A Complete Guide to Debt Finance in Bangladesh

1. Overview of the Bangladesh Debt Finance Market

1.1 Market Performance

The Bangladesh debt market has faced a cautious period following the August 2024 change of regime. This led to a slowdown in domestic credit growth, reported at 9.14% in January 2025 by the Bangladesh Bank (BB), down from 11.86% a year prior. However, confidence is returning as new government policies provide clarity, and the debt finance market is expected to regain momentum.

1.2 Market Players in Bangladesh's Debt Finance

The Bangladesh debt market is composed of several key entities, including regulators, lenders, and intermediaries.

2. Common Debt Financing Transactions

In Bangladesh, debt financing is typically provided by banks and NBFIs for capital expenditure, operational needs, or expansion. These transactions are usually secured by collateral and governed by contractual terms.

2.1 Acquisition Finance

This involves using debt from local banks and NBFIs to fund the acquisition of other companies. It is a steadily growing area in Bangladesh, driven by a demand for corporate consolidation.

2.2 Project Financing

Project finance has seen significant growth, especially for large-scale infrastructure, energy, and industrial projects. This structure relies on long-term funding (like syndicated loans) based on projected cash flows rather than asset value. Public-private partnerships are common, and the regulatory framework is evolving to attract foreign investment.

2.3 Asset-Based Financing

This method involves securing funds using company assets (real estate, inventory, equipment) as collateral. It is gaining traction among SMEs that may lack the credit history for traditional loans but need to manage working capital or expand operations.

2.4 Securitisation

Securitisation is the process of pooling financial assets and converting them into tradeable securities. Bonds are the most common form, regulated by the BSEC under the Bangladesh Securities and Exchange Commission (Debt Securities) Rules, 2021.

3. Understanding Transaction Structures

3.1 Common Forms of Bank Loan Facilities

Commercial banks in Bangladesh offer various loan facilities tailored to business requirements. The most common forms include:

Term loan

A loan provided for a fixed term, repaid in instalments. Term loans are typically used for financing capital expenditures like purchasing machinery, equipment, or real estate.

Working capital loan

Provided as cash credit or overdraft to finance day-to-day operations and manage short-term expenses, ensuring business liquidity. Repayment is flexible, often tied to the business's cash flow cycle.

Trade finance loans

Includes letters of credit and bank guarantees. These are pivotal for securing domestic and international trade, providing comfort to counterparts about financial solvency.

Agricultural credit

Special financing facilities provided under the BB's Agricultural and Rural Credit Policy to support the agricultural sector, a significant contributor to the nation's GDP.

3.2 Syndicated Loans

Another growing method of raising large-scale funds for major projects in Bangladesh is syndicated loans. This arrangement grants borrowers access to significant financing while distributing risk among multiple banks. This is crucial as the Bangladesh Bank (BB) limits single-borrower exposure (per BRPD Circular No 1 dated 16 January 2022). Syndicated lending is common in public-private partnerships and foreign investment projects.

3.3 Debt Securities

Businesses in Bangladesh can also raise funds by issuing corporate bonds and other debt securities. This process is regulated by the BSEC under the Bangladesh Securities and Exchange Commission (Debt Securities) Rules, 2021. Issuers can structure bonds as secured or unsecured, with fixed or floating coupon rates, and trade them via private placement or on the stock exchange (which requires further listing approval).

The investor pool for debt securities is broad, including commercial banks, NBFIs, merchant banks, corporate entities, asset management firms, institutional investors, high net worth individuals, and foreign investors.

4. Securing Loans: Guarantees and Collateral

In Bangladesh, security interests can be taken over both movable (shares, bank accounts, machinery, receivables) and immovable (land, buildings) properties.

4.1 Guarantee and Security Packages

Typical security packages, along with their perfection requirements, include:

Mortgages

Taken over immovable assets via a mortgage deed (governed by the Transfer of Property Act, 1882), which must be registered with the concerned Sub-Registrar (under the Registration Act, 1908) and duly stamped (per the Stamp Act, 1899). An irrevocable power of attorney is often executed, in the format prescribed by the Power of Attorney Rules, 2015, to allow the lender to enforce the mortgage without court intervention. For companies, the mortgage particulars must also be filed with the Registrar of the Joint Stock Companies and Firms (RJSC) within 21 days of creation (under Section 159 of the Companies Act) to be valid against a liquidator.

