CONTENTS 18
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09 $85 million and fancy accents this week in Pakistan’s business and economics Twitterverse 11 Obituary: Malik Riaz the banker
15 15 How the Pakistan Sports Board failed our Olympians and squandered their money 18 Would the RAAST revolution live up to its promise?
27 27 What has Pakistan Cables been up to? 30 No, the stock market is not an accurate indicator of the economy
Profit
Executive Editor: Babar Nizami l Managing Editor: Farooq Tirmizi l Joint Editor: Yousaf Nizami Reporters: Ariba Shahid l Babar Khan Javed l Taimoor Hassan Abdullah Niazi l Meiryum Ali l Shahab Omer Chief of Staff & Product Manager: Muhammad Faran Bukhari Regional Heads of Marketing: Muddasir Alam (Khi) l Zulfiqar Butt (Lhr) l Mudassir Iqbal (Isl) Layout: Ahmad Salahuddin l Photographers: Zubair Mehfooz & Imran Gillani l Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk
Readers Say @FarooqTirmizi remains one of the most eloquent, knowledgeable, & comprehensive business writers out of Pakistan or anywhere I know. This entire article greatly sums up the entire Fintech opportunity in Pakistan, it’s challenges & opportunities. Great great GREAT piece, Farooq. Apropos: Should the fintech playbook scare the banks? @aadilmaan, Twitter A lot of fintechs are in the collection and payment space, however the real question is who will be able to provide a viable financing solution to the different players connected to the ecosystem. I believe the fintech which is able to solve this will take the lead as the product offering is more or less the same for most of the fintechs. Apropos: Should the fintech playbook scare the banks? Faisal Malik, Website I am not sure if these deposits are good for the economy or not as the depositors receive high returns on their USD denominated certificates which the local taxpayer will have to bear. Secondly they are also entitled to invest in certain real estate schemes as well where returns can also be taken out in USD/ How is this benefiting the local economy? Also by allowing car finance and house finance in an already supply deficient market, it is allowing the suppliers to increase the price further on one pretext or another or demand higher ON from the local consumers. So it seems like a win-win situation to the NRPs whereas the loser is the local ‘tax paying’ consumer as always. Apropos: Roshan Digital Accounts hit $2bn mark: SBP F A Malik, Website
facebook.com/Profitpk twitter.com/Profitpk linkedin.com/showcase/13251020 profit.com.pk profit@pakistantoday.com.pk
HOW TO CONTACT
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HUM TV is a brand now, and people will start recognising this very soon. You will see very soon when Youtube subscription income continues and HUM Mart franchises pop up all over the country and HUM becomes a brand name that is common and well known throughout the country. This success will end up making HUM an entity that is worth around Rs 100 billion. And one more thing, the number of views that Hum TV has had in 2020 is an all time high. Approximately 4 billion views in a single year in 2020 is what the number ends up at. To put that in context, from 2011 to June 2019, the total number of views that they had gotten was 8.4 billion - that is an astounding change in numbers. And now, their subscribers on youtube have also hit a massie 15 million. They are clearly growing rapidly in the digital world and the most amazing thing
is that there are no boundaries in this space, and they are also garnering significant interest and a large audience in India - one of the biggest markets in the world. Apropos: The saga at HUM continues Faisal Rasul, Website I strongly disagree with your comments. The haphazard horizontal expansion of Lahore with extremely poor planning is not sustainable and incurs a huge cost by eating up precious agricultural land. For Pakistan to transform into a developed country with efficient cities, it needs high quality jobs that are centrally located and within reasonable commuting distance for young professionals. High quality urban vertical developments support that as in many other successful cities in the world. If the culture believes in land ownership and urban sprawl then it needs to evolve into modern thinking. Commute times between different parts of Lahore are horrendous and getting worse due to lack of planning and highways. Apropos: Lahore’s vertical growth gamble Usman Ahmed, Website I have found them to be very stupid and with ill structured management. I repeatedly told them to send frozen products as "FROZEN", all they kept sending was melted or stale products. I called them, complained to them, emailed them, even asked their complaint representatives multiple times to send my issue to higher ups but all in vain. I mean, they don't know the basic physics of keeping the cold chain. Cheetay does a much better job. Apropos: Pakistan’s Airlift announces raising $85mn in Series-B round Muneeb Ahmad, Facebook Claims ? Techcrunch reported it first which is the most reliable source for Startup News around the World. Apropos: Pakistan’s Airlift announces raising $85mn in Series-B round Abdullah Siddiqui, Facebook Leather producers are getting raw hides practically free and still complaining about higher prices. That is unfair. Apropos: With livestock shopping at an all time low this Eid, leather manufacturer are feeling the heat Usman Umar Sarwara, Facebook Leather manufacturers have been getting free khaals for the last three years. They need to stop fooling us. Apropos: With livestock shopping at an all time low this Eid, leather manufacturer are feeling the heat Waqar Ahmed, Facebook
COMMENTS
IN BRIEF The first consignment of 4G smartphones tagged “Manufactured in Pakistan” has been exported to the Uniteds from Arab Emirates (UAE); however, local manufacturers of mobile phone sets have stressed for an export supportive policy, allowing Pakistan to beat competitors in the Middle East region.
“The Pakistani economy is moving towards the right path and now the government’s focus is on enhancing exports. The government has now decided to prioritise expediting the economic process by increasing the level of exports.” Shaukat Tarin, finance minister
$235 million:
The Asian Development Bank (ADB) on Thursday approved a $235 million loan to further upgrade the 222-kilometre Shikarpur–Rajanpur section of the National Highway 55 (N55) from two lanes into a four-lane carriageway. N55 is part of the Central Asia Regional Economic Cooperation (CAREC) Corridor-5. For the past month, banks and other financial institutions in Pakistan have been using a domestic politically exposed persons (PEP) database to curb corruption and money laundering across Pakistan. The database has been created by First Paramount Modaraba to help Pakistan comply with regulations of the Financial Action Task Force (FATF). The governor of the Central Bank of Afghanistan has predicted an increase in the rate of inflation in Afghanistan and clarified that at present, the total national assets were worth more than $9 billion, but the Taliban will have access to only 0.1-0.2 per cent of these assets.
The Pakistan Customs has processed the first fresh mango, white Chaunsa, consignment for export to Moscow under the TIR convention. According to a press statement issued by FBR, the exporter of the said consignment is Ishfaq & Co, Okara, Sahiwal.
$50 billion:
Adviser for Commerce and Investment Razzaq Dawood on Sunday expressed hope that the country’s exports would reach at $50 billion by following the policy of trade diversification in potential trade sectors and markets by the current government’s the last fiscal year (FY23).
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$85 million and fancy accents
this week in Pakistan’s business and economics twitterverse
T
he massive round that Airlift managed had a lot of people whispering and others shouting from the rooftops in celebration (including the Prime Minister) that Pakistan is truly open for business. The $85 million is obviously a good thing, even if it was good news in the middle of an otherwise heavy week for this country. Accents, wannabe socialists, memeing capability, and more all feature, as Ariba Shahid brings you this week’s social media roundup.
A note on being wrong
Playing it cool Waqas didn’t have to do us dirty that bad. Ouch, our feelings are hurt. But we’re glad we have some sort of job security. We would, however, like to say in our defence that while appalling editorial standards do exist in many places, journalists also take on a lot of the messy work that no one else wants to do. Yes, we mess up, and when we do hopefully we have it in us to recognise it - at least that is how it should be. We’re trying guys.
Rolling your Rs
Did you get any calls this week? Our prime minister sure did. How do we know? Well the PM Office made sure to share tacky infographics to inform everyone of the calls he got. Sadly, no call from Biden yet. We’re assuming that particular infographic will be the best of them all. Unless of course the Prime Minister is trying to make Biden jealous with all of the calls he is getting. In that case, when(if) the call eventually comes, we advise that the honourable PM play it cool and answer with a sultry ‘hey’ and not post any infographics. In the meanwhile, here is some Ali that got a call from his dad to get yoghurt. Twitter doesn’t get any better than this.
SOCIAL MEDIA ROUNDUP
Your fancy accent shouldn’t matter if you’ve got the skills required for the job. Sadly, people do tend to get impressed by accents. Probably because of the colonial hangover we’re all suffering from. Someone with a private school education and a slight tilt in their tenor, and a few rolled Rs means they are more likely to get a job at E&Y or McKinsey than their possibly more qualified university classfellow that sounds barely comfortable in English. At the end of the day, the loss is going to be for these companies.
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Gold medal in memes
Stolen data
Gotta love Pakistan. You can get expensive software worth hundreds of dollars for a mere Rs 100. The downside is you may get hacked at some point. So what if precious data gets in the hands of the wrong people? Who cares after all, especially if the data is someone else’s.
Bollywood business
Pakistanis are famous for their memes. Gone are the days of us parading our mangoes and footballs as our prime produce - it is the memes that make a mark. If making or being memes was a business, we’d be the top performers. No questions asked. If there was an Olympic sport called Memeing, we’d bring back Gold. Then again, the Pakistan Sports Board might find a way to mess that up to.
Could you repeat that please?
Whatsapp voice notes at 2x speed is a game changer. Makes it easier to avoid our bosses on phone calls because you could just send a voice note to explain things. Sadly, it doesn’t work with people that speak too fast. For some, might we even suggest a slow down option?
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Geopolitics aside, Bollywood knows what sells and is able to profit off of it. They’ve got the right special FX teams and don’t base all their movies on the army. Bollywood truly is good at business.
SOCIAL MEDIA ROUNDUP
M
alik Riaz’s stint as a banker has come to an end with Escorts Investment Bank going up for sale. The stint lasted for four years. Malik Riaz’s banking career came to life in 2017, when he bought the Escorts Investment Bank for exactly one rupee. Originally, the real estate tycoon had wanted to buy Burj Bank - a small but traditional commercial bank. However, his attempt had been blocked by the State Bank of Pakistan after the State Bank of Pakistan blocked his bid to buy Burj Bank - a traditional commercial bank which would have been better for his attempt at revamping Pakistan’s nearly non-existent mortgage market. The failure of Malik Riaz is a rare
BANKING
occurrence. In his 20 years as a real estate developer, he has proven himself to be ruthless in his pursuit of expansion, and intuitive in his understanding of what people want. That is why in 2017, he bought the Escort Investment Bank for a grand total or one rupee. The acquisition was a piece of news that had everyone scratching their heads. Why would Malik Riaz want to buy a bank, and if it was to be able to offer people financing for his housing projects, wouldn’t he want to buy a commercial bank? Back then, Profit had covered Malik Riaz’s purchase of Escort Investment Bank, and in a vividly crafted story, this magazine’s managing editor, Farooq Tirmizi, explained why Malik Riaz would want to buy an investment bank in the first place and why it was bound to fail. Today, Profit has reliable news that the bank is
up for sale but has no buyers - because it is in such an undesirable state. So what did Malik Riaz do with the bank and why did he fail? Was he set out for failure from the very beginning or did something else go awry? This is a Profit obituary on Malik Riaz’s failed stint as a banker, and what the fallout of this failure could be on the ‘successful’ branding that Malik Riaz and Bahria Town rely on.
