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

Financial Stability ReportNumber 1Kosovo lags behind the average of SEE countries with respect to the law enforcement(Table 17). In 2009, the Rule of Law Index for Kosovo was ranked at -0.5 which is lowercompared to the average of SEE, CEE and OECD countries, but higher than the average ofCIS countries. Based on this methodology, the law enforcement in Kosovo in year 2009improved compared to 2005 when it stood at -0.9.10.3. The lender-borrower litigation process: an empirical studyThe previous section treated the enforcement of creditor rights in Kosovo, based onContract Enforcement Days (CED) and the Rule of Law Index (RLI). However, theseindicators have their drawbacks either because they may fail to fully capture the context oflender-borrower relationship (i.e. Contract Enforcement Days) or are multidimensional (i.e.Rule of Law Index). In this context, CED is constructed by specifying the time it takes forcourts to handle two types of cases: the eviction of residential tenant for non-payment ofrent and the collection of a cheque returned for non-payment. As such, the time needed forthe enforcement of a contract in these cases may not necessarily explain the lenderborrowerrelationship. Regarding the RLI, although it embodies some characteristicsrelated to the efficiency of contract enforcement such as the enforceability of privatecontracts, the fairness of judicial system and the speediness of judicial process, it containsdiverse other dimensions such as organized crime, violent crime and costs of crime, civilliberties, the freedom of press, political rights, infrastructure, etc. Even though thesemeasures may be good proxies for law enforcement in a particular country, they are amixture of indicators and reflect the general institutional setting. As such, the RLI does notexplicitly deal with law enforcement in the lender-borrower relationship.The need to concentrate on laws in practice in transition economies, explicitly with regardto the lender-borrower relationship, led the EBRD to embark on a New Legal IndicatorSurvey (hereinafter NLIS2003) aimed at helping credit providers assess the potentialadvantages of taking security, highlighting strengths and weaknesses of the legalframework for collateral and giving a basis for objective comparison. By trying to capturecommercial reality, the key concern of the survey was how effectively the process ofenforcement of movable collateral works in practice.As described in EBRD (2003), for the law enforcement survey a case study methodology wasadopted and an imaginary case was presented to commercial lawyers in transitioneconomies. They were asked to evaluate how the bank can enforce their rights in a case ofborrower default. The evaluation had three dimensions: (i) how much of the loan thecreditor can recover; (ii) how fast the creditor can recover the loan; and (iii) how simple isthe recovery procedure (amount, time and simplicity). In addition, 12 additional questionsconcerning the process of enforcement were asked to highlight the influence of third partiesin this process. For example, within the process factors if the debtor can obstruct theprocess then that would have implications for the amount, time and simplicity dimensionsin the enforcement process. The scope factors of enforcement would show how the responsesmight be affected if some circumstances would change. For example, to what extent theenforcement would be affected if the debtor files for bankruptcy, or how the enforcementwould be affected if immovables are pledged as collateral.In order to provide a more up-to-date picture on the enforcement of creditor rights withregard to the lender-borrower relationship in Kosovo, the Central Bank of the Republic ofKosovo conducted a survey with banks operating in Kosovo in 2010, based on the NLIS| 85