Islamic banks face dividend suspension in 2024, marking the first time in 32 years, though liquidity is expected to improve after recent board adjustments.
Highlights
- Islami Bank will not distribute dividends this year due to significant regulatory shortfalls.
- The crisis primarily stemmed from extensive loan corruption linked to the S Alam Group.
- Default loans surged to 40% in 2024, a sharp rise from 4% the previous year.
- Internal audits showed the S Alam Group borrowed nearly tk1 crore.
- Downgrading of banks on stock exchanges is anticipated.
- New management claims liquidity has improved following the removal of S Alam from the board.
Islamic Bank Bangladesh, once a leader in the private banking sector, has not declared dividends for the first time in 2024, ending its remarkable 32-year streak. By the end of 2024, the bank faced a massive provision deficit amounting to TK69,770 crores against defaulted loans, which prohibited any dividend declarations.
Loan provisions are meant to safeguard depositors, ensuring that banks present an accurate financial picture that accounts for potential defaults. Unfortunately, the scheme was undermined by an unusual spike in default loans, reaching 40% at the end of 2024, compared to just 4% the year before.
Only a year prior, the bank boasted significant profits of TK635 crores in 2023 but fell into losses in 2024 due to the heavy provisioning demands for non-performing assets. Interestingly, they managed to show an artificial net profit of TK108 crores by utilizing provisional deferred facilities from the central bank.
A senior Bangladeshi banking official noted that the bank had been allowed to present these artificial profits due to their implications for foreign banking relations. Yet, even with these profits, regulatory restrictions prevented dividend issuance. Recently, the Bangladesh Bank released a directive prohibiting banks from offering deferred facilities after declaring dividends.
If the Islamic Bank were to fully honor the necessary provisions, the reported losses would have been substantial. Historically, banks on the Dhaka Stock Exchange declared a standard 10% cash dividend in 2023, which kept them in the top “A” category, but this year they’ll be downgraded to category “Z” with no dividends declared. Shares remain unchanged at TK40.
This year marks the fourth time in 32 years that dividends have not been issued, a trend previously noted in 1986, 1987, and 1992. Omar Fakh Khan, the newly appointed managing director, remarked that the general shareholders wouldn’t feel much impact since the S Alam Group holds 82% of the company’s shares.
He acknowledged, however, that the significant provision shortfall arose from an unexpected rise in default loans, but stated that liquidity has shown signs of improvement, particularly after the recent board restructuring following turmoil in August 2024.
In 2023, the bank faced a negative balance with the central bank, failing to meet required daily cash ratios. Currently, though, all negative balances are shifting to a surplus status, with TK15,000 crores in deposits acquired in the past six months, indicating a recovery in customer trust.
Islami Bank remains the largest private bank in the country and was taken over by the S Alam Group in January 2017, a group tied to the prior Awami League government, which came to an end amid widespread protests in 2024. Notably, the Anti-Corruption Committee did not pursue inquiries into the funding sources of these shadowy firms during that time.
Following a government change last September, Bangladesh Bank restructured the Islamic Bank committee. The new board initiated an internal audit, revealing that a considerable volume of loans had been improperly issued to the S Alam Group and its associates.
Most of these loans transitioned to default when S Alam Group chairman Mohammad Saiful Alam left the country. In response, Bangladesh Bank has sought both local and international investors to acquire shares of the S Alam Group. Islami Bank is also attempting to auction assets belonging to the group to recoup loan amounts, as per the Money Loan Court Act of 2003.
