Afghanistan Capital Markets Assessment Summary

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
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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
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
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). This assessment includes current capital market activities, the
demand for capital, the basic infrastructure to support capital markets, and government debt markets.
As part of the assessment, a survey was conducted in six major cities of Afghanistan - Herat, Kabul,
Kandahar, Kunduz, Mazar-e-Sharif and Jalalabad.
The 22-question survey targeted businesses with at least 30 employees or initial capital investments of
$250,000 or over, and sought to understand the level of activity in various markets, their significance in
raising capital for private enterprise, and the overall formality and/or informality of such markets. In
addition, business owners were asked to comment on any barriers in the market, what could be done to
make markets more transparent and stable, and what they would like to see in terms of future financial
products and markets. Business sectors surveyed included agriculture, construction, banking
institutions, sarafi (money exchangers), manufacturing, real estate, retail, telecom, trade & distribution,
and transportation.
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.
In total, 285 businesses were interviewed over a 10-day period in January 2010. The number of
businesses in each sector was chosen based on a sampling estimate of such businesses in Afghanistan,
using a number of internal business databases. The questionnaire was conducted via in-person
interviews by 28 field enumerators targeting the six major urban centers of Afghanistan.
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. Those working on the survey included a
researcher with quantitative and qualitative research experience, an Afghan national with strong
statistical analysis and survey training background, and staff with a multitude of experience in the
financial sector in Afghanistan and abroad. Staff also had experience working on USAID-funded
projects in the areas of monitoring and evaluation, and survey design, implementation and analysis.
The survey questionnaire was composed of 21 closed-ended quantitative questions, and one open-ended
qualitative question. Questions were asked in very simple language appropriate to the cultural and
religious context of the local communities. The questionnaire was initially written in English and then
translated into Pashto and Dari for the purpose of the survey administration by field enumerators. In
addition to focusing on capital markets, the questionnaire also collected basic contact and geographical
information for businesses in urban centers throughout Afghanistan for follow-on and verification
purposes.
Pre-testing the Questionnaire

Pre-testing the designed data collection tool is important in ensuring that the combinations of the
questions added are appropriate, properly designed, consistent and clear. 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, the questionnaire was drafted and reimplemented during a one-day pre-testing phase to get to a final draft. Several necessary amendments
were brought into the questions to guarantee that appropriate data would be collected during the
implementation phase. After translations, enumerators were given the questionnaires to check the
fluency and consistency of the translated versions.
Selecting and Training Personnel

Well-qualified and experienced field staffers were responsible to collect reliable, accurate and
trustworthy information, which ultimately lead to reliable survey results. Knowing the importance of
well qualified staff, a total of twenty-eight (28) field enumerators took part in full-day workshops
organized in Kabul. One session was held in Kabul for all Kabul and Jalalabad staff, as well as Regional
Team Leaders for Kandahar and the North (Mazar-e-Sharif, Kunduz and Herat).
The objective of the workshop was to train surveyors to properly implement the designed questionnaire.
The workshop was sub-divided into several sessions: introductory session, questionnaire briefing
session, group discussion session, and practical work session. The workshop ended with a full briefing
and focused detailed discussion on each part of the questionnaire. Special attention was paid to the
necessary re-translation of unclear questions. Following the workshop, practice surveys were
undertaken in the field for additional practice under the supervision of the Project Lead, who provided
feedback to all enumerators at the end of each practice session, and helped them make appropriate
changes in answers their questionnaires, and answer any unclear questions. Subsequent to the session
in Kabul, the Team Leaders for Kandahar and the North undertook similar training sessions for
enumerators in their areas.
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, January 2010.
100
Stratification
Stratification according to sector was done prior to undertaking the survey. Stratification was done to
ensure representation across all sectors, as it was assumed that USAID is interested in a range of
business sectors.
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, with the
assumption that it was representative of business types in Afghanistan. Overall, approximately 20% of
companies in the AISA database fit the criterion of $250,000 start-up capital. The team then chose a
sample of each business type according to general representation in the database. At least one of each
type of company was surveyed, regardless of how few companies there were in the sector. It should be
noted that, while more than half of businesses in the databases were categorized as construction, in
order to have representation across industries, a smaller percentage of construction companies than
other sectors was sampled for the survey. For other sectors, a much larger resulting percentage of the
sector was surveyed in some cases. For example, the survey only interviewed three private Afghan banks,
but the result was 30% of private Afghan banks, since there are only ten (excluding international
subsidiaries) in the country.
The table shows the total number of business type in the database and the sample taken of each. It
should be noted, that since many businesses are not registered with AISA, the numbers in the database
were assumed to be representative, although not exhaustive or encompassing of every business in
Afghanistan. The AISA database also did not categorize trade and distribution companies, although it
is widely considered to be a major sector Afghanistan. Overall, given the number and breadth of
businesses surveyed across the major urban centers, the results can be reasonably extrapolated to the
business landscape of Afghanistan.
Randomization
In each city, team leaders were given overall daily targets for business sectors. Enumerators were then
deployed throughout the city, and asked to randomly select businesses through random walk method
in a pre-assigned area of that city. Only businesses meeting the criteria of 30 employees or $250,000
start-up capital were used. Once targets for each sector were achieved, enumerators were asked to skip
businesses in that sector. In some cases, enumerators surveyed companies that did not meet one of
these criteria; those were excluded from the data herein. Each day different sections of the city were
assigned to different enumerators. These city sections were based on a grid of printed maps.
Afghanistan Information Management Services (AIMS) maps were used for process purposes.
Survey sample origination

Avail.
Lists
Target
Sample
Actual
Sample
Agribusiness
138
15
16
Construction
1,274
80
83
654
50
53
Sarafi
Manufacturing
Real estate
Retail
Telecom
Trade/Distr.
Transport
Other
104
25
27
75
72
35
12
10
Bank
10
Total
2,219
269
285

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

14%
14%
12%
10%
10%
6%
2%
10%
9%
7%
8%
4%
13%
11% 12%
4% 4%
1%
2%
0%

3%
Data analysis and reporting

After collection of the field data, two full-time data entry clerks entered the data into a database created
in Standard Package of Statistical Services (SPSS). The data entry process was consistently followed,
checked and tracked for preciseness, consistency and completeness. The full SPSS database may be
available for analysis by USAID. The analysis and reporting took approximately four days to complete.
Data Quality
Maintaining high quality of the data was imperative, including ensuring data reliability and reducing or
eliminating survey bias to the extent possible. Necessary measures were taken at different stages of the
survey as described below.
Trained surveyors: Educated and well-qualified personnel were hired to take part in the survey. 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.
Training workshop: A two-day workshop to explain the designed data collection tool to these
qualified surveyors was delivered. Various practical sessions were conducted within the workshop to
practically exhibit/display the interview between a surveyor and a business owner. Necessary feedback
was given by the trainer and oversight of the workshop was provided by senior management.
Business person contact number: Each surveyor provided the contact number of the person
interviewed by the surveyors. These contact numbers were regularly called, and the Project Team Leader
asked if a surveyor had been to the business, and to cross check some of the information on the
questionnaire on the telephone.
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. In case of any
inaccuracy, both the business person and the surveyors were contacted to get the right information.
Trained data-entry clerks: Two full-time data entry clerks were hired to enter the received
information into the database designed in SPSS. These data entry clerks participated in the training
workshop and were closely supervised by the Project Team Leader during the data entry phase.
Surveyed businesses profile

