As the economy of Bangladesh reaches the end of 2024, it is currently confronted with a complex economic environment undergoing a transition. In the current political climate, the economy must face inflationary pressures, the need to reduce foreign debt, stabilise the exchange rate, and address the persistent problem of many non-performing loans (NPLs).

The country’s domestic economic problems are made more complex by the rising prices of commodities and the pressure on its foreign exchange reserves. The banking and finance market was somewhat oligopolistic in nature, which in turn affected the confidence in the banking sector as a whole – resulting in diminishing investments. 

Moreover, although the depreciation of the Bangladeshi currency and the overall increase in inflation have resulted in increased interest rates and borrowing costs, which have acted as a deterrent to borrowing by middle or lower-middle-class households and small companies, the demand for loans is currently steady.

Natural calamities have also affected the market for loans to small agricultural and cottage, micro, small and medium enterprises (CMSMEs). This sector constitutes the dominant source (about 80%) of industrial employment in Bangladesh and has been significantly disrupted by the floods, which have struck a number of areas in Bangladesh. The central bank of Bangladesh (“Bangladesh Bank”) has issued a circular extending the deadline to reimburse existing loans taken out by borrowers in industries affected by the floods. Its inclination towards supporting CMSME has always been evident in its issuing of loans with reduced interest rates and retaining credit availability. While the expansion of credit access to businesses based in rural areas remains a key focus, another transition that has been visible in the loan market is digitalisation. With the widespread popularity of digital banking and mobile financial services, other banks have been collaborating with technological experts to allow the younger and tech-savvy population to access loans online with support from the Bangladesh Bank.

To encourage women entrepreneurs’ participation in CMSME initiatives, Bangladesh Bank provides a refinancing facility that offers lower interest rates than those available to the general market. Banking and financial institutions can avail of such incentive at a 3% interest rate (which was 5%) as of 2020 against their disbursed CMSME loan so that the customer can avail of the same at a 7% interest rate (earlier 9%). This, in turn, has led to more women entrepreneurs taking out loans. Similar directions are implemented for climate-conscious business models, which can secure loans at lower interest rates as per the guidelines of the International Sustainability Standards Board (ISSB) (further explored in 1.6 ESG/Sustainability-Linked Lending).

Moreover, considering the country’s socioeconomic structure and its majority Muslim population, Islamic finance products (eg, Shariah-compliant loan products) are popular.

Furthermore, with Bangladesh being marred by numerous high-profile cases of corruption, Bangladesh Bank has also been reinforcing guidelines and measures to ensure the mandatory recovery of loans and limit transactions to prevent money laundering. The restrictions are designed to limit the possibility of obtaining loans through shell companies. Bangladesh Bank is trying to regulate the Know Your Client (KYC) or Client Due Diligence (CDD) process by issuing guidelines that comply with the existing banking, finance, money laundering prevention and anti-terrorism laws.

Over the years, Bangladesh has seen strong growth in the ready-made garments (RMG) industry, growing at an annual rate of 7%; exports doubled between 2011 and 2019. However, the global ramifications of the Russia-Ukraine conflict have had a significant effect on the RMG industry in Bangladesh. Russia had been a major buyer (having bought apparel goods worth USD650 million in the financial year of 2020–21) before the war broke out and sanctions were implemented on the country by major world powers. This affected the trend of seeking business loans for service-oriented industries and shrunk national reserves. In addition to impacting international trade, energy, and foreign direct investment, the Russia-Ukraine conflict has significantly influenced the supply and cost of everyday commodities, especially for a rising economy like Bangladesh. Disrupted supply chains and rising transportation costs (the inevitable result of higher fuel prices) make it difficult for nations like Bangladesh to provide their citizens with inexpensive and necessary commodities. The fluctuations in daily commodity prices can directly impact the cost of living, which can result in higher inflation, lower purchasing power and less demand for loans to expand one’s business.

As briefly mentioned in 1.1 The Regulatory Environment and Economic Background, the depreciation of the Bangladeshi currency compared to the US dollar has resulted in further inflation and impacted the cost of importing essential goods into Bangladesh. Such fluctuations in economic trends fuel the economic crisis and worsen the country’s susceptibility to external shocks.

Over the past decade, Bangladesh's average GDP growth was estimated to be 6.6%, and as late as April this year, 5.6% growth was forecasted for 2024. The government was forecasting that by 2025, Bangladeshi factories would produce 10% of the world's apparel. In spite of this optimistic outlook, the economy was deteriorating rapidly as major infrastructure projects failed due to corruption and the credit binge (excess liquidity in the country's banks dropped by 18% by January, mainly due to increased lending and insufficient deposits) started taking its toll on the country earlier in the year. Rising interest rates, inflation, and declining export demand led to over USD20 billion in non-performing loans. The government provided billions in subsidies to private companies to ensure electricity coverage. Wealthy shareholders prospered, transferring their money out of the country, while remittances from Bangladeshis abroad fell. This, in turn, has increased the number of businesses seeking working capital loans (particularly businesses mostly reliant on raw materials for their operations). The ongoing Israel-Palestine conflict, alongside other internal and external challenges, might cause borrowers to be unable to repay their loans. On top of that, the country is still battling issues like NPLs and the repercussions of inflation. However, the Bangladesh Bank’s advancement towards green and digital banking and stricter implementation of the existing regulations on money laundering could be a ray of hope.