Pledges

Typically taken on company shares. For physical shares, this involves a pledge agreement and depositing original share certificates. For dematerialised shares, a pledge is created through the Central Depository Bangladesh Limited (CDBL) system, pursuant to its by-laws.

Charges

Can be fixed (over a specific asset) or floating (over a class of present and future assets like inventory or receivables). A Letter of Hypothecation is executed and, like a mortgage, must be registered with the RJSC within 21 days for corporate borrowers, as per Section 159 of the Companies Act.

Assignment

Used to take security over a borrower's receivable rights under contracts (e.g., insurance). This is created by an assignment agreement and does not require registration.

Guarantees

Can include bank guarantees, corporate guarantees, or personal guarantees. Providing guarantees to non-residents (prohibited under Section 13 of the FERA without approval) requires prior BB permission, though corporate or personal guarantees for BIDA-approved loans are an exception (per Paragraph 9(a), Chapter 16 of the GFET).

4.2 Key Considerations for Security and Guarantees

Besides perfection, lenders must ensure the corporate guarantor is authorized by its Memorandum and Articles of Association and has obtained necessary board/shareholder approvals.

Agent and Trust Concepts

Agency and trust concepts are recognized in Bangladesh (under the Contract Act, 1872 and the Trusts Act, 1882, respectively). In cross-border lending, a local bank is often appointed as a security agent or trustee to hold security on behalf of foreign lenders. This allows for streamlined enforcement under the Money Loan Court Act.

Restrictions on Upstream Security

Upstream security (a subsidiary providing security for a parent) is generally not prohibited (per Section 121 of the Companies Act), provided the parent and subsidiary are not managed by the same managing agent and there are no conflicts of interest related to directorships (as per Section 103 of the Companies Act).

Financial Assistance

A company is generally restricted (under Section 58(2) of the Companies Act) from providing financial assistance (loan, guarantee) for the purchase of its own shares. This restriction does not apply to banks lending in their ordinary course of business.

5. Required Legal & Financial Documentation

The documentation required for debt finance in Bangladesh depends on the transaction type. Standard documents for the most common financing are outlined below.

5.1 Bank Loan Documentation

• Facility agreement: The primary contract detailing loan terms (amount, tenure, interest rate, covenants).
• Security agreement: Specifies the collateral (movable or immovable assets) securing the loan.
• Intercreditor agreement: Used in syndicated loans to govern relationships, voting rights, and fund distribution among lenders.
• Promissory note: A formal promise by the borrower to repay the loan.
• Guarantees: Personal guarantees from shareholders or corporate guarantees from a parent company are often required.

5.2 Debt Securities (Bond) Documentation

• Information memorandum (or prospectus): A detailed document for BSEC approval, outlining bond terms, risks, coupon rate, and use of funds.
• Trust deed: Creates a trust, with the trustee acting on behalf of the bondholders (beneficiaries).
• Subscription agreement: The contract between the bond issuer and the subscriber (investor).
• Facility arranger agreement: An agreement with the lead arranger (merchant bank) tasked with structuring and facilitating the bond issuance.
• Credit report: An essential report from a credit rating agency required to market the debt securities.

5.3 Impact of Types of Investors (Foreign vs. Domestic)

Foreign lending requirements differ significantly from domestic ones. Private commercial borrowing from foreign sources needs prior permission from the Bangladesh Bank (BB) and the Bangladesh Investment Development Authority (BIDA). Eligible borrowers (industrial enterprises registered with BIDA) can access credit from international banks, capital markets, and multilateral institutions (IFC, World Bank, ADB). These funds must be used for industrial activities, infrastructure, or other priority sectors—not for working capital or capital market investments.

Public sector borrowing from foreign sources requires government approval and, if non-concessional, approval from the Standing Committee on Non-Concessional Loan.

5.4 Jurisdiction-Specific Terms in Documentation

While foreign lenders do not need to be licensed in Bangladesh, the foreign loan itself requires BIDA and BB authorization (per GFET and the Foreign Exchange Regulation Act, 1947 (FERA)). This BIDA approval is a standard condition precedent in cross-border loan agreements. Contracts should clearly specify the governing law and dispute resolution mechanism. A choice of foreign law is recognized in Bangladesh.

Enforcement terms for securities must be tailored to local laws. Only a few specified foreign lenders can enforce security without court intervention under the Money Loan Court Act, 2003. Other foreign lenders typically appoint a local bank as a security agent to hold and enforce the security, an arrangement reflected in the loan documentation.