The Bahria Town concept
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here is one and only one real cultural estimation of whether you have ‘made it’ in Pakistan – and that measure is whether veteran jour-
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When Bahria stepped in, they made changes to turn the bank around by 180 degrees. We had a commitment with the regulator. We made payments to all old depositors and paid off liabilities. Within a month of the takeover, we had paid around Rs 532 billion. Naveed Amin, CEO of Escort Investment Bank
nalist Sohail Warraich has ever called you up and asked to film an ‘Aik Din Geo Kai Saath’ episode with you. A seemingly unassuming, gentlemanly, even oafish presence, Warraich is beneath the surface a master interviewer that can shrewdly get powerful men and women to spill their secrets, and bring out the private personalities of those that otherwise maintain very stoic media profiles out of necessity. In one such interview with Malik Riaz, Warraich got him to spill his secrets on what the trick behind making Bahria Town so successful was. In a moment of journalistic mastery, Warraich asked Malik Riaz a number of lighthearted questions to soften him up, before throwing a pointed question about the European inspiration behind his housing projects. “We go to foreign countries, we see what they have done, we steal the idea and we bring it here,” Riaz responds with shocking candour. “That is all there is. Like I just saw the Eiffel Tower recently, so we imported a replica from China and everyone loves it and comes to Bahria Town from far away to see it.” This little tidbit reveals a much darker side of how real estate developers hook in people for their housing schemes. How they prey on the most basic, the most earnest, the most common of desires that anyone of a middle class background in this country will be able to understand - to live respectably in a home of
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one’s own. A ‘plot’ (pee-lat) in Pakistan is sacred. The desire to live in a clean, gated, ‘posh’ area is the upper-middle class dream for most Pakistanis, one that they spend their entire lives at times, trying to achieve. Every year, the urban housing demand in Pakistan is 350,000 homes. Of this, 62 per cent is for lower-income groups, 25 per cent for lower middle- income groups, and 10 per cent for higher and upper middle-income groups. The formal supply per year is 150,000 units, a disproportionate amount of which caters to the higher and middle-income groups. It is this desire to own a home, to live with dignity in security, and to have facilities that the government should but is unable to provide is what Malik Riaz has tapped into over the past two decades. But with real incomes falling fast, there are now fewer people than ever that are able to afford a plot of land outright. Salaried classes find it harder to save with regularity now, which is why it is so difficult for them to pay a lump sum. If, however, mortgages were available and people could pay over time in installments, there would be a lot more people lining up to try and get possession of these plots. Besides, it is much better for some to pay in bits and pieces and acquire the place at the age of 30 rather than having to save their entire lives to buy a home outright after retirement.
That is why Malik Riaz bought the bank and took the gamble - one that didn’t pay off on this occasion.
Always on the cards
T
he feeling of being able to say ‘we told you so’ is one that we do not revel in, but it is still a pleasant feeling to be able to say that what we predicted happened. “This transaction does not have a snowball’s chance in hell of working out,” were the exact words from the previous article. The reasoning was simple. Bahria Town was the wrong company to try to revolutionise mortgage lending in Pakistan, having absolutely no experience in consumer finance in the past. An investment bank was far from an ideal instrument to select in order to embark on a mortgage lending spree. And even if it was, Escorts was far from the best institution to pull it off. It had neither the capital, nor the talent, nor the relationships to be the kind of innovative institution that Bahria Town would need it to be for this experiment to work. Today, the experiment has failed and Bahria Town seems ready to accept that it has. Sources have informed Profit that not only is the bank up for sale - it is having a hard time finding any buyers. That makes sense, because even four years ago when Malik Riaz first bought Escort, it was in shambles and four
We go to foreign countries, we see what they have done, we steal the idea and we bring it here.That is all there is. Like I just saw the Eiffel Tower recently, so we imported a replica from China and everyone loves it and comes to Bahria Town from far away to see it Malik Riaz
years of trying to turn it into something better has not worked out or even made it a slightly attractive buy. The reasons for why Escort Investment Bank was a bad buy, why Malik Riaz went ahead with it anyways, and why it was never going to work out have already been detailed by Profit in the earlier mentioned feature titled ‘What is Malik Riaz up to now?’ that we would encourage everyone to read or even reread. It contains not just hard financial analysis of why the idea was a bad one, but also details of the corporate history of Bahria Town and the strategies with which Malik Riaz operates. For those that do not want to, here is a very brief summary of what happened: Pakistan has a horrible mortgage market that is not friendly towards upper middle class prospective homeowners and does not provide home financing. With the buying power of the middle class shrinking, Malik Riaz realised that new customers of Bahria Town homes would need financing, and since the banks were not ready to do this for Bahria Town, Malik Riaz would take matters into his own hands and buy his own bank. To do this, he made a bid to buy the country’s smallest bank - Burj Bank. Unfortunately for him, the State Bank of Pakistan had other ideas. The SBP worried that Bahria Town and Malik Riaz were not the kind of people it wanted to entrust with retail deposits from the general
public. Undeterred by this very public snub, Malik Riaz turned his attention towards Escorts Investment Bank. On February 8, 2017, Bahria Town announced its intention to acquire Escorts from the family-owned business group that controlled over 71% of its shares for a single rupee. The deal went through, and Malik Riaz now had a financial institution that would be able to offer prospective Bahria Town buyers financing. The problem was that an investment bank was a horrible vehicle for this, and Escort Investment Bank was the worst among such banks to take on the task.
Here is what happened
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alik Riaz’s idea was that once he had the investment back behind him, it would encourage more buyers to buy Bahria Town property. The problem was that the bank was unable to lend at competitive rates due to its low levels of deposits and losses. In addition to that, the bank also has competition from the Government’s initiative for housing finance. With such cheap credit available, who would pay two times the interest rates for property in Bahria Town, especially following the controversies associated with it. That, however, does not mean Bahria Town did not at least try to turn the bank
around, because that was what they had to do first and foremost to have any chance of making something out of the investment. “The company is a listed financial institution. You will hear of it through the PSX if there is any such news,” says Naveed Amin, the CEO of the bank. A company man, Naveed naturally denies the news but not without a caveat adding later that “with things like these you never know what can happen in the future.” The almost clear admission of the standing of the investment bank was followed by long winding defenses, and to be fair, the bank really did try to shake itself out of its horrific run and turn things around. Following Riaz’s takeover of the bank, a lot of restructuring did take place. In addition to housing finance, Riaz decided to introduce micro financing opportunities for shops in Bahria town and other areas. However, last year when COVID hit, the implementation of the project got impacted. Amin states that they did not stop business during COVID but focused on survival, keeping the portfolio intact, and avoiding bad debts. The bank however shifted its gear towards the short and medium term instead of long term. Housing finance is generally long term. Currently, an analysis of the finance portfolio shows that 150 million, or 54% makes up the housing finance, whereas 45% through microfinance. Last year this was at 56% and
BANKING
40% respectively. “It was a bankrupt bank when they bought it. Half the reason for selling it for a single rupee was so that they could get rid of some of their bad debts and liabilities,” explains Amin. “When Bahria stepped in, they made changes to turn the bank around by 180 degrees. We had a commitment with the regulator. We made payments to all old depositors and paid off liabilities. Within a month of the takeover, we had paid around Rs 532 billion.” If we talk about the company’s financial position, Escorts Investment Bank has been largely making losses over the past decade with an exception in 2013. The revenue of the bank has largely remained flat over the decade. Following the acquisition, however, Escorts Investment Bank has been able to manage its profit after tax and bring that to a small number with a small rise in revenue too. To say that things are heading towards stability, if not profit, could be a safe statement. Unfortunately for Bahria Town, this is not what was required to help in financing Bahria Town property, and with stability still not guaranteed, providing expensive financing has not turned out well either for the bank or for Bahria Town. And more importantly, it has not improved enough for the bank to be desirable, since no sellers seem to be presenting themselves to take the bank off Malik Riaz’s hands. In the right circumstances, the bank could have been a good idea.Had things gone to plan, Riaz may have been able to bolster Bahria Town sales and make a dime off it too. Pakistan currently faces a housing deficit. You wouldn’t think of that considering the number of housing projects you see being made. The housing demand itself is growing by around 700,000 houses per year. The bulk of which are for the middle and lower income segment. Very few houses are actually financed through banks or formal lending financial institutions. It’s usually personal savings that go towards buying property. Had Riaz been able to tap into this segment, not only would he be able to sell houses in Bahria, have a base to expand the projects, but also be able to earn off the financing. Escorts provides 100% construction cost loans to people that already own plots of land. Loans are also given to non-resident Pakistanis. Considering Bahria Town is their own project, the time to get financing and carry out paperwork is also less than what you would face regularly. Unfortunately for Malik Riaz, despite all of the desperate attempts to stop the rot, the bank’s finances are a brutal picture. Picking any commercial bank for the task of revolutionising Pakistan’s mortgage system would have been like picking a horse for a race - a discerning eye would have been required to assess which horse would best perform in the given
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circumstances. In Malik Riaz’s case, the choice of Escort Investment Bank was the equivalent of picking a Llama for a horse race - in its own right a Llama can run pretty fast, but not as fast as a horse and you really can’t expect it to carry you. And to make things worse, Malik Riaz picked the oldest, shabbiest, most underperforming Llama there was. At the end of the day, you do get what you paid for, and this is what you get in one rupee. Instead of the Goliath financing provider it was supposed to have become, Escort has improved with the added investment, but is not just the wrong bank to come through on this experiment, but also the wrong kind of bank.
