Contents Executive summary SME Strategy details Priority sectors

Ministry of Commerce & Industry (MOCI)
Afghanistan SME Development Strategy December 16th, 2009

Contents Executive summary SME Strategy details Priority sectors
Constraints to growth Formalization Implementation Appendix Project background Sources 1

Vision for Afghanistan SME Development Strategy
Create a globally competitive and socially responsible SME sector in Afghanistan, in which sustainable and equitable growth is private-sector led and where government functions to help achieve this goal. 2

Goals and objectives of SME Strategy
Create an SME Development Strategy to help drive the economic prosperity of Afghanistan SMEs with under 300 employees make up 80-90% of Afghan businesses and nearly all rural businesses SMEs generate over 50% of GDP and employ ~75% of labor force Nations such as Pakistan or Singapore have shown that SME development is critical for job creation and poverty reduction Define four key roles for government in SME development Policy maker – Develop a national and regional SME policy which will identify priority sectors for SME development and address the major needs of each of those sectors, especially in financing, capacity building, and infrastructure Facilitator – Remove obstacles, bureaucracy and market inefficiencies that inhibit SME growth Regulator – Ensure that the competitive environment for SME growth remains strong, and that the many forces that influence their growth (government, SMEs, trading partners, etc.) contribute to that environment Coordinator – Help align organizations (donors, NGOs, associations, etc.) that are already working to promote SMEs Pursue SME growth, job creation, and formalization Because of high unemployment rate (~40% and growing) job-creation and growth must be the strategy’s primary goal Policies must also reduce costs and increase the benefits of formalization (80% of SMEs currently not formalized) Increased formalization will help the SME sector grow, improve the quality of service SMEs provide, and increase government revenues, which in turn should promote further growth Increase the role of women in SMEs, in particular their role in entrepreneurship Women already play a major role in Afghan industries, such as agriculture, carpets and embroidery, but typically they receive a low portion of the benefits. For example, a female weaver receives <20% of the value of a carpet. Policy thus must prioritize female-intensive sectors (such as carpets and embroidery) and work closely with women’s associations to improve the benefits women receive from the economy Create ~1M jobs & ~$3B dollars of GDP by 2016 The targets are ambitious but attainable if the government of Afghanistan agrees to take action This is an imperative to meet the needs of a growing population 1 2 3 4 5 3

Priority SME sectors and areas of growth
Labor-intensive, natural-resource sectors are priorities Export industries must play central role in growth Several sectors must receive national priority based on several factors Afghanistan’s competitive advantage Sector’s ability to create jobs Sector growth Afghanistan’s ability to compete across multiple parts of value chain In particular, these industries emerge as highly attractive Agri-processing (including fresh and dry fruits, nuts and medicinal plants) Carpet weaving, cutting, washing and trading Marble quarrying, cutting, polishing Gem stones mining, cutting & polishing and jewelry Livestock and skins Wood, timber and carpentry Priority sectors should be reexamined after 1 year, and then every three years thereafter Exports have grown 3x faster than the overall economy, but still are just 4% of GDP ($550M) All sectors named are appropriate for export, although in many cases these sectors will serve increasing domestic demand as well Import substitution (IS) where Afghanistan has competitive advantage Imports will continue to be key part of economy, but IS should be pursued in low-technology products, such as vegetable oil, dairy and poultry Substitution of inputs to national industries, such as wool, wood and re-imported marble, also critical IS should be achieved without excessive trade & tariff intervention, but rather, with coordinated government and donor support for target industries 4

SME constraints for government to address
Three critical challenges for the government to address Other SME constraints where the government can make an impact Finance Still a major constraint in Afghanistan, especially for SMEs in non-trade industries Actions will include SME windows in banks, Sharia-compliant products, sector-specific products, and lower interest rates Infrastructure Government must work with donors, AISA and others to obtain investment for sector-specific infrastructure, such as cold storage facilities in certain regions Capacity building Must work with donors and BDS firms to address the capacity building needs in target sectors Programs underway, such as National Skills Dev. Program and the National Vocational Education and Training Authority, but efforts must be coordinated with the SME strategy Transportation Improving freight processing in airport and promoting additional capacity in the transport sector Market access Continue to work with EPAA and donors to improve market access in target sectors Certification ANSA must address need for standards and certification in target sectors, such as testing facilities for marble and quality standards for food exports Registration & licensing Continue to improve both the registration & licensing processes, and provide more benefits for registering Trade & tariffs Need clear and well-communicated policy on trade and tariffs. Must also continue to keep import duties low on inputs to national industries Safety, land & electricity Can be addressed in the short-term by continuing to increase the capacity of industrial parks 5

SME Group in MOCI will lead implementation
SME Group within MOCI will implement strategy Strategy will be rolled out in phases, and cover whole nation by 2016 Strategy Group in MOCI will take responsibility for implementing the strategy and delivering results Group should first reside within MOCI, in the PSSD, then become independent group within 2 – 3 years The group must include on its board: Ministers of Commerce & Industry, Finance and Agriculture, and MRRD 4 – 6 respected business leaders from around the country Commitment of the Cabinet and inter-ministerial coordination is required for success Can achieve some coordination by working through the structures of ANDS However, as ANDS does not have an SME component, the SME Group will have to fill the gap Development strategy to be rolled out in four regions: North South East West Regional strategy must be coordinated with many players, including Provincial governments Community Development Councils Specific donors PRTs Others agencies and organizations working in each region region Pilot programs will begin in 4 regions in Q1 2010 Goal is to have all regions covered by 2016 6

Program estimated to cost ~$750M – $1B over 7 years
Preliminary cost estimate Program Administration – $20M Cost of implementing strategy, including establishment of SME development group within MOCI, which will become independent organization after 2 – 3 years Cost ($M) Capacity building for SMEs – $50M Skills are still lacking in many SME sectors. However, efforts to build skills much be coordinated with other efforts underway, in particular: National Skills Development Program National Vocational Education and Training Authority USAID CDP Infrastructure – $180M Infrastructure specific to the target industries, such as cut and wash facilities, cold storage facilities, improved marble quarrying equipment, etc Will come from three sources: donors, FDI, and in some cases from government (such as low-cost leasing of government land to target industries) Much funding is already going toward infrastructure; key will be better coordination Financing – $500M Financing still one of the critical barriers to SME growth. Total SME financing in Afghanistan today amounts to only ~$45M, yet the need for SME financing is estimated at ~$7B Financing is especially scarce in non-trade and agricultural enterprises, and in particular in the loan-size range of $30K - $300K Financing for SME Strategy to come from three primary sources Donors, in the form of additional SME funds available through credit facilities such as ARIES, ARFC, and other SME-specific financing vehicles Banks. Banks have ~$1B of credit outstanding in Afghanistan, but little with SMEs. Goal of SME strategy is to have banks lend greater amount of money to SMEs, both via SME windows and partnerships with donors Source: SME financing data from SME Development Workshop report, ARIES, 2009 7

Targeting growth of > $3B GDP and 1M new jobs
Potential GDP and job creation by sector, by 2016 Incremental GDP, 2016 ($M) Jobs created (K) Growth rates are aggressive, but there are already many efforts underway to achieve these results. Important goal of the strategy is to better coordinate the efforts 8

Summary implementation timeline
Short-term (2010) Mid-term Long-term Activity Jan Feb Mar April May June Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Government approval of policy Creation of SME Group in MOCI First meeting of SME Group Regional strategies shared with stakeholders (donors, ministries, etc) Pilots kicked off in each of 4 regions Address the 3 key areas: financing, infrastructure, & capacity building Results from pilots Revision of strategy based on results Staffing expansion of SME Group Funding sources identified SME Group fully operational, ready to become independent 9

Path from agriculture to higher-value industrial economy
Link between economic sectors and growth Export-driven growth Eventually agriculture become more efficient, less labor intensive, and a greater portion of the workforce moves into manufacturing and services Japan 3 Korea Development generally begins through export growth and import substitution. Asian countries have favored exports, Latin American countries generally have favored import substitution In practice, a country like Afghanistan will have to do both, but choose industries carefully Pakistan 2 Import substitution growth Brazil Afghanistan Developing economies, especially those in post-conflict situations, are usually agriculture-based, low technology, and experiencing large annual trade deficits 1 Reliant on Imports Agricultural, resourced-based Low-tech economy Labor intensive Manufacturing / Services High-tech economy Capital intensive 11

Afghanistan will go through these three phases as well
Link between economic sectors and growth Export-driven growth 3. Where we aim to be (~20 – 30 years) Agriculture and natural resources will always be important However, they will employ a decreasing portion of workforce as agriculture becomes more sophisticated Export of manufactured products will become more important 3 2 2. Where we are moving (5 – 10 years) Increasing exports, especially low technology exports Beginning to increase the value of exports – for example, from fresh fruit to packaged dry fruit Beginning import substitution, especially in areas of food security (mainly wheat) but also low-tech products like soap or pipes Import substitution growth 1. Where we are today: Imports of ~$3B, exports of just $0.5B Exports growing quickly, however Low-tech and low-value products Usually at the commodity end of the value chain 1 Reliant on Imports Agricultural, resource based Low-tech economy Labor intensive Manufacturing / Services High-tech economy Capital intensive 12

The move toward industry – examples from other countries
Manufacturing as % of overall GDP, select Asian countries % of GDP Nearly all countries gradually become more industrialized as they develop The process takes a long time – over 40 years to go from ~10% manufacturing to 30 – 40% Note the correlation between level of manufacturing and GDP per capita in 2002 Korea ($6,691) Malaysia ($4,194) Indonesia ($839) Pakistan ($449) Afghanistan in 2009 earns 16% of GDP from manufacturing Korea Malaysia Indonesia Pakistan Important to look now at specific sectors to understand the situation in Afghanistan Source: Data in manufacturing from World Development Reports, World Bank GDP information from Students of the World and the CIA Fact Book. Afghanistan date from IMF Statistical Appendix 13

