Ministry of Commerce and Industry

SME Development and Management Directorate

SME Development Department

Small & Medium Enterprise

Development Strategy
2015–2020

June 2015

DRAFT
Version 2.0
SME Development Strategy DRAFT Version 2.0

Table of Contents
1.0 Executive Summary........................................................................................................... 1
2.0 SMEs in Afghanistan .......................................................................................................... 2
3.0 Value Chain Approach ...................................................................................................... 4
3.1 Existing Priority Value Chains................................................................................................. 4
3.2 Selecting New Priority Sectors ................................................................................................ 6
3.3 Create New Value Chain Working Groups and Action Plans ........................................ 7
3.4 Empowering Women .................................................................................................................. 8
3.5 Establish PPP Mechanism in Provinces and Villages ...................................................... 9
4.0 Access to Financial Services ........................................................................................... 9
4.1 Background and Issues ..................................................................................................................... 9
4.2 SME Loan Guarantee Program ..............................................................................................10
4.3 Sharia-Compliant Financial Services ..................................................................................11
4.4 Formalization ..............................................................................................................................12
5.0 Regulations and Procedures ........................................................................................ 13
5.1 Business Licensing ....................................................................................................................13
5.2 Customs .........................................................................................................................................13
5.3 Afghan Government Procurement.......................................................................................14
6.0 Infrastructure .................................................................................................................. 15
7.0 SME Development Governance and Support ......................................................... 16
7.1 Role of SME Development Directorate ...............................................................................16
7.2 Strengthen MoCI Provincial Offices .....................................................................................17
7.3 Provincial Economic Growth Plans .....................................................................................18
7.4 Afghan SME Development Agency........................................................................................18
8.0 Implementation Schedule and Action Plan ............................................................ 19

Table 1: SME Development Strategy – Focus Areas and Actions ................................................. 1

Table 2: MoF Definition of SME by Capital and Sales ......................................................................... 2
Table 3: MoCI Definition of SME by Employees and Capital ........................................................... 2
Table 4: Current Status of Value Chain Working Groups and Action Plans ........................... 4
Table 5: SME Development Strategy Implementation Schedule .............................................. 19
Table 6: SME Development Strategy Action Plan .............................................................................. 20

Figure 1: Comparision of MoF and MoCI Definitions of SMEs........................................................ 3

Figure 2: Value Chain Working Group Process ..................................................................................... 7
Figure 3: Challenges Facing SME Development ..................................................................................... 9
Figure 4: Summary of Reasons for SME Financing Gap .................................................................. 10
Figure 5: SMED Coordination of SME Strategy .................................................................................... 17

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1.0 Executive Summary

This document outlines Afghanistan’s SME development strategy for the next five years
(2015–2020). 1 The SME development strategy has the following five main components:

1. Continue implementing the well-established value chain approach

2. Improving access to financial services
3. Making regulations and procedures less of an obstacle to SME development
4. Improving SME access to infrastructure
5. Coordinating governance and policy support for SME development

The overall strategy is to focus SME development efforts in these five areas. The specific
strategy is to implement the key actions identified in each of these areas within the next
five years. The following table summarizes the focus areas, actions, implementation
leader, and deadline:

Table 1: SME Development Strategy – Focus Areas and Actions

No. Focus Area Action Lead Deadline

1 Value Chains Implement existing value chain MoCI SMED 2015
action plans
Create and implement new value MoCI SMED 2016
chain action plans for identified
priority sectors
Establish Enterprise Information MoCI PSD 2016
Centre
2 Access to Encourage provision and DAB 2016
Financial promotion of Sharia-compliant
Services financial services to SMEs
Establish an SME loan guarantee MoF/MoCI/ 2017
program DAB
Develop program to encourage MoF/MOCI 2017
SME business formalization
3 Regulations & Encourage “Afghan First” MoCI PSD 2016
Procedures government procurement policy
Streamline business licencing MoCI 2016
procedures
Improve customs regulations MoF/MoCI 2016
and implementation
4 Infrastructure Establish sectoral industrial MoCI 2018
clusters for SMEs

1 In fact, Afghanistan has had no shortage of SME strategies. The USAID-funded ASMED project
prepared a detailed slide presentation in 2009 that many have called “the SME strategy”, although it
was only presented to the Cabinet’s economic committee and never approved. There is also the
“Growth During Transition” paper prepared by ASI in 2012 under a DFID-funded project, which some
have referred to as the SME strategy. While this included a number of key strategies and
recommendations for SME development, it also included industrial development and general
recommendations for promoting economic growth, so the MoCI SME Development Directorate does
not consider it an SME strategy. It was also never formally presented to or approved by the
Government. This new SME development strategy presented here builds on, consolidates, and
updates this previous work.

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5 Coordination Strengthen MoCI’s provincial MoCI 2015

& Governance offices and operations
Assess need and feasibility of MoCI 2019
establishing Afghan SME
Development Authority
(ASMEDA)

2.0 SMEs in Afghanistan

One of the many challenges of developing an Afghan SME development strategy is that
there is no settled definition of what an SME is in Afghanistan. The Ministry of Finance2,
Ministry of Commerce and Industry, and the different multi—laterals (the IFC and the
World Bank) all having different definitions. Therefore, the initial step in this strategy
was to define what exactly an “SME” is in an Afghan context. The size and types of
businesses that are considered SMEs varies not only from country to country, but also
within countries, and Afghanistan is certainly no exception. For example, the Ministry of
Finance groups business taxpayers as “small”, “medium”, and “large” as seen in the
following table:

Table 2: MoF Definition of SME by Capital and Sales

Afghan Ministry of Finance Taxpayer Offices

Maximum Capital Turnover

Taxpayer Office Million Afs USD Million Afs USD
Small 6 110,000 3 50,000
Medium 150 2,630,000 75 1,320,000
Large > 150 > 2,630,000 > 75 > 1,320,000

Exchange Rate (Afs/USD) = 57

Source: Afghanistan Revenue Department (www.ard.gov.af accessed
May 2014).

