Afghan government has agreed to break up Afghanistan's biggest private lender after a multi-million dollar fraud scandal.

Under threat of the loss of support from the International Monetary Fund (IMF) and billions of dollars of aid, the Afghan government has agreed to break up Afghanistan's biggest private lender after a multi-million dollar fraud scandal.

Diplomats in Kabul said government approval for placing Kabulbank into receivership would be given later on Monday and the process would be complete within two weeks, clearing the way for the IMF to renew its support programme under which billions of dollars of foreign aid are mandated.

All existing shareholders' rights will be extinguished and a special court set up by President Hamid Karzai to determine complaints from last year's troubled parliamentary election would conduct fraud prosecutions, one diplomat said.

Karzai's government and the IMF have been at loggerheads since last September, when news emerged of the scandal at the politically well-connected Kabulbank that has put at risk at least $579 million dollars through fraud, bad loans and mismanagement.

The IMF last month delivered a withering assessment of the Afghan government's handling of the Kabulbank crisis, a review that raised the possibility of the IMF not renewing support.

The IMF wanted the bank placed into receivership immediately to stem losses, while the Afghan government wanted to keep the bank trading and rehabilitate it before a sale in two or three years.

An IMF representative briefed diplomats in the capital, Kabul, late on Sunday. One Western diplomat based in Kabul said negotiations would be concluded during the annual World Bank conference in Washington from April 11-18.

"The renewal of IMF support is one of the conditions that will allow the alignment of our programmes with Afghan needs," the Western diplomat, speaking on condition of anonymity, said.

"It's very encouraging that the government and president Karzai are taking it seriously," he said.

Earlier this month, the British government said it would delay payment of 85 million pounds ($136 million) in aid to Afghanistan because of the continued lack of an IMF support programme, the first warning shot fired by Afghanistan's international aid donors over the banking crisis. [ID:nLDE7282L3]

Britain's Department For International Development said at the time IMF support was used by donors as an indication of sound economic and financial management.

The delayed British aid was to have been paid into the Afghanistan Reconstruction Trust Fund (ARTF), the main vehicle for donor funding.