Development of a Case Study on:

“Bank Loan or Heist - A threat to

Public Funding”

Course No.: 7204

Course Name: Accounting for Management Control

Submitted to
Md. Maksudur Rahman Sarker, FCMA
Professor,
Dept. of Accounting & Information Systems,
University of Dhaka

Date of Submission: 13 April, 2016

Financial institutions of a country play an important role in building the financial backbone of the
country’s economy. Importance of banking system in a country is increasing day by day. It is quite
impossible for any country to develop in industrial and commercial sector without sound banking
system in modern economic era. And this sector makes progress on the strength of client confidence.
But it is very sorry to say that discipline in the banking sector is apparently under strain. At the same
time criminal activities in banks have increased. In the absence of good governance, many banks have
indulged in irregular activities and corruption. Basic Bank is one of the recent largest banking scam in
Bangladesh, which occurred due to regulatory inefficiency of commercial banking sectors. It is a
pointer to the fact that if Government does not tighten the regulatory belt of the banks, serious problems
could creep in.

Bank of Small Industries and Commerce Bangladesh Limited (BASIC) is one of the leading specialized
Banks in Bangladesh. This bank is a banking company registered under the Companies Act 1913. It
was incorporated under this Act on the 2nd of August, 1988. The bank started its operation from the
21st of January, 1989. It is governed by the banking Companies Act 1991. The bank was established as
the policy makers of the country felt the urgency for a bank in the private sector for financing Small
Scale Industries (SSIs). The government of Bangladesh took over 100 percent ownership of BASIC on
4th June 1992. Thus the bank is state-owned. However the Bank is not nationalized; it operates like a
private bank as before. BASIC is unique in its objectives. It is a blend of development and commercial
banks. The Memorandum and Articles of Association of the Bank stipulate that 50 percent of loanable
funds shall be invested in small and cottage industries sector. BASIC Bank is operated by a team of
skilled highly qualified, experienced and enthusiastic working forces headed by the well conversant
Managing Director of the Bank who has about three decades prolong close attachment in different
horizon of Banking.
Paid up capital Tk. 2357.59 million

Total Reserve and Surplus Tk. 3124.17 million

The Bank is required to transfer 20 percent of its net profit before Tax to Capital
Fund as per the Banking Companies Act 1991.
Since the inauguration the bank has managed their activity with their own images to serve their
customers. They have provided services successfully and have achieved goodwill among the Banks.
The Bank is opening with its efficiency and integrity. The bank has sponsors from various sectors of
Bangladesh. The most successful entrepreneurs from various sectors started this company. As a result
there was a combination of different thoughts and skills in the management of the bank, which is very
much essential for success in today’s competitive market. It has a very competent and experienced top
Management. The current Managing Director Mr. Mozammel Haque has banking experience for a long
time period. He had the experience of marketing and customer relationship management in his long
career. This has helped the bank to achieve its goal. The Bank is operating based on Islamic Shariah.
As Bangladesh is a Muslim country, the Shariah banking has been able to attract customers and
achieved a great success in the private banking sector.It is operating their business all over the country
with 30 branches and still planning to expand their business by opening new branches in the country. It
has strengthened the distribution of the bank’s services.The 100% Share of BASIC Bank is
Government. So it is a very Good Strength for any Company.

But it is a very great regret that recently BASIC Bank has opened the doors to new ways of
misappropriating funds through fraud and deception. Blatantly ignoring all banking norms, loans
proposals have been approved without any meeting of the board of directors. . As a result, customers
are losing confidence. Source suggests, BASIC Bank is assumed to have resorted to fraudulent loan. A
fraudulent loan is one in which the borrower is a business entity controlled by a dishonest bank officer
or an accomplice; the “borrower” then declares bankruptcy or vanishes and the money is gone. The
borrower may even be a non-existent entity and the loan merely an artifice to conceal a theft of a large
sum of money from the bank. This can also be seen as a component within mortgage fraud. This is one
of the biggest scam in the banking history of Bangladesh.