At the MoCI, the current working definition of an SME is much narrower than at MoF. It
also differentiates between businesses in manufacturing and services. Grouping its
definition of small and medium, a manufacturing SME would have investment in the range
of $40,000 to $180,000. A business in the service industry is in the SME range with half
of this investment ($20,000 to $90,000), which makes sense since a service business
typically requires less investment, so a larger investment would indicate a service
business too large to be considered an SME. The MoCI also includes the number of
employees in its definitions of business sizes, so the range for an SME is a business with
5 to 99 employees. The MoCI’s criteria for business size categories is summarized below
(SME range highlighted in green):

Table 3: MoCI Definition of SME by Employees and Capital

2 Thus for purposes of income tax collection, the MOF defines SMEs as having capital of less than $2.6 million
and turnover of less than $1.3 million

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MoCI Business Categories

Employees Investment (Million Afs) Investment (USD)

Manufacturing* Services** Manufacturing* Services**
Business Size From To From To From To From To From To
Micro 0 4 0.0 2.5 0.0 1.0 - 40,000 - 20,000
Small 5 19 2.5 5.0 1.0 2.0 40,000 90,000 20,000 40,000
Medium 20 99 5.0 10.0 2.0 5.0 90,000 180,000 40,000 90,000
Large 100 10.0 5.0 180,000 90,000 - -

Source: Adopted by MoCI from World Bank.

Exchange Rate (Afs/USD) = 57

*Manufacturing investment includes investment in firm and machinery.

**Services investment includes investment in equipment.

Not only do the thresholds and ranges of numbers vary, but there is considerable
inconsistency on the metrics used to define an SME: Typical definitions use capital,
investment, turnover, or number of employees.3 Many definitions use multiple criteria
but don’t specify which one takes precedents when there is a conflict. For example, if a
business would be “medium” in terms of capital or investment but has more employees
than qualify for the medium category, it is generally unclear whether the business would
be considered medium or not. A comparison of the various criteria and ranges is seen in
the following exhibit:

Figure 1: Comparision of MoF and MoCI Definitions of SMEs

Comparison'of'MoF'and'MoCI'Defini8ons'
of'Small'and'Medium'Businesses'

MoCI'
0' 5' 20' 100'

MoCI'
MoF' '
$0' $50K' $100K' $150K' $200K' $250K' $300K' $350K' $2.6M'

MoF' '
$0' $50K' $100K' $150K' $200K' $250K' $300K' $350K' $1.3M'

Small' Medium'

Of course, in the general sense, the exact thresholds and definitions are largely irrelevant.
The financial needs of a business with $180,000 in investment and 99 employees are
indistinguishable from a similar business with $200,000 in investment and 100

3 This also sets aside the fact that the lack of generally accepted accounting standards in Afghanistan
means that even these terms are subject to broad and variable interpretation. Therefore, for our
purposes here, there is no distinction between the MoF’s term “capital” (sarmaya) and the MoCI’s
term “investment” (sarmaya guzari).

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employees, and in practice many services offered to SMEs are not constrained by a ridged
definition of exactly what qualifies as an SME. However, in some specific cases, such as a
government-supported lending program, a more precise and fixed definition must be
established and implemented because such programs require a sharp line defining who
potentially qualifies for money and who does not. Therefore, since the MoCI has been
identified as the lead ministry for SME development,4 the operational definition of SME
used here is from MoCI—indicated as the “SME Zone” above.

Although unfortunately the data are quite unreliable, the consensus is that SMEs as
defined generally in this strategy account for 80-90% of businesses, employ about 75%
of the labour force, and generate over 50% of Afghanistan’s GDP. Therefore, by any
definition or measure, SMEs represent the most significant component of the Afghan
economy, and the one with the greatest prospects for growth and development. This is
why this SME development strategy is a crucial component of Afghanistan’s overall
economic development strategy.

3.0 Value Chain Approach

3.1 Existing Priority Value Chains
A key component of the SME development strategy is the value chain approach. This
involves identifying priority industries and developing and implementing polices that
address challenges and support growth along the industry’s value chain, especially
encouraging development at the higher value-added end of the chain.
MoCI has already implemented this approach in several sectors. The process included
identifying the priority sectors, establishing a working group of interested stakeholders,
developing a value chain action plan, and implementing that plan. This process is
conceptually sound and has resulted in some successes, although the implementation of
the plans has been limited. The status of these value chain action plans is summarized
below:
Table 4: Current Status of Value Chain Working Groups and Action Plans

No. Value Chain Working Latest Action Period

Group Plan Covered
1 Agri-Business Active October 2014 3 years
2 Carpets Active October 2014 3 years
3 Marble Active October 2014 3 years
4 Gemstones Active May 2015 3 years
5 Construction Active March 2015 3 years
Materials
6 Women SMEs Active April 2014 3 years
7 Leather (Policy) Active 2014 5 years
8 Cashmere Active October 2014 3 years
9 Woodworking Inactive January 2015 3 years
10 Medicinal Herbs Active May 2015 3 years

4 See documents previously referred to as industrial policy and SME strategy.

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11 Stone Pending
Engraving/Carving
21 Poultry Pending

