Reform and Regulation of Economic Institutions in Afghanistan : Formal and Informal Credit Systems book cover
1st Edition

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

ISBN 9781032157351
Published October 21, 2022 by Routledge
294 Pages 9 Color & 3 B/W Illustrations

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Book Description

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.

Table of Contents




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


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


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


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


Appendix I

Appendix II

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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.