Islami, Al-Arafah, National turn to Sonali for costly fund

Industry Desk: National Bank has been suffering from a severe financial crisis for two years due to a high rate of non-performing loans.
It would have to take permission from BB to issue more than Tk10 crore in a loan to a single borrower.
The bank’s managing director, Mehmood Husain resigned recently citing ‘personal reasons’.
Bangladesh Bank appointed an observer at Islami Bank to curb irregularities in loan disbursement and manage the liquidity crisis.
Gripped with a severe liquidity crisis triggered by irregularities and corruption, private sector lenders Islami Bank, Al-Arafah Islami Bank and National Bank are borrowing money from state-owned Sonali Bank at 9% interest – the highest commercial lending rate at present.
It is a normal practice that when a bank faces a liquidity crisis it borrows from another bank via the interbank money market – where the borrowing cost is lower than the commercial rate. But the liquidity situation in three private sector banks is so critical that they are forced to borrow from another bank at the highest commercial lending rate.
According to the Bangladesh Bank’s guidelines, banks can charge a maximum of 9% interest on all types of loans other than consumer loans such as auto loans and personal loans – in which case the highest lending rate ceiling is 12%.
On 13 December last year, the Sonali Bank board of directors chaired by Ziaul Hasan Siddiqui approved the investment of Tk200 crore in fund placement in favour of Islami Bank Bangladesh Limited and Tk75 crore in favour of Al-Arafah Islami Bank Limited at a 9% lending rate for a period of 90 days.
On the same day, the bank’s board also agreed to the proposal to extend the term of the Tk150 crore loan to National Bank for another six months at 9% interest subject to payment of the previous interest.
Meanwhile, the average call money rate – the interest rate at which a bank borrows from another overnight – was 6.75% Monday, according to the Bangladesh Bank.
The present liquidity crunch in these banks has been triggered by various irregularities and corruption in loan disbursement, according to industry insiders.
Meanwhile, the Chairman of the shariah board of Islami Bank Professor Mohammad Gias Uddin Talukder has questioned this borrowing of interest-bearing loans by two Islamic banks at fixed interest rates, saying it goes against the principle of the shariah-based banking system.
“Islami Bank in no way can borrow money from Sonali Bank. I shall ask the board of directors of the bank about this,” Professor Talukder told.
National Bank needs cenbank’s approval to issue loan over Tk10cr
Meanwhile, the Bangladesh Bank in a notification issued Monday said that National Bank would have to take permission from the central bank from now on to issue more than Tk10 crore in a loan to a single borrower. Besides, National Bank will not be able to renew old loans without collecting due instalments.
The move is meant to protect interest of the bank’s depositors and ensure proper implementation of the memorandum, according to a notification.
The central bank has also barred National Bank from opening any letter of credit (LC) without 100% cash deposit.
When asked, central bank spokesperson Majbaul Haque said, “The managing director of National Bank has resigned. For this reason, monitoring of the bank has been increased. Large loans have been ordered to be closed.”
At the end of September last year, National Bank’s provision shortfall stood at Tk7,474 crore – the highest among all public and private banks.
The bank’s total outstanding loans at the end of September 2022 stood at Tk41,286 crore, of which Tk11,335 or 27.46% was in default status.
Amid such a critical situation, Mehmood Husain resigned as the managing director of the bank on 18 January citing “personal reasons”.
Before resigning last week, Mehmood Husain told that borrowing from Sonali Bank was not actually a loan.
“A fund is being taken for three months. We also have some liquidity crunch. Therefore, we have extended the term of the fund received from Sonali Bank fund for another three months at 9% interest.”
Observer at Islami Bank
Earlier on 11 December, the Bangladesh Bank appointed an observer at Islami Bank to curb irregularities in loan disbursement and manage the liquidity crisis. The central bank has also continued its inspection activities in the bank apart from reviewing the disbursement, recovery, and status of loans of over Tk10 crore since 15 December.
What led to the crisis?
Many customers started withdrawing money from the Islamic banks in the country following the start of discussions of a dollar crisis in July, leading to an alarming downturn in the amount of deposits in various banks, including Islami Bank Bangladesh and Al-Arafah Islami Bank.
Since then, the liquidity crunch started taking a serious turn in most of the banks, making them borrow from other banks at high interests to stay afloat.
On 9 January, banks started borrowing from other banks at an interest rate of more than 9% in the call money market. On that day, a bank took out a loan of Tk15 crore for 14 days at 10% interest. But a year ago, the call money rate was 4%.
To deal with the situation, Islami Bank borrowed Tk8,000 crore from the central bank at 8.75% interest for a period of one day under the “Lender of Last Resort” scheme. Besides, Islami Bank along with four other shariah-based banks received Tk4,000 crore in loans from the Bangladesh Bank for a period of 14 days against Sukuk bond facility.
At a recent programme, Bangladesh Bank Governor Abdur Rauf Talukder said the central bank gave liquidity support to Islami Bank since it had 1.90 crore clients and some Tk1.50 lakh crore deposits.
The amount of excess liquidity held by the country’s banking channel in November last year was Tk1.53 lakh crore – down by Tk65,000 crore than the corresponding month in the previous year.
According to the central bank, Islami Bank had around Tk1.45 lakh crore loans at the end of September 2022. Of it, the amount of defaulted loans was Tk4,792 crore – around 3.28% of the total loan.
The loan amount of Al-Arafah Bank is Tk42,658 crore, out of which Tk2,095 crore is in default.
According to the central bank, the amount of excess liquidity in Islamic banks was Tk25,782 crore at the end of June 2021. But the amount fell to Tk646 crore at the end of November last year.
National Bank moves to raise Tk1,000cr issuing foreign bond
National Bank has been suffering from a severe financial crisis for two years due to a high rate of non-performing loans. The bank has also taken an initiative to raise Tk1,000 crore of funds from foreign sources by issuing a foreign bond to meet the regulatory capital requirements and deal with the crisis.
In September last year, the board of directors of the bank decided to issue seven-year bonds worth $100 million, subject to the approval of relevant regulatory authorities, according to the Dhaka Stock Exchange.
The bank’s then managing director told The Business Standard that this funding was necessary due to high non-performing loans eroding the bank’s capital.