The high-yield market is increasingly becoming integrated into Bangladesh’s banking and finance ecosystem, creating new avenues to credit for businesses that could not access it through traditional banking. Although still an emerging market, the high-yield sector has spurred emerging trends and affected financing terms and structures in various ways outlined below.

Relative Growth in Corporate Bonds and Alternative Financing

For Bangladeshi corporates, particularly those with lower credit ratings or that operate in higher-risk sectors, high-yield bonds have proven to be an attractive alternative to meet their funding needs by opting for flexible options for raising capital, as traditional bank loans have greater collateral-backed obligations and stricter regulations.

It enables companies to access multiple sources of capital and diversify their options. Enterprises that used to mainly depend on bank loans are now scrambling for a piece of the high-yield bond pie as they seek working capital and funds to expand their business. This trend has been more accentuated in manufacturing, textiles, real estate and infrastructure.

Impact on Financing Terms and Structures

Due to the risk factor in high-yield bonds, interest rates are often more significant than those for investment-grade debt or traditional bank loans. That is the premium businesses are prepared to pay in return for taking on high-yield debt and all its associated plus points. The increased cost is initially balanced by the opportunity for growth and expansion that comes with the funded capital.

In the case of Bangladesh, high-yield debt structures now also showcase slightly longer tenors, including bullet repayments at maturity (where a large portion of the principal is repaid on the last day). It helps companies better manage their cash flows and liquidity in the short term without the obligation to pay the principal back at regular intervals.

Emerging Trends Influenced by the High-Yield Market

Growing demand for high-yield debt has, in turn, encouraged greater involvement of non-banking financial institutions (NBFIs): mutual funds, pension funds and private equity firms.

The high-yield market expansion has conferred a new optimism on Bangladesh’s capital markets. The expansion helped diversify financial sector, opening it up to several new initiatives aimed at improving the infrastructure of the bond market through increasing transparency, reducing transaction costs, and promoting investor protection.

The regulators, particularly the Bangladesh Securities and Exchange Commission (BSEC), are now trying to streamline mechanisms for better risk assessment and protection of investors against defaults.

Bangladesh has witnessed significant growth in alternative credit provision, including from private equity investors, angel investors and venture capital firms, whose influence on Bangladesh in terms of financing terms and structure has been immense; the impact, however, has been confined to equity financing and the start-up ecosystem rather than in the traditional loan market. Nonetheless, this recent phenomenon has indirectly affected the broader financing landscape regarding how businesses access capital and negotiate their financing terms.

Over the past 12 years, 121 disclosed deals totalling about USD45 million in angel investments have been made in Bangladeshi early-stage companies. Another form of early-stage targeted financing is venture capital (VC) investment, the closest type of funding to angel investing. VC typically invents significantly larger cheques to early-stage or marginally established businesses that need a lot more capital than is provided by angel investment. This is also true in Bangladesh, where VC firms invested over USD98 million in pre-seed and seed-stage businesses combined (until 2024), whereas angel investors invested a significantly lesser amount of USD30 million in the same early stages of businesses. Angel investors have financed more firms in the nation despite VC’s greater investments, making them a more accessible source of funding for early-stage entrepreneurs. Such investments have given birth to further innovations in the loan market, such as venture debt and mezzanine financing options where the former is intended to complement the product of venture capital, and so finds its way to VC-backed companies that need more finance but do not want to further dilute equity in their companies. The warrants or other equity-linked incentives that come tagged with this form of debt make venture debt a hybrid product that combines the best features of a loan with those of venture capital. As for mezzanine financing, the recent rise in convertible debt and revenue-based financing from VCs has also influenced how banks price certain loan products. Hence, some banks have started using such options whereby loans include equity-like features, such as profit-sharing arrangements or the option to convert into equity.

However, venture capital has high growth and return expectations. It encourages entrepreneurs to grow their businesses rapidly, sometimes at the cost of long-term survival or attainment of profitability. Such pressure is absent in the conservative and predictable bank loan system. While many business holders may lack confidence in alternative investments and would rather stay in their comfort zone of conventional credit facilities, the former has shown steady progress in recognition and implementation over traditional loans. BSEC has formulated regulatory frameworks to smoothen the process.

Banking and financial techniques in Bangladesh have gradually changed to meet both the borrowers’ changing needs and the investors’ growing sophistication. There has been a recent rise in the prevalence of Holding Company (HoldCo) structures in Bangladesh, especially for large conglomerates and businesses involved in several sectors. This trend reflects the urge towards operational flexibility, tax efficiency, and enhanced risk management.

There are several features of the way banking and finance techniques are currently shaping up in Bangladesh set out below.

There is apparent operational flexibility because, through the structure of HoldCo, companies can protect their subsidiaries from operational risks while the parent company takes strategic decisions and executes financial structuring.

