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May 23, 2004

Money Loan Courts
Aiming at fast but not furious disposal

Barrister Tureen Afroz

Financial sector in Bangladesh comprises of mainly banking sector, insurance companies, stock market, non-bank financial institutions and micro financing institutions. Out of these, banking sector dominates the financial system, accounting for more than 95% of its total assets. Banking sector in Bangladesh suffers from chronic inefficiency. According to FSAC (Financial Sector Adjustment Credit) Report of the World Bank, problems in banking sector in Bangladesh can be generally categorized into four main groups:

(a) Economic - such as, when the loan rate of interest does not reflect real risk and price because of excessive control.

(b) Prudential such as, when the capital adequacy requirements are not effectively enforced or there does not exist any appropriate loan classification mechanism.

(c) Institutional such as, when there exist weaknesses in relation to loan screening and supervision or weak management information system.

(d) Legal such as, the loan default system was perpetuated because of the delays and inadequacy originating the system.

However, at this moment, the biggest problem of Bangladesh banking system is the bank loan default problem. There are various reasons for loan default problem in Bangladesh, such as, inefficient loan classification mechanism, improper banking supervision, lack of accountability on the part of bank officials, high loan price, risky economic environment, corruption, unethical use of political power, ineffective and inadequate judicial remedy for financial corruption or frauds etc.

In past, various initiatives have been undertaken to tackle the loan default problem in Bangladesh. Initiatives included prosecuting willful defaulters; imposing prohibitions against defaulters holding public offices or bank directorships; putting limitations on access to new loans; denying import licenses to industrial loan defaulters; shaming defaulters by publishing lists; setting up Credit Information Bureau to record the performance of borrowers; establishing a large Loan Review Cell in Bangladesh Bank to review all newly sanctioned bank loans over Tk. 10 million etc.

However, the above measures, adopted overtime, were found to be inadequate in tackling the massive loan default problem of the country. In early 1990s, it was strongly realized that "a weak legal infrastructure" is mainly responsible for non-recovery of default loan and thus for "deterioration in the quality of overall credit management in Bangladesh". Accordingly, a number of new acts have been enacted (such as, Money Loan Court Act 1990, Bank Company Act 1991 and Bankruptcy Act 1997) and old Acts have been necessarily amended.

In 1990, the Money Loan Court Act was enacted with a view to (a) establishing loan courts at district level; (b) closing the legal loopholes; and (c) ensuring prosecution of defaulters more rigorously than ever before. However, the Task Force Report on Financial Sector Reforms, Government of the People's Republic of Bangladesh, 2000 concluded that: "… the progress in relation to recovery of default loan is not significant even after formulation of new Acts and formation of new courts that too only for recovery of default loans."

It was observed in 1999 that even though there were ninety (90) Money Loan Courts in overall Bangladesh, the performance of these courts has been disappointing. Until the end of 1999, only 9.41% of total litigated amount in the Money Loan Courts could be recovered. As of March 2003, over 40,000 cases were pending with Money Loan Courts, depriving the government of realizing more than US $ 1550 million. Among the 40,000 pending cases, 22,000 were pending for over five years, 5,700 for four years, 4,600 for two years. Hearing of 3,400 cases was pending for previous one year. [Staff Correspondent, "40,000 cases pending with Money Loan Courts", 3(1241) Onirban (March 9, 2003)]. In addition, most of the settled loan cases of the Money Loan Courts are small loan defaulters leaving the major loan defaulters to perpetuate their default culture for ever.

The reasons, identified in various studies, for such poor performance of the Money Loan Courts are:

(a) Money Loan Courts suffer from inefficient case management system. As a result, the courts fail to strictly follow the legal time limits by which they are supposed to settle the claims between parties.

(b) Frequent stay orders from the High Court Division of the Supreme Court of Bangladesh obstruct the usual proceeding of the Money Loan Courts.

(c) There exists an overall culture of non-cooperation by bank officers, judicial officers, legal professionals and the parties involved to expedite the case disposal.

