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Forensic auditing an essential step for Shariah-based banks' reforms

Published : Thursday, 13 February, 2025 at 12:00 AM  Count : 467
Sk Shamim Iqbal
The country's banking sector has been grappling with persistent challenges such as operational inefficiencies, lack of effective governance and an alarming increase in non-performing loans (NPLs).

Bangladesh Bank has taken a significant and proactive step by initiating forensic audits on several underperforming Shariah-based commercial banks supported by the Asian Development Bank (ADB) with necessary funding and expertise.

Six managing directors of these banks have been placed on mandatory leave in this situation to ensure the integrity of the audits and facilitate a transparent investigation.

This decisive action signals a serious commitment by the regulatory authorities to uncover the root causes of the dysfunction and to hold accountable those responsible for mismanagement and inefficiencies.

However, the pressing question remains: will these measures be sufficient to drive the essential reforms needed to revitalize the banking industry and foster sustainable growth.

Forensic auditing has established itself as an essential instrument on a global scale for investigating financial irregularities and detecting fraud and enhance transparency in financial operation.

This process entails a thorough examination of financial records, identification of mismanagement or fraudulent activities and the provision of corrective recommendations.

Historically, forensic audits have been pivotal in exposing major scandals ultimately leading to significant regulatory reforms.

In South Asia, forensic audits have been implemented in India and Pakistan to address financial mismanagement within the banking sector.

In India for example the collapse of the infrastructure financing company IL&FS highlighted the necessity of forensic audits, which subsequently uncovered significant accounting irregularities and the misappropriation of funds.
The results of these audits prompted enhanced regulatory oversight and legal accountability for key executives, underscoring the importance of fiduciary responsibility.

The utilization of forensic auditing provides an essential framework for ensuring accountability, safeguarding financial systems, and fostering transparency in economic transactions.

Audits play a vital role in identifying financial mismanagement, but real progress depends on our dedication to implementing the recommendations that arise from these audits.

Bangladesh's banking sector is currently experiencing challenges, particularly with liquidity shortages in Shariah-compliant commercial banks that adhere to Islamic finance principles.

This decisive action signals a serious commitment by the regulatory authorities to uncover the root causes of the dysfunction and to hold accountable those responsible for mismanagement and inefficiencies in the banking sector

To promote positive change and strengthen these institutions, a forensic audit initiative has been launched with several constructive objectives such as: Identify Root Causes: Engage in thorough investigations to uncover instances of fraud, mismanagement, or inefficiencies that may have affected the banks' performance.

Enhanced Transparency: Foster a culture of openness by creating clear and accurate records of financial transactions and governance practices.

Restore Confidence: Build trust among depositors and stakeholders by demonstrating that effective corrective measures are being put in place.

Ensure Accountability: Promote responsible practices by holding individuals and entities accountable for any identified issues, thus reinforcing a commitment to integrity within the banking sector.

These efforts aim to not only address current challenges but also to pave the way for a more resilient and trustworthy banking environment in Bangladesh.

Before we delve into the strengths, it is essential to first assess the initiative's effectiveness. We must focus on how well the initiative works; we have to focus on how well the Initiative works.

Independent Oversight: Forensic audits will maintain a high level of independence. This independence is crucial as it minimizes the potential for internal bias that could compromise the integrity of the audit results.

Focus on Governance: The decision to place six managing directors on mandatory leave is a significant step toward eliminating potential conflicts of interest. By doing so, the initiative ensures that auditors can conduct their work in an environment free from external pressures or interference.

Capacity for Reform: The insights gained from the audits are expected to serve as a comprehensive roadmap for the necessary structural and operational reforms within the banking sector. We have also identified potential weaknesses and are exploring ways to address them effectively.

Implementation Challenges: Historical evidence suggests Bangladesh has often struggled to bridge the gap between audit findings and their actual implementation. Without strict enforcement of the recommendations made, there is a genuine risk that valuable insights may be overlooked or ignored altogether.

Resistance to Change: Within the banking sector, there are deeply entrenched interests that may push back against initiatives aimed at increasing transparency and accountability. This resistance could significantly hinder the overall impact and effectiveness of the audits, preventing meaningful change from taking place.

Public Perception: While the initiative itself may demonstrate a strong commitment to reform, public confidence will be heavily reliant on tangible results. Improvements such as successful asset recovery and enhanced governance practices will be pivotal in building trust and support among the populace.

Capacity Constraints: Conducting effective forensic audits requires a specific set of expertise and advanced technological resources. Unfortunately, these critical assets may be in short supply in Bangladesh, potentially limiting the depth and effectiveness of the auditing process

Lessons from similar cases in India and Pakistan resulted in recovery of significant amounts of bad loans, coupled with legal action against those who defaulted.

Assessment of Effectiveness in Bangladesh: The forensic audit initiative led by Bangladesh Bank has the potential to bring about significant change, provided the following criteria are met:

Swift Action on Findings: Timely implementation of recommendations, including legal action against fraudulent entities, is crucial for restoring confidence in the system.

Capacity Development: Investing in the training of forensic auditors and enhancing technological tools is essential for conducting thorough investigations.

Policy Reforms: Addressing fundamental weaknesses in the banking sector, such as inadequate oversight and poor risk management practices, will enhance the impact of the audits.

Public Disclosure: Ensuring transparency through the sharing of key findings and corresponding corrective measures with the public will strengthen trust in the system.

Continuous Monitoring: Forensic audits should be regarded as part of an ongoing monitoring framework rather than a one-time event, helping to prevent future irregularities.

The forensic audit initiative launched by Bangladesh Bank, with the support of the Asian Development Bank (ADB), looks at resolving systemic issues that have long affected Shariah-based commercial banks.

The decision to remove managing directors showcases a strong commitment to transparency and reform. However, the real success of this initiative hinges on how diligently the audit recommendations are executed and the level of sustained regulatory oversight maintained.

Bangladesh stands at a critical juncture: this initiative could either mark the start of significant reform or risk becoming just another missed opportunity if key challenges are not effectively addressed.

For the banking sector to emerge robust and resilient, it is essential for all stakeholders-regulators, auditors, and policymakers-to unite and work collaboratively. Only through such cooperation can we ensure the success of this ambitious undertaking.

The writer is a Banker, serves Social Islami Bank PLC as a faculty member at its training institute



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