They are increasingly used for mergers and acquisitions in Bangladesh (especially cross-border transactions), since the holding company would be a vehicle for strategic acquisitions with independence among the operating companies. Big Bangladeshi conglomerates operate under the Holding Company structures and thereby deal with their subsidiaries in various sectors such as textiles, cement, and finances. On the one hand, business diversification aids these companies in raising capital without associating risk from one sector to another.

Preferential equity has recently become more popular in Bangladesh, especially for private equity and venture capital-backed companies looking to raise capital without significant loss of control or increasing debt. For start-ups or high-growth companies in Bangladesh, it has emerged as one of the preferred modes of bank loans and common equity, particularly when an effort is made to attract foreign venture capital or private equity investors. This is particularly true for Bangladesh’s fastest-growing tech, fintech, and e-commerce sectors, as preferential equity provides start-ups and CMSMEs with a route into international VCs and private equity firms without giving away too much ownership, let alone debt.

Mezzanine finance is also becoming equally important in Bangladesh, as introduced in 1.4 Alternative Credit Providers when funding is provided to firms with limited additional debt and equity dilution. It often finds applications in expansion financing, acquisitions, or capital-intensive projects where traditional bank loans fall short. In Bangladesh, mezzanine financing is starting to emerge in industries such as real estate and infrastructure development, where companies need to raise significant capital for long-term projects but may not have enough cash flow to manage traditional debt.

The Government of Bangladesh has always prioritised achieving Sustainable Development Goals (SDGs), which require significant sustainable investment in the infrastructure sectors. Bangladesh’s Intended Nationally Determined Contribution (INDC) prioritises the energy, transport and industrial sectors, setting out a number of quantified targets with a view to reducing Green House Gas (GHG) emissions by 5% within 2030 compared to a business-as-usual scenario.

In order to support and encourage environmentally responsible financing, Bangladesh Bank has been implementing a comprehensive green banking initiative since 2011. Amongst other things, the bank has issued guidelines for evaluating the environmental risk of lending proposals and greening internal procedures and practices within banks and finance companies. It has also directed banks to publish sustainability reporting to their stakeholders using an internationally recognised format, such as Global Reporting Initiatives (GRI), which decided to implement a policy for the financial sector that complies with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, acknowledging the importance of sustainability reporting among stakeholders, investors, and development partners. The goal of the policy is to direct financial disclosures pertaining to sustainability and climate change. The Financial Stability Board (FSB) created TCFD in 2015 with the goal of promoting and improving the disclosure of financial data pertaining to climate issues.

In conformity with the vision, in 2022, the Policy on Green Bond Financing for Banks and Financial Institutions (FI) has been formulated by the Bangladesh Bank in accordance with Section 45 of the Bank Company Act, 1991 and Section 18 (Cha) of the Financial Institutions Act, 1993, aiming to facilitate green-focused, sustainable investment of Banks and FIs through climate change mitigation and adaptation. Since then, sustainability-linked loans have been issued tying financing terms with environmental, social, and governance (ESG) performance, where borrowers benefit from reduced interest rates when they meet the preset sustainability goals, ie, reducing carbon emissions. Moreover, green bonds and financing products are being offered by several banks and NBFIs, particularly for large infrastructures and projects involving renewable energy sources, waste management, and energy conservation. This trend also goes hand in hand with the global investors’ demand for more sustainable investment opportunities.

In Bangladesh, there are two primary lenders who provide financing to various entities (namely, banks and non-banking financial institutions). Bangladesh Bank has been empowered to regulate and supervise banking companies and financial institutions.

Under the Bank Companies Act of 1991, banking companies must obtain a license from Bangladesh Bank to conduct banking operations in Bangladesh. In 2023, Bangladesh Bank increased the minimum paid-up capital required for new banks from BDT4 billion to BDT5 billion. Additionally, these banks must comply with several capital-related requirements:

• pledged capital is not lower than one-half of the authorised capital;
• paid-up capital is not lower than one-half of the pledged capital;
• capital consisting only of ordinary shares; and
• voting rights of a particular shareholder to be determined as per their shareholding and not exceeding 5% of the total voting rights of the shareholders.

Similarly, non-banking financial institutions (NBFI) also need a licence from Bangladesh Bank before they can provide financing to entities in Bangladesh. The NBFIs in Bangladesh were regulated as per the Financial Institutions Act of 1993, and currently, they are regulated as per the Finance Company Act of 2023. The minimum paid-up capital of the NBFIs must be BDT1 billion to carry on financing business. Interestingly, permission from Bangladesh Bank is required for NBFIs to also open branch offices.

Another type of financing recently emerging in Bangladesh is financing through alternative investment funds (AIF), which channel investment into various high-growth companies. Alternative Investment Funds (AIFs) are established as trusts and must be registered accordingly. Additionally, fund managers are required to register with the Bangladesh Securities and Exchanges Commission (BSEC). The BSEC oversees AIFs in accordance with the Alternative Investment Rules of 2015.

Foreign lenders can provide loans in Bangladesh without restrictions, but locally incorporated companies must meet specific requirements. They need permission from the Bangladesh Investment Development Authority (BIDA) before obtaining foreign loans. Companies controlled by foreign entities must maintain a debt-to-equity ratio of 50:50, while other borrowing companies must have a 70:30 ratio. Power-generating firms are an exception and can maintain an 80:20 debt-to-equity ratio.

