Guarantor Liabilities in Bank Loans under current Bangladeshi Laws : Challenges and Pathways to Reform

Abstract

In Bangladesh, the banking sector plays a pivotal role in socio-economic development by providing credit to individuals and institutions. However, the requirement of guarantors for loan disbursement has given rise to complex legal and social dilemmas. Guarantors are often subjected to disproportionate liabilities, facing harassment, financial ruin, and prolonged legal disputes when borrowers default. This paper critically examines the current legal framework governing guarantor obligations in Bangladesh, focusing on the Contract Act 1872, Bank Companies Act 1991, and ArthaRin Adalat Ain 2003.

It highlights the challenges faced by guarantors, the inefficiencies in the system, and their impact on financial inclusion. By comparing Bangladesh’s practices with international models, the paper proposes reform pathways to protect guarantors while ensuring credit security for banks. The study concludes that legislative reforms, proportional liability, and alternative financial safeguards are essential for building a fairer and more sustainable banking environment in Bangladesh.

Introduction

The banking industry in Bangladesh is one of the central pillars of the national economy, ensuring the circulation of capital for industrialization, entrepreneurship, and household development. With rapid urbanization and the growth of small and medium enterprises (SMEs), access to bank loans has become a crucial tool for socio-economic mobility. Yet, the process of securing loans remains heavily dependent on personal guarantors—a practice inherited from colonial-era contract law but increasingly misaligned with the realities of a modern financial system.

A guarantor is legally defined as a person who promises to fulfill the financial obligations of a borrower if the borrower defaults. In Bangladesh, guarantors are not merely support figures; they are often treated as co-borrowers under legal proceedings. As a result, guarantors face lawsuits, asset seizure, and reputational damage despite not directly benefiting from the borrowed money. This creates a paradox: while guarantors are intended to ensure security for banks, they themselves become victims of insecurity.

The issue has gained urgency in recent years due to rising non-performing loans (NPLs) in the banking sector. According to Bangladesh Bank’s 2023 report, defaulted loans exceeded Tk. 125,000 crore, accounting for nearly 9% of total outstanding loans. This alarming trend not only threatens financial stability but also increases the vulnerability of guarantors, who are compelled into legal disputes they did not anticipate.

This paper aims to explore the following key research questions:

1. How does the current legal framework in Bangladesh define and regulate guarantor liability?
2. What socio-legal challenges do guarantors face in loan default cases?
3. How do international best practices differ in ensuring fairness and protection for guarantors?
4. What reforms can Bangladesh adopt to balance creditor rights with guarantor protection?

By addressing these questions, the paper contributes to the academic and policy discourse on financial justice in Bangladesh. It argues that without substantial reform, the guarantor system will continue to discourage financial participation, erode trust in the banking sector, and perpetuate legal injustice.

Literature Review

Historical and Legal Context in Bangladesh

The guarantor system in Bangladesh traces its origin to the Contract Act of 1872, a colonial inheritance that continues to shape contractual obligations. According to Sections 126–147 of the Act, a guarantee is a contract to perform the promise or discharge the liability of a third person in case of default. Scholars such as Rahman (2022) have argued that this legal framework, while intended to safeguard lenders, disproportionately burdens guarantors due to its joint liability nature.

The Bank Companies Act 1991 (amended in 2013) and the ArthaRinAdalatAin 2003 have further institutionalized guarantor liability. The latter empowers special loan courts (ArthaRinAdalat) to recover defaulted loans, where guarantors are often treated as co-defendants alongside borrowers. Research by Islam &Hossain (2021) points out that this legal interpretation overlooks the distinction between primary and secondary liability, thereby erasing the protective shield guarantors are supposed to enjoy under contract law.

Socio-Economic Burdens on Guarantors

Empirical studies show that guarantors in Bangladesh often face harassment, financial ruin, and social stigma when borrowers default. Ahmed (2020) highlights that guarantors, frequently family members or close acquaintances of borrowers, are compelled to sell personal assets or face legal consequences for loans they did not directly utilize. This results in family disputes, community ostracization, and a reluctance among individuals to act as guarantors in future transactions.

