CONTENTS
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10 Mango juice and minority shareholders - this week in Pakistan’s business and economics twitterverse 13 Is the First Women Bank Limited too pink to fail? We hope so
18 16 Will the FBR be able to tame the retail sector? 22 Where there’s a rule, there’s a juggar, and currency is no different 26 What the Daraz rebrand means
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26 28 A decade lost: The fault in our capital markets Ammar H Khan 29 The SBP’s rising credibility issue Uzair Younas
Profit
30 Has the FIR sealed Hascol's fate?
Publishing Editor: Babar Nizami l Editor: Khurram Husain lJoint Editor: Yousaf Nizami l Assistant Editor: Abdullah Niazi Reporters: Ariba Shahid l Babar Khan Javed l Taimoor Hassan 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 Malik Israr (Isl) Layout: Ahmad Salahuddin l Photographers: Zubair Mehfooz & Imran Gillani l Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk
Editorial State Bank autonomy bill There has to be some irony in watching a government talk about the importance of autonomy for the central bank while at the same time it issues directives to the same central bank on what to do on the exchange rate and interest rates, the two central tasks of any central bank. It is no secret today that the rupee, that saw serious volatility in the month of December only to suddenly find tranquility right before the new year, is being propped by whispered intervention from the State Bank. The conditions that produced that volatility – rising trade deficit and falling reserves – have persisted but the exchange rate has remained comfortably anchored around the 177 mark in interbank trade. Interest rates too saw plenty of volatility since the two rate hikes of November and December with the markets demanding higher and higher yields in government debt auctions in the wake of the latter hike. The State Bank took the unusual step of injecting trillions of rupees into the markets through three unusual 63 day Open Market Operations conducted right after the second hike of December, at one week intervals, in what was clearly seen by the markets as a bid to inject liquidity and dampen the appetite for higher yields. These steps were all the result of government interference in central bank operations. Immediately after the rate hike of December 14, for example, the State Bank Governor excused himself from a crucial meeting with analysts and bond traders to go into a virtual meeting with the Prime Minister where he remained for more than 40 minutes, returning only to take two questions from the audience. Three days later he told Bloomberg TV that the central bank was going to “pause” its series of rate hikes in pursuit of “mildly positive real interest rates” to see how the effects of the actions taken thus far play out. In the next monetary policy announcement on Jan 24, the State Bank dropped all mention of the goal of “mildly positive real interest rates”, claiming instead that the raft of taxes activated through the Finance Supplementary Bill passed a few days earlier will help the fiscal equation and should relieve pressure from monetary policy to manage inflation. This analysis starkly contradicted the line the State Bank took in July, when it said the budget “is expected to be broadly inflation-neutral as most tax rates have been left unchanged”. When taxes were “left unchanged” in July the State Bank found reason to hold rates steady because there was not going to be an impact on inflation. But when taxes were imposed in January, it said the step “should help further
moderate the pace of domestic demand growth” and thereby built its case for holding rates steady. These contradictions show the central bank is being pulled in multiple directions at the same time. Clearly the government was unhappy with the rate hikes, the exchange rate depreciation, the market’s demand for higher yields on government paper, and the State Bank obliged on all fronts and conjured up the analysis needed to make these actions appear like those of a serious and professional central bank. In reality the State Bank was bowing before considerable political pressure. There is nothing new in this. Governors past have felt the same heat as the present one is feeling. All this is entirely in keeping with how the central bank has operated in Pakistan over the years and the decades. The odd thing is to see a government that is busy twisting the arm of its own State Bank turn to the rest of the country and tell us that they believe in an independent central bank and must pass legislation to ensure this. The question naturally arises: why do you need such far reaching legislation to enshrine central bank independence? Why not start by practicing it first, and learning to respect the prerogative of the State Bank Governor to conduct his affairs as he sees fit? Clearly the legislation is just being passed to unlock the IMF program. The haphazard way in which the legislation has been hustled through cabinet and then railroaded through parliament shows there is little to no concern with any actual substantive change in how the central bank operates in this country. The absence of any debate, whether in parliament or even within cabinet, or within the government’s own council of economic advisors, around this crucial legislation also belies the lack of interest in its substantive merits. And to top it off, the finance minister, the same person who introduced the legislation in parliament, tells parliament during the one single hearing on this crucial legislation, that if the State Bank does not follow the bidding of the government after this bill is passed, they will still have the option to change the bill or dilute its language to take away this autonomy. Those celebrating the bill as the first step in some sort of important reform are in for a disappointment. Just like the “forward guidance” issued by the State Bank exactly a year ago turned out ultimately to be a fiction, so the “autonomy” being promised in this bill will turn out to be a mirage. This is not a reform measure. This is them ticking a box so the money can be disbursed.
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Readers Say Sad commentary on the regulatory authorities. The bank should have been closed down a long time ago. This is a disaster waiting to happen. SBP will probably end up having to bail out the depositors. Political pressure and incompetent regulators favorite recipe in the country. Enough is enough. Apropos: After three years in the wilderness, can Summit Bank be resurrected? Tariq Ali, Website This is thought provoking analysis. Every journey starts with the first step and in-case of nations, the government has to take that step which to-date has yet to be taken. However, the recent activity in the start-up scene suggests that there is still hope and there are a number of companies willing to bridge the gap for the general population. At the same time, in the long run only a qualified and skilled labour force will ensure consistent economic development, otherwise we will continue to grow our middle class by producing more babies only. Apropos: The case for Pakistan Faisal, 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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In the first place, there should be no doubt that the Ravi Urban Development Project is very ambitious and huge. Secondly, if done well, it will definitely add value to Lahore city landscape which is limited and does not have much room to grow. Therefore, in the best interests of the country and the citizens, we all should support it. Now on the other hand, if there are some problems going on underneath regarding the acquisition of the land, then it is quite normal in such ventures. This is what the land acquisition dynamics are about. Some sellers are fine with it and some may object. Though the article is generally fine trying to provide the insight of the execution but it could also have provided more insight on both sides of the story. But it is also understandable that it also comes under the freedom of speech by journalists and they have the choice and freedom to choose the way they want to write and express it. I think we should all be open minded and respectful about it. With all goods and bads, I still wish the Ravi Urban Project is a big success. Apropos: Pakistan’s mega city project worth $7bn turns shady Zeerik Ahmed, Website Statements like the one made by the Prime Minister are nothing new. This government and governments before have regularly touted tech and information technology as the future of Pakistan and a way out of unemployment and the country’s economic woes. Yet the two most basic
fundamentals to achieve success in the IT sector is a robust education system and widespread internet connectivity. Apropos: Will the fixed broadband revolution please rise? Zee Raja, Website This is a very nice article. I am glad to see that at least someone is raising the issue which has been ignored for several years. The government goes around bragging very proudly that they have increased internet users and have actually doubled them in the country. The part that they do not tell you is that most of these users are the ones that subscribe to internet data connections, particularly since 3G and 4G has become common in Pakistan. Most of these internet subscriptions are done simply to maintain Whatsapp packages, which is very nice for them but quite useless in the bigger picture. It makes no difference in turning Pakistan into a digital hub. The rest of the population is stuck with PTCL copper wire internet with no upload speed. Apropos: Will the fixed broadband revolution please rise? Hamid, Website This is making the FMCG sector less enticing to work for in Pakistan. Most of your time is spent in firefighting rather than brand building! Your core/actual job takes a backseat. Constant forex, commodity cost fluctuation is affecting the profitability which forces you to put more effort on productivity projects. But there's a limit. There comes a point where it becomes a repetitive exercise with no end in sight! Apropos: Shrinkflation and its discontents @syedzainnajam, Twitter Complete blackmailing by TCC and blatant endorsement by IMF and British courts of illegal acts of TCC. Apropos: Dispute over Reko Diq mines heads towards a settlement @MR_Kahlon, Twitter The crypto market is another bubble in the making. Soon we will see millions of people around the world loosing hard earned money (due to decline in value). Just wait and watch. Apropos: Do not ban crypto Anonymous, Website Money doled out to Chinese victims is one instance of generosity of our Government. Further, emphasis on cash based programs speaks volumes of high integrity of our beloved Premier. Apropos: The mini budget is the price of failure Nimra, Website
COMMENTS
IN BRIEF Lucky Motors Corporation, the assemblers of South Korean car brand KIA, have launched their line of French ‘Peugeot’ Cars, displaying their first model of the locally assembled vehicle on Friday. The new car is expected to bring in more competition to a growing market.
Prime Minister Imran Khan once again backed the Ravi Urban Development Authority and the Ravi Riverfront Urban Development Project after it was scrapped by the Lahore High Court. The PM has said that his government will approach the Supreme Court to try and overturn the decision of the LHC to nullify the project.
