With many banks having lost their capital base due to huge looting by the close aides of the last government, Bangladesh’s central bank has launched a special audit for six highly troubled banks to evaluate their asset quality before deciding their future.
EY and KPMG International have been appointed to carry out the inspection at the banks.
The six banks, which operate business under Islamic shariah law in the Muslim majority nation of 170 million people, once had very good financial health before being infiltrated and looted by unscrupulous business groups. After the loan scams these banks have no money to run day to day affairs or pay money to depositors.
The banks which are now under the control of the central bank are: the First Security Islami Bank, the Exim Bank, the Global Islami Bank, the Social Islami Bank, the ICB Islamic Bank, and the Union Bank.
The Asian Development Bank (ADB) is funding the audit and supporting the reform efforts taken by the interim government of Bangladesh, led by Nobel Peace Prize winner economist Dr Muhammad Yunus.
At the same time, a taskforce on the banking sector has started and an investigation into the banks to identify the amount of money disbursed as loans from them, the name of the beneficiaries, where the money landed, and their assess quality.
The managing directors of the six banks have been sent on mandatory leave before starting the audit and investigation.
Central bank spokesperson Husne Ara Shikha said on January 7 at a press briefing said the immediate and proactive policy measures taken by the regulator during the last couple of months have helped to stop the financial bleeding in the banking sector, but achieving full stability will need more time.
She said after the new government has taken office, they instructed the central bank to provide the real picture of non-performing loans (NPLs) in banking sector. She said audits of some of the banks have started and once the procedure is completed the amount of NPLs may cross Tk6 trillion (around $50 billion).
According to central bank data, until last September the banking sector had NPLs amounting Tk2.85 trillion which is 17% of total disbursed loan.
The NPLs in non-bank financial institutions have also been increased significantly at the end of last September amounting Tk261.63 billion which is 35.52% of the total loans disbursed by them.
Foreign law firms to help recover looted money
The government will appoint internationally legal firms to try to recover money looted from banks and siphoned abroad. Central bank governor Dr Ahsan H Mansur said billions of dollars has been transferred abroad, and that the government is now trying hard to bring back the stolen funds.
He said the central bank now plans to appoint foreign legal firms, offering them 10% of the recovered funds, as part of the efforts to expedite the fund recovery process. A White Paper, prepared by the present interim-government, unearthed that each year on an average at least $16 billion was siphoned out illegally from Bangladesh between 2009 and 2023.
Revised guidelines on stress testing
Amid the near-collapse situation of many banks, the central bank recently has issued revised guidelines on stress testing of banks to check their withstanding capacity in the hostile environment.
“In view of burgeoning importance and evolving role of stress testing, changes in the importance of different risk factors, insights gained from the application of existing stress testing framework, and international best practices, Bangladesh Bank has revisited stress testing guidelines,” the central bank said in a recent letter to the chief executive of the banks.
The regulator asked all the banks to carry out stress testing exercise and submit the report in line with the revised guidelines on quarterly basis, effective from December 2024.
Also every bank has been told to establish a rigorous and forward-looking stress testing framework that is commensurate with the nature, size and complexity of its business operations and risk profile. “Stress testing should be integral part of a bank’s internal risk management and capital adequacy assessment process.”
GDP growth slows down
Bangladesh’s economic growth slowed down to 1.81% during the July-September 2024 period, which is the first quarter of fiscal year 2024-25, due to the political volatility which had ousted the government, according to a survey conducted by the Bangladesh Bureau of Statistics (BBS).
Data elaborates that the industrial output rose by 2.13%, service sector by 1.54% and agricultural output expanded by 0.16% in the quarter.
Economists say political upheaval during the period has affected economic activities.
Mid-year rise of VAT
Amid a significant gap in tax revenue collection, which puts Bangladesh’s tax-to-GDP ratio the lowest in this region, the government on January 9, increased value added tax (VAT) on over a hundred products, adding to the cost of living.
The government’s latest measure comes following repeated failures to meet the revenue earning target set by the International Monetary Fund (IMF) as part of its ongoing $4.7 billion credit programme with Bangladesh.
With the latest directive, VAT has been increased on medicines, the internet, imported fresh fruits and fruit juices, raw tobacco, tobacco refuse, paints, varnishes, soap, detergents, airfares, hotels, restaurant service, potato flakes, maize-corn starch, biscuits and pickles.
Officials say revenue collection is far behind the target for meeting the IMF's conditions. The revenue officials will have to realise an additional Tk120 billion through the increased rates of VAT and supplementary duties over the next six months.
Economists fear the cost of living will worsen following the VAT rise, while the public have already suffered due to high rates of inflation. During the last couple of months, the rate of inflation remained at double digits, with latest data in December coming slightly down to 10.9% from 11.4% in November last.
However, food inflation remained at 12.9% in December from 13.8% in November, according to BBS data.
Businesses have strongly reacted to the VAT hike as they fear it will further heighten challenges they have been facing since the war begun in Ukraine. They demanded the government to withhold the move for the VAT rise to help their sustainability.
Unemployment rises
Meanwhile, July-September's Quarterly Labour Force Survey for 2024, carried out by the BBS, found that the number of unemployed people has reached to 2.66 million from 2.49 million in the corresponding period of 2023.
According to the survey, at the end of last September some 4.49% labour force of the country failed to secure a job, up from 4.07% in September 2023.
The country’s women labour force had a 7.16% share, while 3.81% men remained unemployed at the end of last September.
The recovery ahead is going to take many years.