There are, however, exceptions to the requirement of obtaining permission from BIDA for foreign loans. The 100% foreign-owned entities located in the Export Processing Zone (EPZ) may obtain foreign loans without prior approval from BIDA or Bangladesh Bank.

The repayment of foreign loans may be made without prior reference to Bangladesh Bank, provided the conditions set out below are met.

• The instalments are remitted by the authorised dealers (usually scheduled banks) through whom the loan was received.
• In case of loans received in convertible foreign currency, the authorised dealer, while reporting the usual monthly remittance to Bangladesh Bank, must provide a certificate clearly stating the date and amount of receipt of loan funds and monthly returns/schedules in which the receipts were originally reported to Bangladesh Bank. The credit agreement and repayment schedule should also be forwarded.
• If the foreign loan is availed in the form of the supplier’s credit, the borrower must provide the authorised dealer with the attested copies of the bills of entry, proving the actual arrival of capital goods in Bangladesh. The authorised dealer must also forward the bills of entry, credit agreement, and repayment schedule to Bangladesh Bank.

Foreign-owned companies in Bangladesh that have urgent short-term borrowing needs, aside from procuring inputs, can access interest-free loans from their parent companies or shareholders abroad for a period of up to one year without requiring prior approval. This is applicable if they are unable to secure working capital financing from the local market and these loans must be reported to the Foreign Exchange Policy Department of Bangladesh Bank through authorised dealers.

There is no outright restriction on foreign lenders receiving security or guarantees against foreign loans provided in Bangladesh. The securities usually received by foreign lenders are mortgages on real property, charges on fixed and floating assets (usually taking the form of a letter/deed of hypothecation) and share pledges.

In Bangladesh, land leases commonly include a clause stating that the lessee must obtain permission from the lessor before mortgaging the property. This stipulation is frequently found in lease documents where the lessor is Rajdhani Unnayan Kartripakkha (RAJUK). It is essential to secure prior approval from the lessor before proceeding with any mortgage.

Authorised dealers must first obtain permission from the Foreign Exchange Policy Department of Bangladesh Bank prior to issuing any guarantees on behalf of a company for the repayment of suppliers’ credit to foreign suppliers.

Bangladesh has extremely stringent foreign currency exchange laws. In this regard, the Foreign Exchange Regulation Act, 1947 (FERA) is the primary legislation which prohibits the following (except with the general or special permission of Bangladesh Bank):

• buying or selling foreign exchange (other than from an authorised dealer);
• borrowing or lending foreign exchange (other than from an authorised dealer);
• exchanging foreign exchange (with a person other than an authorised dealer);
• entering into a transaction which provides for conversion of:
1. foreign currency into local currency; and
2. local currency into foreign currency,

at exchange rates other than those (for the time being) authorised by Bangladesh Bank.

Without the general or special exemption from Bangladesh Bank, FERA also prohibits a person/resident in Bangladesh from the following:

• making any payment to a person outside Bangladesh;
• drawing, issuing or negotiating any bill of exchange, a promissory note or acknowledging any debt which enables a resident outside Bangladesh to receive a payment;
• making any payment to or for the credit of any person by order or on behalf of any person resident outside Bangladesh;
• placing any sum to the credit of any person resident outside Bangladesh;
• making any payment to or for the credit of any person as consideration for or in association with:
1. the receipt of payment by any person;
2. the acquisition by any person of property outside Bangladesh; and
3. the creation or transfer in favour of a person to receive a payment or acquire property outside Bangladesh.

However, various repatriations have been allowed in Bangladesh to facilitate business, commerce, and foreign investment. The repatriation includes remittance of dividends, salary of foreign citizens up to a certain percentage, royalty and technical service fees, capital and capital gains. However, repatriation is subject to various conditions, including the production of the necessary documentation.

Traditionally, the loan agreements dictate how the borrower shall utilise the loan proceeds. Usually, a provision will stipulate the purpose for which the borrower may spend the loan proceeds, eg, buying capital machinery, expanding a plant, etc.

Both agency relationship and trust concepts are recognised in Bangladesh. Agency relationships are governed as per the Contract Act, 1872. In Bangladesh, any person who is not a minor can be employed as an agent, and no consideration is necessary to create an agency relationship. The authority of the agent may be expressed or implied.

For the formation of a trust in Bangladesh, the following are necessary:

• an intention to create a trust;
• the purpose of the trust;
• the beneficiary; and
• the trust property.

Moreover, the settler is also required to transfer the trust property to the trustee unless the trust is declared by will or the benefactor of the trust is the trustee.

Usually, no other structures are used in Bangladesh in lieu of agency or trust structures.

Bangladesh is experiencing a frequent transfer of loans, commonly known as “loan takeover”. In loan takeovers, loans are usually transferred between two banks. The reasons behind such loan takeovers being popular are the banks taking over the loan offering a lower rate of interest, additional credit, and no processing fee. Loan transfers are usually done through assignment or novation, and the terms of the original financing document determine the transfer mechanism. 