Afghanistan GDP breakdown by sector (2009)
Services and industry now make up over 70% of GDP GDP grew at 10% average from Afghanistan GDP breakdown by sector (2009) 2009 GDP ($M) Agriculture 28% of GDP -0.4% CAGR, 03-09 Industry – 29% of GDP 16.0% CAGR, Services – 43% of GDP 14.5% CAGR, 03-09 CAGR -1.5 3.3 2.3 24.5 9.8 9.8 29.5 4.2 21.1 26.0 3.8 8.7 21.5 15.3 10.1 Source: IMF Statistical Appendix, MOCI Internal Data. Excludes opium products Note: GDP is March 2008 – March 2009 14

Incremental annual GDP, 2009 vs. 2003
Four sectors account for nearly all growth since 2003 Agriculture lagging and yet it is the largest employment sector Incremental annual GDP, 2009 vs. 2003 ~ 90% of new GDP comes from these 4 sectors, driven largely by int’l presence Incremental GDP, (in constant ’03 Afs, millions) (4,721) The growth of all these sectors, including all agricultural sectors, is 0% Yet, these sectors employ >75% of workforce, and contain many SMEs. Thus, large portion of population benefits little from GDP growth so far. There has been some job creation, but perhaps not enough to keep with new entrants to workforce Drought conditions explain some but certainly not all of the low growth in agriculture. Despite the current strength of these four sectors, Afghan economy over the next 10 years (especially SME sector) will be driven by agriculture and a select few traditional manufactured products. Source: IMF Statistical Appendix, MOCI Internal Data. Excludes opium products 15

Sector growth parallels public and donor expenditure Relatively low expenditure on agriculture and agricultural industries Portion of public expenditure, and donor disbursement to external budget Percent Unknown Econ. Governance Social projection Rule of Law Health Education Agriculture Security Infrastructure Total donor distrb to external budget Annual public spend Source: Food for Thought: Analysis of Agriculture Financing in Afghanistan, Economic Literacy and Budget Analysis Group Note: Other studies, such as one from Oxfam International, suggest that only 2% of international aid has gone toward agricultural sector 16

More growth can come from agriculture and related SMEs
Currently operating well below potential Possibility for at least 3 - 4x growth World bank estimates that the agricultural sector needs to grow at ~5% / year in order to meet the needs of poverty reduction % of Afghanistan’s 65M hectares is viable for agriculture, but only 6% currently cultivated In addition, crop yields in Afghanistan are only half what they are in the rest of the world From Afghanistan yielded an average of 1.6 tons of cereal per hectare, versus 3.2 for rest of world, and 2.2 for Pakistan and 2.9 for Uzbekistan Fertilizer intensity was 1 kg per hectare in 2001, versus 140 kg for Pakistan and 160 kg for Uzbekistan Quick analysis suggest a very large potential for growth in agriculture sector: Potential to double cultivated land Potential to double output per hectare of cultivated land Result would be a quadrupling of agriculture contribution to GDP From ~$4B / year to $16B per year That additional $12B of GDP represents a 100% increase over 2009 GDP Question is, how fast and at what cost? Source: Food for Thought: Analysis of Agriculture Financing in Afghanistan, Economic Literacy and Budget Analysis Group; USDA reports; MOCI internal data 17

Recommend pursuing export-led growth first Selective import substitution and increase in domestic demand should follow afterwards Overview Size Strategy Exports 1 A critical component of the economy, especially in natural-resource based sectors where Afg. has advantage Export growth continues to outpace growth of the overall economy Central to the development strategy of many countries in the Far East Exports currently are ~$550M, which is approximately 4% of total GDP However, exports growing at 32% annually, while overall economy growing at 10% – hence a growing priority Most are agricultural or based on other natural resources, such as marble & gems Export growth should be primary focus of strategy, especially in short-term: Afg has resources and skills already Demand exists in neighboring countries, such as India (for fruits & nuts) Quick impact possible by linking local to producers to markets (eg, trade fairs) Additional growth by removing barriers to exporting (paperwork, transport, etc) Often involves technology investment to meet buyer standards Import substitution (IS) 2 Imports do not count toward GDP, they deplete foreign reserves, and don’t generate profits for population Hence, IS can be a way to bring profits and production back home However, IS often involves raising tariffs or manipulating exchange rates – which is generally not beneficial in the long-run Imports are currently ~$3B / year in 08 Roughly 6x the level of exports, hence the trade deficit which will need to be corrected over time Roughly 40% of this comes from machinery, equip, petroleum products and metals – which are not likely to be substituted soon Identify several priority products Low-tech products Products where Afg. can be cost competitive without government price / tariff intervention Likely areas are food products Wheat, chicken, eggs, veg oil Important for establishing food security Domestic Demand 3 The backbone of the economy Will increase as population produces more, which leads to greater consumption, which leads in turn to further production Currently makes up ~96% of GDP Overall GDP: $13B Minus exports: $500M Equals domestic demand: $12.5B Within agriculture sector, exports make up greater percentage of GDP ~20% Domestic demand component increases with import substitution (Imports not part of GDP, but locally-made substitutes are) Increasing domestic supply and demand is key to strategy Focus largely on the food sector; ability to meet domestic demand without imports is key to food security Moving domestic customers to higher value consumption will occur as GDP per capita continues to rise 18

Export sectors growing 32% annually, but still only ~4% GDP
Afghanistan exports by sector ( ) Prod. Exp ‘09 ‘03-09 CAGR $M 547 Wool 5 4% Skins 13 17% Med. Plants 24 30% 454 Fresh fruit 37 27% 416 383 Other % 297 Carpets % 135 98 Dried fruit % Total % Source: IMF Statistical Appendix, MOCI Internal Data. Excludes opium products 19

Adding unofficial exports at least doubles the figures
Several reasons for unofficial exports Example of unofficial trade – skins and hides Large quantities of legitimate products are exported unofficially overland to neighboring countries There are several reasons for the trade, despite the fact that Afghanistan does not have export taxes (except on gemstones) Many traders seek to avoid import taxes that neighboring countries place on products Traders will want to lower annual tax burden, and hence have incentive to hide some transactions In particular, there is potential for re-export arbitrage with Pakistan as traders seek to avoid some of the import taxes levied by Pakistan Estimates of unofficial trade vary by sector, but overall are in the range of 100%, even more in some industries In 2006, official exports of bovine, goat and sheep skins and hides estimated at $15.6M However, interviews with traders in Kunduz suggest that the actual amount of exports could be up to 4x that amount: ~$50 – $60M Implications Estimates of skin supply, for analysis of a tannery, for example, needs to take this supply into account Much of the unofficial trade could be made official, and more valuable, if we had capability for post-processing – i.e., a tannery $15M sector could turn into a $150M sector based on existing supply only Potential to boost value exists in most commodity industries which rely on overland transport Note: By unofficial exports, we do not include opium products, only unofficial exports of legal products Source: IMF Statistical Appendix, EPAA Interviews, Investigation into the Potential of Establishing a New Tannery, Avery Leather Consulting 20

Must prioritize export industries based on several criteria
Is the sector growing quickly, or does it have the potential to grow quickly? For example, carpets, which have grown at ~50% annually, and dried fruit, which grew at 25% Or marble, which has grown very little so far in Afghanistan, but which is growing ~8% annually worldwide Are the barriers to entry low? Raw materials: easy access to input materials, such as raw marble, wood or agricultural products Skills: the right level of skills in the workforce in order to be competitive in the industry Technology: low technology requirements, or at least the ability to introduce the technology quickly and cost-effectively Does the industry have a large concentration of SMEs? For example, carpet cutting and washing facilities, which usually employ <200 people, and often just Is the industry labor-intensive? Because of the importance of job creation, labor-intensive industries must be prioritized, such as carpets, which are extremely labor-intensive in the weaving phase When selecting particular technologies to use within each industry, must strike a balance between high-technology and high job creation High-technology equipment generally means fewer jobs, but sometimes such equipment is required in order to meet international standards Can Afghanistan be competitive in most parts of the industry’s value chain? Preference should be given to industries where Afghanistan can be competitive across the value chain For example, the carpet value chain: wool – spinning – weaving – cutting and washing 1 2 3 4 5 21

Population & workforce breakdown
Job creation is especially important criteria Unemployment currently 40% and likely to raised based on current demographic skew toward youth Population & workforce breakdown People (Millions) >65 yrs old 0.75M 40% unemployed ~7M 15-65 yrs old 17M Each year, ~200K of these people leave the workforce… 60% employed ~10M New jobs needed each year to hold unemployment levels steady at 40% Large young population is a massive opportunity or threat – depending on whether jobs are available <15 yrs old 14M …and ~1M of these people enter Unemployment data is unreliable due to informal employment and child labor, etc, but the fact that 45% of population is under 15 means growing pool of workers will need jobs Source: CIA Statistics; Spotlight on Differing Demographic, World Bank Note: World Bank also predicts that the boom in youth demographic will continue in Afghanistan for several decades 22

Capital requirement (USD)
Focus is on SMEs under 300 employees and $15M in capital SME definition used by IFC in developing countries and by ACBAR Number of employees Capital requirement (USD) Large >300 51 – 300 11 – 50 1 – 10 >15M 3M – 15M 100K – 3M 0 – 100K Medium Accounts for ~80-90% of businesses ~500K businesses overall At least 75% of the workforce Small enterprises Micro-enterprises By this common definition, SMEs make up the vast majority of business activity in Afghanistan 23

