Afghanistan's Agenda for Action - Economic Growth - usaid

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Afghanistan’s Agenda for Action: Developing the Trade & Business Environment – August 2007current lack of enforcement capacity is actuallybeneficial because it hinders imposition of disrespectedjudgments. All efforts to enhance the generalenforcement powers of the court system should followimprovements in court integrity, so that enforcementbegins in earnest only as the courts become moretrustworthy.Not all improvements in enforcement can await thelong-term improvements in the overall legal system.Commercial activity depends on enforcement ofcommercial contracts, and the current atmospheredramatically increases the risks that an investor maynot be able to enforce a contract at all, much less in atimely and reasonably cost-efficient manner.Consequently, near-term programs should be institutedimmediately.Keeping in mind that investors do not trust the courtsin general, it is important to provide other enforceableoptions and to assist in giving enforcement powerwhere trust is present. This can be done in severalways. First, commercial arbitration is more favored in asystem with under-developed courts, but only if thearbitration awards are enforceable. Projects aimed atbuilding commercial arbitration capacity should alsoinclude enforcement components. Second, specialattention should be given to leasing and securedtransaction cases, which depend heavily on efficientenforcement mechanisms to increase access toaffordable credit. This should include rights or self-help,such as repossession, private sale, or other rapidenforcement actions set forth in the underlyingcontract and supported by law. Third, upper levelappeals are generally more trustworthy than lowerlevel court decisions. Within the court system,improvements in enforcement should begin withenforcement of Supreme Court decisions and worktheir way down over time to the courts of firstinstance.Credit Bureaus, Pledge Registries andCollection AgenciesAn effective system of enforcement requires that therebe consequences for commercial behavior. These canbe delivered by courts, of course, but that is only oneof the needed mechanisms. There should also be asystem for sharing information about commercialperformance, so that those who perform well canestablish their credibility, and those who do not cannotsimply hide their past failures. At the same time,mechanisms are needed for collecting past dueaccounts.Credit information bureaus – whether public or private– provide information on the past credit history ofborrowers, including records of late payments,bankruptcy filings, litigation, and, more positively, timelyrepayment. This permits lenders and potential businesspartners to assess and manage their risks moreeffectively. In so doing, they system creates incentivesfor better performance and reduces the need for courtenforcements. Afghanistan has no such system in place,not even a shared list of bad debtors (a “black list”)among banks.Movable property registries provide a similar function:they list claims against a debtor’s property in a publicvenue. This transparency results in improvedrepayment behavior and reduces the possibility of fraudagainst creditors. It also establishes priority interests inthe property, thus reducing conflicting claims andimproving efficiency in enforcement. Afghanistan has noregistry for pledges of movable property. A securedtransaction law is being drafted, however, and willinclude a registry.Collection agencies bring discipline to enforcement ofcontracts. First, they aggressively pursue delinquentdebtors as an important step prior to pursuing a lawsuit. Second, they teach creditors the importance oftimely account management because they normallyrefuse to pursue aged accounts that have languishedtoo long to be readily collectible. Collection agenciesare also a component of self-help, in which creditorscan delegate their self-help rights to specialists.Afghanistan has no collection agencies.All of these supporting institutions should be promotedand pursued within a strategic approach toenforcement as a system. Without these supports, thecourts will eventually become overloaded withunnecessary claims that could have been avoided.83
Afghanistan’s Agenda for Action: Developing the Trade & Business Environment – August 2007Social DynamicsA well functioning system of reliable commercialdispute resolution is fundamental to the integrity of anyeconomy. Investors – whether foreign or domestic,large or small – require certainty and transparency inthe rules of the game in order to manage risks and setprices competitively. Without a well functioning disputeresolution system, economic growth is stunted.There is high demand in Afghanistan for reliable courtsand other mechanisms for dispute resolution, butmeeting that demand is and will be a significantchallenge. Formal systems were destroyed during thegeneration of war and will take years to rebuildeffectively. In the best of circumstances, there isunlikely to be substantial systematic improvement inthe court system for at least five years, based onexperience in easier jurisdictions. Unfortunately,business cannot wait five years to start growing.The informal shura system is widely accepted andutilized heavily throughout the country by all socialclasses, including the commercial sector of Kabul. Forsimple disputes, this system is generally sufficient. Forcomplex commercial transactions, however, it is notappropriate, especially for outsiders – foreign investorsand individuals from other provinces or minority ethnicgroups. Because it is unregulated, the shura systemcannot be readily reformed to improve its capacity orits record on rights of women and minorities.Trust and respect are built over time. The shura systemis widely trusted and respected; the court system isnot. The goal of reformers must be to establish asystem that is sufficiently accepted as it providesneeded services that it will fill existing gaps in disputeresolution. Eventually, the formal system may evenreplace much of the work of the shura, at least onmatters affecting commerce.Because of the level of devastation in the courts, thereare no short-term solutions to repairing them.Systemic, long-term assistance is needed. Yet thebusiness community requires better options today. Thiscan be accomplished, in part, through focusing shorttermefforts on creation of new mechanisms built ontrustworthy foundations. Arbitration provided byprivate-sector organizations, such as the AfghanInternational Chamber of Commerce, should beencouraged in tandem with efforts to ensureenforceability of arbitral awards. Credit informationgaps can be filled over the long term through creationof bureaus and registries, but over the short term itmay be possible to insist on “good standing”certification from local shuras as a risk-management andenforcement tool.Current funding for the formal court system is doomedto failure. The high cost, contingency fee structure willkeep litigants out of court, or will distort incentives sothat they find ways to avoid the fees. The system needsto be restructured on a cost recovery basis that willbetter ensure a source of funding. This, of course, willhave to be balanced with general budgetary needs, butelsewhere it has been shown that revenue earnersimprove their likelihood of necessary funding lest theirrevenue potential be undermined.Afghanistan’s culture of consensus provides a strongfoundation for building various dispute resolutionmechanisms, whether 3-judge panels, 3-arbiter boards,or decision-making by associations. However, there isanother context underlying consensus. Directly orindirectly, consensus assumes compliance with Islamiclaw – Sharī’ah – and failure to recognize this importantparameter can destabilize reform efforts.In commercial matters, Sharī’ah is only indirectlyapplicable. That is:Nothing in the Qur’an or the sunna is directlyapplicable to such contemporary problems asindustrial pollution and traffic control, soregulations for those matters must be setaccording to nonreligious criteria. To conformwith Islamic law, the regulations must be just,equitable, and imposed after consultation withthe community, but there is considerableleeway within those standards. 128For new institutions and rules to be acceptable to thegeneral population, they must be approved or certified128Lippman, Thomas W., Understanding Islam: An Introductionto the Muslim World. Revised 2 nd Edition; Meridian Books,New York, 1995, p. 88.84
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Nicholas Klissas, USAID/EGATTel: 20
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