This brand new method of swindling has been carried out openly in front of the observer appointed by
Bangladesh Bank. He was present at the 329 the meeting of the board held on December 21, 2013.
There were 308 points on the agenda of the meeting.
Though many days had passed, observer Ashok Kumar Dey was still not given the minutes of the
meeting. He finally received the minutes, but only after having to phone the Bank's Managing Director
Kazi Fakhrul Islam thrice. The minutes revealed this 'innovative' method of fraudulence.

While the agenda of the meeting contained 308 items for discussion, the approved minutes lists 414. In
other words, 106 loans were approved without having even been raised at the board meeting. The total
sum of the 106 approved loans was Tk 1,354 crore. However, in 2014 a scandal came out against
BASIC bank around Tk. 4500 crores loan scam. The Chairman acted with dishonesty. He approved the
loan to loan seekers ignoring the alert of bank officials & cautions against such loans by the central
bank.

Some Reasons has been found behind these fraudulent activities, some of them are explained here.

Politics is a very influential factor in all of the sectors in our country. In any country of the world,
banking sector plays a significant role in the economic development of that country. All of business and
economic activities of a country are totally depend on the banking sector. But sorry to say, political
influence on banking sector has already brought about many adverse situation in the banking sector of
our country. Basic Bank is one of them. It is alleged that loans have been given to fake companies
because of political pressure and connivance of dishonest bank officials. Directors of this state-owned
commercial bank appointed on political considerations have allegedly played an important role in this
regard. Millions of Taka has been withdrawn in the name of fake companies by opening local letter of
credit. Although many irregularities have been detected by the central bank, no punitive action has been
taken against banks and bank officials. Letters have been issued to the chief executives of the banks
several times. Political influence is making the banking sector risky.

The Govt. doesn’t take necessary steps against this fraudulent activity. Though several cases have been
filed against the members, board of directors, bank officials and they have already been arrested by the
police. But unfortunately no case has been filed yet against the Chairman of Basic Bank, who is close
to the government. This is really ridiculous. Besides, the comments of the finance minister are
encouraging the corrupt officials. The health adviser has allegedly tried to influence the anti-corruption
commission. The government will have to cooperate in the process otherwise nothing will happen.
“The bank would have been closed down if it had to meet up the shortfalls,” said Khondkar Ibrahim
Khaled, former deputy governor of Bangladesh Bank and former chairman of Bangladesh Krishi Bank.
He, however, accused the government of destroying the bank by appointing a corrupt chairman.
Bangladesh Bank is now busy in justifying the government’s misdeeds by allowing the bank to hide its
real financial situation.

Plundering of resources is taking place in state-owned commercial banks. Loans are being advanced in
the name of fake companies. There is little prospect of recovering such loans. Bangladesh Bank is
hardly able to inspect the state owned commercial bank.

The foundation of our economy is eroded for lack of transparency, accountability and absence of
monitoring in our banking system. Because of a non-transparent and weak financial system, this
fraudulent activity has been occurred. This Bank has signed loan agreements without looking into
management of liquidity problems. Granting of risky loans due to political considerations is creating
pressure on liquidity. A big chunk of this money has allegedly gone into the pockets of politically
influential people and some other fake companies. There is clear evidence of lack of transparency in
appointing the board members of the bank. The central bank has produced a detailed guideline for the
management of banks. But this is not being followed. It is alleged that chairman of the bank interfere in
the work of the banks going beyond their authority. This is a violation of central bank rules. The tenure
of chairman of state-owned commercial bank has been extended despite allegations against them.
Bangladesh Bank has to bring back discipline in the banking system.

Various problems including inefficiencies, malpractice and scams in the banking sector have impacted
the soundness of a tool that is mainly used foster economy and wellbeing of the people. But it is evident
that savings in the banks and other financial institutions by people is misappropriated by a class who is
resorting in capital flight instead of investing in the home soil.

Basic Bank was unable to select the right individuals or organizations for lending. If the selection of
borrower becomes faulty then the whole lending process will fail. The persons or organizations should
be selected as the borrowers who are financially as well as mentally fit for the borrowing. If the banks
select the fraud people whose intentions is not to repay the loan then the bank will face higher classified
loans thus their banking operations be collapsed. So in case of selection of right borrower, the bank
should be knowledgeable or aware of the information of the borrower that is proper KYC (Know Your
Customer). But Basic Bank sanctioned loans to the fake and politically influenced companies. That’s
why the fraudulent activities have been occurred.