Action: Implement existing value chain action plans

The following are the key implementation steps for this action:
1. Revitalize existing value chain working groups. SMED must increase its active
engagement with the established value chain working groups. This should
include scheduling and participating in regular working group meetings. The
working group should meet at least on a quarterly basis. SMED must have a
knowledgeable sector expert that can coordinate and facilitate the working group
meetings. The sector experts must meet and report regularly to the SMED
director on the progress in implementing their value chain action plans.
2. Facilitate updating value chain action plans. SMED will review existing value
chain action plans and identify those requiring revisions or updates. SMED will
then oversee the working group’s progress in updating the plans. If this process
requires donor support, SMED will attempt to identify and secure those resources.
3. Coordinate implementation of action plan and include required resources
in MoCI budget. The value chain working group is responsible for managing the
implementation of the value chain action plan, but this process will be
coordinated, monitored, and evaluated by SMED. Since SMED has overall
responsibility for the implementation of the action plan, it must identify and
attempt to procure the resources required to implement the plan. The initial
request for these resources should be included in the MoCI budget. Supplemental
resources may be sought from donors, but the action plan should not rely solely—
or even primarily—on donor resources, since this effectively cedes responsibility
for implementing the action plan to the shifting agendas and declining budgets of
the donors.
4. Identify actions requiring and likely to receive donor support. The value
chain working group, in coordination with SMED, should identify specific actions
in the action plans that both require and are likely to receive donor support.
SMED should then initiate the process within MoCI to seek donor support for
those activities.
5. Prepare proposals to seek donor support for key action plan components.
SMED will identify prospective donors and prepare a proposal to the donor or, if
there is already an established project or funding mechanism likely to support the
activity, the implementing partner. Note that hopefully in some cases, the action
will already have been discussed and supported by the prospective donor, so
developing and submitting the proposal will simply be a formal request for
support in implementing the agreed priority action.

Lead: SMED will continue to coordinate and lead the activity.

Timeframe: The activity is already on-going to a limited extent. It will continue

and expand with greater focus—and hopefully greater resources—once this strategy is
approved in 2015. The activity will continue throughout the five-year period of the SME
development strategy.

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3.2 Selecting New Priority Sectors

The existing working groups and action plans represent a significant portion of the
Afghan economy. However, they also neglect sectors that represent significant
opportunities for SME development and overall growth of the Afghan economy.
Therefore, SMED must be able to identify additional priority sectors to support as and
when it has the resources and capabilities to expand its support for SME development. In
order to do this, MoCI has identified the following criteria for selecting new sectors5:
• Labour-intensity/ability to create jobs. Due to extremely high unemployment
rate (~40% and growing) job-creation and growth must be important parts of the
SME sector selected for support.
• Afghanistan’s ability to compete in value-added areas. The key to long-term
prosperity for Afghanistan involves moving from its current largely agriculture
and low-end manufacturing dominated economy to a higher value industrial
economy in which value is added to its currently largely minimally processed
exports inside Afghanistan prior to the goods being exported. In general, the
higher an economy is on the value chain, the higher its margins and the higher its
per capita income. At present, much of the value of Afghan produced goods is
captured by Afghanistan’s neighbours who dominate the final segments of the
value chain.
• Low barriers to entry and high growth potential. Sectors where the barriers
to entry are low are more likely to be successful in the Afghan context. These are
characterized by the following:
• Easy access to input materials, such as raw marble, wood or agricultural
products.
• The right level of skills in the workforce in order to be competitive in the
industry.
• Low technology requirements, or at least the ability to introduce the
technology quickly and cost-effectively.
• A large concentration of existing SMEs.

• High export potential. A focus on exporting, particularly of manufactured goods,

was central to the development strategy of many countries in the Far East, which
have successfully industrialised and there are good reasons for believing that it
should form a major part of Afghanistan’s economic development strategy. In
general, productivity growth is higher in the tradable sector of an economy –
particularly in manufacturing.
• Import substitution. Import substitution is a useful selection strategy to identify
products that enjoy strong and consistent domestic demand and that may be
commercially feasible to produce locally. In determining the viability of local
production additional criteria include:
• Modest investment requirements.
• The presence of adequate human capacity to undertake production.
• A supportive enabling environment.
• Relatively simple production technology.
• Easy access to raw materials and other inputs.

5 These are essentially the same criteria used to select the current priority sectors, although other
criteria, such as donor interest and the Ministry’s influence over the sector, were also factors in
selecting the current priority sectors.

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• High transport costs from neighbouring countries forming a substantial

part of the cost of the product in Afghanistan.

• Afghan firms already established at various parts of the value chain.

Preference should be given to industries where Afghanistan can be competitive
across the value chain as these are likely to be more robust in the face of
competition, more likely to generate jobs and realise synergies and it is
competitiveness in one part of the value train usually helps make other parts
competitive making it easier for Afghanistan to move up the value chain.
3.3 Create New Value Chain Working Groups and Action Plans
Following the identification and selection of a priority sector, the next step in the value chain
approach is the establishment of the value chain working group. This process should be
initiated and coordinated by SMED, although as part of this process, SMED may want to seek
donor support. However, SMED must be actively engaged with the value chain working
groups since it has overall responsibility for monitoring, managing, and coordinating the
activities of group—and is ultimately responsible for the development and successful
implementation of the value chain action plan. It is important to note that the value chain
working group’s role does not end with the creation of the value chain action plan, but rather
it must be the primary driver behind implementing the action plan and promoting the
development of the sector. The value chain working group process is illustrated in the
following figure:
Figure 2: Value Chain Working Group Process

Action: Create and implement new value chain action plans for identified
priority sectors

The following are the key implementation steps for this action:
1. Identify additional priority sectors. As SMED determines that it has the need
and capacity to add a new priority sector to its portfolio, it will follow the process
and procedure previously outlined to select the new sector. SMED should either

