No long queue at bank and post office
Reflects people's trust is on the edge of precipice.
Last week was a happening week for the financial sector.Court has ordered to seize the property of a chairman of a group as well as an Islami Insurance Company. The chairman is in jail for allegedly swallowing Tk 516 crores through abuse of power,treachery and money laundering. Tk 1.5 billion worth of house is situated at the rich neighborhood of Baridhara.This is the snapshot of the anarchy going on in the financial sector.He has even been accused of taking loans in the name of employees without their consent.
Meanwhile, liquidity crisis in the Islami Banks is acute.Last week ,central bank provided credit worth Tk 147.90 billion to Islami Bank,First Security Islami Bank,Union Bang,Social Islami Bank Limited and Global Islami Bank.Interest rate in this case is set at 8.75%.What is interesting banks lack bond or treasury bill to draw credit from the central bank.The special credit provided against promissory demand note,which pledges to pay back the credit at any cost. Liquidity crisis in the banks has driven inter-bank lending rate to 10%. Many banks failed to meet the cash reserve ratio due to the crisis.
This is an indication how clients lost their trust on banking system as govt took a nonchalance stance on earlier irregularities.
Despite slight improvement in inflationary situation,inflation is hovering around 8% as per official statistics. Amid this,Finance minister ditched the idea of a new pay-scale for inflation-battered public servants.Another pay-scale would definitely hike the price level.Meanwhile, central bank is pursuing a monetary policy aiming to tame the inflation.
In addition, govt also raised the price of electricity by 5% ahead of scheduled visit of IMF DMD.The move coupled with the idea of open market determinaton of oil price at the domestic market is a deliberate one to unhook the IMF credit package.
Post offices that sell savings certificates and offer attractive rates on deposits are deserted.Once they are packed like sardines.Same picture can be seen in banks. In the banks only the time deposits bear significant interest rate. But the interest rate is well below the inflation rate. And investment
of more than Tk 500,000 on savings certificate requires submission of tax return.Series of banking scam further erodes people's trust on banks.
Decrease in overall deposit amount last year sums up the whole story.Govt is stubborn to cap the lending rate at 9%.It is still unknown how the government will win back people's lost confidence on the banking system.
New banks fall into liquidity trouble
Instead of recovery, woes become double.
Regulations on management board reform
Unlikely to become the new norm.
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:
- “Rastrayatto Banker Chairman Note Lagbey 10 Bochhorer Oviggota(Public Bank Chairman Must Have 10 Years Experience)”,jagonews24.com,December 24,2022.
https://www.jagonews24.com/m/economy/news/820089
- “Nasty November for Islamic Bank “ ,Sanaullah Sakib,Daily Prothom Alo,November 24,2022.
https://en.prothomalo.com/business/local/x60ivy2cbn
- “ Aat Percent Sude Amanat Chai Islami Bank (Islami Bank Offers 8% Interest On Deposit)”,Daily Prothom Alo,P-13,December 29,2022.
- “Lendene Goti Firchhey Na,Bond Chharbe Tin Bank(No Pace In Transaction, Three Banks To Issue Bond)”,Daily Prothom Alo,P-13, December 28,2022.
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