Institutional Entrepreneurship in Afghanistan: How Afghan Merchants and Afghan Judges Negotiate Innovative Financing Solutions

By Haroun Rahimi
Formal institutions in Afghanistan have failed to offer credit in a way that works for the Afghan context. As a result, only a small percentage of Afghan merchants use bank loans. Despite the failure of formal institutions, Afghan merchants have developed a number of informal institutions to alleviate their credit constraints. This article describes two informal financing institutions in Afghanistan and their judicial treatment.

By studying how Afghan merchants and Afghan judges negotiate informally developed institutions, this article paints a dynamic view of Afghanistan’s institutional landscape and introduces new possibilities for legal reform in
Afghanistan. It shows that a formal-institution-only lens provides a grossly incomplete view of Afghanistan’s institutional landscape. At the same time, it challenges a strict informal-formal divide by describing the dynamic interaction between institutional entrepreneurs and Afghanistan’s judiciary. By providing a success story of judicial formalization of an informally developed credit institution, this article argues that incrementally formalizing informal institutions may be the most effective way to create working formal institutions.

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About the Author:

Haroun Rahimi has a PhD from University of Washington’s School of Law and is currently Assistant Professor of Law at American University of Afghanistan.