Profit E-Magazine Issue 193

I s t h eb r o a d c a s t e r a b o u t t od o nt h eb a n k e r h a t ?

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V R Gi s s e e k i n gR s 1 b nt oc a p t u r et h e u n b a n k e d .

Wh a t ma k e s i t t i c k ?

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Pr of i t I S S UE1 9 3l1 6 2 2Ma y2 0 2 2

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ALI FBANK

pl ansent r yi nt ot he Paki st ani mar ket ,

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www. pr of i t . com. pk

CONTENTS

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09 Love for Nawaz and heatwaves this week in Pakistan’s business and economics twitterverse 11 Is the broadcaster about to don the banker hat?

14 Is the chair of power poisoned?

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16 What options does Shehbaz have?

17 In seeking to come into power, did Shehbaz Sharif make a mistake?

19 The Groundhog Day conundrum - is the economy stuck in a loop?

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20 As Tajikistan’s Alif Bank plans entry into the Pakistani market, uncertainty for Digital Banks looms

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26 VRG is seeking Rs1bn to capture the unbanked. What makes it tick?

29 Regulating capital formation

Profit

32 Will Cash Margins curtail imports at the cost of digitisation?

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 An honest look at import policy is needed Our own experience teaches us that import restrictions are only a very temporary way of curtailing imports. In the face if a rising trade deficit a government has limited option, but if this problem of repeated boom bust cycle is to be broken there are really only two ways, in which the problem of ballooning imports cam be addressed, in them is to raise productivity or attentiveness other is to restrict demand growth in the economy, neither one of these is a palatable option. Raising competitiveness is a long term venture that requires serious policy focus which has been lacking in our policy environment for more than a quarter of a century now. Killing demand growth is another of saying killing growth.

Successive governments have taken extensive recourse with import restrictions to try and curb import growth, this is not a sustainable model, as we have learnt over the years ourselves. The new government now faces the same task as previous two governments before it, which is to sharply bring down the trade deficit, in a but to control the ballooning current account deficit, and preserve foreign exchange reserves. Doing so via intensification of import restrictions will

be a temptation but the policy makers of the new government need to realise that at best this is an extremely temporary measure, good only for a few months.

As this week’s story on cash margins points out, The Telecommunications sector has seen a chain of events starting from the government tracking back on its prom- ise of reduced withholding tax to the latest implementation of 100 percent cash margin on equipment imports of the sector.

The measure comes as an attempt to curb current account deficit through discour- aging imports. However, it fails to distinguish between consumption based imports and equipment imports that are part of a collective effort to develop the country’s infrastructure, specially in the case of IT and Telecommunication sector.

If the current government cannot muster this focus to apply their minds and their policy energy, on the most structural weaknesses that plague this economy then this government will be another in along line of governments, that have done little more than firefighting.

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IN BRIEF The Government of Pakistan has chosen to implement a Third-Party Inspection (TPI) system for development projects worth more than Rs10 billion to enhance project quality and execution.

$2.5 billion

The Asian Development Bank (ADB) here on Thursday indicated to provide additional support of $2.5 billion to Pakistan for the next fiscal year, out of which $1.5-2 billion could be available in the ongoing calendar year.

The government of Pakistan will begin a crucial round of talks with the International Monetary Fund on May 18th.

The talks will be held in Doha.

In a statement released on Friday the IMF resident representative in Islamabad, Esther Ruiz, confirmed the talks to Profit.

Despite a large majority of cargoes imported at cheaper long term contracts, the basket price for imported Regasified Liquefied Natural Gas (RLNG) has surged 40 per cent to a record $22-24 per million British Thermal Unit (mmBtu) for May owing to a string of spot cargoes procured by the new coalition government in first month in office to meet energy shortages.

For the first time, remittances crossed the figure of $3 billion in a month, which gave hope that the country would achieve its annual remittance target of $30bn.

The Pakistan Bureau of Statistics (PBS) reporte that large-scale manufacturing (LSM) grew 26.6 per cent year-on-year in March.

Industrial production output not only rebounded but also posted the highest growth in the last month of the previous government.

The US dollar climbed above Rs194 in the interbank market on Friday morning, reaching a new all-time high and breaking its previous day’s record which breached the Rs192 mark.

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Love for Nawaz and heatwaves

this week in Pakistan’s business and economics twitterverse

I

t’s all heat these days. Political, economic and ecological. PML-N leader Nawaz Sharif possibly knows the solutions to the first two for sure which is perhaps why love for Nawaz in the party ranks outweighs everything else. While the PML-N entourage’s visit to London has dominated, the crypto crash has worried investors everywhere. All this and more in this week’s social media roundup.