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identify an existing staff member qualified to serve as a sector expert or hire a

suitable candidate.
2. Establish new working groups. Once the priority sector is selected, SMED will
identify the key industry players and stakeholders in the sector, establish
contacts, and select representatives for the working group. SMED should prepare
a terms of reference for the working group and facilitate the formal establishment
of the group. The SMED sector specialist will serve as the working group
facilitator, either as a chairperson or secretary depending on capacity and
circumstances.
3. Facilitate preparing new value chain action plans. SMED will supervise the
working group’s progress in preparing the new value chain action plan. If this
process requires donor support, SMED will attempt to identify and secure those
resources.
4. Get action plan approved by Cabinet Economic Committee
5. Coordinate implementation of action plan and include required resources
in MoCI budget. The value chain working group is responsible for managing the
implementation of the value chain action plan, but this process will be
coordinated, monitored, and evaluated by SMED. Since SMED has overall
responsibility for the implementation of the action plan, it must identify and
attempt to procure the resources required to implement the plan. The initial
request for these resources should be included in the MoCI budget. Supplemental
resources may be sought from donors, but the action plan should not rely solely—
or even primarily—on donor resources, since this effectively cedes responsibility
for implementing the action plan to the shifting agendas and declining budgets of
the donors.
6. Identify actions requiring and likely to receive donor support. The value
chain working group, in coordination with SMED, should identify specific actions
in the action plans that both require and are likely to receive donor support.
SMED should then initiate the process within MoCI to seek donor support for
those activities.
7. Prepare proposals to seek donor support for key action plan components.
SMED will identify prospective donors and prepare a proposal to the donor or, if
there is already an established project or funding mechanism likely to support the
activity, the implementing partner.

Lead: MoCI will initiate the activity by coordinating the establishment of the
working group. Following its creation, the working group will lead the activity.

Timeframe: The activity should be initiated in 2016 and continue throughout the
five-year strategic planning period.
3.4 Empowering Women
While women already play a major role in some Afghan SME sectors, such as agriculture,
carpets, and embroidery, typically they receive a low portion of the benefits. 6 Female
entrepreneurs and owners face additional barriers to setting up and growing businesses,
which in turn represents a significant drag on Afghanistan’s growth (with the country
effectively harnessing little more than half of its economic potential). However, rather than

6Previous research indicates that female carpet weavers, despite creating and adding most of the
value to a carpet, typically receive less than 20% of the value of the carpet.

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having women-specific policies or actions, which tend to segregate women as a “special”

group that must receive little more than lip service and token support, the SME development
strategy requires that women’s issues and concerns be fully incorporated and integrated
within all of the strategy’s actions. This will require a women’s SME empowerment group to
advise on policy development and monitor and evaluate the impact of implementation of the
SME development strategy on women.
3.5 Establish PPP Mechanism in Provinces and Villages
The establishment of WGs are not only benefits the value chain sectors, these are useful for
promoting PPP mechanism at the provinces and villages level. It is possible to have
continuous discussion and support thought this effort.

4.0 Access to Financial Services

4.1 Background and Issues
While the capacity to make long-term investments is vital for growth of SMEs, in almost all
over the world SMEs have difficulties in accession of financial resources they need. Financial
services needed by the SMEs can primarily be categorized into short and long-term loans,
unsecured credit, and trade and transportation support such as letters of credit and
factoring 7 . Access to finance for SMEs in Afghanistan is also complicated and often very
difficult. The SME financial services that currently exist in Afghanistan are diverse but
fragmented, uncoordinated and limited. They could be categorized into services provided
directly by donors and their implementing partners, Banks and government. The gaps remain
there as it was shown from the result survey carried out to collect data for this strategy.
Figure 3: Challenges Facing SME Development

7 SME credit gaps in Afghanistan, 2014

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Figure 4: Summary of Reasons for SME Financing Gap

Supply Demand
Why banks don’t want to lend Why SMEs don’t want to borrow
Lack of audited financial statements High interest rates
 SMEs can’t provide proper business  Rates are often over 20%.
documentation. Short payback periods
Desire for quick payback  Loans are often only for 6-12 months,
 Banks reluctant to make long-term which is too short for business
loans in highly uncertain environment. investment.
 Long loan periods desired by SMEs are Unreasonable collateral requirements
incompatible with bank’s desired loan  Banks require collateral of 200% or
portfolio risk profile. more of loan value.
Borrowers have insufficient collateral Lack of Sharia-compliant products
 Unclear land/asset titles make  Some companies are only willing to use
documenting collateral difficult. financial services that comply with
General lack of desire to lend Islamic finance rules (e.g., don’t
 Feel that lending to SMEs is a high-risk, formally charge interest).
low-margin business. Lack of awareness
 Some banks view themselves as largely  Businesses unaware of availability of
a cash management service and have loans and are unfamiliar with
little interest in or ability to manage application process and requirements.
large loan portfolio. Informal Economy
 Borrowing requires business
formalization, which brings unwanted
government scrutiny and taxes.
4.2 SME Loan Guarantee Program
A loan guarantee is probably the most common form of government support for SMEs. The
guarantee can take a variety of forms, but the primary feature is that the government backs
the loan made by a private bank and repays the loan if the business defaults. The business
will typically apply for a loan at a participating private bank, but in addition to the bank’s loan
application procedure, the business will also apply for the government loan guarantee
program. If the application is accepted, the bank can make a loan to the business knowing
that the loan is guaranteed by the government. Since the risk to the bank of default is
significantly mitigated, this typically results in a loan at a lower interest rate than the business
would have gotten without the guarantee. Loan grantees have been used in many developed
and developing countries with very good results, example can be of The Small Business
Administration (SBA) in the United States and Credit Guarantee Fund (KgF) in Turkey.

A loan guarantee has the potential to significantly distort the private loan market by
effectively forcing banks to offer a more attractive product at a lower cost than the market
would dictate. However, this distortion can be minimized if there is a strong credible threat
that the government will seek to recover any default directly from the borrower. This then
merely lowers the cost to the banks by shifting the default risk and collection costs to the
government.

A loan guarantee provides the best combination of significant individual benefit without
necessarily unduly distorting the market.

Action: Establish and SME loan guarantee program.

