Excerpt: Agriculture and rural development are emphasised in the January 2006 Interim Afghanistan National Development Strategy (IANDS) as important factors in effecting much needed transition from a largely informal economy to a formal and prospering one geared toward improving Afghan livelihoods and strengthening the revenue base for the national government. According to the Afghanistan Millennium Development Goal Report (2005), agriculture accounts for over 50 percent of the licit economy and provides employment to almost two-thirds of the workforce. In 2003, the National Risk and Vulnerability Assessment (NRVA) estimated that agricultural activities contributed to the income of 63 percent of Afghan households, with significant diversity on a provincial, district and even village level. This paper provides an overview of the key challenges faced by small and medium-sized rural enterprises (SMEs) in Afghanistan. The evidence is drawn from secondary sources as well as primary data collected during fieldtrips to the provinces of Bamyan, Balkh, and Nangarhar. The secondary data are from widely available government and non-government sources such as reports and briefings, while the primary data are from interviews with SMEs involved in commercial agricultural production, food processing, marketing and trading in the three provinces. The case studies, combining the data from secondary and primary sources (interviews with key informants in Kabul and in the field), are analysed to formulate a series of recommendations aimed at improving the operating environment for rural SMEs. We begin with a general description of the regulatory context and some of the formal institutions with key roles in rural enterprise development.