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Afghanistan Capital Markets Assessment

A survey and analysis of current capital market activities, the demand for capital, the basic
infrastructure and government debt markets.

January 2010

Copyright 2010 Afghanistan Financial Services. Funded by the United States Agency for International Development (USAID). All rights reserved. No part of
this publication, including electronic materials, may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic,
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mechanical, photocopying, recording, or otherwise, without full attribution.

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Table of Contents
Key Findings .................................................................................................................................................................................................................................................. 3
Introduction .................................................................................................................................................................................................................................................. 4
Methodology ................................................................................................................................................................................................................................................. 4
I. Current Capital Market Activities ........................................................................................................................................................................................................... 9
Level of activity in current capital markets ......................................................................................................................................................................................... 10
Significance in raising capital for private enterprise ........................................................................................................................................................................... 11
Economics of current capital markets ................................................................................................................................................................................................. 12
Informal markets that are currently raising capital for private firms ............................................................................................................................................... 13
Typical types of private firms that access and use these markets ..................................................................................................................................................... 14
II. Demand for Capital................................................................................................................................................................................................................................. 15
Level of demand for funds for private enterprise finance .................................................................................................................................................................. 15
Private firms that would be candidates for debt and equity ............................................................................................................................................................. 16
Potential investor base for a capital market ........................................................................................................................................................................................ 18
Current markets for debt finance at the enterprise level ................................................................................................................................................................... 19
III. Basic Infrastructure .............................................................................................................................................................................................................................. 20
Business registration .............................................................................................................................................................................................................................. 21
Level of accounting and auditing that exists...................................................................................................................................................................................... 22
Fiscal, legal and regulatory infrastructure .......................................................................................................................................................................................... 25
IV. Debt Markets ........................................................................................................................................................................................................................................ 27
Current capital notes program ............................................................................................................................................................................................................ 27
Expanding the government securities market ................................................................................................................................................................................... 28
Level of potential feasibility ................................................................................................................................................................................................................. 29
Potential major investor groups .......................................................................................................................................................................................................... 30
Case Study: Sarafi Haji Abdul Qayoom ..................................................................................................................................................................................................... 31
Case Study: Maiwand Bank ........................................................................................................................................................................................................................ 32
Annex 1. Identifying Business Information
Annex 2: Survey Questionnaire
Annex 3: Frequencies
Annex 4: Capital Investment Amounts: Disaggregated by Individual Businesses

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Key Findings

285 of 2,219 qualifying large businesses were surveyed
$290,000 was their median annual turnover
90% were established after 2001
72% claim initial capital investment exclusively from ‘self’
5% of the sample relied on banks for capital
1% of the sample relied on a sarafi (money exchanger) for capital
93% thought it important or very important to raise capital
78% also found it difficult or very difficult to raise capital
88% could expand their business with more formal capital
31% claim late payment penalty is simply no more capital
43% of financial disputes are settled by tribal shuras

100% selected Islamic financing in their top three options
$40m is the amount they would raise through musharaka (equity)
$2m is all they would raise through qarzi sood (interest based debt)
45% said they would invest in someone else's business
43% required a business plan if they were to invest
14% required a personal connection to invest
71% of surveyed businesses reported having AISA registration
65% use paper financial records
2.1% use an external international auditor
65% were not willing to share financials publicly
48% were very willing to share financials with a financing partner

Kabul. and survey design. construction. sarafi (money exchangers). Mazar-e-Sharif and Jalalabad. a survey was conducted in six major cities of Afghanistan . The number of businesses in each sector was chosen based on a sampling estimate of such businesses in Afghanistan. implementation and analysis. Those working on the survey included a researcher with quantitative and qualitative research experience. The questionnaire was conducted via in-person interviews by 28 field enumerators targeting the six major urban centers of Afghanistan. using a number of internal business databases. and the overall formality and/or informality of such markets. The 22-question survey targeted businesses with at least 30 employees or initial capital investments of $250.000 or over. Staff also had experience working on USAID-funded projects in the areas of monitoring and evaluation.4 Introduction Afghanistan Financial Services (AFS) was tasked to undertake a range of research and analysis activities of capital markets in Afghanistan by the United States Agency for International Development (USAID) Office of Economic Growth (OEG). 285 businesses were interviewed over a 10-day period in January 2010. As part of the assessment. the basic infrastructure to support capital markets. In total. their significance in raising capital for private enterprise. This assessment includes current capital market activities. telecom. Methodology Questionnaire Development Implementation of the right data collection tool is critical to any successful survey. The survey instrument was designed by AFS and approved by USAID. retail. and staff with a multitude of experience in the financial sector in Afghanistan and abroad. Two detailed case studies were also conducted at both ends of the capital market lending spectrum one of a sarafi business and one of a formal institutional bank. manufacturing. banking institutions.Herat. In addition. Kandahar. trade & distribution. . business owners were asked to comment on any barriers in the market. and sought to understand the level of activity in various markets. and government debt markets. and what they would like to see in terms of future financial products and markets. and transportation. what could be done to make markets more transparent and stable. the demand for capital. Business sectors surveyed included agriculture. real estate. an Afghan national with strong statistical analysis and survey training background. Kunduz.

accurate and trustworthy information. the Team Leaders for Kandahar and the North undertook similar training sessions for enumerators in their areas. The objective of the workshop was to train surveyors to properly implement the designed questionnaire. Questions were asked in very simple language appropriate to the cultural and religious context of the local communities. The workshop was sub-divided into several sessions: introductory session. Knowing the importance of well qualified staff. The questionnaire was initially written in English and then translated into Pashto and Dari for the purpose of the survey administration by field enumerators. Selecting and Training Personnel Well-qualified and experienced field staffers were responsible to collect reliable. and one open-ended qualitative question. the questionnaire also collected basic contact and geographical information for businesses in urban centers throughout Afghanistan for follow-on and verification purposes. a total of twenty-eight (28) field enumerators took part in full-day workshops organized in Kabul. and helped them make appropriate changes in answers their questionnaires. who provided feedback to all enumerators at the end of each practice session. which ultimately lead to reliable survey results. Special attention was paid to the necessary re-translation of unclear questions. Pre-testing the Questionnaire Pre-testing the designed data collection tool is important in ensuring that the combinations of the questions added are appropriate. After translations. questionnaire briefing session. In addition to focusing on capital markets. and answer any unclear questions. group discussion session. and practical work session. as well as Regional Team Leaders for Kandahar and the North (Mazar-e-Sharif. consistent and clear. Subsequent to the session in Kabul. enumerators were given the questionnaires to check the fluency and consistency of the translated versions. Survey respondents Herat 24 Kunduz 30 Mazar 39 Kandahar 45 Jalalabad 53 Kabul 94 0 20 40 60 80 Source: Survey for Afghanistan Capital Markets Assessment. “practice” surveys were undertaken in the field for additional practice under the supervision of the Project Lead. The pre-testing phase helps identify poorly designed questions and enable the survey team to make the necessary amendments to the questionnaire before initiating the survey. In this case. One session was held in Kabul for all Kabul and Jalalabad staff. The workshop ended with a full briefing and focused detailed discussion on each part of the questionnaire. the questionnaire was drafted and reimplemented during a one-day pre-testing phase to get to a final draft.5 The survey questionnaire was composed of 21 closed-ended quantitative questions. Following the workshop. 100 . January 2010. Kunduz and Herat). properly designed. Several necessary amendments were brought into the questions to guarantee that appropriate data would be collected during the implementation phase.

those were excluded from the data herein. in order to have representation across industries. Randomization In each city.219 269 285 Source: Survey for Afghanistan Capital Markets Assessment. a much larger resulting percentage of the sector was surveyed in some cases. the numbers in the database were assumed to be representative. but the result was 30% of private Afghan banks. For example. Afghanistan Information Management Services (AIMS) maps were used for process purposes. At least one of each type of company was surveyed. regardless of how few companies there were in the sector. The AISA database also did not categorize “trade and distribution” companies. The stratification by sector was done through analyzing the official Afghanistan Investment Support Agency (AISA) database in addition to an internal venture capital database held by AFS.000 start-up capital were used. For other sectors. Once targets for each sector were achieved. Overall. approximately 20% of companies in the AISA database fit the criterion of $250. The team then chose a sample of each business type according to general representation in the database. Lists Target Sample Actual Sample Agribusiness 138 15 16 Construction 1. with the assumption that it was representative of business types in Afghanistan. Transport Other 0 5 4 104 25 27 4 3 1 0 75 72 35 8 12 0 0 10 Bank 10 3 3 Total 2.274 80 83 0 5 4 654 50 53 Sarafi Manufacturing Real estate Retail Telecom Trade/Distr. These city sections were based on a grid of printed maps. Overall. Survey sample origination Avail. a smaller percentage of construction companies than other sectors was sampled for the survey. In some cases. Each day different sections of the city were assigned to different enumerators. the survey only interviewed three private Afghan banks. .6 Stratification Stratification according to sector was done prior to undertaking the survey. although not exhaustive or encompassing of every business in Afghanistan. and asked to randomly select businesses through “random walk method” in a pre-assigned area of that city. enumerators were asked to skip businesses in that sector. given the number and breadth of businesses surveyed across the major urban centers. as it was assumed that USAID is interested in a range of business sectors. although it is widely considered to be a major sector Afghanistan. that since many businesses are not registered with AISA. Enumerators were then deployed throughout the city. It should be noted. team leaders were given overall daily targets for business “sectors”. since there are only ten (excluding international subsidiaries) in the country. January 2010. enumerators surveyed companies that did not meet one of these criteria. while more than half of businesses in the databases were categorized as “construction”. Only businesses meeting the criteria of 30 employees or $250.000 start-up capital. the results can be reasonably extrapolated to the business landscape of Afghanistan. Stratification was done to ensure representation across all sectors. It should be noted that. The table shows the total number of business “type” in the database and the sample taken of each.