The concept of “debt buyback” is not yet recognised in Bangladesh. 

Public mergers and acquisitions are comparatively rare in Bangladesh. There is also no rule regarding requiring specified funds necessary for financing the acquisition of public companies. Usually, the documentation relating to funding the acquisition of a company and/or assets contains long-form agreements alongside various security documents being executed in favour of the lender. None of the documents are required to be publicly filed. 

There was a practice prevalent in Bangladesh of receiving undated and blank signed cheques by way of security when providing any loans or financing various businesses.

In 2016, the High Court Division of the Supreme Court of Bangladesh passed a judgment stating that once a cheque has been issued, the person who signed it cannot later avoid liability by arguing that the cheque is undated. The apex court of Bangladesh later held that such cheques are required to be supported by consideration. However, more recently (in 2023), it has been held by the High Court Division of the Supreme Court of Bangladesh that every essential element of a cheque is required to be filled up by the said drawer/maker in order to comply with the Negotiable Instruments Act, 1881. In light of that, the practice and provisions in the loan agreements receiving cheques as a form of security will likely be modified.

The primary legislation in Bangladesh pertaining to usury laws is the Usurious Loans Act, 1918. This Act empowers the court to re-open a transaction, relieve a debtor in respect of excess interest, and set aside or revise/alter any security given, should the court consider the interest to be excessive and the transaction be substantially unfair. To assess whether an interest rate is considered “excessive," the court will evaluate the amount charged or paid. If compound interest is applied, the court will also examine the intervals at which it is calculated and the overall benefit that might reasonably be expected from the transaction. In determining substantial unfairness, the court shall take into account all the circumstances materially affecting the relations at the time of the loan. In this regard, the interest itself may be sufficient evidence of the transaction being substantially unfair.

Moreover, as per the Money Lenders Act, 1933, in suits commenced after the commencement of the Usurious Loans Act, 1918, if the rate of interest exceeds 15% per annum for a secured loan, 25% per annum for an unsecured loan or that there is a stipulation for rests at intervals of less than six months, the court shall presume that the interest is “excessive“ and the “transaction was harsh and unconscionable and was substantially unfair”. Furthermore, when compound interest is charged, the lender shall not be able to recover the interest through suit at a rate exceeding 10% per annum. The Courts are also not allowed to decree an amount of interest greater than the principal of the loan.

After the enactment of Money Lenders Act, 1940, the borrowers are not under an obligation to repay a sum greater than the principal with respect to interest and interest per annum exceeding (i) 10% simple for unsecured loan and (ii) 8% for secured loan.

There is no direct obligation imposed through laws to disclose the financial contracts. However, to adhere to various regulatory requirements, a financial contract being executed may need to be disclosed to the authorities.

Withholding taxes are commonly referred to as tax deduction and collection at source in Bangladesh. Entities are required by law to withhold taxes at the time of payment and deposit them to the Government Exchequer. The withholding authority issues a certificate to the taxpayer, who then uses it to receive tax credits against assessed tax.

At the start of this fiscal year 2023–24, the tax authority removed the decades-long tax benefits that foreign creditors had received by imposing a 20% withholding tax on interest payments made by local businesses to international lenders. However, subsequently, NBR has exempted the local borrowers from withholding tax on foreign lenders’ interest earnings, and the exemption has been extended till the end of 2024.

The Stamp Act of 1899 provides that any instrument charged with duty and executed by any person in Bangladesh must be stamped either before or at the time of execution. Moreover, any instrument chargeable with duty executed out of Bangladesh (not being a bill of exchange or promissory note) may be stamped within three months of its first delivery in Bangladesh.

Moreover, a mortgage must be adequately stamped and registered. Most recently, a significant amount of stamp duty has been imposed on share pledges and assignment agreements, which increased the cost of borrowing.

Foreign Lenders often attempt to gross up any tax by increasing the gross amount of the payment to account for the taxes they were to withhold. This results in additional exposure and burden on the borrower.

To mitigate this, potential borrowers can borrow money from foreign lenders who are residents of countries that have signed a DTAA (Double Taxation Avoidance Agreement) with Bangladesh. If the foreign lender resides in a country with which Bangladesh has a DTAA, the withholding tax rate on interest payments may be reduced. The reduced rate would depend on the specific treaty provisions.

The most common form of security against loans is a mortgage of lands completed through mortgage deeds. If the mortgage is not made through the deposit of title deeds and the sum advanced exceeds BDT100, then the mortgage is required to be executed through the signature of the mortgagor along with attestation by two witnesses. The above process must be followed even if the mortgagee is a government, bank, or financial institution (even if the mortgage is created through the deposit of title deeds). The mortgage deeds must also be registered with the relevant sub-registry office.

The second commonly used form of security is hypothecating the company’s present and future assets through a letter or deed of hypothecation.

Shares may also be pledged as a form of security in Bangladesh by providing the creditor with:

• a signed undated share transfer form;
• delivery of the original share certificates; and
• an irrevocable power of attorney enabling the attorney to perfect the security.

