Why did BB withdraw its observer from Islami Bank?

The BB had appointed an observer in the Islami Bank in 2010, but withdrew him in 2020 

Logo of Islami Bank Bangladesh Limited

The Bangladesh Bank had appointed an observer to Islami Bank in December 2010, being propelled by a fear of loan irregularities.

Since then, a director level official (then general manager) of the central bank used to attend different meetings of the Shariah-based bank. 

A Chattogram-based industrial group took over the bank in 2017 with the observer keeping a cautious eye on the process. Later, the central bank withdrew the observer from the largest private bank in March 2020. 

The then governor of Bangladesh Bank, Fazle Kabir, was not in favour of keeping an observer in the Islami Bank, though six other scheduled banks still have observers in their boards.  

Besides, the regulator has started appointing coordinators to some more banks. 

Against such a backdrop, a question arose as to which consideration had prompted the central bank to bring the observer back from the Islami Bank. Some even pointed the finger at the regulator, saying that the move was taken to facilitate the irregularities. 

The method, which was used to lift money from the Islami Bank in the name of shell companies, is quite similar to the notorious financial scam of PK Halder.

The officials associated with the banking sector even described the Islami Bank saga to be more horrific than the loan scams of Hallmark Group in Sonali Bank and chaos of BASIC and Farmers banks.       

An inspection team of Bangladesh Bank is now working to find out how much money has been withdrawn from the Islami Bank so far.

The central bank has apparently failed to provide a rationale behind the withdrawal of the observer, rather it adopted the policy of being silent on the issue. When the newsmen approached its spokesperson Abul Kalam Azad on Wednesday, he said the central bank would not make any comment on the Islami Bank. 

According to several officials of the central bank, the process of lifting money from the Islami Bank in the name of companies that only exist in the paper initiated after the removal of the central bank observer. The Khatunganj branch in Chattogram started the irregularities that gripped some other branches gradually.

The loans disbursed from the Khatunganj branch jumped from Tk 26 billion to Tk 270 billion in only five years. Later, some branches in the country’s northern region followed the suit and disbursed loans in the similar fashion. 

The officials, who served at the Khatunganj branch since 2017, were awarded with promotions and attached to the loan disbursement section in the bank’s headquarters in Dhaka. Some officials of the head office were also engaged in the process after awarding them promotions. 

Thus, some 20 to 30 officials formed a syndicate in the bank and the directors, who are mostly from different sister concerns of a giant industrial group, endorsed it.     

A review of the bank's loan documents showed that the maximum loan disbursed in favour of the paper-based companies was a little less than Tk 15 billion.

There is an obligation of seeking the central bank’s approval in case of lending 15 per cent of a bank’s regulatory capital. 

The Islami Bank currently has a regulatory capital of Tk 100 billion and it will require the central bank’s clearance for disbursing the capital’s 15 per cent, which amounts to Tk 15 billion. 

A disbursal of less than Tk 15 billion does not require the Bangladesh Bank’s approval and this loophole was used to get the loans disbursed in favour of the paper-based companies. 

All the loans ranged between Tk 9 billion to 11 billion. 

A Prothom Alo report, titled “Nasty November at Islami Bank”, sheds light on the loans unusually disbursed by three Islami banks. A whopping Tk 90 billion was lifted from the Islami Bank, the Social Islami Bank, and the First Security Islami Bank, according to the report. 

Meanwhile, an English daily uncovered irregularities in the disbursal of another Tk 27 billion by the Islami Bank to some shell companies. Another daily reported that Chattogram-based S Alam Group withdrew some Tk 30 billion from the Islami Bank, which it owns.