sampling businesses with 30+ employees or $250. January 2010. Survey teams had been deployed in central Kabul where the attacks took place. worried that the surveyors were either from the Ministry of Finance and sent to collect information. due to their general scarcity as well as unavailability in open areas of cities. for the first time since 2001. however. Significant Events Significant events that may have affected the survey are as follows: At the time of the survey. or that the information could be shared with the Ministry of Finance through a third party. or those businesses on the main roads. including one surveyor who was in an upscale shopping area. during the field portion of the survey implementation. Finally. team leaders and businesses owners. although this is not a major issue in the cities. and should not necessarily be used as categorizations when designing interventions for the business community. In Kandahar. a major attack on Kabul city by militant forces ensued. according to enumerators. The stratification method employed could also skew results towards a non-representative sample if the sectors are not representative of the business landscape in Afghanistan. As a general rule. the size of the sample helped to made up for anomalies and outliers. the Ministry of Finance within the Government of Afghanistan had recently begun enforcing the Afghanistan Tax Law in earnest.7 Limitations The main disadvantage of the approach used here was its reliance on incomplete and inaccurate lists. which are likely present here. particularly “annual turnover” information. Using “random walk method” may bias the sample towards more heavily-trafficked areas. Year of business establishment 14% 14% 12% 10% 10% 6% 2% 10% 9% 7% 8% 4% 13% 11% 12% 4% 4% 1% 2% 0% Source: Survey for Afghanistan Capital Markets Assessment. where the survey was employed.000 of capital or more were arbitrary classifications to target larger businesses. which suffered damage from the attacks. limiting results in that city to a particular area. relying on “self reports” of people always introduces respondent recall bias into the results. As a result. some businesses were reluctant to share financial information. 3% . security limited the sample area to a secure portion of the central part of the city. On 18 January 2010. It should also be noted that few women-owned businesses were included in the survey. and enumerators were instructed to cover as much of their “grid” as possible to reduce bias to the extent possible.

January 2010. In case of any inaccuracy. Most surveyors were hired based on the previous survey experience with the Research Partner and other donor agencies and were well known to the project team undertaking the survey. “Double-checking” filled questionnaires: Filled questionnaires submitted were cross-checked by the Project Team Leader and his assistant to see if any inconsistency and inaccuracy existed. The analysis and reporting took approximately four days to complete. These contact numbers were regularly called. two full-time data entry clerks entered the data into a database created in Standard Package of Statistical Services (SPSS).000 Mode 10 100. Necessary measures were taken at different stages of the survey as described below.505. consistency and completeness. Trained surveyors: Educated and well-qualified personnel were hired to take part in the survey. . The data entry process was consistently followed. Surveyed businesses profile Employees Turnover ($) Count 285 278 Mean 62 3. Business person contact number: Each surveyor provided the contact number of the person interviewed by the surveyors.137 Minimum 2 20. The full SPSS database may be available for analysis by USAID. Dev.8 Data analysis and reporting After collection of the field data. 151 21.000 Std. and to cross check some of the information on the questionnaire on the telephone.000 Source: Survey for Afghanistan Capital Markets Assessment. Various practical sessions were conducted within the workshop to practically exhibit/display the interview between a surveyor and a business owner. Data Quality Maintaining high quality of the data was imperative.108 Median 20 290. Necessary feedback was given by the trainer and oversight of the workshop was provided by senior management.549.000 Maximum 1400 343. Training workshop: A two-day workshop to explain the designed data collection tool to these qualified surveyors was delivered. and the Project Team Leader asked if a surveyor had been to the business. including ensuring data reliability and reducing or eliminating survey bias to the extent possible. Trained data-entry clerks: Two full-time data entry clerks were hired to enter the received information into the database designed in SPSS. both the business person and the surveyors were contacted to get the right information. These data entry clerks participated in the training workshop and were closely supervised by the Project Team Leader during the data entry phase.000. checked and tracked for preciseness.

borrowers would have difficulty finding lenders themselves. Lender-Borrower Relationship Lenders Intermediaries Capital Markets Borrowers Individuals Companies Banks Insurance Companies Pension Funds Mutual Funds Interbank Stock Exchange Money Market Bond Market Foreign Exchange Individuals Companies Central Government Municipalities Public Corporations Source: Afghanistan Financial Services. the Government is making efforts to strengthen and develop domestic capital markets. As there are currently no formal equity markets in Afghanistan. Having said that. and where existing borrowing or lending commitments can be sold on to other parties. where business enterprises (companies) and governments can raise long-term funds. the definition of capital markets is expanded for purposes of this assessment to include all activities conducted by businesses to raise longterm funds. Without capital markets. capital markets typically refer to primary and secondary markets for debt and equity securities. 2010. Afghanistan has witnessed a growth of financing activities to a large extent dependant on foreign capital inflows. They can then lend money from this pool of deposited money to those who seek to borrow. A good example of a capital market is a stock exchange.9 I. Current Capital Market Activities Given the level of understanding of financing systems in Afghanistan. A capital market is a market for securities (debt or equity). A proper mobilization of financial resources is a critical condition of economic development and an efficient and competitive capital market is an important pre-condition for the liquidity of financial resources. More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents. we begin our narrative with a brief and simple introduction to capital markets. Funds in a capital market can be sourced from domestic as well as international sources. Banks take deposits from those who have money to save. Thus. Intermediaries such as banks help in this process. . It is defined as a market in which money is provided for periods longer than a year. A company can raise money by selling shares to investors and its existing shares can be bought or sold. Banks popularly lend money in the form of loans and mortgages.

In the survey.41 Banks $14. and trade/distribution.024 Sarafi 2. or money changers. Smaller businesses may be borrowing money from sarafi. who relied entirely on their own capital. Sarafi. people invested a total of $2. those borrowing from banks invested an average of $10. Overall. Most other industries have businesses who relied on both their own and external capital. unsurprisingly.10 Level of activity in current capital markets The survey found strong variations across sectors in capital markets activities. manufacturing. telecommunications and banks did not rely at all on friends or family for capital.9% of all businesses relied on banks for some type of capital. construction.129 Trade/ Distribution 1.17 $0 $50 $100 $150 One outlier was removed – a $400m investment by a bank into a bank. Indeed.576 Agriculture 1. Other areas using banks included agriculture.607. At the other end of the spectrum were sarafi (money changers) and real estate agents.582 Transportation Of those borrowing money for their business. approximately 1% of people had borrowed money from sarafi. however.074 Real estate 1. January 2010. 2. this survey focused on larger businesses. 100% of telecommunications companies relied on banks for some of its capital.780 Other 3. Initial capital investment by sector ($m) Retailer 1. although largely unregulated. sarafi. borrowed relatively small sums from them. This is likely due to the fact that there are more high-net-worth individuals in these cities so people are more easily able to access capital from their friends and family members. their capital investments were much larger than the average capital investment of the survey. However.639 Construction 2. Telecommunications and banks relied exclusively on external capital in the form of formal shareholders. In looking at those companies who used banks for capital.18 Friends $4. most of the businesses borrowing from sarafi.81 Others $54. There is some indication that even larger banks relied heavily on friends and family for capital investment.05 Self $148.200 Manufacturing 2. On average. Analysis by province shows that Herat and Kabul had the most reliance on external capital from friends and family.19 Family $2. only 4. with the only difference being that bank investors were organized into formal legal shareholders.06 Sarafi $1. retailers. real estate. illustrating the use of the banking sector by larger companies.504. Notably.4 million. 33% of banks did the same. Nearly all industries relied on external capital far less than “self” capital. $200 . Source: Survey for Afghanistan Capital Markets Assessment. 4 Source of initial capital investment ($m) Donors $0. All businesses interviewed in Kunduz relied entirely on their own capital. January 2010.522 0 1 2 3 Source: Survey for Afghanistan Capital Markets Assessment. although they did indicate that they planned and would like to borrow again from sarafi in the future. transportation and other categories showed the highest reliance on friends and family. Further analysis by sector shows that construction companies. They are responsible for changing currencies and moving large sums of capital around Afghanistan. trade/distribution companies. are part of the capital markets in Afghanistan. the largest sources that were used for capital were friends and family.

