Has the Time Come for a Kabul Stock Exchange?

Two young Afghans are working hard to start up an Afghan bourse. It may be one way to goose a moribund economy.

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Afghan men buy and sell currencies at a money market in Kabul on Oct. 10, 2012

The project seems, at the least, ill-advised: establishing Afghanistan’s first ever stock exchange amid the uncertainties of security and the suffocating presence of official corruption. But that is exactly what two young Afghans want to do. Ahmad Bassam and his partner Sanzar Kakar — both with years of banking experience in the U.S., with Morgan Stanley and Merrill Lynch, respectively — hope to have a viable bourse operating by 2014, about the same time U.S. troops pull out of the country.

“Once the foreign forces withdraw, the country will still need an economy,” Bassam says, explaining his rationale for the stock exchange. “And we want to help bring the structures in place that will get us away from donor dependence.” He and Kakar claim to be in conversation with Nasdaq to bring the U.S. exchange on board as their technology partner.

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Foolhardy may be a word to use to describe this quest to build an institution usually associated with the first world into a country so poor it is barely third world — with per capita GDP of $528 in 2010–11 and an economy largely dependent on spending tied to the international military presence. Hundreds of billions of dollars in aid over the past decade, according to officials and analysts, has largely been funneled to quick-impact projects, promoting patchwork and not long-term economic development.

But a stock market could actually be an important step toward rationalizing the way funds and capital flow in Afghanistan. “We have not woken up to the reality to make the economy function,” says Ashraf Ghani, a former Finance Minister in the government of President Hamid Karzai, who describes the current state of the Afghan economy as “an aid-dependent, distributive system,” not a dynamic market economy. “There is still wishful thinking that aid will save us.”

More than just aid, a stock exchange could impose a kind of transparency on the Karzai government’s attempt to privatize state enterprises, much of it the remains of companies set up during the Soviet-backed regime whose final dregs disintegrated after the Taliban took Kabul in 1996. Those enterprises had lost as much as 80% of their value during the years of war, according to a 2002 assessment commissioned by Karzai. “There were very few state-owned enterprises that were of value to the country,” says James Blewett, part of that commission. “The majority of the enterprises were defunct or nonfunctional.” Still, Karzai chose to go ahead with privatization.

Public offerings were not immediately possible, said the 2002 report, because “they usually require the existence of substantial capital-markets infrastructure … stock exchanges, legal and regulatory frameworks, and financial market institutions.”  The government had no patience — or capacity — for creating those structures, and so most of the enterprises were sold directly to individuals and entities.

That process, however, involved distributing some of the companies to politically connected individuals. Mahmood Karzai, President Karzai’s brother, for example, partnered to buy a large state-owned cement factory. The Afghan Ministry of Mines recently questioned the transparency of the contracting process.

Enter Bassam and Kakar. Their vision is to create a platform for the revival of those enterprises through public ownership. The industries involved are potentially lucrative — mining, transportation and aviation, construction, textiles. “The idea is to create a proper capital market — not just a stock market,” Bassam says. And it is not just the individual investors that they hope to attract to the bourse. The Afghan government has several institutions that must manage their funds for long-term societal reasons. Says Bassam: “We hope to tap into the pension plan, and the investment of retirement plans.”

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For Bassam, a Kabul stock market has been a cherished dream. Almost 10 years ago, he was an immigrant in the U.S., having escaped the wars of his country when he was 15. After completing a college degree at the University of Phoenix, he was a candidate for a job at Morgan Stanley when the interviewer asked Bassam what a job at firm would lead him to do. “It would be amazing if I could open the first ever Afghan stock exchange,” Bassam recalls saying.

Bassam got the job. During his seven years at Morgan Stanley and a year at Harvard, where he received his masters in finance, he developed the concept and action for his vision. In 2011, after attempts at getting the project rolling through occasional visits, Bassam decided to move to Afghanistan.

For years, Bassam and Kakar pinned their hopes on donors to help them get started, just like a large part of Afghan businesses are boosted by foreign aid in their early steps. But they found no funders, a sign of reluctance to invest due to the looming uncertainties. Bassam says they then decided to fund the project privately. “We are fully capitalized to start the stock exchange, but we are keeping our options open for fundraising if we decide to expand,” he says.

One big hurdle, however, remains public trust. The Kabul Bank fiasco, in particular, got in the way of moving the stock-market project forward. In that scandal, more than $900 million in deposits disappeared because of insider lending. Lines stretched across blocks of the capital as desperate bank customers tried to get their savings out of the bank. Furthermore, Bassam’s progress was also impeded by a former Afghan central-bank chief who, returning from an Islamic-finance conference overseas, declared that he wanted a “Shari‘a compliant” stock exchange.

Bassam says the steps taken by the World Bank and the Afghan government in the wake of Kabul Bank have, to an extent, restored consumer confidence, but he acknowledges that winning trust will require hard work. “We will win public trust by adhering to highest industry standards and complying with the rules and regulations,” says Bassam. Transparency will be crucial. Says Ghani: “The burden is to win the trust of the people. But if it is done right, the public will trust.”

With the U.S. military withdrawal looming, the question of stability is paramount. The international community, says Gautam Mukhopadhyay, India’s ambassador to Kabul, “[has] tried stabilizing Afghanistan militarily. It hasn’t worked. We have tried the political route. There is little progress. Why don’t we try economically — by incentivizing security through small- and big-ticket investments?” In the end, that kind of money could well be the key.

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