The opposition benches were left fuming as the Upper House of the Parliament on Friday approved the State Bank of Pakistan (SBP) Amendment Bill on Friday. The bill was passed with 44 votes in favor, and 43 votes against. PPP Senator Yousaf Raza Gillani was among eight senators that skipped the crucial vote.
Rs 8 trillion:
Federal Board of Revenue (FBR) Chairman Dr Ashfaq Ahmed has expressed optimism that the FBR will succeed in achieving its revenue target of Rs8 trillion during the next fiscal year 2022-23. He said that their revenue target is Rs 5.830 trillion which is expected to increase till Rs 6 trillion by June 2022. The Competition Commission of Pakistan (CCP) has initiated an enquiry into the suspected cartelization by primary dealers in the recent auction of T-bills carried out by the Government of Pakistan (GoP). The SBP in its monetary policy statement issued on December14, 2021 also termed the rise in yields unwarranted.
$9.1 billion:
According to data released by the central bank the current account deficit has climbed to $9.1 billion in the first half of the current fiscal year, as compared to a $1.2 billion surplus in the same period last year. According to reports, the current account deficit stands at 5.7 per cent of the Gross Domestic Product (GDP). The restructuring plan for the Rs54 billion troubled debt of oil marketing company Hascol was thrown into doubt when an FIR was issued against its management and directors as well as associated parties. The FIA alleged a massive scam at Hascol where money borrowed from banks was siphoned out against Non Product Supplied LCs.
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Mango juice and minority shareholders this week in Pakistan’s business and economics twitterverse
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here was a detailed discussion on the merits and demerits of mango juice and Pakistan this week after the unavailability of mango juice on international flights was brought up by one tweeter. Some less serious topics like cash on delivery and inflation were also hot topics throughout the week. Ariba Shahid brings you all this and more in this week’s social media roundup.
Mango juice is as Pakistani as the Pakistan flag. In a way it could have been our national drink but tea got in the way.
This definitely looks cool. Glad to see we’re moving beyond textile looms.
Minority shareholders just have it bad. To make it worse they then have to hear businesses lament about how difficult it is for them to operate all while having a drool worthy balance sheet and earnings. It’s just not easy being an investor.
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It’s always fun knowing what other people are doing. Tech makes it easier
It’s really nice to see Pakistani institutions using data analytics and analysis to improve their services. This is how businesses across the world analyze consumer behavior. It’s refreshing to see this in practice at an embassy.
Who else hates cash on delivery. More importantly who else hates getting cash from the ATM? This is a billion dollar startup idea. And to burn money, they could pay you 10% more than you asked for no charges
Block chain is the future. Makes sense for balsamic vinegar to jump the bandwagon too.
Very likely considering thr government usually picks Twitter celebrities for positions.
Remember when the cashier unnecessarily gave you a tough time for a scribble on a cheque. They were just trolling you for fun.
I wonder if the SBP is enjoying the attention.
SOCIAL MEDIA ROUNDUP
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By Zunairah Qureshi
f a ‘bank’ created for ‘women’, fails to either serve women, or function as a viable commercial bank, then why should it exist? That is the dilemma that the First Women Bank Limited (FWBL) faces today. Founded in 1989 under the patronage of then Prime Minister Benazir Bhutto, the
BANKING
charter drawn for the bank stated that it will be ‘undertaking the conduct of all forms of business of Banking Company in a manner designed to meet the special needs of women and to encourage and assist them in promotion and running of trade and industry and practice of profession.’ And alongside its unique charter, the bank also has to make money, just like any other commercial bank. That is the problem: FWBL has strug-
gled to survive as a viable commercial bank. Talks to privatise the bank have been on the table at least four times: in 1994, in 1996, in 2018 and most recently in 2021. In the latest update, the deadline has now been pushed to December 2022. So what gives? The Privatisation Commission (PC) spokesperson told Profit that because the label of ‘women’ was attached to the project, it was deemed too risky to close
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down a project that was supposed to symbolise women empowerment. Such a move would have been akin to admitting that any efforts to provide women financial alleviation and independence was set-up to fail. Should the country’s only bank dedicated to women be privatised; and will the bank continue to serve women if it is indeed privatised?
Up for privatisation in less than a decade
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he premise of the bank was simple: it would cater to women at all levels of economic activity, including micro, small, medium and corporate. It was the first commercial bank to launch microcredit in Pakistan. The bank’s unique credit policies mean that it finances businesses where either women have 50% shareholding, a woman is the managing director or women employees make up 50% or more of the total workforce. It is also the only bank in Pakistan which offers women single and joint accounts, without any minimum balance requirements or penalties on low balances. FWBL had an initial paid up capital of Rs100 million. About 90% of that came from the five state-owned banks at the time: the National Bank of Pakistan, Habib Bank, Muslim Commercial Bank (now MCB Bank), United Bank, and Allied Bank. The remaining 10% came from the federal government. For comparison, today, the Ministry of Finance holds an 82.64% share in the bank. Habib Bank has a 5.78% stake; MCB Bank, 5.78%; Allied Bank, 1.94%; National Bank of Pakistan, 1.93%; and UBL, 1.93%. But despite the changes implemented, FWBL continued to grow at a sluggish pace. Consider, when Sultana started out, in 1989, FWBL had five branches across Pakistan. By 1993, this had expanded to 23. But in 2010, the bank had only grown to 38 branches; by the time Sultana left in 2014, the bank had only 41 branches. One of our sources reminisced how in its foundational years the bank opened its first branches in posh localities and the women hired as staff similarly belonged to elite families who didn’t appear to care much about the larger goal of women’s development. In 1996, FWBL incurred extreme losses owing to exchange rate exposure on faulty foreign investments. The same year, it was put up for privatisation for the first time but the process was suspended after the Women Action Forum made a case against it, calling for a termination of its privatisation. Later, disagreements continued regarding the bank’s purchase with one of the disqualified con-
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tenders making a case against the qualified party. This was followed by years of underwhelming performance by the bank that made its ledger unattractive for a commercial bank. Through years 2001 and 2008, FWBL maintained a fluctuating yet profitable annual net income that averaged around Rs 124 million profit before tax. In 2009, it saw losses of Rs 80 million. In 2013 and 2014 the bank incurred losses of Rs 206 million and a shocking Rs 500 million respectively. As per the PC spokesperson, it was in 2016, when the FWBL board of directors decided to drop the policy of only providing loans to women entrepreneurs and became even more like a commercial bank by loaning out to everyone regardless of their gender that the bank’s health worsened and its losses deepened. As per Profit’s previous story on FWBL published in 2020, former bank president Naushaba Shahzad, who was appointed in 2018, laid claim to a turnaround of pre-tax profits of Rs 282 million in just 6 months after six years of consistent losses. FWBL’s financials since September 2018 have not been published so it is not possible to verify its performance since then. However, a source has shared that the bank stands at a loss of Rs 250 million as of September 2021 when it faced an exchange rate exposure of around Rs 500 million. FWBL has continuously found itself in rocky waters with major losses over the years. All this, despite exemptions such as the State Bank of Pakistan (SBP) allowing it a minimum capital requirement of Rs 3 billion instead of the Rs 10 billion requirement levied for commercial banks. Moreover, the Ministry of Finance injected Rs 1000 million into the bank over the years 2015 and 2016. Then in 2017, a new equity injection of Rs 500 million was administered by the Government.