Employees
Turnover ($)
Count
285
278
Mean
62
3,549,108
Median
20
290,000
Mode
10
100,000
Std. Dev.
151
21,505,137
Minimum
20,000
Maximum
1400
343,000,000

I. Current Capital Market Activities

Given the level of understanding of financing systems in Afghanistan, we begin our narrative with a brief
and simple introduction to capital markets. A capital market is a market for securities (debt or equity),
where business enterprises (companies) and governments can raise long-term funds. It is defined as a
market in which money is provided for periods longer than a year.
Without capital markets, borrowers would have difficulty finding lenders themselves. Intermediaries
such as banks help in this process. Banks take deposits from those who have money to save. They can
then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend
money in the form of loans and mortgages.
More complex transactions than a simple bank deposit require markets where lenders and their agents
can meet borrowers and their agents, and where existing borrowing or lending commitments can be
sold on to other parties. A good example of a capital market is a stock exchange. A company can raise
money by selling shares to investors and its existing shares can be bought or sold.
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. Funds in a capital market can be sourced from domestic as well as international sources.
Afghanistan has witnessed a growth of financing activities to a large extent dependant on foreign capital
inflows. Having said that, the Government is making efforts to strengthen and develop domestic capital
markets.
Thus, capital markets typically refer to primary and secondary markets for debt and equity securities. As
there are currently no formal equity markets in Afghanistan, the definition of capital markets is
expanded for purposes of this assessment to include all activities conducted by businesses to raise longterm funds.
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, 2010.
10
Level of activity in current capital markets

The survey found strong variations across sectors in capital markets activities. Telecommunications and
banks relied exclusively on external capital in the form of formal shareholders. At the other end of the
spectrum were sarafi (money changers) and real estate agents, who relied entirely on their own capital.
Most other industries have businesses who relied on both their own and external capital. Nearly all
industries relied on external capital far less than self capital.
Initial capital investment by sector ($m)

Retailer
1.074
Real estate
1.129
Trade/ Distribution
1.576
Agriculture
1.582
Transportation
Of those borrowing money for their business, the largest sources that were used for capital were friends
and family. Analysis by province shows that Herat and Kabul had the most reliance on external capital
from friends and family. 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. All
businesses interviewed in Kunduz relied entirely on their own capital.
Further analysis by sector shows that construction companies, retailers, trade/distribution companies,
transportation and other categories showed the highest reliance on friends and family. Notably, sarafi,
real estate, telecommunications and banks did not rely at all on friends or family for capital. There is
some indication that even larger banks relied heavily on friends and family for capital investment, with
the only difference being that bank investors were organized into formal legal shareholders.
Overall, only 4.9% of all businesses relied on banks for some type of capital.
100% of
telecommunications companies relied on banks for some of its capital, 33% of banks did the same.
Other areas using banks included agriculture, construction, manufacturing, and trade/distribution.
In looking at those companies who used banks for capital, unsurprisingly, their capital investments were
much larger than the average capital investment of the survey. On average, people invested a total of
$2,607,504. However, those borrowing from banks invested an average of $10.4 million, illustrating the
use of the banking sector by larger companies.
Sarafi, or money changers, are part of the capital markets in Afghanistan, although largely unregulated.
They are responsible for changing currencies and moving large sums of capital around Afghanistan. In
the survey, approximately 1% of people had borrowed money from sarafi. Smaller businesses may be
borrowing money from sarafi, however, this survey focused on larger businesses. Indeed, most of the
businesses borrowing from sarafi, borrowed relatively small sums from them, although they did indicate
that they planned and would like to borrow again from sarafi in the future.
2.024
Sarafi
2.200
Manufacturing
2.639
Construction
2.780
Other
3.522
0
1
2
3
Source of initial capital investment ($m)

Donors
$0.06
Sarafi
$1.19
Family
$2.18
Friends
$4.41
Banks
$14.81
Others
$54.05
Self
$148.17
$0
$50
$100
$150
One outlier was removed a $400m investment by a

bank into a bank. Source: Survey for Afghanistan
Capital Markets Assessment, January 2010.
$200
11
Significance in raising capital for private enterprise

Overall, business found it important to raise additional funds for their businesses, with a cumulative
93% of businesses indicating it was either very important or important to do so. This finding, while
not surprising, is particularly important to note that businesses in Afghanistan clearly understand the
significance in obtaining external capital for their private enterprises. The answers to this question
remained fairly consistent across provinces and sectors.
Raising additional capital was considered relatively challenging, with a cumulative 78% citing it as very
difficult or difficult to raise funds for their business. However, 22% of businesses indicated it was
either less difficult or not difficult to raise funds for their business. Those indicating it was less
difficult or not difficult came from all different sectors and capital investment ranges, although the
average investment was higher than the overall average. The majority of businesses citing ease in raising
money were from Balkh province. Those in Kunduz and Nangarhar reported the most difficulty in
raising capital. People in Kandahar, Herat and Kabul were mixed, with some businesses reporting
difficulties, with others reporting ease.
Cross-checking this with the Investment Climate Survey, we found that the ICS reported 37% of
businesses interviewed had major or very severe obstacles in accessing finance, compared to 78% of the
businesses we interviewed. Since the ICS surveyed all ranges of businesses while this survey focused on
large businesses only, we can deduct that larger businesses face more problems with financing. This may
be because larger businesses are looking for larger capital amounts and longer payback times. The 16
microfinance institutions (MFIs) dwarf the 5 enterprise financing options listed in the next section,
indicating the possibility of lower availability of higher amounts of financing. Furthermore, a one year
loan is considered a long term loan in Afghanistan and any loans over a year are fairly rare.
Businesses were asked how much they thought they could expand their business if they had access to
formal capital markets. Only 12% said they could not expand their business further, 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. Of the 66%, a striking 25% believe they could double their business and an
additional 10% believed they could more than double their business.
These three interview results make a case for the development of capital markets in Afghanistan, 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.
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
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