Furthermore, reports by Transparency International Bangladesh (TIB, 2022) indicate that guarantor harassment is compounded by procedural inefficiencies in the ArthaRinAdalat system, where cases remain unresolved for years, trapping guarantors in prolonged legal battles.

Comparative International Approaches

Globally, many countries have adopted more balanced approaches toward guarantor liability:

India: Indian courts have gradually recognized the principle of proportional liability. The Supreme Court in several rulings has emphasized that guarantors’ obligations must be reasonable and not extend beyond the scope of their original agreement (Sharma, 2019).

United Kingdom: Under the Financial Conduct Authority (FCA) regulations, lenders are mandated to provide guarantors with a clear and comprehensive risk disclosure before signing contracts. This ensures informed consent and reduces cases of unintentional liability.

Malaysia: The Malaysian legal system requires banks to conduct an independent financial assessment of guarantors before loan approval, ensuring that guarantors have the capacity to fulfill potential obligations without jeopardizing their own financial stability (Hassan, 2020).

Comparative analysis by World Bank (2023) shows that Bangladesh lags behind these international best practices, as its current legal framework places guarantors under blanket liability without adequate safeguards.

Academic Gaps and Critical Insights

While several studies in Bangladesh have analyzed loan defaults and non-performing loans (NPLs), the plight of guarantors remains an under-researched area. Most academic literature focuses on borrower obligations, banking sector reforms, or debt recovery mechanisms, leaving guarantors as a “forgotten stakeholder.”

Chowdhury (2021) argues that this gap has perpetuated systemic injustice, where guarantors are legally bound but socially powerless. There is also limited empirical research on the psychological and social impacts of being a guarantor, which is a pressing issue given the rise in loan defaults.

This review reveals that although global scholarship has moved toward guarantor protection and transparency, Bangladesh’s legal and financial system continues to enforce an outdated and inequitable model. Addressing this gap requires both doctrinal legal reform and empirical socio-economic research to design a balanced framework.

Methodology

This article adopts a qualitative desk research methodology to critically examine the legal, social, and economic dimensions of guarantor obligations in Bangladesh. The study combines doctrinal legal analysis, secondary data review, and comparative assessment to generate findings that are academically rigorous and policy-relevant.

Doctrinal Legal Analysis

Primary legal documents were reviewed to understand how guarantor liabilities are defined, interpreted, and enforced within the Bangladeshi legal framework. Key instruments include:

Contract Act, 1872 (Sections 126–147: Guarantee contracts)

Bank Companies Act, 1991 (Amendments up to 2013)

ArthaRinAdalatAin, 2003 (Loan recovery courts and procedures)

Bangladesh Bank circulars and policy guidelines on loan disbursement and guarantor requirements

This analysis focused on identifying provisions that create legal ambiguities or disproportionate liabilities for guarantors.

Secondary Data Review

The study synthesized data from multiple secondary sources, including:

Bangladesh Bank Annual Reports (2020–2023): Non-performing loan (NPL) statistics, guarantor requirements, and credit risk management.

Academic Articles: Publications in journals such as Journal of South Asian Law and Dhaka University Law Review, which discuss loan defaults and guarantor liability.

NGO Reports: Findings from Transparency International Bangladesh (TIB) and BRAC on banking practices and public grievances.

Media Reports: News coverage of high-profile guarantor disputes, reflecting real-world implications.

This data helped highlight both the quantitative scope of the problem (default loan amounts, case backlogs) and the qualitative experiences of guarantors.

Comparative Jurisdictional Study

To identify reform opportunities, the study incorporated a comparative analysis of guarantor laws and practices in:

India: Case law developments and Reserve Bank of India (RBI) guidelines.

United Kingdom: Financial Conduct Authority (FCA) regulations ensuring guarantor consent and transparency.

Malaysia: Central Bank guidelines requiring financial capacity checks for guarantors.

This comparative perspective enabled benchmarking Bangladesh’s legal structure against global best practices.

Analytical Framework

The collected data was analyzed using three lenses:

1. Legal Lens: Examining statutory provisions and judicial interpretations.
2. Socio-Economic Lens: Assessing guarantors’ lived experiences, financial burdens, and community-level consequences.
3. Policy Lens: Identifying gaps in regulation and proposing reforms.

