The Bangladesh Bank has given a rare benefit of special loan of Tk 80 billion (8,000 crore) to Islami Bank Bangladesh Limited (IBBL) due to its liquidity crisis.
The crisis is in fact so severe that the bank failed to maintain the cash reserve ratio (CRR), a certain minimum amount of deposit a commercial bank has to hold as reserves with the central bank, for a total of 24 days in November and December of 2022. The bank is now facing fines for this.
The central bank has given this facility to the IBBL, without taking deposit of any Sukuk (Islamic bond or “Sharia-compliant” bond), at an interest rate of 8.75 per cent. Generally, the Shariah-based banks borrow money from the Bangladesh Bank depositing Sukuk and Bangladesh Government Islamic Investment Bond (BGIIB).
But the usable bond of Islami Bank has ended. That’s why the central bank has lent the money to IBBL taking resort to the rare privilege though the Shariah-based banks do not have the benefit of borrowing money at a specific interest rate.
Islami Bank managing director (MD) Mohammed Monirul Moula wrote a letter to the central bank seeking this special funding on 29 December, 2022.
The Bangladesh Bank gave approval to the request within a few hours of submitting the application while the money was disbursed on the last working day of 2022. As a result, the Islami Bank could show its financial statement in a relatively better condition than the actual condition.
Mohammed Monirul Moula could not be reached when Prothom Alo tried to contact him Sunday night over the situation. He, however, spoke to Prothom Alo Sunday morning and said, “There is no liquidity crisis in the bank. The situation is improving,”
What happened
Many general and corporate customers shifted their deposits from the Islami Bank to other banks when the information of large scale loan scams at the bank was unearthed. Several customers shifted their dollar deposits at the bank as well. As a result, the bank fell in crisis of both taka and dollars in November and December.
In this context the bank failed to maintain the cash reserve ratio with the central bank for a total of 24 days in November and December of 2022. This situation is called current deposit deficit, as per an order of the Bangladesh Bank. For this the bank’s director, managing director, and treasury heads face fine every day. The central bank could stop the bank from taking deposits from the consumers if the situation worsens.
Current deposit at the bank is about Tk 140,000 crore, which was over Tk 153,000 crore on 31 October.
The Bangladesh Bank introduced special liquidity benefits for the Shariah-based banks when the deposit of Islami Bank started decreasing. But in a few days the bank ran out of its usable bonds after taking loan from the central bank against the bonds.
Liquidity situation
The liquidity situation of the Islami Bank is extremely vulnerable, thinks the Bangladesh Bank. According to the central bank’s calculation due to the gradual plummet, the cash reserve ratio deficit of the bank decreased to Tk 51.01 billion on 28 December. Islami banks are needed to maintain 4 per cent cash reserve ratio and 5.5 per cent statutory liquidity ratio (SLO).
Following the advice of several central bank officials, the MD of IBBL applied for special liquidity benefit on 29 December. Analysing the laws, the central bank officials found they cannot lend the money to Shariah-based banks under the benefits that can be used to lend money to other commercial banks. For this, as the last resort Bangladesh Bank decided to loan money to Islami Bank for one day under special repo rate.
Speaking to Prothom Alo, Bangladesh Bank spokesperson Mesbaul Haque said Bangladesh Bank assists as the last resort if any bank faces liquidity crisis. Islami Bank has sought the liquidity help and the central bank has given Tk 80 billion to it. More help will be given to the bank if such crisis persists. Such benefit was given to Padma and ICB Islami Banks too, he added.
How to resolve
Specialists, however, think the bank’s situation cannot be improved with such liquidity help without taking any action.
Policy Research Institute executive director Ahsan H Mansur told Prothom Alo, “The government and the Bangladesh Bank have to realise the depth of the problem before giving public money to the Islami Bank. People have kept deposits at the bank, at the same time the central bank is also giving money to it. That’s why the decision should be taken considering everything as Islami Bank is the top bank in the country.”
“There will be no benefit of giving money in that way without ensuring accountability. This will encourage corruption and irregularity. It is essential to find out the hole of the bucket before filling it with water. Because the source of money will end a day and the crisis will engulf the whole economy,” he added.