Al-Arafah Islami Bank PLC is facing significant financial vulnerabilities, including substantial provision shortfalls, weak capital adequacy, and regulatory compliance concerns, according to its audited financial statements for 2025.
The bank’s external auditor, KM Alam & Co. Chartered Accountants, highlighted the issues in an “Emphasis of Matter” section of its audit report, noting that the bank had an overall provision deficit of Tk 5,393.19 crore across several asset categories. The shortfall was not recognized in the financial statements due to special regulatory approval from Bangladesh Bank, allowing the lender to report a profit for the year.
According to the audit report, the provision gap relates to investments, off-balance-sheet exposures, other assets, non-banking assets, deposits placed with other banks, and gratuity liabilities.
The report stated that required provisions against investments and off-balance-sheet items stood at Tk 6,983.89 crore, while the bank maintained only Tk 1,985.31 crore, leaving a deficit of Tk 4,998.58 crore. The bank’s non-performing investment (NPI) ratio rose to 17.16 percent, and auditors said no dividend would be distributable for the year under the current circumstances.
Classified investments increased by Tk 1,971.53 crore during 2025. Although the bank wrote off Tk 524.87 crore in loans during the year, it failed to maintain the necessary provisions due to insufficient earnings.
The auditors noted that more than 16 percent of the bank’s total investment portfolio had been rescheduled. While the rescheduling complied with regulatory guidelines, the report warned that extended grace periods and delayed recoveries could place pressure on cash flow and liquidity management while potentially masking the true level of credit risk.
The audit also identified provision shortfalls in several other areas. Against other assets, the bank was required to maintain Tk 154.52 crore in provisions but held only Tk 55.50 crore. No provisions were maintained against Tk 3.01 crore in non-banking assets or Tk 206.19 crore related to placements with financially distressed banks.
In addition, the bank’s gratuity liability stood at Tk 428.39 crore, while the corresponding fund contained only Tk 342 crore, contributing to a combined shortfall of Tk 394.61 crore in these categories.
Bangladesh Bank, through a letter issued on April 28, 2026, permitted the bank to defer recognition of the entire Tk 5,393.19 crore provision deficit. As a result, the financial statements were prepared without reflecting the shortfall.
Auditors cautioned that although the statements complied with the regulator’s directive, they did not fully reflect the bank’s actual credit risk and potential losses.
Al-Arafah Islami Bank reported a net profit after tax of Tk 86.51 crore for 2025. However, auditors said that if all required provisions had been recognized, the bank would have posted a net loss after tax of Tk 5,306.68 crore, and its capital adequacy ratio would have turned negative.
The audit report also flagged the recognition of Tk 20 crore as income from the “Profit Rent Suspense” account without actual realization, contrary to Bangladesh Bank instructions.
Furthermore, the bank failed to make a required tax provision of Tk 21.40 crore, resulting in net profit being overstated by Tk 41.40 crore, according to the auditors.
The bank’s Capital to Risk-Weighted Assets Ratio (CRAR) stood at 10.72 percent, below the regulatory minimum of 12.50 percent, creating a capital shortfall of Tk 689.45 crore.
The auditors noted that if the full provision deficit were taken into account, the capital adequacy ratio would become negative, indicating an extremely weak capital position.
The audit also identified a provision shortfall at the bank’s subsidiary, AIB Capital Market Services Ltd. The market value of its investments had declined by Tk 142.85 crore, but only Tk 50.38 crore in provisions had been maintained, leaving a deficit of Tk 92.47 crore.
Al-Arafah Islami Bank’s share of this shortfall amounts to Tk 55.94 crore, reflecting its 60.5 percent ownership in the company. However, the Bangladesh Securities and Exchange Commission (BSEC) has allowed the provision requirement to remain suspended until December 31, 2031.
In a separate observation, auditors noted that sponsors and directors collectively hold only 15.11 percent of the bank’s paid-up capital, significantly below the 30 percent minimum shareholding requirement for listed companies under regulatory rules.
The findings underscore mounting challenges for Al-Arafah Islami Bank as it grapples with asset quality deterioration, capital weakness, and compliance issues amid increasing regulatory scrutiny of the banking sector.
