Formalizing Informal Trade and Credit Institutions

Download or read book Formalizing Informal Trade and Credit Institutions written by Haroun Rahimi and published by . This book was released on 2018 with total page 411 pages. Available in PDF, EPUB and Kindle. Book excerpt: As part of the country’s recent economic reforms, a number of banks have been established in Afghanistan. Although these banks hold large reserves, an increasing number of Afghan merchants are reporting problems getting the credit they need to expand their businesses. This dissertation explains why this situation exists and proposes that the government adopt a new approach to designing economic reforms, one that would improve access to finance for Afghan merchants and would generally better policymaking. This dissertation draws on more than eighty interviews with Afghan merchants, business leaders, Sarrafs, 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 dissertation finds that Afghan merchants are 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. A number of informal institutions have emerged that alleviate some of the credit constraints on Afghan merchants. These informal institutions include risk-sharing trade credit operations, short-term working capital loans, Gerawee, and Sar qufli. Although these informal institutions have helped Afghan merchants survive, they are unable to support a growing economy. They have only limited capacity to pool savings for investment purposes, and furthermore, their extra-legal practices may have negative consequences on long-term economic growth and attraction of foreign investment. In short, the existing “formal” institutions have sufficient capital, but they cannot operate effectively in an environment like Afghanistan. Conversely, the existing informal institutions, can operate effectively, but, precisely because they are informal, they cannot provide a country like Afghanistan the investment capital it requires. This dissertation argues that Afghanistan should try to address this dilemma using a new approach the author calls “Grounded Institutional Reform.” Using this approach, Afghanistan would formalize existing informal institutions, a development that would vastly increase their effectiveness. There are, of course, good reasons for Afghanistan to continue in its efforts to establish banks and to encourage Afghans to use them. Nevertheless, as the author explains, this policy is unlikely to be an immediate success. Instead, as the banking industry slowly takes root, the formalized “informal” institutions would promote slow, but significant economic development. While from an empirical standpoint, this dissertation focuses on credit and trade in Afghanistan, the analysis of how grounded institutional reform and a policy of “formalizing the informal” can easily be extended to solve other types of political and economic problems in Afghanistan and, indeed, in many other similarly situated countries.