Audits expose hidden bad loans at 6 Islamic banks

Asset quality reviews by international auditors KPMG and Ernst & Young have revealed that six Shariah-based banks in Bangladesh are in a dire financial state, with non-performing loans (NPLs) skyrocketing four times greater than previously reported.

The reviews, initiated in January with backing from the Asian Development Bank, expose deep-seated financial mismanagement at First Security Islami Bank, Social Islami Bank, Union Bank, Global Islami Bank, ICB Islamic Bank, and Exim Bank. The findings suggest that these banks have been submitting questionable data to regulators for years.

The forensic audits, which examined the banks' financial statements up to September of last year, paint a starkly different picture from the official records. While Bangladesh Bank's reports indicated the six lenders held a combined Tk 35,044 crore in NPLs, the international auditors' assessment places the figure at a staggering Tk 147,595 crore.

The discrepancy is particularly glaring for three banks. First Security Islami Bank's NPL ratio was found to be 96.37 percent, a dramatic increase from the 21.48 percent it reported. Similarly, Union Bank's NPL ratio stands at 97.80 percent, compared to the previously stated 44 percent, and Global Islami Bank's is 95 percent, up from 27 percent.

The reviews also uncovered a significant capital shortfall. The combined provision shortfall for all six banks has reached Tk 115,672 crore until September of last year, according to the AQR reports.

These revelations have spurred the central bank to take decisive action. Under the newly enacted Bank Resolution Ordinance 2025, a framework established following the political transition last year, five of the six banks were slated for merger. The new ordinance grants the central bank expanded authority to resolve distressed financial institutions.

ICB Islamic Bank has been excluded from the merger plans due to the presence of foreign investment.

As of September last year, the six banks held investments or loans worth Tk 1,93,537 crore against deposits of Tk 1,60,030 crore, underscoring the pressure on their balance sheets, according to the AQRs.

A senior BB official alleged that these banks had been "providing false and fabricated data to the central bank for years during the previous government regime".

Banking expert Md Arfan Ali, former managing director of Bank Asia, said the AQRs were a much-needed move to expose the true health of the Islamic banks.

"This will help determine whether the banks can continue independently or the government needs to take them over temporarily with capital support and later transfer them back to private ownership or to other investors," he said.

He stressed the need for strict loan recovery mechanisms, particularly against willful defaulters, and stronger regulatory controls to prevent future crises. "Strong regulatory control is needed to prevent such practices in the future."

KPMG audited First Security Islami, Global Islami, and Union Bank, while Ernst & Young audited Exim Bank, Social Islami, and ICB Islamic Bank. The audit firms submitted their findings to the central bank earlier this year, and The Daily Star has reviewed  copies of the reports.

MERGER SLOWED

After the fall of the previous regime last year, the central bank has already restructured the boards of the five banks slated for merger. Four of them -- First Security Islami Bank, Social Islami Bank, Union Bank, and Global Islami Bank -- had seen significant influence from S Alam Group, a business conglomerate known for its ties to the previous ruling party.

The formal merger process began this month under the Bank Resolution Ordinance, but differences over Exim Bank and Social Islami Bank's inclusion have slowed progress.

Both banks have pushed back. Md Nazrul Islam Swapan, chairman of Exim Bank, said the bank's financials are stronger than those of the other institutions and that the merger decision has triggered fresh deposit withdrawals.

Md Rezaul Haque, director and former chairman of Social Islami Bank, echoed the concern, saying the bank could recover on its own and should be excluded from the merger plan.

Despite the resistance, officials at the central bank confirmed that work is underway to execute the merger under a newly created dedicated department, the Bank Restructuring and Resolution Unit.

However, one senior official at the unit, speaking on condition of anonymity, told The Daily Star that the process has slowed due to the central bank's lack of prior experience with such a large-scale restructuring.

Mohammad Abdul Mannan, independent director and chairman of First Security Islami Bank, welcomed the move. "It's a good decision by the regulator," he said. "But the process should be expedited."