KABUL (Reuters) – Isolated by poverty and war from the global recession and heavily dependent on expensive imports, Afghanistan can offer healthy profits to investors with a strong stomach for risk, one of the country’s first fund managers says.

Mustafa Kazem, who controls $25 million at a foreign investment fund, says there is no shortage of entrepreneurs keen to supply the small but booming domestic market and a dearth of credit means many are knocking on his door.

“Afghanistan is still insulated enough from the real effects of what’s happened in other countries,” Kazem said, adding however that isolation caused by years of conflict and security worries, brought Afghanistan a different set of troubles.

It is one of the world’s poorest countries, and listed by the World Bank as one of the most difficult in which to do business.

“It’s tough with certain things not being in place: legal frameworks, transport and security. Convincing people is difficult but there are enough examples of businesses that have managed to make great returns to show an investor,” said Kazem.

“There are certain sectors that have tremendous investment potential: mining, gold, marble, telecoms, agro-processing.”

In front of his desk, magazines are stacked on a chic glass and steel coffee table that is proof of this potential, the product of a steel-working company his fund has invested in.

“We gave them a $1 million loan and so we helped them have access to more working capital,” he said with a smile.

Afghanistan-born Kazem was raised and educated in the United States, but has been based in Kabul since 2004 — a background that he says helps him operate successfully in an environment with virtually no regulatory framework and rife corruption.

FINDING CREDIT

The Afghan Growth Finance (AGF) fund started in April 2008 with a $20 million loan from the Overseas Private Investment Corporation, which is partly run by the U.S. government, and $5 million of equity from other public and private investors.

Despite a burgeoning commercial banking sector in Afghanistan that is funding large private companies, small to medium-sized businesses find it extremely difficult to secure credit.

“Currently in the market what is available through the banking sector are 12-month working capital loans … it doesn’t allow the small to medium-sized enterprises to grow, you need heavy collateral requirements to qualify,” Kazem said.

And because security, regulation and corruption woes spook many foreign investors, the market is relatively wide open for AGF to finance fledgling firms.

So far it has six clients who have each borrowed an average of $500,000 to $600,000. In total the fund has invested $3.65 million of its kitty, keeping loans small so it can maintain a diverse portfolio of clients, but plans to speed up spending.

“In the first half of this year we’re going to invest more than we did in the entire 2008 because as we’re getting aware of the market we’re expanding,” Kazem said, adding that AGF was planning to open new offices in east and north Afghanistan.

“IMPORT SUBSTITUTION”

Afghanistan imports some 90 percent of its goods, Kazem says, providing huge potential for a domestic manufacturing sector.

“All we are trying to do is import substitution. I think that’s the way to go initially to ride out the recession, then these companies are in a position to say: ‘Now we know what to do, we can sell to Dubai or Turkey’.”

The small businesses AGF has provided with credit include a steel processing plant and dried fruit and nut producers that used to have to send their produce to India for finishing and packaging.

With loans they have established their own in-house quality control systems and packaging and cleaning equipment, enabling them to provide a cheaper product to the domestic market. Kazem also wants to help the companies expand into China.

“One of the things we look for is companies that … have the inputs that are available domestically and just add value to them through some processing method,” Kazem said.

“There’s enough domestic requirement or consumption or absorption possibilities that a lot of these companies do not necessarily need to get into other markets.”