Are merged banks destined to be back under ex-owners' control?

The merger of five troubled Islamic banks gets into quagmire with the latest insertions in the newly-enacted Bank Resolution Act that allow former shareholders to regain conditional control over the banks.

Officials at Bangladesh Bank (BB) and some economists air concern over the fate of the merger of five into big one, which virtually remained at halt after the recently concluded parliamentary polls through which Bangladesh Nationalist Party (BNP)-led government came to power last February.

With the late inclusion in the act, uncertainty looms large over operation of the emerging Sammilito Islamic Bank which was formed through merging five severely liquidity-hit shariah-based commercial banks last year, according to them.

The merged banks were First Security Islami, Union, Global Islami, Social Islami and EXIM.

Such changes also trigger panic among many of the directors of the merged banks who fear representatives from the group who looted public money from the banks might get back in the ownerships through using the amended law.

According to the interpolation of changes into section 18(Kha) of the Bank Resolution Act, former directors or shareholders of banks, merging or listed for mergers, can pay 7.5 per cent upfront of the amount injected by the government or the central bank to reclaim the banks. The remaining 92.5 per cent is to be repaid within two years at 10-percent interest.

Seeking anonymity, a BB official says the ministry of finance formed a nine-member body to make some amendments to the Ordinance before it was placed in parliament to get passed as an act.

Initially, he says, there was no such provision regarding the former shareholders but it was incorporated later amid concerns of the central bank's representatives on the committee.

"On the committee, there were only three members from the central bank while remaining people were from the ministry concerned. They (BB officers) were not given the opportunity to present their views during the drafting of the Bank Resolution Act," the central banker told the FE.

On condition of anonymity, another central banker says the activities of Sammilito Islami Bank virtually gets caught up in limbo after the last parliamentary election with no progress in appointing chairman and managing director of the newborn unconventional bank.

"I am now really concerned about the fate of the Sammilito Islami Bank," says the BB official.

He says the government injected capital amounting to Tk 200 billion for the emerging bank having paid-up capital of Tk 350 billion. The government perked money in the current account of the newborn bank with the regulator. Of the funds, it invested Tk 100 billion in Sukuk bonds while the remaining Tk 100 billion in cash remains almost intact in the account.

On the other hand, the central banker says, the banking regulator already distributed Tk 80 billion out of Tk 120 billion among the bank's depositors.

In response to a question as to whether S Alam and Nassa Group would get the opportunity to regain control of the banks through this provision in the law, BB assistant spokesperson Mohammad Shahriar Siddiqui told reporters that the process under which the five banks are being merged is ongoing.

The government always aims to ensure transparency, accountability and discipline in the financial sector. When the current ruling party was in power previously, it ensured transparency in the banking sector.

"Only those former directors against whom there are no allegations will be able to return to control of the banks," Shahriar added.

Talking to the reporters, the economic adviser to the Prime Minister, Prof Rashed Al Mahmud Titumir, said they believe in independence of the regulator.

"The BB governor can respond to the bank resolution act, not we," he says.

Talking to The Financial Express, former chief economist at the World Bank's Dhaka Office Dr Zahid Hussain said the latest inclusion regarding the former shareholders of the banks created an uncertainty regarding operation of the merged banks.

Under the Act, he says, the former directors or shareholders can reclaim ownership of the banks. "But ownership of what? For Sammilito Islami bank or of the weak banks that officially merged, it is not cleared."

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