The former finance minister has forgotten that they send remittances too. How do you think Nawaz takes care of his expenses and buys apartments?

For Khawaja Saad Rafique, love for Nawaz Sharif is greater than the Pakistani economy. After a meeting with the Pakistan Muslim League Nawaz (PML-N) chief Nawaz Sharif, Saad, while talking to the media looked profoundly aggrieved that the PML-N chief was separated from them by the PTI government after allegedly constituting fake cases. While love for Nawaz didnot stay hidden, Saad and the rest of the cabinet members in London maintained the secrecy around how they plan to fix the economy.

SOCIAL MEDIA ROUNDUP

Dar pleased at what Dar said

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Did you miss seeing that coming? Pakistan’s startups, beware! You might have to take care of the bills.

The irony though….in this heat!

Maybe time to buy now?

Please. It was Gill before.

French economy, please! With fries.

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It’s not easy for a candidate to be rejected after a job interview. You have to take it with a heavy heart and just deal with it. In a recent case though, it was revealing that its sad for companies too when they are rejected. Insurance giant EFU Life was rejected by a candidate and the recruiter seemed to have lost it at the rejection and got to using slurs. Calm down, EFU guys. Also, now you know what being rejected feels like.

SOCIAL MEDIA ROUNDUP

Is the

broadcaster

about to don the banker hat?

BANKING

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Buying a bank is one of many steps in making it big in Pakistan. Will Salman Iqbal succeed?

Profit Report

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media mogul and a UAE based businessman walk into a bank. What do they do? They buy it. That is at least what is happening between Salman Iqbal, Nasser Abdullah Hussain Lootah, and Summit Bank.

As per a notice sent to the Pakistan Stock Exchange Salman Iqbal, the owner of the ARY Group, has agreed to subscribe to 25% shares of Summit Bank through a consortium led by Nasser Abdulla Hussain Lootah, a businessman from United Arab Emirates who plans to buy 51% of the bank.

Iqbal’s entry onto the scene has been seen as a surprise by many. The Central Bank had formally approved the Lootah transaction a while ago, and Summit Bank was simply waiting for the tender offer.

They have it now that Iqbal has declared his intention to subscribe to 25% of the shares.

Iqbal plans on buying 25% shares at the price of Rs 2.51 per share. The acquisition will be done by purchasing existing shares at Rs 2.51 and subscribing to new shares as well. This will give him the bank’s majority stake and management control.

Salman Iqbal has agreed, in principle, to subscribe to such a number of shares in SBL as part of the Lootah consortium at a subscription price. Lootah had sent an offer letter in October of 2021. In the letter he asked for 51% voting shares, and new ordinary shares through fresh equity injection. The board agreed to handing over 5,976,000,000 ordinary shares without right to Lootah, and also increased the authorised capital from Rs28 billion to Rs90 bil But buying a bank is not a simple matter of paying the money and walking away with the keys. Because of regulations, not everyone can buy a majority stake in a bank, like they can in other listed entities. Banks have checks on who is buying their shares. This too is regulated by the State Bank of Pakistan. As Salman Iqbal along with Looth try to buy Samba Bank, it will be interesting to see how they

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face the regulatory fire - in particular the SBP’s Fit and Proper Test (FPT).

Why buy a bank?

O

wning a bank is the equivalent of making it big in Pakistan and showing you’re legitimate.

Owning a bank gives one power to decide who gets to borrow on what terms, and is also an admission ticket into the hallowed halls of high finance in Pakistan. Many industrial houses look to set up a financial services arm of some sort, and owning a bank is the gold standard in this endeavour. IT is also worth adding that many industrial groups have large pools of working capital and a presence in the financial sector helps in placement of these funds in short term instruments that are readily encashable as per requirements yet also yield a return.

Not only that, it gets you great power.

A similar power is sought often within the media by those that want to own television channels. The power of owning a bank also gets you political clout and protection.

Moreover, in absence of the SBP lending to the government, you may or may not get certain pulls with the government as private sector lending is the only option.

Previously, Profit had covered individuals and groups interested in buying Samba Bank. These included Fatima Group, TAG, Meezan Bank, and UBL. While the latter three are financial institutions, Fatima Group is not.