Bangladesh Bank provides circular to the commercial banks time to time for their smooth operation and
own safety and security. All commercial banks must have to follow those circulars. It was found that
sometimes officials are unaware of those circulars. This may lead the bank towards operational as well
as reputational risks.

Corrupted bankers are quiet responsible for this financial fraud or scams. They make linkage with the
clients and associated with these fraudulent activities. As they know the banking rules and regulations
very well and they find the way to do fraud by showing their thumbs to the bank.

When the scam has been exposed to the public, several cases have been filed against Basic Bank. In
July, 2014 the central bank has sent a report on the financial scam at BASIC Bank to the Anti-
Corruption Commission after concluding a special inspection into the scam in the first week of this
month, detailing how borrowers embezzled money from the state lender through fake companies and
suspected accounts. The central bank first inspected BASIC Bank's Gulshan, Shantinagar and Dilkusha
branches in 2012 and found evidence of serious anomalies in approving loans.

The central bank suspects a chunk of Tk 4,500 crore embezzled from BASIC Bank has gone out of the
country, officials said. The report was also sent to the anti-money laundering unit of Bangladesh Bank
to see whether the money was laundered. The latest inspection was aimed at identifying the actual
beneficiaries of the scam by digging deep into specific accounts.

After four years of remaining silence, the Anti-Corruption Commission (ACC) has suddenly become
lauded over the Tk 4,500 crore loan scam of state-owned specialized financial institution Basic bank.
The ACC investigation team submitted its report on BASIC Bank loan scam to the commission,
recommending filing cases against 56 people, excluding the bank`s then chairman Sheikh Abdul Hye
Bacchu.
The report, submitted at ACC inquiry and investigation desk-1, included name of the bank’s ex-
managing director Kazi Fakrul Islam, an official close to the investigation process. Responsible
officials at the desk said it would take one more week to make public outcome of the report. The
accused 56 people include Basic Bank officials as well as chief executives and managing directors of
the organizations involved in the scam. Kazi Fakhrul Islam was removed on May 25 last year following
intervention of the central bank. Before that, several other officers were sacked. On the same day,
Sheikh Abdul Hye Bacchu also resigned from the post of chairman, following allegations of financial
irregularities. Sheikh Abdul Hye Bacchu was allegedly `masterminded` the biggest-ever banking fraud
of around Tk 35 billion in Bangladesh that took place between 2009 and 2012.

On 21, September, 2015 the Anti-Corruption Commission filed 18 cases against a number of bankers
and borrowers linked with the Tk 4,500-crore BASIC Bank scam between 2010 and 2013. Of the cases,
eight were lodged with Gulshan Police Station, seven with Paltan Model Police Station and three with
Motijheel Police Station, accusing 56 people of embezzling over Tk 650 crore from the state lender.
However, the then BASIC Bank chairman Abdul Hye Bacchu, who is believed to be at the centre of the
scam, was not accused in any of the cases filed.

Early this year, a functional audit by the bank outright blamed the Bacchu-led board for the
irregularities that cost the state-run bank more than Tk 4,500 crore. In its inspections in 2012-13,
Bangladesh Bank also found Bacchu's complicity in the embezzlement. According to police, Kazi
Faqurul Islam, who was fired from the post of BASIC Bank managing director for involvement in
serious irregularities, was accused in a number of cases.

In January, 2016 the court has sent three high ranking BASIC Bank officials to jail over the charges of
a sensational scandal.

The 18 cases filed by the Anti-Corruption Commission (ACC) did not charge Sheikh Abdul Hye
Bacchu for the irregularities involving loans worth 35 billion. The bank officials had pointed their
fingers at Hye but the ACC cases filed in September last year, after four years of investigation, did not
accuse him. Bacchu, a former MP from the Jatiya Party, was made chairman in 2009 and reappointed in
2012. Unsatisfied by the ACC’s investigation, the parliamentary committee on the finance ministry
launched its own investigation. The ACC and the central bank have been ordered to submit their
findings about BASIC Bank to High Court on Feb 9.

On 27, March, 2016 Anti-Corruption Commission (ACC) in a drive arrested four persons in connection
with Basic Bank’s money misappropriation. After the arrest, investigation officers of ACC produced
them before the court on March 28, seeking remand for interrogation.