However, for the actual transfer to take place, the legal owner is required to provide his signature before RJSC (Registrar of Joint Stock Companies And Firms). A lien on shareholder shares is also a common form of third-party security, which does not require delivery of share certificates. Lien is gaining popularity as the share pledge attracts considerable stamp duty.

Other forms of security include personal and corporate guarantees and counter-guarantees. If the mortgagor is a company, the mortgage or charge on the company’s assets must be registered with the RJSC.

The laws of Bangladesh permit the creation of a floating charge. A floating charge may be created on all present and future assets of a company and/or entity, and the same can be created by executing a hypothecation letter.

Usually, downstream, upstream and cross-stream guarantees are allowed in Bangladesh. It is a common practice for foreign shareholders and/or sister concerns to provide a corporate guarantee against the loans advanced to companies incorporated in Bangladesh.

However, companies are not allowed to provide a guarantee or any security in connection with a loan advanced by a third party to the following:

• any director of the company.
• any firm in which any director of the company is a partner.
• any other company in which any director of the company is a director or member.
• any public company whose managing agent, manager or director is accustomed to acting under the directions or instructions of the company's director(s).

An exception to the abovementioned prohibition applies to banking companies, where the holding company makes the loan and gives the guarantee or security to its subsidiary. In this case, the loan needs to be sanctioned by the board of directors and approved in general meetings, and it needs to be specifically mentioned on the balance sheet. Moreover, the total amount of such loan or guarantee shall not exceed 50% of the paid-up value of the shares held by such director.

No company (other than a private company or subsidiary of a public company) is allowed to provide loans, guarantees, security or other financial assistance to acquire its own shares (unless lending money is the ordinary course of the company’s business).

There is a stamp duty payable on the execution of a mortgage deed. The stamp duty varies on a case-to-case basis and can be up to BDT50 million. Please see section 4.2 Other Taxes, Duties, Charges or Tax Considerations for the stamp duty applicable to mortgage deeds.

Moreover, in case of a guarantee or security (directly or indirectly) favouring the director of a company, they are required to disclose their interest at a board meeting, and they are prohibited from voting in favour or against the relevant agenda of the meeting.

The Transfer of Property Act of 1882 allows for the redemption of mortgages. Once the principal money has been due, upon the payment of mortgage money, the mortgagor may require the mortgagee:

• to return the relevant documents to the mortgagor;
• to deliver the possession of the mortgaged property; and
• to re-transfer the mortgaged property to a third party.

Typically, mortgages are redeemed by registering a new conveyance document. To release a hypothecated deed, the parties involved may need to create additional release documents following the terms specified in the original deed of hypothecation.

In the case of pledged shares, the party that received the shares must return the share transfer documents and certificates to the original owner.

The rules relating to the subordination of securities during insolvency are contained in the Bankruptcy Act, 1997 and Companies Act, 1994 (applicable during winding up). As per the Bankruptcy Act, 1997, during insolvency, at first, the administrative expenses (including the receiver’s fee) are prioritised, and thereafter, other receivables are paid in the following order:

• (a) all taxes and dues to the government;
• (b) all wages and salaries (not exceeding BDT2000 to any clerk, servant, labourer or workman) for the work rendered during the 6 months prior to initiating bankruptcy proceedings;
• (c) all bank debts;
• (d) all unsecured claims; and
• (e) any subordinated claim.

If, after making the payments outlined in (a) and (b), all bank debts and at least 50% of unsecured claims cannot be fully paid, then priority will be given so that the payments for unsecured claims amount to at least 50% of the total bank debts. Additionally, debts within each class will rank equally among themselves. If the estate is unable to meet these claims, the lenders will be paid in equal proportions. Furthermore, the lenders may enter into pari-passu agreements to determine the ranking of charges on assets.

Transfer of Property Act, 1882 provides that where the parties have not agreed otherwise, a right created at an earlier point in time shall have priority to the rights created at a later point if all the rights cannot be exercised together. The Contract Act of 1872 states that, unless a contrary agreement exists, bankers, factors, wharfingers, Supreme Court advocates, and policy brokers are permitted to retain goods that have been entrusted to them as security for a general balance of account. No other individuals are entitled to retain goods under such conditions.

Recently, in cases of winding up or insolvency for a business entity located in an economic zone, the authorities of these economic zones often assert a claim for the first charge over the entity’s assets to secure payment of outstanding debts owed to them. In some instances, the entities may establish a second-ranking charge with various banks and financial institutions, allowing the economic zone authorities to maintain a first-ranking charge.

Usually, the secured lenders will enforce their collateral when the borrower is unable to repay its liabilities to the lender. The lenders would follow the terms and conditions of the finance document, which shall make provision for security enforcement. After the enactment of the Artha Rin Adalat Ain, 2003, the securities provided against different loans are enforced as per the provisions of that Act.

The Artha Rin Adalat Ain, 2003 states that financial institutions cannot file lawsuits against borrowers without first selling any property they possess or control that is related to the loan and using the proceeds from that sale to repay the debt. If the borrower holds the property, they are obliged to return it. Additionally, when any property that has been mortgaged, hypothecated, or pledged is sold to enforce the security, the ownership of that property will transfer to the borrower.