6. Key Tax and Regulatory Hurdles

6.1 Tax Considerations

Withholding Tax

Interest paid to non-resident lenders is subject to a 20% withholding tax (under the Income Tax Act, 2023). This can often be reduced through a Double Taxation Avoidance Agreement (DTAA), but this requires a specific exemption certificate from the National Board of Revenue.

Offshore Banking Unit (OBU) Exemptions

Interest on loans from OBUs (offshore branches of local banks) has been exempt from withholding tax, making them an attractive vehicle for foreign loans.

Debt-to-Equity Ratio

While Bangladesh lacks formal "thin capitalisation" rules, BIDA uses a 70:30 debt-to-equity ratio (80:20 for power projects) as a guideline when approving foreign loans.

Stamp Duty

Stamp duty (governed by the Stamp Act, 1899) is applied to various financing instruments, including mortgages (capped rates based on loan amount), pledges (0.5% or 0.3% with caps), assignments (1.5% with cap), trust deeds (0.1% with cap), and irrevocable powers of attorney (fixed fee).

6.2 Regulatory Considerations

Cross-Border Lending Approvals

All foreign loans for private industrial enterprises require prior authorisation from BIDA. Once BIDA approves, the loan agreement is sent to BB. Short-term supplier's/buyer's credit (up to one year) is an exception and falls under general authorisation (subject to paragraph 1, Chapter 15 of the GFET and BIDA’s 1998 notification). BB monitors all repayments, which must be routed through the same AD bank that handled the loan inflow.

Borrowers in EPZs or EZs

Companies in Export Processing Zones (EPZs) or Economic Zones (EZs) follow a different path, applying through BEPZA or BEZA, respectively, who then forward the application to BB. They are still subject to BIDA's debt-to-equity ratio requirements.

Purpose and End-Use Restrictions

Foreign loans are generally approved only for capital expenditure or project finance, not for working capital.

Registration of Securities

Mortgages and charges created by companies must be registered with the RJSC. Dematerialised shares must be pledged through the CDBL system.

7. Navigating Intercreditor Agreements

7.1 Role of Intercreditor Arrangements

Intercreditor agreements are crucial in syndicated lending and project finance. They allow lenders to participate in large loans while adhering to BB's credit limits and spreading risk. These agreements streamline lender co-ordination, defining priority rankings, security management, and voting power on key decisions like waivers or security enforcement.

7.2 Contractual vs. Legal Subordination

Creditors can mutually agree to contractual subordination (prioritizing one over the other), which is enforceable under the Contract Act, 1872. However, this does not override legal subordination in insolvency. Under the Companies Act and the Bankruptcy Act, 1997, secured creditors have first priority, followed by preferential creditors (government taxes, employee wages), and then unsecured creditors. Subordinated creditors are paid only before shareholders.

8. Enforcing Security and Judgments

8.1 Process for Enforcement

Foreign lenders can hold and enforce security in Bangladesh. The primary law for loan recovery is the Money Loan Court Act, 2003. While lenders can file claims in court, this process is time-consuming.

A key provision (Section 12 of the Act) empowers specified financial institutions (as defined in Section 2) —holding an irrevocable power of attorney—to enforce security without court intervention. They must first try to sell the mortgaged/hypothecated property before filing a suit. This right extends to local banks and select foreign institutions (IFC, ADB, World Bank, etc.). This is why other foreign lenders appoint local banks as security agents.

8.2 Enforcement of Foreign Judgments

Reciprocating Territories

Bangladesh can directly execute money decrees (under Section 44A of the Code of Civil Procedure, 1908) from superior courts in "reciprocating territories" (countries declared by official gazette). The decree-holder files a certified copy in the relevant District Court. The court will enforce it, provided it doesn't violate any exceptions listed in Section 13 of the CPC (e.g., not given on merits, obtained by fraud, or breaches Bangladeshi law).

Non-Reciprocating Territories

Judgments from non-reciprocating territories cannot be directly executed. The decree-holder must file a fresh suit in a Bangladeshi court, using the foreign judgment as evidence. The court will then issue a new judgment based on its validity under Sections 13 and 14 of the CPC.

