Islamic finance sanctions 40% of its unsecured loans

Islamic Finance and Investment Limited, a non-banking financial institution, sanctioned 40% of its total loans without collateral such as a mortgage on land or a lien on shares, its auditor said.

In its financial report for 2021, the auditor mentioned that the company has disbursed a total of Tk 387.55 crore in the form of short term finance, leasing, term finance and housing finance.

However, the company – listed on the country’s capital market – has a corporate and personal guarantee against the sanctioned loans.

At the end of 2021, the company’s loan amounted to Tk 1,336 crore.

According to the Bangladesh Bank guideline, collateral is an asset pledged by a borrower to a lender until a loan is repaid. If the borrower defaults, the lender has the right to seize the collateral and sell it to repay the loan.

A borrower’s reluctance to post collateral could signal to the financial institution that the borrower is fully aware of the implications of pledging, and if he provides collateral, he is likely to do everything possible to avoid the loss of the pledged asset, he added.

A senior executive at a renowned non-banking financial institution, speaking on condition of anonymity, said that depending on the relationship with the client, loans are often disbursed only with a guarantor.

“But it’s not good practice for the institution. It increases the risk,” he added.

A central bank official said it was possible to provide unsecured loans to small entrepreneurs in some emerging sectors such as women entrepreneurs and agriculture.

“However, it should not exceed Tk 5-10 lakh. There is no possibility of granting bigger loan without collateral,” he added.

SQ Bazlur Rashid, acting chief executive of Islamic finance, told The Business Standard: “It’s a very complicated question. So it’s not possible to comment on that in simple language.”

The post of its chief executive became vacant in June last year after Abu Zafore Md Saleh resigned over allegations of breaching hiring rules and financial profiteering.

Some of his senior officials were also implicated in these irregularities; the Bangladesh Bank discovered such cases during an inspection.

The company then sought to hire Chowdhury Manzoor Liaquat, a former managing director of Union Capital. But the central bank asked the company to refrain from hiring him as its chief, as Union Capital’s financial health deteriorated under his leadership.

The central bank has also asked the company to appoint someone with a clean rating as chief executive so that he can solve the company’s problems.

In 2021, Islamic finance net profit decreased by 14% to Tk 18 crore and earnings per share stood at Tk 1.32. But it declared a 10.50% cash dividend for its shareholders amid falling profits.

The downward trend continued in the first quarter of 2022. In the January-March quarter, its profit fell by 28% to Tk 4.19 crore and earnings per share was Tk 0.30.

Islamic Finance said in the financial report that profits declined mainly due to an increase in the expectation of profits and the maintenance of a provision against general investment for the irregular reimbursement of investor customers. In addition, the company is currently in a financial crisis due to withdrawals of deposits by customers.

Meanwhile, its share price rose by 3.86% and closed at Tk 21.50 each on Monday on the Dhaka Stock Exchange.

Comments are closed.