Bank-Insurance
How some Islamic banks issued dividends despite cash crunch
All the cash-strapped Islamic banks owned by S Alam Group disbursed cash dividends for 2023 to their directors and shareholders by taking liquidity support from the Bangladesh Bank under a special facility called the lender of last resort (LoR).
The central bank had to provide this special liquidity support last year by printing money, which ultimately ended up in the directors’ pockets.
The lender of last resort provides emergency credit to financial institutions that are struggling financially and are near collapse. Central banks use this instrument under the special authority of the governor to rescue banks.
On 28 December last year, the Bangladesh Bank provided liquidity support of Tk22,000 crore to seven banks, including five Shariah-based banks, under the LoR facility.
Of this amount, 90% was given to the five Islamic banks owned by S Alam Group – Islami Bank Bangladesh, Social Islami Bank, First Security Islami Bank, Union Bank, and Global Islami Bank – as their current accounts continued to face deficits due to a severe liquidity crisis.
These banks were granted LoR for only three days to artificially show a healthy balance sheet at the end of December 2023, as they were running short of the cash reserve ratio (CRR) that is mandatorily required to be maintained with the central bank.
When a bank fails to maintain the required CRR – an amount of funds that a bank holds in reserve to ensure it can meet liabilities in case of sudden withdrawals – it faces financial penalties from the central bank.
The continuous failure to maintain the CRR indicated that these banks were on the brink of collapse. Despite this, all five banks were allowed to declare cash dividends by the Bangladesh Bank while Abdur Rouf Talukder was governor, which goes against banking regulations and norms.
The respective department of the Bangladesh Bank initially denied permission for the cash-strapped banks to announce cash dividends, but reversed the decision after receiving verbal instructions from the governor, according to a senior executive of the central bank who wished to remain anonymous.
He stated that the dividends were allowed under special consideration.
All five banks disbursed 5-10% cash dividends for 2023, according to the Dhaka Stock Exchange (DSE) website.
Despite still being short of the required CRR, these banks completed cash dividend disbursements by January this year, taking further liquidity support from the central bank.
In 2023, the Bangladesh Bank printed Tk1 lakh crore in new money to provide liquidity support to cash-strapped banks, primarily Islamic banks.
Instead of taking corrective measures or punitive actions against the corruption that led these Islamic banks into a liquidity crisis, the central bank continued to provide cash support under the LoR facility.
The Bangladesh Bank did not even conduct any audits or investigations to determine the reasons behind the liquidity crisis in the S Alam Group-owned banks.
In the latest development, the Bangladesh Bank provided Tk35,000 crore in liquidity support to Islamic banks, mostly owned by S Alam Group, in a single day on 30 June under the authority of the governor, a central bank source confirmed.
Although the central bank continued to provide liquidity support, it did not recover the financial penalties imposed for the CRR shortfall, according to central bank sources.
Defending the LoR, Rouf Talukder, who recently resigned after the fall of the Hasina-led government, stated in a press conference held in January this year, “The governor is empowered by the Bangladesh Bank Order to provide liquidity support, so we provided it.”
How affluent Islamic banks fell into a liquidity crisis
Islamic banks, which were once the highest deposit banks in the country, began to lose depositor confidence in 2017 after S Alam Group forcibly took over two banks, Islami Bank and Social Islami Bank, while authorities remained silent.
Islami Bank, the largest private commercial bank, was taken over in January 2017. In October of the same year, some little-known companies purchased shares in the bank.
However, no authorities, including the Anti-Corruption Commission (ACC), questioned the source of the substantial funds involved with these obscure companies.
Following the takeover of these two banks, a total of six out of ten Islamic banks came under the control of S Alam Group, with relatives and family members of the business conglomerate occupying key positions in these banks.
S Alam Group began to misuse these banks as personal assets, taking loans through corrupt practices, which eventually led to significant trouble for these lenders.
For instance, Ahsanul Alam, son of S Alam Group Chairman Saiful Alam Masood, was appointed chairman of Islami Bank, the country’s largest bank, in June of last year at the age of 28.
This appointment, which came with central bank approval, did not raise questions about his capacity to manage the largest bank in the industry. His appointment was seen as a marriage gift.
In response to widespread criticism of the newly appointed chairman of Islami Bank, the Bangladesh Bank issued new guidelines regarding the experience and academic qualifications required for becoming a director of a bank.
Evidence of loan corruption also indicates misuse of the bank by the business conglomerate.
For example, in 2022, loans totalling Tk2,700 crore were approved for three unknown companies, with Tk900 crore allocated to each without any proper documentation.
All three companies were newly registered, and their office addresses were fake, as verified by the news reporter. Despite this, the Bangladesh Bank did not investigate the loan process.
This practice of approving loans for dubious borrowers has put depositors’ money at risk and contributed to a severe liquidity crisis for the bank.
As of the end of December last year, the bank’s loan book stood at Tk1.6 lakh crore, nearly Tk66,000 crore more than the deposit book, which was Tk1.53 lakh crore.
