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Hypothecation Agreement in Bangladesh

by | Oct 8, 2023 | 2023, Banking Law, BD Law, Commercial, Company Law | 0 comments

Hypothecation Agreement in Bangladesh best lawyer in Bangladesh barrister tahmidur rahman remura

Hypothecation Agreement in Bangladesh: Legal Insights and Applications

Hypothecation is a financial concept that plays a crucial role in securing loans and investments, and its legal implications vary from one jurisdiction to another. In the context of Bangladesh, this article will explore the concept of hypothecation, its applications, and the legal aspects surrounding it.

What is Hypothecation?

Hypothecation is a financial arrangement in which an asset is pledged as collateral to secure a loan. The key distinction of hypothecation is that while the borrower retains ownership, possession, and income rights over the asset, the lender has the right to seize the asset if the terms of the agreement are not met. This distinguishes it from a mortgage, lien, or assignment.

In Bangladesh, hypothecation is a common practice, particularly in mortgage lending and other financial transactions.

Hypothecation in Bangladesh

Mortgage Lending

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In Bangladesh, hypothecation is most commonly associated with mortgage lending. A mortgage is a type of loan secured by an underlying property. The borrower technically owns the property, but it is pledged as collateral. If the borrower fails to meet the repayment terms, the mortgage lender has the right to seize the property through foreclosure proceedings.

This practice provides security to the lender, making it easier for borrowers to secure loans with lower interest rates compared to unsecured loans. It also offers some protection to borrowers, as it allows them to obtain loans with smaller down payments or lower credit score requirements.

Commercial Real Estate

Hypothecation in commercial real estate in Bangladesh operates similarly to residential real estate lending. Borrowers use the property itself as collateral for a loan. If the borrower defaults, the lender can claim ownership of the collateral.

Construction loans in commercial real estate, however, may involve substitute collateral since the property has yet to be built. Regardless, the same rules regarding default and collateral apply.

Rehypothecation: An Important Consideration

Rehypothecation is a practice where banks and brokers use hypothecated collateral as collateral for their own transactions and trades with the client’s agreement. This practice is regulated by the Securities and Exchange Commission in Bangladesh, and banks and lenders must have the property owner’s permission to engage in rehypothecation.

It’s worth noting that rehypothecation by banks and financial institutions is less common today due to the adverse impact it had during the global financial crisis of 2008.

Legal Distinctions

Hypothecation vs. Mortgage

In a hypothecation agreement, the borrower retains ownership of the asset used as collateral, while the lender only has a right to seize it in the event of default. In contrast, a mortgage involves the lender holding the title to the property, with the borrower having possession and ownership rights.

Hypothecation vs. Assignment

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Assignment involves transferring rights and responsibilities outlined in a contract from one party to another. Hypothecation, on the other hand, allows a borrower to retain possession of an asset while using it as security for a loan.

Hypothecation vs. Lien

Hypothecation allows the borrower to hold onto the property used as collateral while agreeing to repay the loan, with the lender having the right to claim the property in case of default. A lien, however, requires the property owner to clear outstanding debts before refinancing or selling the property.

Practical Application of Hypothecation in Bangladesh

An example of hypothecation in Bangladesh would be an individual taking out a mortgage to purchase an investment property. The property serves as collateral for the loan, but the borrower continues to collect rental income from it. In case of default, the lender can initiate a foreclosure proceeding to take ownership of the property.

Legal Considerations and Conclusion

Hypothecation is a critical financial tool in Bangladesh, especially in the context of mortgage lending and real estate transactions. It offers advantages to both borrowers and lenders, facilitating easier access to loans with lower interest rates while providing lenders with security through collateral.

Understanding the legal aspects of hypothecation is essential for all parties involved in such agreements. Whether you are a borrower or a lender, it is crucial to be aware of your rights and responsibilities within the framework of hypothecation agreements. In a dynamic financial landscape, such knowledge can help ensure the smooth functioning of financial transactions in Bangladesh and promote responsible lending and borrowing practices.

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ComponentDescription
Parties InvolvedIdentifies the borrower (hypothecator) and the lender.
Asset Used as CollateralSpecifies the asset being pledged as collateral.
Loan AmountStates the total loan amount granted by the lender.
Repayment TermsOutlines the schedule for repaying the loan, including interest rates and installments.
Ownership RightsClarifies that the borrower retains ownership, possession, and income rights over the collateral asset.
Default ProvisionsDescribes the conditions under which the lender can seize the collateral, including defaults and breaches of the agreement.
Foreclosure ProcessDetails the legal process to be followed by the lender if foreclosure becomes necessary.
Rights and ObligationsSpecifies the rights and obligations of both parties during the agreement’s term.
Insurance RequirementsAddresses any insurance obligations for protecting the collateral.
Termination ClausesOutlines circumstances under which the agreement can be terminated or amended.

The legal team of Tahmidur Rahman Remura Wahid, TRW The Law Firm in Bangladesh: The Law Firm in Bangladesh are highly experienced in providing all kinds of services related to corporate and commercial law in Bangladesh . For queries or legal assistance, please reach us at:

E-mail: [email protected]
Phone: +8801847220062 or +8801708080817

Address: House 410, Road 29, Mohakhali DOHS

Written By Barrister Tahmidur Rahman

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