I was in Afghanistan almost a decade ago, just before the Taliban came to power. I entered it from Tajikistan, a nearby former Soviet republic. Going to Tajikistan was like stepping back 20 years to a time of bad Soviet clothing, drab Soviet architecture and ugly cars. Walking across the border into Afghanistan felt like stepping back a thousand years.

In many parts of the country, there was nary a paved road, no irrigation, no electricity and little motorized transport of any kind. People lived in huts they made themselves out of dried mud. I stayed in homes with no indoor plumbing and no indoor cooking facilities.

The only vibrant parts of the Afghan economy were the street markets in every town I passed through-composed of groups of small stalls that opened up to display spices or fabrics or other goods.

These markets were also the heart of Afghanistan's financial sector. In fact, they were the financial sector. And now, two years after the U.S. entered Afghanistan and deposed the ruling Taliban regime, few steps have been taken to move the country's financial system beyond those roots. The more ambitious-but no less important-task of building a securities trading infrastructure that would speed the country's entry into the modern global economy remains little more than a dream.

Unregulated, independent money traders continue to be essentially the only way to move money in and out of the country, or within its borders. They exchange foreign currencies, take deposits, make short-term loans and handle trade finance.

"The one institution that did survive [the years of warfare] was the Kabul money market," said former ambassador Charles Dunbar, who was charge d'affaires at the American Embassy in Kabul in the 1980s and is now the Warburg Professor of International Relations at Boston's Simmons College. "It was a deeply rooted institution."

In Kabul, the main market is located close to the gold and silver bazaars and operates as an open outcry exchange. At the end of each day, dealers store their excess currency and working capital in vaults located in their shops until the next working day.

The International Monetary Fund estimates that there are 5,000 money traders in Kabul and 500 traders in regional towns. The system is known as hawala and has existed for hundreds of years.

Moving Beyond Hawala

In an attempt to make money trading more legitimate, without directly taking away the hawala system, the IMF helped Da Afghanistan Bank, the country's central bank, establish foreign exchange auctions in the spring of 2002. In the first half of 2003, between 50 and 80 of the largest traders participated in these auctions, most of them in Kabul but a few in the provinces as well.

Since the hawala can be easily abused by money launderers, terrorists and drug traffickers, regulating it has been a priority. In fact, Afghan President Hamid Karzai approved a new banking law in September that allows foreign banks to set up in Afghanistan for the first time in 20 years. These banks would then be able to compete directly with the hawala.

Three banks have already received operating licenses-the U.K.'s Standard Chartered Bank, the National Bank of Pakistan and a micro-credit bank supported by the Aga Khan Foundation. In addition, Central Bank Governor Anwar ul-Haq Ahady has told reporters that the country would like to privatize or restructure the six banks currently operating in the country, all of which are state-owned.

This is all pretty basic, admits Dale Lautenbach, a spokesman for the World Bank. "We're working on public administration, such as helping the government pay its bills in a transparent and efficient manner," she said. "Health, transportation, public works. But a central stock market? We're not involved in that at this point. It's pretty early on for that."

"Basic financial services are currently not available in this market," said Momina Aijazuddin, Investment Officer at the International Finance Corp., which, together with the Aga Khan Foundation, is helping to set up the country's first micro-credit bank. "The banking law was just passed by Karzai. We have to focus more on things that you take for granted in other countries-security, infrastructure, communications. But we're hoping to have technical assistance to be able to overcome some of those hurdles."

The bank is expected to open in Kabul at the beginning of 2004, with branches in the northern areas of the country. It is expected to be nationwide within five or six years, she said.

Market Unstructured

However, no major organizations are working on helping Afghanistan build a securities industry.

Securities Exchange Commission spokesman John Nester said the SEC is not currently involved in any Afghanistan-related projects. Meanwhile, David Lucas, marketing manager of markets technology at Computershare Investor Services, who has worked on projects in other developing countries, said he hasn't heard anything about a stock exchange project in Afghanistan.

He and his colleagues have installed the company's ISTS trading system in the Gulf, in Nigeria and other West African nations, in Shanghai, in Indonesia, in Russia and in many European locations.

"We've had discussions with a number of parties regarding Iraq, which has a much bigger economy and more potential," he said. "The United States, it seems, is very interested in looking at that. But I've heard nothing about Afghanistan."