The image issue
O
ne thing that we must admit about Malik Riaz is that he is an astute businessman. He is not afraid to use whatever means are at his disposal, and has on occasion admitted to bribing government and public officials to get his way about things. And if there is one thing about Malik Riaz, it is that he recognises when something is going right or wrong. Perhaps that is why he is so quick to get rid of the bank he had such high hopes for. Escort was a bad decision, and that for Malik Riaz is a failure. Unfortunately for him, his entire thing is being successful and his rags to riches story. Already Bahria Town has started to get a bad reputation in property buying circles for being in the limelight for all the wrong reasons. And with this failure soon to become public knowledge, it could be another blow to the Bahria Town, and indeed, Malik Riaz image of success. A long time ago at a dinner party filled to the brim with the elite of this city, a friend of one of the editors of this magazine was introduced by another friend to a gentleman that was not particularly impressive to look at. The friend chatted over the gentleman who stood by amicably listening to the conversation between the two men that knew each other. At one point, he turned around and asked the gentleman, “and what do you do?” “I’m a banker” came the response. The man in question was back then not very well known by face because his pictures had not yet gone out to the media - but he was not a banker, he was merely the owner of a bank and in reality an industrialist, and one of the richest men in Pakistan back then and to this day. Yet when someone asked him what he did, he responded by saying he was a banker. That is the sort of respectability that the profession commands - and among the elite, there is a certain pride in having made
money through the world of finance rather than business. So for Malik Riaz, to fail owning a bank is a particularly stinging rebuttal of his status as the ‘it’ man of Pakistani business. If you can’t own a bank and run it well, would people still aspire to be you? The question is an open-ended one, but it will be bothering Malik Riaz even now. At the end of the day, both the bank and Bahria Town have become issues of credibility for Malik Riaz. For starters, the initial reason why commercial banks were refusing to provide financing for Bahria Town property was that banks require clean, undisputed titles of land ownership for any house/flat they finance and the land titles of Bahria Town properties are not as clean and transparent as they appear to the general public. With continued litigation against Bahria Town, allegations of personal corruption against Malik Riaz, and a general mistrust of the housing projects means that unless perfect financing conditions were being provided by Escort, people were not going to bite. Malik Riaz and Bahria Town have a serious image issue on their hands. As we have repeatedly said not just in this story but in the many stories Profit has done on real estate in Pakistan - Malik Riaz and others make money on the very precarious dreams of Pakistan’s middle classes to have a home of their own. For so many people, buying a plot and building a home on it is not just the most money they will ever spend on a single thing in their lives, but it is also possibly the most important decision they make in their entire lives. Where one has a house determines what school their children go to, how much inheritance they leave behind, and even what possible matches for marriage their children get. When making a decision that big, it would take the truly brave of heart to invest in a place that is considered shady or where dealings are not necessarily always thought to be above board. n
BANKING
I
By Abdullah Niazi
t was an agonising watch this month as not one but two Pakistani athletes made it close to the medals podium at the Tokyo Olympics. Talha Talib from Gujranwala and Arshad Nadeem from Mian Channu both finished in fifth place. Their close brush with bronze means Pakistan’s olympic medal drought has extended from 29 years to at least 32 - with the next chance at success coming in Rio 2024. Since the games ended, there has been a fierce back and forth over who is responsible. Blame has naturally been directed towards the Pakistan Olympic Association (POA) and its longstanding chairman Lt Gen (r) Arif Hasan. The POA has in turn responded and pointed out that they are simply responsible for promoting olympic values and player development falls squarely under the jurisdiction of the Pakistan Sports Board (PSB) run by the federal ministry of Interprovincial Coordination (IPC). The truth lies somewhere in between. It seems that both the PSB and the POA are happy to point fingers at each other and let the whole matter die down in a whirlwind of confusion and
SPORTS
accusations. However, both are to blame for different aspects of Pakistan’s Olympics woes. Much has been made of the squalid conditions in which athletes have to train in Pakistan and how they have to fund themselves to make it to the games. This story will focus on where the money comes from, or at least where it should come from, for olympic athletes and why we should be spending more not just on our olympians but all players of different sports.
The Olympics
B
efore we begin discussing Pakistan’s Olympic failures, it is necessary to try and understand how the Olympics work. Here is the first thing you need to know: the International Olympic Committee (IOC) does not give a single dime, cent, or rupee to any athlete for participating in the games. They also do not provide travel and lodging. Most countries have their own Olympic Committees that provide travel and lodging as well as coaches and support staff to athletes, but even in the United States of America (USA), athletes do not get salaries unless their sport, their team, their federation, or they personally have been sponsored by a private organization or individual. As such, being an Olympian is not
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Yes, we have surrendered the amount to the government exchequer as I am new to the post and I don’t want any hasty decisions in awarding renovation work. We still have some amount left with us and we are to hold a meeting in the coming days. We will look into what the best we can do for the federations Col (r) Asif Zaman, director general of the PSB
necessarily lucrative. Not just in Pakistan but all over the world most Olympians hold day jobs and work in different capacities until it is time to train for the games. This tradition of not paying athletes is a holdover from the time when the Olympics were an event exclusively for amateur athletes. It was not until 1971 that professional athletes were allowed to compete in the Olympics - which meant that Olympic athletes were now also allowed to receive compensation, sponsorship from national and sports organizations as well as private businesses. In fact, the amateur nature of the competition did not completely end until 1986, which is when professional athletes were allowed to compete in every Olympic sport. Essentially, if you are a star athlete and manage to win big at the Olympics, you have a real shot at making some serious money through endorsements and corporate sponsorships. Winning can also land you in other careers such as coaching and even acting. However, once again this is usually a very select group of athletes and most have to go back to their day jobs after competing at the most prestigious sporting event in the world. Meanwhile, the International Olympics Committee makes a pretty penny through the games every four years. The International Olympic Committee is entirely privately funded and ever since the first modern Olympic Games in Athens in 1896 it has relied upon contributions from commercial partners in order to stage the Games and support the Olympic Movement.Because the IOC is a non-profit organisation, 90 percent of the revenues from the Games go straight back into sport and athlete development. In total, around USD 2.5 billion is put towards the staging of the Olympic Games, to ease the financial burden on the host cities. Since the Olympics are very widely watched, around 73% of this revenue comes from broadcasting rights. The rest of this broadcasting rights money is highly prized and contested between different countries. Take, for example, the United States Olympic Committee (USOC), which has an astounding $845 million
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at their disposal over a four year period between games. Of this massive budget, $120 million comes from corporate sponsorships. The rest all comes from US-only broadcasting rights. For a country like Pakistan, getting any broadcasting deals is unlikely because of the very small viewership numbers. What is important is that 90% of revenue that the IOC distributes for the development of players and sports all around the world. This is where the POA comes in - the organization is not just responsible for promoting Olympic values and anti-doping regulations, it also has the critical role of being the recognised organization by the IOC in Pakistan and as such it is their job to lobby for funding from the IOC - something they have time and again failed to do. However, while their negligence is apparent, it is nowhere as bad as the role of the PSB.
The PSB messes up
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ight after both Taha Talib and Arshad Nadeem failed to secure medals, Shahbaz Gill, Special Assistant to the Prime Minister and newly minted hair-icon at a news conference asked retired Lt Gen Arif Hasan to resign as the Pakistan Olympic Asso¬ciation (POA) president, a post he’s held since 2004. Shahbaz, flanked by Minister for Interprovincial Coordination Fehmida Mirza, claimed that the failure to develop medal winning Olympians in Pakistan was a failure of the POA. The entire presser was complete hogwash. Here is what you need to know from a Pakistani perspective: The POA is a private organization that is recognised by the IOC and it is the IOC’s liaison in Pakistan. Athletes get processed and sent through the POC and it is their job to secure funding from the IOC for our players. However, other than this and the fluffish job of “promoting Olympic values” the POA does not do much and does not have a lot of powers in terms of providing government funding or sports and player development. “Right at the outset, let us make certain aspects very clear. The POA is not responsible
for Sports Development in the country. This is the responsibility of PSB and it is clearly stated in their own rules which are available on their website,” said a recent statement from the POA. “Our organisation is representative of IOC and OCA for Olympic Movement in Pakistan and is mandated to Foster Olympism through Sports and Education. It is our stated position, duly conveyed to the concerned quarters on multiple occasions, that the existing facilities and financial support for our sportspersons are the lowest in the region despite which our athletes have made tremendous strides in their respective sports events, as is evident from Talha Talib’s performance.” Now, the PSB is admittedly handicapped. The reason Fehmida Mirza was at this press conference in the first place was that the PSB falls under the ministry of interprovincial coordination (IPC). This is because after the 18th amendment, sports was one of the administrative categories that was made a provincial subject. However, to participate in both the Olympics and other competitions like the Asian and Commonwealth Games, athletes have to compete on a national level first to get selected for international competitions. This also means that the different federations for different sports are all structured federally, even though the dispensation of funds happens provincially. That is why in May this year, right before the Olympics, the PSB surrendered a whopping amount of Rs440 million to the Finance Division, ahead of the financial year’s culmination, triggering the fears that some result-producing sports federations may not be given their due share of grants for the year. According to a report in The News, the bulk of the surrendered amount was meant for the assistance to sports federations. The amount comes under the non-development head, usually meant for the renovation and extending grants to the federations. Even at the end of the financial year, there were hardly any plans of the PSB to release annual grants to the deserving federations. On the insistence of a few well-versed former
officials of the PSB including former deputy director general (Technical) Azam Dar, the PSB released grants to some federations, hours before the end of financial year in June 2020.
Why they returned the money and what it means
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ports Federations are the administrative unit of sports in Pakistan. They are responsible for their respective sports from arranging competitions to preparing athletes and finding new talent. They are essentially administrative bodies made up of former athletes that manage everything to do with a given sport in Pakistan. Under the PSB, they are not getting any money to do so. Ideally, the federations should have scouts and camps setup at schools. Schools should have facilities for different sports and produce athletes that play in interschool competitions and then get selected by the federations there. Interschool competitions also make the sports popular and that means money will flow into the sports as well. However, Pakistan is a country where there are barely any schools, and sporting culture is such that even private schools with funds do not offer facilities for track and field sports, or competitive environments for weightlifting, boxing, and other impact sports. Since the sports federations have not been able to get the required assistance from the government or private sector, meaning that the majority of the federations channelize their own sources to keep domestic activities alive and honour international commitments. Some leading federations including tennis, squash, karate, shooting, taekwondo, wrestling, weightlifting, boxing, snooker have to spend millions of rupees to stay at par with the international and national requirements. The PSB has claimed that their new director general, Col (r) Asif Zaman, returned the money because he was new to the job and did not want to make any rash decisions on allocation of funds. “Yes, we have surrendered the amount to the government exchequer as I am new to the post and I don’t want any hasty decisions in awarding renovation work. We still have some amount left with us and we
Right at the outset, let us make certain aspects very clear. The POA is not responsible for Sports Development in the country. This is the responsibility of PSB and it is clearly stated in their own rules which are available on their website Statement of the Pakistan Olympic Association are to hold a meeting in the coming days. We will look into what the best we can do for the federations,” he said. However, the maltreatment of the federations is a norm. Only a year ago before this money was returned, in May 2019, The Ministry of Inter-Provincial Coordination (IPC) on Monday told a bunch of national federations that the state would only support those 18 federations which have been short-listed and also hinted that no annual grant would be given to the federations any more. According to sources, the federations were told that they would have to meet their office expenses by themselves besides holding national championships. For the Pakistan Sports Board to then come up and try to blame the POA for the country’s more than three decade long drought in the Olympics is thus laughable. There is a lot that could be done with the POA, and it needs to do a better job at lobbying and making Pakistan’s case particularly after the underdog stories that two of its athletes had this year around, but it cannot be blamed for the state of sports in Pakistan right now.