Clothing / leather goods
Based on criteria, several attractive value chains emerge In most cases, industries are based on natural resources and will be export-led Value chain Potential Low potential in near-term; technology needed Tough competition from India and Pakistan However, raw skins has historically been a major export Attractive and very large sector High brand awareness in certain sectors, such as nuts Need to address particular sub-sectors individually Room for growth and repatriation cut & wash / trading However, overall market size limited (~$1B) Still important because it is extremely labor intensive Mining generally not SME business Opportunity in polishing, processing and jewelry Afghan market potential at least ~$100 – $200M India gems went from $13M to $13B High-potential segment for SME Quarrying capital intensive; only 10-year lease on mines World market size ~$3-4B, growing ~9% / year High-potential segment, generally overlooked Government has recently approved a timber policy Limited reserves in South and SE, sustainability is key Construction industry high-growth, driven largely by international presence in country Bricks and simple tools attractive for Import Substitution Potential for cement, but not generally SME business Livestock Dairy / meat Skins Leather Clothing / leather goods Livestock Fresh fruit / plants Concen-trate / Juice Dried fruit / nuts Medicinal plants Agri- processing Carpet Wool Spinning / dying Weaving Cutting / washing Trading Mining Cut / polish Trading Jewelry design Gemstone Marble quarrying Cutting Finishing Marble Wood Carpentry Furniture / crafts Wood Cement Aggre-gates Bricks Tools, other supplies Construct. Building Important to increase production at the beginning of the value chain, but also to migrate toward the end of the value chain where much of the value is added. Note that is not a complete list of industries. BDS, for example, is an area that will grow as SME sector becomes more sophisticated 24

Potential for official exports to reach $3.8B by 2016
Prod. Exp ’16 (M) ‘09-16 CAGR Potential exports by sector ( ) $M Wool % Carp C&W % Wood % Leather % Skins % Fresh fruit % Other % Med. Plants % Marble % Carpets % Dried fruit 1,000 25% Total 3.8B 30% Without SME strategy, exports would grow at 20% (2x average GDP growth), as shown by line. This is less than export growth since 2003, as is expected given that early export growth was starting from a very low base. Source: IMF Statistical Appendix, MOCI Internal Data, interviews with MOCI, ASMED and Harakat. Note: Excludes opium products 25

Potential incremental GDP by sector (2016)
~$1.8B incremental GDP and ~500K new jobs from exports Will need to set targets for each region and verify estimates Potential incremental GDP by sector (2016) Incremental GDP, 2016 ($M) 5% 09-16 CAGR - status quo 0% 20% 20% 20% 0% 20% 20% 0% 20% 09-16 CAGR - target 70% 30% 50% 25% 50% 30% 30% 25% 60% 25% Job potential (K) 15 200 150 100 20 50 20 15 6 2 Approximately $1B in increased domestic demand expected as well, especially in dried and fresh fruits, plants, skins and leather Note: Based on all sector-specific reports, interviews, and ASMED assumptions 26

Afghanistan import substitution potential (2006)
~$500M potential for import substitution as well Numbers shown here are 2006 – latest available; estimate of $500M based on extrapolation to 2009 Afghanistan import substitution potential (2006) ($M) 0.3 SME SME SME SME SME SME SME Other potential income substitution opportunities include grains, flour, fruit juice, and potentially some leather products such as footwear Source: ARDEP, “A Competitive Afghanistan” 2006 27

Four major types of constraints can affect SME growth
1 Macroeconomic 2 Legal / Regulatory 3 Infrastructure 4 Business services Interest rates Trade & tariff Taxation Inflation Exchange rates Land Registration & licensing Bankruptcy / closing Labor law Environmental law Patent / IP protect. Transportation Electricity Sector-specific (e.g., cold storage) Telecom (mobile phone, internet) Water Finance Capacity building Certification Market access BDS (accounting, consulting, etc.) Associations Macro-econ environment generally good in Afghanistan Only 14% of firms feel that there is consistency in the interpretation of laws and regulations Many issues here, but generally requires much time and coordination to influence Many things MOCI can do to lessen these constraints Businesses cite excess bureaucracy and corruption across almost all areas: taxation, tariffs, regulations, access to infrastructure, etc. Safety and crime are also major issue for most SMEs Source: Afghanistan Investment Climate, 2008, and Doing Business in Afghanistan, 2010 (for information about severity); ASMED interviews (for information about MOCI ability to change constraint) 29

1. Macroeconomics – significant improvement
Constraint Issue Responsibility Interest rates Trade & tariff Taxation Inflation Exchange rates Interest rates generally high (~19%) for SMEs Typical for post-conflict nations where cost of doing business is high; prohibits many SMEs from taking loans Trade and tariffs generally liberal Potential to selectively increase tariffs for import substitution Potential to work with neighbors (Pakistan, for example) to improve customs process – cited as major issue Need better communications of trade and tariff regulations – most SMEs have low knowledge about international trade Overall tax rates generally not problem, although high BRT makes many low-margin businesses are not viable unless they avoid taxes or simply pass high tax onto consumers LTO and MTO have simplified taxes for some payers in last several years, but still many complaints around process No consistency or transparency in how tax law is applied No major issue – inflation rate has been stabilized No major issue – exchange rates have been stabilized DaB, MoF MOCI (for trade) MoF (for tariffs) MoF Source: Afghanistan Investment Climate, 2008, and Doing Business in Afghanistan, 2010 (for information about severity); ASMED interviews (for information about MOCI ability to change constraint) 30

2. Legal and regulatory – better, but must be MOCI priority
Constraint Issue Responsibility Land Registration & licensing Bankruptcy / closing Labor law Environmental law Patent / IP protection Improving, but still an issue Difficulty accessing land, obtaining zoning approval, and land titling – also leads to difficulty of banks to extend credit Construction permits also very difficult to obtain Area shows much improvement with ACBR, etc, but still opportunity to speed registration nationwide, to better communicate the process and the benefits No set process for bankruptcy, hence low World Bank ranking However, not the primary obstacle to growth or financing. Issue need to be addressed, but not short-term priority for SME strategy Labor law not currently a major issue, but will grow in importance as businesses mature Generally not a major issue yet, although law is required in area of wood production, as well as in tanning/leather and mining. Will become increasingly significant issue Not yet a major issue, but will become a more significant issue in the next 5 – 10 years as companies advance and FDI increases Ministry of Justice MOCI, AISA, municipalities MOCI, Ministry of Justice, potentially MoF, too Ministry of Labor National Environmental Protection Agency (NEPA) MOCI (has an IP sub-department) Source: Afghanistan Investment Climate, 2008, and Doing Business in Afghanistan, 2010 (for information about severity); ASMED interviews (for information about MOCI ability to change constraint) 31

3. Infrastructure – big issue, difficult to address in short term
Constraint Issue Responsibility Transportation Electricity Sector-specific infrastructure Telcom Water Road system poor, disconnecting suppliers and customers Security on roads poor, leading to overall high transport costs Air transport constrained due to lack of facilities at airport Leads to overall high cost for SMEs Major issue for businesses: lack of access, and poor service leading to higher cost of business Many sectors lack specific infrastructure needed for basic operations. For example, cold storage. Government might provide help until private sector matures to the point that it can provide for itself Constraint for some, but rapidly growing mobile coverage Internet access generally not cited as a constraint, but that is due to the fact that most SMEs haven’t had enough access to the internet to realize its importance Generally not a major issue, but could affect water-intensive industries, such as the potential for tanneries Ministry of Transport MOCI Ministry of Power and Energy MOCI, MAIL, ARDEP, Donors Ministry of Communications Source: Afghanistan Investment Climate, 2008, and Doing Business in Afghanistan, 2010 (for information about severity); ASMED interviews (for information about MOCI ability to change constraint) 32

4. Business services – MOCI can make large impact
Constraint Issue Responsibility Finance Capacity building Certification Market access BDS (accounting, consulting, etc.) Associations Shortage of funding, especially for SMEs ~Only 50% banks assets are lent, and only 3% of total loans outstanding are SME loans Access to finance difficult for many reasons: SMEs lack proper paperwork to prove business, no land titling and collateral, high interest rates, no Islamic finance Many sectors require training from donors / associations in order to become more competitive. Technical training is key, as well as training in bookkeeping, accounting, etc. An important area as export sectors growth. For example, testing of livestock, dairy products, marble testing, etc. Major constraint for export-oriented sectors Progress made with trade shows, etc, but opportunity for MOCI to do more BDS services increasingly important for businesses as they enter the formal sector Not usually cited by SMEs as a constraint to growth, and yet still an important factor in growth MoF, MOCI, MAIL, ARDEP, Banks, Donors BDS, MOCI, National Skills Development Program, Donors BDS / MoCI – for tech skills Afg Nat. Standards Agency (ANSA) and EPPA – for testing MOCI, EPPA BDS, MOCI BDS, MOCI, ACCI Source: Afghanistan Investment Climate, 2008, and Doing Business in Afghanistan, 2010 (for information about severity); ASMED interviews (for information about MOCI ability to change constraint) 33

MOCI should prioritize those where it has most influence
Typical constraints to SME growth High Must work with others MOCI priorities 4.1. Finance Safety / crime corruption 3.3. Sect. specific infrastructure 4.2. Capacity building 1.3. Tax 3.1. Transport 2.1. Land 3.2. Electricity 4.4 Market access 4.3. Certification 1.1. Interest rates 4.5. BDS 2.2. Registration & licensing How severe is this constraint? 1.2. Trade & tariff Less important Future priorities 2.3. Bankruptcy / Closing 3.4. Telcom 2.4. Labor law 3.5. Water 4.6. Associations 2.6. Patent / IP 1.5. Exchange rates 2.5. Environmental 1.4. Inflation Low Ability of MOCI to change it? Low High Source: Afghanistan Investment Climate, 2008, and Doing Business in Afghanistan, 2010 (for information about severity); ASMED interviews (for information about MOCI ability to change constraint) 34

