Central Bank Waives Islami Bank Penalty

Allegations of irregular foreign exchange transactions and questionable regulatory decisions have surfaced involving Bangladesh Bank and Islami Bank Bangladesh Limited during a period when the latter was under the influence of S. Alam Group. Internal documents and audit observations suggest that both large-scale liquidity support and subsequent penalty enforcement were later partially reversed without formal application or board approval.

Irregular dollar transactions and liquidity support

Between December 2023 and June 2024, Bangladesh Bank reportedly extended five rounds of liquidity support amounting to approximately BDT 13,000 crore to Islami Bank through foreign exchange transactions. These were structured as dollar purchases, where the central bank provided local currency in exchange for dollars that were never delivered in full compliance with settlement expectations.

Normally, such transactions follow a standard settlement cycle in which dollars are credited to the central bank’s nostro accounts the following day. If settlement fails, the counterparty bank is required to refund the funds with interest. However, in this case, the expected foreign currency inflows reportedly did not materialise as required.

Penalty imposition and subsequent waiver

Due to non-settlement and delayed repayment, Bangladesh Bank imposed a penalty equivalent to around BDT 37 crore on Islami Bank. Internal review documents indicate that this amount was later reduced by 50 per cent, despite no formal waiver request being submitted by the bank.

The reduction was reportedly recommended by senior officials and approved by then leadership of the central bank. However, even after the partial waiver, the penalty remained unpaid at the time. Following a change in central bank leadership, the decision to retain the waiver was upheld.

An internal audit review later suggested reinstating the full penalty amount, citing compliance risks and potential reputational damage. Despite this recommendation, the earlier waiver decision remained in effect.

Key financial exposure summary

Governance concerns and audit observations

Bangladesh Bank’s internal assessment reportedly flagged the transactions as highly unusual, noting that such structured dollar trades without proper settlement were not consistent with standard central banking practice. The issue also raised concerns in the 2023–24 financial audit, which reportedly carried a qualified opinion due to foreign exchange irregularities.

Officials familiar with the matter indicated that concerns were escalated internally but did not result in immediate corrective enforcement at the time. Questions have also been raised regarding whether due process, including board-level approval, was followed in approving the penalty reduction.

Institutional responses

Attempts to obtain an official explanation from Bangladesh Bank’s spokesperson did not yield a detailed response, with officials indicating that some information in circulation may be inaccurate.

Islami Bank officials, however, acknowledged that irregularities occurred within its treasury operations during the period in question, attributing responsibility to then-management structures that have since changed. The bank stated that many of the individuals involved are no longer in their positions.

Wider implications

The episode has raised broader concerns about regulatory discipline, central bank governance, and oversight integrity in Bangladesh’s financial system. Analysts argue that when the regulator itself becomes involved in non-standard financial practices or inconsistent enforcement, confidence in the banking sector can be significantly undermined.