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The following are the key implementation steps for this action:
1. Establish working group to prepare feasibility assessment. MoCI will
coordinate the establishment of a working group with MoF and DAB. The working
group will then draft a terms of reference for conducting the feasibility
assessment.
2. Prepare feasibility assessment. The working group will review existing
research on feasibility of establishing SME loan guarantee program, including
work already conducted by MoCI and assessments from similar countries.
3. Identify prospective partner banks. Following the feasibility assessment, DAB
will establish criteria for suitable partner banks (e.g., national presence,
established SME lending program) and identify the most promising partner
banks. DAB will promote program to prospective partner banks and enlist at least
2-3 to participate in the initial phase of the program.
4. Develop implementation plan for SME loan guarantee program. Based on the
feasibility assessment and in collaboration with the identified partner banks, the
working group will prepare an implementation plan for the SME loan guarantee
program.
5. Establish SME loan guarantee program.

Lead: MoCI will initiate the activity by coordinating the establishment of the
working group. Following its creation, the working group will lead the activity.

Timeframe: The activity should be initiated in 2016 and completed during 2017.

4.3 Sharia-Compliant Financial Services

About 45% of the same group that had identified access to finance the most pressing issue
for the development of SMEs, suggested that the main problem with access to finance is
lack of availability to Sharia-compliant financial services. Until recently no state owned
provided Sharia-compliant financial service for SMEs. Bank Milli has just introduced the
concept. Mostly private commercial banks provide Sharia-compliant financial services
but they never targeted SMEs. Afghanistan International Bank (AIB) has a loan program
specifically targeting SMEs, but it is not Sharia-compliant.

Action: Encourage provision and promotion of Sharia-compliant financial

services to SMEs.

The following are the key implementation steps for this action:
1. Establish Islamic banking working group MoCI will coordinate the
establishment of a working group with private commercial and sate owned banks
and DAB.
2. Prepare and approve Islamic banking regulations. The law to regulate Sharia-
Compliant Financial Services has been drafted and is with the parliament awaiting
its approval. DAB/MoF will follow it up and develop the accompanying regulation
in a way that would include SMEs specific issues.
3. Encourage private banks to promote their existing Sharia-compliant
financial services to SMEs. The working group will meet and encourage these
banks to extend their service to provinces as well with an emphasis on providing
loans to SMEs.

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4. Direct state banks to develop and promote Sharia-compliant financial

services to SMEs. The working group will meet with Milli Bank (has just
introduced Sharia-Compliant loans) and other state owned banks to offer these
services and extend them to the provinces as well. Special emphasis should be
given to SMEs.
5. Monitor and evaluate provision and promotion of Sharia-compliant services
to SMEs. The working group will monitor and evaluate the provision and
promotion of Sharia-Compliant services to SMEs on quarterly basis.

Lead: MoCI will initiate the activity by coordinating the establishment of the
working group. Following its creation, the working group will lead the activity.

Timeframe: The activity should be initiated in 2015 and completed during 2016.
4.4 Formalization
Formalization refers to the process whereby informal enterprises become integrated into
the formal economy, which is regulated by state-sanctioned economic and legal processes
and institutions. More than 80% of economic activity in Afghanistan occurs in the
informal sector. The informal sector is often characterized by limited access to credit,
poor quality products and jobs, low wages, no protection for workers, unfair competition
with legitimate formal businesses, tax evasion, and reduced contributions to output,
employment and government revenues.

It is important to note that improved access to credit is a leading driver supporting

business formalization. The fact is that there are significant costs and very few benefits
for businesses to get themselves formalized—i.e., registered and licensed—since the
primary outcome of this process is increased government intrusion and taxation.
However, if being a properly registered and licensed (and tax-paying) business allows a
company access to high-quality credit services, then it provides an incentive for the
businesses to join the process. This is an important additional benefit that donors and
governments should factor into their cost-benefit analysis of improving SME financial
services.

Action: Develop program to encourage SME business formalization.

The following are the key implementation steps for this action:
1. Identify barriers to SME business formalization. MoCI will initiate a study to
identify barriers to SME formalization and find ways to overcome those problems.
2. Develop business formalization incentive program, including access to loan
guarantees. Based on the results of the study an incentive program will be
developed in consultative process by MoCI and MoF.
3. Get program approved by the Cabinet. The final draft of the program will be
submitted the Cabinet Economic Committee as a jointed submission. After which
it will be sent to the Cabinet for discussion and approval.
4. Implement formalization incentive program.

Lead: MoCI will initiate the activity and will later on lead and coordinate the process

Timeframe: The activity should be initiated as soon as the strategy is approved and
the program should be approved by the Cabinet during 2017.

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5.0 Regulations and Procedures

5.1 Business Licensing
Business licensing procedures in Afghanistan are extremely complex and confusing. Both
the Ministry of Commerce and Industry and the Afghan Investment Support Agency
(AISA) claim authority to issue business licenses, and businesses are often left with no
choice but to register and get a license from both organizations.

Currently there are many individuals and companies in Afghanistan that choose to work
illegally and foreign investors who shy away from investment opportunities for reasons,
such as administrative regulations and the complexity of the Business registration and/or
License renewal or closure procedures, thus creating huge losses for the government and
slowing the development of the country.

Streamlining and improving the Business registration and Licensing procedures and
processes and educating the local and foreign investors about these improvements, will
be one of many steps towards improving business and investment climate in Afghanistan
and increasing revenue generation.

Action: Streamline business licensing procedures.

The following are the key implementation steps for this action:
1. Assess existing business licensing and registration procedures. MoCI has
already completed a detailed assessment of its own business licensing and
registration procedures, including developing a detailed plan for streamlining the
procedures. MoCI should now initiate a comprehensive assessment of business
licensing procedures across the Government, including the numerous permits,
certificates, and stamps required by various Ministries and other organizations.
2. Review role of MoCI and AISA. The Supreme Investment Council should clarify
the roles of MoCI and AISA and eliminate redundant and potentially conflicting
regulations and procedures.
3. Prepare feasibility assessment of consolidating licensing and registration
function under MoCI. Following the clarification of roles between MoCI and
AISA, MoCI should review the clarified roles and assess the feasibility of
consolidating all business licensing functions under its authority.
4. Present feasibility assessment to Supreme Investment Council for approval.
5. Implement recommendations from feasibility assessment. Supreme
Investment Council should develop an implementation plan and direct MoCI and
AISA to implement it.

