The article analyzes small and medium enterprise (SME) development in Afghanistan as one of the fragile contexts as defined by the OECD. State fragility is characterized by the combination of exposure to risk and insufficient coping capacity of the state, system or communities to manage, absorb or mitigate those risks and, as shown in the article, may be an impediment to entrepreneurship. However, private sector and SME development has been prioritized both by the Afghan government and international donors as an important driver of economic growth in the country. In our analysis we apply fragility framework to SME development in Afghanistan to show how state fragility affects Afghan SME and whether action taken by the government and donors helps resolve the problems faced by Afghan businesses. The article finds that as Afghanistan is simultaneously fragile across multiple dimensions appropriate policies should be in place to mitigate negative effects of state fragility. Despite that, Afghan government has only recently accelerated business environment reforms, with donor projects yielding only mixed results and failing to account for their sustainability. Our analysis of the problems faced by the Afghan SMEs indicates that action taken by the government and international donors has not been effective. Increasing violence and lack of capacity of governmental institutions to enforce and implement regulation in due form, as well as limited access to resources, remain a source of uncertainty and increased risk for businesses, creating incentives for them to operate informally or adopt risk-averse strategies that do not contribute to economic growth. We argue that there is a need for further reforms to produce better outcomes for Afghan SMEs.