Sector-specific infrastructure
Three areas for government to prioritize In many cases, will need to be address in sector-specific basis Constraint Actions Responsibility Finance Gap in SME loans in range of $30K-$300K; MOCI must work with banks and donors to: Provide sector specific products, especially in ag sectors where payback is longer term Help to reduce (but not eliminate) interest rates with help of partial donor funding Provide Sharia-compliant products, potentially including leases Financing must still be bank-driven, but facilitated with help of government and donors See following three pages for additional information MOCI, MoF, MAIL, AREDP banks, donors Sector-specific infrastructure MOCI must work with donors and AISA to obtain investment for sector-specific infrastructure Must be undertaken at a region-specific level, as described under regional strategies Infrastructure could come in many forms, depending on the industry’s particular need E.g. cold storage facilities in certain regions which are producing fruit for further processing Tanning facilities in the north to increase the value of skins which are currently exported Roads to and from quarries, or quarrying equipment Goal is not to fully subsidize industries, but rather, to provide starter infrastructure until the sector can provide its own In most cases, the government should work with donors to obtain grants for equipment, partially subsidized funding, etc. However, in some cases the government can provide some of the infrastructure directly – such as providing government land at low rental rates MOCI, AISA, MAIL, AREDP donors Capacity building Additional training needed in most growing SME industries In many cases, training spans most industries, such as management and accounting training, which should be done by BDS firms Sector specific training is needed too – just as gem cutting, jewelry making, and tanning MOCI should work with donors in each region to develop sector-specific training needs Programs are underway, such as National Skills Dev. Program and the National Vocational Education and Training Authority, but these efforts must be coordinated with the SME strategy MOCI, donors, BDS, National Skills Dev. and other gov’t training programs 35

SME financing gap – especially for non-trade SMEs
Finance SME financing gap – especially for non-trade SMEs Commercial banking portfolio 2009 SME breakdown Agriculture 1% ($M) $980M ~40M Production sectors lagging Agriculture lagging in particular because it is a higher-risk sector due to seasonality and need for longer-term payback periods Non-ag prod 10% Service 9% Trade is majority of SME portfolio Quick turn-around, profitable for banks Does not generate high job creation Trade 80% Many institutions addressing micro-credit and many commercial banks offering loans to large companies, but SMEs have few options. Strategy must address their lack of credit Source: Challenges and Next Steps in SME Financing, Shorebank; Development of Commercial Banking System in Afghanistan, IMF; MISFA Interviews 36

Supply and demand reasons for the SME financing gap
Finance Supply and demand reasons for the SME financing gap Supply: Banks don’t want to lend Demand: SMEs don’t want to borrow SMEs can’t provide proper business documentation No financial statements No order books Insufficient collateral Banks often demand over 200% collateral I.e., the only people who get money are those who don’t need money Desire for quick payback Most bank loans go to traders, whose loans are often repaid within 3 – 6 months Reluctant to lend to enterprises which require a longer payback period Insufficient training of loan officers Many banks claim they want to lend more, but currently have enough skilled SME loan officers No desire to lend in general Some banks in Afghanistan are simply cash management services / deposit companies with little intention to lend Interest rates too high and payback period too short Rates often over 20% Payback often starts within months, which doesn’t suit many businesses, such as seasonal agriculture Lack of Sharia-compliant products Islamic loan products Leases Little information about how to get a loan and what kinds of products are available No desire to enter the formal economy 37

Short- and long-term actions to improve financing
Finance Short- and long-term actions to improve financing Short-term (<6 months) Mid-term & Long-term (> 6 months) Work with 2 – 3 banks to provide loans to SMEs within target sectors Likely partners are BRAC, FMFB and AIB Often, sector-specific products will be needed For example, loans to agri-businesses might require more time before first payment (~1 year) Coordination between banks & donors is important Donors can help to identify priority SMEs within each sector Interest rates could be partially subsidized Can subsidize rates to ~10%, but should not eliminate interest Work with ARIES to ensure that their SME lending is coordinated SME policy Drafting appropriate banking law in four areas Sharia-compliance, secure transactions, leasing and negotiable instruments Improved training for bankers, especially loan officers Will be done as part of the Institute of Banking and Finance which will be active in 2010 Establishment of credit information bureau to promote commercial lending Establish a collateral registry to ensure ownership of pledged assets and to ensure that they are not already pledged elsewhere Work with partner banks to have them open SME windows in branches Government can either mandate the opening of SME windows, or provide an incentive to Banks who open them SME policy should also link closely to upcoming USAID FAIDA project (Financial Access for Investing in the Development of Afghanistan) 38

Additional areas where government can make impact
Constraint Actions Responsibility Registration & licensing MOCI already taking action here (e.g., ACBR, and licensing reform) but still room to do more Licensing process still not transparent or consistent at MOCI or at municipal level MOCI must better communicate process and benefits of registration In addition, must streamline process in MoF to encourage license renewal Harakat initiative now underway to address many of these issues, both in terms of better processes and better infrastructure MOCI, AISA, MoF Trade & tariff Trade restrictions and tariffs on exports are major point of confusion for SMEs in all regions Often just better communication is needed – but that must come from MOCI Should continue to keep import duties low in inputs to national industries MOCI, MoF Safety / Land / Electric Continued creation of industrial parks can solve these issues for targeted groups Therefore, expanding the industrial parks strategy under MOCI and AISA is imperative MOCI, AISA Transportation Transportation is a key constraint, and MOCI can address this issue in several ways Improving freight processing facilities at the airport – initiative in progress Easing the paperwork requirements for shipping overseas – initiative in progress Encouraging additional competition and capacity in transport sector MOCI, Min. Transport, MoF, donors Market access MOCI should continue to work with donors to sponsor trade shows, foster links, etc. Must work to coordinate donors around sector and regional strategies MOCI, EPPA, donors Certification For exports, MOCI must work with ANSA and associations to determine required certification E.g., with pomegranates and marble, do we need a national testing facility? Must ensure that testing is based on customer needs, not government mandates MOCI, EPPA, ANSA, donors 39

Four typical components to formalization Currently focusing on the first three components in Afghanistan 1. Business registration Business registered with some department of government or agency For example, registered with ACBR, or a municipality Business has a license to operate, as granted by AISA or Department of Licenses, for example Business may be required to have additional licenses and permits, such as an additional license from the Ministry of Public Health for pharmacies Business has a Tax Identification Number (TIN) and pays taxes to the government Or, business is registered with municipality and pays municipal taxes Typically means the business participates in labor programs, provides labor insurance, etc. Currently less applicable in Afghanistan 2. Business licenses and permits 3. Tax identification number 4. Labor / Social insurance 41

High costs and low benefits to formalization in Afghanistan
Fewer benefits Entry and compliance costs Registration fees (e.g., up to $1,200 at AISA) Time spent obtaining licenses and approvals (improving with AISA & ACBR, but still high) Difficulty re-registering, especially getting tax clearance from MoF, leading people to start a new company rather than renew existing registration Paying tax Actual cost of the tax itself, especially 20% BRT Time spent dealing with complex tax system, Mustoufiats, and additional corruption Additional reporting – must submit balance sheet annually to the MoF The costs of corruption Bribes to officials during the registration process Bribes to inspectors / officials once business is formal Loss of existing relationships with customers, suppliers, and others Low level of government services and infrastructure – even for formal business Shortage of credit, which is one of the typical benefits for formalization Little benefit of technical training, certification, accreditation, etc. Fewer regulated markets and other formal sector business to have access to Limited access to better skilled labor “Among the companies registered with AISA or the Ministry of Commerce, only 47% were able to identify a benefit from registering.” -- Harakat study A vicious circle: low SME formalization (20%), leading to low tax revenues (4% GDP), leading to poor government services, which reinforces disincentive to formalize Source: A Formalization Strategy for Afghanistan, 2008, Market and Business Development Department, PSDD. Reforming Business Licensing in Afghanistan 42

Several opportunities for improvement in registration process
Reasons SMEs cite for not registering % of SMEs Should lower cost (AISA currently $200 - $1,200) Need to better communicate process (90% who did register say process was NOT complicated) Need to better communicate benefits to registration, and introduce more benefits Source: Afghanistan Investment Climate, 2008, based on 197 respondents 43

But business registration still complex in many areas
MOCI Licensing Dept. Provides trade license Facilitates registration and receipt of TIN Offices in 17 provinces ~8K business / year Official price: 3,500 afs. Other Ministries Provide sector-specific licenses Ministry of Transport Ministry of Communication Ministry of Public Health DAB etc. If trading co ACBR Collects forms from AISA or Department of Trade Registers business Sends paperwork to MoF for TIN Collects and returns to DoT Has offices in Mazar and J’bad Charges $20 Ministry of Finance Receives paperwork Sends TIN to ACBR TIN sub-office usually in the ACBR No charge AISA Provides invest license Facilitates registration and receipt of TIN Part of High Comm. on Investment Offices in 7 provinces ~8K businesses / year Charges up to $1,200 Min. Culture / MoJ Receive information, publish in official gazette Charges 3Afs/letter SME wants to register If investing Municipality and District Takes SME paperwork and fee, registers business Grants municipal and district licenses Sends paperwork to Kabul for additional license, if necessary (trading, for example) Will place business in one of 412 different classifications based on Soviet methodology Municipality collects all taxes, which is likely different in each municipality If neither of above 44

