Bangladesh Bank yesterday re-appointed an observer at Islami Bank and dispatched an observer for the first time at First Security Islami Bank (FSIBL) -- the two Shariah-based lenders where Chattogram-based business giant S Alam Group has significant stakes.

Md Abul Kalam, director of the central bank's forex reserve and treasury management department, will serve as the observer at Islami Bank and Motasem Billah, director of the payment systems department, will as an observer at FSIBL.

The decision comes amid reports of allegations of irregularities in the disbursement of large amounts of loans in violation of banking rules in recent times.

On December 4, the High Court directed the authorities to probe the alleged loan scams at Islami Bank, Social Islami Bank and FSIBL, whose chairman is S Alam Group chairman Mohammed Saiful Alam. S Alam Group has significant stakes at Social Islami Bank, too.

The Anti-Corruption Commission, BB, the Bangladesh Financial Intelligence Unit and the Criminal Investigation Department of Police have been asked to submit probe reports to the court by April 5.

If the allegations of loan scams are found to be true in the probes, the agencies will have to inform the court about the actions taken against the persons involved in the scams.

The central bank usually appoints observers in banks whose financial health is fragile. The observer takes part in the board meetings and keeps watch on the bank's operations. The observer is withdrawn once the financial health improves.

Including yesterday's appointments, BB has sent observers to nine banks.

The central bank appointed an observer to Islami Bank in 2010.

Despite being among the best-run and the most profitable bank in Bangladesh in the past decade, Islami Bank had an observer on its board the entire time.

The observer was withdrawn in March 2020 without any reason and the country's largest private sector bank tumbled into chaos.

The central bank is now carrying out an investigation into Islami Bank for authorising Tk 7,246 crore in loans to nine companies in recent weeks violating banking rules. Most of the companies used fake addresses in their loan application forms.

The re-appointment of the observer in Islami Bank may not bring positive output as the directors of the lender are highly politically connected, said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

The central bank should disband the Islami Bank board for an unbiased investigation.

In 2017, the Islami Bank board was populated with representatives of the S Alam Group. The companies the directors represent exist only on paper, shows the bank's internal documents.

"It is a good initiative that the central bank is now carrying out an inspection. But the board members of the bank may intervene in the investigation, which is why the board should be dissolved."

In addition, the central bank earlier did not get any good results from appointing observers in the weak banks in most of the cases, said Mansur, also the chairman of Brac Bank.

Fahmida Khatun, executive director of the Centre for Policy Dialogue, also expressed doubts that the observers would yield any positive outcome for the banks.

She, however, said that this is a positive move taken by the bank.