The trouble-hit BASIC Bank incurred a highest loss of TK.2,686 crore in 2014 because of spillover
effects of loans scams of the previous years. The bank plunged into a loss of TK.53 crore for the first
time in the year 2013 since its inception, compared to the net profit of over TK.2 crore in 2012.

The loss increased by 153.52% during last year as the bank witnessed a negative growth with the piling
of the default loans over the years. The operating loss of the BASIC bank was around Tk111 crore in
the last year compared to operating profit of Tk147 crore in the previous year. The bank has failed to
get any income from more than half of its assets, which turned into default for last two years, said
another senior executive officer of the central bank. As the provisioning requirements of the bank are
increasing as well as default loans, it badly hit the earnings of the bank.

The default loans of the bank rose to 53.32% or TK.6310 crore at the end of the year 2014, more than
half of the total assets of Tk.11,834 crore, according to the Bangladesh Bank data. The interest to the
suspense account rose to Tk.419 crore during the last year compared to Tk.173 crore in the previous
year.

Both the return from asset and equity deteriorated further to negative 15.70% and 210.66% respectively
in the last year compared to negative 0.34% and 8.80% in the previous year. The capital shortfall of the
bank stood at Tk2, 223 crore at the end of the year 2014. Though the bank got the capital support of
Tk790 crore from the government on December 29 last year, it did not reflect in the annual balance
sheet.
An overview of Profit or loss and financial ratios from 2012 to 2014:

Particulars 2014 2013 2012

Profit (loss) after Tax (Million TK) (531.53) 27.89 976.11
Financial Ratios:
Capital Adequacy Ratio (1.66) 10.05 10.13
After Tax Return on Equity (8.05) 0.47 19.61
After Tax Return on Asset (0.40) 0.03 1.40

2014 2013 2012

976.11

27.89 10.05 10.13 0.47 19.61 0.03 1.4

-1.66 -8.05 -0.4

Profit (loss) after Tax Capital Adequacy Ratio After Tax Return on After Tax Return on
(Million TK) Equity Asset

-531.53
To avoid this type of scam in future some measures can be taken:
 Basic bank can use automated analysis tools to identify and report fraud attempts in a timely manner.
 It can formulate a sector-oriented benchmarking solution for a targeted and cost-effective action plan
against fraud risks.
 It can Data Visualization tools to provide a visual representation of complex data patterns and
outliers to translate multidimensional data into meaningful pictures or graphics.
 It can implement Behavioral data analytics by the institutions to understand customer behavior,
preferences etc.
 It should use deep learning, a new approach to machine learning and artificial intelligence that is
good at identifying complex patterns and characteristics of cybercrime and online fraud.
 Need a well-defined governance structure to avoid this type of scam.
 Develop policies and procedures to provide guidance to business
 Policies to be structured in layers to cover all products and services across locations
 Data capturing should be consistent and adequate
 Data flow from various systems to be unhindered
 Data sanctity should be preserved
 Employ qualified and experienced staff to enable supervision and monitoring.
 Effective technology solutions to be implemented for business to run in sync and data to be
available consistently.
 Periodic reviews and transparent management reporting.
Key Components of an effective Anti-Fraud Programme:

Governance
and control
Policies and
Deep learning
procedures

Behavioural Effective
analytics data

Awareness
&
Data
Human
visualisation Training capital
tools

Sector-oriented Technology
benchmarking framework

Automated Periodic
analysis tools review
QUESTIONS:

Question1: What do you mean by Independency Threat? How much independency threat has affected
Corporate Governance of BASIC bank & how to overcome it? Evaluate your answer.

Question2: “Bangladesh Bank is now busy in justifying the government’s misdeeds by allowing the
bank to hide its real financial situation” – evaluate your answer.

Question3: Does Basic Bank maintain significant contribution to Government revenue consistently?
What impact it has on the economy?

Question4: Do you think Privatization of bank will increase transparency of the state-owned bank? Is
Government in favor of this policy? Evaluate your answer.

Question5: Considering all of those resolving tools, is it really possible to regain the public faith fully?
Give your valuable opinion.