Negotiable Instrument Cases: Challenges and Solutions for Bangladeshi MFIs

Microfinance Institutions (MFIs) in Bangladesh play a crucial role in financial inclusion, often using post-dated checks as collateral for loans. However, dishonor of these checks presents major legal and financial challenges. Under the Negotiable Instruments Act, 1881, check dishonor is a criminal offense in Bangladesh, similar to laws in India and Pakistan. Despite this, MFIs face prolonged legal battles, high litigation costs, and weak enforcement mechanisms, making debt recovery difficult.

Legal Challenges and Comparative Perspectives

1. Judicial Delays and High Costs

In Bangladesh, check dishonor cases are filed under Section 138 of the Negotiable Instruments Act, 1881, leading to lengthy court proceedings. A similar provision exists in India (Section 138 of the Negotiable Instruments Act, 1881), where courts are overburdened with check dishonor cases, causing delays in justice. The United Kingdom, however, does not criminalize check dishonor; instead, civil remedies are preferred, making recovery more predictable.

2. Weak Enforcement Mechanisms

While Bangladeshi courts may order repayment, enforcement remains weak. In Pakistan, under Section 489-F of the Pakistan Penal Code, check dishonor is a criminal offense, but weak enforcement has resulted in similar recovery challenges. In contrast, in the UK, banks strictly monitor account overdrafts, reducing fraudulent post-dated check transactions.

3. High Default Rates and Fraud Risks

Many MFIs struggle with fraudulent borrowers who issue checks without sufficient funds. Similar issues exist in India, where the Supreme Court (Damodar S. Prabhu v. Sayed Babalal H, 2010) emphasized the need for quick settlements through compensation instead of prolonged litigation.

Proposed Solutions for MFIs

1. Stricter Borrower Screening and Risk Assessment

• Indian MFIs have started using credit scoring models and digital verification to minimize fraudulent check issuances.

• Bangladesh should adopt similar models, integrating alternative credit assessment mechanisms for better risk profiling.

2. Digital Payment Systems and Alternative Dispute Resolution (ADR)

• The UK promotes online banking and electronic payments, reducing reliance on post-dated checks.

• Bangladesh can encourage mobile banking platforms (like bKash, Nagad) to reduce check-based transactions.

• ADR mechanisms, like those encouraged in India through Lok Adalats, can expedite dispute resolution.

3. Specialized Financial Courts and Stronger Enforcement

• India has introduced Fast-Track Courts for financial disputes, reducing case backlog.

• Bangladesh should establish specialized financial courts to handle check dishonor cases efficiently.

• Improved enforcement, such as automated asset seizures, can deter defaulters.

4. Borrower Awareness and Transparency

• Indian courts emphasize settlement-focused approaches, urging borrowers to clear dues promptly.

• Bangladesh MFIs must educate borrowers on legal consequences, ensuring transparency in loan agreements.

Conclusion

A combination of legal reforms, digital advancements, and proactive risk management is essential for strengthening Bangladeshi MFIs. Lessons from India, Pakistan, and the UK highlight the importance of civil enforcement, digital finance, and judicial efficiency. By implementing these strategies, Bangladesh can ensure a more sustainable, efficient, and inclusive financial system.

Writer 

Hasibul Hasan 

LL.B. (Hon’s) (First Class First)

Stamford University Bangladesh

Legal & Compliance Lawyer, BRAC