1st Edition

Reform and Regulation of Economic Institutions in Afghanistan Formal and Informal Credit Systems

By Haroun Rahimi Copyright 2023
    294 Pages 9 Color & 3 B/W Illustrations
    by Routledge

    294 Pages 9 Color & 3 B/W Illustrations
    by Routledge

    294 Pages 9 Color & 3 B/W Illustrations
    by Routledge

    Taliban's return to power in August of 2021 caused everyone to ask why the two decades of institution building in Afghanistan failed. This book investigates the root causes of failed reforms in an important area of reform: trade and credit institutions. It explains why the efforts to reform and regulate the economic institutions in Afghanistan failed and what we can learn from their failure. It draws on more than eighty interviews with Afghan merchants, business leaders, money dealers, and government officials in five major provinces of Afghanistan to identify the barriers to access to credit and to understand the performance of formal institutions (banks) and their informal counterparts. This book finds that Afghan merchants were often unable to benefit from the offerings of formal institutions for three reasons: a highly volatile business climate, uncertain contract enforcement, and an unsupportive property rights system. Several informal institutions have emerged that alleviate some of the credit constraints on Afghan merchants. These informal institutions include risk-sharing trade credit operations, money dealers’ short-term working capital loans, Gerawee, and Sar qufli. Although these informal institutions have helped Afghan merchants survive, they are unable to support economic growth. This book argues that countries like Afghanistan should solve their institutional dilemma by adopting an approach which the author calls "Grounded Institutional Reform." Using this approach, a country would formalize existing informal institutions, a development that would vastly increase their effectiveness. While this book focuses on credit and trade in Afghanistan, the analysis of "formalizing the informal" can easily be extended to solve other types of economic problems in similarly situated countries. This book should be of great interest to scholars, policymakers, and development workers in the field of law, finance, and development.

    Acknowledgement

    Preface

    Introduction

    Broader theoretical landscape and the case of Afghanistan

    Overview of the book’s organization and summary of its argument

    Methodology and Definitions

    Grounded Theory

    Sampling and Data Collection

    Definitions

    1. Background on the Economy and the Problems of Credit Transacting in Afghanistan

    A General Picture of Afghanistan’s Economy under the Islamic Republic

    Main Types of Actors in Afghanistan’s Credit Economy

    An Analysis of Businesses in Afghanistan

    Business Registry Data on Business Registry and Initial Capital Investment in Five Major Provinces

    The Business Survey Data on Business Establishments in Afghanistan

    An Overview of the Social Context of Afghanistan’s Economy

    A Brief Overview of Institutional Context of Afghanistan’s Economy

    Fundamental Problems of Credit Transactions in Afghanistan

    Afghanistan Has a Volatile Business Climate

    Formal Property Rights in Afghanistan

    Formal Commercial Dispute Resolution in Afghanistan

    2. Informal Financial and Dispute Resolution Institutions in Afghanistan

    Supply Chains and Trade Credit

    Market Competition and Provision of Trade Credit

    Weekly Payment System (Ugraee)

    How Businesses Come to Trust Credit Sales in Afghanistan

    Trade Credit versus Bank Loans

    Sources of Initial Capital to Start a Business

    Prevailing Institutions in Afghanistan Disincentivize Destructive Innovation and Creative Destruction

    Agency Costs Limit Business Expansion

    Family Businesses in Afghanistan

    Trade Credit from Suppliers Located Outside Afghanistan

    Is the Solution Curbing Credit Sales?

    Sarrafs and Sarrafi Markets

    Deposit-keeping

    Domestic Money Transfer (Hawala)

    International Money Transfer (Hawala)

    Currency Exchange

    Speculative Trade in Currencies (Sita) and Public Auctions (Booli)

    Sarraf’s Checks

    Short-Term Working Capital Loans

    Medium and Long-Term Sarrafi Loans

    Equity Financing

    The Case of Balkh’s Sarrafi Market

    Religious Prohibition of Interest and Access to Finance

    Regional Variations within Sarrafi Markets

    Gerawee

    Size of Gerawee Market

    Gerawee and its variations

    Important Characteristics of the Gerawee Market

    Bay’ al-Wafa: Sale with a Right of Repurchase

    Gerawee in Fatwas issued by the Afghan Muftis

    Status of Gerawee under Afghan Civil Code of 1977

    Gerawee cases before Afghan Courts

    Sar qufli

    What is Sar qufli?

    Recognition of Sar qufli by Commercial Courts

    The Contrast between Judicial Treatment of Sar qufli and Gerawee

    Informal Dispute Resolution Institutions in Afghanistan: Who Uses Them and Why?

    Afghan Merchants Prefer Informal Dispute Resolution Institutions

    Who Uses Formal and Informal Dispute Resolution Institutions in Afghanistan

    Why Merchants Use Informal Dispute Resolution

    Variation in the Effectiveness of Informal Dispute Resolution Institutions

    Informal Dispute Resolution and Pashtun Culture

    The Use of Force to Resolve a Commercial Dispute

    3. Afghanistan’s Formal Financial Institutions

    Formal Financial Intermediaries in Afghanistan: Are Sarrafs Included?

    Formal Regulations of Sarrafs

    What Is Wrong with the Sarrafi Regulation?

    Banks in Afghanistan

    Trust in Banks

    Banks’ Total Assets

    Banks’ Total Deposits

    Banks’ Loans

    Government Strategic Policies Aimed to Improve Access to Credit during the Islamic Republic

    Afghanistan National Peace and Development Framework (2017-2021)

    Ministry of Economics’ Afghan Government Economic Plan (National Economic Plan) (2013)

    Ministry of Commerce and Industries Strategic Plan (Commerce Strategy) (2016-2020)

    Afghanistan Central Bank Strategic Plan (Banking Strategy) (2017-2021)

    Ministry of Justice Strategic Plan (Justice Strategic Plan) (2014-2018)

    Analysis of Afghan Government Strategic Policies

    4. A Critique of the Approach to Institutional Reform in Afghanistan, and a Proposal for a New Approach: Grounded Institutional Reform

    Grounded Institutional Reform: A Revised Approach for the Countries with Poor Infrastructure, Limited Market Expansion Opportunities, and a Willing Government

    Rationales for Anti-Informal Institutions Positions: The Problems of Formalizing Informal Institutions in Afghanistan

    Theoretical Underpinning of Anti-Informal Institutions in Afghanistan

    Practical Problems of Absorbing Informal Institutions in Afghanistan

    What Would Reforms Based on Grounded Institutional Reform Look Like in Afghanistan?

    Conclusions and Recommendations

    Bibliography

    Appendix I

    Appendix II

    Biography

    Haroun Rahimi has obtained his B.A. in Law from Herat University, his LLM in Global Business Law from the University of Washington School of Law, and his Ph.D. from the University of Washington. Rahimi is Assistant Professor of Law at the American University of Afghanistan. Rahimi's research focuses on economic laws, institutional reform, Islamic finance, and divergent conceptions of rule of law in the Muslim and modern thoughts. Rahimi's research has appeared in reputable local and international journals. Rahimi has also collaborated as an independent consultant with a number of research firms and policy think tanks conducting policy research on institutional development and good governance in the South Asia context. At the Oxford Centre for Islamic Studies, Rahimi has worked on Islamic finance as a poverty alleviation strategy, legal history of Afghanistan and the ways that legal transplantation is legitimized in Muslim countries. More recently, Rahimi was a visiting scholar at the International Institute for the Unification of Private Law (UNIDROIT) in Rome. Currently, Rahimi is a Visiting Professor at the Bocconi University School of Law in Milan, Italy.