9. Lenders' Rights During Insolvency

9.1 Rescue and Reorganisation Procedures

Beyond insolvency, corporate rescue mechanisms include:

• Scheme of Arrangement (Companies Act): A flexible, court-sanctioned compromise (under Section 228 of the Companies Act, 1994) between a company and its creditors or members. If approved by a three-fourths majority in value and sanctioned by the High Court, it becomes binding on all parties. It can be used for financial restructuring, mergers, or business transfers.
• Bank Correction Measures (PCA Framework): The Bank Companies Act, 1991 (Section 77A) and BB circulars (e.g., BRPD Circular No 17, 2023) provide a framework for "prompt corrective action" (PCA) for-stressed banks, including voluntary or forced amalgamation.
• Debt Restructuring (BB Policies): BB has policies (e.g., BRPD Circular No 16, 2022) for out-of-court rescheduling and restructuring of loans for viable entities affected by circumstances beyond their control.
• Substantial Share Acquisition: The BSEC (Substantial Share Acquisition, Takeover and Control) Rules, 2018, allow for the rehabilitation of a financially weak listed company via acquisition.

9.2 Main Insolvency Law Considerations (Bankruptcy Act, 1997)

The Bankruptcy Act, 1997, governs insolvency for both individuals and corporate debtors.

Right of Enforcement in Insolvency

Crucially, an adjudication of bankruptcy does not affect the rights of secured creditors to realise or deal with their security (per Section 31 of the 1997 Act). Secured creditors can enforce their security independently. If they realise their security, they can prove for any remaining balance. If they don't, the asset vests in the Receiver, who will sell it to pay the secured creditor first.

Order of Payment

After secured creditors and administrative expenses are paid, the priority for remaining assets is:

1. Government taxes and debts;
2. Employee wages (up to six months);
3. Bank and financial institution debts;
4. All other unsecured claims;
5. Subordinated claims.

Claw-Back Risks

A court can nullify property transfers (under Section 60 of the 1997 Act) made by the debtor within 15 years preceding the adjudication if the transfer was intended to "defeat any debt." This does not apply to transfers made for proper value.

10. Special Jurisdiction & Cross-Border Factors

10.1 Additional Issues to Highlight

Signing Formalities

Execution of instruments typically requires wet-ink signatures. Electronic signatures are not standard practice for indentures.

Verification

Lenders must verify the borrower's ownership of assets and ensure they are free from encumbrances to confirm the security package is enforceable.

No Works Council or Labour Consent

There is no requirement in Bangladesh to obtain consent from employees or works councils for arranging debt financing or creating security. Corporate approvals (board/shareholder resolutions) are sufficient.

11. Q&A: Company-to-Company Lending Scenarios

Q: Can a company in Bangladesh lend money to another local company?

A: Yes, provided the lending company is authorized to do so by its Memorandum of Association (its objectives clause must allow for making loans or investments). The loan should be documented with a formal loan agreement detailing the interest rate, repayment terms, and any security. This is crucial for tax purposes (to prove it's an arm's-length transaction) and for enforceability.

Q: Are there restrictions on a subsidiary lending to its parent company (upstream loan)?

A: This is complex and faces scrutiny. While not entirely prohibited, it could be challenged under company law, particularly if it's not at arm's length or if it prejudices the subsidiary's creditors. You must review Section 103 of the Companies Act (regarding loans to directors or connected entities) and Section 121 (if a managing agent is involved). A parent lending to its subsidiary (downstream loan) is far more common and treated as an investment.

Q: Can a foreign parent company lend money to its Bangladeshi subsidiary?

A: Yes, this is a primary method of financing. However, this is a **foreign loan** and is strictly regulated. The Bangladeshi subsidiary must obtain prior approval from BIDA. The loan is also subject to all Bangladesh Bank (BB) regulations, including reporting requirements and the "end-use restrictions" (e.g., funds cannot be used for working capital).

Q: Can a Bangladeshi company lend money to its foreign subsidiary?

A: This is highly restricted. Taking capital *out* of Bangladesh is tightly controlled by the BB under the Foreign Exchange Regulation Act, 1947 (FERA). This would be considered an "outward investment" or loan and requires specific, and often difficult-to-obtain, approval from the Bangladesh Bank.

Q: Can a company lend money to someone to buy its *own* shares?

A: No, this is explicitly prohibited. Section 58(2) of the Companies Act forbids a company from providing "financial assistance" (including a loan or guarantee) for the purpose of purchasing its own shares. This rule is designed to prevent market manipulation and protect the company's capital.