BB's latest move to stabilise troubled Islamic banks

That the Bangladesh Bank (BB) has, at last, embarked on its avowed plan to rescue the problem-ridden five Shariah-based banks through a process of merger or otherwise is a piece of welcome news. For thousands of depositors of these banks have been passing highly anxious times. The high-ups of the central bank have begun discussions with the authorities concerned about the ways of dealing with the crisis the banks in question are facing. Two banks --- the First Security Islamic Bank and the Union Bank --- have agreed to go through the merger process while EXIM Bank has declined and offered to submit a detailed plan that, it hopes, would help the bank make a turnaround. The Islamic banks in question are now in a pitiable condition because of their huge default loans.  Political cronies and other influential quarters looted funds of these banks with support coming from the government and banking sector regulator. 

Notably, the merger decision regarding these five non-conventional banks came in June last following a forensic audit report on their financial health by the global audit firms, KPMG and Ernst & Young. The asset quality review found that their NPLs were four times higher than what was reported before. As these banks had been struggling to repay the depositors following widespread irregularities and financial scandals, it was justifiably decided by the central bank that those should be brought under the Bank Resolution Ordinance 2025. The decision was only natural to protect depositors' funds and preventing further systemic collapse from happening. However, concerns would still remain about the long-term reform of the sector and holding individuals responsible for the crisis to account.  The taking over of this private bank would be done, as understood, for an interim period with the assurance that the depositors' money would remain safe during the transition and ultimately be returned to their owners. The steps for the merger move as told by the BB governor on different occasions would  involve injecting substantial capital into the distressed banks to meet significant equity shortfalls while as part of their restructuring, the existing management would be replaced with a new board that would operate under the  direct supervision of the Bangladesh Bank. Also, creation of a bridge bank might be necessary following the takeover to manage assets and liabilities of the failing banks until a permanent solution is reached.  The mechanism means to ensure financial stability, depositors' protection and also to prevent systemic risks to the economy arising from inadvertently pressing any panic button. 

Understandably, these steps are necessary to improve the bank's governance and prevent future abuse.   Even so, questions would remain if the entire process of bailing out the distressed banks through BB's acquisition and merger is not another way of potentially granting immunity to the very directors of the sick banks who misappropriated public money through advancing irrecoverable loans to fake clients resulting in unprecedented rise in the NPLs. In this context, the status of FSIB itself, as of June 2025, was that 95 per cent of its loans were classified.  So, one wonders whether those behind hollowing out of the banks might again return and claim their stakes in it. In that case, fears also need to be allayed by ensuring that the investments made by general investors who bought shares of the failed publicly listed banks are duly protected. 

In fine, the intervention being made by the Bangladesh Bank to streamline the affairs of the five Islamic banks is a step long time coming, The crisis  in the banking sector, essentially, is the outcome of massive loan fraud and irregularities by political quarters during the previous autocratic regime. The success of the entire exercise, however, will hinge on addressing the underlying issues.