What needs to be done
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mmediately there is a lot that must happen. Players with raw potential that have made it this far completely on their own like Taha Talib and Arshad Nadeem have to be given facilities and sponsored by private companies or corporate sponsorships if the government is not coming through for them. Both of them are young and with focused training that only steady money can provide, they are still young enough to give Pakistan a serious shot at the Rio Olympics in 2024. On a larger scale, the perfect solution is
On a larger scale, the perfect solution is to build up a sporting culture in schools and push for reforms. However, more urgent is the immediate restructuring of the PSB, and making sure that the ministry it falls under is held accountable for letting athletes languish.
to build up a sporting culture in schools and push for reforms. However, more urgent is the immediate restructuring of the PSB, and making sure that the ministry it falls under is held accountable for letting athletes languish. The Olympics and other such events are a great opportunity for diplomacy, as well as the obsessive need Pakistan seems to have to “portray a positive image.” If not for the sake of the men and women that dedicate their lives to attaining excellence in these pursuits and their futures, then at least for the silly aim of positivity. The need of what has to be done was summed up very well in a Dawn editorial from a few weeks ago, which stated that “It is about creating an environment to facilitate access to sports. Renovation and development of sports facilities is the first step towards that, one that will help grassroots programmes to flourish. Most importantly, schools must align themselves with the government plan and allocate sufficient time and resources to physical fitness and sports activities. It has to be a multi-tiered structure that propels the talented ones to colleges and universities up to the national level where federations, ideally run by sports professionals, will take them to the next level.” This is what we have been advocating for throughout this piece. However, there are impracticalities in the idea. Pakistan’s schools are decrepit and many of them barely have enough facilities to educate children. Adding the dream of making them big and rich enough to have sports facilities is a very distant dream. For now, it would be better if private sponsorship and government funding keeps the ball rolling on sports in Pakistan. Ideally, all sports should work the way cricket works in Pakistan. The Pakistan Cricket Board (PCB) makes and spends its own money as well as gets significant revenue from the International Cricket Council (ICC). It is a profitable organization. However, not all organizations can be such when it comes to sports. Some sports, like weight lifting or javelin, are not as watched and do not get the recognition that they should. This is why the government must support sports in Pakistan, and why the PSB needs to stop blaming others and actually do its job. n
SPORTS
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By Taimoor Hassan
n 2016, the board of directors of the State Bank of Pakistan received a concept note for a micropayment gateway. The concept note was quickly approved with enthusiasm, and the idea for RAAST was born. What is RAAST? Ask the state bank and they will tell you that it is a one-stop fix to make digital payments faster and more convenient, and a solution to most of your frustrations with the country’s digital payments infrastructure. Ask the banks that are supposed to be using it and they will begrudgingly tell you that while RAAST has certain benefits, it is a draconian and heavy handed imposition in which they are being given very little choice. What is the reality? For starters, RAAST is going to be a brilliant idea for the end consumer in more than one way. Transactions will be fast and take place in real time, and there will be other ease of access points that the SBP hopes will encourage the digital payments revolution they are trying to achieve. For the banks, RAAST will mean that they are free from the inefficiencies of 1Link (Pakistan’s
COVER STORY
For banks, as IBFTs increase, the associated costs also increase in case transactions are stuck. More resources are required for customer service, call centers, reconciliation team and dispute handling. I do believe this will all significantly come down with RAAST, which makes it a compelling proposition for banks Shariq Mubeen, Meezan Bank’s head of alternate delivery channels
largest interbank network) and the delays caused by the IBFT transfer system. What are some of these problems that RAAST is planning to target? RAAST claims it will settle payments between banks immediately (which does not happen right now under the incumbent 1Link system), it will allow something called ‘bulk payment’, it will also make transferring funds easier by introducing ‘aliases’ that will act as unique bank account numbers. With RAAST will also come ‘request-to-pay’ services in which service providers can ask for payments directly. All of these are solutions to problems that do exist in Pakistan’s digital landscape currently. All of them will go away by the time the State Bank of Pakistan has launched RAAST completely, and if the SBP is to be believed, all of these services will be provided for free. While this will make life much easier for the consumers, it will also leave other players in the financial industry teetering on the edges and not quite sure of their position any longer. The banks are already unhappy about the possibility of losing out on transfer fees and having to provide these services for free, and 1Link is expecting a major blow. And then the banks have another issue: the SBP is going to open up RAAST to the fintechs, which are the sworn mortal enemies of traditional banks. At present, it seems that the SBP is going to get its way (as it almost always does) and that the banks are going to have to toe the line. But how will RAAST pan out, and will the banking industry be able to foil the plans if they want? Profit looks at how the launch of the SBP’s RAAST is likely to play out, and what its role could be in the SBP’s grander plan of digitising finance in Pakistan.
Setting the scene
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hen you make an online transfer from one account to another today, what happens exactly? To you (the
consumer) it may seem that the transaction is happening in real time. For example, if you have to transfer Rs 2000 to a friend, you will simply log onto your bank’s application or website, add a beneficiary, and make the payment. Within a few minutes of making the transfer, you will get an SMS alert or an e-receipt that the transfer has been made. A few minutes after that, the person that you sent the money will have received it in their account. The only problem is that while the numbers are being updated within minutes on your accounts, something else is going on behind the scenes between your two banks. Currently, the way transfers between banks work is through a system called IBFT (Inter Bank Funds Transfer). IBFTs are run through 1Link, which is a consortium of 11 banks that own and operate the largest representative interbank network in Pakistan. This is the same consortium that allows you to use your debit card at the ATM of a different bank from the one you have your account in. So when you transfer money online, first the transaction goes to 1Link which approves it and then it goes to the person you are paying. However, the settlement of the money does not happen between the banks immediately. That takes place at the end of the day in the evening, and sometimes some transactions get missed out on. And if 1Link is down, for example, it is possible that money gets deducted from your bank account (because your bank has sent it to 1Link) but does not get added to the bank account of the payee, since 1Link has not forwarded the money to them. In cases like these, 1Link has to make files on every failed transaction and it can take up to 5-6 days for the failed transactions to be settled and for the money to get returned to you. In case you are making a larger payment, say Rs 200,000, you will not want to transfer the money again until your issue has been resolved. Consider a scenario where you transferred money from your Habib Bank account
to let’s say MCB Bank but the receiver or payee sends you a message that money was not received, while your mobile banking application shows that the money was transferred. What do you do then? Most likely, you will call your bank to find out what happened or the payee is going to call his bank. Maybe both of you will call your bank and both banks would perhaps say it’s the other bank’s glitch. Eventually, the phone banker will ask you to wait for a few days and after that you will get to know because somewhere in the digital payments ecosystem, that money is stuck along the stakeholders chain that include the sender’s bank, the receiver’s bank and the switch, 1Link. You see, when you make a funds transfer from your bank account today, it first gets to 1Link because all the funds transfers are through IBFT which is the service from 1Link that banks have subscribed to for these transfers. Once the sender initiates the transaction, 1Link switch authorises and the receiving bank is credited and the customer is updated and can withdraw funds. While the transaction looks instant, behind the scenes, it is not. The actual settlement of this transaction between banks occurs in the evening if the transaction is processed before 4pm, or the next day in the morning if the transaction is carried out after 4pm. The final settlement between banks for IBFTs happens in large value transactions through the RTGS (Real Time Gross Settlement) system - which is meant specifically for large payments between banks, not small consumer transactions and IBFTs. While the IBFTs happen at consumer level and are small value payments, the eventual settlement between banks happens at RTGS, in bulk - which is what we mean when we say that the payments are made to and from the banks through 1Link at the end of the day and not immediately. Now what if the transaction was unsuccessful? Behind the scenes, 1Link creates settlement files of successful transactions
Various stakeholders including the World Bank and experts agreed that Pakistan should have an instant payment system but there was no consensus then on what would be the form of this system Syed Sohail Jawad, director Payment Systems Department (PSD) at the State Bank of Pakistan
and unsuccessful transactions and shares these files with banks the next day. The respective banks reconcile those transactions in their system a day after they receive from 1Link and after reconciliation, the sending bank looks at which transactions actually happened and the receiving bank does the same. So when your transaction is stuck, it could either be stuck at the sender’s bank or the receiver’s bank but they would only know once the reconciliation is done of these transactions and the errors are rectified but for a consumer, this essentially means that the payment is going to take some time to fall into the payee’s account, or the payer’s account if the transaction failed at payer’s bank. In either case, it’s a delay of a few days, with confusion if the payee will receive the money or the payer will get it back. In numbers, Profit has learned that transactions that fail like this are roughly 3% of the overall transactions but because the overall number of volume of these transactions is so high, the 3% adds up to a significant chunk of transactions that fail. In today’s numbers, 1Link processed 143.5 million IBFT transactions of various banks in the first half of 2021. 3% of these transactions failing is 4.3 million transactions in 6 months. On a monthly basis, that is 717,500 IBFTs and on a daily basis, we are looking at 23,916 transactions failing every single day. Some, if not all, of these transactions would be carried out by salaried persons, or those who put in small amounts in banks and do very few transactions. For context, roughly 80% of the transactions on IBFTs are below Rs25,000. For persons who let’s say only have Rs35,000 in the account and they have to transfer say Rs25,000 for the sustenance of the family in some other city, transaction falling down and the money not received for a few days is plainly inconvenient to keep it soft, and an ugly digital experience for the transacting parties. On the surface this may seem like a not so important and infrequent happening. In reality, it could not just possibly be
a deterrent to people using online banking, but also a harrowing concept in principle. The issue is that the current system is not ‘instant.’ Ideally, online banking should be as easy (easier actually) than handling cash. And with cash, it is a simple matter of bills exchanging hands. This inefficiency is exactly what the kind of problem that the SBP wants to solve. Their ultimate goal is pushing Pakistan into going digital, and with outdated systems like IBFT and 1Link, there is still a long way to go. This is where RAAST comes in.
