BankIslami ‘unduly favoured’ in KASB deal: AGP

Findings presented to parliament, points out SBP sustained Rs435m in losses

ISLAMABAD: The central bank unduly favoured BankIslami in the KASB Bank merger deal at the cost of public funds, said a report of the Auditor General of Pakistan to the parliament, which also affirms the findings of an earlier inquiry of an anti-corruption watchdog.

The issue of the KASB merger into BankIslami has now landed in parliament after two years of the deal, allowing legislators to look into the matter that has so far remained off their limits.



The department of the AGP, which serves as the ears and eyes of the parliament, has pointed out that the central bank sustained Rs435 million in losses due to grant of a Rs15 billion concessionary loan to BankIslami. The auditors have raised another objection on hiring of two external auditors including AF Ferguson. The chartered accountancy firm had also been engaged in the KASB merger deal.

The report has been laid in the Senate this week, which will now be discussed in the Public Accounts Committee.

The State Bank of Pakistan (SBP) had extended two separate loans of Rs20 billion to BankIslami after the amalgamation of KASB bank. However, the auditors have picked the loss of Rs435 million only on account of one facility. The AGP could not detect Rs3 billion loss that the central bank’ sustained by giving Rs5 billion loan at exceptionally low rate of 0.01% per annum for ten years.

The SBP’s internal documents revealed Rs3 billion as provisional losses that it worked out over a period of ten years. The central bank had to book these losses to meet the requirements of International Accounting Standards (lAS).

The SBP extended a loan of Rs15 billion to BankIslami for a period of one year at a nominal rate of 4.7% against the prevailing KIBOR rate of 7.6% and resulted into a loss of Rs435 million, according to the AGP report.

“Undue favour was extended to the BankIslami at the cost of public funds,” it added. The AGP pointed out that the decision to give concessionary loan to BankIslami was also in violation of the Finance Division’s Office Memorandum of July 2003.

While pointing out another major flaw in the deal, the AGP noted that the process of selection of bank for giving loan was also not transparent, as the July 2003 directives also required that the selection of the banks as well as terms of the deposits will be approved by the Board of Directors on the basis of competitive bids from at least three independent banks.



The AGP’s observations endorsed the findings of an inquiry by National Accountability Bureau (NAB) that has also said that the SBP gave undue favour to BankIslami. The inquiry officer has recommended the NAB headquarter to launch an investigation. On May 7, 2015, the SBP merged KASB Bank into BankIslami after the former could not meet the statutory paid-up capital requirement of Rs10 billion.

The NAB inquiry has concluded that senior officials of the SBP took harsh action and “misused their authority” in amalgamating KASB Bank into BankIslami for just Rs1,000. The report further disclosed that BankIslami was not capable of handling the now-defunct KASB Bank without the central bank’s financial support.

One of the three options that the central bank had considered for resolving the defunct KASB Bank issue was to “reconstruct the bank via capital injection by SBP”. But it did not pick this option and instead gave Rs20 billion exceptionally concessional loan to BankIslami that has now landed it in trouble.

SBP version

In a meeting held in January this year, the SBP management informed the AGP department that the purpose of providing liquidity assistance to BankIslami was not to make investment rather to secure the interest of the depositors of the KASB Bank. The SBP claimed that it has recovered the Rs15 billion loan from BankIslami but the federal auditors wrote in its report that the central bank did not show loan settlement record till the finalisation of the audit report.

AGP objection on AF Ferguson

The federal auditors have also printed another audit objection against the SBP in which it said that the central bank irregularly hired two chartered accountant firms - AF Ferguson and Ernst & Young Ford Rhodes Sidat Hyder as its external auditors. Both firms were hired without inviting tenders in the newspapers and the central bank paid Rs19.4 million to them, according to the AGP report.

Although the AGP audit objection on AF Ferguson pertains to another matter, the NAB report had found out that the central bank also gave undue favour to AF Ferguson in the KASB deal. The NAB report stated that the central bank’s decision to award KASB Bank’s due-diligence contract to AF Ferguson was an “illegal act”.

The central bank had hired AF Ferguson one year after the collapse of Kabul Bank. A November 2012 report of the Public Inquiry into Kabul Bank Crisis by independent Joint Anti-Corruption Monitoring and Evaluation Committee of Afghanistan has thrown some responsibility of Kabul Bank crisis on AF Ferguson.

AF Ferguson was the external auditor of Kabul Bank. None of the external audit reports of Kabul Bank identified any substantive issues with the bank, and all made positive statements about the Bank’s compliance with banking law and internal policies, according to inquiry findings.  “These clean assessments are difficult to understand”, it added.

Published in The Express Tribune, August 27^th, 2017.

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