The Contract Act of 1872 states that, except for arbitration, any contract that restricts a party from enforcing their rights or limits the time frame for enforcing those rights is considered void to that extent. However, it has been determined that selecting a foreign jurisdiction does not violate this provision. In essence, a party to a contract cannot be prevented from pursuing their rights through the standard legal proceedings in regular courts.

However, mutual consent alone cannot grant jurisdiction to a court that does not already have it under general law; nor can individuals, by agreement among themselves, strip any court of the jurisdiction it possesses under general law.

Judgments delivered by foreign courts against a company would be enforceable in Bangladesh as per the Code of Civil Procedure, 1908, which provides that where a certified copy of a decree of any superior courts of a reciprocating territory is filed with the District Court, it shall also be executed as if it has been passed in Bangladesh. However, India is the only country with which Bangladesh has an outstanding reciprocity agreement.

Moreover, the Arbitration Act of 2001 provides that any enforceable foreign arbitration award shall be binding between the parties and, on an application made by any party, courts shall enforce its execution as per the Code of Civil Procedure, 1908. However, the enforcement may be denied by a local court on the following grounds:

• a party to the arbitration agreement was under some incapacity;
• arbitration agreement not being legally valid;
• the party against whom the award was made was not given proper notice of arbitration or an opportunity to present their case;
• the award contains matters beyond the scope of the arbitration agreement;
• the composition of the tribunal is beyond the arbitration agreement; and
• the award has not yet become binding or has been set aside or suspended.

Moreover, the recognition and execution of a foreign award are also denied if they conflict with Bangladesh’s public policy. Interestingly, the concept of public policy is still evolving, and its scope is not yet well defined. Recently, the courts have taken a wider view in defining public policy.

In practice, the process of enforcing security against loans in Bangladesh is cumbersome. In an effort to speed up the loan recovery, the Money Loan Court Act (Artha Rin Adalat Ain) of 2003 was enacted, prescribing that the resolution of any proceedings should be made within 60 days. In practice, however, a proceeding in the Money Loan Court takes years. Further, a foreign lender is not entitled to seek remedy under the Money Loan Court Act. To avoid such difficulty, foreign lenders often appoint a security agent who enforces the security without prior intervention from local courts under the Artha Rin Adalat Ain, 2003.

In Bangladesh, a Company may be wound up by the following processes:

• by the court or
• voluntary or
• subject to the supervision of the court.

The Companies Act of 1994 gives the court the authority to halt further proceedings in any lawsuit or legal action against a company. The court can also issue any order it finds appropriate. Additionally, the Bankruptcy Act of 1997 grants the court powers similar to those it holds in its original civil jurisdiction. Therefore, once a winding-up or bankruptcy petition is filed in court, the court may suspend any further actions taken by lenders to enforce a loan or security.

The Companies Act of 1994 states that the same insolvency laws apply to companies as those governing the estate of a person declared insolvent. Hence, for an overview of the prevalent laws, please refer to section 5.7 Rules Governing the Priority of Competing Security Interests. However, the Companies Act of 1994 has provided a list of payments which shall have priority over all other debts, which is as follows:

• all payments owed to government which became due and payable within the next 12 months before the date of the winding up order (in case of compulsory wound up) or commencement of winding up;
• wages or salary of clerks and servants for the services rendered within the next two months prior to the date of the winding up order (in case of compulsory wound up) or commencement of winding up, not exceeding BDT 1000 per clerk or servant;
• all wages of labourers and workmen, not exceeding BDT500 for each rendered to the company within two months next before the date of the winding up order (in case of compulsory wound up) or commencement of winding up;
• compensation payable under Workmen’s Compensation Act, 1923 for death or disablement;
• sums due to employees from funds for the employee’s welfare (provident fund, gratuity fund, pension fund); and
• the expenses of any investigation held by the government on a report by RJSC.

These debts shall rank equally amongst themselves, and if the assets are insufficient to satisfy the said debts, they shall be paid in proportion. Moreover, the said debts shall also have priority over the claims of holders of debentures under any floating charge created by the company.

The winding-up procedure of a company may take around six to nine months to complete. However, liquidating assets after a company is wound up may take 2-3 years. Under the Bankruptcy Act of 1997, insolvency may take roughly 20-25 years.

The recovery by lenders varies largely on a case-to-case basis and depends on the financial status of the company or the borrower.

The Bankruptcy Act of 1997 permits a debtor to propose a scheme of arrangement after a bankruptcy order has been issued, provided the debtor intends to repay their liabilities. Once this scheme is submitted to the court, the court will set a date to review the proposal and notify the debtor about it. Following this, the receiver must file a report assessing the viability of the debtor's proposal.

Moreover, before or after the bankruptcy order is passed, an eligible debtor may apply to the court for a reorganisation of the debts. The application shall be filed with a plan of reorganisation. After such an application is filed, a date for the hearing will be fixed within 90 days, and the receiver and lenders will be notified of such an application.