The long winding road to RAAST
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akistan’s road to digitisation has been an arduous one. Online banking is full of inefficiencies from adding new beneficiaries to waiting for confirmation that a payment has been made, whereas the world has moved on to new technologies that make the payments experience smoother. And for a country that has time and again resisted this kind of change in terms of money going online, even the smallest of inefficiencies let alone these very basic problems are a deterrent stopping people from using online services. The IBFT system being operated by 1Link is not exactly archaic, but it is clunky and outdated for sure. Ideally, a system like RAAST to fix these wrongs should have been created by the private sector and not the State Bank of Pakistan. The banks are already grumbling about the fact that they have very little choice in coming on board RAAST since the directive is coming directly from the central bank - but that is also precisely the point. If RAAST had been launched by a private fintech company, the banks would never have taken the bait. Right now, the SBP’s plan is to launch RAAST as a free of cost platform since their ultimate goal is to promote digital banking over traditional over-the-counter banking. Even with this the banks are having a hard time. If it was a private fintech company
launching the platform and taking a large cut of the earning from each transaction made on RAAST, there would have been a blood-bath between the banks and the company pitching the idea. Despite this, to the SBP’s credit, they tried to get the private sector to fix the problem. This scenario had put the SBP in a quandary. So they decided they would make regulations that would allow the private sector to come in, connect with the RTGS system, build use cases (a use case is simply a function that a website can perform - a feature that allows instant payments on a banking app for example) for retail level financial transactions, and fix the problem. Essentially, this was a call for fintechs to come in and troubleshoot the problems that Pakistan’s digital payments landscape had. Already in Europe a new payments revolution had come about after the Payment Services Directive 2 (PSD2) that provided a regulatory framework for non-banks such as fintechs to become part of the formal financial system through API-based integrations. API based integrations are systems like RAAST that allow for interoperability and immediate transactions. To put it in simpler words - the SBP wanted a fintech company to come in, connect to the existing network of RTGS, and use that digital infrastructure to create a platform that banks and fintech could all use to encourage immediate payments and smoother interoperability between banks. Meaning no more lag times between transactions, no more failed attempts and money stuck in purgatory, and most importantly an easier user experience. They introduced regulations for Payment Systems Operator (PSO) and Payment Systems Provider (PSP) in 2014 for the private sector to come in and get authorisation from the SBP under the PSO/PSP license to digitise payments for various use cases. In the natural evolution of things, the interaction of the private sector with the SBP highlighted the need for electronic money institutions (EMIs), not banks,
COVER STORY
to make digitisation a reality. Consequently, EMI regulations were introduced in 2019. However, this was never going to work? Why? The banks hate the fintech companies cropping up and take them as direct competitors, so they were never going to agree to come willingly on board a system designed by a fintech company and pay them money for it. In a parallel, harmonious, logical world, interoperability between various financial institutions was necessary whereby a fintech company’s application could be used to make payments to and from any bank or wallet. But because of the antagonism between the banks and fintech companies, it was virtually impossible. However, even as it seemed that Pakistan would never be able to come up with a platform where all the banks could link up for immediate transactions, the world was moving forward. Instant payments were becoming more instantaneous and there was a need for a system in Pakistan that was cutting edge. That is when the State Bank decided to take things into its own hands and launch RAAST. Translated as the ‘right-way’ in Urdu, RAAST was pitched to the SBP back in 2016, and it was inaugurated earlier this year in an elegant ceremony attended by Prime Minister Imran Khan, members of the Bill and Melinda Gates Foundation which funded the project and officials from the central bank. At the ceremony, PM Khan hailed RAAST as a major leap towards ‘Digital Pakistan’. “Various stakeholders including international the World Bank and experts agreed that Pakistan should have an instant payment system; however the features and design of the system had to be decided. but there was no consensus then on what would be the form of this system,” says Syed Sohail Jawad, director Payment Systems Department (PSD) at the SBP. “There are different models around the world for an instant payment gateway. Mexico for example modified its RTGS for instant payments for retail. The SBP studied different models in countries and the challenges faced during and after implementations of their hiccups. Meanwhile, the digital financial services team at Bill and Melinda Gates Foundation also liked the idea and decided to not only provide funding but also technical expertise for the new instant payment system,” says Sohail. Consequently, in 2017, the Gates Foundation through Karandaaz Pakistan signed the funding agreement with the SBP and in 2018, Mckinsey and Co. was brought in as consultant and project manager, RFPs and EOIs were floated and the procurement for infrastructure for the project was completed
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It has been a smooth ride so far. There hasn’t been any instance in the history of IBFTs that settlement did not occur Najeeb Aggarawala, CEO at 1Link
late 2019. In January 2020, proof of concept was conducted and following its validation, Karandaaz signed the agreement with the vendor of the project, a Swedish company called CMA Small Business Systems, in March 2020. CMA Small Business Systems is also the vendor for Pakistan’s RTGS. SBP says they are not aware of the size of funding received from the Gates Foundation. All procurements and financial matters relating to the project are handled by Karandaaz Pakistan which directly receives all funding from the Bill and Melinda Gates Foundation. Karandaaz Pakistan told Profit that the funding for the project is in the vicinity of $13-14 million. The size of funding is another one of the reasons why no fintech company would have undertaken this project on its own. From sources, Profit has learned that the central bank had initially asked the private sector, fintech companies already operating payment gateways or new ones, to launch the instant payment system. The size of funding for the project is mammoth but to push its adoption, the regulator is poised to keep the service for consumers free which means that private companies would not be able to generate returns on the investment and, therefore, did not have a business case for the project.
What RAAST will look like
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p until now we have discussed how the SBP wanted a fintech company to come in and fix the problem for them, and how this would cost too much money and that the banks would never be on board with this. However, with a system like RAAST that is being implemented from the top up by the SBP, which is giving very little choice to the banks, there are other functions too that will make life easier for consumers and encourage digital payments. For starters, there will be no change in
interface on the banking apps. Most of the consumers won’t even know that their bank is providing them funds transfers facility through RAAST now instead of IBFT. It’s just that the experience would be better. According to Shariq, banks would prefer to keep interfaces the same because banks have had to bear through the pains of making customers get used to the interfaces that they have now. These are the major changes. These are the major changes we can expect from RAAST to improve this user experience.
Immediate payments:
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his one has been discussed at length in our explanation above - what happens if you transfer money to someone’s account and it gets stuck somewhere in the process between the payment going from your bank to 1Link through IBFT and then to the person you are transferring the money to? Under a system like RAAST under which all of the banks are connected, small retail transactions are immediately recorded with the bank and there is no chance for failure in the transaction. So with RAAST, when you transfer money through your bank account to someone else, it will take seconds. That is a ‘right way’ to do it, whereby once a customer is making a funds transfer, it is happening real-time: the money is either sent, or it is not! There are no backend reconciliations, no settlements between banks. Quite simply, under RAAST, all fund transfers will be settled between banks real-time at RTGS. Real-time settlement under RAAST for banks also means that costs for banks are reduced. “For banks, as IBFTs increase, the associated costs also increase in case transactions are stuck. More resources are required for customer service, call centers, reconciliation team and dispute handling. I do believe this will all significantly come down with RAAST, which makes it a compelling proposition for banks,” says Shariq Mubeen, head
TEXTILES
of alternate distribution channels at Meezan Bank.
Low-cost, contextual rails, quicker access and settlement is just what is needed for scaling digitisation across multiple verticals
Bulk payments
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n January this year, the central bank rolled out the first use case for RAAST - bulk payments for entities that do multiple payments, for instance salaries or pensions. When this system was launched in January, there were around 14 banks. Now, 30 banks have been onboarded and integrated with RAAST. Bulk payments also include dividend payments for shareholders that are done by the Central Depository Committee (CDC). It is currently working with Accountant General Pakistan Revenues (AGPR) for salaries, Ehsaas programme for disbursement of payments and Central Directorate of National Savings (CDNC) for savings payments. If you are a customer of a bank and receive your salary in your account, or if you are a bank customer or a mobile wallet user, the most obvious question that you will pose is that you already receive your salary and you already make funds transfers through your banking application, so what is new here? Or what exactly is RAAST going to change? The quick answer is that payments would now be settled immediately and the transactions are going to be swift. So, as we mentioned in our scenario, your colleague is no longer going to get their salary before you because when accounts send out salaries, it will all happen in one fell swoop. Right now, for instance, all your salary transfers are done through IBFTs by your bank which are done one after the other. So RAAST bulk payments are going to change that instead of doing these transfers individually, the payments are going to be done in one go. If it is 500 employees, the payment will be pushed all at once instead of individually. If it is 1,000 employees, it is going to be pushed for all the employees at the same time, making these payments more instantaneous.
Aliases
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his is another simple and compelling feature of RAAST that would simply add to ease of making digital financial transactions, deterring cash transactions and promoting financial inclusion. To use a personal anecdote, I recently witnessed an instance of a bank transfer that was pretty anomalous and by chance got to know what sorts of problems having the ability to create aliases can solve. The instance was simply a friend transferring money from a Bank Alfalah account to a UBL Bank account. The transaction would simply not go through and later it emerged that UBL
Omer bin Ahsan, lead Regulatory Liaison Pakistan Fintech Association (PFA)
Bank had three formats for account numbers. The account number could have branch code in the beginning, in the end and in one format, they would have branch code followed by branch code again and then the account number but the banking applications would only recognise one format. Under RAAST, the UBL account number, in whatever format, could be linked to an alias for instance the phone number of the customer, and next time he asks someone to send money to that account, he could give that phone number to the sender and the sender’s banking application would automatically recognise which account that number belongs to and the transfer would be processed happily. Imagine the utility of such aliases for the unbanked that are still unbanked because of the troubles remembering or putting in account numbers because they are not literate enough. For these transactions failing because of complexities associated with account number formatting issues in the case of UBL, and for a few, complexities associated with remembering and putting these account numbers in banking application and processing transfers means that such errors and complexities could deter digital transactions, end these transactions even before they could start which can eventually promote cash transactions.
Request to pay
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2P (request to pay), or pull payments as they are known in digital payments nomenclature, are the opposite of fund transfers that you do under which payments are pushed from one account to another. Currently, for example, if you want to pay your child’s school fee through an online transaction you add the school as a beneficiary and pay your child’s fee. This means you have to remember the due date, log into
your account, add the school’s detail, add the exact amount and purpose of payment, and then send a receipt to the school and wait for confirmation as you have the payment is not among the 23,916 failed transactions that take place every single day. Under R2P, your child’s school can ask its bank to enable R2P for fee payments and instead of sending you a fee voucher, you will receive a message or an email from the school, informing you that your child’s fee is due, with a request to pay. You agree to pay through a link in that message and email and your child’s school fee is processed. The convenience there is that as a parent, you could slack on your child’s fee if you have to pay the fee yourself, even if it is over a banking application. You’d be in office, you would forget to pay because of recurring meetings at work. Same would happen the next day, and the next. But if the school initiates this payment for you, chances are that you would pay immediately. With EMI regulations in place, new fintech companies can potentially cause massive digitisation on the back of R2P, digitising entities like schools, public entities like K-Electric could request bill payments from you, and banks can R2P the loans back. From what we have learnt, banks foresee a huge surge in transaction volumes because of R2P, and huge volumes mean that the system would have to be robust and does not fall down every other day. And as we have come to know, RAAST is a system which is capable of handling large loads of transactions, and yet gives the best performance. R2P is one use-case, however, which the SBP is proactively pushing itself. But use-cases will be continuously developed by banks and EMIs, even on R2P, for instance P2G (person to government) payments or corporate to corporate payments could be built on RAAST by an EMI. The EMI would
COVER STORY
simply have to request the SBP to create the use case on RAAST and make the API for that available to the EMI, and everyone including the banks would have to work with the EMI; it would be interoperable. Officially, fintech companies look forward to working with the SBP on RAAST. “Low-cost, contextual rails, quicker access and settlement is just what is needed for scaling digitisation across multiple verticals,” says Omer bin Ahsan, Lead Regulatory Liaison Pakistan Fintech Association (PFA).