This triangulated approach ensured a holistic understanding of the guarantor dilemma, bridging the gap between legal theory and socio-economic reality.

Limitations

As a qualitative desk-based study, this research relied on secondary data and legal texts rather than field surveys or interviews. While this provides a strong theoretical and comparative foundation, future empirical studies could enrich the analysis by incorporating guarantors’ direct experiences and voices.

Findings and Analysis

Legal Findings: Guarantors as Co-Borrowers

The review of Bangladeshi laws demonstrates that guarantors are often treated not as secondary obligors but as co-borrowers. Under the ArthaRinAdalatAin 2003, banks can file cases against both borrowers and guarantors with equal liability. This means guarantors, who may have had no financial gain from the loan, face lawsuits, asset attachment, and enforcement orders.

Finding: Legal provisions blur the distinction between primary liability (borrower) and secondary liability (guarantor), creating systemic injustice.

Implication: Guarantors are exposed to risks far beyond the original spirit of the contract under the Contract Act, 1872.

Rise of Non-Performing Loans (NPLs) and Guarantor Victimization

Bangladesh Bank’s 2023 data reveals defaulted loans of approximately Tk. 125,000 crore, representing nearly 9% of total outstanding loans. With this surge in NPLs, guarantors are increasingly being targeted for recovery.

Finding: Loan defaults in large corporate sectors are indirectly shifting burdens onto guarantors, many of whom belong to the middle class.

Implication: Instead of holding powerful defaulters accountable, the legal system disproportionately penalizes guarantors, thereby discouraging financial participation.

Socio-Economic Harassment of Guarantors

Interviews reported in secondary sources (TIB 2022, BRAC 2021) highlight recurring issues:

1. Property Seizure: Guarantors’ land and homes are confiscated even if they had no role in loan utilization.
2. Family Conflicts: Borrowers are often relatives; defaults create family disputes, inheritance conflicts, and social alienation.
3. Psychological Stress: Prolonged litigation causes depression, anxiety, and reputational damage.

Finding: The guarantor system acts as a tool of social and financial oppression rather than a protective mechanism for banks.

Implication: People are increasingly reluctant to become guarantors, limiting access to credit for genuine entrepreneurs.

Legal Backlogs and Procedural Inefficiencies

ArthaRin Adalat courts are overburdened with loan recovery cases. As of 2023, nearly 70,000 cases were pending, many involving guarantors. Court delays mean guarantors remain trapped in litigation for years without resolution.

Finding: Legal inefficiency prolongs guarantor harassment.

Implication: The justice system indirectly discourages financial trust and stability.

Lack of Informed Consent

Evidence shows that guarantors often sign agreements without full knowledge of the consequences. Banks rarely provide clear explanations of guarantor liabilities. Unlike the UK’s FCA model, Bangladesh does not mandate disclosure of risks.

Finding: Lack of transparency creates “blind consent.”

Implication: Guarantors assume obligations without understanding long-term consequences.

Comparative Gap with International Practices

Compared to India, the UK, and Malaysia, Bangladesh lacks:

Proportional liability mechanisms (India)

Mandatory risk disclosure (UK)

Guarantor financial capacity assessments (Malaysia)

Finding: Bangladesh is behind global standards in ensuring fairness and accountability.

Implication: This undermines both the credibility of the financial system and the rights of guarantors.

Broader Policy and Economic Impacts

1. Credit Access Blocked: Genuine borrowers struggle to find guarantors.
2. Entrepreneurship Hampered: SMEs and startups cannot secure loans.
3. Financial System Distrust: Guarantor harassment erodes public trust in banks.
4. Shadow Economy Growth: People avoid formal banking channels, increasing reliance on informal lenders.

Case Studies and Data

Case Study 1: Family Dispute over SME Loan

In 2021, a Dhaka-based small businessman defaulted on a Tk. 50 lakh SME loan. His elder brother had signed as guarantor, expecting that the business would flourish. However, when the borrower’s business collapsed during the COVID-19 pandemic, the bank filed a case under the ArthaRin Adalat Ain, 2003.

Outcome: The guarantor’s house was attached despite not being a beneficiary of the loan.

Implication: Family relationships broke down, with inheritance disputes arising from property seizure.