A flawed business model
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ut exemptions and injections aside, a bank with a dual mandate to support its unique undertaking of women’s development as well as turning profits while competing with other commercial banks was perhaps never meant to be. Let’s recall that FWBL’s unique charter undertook the conduct of all forms of business of a banking company ‘in a manner designed to meet the special needs of women…’. This is only its partial promise as it also strived to encourage and assist them in trade, industry and practice of profession. As per the charter, even if the bank was making profits, it wasn’t upholding its mandate if the profits were not the result of a system that was directly benefiting women in particular. But how was all this possible if FWBL was to function as any other profit-making commercial bank and struggled to meet its diverse stakeholders’ expectations? While speaking to Pakistan and Gulf Economist in 2017, then President, Tahira Raza said that FWBL is regulated like a commercial bank without any additional funding stream for research and development. It had to work with its limited resources to survive as a commercial bank in a competitive market and pursue its mandate for women’s development. Although FWBL had a relaxation in its minimum capital requirement, its required capital adequacy ratio, at 18%, is higher in comparison to other commercial banks. Commercial banks are required to maintain a capital adequacy ratio of around 12% while microfinance banks must maintain it at 15%. So then, does it all come down to a flawed business model? Our source believes so. When the bank was founded in 1989, microfinance was not a major thing in Pakistan. This is why FWBL was granted a commercial banking
license and had to uphold what this license entailed alongside its unique mandate. At its onset, FWBL was the pioneering institution working towards financial services and banking solutions for women. The bank’s President shared with us how FWBL has been a first of its kind institution in the world when it comes to providing financial support for women, with India and Tanzania following in its footsteps. It is a shame then, that the bank got caught up in the brutal grind of churning profits in a competitive market and gradually became more and more similar to other commercial banks. Understandably so, it’s hard to identify exactly how FWBL is a ‘women’s bank’. Now that it no longer provides loans exclusively to women entrepreneurs, what is it that it does to actually contribute to women’s development and put into practice its mandate? I have tried to learn more about this from former President, Nuashaba Shahzad and approached FWBL as well. However, I haven’t found a satisfactory response if there was any at all. The FWBL President, Farrukh Iqbal Khan, who joined office at the start of the year told Profit about the bank’s following initiatives towards women’s development and inclusion, ‘Adhering to its objective of ensuring financial inclusion FWBL has, since its inception, facilitated women across all segments, from small borrowers to SMEs.’ He further added, ‘As a niche player, with a focus on the ‘S’ of the SME market segment over the years, FWBL has developed several products to promote the SME sector in the country. Currently, the Bank is an active participant in the Prime Minister’s Kamyab Jawan Youth Entrepreneurship Scheme and also the Mera Pakistan Mera Ghar Financing scheme. In both schemes, our focus is on benefiting women.’ The current President came over from Askari Bank with years of experience in commercial banking much like his predecessors and his fellows on FWBL’s Board of Directors. This isn’t to cast doubt onto the President’s abilities right before he even settles into office, but going off of past record, it begs the question whether only hiring commercial bankers helps execute FWBL’s unique and ambitious mandate. However, despite being bound by LHC to fulfil its mandate, as one of our sources put it, SBP seems to continually cut FWBL slack for failing to meet its mandated goals instead of taking action. Moreover, it is the first time in its almost 30 years of existence that FWBL has a male President. Now, I agree with their spokesperson’s rebuttal that women’s development doesn’t mean that men can’t work for and towards women’s alleviation in society. But there’s something called public image and with a management team which is 7/11 male and not
The bank’s unique credit policies mean that it finances businesses where either women have 50% shareholding, a woman is the managing director or women employees make up 50% or more of the total workforce. It is also the only bank in Pakistan which offers women single and joint accounts, without any minimum balance requirements or penalties on low balances much to show for women’s development, what is it that makes FWBL unique? This is further intriguing if we consider that a source has confirmed that the FWBL cited their increased employment of women as evidence for following the mandate. It has also been pointed out that we can’t expect much difference from the people given charge of the bank. They are hired for 3 years at a time at a bank that is set to be sold and its fate lies uncertain. The smartest route to take in this scenario is to worry about making revenue out of the bank’s continuous losses. Will anyone really step up to devise an action plan for revising the bank’s structure from a commercial one to something that would specifically cater to women? If those behind the bank, and this includes FWBL’s management as well as the Ministry of Finance and SBP, truly wanted to see an institution that would do something for women’s banking and financial support, they should have learnt from the lack of results for years and stepped forward to change strategy. One way this could have been done was by granting the bank a microfinancing licence when it became available in 2001 and freeing it from the regulations of a commercial bank.
Second attempt at privatisation
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n October 2018, FWBL was up for privatisation for a second time. And this is where the question of FWBL’s future as an institution for women really lies. Will the bank remain a women’s bank once it’s privatised? FWBL President chose not to comment on this. However, our source informed us it’s unlikely. If the bank could not adequately fulfil its mandate in 30 years under the government after being granted multiple exemptions, it was difficult to expect it would do so after being sold. According to our source, once privatised FWBL’s minimum capital requirement will be raised to Rs 6 billion from the current Rs 3 billion and its 18% capital adequacy ratio will drop to 16%. We learned that FWBL has received a valuation of Rs 4.5 billion – which includes a
considerable hike-up just because of its ‘women’ label. However, not a single commercial bank is interested in its purchase. There have only been reports of a number of microfinance institutions showing interest. While there may have been talks about acquiring a microfinancing licence for the bank, nothing can be confirmed in this regard but this would surely help in its sale since its figures do not look great for a commercial bank. While the PC spokesperson hoped the sales purchase agreement (SPA) will include the women’s development mandate, it can’t be confirmed as of yet. Perhaps a microfinancing reconstitution is what can salvage the banks future as an institution that will work for women. The FWBL spokesperson however, was expecting that the bank would get a digital banking licence. Which is something it definitely needs to catch up with the commercial market and also for supporting women’s financial activities in general. Previously, the current government had promised to privatise FWBL by March 2021. However, the deadline was pushed to December 2022 and according to PC, the process is well on track. FWBL’s board had been dysfunctional since 2018 and wasn’t reinstated until late 2021, soon after the current President finally took over office even though he had been appointed two years ago. It was because of the board’s absence that audits could not be conducted and FWBL was receiving exemptions for its 6-month audits from late 2018. Finally, it received further exemption from scrutiny by statutory audits as it got approval to retain Klynveld Peat Marwick Goerdeler (KPMG) as its auditor for a sixth year in 2021. The Ministry of Finance informed us that the reason KPMG was renewed as auditor for FWBL was the convenience of having the former auditor while there was still uncertainty regarding the bank’s board and future. Once the board was in place, it also decided to have KPMG audit financials for the years 2018 to 2020. According to the ministry FWBL’s missing financial statements are soon to be made available once the audits get approved and this will further advance the privatisation process. n
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By Ahtasam Ahmad
n November 2021, the Federal Board of Revenue issued a list of 608 big retailers which it had categorised as ‘Tier-1.’ These 608 retailers would have to integrate with the board’s Point of Sale (POS) system. Failing to do so would result in these retailers being denied 60 percent input tax credit. At first glance the penalty may seem harsh. A closer look at the numbers reveals that the measures were taken by the FBR to curb the culture of rampant tax avoidance within the retail industry. According to a recent report by Planet Retail, the retail market in Pakistan has crossed $152 billion, which makes the sector the third largest contributor to the country’s GDP and its second large employer. According to the FBR, the retail market accounts for a whopping 18% of the GDP. Meanwhile it’s contribution to the national exchequer is a meagre 1%. There has long been an understanding that the only way to bring these retailers within the tax net was to digitise transactions and keep an eye on buying and selling at these retailers. The latest idea was that under the FBR’s new POS system, details of each transaction would go directly to the board and they would
TAXATION
be able to calculate and charge tax accordingly. However, the retailers in question have not taken these directive meekly, and have responded with a slew of tactics meant to either stall, sabotage, or spoil the FBR’s efforts to bring the untamed retail market within the tax net. Even though the FBR has been able to net a significant amount of retailer’s into the new POS system, most retailers have either cited technical difficulties or have simply continued to operate mostly on cash to try and go under the radar on transactions. The question is, will the FBR manage to wrangle the market or will it eventually submit to their resistance?
The POS system
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ost of the retailers that fall within the Tier-1 had the option to pay through POS machines well before the FBR introduced the new system. The concept of a Tier-1 retailer was introduced through the finance act 2017. Tier-1 retailers would include large chain stores, any stores in malls, most restaurants etc. A good way of looking at it is through grocery stores. Tehzeeb in Islamabad, Imtiaz in Karachi, and Jalal Sons in Lahore all fall under the category of Tier-1 retailers. The implementation of this tiered system only really kicked off at the tailend of 2021. It was around this time that the finance
What is a Tier-1 retailer? In November 2021, the FBR announced and released a list of Tier-1 retailers. The definition of the retailer was anyone that met even one of the following criteria: A retailer operating a unit of an international or national chain of stores Any retailer in an air-conditioned shopping mall except kiosks A retailer whose electricity bill over the past 12 months was more than Rs 1.2 million Any retailer whose shop measures more than 1000 square feet
ministry set a target of wanting to collect Rs 50 billion in addition taxes from these retailers by launching a drive to get them to install Point of Sale machines that will monitor their sales and report every transaction in real time to the FBR.. How would this tax collection work? The FBR would launch a massive drive to integrate all of the Tier-1 retailers and have a total of 500,000 machines installed within three years. The new machines designed by the tax department would directly deposit the sales tax into the national treasury. The sales tax at retail stores is charged at the time of transaction and is later supposed to be credited by these retailers at the time of filing taxes. Generally, most retailers do not credit this and either charge rates without tax to get more customers or pocket the tax. Since most transactions are done via
cash, there is no way to keep a track of this. By mandating POS machines, the FBR was seeking to kill two birds with one stone - encouraging digital payments and ensuring that sales tax is paid directly to the board. The drive to get this done was initially swift and promising. By December 2021, as many as 15,180 cash counters/POS machines of 2,616 big retailers were integrated with the FBR POS system. In the first phase, the government had committed to integrate the largest 500 retailers followed by the next 500 and so on.The overall goal in the first 6 months was to get to 15,000 retailers and all of their outlets. While the government only initially managed to get to less than 3,000 retailers, a campaign was launched to visit 8000 retailers by the corporate tax office (CTO) in Karachi, and similar efforts in other areas. However, it soon became apparent that simply integrating the retailers was not going to be enough as there were plenty of loopholes to be exploited. As the federal tax agency started to push for the implementation of the tax, the businesses resisted citing technical issues, impracticability of the system and the age old “ease of doing business” phrase. The problem with many of Pakistan’s retail sector businesses is that they have grown up outside the tax net and are now so accustomed to living that way that they are severely resisting the change.
