New banks fall into liquidity trouble Last few weeks have been happening weeks for Bangladesh financial sector. Bangladesh Bank issued new regulations on the appointment of directors and chairman in the management board of public banks,which are at the heart of bank scam1.Earlier people with little credentials occupied the post and approved loan to projects that do not qualify for it. The result is piling up of Non Performing Loan(NPL) which is jeopardizing stability of the whole banking sector. Government even concluded initial talks with the IMF for a credit of $4.5 billion to finance budget deficit in the wake of high oil price and ongoing war in Ukraine and bad economic management.Earlier only public and some private banks are in crisis. But now banks that operate islamic banking are also in liquidity crisis. Depositors have lost their trust in them and queue behind bank booths to withdraw their deposits.But some islamic banks do not have enough money to meet depositors' demand. Crisis unfolded into these banks after one Nabil Group took Tk 90 billion loan from Islami Bank,First Security Islami Bank and Social Islami Bank. The group followed fraudulent means to unhook the loans. It floated several shell companies and then applied for loans. Addresses provided are later found hoax and all of them appeared to be sister concerns of the Nabil Group,which operates agro-processing and food grain import business in Rajshahi. Islami Bank gave Tk 70 billion to the group and First Security Islami Bank and Social Security Islami Bank provided the rest2. On some occasions, documents were not scrutinized thoroughly. So the blame puts squarely on the new management board of Islami bank, which is mostly formed by members backed by a local business conglomerate. The conglomerate itself took several loans from the banks and invested abroad. Rumours are rife that it even purchased a five-star hotel in Singapore. It is highly likely that the credit becomes another incident of money laundering. As soon as the news broke, clients’ trust on islamic Banks erodes and many opt to withdraw their deposit. It is translated into these banks' depleted deposits. Situation is so grave that the biggest one, Islami Bank offers 8% interest rate to Mobile Financial Service (MFS) operator Nagad,which is already marred by corrupt practices3. Furthermore, Islami Bank Bangladesh and Social Islami Bank along with Pubali Bank Limited received Bangladesh Security And Exchange Commission's nod to issue bond in a bid to raise Tk 21 billion from stock market.The islamic banks will use the fund to meet the acute liquidity crisis4. It appears clearly that islamic banks also face liquidity crisis. New banks fall into such crisis. In general, banking sector instead of recovering falls into deeper crisis. Serious trust deficit translates into depleting deposit and foreign banks’ refusal to LCs issued by local banks. Luckily, IMF in its upcoming board meeting in January may take a decision on approving first instalment of credit, taking into account recent central bank's decision of management board reform. But only time will tell how much it will help the cash-strapped govt and the ailing banks. Notes And References:
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