Why is Bangladesh Bank failing to handle Islami Bank with care?

The central bank took control of the Islami Bank, with a new board of directors after the Awami League regime fell in 2024 wresting it back from the clutches of the S Alam Group.

The largest private bank was at that time beset with massive lending irregularities and scams as the S Alam Group and its associates reportedly took out about 80 percent of the lender's loans, amounting to Tk 1,87,955 crore.

As a result, the largest Shariah-based bank began facing a severe cash crisis from early 2023. Its precarious financial health was exposed through an independent audit by the Bangladesh Bank-appointed board following the July uprising.

Despite having the highest volume of bad loans among Bangladeshi banks — Tk 95,629 crore — Islami Bank’s cash flow returned to normal with liquidity support from the central bank during the tenure of the interim government. People were able to withdraw their money without difficulty, marking a surprising turnaround.

However, the current crisis of the same bank appears to have been triggered by the appointment of the of a new chairman. While clients are being restricted from withdrawing cash to avoid a bank run, its authorities have also sought a bailout from the Bangladesh Bank to keep it afloat according to news reports.

It is not new in Bangladesh for a political party, after coming to power, to appoint its loyalists to key positions in important institutions and sectors. The BNP government lost no time in replacing the Bangladesh Bank Governor Ahsan H Mansur with a party activist with little experience in a similar position. The newly appointed Mostaqur Rahman is a cost management accountant and was also a member of the BNP’s central election steering committee.

The news surprised many at the time. However, Mostaqur has since earned admiration through his warm and approachable manner. In various statements, he has consistently said that he will not bow to political pressure and will not make decisions under political influence.

However, the appointment of a new chairman at Islami Bank Bangladesh surprised and shocked many. The announcement came on the evening of May 24, just as the country was set to go into a week of holidays ahead of the Eid. Md Khurshid Alam, a former deputy governor of the Bangladesh Bank, had been named chair of Islami Bank, hours after the previous chairman resigned.

Khurshid was among the top Bangladesh Bank officials who were forced out in the face of strong protest from central bank officials on August 6, 2024, a day after the Awami League regime fell.

The central bank had also reportedly found evidence of embezzlement against Khurshid. In addition, his wife has defaulted on bank loans. The appointment sparked widespread discussion across the banking sector. There were allegations that Khurshid played a controversial role during the Awami League government’s tenure, when S Alam, a Chattogram-based businessman, had taken over several Shariah-based banks and was linked with major loan irregularities.

Thus, Bangladesh Bank’s motive behind such an appointment is being questioned and rightly so. Why was the appointment made with such haste? Was there any political pressure? If not, then what qualified Khurshid for the post? Was there no one else more suitable? Could the central bank not have appointed another person with a cleaner and more credible record?

None of these questions have been answered. Instead, the central bank’s spokesperson responded saying none of the allegations against Khurshid had been proven. Had the central bank appointed a clean and credible person, the unrest might not have escalated to such a level that the bank had to seek ‘special liquidity support’ of Tk 10,000 crore having lost over Tk 4,000 crore to withdrawals in the first week of June alone.

Jamaat-e-Islami’s vocal and visible support of the protesters as well as the statements by the party’s senior leaders leave little doubt that they are opposed to the new chair and ready to wage a campaign on the streets, on the parliament floor and within the bank as employees register their opposition to the new appointment.

The government and the opposition have also traded allegations regarding the Islami Bank’s role in general and specifically during the last election that the home minister said had favoured Jamaat, while Jamaat MPs said it was false and that such allegations be expunged from the records.

While the Islamist party is said to have close links with the Islami Bank since its establishment in 1983, the prevailing unrest surrounding it (whether or not that is initiated by the Jamaat-e-Islami) has become a matter of grave concern with a potential to cause sector-wide instability. The bankers’ association has already made statements to such effect. Its chair, Mashrur Arefin, told journalists that the growing unrest at Islami Bank, which had a political dimension, was eroding confidence in the banking industry and could pose risks to overall financial stability.

While Bangladesh Bank may not have the muscle or the resolve to put an end to this turmoil, it is imperative for the government to step in to resolve the crisis before it goes any further.