Islami Bank Bangladesh PLC has reportedly obtained a loan of Tk1,000 crore from state-run Sonali Bank PLC with interest, thereby violating Bangladesh Bank guidelines for Shariah-based banking.
Islami Bank has yet to fully repay the borrowed amount even though the tenure of the liquidity support has expired.
According to industry insiders, Shariah-based banks are strictly prohibited from either receiving or paying interest.
Based on the meeting minutes of Sonali Bank, which the Dhaka Tribune has obtained, it was seen that in the 851st board meeting held on December 26, 2023, Islami Bank secured the amount for 14 days at an interest rate of 10.5%.
The approval for this liquidity support, termed as "call and short notice deposit," was granted during the board meeting, and subsequently, the funds were disbursed to Islami Bank.
It’s said, that Sonali Bank invested this Tk1000 crore to Islami Bank PLC on the next day of December 27, 2023 to its Special Notice Deposit (SND) account.
A Special Notice Deposit account is an interest-bearing deposit account where advance notice is required for withdrawal.
The meeting minutes also said, of the amount, Sonali Bank has provided Tk621 crore beyond its internal limits.
Requesting anonymity, Sonali Bank officials said they had informed the issue to the central bank already.
Neither Sonali Bank's Managing Director and CEO Md Afzal Karim nor Islami Bank’s Managing Director Mohammed Monirul Moula declined to comment on the matter, despite repeated attempts from Dhaka Tribune.
Central Bank Spokesman and Executive Director Md Mezbaul Haque told the media that: “I can only comment after knowing the issue as I am not aware of the arrangement between the two banks.”
Regarding disbursement of the Tk1000 crore loan, in its meeting minutes, Sonali Bank said it extended the liquidity support despite having no counterparty credit limit for Islami Bank considering the Shariah-based banks' financial health, including satisfactory credit rating and tolerable classified loan rate as claim themselves as domestic systemically important bank (D-SIB).
A counterparty credit limit is a perimeter imposed by a bank or financial institution to cap its maximum possible exposure to a specified counterparty.
The liquidity support was given in the interest of the country's overall banking system as the Shariah-based bank was facing a temporary liquidity crisis, the meeting minutes said.
Islami Bank, which accounts for the highest volume of deposits and loans among the 61 scheduled lenders in Bangladesh, has a deficit in its current account with the central bank for a long time.
Banks have to maintain a current account with the central bank for different clearing payment systems and they have to maintain a hefty balance in the account.
Bangladesh Bank’s deadline
On November 28, the central bank issued letters to the managing directors of five Shariah-based lenders, instructing them to rectify the deficit in their current account balance within 20 working days, or face the risk of being blocked from all clearing platforms by December 26.
The list of banks included Social Islami Bank, First Security Islami Bank, Union Bank, Global Islami Bank, and Islami Bank.
Seeking anonymity during this period, one of the bank's managing directors stated: "If the central bank excludes us from the national clearing system, our ability to engage in any interbank transactions would be compromised."
In that letter, BB said: "Upon reviewing your current account balance, it has come to our attention that it has been consistently in deficit for an extended period, which is not in line with normal banking activities. Despite repeated warnings, there has been a lack of significant action on your part."
The central bank emphasized that failure to rectify the deficit within the stipulated time would result in the affected banks being barred from all or specific clearing platforms, as per the agreement with the payment system department.