is particularly important to note that businesses in Afghanistan clearly understand the significance in obtaining external capital for their private enterprises. How difficult is it to raise capital for your business? 50% 40% 30% 20% 10% 0% 39% 35% Very Difficult Difficult 11% 11% Less Difficult Not Difficult Source: Survey for Afghanistan Capital Markets Assessment. The answers to this question remained fairly consistent across provinces and sectors. Raising additional capital was considered relatively challenging. This may be because larger businesses are looking for larger capital amounts and longer payback times.11 Significance in raising capital for private enterprise Overall. Furthermore. January 2010. with a cumulative 93% of businesses indicating it was either “very important” or “important to do so. a one year loan is considered a long term loan in Afghanistan and any loans over a year are fairly rare. The 16 microfinance institutions (MFIs) dwarf the 5 enterprise financing options listed in the next section. 22% of businesses indicated it was either “less difficult” or “not difficult” to raise funds for their business. with a cumulative 78% citing it as “very difficult” or “difficult” to raise funds for their business. People in Kandahar. a striking 25% believe they could double their business and an additional 10% believed they could more than double their business. although the average investment was higher than the overall average. Of the 66%. However. This finding. compared to 78% of the businesses we interviewed. Herat and Kabul were mixed. January 2010. How much could you expand your business with formal capital? 30% 25% 16% 20% 17% 14% 12% 10% 10% 6% 0% 0% 20% 40% 60% 80% 100% 100%+ Source: Survey for Afghanistan Capital Markets Assessment. with others reporting ease. we found that the ICS reported 37% of businesses interviewed had major or very severe obstacles in accessing finance. Those in Kunduz and Nangarhar reported the most difficulty in raising capital. with the current capital markets failing to meet business needs – leaving them stressed about raising capital while knowing how imperative formal capital is in growing their company. Businesses were asked how much they thought they could expand their business if they had access to formal capital markets. January 2010. Only 12% said they could not expand their business further. Those indicating it was “less difficult” or “not difficult” came from all different sectors and capital investment ranges. These three interview results make a case for the development of capital markets in Afghanistan. business found it important to raise additional funds for their businesses. while not surprising. How important is it to raise capital for your business? 74% 80% 60% 40% 20% 0% 19% 4% 3% Very Important Little Not Important Important Important Source: Survey for Afghanistan Capital Markets Assessment. The majority of businesses citing ease in raising money were from Balkh province. while 66% of those interviewed claimed that they could expand their private businesses by 60% or more if they had access to formal capital markets. . Since the ICS surveyed all ranges of businesses while this survey focused on large businesses only. Cross-checking this with the Investment Climate Survey. we can deduct that larger businesses face more problems with financing. with some businesses reporting difficulties. indicating the possibility of lower availability of higher amounts of financing.

and 25% U. 26.000 to $2m) The eligibility requirements are very narrow. Considering most financing is informal and largely from family and friends. this is to be expected.000 to $300. January 2010. 60% . Technically. However. 13% insisted there would never be any disputes (family. This question is difficult to judge. First. with equal number of representatives from both sides of the dispute.2% 13. 31% claimed that the only penalty for not repaying on time is that they will receive no more capital from that source. rural only. friends) and 16% stated that their disputes would be settled by the payment of fine penalties only. With this is mind.8% 11.5% 2. meant to resolve the issue in a reconciliatory instead of retributive manner.4% 17. equity. only 87 of the 285 businesses responded with an interest percentage as a cost of capital that they were using – either because it was self funded or equity based.000) 2) Afghanistan Rural Finance Center ($20. January 2010. 42% of respondents stated that their financial disputes would be handled by a local tribal shura. 50% How would disputes be settled? Informal 6% Other 11% In court 12% No disputes 13% Fines 16% Shura 42% 0% 20% 40% Source: Survey for Afghanistan Capital Markets Assessment.7% claimed their external capital was free. Of the 87.000 to $3m) 3) International Finance Corporation (25%-50% of venture) 4) Overseas Private Investment Corporation ($500. as the number of respondents not answering (70%) seems to be more telling than the metrics of those who answered. sarafi or others. Only 10% stated their financier would stop their company or seize company property if they defaulted on their loan – and mainly friends would do so more than banks. January 2010. 28. Interviews quoted five main sources of enterprise financing currently in Afghanistan: 1) Afghanistan International Bank ($50.7% 26. it can be said that 59% of the disputes are settled informally.3% Free 1-5% 6-10% 11-15% 16-20% 20%+ Source: Survey for Afghanistan Capital Markets Assessment. For settling disputes.2% stated they were paying over 20% interest rates. Typically. Penalties for not paying on time Other 2% Seize company property 5% Stop my company 5% Fine/late payment fee 17% No more capital 31% No penalty 41% 0% Source: Survey for Afghanistan Capital Markets Assessment. Annual cost of capital 35% 30% 25% 20% 15% 10% 5% 0% 28. all non-court resolutions such as tribal shuras and others are informal and therefore. 41% of businesses claimed there is no penalty associated with their type of financing.12 Economics of current capital markets The economics of current capital markets vary drastically by the type of product being used. Second.4% claimed that it cost them between 1-5% annually while 17.S. Many businesses did not wish to discuss or disclose penalties for not paying on time. shuras are lunch meetings of village elders.000 to $250m) 5) Afghan Growth Finance ($100. 17% of businesses interviewed stated that they will be subject to fines and late payment fees – mainly those who borrowed from banks. including prerequisites like high collateral. some overarching themes can be drawn from the survey responses.

7% of people used at least some of their own capital to start their business. 2007/8.9%) of surveyed businesses had sourced any capital from a bank. varied by province and by sector.9%). the data is highly similar. This held true across regions and all sectors. only 14 (4. the survey found that 28% of people relied on capital other than themselves (external capital). and 3% from banks (vs. External working capital 15% 12% 10% 10% 3% 5% 1% 0% Friends Suppliers Banks Others Source: Investment Climate Survey. Notably. family and friends. A total of 205 of the 285 people (72%) relied exclusively on their own capital. or a combined 77% from family and friends.9% Friends 14. 4.9%) of the capital market activities.8% Bank 4. Overall. The only notable exception to the rule were the banks. Central Statistics Organization.682. Banks make up only a fraction (4. while this survey asked for initial capital sources. January 2010. It should also be noted that. The average investment by “self” was $2.2%).7% self funded capital sources out of our survey.” Cross referencing this information with the Investment Climate Survey (ICS) conducted by the World Bank and DFID in 2008. 12% state to receive capital from friends (vs. although in most cases these shareholders were in fact made up of self. the vast majority of businesses in Afghanistan rely exclusively on their own capital (72%). who were organized into a more formal group called “shareholders”. In addition. About one-third of businesses in Balkh and Kabul relied on external capital. 94. 14. The degree to which people relied on external capital. 2008. Source of external loans Local Traders 24% Family & friends outside AF 2% land owner.4%). In a survey conducted in November among 500 heads of SMEs nationwide. 70% stated that it was difficult to borrow money. World Bank and DFID. and 59% said they needed additional credit to keep their business going. n0 businesses in Kunduz reported reliance on any capital other than “self. Sarafi Family 2. while 25% of businesses in Kandahar and 15% in Nangarhar reported relying on external capital. The minor differences can be accounted for because the ICS survey asked where working capital was sourced. however. The mode for this category was $250.13 Informal markets that are currently raising capital for private firms Initial capital sources The survey found that the vast majority of people relied on their own capital to start their business. Source: Survey for Afghanistan Capital Markets Assessment.1%). In conclusion. 68% listed family and friends inside Afghanistan as their source.133. we are left with 29% family and 48% friends.1% 8. Those that do manage to obtain external financing are served by mainly family and friends (23. If an external loan was taken. 3% Family & friends inside AF 68% Source: National Risk and Vulnerability Assessment. .7% Multiple selections allowed in responses. Businesses in Herat relied on external capital the most. Taking 94. nobody reported accessing capital from “elders” and only one from a “donor”.000. 58% of businesses reported such reliance. Including sarafi financial institutional sources increased this number to 17 (6%). while they were available as answers on the survey.4% Self 94. and sarafis half that (2. 83% stated that they started the business with family money.

These types of firms were the hungriest for capital.2 223 135 89.4 25 22 5 0 100 200 300 Total outstanding loans were $873. This survey is concerned with only the 12% that use loans for business investments – and only for large businesses at that. 45% of loans are used for food purchases. Active outstanding loans ($m) Transport Agriculture Energy & Mining Healthcare Education Water Supply Governance Urban Development Global IT Financial 223. Islam was far and away the number one reason they did not apply for a loan. the businesses we interviewed had a strong aversion to interest based debt. World Bank and DFID. while we interviewed businesses across nearly every sector. manufacturing and sarafi. However this did not match the 2006 outstanding loans portfolio of the country. Second. 2007/8. indicating that of those who needed financing. Source: Da Afghanistan Bank. June 2006 Reason for not applying for a loan Other Islam May not be approved Loan size insufficent High collateral Interest rate high Complex application 1% 26% 4% 3% 4% 8% 3% 0% 10% 20% Source: Investment Climate Survey. according to the National Risk and Vulnerability Assessment by the Central Statistics Organization. Food purchases Business investment Health emergency Home improvement Home construction Wedding Other Funeral Land purchase Agricultural inputs First. 2008. Central Statistics Organization. Here we highlight themes on the current activities of capital markets discussed so far in Part I in Afghanistan which create a profile of the private firms involved. 30% . before moving on analysis in Part II. This may indicate a mismatch between the sectors needing capital and those that the banks are willing to finance.2m. agriculture and energy/mining held the top three loan sector types. Third.14 Typical types of private firms that access and use these markets Main use of loans Two case studies are included at the end of this survey to provide detailed snapshots of typical types of private firms that access and use capital markets in Afghanistan at either end of the formal/informal spectrum. we begin to profile the businesses that currently access and use these highly informal. 45% 12% 10% 9% 9% 6% 5% 3% 1% 1% 0% 20% 40% 60% Source: National Risk and Vulnerability Assessment.6 75 40 35. High interest rates came in second. where transport. the typical types of private firms needed financing the most were also in the capital intensive sectors: construction. severely undeveloped capital markets in Afghanistan. This eliminates 88% of the loans that are made nationally. Thus. as shown by their preference for Sharia-compliant based products. The ICS confirms this finding.

