Liquidity crunch: Six Shariah-based banks incur fines daily

Six Shariah-based banks grappling with a severe liquidity crisis are counting penalty interests or fines on a regular basis due to their failure in depositing the required amount of cash with the central bank.

The crisis has turned so acute that they are even failing to settle the penalty interests fully. Against such a backdrop, the Bangladesh Bank has stipulated until September to address the liquidity challenges and pay the fines.

The banks facing liquidity issues are Islami Bank Bangladesh Limited (IBBL), Social Islami Bank (SIBL), First Security Islami Bank (FSIBL), Global Islami Bank (GIBL), Union, and ICB Islamic Bank.

Except for the ICB Islamic Bank, the rest are owned by S Alam Group, a Chattogram-based business conglomerate.

These banks have been in a liquidity crisis since December of last year, which is why they are failing to maintain the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) as per the requirements of the central bank, despite a rise in their deposit base.

However, the central bank did not take any action against the board of directors and officials of the concerned banks. The regulator deemed its job done by simply appointing observers to two banks -- Islami Bank and First Security Islami Bank.

Moreover, the officials involved in different irregularities in the six banks are being awarded promotions.

In a conversation with Prothom Alo, the central bank spokesperson, Mejbaul Haque, claimed that the regulator is taking action as per the law. He said, "Observers and coordinators have been appointed to the banks failing to fulfill CRR and SLR obligations."

Meanwhile, the Bangladesh Bank said in a report that the Shariah-based banks witnessed a downward trend in their deposit base. The deposits in 10 Shariah-based banks of the country amounted to Tk 3917.92 billion in September last year, but it dropped to Tk 3795.24 billion in March this year.

On the flip side, the banks’ investments jumped from Tk 3648.79 billion to Tk 3881.01 billion during the same timeframe.

Mustafa K Mujeri, former chief economist of the Bangladesh Bank, slammed the central bank's inaction over the liquidity crisis in the Shariah-based banks and warned that it is intensifying risks for the banking sector.

He further said the central bank should dissolve the boards of the crisis-hit banks and appoint administrators to safeguard depositors' money and restore customer confidence.

Background of the fines

The penalty interests are imposed on the banks for failing to maintain the required CRR and SLR with the central bank.

As per the CRR, the banks have to deposit 3.5 per cent of customer deposits daily and 4 per cent at the end of every two weeks. A bank failing to deposit the required money has to pay a daily penalty interest of 9 per cent on the due amount.

The SLR requires 13 per cent of customer deposits, 5.5 per cent for Islamic banks, to be deposited in the form of cash, bonds, bills, or foreign currency. Here, the penalty interest rate is 8.5 per cent.

The Bangladesh Bank Act and Bank Company Act do not contain any provisions to waive the penalty interests, leaving the central bank with limited options but to grant extra time to the concerned banks.

Earlier, Padma Bank availed the time extension privilege.

Extent of fines

Islami Bank had a penalty interest of Tk 1.6 billion until mid-June, while the Bangladesh Bank managed to collect only Tk 750 million. First Security Islami Bank faced a fine of Tk 600 million but paid only Tk 250 million to the central bank.

Social Islami Bank was fined Tk 300 million, and it paid Tk 70 million. Union Bank faced a Tk 200 million fine and paid Tk 60 million. Global Islami Bank was fined Tk 80 million and paid only Tk 1.5 million to the central bank.

ICB Islamic Bank was fined Tk 10 million, and there is no payment yet. The central bank instructed the banks to pay the remaining fines by September.

Monirul Moula, managing director of Islami Bank, expressed a commitment to improving the liquidity situation and settling their penalty and deficit obligations by the stipulated time frame.

Jafar Alam, managing director of Social Islami Bank, also came up with a similar commitment.

What led to the crisis?

The liquidity crisis in Islami Bank was mainly caused by debt irregularities, as reported by a central bank report. Clients began to withdraw large amounts of deposits from the largest private sector bank after the irregularities were reported in the media.

According to the annual financial report, Islami Bank saw its deposits decreased by Tk 177 billion in 2022. But the depleting deposit base could not deter the bank from disbursing a staggering Tk 114 billion in loans, leading to a liquidity crunch.

The regulator directed the bank to take action against the officials involved in the irregularities, but the bank awarded the concerned officials with promotions.

Miftah Uddin, who was responsible for large loan disbursements, was promoted as deputy managing director (DMD). Besides, Kazi Rezaul Karim, who was previously suspended from Bangladesh Commerce Bank for money laundering, was made DMD of Islami Bank.

Nazmul Hasan, the then chairman of Bangladesh Commerce Bank and a Dhaka University professor, claimed to be unaware of the irregularities and said the responsibilities lie with the management authority as they did not inform the board about the irregularities.

The impact of the liquidity crisis extended beyond Islami Bank to other Shariah-based banks, including Social Islami Bank, Union Bank, and Global Islami Bank. The remaining Shariah-based banks used to borrow money from Islami Bank to resolve their crises.

Later, the Bangladesh Bank took various initiatives over the past eight months to provide liquidity support to the crisis-hit banks.

This report first appeared in the print edition of Prothom Alo and has been rewritten in English by Misbahul Haque