How to avoid taxes
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he problem of tax evasion stems from the fact that a majority of retailers don’t deduct sales tax from transactions and even if they do, they don’t submit the proceeds to the national treasury. This has continued even after the implementation of Tier-1 POS machines. Now, the retailers have been conducting this tax fraud in different ways. The first one is by discouraging electronic transactions and insisting
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on paying via cash. This trick is used to avoid leaving a digital print of the transactions which the tax regulators can track back to if auditing the retailer’s filings. To tackle this, FBR has made it mandatory for all Tier-1 retailers to maintain card payment machines at their outlets. As per Rule 150 ZEB(II) of the Sales Tax Rules, 2006, Tier-I retailers “must have the facility of debit and credit card machines installed at each notified outlet and the sales through debit or credit cards shall not be ordinarily refused.” Customers of high end retail shops are accustomed to making payment by card. As a result most large retailers do not refuse this mode of payment. Instead the more common technique to avoid the tax is by issuing nonFBR invoices. This can be done in two ways. First is by issuing a simple invoice stating sales tax deduction amount. This way the customer assumes that he or she is paying the sales tax to the government but as the invoice is not generated through FBR’s POS, the regulator has no audit trail for it specially in case of cash transaction and thus, the retailer gets to keep the price as well as the tax amount. As a result, raising awareness about the integration process and the “FBR invoice” has become critical. An extensive awareness campaign has been launched in digital, print and broadcast media as well as by holding local events like “POS Integration Awareness Walk”. This in turn has led to the customers specifically demanding FBR POS invoices from retailers. However, to tackle this the retailers have started issuing fake FBR POS invoices. These invoices are laid out in the same format as the FBR invoice but have some critical details missing that can serve as a differentiator. As you can see in the two invoices above, these are for the same transaction. The left one is a Non-FBR invoice as it does not have a QR code and neither is the FBR invoice number printed on it. (The irony is that you still end up paying Rs1 FBR POS charges on fake invoices). If you ask the restaurant about the invoice, they will tell you that it was a prepayment bill and will print the bill when you pay. However, if you don’t question such invoices, those “Paid Invoices” will never be printed and the tax collected will never reach the national treasury. While investigating this matter we got a lot of evidence regarding the techniques used by the retailers to avoid taxes. Some were even printing invoices with fake QR codes and invoice numbers. As per Sales Tax act, it is an offence
which is punishable by a penalty of five hundred thousand rupees or two hundred per cent of the amount of tax involved, whichever is higher. The retailer shall, further be liable, upon conviction by a Special Judge, to simple imprisonment for a term which may extend to two years, or with additional fine which may extend to two million rupees, or with both. There were also instances where retailers deployed multiple machines, some integrated and some that were not, and at instances the POS integrated machines were non operational due to “Technical Faults”. However, as per Sales Tax rules, The Tier-I retailer shall — (a) make all payment counters comprising of point of sale at each outlet, available for installation of the systems; (b) be responsible for smooth functioning of point of sales; (c) report to the Board and the concerned Commissioner Inland Revenue within twenty four hours of any operational failure, damage disruptions or tampering of the system; or (d) report any inoperative point of sale to the Commissioner Inland Revenue holding the jurisdiction. Cases of software manipulation have also been identified that allowed retailers to evade tax by colluding with the software vendor. In one case of software manipulation, a recoverable demand of Rs320 million in sales tax and Rs350 million in the income tax has been created, by CTO Karachi. It is to be noted that if any software vendor is an accomplice in tax evasion, they can be imprisoned for upto one year or slapped with a fine upto Rs 250,000. However, before diving into the measure to curb this tax evasion, it is important to understand what businesses fall under the Tier-1 category.
What does the FBR hope to achieve?
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he rationale behind implementing the system is to monitor sales of the retailers in real time which will have two major benefits, first that all the amount of sales tax collected will be deposited to the National Treasury and Secondly, retailers will not be able to suppress their sales in income tax returns and subsequently, will not be able to evade income tax.To ensure compliance with the new scheme, the board has been diligent and has regularly been uploading lists of retailers that haven’t yet integrated into the system. Under the Sales Tax Act, Tier-1 retailers who don’t integrate themselves with FBR POS, can face a penalty of five hundred thousand rupees for first default; (ii) penalty of one million rupees for second default after fifteen days of order for first default; (iii) penalty of two million rupees for third default after fifteen days of order for second default;
(Invoice number hidden to protect identity)
TAXATION
(iv) penalty of three million rupees for fourth default after fifteen days of order for third default. Furthermore, the business premises of such shall also be liable to be sealed by an officer of Inland Revenue in the manner prescribed.
Has the FBR been any successful?
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hen the fiscal year started in July, FBR had already 11,000 POS machines integrated with its system and by the end of next 6 months, in December the total was up to 15,000 machines. The pace, in this case, is seriously of concern given that during the latter half of the year FBR had been aggressively campaigning for the integration drive. At the given pace of less than 1000 integrations a month, it would be impossible to achieve the target of 500,000 POS integrations in the near future. The failure on FBR’s behalf is that its approach has not been a systematic one rather it has been quite disorganised. A simple example is the fact that the board still hasn’t been able to bring all the existing bank enabled POS machines under its integration scheme. As per State Bank quarterly report March 2021, there were 67,000 POS machines connected to the banking system and retail transactions valued at more than Rs.123 billion took place through these machines. If a straight 17% sales tax is applied only to these transactions, revenues in excess of Rs. 20 billion can be generated. The fact that the regulator has not yet given any numbers for tax collected under the Tier-1 retailer scheme further emphasises that the response was underwhelming. Part of this blame is on the finance ministry that proposed an unrealistic target of Rs. 50 billion under this scheme, in a desperate attempt to please the IMF. However, given the size of Pakistan’s retail sector and how most of it isn’t even documented, it is almost impossible for FBR to ensure 100% compliance of its tracking and monitoring system, on its own. The Board acknowledges this fact and has developed portals and mechanisms to ensure that invoices can be verified by the general public and instances of non-compliance can be highlighted. Even the Rs1 charge on POS invoices (mentioned earlier in the article) is basically used to fund the implementation process. As per FBR, The service charge of Rs1 per invoice (of whatever amount), is t be used to promote integration of all Tier-1 retailers, launch publicity campaign, and finance a special prize scheme for all customers who duly verify their invoices to determine the validity and genuineness of the invoices issued by the
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integrated Tier-1 retailers. Therefore, the general public can play its part by insisting on only paying if an FBR invoice is given and can go a step forward by verifying those invoices. There are two ways to verify issued invoices, the first one is by using the Tax Asaan Mobile Application which has a separate section dedicated for verifying sales tax invoices. One can scan the QR code or manually type in the invoice number and fill in the personal details to verify the invoice. On successful verification the following screen will pop-up followed by the transaction details. The second way is to SMS the invoice number to FBR designated number (9966) and the confirmation will be received whether the invoice is a genuine one or not. Furthermore, if the invoices are fake,
the consumers can raise a complaint on the same portal and if you are thinking what good that can achieve? Then you might be surprised by the fact that a single person registered several hundred complaints that enabled FBR to bring around 225 Businesses to the Tax net and impose around Rs33 Million in Penalties. It is pivotal to understand that by assisting the regulator to ensure compliance and collect taxes, we are only doing a favour to ourselves. The rampant tax evasion that has taken place in Pakistan over the years has been a key contributor to the country being debt ridden at this point of time. If we are just able to control these tax evasion activities, perhaps there would be no need for these “Mini Budgets” every now and then for which the poorest of the lot bears the burden. n