Who regulates the regulator?
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s mentioned earlier, one of the reasons why the SBP is the one undertaking RAAST and not a private company is because a private fintech company would not be able to get everyone onboard for the adoption of the project, and also because a private company would probably have a hard time getting its hands on the kind of money that it needs to do a project of this magnitude. Take 1Link for example. From sources, Profit has learnt that by virtue of it providing IBFTs to financial institutions, it had also developed R2P and presented the same to banks, which was shunned by the banks because R2P means deposits would be moving out of banks, towards smaller banks. Consider an EMI that has its primary account with a small bank, let’s say JS Bank, and develops
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a R2P use case. In this case, R2P payments would mean customers that are using the EMI’s service, if they are with big banks such as HBL or Meezan Bank or UBL, money in form of payments would be moving out of these banks into JS Bank. The banks dread their deposits depleting, which is why 1Link could not do it. But banks also dread turning down the regulator, the SBP, when it asks them to do something which is why RAAST is going to do well, even though they would have some apprehensions about the project. From industry sources, Profit has learnt that banks are wary of the regulator because the banks are hard-pressed when it comes to SBP directives that it pursues seriously. RAAST is one of these projects where the banks had to prioritise the SBP projects over their own projects despite concerns like the R2P use case. Pricing of RAAST is another aspect where there is going to be some sort of contention between the SBP and the banks and branchless banking companies JazzCash and EasyPaisa in particular, and which could at least slow down the RAAST revolution despite its benefits to the banks. When Covid-19 hit, the central bank was quick to move to remove charges on interbank fund transfers, which was followed by rounds of lobbying from the financial institutions, JazzCash and EasyPaisa, in particular because IBFTs are a revenue source for banks, and one of the few income sources for branchless banking players. The waiver
on IBFT charges was removed, however, and a tiered system of charges was put in place where financial institutions can now charge 0.1% or Rs200 on transactions above Rs25,000. Transactions below Rs25,000 aggregated in a month are free of cost. For banks, IBFTs are a business case that incurs a cost and generates income for these banks. It is a significant case for EasyPaisa and JazzCash because these financial institutions do not have many avenues of making money and IBFTs form a big chunk of their income. Which is why both EasyPaisa and JazzCash were the frontrunners in getting charges on IBFTs restored. But the SBP is poised to improve the adoption of RAAST and the earlier waiver on IBFT charges resulted in a massive surge in IBFT transactions. From 1Link’s numbers, IBFT transactions for the year 2019 were only 51.2 million in volume and Rs2.2 trillion in value, whereas for the following year when Covid hit and the waiver was announced, IBFT transactions in volume spiked by over 200% to 164.9 million transactions and value-wise, the spike was over 100% with Rs4.89 trillion processed by 1Link as IBFTs. The sheer increase in IBFT numbers, though it is unclear if the rise in IBFTs was on new accounts or there was more depth in the existing IBFT transactions, provides the required conviction to the SBP that if prices are kept low, adoption of digital payments would increase. Consequently, the SBP, in our conversation with them, showed an
TEXTILES
inclination of keeping the charges for RAAST free for banks and also mandating banks to keep these charges free for bank customers. The financial institutions would, however, be allowed to charge for the innovative use cases that they bring as value added services. But banks contend that setting up systems at banks to connect with RAAST is coming at costs for them and that they should be allowed to charge at least what the charges for IBFTs are right now for RAAST to make business sense. You see, RAAST is currently run by the SBP itself, with a steering committee at the central bank acting as a governing board. The project is currently being run with operational costs being borne by the regulator and in our conversation with the regulator, the SBP is likely going to run it itself for the next 2-3 years. Since the project is all about spurring digital payments, the regulator would try to incentivise adoption on low cost transactions for consumers as it has seen an adoption in IBFTs on the back of the waiver it announced last year. But the important question here is who would regulate the regulator for as long as it owns the project? The SBP is a powerful regulator that finds its way around doing things and banks are wary of dealing with the regulator. However, the SBP assured us that even though they are regulators with goals for the economy, they are a rational regulator that has to comply with international standards of regulating financial institutions. “In payment systems, there is a function
of oversight which is different from supervision in banks. This oversight is done under as per international standard developed by the Bank of International Settlements (BIS) called. These standards apply to all systemically important payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories (collectively or "financial market infrastructures"). As SBP owns and operates Pakistan’ Real-time Gross Settlement System (PRISM), we also perform self-assessment against those principles and measure compliance. SBP also advises systemically critical payment infrastructures like 1Link and NIFT to conduct their own self-assessments according to these principles,” says Sohail Jawad. “Our internal audit department is also vigilant and we have segregation of duties at the SBP. Recently, we have created a Digital Financial Services Group at the central bank by bifurcating the existing payments department into payments policy and oversight department and settlements and digital innovations department, which means oversight is going to be more effective and innovations in payments space would have more focus by the regulator,” he adds. Another point of contention, and a broad problem in the financial services landscape of Pakistan, and which is why the SBP chose to launch RAAST on its own, is that onboarding of fintech companies is full of friction, with banks having their own agendas. (Read more on the problems in the
financial services industry: FAP vs PFA: Who has the right credentials to lead Pakistan’s fintech industry?). Secondly, banks, being the biggest players in the financial services, have till now not prioritised digital payments, which is why QR codes haven’t taken off in Pakistan. (Read more on QR codes in Pakistan: QR codes did not bring a payments revolution. That doesn’t mean it’s over). Sometimes, banks would be wary of opening their customers to an outsider, sometimes, they wouldn’t simply prioritise innovative payment methodologies, like QR codes, because they do not want to give up on their cash cows; Visa and Mastercard, which new payment methods would be cannibalising. Banks simply act risk-averse when it comes to digital payments. On the other hand, fintech companies want an in the financial services industry because there is simply so much gap that is left that can be fulfilled, in an agile, cost-saving manner. But banks would refuse to expose their customers to the new players which they perceive as competitors. It is only logical then that when it came to RAAST, SBP was perhaps faced with a stiff choice of doing it itself, get it up and running and let a new order for the entire sector take shape where fintech is an established industry and banks are also comfortable working with them. But the regulator running RAAST has worried many. The central bank, however, is possibly going to act rational. It knows where and when it is transgressing and makes amends when it does. The example we
COVER STORY
have is the restoration of charges on IBFTs. The SBP realised that though banks have other avenues of making money, JazzCash and EasyPaisa would suffer because of the waiver and the regulator eventually realised and rationalised the charges to some extent.
Aftermath: Future of IBFTs
O
ne of the reasons why RAAST was launched was because the entire funds transfer infrastructure was relying on one entity: 1Link. Simply letting the entire infrastructure rely on one entity and any failure at 1Link would be a systemic risk. Imagine 1Link IBFT crashing, though it has never happened before but the risk is still there, and the entire systems of funds transfer stopping. In a sense, RAAST was created as a back-up option but because it is cutting edge and advanced in terms of technology that gives a better payments experience, it would be the primary system for most banks if not all and 1Link would become the fallback option for these banks. “1Link could potentially be a backup option. For instance, if there is an upgrade at RAAST and the system is down, banks can have the option to immediately switch to 1Link and carry out funds transfer to ensure uninterrupted services. However, it depends on 1Link’s decision to continue to exist in this space,” says Shariq. The few things that are going to matter to banks for choosing RAAST or IBFT for funds transfer are price and service quality, on which RAAST tops for now because of the advanced technology and infrastructure. On price, IBFT makes more sense because banks are allowed to charge on transactions above Rs25,000 aggregated in a month and RAAST also makes sense for banks when they are allowed to charge at least as much as they do for IBFTs to consumers. 1Link witnessed an unprecedented growth in the IBFTs during Covid-19 lockdowns and the waiver, but is buckling up to take a hit as more banks onboard RAAST. “We cannot quantify yet, but we are expecting some hit on our IBFT transactions in cases where there is direct settlement in RAAST without 1LINK involvement,” says Najeeb Agrawalla. Though Najeeb also says they can also potentially introduce real-time settlements for banks if SBP mandates, just like RAAST, but refused to say definitively if and/or when that would actually happen. Even with a hit on IBFTs, as an entity, 1LINK is sustainable on the back of the ATM switch which powers the entire ATM infrastructure of the country, PayPak, Fraud Risk Management Services and through its services as a bill aggregator for various entities.
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While 1LINK's IBFT appears to be a competitor to RAAST, 1LINK is planning to join the RAAST network for faster payments for other services that it provides, or to introduce new services. 1LINK’s legal and commercial arrangements with banks, billers, EMIs, PSO/PSPs etc., indicate that these arrangements will help 1LINK leveraging RAAST for a better service delivery to the industry.
Aftermath: Future of debit cards and payment schemes
H
ow do you make payments at a merchant today? If you go to a big retailer, you can pay through cash or your debit card/credit card. If you go to a small retailer like your neighborhood kiryana store, you would be able to use cash only. These are the only two methods you can use to pay a merchant today. An important component of the central bank’s digital payments strategy is to roll out another method of payment, QR codes, through the RAAST instant payment system. As a customer, you would be able to scan a QR code in plastic at a merchant, or you could scan a code through your wallet or banking application right off your merchant’s phone then and there and the payment will be processed. QR codes have not been successful in Pakistan. As earlier mentioned, interoperability has been a big problem where banks and wallets won’t open up to other banks and wallets. The case has been the same with QR codes for payments. For instance, JazzCash and EasyPaisa have proprietary codes in the market but those can only be scanned using the JazzCash and EasyPaisa mobile wallet applications. If you have a mobile banking application on your phone, came across a JazzCash or EasyPaisa QR code but could not scan it to make a payment, it is because these QR codes have not been opened to your bank by the respective branchless banking companies. So if the SBP is able to roll out interoperable QR codes, essentially, that would be replacing cash and debit cards. While cash could be considered a bane that even banks would want to replace, debit cards are lucrative cash cows for banks that help them replace cash. A banker once told us that debit cards are very lucrative for banks that help them earn income via the merchant discount rate and the hefty annual fees. And that it would hurt them to see their debit card income go down if QR codes come into the market (Read more on how much money banks make
on debit cards: SBP wants the cheap PayPak to be the default debit card; the banks don’t). The vested interests of banks in keeping QR codes out of the market means consumers have less options of making digital payments. The current methods of payments are costly as compared to QRs, and all this means that the country would not see the spur in digital payments that it desires. As a matter of pride, it also does not look good for a country to not have advanced modes of payments. While it is going to hurt banks if debit cards go down, importantly, it is going to hurt the payment schemes Visa and Mastercard primarily if their cards in the market go down, or don’t go up because there are QR codes out there. The payment schemes have made concerted efforts to aggressively sell these cards to banks through lucrative incentives, and they have been doing this for decades now. Visa and Mastercard, and even China UnionPay, have QR codes in the market that they have recently started focusing on because they have foreseen a decline in debit card income. But in any case, debit cards are more lucrative than QR codes. The MDR on debit card transactions is 2.5% whereas on QR codes, it is 1%. Payment schemes get different cuts from the MDR charged to merchants and a bigger percentage means a bigger cut for the payment scheme. For banks, it is more lucrative because they get a cut from the MDR and earn issuance and annual fees. So if the central bank successfully achieves interoperability for QR codes, these payment schemes would be in a fix. The more important question, however, is whether the SBP will be able to push QR adoption in Pakistan. The State Bank’s plan is quite visible: they want to make sure low cost modes of payments like QR codes are available. But critics say QRs have really been a success in China and a few Southeast Asian nations and for successful adoption of QR codes, these QRs would have to penetrate deep into streets in towns and cities at kiryana stores for it to be called a successful adoption. If that happens, the volume of transactions then would be significant enough to recover the income lost on debit cards for banks and payment schemes. But that is a big if. For now, in our conversations with bankers, we could witness the tension in their voices when it came to QR codes replacing debit cards. Tensions in voices means reluctance and reluctance would lead to banks finding ways to block adoption of QR codes. So with a nation badly needing a serious push in digital payments, a regulator ready to give that push and hesitant banks and payment schemes, we can only hope that RAAST is able to live up to its promise. n
COVER STORY
What has Pakistan Cables been up to?