The advance-to-deposit ratio was 91.90%, exceeding the regulatory limit of 91%. This ratio would have surpassed 100% without the Bangladesh Bank’s liquidity support under the LoR facility.
If the investment-to-deposit ratio exceeds 100%, it means the bank has lent more than its deposits, potentially making it unable to repay depositors. The liquidity crisis at Islami Bank, the largest Islamic bank, has affected the entire Islamic banking industry due to the erosion of depositor confidence.
A central banker, speaking on condition of anonymity, said that without liquidity support, Islamic banks would have faced a capital shortfall, which would have negatively impacted their international credit ratings.
However, many international banks have cut off their credit lines with Islami Bank due to its growing bad reputation and failure in foreign payments, according to information obtained by the news reporter from some foreign lenders.
During conversations with this reporter, many foreign export-import companies expressed frustration with Islami Bank, citing issues with obtaining LC confirmations from foreign lenders due to payment failures and the bank’s poor reputation.
The decline in deposits at Islamic banks also reflects a lack of depositor confidence. From November 2023 to April 2024, Islamic banks experienced a more than ninefold increase in loan growth compared to their deposits.
According to central bank data, deposits in 10 Islamic banks increased by Tk2,808 crore during this period. In contrast, loans extended by these banks surged by Tk25,790 crore over the same timeframe.
Bangladesh Bank Governor Ahsan H Mansur has announced that the central bank will increase the policy rate twice within the next month to combat rising inflation. During a press briefing on Monday, Mansur said, “We will follow a contractionary monetary policy until inflation is brought under control. The policy rate will be raised next week and again next month.”
The governor expressed optimism about inflation stabilizing by March or April, although he did not specify the expected inflation rate. “While we can’t predict the exact level of inflation, we will tighten policies to bring it down. Our exchange rate remains stable, and remittances are on the rise, which should help ease inflationary pressures,” Mansur added.
Recent Rate Hike Follows a Series of Increases
On 25 August, the central bank raised the policy rate by 50 basis points, bringing it to 9% as part of its efforts to tackle high inflation. This marked the third increase in the key interest rate this year. Mansur had previously indicated that the policy rate, or repo rate, could potentially rise to 10% in phases.
Plans to Merge Smaller Islamic Banks
The governor also discussed the possibility of consolidating smaller Islamic banks. “Merging smaller banks would be beneficial. While no formal decision has been made, we are considering the option,” he said. Mansur explained that past irregularities had caused some bank owners to lose their ownership, which could make the process of consolidation easier.
He assured that depositors’ funds would be safeguarded, even if the banks are merged. “We will take actions based on the situation, but depositors’ money will be returned,” Mansur promised.
Task Force Established for Banking Sector Reform
Mansur further outlined that a task force has been formed to address issues in the banking sector, focusing on identifying distressed assets and recovering them. Initially, the task force will work with three banks, followed by an additional six. The team consists of 14 Bangladesh Bank officials, divided into three groups, with six members specifically overseeing larger Islamic banks.
Development partners will provide funding for these efforts, with external and international auditing firms assisting in the process. “Our first step will be to assess how much money has been withdrawn, both in name and covertly. If funds have been transferred abroad, we will work on bringing them back under international law,” Mansur explained.
Liquidity Support for Weaker Banks
The governor noted that some depositors were shifting their funds from weaker banks to stronger ones, creating liquidity challenges for the former. To address this, the central bank will provide funds from more liquid banks to those in need, ensuring that Bangladesh Bank covers any shortfalls if weaker banks are unable to repay.
Potential Changes in Bank Loan Targets
Mansur also mentioned the possibility of reducing the budget target for bank loans by Tk50,000 crore. This move could potentially boost private sector investment. “If we can reduce inflation to around 4%-5%, we will have the opportunity to lower interest rates,” he stated.
Bangladesh Bank (BB) has received a loan proposal totaling $2.5 billion from the World Bank (WB) and the Asian Development Bank (ADB) in several packages, aimed at supporting structural reforms, policy implementation, and investment projects.
The proposal was presented today during a meeting between Bangladesh Bank Governor Ahsan H Mansur, senior officials, and delegations from both the WB and ADB at the BB headquarters. The information was confirmed by BB spokesperson and Executive Director Husne Ara Shikha.
“The World Bank has proposed a $1 billion loan, which includes a $750 million policy-based loan requiring the central bank to implement specific policies. Additionally, a $250 million investment loan is currently in process,” said the BB spokesperson.
Similarly, the ADB has proposed a $1.5 billion policy-based loan, which will be disbursed in three phases, including a $200 million investment loan. According to the central bank spokesperson, $500 million of the loan could be received by 2025.
Additionally, a visiting US delegation, led by Brent Nieman, Assistant Secretary of the US Treasury Department, met with the central bank governor today. During the meeting, the delegation was briefed on the country’s macroeconomic conditions, though no specific loan amount was discussed by the US treasury team.
Parvez Tamal, Chairman of NRBC Bank, once known as a close ally of former Prime Minister Sheikh Hasina, has reportedly shifted his stance following the resignation of the Awami government on August 5. Tamal, who had been accused of exploiting political power for financial misdeeds during the Awami regime, is now aligning himself with student activists in a bid to protect his position.