TEXTILES
Profit tells the tale of how rethinking regulations is the
answer to dollarization in this dramatised explainer By Ariba Shahid {A melody is heard, played upon a flute. It is small and fine, telling of grass and trees and the horizons. The curtain rises and simultaneously the tune fades into the sounds of the hustle and bustle of traffic. Before us on stage is the entrance to a mall in the rougher part of town in Karachi, and beyond the entrance centre stage is the money changer’s shop. Off-stage from stage right the sounds of an engine whirring get louder. We hear a key turning in an ignition and then the sound of silence as the engine goes dead. A car door slams shut and footsteps follow sounds of shuffling. The steps grow louder until our reporter enters the stage
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and walks to the money exchange shop at downstage.} Journalist: Salamalaikum jee. What is the rate for the dollar? Money changer: Are you buying or selling? Journalist: What’s the rate? Money changer: We’re buying at Rs177.7 {A tense moment passes as the journalist takes out her phone and looks at the rate board that displays the interbank prices. The money changer looks straight ahead pretending not to notice. She takes her phone out to take a picture when the money changer snaps his neck and snarls} Money changer: No pictures allowed
Journalist: Sorry I didn’t see a sign. Money changer: There’s no need for one. You’re here to sell dollars right? Or did someone send you? Journalist: Why would someone send me? Money changer: It’s the SBP people. We never know with them bibi. Each day it is a new rule and we’re never sure when someone is going to report us. Journalist: Aisi koi baat nahi hai jee. Don’t worry. You were telling me the interbank rate. {The money changer looks down. A large board on stage bearing the interbank rates tells the audience the interbank rate closing was at Rs 176.98.}
Money changer: The closing was around Rs2.5 cheaper than our rates. {The journalist raises an eyebrow but doesn’t say anything} Journalist: Alright, sure. And what if I want to buy $2000? Money exchange: Buy? But you just said you wanted to sell dollars? Journalist: Yes and now I’m thinking about buying instead. Money changer: The rate is different for buying. How much do you need? Journalist: I’d like $2000 please. Money changer: For what reason? Journalist: I feel like it? I want to invest? Why do I need a reason? Money changer: That’s not good enough I’m afraid. New SBP regulation says you need to have a reason like travelling abroad. And if you’re doing that you need proof like an international travel ticket. Journalist: Is there any way around it? Money changer: Not really. If you want up to $900, you can buy that after biometric verification. But anything above that you’re going to need to give a reason. Par aik juggar hai. Journalist: What’s that? Money exchange: You can bring your family members with you. Each CNIC gets $900. So the more people, the easier it is. You don’t even need to provide a reason. Journalist: I don’t have anyone with me right now. Money exchange: Ask your friends and family to show up. You’ll get the dollars this way. Journalist: And what if I want more and don’t have enough people? Money exchange: You can bring in someone that is about to travel and doesn’t need to carry money with them. We can give you dollars against that. If you’ve got a visa and show me a ticket, I can give you dollars. In fact, I just need the ticket. Journalist: Oh this is nice. I had trouble buying dollars a few weeks ago. Money exchange: Supply was short in formal exchanges. Supply constraints made the difference between interbank and open market go up. We had one of the best rates, but didn’t have too many dollars to sell. Journalist: So what is really happening? Money exchange: I am not a technical person. My job is to calculate and exchange currencies. But my understanding says it’s all just about controlling the rupee. Everyone wants to save dollars these days. Student rush in December made it even worse. Journalist: Did you turn back customers? Money exchange: Sometimes, yes. Journalist: Are people selling dollars? Money exchange: Some people are selling dollars they bought years ago and used as savings.
However, most of them only sell as much as they need, and try to take some dollars back. Like if they bring in $100, they usually take $30 back and don’t exchange it all. They still think it’ll go up even more. Journalist: Alright, thanks for talking. I think I’ll come back with some friends and family in a bit. {Exeunt}
Why the strictness?
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his is a rough, dramatised, transcription of a conversation between a money exchanger present at a mall and me. While the money exchange cashier may have been annoyed by the fact that I wasted his time, it points out more loopholes in the system. To be blunt, no matter how many rules you put into place, there will always be a jugaar. This is Pakistan; our lives are dependent on jugaars. That aside, this anecdote gives us two things to focus on. Firstly, the loopholes one can use to buy dollars. More importantly, second, the extremes people go to buy dollars. For those of you who don’t know, in December 2021, the State Bank of Pakistan (SBP) amended its regulations regarding purchase of foreign currency, whereby all exchange companies have to ensure that no individual buys foreign exchange of more than $10,000 per day and $100,000 per calendar year (or equivalent in other currencies) in the form of cash or outward remittances. You can, however, still remit $70,000 in a calendar year for education and medical expenses abroad. In addition to this, you can also send $50,000 per invoice from banks in accordance with existing regulations. The amendments have been made to instructions contained in paragraph 9 of chapter 3, and paragraph 12 of chapter 8 in the Exchange Com panies’ Manual. Despite these changes, if you want to send an amount beyond these limits, you need to get in touch with the Foreign Exchange Operations Department at the SBP Banking Services Corporation. This is done through your bank. It is important to note that while the money exchanger said $900 is available without any supporting documents, the actual limit is $1000. Exchange companies only need to obtain supporting documents against transactions where an individual is selling FX worth more than $1000. As per the SBP, these steps were undertaken “to improve documentation, transparency and to strengthen the foreign exchange regulatory regime”, it is believed that this was done to prevent dollarization.
While markets have been calm recently, it was not the case a few weeks ago. Speculative buying and selling was at a high.
Enter the Jugaars
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n order to understand this further, Profit spoke to individuals that bought dollars within the past two months.The speculation that drove the dollar up made it difficult for individuals that actually needed money. While speaking to Profit on the condition of anonymity a student recalled her experience in December. “It was 2 days before my flight. I couldn’t find dollars anywhere. Exchanges that had dollars were over-charging significantly. I gave up but then my uncle managed to buy some dollars for me through his sources. I didn’t ask how he got them, I didn’t really care at that point. I just needed dollars.” This was before the regulations were put into place. Following regulations, things haven’t been smooth sailing for all customers either. “I needed $1500 dollars,” said one businessman on condition of anonymity. “I showed the exchange company my ticket. They said it wasn’t enough and I need to show them my visa too. I was about to go back home to bring my passport as proof. The cashier, however, stopped me and told me a location near Tower where I could get dollars without proof but at a slightly higher premium. I thought it would be better to just go get my passport or try another exchange.” In this case the exchange/ cashier were making it unnecessarily difficult so that the customer would use their informal trading arm or associate. “I’m glad I wasn’t desperate or in a rush. I went to another exchange and my ticket was good enough,” he explained. The very fact that loopholes exist have been exploited by a number of individuals too. Need we remind you that Pakistan is a country where a poor falooda vendor finds Rs 2.25 billion in his account as a result of an alleged money laundering scam that ties up with former president Asif Ali Zardari. It is also a country where Shehbaz Sharif’s family allegedly used the names of 14 employees with meagre salaries for 28 benami accounts. For instance Rs 4 billion was deposited in the account of a peon. The rich in the country have plenty of house help. When you don’t want to draw attention to your family buying dollars, you could simply use the CNICs of your house help. “Ma’am, I’ve seen a lady walk in here with her maid, her maid’s husband, her gardener, driver, and guard. Five individuals meant almost $5,000. I doubt the house help needed dollars, or were ever going to. The lady might have thought to extinguish their limit. Besides, this isn’t as uncommon as you think.
CURRENCY
If you want something, you’ll find a way.” said a different cashier at a money exchanger.
