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Starting a business

COUNTRY PROFILES

15
Starting a business
Business registration is an area where Afghanistan is
close to global best practices. It takes only 3 procedures
to fulfill all start-up requirements and the process is usu-
ally completed within 8 days. To operate legally, an in-
vestor may register through the Afghanistan Investment
Support Agency (AISA). AISA was set up in 2003 with
the mandate of promoting investment in the country.
Before its inception it took 28 procedures and 90 days
to complete start-up requirements. The creation of the
AISA registration process now puts Afghanistan in 17th
place worldwide on the ease of starting a businessan
improvement over 2005 when it ranked 22nd.
What to reform
AISA is relatively new and would-be entrepreneurs
need to be made more aware of its services. Alternative
ways to register through the previous system should be
discontinued to avoid confusion and duplication. Start-
up costs are also relatively high in Afghanistan67% of
income per capita. Although an improvement over 2005,
when costs were 75% of income per capita, they are still
well above the South Asia average of 47% of income per
capita. Registration fees comprise more than 80% of
the costs. Reducing these fees would place Afghanistan
in line with lower-cost countries such as Sri Lanka, the
Maldives and Pakistan, and encourage more businesses
to register formally.
While the general registration process was stream-
lined, industry-specific start-up barriers remain. In
many sectors, investors must also obtain a license from
the ministry responsible for the industry in which it
plans to operate, such as in the pharmaceutical, trade,
banking, insurance, foreign exchange, transportation,
construction, hospitality, travel and real estate sectors. In
some of these sectors, there is no rationale for requiring
an additional license, and a simple business registration
should suffice. In others, the rationale is strong (such as
in the pharmaceutical industry) but considerable scope
exists for streamlining the licensing process. In Afghani-
stan, investors also often have to personally transmit
the paperwork from office to office and wait while each
bureaucrat works on the application.

Employing workers
Afghanistan ranks 74th on the ease of employing work-
ers. The cost of hiring is zero, as there are no social se-
curity payments or payroll taxes associated with hiring
a new worker. In Pakistan and India, such costs amount
to 12% and 17% salary respectively. The cost of firing
is lowan employer must only give 1 months notice
when dismissing a worker. By comparison, costs of firing
amount to 56 weeks wages in India and 90 weeks wages
in Pakistan. Overall the rigidity of employment score is
low at 46 out of a possible 100.
What to reform
Although employment regulations in Afghanistan are
flexible overall, some specific rigidities dampen incen-
tives to create formal jobs. In particular, Afghanistans
performance on the difficulty of hiring index, at 67 out
of 100, is relatively high (the South Asian average is 42
out of 100). Term contracts are significantly restricted
based on the nature of the task and the length of the
contract. Loosening these rules will encourage the cre-
ation of more formal sector jobs. Outside the scope of
COUNTRY PROFILE
AFGHANISTAN
The lowest ranked country overall in South Asia
SINGAPORE
SOUTH
ASIA
RANGE
JAPAN
CANADA
UNITED
STATES
NEW
ZEALAND
UNITED
KINGDOM
NEW
ZEALAND
MALDIVES
HONG KONG
CHINA
DENMARK
JAPAN
Afghanistan
Ranking
BEST (1)
Worst (175)
162
17
74
169
174
173
30
152
165
151
1
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
100
105
110
115
120
125
130
135
140
145
150
155
160
165
170
175
NO
DATA
Ease of
doing
business
Dealing with
licenses
Employing
workers
Registering
property
Getting
credit
Protecting
investors
Paying
taxes
Trading
across
borders
Enforcing
contracts
Closing a
business
Starting a
business 16
DOINg BUSINESS IN SOUTH ASIA IN 2007
the Doing Business indicatorswhich focus on private
sector employmentan important priority is to develop
a sound mechanism for retrenchment of workers in
state-owned enterprises. This is necessary to facilitate
state-owned enterprise reform, including liquidation
and privatization.
Registering property
Afghanistan ranks 169th globally in 2006 on the ease
of registering propertythe same as in 2005 and well
below the South Asian average. It takes 252 days to
complete the 11 procedures required and costs 10% of
the property value (figure 2.1). The greatest bottleneck is
in the time needed for the primary court to process the
deed, which can take up to 1 year in some cases. Such
delays are common when courts are involved in property
registration. The complexity of the proceduresrequir-
ing visits to different levels of the courts, the land office,
the tax collection office, the human resource directorate
and the bankdiscourages formal property registra-
tion.
What to reform
Most private land in Afghanistan does not have a clear
title. Many land title records have been destroyed over
the years, particularly during the recent conflicts in Af-
ghanistan. The land courts that are in charge of land ti-
tling and property transfer are said to be among the most
corrupt in Afghanistan. Reforming both land ownership
and land registration rules are urgent priorities. With-
out secure property rights, businesses invest less and
are constrained in getting credit. The first steps toward
reform in Afghanistan can be to rebuild the administra-
tion of property deeds, design effective property dispute
resolution mechanisms and implement a transparent
means for enforcing decisions. Reducing the complexity
of the property registration process is also an important
element in securing property rights. Though land reg-
istration pilot projects have been proposed in Afghani-
stan, their scale will need to be substantially increased to
address urgent national needs. The registration system
does not require sophisticated technologiesThailand is
an example of best practices with paper-based registra-
tion that requires only 2 procedures and 2 days. Stamp
duties and taxes should also be reduced to encourage
formal registration. Typically reductions in fees lead to
more revenues, as more properties are registered and
with less underreporting of property values.
Getting credit
Afghanistan scores zero on all four Doing Business indi-
cators on the ease of getting credit. Lenders look at the
borrowers credit history and collateral when extending
loans. But in Afghanistan there are no credit registries
to provide lenders with information on the borrowers
credit history. There is no functioning secured transac-
tions law to allow creditors to take and enforce collateral
effectively. And there are no functioning property reg-
istries to support the use of land as collateral. Although
discussions have been held on the possibility of estab-
lishing a basic credit bureau, none has been established.
Source: Doing Business database.
FIGURE 2.1
Procedures
Time
(days)
Time
Cost
(% of property value)
1
11
300
240
180
120
60
0
10
8
6
4
2
0
Procedures
1. Submit two signed copies of Circular Form to the Head of Makhzan (judge)
2. The signed Circular Form is then submitted to the Chief of Makhzan
3. Circular Form sent to Imlak (Municipal Land O ce) for certi cation
4. An Imlak committee establishes the value of the land
5. The Circular Form is submitted to the local Tax Collection O ce
6. The Circular Form is submitted to the provincial Tax Collection O ce
7. Submit the Circular Form to the Human Resource Directorate
8. The completed Circular Form is submitted back to the Primary Court judge
9. Seller pays property taxes at a designated bank

10. Submit the completed Circular Form to the Primary Court

11. The buyer obtains a copy of the deed
Cost
Registering property in Afganistan
COUNTRY PROFILES

17
What to reform
The government could start by creating a simple credit
registry to facilitate the exchange of information on
repayment patterns among financial institutions. Regis-
tries are inexpensive to establishless than $2 million
and can be expanded in scope as the market develops.
Although land reforms will take time to implement, the
government can support the development of secured
lending by introducing a collat