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%+

12
Economics of current capital markets

The economics of current capital markets vary drastically by the type of product being used. However,
some overarching themes can be drawn from the survey responses. Interviews quoted five main sources
of enterprise financing currently in Afghanistan:
1) Afghanistan International Bank ($50,000 to $300,000)
2) Afghanistan Rural Finance Center ($20,000 to $3m)
3) International Finance Corporation (25%-50% of venture)
4) Overseas Private Investment Corporation ($500,000 to $250m)
5) Afghan Growth Finance ($100,000 to $2m)
The eligibility requirements are very narrow, including prerequisites like high collateral, rural only, and
25% U.S. equity. With this is mind, 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. Of the 87,
28.7% claimed their external capital was free, 26.4% claimed that it cost them between 1-5% annually
while 17.2% stated they were paying over 20% interest rates. This question is difficult to judge, as the
number of respondents not answering (70%) seems to be more telling than the metrics of those who
answered.
Many businesses did not wish to discuss or disclose penalties for not paying on time. First, 41% of
businesses claimed there is no penalty associated with their type of financing. Considering most
financing is informal and largely from family and friends, this is to be expected. Second, 31% claimed
that the only penalty for not repaying on time is that they will receive no more capital from that source.
17% of businesses interviewed stated that they will be subject to fines and late payment fees mainly
those who borrowed from banks. 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,
sarafi or others.
For settling disputes, 42% of respondents stated that their financial disputes would be handled by a local
tribal shura. Typically, shuras are lunch meetings of village elders, with equal number of representatives
from both sides of the dispute, meant to resolve the issue in a reconciliatory instead of retributive
manner. Technically, all non-court resolutions such as tribal shuras and others are informal and
therefore, it can be said that 59% of the disputes are settled informally. 13% insisted there would never
be any disputes (family, friends) and 16% stated that their disputes would be settled by the payment of
fine penalties only.
Annual cost of capital

35%
30%
25%
20%
15%
10%
5%
0%
28.7%
26.4%
17.2%
13.8%
11.5%
2.3%
Free
1-5%
6-10% 11-15% 16-20% 20%+

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%
50%
How would disputes be settled?

Informal
6%
Other
11%
In court
12%
No disputes
13%
Fines
16%
Shura
42%
0%
20%
40%

60%
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. A
total of 205 of the 285 people (72%) relied exclusively on their own capital. 94.7% of people used at least
some of their own capital to start their business. This held true across regions and all sectors. The
average investment by self was $2,133,682. The mode for this category was $250,000. The only notable
exception to the rule were the banks, who were organized into a more formal group called
shareholders, although in most cases these shareholders were in fact made up of self, family and
friends.
It should also be noted that, while they were available as answers on the survey, nobody reported
accessing capital from elders and only one from a donor. In addition, only 14 (4.9%) of surveyed
businesses had sourced any capital from a bank. Including sarafi financial institutional sources increased
this number to 17 (6%).
Overall, the survey found that 28% of people relied on capital other than themselves (external capital).
The degree to which people relied on external capital, however, varied by province and by sector.
Businesses in Herat relied on external capital the most, 58% of businesses reported such reliance. About
one-third of businesses in Balkh and Kabul relied on external capital, while 25% of businesses in
Kandahar and 15% in Nangarhar reported relying on external capital. Notably, n0 businesses in Kunduz
reported reliance on any capital other than self.
Cross referencing this information with the Investment Climate Survey (ICS) conducted by the World
Bank and DFID in 2008, the data is highly similar. 12% state to receive capital from friends (vs. 14.4%),
and 3% from banks (vs. 4.9%). The minor differences can be accounted for because the ICS survey asked
where working capital was sourced, while this survey asked for initial capital sources. If an external loan
was taken, 68% listed family and friends inside Afghanistan as their source. Taking 94.7% self funded
capital sources out of our survey, we are left with 29% family and 48% friends, or a combined 77% from
family and friends. In a survey conducted in November among 500 heads of SMEs nationwide, 70%
stated that it was difficult to borrow money, 83% stated that they started the business with family
money, and 59% said they needed additional credit to keep their business going.
In conclusion, the vast majority of businesses in Afghanistan rely exclusively on their own capital (72%).
Those that do manage to obtain external financing are served by mainly family and friends (23.2%).
Banks make up only a fraction (4.9%) of the capital market activities, and sarafis half that (2.1%).
Sarafi Family
2.1%
8.8%
Bank
4.9%
Friends
14.4%
Self
94.7%
Multiple selections allowed in responses. Source:
Survey for Afghanistan Capital Markets Assessment,
January 2010.
External working capital

15%
12%
10%
10%
3%
5%
1%
0%
Friends Suppliers
Banks
Others
Source: Investment Climate Survey, World Bank and

DFID, 2008.
Source of external loans Local

Traders
24%
Family &
friends
outside
AF
2%
land
owner,
3%
Family &
friends
inside AF
68%
Source: National Risk and Vulnerability Assessment,

Central Statistics Organization, 2007/8.
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. 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, before moving on analysis in Part II.
Food purchases
Business investment
Health emergency
Home improvement
Home construction
Wedding
Other
Funeral
Land purchase
Agricultural inputs
First, according to the National Risk and Vulnerability Assessment by the Central Statistics
Organization, 45% of loans are used for food purchases. This survey is concerned with only the 12% that
use loans for business investments and only for large businesses at that. This eliminates 88% of the
loans that are made nationally.
Second, the businesses we interviewed had a strong aversion to interest based debt, as shown by their
preference for Sharia-compliant based products. The ICS confirms this finding, indicating that of those
who needed financing, Islam was far and away the number one reason they did not apply for a loan.
High interest rates came in second.
Third, while we interviewed businesses across nearly every sector, the typical types of private firms
needed financing the most were also in the capital intensive sectors: construction, manufacturing and
sarafi. These types of firms were the hungriest for capital. However this did not match the 2006
outstanding loans portfolio of the country, where transport, agriculture and energy/mining held the top
three loan sector types. This may indicate a mismatch between the sectors needing capital and those
that the banks are willing to finance.
Thus, we begin to profile the businesses that currently access and use these highly informal, severely
undeveloped capital markets in Afghanistan.
45%
12%
10%
9%
9%
6%
5%
3%
1%
1%
0%
20%
40%
60%
Source: National Risk and Vulnerability Assessment,
Central Statistics Organization, 2007/8.
Active outstanding loans ($m)

Transport
Agriculture
Energy & Mining
Healthcare
Education
Water Supply
Governance
Urban Development
Global IT
Financial
223.2
223
135
89.6
75
40
35.4
25
22
5
0
100
200
300
Total outstanding loans were $873.2m.