This is not the first time a business tycoon or business family has shown interest in buying a bank. Previous examples include Malik Riaz and his attempt at buying Burj Bank, which did not work out.

In the summer of 2015, Bahria Town began an earnest due diligence of Burj Bank, an Islamic bank and the smallest bank in the country. Burj Bank had functionally been up for sale since the financial crisis of 2008, but had consistently struggled to find a buyer. By early 2016, it looked as though a deal may be possible, but the transaction was blocked at the last minute by the State Bank of Pakistan. 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.

Despite being so publicly rebuffed by the country’s most important financial regulator, Malik Riaz was undeterred. He found a way around the SBP’s decision. In order to do that, he needed to find another financial institution to acquire, one that did not take public deposits, and preferably one that did not fall under the purview of the State Bank itself.

In late 2016, he found just such an entity in 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. This is the closest that Malik Riaz was able to get to owning a bank.

What is the FPT?

T

he SBP conducts Fit and Proper Test (FPT) in order to assess whether an individual can be entrusted to deal with other people’s money. This is standard global practice. However, in the case of Pakistan, one would expect that influential individuals get exceptions, much like other things in life. But not so in this case, SBP is very stringent with the FPT. A number of other important parties have discovered this when trying to acquire a bank by trying to meet capitalization requirements using funds from entities that the SBP did not approve.

For starters, they judge you based on your integrity, honesty, and reputation.

They check whether you have been convicted in any criminal offence, involved in fraud, forgery or any form of financial crime.

The SBP also checks whether there are any adverse findings or any settlements in civil and criminal proceedings related to investments, financial or business conduct, fraud, formation or management of a corporate body. The SBP also checks whether the applicant has been debarred from being CEO, chairman, or director of any company.

Not only do you have to live up to the SBPs requirements, but the SBP also checks if the applicant has contravened any requirements and standards of the regulatory system or the equivalent standards of requirements of other regulatory authorities.

The SBP checks whether the individ-

ual has been involved with a company or firm or other organisation that has been refused registration/licence to carry out trade, business etc; and whether the individual has been involved with a company/firm whose registration/licence has been revoked or cancelled or gone into liquidation.

The SBP also inspects solvency and financial integrity by assuring the individual has not been associated with any illegal activity especially relating to banking business; and has not been in default of payment of dues owed to any financial institution and/ or default in payment of any taxes individual capacity or as proprietary concern or any partnership firm or in any private unlisted and listed company.

The individual’s track record is assessed to check whether the individual has ever been terminated or dismissed in the capacity of employee, director, or chairman of a company.

The person must have an impeccable track record in the companies he/she has served either in the capacity of an employee or director/chief executive or as chairman.

Directors of financial institutions cannot pass the fit and proper test should there be any conflict of interest. The regulations define the term “financial institution” to include “any bank, investment finance company, non-banking finance company, venture capital company, housing finance company, leasing company or modaraba company”.

As per the SBP, any sponsor shareholders/beneficial owners, directors, presidents and key executives (persons subject to FPT) shall become disqualified if they are designated/proscribed or associated directly or indirectly with designated/proscribed entities/persons under United Nations Security Council Resolution or Anti-Terrorism Act 1997.

The interesting thing about FPT is that it is continuous in nature. FPT regulations have been in force for many years, and in 2018 the SBP updated them via a circular to make them continuous. Any subsequent change in this regard shall be immediately disclosed to the Board of Directors and/or the concerned authority including SBP.

So what about Lootah and Iqbal?

I

f the name Lootah sounds familiar, that is because he was named as one of the main suspects by the FIA in the money laundering case against Summit. NAB was pursuing the case as well and it was only after he became approver against Asif Ali Zardari – the main accused in the case along with his sister Faryal Talpur – that his arrest warrants were cancelled.

Lootah putting money back into

“We had a legal dispute with Geo group. A lot of people think our licence was revoked but this never happened. We did have to close down the company” Salman Iqbal, CEO of ARY Group Summit to ‘revamp’ it after serious financial troubles brought on in some part due to the money laundering scandal is quite ironical, because the FIA, during the course of its investigation revealed that a sum of Rs2.49 billion had actually been paid out to Lootah by the bank, details of which are at best murky.

This means Lootah has already had problems with the FPT, which makes it interesting why the consortium now includes Iqbal, who now has to pass the FPT. Despite being the recipient of the Sitarah-e-Imtiaz, he may also face some challenging questions.

