With observer’s departure, Islami Bank’s health worsened
Despite being among the best-run and the most profitable bank in Bangladesh in the past decade, Islami Bank had an observer in its board the entire time.
The central bank usually appoints observers in banks whose financial health is fragile. The observer takes part in the board meetings and keeps watch on the bank's operations. The observer is withdrawn once the financial health improves.
But in the case of Islami Bank, the reverse happened: the observer was withdrawn in March 2020 without any reason and the country's largest private sector bank tumbled into chaos.
For instance, the central bank is now carrying out an investigation into Islami Bank for authorising Tk 7,246 crore in loans to nine companies in recent weeks on allegations of violating banking rules. Most of the companies used fake addresses in their loan application forms.
BB has asked not to disburse any loan to the companies until prior instruction is given to the bank.
"The central bank might have withdrawn the observer on political grounds, thinking that it was taken over by its own people," said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.
S Alam Group, a Chattogram-based business entity, took over the bank in January 2017. The group had appointed some representatives of "companies" under its umbrella as directors of the bank. The "companies" existed only on paper.
Apart from Islami Bank, the group is now controlling six other banks.
"The government should take immediate measures to take over the bank from S Alam Group. Otherwise, the confidence of depositors will erode," Mansur said.
This is the time to protect the confidence of depositors in the banking sector in the interest of the whole economy, said Mansur, a former economist of the International Monetary Fund.
"The officials of the central bank who had taken the decision to withdraw the observer should be made accountable," said Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue.
The decision taken by the central bank allowed scamsters to take loans ignoring banking norms, he said.
Contacted, GM Abul Kalam Azad, spokesperson of the central bank, said the observer was withdrawn from Islami Bank as the official who had played the role was promoted to the post of executive director from general manager.
As per the central bank policy, general managers are usually assigned to play the role of observer in private banks, he said.
Asked why another general manager was not assigned to play the role, he declined to elaborate further.
At present, six banks have observers and five other lenders have coordinators.
The central bank now appoints coordinators instead of observers and there is no difference between the two roles.
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