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%

DFID, 2008.
30%
15
II. 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,
and what their top three financing priorities are, if they were available. The survey gave a range of
options: qarzi sood (loan with interest), qarzi hasana (interest free loan), ijara (an Islamic lease
agreement), murabaha (when something is purchased at one price, and then sold to another at a higher
price), musharaka (equity partnership), stock exchange, no need and other. Instead of lending
money and earning interest, ijarah allows the lender to earn profits by charging rentals on an asset
leased to the customer.
More than 75% of businesses identified qarzi hasana as their first choice for financing. Musharaka was
identified by 12% as their first priority, and murabaha by 6%. For second choice, the highest rated
options were musharaka (31%), ijara (20%) and murabaha (23%). Third-rated services were again
musharaka (32%), ijara (20%) and murabaha (13%). After taking aside everyones favorite interest free
loans, the overwhelming dominance of equity based financing over debt is undeniable.
For those companies already borrowing from formal financial institutions (banks), the results trended
similarly to overall averages, but with a slightly higher preference for qarzi sood financing. Since
financing from banks in Afghanistan is almost wholly qarzi sood, it is unsurprising that existing bank
customers would choose this type of financial product.
These results are further emphasized when the survey asked how much capital the business would raise
from each of the above financing instruments. Collectively, when converted to U.S. dollars, the
businesses wished to raise $714.4m via qarzi hasana, or an average of $2.5m per business. This is
indicative of the vast financing needs of businesses in Afghanistan. Of the remaining choices, musharaka
stole the show with a whopping $40.44m, compared to between $4-5m for the other Islamic products.
Qarzi sood came in last again at a mere $2m. The market wants equity financing products and not debt.
While a stock exchange was included as one of the options, most businesses did not understand the
term and were much more familiar with the Arabic terms for the various financing products. In essence,
equity instruments on a stock exchange are musharakat products on a larger, more public scale and is
typically considered wholly Islamic.
Finally, in a separate question, businesses were asked how much money they needed in the next five
years for their business. $1.908 billion was the cumulative response of the 285 businesses, indicating a
very high demand for capital.
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%. Source: Survey for Afghanistan
Capital Markets Assessment, January 2010.
How much capital ($m) would you

raise from each source?
Others
$4.09
Stock Exchange
$5.32
Musharaka
$40.44
Mudaraba
$4.74
Ijara
$4.74
Qarzi Sood
$2.00
$0
$20
$40
$60
Interviewed businesses claimed they would raise

$714.4m if offered Qarzi Hassana (interest free loan).
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. First, are the largest and most well-known enterprises, including the banks,
telecommunications operators, beverage bottlers, and airliners. Second are the up and coming large
businesses, mainly in construction, manufacturing and financial services. Finally, there are about 75
state-owned enterprises that could be privatized through formal capital markets. It is particularly
important to note that this only covers existing businesses that could be candidates, 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.
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, instead of full legal names. Source: Afghanistan Financial Services, 2010.
Sampling of businesses that use formal financing

Province
No. 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
1,010,000
15,000,000
500,000
500,000
50%
3%
Debt 6-10%
Debt 16-20%
35
30
Manufacturing
Other
260,000
300,000
260,000
150,000
100%
50%
Debt 6-10%
Undisclosed
Balkh
40
Construction
350,000
80,000
23%
Debt 1-5%
Kabul
20
Construction
12,000,000
10,000,000
83%
Debt 11-15%
35
Construction
2,580,000
40,000
2%
Debt 1-5%
30
Manufacturing
280,000
30,000
11%
Debt 6-10%
35
Trade/ Distribution
4,080,000
60,000
1%
Debt 6-10%
Source: Survey for Afghanistan Capital Markets Assessment, January 2010.
Business type
Cost of capital
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.
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
18
Potential investor base for a capital market

The term businessman is translated to Dari and Pashtu as tujar, literally meaning trader. The concept
of buying low and selling high is deep within the entrepreneurial spirit of nearly every Afghan. The
foreign exchange markets are highly active in Afghanistan, with sarafi and hawala dealers on nearly
every corner. The middle of the market place in Saraye Shahzadah, Kabul feels very similar to the floors
of the New York Stock Exchange with traders yelling out prices for a constant litany of orders. With a
high savings rate and culture of trading, Afghanistan seems to be fertile grounds for a formal capital
markets and plenty of ready investors.
Overall, 45% of business owners indicated that they would be interested in investing in external
businesses, given the opportunity through a formalized market. Many cautioned this willingness with
proper controls, stable political landscape and transparent legal foundation/framework. 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, underlying a
real security concern for wealthy businesspeople in Afghanistan. In Nangarhar, anecdotal reports
indicate that people lack the amount of capital to invest in others businesses.
In order to properly execute a target, a well laid plan can ease of the burden a whole lot. 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, a proper business plan which was the dominant of all the factors
with a rating of 43%, followed up by cost/benefit analysis with 30%,which is normal business thinking
because it is human nature to weigh most of the things according to what cost and benefits are there,
third factor is personal connection at 14% indicating that close connections can work as a medium for
most businesses to capture investors, 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. It can also be put up to the number of businesses that gets audited by proper recognized
accountancy firms, which only makes up 2% of all the businesses that are operating in Afghanistan.
Factors other than the ones indicated above makes up only 3% of the total ratings which may include
references by others, personal relationships and reputation of the business etc.
Would you invest in someone else's

business?
60%
55%
45%
40%
20%
0%
Yes
No
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%
How much would you invest in a formal

capital market?
60%
50%
40%
30%
20%
10%
0%
56.9%
27.6%
12.2%
3.3%
$5K-10K
$10K-25K
$25K-$100K

$100+
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, non bank financial institution, state owned banks and
different other institution operating within the market.
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. 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, but in return the risk is also less as well,
that goes on well with the saying that higher the risk ,higher the return, lower the risk, lower the
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%.The remaining space is filled
up by different other institutions operating on a small scale, i.e. Self finance
Who issued the loan

State
owned
banks
14%
Other
12%
Private
banks
45%
Non-bank
financial
institution
29%
DFID, 2008.
The demand for any product in a market depends, upon the amount of supply there is in the market.
But the more important aspect is the existence of proper and efficient market, which could cater for the
needs of different businesses.
The situation is the same for debt finance markets in Afghanistan. The lack of financial institution which
specializes in the debt products is one of the main concerns. There are no major debt finance products
available in the market, which could benefit large enterprises. 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, improve the economy. But the rules, regulation, cost and Islamic point
of view about interest laden debt surrounding the provision of the debt eradicates its effectiveness and
popularity among the enterprises. Another factor could be the criterion for creditworthiness of the
businesses; 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.
According to the survey concentration of loans taken out or applied for vary significantly according to
different sectors of the economy. The highest concentration relates to commerce that is almost 90% of
the whole sector, and the rest shared between mortgage, consumer, agriculture and others collectively.
This highlights the business preferences of the enterprises. 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.
Loan Concentration by Sector

