Politics Must Not Fuel Islami Bank Depositors’ Anguish

There is an old tradition in Bangladeshi politics: when an institution performs well, everyone wants to claim ownership of it; when it falls into crisis, no one wants to accept responsibility. The recent turmoil surrounding Islami Bank appears to be yet another version of that familiar story.

Today, thousands of depositors stand in long queues outside the country's largest Shariah-based bank. Some have come to withdraw retirement savings. Others need money they set aside for their daughter's wedding. Many depend on remittances sent by family members working abroad. Inside the bank, however, there is a shortage of cash; outside, there is a storm of anxiety, speculation, and uncertainty. This situation was not triggered by a global financial meltdown or a sudden economic disaster. Rather, it emerged from interference in a financial institution.

What began as a dispute over the appointment of a chairman after the Eid quickly evolved into a banking crisis. The fundamental question is simple: Should a bank be governed by professional competence and sound financial management, or by loyalty and influence? The Bangladeshi public appears to have already reached its own conclusion.

When the BNP-led government assumed office, many citizens hoped that the banking sector would finally be freed from years of political influence and institutional manipulation. Yet recent events suggest that one sphere of influence may simply be replacing another. At the very least, the developments surrounding Islami Bank have reinforced that perception.

Allegations that Jamaat-e-Islami has long viewed Islami Bank as an important sphere of influence are not new. At the same time, there has been widespread discussion in political circles regarding the interest of various BNP-affiliated groups in exercising influence over the institution. As a result, the bank increasingly resembles a political trophy rather than a financial institution. And whenever political actors compete over a trophy, ordinary citizens are left with uncertainty and fear.

Bangladesh Bank has now dissolved the bank's board of directors and appointed one of its executive directors with special authority to oversee operations. The central bank has also provided an emergency liquidity support package of Tk 2,500 crore, with indications that further assistance could follow if necessary.

Yet a crucial question remains: Can a crisis of confidence be resolved simply by injecting more money into the system?

When a depositor stands in line before sunrise, he does not examine a bank's balance sheet. He watches whether the person next to him is withdrawing funds. He follows rumours circulating on social media. He listens to politicians blaming one another. Once confidence is broken, restoring it becomes extraordinarily difficult.

Former Bangladesh Bank Governor Dr. Ahsan H. Mansur has highlighted precisely this reality. He argued that the problem was created politically and therefore must be resolved politically. Some observers may find that assessment surprising. Yet when the roots of a crisis lie not in economics but in politics, the solution cannot be found solely in economic textbooks.

Dr. Mansur also warned that liquidity support alone may not be sufficient to save the institution. Today it is Tk 2,500 crore. Tomorrow it could be Tk 10,000 crore. Islami Bank has already disbursed approximately Tk 8,000 crore to its depositors. The day after, perhaps Tk 50,000 crore. No bank can meet withdrawal demands from all 3 crore depositors simultaneously using only the cash held in its vaults. Where does the process end? He cautioned that if the situation spirals out of control, support requirements could rise dramatically.

This warning extends far beyond Islami Bank itself. It is a warning for Bangladesh's entire financial system.

Banking ultimately rests on one foundation: trust. If customers lose confidence in one bank, fear can spread rapidly to others. At that point, the problem ceases to be an institutional issue and becomes a national economic concern.

Perhaps the most striking aspect of the current situation is that political actors who routinely attack one another are now being urged to sit together and find a solution. Dr. Mansur has called on BNP and Jamaat leaders to engage in dialogue, arguing that if political rivalry helped create the crisis, political understanding may be necessary to resolve it.

It is an unusual reality. Those who insist that economics and politics are separate now find themselves watching a major bank's future depend on political compromise. Those who believe markets alone can solve every problem are discovering that trust comes before markets, and governance comes before trust.

In a latest development the International Monetary Fund (IMF) has sought a time-bound action plan for comprehensive banking sector reforms, specifically raising structural objections over the newly added Section 18(A) of the Bank Company Act, finance ministry sources said.

The global lender has placed these conditions as part of ongoing negotiations for a completely new loan package formally requested by the government on June 1.

According to reports, the IMF has expressed strong reservations regarding Section 18(A) of the Bank Company Act—a controversial provision incorporated into the legislation that creates a legal window to return the ownership of forced-merged or restructured banks back to their previous owners. The multilateral lender views this clause as a masked loophole that compromises structural governance and weakens accountability within the financial sector.

To satisfy the IMF conditions and ensure financial sector discipline, the government has taken a decision in principle to drop Section 18(A) from the law entirely.

In addition to stripping the controversial provision, the IMF has sought explicit, definitive plans from the government to sharply bring down non-performing loans (NPLs), execute the merger of weak financial institutions, and completely halt state and political interference in commercial bank management.

Bangladesh has witnessed numerous examples of bank scandals, non-performing loans, political influence, and regulatory weakness. Yet the significance of the Islami Bank crisis lies elsewhere. The issue is not merely financial. It raises a broader question: Can the state protect financial institutions from becoming battlegrounds for political competition?

If the answer is no, then the risks extend well beyond a single bank.  (The writer is the Head of News at The Mirror Asia, a German-based news outlet.) 

[This story has been published in the June print edition of the GreenWatch]