The bigger problem
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n an earlier interview with Profit, Dr Reza Baqir, Governor SBP talked about a number of factors that had caused the rupee to depreciate. One such factor was “self-fulfilling expectations.” Profit asked him if he meant speculation, however he felt the term self-fulfilling expectations suited the situation better. “The fourth factor is self fulfilling expectations of the buyers and sellers of foreign exchange. Which is somewhat different from speculation? Speculation is a term that is not defined very clearly and different people mean different things from it. For the rupee, I want to be clear and say the movement is self-fulfilling expectations,” he said. “If tomorrow, everybody comes to the view that the rupee is going to depreciate then many people will buy dollars or hold onto their dollars. The rupee as a result will depreciate. You will fulfil your expectations. Whatever you have expected is what transpired.” “The next day if you expect that the rupee is going to appreciate, then whoever has foreign currency may sell considering they’d get a better rate today than in the future. For instance, the rupee strengthened significantly from 175 to 170, after the announcement of
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The very fact that loopholes exist have been exploited by a number of individuals too. Need we remind you that Pakistan is a country where a poor falooda vendor finds Rs 2.25 billion in his account as a result of an alleged money laundering scam that ties up with former president Asif Ali Zardari. the Saudi deposit, we certainly saw a lot more inflows into the foreign exchange market because a few days, the expectation that got created was that the Rupee has hit the trough and now it’s going to strengthen. And so you begin to see the movement in the other direction. So that is the fourth factor in our view that also has contributed to the exchange rate depreciation,” he added. The bigger problem here is the fact that individuals who are not travelling or are not required to make international transactions are still keen on buying dollars as a form of savings and/or investments. The lack of confidence in the rupee and its stability is a problem that the country has faced for a while. However, it is important to note that the difficulty by which an individual manages to open a savings account at a bank, a brokerage account at a brokerage company, or invest in a non-predatory saving scheme leaves an individual no choice but to stick to real estate,
gold, prize bonds, and dollars. The fact that people are willing to find loopholes shows just how much demand for dollars is prevalent in the country. The obvious solution is to make stringent regulations to control the supply. However, that sometimes creates a grey market, like it has in this case, and compels individuals to push the boundaries of what is right and what is wrong. The unorthodox way to look at it is to assess the reasons behind. In a high inflationary environment, the dollar makes sense to many. Working double time to bring down persistent inflation is a big task though. Another way to divert individuals from the dollar could be incentivizing other forms of savings or providing easier access. Over the years people rely on savings in the form of dollars and gold because of how easy it was for them. Might as well make other forms of savings easy as a way to prevent dollarization. n
CURRENCY
By Abdullah Niazi
W
hy do companies rebrand? Sometimes, it is a matter as simple as updating an outdated image or wanting a new logo to get some much-needed marketing momentum. On other occasions, it is a much more complicated affair. International growth, new management, a PR nightmare, or a bad reputation could all prompt a corporate rebranding. This rebranding can be proactive or reactive, which means a company can either choose to undergo one to actively try and change course or they could have been forced to do so by public pressure or bad press over some incident. Whatever the case might be, a company going through a rebranding is trying to say one thing - something is about
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to change. A new logo can indicate a change in values and ethos or a change in direction and outlook. Daraz, the multinational e-commerce and logistics technology company based in Pakistan, Nepal, Bangladesh, and Sri Lanka, has recently gone through a rebranding that has resulted in a lot of chatter within marketing and advertising circles. With a shiny new logo designed by a London-based creative brand agency, Daraz is pushing their rebranding efforts by supplementing it with a new website and a large marketing campaign. The only question is, will the changes that come with the rebranding make any difference?
Why rebrand?
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hether the rebranding is proactive or reactive makes all the difference in the world. Most companies have to rebrand in response to something. Take, for
example, Subway. The American multinational fast-food chain released a new logo after the 2016 Olympics to try and draw attention away from sexual misconduct allegations against their former spokesperson Jared Fogle. This is the kind of situation where a company undergoes a rebranding to symbolise change in the wake of bad press. A more locally relevant example of this would be the pivot made by skin-care cream Fair and Lovely, which in September 2020 announced that they would be changing their product’s name to ‘Glow and Lovely’ and removing all references to “skin lightening” and “skin whitening” on their product. Fair and Lovely had been under criticism for promoting colourism for years, but were forced to make the change due to public pressure. On the other hand, a company could also go through a rebranding like Airlift did in Pakistan when they made their pivot from mass transit startup to grocery delivery.
Daraz is lucky in the sense that the rebranding they are undergoing is a proactive one, which means it is completely on their own terms. In fact, there seems to be very little in terms of reasoning behind why Daraz chose now to rebrand. Profit reached out to Bjarke Mikkelsen, the CEO of Daraz, whose team said in response to our question that the rebranding came because Daraz has changed over the past seven years. “Daraz has come a long way and grown so much over the past seven years. We have transformed multiple times from being a small online fashion retailer to becoming a household name and the leading South Asian marketplace,” read the response. In the past seven years, perhaps the most significant change at Daraz has been its acquisition by the Chinese e-commerce giant Alibaba. In 2018, Alibaba acquired the Daraz Group for an estimated $150 to $200 million a couple of months after it announced a multibillion rupees investment in acquisition of 45 percent stake in a local financial service industry. Back then, there had been murmurs about a rebranding which had been quashed quickly after it was announced that the brand would continue to operate as Daraz. However, the changes that came after the acquisition have been slow to become apparent, and while the rebranding has not officially been tagged as a result of the acquisition, it is coming after some serious changes in how Daraz operates. “Just in the past 12 months we have significantly upgraded our user experience and our NPS has reached an all-time high. As we look forward to the next chapter of our journey with a further enhanced shopping experience, we believe it is the right time to evolve our brand to showcase how we are shifting gears as a business,” the Daraz team said in their response. “The brand refresh is a natural step of establishing greater connectivity with both our customers and sellers, and creating a more personal experience. We also hope that the refreshed brand will allow us to engage more women in the marketplace – both as customers and sellers.”
What is changing?
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he rebrand itself has garnered quite some mixed reactions. The biggest change as of now has been the daraz logo, which used to be simply the word ‘daraz’ in all lowercase letters written in the company’s corporate colours. Now, it has changed to a single symbol instead of a word. “We wanted to have an icon that is unique and representative of everything that Daraz is about. Many ecommerce companies have a shopping bag as their icon, but ecom-
A more locally relevant example of this would be the pivot made by skin-care cream Fair and Lovely, which in September 2020 announced that they would be changing their product’s name to ‘Glow and Lovely’ and removing all references to “skin lightening” and “skin whitening” on their product. Fair and Lovely had been under criticism for promoting colourism for years, but were forced to make the change due to public pressure merce orders are not delivered in a shopping bag – they are delivered in a package,” Daraz CEO Bjarke Mikkelsen’s team said in their response. The goals that Daraz has set for themselves for the year in addition to this are ambitious, and the year will be an important one both in terms of the rebranding rollout and changes to operations. Their aim is to reach 100 million customers and businesses by 2030, while also continuing our purpose to uplift communities through the power of commerce. “We will be investing heavily in our infrastructure to accelerate deliveries, providing a frictionless experience to both our customers and sellers, scaling our brand portfolio and assortment, driving price competitiveness, and investing in content, search, and navigation to create a platform that is personal and intuitive to use,” said the Daraz team. The sentiment was echoed by Bejerke’s team in Pakistan, which in their response to Profit wrote that the rebranding is part of a natural evolution, and is not even unprecedented in Pakistan. “As we mature our service offering and shift gears as a business. Many (if not most) brands have undergone refreshes over the years – in Pakistan this includes brands such as Foodpanda, Careem and OLX.” Daraz has tried to explain the ethos behind their rebranding in some detail. It is also clear that it has come not just after the Alibaba acquisition in 2018. But once again, as mentioned earlier, the question is what are the changes that are upcoming as a result or along with the rebranding. “We know there has been a mixed response, but for us the customer experience is the most important part. Rebranding is never easy, and it takes its due course,” said Ammar, Daraz’s head of marketing. “A lot of my role involves talking to different external stakeholders, and the response to the new brand look has been overwhelmingly positive. I have received great feedback from industry leaders, including our parent company Alibaba. Most importantly, I have received many appre-
ciation messages from customers, partners and people in the creative industry - that is personally the most meaningful to me.”
Who did the rebranding and what did it cost?