Summary timeline of actions to improve formalization
Short-term (< 6 months) Mid-term (6 – 18 month) Long-term (>18 months) Reducing costs Plan for better overall communications so that SMEs see that the process is not as complicated as many perceive Link with upcoming AISA PR campaign Reduce cost of registration at MOCI Licensing Department High corruption and low transparency Coordinate with AISA to have them lower their rates if possible Continue with one-stop registration for exporters at the airport Communicate more success stories about ease and benefits of registration Work with MoF, as tax clearance is primary obstacle to renewing license As long as tax clearance issues remain, many businesses will not renew Hence, AISA formalizes many businesses for one year only Consider eliminating Trader and Investment licenses all together AISA should still provide investment services, but the licenses are not critical Work with other ministries to remove other licenses Many ministry licenses are currently just a form of tax, not a mechanism to protect public safety, as they should be In India model, removed all but ~8 licenses Work with municipalities to consolidate municipal and district registration with national registration Remove multiple business classifications at the District level Remove duplication of licenses at district and municipal level Increase transparency of taxation at municipal level Increasing benefits Identify target sector for pilot (same sector as for growth pilot) Introduce specific formalization benefits Access to lower-cost financing Help with preparing financials for loan Access to technical advice, certification Communicate benefits to target group Message should be: here is what the government is doing in the sector, and what they will do for you if you register Formalize group Take findings from group and incorporate into overall plan to improve formalization Build on success stories from the pilot to better communicate process to other sectors Work with donors, banks and associations to develop additional benefits to formalization MOCI should also ensure that benefits are communicated clearly by the many groups, and check to see that the promises are delivered Continue communicating benefits to formalization Work with other ministries to better define what benefits they offer For example, if an SME needs to register with the Ministry of Communications, what do they get besides just the license? 45

Formalization Constraints to growth Implementation Appendix Project background Sources 46

Implementation will happen in three phases
Short-term (<6 months) Mid-term (6 – 18 months) Long-term (>18 months) Gain government buy-in on strategy Establish SME Group within MOCI Share strategy with stakeholders Launch sector-specific pilots and interventions which will Test ideas Create quick impact Create momentum and buy-in Build on current programs SME Group reports pilot results Modify policy based on pilot results Communicate updates Continue successful pilot activities, and expand pilots to new sectors and geographies Build capacity of SME Group which will manage long-term plan Prepare rollout of long-term plan MOCI SME Group continues implementing and monitoring plan Plan will need to address exit strategy from foreign aid Incorporate ongoing findings, communicate to stakeholders Continue to track metrics of job creation and poverty reduction Develop pilots of new concepts as needed Remember, South East Asia required fifteen years to create a solid base of SMEs 47

SME Group within MOCI should initially drive the strategy
Group to be part of Private Sector Dev. Directorate Propose a small team at first which can expand as needed Depending on Director’s other responsibilities, might need additional SME strategy leader PSD Director Minister Specialist North Regional specialists should work immediately to prepare pilots and regional strategies Coordinate with regional entities where possible (ACBR, AISA, ASMED, regional government) Deputy Minister Trade Deputy Minister Consumer and Reg. Deputy Minister Private Sector and Industry Specialist South Specialist East Industrial Affairs Directorate Private Sector Dev. Directorate Specialist West Financing is important enough that person should be dedicated to working with banks / donors to set up financing product Formalization specialist from MOCI should also be part of the team SME Group SME Financing SME Group also will work closely with other groups within MOCI, and with the other stakeholders (donors, banks) Senior-level coordination across ministries is important, so support from Minister, Deputy Minister and Director is key, especially in the first 6 months Meetings of group should occur at least once per month 48

SME Group can expand over time as needed Complete pilots first, then expand SME Group based on needs
Longer-term group roles – based on SMEDA, Pakistan’s SME Development Association Potential long-term structure of SME Group – again, based on SMEDA in Pakistan Formulate policy to encourage the growth of SMEs and to advise government on issues related to SMEs Facilitate BDS Services to SMEs Facilitate the development and strengthening of SME representative bodies, associations and chambers Conduct sector studies and analysis for sector development strategies Facilitate SME financing Strengthen SMEs by conducting and facilitating seminars, workshops and training Help coordinate donor assistance for programs and projects Assist SMEs in getting international certifications, where needed, for their products and processes Identify SME service opportunities on the basis of supply/demand gap CEO Board of Directors Out-reach BDS Policy and planning Support Region 1 Fin. Serv Research Accounts Region 2 Legal Planning HR Region 3 Tech Policy Dev. Admin Region 4 MIS Communication Board should include both the public and private sectors Minister of Commerce and Industry – Chairman Ministers or Deputy Ministers of Agriculture, Finance & RRD Potentially other ministries too (Min. Mines, MOPH) ~ 4 – 6 industry leaders, at least one from each region Source: ASMED research; Pakistan Small and Medium Enterprise Development Association Group Charter 49

Coordination among multiple stakeholders is key
Government MOCI AISA, EPAA MAIL MRRD AREDP MoF MoT DAB ANDS Coordinated through many inter-ministerial committees 1 4 Donors / Implementers USAID (AIRES, ASMED / EGPSS) UN / UNIDO / UNDP World Bank / IFC GTZ DFID (Dept. for Intl Dev) JICA (Japan Int. Coop Ag.) AKDN (Aga Khan) Harakat USDA ACBAR 2 Private sector Financial institutions 17 commercial banks MFIs and DFIs (inc’d MISFA, etc.) BDS firms Consulting Auditing, accounting Transportation, etc Banks coordinated via ABA BDS associations emerging as well 5 SMEs Associations SME associations ACCI Federation of Afghan Crafts and Trades (FACT) Afg. Woman’s Bus. Fed. Afg. Carpet Exporter Guild & Kabul Carpet Association Trade organizations Unions 3 50

Government and SME group will have to lead coordination Much coordination will need to be done on a regional level, as described next Government First step is to gain commitment at Cabinet level – Min. Commerce and SME Group will lead Input critical from MAIL, MoF, MRRD, and MOCI Will likely take ~1-2 mo. for first buy-in from all parties Ongoing inter-ministerial coordination either through board of SME group, or through a separate SME inter-ministerial committee, as ANDS has an SME gap 1 4 Donors / Implementers Donors and implementers should must be informed of strategy and at national level Then, donors will work on specific sectors and regions, based on their current operations and areas of interest 2 Private sector As with donors, private sector needs to be aware of SME strategy overall, in particular the banking sector Government should work with ABA to communicate high-level strategy Then, will work with ABA to select specific partners banks for targeted products and sectors 5 SMEs Associations SME development group will coordinate with associations on a national, regional and sector basis Regional & sector basis for specific industries & areas National for multi sector issues, such as Women Entrepreneurship 3 51

SME strategy needs to be effective at various levels National and international activities, as well as regional activities, based on operating conditions Varying operating conditions at each level International to provincial level Strong at national level International National Int’l trade FDI Market access National SME sector policy Capacity building program SME financing facility Customs / transport facilities Strategy enablers Human capacity Population density Private services Efficiency & cost-effective delivery Infrastructure Security Regional Province Province Local facilities Infrastruct. Training Weak at province level 52

Regional strategies will be based on four major regions
North Balkh Badakhshan Faryab Kunduz Baghlan Jawzjan Samangan Sari Pul Takhar 1 3 West Central / East Herat Farah Ghor Badghis Kabul Nangarhar Kunar Bamyan Laghman Kapisa Nuristan Logar Panjsher Parwan Wardak Ghazni Khost Paktya Paktika 1 1 2 2 3 2 3 South Kandahar Hilmand Daykundi Nimroz Uruzgan Zabul 1 2 3 53

Actions in each region depend on local conditions
Varying operating conditions in each district Types of development action Build (Herat, Mazar) Good conditions in terms of both infrastructure and safety SME development can take place immediately and progress quickly Create strong institutions (associations, etc) Make significant investment (donor and private sector) Promote national & international linkage Create linkage to hold / clear / shape provinces which will aid in their development Hold (Kunduz) Conditions generally good, but must prevent backsliding to poor safety situation Provide services, training Likely less investment Empower local institutions, like professional associations Build links to build provinces Economic ties across value chains Clear (Badakshan) Difficult conditions, will need improvement before development can occur across region Empower local institutions, like professional associations Where possible, look to these regions to provide agricultural inputs to SMEs in neighboring regions until conditions improve Shape (Hilmand, Paktika) Extremely difficult local conditions in terms of safety and / or infrastructure Can begin to build select SMEs, but widespread SME growth unlikely soon 54

Will test and refine strategies with regional pilot programs
Wool Spinning / dying Weaving Cutting / washing Trading Carpet Marble quarrying Cutting Finishing Marble Medical Herbs Agri- processing Wood Carpentry Furniture / crafts Wood Fresh fruit Concen-trate Juice Agri- processing 55