Previously, Iqbal had made three intentions to buy WorldCall after finally revoking his plan despite the lengthy negotiations between ARY and WorldCall. The last attempt to buy worldcall resulted in the PSX volumes rising to unprecedented levels. However, considering the FPT checks on abiding by industry regulations, Iqbal’s bid could face questions.

In December 2016, ARY became the first Pakistani television channel ordered by a British judge to broadcast the summary of a legal judgement against it. Judge Sir David Eady ordered that ARY will have to say thay on Dec 2, 2016, the High Court of Justice ordered the UK broadcaster of ARY News... to pay £185,000 in libel damages to Mir Shakilur Rehman, the Editor-in-Chief of Jang/Geo Group, in relation to seriously defamatory allegations broadcast in 24 programmes which the judge said simply had no foundation. The court also made it clear that it was to be in urdu.

Later Ofcom, a UK based watchdog, released a statement that it was revoking ARY’s broadcast licences.

“The ARY Network held six Television Licensable Content Service (‘TLCS’) licences granted under Part 1 of the Broadcasting Act 1990,” the statement said. For his part Iqbal denies it that the licences were revoked, arguing that his company decided on its own to wrap up its operations in the UK. The FPT specifically checks for issues with regulators in different industries. Considering the license was revoked, this might pose trouble for Iqbal.

Profit has spoken to sources at the SBP about the challenges iqbal might face with

the FPT. There has been no comment, even off record.

As a result of their loss in the UK, the ARY Group had to shut down their channel there to avoid such incidents in the future.

“We had a legal dispute with Geo group. A lot of people think our licence was revoked but this never happened. We did have to close down the company,” Iqbal told Profit in an interview in 2020. Moreover, Iqbal has had issues with the Pakistan Broadcasters Association which placed allegations of unfair advantages.

The PBA had written a letter to the government hinting at possible favouritism amounting to approximately Rs1 billion, uncovered by government investigators in 2013.

It was about an illegal exemption certificate on airtime/content claimed by the Federal Board of Revenue (FBR). The FBR alleged that ARY had evaded this tax through the misrepresentation, concealment, and misuse of exemptions back in 2013.

However, ARY claimed that the correct cost comparisons were not made, citing a different business model to be the reason behind the inflated costs in comparison to other media companies. ARY COMM, ARY Films and TV Productions (Pvt) Ltd used an offshore company, through a tripartite agreement allowed the three companies to settle their receivables and payables for ARY FZ LLC, a Dubai-based offshore company.

According to Iqbal, people have it backwards. ARY did not form offshore companies, they are an offshore company from the get-go, according to him. ARY Digital FZLLC was incorporated in the UAE. “Like I said, I was born in Dubai, we began business in Dubai.

We didn’t make an offshore company. We were an offshore company. We invested in Pakistan. Gold business was shifted to Pakistan, we invested money from our businesses into the television business in Pakistan.”

“Dubai has always been the home of the company and still is,” Salman explained. “I could have made a statement when the PBA made a statement, but I have avoided doing so considering it is in the courts. All I can say is that it is a decade old case. It was getting outdated. As for the rest, I’ll wait for the courts to give a decision and then talk about it,” said Iqbal. n

BANKING

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COVER STORY

What options does Shehbaz have?

How can he stabilise an economy on the brink while building traction with voters at the same time?

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By Uzair Younus

magine a publicly traded company facing a crisis that has brought it on the verge of bankruptcy. There has been a hostile takeover of said company, with a new chief executive officer embarking on a difficult task of stabilizing and turning around the business. These events take place after months of tensions, much of it playing out in the public domain. In his first few days on the job, the CEO has failed to provide a new plan, and has in fact met the former CEO and his old team to discuss the turnaround strategy. As if this was not enough, the old team’s key members are making statements that are contrary to what the CEO’s key advisors are saying. Such a company would quickly see its stock tank, creditors scrambling to protect their interests, and employees who have lost all faith in the new team.

This is, in short, what has happened with the Pakistan Muslim League Nawaz’s (PML-N) tried, tested, and experienced team over the last few weeks. As Shehbaz Sharif ascended to the prime minister’s office in Islamabad after a tortuous few weeks, it was quite evident that Pakistan’s economy was on the brink. A disastrous fuel subsidy had blown up the fiscal deficit, political polarization had eroded the legitimacy of the new government before it even began doing its work, and former prime minister Imran Khan’s rallies across the country had put him in the driving seat. Rather than roll out a bold economic reforms agenda within hours of coming to power, Shehbaz Sharif and the Pakistan Muslim LeagueNawaz dithered, with successive rejections of the fuel price hike summary signaling to the market that they were still figuring things out.