When it comes to building a new exchange, he said, Afghanistan has one thing going for it. "If you come from a low base," he said, "it's very easy to move ahead to the latest and greatest very quickly."

For example, a new stock market isn't going to have a problem with dematerialization-from the very start, securities are designed to exist only in virtual form. "So you have straight-through processing right from the start," he said. "Meanwhile, some western countries are still struggling with this issue."

On the flip side, Afghanistan certainly has a lot of major problems to deal with-lack of roads, schools, hospitals, electricity, water and, of course, the ever-present danger of attack from warlords, the Taliban and other armed groups.

"The capital markets are not seen as a priority project," Lucas said. "And that's too bad, because an essential thing in reestablishing the economy is to bring the financial infrastructure there."

Harry Edwards, a spokesman for the United States Agency for International Development-which has already put $545 million into Afghanistan this year alone-said the agency is not involved in helping create a stock market in Afghanistan. But Edwards pointed out that a significant amount of progress has already been made.

"We have thousands of projects going on in Afghanistan," he said. "We've refurbished hundreds of schools. We've immunized, together with other non-governmental organizations, 11 million children against childhood infections. We're revamping 400 health clinics nationwide over the next three years. Since 2001, we've had over 7,000 well-drilling projects. We're reworked about 7,200 kilometers worth of roads. We are working to get electricity to some places in Afghanistan that have never had it."

Thomas Barfield, chairman of the anthropology department at Boston University, said he's not surprised that a stock exchange is low on the agenda. Barfield, whose current research focuses on war reconstruction and economic development in Afghanistan, said an additional obstacle to creating an Afghan securities industry is there is no investment culture or history in that country.

"Afghanistan doesn't have public companies," he said. "And historically, foreigners weren't allowed to own anything in Afghanistan. Even before the Communists took power, the government nationalized anything that made money, like the cotton industry. Afghanistan was deliberately underdeveloped by their rulers so that it would not be a target of its neighbors. They didn't want foreign investment because they thought it would bring trouble."

Trouble found Afghanistan anyway. "The place is fairly chaotic," said Dunbar. "It is very difficult to do work in a lot of the country because of the insurgency."

Help Wanted

Although the international community, and the United States as well, has pledged a significant amount of money-around $5 billion, by Dunbar's estimate-to rebuilding Afghanistan, more needs to be done to control the warlords in outlying provinces, and to clean up Pakistan's northwest province, which continues to be a breeding ground for terrorism.

The war in Iraq, he added, has become a rallying point for hostility in general, Dunbar said. "The United States just needs to refocus on Afghanistan," he said. Of the $87 billion in aid approved by Congress last week, only $1.2 billion was earmarked for Afghan reconstruction.

Iran and Iraq are about the same size, said Kevin Henry, advocacy director for Care USA, an international aid organization, but Iraq has a more developed infrastructure, more natural resources and a significantly larger cadre of civil servants and professionals. Meanwhile, Finance Minister Ashraf Ghani said Afghanistan will need $30 billion in aid and investment in the next five years to rebuild the economy.

Other countries have been able to build modern financial infrastructures and markets without Marshall Plan-style financial support from the United States. Russia, for example, now has several thriving stock exchanges and a modern banking system. But even though Russia seemed hopelessly backward when the Soviet Union collapsed, it was a modern country compared to Afghanistan.

Afghanistan's literacy rate is 36, according to the most recent Unicef estimates. Even Tajikistan, one of the most backward of the former Soviet republics, has a literacy rate of more than 99 percent.

According to Roy Gutman, Newsweek's chief diplomatic correspondent and a fellow at the U.S. Institute for Peace, there's a 40-percent chance that Afghanistan will slip back into civil war, and a 60-percent chance that it will recover in time. "But when I say, in time,' I think it's a 20-year project," he added.

Nonetheless, Gutman-who won a Pulitzer Prize for his work in Bosnia, and has reported from a number of developing countries-said he sees a great deal of hope for progress in Afghanistan.

"It's rare that you see opportunities like those you see in today's Afghanistan," he said. "The people really want it, and you've got the international community there. It's something that must succeed, but you have to give it time. This is a place where growth will occur if security is guaranteed and you have inputs like money and technical advice."