Policy Paper 09

This paper examines the importance of courts for trade credit amongst manufacturing firms in the East African community (EAC). The paper finds that high enforcement costs do not deter the use of courts to settle disputes associated with trade credit. The analysis suggests that when courts function efficiently they are likely to be a more effective deterrent to opportunistic behaviour relative to non-court mechanisms. Further, the paper finds that when enforcement costs are low firms that have confidence in the judiciary to enforce their property rights are more likely to provide trade credit. The paper also considers whether firm characteristics affect the way firms perceive the judiciary’s ability to enforce property rights in business related disputes. Where judicial enforcement is efficient firm characteristics are not important. However, when enforcement costs are high, firm characteristics are important implying that firms are capable of swaying judicial decisions in their favour.