Issues & Infrastructure
Initial regional strategy: North Strategy will need to be refined and expanded during pilot planning Provinces (Pop. M) Industries Balkh 1.1 Badakhshan 0.8 Faryab 0.9 Kunduz 0.9 Baghlan 0.8 Jawzjan 0.5 Samangan 0.3 Sari Pul 0.5 Takhar 0.9 Balkh: carpets, livestock, skins & leather Badakshan: minerals, medicinal herbs Faryab: carpet, pistachio (primary national producer), salt, marble Kunduz: agriculture (grains), livestock, formerly a large cotton producer Baghlan: grains, vegetables, cement, timber & untapped coal and marble Jawzjan: little, some agriculture Samangan: grains, fruits nuts; long-term potential for tourism Sari Pul: agriculture, mainly cereal and melons Takhar: cereal, pistachio, untapped coal, gold & salt 1 2 3 MOCI Partners Issues & Infrastructure USAID, EGGI GTZ, EU JICA Large numbers of people returning home from northern countries Good infrastructure in Balkh, especially around Mazar; also good irrigation infrastructure around Takhar Large number of literate workers in Kunduz, but separated by poor and mined roads Other areas undeveloped, such as Jawzjan, and Samangan (no energy infrastructure) Priorities 1. Carpet pilot: Recommend a carpet pilot first because of job creation potential. MOCI works with 2 donors in region to remove constraints on industry growth; strategy involves repatriating cut & wash & trade from Pakistan, as well as including more domestic wool in production. 2. Kunduz has high potential for leather industry, given presence of livestock and high number of literate workers; however, water supply and transportation will be issue; requires significant investment. 3. Medical herbs are low-investment potential for Badakhshan. 4. Far North East (Badakhshan, Takhar, and Baghlan) are attractive mineral belt in long-term, but mining issues are barrier. 56

Regional strategy: South Strategy will need to be refined and expanded during pilot planning Provinces (Pop. M) Industries Kandahar 1.0 Hilmand 0.8 Daykundi 0.4 Nimroz 0.1 Uruzgan 0.3 Zabul 0.3 Kandahar – agriculture, especially fruit production, currently poppy production as well Hilmand – agriculture, especially cereal, vegetables, tobacco and cotton, and poppy Daykundi – agriculture, especially almonds Nimroz – some agriculture, but susceptible to drought, and with high unemployment Uruzgan – agriculture, especially grains, apricots, almonds and poppy Zabul – agriculture, wheat, almonds, grapes, apricots 1 2 3 MOCI Partners Issues & Infrastructure USAID, EGGI DFID (Helmand) GTZ (in Uruzgan) High security risk and poppy production, especially in Kandahar, Hilmand, and Uruzgan Whole region generally suffers from low population density, drought, poor infrastructure Priorities As in parts of the East, security is a risk here, which makes high-investment activities difficult. However, given that the high-risk areas have high agricultural output, the goal should be to encourage that output by purchasing products from under-developed areas and processing them in facilities in nearby more developed areas. Plan is first to pilot activities around an agricultural product in Kandahar – most likely either pomegranates or almonds. The area already produces both of these products, but will need to assess the cost of setting up additional processing facilities for each product and then work at first with the one that will create more job opportunities in the short term. 57

Regional strategy: West Strategy will need to be refined and expanded during pilot planning
Provinces (Pop. M) Industries Herat 1.6 Farah 0.5 Ghor 0.6 Badghis 0.4 Herat: Agriculture (wheat), livestock, tomato, carpet (kilim), marble & trade with Iran Farah: Agriculture (wheat, barley), embroidery Ghor: Primarily livestock, with some nuts, fruit and honey as well, embroidery Badghis: Agriculture (wheat, barley, pistachio), cattle 1 2 3 Issues MOCI Partners Large numbers of displaced people returning to region – in need of skills Increased unrest and difficulty in Farah, making development work difficult, and water shortage which affects economic base USAID, EGGI Italy (PRT leaders) CRS (in Herat and Ghor) Infrastructure Roads good in many places, airports and easy access to boarder with Iran Industrial park in Herat Electricity outages common, no access to electricity for some industries, such as marble Priorities 1. Marble pilot in Herat. Already a priority among donors, but MOCI can undertake several activities to speed growth, as described under Marble pilot, starting on page 64. 2. Coordinated investment in agriculture processing: many defunct facilities silos & mills for wheat production, cotton (cotton fabrics & oil), shoe mfg. Also, high potential for saffron. 3. Trade & tariff with Iran: traders & SMEs unsure of trade and tariff regulation. 4. Skills building for displaced workers: embroidery, higher value farming. 58

Regional strategy: East Strategy will need to be refined and expanded during pilot planning Provinces (Pop. M) Industries Kabul 3.5 Nangarhar 1.3 Kunar 0.4 Bamyan 0.4 Laghman 0.4 Kapisa 0.4 Nuristan 0.1 Logar 0.3 Panjsher 0.1 Parwan 0.6 Wardak 0.5 Ghazni 1.0 Khost 0.5 Paktya 0.5 Paktika 0.4 Agriculture – as with most parts of Afghanistan, agriculture is the major industry Minerals – currently a small but high-potential segment, especially along eastern border Forestry – as with minerals, currently an unexploited sector, but one with high-potential Manufacturing – large potential for manufacturing, especially around Kabul and J-bad 1 2 Issues & Infrastructure Many parts of this large region have quite high development potential, but several of the provinces (such as Paktya and Paktika) still suffer from security problems which make development activities in those areas difficult Similarly with infrastructure, it is quite good in some areas, but lacking in others, especially in many of the provinces bordering the Pakistan border 3 Priorities Key to this region will be to develop a strategy that can utilize both the high-infrastructure areas (like Kabul & Jalalabad) while beginning to develop more difficult areas such as Paktya. Plan is to first begin a pilot program promoting the wood & furniture sector, which currently is under-developed. First step is to complete assessment of timber supplies in Kunar, as well as assess their carpentry capability. Much of the processing of timber and carpentry work might have to be done in Kabul, especially at first. In addition, as part of the North Regional Strategy, more carpet cut and wash facilities will need to be opened in Kabul and around Jalalabad. For areas such as Paktya and Paktika, recommendation is to encourage greater production of agricultural raw materials by purchasing them for use in processing facilities which are being developed in nearby developed provinces, such as Kabul. MOCI Partners USAID ASMED, EGGI USA (Leaders of most PRTs in the region) 59

Carpet example: significant value comes from final steps
Carpet – North / East Carpet example: significant value comes from final steps Value distribution of typical Chob Rung carpet $ / sq. m Significant value from weaving, but extremely labor intensive, and low margin overall High value from trading, and has the key benefit of access to markets, customer, brand, etc. But currently these final two steps are performed in Pakistan on 85% of carpets Source: Growth Strategy and Action Plan for Carpet Sector, ACC & On the Frontier; ASMED Carpet Sector Strategy; Carpet Sector Analysis, US Department of Trade 60

Carpet sector can gain ~30% value through repatriation
Carpet – North / East Carpet sector can gain ~30% value through repatriation Overall market information World market ~$1B; Afg market: ~$150M (15% market share) National production ~1.6M sq m / year Price $90 / sq m; output: 1 sq m / person / month Hence, ~140K full-time weavers could work full time In practice, there are probably at least twice that many weavers, working half time or less. Some estimates of up to ~1M people weaving part time Thus a $150M annual market can become a roughly $200M market Adds 7K jobs in cut and wash Gives Afghanistan better control over market and brand, which in turn will lead to higher sales Question is: what needs to happen now? Cut and Wash Cut and wash in Pakistan generates ~$6M in revenue 1.6M sq. m / year * 85% cut in Pakistan * $4 revenue per m And employs ~7K people Based on average facility of 200 people cutting and washing 3,000 sqm / month Hence, average person cuts and washes 180 sqm / year Trading Trading Afghan carpets in Pakistan generates $38M Traders make on average $27 / sq meter Trading does not employ many people Given the fact that a single trader trades 1,000s of square meters / month, while a weaver just weaves 1 sq m / month But trading would give Afghanistan better control over markets and branding, and keeps margins in country, which could then benefit weavers Source: Growth Strategy and Action Plan for Carpet Sector, ACC & On the Frontier; ASMED Carpet Sector Strategy; Carpet Sector Analysis, US Department of Trade 61

Several actions in carpet sector for MOCI and others
Carpet – North / East Several actions in carpet sector for MOCI and others Cut and Wash Land – more land needed for cut and wash, likely in industrial parks – in some cases, MOCI can provide land at low lease rates to attract industry back from Pakistan Finance – will need to work with banks to provide financing; however, loans <$20K Environment – increased cut and wash in Afghanistan means NEPA will need to develop a policy to address the environmental impact of cut and wash Additional incentives – to bring back cut and wash from Pakistan, government will have to offer additional incentives (low or no tax, subsidized shipping out of Afghanistan, land, etc.) Trading Shipping and transportation Need to increase shipping and handling capacity at the airport Security issue at airport – carpets are cut and damaged during a post-customs security check Trade paperwork – most Kabul-based traders still complain of excessive procedures in order to get permission to export Others say the process is not difficult, but process is neither consistent nor transparent One-stop-shop for exporters at the airport will help to address this issue Financing – Kabul traders will need more access to finance (although finance for traders typically not too difficult to obtain) General Branding – will need to develop a brand for the finished products, including several components Fair Trade – increases value of brand in the states, but would require government mandate stating that all carpets are made according to Fair Trade, and then would require Fair Trade organization itself to ensure compliance Also need to consider other certifications – handmade vs. machine, natural vs. chemical. Before making these decisions, need to find out what the customer market actually values Design – Afghanistan will have to spend more time with design Hence, a design facility might be needed. Could be done as part of a new independent carpet guild, which would draw from members of the existing carpet associations Source: Growth Strategy and Action Plan for Carpet Sector, ACC & On the Frontier; ASMED Carpet Sector Strategy; Carpet Sector Analysis, US Department of Trade 62

Marble - West Marble production taking place in all regions Herat is good place for pilot: high quality product, some production already; Jalalabad also potential Mazar Some exports, but little market data available Kabul 300 tons / month White, black, green Herat 300 tons / month High quality white marble Jalalabad 150 tons / month White, medium quality Kandahar Helmand 150 tons / month But low quality Lashkar Gah 10 tons / month White / onyx Source: On the Frontier; ASMED Marble Sector Strategy 63

