Bangladesh's banking sector has been rocked after international audit firms revealed a huge hidden bad debt at some Shariah-based banks.

The latest update has surprised banking sector experts, including the Bangladesh Bank, as the findings suggest years of deliberate data manipulation by banks under the previous government, leading to severe underreporting of bad debts.

A forensic audit, scrutinizing the financial statements of these banks up to September of last year, painted a starkly different picture compared to Bangladesh Bank's official records.

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While the central bank's records indicated a combined NPL of Tk 35,044 crore for the six Islami Banks, the international auditors' assessment pegged that figure at a staggering Tk 1.48 lakh crore.

The audit firms have uncovered massive discrepancies between banks' published non-performing loan (NPL) figures and the actual financial health of several Sharia-based banks.

During the tenure of the previous government, these banks consistently provided the central bank with fabricated and misleading information for years," a senior Bangladesh Bank official said, conditioning anonymity.

An Asset Quality Review (AQR) conducted by international audit firms KPMG and Ernst & Young has exposed the dire financial straits of six Sharia-based banks in Bangladesh.

Their actual non-performing loans (NPLs) are found to be four times higher than previously declared, indicating a widespread cover-up.

The review, which commenced last January with support from the Asian Development Bank (ADB), revealed long-standing financial irregularities and weak management practices at First Security Islami Bank, Social Islami Bank, Union Bank, Global Islami Bank, ICB Islamic Bank, and EXIM Bank.

The report states that these banks have consistently provided misleading information to regulatory bodies for an extended period.

The disparity is even more pronounced for three specific banks. First Security Islami Bank's NPL rate was found to be 96.37 percent instead of its declared 21.48 percent.

Union Bank's rate jumped from 44 percent to 97.80 percent, and Global Islami Bank's rate soared from 27 percent to 95 percent.

The forensic review also highlighted a critical capital deficit. According to the AQR report, the combined provision shortfall for the six banks reached Tk1.16 lakh crore as of September last year.

The AQR report further reveals that as of September last year, the six banks held investments or loans totaling Tk 1.93 lakh crore against deposits of Tk 1.60 lakh crore.

These figures signal that these banks, underscoring the urgent need for comprehensive reforms in the sector.

In response to these alarming findings, Bangladesh Bank has taken stern measures. Under the 'Bank Resolution Ordinance 2025,' enacted after the political transition last year, the central bank's authority to restructure or liquidate distressed financial institutions has been expanded. Under this ordinance, plans are underway to merge five of the six problematic banks.

However, ICB Islamic Bank has been excluded from the merger plans due to the presence of foreign investment.