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he rebranding was done by DesignStudio, a London- based creative brand agency, but we specifically worked with their APAC team based region in Sydney, Australia. The agency has produced great work for global brands like Airbnb, AliPay, Deliveroo, Champions League, Grab, Swiggy, and Evernote, and we were confident of having them lead the rebranding process for us. The rebranding was a 360-degree brand refresh on the brand strategy, vision, mission, architecture, tone of voice, typeface, graphic systems, and avatars. “Overall, we are very happy with the output. Excitingly, we also launched our new corporate website, www. daraz.com, which brings all of the new elements together,” said the Daraz team. While they did not offer any details on how much the rebranding cost or what their expected revenue targets for the rebranding might be, Daraz CEO Bejarke Mikkelsen told Profit that it was not an extravagant rebranding. “The price isn’t something we can talk about. I dont know of any company that has ever published expected revenue numbers from brand refresh - that’s not something you can quantify. We can say that this was within a normal budget compared to other companies that have done a brand refresh and we are confident that streamlining our brand will be a good investment in the long term.” Overall, the rebranding has gotten one thing right for sure - people are talking about and noticing the rebranding. That is the most essential ingredient in measuring the outcome of something like this. Whether they will be able to reach their ambitious goals is yet to be seen. n
MARKETING
OPINION
Ammar H. Khan
A decade lost: The fault in our capital markets
investor anywhere in the world through a mobile app, something which is not typically possible in conventional markets, unless one is a High Net Worth Individual (HNWI), or an institutional investor. Investor onboarding takes only a few minutes, another few minutes for transferring funds, and one is ready to invest. Clearing and settlement is instantaneous, a far cry from a traditional T+2 mechanism. The operational efficiencies as introduced by crypto exchanges will shape the way conventional exchanges operate, maybe even led to convergence in the middle somewhere. If anything, it’s only going to get faster, and more efficient, with capital gravitating towards platforms providing ease of access. Meanwhile, in Pakistan we have had a lost decade for capital markets. The number of investors have largely remained flat while they have risen substantially across the region. Fintechs in India add more new investors on a monthly basis than the current numhe business of an exchange (whether equity, or comber of total investors in Pakistan. Young professionals here are modity, or any other) has been completely upended by more likely to have an account with one of the crypto exchanges technology. Trading pits have been replaced by trading than with the local bourse, largely due to a simple and no-nonterminals, and in most cases traders have been replaced sense onboarding process. The investor onboarding process by algorithms. Access to data even a nanosecond earlier for the local bourse involves signing multiple documents, going is considered to be an advantage worth exploiting in through multiple hoops to justify your source of income, and waitmost developed markets. The marginal cost of executing a trade for an ing for a few more days till you can finally trade. Some efforts have exchange is close to zero given the prevalence of technology, pushing been made by the regulator in making the process more investor exchanges to look for additional streams of revenue, or greater cost friendly, but not much has changed, as the onboarding process efficiencies. continues to be rooted in inefficiency with the rare exception of a Additional revenue streams propped up through introduction of few. new and innovative products, ranging from a wide range of Exchange On the product side, the local exchange has only two major Traded Funds (ETFs), to vanilla and exotic derivatives, tracking everyproducts, a ready (cash) market, and a futures market. Overall thing from a price of an equity, to an obscure commodity like cardamom. leverage in the market has been consistently declining in US$ Exchanges created a market structure which incentivized availability terms given sparse liquidity. The exchange recently introduced of greater liquidity. Over the last decade there has been consolidation ETFs, but scant volumes have ensured that the activity remains of exchanges globally, as survival was dependent on either scaling up sublime. Despite trying multiple times, the exchange is yet to offer through an expanding product suite, and consequently higher number derivatives as a product, largely due to inherent inefficiencies in of market participants, or through realizing cost efficiencies through the market. Presence of circuit breakers, which basically do not technology. allow most stocks to move beyond 7.5 percent is not conducive The recent phenomenon of crypto assets has further upended the for any sort of market making. In absence of market makers, it is business model of the exchange. The market for crypto assets works not possible to ensure availability of liquidity for derivatives, or round the clock, and every day of the year. Its a truly global phenomenon ETFs. A fixed income market (outside of banks) is also non-exiswhere an investor from Pakistan can sell or buy crypto assets from an tent, with a handful of trades being done on a daily basis despite half-hearted efforts to gain traction every once in a while. There have been many capital market plans, often funded by sovereign debt, but not much has changed. A key element missing in all those plans is implementation, and that is often done in a manner which is The writer is an contrary to principles of a free market. Minor kinks to control market dynamics, or to create an environment independent where only a selected few market participants can succeed often leads to a market failure, or a flawed implemacroeconomist and mentation. energy analyst. Locally, capital markets not only need fresh human capital, but also fresh institutional blood, wherein existing market participants are too comfortable with the status quo. The blueprint has been replicated across many jurisdictions, and that has enhanced the ability of markets to raise capital, while providing investors with a broad suite of products -- the question remains of who is going to bell the cat, and actually catalyze market development rather than serve vested interests. n
The recent phenomenon of crypto assets has further upended the business model of the exchange
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COMMENT
OPINION
Uzair Younus
The SBP’s rising credibility issue
more quickly than previously forecasted as demand-side pressures wane faster due to the Finance (Supplementary) Act.” The SBP has also changed its position on the inflationary impact of the budget in recent months. In July 2021, the central bank argued that “the FY22 budget is expected to be broadly inflation-neutral as most tax rates have been left unchanged.” In the January 2022 statement, however, the central bank argues that “the enactment of Justifying its actions has taken a the recent Finance (Supplementary) Act, 2022 represents significant toll on the central bank additional fiscal consolidation compared to the budget and has lowered the outlook for inflation in FY23.” The central bank’s contradictory language is not the only issue he State Bank of Pakistan has a growing credibility here. The SBP governor argued in a television interview that the problem. For the past several months, Pakistan’s mini budget will “give a contractionary impulse of around 1 percent central bank has been chasing an elusive inflation of GDP.” The central bank’s presentation also made a similar point, target. While justifying an evolving near-term policy showing that the primary deficit would decline by about 0.5 percent stance, ranging from dramatically ramping up rates of GDP. This is an interesting point to make, mainly because the to justifying negative real interest rates, the SBP has finance minister has argued, both in parliament and outside, that the consistently argued one thing: medium-term inflation is likely to mini budget’s withdrawal of tax exemptions was about documenting decline to a range of 5-7 percent. In addition, the SBP has gone from the economy, not taxing the citizens of Pakistan. arguing that the 2022-23 budget was inflation neutral to arguing The central bank’s latest inflation outlook also conveniently that the recently passed mini budget has lowered the inflation ignored the fact that “the seasonal decline in CPI during December is outlook. a well-established phenomenon, attributable to arrival of fresh winBelow are some quotes from the SBP’s Monetary Policy Stateter crops of vegetables and fruits.” It also ignores that the wholesale ments with regards to its medium-term inflation outlook: price index is on a tear, indicating that inflation is not likely to modJanuary 2020: “The MPC also viewed the current moneerate for the foreseeable future. Add to this the fact that folks who tary policy stance as appropriate to bring inflation down to the keenly follow the agriculture sector are warning of missed wheat medium-term target range of 5 – 7 percent over the next six to eight outputs and a negative impact of fertilizer shortages; meanwhile the quarters.” monetary policy statement does not mention this risk and the central January 2021: “As a result, inflation is still expected to fall bank’s presentation argues that “agriculture input conditions broadly within the previously announced range of 7-9 percent for FY21 and remain supportive for sowing of Rabi crops.” trend toward the 5-7 percent target range over the medium-term.” A poorer than expected wheat output is not only likely to July 2021: “As a result, inflation is still expected to fall within increase inflation, but also increase pressure on imports and by the previously announced range of 7-9 percent for FY21 and trend extension the current account deficit – global commodity prices are toward the 5-7 percent target range over the medium-term.” stubbornly high and the ongoing crisis in Ukraine is likely to add January 2022: “However, during FY23, inflation is expected fuel to the fire. But somehow this is not a risk as far as the SBP is to decline toward the medium-term target range of 5-7 percent concerned. Some may argue that the medium-term target, which the SBP has been chasing since at least January 2020, has been unattainable due to supply-side shocks caused by the pandemic, which have led to cost-push inflation around the world, including Pakistan. That is a fair argument. However, if this argument The writer is Director of is true, then one must ask: why is the central bank arguing that “demand moderating measures are gaining the Pakistan Initiative traction and have improved the outlook for inflation?” at the Atlantic Council, a As the above quotes from the central bank show, the SBP has been chasing an elusive medium-term Washington D.C.-based inflation target. During this process, it has evolved its policy positions drastically, using various means to think tank, and host of justify its policy response. It almost seems as if the bank makes a decision and then goes to find reasonable the podcast Pakistonomy. justifications for its actions. While the justifications may make sense in isolation, reading the bank’s historHe tweets @uzairyounus. ical statements makes one scratch their head. We are all dead in the long-run, and perhaps the SBP’s logic is that those reading its statements closely will all die before they can ask the SBP about when it is going to finally achieve its medium-term inflation target. n
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Has the FIR sealed Hascol’s fate?
The company was pinning hopes on a restructuring deal with its lenders, but with the FIA dossier now out, would the banks dare pursue this deal any further? By Babar Nizami Be careful what you wish for, because you just might get it. And be careful from whom you apply for a loan, because you just might get it. If all goes well, no problem. But if it doesn’t, and a business cannot return its loan because it just can’t or because it never intended to, the great debtor-bank pantomime that will subsequently play out depends upon the nature of the bank more than the nature of the business. The banks exist on a spectrum, really. Three basic categories. The first is the government-owned banks like, most notably, the National Bank of Pakistan. Owned largely by the government, their work culture also unfortunately resembles sarkari sluggishness. These banks have by and large been known to not pursue default cases very aggressively, letting borrowers drag default cases upto seven to ten years. On the other extreme are banks like MCB, owned and run by their seths. The owners of these banks take default cases very personally, and are known to pursue the defaulters very aggressively, both legally and otherwise. Third: the approach of the executives of foreign owned banks or of the local ones run by ‘professional’ bankers lie somewhere in the middle. They seem to care about their bank’s money going bad more than the government owned banks, but probably only as much as it reflects badly on their personal performance. So, it’s simple, then? Even if a business concern isn’t a bad faith actor, they should just try borrowing from the government-owned banks to hedge against any risks in the worst case scenario. Well, not quite. After years of litigation and using the bank’s money, most business owners want to settle their loans. A settlement here means a discount from the bank on the principal amount owed to them. It’s (usually) bad faith borrowers who want settlements; banks could have simply seized the assets that had been kept as collateral at the time of the loan. Risk management policies of banks dictate that the collateral has to be a good twenty to thirty percent more than the
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amount of the loan. A willingness by the bank to settle for anything less than what is owed instead means that the collateral wasn’t exactly worth what it was purported to be. Private banks, with egg on their face for having been duped, are usually willing to cut their losses and settle. To at least get some amount back. That, however, is where the government-owned banks might not be as pliant. It’s the government’s money and these bankers would get in trouble for giving write offs on bad loans. And when we say trouble, we don’t just mean compromised careers, we mean stints in the slammer. If such settlements were prickly for executives in government-owned banks in the pre-NAB era, they are absolutely toxic now. Okay, so do we have a neat trade-off now? Easier not to pay the sarkari banks but easier to reach settlements with private corporate banks, whose CEOs would be looking to at least boost their recovery KPIs? Shrewd borrowers just need to take a good, hard look at their own circumstances and priorities and decide who to approach for a loan program? But that’s not where the distinction between the government-owned banks and their private counterparts ends. Yes, the government banks are difficult to reach a settlement with. But a loan restructuring agreement is something they are still more willing to entertain than the private banks. The latter are once-bitten-twice-shy; they don’t want to throw good money after bad. The government bankers are far more receptive to the idea. Anything that still rekindles the hope of getting that original loan bank with interest. Just give the business more money so they can get their business back off the ground, they reason.