Despite difficulties, the company has been slugging away and staying on track for their expansion plans
W
hat has Pakistan Cables been up to? In the midst of one of the worst years for construction (2020) and the best years for construction (2021), the company has been quietly sluggin away at its expansion plan - that it had prepped for all the way back in 2018. In a notice sent to the Pakistan Stock Exchange on August 17, the company laid out its quarterly progress report on the utilization of its right share funds. To recall, in April 2018, the company had offered 25% right shares for the purpose of acquiring machinery for its manufacturing expansion project, by offering 7,115,594 shares to existing shareholders at a price of Rs160 per share (including a share premium of Rs150 per share). As per the notification,
CONSTRUCTION
the right shares were fully subscribed by the shareholders and the proceeds from the issue were credited in the company’s bank account at end of July 2018. Today, the full proceeds of around Rs1,138 million have been spent by the company on construction and civil works, as of June 30, 2021. The company had purchased a 42-acre plot of land in Nooriabad-SITE in 2018 for a new manufacturing base, with most of the work intended to be completed by end 2021. After the site is done, manufacturing operations will be split between the new Nooriabad factory and the current S.I.T.E factory. Not bad for a company that essentially has perfectly timed its expansion plans to coincide with the biggest boom. Pakistan Cables has been one of the strongest performing companies on the exchange, even during
its rough years. And the latest 2021 financial results only point to that. Here’s how it got here: the company is the brainchild of Amir Sultan Chinoy, an industrialist born in British India in 1921. He migrated to Pakistan and almost immediately had a massive impact on the industrialisation of the nascent country, incorporating International Industries (it initially dealt in electronic instruments). Chinoy initially named the company Sir Sultan Chinoy & Co. Ltd., after his father. In 1953, Chinoy sponsored the establishment of Pakistan Cables Ltd, as a joint venture with British Insulated Callender’s Cables (BICC). The company was the pioneering company in Pakistan’s cable industry, producing conductors, cables, and wires for the new country. In 1984, the company started extrusion of anodized aluminium profile sections
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for architectural applications. In 1996, the company set up a state of the art plant to manufacture High Conductivity Oxygen Free (HCOF) Copper Rod. In 2008, the company set up a PVC Compounding Plant to manufacture high quality electric cable grade PVC compound. The company also set up a 2-MW gas fired trigeneration Power Plant, allowing it to be mostly self- sufficient for its electricity needs. Between 2010 and 2017, the company was affiliated with General Cable, a Fortune 500 company headquartered in the United States Today, the company can boast a fair bit of ‘onlys’: it is still the only wires and cable manufacturer in Pakistan listed on the Pakistan Stock Exchange; the only cable company in Pakistan to have a fire testing laboratory for flame propagation testing; and the only manufacturer to launch an an e-store on September 2019 (conveniently months before the pandemic). That store is now present in 50 cities in Pakistan (the overall trade network extends to 190 towns and cities). The company’s revenue grew steadily between the years 2009 and 2015, from
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Rs3.3 billion to Rs6.9 billion. After faltering somewhat in 2016, revenue jumped to the Rs9 billion range in the 2017-2020 years. However, steady profits have been more elusive. The company had some good years between 2013 and 2016, in around the Rs200 million range, and then a very good year in 2017, with profits of Rs478 million. But profits actually declined in the years after that - and the company even posted a loss of Rs92 million in 2020. What happened? According to that year’s annual report, it was not actually the pandemic that affected the company - after all, sales only dipped 6%, because of government lockdowns. Rather, it was the devaluation of rupee against the dollar which increased the cost of the company’s inputs. The exchange rate loss on borrowings in US dollars and high interest rates also made the company’s finance cost jump. The company is also vulnerable: the prices of cables, copper rod, conductors and aluminium extrusions are closely linked to the global markets for copper and aluminium. Both base metals are traded on the London Metal Exchange (LME), the world’s premier
non-ferrous metals market. The price of both these metals is therefore determined at the LME and any fluctuations in copper or aluminium prices have a direct effect on pricing. Still, the company was optimistic. As it oted in is report, it was “confident, that fundamentally there is a strong need for infrastructure development and construction in Pakistan, particularly with lower borrowing rates and the recent construction / real estate packages announced by the government. This is expected to drive the demand for wire and cable in the medium to long term.” That is exactly what happened: not just with new government policies, but also the State Bank of Pakistan mandated the banking sector to increase lending towards construction and real estate to equal 5% of their total private sector lending. And the results speak for themselves: the company’s 2021 revenue stood at Rs13.1 billion, the highest it has ever been. It also recorded its best profit, at Rs554 million. And with its new plant, there is bound to be more growth. n
CONSTRUCTION
No,
the stock market is not an accurate indicator of the economy Profit answers your questions and lists out the reasons why the stock market isn’t an indicator of the economy 30
T
By Ariba Shahid
he stock market is not an accurate indicator of the economy. If you’re on twitter you’ve probably read this scribe tweet about it often enough - at times ad nauseam even. Whether you agree or disagree to the statement widely depends on a number of reasons. Before we get into details and talk about whether or not the stock market is an indicator of the economy, let’s talk about what politicians say. It’s simple. If you’re in government and the stock market index goes up taking credit for it seems like the best thing to do because optics. If you’re in opposition and the market goes down, you could say that the government is doing a terrible job at managing the economy and it is reflected in the index’s performance. Our argument, which also happens to be true by the way, is that whether the stock market goes up or down it says absolutely nothing about how the economy is doing. It does say how people think the economy is doing, but that is a pretty big and pretty significant detail. However, before we debate on this
concept, let’s get some concepts straight, and to do that let us answer some important questions.
How do you define an economy?
A
textbook definition is that an economy is the state of a country or region in terms of the production and consumption of goods and services and the supply of money. In order to understand how the economy is performing we use a number of indicators. These indicators are pieces of economic data. They are usually macroeconomic and not microeconomic. Macroeconomic data is basically data for the aggregate economy. This means large scale data such as the total number of cars produced in an economy in a year. Microeconomics, in contrast, is on a smaller level - as the name suggests. For instance, the number of cars produced by a single manufacturer in a year. Another example to understand this better could be the total money spent by the government in a year is concerned with macroeconomics; while the total money spent by your family in a year is concerned with microeconomics.
What do we mean by economic indicators?
T
here are a number of economic indicators. Essentially investors or analysts can use any indicator they deem relevant to the research they are undertaking. However, some indicators are widely used as they are released by the government or dedicated organizations. For instance, the consumer price index, gross domestic product, unemployment rates, debt, exchange rate, risk premiums, budgets, current accounts, interest rates, gold and oil prices, and stock market indices. Some of these indicators work hand in hand with the economy without lag, some have impacts on the economy in a lag, and some are impacted by the economy with a lag. For instance, the GDP is an indicator of the economy. When the GDP grows, in crude terms the economy has grown too. To refine this, we look at real GDP instead which is inflation adjusted GDP. Similarly, interest rates have an impact on the economy. When interest rates are higher, output growth slows down as investment slows down. In contrast, the stock market as an indicator is debatable and also depends on a variety of factors.
What is a stock market?
T
he stock market can also be called a stock exchange. Essentially, when you’re buying a share on the stock market you’re buying the ownership of shares in a corporation. Similarly, when you’re selling shares, you’re selling your rights to ownership. Incorporated companies list on the stock exchange to raise money. What this means is that the stock market is composed of buyers and sellers of shares. This does not represent all businesses, employees and households. People use indices to understand how the market is performing.
What is a stock market index?
A
stock market index is an index that measures a stock market. It helps investors compare current price levels to the past as a gauge of market performance. In Pakistan we have the KSE 100 index, KSE 30 Index, KSE All index, KMI 30 Index, and KMI All index. The KSE 100 index is a stock index that is used as a benchmark. 100 companies with the highest market capitalization are chosen. In order to make it a greater representative, the company with the highest market capitalization from each sector is also included. Approximately 90% of market capitalization is
represented by these companies. The KSE 30 index on the other hand only represents the free float of shares rather than using paid up capital as a determinant. Top 30 companies participate in it.The KSE All Index is an index used to show changes in all the stocks listed on the PSX. The KMI 30 index is called the KSE Meezan Index. These companies listed in this index are Islamic Shariah Compliant. It was introduced in 2009. At the time, the Karachi Stock Exchange (now PSX) and Al Meezan Investment Bank (now Meezan Bank Limited) created the index. It is calculated on the basis of free float market capitalization. The index reflects the free float market value of selected Shariah-compliant shares in comparison with the base period. KMI-30 is recomposed semi-annually. Some day we’ll write an ELI5 on the KMI index and the criteria.
So does the PSX accurately represent the economy?
I
f you don’t want to read ahead, let’s make it simple for you. No. it doesn’t. While there have been many papers written about the relationship between the stock market in general with the economy, and the PSX and Pakistani economy specifically, we’re going to list a few simplistic reasons. There are, of course, more. In case you don’t buy it, here are the major reasons why the PSX cannot be taken as an accurate indicator of the economy.
Reason 1:
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he PSX market capitalization to GDP stands at 17.39% in FY21. It was around 43% in 2007. What this means is that the country’s output has grown while the PSX’s contribution to the output has shrunk.
Reason 2:
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he stock market does not represent all the companies that make up the Pakistani economy, especially considering the size of the informal sector. The market is largely made up of corporations that are larger and have access to broad capital markets which not all small companies do. If we talk about Pakistan, agriculture remains a huge source of employment, most of which is in the informal sector and is not listed on the market. However, spillover effects happen, such as employment generation through the demand created by the companies listed on the PSX.
