Cenbank to launch forensic audits of troubled banks in January

The Bangladesh Bank has launched a forensic audit into a dozen struggling banks to uncover potential fraud, assess financial damage, and propose reforms in a move to address long-standing issues plaguing the banking sector.

As part of the initiative, the central bank has engaged in discussions with global auditing giants KPMG, Deloitte, and Ernst & Young to conduct the audits, a development confirmed by banking sector reform taskforce members, central bank officials, and industry insiders.

"This will be a specialised audit, focusing not only on loan asset quality but also on intangible assets," said a taskforce member, requesting anonymity due to a non-disclosure agreement with the central bank. "We have recommended that the BB conduct forensic audits of these banks' balance sheets."

The United Kingdom's Foreign, Commonwealth, and Development Office (FCDO) has agreed to finance the special audit programme and broader banking sector reforms in Bangladesh. The World Bank, the Asian Development Bank, and the International Monetary Fund will provide technical support for the initiative, according to several BB officials.

Another member of the taskforce said banks have been categorised for the audit based on simulations of key indicators, such as non-performing loans (NPLs) and liquidity, as presented by the BB.

"The BB plans to appoint auditing firms in January as December marks the year-end," the taskforce member told TBS.

Bangladesh Bank Governor Ahsan H Mansur said discussions are currently underway regarding the modality and framework of the auditing process. "Since December is a month of holidays and festivities in Western nations, we plan to commence the auditing in January," Mansur told The Business Standard.

Also, a BB board member confirmed that the appointment of globally reputed auditing firms was discussed during a meeting on Sunday. "However, no decision has been finalised yet. As the financier of the programme, FCDO, will have a significant role in this process," the board member said.

Banking sector marred by high NPLs and loan fraud

The banking sector in Bangladesh has long been grappling with issues such as high NPL ratios, weak governance, and recurring loan fraud. The situation has worsened over the last 15 years under Sheikh Hasina's administration during which politically motivated decisions allegedly undermined the sector.

In an already saturated market, around a dozen new banks were licenced – a move widely criticised for being driven by political considerations. Former finance minister of Hasina's government AMA Muhith admitted publicly that many of these licences were granted for political reasons.

The banking sector's vulnerabilities became glaringly evident with a series of high-profile loan scams just a couple of years after Sheikh Hasina came to power for the second time in 2009. 

In the early 2010s, the Hall-Mark Group fraud emerged as a major scandal with the little-known company obtaining over Tk3,000 crore in loans from the state-owned Sonali Bank using fabricated documents. 

Shortly after, the BASIC Bank scam surfaced, where over Tk4,000 crore in dubious loans were sanctioned under the leadership of Sheikh Abdul Hye Bacchu, a political appointee. Despite Bacchu's removal a decade ago, BASIC Bank remains in dire financial distress.

More recently, allegations of large-scale mismanagement have surfaced surrounding Islami Bank Bangladesh Limited (IBBL), the country's largest bank in terms of assets. Since 2017, Chattogram-based conglomerate S Alam Group has been accused of siphoning off billions of dollars through questionable practices after gaining control of IBBL.

In a revelation to the Financial Times in October, BB Governor Ahsan H Mansur alleged that tycoons linked to the Sheikh Hasina administration had siphoned off nearly $17 billion from the banking sector during her tenure. Of this, $10 billion is believed to have been embezzled by S Alam Group alone.

'Political heavyweights responsible'

A recent White Paper on the state of Bangladesh's economy ranked the banking sector as the most corruption-ridden industry in the country. The document identified politically connected "heavyweights" as key actors responsible for distressed assets amounting to Tk6.75 lakh crore, or 31.7% of total loans, by the end of June 2024.

"Audits have to be done to assess the extent of the problems and the true financial health of the banks," said Muhammad A. (Rumee) Ali, a member of the taskforce on banking sector reform and a former deputy governor of BB.

However, he pointed out that the central bank should assign specific tasks and set clear targets for troubled banks to help improve their overall condition.

After the interim government led by Muhammad Yunus assumed power on 8 August, Ahsan H Mansur was appointed governor of BB, succeeding Abdur Rouf Talukder, who resigned following the Awami League government's ouster on 5 August.

Since then, the central bank has restructured the boards of several troubled banks previously controlled by conglomerates tied to the Awami League. It initially provided interbank liquidity support for several weeks, and when that proved insufficient, BB resorted to printing new money, extending Tk22,500 crore in liquidity assistance to the distressed banks recently.