Most of the value going to neighbors
Marble - West Most of the value going to neighbors Value distribution of typical metric ton of marble from Afghanistan $ / ton Majority of the value comes from the final two steps, but a significant amount of capital investment is required. Hence, marble pilots should focus on high-quality quarries, such as in Herat Afghanistan captures only $40 per ton from a value chain that is worth approximately $240 / ton, and low quality blasting at the quarry means ~50-80% of marble is wasted Source: On the Frontier; ASMED Marble Sector Strategy 64

Could become ~$450M industry; ~$100M investment needed
Marble - West Could become ~$450M industry; ~$100M investment needed Potential grown of Afghan Marble But substantial investment needed USD $M Requires ~$100M in investment in several areas Road and infrastructure to and from quarries Equipment within each quarry Overall, building this type of capacity requires opening over 200 quarries, and 50 finishing plants These estimates also rely on several assumptions World capacity continues to grow at 8% per year, as it has over last five years Adding 250K tons of capacity each year between now and 2016, meaning a total capacity in 2016 of 1.5M tons Also assumes an ongoing price of $150/ton for blocks and $300/ton for slabs Nearly all production would be exported Best estimates suggest that output at this level would create 15K jobs Tiles Slabs Blocks Source: On the Frontier; ASMED Marble Sector Strategy 65

But many actions and interventions needed to start industry
Marble - West But many actions and interventions needed to start industry Quarrying Advocacy need with Ministry of Mines to encourage investment Quarrying rights should be awarded based on company’s willingness to invest capital Quarry owners should be taxed based on profits, not based on a royalty system Lease lengths need to be increased – current short-terms of lease discourage high capital investment The industry is unlikely to grow if these mining issues cannot be resolved Financing required to improve quarrying operations Organizations such as USAID / ASMED working with OPIC, IFC and others to provide financing Capital requirements high – up to ~$1M per quarry MOCI can help to promote the marble cluster and work with banks to provide financing However, the most important role for MOCI is to help remove roadblocks at Ministry of Mines Cutting (slabs) Final cut & polish Afghanistan already has skills in this area Often Afghanistan re-imports slabs and tiles from Pakistan However, more training and equipment needed to further raise the standard of local finishing Other Infrastructure Government coordination will be needed to ensure proper infrastructure. For example, improved roads will be needed to access several major quarries in Heart Electricity grid might also need to be extended to quarries Testing Critical for marble to be tested before selling to international markets. Currently samples are sent out of the country for testing. Based on test results, quarries for pilot can be identified. However, as industry grows, government will need to support an in-country testing facility Source: On the Frontier; ASMED Marble Sector Strategy 66

Action needed in most of the SME constraint areas
Marble - West Action needed in most of the SME constraint areas Constraint Issues and actions Responsibility Finance Financing is critical with marble industry; ~$1M for quarry to be fully effective Payback time will be slow, at least 1 – 2 years Will need to work with bank to provide financing, and with donors to provide some capital to reduce risk to banks and to help lower the effective interest rate MOCI, MoF, Banks, donors Sector-specific infrastructure Needed infrastructure are generally roads to quarry and equipment in each quarry Polishing and final cut facilities can be done near quarries or in industrial park MOCI, donors Capacity building Training needed for use of all new equipment in quarries MOCI, donors, BDS Transportation Most transportation will be overland; roads in region generally good, but in many cases will need to work with donors to provide last stretch of road to quarry MOCI, Min. Transport, donors Market access Government should continue to work with donors to sponsor trade shows Trade shows in Italy have been effective in past MOCI, EPPA donors Certification Testing needed, and must be quarry specific Donors have helped send samples for overseas testing, but need explore in-country testing MOCI, ANSA, donors Registration MOCI already taking action here; should coordinate through new ACBR in Herat MOCI, donors Trade & tariff Trade and tariffs are still major point of confusion for SMEs in all regions Some regulations might need changing, but often just better communication is needed MOCI, MoF Safety & crime / Land / Electric Electricity is issue in many quarries; usually powered by generator Final cut and polish can be done in industrial park MOCI, AISA 67

For all target sectors, communication from government is key
1 Government must determine for each target sector what type of benefits the government can provide to companies Access to overseas markets via trade shows, customer visits to Afghanistan Access to technical training or certification, for example, design training in carpets or ISO certification in Agri-processing Assistance with access to finance via banks or a public-private SME credit facility Information about donors and access to their programs Expedited tax and / or registration procedures, and potential tax-reductions Advice from MOCI, provided SME can show proof that they have registered Once the benefits have been agreed on for a target sector, MOCI will have to communicate them clearly Recommend putting together an official MOCI guide to specific sector. Should include: Information on the current state of industry: size, dynamics, achievements to date, etc Details about what MOCI’s plans are for that industry: how much MOCI is investing, how big the industry can become, what that means in terms of additional profit for companies What the SME can expect when they formalize: not just the benefits, but also details on taxes, trade regulations, inspection regulations, etc. Distribute official guide through multiple existing channels Regional governments ACCI Sector-specific associations Donor groups Banks that are participating in credit programs for that particular sectors MOCI and other Ministries will have to commit to benefits once they are communicated E.g., a tax rate and procedure, once communicated, will have to stick SMEs should be encouraged to call MOCI with complaint if they experience different procedures than those communicated Opportunity to contact the Ministry with such issues is a benefit to registration 2 3 Will help to promote formalization as well, as the government will only be able to provide these benefits to formalized companies 68

Strategy implementation timeline – overview
Short-term (2010) Mid-term Long-term Activity Jan Feb Mar April May June Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Government approval of policy Creation of SME Group in MOCI First meeting of SME Group Regional strategies shared with stakeholders (donors, ministries, etc) Pilots kicked off in each of 4 regions Address the 3 key areas: financing, infrastructure, & capacity building Results from pilots Revision of strategy based on results Staffing expansion of SME Group Funding sources identified SME Group fully operational, ready to become independent 69

Summary of tasks for each stakeholder group
Short-term Mid-term Long-term MOCI & government Gain agreement on overall SME strategy Agree on sector activities to support strat. Communicate strategy to all stakeholders Create SME Group within MOCI Kick off pilot in particular sector Likely includes support from donors and banks (tech skills, subsidized loans, etc) Incorporate results of pilot into strategy Prepare additional pilots Add additional staff to SME Group based on pilot results Potentially a communications person to continue promoting MOCI target clusters Working together with stakeholders SME Group to have regular sessions with donors, certain SMEs, and MOCI MOCI receives recommendations from SME Group Through Inter-ministerial mtgs, MOCI ensures that gov’t meets SME needs Donors and implementers Work through MOCI to ensure that efforts are coordinated at national and regional level Certain donors should be coordinated in particular for pilot program Continue dialogue with MOCI & SME Group on results of work Make recommendations based on their own findings in the field Continue dialogue with MOCI & SME Group on results of work Recommendations based on findings Ensure that capacity over the long term is transferred to permanent institutions Banks and BDS Specific SME-oriented banks will work with MOCI to offer SME product to target sector BRAC, FMFB, AIB, for example Donor support to offer subsidized loans Specific BDS firms engaged to provide support – for example, in preparing necessary documentation for loans Specific banks will work with gov’t to open dedicated SME windows in certain locations BRAC, FMFB, AIB are all potential partners Expansion of SME windows Ongoing program to offer single-digit interest on loans for target industries Is it possible for regional branches to accelerate formalization right at the SME window? Associations Associations such as ACCI or FACT will provide important input to pilot Names of potential participants Information on needs of participants Associations will continue to be consulted as overall strategy is developed Associations are conduit between SMEs and gov’t / donors Help ensure that SME strategy is understood by SMEs and that gov’t understands SME needs Should also be able to help promote formalization Associations gradually take on a larger role as donor transfer more capacity-building responsibility to them 70

Major risk factors Potential Issue What needs to be done
Commitment from government Without government support from multiple Ministries, the SME Policy and Strategy cannot succeed In particular, government support must come from Cabinet level, additional inter-ministerial level, and the regional level “Support” is not so much financial or human resources as it is a general agreement and willingness to support the principles of laid out in the SME Policy and Strategy There is no to way to gain wide-spread buy-in except by working very closely and extensively with all stakeholders at the start of the project The Minister has proposed inter-ministerial SME meetings 2x/month, at least for first 6 months Only when this is achieved and all feedback is consolidated can the strategy proceed to a regional level Funding Funding will be required to further develop and execute plan In some cases, funding is already being directed to areas consistent with the strategy (such as in carpets) However, in other areas, such as SME-credit and development of the SME group, additional funding is key Donor funding needs to be secured at the start of the project, but only after government commitment is achieved Recommending small donor funding at first, then increasing a project gains momentum Organizational development Capacity building will be important at the Ministerial level, particularly within the SME group at MOCI, but also on a regional level Plan is currently to have a small SME group which reduces immediate capacity building needs, but as group grows in 2011 and beyond, much more capacity is critical As with donor funding, organizational development must be addressed after government buy-in is achieved Capacity building needs must be limited at the project outset. Throughout the project, the aim is to do a few things right, and then build, rather than attempting too much too soon Private sector-failure Fundamentally, much of the success for this program involves SMEs building trust in the government so that the government can better serve their needs However, given current level of SME’s mistrust in government (as evidenced by low levels of formalization), gaining buy-in from our primary stakeholders (SMEs) will be a challenge Clear and frequent communication between the government and all stakeholders is essential to success, otherwise we expect little buy-in from SMEs However, before communication can happen, the government must decide what to communicate, leading again to the notion of government commitment Better no communication than to communicate a promise which is either unclear or not kept 71