Lead: SMED will take ownership and lead this activity.

Timeframe: This should be an on-going activity and will depend on the resources
available to establish new working groups, but at least one new group should be
established in 2016.
5.2 Customs
Currently Afghanistan suffers from a huge trade deficit, therefore it is important to balance it
out by increasing intra-industry trade and exports on local production, helping the country
to integrate in the world economy, and reducing the impact of external shocks on the

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domestic market. Exports play an important role in the economic development of any
country, especially in terms of increasing foreign revenue and domestic production.

Traditional obstacles like tariffs and quotas are easily identifiable, while non-tariff barriers,
like administrative regulations and the altering of procedures, are often not that obvious and
are more complex to deal with.

Action: Improve customs regulations and implementation.

The following are the key implementation steps for this action:
1. Identify impact of customs regulations and processes on SME development.
SMED Directorate of MOCI should carry out a study to specify the impact of the
customs regulation on SME development and come up with recommendations to
overcome those issues.
2. Coordinate customs policy and tariffs with economic policies supporting import
substitution and export promotion within targeted sectors. Based on the results
of the study, customs and tariff policies would need to be amended. The focus of these
policies should be extending support to import substitution and export promotion.
3. Improve bilateral customs arrangements with neighbouring countries. In
negotiations with the neighbouring countries and international trade agreements
emphasis should be to improving customs regulations specially for SMEs.

Lead: SMED will initiate and lead this activity in collaboration with MoF.

Timeframe: This activity will be initiated immediately upon approval of this strategy
and completed during 2016.
5.3 Afghan Government Procurement
One of the significant problems that Afghan SMEs face is a lack of demand for their
products. There is a strong need to create a market for the locally produced products to
support SMEs. The Afghan Government purchases around one billion in goods and
services annually. For example according to 1394 National Budget, the operating budget
is about USD 4.973 billion accounting for 65% of the total national budget. Of this 30% or
1.491 billion is spent on goods and services. Currently only a very small percentage of
these goods and services are provided by Afghan companies. As potentially the largest
buyer for many goods, the Afghan government can significantly increase the market for
locally-produced goods. Also, in areas where Afghan-made products do not currently
meet the government’s standards, the government can work with potential suppliers to
help them meet the standards.

Action: Encourage “Afghan First” government procurement policy.

The following are the key implementation steps for this action:
1. Identify legal and regulatory limits to preferential procurement policy.
Afghanistan’s planned accession to the World Trade Organization (WTO) may
impose limits on the Government’s ability to implement a preferential
procurement policy. The MoCI Private Sector Development General Directorate
should coordinate with the International Trade General Directorate to identify

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what, if any, constraints the WTO would impose on an “Afghan First” government
procurement policy.8
2. Conduct feasibility and impact study of Afghan First government
procurement policy. Given the constraints identified above, MoCI should assess
the feasibility and potential impact of an Afghan First government procurement
policy.
3. Prepare draft Afghan First government procurement policy and regulations.
Based on the feasibility study and impact assessment, MoCI should prepare a draft
policy and regulations for cabinet approval.
4. Seek cabinet approval of policy and regulations. The Minister should present
the impact assessment and proposed policy and regulations to the Cabinet
Economic Council and Cabinet.
5. Develop policy implementation plan. After Cabinet approval of the Afghan
First policy and regulations, MoCI, in collaboration with the Ministry of Finance,
should develop an implementation plan for the policy.
6. Promote and implement Afghan First procurement policy.

Lead: MoCI Private Sector Development General Directorate should take the lead on
this activity.

Timeframe: This activity should be initiated immediately upon approval of this

strategy and completed during 2016.

6.0 Infrastructure
Billions of dollars in donor funding have provided Afghanistan with the best infrastructure it
has ever had. However, Afghanistan still has terrible infrastructure: It lacks the roads,
electricity, water, sewage, and communication infrastructure necessary for economic
development. This obviously affects all of Afghan society, but it is a particular impediment to
SME development because SMEs typically lack the resources to overcome the barriers
imposed by poor infrastructure, such as reliable generators and refrigerated trucks (for
perishable agricultural products).

Solving Afghanistan’s infrastructure challenges is far beyond the scope of the SME
development strategy. However, the strategy includes one key component specifically
designed to mitigate infrastructure challenges for SMEs: The SME sectoral industry cluster.

The SME sectoral industry cluster is a type of industrial park dedicated to one industry.9 It
clusters the various components of an industry’s value chain in one location. Given poor
infrastructure, significant economies of scale can be achieved by clustering the various
segments of the value chain.10 This allows for greater collaboration and integration among
the various sectors, for example wool dyers and weavers in the carpet industry. It also
significantly reduces transaction and transportation costs among the segments of the value

8 Note that these concerns become moot if the new Afghan government decides not to pursue WTO
accession.
9 Sectoral industrial clusters have been particularly effective in other regional developing countries,
such as India, where they were first used primarily in manufacturing, but have now expanded to
include high-tech industries such as software development, pharmaceuticals, and services.
10 This mechanism for addressing the infrastructure problem is therefore effectively a practical
extension of the value chain approach.

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chain, which are significant and even prohibitive barriers in Afghanistan. For example, due
to poor transportation infrastructure and lack of cold storage, an agri-business SME might
only be viable if it is physically co-located with the agricultural product, such as a juice
processor located with a pomegranate farm.

Action: Establish sectoral industrial clusters for SMEs.