Consumer
2.17%
Mortgage
2.28%
Other
6.74%
Agri.
0.14%
Commerce
88.67%
Source: Central Bank Strategy Plan 2009-2014, Da

Afghanistan Bank, 2009.
20
III. 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. It needs an increased
regulatory and enforcement capacity aimed at developing a fairer and more efficient capital market and
facilitating market innovation. 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.
In addition to these infrastructural obstacles, Afghanistan has far from completed its reform of the legal
and regulatory environment for investment. The government is in the process of transforming the entire
legal and regulatory environment, including drafting a contract law, arbitration law, company law and
partnership law, all of which are currently absent, inadequate, or require extensive revision. These laws are
expected to be in place by 2010. It may be unrealistic to expect many investors, especially foreign investors,
to express interest in SOEs before these laws are in place. Source: Putting the Cart Before the Horse?
Privatization and Economic Reform, Afghanistan Research and Evaluation Unit, November 2006.
16.4%
15.1%
15%
11.5%
9.4%
10%
8.0%
5%
0%
1383 1384 1385 1386 1387 1388 1389 1390
Source: Central Statistics Organization, 1383-1390.
Contributions to GDP growth

Services
Industry
Agriculture
20%
15%
In tandem to the development of institutions and regulatory infrastructure, capital market

intermediation services should be developed which would include managed investment funds. This will
consist broadly of funds managed by provident and pension funds, unit trust management companies,
asset management companies, insurance companies and others.
9.0% 9.0%
6.1%
10%
5%
0%
-5%
7.8%
1.3%
5.2%
1382
3.1%
5.7%
6.3%
6.1%
-3.9%
1383
5.4%
5.8%
7.3%
1384
-8.6%
1385
-10%
The government should introduce various measures to enhance market infrastructure and put in place
an appropriate regulatory framework. These would include the above mentioned and could add on to
the establishment of a credit rating agency, guidelines on debt securities issues, bond information
dissemination system etc. DAB may perhaps try to develop a market infrastructure for debt securities,
improving the trading, clearing, settlement and depository systems. State-of-the-art Computerized
trading system, electronic clearing and settlement, and central depository systems are crucial to provide
a fair, transparent, efficient and cost effective market for the investors.
The market infrastructure for the equity market needs to be developed, but transparency, disclosure,
and corporate governance need to be improved. In particular, speedy and frequent disclosure of
appropriate information is essential. In addition, the details of asset value and off-balance-sheet items
should also be disclosed.
Since disclosure practices and corporate governance in Afghanistan do not conform to international
standards, legal enforcement needs improvement. Most investors are focused on short-term placements,
Per capita GDP

$500
$400
$300
$200
$100
$0
$199
1383
$252
1384
$300
1385
$335
1386
$383
1387
$433
$433
1388
1389
21
making it difficult to enhance corporate governance. The public has to be encouraged to make longterm investments. An increase in dividend payments could be considered. Dividends are subject to
withholding tax. Due to the withholding tax, companies, particularly major shareholders, are reluctant
to pay high dividends. They prefer to use the profit for further expansion, which leads to an increase in
asset values (capital gains). In addition, they tend to maximize their returns by injecting their family
assets into the company. If they were exempted from the tax on dividends, companies would increase
their payout ratios and investors would be encouraged to hold shares for longer periods. In this case,
shareholders must pay more attention to the management of companies in order to receive better
dividends. This could, in turn, improve corporate governance. Lowering of the effective tax rates,
exemptions from Business Receipt Tax (BRT) and capital gains tax would be very commendable steps.
This move will likely help in boosting the confidence of the long term investors.
Overwhelmingly, growth is strongly influenced by infrastructure to support information gathering and
by enforcing business dealings based on such information. Highest standards of accounting, disclosure
and transparency are prerequisites for efficient working of the capital market. Thus, rotation of auditors
by companies after every five years, 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.
Business registration
AISA registration is the official business registration in Afghanistan, and by law, all businesses are
required to register with the agency. A total of 71% of surveyed businesses reported having AISA
registration whereas 29% reported that they did not have AISA registration. While many small
businesses cannot afford the fee ($180), these results indicate that even large businesses do not register
with the government.
Business registration
Not
registered
19%
AISA
31%
Other
3%
Municip.
22%
Other Gov
Ministries
17%
Ministry of
Commerce
20%
DFID, 2008.
New buinesses registered by AISA

Domestic
Foreign
3000
380
2000
1000
101
249
1474
1137
2003
2004
300
171
2123
1746
1925
2005
2006
2007
Source: Registration Database Department,

Afghanistan Investment Support Agency, 2003-8.
Survey respondents with AISA license

This indicates a large share of the market across sectors is unregistered, unregulated and not included in
official statistics. Across the country, a total of 29% of surveyed businesses were unregistered, with the
highest number (64%) in Nangarhar, and the lowest numbers in Kandahar (0%) and Kabul (10%). In
Kandahar, the area of movement for the field teams was restricted to the city center due to security,
which likely skewed the results, as most businesses within the city centers are under governmental
authority, and it is more difficult to operate in these areas without registration.
Balkh and Herat
trended with national average, and Kunduz was slightly higher than the national average. It should also
be highlighted here, that due to the recent implementation of the Afghan tax law by the Ministry of
Finance, some businesses may have been reluctant to share their AISA registration numbers, and simply
omitted this information during their interview.
No
Yes
Kandahar
Kabul
0%
100%
11%
89%
Mazar
36%
Herat
38%
Kunduz
Jalalabad
64%
63%
47%
53%
64%
36%
0%
50%
100%
150%
22
Level of accounting and auditing that exists

A total of 70% of all companies indicated that they had audited financial records. Of those who had
audited records, most companies relied on internal audits (40%), then government audits (28%). Only
2.1% of firms relied on international audit companies; these were the banks and telecommunications
companies. It is notable that all international audits were conducted by KPMG Afghanistan.
A weak accounting industry presents a number of key barriers to Afghan businesses, 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, followed by the current actions
being taken to remedy them.
How do you keep financial records?

Other, 2%
Software
19%
None, 1%
Excel
31%
Paper 65%

Are your financial records audited?

