Where the paper is worth more than the contract written on it!

The Africa Development Index 2008/09 (ADI) launched by the World Bank at the beginning of this month focussed on the urgent need for interventions to address the ever increasing numbers of unemployed youth.

Indeed the index can be described as the World Bank’s best book of numbers on Africa covering more than 1,400 indicators on the economy, human development, private sector development, governance, environment, and aid to Africa, with a series of indicators dating back to 1965.

As such, the indicators provide a useful platform to analyse the socio-economic factors that have an impact on the business environment in Africa. On doing an analysis on youth entrepreneurship opportunities, we came across some figures, which we felt should have an index all to themselves.

One of the main assets of an enabling business environment is the ease with which contracts can be enforced. According to the ADI, Rwanda had the fewest number of procedures required (24) compared with Sudan with the highest number of procedures (53).

Namibia had the shortest enforcement duration of 270 days compared with Liberia where one needs 1,280 days to enforce a contract. However a more glaring indicator was the cost of actually enforcing contracts.

The real cost of the debt

The debate between incurring costs in debt collection as opposed to writing off the debt is an issue that confronts many entrepreneurs. The ADI found debt collection costs in Tanzania and the Seychelles to be the lowest at 14.3% of the debt, whilst the Democratic Republic of Congo had the highest debt collection cost at a whopping 151.8% of the debt.

Yes, you read correct: 151.8%!

It costs more to collect your debts than it is to write them off! The DRC is not the only country where it is more expensive to collect debt (over 100% of the original amount). The ADI also listed Burkina Faso (107.4%), Malawi (142.4%), Mozambique (142.5%) and Sierra Leone (149.5%).

Contracts verbal or written, explicit or implied are what business is all about. Someone walks into your shop and picks up an item. You receive cash for that item and in exchange you give them the item. That is a contract. Contracts cover landlords, suppliers, agents, employees and run the entire gamut of business relationships.

Thus in a situation where pursuing a contract are too expensive and time consuming, the door is left open to less integrity uncertainty in doing business.

This in turn results in low levels of entrepreneurship and investment.

In fact delays and expense in contract enforcement can also have social repercussions. In Italy, a country where courts take 1,210 days on average on settle disputes, landlords were hesitant to rent apartments to young people, culminating in a large number of Italians living with their parents!

According to another World Bank product, the Doing Business Reports, countries faced with this situation have undertaken reforms to speed up contract enforcement processes.

Tonga is a country that markedly improved contract enforcement through the introduction of computerisation as well as alternative dispute resolution mechanisms such as mediation. Tonga managed to cut the time to enforce contracts from 510 days to 350. Cases are now monitored daily, and if they remain inactive for 3 months, the judge summons the parties and asks whether they plan to pursue the dispute.

In 2006, Slovenia where it takes an average of 1,350 days to resolve a dispute, a law was adopted obliging the government to pay plaintiffs up to €5,000 per case as a fine for delayed justice.

Though many African countries have specialised commercial courts, resolving disputes through the judiciary has commonly been perceived as a preserve of the rich. This also keeps small business litigants away from courts, which in turn adversely affects their business bottom line.

Nevertheless even though these courts speed up the process of collecting debt (such as the commercial courts in Kinshasa which set a strict deadline of 8 days to appeal judgments), the cost of going to court is among the highest in the world. Another concern for African entrepreneurs is the prevalence of corruption in the judiciary. However, increasing judges’ salaries (such as is the case in Kenya) has been a way to ensure that they maintain their integrity. Further afield, countries like Bulgaria and Moldova introduced random allocation of court cases to judges, whilst Bulgaria also made the selection and appointment of judges more transparent.

Of course while a case is in litigation business must go on. Many times, property is confiscated and evictions happen doubly hurting the business, if not closing it down. In Brazil, to avert this problem, debtors are now also obliged to tell their creditors where their goods are. If debtors do not cooperate, they risk a penalty of 20% of the claim.

Widening the mandate of courts so they can deal with cases involving larger sums of money also enhances the expediency of justice and encourages entrepreneurs to seek this option.

Bringing justice closer to the entrepreneur

The next frontier in opening up judicial enforcements of contracts is through the internet. As internet use becomes more widespread in African countries, the introduction of e-courts, whereby certain procedures can be carried out will not only speed up justice but also lower costs of the whole process.

For instance, litigants in New York are able to access case data and documents through the internet whilst lawyers in Milan can upload case information into a case management database.

As mobile phone use in Africa is much more common than internet use, maybe the Singapore system could be an option. In 2006 the country introduced 3G mobile phones to conduct virtual court hearings and a pilot project allowing pre-trial conferences by e-mail.

However, websites of judiciaries in Africa could also replicate India example where businesses can download court forms, look at the court’s schedule for the day, check the status of a case or read the judge’s orders. The supreme court even allows electronic filing of cases. In African countries where the road network is undeveloped or dilapidated, such a system would also benefit those small business owners who live in rural areas.

Even though the judiciary’s primary role is to enhance justice, fairness and equity, efficient courts can do much more — they can help the economy grow and thus promote entrepreneurship development.

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About yipe
Yipe an acronym for the Youth Interactive Portal for Enterprise is an organization that assists entrepreneurs to start up and manage their small businesses.

2 Responses to Where the paper is worth more than the contract written on it!

  1. Mandino says:

    what are the things that affect the collection costs? Are there lives at stake when collecting? Then, if that is the case, collection would be quite pointless. I would have rather considered them bad debts, and I would have been so stupid to have lent some money if I knew that the people I lent money have bad credit ratings. Instead of lending some money, it would have been better if I help a cause like The Emma Academy Project. I have recently found this project and I like the idea of helping them build a school in Leer, Sudan.

  2. Pingback: Doing business in East Africa - JamiiForums |The Home of Great Thinkers

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