Reason 3:
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he money invested in the PSX is somewhat concentrated in a few hands. For instance, big conglomerates have
multiple companies listed on the PSX. Top 12 groups in Pakistan own around 41% of the total value of the PSX. That is how concentrated the market is.
Reason 4:
I
nvestors do not always rely on fundamentals to invest in the PSX. They may be driven by emotions or speculation. Their behavior may not always go line in line with the economy’s performance and current affairs. The market isn’t really the most rational place in the world. Had it been rational, we wouldn’t have seen market crashes or markets rallying for no apparent reason.
Reason 5:
B
ubbles exist. Individuals, institutions and the government should stay weary of speculative bubbles, especially when there are no other strong economic indicators to back this. A recent example of this is from 26 May 2021 when the PSX saw an all time high daily trading volume. The government was quick to take credit and make it seem like the economy was booming. However, a deeper look into the trading showed that it was indeed not the economy that was pumping up volumes. Out of a volume of 1560 million shares, 707 million were added by Worldcall Telecom Limited making up almost half of the total intraday volume. Volume was witnessed in WTL considering the recent news of an acquisition or an alleged pump and dump. Now tell me dear reader, does that mean the PSX and the economy are highly integrated?
Reason 6:
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here are a handful of investors. There are only 252,322 unique investors on the PSX as per data by NCCPL. 12,356 are foreign accounts. How can the PSX be an indicator of the economy when it doesn’t even engage a significant proportion of individuals?
What does all of this mean?
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e’re not saying that the PSX has nothing to do with the economy. Ofcourse, when the economy is performing better there is usually more activity on the PSX. However, we’d like to say that the PSX is better at explaining or representing what investors expect in the future or how they feel about the present. It could be used as an indicator of expectations or sentiments. However, even with that the indices may not be a true representative. The good thing is that in economics, there is always room for proxy variables in the absence of true indicators n
EXPLAIN-IT-LIKE-I’M-FIVE
H
ush Puppies is renowned for its casual footwear catering to men, women and children. Their focus has always been about making a positive difference and inspiring their customers to “help shape a brighter world.” Today, that means a world where the pressing matter of climate change is addressed. According to German watch, Pakistan ranks 5th in the list of countries most vulnerable to the adverse impacts of climate change. Hush Puppies wants to help bolster our government’s efforts to mitigate this change through Vision 2025. In line with this belief, they have introduced the first ever “Good Shoe” in their range – an eco-friendly, stylish shoe that doesn’t compromise on comfort. “The Good Shoe” uses bounce technology in the sole which helps one stay comfortable with sustained cushioning even up to 250,000 steps. The shoe is made from algae harvested from water bodies where it is causing harm, and has 100% recycled uppers made from ocean landfills plastic (from approximately 500,000 plastic bottles) helping improve the environment by giving a second life to those plastics and reducing trash in our landfills. All round, it is their most sustainable shoe. Their mission is to innovate their core Body Shoe category (which is also made from Bounce footbed technology, with bio-Dewix and bio-Derix, the antimicrobial inner and upper being made of these natural and sustainable dry fabrics which are good for moisture management, among many other benefits) and provide the wearer with unmatched comfort. And that isn’t all: Hush Puppies is planning to plant a tree for every Good Shoe sold,
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meaning each pair is a direct step towards climate resilience. In order to get more people to play their part in creating a greener and cleaner future through small steps, the brand has also taken to social media with their initiative, creating the viral #smallstepschallenge. The company is firm in their belief that each positive action towards protecting the environment, no matter how small, is significant in the fight against climate change. Further, Hush Puppies has partnered with Waste Busters for a tree plantation drive, the first leg of which is complete. In honor of Independence Day, they plant 500 trees in Raiwind, Lahore. Firhaj Footwear (Pvt.) Ltd subsidiary of Umer Group of Companies introduced the brand in Pakistan, where the growth rate of their shoes has been recognized and appreciated by Hush Puppies® USA as being the second largest in the world. The Umer Group of Companies has always been conscious of environmentally-positive measures. Another project undertaken as part of this environment protection initiative is the deployment of a large-scale solar power unit producing 50kV of clean electricity. This unit will significantly reduce the company’s carbon footprint. This switch towards using renewable and sustainable energy resources is a huge win for environmental health. In addition to this, Hush Puppies is one of the only local companies to have integrated their Point of Sale system online. This avoids production of paper waste through printing invoices. The company actively educates customers about the importance of SMS or Email based invoices to eliminate the need for paper entirely. Mohammad Qasim, Managing Director of the company, is focused on leading the change: “at Hush Puppies, we try to take every step we can to ensure a sustainable future. From our products all the way down to the hand sanitizers we use, we try to emphasize on eco-friendliness.” Hush puppies has clearly renewed their focus on sustainability and is making exhaustive efforts to ensure they not only reduce their carbon footprint with their green investments and sustainable products, but also encourage others to play their part in improving the environment. Their socially responsible and future-focused approach is inspiring and other companies should follow their lead in taking action in every capacity to combat the pressing matter of climate change.
SPONSORED CONTENT
The valuation has implications beyond just Airlift as a company By Taimoor Hassan and Meriyum Ali
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ccording to that year’s annual report, it was not actually the pandemic that affected the company - after all, sales only dipped 6%, because of government lockdowns. Rather, it was the devaluation of rupee against the dollar which increased the cost of the company’s inputs. It’s not every day that the head of a country decides to comment on the ‘tech
VCs
valuation space’. This is especially true in Pakistan, where you would think the collapse of our western neighbour to armed terrorists, or the imminent climate change disaster on our hands, would take up headspace, rather than the musings of tech bros on twitter. Not so here: it speaks to the complete paucity of decent news in recent times that Prime Minister Imran Khan found time to tweet the following: “We welcome the recent investment of $85 million by leading VCs of the world in Airlift, a company led by young Pakistanis. Pakistan has huge potential and we are open for business. My government {sic} is fully committed to creating opportunities.”
Unless you are living under a rock, you will have by now found that Airlift (a startup that this writer has used exactly once, to order potatoes (make of that what you will)), is now one of the highest valued tech companies in Pakistan, with a higher valuation than actual listed tech companies on the Pakistan Stock Exchange. Again, it speaks to the rarity of this news, that even mainstream news channels struggled to figure out how to broadcast this information - valuation? investment? VCs? But this appears to be a good sign: Pakistan is (finally, finally) now entering a brand new world, where technology takes paramount importance over agriculture or construction,
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and where increasingly this jargon will become more commonplace (and not just limited to the realm of a small few). And that is also what Shahrukh Saleem, analyst at AKD Securities, also highlighted in a report sent to clients on August 20. Airlift has only claimed to raise $85 million in Series B funding, which potentially takes the total amount of funding raised by the company to $109.2 million. As earlier reported by Profit, Airlift has managed to secure only $30-40 million, out of the claimed $85 million investment in Series B1 and Series B2 rounds. Whereas for the remaining $45-55 million, the startup plans to go for a Series B3 round in the fourth quarter of this year and Airlift is only riding the hype with the tweets on claims of $85 million funding, which it has yet to raise completely. What’s of more importance, however, is that like many out there, even perhaps the prime minister is not aware that the present regulations keep investors from coming into Pakistan and the Airlift funding is also going to be channeled to the holding company (HoldCo) in Singapore, which is the parent company and owns Airlift in Pakistan, from where only bits and pieces of this investment will sporadically be invested into Pakistan. As the company, Airlift, has expressed the desire for international expansion, we expect only little will be coming into Pakistan (maybe $10-15 million only) and most will be invested outside the country. Middle-east is one of the regions where Airlift would be investing and is reportedly in the process of setting up an office in Dubai. We can, therefore, rightly challenge Airlift co-founder and CEO Usman Gul’s statement that the financing will add five per cent to the country’s foreign direct investment (FDI) for the fiscal year 2022. The financing that has been secured so far was co-led by Harry Stebbings from 20VC and Josh Buckley from Buckley Ventures Ltd., with participation from former Y Combinator president Sam Altman. The Lahore-based company started off as a decentralized transport network with an aim to provide affordable mass transit, but because of the pandemic, made an abrupt turn towards last-mile delivery. The funding that has so far been raised is still a sizable amount. Before Airlift, it had been e-commerce behemoth Daraz that had secured large funding of $55 million in their Series B. Rightly so, it cannot be underestimated how huge of a deal this is: Pakistan startups have raised a cumulative $165 million in 2021 to date. If you take out Daraz’s $55 million, that is larger than the combined proceeds in the past six years. And if Airlift gets the $85 million, it will account for 52% of the amount raised by Pakistani startups during the past
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We welcome the recent investment of $85 million by leading VCs of the world in Airlift, a company led by young Pakistanis. Pakistan has huge potential and we are open for business. My government {sic} is fully committed to creating opportunities Imran Khan, Prime Minister of Pakistan
six year. An even bigger deal is the proposed valuation of Airlift, which stands at $275 million. This is for a company that started in March 2019, and pivoted to a brand new business plan in March 2020. Airlift’s higher valuation will enable other startups to claim higher valuation as well. Meanwhile the valuations of PSX Tech bluechips stand at just $547 million for TRG, $518 million for SYS and just $195 million for AVN. These are established companies that have been around for years. Which leads to the question: are these seriously undervalued? Shahrukh Saleem at AKD Securities seems to think so. As he points out, the latest round of funding by Airlift casts key insights on potential valuation for the listed Tech sector, opening up opportunities of re-rating of multiples where investors have only recently realized the potential of the technology sector. This is especially true considering that the technology sector posted a return of 174.1% in fiscal year 2021, compared to just 35.7% of the market. “Market cap for SYS/AVN/TRG stands at $518/195/547 with P/S standing at 7.0/6.3/6.9x where market grapevine suggests Airlift’s P/S multiple at 6.0-6.5x,” Saleem notes. According to him, historically, the re-rating of multiples in the technology sector can be traced back to increased funding in Pakistan’s
startup space, mainly by foreign funds, indicating increasing confidence in Pakistan’s growth prospect. “Consequently, with local startups moving towards Series B and C rounds, increased foreign interest can again lead towards rerating of listed tech companies. Moreover, apart from SYS and AVN, this also bodes well for small cap companies like TELE (Telecard Limited) which is poised for strong future growth,” he says in his report. And for all the FDI-obsessed warriors out there, what perhaps should make everyone sit up is that technology is quite literally going to save the country. Tech based funding inflow stood at $165 million - which is a completely contrasting picture to foreign interest in Pakistan, with PSX witnessing an outflow of $138.2 million this year. And the listed tech space has attracted $20.9 million of inflow compared to outflow of $63.3 million from traditional blue chip sectors, bank and oil and gas. This clearly indicates changing investor preferences at a global level. That is what Saleem posits as well: “With Pakistan’s IT based exports reaching $2.1 billion in fiscal year 2021, up 47% year-onyear, we believe the sector is poised to become a pivotal component of the country’s exports and as such, will continue to command investors’ attention.” n
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