It was during this unfolding crisis that Finance Minister Miftah Ismail visited Washington, where he had meetings with the International Monetary Fund (IMF). The goal of these meetings was to get the IMF program back on track, with the finance minister clearly signaling that there was no option but to end the petroleum subsidy. There was an expectation that upon his return to Islamabad, the government would make the tough choices that were needed and embark on a painful period of stabilization

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and reform.

This, however, did not happen.

It soon became clear that financial assistance from key allies including Saudi Arabia was also contingent on the resumption of the IMF program, which again meant that the government had to signal a willingness to fulfill the prior actions the IMF was expecting. But former finance minister Dar’s public interviews, where he openly and clearly disagreed with his own party’s finance minister, signaled that all was not well in the PML-N. Led by the prime minister, a delegation flew to London to sit around the table and ask their leader to sort out the disagreements. The signal of such a trip has significantly undermined confidence in the government and its ability to make tough choices. The London huddle is still ongoing at the moment this article is being written, meaning that the experienced team of the PML-N continues to be lost at sea.

The path forward is quite clear: the PML-N must bite the bullet and embark on yet another period of austerity and stabilization.

This will be painful, more so because main street has already been hurt by 40 percent inflation over the last three and a half years. The political cost of the adjustment will be singularly borne by the PML-N, not its coalition allies, because it is the PML-N that oversees the key ministries responsible for pushing things forward.

The prime minister and his advisors need to realize that this crisis is an opportunity, which if grasped, can significantly bolster their own electoral chances. How, one would ask, is that possible, when there is more inflation, more joblessness, and more economic pain around the corner?

The answer is simple: the pain can be managed by redirecting the state’s largesse, which directs almost $17 billion a year to the country’s

elite, to ordinary citizens who have been ignored for far too long. The easiest way to do that is to raise the fuel prices to plug the fiscal deficit and direct much of the windfall to millions of households via cash transfers. These transfers should be made to every qualifying citizen’s bank account – those that do not have a bank account should be permitted to open a zero-balance account at a bank of their choosing through an automated, frictionless process. Reaching these people should be part of the PML-N and its allies’ electoral strategy: a prime minister hitting the pavement from Thatta to Skardu will dominate the news cycle, engaging with the masses to onboard them into the program and ensuring that they are receiving benefits that they are entitled to. Such a strategy will suck the oxygen out of Khan’s agenda and dominate the news cycle daily. To ensure maximum coverage, the prime minister and his allied party leaders should set clear goals for parliamentarians with regards to onboarding citizens in their constituency in the next thirty days.

This is the only way for the government to navigate these choppy economic waters and bolster its electoral chances. Anything short of this will allow Khan to build further momentum while simultaneously inflicting immense economic pain on millions of ordinary citizens. n

COVER STORY

In seeking to come into power,

did Shehbaz Sharif make a mistake?

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By Khurram Hussain

t has been more than one month since the new government led by Shehbaz Sharif was sworn into office, and they are yet to make an important decision (as of this writing). Meanwhile the pressures on the economy are mounting.

The exchange rate continues to slide, crossing Rs194 while the KSE 100 index has plummeted by more than 3000 points. Yields demanded by banks on government debt are touching 15 per cent in six month tenors, a full 275 basis points above the discount rate. These may not be indicators of the overall health of the economy, but taken together they certainly speak to plummeting confidence in the financial markets.

Meanwhile the government has to continue shelling out massive amounts under the head of Price Differential Claims, with the latest bill coming in at Rs75 billion for the next fortnight. IMF talks are scheduled to start on Wednesday, but if the price caps on power and fuel prices that were imposed by former Prime Minister Imran Khan in his last weeks in power are not removed, it is a near certainty that the talks will yield few results.

Through it all the Prime Minister treated us all to the rather unimpressive display of aggravated indecision by taking off for London, along with a large section of his cabinet, to “seek counsel” from his party chief Nawaz Sharif. As the deliberations there dragged on for a few days, Imran Khan ramped up his fiery rhetoric at home, holding a rally every day, and firing outrageous allegations of malfeasance, conspiracy, betrayal, and going so far as to say “it would be better to drop an atom bomb on the country rather than let these thieves back into power”.

It is hard to find a more incendiary political moment in our history, at least in the past five decades.

