Financial Stability Report No1 20 December 2010 - Banka Qendrore ...

Financial Stability ReportNumber 110. Enforcement of Creditor Rights in Kosovo: Empirical StudyValentin Toçi and Arben Mustafa10.1. IntroductionAfter the war in 1999, Kosovo started to build institutions needed for the functioning of amarket economy. Kosovo marked substantial progress in creating conditions for thefunctioning of the financial market and protection of creditor rights, putting in place thefinancial sector regulatory framework, bankruptcy, mortgage and pledge laws as well aspledge and credit registers. Kosovo appears to stand better than the average of transitioneconomies when it comes to the protection of creditor rights as they appear in the books oflaw. An assessment of creditor rights was made by the World Bank’s ‘Doing Business’(2011), which rated the protection of creditors in some key aspects of bankruptcy andpledge laws – covering three aspects of bankruptcy laws and seven aspects of collaterallaws. The scoring of the Creditor Rights Index ranges from 0 to 10 (the higher the score, thebetter the protection of creditor rights). The Creditor Rights Index for Kosovo stood at 8,which is higher than the average of 7 for other transition economies. Regarding the SEEcountries, only Albania attained a higher score than Kosovo. In terms of enforcement,however, there is no conclusive evidence on how laws work in practice as different studiesprovide different assessments (e.g., World Bank, 2004; Zahler, 2004; BCI, 2005). Some pointto the weak 'rule of law', while others highlight the strong protection of creditor rights –better than the average transition economy and even some high-income countries.This study provides an up-to-date assessment of enforcement of creditor rights in Kosovo.Initially, the analysis shows assessments by some international agencies for theenforcement of creditor rights. These indicators, however, may not fully explain the lawenforcement specifically in the context of the banking sector. The limitations are eitherbecause they may fail to fully capture the context of the lender-borrower relationship or aremultidimensional. Therefore, this study aims at investigating the legal environmentsurrounding Kosovo’s banking sector, particularly aspects of the enforcement processrelated to the lender-borrower relationship. The analysis relies on primary data collectedfrom a survey with banks in Kosovo, aiming at assessing how the pledge law works inpractice.10.2. Enforcement of Creditor RightsThe World Bank (2004) evaluated the 'laws in action' in Kosovo and pointed out manydeficiencies in court procedures. Aspects such as the unpredictability of the judgment, thelength of the process, and the complexity and lack of clarity in procedures are considered asconstraints in enforcing creditor rights which may encourage a culture of non-payment onthe borrowers’ side. This suggests the poor development of the legal system related to theenforcement of contracts. In addition, based on interviews with bankers in Kosovo, Zahler(2004) claims that courts and judges tend to favour borrowers vis a vis the lenders indisputes. The author also points to the poor functioning of legal institutions governingfinancial transactions.| 83