MIGA Guarantees Support Economic Development and Reconstruction in Afghanistan

MIGA Guarantees Support Economic Development and Reconstruction in Afghanistan

WASHINGTON, DC, October 2, 2006—The Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, said today it is supporting two new investments in Afghanistan to address the lack of financing available to micro and small businesses, as well as the need for low-cost generic medicine.

The projects were underwritten through the Afghanistan Investment Guarantee Facility (AIGF), a special fund designed to encourage foreign direct investment into the country. The facility, administered by MIGA, is jointly funded by the World Bank's International Development Association, government of Afghanistan, United Kingdom, and Asian Development Bank. Germany is covering implementation costs.

"Attracting foreign direct investment is critical to the reconstruction efforts and sustainable long-term economic growth of Afghanistan," says MIGA's Executive Vice President, Yukiko Omura. "Perceptions of risk by investors and bankers can be a major obstacle to investment. MIGA's risk mitigation tools can play an important role in securing investment, which is especially important given the country's challenging post-conflict environment."

After more than two decades of conflict, Afghanistan has begun a political, economic, and social transformation. Despite some early gains, tremendous challenges remain. Capacity remains uneven and weak overall, systems and procedures rudimentary, and many areas of the country are seriously affected by conflict. Today, the majority of Afghans still live in dire poverty without access to safe drinking water or electricity—or opportunities to improve their lives. Reconstruction needs are enormous and underscore the need for private sector help in meeting the challenge.

MIGA's support comes in the form of two investment guarantees (insurance), totaling $2.43 million. The first guarantee covers a $2 million equity investment and retained earnings in BRAC Afghanistan Bank by ShoreCap International Ltd., of the Cayman Islands. The guarantee, for up to seven years, will protect the investment against the risks of transfer restriction, expropriation, and war and civil disturbance (including terrorism).

The project involves the creation of a newly licensed commercial bank, BRAC Afghanistan Bank, to provide credit and other financial services to the country's small and medium-size enterprises. BRAC NGO—the bank's sponsor and Afghanistan's primary microfinance provider, with 70 percent market share in terms of lenders—is one of the largest microfinance operators in the world.

BRAC Afghanistan Bank will provide loans and savings products to micro entrepreneurs and small businesses across Afghanistan. The lack of employment opportunities in war-ravaged rural areas and the disappearance of jobs and low pay in the public sector in urban areas have resulted in the growth of a large number of small, privately owned enterprises, representing a sizeable demand for credit.

"This new bank is going to focus on providing access to capital for the 'missing middle'—small enterprises that are too large for conventional microfinance programs but not big enough to be served by existing commercial banks in Afghanistan," says Paul Christensen, President of ShoreCap International Ltd. "We expect BRAC Afghanistan Bank to replicate the success of BRAC Bank in Bangladesh, another ShoreCap portfolio company, where outreach has grown to nearly 50,000 borrowers. But we would not have gone forward without mitigating the risks beyond our control with MIGA's instruments."

The second guarantee involves the establishment of a local pharmaceutical company, Baz International Pharmaceutical Company Limited. The company will produce essential generic medicine locally, which will help improve the availability, quality, and access to essential medicines in Afghanistan.

The health sector in Afghanistan remains underdeveloped. Due to the shortage of essential medicines, diseases such as acute respiratory illnesses, diarrhea, pneumonia and typhoid continue to spread through the Afghan population.

"This project really takes aim at improving the Afghan people's quality of life," says MIGA's Omura. "The plant is the first initiative focused on producing basic medicines, adhering to international standards of production and quality control.  It will be one of the first concrete reconstruction projects led by the international community in partnership with local entrepreneurs to rehabilitate Afghanistan's manufacturing infrastructure."

The MIGA guarantee is covering a $0.48 million equity stake in the pharmaceutical company by the Geneva-based non-profit, Business Humanitarian Forum Association, for a period of up to three years. Private Afghan investor, Dr. Karim Baz, the United Nations Development Program in Kabul, the European Generic Medicines Association, and the Development Finance Institution of Germany are contributing to the project.

The investments represent the second and third transactions supported by the Afghanistan Investment Guarantee Facility to date. The first deal covered by the fund was a $1.07 million investment in the agricultural sector by French investor Dagris in February 2006. "Afghanistan is a challenging environment, but MIGA is pleased to have been able to support three investments through the facility this year," says Orjan Helland, AIGF Investment Officer.

For information:
Angie Gentile, agentile@worldbank.org, 202.473.3509
Farah Hussain, fhussain@worldbank.org, 202.473.2540