This case reflects the misuse of guarantor liability in family-based loans, where guarantors are treated as co-borrowers.

Case Study 2: Large Corporate Loan Default

A leading Bangladeshi conglomerate defaulted on a Tk. 300 crore loan in 2020. The borrower had influential political connections, which delayed enforcement against the company. Instead, the bank aggressively pursued individual guarantors linked to the loan.

Outcome: Guarantors, who were minor shareholders, faced lawsuits and travel restrictions.

Implication: The system disproportionately penalized guarantors while allowing large defaulters to escape accountability.

This case highlights the structural bias in enforcement, where guarantors without political power suffer more than influential borrowers.

Case Study 3: Women as Guarantors

According to a BRAC Bank report (2022), in many microfinance-linked loans, women are asked to serve as guarantors for male relatives. When defaults occur, women—often homemakers with no independent income—face harassment, legal notices, and humiliation.

Outcome: Women guarantors are compelled to mortgage jewelry or ancestral property.

Implication: The guarantor system reinforces gendered financial oppression, disproportionately affecting women in rural and urban areas.

Statistical Data on Loan Defaults and Guarantors

Non-Performing Loans (NPLs): As per Bangladesh Bank (2023), defaulted loans stood at Tk. 125,000 crore (approx. USD 11.5 billion).

ArthaRinAdalat Caseload: Nearly 70,000 pending cases, many involving guarantors, with resolution times averaging 5–7 years.

Public Perception (TIB Survey 2022):

61% of guarantors reported not receiving clear explanations of liabilities before signing.

48% reported facing social humiliation or family conflict due to guarantor obligations.

32% said they would “never act as guarantor again,” even for close relatives.

Key Insights from Data

1. Guarantors are disproportionately punished in both small-scale and large-scale defaults.
2. Political influence often shields borrowers, leaving guarantors vulnerable.
3. Women guarantors face unique vulnerabilities, reflecting a gendered dimension of financial injustice.
4. High case backlogs perpetuate guarantors’ financial and psychological suffering.
5. Policy Reform: Pathways to Address Guarantor Harassment in Bangladesh

Clarifying Legal Distinction between Borrower and Guarantor

Bangladesh’s current banking and financial laws should be amended to clearly differentiate between the primary liability of borrowers and the secondary liability of guarantors. Inspired by the Indian Contract Act amendments, guarantors should only be liable once all recovery measures against the borrower are exhausted.

Reform Proposal: Amend the ArthaRin Adala tAin 2003 to codify guarantor liability as “subsidiary,” not “primary.”

a) Mandatory Risk Disclosure

Banks often fail to provide clear information to guarantors at the time of signing. In the UK, the Financial Conduct Authority (FCA) requires banks to provide written risk disclosures to guarantors.

Reform Proposal: Bangladesh Bank should issue guidelines making it mandatory for banks to explain guarantor obligations in writing and obtain written acknowledgment of risk awareness.

b) Proportional Liability and Asset Protection

Currently, guarantors face unlimited liability, which is disproportionate to their role. Malaysia and Singapore have introduced proportional liability models where guarantors’ liability is capped.

Reform Proposal: Introduce caps (e.g., maximum 50% of outstanding loan) and protect “primary residence” from attachment to safeguard guarantors from complete financial ruin.

c)  Strengthening Due Diligence in Loan Sanctioning

Many defaults occur because banks approve loans without proper credit assessment of the borrower, later transferring the risk to guarantors.

Reform Proposal: Regulators should enforce stricter due diligence for borrowers before sanctioning loans, instead of relying excessively on guarantors as collateral.

d) Fast-Track Dispute Resolution

Guarantors remain trapped in litigation for years due to delays in ArthaRin Adalat. India has introduced fast-track tribunals for financial disputes.

Reform Proposal: Establish specialized Loan Dispute Resolution Tribunals with a six-month resolution timeline for guarantor-related cases.

e) Protection of Women and Vulnerable Groups

Evidence shows women, especially homemakers, are disproportionately exploited as guarantors in microfinance and SME loans.

Reform Proposal: Prohibit banks from taking guarantors who lack independent income, and provide gender-sensitive legal safeguards to prevent coercion.

f) Strengthening Regulatory Oversight

Bangladesh Bank should play a proactive role in monitoring bank practices regarding guarantors.

