A move is underway to recognise movable property, too, as collateral against credits.

Bankers believe that such a change in traditional mortgage system will help expand lending and spur economic activities.  

Bangladesh Bank (BB) has already prepared a draft law titled 'The Secure Transaction Act' providing for such non-traditional mortgage system, officials said.

They said BB is expected to finalise the draft within this month. Thereafter, it will be sent to the Ministry of Law, Justice and Parliamentary Affairs for placing before Parliament for approval.

Movable property like goods, a document of title, security, instrument, money or any other intangible asset like goodwill will be regarded as collateral after enactment of the law in the making.

These are not accepted now in the financial sector as security for loans. Currently, only the immovable like house or flats, land property are accepted by banks and financial institutions as collateral.

People familiar with the latest move at the central bank told the FE that this would promote economic activities in the country, and reduce the dependence of lending institutions on immovables as security for credit facilities.

This innovation is being financed by Japanese aid-agency JICA under a project named 'secured lending and movable collateral reform in Bangladesh'.

A senior person familiar with the developments at the central bank told the FE that they were expecting to finalise the draft by August 30.  

A senior official at the Ministry of Finance (MoF) said this initiative is intended to help small and medium entrepreneurs and those engaged in self-employment who are unable to furnish immovable property as security against credits.

"SMEs, even startups, may be benefited as their access to the formal credits will rise," said a senior official at the MoF.

However, a high-powered monitoring team will meet on the matter at the MoF on August 29.

Bankers view that this is a piece of good news for them as it will help expand the volume of credits as the banking system now rolls in "excess liquidity".

They also hope this will bring dynamism in the business sectors as well the economy as many will have access to loans based on such property which the banking system has so far ignored as collateral.  Managing Director & CEO of Mutual Trust Bank Ltd (MTB) Anis A. Khan said: "We welcome this type of initiative as it brings dynamism in the economy."

He also sees nothing wrong in it. Many will get loans for further investment in business and it will help widen the base of collateral.

"The higher security, the higher loans," he told The Financial Express.

Mr Khan, also chairman of the Association of Bankers, Bangladesh Limited (ABB), said many will be even able to get loans against their motorised vehicles.

"It will have spillover impact on the economy. The insurance sector will also get some sort of business."

Another banker, Md Nurul Amin, managing director and CEO at Meghna Bank, said they had long felt the necessity of such arrangements.

"Such type of collateral exists in many countries, even in Sri Lanka," he said as an example to justify this initiative towards diversifying collateral.

Mr Amin, however, sees some risks of such type of security, such as the owners of such property may sell those to other parties and thus cause a problem to the lending banks.

"Suppose, a person gave his vehicles as collateral to a bank and he could sell it to other people, and in such cases bank may face problems."

Similarly, he added, the owners of factories may sell their machinery out to others.

However, there will be a separate entity paving the way for people to borrow by using such moveable property as security under the act.

The institution will help lenders get a risk-free picture of the security to accept movable property as collateral for advances.

The oversights body will be established under the name 'Secured Transaction Registration Authority'.

The main objective of the authority will be to promote the interests of the national economy by facilitating secure transaction against movable property in compliance with the provisions of the act.

The governor of Bangladesh Bank will be chairman of its board or a person nominated by him as his representative will work in the entity.

Under the law, the MoF secretary or a person to be nominated by him will stand as second in authority at the Authority. A registrar will also need to be appointed, according to the draft act.

The draft also states a designated person from Bangladesh Securities and Exchange Commission will also be on the board.

The main function of the board is to ensure registration of security rights of movable property.