Aga Hassan Abedi, the founder of the Bank of Credit and Commerce International (BCCI), talked a lot about starting an “ordinary” bank with an extraordinary mission. He never tired, and still does not, of expounding on his vision and ambitions, which became the bank’s credo and one that many of his loyal officers believed in, to start a bank that would serve the Third World’s economic development. Couching his ideas in the rhetoric of the North/South and New International Economic Order ideology of the 1970s, Abedi claimed he could bring a unique set of services to the “South”: Finance its trade and investment and provide its citizens a high level of financial services. On that level there was no shortage of admirers — apart from some of his employees — whose admiration provided a cover for what was a deeply corrupt and dishonest bank. (Two of the principal vehicles of the Order ideology, South magazine and its sister publication, Third World Quarterly, were extensively funded by BCCI.)

Rhetoric or even “vision” cannot account for the heights BCCI attained in its nearly 20 years of operation. Ingo Walter, writing in the Financial Times, observed that an “ordinary” bank would require financial, technical and human resources that BCCI lacked to compete in competitive international markets. “So BCCI appears to have quickly gravitated to the most imperfect of financial markets” — including the Persian Gulf. In addition, it needed wealthy backers, political influence in the right countries and at least some legitimate business operations. In many ways the 1970s were a perfect time to exploit all of these factors that ultimately contributed to its success.

Aga Hassan Abedi has his professional origins in the Pakistani banking industry, which by any standards had achieved a high level of sophistication and had penetrated most regions of this poor Third World country. His personal success, like that of the entire financial sector, owed much to the careful cultivation of Pakistan’s political and military leadership.

Abedi relied heavily on Gulam Ishaq Khan, now president of Pakistan. When Khan was governor of the State Bank, he “dissuaded” an important business family, which owned part of Pakistan”s second largest bank, United Bank Ltd., from removing Abedi as manager. Gulam Ishaq Khan later headed the BCCI foundation in Pakistan, the main beneficiary of which has been the Gulam Ishaq Khan Institute. During the Zia ul Haq period, a close friendship with the military ruler and his family secured the bank a number of lucrative opportunities, including provision of trade finance for Pakistan’s nuclear program, handling a portion of CIA funding of Afghan rebels and, some have asserted, laundering the proceeds of Pakistan’s large heroin exports. BCCI, in turn, was a faithful “lender of last resort” to the chronically cash-short Pakistani government, and helped finance the creation of the MQM, an ethnic party of immigrant Muslims from India, to rival Zia’s most troublesome opponents, the People’s Party led by the Bhutto family.

His early cultivation of Sheikh Zayid of Abu Dhabi, reportedly during the sheikh’s falconry expeditions to Pakistan, propelled Abedi into the realm of international finance. In 1972, when then-Prime Minister Bhutto nationalized United Bank and placed Abedi’s name on the “exit control” list, Sheikh Zayid came to Abedi’s rescue, through political pressure and the establishment of a foundation that built a hospital in Lahore and set up two newspapers in Bhutto’s home province of Sind. BCCI was born shortly thereafter.

For Zayid, BCCI was a small investment in a bank run by a friend. It remains unclear how much Sheikh Zayid benefited financially from the relationship in the early years, but the payoff must have been significant. There is no doubt that Abu Dhabi’s ruler reveled in the glow of a prestigious bank with an international reputation. Moreover, his positive impressions were most likely nurtured by family, advisers and close associates. When the Bank of England closed BCCI earlier this year, one of the principal reasons was the size of unsecured loans the bank had made to prominent businessmen in the Gulf and royal family members from the Emirates, many of whom sat on the bank’s board. In the end, Zayid was stuck with a huge insolvent bank with unrecoverable loans of well over $5 billion on a capital base which had reached $20 billion in 1990.

The bad banking practice of extending credits to shareholders and politically based lending did not in itself attract much attention in the Gulf. It was essential if BCCI was to maintain its influence within the region, and the practice had become so common in the Gulf that it is almost considered a normal business activity. Limited banking opportunities relative to the size of the bank’s capital, the interlocking network of owners and clients, loose regulatory environments and poor technical skills have produced a Gulf banking sector prone to chronic failures. Gulf governments have had to step in periodically and recapitalize major banks, yet little has been done to prevent these practices from continuing. In most cases the biggest culprits are members of the ruling families or their close associates.

BCCI traded more on the reputation of Sheikh Zayid than on the initial investment from Abu Dhabi. This was essential for BCCI to break into international banking and create a market niche for the bank. Armed with an image of being backed by an investor with limitless funds, and a desire (and penchant) to circumvent all supervisory and regulatory controls in established banking centers, BCCI peddled its services to essentially bankrupt and corrupt governing elites in Africa, Asia and Latin America. It tapped into the burgeoning drug money laundering business of the 1980s, was willing to make loans to cash-strapped governments (at very high spreads), bribed officials to induce them to place their countries’ foreign exchange reserves as deposits, and financed imports of arms and other controlled items.

In the one area that BCCI was legitimately innovative, it struck gold. This was servicing the large immigrant communities of Asians and other nationalities in Great Britain, Africa and Latin America. Undoubtedly, trading on Sheikh Zayid’s reputation was essential to establishing itself as a creditworthy entity, but what won BCCI the business of these small merchant traders was its attention to their specific needs. In Britain, for example, the influx of Asian immigrants in the mid-1970s provided the bank with a fertile ground to expand and become a “high street bank.” Asian immigrants expelled from Uganda and elsewhere in Africa came to Britain with only their savings and a willingness to engage in the same sorts of enterprises they had thrived on in the ex-European colonies. Lacking credit and a track record, and facing a largely hostile banking environment (owing to racism and conservative business practices), the immigrants flocked to BCCI. The community prospered (admittedly for more reasons than just the bank’s attention), and BCCI gained a legitimate and sizable chunk of a First World market. But even here the bank’s corrupt culture could not be kept out, and BCCI helped several of its British clients evade tax laws and indulge in other illegalities.

It may be that Abedi never intended to run a legitimate bank. The entire corporate structure was designed to evade scrutiny, with its operating headquarters in London, legal center in Luxembourg and a variety of small operations in offshore banking centers and the Gulf. As early as 1977 it was denied entry into the US market when it first attempted to purchase First American, leading to an elaborate scheme to circumvent US banking authorities. Regulators, when they finally looked, found a bank within a bank, designed to hide non-performing loans and capital losses from commodity and financial trading behind the facade of a vibrant and creditworthy bank.

Could BCCI have thrived through legitimate banking practices? On the one hand, the bank was doomed from inception with its origins in the “highly imperfect financial markets” of the Gulf and Pakistan. On the other hand, BCCI did exploit some legitimate corners of business and could have built its operations on that foundation. But the global ambitions of its founder and some of its owners, and their willingness to break laws, makes it doubtful whether it was their intention to be so limited in the first place.

How to cite this article:

"The Fall of BCCI," Middle East Report 173 (November/December 1991).

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