BankIslami, KASB Bank merger caused Rs3.5b loss: AGP

Report blames central bank again for ‘irregularities’ in amalgamation

ISLAMABAD: The irregular amalgamation of KASB Bank with BankIslami caused roughly Rs3.5 billion in losses to the exchequer in addition to Rs6.6 billion as losses to sponsors of the defunct bank, affirms a new report of the Auditor General of Pakistan.

It is the second time that the office of the Auditor General of Pakistan (AGP) has framed allegations against the State Bank of Pakistan (SBP) in the case of “irregular” amalgamation of the defunct KASB Bank into BankIslami.

The AGP has framed the audit objections in its latest report for the Audit Year 2017-18 on the accounts of the central bank. The AGP had also printed an audit objection of a loss of Rs435 million in its last report for the Audit Year 2016-17. On May 7, 2015, the SBP merged KASB Bank into BankIslami at a token price of Rs1,000 after the former could not meet the statutory paid-up capital requirement of Rs10 billion. The SBP had extended two separate loans of Rs20 billion to BankIslami after the amalgamation of KASB bank.

In August 2017, The Express Tribune reported that SBP’s financial aid to BankIslami caused Rs3.45 billion losses.

“The grant of financial assistance and credit line shows that BankIslami was not in a financially sound position to manage the losses of the KASB.” The SBP gave undue favour to BankIslami as other banks were not offered such facilities as given to the BankIslami, according to the audit report.

Moreover, the procedure of amalgamation was made in violation of Banking Companies Ordinance 1962, hence, the amalgamation of the KASB Bank was irregular, the auditors noted in the report.

The SBP amalgamated KASB Bank, having assets and deposits worth Rs57 billion with BankIslami, without considering market value of assets of KASB Bank or its shares price at the stock exchange, according to the audit objection.

The auditors were of the view that at the time of KASB’s merger the market value of the bank was Rs6.6 billion, being worked out at Rs3.47 per share of 1.9 billion shares. The decision to merge the bank at Rs1,000 caused this much loss to the sponsors.

The National Accountability Bureau (NAB) has also launched an investigation in the case of irregular amalgamation of the KASB Bank.

The report underlined that the SBP granted Rs5 billion to BankIslami for 10 years at a very low rate of 0.01% per annum to cover the losses of KASB, which caused Rs3 billion losses to the exchequer. Not only that, the SBP also gave Rs15 billion to BankIslami, which caused additional loss of Rs435 million. The BankIslami has returned the Rs15 billion amount.

The amalgamation was made with BankIslami without offering to other large banks despite interest shown by other large banks and investors, according to the AGP report. The AGP further noted that MCB was interested to buy KASB Bank and a MoU was signed between both banks. However, within two days of signing the MoU, SBP imposed moratorium due to which MCB backed out.

The auditors affirmed that sponsors of KASB Bank managed to bring a Chinese investor, Cybernaut Investment, but the SBP never gave permission to the investor to open an Escrow account.

The AGP reported the issue of Rs3.45 billion loss to the SBP in January this year. A Departmental Accounts Committee (DAC) meeting was held but the SBP management said that it was not in a position to immediately respond. The DAC asked the SBP management to submit its reply to the AGP but no response has been received till the filing of this report, according to the auditors. 

Published in The Express Tribune, April 1^st, 2018.

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