is a huge success," he said.

Afghanistan's parliament confirmed Delawari's appointment to head the central bank in late November. The five-year term marks his second spell in the role after he ran the bank from 2004 to 2007 and then founded the Afghan Investment Support Agency (AISA), a business development agency.

"I hope I will be healthy to complete this job," said Delawari, speaking in Washington on Wednesday on his way to visit family members in California. "I've inherited a lot of very difficult things to do."

Delawari, who was born in 1945 and studied in Britain and the United States before working for Lloyds Bank of California and Bank of the West, said he is restructuring the central bank to add more supervisory powers.

The bank will now have a special unit to focus on commercial banks that are identified as troubled in routine examinations.

He is also changing banking laws to tighten regulation.

"I believe that our implementation of changes to the banking law will close loopholes," he said.

Delawari said he hoped to lead by example in the push to reduce corruption in Afghanistan.

"I can say with confidence that AISA is a place where you go. No one is expecting any kind of bribe and they do their job without mischief."

He plans to run the central bank with the same discipline, hoping to serve as a model for other government agencies and officials.

KEEPING THE CURRENCY STABLE

During his first term, Delawari helped re-launch the country's currency, the Afghani, after different regimes and leaders issued their own competing versions of coins and banknotes amid the chaos of years war.

Afghanistan faces a new challenge in the coming two years as foreign troops leave, taking with them some of the dollars and euros with which the country is now flush.

Delawari said keeping the currency stable would involve finding new sources of income, most immediately through new mining projects.

He said reducing imports would also help. Afghanistan could start to produce some of the things it buys from other countries, including cement, natural gas and oil, he added.

"I want to see more investment in the country, particularly in the area of agriculture."

DRY PORT

For the imports that will still flow into landlocked Afghanistan, Delawari said the government was negotiating with a major foreign company to establish a dry port at the entry point from Pakistan to the eastern city of Jalalabad that could receive and process goods shipped into the Pakistani port of Karachi.

Having the dry port would help bring more importing activity inside the banking system because the goods in transit could be considered as collateral for loans to purchase them.

Delawari said 90 percent of Afghanistan's imports were now ordered on a cash-in-advance basis.

The dry port could also help bring the foreign exchange market under the central bank's regime, he said.

(Editing by Robert Birsel)