Govt
100%
Self
Auditor
2.10%
No accounting regulatory body in Afghanistan

At the present time, there is a limited (albeit nascent) accounting and audit profession in
Afghanistan. The number of resident qualified Certified or Chartered Accountants is estimated at
less than ten in Kabul, a city of four million people and the Capital of Afghanistan.
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.
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, except for Banks.
Not for profit organizations and NGOs prepare financial reports in accordance with Donors
requirements rather than any local requirements/standards.
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.
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.
The curriculum followed in the Universities of Afghanistan does not extend to teaching
International Financial Reporting Standards (IFRS) and International Standards on Auditing
(ISA).
50%
40%
29.80%
28.10%
No
Yes
0%

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
23
Due to the abovementioned issues, the accountants of Afghanistan have stepped up and joined hands to
form the Afghanistan Association of Professional Accountants (AAPA). This Association is registered
with the Government of Afghanistan and has the legal status to represent the accounting profession.
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.
Facilitate discussions on noted critical accounting and auditing problems faced by professionals.
Assist the Government in developing the law of external audit requirements.
Support the Afghanistan Universities and other training providers in curriculum development in
accounting, 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.
As a result, local entities will be advised to prepare, 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. The accounting standards
committee will develop accounting standards to be implemented by all business entities. Clarification
on standards will speed up compliance. 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.
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.
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. MoF and several other relevant
influential Governmental authorities (Ministry of Justice, Ministry of Higher Education, Audit and
Control Office, Central Bank, Member of the Parliament, Afghanistan Chamber of Commerce) will be
member of the Standards Committee.
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. As it will
be providing support to the current accounting students of ACCA, it is expected that it will be supported
by ACCA in terms of resources and professional guidelines. ACCA has already shared its discussion
paper with AAPA for supporting development in Afghanistan which addresses accounting areas such
as (Accounting Legislation, Structure and Governance, Audit Quality Review, Education and Training,
Adopting IFRS, and more.)
Beneficiaries of reform
Businesses: This will improve investment in
Afghanistan and investors confidence in
accountability by demonstrating a successful and
effective accounting society. As the standards
are in place this is expected to promote cooperation between government, the accountancy
profession, the international financial
institutions, regulators, standard setters, capital
providers and issuers. 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.
Government: The standards committee of AAPA
will assist the Government of Afghanistan to
develop, the accounting curriculum, tax law and
audit regulations in manner that is more
appropriate and applicable in the country. Also
the standards committee will assist the GoA to
develop the financial reporting requirements for
State Owned Enterprises (SOEs).
Civil Society: Well trained and certified Afghan
accountants will be able to replace international
accountants. As such, in increasing the desire
for greater accountability and transparency, the
cost of auditing and accountancy will more
effectively align with local ability to pay. This is
also expected to promote the importance of
accountancy and professional accountants in
general and to influence ways of thinking about
professional practice.
International Community: The result and
outcomes will contribute to strategic objectives
of international community, regulated society,
building capacity, increased incomes through
economic growth, progress toward sustainability.
Source: Afghanistan Financial Services, 2010.
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. should be reduced. In effect, having more qualified local
accountants/auditors that understand the current financial reporting environment should facilitate ease
of communication with various government entities.
Avoidance or at least reduced corruption: Reporting of financial accounts along international
accountancy standards will increase transparency of accounts and could reduce corruption. 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.
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.
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. As such, the local cost structure, for developing international caliber financial
reports, will more readily align with the local labor pool.
Businesses with a bank account

(by sector)
Construction
80%
Retailers
49%
Manufacturing
45%
Other Services
44%
Professional
32%
0%
50%
100%
DFID, 2008.
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, locally trained accountants and auditors. 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. As such, the local cost structure, for developing international caliber financial
reports, will more readily align with the local labor pool.
Easier access to local and international markets, 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.
50%
Source: Investment Climate Survey Full Report,

World Bank and DFID, 2008.
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, 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.
100%
Afghanistan
11%
2%
0%
5%
10%
15%
Source: Investment Climate Survey Full Report,
World Bank and DFID, 2008.
25
Fiscal, legal and regulatory infrastructure

The 2005 Private Investment Law specifically prohibits discrimination against foreign investors.
Investments can be 100% foreign owned; foreign investors are not required to secure an Afghan partner.
Private investors have the right to transfer their capital and profits out of Afghanistan. Foreign and
domestic investors enjoy equal treatment, including under ongoing privatization programs. Foreigners
may not own real estate, but they may lease it for periods up to 99 years.
The Government has adopted progressive policies to foster trade and investment, including currency
reform, rationalized customs tariffs and a simplified tax code. 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 Private Investment Law states that an investor may freely transfer investment dividends or
proceeds from a sale of an approved enterprise abroad. Furthermore, Afghanistan does not maintain a
dual exchange rate regime, currency controls, capital controls, or any other restrictions on the free flow
of funds abroad.
Gross Foreign Exchange Reserves

($b)
$4
$3
$3
$2
$2
$1
$1
$0
$2.900
$1.283
$0.425
$1.662
$2.064
$0.820
1382 1383 1384 1385 1386 1387

Source: Central Bank Strategic Plan 2009-2014, Da
Nominal exchange rate (AF/$)

60
Da Afghanistan Bank has been particularly successful in its fiscal policies - albeit in part by the opium
and donor inflows into the country. Gross foreign exchange reserves have steadily increased year on
year, and inflation has been controlled from over 50% to under 20%. In particular, value of the Afghani
has been very constant at around 50 Afghani to the dollar since 2003. The international financial crisis
left Afghanistan largely unscathed.
40
20
0
1381
1382
1383
1384
1385
1386
Source: Central Statistics Office, 1381-1386.
While the fiscal and regulatory infrastructure is relatively favorable for supporting capital markets, the
legal court system is completely broken. The average civil case takes three years to go through the
extremely corrupt courts, and enforcement of contracts or government regulations is seen as very weak.
In addition to insecurity, poor land tenure, and corruption, the high level of uncertainty and risk facing
investors in Afghanistan comes from the absence of a clear legal framework. In Afghanistan's uncertain
business environment, individual firms experience many benefits from having close ties to influential
commanders. The formal court system barely functions and most people rely on informal dispute
resolution mechanisms. Despite ongoing efforts at legal reform, the legislative process is slow and a
number of important laws have been languishing, awaiting parliamentary approval, final drafting, or
implementation. Above all, the government must be consistent and predictable. Source: The Investment
Climate in Afghanistan, World Bank, 2008.
Consumer Price Index & Inflation

CPI
Inflation
60%
40%
20%
0%
-20%
1381 1382 1383 1384 1385 1386 1387
-40%
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.
The proceeding sections reflected analysis of the legal, fiscal, institutional, regulatory infrastructure
conducted by the Afghanistan Financial Services. The last question of the survey questionnaire was open
ended and asked the 285 businesses for their suggestions on improving capital markets. Several themes
came up in all provinces. 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).
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.
Taxes: In part due to the fact that the Government of Afghanistan has recently begun enforcing the tax
law in Afghanistan, many business owners said that they cannot afford high taxes, and that the
government ought to encourage business investment by suspending taxes on companies that provide
jobs and meaningful contributions to the economy.
External Budget
28%
40%
34%
21%
8%
10%
11%
1382
1383
1384
10%
22%
10%
1385
1386
Official exports growth rate