Lenders face two main risks if a borrower, security provider, or guarantor becomes insolvent. The first risk is the inability to recover loans. Most banks and non-bank financial institutions (NBFIs) may opt to recover their loans through the Artha Rin Adalat Ain, 2003, rather than the Bankruptcy Act, 1997, which offers an insolvency pathway. The second risk involves the delayed recovery of funds, which can take a prolonged period of 20 to 25 years. Such delays can ultimately be detrimental to lenders due to inflation and other economic factors.

Energy and infrastructure are two key areas for project financing in Bangladesh. Recently, the Asian Development Bank (ADB) signed a USD121 million financing package with an energy company to operate a 100-megawatt utility-scale solar facility in Bangladesh. According to ADB, this is the first private sector utility-scale solar facility to receive such funding. Other examples of project financing activities include Padma Bridge Project, Matarbari Coal Fired Power Plant, Dhaka Elevated Expressway, Sembcorp North-West Power Company’s 413.8 MW (gas)/333.02 MW high-speed diesel, dual-fired power station, Sirajganj (Unit 3) 225 MW Combined Cycle Power Plant.

The key pieces of legislation governing the public–private partnership in Bangladesh are as follows:

• Bangladesh Public–Private Partnership Act, 2015 (PPP Act), which establishes the Public Private Partnership Authority as the regulatory for public-private partnership projects; and
• Procurement Guidelines for PPP Projects, 2018, govern the process of tendering projects pursuant to the PPP Act. This guideline details four key phases: identification, development, bidding, approval, and award.

Apart from these, there is another Policy for Implementing PPP Projects through Government-to-Government Partnership, 2017, which the Public Private Partnership Authority developed for engaging with the governments of other states to implement projects in Bangladesh through PPP Projects.

Agreements such as construction contracts, power purchase agreements, concession agreements, engineering, procurement and construction contracts (EPC contracts), and production sharing contracts (PSC) are usually governed by Bangladesh law.

However, if the agreement involves an investor from a country with which Bangladesh has an investment treaty and the government of Bangladesh (and/or its agencies), then the agreement usually contains an arbitration clause to resolve the dispute through ICSID - International Centre for Settlement of Investment Disputes Arbitration. International forums such as ICC, UNCITRAL, LCIA, etc, are also frequent in such agreements.

If the financing agreements for such projects involve international lenders, then the agreements may also be governed by English Law.

Foreign entities do not face direct restrictions on owning or having real property in Bangladesh and there are no limitations on foreign lenders in terms of holding or exercising a remedial right on a lien against such property. However, the Constitution of Bangladesh grants the fundamental right to property exclusively to its citizens.

The primary concern while structuring a deal would be obtaining a right over the concerned land. For example, to build or operate a power plant, the entity or investor would require a suitable piece of land and a right to build it. Usually, a leasehold right or licence is obtained over the land.

Other considerations invariably include regulatory compliance, force majeure events, operational issues, environmental effects, revenue sharing between parties, etc.

Typically, the investors would incorporate a special-purpose vehicle in Bangladesh for the concerned project. Often, the projects are completed through joint ventures between entities. Interestingly, Bangladesh enacted the Foreign Investment (Protection and Promotion) Act of 1980, ensuring fair and equitable treatment of foreign private investments.

Usually, projects are financed in Bangladesh through a combination of debt and equity from banks and NBFIs. Please refer to section 3 for more detailed insight.

Companies usually obtain syndicated loans from banks and/or NBFI to finance their projects by providing security over their assets and/or rights.

As per Article 143 of the Constitution of Bangladesh, 1972;

all minerals and other things of value underlying any land in Bangladesh;

minerals and other things of value underlying the ocean within the territorial waters (or the ocean over the continental shelf) of Bangladesh; and

any property located in Bangladesh that has no rightful owner, are all lawfully owned by the Republic and are extremely restricted.

They are regulated and explored through government entities or state-owned corporations. As for a few exportable natural resources like natural gas, the government mostly follows a production sharing contract (PSC), a special agreement between the government of Bangladesh and foreign contractors signed for petroleum exploration that contributes to the development of the country.

Mineral resources in Bangladesh are limited. Aside from natural gas, there has been little focus on the mining of other mineral resources. The country primarily relies on natural gas and small amounts of imported liquid petroleum fuels to meet its energy needs, especially against a backdrop of low economic activity. While Bangladesh is working towards renewable energy solutions, such as solar power, it remains heavily dependent on natural gas, particularly for export purposes. However, the export of all petroleum and petroleum products, except those derived from natural gas (including condensate, MIT, MS, bitumen, furnace oil, lubricating oil, naphtha, etc), is prohibited. 

Given that, this prohibition shall not apply to the export of petroleum and LNG as shares, as per the agreement of the foreign investment companies under the PSC. The rules can change periodically in the Ministry of Commerce’s published annual export policy.

The key piece of legislation concerning the conservation of the environment is the Environment Conservation Act of 1995, which was enacted with the aim of conserving the environment.

This Act provides that an industrial project cannot be established or undertaken without obtaining Environment Clearance Certificate from the Director General. The Environmental Conservation Rules, 1997, supplement the Act and provide for the procedure to be followed in order to obtain the environment clearance certificate. Furthermore, the Environmental Court Act (2000) was enacted to establish a court for trying pollution-related offences.