In many developing countries, businesses are unable to get low-cost, long-term loans from private lenders. This has economic repercussions. When borrowers cannot use their assets to secure loans and cannot purchase goods on credit using the goods as security, loan interest rates tend to be higher. They essentially reflect the risk to lenders.

Reforms that make it easier for borrowers to use movable property, like jewellery and machinery, as collateral spur economic activities. They give comfort to creditors, stimulate investment and boost productivity. The cost of credit, as well as the efficiency of the market for secured credit, is influenced by the laws on secured transactions. In this context, a secured transaction is a pact between two parties in which the borrower gives a movable property as collateral, or security, for a loan.

The reform project of Bangladesh’s secured transactions regime stemmed from its government’s intention to ascend in the World Bank Group’s Ease of Doing Business (EODB) ranking. However, EODB was discontinued in September 2021 as a result of internally investigated data irregularities. Up until then, EODB was a benchmark for assessing a country’s business environment. On the World Bank’s Doing Business 2020 report, Bangladesh ranked 168th out of 190 countries.

One of the indicators for determining this score was ‘getting credit.’ In its effort to enhance access to credit, Bangladesh initiated drafting of its Secured Transaction (Movable Property) Act.

In discussing the effects of the draft law, it is important to understand that a transaction that involves a monetary loan can be either secured or unsecured. When a lender receives interest over a property as a security for the loan, the transaction is a secured one. The property over which such a security right is created is termed ‘collateral.’ In Bangladesh, immovable property such as real estate is traditionally used as collateral to secure a transaction. With the draft Act, movable property will come into the mix of collaterals to secure a loan or debt.

For Bangladesh, recognising movable property as collateral will diversify the loan portfolio and accelerate the access-to-credit process. With this non-traditional security kicking in, a person will be able to significantly expand their volume of credit. The draft Act also paves the way for establishing a well-defined e-registry of security interests in movable property.

Why is a law needed?

There are multiple laws in Bangladesh dealing with secured transactions in movable property. However, none of these covers all aspects, and the provisions are scattered across different pieces of legislation. In other words, there is no single Bangladeshi law that caters to all types of security interest over movable property.

Also, in Bangladesh there are disparities in the enforcement proceedings of banks or financial institutions and non-bank financial institution. The only registry available on security interests over movable property comes under the country’s Companies Act 1994. As a result, individuals or corporate bodies, other than companies, do not have any database that they can access to identify any prior claims over movable property. The upcoming law aims to resolve these issues.

… there is no single Bangladeshi law that caters to all types of security interest over movable property.

Furthermore, a unified database will enhance transparency in the lending process of movable property. This will enable businesses to leverage their asset, access credit and grow. This will eventually increase asset liquidity. On the lenders’ side, a searchable registry will ease verification, promote safe lending and reduce forgery in the banking sector.

International best practice

Globally, a number of secured transactions law models are available. These include the European Bank for Reconstruction and Development’s Model Law (implemented by many Central and Eastern European countries), the Organisation for the Harmonisation of Business Law in Africa Uniform Act, Book IX on Proprietary Security of the Draft Common Frame of Reference (for European countries), the Organization of American States Model Inter-American Law (adopted by a number of Latin American countries) and the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Secured Transactions (implemented in some African countries).

In choosing a model for the draft law, a comprehensive evaluation of the legal structure of Bangladesh was conducted.

In choosing a model for the draft law, a comprehensive evaluation of the legal structure of Bangladesh was conducted. As a former British colony, Bangladesh inherited most of the existing colonial laws after its independence in 1971. Bangladeshi courts also rely upon judgements of Commonwealth countries (including Indian and English judgements) when deciding cases in the absence of any Bangladeshi precedent.[1] They also refer to judgements from the United States.

Hence, it was deemed important for the draft law to follow a model used in countries that apply common law principles. Accordingly, the draft Act followed the Personal Property Security Act of Canada’s Saskatchewan and Ontario as a model law. It was supplemented by UNCITRAL’s Model Law on Secured Transactions 2016 where necessary.

Development of the draft law

The draft Act was first reviewed by a monitoring committee from the Bangladeshi government’s go-to bodies, the Ministry of Finance and its central bank, Bangladesh Bank. Consultations were conducted with other policy stakeholders such as the Ministry of Commerce, Bangladesh Investment Development Authority, Bangladesh Leasing & Finance Companies Association and legislative committees.

The feedback from stakeholders was incorporated into the draft Act. For example, on the advice of the Ministry of Finance, the draft act was shortened from 103 to 35 sections. Bangladesh’s central bank further polished the law and prepared a revised version from the shortened draft.

Features of the draft law

The draft law is divided into 10 chapters.[2] Chapter 1 deals with a list of definitions that have been modified to fit locally accepted terminologies. For instance, the law defines an ‘obligor’ as a person who has rights in the collateral, even though internationally an obligor is commonly understood to be the debtor. In the Bangladeshi context, a debtor is usually the person who has been granted the loan. This chapter also stipulates an official notification date for the draft law to come into force.