In essence. ijara (20%) and murabaha (23%). Of the remaining choices. $1. Source: Survey for Afghanistan Capital Markets Assessment. musharaka (equity partnership). These results are further emphasized when the survey asked how much capital the business would raise from each of the above financing instruments. more public scale and is typically considered wholly Islamic.4m if offered Qarzi Hassana (interest free loan). but with a slightly higher preference for qarzi sood financing. ijara (20%) and murabaha (13%). it is unsurprising that existing bank customers would choose this type of financial product. Source: Survey for Afghanistan Capital Markets Assessment. businesses were asked how much money they needed in the next five years for their business.09 Stock Exchange $5. the results trended similarly to overall averages. This is indicative of the vast financing needs of businesses in Afghanistan. More than 75% of businesses identified qarzi hasana as their first choice for financing. murabaha (when something is purchased at one price.4m via qarzi hasana. Demand for Capital Level of demand for funds for private enterprise finance The survey asked businesses what type of financial services they would be interested in for the future. Musharaka was identified by 12% as their first priority.74 Ijara $4. ijara (an Islamic lease agreement). and what their “top three” financing priorities are. ‘no need’ and ‘other’. Collectively. when converted to U. After taking aside everyone’s favorite interest free loans. . Qarzi sood came in last again at a mere $2m. the highest rated options were musharaka (31%). ijarah allows the lender to earn profits by charging rentals on an asset leased to the customer.74 Qarzi Sood $2. How much capital ($m) would you raise from each source? Others $4.44 Mudaraba $4. dollars.908 billion was the cumulative response of the 285 businesses. Finally. ‘stock exchange’. Third-rated services were again musharaka (32%).44m. Since financing from banks in Afghanistan is almost wholly qarzi sood. equity instruments on a stock exchange are musharakat products on a larger. indicating a very high demand for capital. For those companies already borrowing from formal financial institutions (banks).32 Musharaka $40. compared to between $4-5m for the other Islamic products. and then sold to another at a higher price). the overwhelming dominance of equity based financing over debt is undeniable. the businesses wished to raise $714. musharaka stole the show with a whopping $40. most businesses did not understand the term and were much more familiar with the Arabic terms for the various financing products. in a separate question. What are you top three financing priorities? 1st Priority 2nd Priority 3rd Priority 12% Musharaka 31% 32% 6% Murabaha 23% 13% 2% No need 5% 2% 2% Stock Exchange 13% 10% 1% Ijara 20% 20% 1% 4% 2% Qarzi Sood 0% 10% 20% 30% 40% Qarzi Hassana (interest free loan) was the most popular first priority at 76%. if they were available. or an average of $2. and murabaha by 6%. While a stock exchange was included as one of the options. The market wants equity financing products and not debt. The survey gave a range of options: qarzi sood (loan with interest). January 2010. For second choice.S. January 2010.5m per business. Instead of lending money and earning interest.00 $0 $20 $40 $60 Interviewed businesses claimed they would raise $714.15 II. qarzi hasana (interest free loan).

of employees Kabul Kabul 180 375 Kandahar Kabul M Saleem Sadat Shirkat Sakhtumani Onix Shirkati Mujtaba Faqeer Yar Balkh Shirkati Tawlidi Wa Murgh Dari Amu Ltd Balkh Shirkati Tijarati Waseem "Wafa" LTD Balkh Company name Asir Nabi Zada Geo Map Ittihad Plastic Jahim Printing Press Initial capital ($) Capital from banks ($) % capital from banks Construction Construction 1.000 500. beverage bottlers.000 80. are the largest and most well-known enterprises. manufacturing and financial services.000 1% Debt 6-10% Source: Survey for Afghanistan Capital Markets Assessment. January 2010. Second are the up and coming large businesses. Source: Afghanistan Financial Services.000.000 11% Debt 6-10% 35 Trade/ Distribution 4.16 Private firms that would be candidates for debt and equity This survey identifies three groups of firms that could be candidates for private equity and debt placements.000. instead of full legal names. telecommunications operators. and airliners. It is particularly important to note that this only covers existing businesses that could be candidates.000 40.010. First.000 100% 50% Debt 6-10% Undisclosed Balkh 40 Construction 350.000 50% 3% Debt 6-10% Debt 16-20% 35 30 Manufacturing Other 260. there are about 75 state-owned enterprises that could be privatized through formal capital markets.000 150.000 15.000 60. there is an unknown potential of additional candidates that do not exist or have left Afghanistan because of the very fact that there are no formal capital markets.000 83% Debt 11-15% 35 Construction 2.000.000 300. Sampling of the largest enterprises in Afghanistan (some are state owned and foreign) Banks Telecom Bottlers Kabul Bank Bank-e-Millie Arian Bank Afghan Telecom Cristal Panjsher Airliners KamAir Azizi Bank Pashtany Bank Punjab National Bank Afghan Wireless Coca Cola Salang Safi Airways Afghan United Bank Afghanistan Intnl Bank Standard Chartered Bank Roshan Sadat Cola Zamzam Pamir Airways Maiwand Bank Bank Alfalah Habib Bank Ltd Etisalat Super Cola Pamir Ariana Airlines Ghazanfar Bank Brac Afghanistan Bank National Bank of Pakistan MTN/Areeba Watani Noshak Common trade names used.000 30.080.580.000 500.000 2% Debt 1-5% 30 Manufacturing 280. mainly in construction.000 260. Business type Cost of capital . 2010. Finally. Sampling of businesses that use formal financing Province No.000 10. including the banks.000 23% Debt 1-5% Kabul 20 Construction 12.

Ministry of Public Health Pharmacy Department Ministry of Agriculture Improved Seed Enterprise Pule-e-Khumri Silo Enterprise Kabul Silo Enterprise Slaughter and Livestock of Hirat Baghlan Sugar Enterprise Kandahar Fruit Enterprise Fertilizer and Agro-Services Balkh Silo Enterprise Ministry of Commerce and Industry Foodstuff Enterprise Fuel and Liquid Gas Enterprise Cooperative and Commercial Plant Export Enterprise Samon Dried Fruit Enterprise Shir Khan Bandar Enterprise Ministry of Urban Development and Housing Macrurayan Maintenance Water Supply and Canalization Banaye Construction Afghani Construction Housing Construction .17 Sampling of State Owned Enterprises in Afghanistan Ministry of Education Education Printing Enterprise Ministry of Justice Prison Industry Enterprise Ministry of Mines Balkh Gin and Press Enterprise Kandhar Textile Yam Enterprise Medical Supplementary and Technical Wool Weaving Afghan Industry Enterprise Bagrami Textile Enterprise Kandahar Wool Weaving Helmand Bust Enterprise Kunduz Spin Zar Enterprise Balkh Textile Enterprise Engineering Research Mines Extraction Jangalak Enterprise Rokham Marble Enterprise North Coal Enterprise North Power and Fertilizer Enterprise Ghuri Coment Enterprise Afghan Gas Enterprise Jabal Seraj Cement Enterprise Afghan Carpentry Ministry of Defense Slaughterhouse Enterprise Construction Material Production Ministry of Culture and Information Afghan Advertisement Azadi Printing Enterprise Ariana Printing Enterprise Afghan Tour Enterprise Ministry of Energy and Water Brishna Organization Spin Ghar Construction Power Construction Jadid Entergy Enterprise Helmand Construction Metal Components Production Ministry of Transportation Millie Bus Center Kamaz Enterprise Kamaz Enterprises Technical Services Enterprise Hotels Enterprise Ministry of Finance Security (Sukuk) Printing Enterprise Source: Various ministries in the Government of the Islamic Republic of Afghanistan. July 2007.

It can also be put up to the number of businesses that gets audited by proper recognized accountancy firms. With a high savings rate and culture of trading. The middle of the market place in Saraye Shahzadah. personal relationships and reputation of the business etc.2% 3. January 2010. The concept of buying low and selling high is deep within the entrepreneurial spirit of nearly every Afghan. closely followed up by audited financials with 11% rating which is largely due to the lack of awareness of the individuals and businesses about the scope and study of this particular area. Kabul feels very similar to the floors of the New York Stock Exchange – with traders yelling out prices for a constant litany of orders. a well laid plan can ease of the burden a whole lot. The foreign exchange markets are highly active in Afghanistan. anecdotal reports indicate that people lack the amount of capital to invest in others’ businesses. 45% of business owners indicated that they would be interested in investing in external businesses. which only makes up 2% of all the businesses that are operating in Afghanistan. $100+ . underlying a real security concern for wealthy businesspeople in Afghanistan. In order to properly execute a target.which is normal business thinking because it is human nature to weigh most of the things according to what cost and benefits are there.6% 12. Afghanistan seems to be fertile grounds for a formal capital markets and plenty of ready investors. Many cautioned this willingness with proper controls.3% $5K-10K $10K-25K $25K-$100K Source: Survey for Afghanistan Capital Markets Assessment. third factor is personal connection at 14% indicating that close connections can work as a medium for most businesses to capture investors. literally meaning ‘trader’. given the opportunity through a formalized market.18 Potential investor base for a capital market The term ‘businessman’ is translated to Dari and Pashtu as ‘tujar’. Factors other than the ones indicated above makes up only 3% of the total ratings which may include references by others. Several businesspeople in Kandahar commented that they would not be willing to invest in any public sector capital market because they did not want “everyone” knowing how much money they had. Would you invest in someone else's business? 60% 55% 45% 40% 20% 0% Yes No Source: Survey for Afghanistan Capital Markets Assessment. followed up by cost/benefit analysis with 30%. with sarafi and hawala dealers on nearly every corner. In Nangarhar. a proper business plan which was the dominant of all the factors with a rating of 43%. January 2010. stable political landscape and transparent legal foundation/framework. January 2010. Overall.9% 27. According to the results of the survey the factors that are necessary in order for an individual or a business to invest in a particular business type mainly were. How much would you invest in a formal capital market? 60% 50% 40% 30% 20% 10% 0% 56. What do you need to invest in another business? Others 3% Personal Connection 14% Cost/Benefit Analysis 30% Audited Financials 11% Business plan 43% 0% 20% 40% 60% Source: Survey for Afghanistan Capital Markets Assessment.

