Uncertainties in the Enforcement of Loan Agreements in the Informal Credit Markets in Ethiopia

Abstract

Credits from informal credit markets are commonly used by those who have limited access to formal financial institutions. There is no comprehensive legal framework that deals with informal credit markets in Ethiopia. The lack of clear, effective and enforceable legal framework to regulate transactions in the informal credit markets has created uncertainty on the applicable laws. Legal contentions on the formation of valid loan contracts and in relation to interest rates have caused ambiguities and inconsistent patterns of interpretation among courts, legal professionals and parties who are involved in the informal credit markets as borrower or lender. This article examines how the provisions of the Civil Code that regulate contract of loan are used and interpreted by courts and contracting parties. Thirty court cases are used to examine how courts apply the provisions of the Civil Code in their decisions in loan related cases in the context of informal credit markets. Key terms Contract of loan, Enforcement of contract, Access to finance, Informal credit markets, Oral evidence, Parol evidence rules