The following are the key implementation steps for this action:
1. Conduct feasibility study for establishing sectoral industrial clusters. MoCI
will prepare terms of reference for feasibility study. Since the study is scheduled
for 2018, ideally MoCI will have the internal resources to conduct the study.
However, if not, then donor support for technical assistance will have to be
sought.
2. Identify most promising sectoral cluster and develop detailed action plan
for establishing cluster. The feasibility study will establish criteria for
determining which sector is most suitable for being supported in an industrial
cluster, including which has sufficient viable existing segments of the value chain
and would benefit the most from proximity and integration within a sectoral
industry cluster. This will then be compared with available locations to identify
the most promising sector and site for a pilot industry cluster. MoCI will then
develop, perhaps with technical assistance, a detailed action plan for establishing
the cluster.
3. Approve and implement action plan to create sectoral industrial cluster.
MoCI will seek cabinet approval of the action plan, identify the resources required
to implement it, and implement the plan.
4. Monitor and evaluate sectoral industrial cluster and assess whether pilot
project should be expanded to other sectors and locations. The performance
of the pilot sectoral industrial cluster will be evaluated, and if it is found to be
successful, the concept will be evaluated and implemented as appropriate for
other promising sectors. Note that this can only happen 1-2 years after the pilot
cluster is established, so it will be beyond the five-year timeframe of this plan.

Lead: MoCI will take take the lead on this activity, although it will have to coordinate
with other ministries, including MoI, MRRD, MoF, and DABS.

Timeframe: Given the long lead time required to prepare a detailed feasibility
study and action plan, this activity should be initiated in early 2017 so it can be completed
before the end of 2018. This will provide some time for evaluation prior to the end of the
five-year strategy period so that MoCI can determine if the pilot should be continued or
expanded during the next five-year strategic planning period.

7.0 SME Development Governance and Support

7.1 Role of SME Development Directorate
Many ministries have a role in SME development. However, responsibility falls primarily
within the remit of the Ministry of Commerce and Industry. To exercise this
responsibility, MoCI established the SME Development Directorate within the Private
Sector Development General Directorate in 2010. Therefore, the SMED directorate is the
obvious place within the government to drive SME development—it will coordinate SME
development activities within MoCI and MoCI will in turn coordinate activities with other

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stakeholders, including the cabinet, other ministries, associations, the private sector,
donors, and other relevant organizations. SMED’s central role in coordinating SME
development activities is illustrated in the following figure:

Figure 5: SMED Coordination of SME Strategy

The Cabinet’s approval of this strategy will formalize SMED’s central role as coordinator
of the SME development strategy.

7.2 Strengthen MoCI Provincial Offices

Historically, most SME development efforts have focused on Kabul. This is due both to
the limited reach of donor projects (primarily for security reasons) and the limited
capability of MoCI and other government organizations in the provinces. However, since
most SMEs are in the provinces and nearly all businesses in the provinces are SMEs,
provincial and SME development are inextricably linked: Provincial development is SME
development, and SME development is provincial development.

Unfortunately, MoCI only has provincial offices in 22 of the 34 provinces and those offices
have extremely limited capabilities and are only loosely connected to and coordinated by
the ministry in Kabul. Therefore, if the SME development strategy is going to be
effectively implemented throughout Afghanistan by MoCI, the first action to be
implemented is to strengthen the MoCI’s provincial offices. Fortunately, MoCI already has
a provincial strategy and action plan that is designed to strengthen its provincial
operations, including the implementation of the SME development strategy.
Unfortunately, this strategy and action plan have yet to be formally approved and
implemented. Therefore, the action required is straightforward:

Action: Strengthen MoCI’s provincial offices and operations.

The following are the key implementation steps for this action:

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1. Formally approve provincial strategy and action plan drafted for MoCI.11
2. Begin implementing provincial strategy action plan.

Lead: MoCI is solely responsible for this action.

Timeframe: This action can and should be initiated immediately.

7.3 Provincial Economic Growth Plans
MoCI has begun developing provincial economic growth plans (PEGP) with the approach
being piloted in Kunduz Province. These plans identify, amongst other things, provincial
barriers to economic growth covering both SMEs and larger organizations. PEGPs will
therefore be the vehicle through which MoCI will identify and address province specific
barriers to provincial economic growth. Developing and implementing these plans is part of
the provincial strategy and is therefore subsumed in the previous action, although the
challenge this represents should not be underestimated.
7.4 Afghan SME Development Agency
The Afghan SME Development agency (ASMEDA) is a proposed concept for an independent
SME development agency in Afghanistan, modelled after similar agencies in Pakistan, India,
and Turkey. Creating ASMEDA would effectively involve the government outsourcing SME
development from SMED and MoCI to this autonomous agency. This may be a necessary and
viable option if SMED is unable to deliver on its mandate to coordinate the implementation of
the SME development strategy. While it is hoped that this will not be necessary, the potential
advantage of establishing ASMEDA is that it would be staffed by people outside of the civil
service, unconstrained by tashkeel positions and salaries, and would (at least in theory)
generate revenue to fund its operations through offering value-added services to SMEs.

Action: Assess need and feasibility of establishing Afghan SME Development

Authority (ASMEDA)

The following are the key implementation steps for this action:
1. Establish ASMEDA working group. SMED will develop a terms of reference for
the working group. The members of the working group should be primarily
outside independent observers that are proposed by the Minister to the cabinet
for approval.
2. Prepare feasibility study to determine whether SME development function
should remain in MoCI or be established in ASMEDA. The working group,
ideally with the support of donor-funded technical assistance, will evaluate the
performance of SMED in coordinating the implementation the SME development
strategy. This performance will then be compared with the costs and benefits of
establishing ASMEDA.
3. Prepare plan, budget, and cabinet submission if recommendation is to
create ASMEDA.