The lack of financial institution which specializes in the debt products is one of the main concerns. Private banks are the most widely used mediums for debt finance covering almost 45% the market share. This tends to indicate both the concentration of the private sector banks and the flexibility of their products. i.higher the return. non –bank financial institution. 0. lower the risk. which could benefit large enterprises.67% Source: Central Bank Strategy Plan 2009-2014. This highlights the business preferences of the enterprises. and the rest shared between mortgage. There are no major debt finance products available in the market. The demand for any product in a market depends. regulation. According to the survey concentration of loans taken out or applied for vary significantly according to different sectors of the economy. But the more important aspect is the existence of proper and efficient market. that goes on well with the saying that “higher the risk . The reason for this may be because government sector wants to priorities long term debt financing with a view of long term investment by businesses that would in return. Which is why state owned markets has a lower percentage of market share of up to 14% which is even lower than non-bank financial institutions with a market share of 29%. But in the hind sight it signifies the fact that other participants with in the sector are either unaware or lack proper tools to take a grab at the facility or they are simply not interested. but in return the risk is also less as well.17% Mortgage 2. cost and Islamic point of view about interest laden debt surrounding the provision of the debt eradicates its effectiveness and popularity among the enterprises. Self finance Who issued the loan State owned banks 14% Other 12% Private banks 45% Non-bank financial institution 29% Source: Investment Climate Survey. . agriculture and others collectively. Another reason could also be that private sector tends to concentrate on short term loan financing which may demand collateral but of a lower value.19 Current markets for debt finance at the enterprise level According to the survey that was conducted indicates that markets for debt finance are divided in to different sectors namely private sector banks. state owned banks and different other institution operating within the market. Da Afghanistan Bank. Another factor could be the criterion for creditworthiness of the businesses. Loan Concentration by Sector Consumer 2. But the rules.The remaining space is filled up by different other institutions operating on a small scale.e. upon the amount of supply there is in the market. 2009. lower the return”. The highest concentration relates to commerce that is almost 90% of the whole sector. 2008.28% Other 6. banks mostly rely on audited and verified financial records and as highlighted by the survey most of the businesses that are registered with AISA lacked proper independent external audited financial records. improve the economy. World Bank and DFID.14% Commerce 88. which could cater for the needs of different businesses. consumer. The situation is the same for debt finance markets in Afghanistan.74% Agri.

16. transparent. insurance companies and others. This will consist broadly of funds managed by provident and pension funds.4% 15. including drafting a contract law. arbitration law. Since disclosure practices and corporate governance in Afghanistan do not conform to international standards. electronic clearing and settlement. Basic Infrastructure GDP growth 20% The legal and regulatory infrastructure for Afghanistan capital markets are missing constituents for the longer term creation and evolution of a more formal capital market in the country. inadequate. bond information dissemination system etc.3% 1384 -8. 9. In particular. but transparency. These would include the above mentioned and could add on to the establishment of a credit rating agency. all of which are currently absent. and central depository systems are crucial to provide a fair. legal enforcement needs improvement.2% 1382 3. “In addition to these infrastructural obstacles. DAB may perhaps try to develop a market infrastructure for debt securities. and corporate governance need to be improved.3% 6. guidelines on debt securities issues.0% 9. It may be unrealistic to expect many investors.8% 1. Afghanistan has far from completed its reform of the legal and regulatory environment for investment. disclosure. efficient and cost effective market for the investors. A substantial program of law reform has to be undertaken in recognition of the important influence of the regulatory framework on the growth and development of capital markets.1% 5. clearing.20 III. Per capita GDP $500 $400 $300 $200 $100 $0 $199 1383 $252 1384 $300 1385 $335 1386 $383 1387 $433 $433 1388 1389 Source: Central Statistics Organization. Afghanistan Research and Evaluation Unit.1% 10% 5% 0% -5% 7. Contributions to GDP growth Services Industry Agriculture 20% 15% In tandem to the development of institutions and regulatory infrastructure. The market infrastructure for the equity market needs to be developed. The government is in the process of transforming the entire legal and regulatory environment.1% -3. speedy and frequent disclosure of appropriate information is essential. improving the trading. 1383-1390. or require extensive revision. Most investors are focused on short-term placements.9% 1383 5.7% 6.0% 5% 0% 1383 1384 1385 1386 1387 1388 1389 1390 Source: Central Statistics Organization. asset management companies. . unit trust management companies. State-of-the-art Computerized trading system. to express interest in SOEs before these laws are in place.6% 1385 -10% The government should introduce various measures to enhance market infrastructure and put in place an appropriate regulatory framework.” Source: Putting the Cart Before the Horse? Privatization and Economic Reform. November 2006.8% 7. It needs an increased regulatory and enforcement capacity aimed at developing a fairer and more efficient capital market and facilitating market innovation. especially foreign investors. Source: Central Statistics Organization. the details of asset value and off-balance-sheet items should also be disclosed. 1383-1390. company law and partnership law. In addition.5% 9.4% 10% 8.3% 5. settlement and depository systems.1% 15% 11. 1383-1390.4% 5. These laws are expected to be in place by 2010.0% 6. capital market intermediation services should be developed which would include managed investment funds.

that due to the recent implementation of the Afghan tax law by the Ministry of Finance. Across the country. and the lowest numbers in Kandahar (0%) and Kabul (10%). It should also be highlighted here. unregulated and not included in official statistics. they tend to maximize their returns by injecting their family assets into the company. and it is more difficult to operate in these areas without registration. with the highest number (64%) in Nangarhar. which leads to an increase in asset values (capital gains). these results indicate that even large businesses do not register with the government. January 2010. This move will likely help in boosting the confidence of the long term investors. Business registration Not registered 19% AISA 31% Other 3% Municip. shareholders must pay more attention to the management of companies in order to receive better dividends. Thus. are reluctant to pay high dividends. They prefer to use the profit for further expansion. Overwhelmingly. growth is strongly influenced by infrastructure to support information gathering and by enforcing business dealings based on such information. particularly major shareholders. Survey respondents with AISA license This indicates a large share of the market across sectors is unregistered. some businesses may have been reluctant to share their AISA registration numbers. disclosure and transparency are prerequisites for efficient working of the capital market. and by law. World Bank and DFID. Due to the withholding tax. A total of 71% of surveyed businesses reported having AISA registration whereas 29% reported that they did not have AISA registration. In this case. in turn.21 making it difficult to enhance corporate governance. exemptions from Business Receipt Tax (BRT) and capital gains tax would be very commendable steps. Business registration AISA registration is the official business registration in Afghanistan. No Yes Kandahar Kabul 0% 100% 11% 89% Mazar 36% Herat 38% Kunduz Jalalabad 64% 63% 47% 53% 64% 36% 0% 50% 100% Source: Survey for Afghanistan Capital Markets Assessment. as most businesses within the city centers are under governmental authority. Afghanistan Investment Support Agency. restriction of auditors to provide non-audit services to their audit clients and enhancement of penalties on auditors in case of professional misconduct would add to transparency of the markets. improve corporate governance. In Kandahar. 150% . companies would increase their payout ratios and investors would be encouraged to hold shares for longer periods. Highest standards of accounting. If they were exempted from the tax on dividends. This could. all businesses are required to register with the agency. While many small businesses cannot afford the fee ($180). New buinesses registered by AISA Domestic Foreign 3000 380 2000 1000 101 249 1474 1137 2003 2004 0 300 171 2123 1746 1925 2005 2006 2007 Source: Registration Database Department. and Kunduz was slightly higher than the national average. Dividends are subject to withholding tax. rotation of auditors by companies after every five years. the area of movement for the field teams was restricted to the city center due to security. a total of 29% of surveyed businesses were unregistered. Lowering of the effective tax rates. and simply omitted this information during their interview. 2003-8. companies. An increase in dividend payments could be considered. The public has to be encouraged to make longterm investments. 2008. 22% Other Gov Ministries 17% Ministry of Commerce 20% Source: Investment Climate Survey. Balkh and Herat trended with national average. which likely skewed the results. In addition.

