How some Islamic banks issued dividends despite cash crunch

Over Tk35,000 crore liquidity support was provided to Islamic banks under special facility in a single day by former governor Rouf

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 TBS. 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 TBS 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.