Previously, Tamal had threatened NRBC Bank employees with termination if they supported or joined the quota reform movement. He also warned of administrative harassment for any Facebook posts or comments related to the movement. However, after the fall of the Awami government, Tamal has been providing financial support to the very student protesters he once opposed, in an attempt to distance himself from his controversial past.
An investigation by Orthosongbad revealed that during the anti-quota movement, Tamal worked on behalf of Sheikh Hasina, even monitoring NRBC Bank staff to ensure they did not participate in the protests. On July 17, under his directive, a warning was sent to all branch managers of the bank, cautioning them about the movement. Documents related to this have surfaced during the investigation.
A directive from NRBC Bank instructed all its officers and employees to refrain from joining any assembly related to the quota reform movement or sharing any comments, posts, or information about it on social media. The email from the bank’s HR department, titled ‘C,’ warned that any violation of this order would result in administrative action in accordance with HR policies. The directive also emphasized ensuring maximum security in and around the bank and required employees to be punctual in reporting to work.
Sources suggest that NRBC Bank Chairman Parvez Tamal, in an attempt to secure his position, has been trying to win over the coordinators of the anti-discrimination student movement. This speculation gained traction after a recent event where Tamal handed over a cheque for 5 million BDT from the bank’s Corporate Social Responsibility (CSR) fund to Hasanat Abdullah, one of the coordinators of the student protests. The donation, aimed at providing treatment and rehabilitation for injured protesters, has sparked widespread criticism on social media. Many are questioning Tamal’s sudden shift, given his previous ties to former Prime Minister Sheikh Hasina and his outspoken opposition to the student movement.
At the donation event, Parvez Tamal remarked that NRBC Bank would support the dreams of those building a “new Bangladesh.” In addition to providing medical assistance to the injured, he pledged future employment opportunities and scholarships for injured students. NRBC Bank also committed to offering jobs to able-bodied members of families affected by the protests. These promises mark a stark contrast to Tamal’s previous stance, where he had vocally supported Sheikh Hasina and opposed the student protests.
Attempts to reach Hasanat Abdullah, one of the coordinators of the anti-discrimination student movement, for a comment were unsuccessful. Despite multiple calls from Orthosongbad office to his mobile phone, there was no response. Similarly, efforts to contact another coordinator, Sarjis Alam, also failed to yield any comments.
However, former law student of Dhaka University and social media figure Syed Abdullah shared his thoughts on Facebook, stating that NRBC Bank Chairman Parvez Tamal is on a mission to secure his position by ingratiating himself with the students, thereby improving his image. Abdullah urged immediate investigations by the Anti-Corruption Commission (ACC) and journalists into the activities of Tamal and his associates.
Orthosongbad made several attempts to contact NRBC Bank Chairman Parvez Tamal for comments, but no response was received.
Sources claim that Parvez Tamal, in his efforts to support the Hasina government, has distributed various donations through the bank, both publicly and covertly. Among these are scholarships in the name of Bangabandhu, a special issue of “Planet” magazine focused on Sheikh Mujibur Rahman’s life and legacy, donations to the Bangabandhu Memorial Trust, contributions to the Bangabandhu Youth Fair, and charity books and iftar events around Bangabandhu’s birthday. Additionally, the bank had provided significant funds for Sheikh Hasina’s Ashrayan Project.
Parvez Tamal, who claims to be a Russian oligarch and served as the president of the Russia Bangabandhu Parishad, has been implicated in various financial irregularities, including loan fraud, commission schemes, recruitment corruption, stock manipulation, money laundering, and the embezzlement of funds. During the tenure of former Prime Minister Sheikh Hasina, Tamal reportedly leveraged his connections with senior leaders of the Awami League to engage in these activities.
The Anti-Corruption Commission (ACC) had previously launched an investigation into Parvez Tamal, chairman of NRBC Bank, following allegations of irregular salary increases for select officials. The investigation stemmed from a complaint by a sponsor shareholder of the bank. Tamal reportedly bypassed the banking regulations, awarding significant salary increments to 27 officials while ignoring over 3,800 employees. Additionally, Tamal and his personal secretary, Asif Iqbal, allegedly pocketed excessive fees from board meetings, violating the country’s banking laws. Furthermore, the investigation revealed that Tamal had set up an unauthorized entity, NRBC Management, without approval from Bangladesh Bank. However, the investigation was abruptly halted, allegedly due to Tamal’s political influence.
In a separate case filed on July 11, 2023, the ACC accused 14 individuals, including 11 NRBC Bank officials, of money laundering and providing unlawful loans. The lawsuit alleges that the accused embezzled approximately 78 crore BDT (including interest) by issuing loans without proper collateral. Additionally, 5.97 crore BDT worth of export proceeds were reportedly laundered without being repatriated to Bangladesh. Tamal was implicated in this fraudulent activity but reportedly used his political connections to suppress the investigation.
Further details of this ongoing investigation will be disclosed in subsequent reports by Orthosongbad.
