Role of Venture Capital as a Source of Finance for Small and Medium Enterprises in Afghanistan

Abstract

Venture capital is an important source of finance for small businesses although it is least understood. The Venture Capital financing market in Afghanistan is inactive and mainly targets large companies instead of small to medium enterprises. The study sought to evaluate the role of venture capital as a source of finance for small to medium enterprises (SMEs) in Afghanistan. The objectives of the study were to review the types of venture capital financing in Afghanistan, identify the factors that drive the venture capital financing and impact of venture capital on small business development. The study adopted a quantitative methodology in order to investigate the subject. Questionnaires were administered on respondents. The respondents were from the Ministry of Commerce, ACCI, AISA, MISFA, and financial Institutions. An overall response rate of 89.66% was achieved. The study established that government was the main financer of venture capital financing in Afghanistan. Further, stable economic environment, investor protection and corporate governance and well developed capital markets were found to be main determinants of venture capital financing. The study also established that the role of venture capital financing played an important role in the areas of employment creation, investment, export growth as well as innovation and creativity. Overall venture capital financing is an alternative financing option for SMEs. However, the development of venture capital market is being constrained by the economic environment, lack of a vibrant capital market, no regulatory framework regards corporate governance and investor protection. The study recommends that development of entrepreneurship by having an active venture capital market, stable macroeconomic environment and regulatory framework that protect investors.