. • Commercial entities generally do not prepare the financial statements for any external financial reporting since there is no legal requirement for filling of audited financial statements along with Income Tax returns.10% No accounting regulatory body in Afghanistan • At the present time. then government audits (28%). Are your financial records audited? Govt 100% Self Auditor 2. followed by the current actions being taken to remedy them. including: • Limited access to finance (banks require valid financial reports to disperse loans) • Limited access to overseas markets (who require formal accounts as part of their due diligence) • Greater opportunities for corruption (with no oversight and checks on money flows) • Greater level of difficulty paying tax and collecting tax (for MoF) The specific problem/issues for the accounting sector are listed below.1% of firms relied on international audit companies. • A local regulatory structure is required so that Afghanistan can be independent of international bodies and run its accounting profession in accordance with its own needs and laws. It is notable that all international audits were conducted by KPMG Afghanistan. Are you willing to share financials? Publicly 70% 60% 50% 40% 30% 20% 10% 0% With financing partner 65% 48% 15% 11% 16% 18% 18% 9% Very Somewhat Willing Not willing willing willing Source: Survey for Afghanistan Capital Markets Assessment.10% No Yes 0% Source: Survey for Afghanistan Capital Markets Assessment. January 2010. Limited higher education efforts with respect to accountancy/audit • There is no evident effort by the Government of Afghanistan (GOA) to introduce accounting and finance courses at university level.80% 28. except for Banks. • The curriculum followed in the Universities of Afghanistan does not extend to teaching International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA). there is a limited (albeit nascent) accounting and audit profession in Afghanistan. 2% Software 19% None.22 Level of accounting and auditing that exists A total of 70% of all companies indicated that they had audited financial records. The number of resident qualified Certified or Chartered Accountants is estimated at less than ten in Kabul. Of those who had audited records. How do you keep financial records? Other. these were the banks and telecommunications companies. 1% Excel 31% Paper 65% Source: Survey for Afghanistan Capital Markets Assessment. 50% 40% 29. • There is no recognized body that regulates the accounting and auditing profession in Afghanistan • There is no established procedure to enforce accounting or auditing standards for the private sector. a city of four million people and the Capital of Afghanistan. A weak accounting industry presents a number of key barriers to Afghan businesses. January 2010. • Not for profit organizations and NGOs prepare financial reports in accordance with Donors requirements rather than any local requirements/standards. Only 2. January 2010. most companies relied on internal audits (40%).

This Association is registered with the Government of Afghanistan and has the legal status to represent the accounting profession. Audit and Control Office. the accountancy profession.) Beneficiaries of reform Businesses: This will improve investment in Afghanistan and investors’ confidence in accountability by demonstrating a successful and effective accounting society. As a result. the accountants of Afghanistan have stepped up and joined hands to form the Afghanistan Association of Professional Accountants (AAPA). The Committee will assist the GoA in developing transparent tax laws and audit regulations which will be implemented by the GoA and applicable to all business entities. Also the standards committee will assist the GoA to develop the financial reporting requirements for State Owned Enterprises (SOEs). Structure and Governance. local entities will be advised to prepare. • Assist the Government in developing the law of external audit requirements. Civil Society: Well trained and certified Afghan accountants will be able to replace international accountants. auditing and financial management and negotiate with Government universities to incorporate the Association of Chartered Certified Accountants (ACCA)’s fundamental curriculum in the undergraduate economics degree program. 2010. Afghanistan Chamber of Commerce) will be member of the Standards Committee.23 Due to the abovementioned issues. progress toward sustainability. International Community: The result and outcomes will contribute to strategic objectives of international community. capital providers and issuers. It will also assist the GoA in developing the financial reporting requirements for State Owned Enterprises (SOEs) and make sure that corporate organization to practice Code of Corporate Governance. The establishment and financing of the Accounting Standards Committee within AAPA will enable the following nonexclusive list of project objectives to be achieved: • Develop national accounting and auditing standards that are in line with international standards. Adopting IFRS. regulated society. Government: The standards committee of AAPA will assist the Government of Afghanistan to develop. Education and Training. the international financial institutions. Member of the Parliament. standard setters. the cost of auditing and accountancy will more effectively align with local ability to pay. maintain and present their financial statements in according to standards which will enable the financing institutions to evaluate their financial statements and this will increase the chance of businesses to access the capital markets. it is expected that it will be supported by ACCA in terms of resources and professional guidelines. AAPA has put this discussion with Ministry of Finance (MoF) and MoF is in agreement with this project and has proven it is commitment by means of an official support letter. As such. . This is also expected to promote the importance of accountancy and professional accountants in general and to influence ways of thinking about professional practice. MoF and several other relevant influential Governmental authorities (Ministry of Justice. The accounting standards committee will develop accounting standards to be implemented by all business entities. Financiers will be more inclined to extend vendor credit if the financial condition of client firms can be verified through independent audit of qualified accountants and auditors. and more. ACCA has already shared its discussion paper with AAPA for “supporting development in Afghanistan” which addresses accounting areas such as (Accounting Legislation. in increasing the desire for greater accountability and transparency. As the standards are in place this is expected to promote cooperation between government. building capacity. regulators. • Support the Afghanistan Universities and other training providers in curriculum development in accounting. Audit Quality Review. • Facilitate discussions on noted critical accounting and auditing problems faced by professionals. tax law and audit regulations in manner that is more appropriate and applicable in the country. Ministry of Higher Education. Source: Afghanistan Financial Services. As it will be providing support to the current accounting students of ACCA. Central Bank. the accounting curriculum. Clarification on standards will speed up compliance. The Association will seek membership of International Federation of Accountants (IFAC) and may receive technical support from its International Standards Board to develop local regulations. increased incomes through economic growth.

Avoidance or at least reduced corruption: Reporting of financial accounts along international accountancy standards will increase transparency of accounts and could reduce corruption. World Bank and DFID. As such. In effect. A positive by-product in training more local accountants and auditors is that the use of international accountancy expertise will become more strategic in nature. Increased productivity and lower operating costs: A positive by-product in training more local accountants and auditors is that the use of international accountancy expertise will become more strategic in nature. will more readily align with the local labor pool. Businesses with a bank account (compared to other countries) Yemen 5% Pakistan 63% Jordan 94% Afghanistan 51% 0% Increased profitability of local content: One of the primary functions is to increase the competency. and number of certified. should be reduced. Share of new investments financed by banks West Bank 3% Jodan 3% Syria 4% Yemen 9% Egypt Easier access to capital: Local entities will be advised to prepare. generating higher sales and export revenue: Business entities producing financial statements that meet international standards requirements will have increased chance to enter into partnership with international partners and do business in the international markets. Enabling more local Afghan consultants to have an awareness of how to present accounts in an internationally acceptable manner should facilitate a reduction in corruption. World Bank and DFID. for developing international caliber financial reports. for developing international caliber financial reports. 2008.24 The role of reforming accounting and auditing in Afghanistan could have a serious impact: Reduced transactions costs in dealing with government: Financial reporting to the Ministry of Finance with respect to taxation etc. World Bank and DFID. Easier access to local and international markets. having more qualified local accountants/auditors that understand the current financial reporting environment should facilitate ease of communication with various government entities. 50% Source: Investment Climate Survey Full Report. the local cost structure. 2008. 100% Afghanistan 11% 2% 0% 5% 10% 15% Source: Investment Climate Survey Full Report. Reduced investment risk: Transparent financial reporting undertaken by skilled and more importantly certified accountants will increase the confidence of local and international investors in the local business community. As such. locally trained accountants and auditors. Businesses with a bank account (by sector) Construction 80% Retailers 49% Manufacturing 45% Other Services 44% Professional 32% 0% 50% 100% Source: Investment Climate Survey. . maintain and present their financial statements in according to standards which will enable the financing institutions to evaluate their financial statements and this will increase the chance of businesses to access the capital markets. 2008. will more readily align with the local labor pool. the local cost structure.

Investments can be 100% foreign owned. Foreigners may not own real estate. In Afghanistan's uncertain business environment. The Government has adopted progressive policies to foster trade and investment. currency controls. the legislative process is slow and a number of important laws have been languishing.albeit in part by the opium and donor inflows into the country. including under ongoing privatization programs. Above all. 1381-1386. Da Afghanistan Bank. While the fiscal and regulatory infrastructure is relatively favorable for supporting capital markets. but they may lease it for periods up to 99 years. or implementation. Private investors have the right to transfer their capital and profits out of Afghanistan. The average civil case takes three years to go through the extremely corrupt courts. the high level of uncertainty and risk facing investors in Afghanistan comes from the absence of a clear legal framework. World Bank. 1381-1386. The Private Investment Law states that an investor may freely transfer investment dividends or proceeds from a sale of an approved enterprise abroad. There are no restrictions on converting or transferring funds associated with investment into a freely usable currency and at a legal market clearing rate. The formal court system barely functions and most people rely on informal dispute resolution mechanisms. Furthermore. and inflation has been controlled from over 50% to under 20%.662 $2. Nominal exchange rate (AF/$) 60 Da Afghanistan Bank has been particularly successful in its fiscal policies . and enforcement of contracts or government regulations is seen as very weak. Foreign and domestic investors enjoy equal treatment. The international financial crisis left Afghanistan largely unscathed. Gross Foreign Exchange Reserves ($b) $4 $3 $3 $2 $2 $1 $1 $0 $2.064 $0. including currency reform. . and corruption. poor land tenure. rationalized customs tariffs and a simplified tax code. Afghanistan does not maintain a dual exchange rate regime. Consumer Price Index & Inflation CPI Inflation 60% 40% 20% 0% -20% 1381 1382 1383 1384 1385 1386 1387 -40% Source: Central Statistics Office. 2008. capital controls.820 1382 1383 1384 1385 1386 1387 Source: Central Bank Strategic Plan 2009-2014. “In addition to insecurity.” Source: The Investment Climate in Afghanistan. the legal court system is completely broken. awaiting parliamentary approval. 2009. Despite ongoing efforts at legal reform. final drafting.25 Fiscal. or any other restrictions on the free flow of funds abroad. the government must be consistent and predictable. In particular. foreign investors are not required to secure an Afghan partner. legal and regulatory infrastructure The 2005 Private Investment Law specifically prohibits discrimination against foreign investors.425 $1. value of the Afghani has been very constant at around 50 Afghani to the dollar since 2003. 40 20 0 1381 1382 1383 1384 1385 1386 Source: Central Statistics Office.283 $0. individual firms experience many benefits from having close ties to influential commanders. Gross foreign exchange reserves have steadily increased year on year.900 $1.