Reform Proposal: Introduce a Guarantor Protection Framework, requiring banks to submit quarterly reports on guarantor-related cases, complaints, and settlements.

Recommendations

Based on the findings, case studies, and policy reform discussions, the following recommendations are proposed to ensure a fair, transparent, and sustainable guarantor system in Bangladesh:

Legal and Policy Recommendations

1. Amend the ArthaRin Adalat Ain (2003): Clearly establish guarantors as secondary obligors, liable only after borrower remedies are exhausted.
2. Codify Liability Caps: Introduce proportional liability limits (e.g., maximum 50% of unpaid loan) to prevent excessive burden on guarantors.
3. Protect Essential Assets: Amend laws to exempt guarantors’ primary residence and livelihood-related property from attachment.
4. Banking and Institutional Recommendations
5. Mandatory Risk Disclosure: Require banks to provide guarantors with written, easy-to-understand explanations of their obligations.
6. Due Diligence in Loan Approval: Strengthen borrower assessment procedures to prevent risky lending practices that shift the burden onto guarantors.
7. Digital Record of Consent: Introduce a digital guarantor consent system to ensure transparency and traceability in loan contracts.

Judicial and Regulatory Recommendations

1. Fast-Track Tribunals: Establish specialized tribunals or arbitration panels for guarantor disputes with strict resolution deadlines (maximum six months).
2. Alternative Dispute Resolution (ADR): Encourage mediation and negotiation between banks, borrowers, and guarantors before litigation.
3. Regulatory Oversight: Bangladesh Bank should create a monitoring unit for guarantor-related disputes, publishing quarterly compliance reports.

Social and Gender-Sensitive Recommendations

1. Ban Coercion of Women without Income: Prohibit banks from requiring women (especially homemakers) to act as guarantors without proven financial capacity.
2. Awareness Campaigns: Conduct financial literacy programs highlighting guarantor risks, rights, and responsibilities.
3. Civil Society Monitoring: NGOs and rights groups should monitor guarantor-related cases to ensure accountability and protect vulnerable groups.

Long-Term Structural Recommendations

1. Encourage Collateral-Based Lending: Gradually reduce reliance on guarantors by improving collateral assessment mechanisms.
2. Introduce Credit Guarantee Schemes: Government or central bank-backed schemes should partially cover loan defaults, reducing the need for personal guarantors.
3. Strengthen Credit Information Bureaus: Ensure better borrower credit histories to reduce dependence on guarantors as risk-mitigating tools.

Conclusion

The guarantor system in Bangladesh’s banking and financial sector, though originally designed to safeguard loan recovery, has evolved into a mechanism of disproportionate liability and social injustice. Current laws, particularly the ArthaRinAdalatAin 2003, treat guarantors almost as co-borrowers, exposing them to lawsuits, property seizures, and prolonged litigation. Findings from case studies reveal that guarantors, often family members or socially vulnerable individuals, bear the brunt of defaults despite not benefiting from the loans.

The analysis also shows that weak borrower due diligence, political influence in large defaults, and judicial backlogs compound the problem. Women and middle-class guarantors face unique forms of harassment, reflecting both gendered and class-based dimensions of financial exploitation. This not only undermines individual rights but also erodes public trust in the banking system, limits entrepreneurship, and encourages reliance on informal credit markets.

Comparative insights from India, the UK, and Malaysia demonstrate that Bangladesh lags behind international standards in protecting guarantors. Reforms such as mandatory risk disclosure, proportional liability, asset protection, and fast-track tribunals can create a more balanced framework. Moreover, strengthening regulatory oversight and introducing credit guarantee schemes will reduce the excessive dependence on personal guarantors.

Ultimately, the pathway forward lies in striking an equitable balance: safeguarding the financial sector’s stability while ensuring that guarantors are not transformed into scapegoats for systemic failures. By adopting these reforms, Bangladesh can foster a more just, transparent, and resilient financial environment that promotes trust, entrepreneurship, and inclusive economic growth.

References

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Author Shahinur Rahman, PhD Scholar, Faculty of Law, Mangalayatan University, India.