$450m reserve drop on 11 Aug: Cover-up for Islami Bank misconduct?

Infograph: TBS

On 11 August 2024, Bangladesh Bank's reserves suddenly fell by nearly $450 million. The drop was puzzling since it happened on a Sunday when international transactions were closed, leading some to fear a hacking incident.

However, it was found that the drop was due to the Bangladesh Bank adjusting its reserves after Islami Bank Bangladesh failed to deliver dollars owed to the central bank. This adjustment was reportedly part of an effort to cover up misconduct involving former governor Abdur Rouf Talukder, former deputy governor Kazi Sayedur Rahman, and the governor's adviser Abu Farah Md Nasser.

Origin of the incident

The practice of buying dollars for future delivery began on 19 July 2023, under the directive of fugitive former governor Abdur Rouf. On that day, the Bangladesh Bank bought $35 million from Islami Bank and deposited an equivalent amount in taka into the bank's account. However, Islami Bank only provided the dollars in phases much later.

According to officials of Islami Bank and the Bangladesh Bank, from 19 July 2023 to 3 July 2024, the central bank purchased a total of $1.6 billion from Islami Bank.

In the first week of this year's July alone, the Bangladesh Bank bought $550 million. Despite paying Islami Bank equivalent taka for these dollars, the bank did not deliver them. This amount was recorded in the reserve to comply with international law, despite the actual reserve being $550 million short, which is a serious violation of international reserve statistics regulations.

Sudden reserve adjustment

After the Anti-Discrimination Students Movement led to the fall of former prime minister Sheikh Hasina and the Awami League government, former governor Abdur Rouf Talukder did not return to the Bangladesh Bank. Deputy Governor Kazi Sayedur Rahman, who did return, was forced to resign.

Later, Abdur Rouf, his adviser Abu Farah Md Nasser, and deputy governor Khorshed Alam all resigned. This left acting governor Nurun Nahar struggling to recover the dollars owed by Islami Bank.

After consulting with officials, she decided to adjust the reserve by deducting the amount due from Islami Bank. On 11 August, $450 million (Tk5,310 crore) was deducted from Bangladesh Bank's account, which resulted in a decrease of nearly half a billion dollars in reserves.

An official concerned at the Bangladesh Bank explained that on 11 August, Tk5,310 crore was deducted, based on an exchange rate of Tk118 per dollar, to settle the owed dollar amount. Although the Bangladesh Bank purchased $550 million from Islami Bank in the first week of July, the bank paid only $100 million.

What analysts are saying

Senior banker and former president of the Association of Bankers Bangladesh, Mohammad Nurul Amin, told TBS, "Purchasing 'due' dollars while releasing money is a severe violation of the double-entry system and constitutes a serious crime. If anyone is responsible for this, they have committed fraud with the reserve accounts. This is an unforgivable crime."

Zahid Hossain, former chief economist of the World Bank Dhaka office, said, "If this has happened, it's not just fraud but outright theft. Those involved should face exemplary punishment."

He added, "The macroeconomic impact is that Bangladesh has lost $500 million from its reserve. This is public money, not personal assets."

Unusual secrecy in reserve data release

When asked about the reserve data, officials at Bangladesh Bank's Foreign Exchange Reserve and Treasury Management department said they are responsible for managing reserves in theory but have no actual records. The Accounts and Budgeting Department now handles this accounting.

The reason for shifting the responsibility to the Accounts and Budgeting Department is unclear. This department was unable to provide reserve statistics from 9 August to 11 August.

Data from 8 August showed that Bangladesh Bank's gross reserve was $25.89 billion, which fell to $25.46 billion by 12 August – an almost $430 million decrease.

Meanwhile, sources at the Payment Systems Department confirmed that Tk5,310 crore was deducted from Islami Bank's account, supporting the reserve adjustment.

Bangladesh Bank's spokesperson and Executive Director Mezbaul Haque declined to comment on the matter.

Interest rate waiver on reserve

Sources at the Bangladesh Bank said the average interest rate at the Federal Reserve Bank is 5.30%. This means that if the dollars had been held there, the Bangladesh Bank would have earned interest at this rate.

However, because of the outstanding dollars from Islami Bank, the Bangladesh Bank missed out on this benefit. When this issue was brought to the governor's attention, he directed that interest be charged at about half the rate (2.65%). It is unclear how much interest the Bangladesh Bank was actually able to collect.

Multiple sources at the Bangladesh Bank confirmed that Islami Bank has faced severe liquidity crises in recent years due to embezzlement involving S Alam Group's loans. The crisis was so severe that the bank could not maintain its cash-reserve ratio.

At the time, former governor Abdur Rouf, his advisor Abu Farah Md Nasser, and former deputy governor Sayedur Rahman developed a process to release cash from the reserve while holding on to outstanding dollars.

This practice of showing dollar purchases from Islami Bank while providing cash became a routine work for the central bank. Although Islami Bank gradually repaid these dollars, they continued to be recorded in the reserve from the day the cash was released. As a result, reserve accounting became a deceptive practice.