Security: Security was cited as a concern by businesses.4% 40% 22. and didn’t allow them to make long-term capital investment decisions in fixed assets.26 Missing elements of infrastructure There are a number of elements that will need to be implemented in the next 3-5 years to establish the basic fundamentals for the longer term creation and evolution of a more formal capital market in the country. institutional. Legal Framework: Reduced levels of corruption/bribing as well as a more transparent legal framework for capital markets was cited as an important foundation for investment in formal capital markets throughout Afghanistan. 2009. 1381-1386. particularly in Kandahar and Kabul. 2008.1% 13. many business owners said that they cannot afford high taxes. Some businesses noted that the volatile political landscape prevented them from investing further sums of money into Afghanistan. The last question of the survey questionnaire was open ended and asked the 285 businesses for their suggestions on improving capital markets. External Budget 28% 40% 34% 21% 8% 10% 11% 1382 1383 1384 10% 22% 10% 1385 1386 Source: Central Statistics Office. The proceeding sections reflected analysis of the legal. . These requests were particularly prevalent in Nangarhar. Banks in particular mentioned that a transparent and cohesive legal foundation was necessary for improvements in the banking sector.1% 20% 0% 1383 1384 1385 1386 1387 1388 1389 1390 Electricity: Electricity was repeatedly cited as a large barrier to improving profit margins and expanding business operations. Official exports growth rate 112. regulatory infrastructure conducted by the Afghanistan Financial Services. Any fixed assets purchased last year <5 employees 5 to 19 20 to 99 100 or more Retailers Other Services Manufacturing Construction Professional 17% 29% 55% 64% 22% 32% 37% 43% 45% 0% 20% 40% 60% 80% Source: Investment Climate Survey. and that the government ought to encourage business investment by suspending taxes on companies that provide jobs and meaningful contributions to the economy. Source: Export Promotion Agency of Afghanistan. Taxes: In part due to the fact that the Government of Afghanistan has recently begun enforcing the tax law in Afghanistan.8% 20. World Bank. Reliance on Imports/Internal Capacity: Businesses mentioned that help from the donor community and the Government of Afghanistan to improve local manufacturing/production capacity as well as provide controls on similar imports was welcome.0% 120% 100% 80% 60% 43.7% 7. Some of these are summarized below: Foreign Assistance as % of GDP Core Budget 60% 40% 20% 0% Currency Control: Businesses mentioned that the government should do more to enforce transactions in Afghani rather than other currencies (Pakistani Rupee and US dollar were cited).9% 26. fiscal.6% 25. with business owners requesting expanded electricity or alternative energy investments. as well as any other formal capital sectors developed in the future. Several themes came up in all provinces.

4 0.8 112.0 4.27 IV.7 37. The monetary base declines.0 5. As a liability of DAB there is negligible default risk and settlement risk.0 0. having purchased $405m in 28 day notes and $83.0 0.1 3.4 10.5 27.350 basis point premium over last 28 day Note auction rate. other banks. If funds are needed before maturity. March 2007-2009. 2006 Capital Notes are a discount security with fixed maturity which is sold in auction every Tuesday. allowing the 17 licensed banks to purchase capital notes online and then sell to their clients. although the effect on the central bank’s own balance sheet differs.7 1.5 2.5 0. Since the interest rates on capital notes issued by Da Afghanistan Bank have fell from over 15% to less than 5% in just one year. On 16 December 2008.5 123.afx. and in the supply of credit in the economy. DAB capital notes purchased ($m)* 182-day 28-day Standard Chartered Bank Punjab National Bank Pashtany Bank Millie Bank Maiwand Bank Kabul Bank Habib Bank First MicroFinance Bank Development Bank Brac Bank Azizi Bank Arian Bank Al-Falah Bank Afghan United Bank 0.7m in 182 day notes.62%) and Afs 5. Da Afghanistan Bank. It broadens the range of available assets for investors and provides opportunities for more efficient liquidity management for financial and non-financial firms.0 0 100 200 *Afghanistan International Bank was an outlier.0 14.7 2.3 billion in outstanding 28-day notes (13. March 2007-2009. Debt Markets Current capital notes program “The function of the capital note is similar to that of government securities in more highly developed financial markets.af) for primary and secondary market trading of capital notes was launched in August 2009. The same multi-lingual online system can also handle other types of debt instruments as well as equities. A secondary market is a key driver of liquidity in capital markets. for a total issuance of 302 securities. Since 2007. Source: Market Operations Department. DAB capital notes auctions won ($m) 182-day 28-day Standard Chartered Bank Punjab National Bank Pashtany Bank Millie Bank Maiwand Bank Kabul Bank Habib Bank First MicroFinance Bank Development Bank Brac Bank Azizi Bank Arian Bank Al-Falah Bank Afghanistan Intnl Bank Afghan United Bank 1 2 28 24 11 72 41 3 3 4 2 3 23 40 70 30 12 3 14 2 5 27 30 59 22 0 4 0 47 50 100 Source: Market Operations Department. with a 28-day note and 182-day note. capital notes can be used as collateral for DAB Credit Facility with +/.1 65.0 72. AFX had served 3055 logins over 19 auctions. The monetary base declines in this instance. too.5 66.1 0. Da Afghanistan Bank. These declines in the monetary base promote declines in the broader monetary aggregates.41%). it can be used by institutional investors (insurance and pension funds) and catalyze the development of other fixed-income securities. By providing more opportunities for more frequent trading. 152 auctions had been conducted for both the 28-day note and 182 day-note. When DAB sells a capital note to a banking organization. A robust electronic platform (www.0 131.4 billion of 182-day Notes (14.0 17. there were Afs 3. Finally. it debits the bank’s current account at DAB and credits capital notes (a liability of DAB). .2 77. running off the charts ($405m). By January 2010. state-owned Millie Bank has purchased the most into 128-day notes ($112. In the six months after its launch.” Source: Da Afghanistan Bank Capital Notes Regulation. the secondary market improves the price discovery process for Capital Notes. The weekly blind Dutch auction for capital notes in primary market is particularly active.1 15.4 79.6 3.3 20. or back to DAB.7m) while Afghanistan International Bank leads the way into purchasing 28-day notes. When a central bank sells a government security to a bank. it debits the bank’s current account at DAB and credits its holdings of government securities (an asset of that central bank).

2009. and investors would examine the intrinsic risks of the assets in making investment decisions. • Making sure that the borrowing of bonds are against cash collateral. investors would analyze the inherent risks of the sponsors or the project fundamentals. For unsecured securities. The Securities Commission’s responsibility will be to act as a single regulatory body to encourage the development of the debt and overall capital markets. including bonds. a special purpose vehicle (SPV) or a Funding Company that protects the rights of the investors must be created. . With no entities acting as financial intermediaries. • Introduction of open market operations and principle dealer such as selected commercial banks. a Securities Commission Act needs to be developed and a Securities Commission to be established. direct lending/borrowing and liquidity requirements. With the realization to have a single streamlined regulatory body to govern and monitor the debt markets. Other than getting financing from financial institutions. The regulatory setup of the debt market in Afghanistan needs adequate support from the Central bank and MoF. This will create a more active and liquid cash market in Government bonds Strategic Pillar: Promoting the Development of Money & Capital Markets Activity Deadline Organize public awareness events on money & capital markets development Dec 2010 Establish a Central Depository System Dec 2009 Effect benchmarking of securities Jan 2010 Produce a regulatory policy paper on the establishment of Bond Markets Dec 2010 Produce a policy paper on the introduction of government securities Dec 2010 Prepare a policy paper on the establishment of a stock exchange Dec 2012 Source: Central Bank Strategic Plan 2009-2014. Da Afghanistan Bank. issues and investors • Institutional and regulatory reforms including demutualised securities exchange and corporate governance • Deregulation in investment management industry • Broad fiscal incentives • Vast improvements in market infrastructure • Develop the auction system for government securities to promote fair pricing • Establishment of credit rating agencies • Tax exemptions on interest income • bond information and dissemination system • Clear guidelines on lending. The principal dealers will be required to underwrite and make markets for government bonds. funds can be raised from investors from the capital market by issuing different kinds of securities. The former type of securities would be asset backed. Other key measures would include: • Create public awareness on government securities • Measures to develop market liquidity in bond market • Market access liberalized for intermediaries. Types of securities that can be used to raise funds from the capital market can either be secured or unsecured.28 Expanding the government securities market Debt includes financing from banks. specialized institutions (domestic and international).

