BizCLIR

The presence of a working legal system for the enforcement of a lender’s rights to its collateral upon the borrower’s default is central to a mature economy with a strong commercial lending sector. A well understood and efficient Secured Transactions Law – combined with a judiciary that is well versed in commercial law and is perceived to be fair, speedy, and transparent in the enforcement of commercial rights – are essential components of such a system. Unfortunately, at this stage of its development, Afghanistan has neither the statutory framework nor a judiciary that can be relied upon for the enforcement of a lender’s collateral rights.

Notwithstanding these shortcomings, Afghanistan has an active and emerging commercial financing sector willing and capable of lending to borrowers that include small and medium business enterprises (SMEs). Currently, contractual collateral-based lending to SMEs is succeeding, albeit on a limited basis, despite the absence of an effective court system and a statutory framework for obtaining, recording, and enforcing security interests in personal property. While this may seem surprising in a society with a notoriously corrupt and unreliable legal system, the presence of community-based relationship banking has resulted in overall excellent loan performance of SME loans.

While there is no short-term solution to the ineffectiveness of the court system, there is currently legislation addressing secured transactions in personal property that will provide a statutory basis for such lending, and which is supported by the lending community. This effort should continue to be supported. Further work on the implementation of the new legislation, to include drafting and training in the new laws and applicable forms, and evaluating and making loan credit decisions, is important to the continued viability and expansion of secured lending to commercial borrowers.

In addition, Afghanistan lacks a collateral registry system by which creditors can establish a non-possessory interest in collateral. Afghanistan’s establishment of such a collateral registry system is necessary to support the extension of secured credit. The absence of reliable credit information is also an impediment to rational commercial lending. Work should commence on the appropriate mechanisms and implementing institutions for such a registry.

With the potential for increased urbanization and the possible marginalization of the tribal Shura-based system for enforcement of collection rights, Afghanistan’s need for a functioning judicial system in the commercial area will increase. Work must be done to improve the judiciary in terms of its transparency. The training of judges on the terms of the new legislation and the general economics of commercial lending is also an essential part of the process.