Governor Ahsan H Mansur has sanctioned an additional Tk2,500 crore in liquidity support for the financially distressed Social Islami Bank and First Security Islami Bank by printing new money, sources at the central bank confirmed on Thursday (13 March).
Key Points:
- Governor approves fresh liquidity support on Thursday.
- Total loans provided so far amount to Tk29,910 crore.
- Nine troubled banks have received financial assistance.
- Printing money to provide liquidity support may fuel inflation.
The central bank has extended Tk1,500 crore to Social Islami Bank and Tk1,000 crore to First Security Islami Bank. This brings the total liquidity support granted to struggling banks under the interim governor to Tk29,910 crore.
Among these banks, Social Islami Bank has received Tk5,500 crore, while First Security Islami Bank has been allocated Tk6,500 crore. Other recipients of liquidity support include National Bank (Tk5,000 crore), Union Bank (Tk2,000 crore), Bangladesh Commerce Bank (Tk200 crore), ICB Islami Bank (Tk10 crore), Global Islami Bank (Tk2,000 crore), EXIM Bank (Tk8,500 crore), and AB Bank (Tk200 crore).
During Sheikh Hasina’s tenure, the losses within the banking sector remained concealed. However, towards the end of 2022, media reports exposed large-scale loan fraud in multiple banks. As a consequence, depositors withdrew their savings, exacerbating the liquidity crisis.
Many banks failed to maintain the statutory cash reserve ratio (CRR) with Bangladesh Bank and also struggled to uphold their statutory liquidity ratio (SLR) obligations. Despite these setbacks, former governor Abdur Rauf Talukder maintained their solvency by offering various regulatory relaxations, including injecting liquidity through money printing to cover current account deficits.
Although the incumbent governor initially pledged not to inject liquidity by printing money, he was compelled to abandon that stance as the banking sector’s financial distress worsened. In November, six banks received Tk22,500 crore, followed by Tk4,910 crore in January, and now an additional Tk2,500 crore has been approved.
These funds were provided without collateral, a move that economists warn could drive inflation upwards.
At a press conference last November, the governor stated: “I had previously asserted that we would refrain from printing money. However, given the prevailing circumstances, I have temporarily deviated from that commitment. Nonetheless, the liquidity injections will be counterbalanced by issuing bonds of an equivalent value in the market.
“We are providing liquidity with one hand and withdrawing funds from the market with the other. Therefore, this cannot be classified as indiscriminate money printing. The overall liquidity balance in the market will remain stable.”
He further highlighted the introduction of 90-day and 180-day Bangladesh Bank bills as measures to absorb excess liquidity.
The governor reassured that contractionary monetary policy would persist until inflation is contained. “We will manage liquidity flows between banks while offsetting them through bond issuances to maintain economic stability. Our commitment to inflation control remains steadfast. This new approach will neither disrupt customers nor destabilise the market.”
However, practical evidence contradicts the governor’s assurances, as only Tk3,159 crore has been absorbed through ten auctions over the past two months.
Supplementary Information:
The liquidity crisis in Bangladesh’s banking sector stems from a combination of misgovernance, loan fraud, and regulatory leniency. The repeated provision of liquidity support without sufficient oversight has raised concerns over long-term economic stability. While the central bank claims it is counteracting the inflationary impact by issuing bonds, analysts remain sceptical about the effectiveness of such measures in ensuring overall financial discipline. The upcoming months will be crucial in determining whether these interventions can stabilise the banking sector without exacerbating inflationary pressures.