the corporate will need to turn to the debt market for their funding needs. the Government may focus on Sharia-compliant products. a little of the securities enter the secondary market allowing them to be traded. Sukuk constitutes a partial ownership in a debt (Sukuk Murabaha). . In the Persian Gulf and Asia. These securities tend to be bought and held and. or paying of interest. Such principles form part of Shariah. Motivated primarily by the interest issue. 400 200 135 65 194 84 47 51 520 1384 1385 1386 Source: Da Afghanistan Bank. many are reluctant to invest in interest-bearing instruments. Private 20 State-owned Foreign 15 10 4 3 4 5 3 4 1384 1385 5 0 5 3 5 3 7 8 1386 1387 Source: Da Afghanistan Bank. which prohibits the charging. Sukuk “legal instrument” is the Arabic name for a financial certificate. Given the limitations of the banking sector. 2010. which is often understood to be ‘Islamic Law’. 2010. interest bearing bonds are not permissible in Islam. These could be Sukuks. as a result. the potential feasibility for establishing a government Sukuk market in the next three to five years remains fairly high. and the assessment of the basic infrastructure components needed.29 Number of licensed banks Level of potential feasibility The corporate sector in Afghanistan appears to appreciate the potential of debt markets and the realization of serious intentions to develop a fully functional debt market. Further enhancement of market depth and liquidity by way of listing of more primary issues. Islamic bonds and Khazanah bonds which are based on Islamic concept (no coupon or interest payment). promotion of the secondary market in debt securities and strengthening of regulations and their enforcement would help mitigate risks. Furthermore only public Sukuk are able to enter the secondary market.2 trillion of assets are being managed according to Islamic investment principles. 218 74 600 0 As majority of Afghans are Muslims whose teaching prohibit payment of interest. Licensed banks deposits ($m) Private 1200 State-owned Foreign 1000 While conventional bond is a promise to repay a loan. Sukuk securities are structured to comply with the Islamic law and its investment principles. 84 652 1387 Licensed bank profitability Private Conservative estimates by the Ten-Year Framework and Strategies suggest that over $1. Standard & Poor's estimates that 20 per cent of banking customers would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile. 2010. Since fixed income. asset (Sukuk Ijara) and business (Sukuk Musharaka). but commonly refers to the Islamic equivalent of bond. as they are listed on stock exchanges. 286 800 State-owned Foreign 1385 1386 150% 101% 100% 50% 65% 23% 0% Considering the results of the survey. -50% -17% -46% -55% -100% Source: Da Afghanistan Bank.

000 2.500 2. 2010 The same three groups that were listed as candidates for private placement may serve as serious investors in a formal securities market. the 4-5m estimated Afghan diaspora population and their associated businesses may serve as the largest component of investors in Afghanistan.30 Potential major investor groups The market potential for government debt in Afghanistan is tremendous when compared to other Islamic countries: • Based on a comprehensive list provided by The Islamic Banker. while the majority of the 285 businesses interviewed by the survey may not qualify as candidates for private placement. many of them seemed to be apt investors and welcomed the concept of a formal securities market. the annual stock market capitalization meeting the DJIMI criteria in the member countries may exceed US$300 billion. Abdul Qadir Fitrat .500 3. • A recent study conducted suggests that a sizeable proportion of existing companies listed in the stock markets of Islamic Development Bank (IsDB) member countries are Shariah compliant.000's) Pakistan 2. currently managing assets worth about US$11 billion. • Applying the Dow Jones Islamic Market Index (DJIMI) criteria to local share markets of three IsDB member countries. • The Liquidity Management Centre of Bahrain lists 77 corporate and sovereign sukuk issues worth US$17.000 EU 250 Rest of the World 200 Central Asia 200 Gulf 100 USA 100 Canada 45 Austrailia 30 0 500 1. Foreign individual or institutional investors with an appetite for high-risk markets to diversify their portfolios may be another major investor group. diaspora populations (1. • According to the available data. In the broader context.97 billion. Est. the outstanding Malaysian domestic market of Islamic debt certificates is estimated to be worth US$17.1 billion. while that of Bahrain is estimated to be worth US$2 billion. Source: Ten-year framework and strategies by Islamic Development Bank. London. it is estimated that there are more than 250 Shariah compliant mutual funds.500 Iran 1. Enhancement of Shariah screening technologies and market microstructures can further support this segment of the capital market.000 Source: The Role of Diaspora in Private Sector Development of Afghanistan. Assuming that these three countries constitute 30% of the stock market capitalization in the IsDB universe. this study suggested that the total annual market capitalization of counters meeting the DJIMI criteria in the three countries was US$104 billion in 2004.000 1. In particular.

But now all the profit is on “cents” for example if he sells 5.000 on daily basis.000 dollars he would have a net profit of $100 or (minimum $50). there are no businesses that deal with or exchange over $100. the owner is optimistic about future expansion with the help of his three sons. one of the good opportunities in the current market is the security situation. However. with approximately $25m in annual exchanges last year. Management: The business is managed by an owner and three sons. Azizi Bank and Afghan United Bank. . The global economy has affected the businesses in Balkh and fewer people are spending money. Weaknesses: Haji Qayoom’s Sarafi is weak in terms of capital. he is head of all Sarafis in this province.000 daily. History: The Sarafi business was started 14 years ago with $15. However. The ones with more capital started a bank like Kabul Bank or Afghan United Bank. In Jonbish time (or 10 years ago). Haji welcomed capital investment financing (musharaka or mudaraba). Good relationship with the government entities such as the Central Bank of Afghanistan from where he has work permit (license) that gets renewed every year. Opportunities: According to Haji Qayoom. He estimates he is fifth or sixth in terms of actual market share in Balkh. They have been in operation for 14 years. with no reliance on computers or internet. Economically: The business is affected by the overall money supply in the market. but Haji believes that in the future it’s getting better. Now his daily money exchange is estimated to be $80. Socially: Haji is one of the oldest money exchangers in Balkh and is well-known in the public sphere. He also gets in contacts with the police departments and courts whenever there is a dispute with his clients. Their clients are local shopkeepers and superstores of Mazar-e-Sharif. Threats: Dramatic fluctuation of dollar value is a great challenge in the current market. if Haji sold 5. He said he needs more capital to invest in his business in order for him to be able to compete in the money exchange market.000 of capital. the owner is very interested in improving his management and operation of the business. but faces competition from approximately 10 peer Sarafi businesses in the provinces. He has business with Kabul bank. But now all the money is transferred through those banks and the Sarafis are dealing with relatively smaller amounts of money. Strengths: In terms of market share. relationships with other Sarafis and public relationships.31 Case Study: Sarafi Haji Abdul Qayoom The owners and employees of this money exchange business are Haji Qayoom and his 3 sons. However. as well as the fact that he deposits capital in each of them. The businesses of Sarafi were much better before the establishment of the commercial banks. and to all money exchangers in the province. there are no formal methods of management or business organization within the business at this time. all of whom are University educated. He cited good personal relations with these banks. Technologically: His business is operated by paper-based method of accounting and book-keeping.000 he will have a profit of $2 only. Haji Abdul Qayoom is quite strong. which he cited as satisfactory. Haji said that in this market. The company is very competitive in the market.

has 585 employees and 12 branches nationwide. it has passed all of its audits in its first year of operations. as a national Afghan Bank. It would not disclose its annual turnover. with $15 million of start-up capital. no other banks had such reach one year into its operations. The nascent nature of the sector. Access to financial markets through shareholders. History: Maiwand Bank. Opportunities: Maiwand Bank. Its capitalization is also good. and compliance with external auditor. according to the General Manager. the overall volatility in Afghanistan and the capacity of the Central Bank makes the investment risky. and it has an aggressive expansion plan based on a comprehensive employee training program. Good relationship with the government entities such as the Central Bank of Afghanistan. Threats: There are many new banks entering the banking sector. Finally. is well-positioned to expand. There is a high degree of formality within the company. and it has an aggressive expansion plan based on a comprehensive employee training program. Maiwand Bank has 12 branches. An extensive training plan is underway to train up employees for its branches and to prepare expansion of new branches. Weaknesses: Maiwand does not have a large deposit share compared to other banks based on its recent entry to the market. Its shareholders have additional capital to invest. . Economically: The bank needs depositors. Strengths: In terms of its market reach after just one year.32 Case Study: Maiwand Bank The financial institution has been in operation for 1 year. it is estimated that Maiwand is number seven in depositors. other private banks. KPMG. as a national Afghan Bank. and subsequent deployment of staff. Its shareholders have additional capital to invest. Technologically: The business uses modern banking software and is up to standard in terms of audits. which to some extent sets policies in accordance with donor community influence. Of an estimated 10 local national banks. Management: Maiwand Bank is managed centrally in Kabul. but needs to increase its brand name. It also lacks name recognition among Afghan banks. Socially: The bank shareholders are well-placed in as all Afghan Nationals in Afghanistan. although no current formal loans from other financial markets. which is ultimately managed by a Board of Directors. is well-positioned to expand. with 12 branches. Politically: Maiwand Bank operates within the parameters and policies of the Central Bank. Clients include businesses and individual depositors nationwide.