Lead: MoCI will initiate this this activity, but the evaluation and feasibility study will
be conducted by the independent working group.

11These documents were drafted by MoCI in collaboration with the DFIF-funded Technical
Assistance to Ministry of Commerce and Industry project implemented by Adam Smith International,
which also supported the Ministry in the development of this strategy.

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Timeframe: This activity should start in 2019 after SMED has had sufficient
opportunity to implement the SME development strategy within MoCI.

8.0 Implementation Schedule and Action Plan

The SME development strategy is designed to be ambitious but achievable. Although the plan
assumes the continued availability of limited donor resources, it is designed to be primarily
implemented by Afghan institutions with Afghan resources. The schedule and action plan
outline are summarized in the following figure and table:

Table 5: SME Development Strategy Implementation Schedule

SME Development Strategy Implementation Schedule

No. Action 2015 2016 2017 2018 2019 2020

1 Strengthen MoCI’s provincial offices and operations MoCI
2 Implement existing value chain action plans MoCI SMED
3 Create and implement new value chain action plans
for identified priority sectors MoCI SMED
4 Establish Enterprise Information Centre MoCI PSD
5 Encourage “Afghan First” government procurement
policy MoCI PSD
6 Streamline business licencing procedures MoCI
7 Improve customs regulations and implementation MoF/MoCI
8 Encourage provision and promotion of Sharia-
compliant financial services to SMEs DAB
9 Establish an SME loan guarantee program MoF/MoCI/DAB
10 Develop program to encourage SME business
formalization MoF/MoCI
11 Establish sectoral industrial clusters for SMEs MoCI
12 Assess need and feasibility of establishing Afghan
SME Development Authority (ASMEDA) MoCI

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 Table 6: SME Development Strategy Action Plan

No. Action Implementation Steps Responsible Timeframe

1 Strengthen MoCI’s provincial offices and  Formally approve provincial strategy and action MoCI 2015
operations plan drafted for MoCI
 Begin implementing provincial strategy action
plan
2 Implement existing value chain action plans  Revitalize existing value chain working groups MoCI SMED 2015
 Facilitate updating value chain action plans
 Coordinate implementation of action plan and
include required resources in MoCI budget
 Identify actions requiring and likely to receive
donor support
 Prepare proposals to seek donor support for key
action plan components
3 Create and implement new value chain  Identify additional priority sectors MoCI SMED 2016
action plans for identified priority sectors  Establish new working groups
 Facilitate preparing new value chain action
plans
 Get action plan approved by Cabinet Economic
Committee
 Coordinate implementation of action plan and
include required resources in MoCI budget
 Identify actions requiring and likely to receive
donor support
 Prepare proposals to seek donor support for key
action plan components
4 Establish Enterprise Information Centre  Prepare gap assessment of existing enterprise MoCI PSD 2016
information resources and analytical abilities
 Develop plan for creating Enterprise
Information Centre to fill identified gaps

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No. Action Implementation Steps Responsible Timeframe
 Determine whether EIC should be part of MoCI
or stand-alone organization
 Seek donor funding to establish EIC.
 Implement action plan for establishing EIC
5 Encourage “Afghan First” government  Identify legal and regulatory limits to MoCI PSD 2016
procurement policy preferential procurement policy
 Conduct feasibility and impact study of Afghan
First government procurement policy
 Prepare draft Afghan First government
procurement policy and regulations
 Seek cabinet approval of policy and regulations
 Develop policy implementation plan
 Promote and implement Afghan First
procurement policy
6 Streamline business licencing procedures  Assess existing business licensing and MoCI 2016
registration procedures
 Review role of MoCI and AISA
 Prepare feasibility assessment of consolidating
licensing and registration function under MoCI
 Present feasibility assessment to Supreme
Investment Council for approval
 Implement recommendations from feasibility
assessment
7 Improve customs regulations and  Identify impact of customs regulations and MoF/MoCI 2016
implementation processes on SME development
 Coordinate customs policy and tariffs with
economic policies supporting import
substitution and export promotion within
targeted sectors
 Improve bilateral customs arrangements with
neighbouring countries.

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No. Action Implementation Steps Responsible Timeframe
8 Encourage provision and promotion of  Establish Islamic banking working group DAB 2016
Sharia-compliant financial services to SMEs  Prepare and approve Islamic banking
regulations.
 Encourage private banks to promote their
existing Sharia-compliant financial services to
SMEs.
 Direct state banks to develop and promote
Sharia-compliant financial services to SMEs.
 Monitor and evaluate provision and promotion
of Sharia-compliant services to SMEs.
9 Establish an SME loan guarantee program  Establish working group to prepare feasibility MoF/MoCI/DAB 2017
assessment
 Prepare feasibility assessment
 Identify prospective partner banks
 Develop implementation plan for SME loan
guarantee program
 Establish SME loan guarantee program
10 Develop program to encourage SME  Identify barriers to SME business formalization MoF/MOCI 2017
business formalization  Develop business formalization incentive
program, including access to loan guarantees
 Get program approved by Cabinet Economic
Committee
 Implement formalization incentive program
11 Establish sectoral industrial clusters for  Conduct feasibility study for establishing MoCI 2018
SMEs sectoral industrial clusters
 Identify most promising sectoral cluster and
develop detailed action plan for establishing
cluster
 Identify prospective locations for sectoral
industrial clusters

22
No. Action Implementation Steps Responsible Timeframe
 Approve and implement action plan to create
sectoral industrial cluster
 Monitor and evaluate sectoral industrial cluster
and assess whether pilot project should be
expanded to other sectors and locations
12 Assess need and feasibility of establishing  Establish ASMEDA working group MoCI 2019
Afghan SME Development Authority  Prepare feasibility study to determine whether
(ASMEDA) SME development function should remain in
MoCI or be established in ASMEDA
 Prepare plan, budget, and cabinet submission if
recommendation is to create ASMEDA

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