112.0%
120%
100%
80%
60% 43.6%
25.7%
7.9%
26.4%
40%
22.1%
13.8%
20.1%
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, with business owners requesting expanded electricity or alternative
energy investments. These requests were particularly prevalent in Nangarhar.
Security: Security was cited as a concern by businesses, particularly in Kandahar and Kabul. Some
businesses noted that the volatile political landscape prevented them from investing further sums of
money into Afghanistan, and didnt allow them to make long-term capital investment decisions in fixed
assets.
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. Banks in particular mentioned that a transparent and cohesive legal
foundation was necessary for improvements in the banking sector, as well as any other formal capital
sectors developed in the future.
Source: Export Promotion Agency of Afghanistan, 2009.
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, World Bank, 2008.
27
IV. 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, although the effect on the central banks own balance sheet differs. When DAB sells a
capital note to a banking organization, it debits the banks current account at DAB and credits capital
notes (a liability of DAB). The monetary base declines. When a central bank sells a government security to
a bank, it debits the banks current account at DAB and credits its holdings of government securities (an
asset of that central bank). The monetary base declines in this instance, too. These declines in the
monetary base promote declines in the broader monetary aggregates, and in the supply of credit in the
economy. Source: Da Afghanistan Bank Capital Notes Regulation, 2006
Capital Notes are a discount security with fixed maturity which is sold in auction every Tuesday. If funds
are needed before maturity, capital notes can be used as collateral for DAB Credit Facility with +/- 350
basis point premium over last 28 day Note auction rate. As a liability of DAB there is negligible default
risk and settlement risk.
The weekly blind Dutch auction for capital notes in primary market is particularly active, with a 28-day
note and 182-day note. Since 2007, state-owned Millie Bank has purchased the most into 128-day notes
($112.7m) while Afghanistan International Bank leads the way into purchasing 28-day notes, running off
the charts ($405m). On 16 December 2008, there were Afs 3.3 billion in outstanding 28-day notes
(13.62%) and Afs 5.4 billion of 182-day Notes (14.41%). By January 2010, 152 auctions had been conducted
for both the 28-day note and 182 day-note, for a total issuance of 302 securities.
A secondary market is a key driver of liquidity in capital markets. It broadens the range of available
assets for investors and provides opportunities for more efficient liquidity management for financial and
non-financial firms. By providing more opportunities for more frequent trading, the secondary market
improves the price discovery process for Capital Notes. Finally, it can be used by institutional investors
(insurance and pension funds) and catalyze the development of other fixed-income securities.
A robust electronic platform (www.afx.af) for primary and secondary market trading of capital notes was
launched in August 2009, allowing the 17 licensed banks to purchase capital notes online and then sell to
their clients, other banks, or back to DAB. Since the interest rates on capital notes issued by Da
Afghanistan Bank have fell from over 15% to less than 5% in just one year. In the six months after its
launch, AFX had served 3055 logins over 19 auctions. The same multi-lingual online system can also
handle other types of debt instruments as well as equities.
DAB capital notes auctions won ($m)

182-day
28-day
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, Da

Afghanistan Bank, March 2007-2009.
DAB capital notes purchased ($m)*

182-day
28-day

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
0.0
0.5
27.1
3.0
14.0
0.0
4.0
131.1
65.8
112.7
37.5
123.7
2.2
77.5
2.5
66.4
0.6
3.0
17.3
20.4
10.0
72.1
15.4
79.5
0.7
1.1
0.0
5.0
0
100
200
*Afghanistan International Bank was an outlier,
having purchased $405m in 28 day notes and $83.7m
in 182 day notes. Source: Market Operations
Department, Da Afghanistan Bank, March 2007-2009.
28
Expanding the government securities market

Debt includes financing from banks, specialized institutions (domestic and international). Other than
getting financing from financial institutions, funds can be raised from investors from the capital market
by issuing different kinds of securities, including bonds. With no entities acting as financial
intermediaries, a special purpose vehicle (SPV) or a Funding Company that protects the rights of the
investors must be created. Types of securities that can be used to raise funds from the capital market can
either be secured or unsecured. The former type of securities would be asset backed, and investors
would examine the intrinsic risks of the assets in making investment decisions. For unsecured securities,
investors would analyze the inherent risks of the sponsors or the project fundamentals.
The regulatory setup of the debt market in Afghanistan needs adequate support from the Central bank
and MoF. With the realization to have a single streamlined regulatory body to govern and monitor the
debt markets, a Securities Commission Act needs to be developed and a Securities Commission to be
established. The Securities Commissions responsibility will be to act as a single regulatory body to
encourage the development of the debt and overall capital markets. Other key measures would include:
Create public awareness on government securities
Measures to develop market liquidity in bond market
Market access liberalized for intermediaries, 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, direct lending/borrowing and liquidity requirements.
Introduction of open market operations and principle dealer such as selected commercial banks.
The principal dealers will be required to underwrite and make markets for government bonds.
Making sure that the borrowing of bonds are against cash collateral. 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

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. Given the limitations of the
banking sector, the corporate will need to turn to the debt market for their funding needs. Further
enhancement of market depth and liquidity by way of listing of more primary issues, promotion of the
secondary market in debt securities and strengthening of regulations and their enforcement would help
mitigate risks.
Sukuk legal instrument is the Arabic name for a financial certificate, but commonly refers to the
Islamic equivalent of bond. Since fixed income, interest bearing bonds are not permissible in Islam,
Sukuk securities are structured to comply with the Islamic law and its investment principles, which
prohibits the charging, or paying of interest.
Private
20
State-owned
Foreign
15
10
4
3
4
5
3
4
1384
1385
5
0
5
3
5
3
1386
1387
Source: Da Afghanistan Bank, 2010.
Licensed banks deposits ($m)

Private
1200
State-owned
Foreign
1000
While conventional bond is a promise to repay a loan, Sukuk constitutes a partial ownership in a debt
(Sukuk Murabaha), asset (Sukuk Ijara) and business (Sukuk Musharaka). These securities tend to be
bought and held and, as a result, a little of the securities enter the secondary market allowing them to be
traded. Furthermore only public Sukuk are able to enter the secondary market, as they are listed on
stock exchanges.
400
200
135
65
194
84
47
51
520
1384
1385
1386
84
652
1387
Licensed bank profitability

