How Bangladesh's Islamic Banks Became Ground Zero for Financial Fraud

In the heart of South Asia, a financial drama has been unfolding that rivals the most complex Wall Street scandals. Bangladesh's Islamic banking sector—once a symbol of ethical finance and rapid growth—now stands as a cautionary tale of what happens when politics, fraud, and regulatory failure converge.

The Hostile Takeover

The story begins on a January morning in 2017. Before dawn, military intelligence officers arrived at the homes of several executives at Islami Bank Bangladesh Limited (IBBL), the country's largest Islamic financial institution. Hours later, these executives found themselves in a Dhaka hotel, signing resignation papers under supervision.

This wasn't a response to corruption or mismanagement. Instead, it marked the beginning of what investigators now call one of the most sophisticated financial heists in banking history.

The S Alam Group, a powerful conglomerate with political connections, took control of IBBL that day. Few understood then what this would mean for Bangladesh's financial stability.

Building the Extraction Machine

What followed was not random opportunism but systematic extraction. The new controllers established a complex network of 18 shell companies in the British Virgin Islands—all without central bank approval. Some received loans worth 900 crore taka (approximately $78 million) within days of their creation.

Through various mechanisms, S Alam Group managed to control approximately 82% of IBBL's shares through 24 companies—far exceeding the 10% legal ownership limit. This concentration of power enabled them to extract an astounding 731 billion taka—nearly half of the bank's total lending portfolio.

How did regulators miss this? In a puzzling move, Bangladesh Bank withdrew its observer from IBBL in 2020 despite growing red flags, effectively removing crucial oversight during the peak looting period.

When Numbers Tell a Story

By December 2024, the damage was catastrophic. The Islamic banking sector recorded a negative 4.95% capital adequacy ratio—a shocking figure considering the regulatory minimum is 10%. Individual banks faced staggering capital shortfalls.

Islamic banks proved particularly vulnerable compared to conventional banks. When depositors began losing confidence, Islamic banks lost a huge amount of deposits during January 2024 alone, while Islamic windows of conventional banks actually gained funds.

The Merger Question

Now Bangladesh faces a difficult decision. The central bank has proposed merging five troubled Islamic banks (Social Islami Bank, Global Islami Bank, First Security Islami Bank, Union Bank, and EXIM Bank) to create the country's largest financial institution.

But a critical question remains:

Can combining several failing institutions create a healthy one?

The proposal has revealed stark differences among these banks. While EXIM Bank has a 28% default rate, First Security, Union, and Global Islamic Banks report default rates of approximately 95%. Some stronger banks have expressed reluctance to absorb the liabilities of weaker institutions, recognising that merging does not automatically solve fundamental problems.

The merger would require government recapitalisation of 10,000-12,000 crore taka—a substantial public investment in institutions that failed due to governance issues rather than economic conditions.

The Political Connection

At its core, this crisis isn't just about financial mismanagement. It reveals how political influence can undermine even the most sophisticated regulatory systems.

The Cambridge University study on Bangladesh's banking sector identified "the Finance Ministry's overreach in licensing private banks, under political considerations" as a key factor in the crisis. Transparency International Bangladesh concluded that "bank owners, regulators and the government—these three parties jointly create the scope for depositors' money to be looted."

This political dimension explains why the legal framework for Islamic banking remained incomplete until 2025, leaving these institutions operating in a regulatory gray area that made them more vulnerable to exploitation.

The Path Forward

Can Bangladesh's Islamic banking sector recover? The interim government has initiated reforms that offer some hope:

• Bank Company Act amendments limiting family board representation and banning political figures from bank boards
• Central bank independence reforms removing political control over monetary policy
• A dedicated Islamic Banking Regulations and Policy Department aligned with international standards

However, the decision about merging troubled institutions versus letting some fail remains contentious. Any restructuring must address the fundamental governance failures that enabled the crisis, ensuring professional management insulated from political interference.

What's certain is that Bangladesh's experience offers critical lessons for other emerging markets: specialized banking sectors like Islamic finance require not just technical regulation but robust safeguards against political capture and concentrated ownership.

The coming months will determine whether Bangladesh can transform this crisis into an opportunity for genuine financial reform—or whether the cycle of exploitation will continue under new management.

[Note: This analysis is based on data available as of August 2025. The situation continues to evolve as investigations and reforms progress.]

Disclaimer: The views expressed in this blog are not necessarily those of the blog writer and his affiliations and are for informational purposes only.

Fuel more mind-shifting insights: Buy me a coffee and watch the wisdom percolate! ☕💡