Chapter 2 of the law deals with its application and contains rules on conflict of laws for transactions with foreign aspects. In terms of application, the draft Act applies to all agreements, irrespective of the form in which a security right is created.[3]

It contains a non-exhaustive list of devices such as chattel mortgages, hypothecations, pledges, fixed charges and floating charges.

Chapter 3 gives the framework for creating a secured transactions registration authority. This would essentially be an independent body responsible for managing the secured transactions registry. Chapters 4, 5 and 6 deal with three key elements of a secured transaction—namely, attachment or creation of a creditor’s right over the property, perfection or declaration of a creditor’s right over the property and assessing the priority of a security right.

The draft law requires a written security agreement with details of the parties, the obligation and the collateral.[4] This provision will minimise the risk of disputes arising from oral contracts.

The draft law has two key methods for gaining a security right: registration and possession. There are some special methods for bank accounts and non-intermediated securities—for instance execution of a control agreement.[5] The priority of a security right is accorded primarily depending on the date of its registration.[6]

With regard to security rights in fixtures and crops, the draft rules limit application of the law to rights in land for which title has been granted by law.[7] This condition has been attached because, in Bangladesh, issues related to ownership of land are dealt with under another legal regime with separate registries. This modification in the draft law is an example of how the existing global models are altered keeping in mind the peculiarities of Bangladesh’s legal system.

The registry will be searchable against a unique identifier of the obligor or a serial number of the goods.

The registration of a security right will be carried out by filing a financing statement as per the requirements of Chapter 7. The financing statement will contain details of the obligor, the secured party and the collateral.[8] The registry will be searchable against a unique identifier of the obligor or a serial number of the goods.[9] The parties are entitled to remedies under the draft Act, the security agreement and any other law.[10]

Finally, Chapter 10 of the law deals with transition of security rights in movable property under prior law. Secured parties will be given a period of one year to perfect their security interests by one of the stipulated methods.[11]

What lies ahead?

As of September 2021, the World Bank decided to discontinue its signature Ease of Doing Business ranking. Bangladesh was focused on bettering its ranking here because this would have helped enhance its investment regime. Reaching a two-digit rank was the primary motive behind creation of the draft Act for secured transactions. Bangladesh should not halt this development because, at the start of 2022, the World Bank had already announced that it was formulating a new approach, called the Business Enabling Environment (BEE), ‘to assessing the business and investment climate in economies worldwide.’

Kalam, a seasonal farmer, inspecting his bottle gourd plot, Netrokona, Bangladesh, October 2017 | Photo by GMB Akash.

A detailed secured transactions regime would add value to Bangladesh’s profile as an investment ground for foreign investors. The current Bangladeshi legal regime of secured transactions in movable property is neither modernised nor meaningful to deal with the multifarious nature of the legal issues. The legal regime is not equipped to attract large-scale investment in the secured financing sector.

Collateral registries are ensuring access to credit for women and younger entrepreneurs in Latin America with no credit history. A 2016 report by the International Finance Corporation, a sister concern of the World Bank, in Colombia, shows that about one-fourth of registrations are made up of credit to small businesses. Similarly, in Mexico, 97% of registrations are supporting loans to small and medium enterprises (SMEs).

The registry will allow low-income people and small-scale entrepreneurs in Bangladesh to secure loans against movable assets such as machinery and livestock. According to Bangladesh’s SME Policy 2019, the country’s SME sector is made up of about 7.8 million enterprises that contribute close to 25% of the country’s gross domestic product. The draft law, once promulgated, will tap the potential to improve small businesses’ access to finance and credit opportunities and broaden the financial inclusion agenda of the government.

The cutting-edge feature of the draft Act is that it is not a regurgitation of international best practices. Rather, it is thoroughly curated to align with Bangladesh’s existing laws. More importantly, it has been through an inclusive process to involve all stakeholders and to adhere to global standards. Such a meticulous effort will surely contribute to the effort to develop a modern secured transactions regime for the country.

 

[1] See the Bangladeshi case of Public Service Commission v. Mohammad Sohel Rana VIII ADC (2011) 332.
[2] The draft law comprises the draft act and an accompanying set of draft rules titled the Secured Transaction (Movable Property) Rules.
[3] Section 4(1)(a) of the draft Act.
[4] Section 14 of the draft Act.
[5] Rule 22 of the draft rules.
[6] Section 21(1)(a) of the draft Act.
[7] Rules 28(1) and 29(1) of the draft rules.
[8] Section 25(1) of the draft Act.
[9] Rule 42(1) of the draft rules.
[10] Section 28(2) of the draft Act.
[11] Section 35(1) of the draft Act.

 

Photo ©️ Mahmud Hossain Opu

Junayed Ahmed Chowdhury is founder and managing partner of Vertex Chambers, Bangladesh and Vertex International Consulting, Sydney. He is a lawyer. He is an advocate at the Supreme Court of Bangladesh. He specialises in corporate taxation, telecommunication and real estate. He was a visiting research fellow at the University of Connecticut Law School, USA, and the British Institute of International and Comparative Law, London. He was a guest faculty member at IBA, University of Dhaka and Chittagong Independent University. He pursued his graduate studies in Law at the University of Chicago and was called to the Bar of England and Wales from Lincoln’s Inn.