Private
Conservative estimates by the Ten-Year Framework and Strategies suggest that over $1.2 trillion of assets
are being managed according to Islamic investment principles. Such principles form part of Shariah,
which is often understood to be Islamic Law. In the Persian Gulf and Asia, 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.
218
74
600
As majority of Afghans are Muslims whose teaching prohibit payment of interest, many are reluctant to
invest in interest-bearing instruments. Motivated primarily by the interest issue, the Government may
focus on Sharia-compliant products. These could be Sukuks, Islamic bonds and Khazanah bonds which
are based on Islamic concept (no coupon or interest payment).
286
800
State-owned
Foreign
1385
1386
150%
101%
100%
50%
65%
23%
0%
Considering the results of the survey, and the assessment of the basic infrastructure components
needed, the potential feasibility for establishing a government Sukuk market in the next three to five
years remains fairly high.
-50%
-17%
-46%
-55%
-100%
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, London, it is estimated that there
are more than 250 Shariah compliant mutual funds, currently managing assets worth about US$11
billion.
The Liquidity Management Centre of Bahrain lists 77 corporate and sovereign sukuk issues worth
US$17.97 billion.
According to the available data, 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.
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.
Enhancement of Shariah screening technologies and market microstructures can further support
this segment of the capital market.
Applying the Dow Jones Islamic Market Index (DJIMI) criteria to local share markets of three
IsDB member countries, 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. Assuming
that these three countries constitute 30% of the stock market capitalization in the IsDB universe,
the annual stock market capitalization meeting the DJIMI criteria in the member countries may
exceed US$300 billion.
Source: Ten-year framework and strategies by Islamic Development Bank, 2010
The same three groups that were listed as candidates for private placement may serve as serious
investors in a formal securities market. In the broader context, 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. Foreign individual or
institutional investors with an appetite for high-risk markets to diversify their portfolios may be another
major investor group. In particular, the 4-5m estimated Afghan diaspora population and their associated
businesses may serve as the largest component of investors in Afghanistan.
Est. diaspora populations (1,000's)

Pakistan
2,500
Iran
1,000
EU
250
Rest of the World
200
Central Asia
200
Gulf
100
USA
100
Canada
45
Austrailia
30
0
500 1,000 1,500 2,000 2,500 3,000
Source: The Role of Diaspora in Private Sector

Development of Afghanistan, Abdul Qadir Fitrat
31
Case Study: Sarafi Haji Abdul Qayoom

The owners and employees of this money exchange business are Haji Qayoom and his 3 sons. They have been in operation for 14 years, with approximately
$25m in annual exchanges last year. Their clients are local shopkeepers and superstores of Mazar-e-Sharif.
History: The Sarafi business was started 14 years ago with $15,000 of capital. Now his daily money exchange is estimated to be $80,000 daily. In Jonbish time
(or 10 years ago), if Haji sold 5,000 dollars he would have a net profit of $100 or (minimum $50). But now all the profit is on cents for example if he sells 5,000
he will have a profit of $2 only. However, the owner is optimistic about future expansion with the help of his three sons. The company is very competitive in
the market, but faces competition from approximately 10 peer Sarafi businesses in the provinces.
Haji said that in this market, there are no businesses that deal with or exchange over $100,000 on daily basis. The ones with more capital started a bank like
Kabul Bank or Afghan United Bank. The businesses of Sarafi were much better before the establishment of the commercial banks. 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, Haji Abdul Qayoom is quite strong; he is head of all Sarafis in
this province. He estimates he is fifth or sixth in terms of actual market share in Balkh.
Weaknesses: Haji Qayooms Sarafi is weak in terms of capital. 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.
Opportunities: According to Haji Qayoom, one of the good opportunities in the current market is the security situation, which he cited as satisfactory.
Threats: Dramatic fluctuation of dollar value is a great challenge in the current market. The global economy has affected the businesses in Balkh and fewer
people are spending money, but Haji believes that in the future its getting better.
Economically: The business is affected by the overall money supply in the market.
Socially: Haji is one of the oldest money exchangers in Balkh and is well-known in the public sphere, and to all money exchangers in the province.
Technologically: His business is operated by paper-based method of accounting and book-keeping, with no reliance on computers or internet.
Management: The business is managed by an owner and three sons, all of whom are University educated. However, there are no formal methods of
management or business organization within the business at this time. However, the owner is very interested in improving his management and operation of
the business.
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. He also gets in contacts with the police departments and courts whenever there is a dispute with his clients. He has business with Kabul bank, Azizi Bank
and Afghan United Bank. He cited good personal relations with these banks, as well as the fact that he deposits capital in each of them. Haji welcomed capital
investment financing (musharaka or mudaraba).
32
Case Study: Maiwand Bank

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

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Afghanistan Capital Markets Assessment

285 of 2,219 qualifying large businesses were surveyed

100% selected Islamic financing in their top three options

Pre-testing the Questionnaire

Selecting and Training Personnel

Source: Survey for Afghanistan Capital Markets

Survey sample origination

Source: Survey for Afghanistan Capital Markets

Year of business establishment

Source: Survey for Afghanistan Capital Markets

Data analysis and reporting

Surveyed businesses profile

Source: Survey for Afghanistan Capital Markets

I. Current Capital Market Activities

Source: Afghanistan Financial Services, 2010.

Level of activity in current capital markets

Initial capital investment by sector ($m)

Source of initial capital investment ($m)

One outlier was removed a $400m investment by a

Significance in raising capital for private enterprise

How important is it to raise capital for

How difficult is it to raise capital for

Source: Survey for Afghanistan Capital Markets

How much could you expand your

Source: Survey for Afghanistan Capital Markets

Economics of current capital markets

Annual cost of capital

6-10% 11-15% 16-20% 20%+

Source: Survey for Afghanistan Capital Markets

Penalties for not paying on time

Seize company property

Fine/late payment fee

How would disputes be settled?

Source: Survey for Afghanistan Capital Markets

Initial capital sources

External working capital

Source: Investment Climate Survey, World Bank and

Source of external loans Local

Source: National Risk and Vulnerability Assessment,

Main use of loans

Active outstanding loans ($m)

Total outstanding loans were $873.2m.

Reason for not applying for a loan

Source: Investment Climate Survey, World Bank and

II. Demand for Capital

What are you top three financing

Qarzi Hassana (interest free loan) was the most popular

How much capital ($m) would you

Interviewed businesses claimed they would raise

Private firms that would be candidates for debt and equity

Punjab National Bank

Afghan United Bank

Afghanistan Intnl Bank

Standard Chartered Bank

Habib Bank Ltd

Brac Afghanistan Bank

National Bank of Pakistan

Sampling of businesses that use formal financing

Shirkati Tawlidi Wa Murgh Dari Amu Ltd

Shirkati Tijarati Waseem "Wafa" LTD

Source: Survey for Afghanistan Capital Markets Assessment, January 2010.

Sampling of State Owned Enterprises in Afghanistan