Project background and objectives
His Excellency, Mr. Shahrani, Minister of Commerce and Industry, drafted ambitious 2-year plan for MOCI Goal to create a “socially responsible market economy in which sustainable and equitable growth is private-sector led” ASMED to develop SME section of the plan to answer some key questions What barriers prevent SMEs from joining the formal economy? What should MOCI do to lower barriers and to help to grow the overall SME sector? How will other ministries, agencies, etc, help? What are MOCI’s benchmarks for success? Given the above, what will be the government’s overall policy for SME development? Primary deliverable is an SME policy and development plan with three major sections Diagnostics Assessment of current state of SMEs (growth, barriers to growth, etc) Overview of what initiatives are underway now Understanding of gaps Policy and Initiative development Government’s SME policy, based on findings in the diagnostics Tasks for MOCI and other government groups Outline of areas of coordination between government and other organizations Implementation planning Timing of initiatives and policy rollout Plan for coordinating all stakeholders Budget and manpower needs Estimation of impact Plan builds on existing research and draws from interviews with ministries, NGOs, donors, banks, etc. 73

Strategy development followed two-month schedule
Activity Oct 9 Oct 16 Oct 23 Oct 30 Nov 6 Nov 13 Nov 20 Nov 27 Dec 4 Week of 1. Diagnostics Overview of current research Fact-finding with stakeholders Synthesizing results 2. Initiative Development Overview of actions Analogues from region First recommendations 3. Implementation Planning Develop implementation plan Validation with stakeholders Develop metrics to measure Identify quick wins Present final plan Incorporate final feedback Milestones First review with Minister Second review with Minister Final presentation 74

Incorporated findings from existing studies (I)
Topic Report Source Topic SME development --best practices from other countries SME Development in Pakistan – Issues and Remedies SME Development in Pakistan – Analyzing Constraints on Growth Towards a Prosperous Pakistan – Strategy for Rapid Industrial Growth Promoting SME Development: Some Issues and Suggestions for Policy Consideration A Proposed ASEAN Policy Blueprint for SME Development Promoting SME Exports from Developing Countries The Political Economy of SME Development Policy in Indonesia GC University, Lahore, Office of the Chancellor Asian Development Bank Pakistan Development Forum, 2005 Thitapha Wattanapruttipaisan, Senior Officer, Industrial Services, ASEAN Human and Organizational Potential Development Center, Thailand Ganeshan Wignaraja, Head of Competitiveness and SME Strategy, Maxwell Stamp USAID Overview of SME policy reform in Pakistan and its impact on growth Constraints and policy recommendations Data on correlating industrialization with GDP Assessment of Asian SME development policy, with particular emphasis on trade Overall policy recommendations for SME development in ASEAN Initiatives for gov’t, SME associations, & donors to develop SME sector Navigating the political aspects of SME development & building consensus 76

Incorporated findings from existing studies (II)
Topic Report Source Topic SME development --best practices from other countries SME Development in Pakistan – Issues and Remedies Formalization of SMEs in Africa SMEs in India SME Development Framework, Cambodia, 2005 Leather Industry Development, Pakistan SMEDA Ordinance SMEs in Bangladesh GC University, Lahore, Office of the Chancellor World Bank Government (?) Royal Government of Cambodia SMEDA Abdul Awal Mintoo Overview of SME policy reform in Pakistan and its impact on growth Analysis of local constraints in various African countries Review of India SME policy Outline of national framework and policy How Pakistan developed their leather industry Operating rules and charter for Pakistan SME development group Report on what Bangladesh is doing in its SME sector 77

Incorporating findings from existing studies (III)
Topic Report Source Topic SME sector analysis Afghanistan SME Market Analysis – Phase 1 Afghanistan SME Market Analysis – Phase 2 Afghanistan Revival and Redevelopment ARDEP SME Survey Analysis The Case for SMEs in Afghanistan Mapping of Alternative Livelihood Projects in Afghanistan ASMED / Altai Consulting Clive Mitchell, Antony Benham, British Geological Survey ARDEP, Haroon Chakansuri Agency Coordinating Body for Afghan Relief, Saurabh Naithani, MOCI UN Office on Drugs and Crime Feasibility study for 6 sectors Milk and yoghurt Cashmere Gemstones Flour Industrial bread Cakes and candies Market analysis and feasibility study for renewable energy and energy efficiency Study focussing on the minerals sector Analysis of constraints to SME development Issues in promoting SMEs, and governance recommendations Assessment of viable SME sectors and overview of scope of major donor agencies 78

Incorporating findings from existing studies (IV)
Topic Report Source Topic SME sector analysis (cont’d) Potential for Establishing a New Tannery in Afghanistan, 2009 Afghanistan Marble Industry Competitiveness, 2009 Marble Cluster Analysis Carpet Cluster Analysis Analysis of Business Opportunities within Afghanistan’s Carpet Sector, 2007 Production and Marketing of Red Meat, Wool, Skins and Hides, 2005 Overview of the Livestock Sector and Livestock Marketing in Afghanistan Rebuilding Afghanistan’s Agricultural Sector, 2003 Avery Leather Consulting Mir A. Rahim Yahya On the Frontier The McCord Group The Macauley Institute & Mercy Corps Euan Thomson / AREU ADB Analysis for potential leather industry in North region, including report on engineering specifications Analysis of Afghanistan competitive advantage Sector report done for ASMED As described in title Focusing on these sectors in North Frameworks and data for agricultural sectors 79

Incorporating findings from existing studies (V)
Topic Report Source Topic Investment climate for SMEs The Investment Climate in Afghanistan, 2005 The Afghan Investment Climate in 2008 Doing Business in Afg, 2010 ACBAR’s Guide to the ANDS AREDP SME Survey Analysis Results & Presentation Doing Business in Afghanistan – A Country Commercial Guide for US Companies, 2005 Afghanistan: State Building, Sustaining Growth &Reducing Poverty, 2004 Afghanistan Report, 2009 ARIES SME Dev. Workshop Rept. Sayed Mahmood, WB Finance and PSD Sector Unit (SASFP) John Speakman, World Bank, DFID, Altai IBRD / World Bank Saurabh Naithani AREDP US State Department World Bank NATO / OTAN ARIES Major impediments to SME development, based on results of SME survey Constraints to growth Overall guide to ANDS (not SME specific) Business climate for SMEs Practical facts for investors, including registration procedures, etc. Good source of overall development data General, not SME specific SME constraints and recommendations 80

Incorporating findings from existing studies (VI)
Topic Report Source Topic Investment climate for SMEs Afghanistan Poverty Reduction Strategy Paper, 2008 IMF Statistical Appendix, 2008 Understanding Afghanistan: Growth Diagnostic, 2008 ADB Afghanistan Statistics Afghanistan National Human Development Report, 2004 Structure of Afghan Economy Economic Incentives and Development Initiative to Reduce Opium Production, ‘08 Falling Short: Aid Effectiveness in Afg. Alternative Development Program, East Region, 2005 – 2009 IMF DFID ADB UNDP World Bank DFID, World Bank Matt Waldman / ACBAR USAID Update on IMF poverty reduction initiatives Excellent source of macroeconomic data Another excellent source of macroeconomic data Macro-economic data Good source of macroeconomic data Excellent macroeconomic data Analysis of agricultural sectors Good for aid data Review of agricultural programs in the East 81

Incorporating findings from existing studies (VII)
Topic Report Source Topic Investment climate for SMEs Reforming Business Licensing In Afghanistan, 2008 Afghanistan Needs Pro-Private Sector Growth, 2005 SME Policy Issues, 2008 Adam Smith / DFID William Byrd GFA Consulting Group Report on issues and solutions Actions to promote growth Analysis of issues and constraints, especially in Kunduz and Balkh 82

Incorporating findings from existing studies (VIII)
Topic Report Source Topic Access to credit Facing the Challenge of Scaling up Microfinance in Afghanistan From Access to Impact: Microcredit and Rural Livelihood in Afghanistan Midterm Review of the Microfinance Sector and MISFA in Afghanistan The Microfinance Revolution Banking Sector Reforms in Pakistan Finance Cluster: Understanding Investor Needs, 2006 The Link Between Competitiveness and SME Financing, 2006 Development of Commercial Banking System in Afghanistan, 2009 FINCA Progress Review, 2009 Amjad Arbab, Managing Director, MISFA Afghanistan Research and Evaluation Unit MRRD and MoF, Afghanistan Radjeep Sengupta and Craig Aubuchon Ishrat Husain On the Frontier World Bank IMF ARIES Microfinance sector analysis Assessment of microfinance institutions and credit-seekers, and discussion of barriers to increased lending Microfinance reviews and recommendations Overview of Microfinance around the world Tactics used in Pakistan to increase access to finance Details on the barriers to financing in Afghanistan Framework for enhancing SME growth through financing Academic details on risk and rewards and CAMEL system Review of efforts 83

Incorporating findings from existing studies (IX)
Topic Report Source Topic Access to credit Export promotion versus import substitution Food for Thought: Analysis of Agricultural Financing in Afghanistan, 2009 Agricultural Market Research for Microfinance and SME Interventions, 2009 Challenges and Next Steps in SME Lending in Afghanistan, 2009 Export Promotion versus Import Substitution Effects of Export Promotion and Import Substitution on Poverty, Inequality and Growth in India Actionaid Mennonite Economic Development Associates Shorebank International Hakan Yilmazkuday Debdas Bandyopadhyay Excellent detail on financing needs in agricultural sector Excellent data on what is needed in agricultural sector Constraints to SME financing General analysis of costs and benefits Academic framework for analysing benefits in India 84

Contents Executive summary SME Strategy details Priority sectors

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