It’s again a no-brainer. Borrowers that want their loans restructured - and not settled - should definitely go for banks like the NBP. A no-brainer, then? No tradeoff? Actually, there is. And quite a big one. Because if state agencies like the FIA and NAB get involved in the investigation process - whether it is following a tip-off or if the discrepancies in numbers are large enough to initiate an external enquiry - the borrower has had it. When the FIR speaks of “loss to the national exchequer,” every word falls like a heavier axe than the last. ———Take the much-publicised case of Hascol. The OMC has accrued a debt of more than a whopping Rs 54 billion. There do seem signs of some foul play on the OMC’s part. The makings of the fraud seem, prima facie, of the commonplace variety. Assets overvalued, profit numbers exaggerated, some domestic LC facilities misused, all to get more loans than the company would on merit qualify for. Apparently all of this is not too uncommon in the corporate and commercial banking scene in Pakistan. To cut a long story short, since the collateral, it now transpired, was much less than what the books suggested, the banks had no choice but to cut their losses and look into some sort of settlement. That, as discussed above, wasn’t an option for NBP, which was more open, reportedly, to a debt restructuring program. Unfortunately for some of the other banks, it was the NBP that led the consortium of banks that was negotiating with Hascol. And more unfortunate still, that Hascol itself
only offered a restructuring. “Under (a) restructuring agreement, short-term expensive debt is replaced by long-term debt, affordable debt and some new equity,” the company said in a notice sent to the Pakistan Stock Exchange. Chairman Alan Duncan was similarly optimistic: “I believe we are making good progress in doing so, and I am pleased to be able to explain some of the steps we have taken over the last few months.” Duncan’s sunny disposition would seem misplaced when the feds, as it were, got involved. The FIA’s Commercial Banking Circle has registered a case against 30 individuals including former - and some current - executives of the NBP and Hascol. The CBC’s claims, in very definitive language, to have found evidence of bank default, financial fraud and money laundering. ——It is a cautionary tale on the perils of borrowing from the nice, obliging government-owned banks all while flying too close to the sun, in terms of size. You see, Hascol had the private banks by the proverbial. It had all the leverage. It was about to get its way into getting the banks to a very favourable restructuring. Private bankers, while speaking to Profit, spoke of the inevitability of such a new lease of life for the OMC. The same bankers say that may not happen now because of the FIA’s scrutiny and a declared loss to the NBP “and to national exchequer.” n
BANKING
OPINION
Asif Saad
administration provides a sense of general wellbeing and prosperity here. But despite all this, Karachi seems miles ahead in terms of output. So why exactly is this so? For starters, Karachi has some inherent advantages. It is a port city and the center for the country’s financial markets. It has always been the base for multinational companies operating in Pakistan, which has helped build its work ethos as well as its trained and developed management cadre. The businessmen I have come to know in Lahore Lahore seems to have some natural advantages return from work-related trips to Karachi surprised at the different business culture there. They comment on when it comes to business. Why is Karachi still far how Karachiites take their work more seriously, how ahead? It’s all about the culture much more professional and disciplined they are. All this, my Lahore friends recognize, is good for business. Many seem to be coming to a realization about the need aving spent my childhood in Lahore but worked to change Lahore’s work ethos in order to make it more most of my life at corporations based in Karachi, a productive. Some even realise that unless they transreturn to the city once known as the ‘Paris of the form their culture, they will be unable to compete and East’ for an ongoing consulting assignment some grow. What a waste of potential that would be. months ago has been an eye-opening experience. “I want to take a group of big business owners Lahore has a lot going for it. For starters, it is from Lahore to Karachi for us to just observe how the hub of business in central Punjab. All large busipeople work in Karachi. We have so much to learn ness houses in the surrounding areas of Faisalabad, Gujranwala, Sialkot from them”, a large business owner in Lahore told me and many other cities converge in Lahore with most having located their recently. head offices here. In the recent past many of these businesses have been I agree. For someone used to Karachi’s fast paced financially successful, as evident in the newfound prosperity behind the and relatively efficient work ethics – far from perfect show of wealth one becomes accustomed to seeing in Lahore. though these may be – it can be frustrating to try and The city has recently built modern infrastructure of roads and do business in Lahore. The workforce focus here seems transport which is a huge advantage to businesses. Lahore also has a to be on maintaining status quo and not to change for plethora of business schools topped by LUMS, reputed to be the country’s the better. Frequently during a work day, I hear Lahoris premier business school (full disclosure, I graduated from the first batch. reflecting upon some inefficiency or work mishap with Sorry, IBA). All this coupled with much better law and order and civil words like: “Things only happen in this way in this industry/sector/city”. What most find difficult to grasp is the process required to get to the next performance level. A certain evolution is required which can only happen if they accept “what got you here will not get you there”. The obsession with large spaces; be it homes, offices, cars, overshadows any sense of The writer is a strategy efficiency or introspection on such issues. Much can be achieved with well designed, compact consultant who has previously workspaces. Besides more value for money, such spaces improve teamwork and help with sharworked at various C-level ing ideas, building community among a team, and so on. For these reasons, most company offices positions for national and in Karachi are located in office buildings, unlike Lahore where most offices are run out of homes multinational converted into workspaces. No wonder they look more like drawing rooms than offices. corporations Another issue in Lahore, probably true for other parts of Punjab as well, is the lack of
“Lahore L’hore ay” — but is Lahori culture good for business?
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diversity in the workforce. There are many different communities in Punjab of course, but the ethnic base is still largely the same. This is very different from Karachi, enriched by a variety of opinions, views, and lifestyles from many ethnic and religious communities other than the mainstream, like Hindus, Parsees, Goan and Anglo-Christians. Another aspect of diversity is that Punjab’s urban labor force includes few women. Many consider it against their traditional community or family ethos to allow “their” women to work outside the home. So, most women in Punjab’s cities don’t go out to work. The lack of women workers is a huge drawback for businesses located here, particularly in the textile and garment industry. Globally, this industry employs mostly women workers for stitching and sewing. However, in Lahore, the biggest and most cosmopolitan city in Punjab province, there are hardly any women in this sector.
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This is a problem because women tend to have nimbler fingers and more dexterity, enabling them to produce better quality than men in this field. Women’s increased labour force participation can also bring about positive social change as it has in Bangladesh and other such countries where more women are out working and earning, helping to uplift their family situations. Given all these issues, how can Lahore change its work culture to make it more efficient? To begin with, business owners in Lahore need to become open to new ideas -accepting different perspectives even in their traditional businesses. They need to eschew traditional mindsets, challenge the status quo, and change compensation structures to reward creativity and innovation besides just short-term profitability. In this aspect, Lahore business groups need to learn not just from Karachi but even look at cities abroad. Punjab may not have the diversity that
helps generate creativity, but its business community could take the lead in changing this, for example by opening training institutes for women. Training women and paying them well will encourage families to let them go out and work. The flip side of this of course is that women end up bearing the double burden of domestic work as well as work outside the home – something that begins to change in the next generations with increased awareness as they bring up their children differently. Success won’t come overnight. But to move towards making Lahore, and other cities in Punjab more productive, those with a stake in it must initiate change in their work ethics and culture. The very few companies in Lahore who have realized these things have already started seeing advantages accrue to their businesses and are trendsetters. What will it take for the rest to follow? For the sake of the region’s development and economy, the transformation must begin soon. n
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