(d) Corrupt and unethical practices of banking administration inhibit the proper functioning of the Money Loan Courts.

(e) Political lobbying by influential defaulters makes the entire judicial mechanism ineffective.

As the 1990 Act proved to be less effective, the government has recently enacted the Money Loan Courts Act 2003 with a view to 'inspire and encourage efficient entrepreneurship' as well as to 'protect interest and security of financial institutions restoring discipline in the financial sector'. Under the new Act, the Money Loan Courts are to dispose cases within three months.

It is too early to comment as to whether the new Act has been successful in enhancing a better case management system than under that of the old Act. However, some critical observations can be made. Since its adoption in May 1, 2003, the new Act has aimed at disposing the cases of Money Loan Courts at the shortest possible time. One striking feature of the new Act is of course to utilize the 'alternative dispute resolution' mechanism along with the formal court system. The huge success of alternative dispute resolution at family courts in 12 districts of Bangladesh since June 2000, has prompted the government to incorporate similar provisions for mediation in the Money Loan Courts Act 2003. The government claims in October 17, 2003 that the Money Loan Courts could successfully resolve more than 9,000 cases, within only 5 months (May September, 2003) of enactment of the new Act. [Report, The Bangladesh Observer (October 17, 2003)]. This does portray a positive picture of the workability of the Money Loan Courts regime under the new Act.

It is, however, stated that these disposed off cases are only 22% of the total pending cases of the Money Loan Courts. If this speed of resolving the cases (9,000 cases in 5 months) remains, then just to resolve the already pending cases at Money Loan Courts (40,000 in number, pending as of March 2003), it will take almost 23 months i.e. nearly two years. Also, while resolving the pending cases, new cases will be initiated and as such, the huge backlog of cases will remain for ever. Even though the government claimed to have achieved success in speedy disposal of loan default cases within 5 months of enactment of the new Act, the volume of overall default amount is still very high. The Finance Minister, M. Saifur Rahman, in mid November 2003 declared that Banks in Bangladesh are in fact currently stacked with US $ 3515 million in default loans. [Staff Correspondent, "Tk 20,736 Crore Loans in Default Hands", The Daily Star (November 17, 2003)].

Loan default problem in Bangladesh is like a chronic disease, which will take long time to cure. The fast disposal of pending cases may help to tackle the problem up to certain extent. However, it is stated that the major evils behind the loan default problem still remain outside the purview of regulatory bodies. They are:

(1) Wide spread 'corruption' and 'unethical practice' that leads to the over all default culture in Bangladesh.

2. Political lobbying by major and powerful loan defaulters.

Unless and until, these evils are fought back furiously, by taking recourse only to speedy disposal of cases will be a futile attempt to tackle loan default problem in Bangladesh. The efforts of the Money Loan Courts will have to be much more rigorous, while dealing with corruption, unethical practices and/or major loan defaulters in disposing of the cases. In this regard, Money Loan Courts will have to boldly avoid the scope of any political pressure, no matter even if it comes from the Prime Minister's Office. The common men have lot to expect from the Money Loan Courts. These courts should in disposing of the cases keep in mind that it is the people's money that is being held up by the defaulters. If the loaned amount is not repaid in due time, it raises the cost of lending substantially. Due to increase in cost of lending, good borrowers are adversely affected as there is an erosion of capital from banks. Also, due to loan default, many prospective investment ventures are hauled, which further degenerates income and employment of the common people. Such macro-economic turmoil puts the national economy in 'growth crisis' and the 'poorest of the poor' of the economy suffer. Therefore, the Money Loan Courts should deal default cases with explicit courage, notwithstanding any pressure from any corner of the society. The courts should diligently opt for not only 'fast' but also 'furious' disposal of cases.

Barrister Tureen Afroz is an Advocate of the Supreme Court of Bangladesh. She is currently doing her PhD in Law at Monash University, Australia.