The time has now come to ask a simple but critical question. Did Shehbaz Sharif make a mistake in leading the vote of no confidence against Imran Khan’s government and seeking to come to power himself? It was no secret at that time that the economy is in deep trouble.

In essence this is the bill coming due from the stimulus induced pandemic boom that Khan

COVER STORY

touted as his signature success. That boom was bound to end in a bust, and all the signs that this was building up were there from at least January of 2021, as the current account deficit ballooned, inflation began its second rout, and the exchange rate saw strong volatile swings from May 2021 onwards.

By September 2021 it was clear that the pandemic bubble was bursting when the State Bank reversed course and began applying the brakes through a nominal interest rate hike. In November and December it burst in earnest as two emergency hikes saw the policy rate climb by 250bps. The extreme rush with which the government of the time railroaded two crucial items of legislation – the State Bank bill and the tax exemptions withdrawal – followed by a hurried approach to float a Eurobond even before the IMF board meeting had taken place showed that there was mounting concern about the coming downturn.

We are now on the cusp of that downturn, and Imran Khan is in the enviable position of owning the boom while Sharif has to own the bust, pick up the pieces and set things right again. Everybody knew this is what was coming, including Sharif. Yet they powered ahead with the vote of no confidence. Having done so, they now own the moment and have

no choice but to undertake the steps necessary to rectify the deficits that are eating away the economy’s viability.

The situation is unprecedented in one important respect. This is the first time we are seeing an incoming government facing the prospect of undertaking a painful economic adjustment in the run up to an election. In every such situation in the past, incoming governments had to undertake an adjustment after coming to power. They blamed the previous government for the resultant pain, and after two to three years, abandoned the path of adjustment to pump growth till the end of their term.

Nobody has had to go into an election immediately after administering a painful adjustment that sees prices of essential items rise rapidly as well as unemployment. This is the predicament the Sharif government is now facing.

However difficult the situation may be, there is no getting around the fact that they knew this was to be their lot after coming into power. There is no excuse for dithering or indecision now. Having sought power at all costs, Sharif must now prove that he has what it takes to deliver. The cost of failure at this point is very high.

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OPINION

Ammar H. Khan

The Groundhog Day conundrum is the economy stuck in a loop?

litical musical chairs continue, the country continues to suffer as a global commodity super cycle ramps up expected inflation, and eventually interest rates, while the government actually struggles to govern.

The friendly countries who either supply us with energy, or have friendships as high as the Himalayas, have also figured the three-year groundhog day pattern, and have started to either politely decline requests for fresh facilities, or rollovers, or have made their support contingent on continuation of the IMF program. All roads lead to the IMF, as they have for the last sixty-four years.

Pakistan continues to be a consumption driven, and import fueled economy despite multiple prescriptions for structural reforms. Heavy dependence on imported energy, and more recently imported edibles despite being an agrarian economy n the 1993 cult classic, Groundhog Day, Bill Murray being prohas further made the balance of payments position susceptible tagonist of the movie re-lives the same day again, and again, in a to the global commodity markets. A fiscal deficit which is rareloop. It is estimated that he re-lives the same day 12,395 times, or ly tamed, and an incentive structure which largely awards rent just sixteen days short of thirty-four years. Every day the protagseekers continues to move capital from productive export-orionist wakes up, he lives the same day on a loop. ented endeavors to informal non-productive activities. A low Pakistan’s economy also seems to be following some iterinvestment to GDP ratio, and consequently sluggish growth ation of a sovereign groundhog day. There is a political crisis every few in productivity over the last two decades are all symptoms of years, which is followed by a balance of payments crisis, an organic, or a an economy which is either being fueled by borrowed foreign propped up regime change, and then a tour of friendly, and not so friendcurrency, or through largesse of one friendly country or another. ly countries for some concessional loans, or dollar deposits. The same A monetary structure which subsidizes cost of capital for the loop is repeated every few years. Pakistan has approached the Internarent-seeking elite without having in place any mechanism for tional Monetary Fund (IMF) for a standby arrangement, or extended penalties in absence of targeted growth continues to fuel inflafund facility at least twenty-two times during the last sixty-four years, tion for rest of the country. bringing our groundhog day to a sweet average of three years. The same The groundhog day is here to stay. Over the next few story repeated every three years, with little-to-no reforms conducted weeks, we may eventually see subsidies on fuel being eventually in-line with the spirit of the program. removed, which would lead to second and third rounds of inThe recent crisis has similar ingredients, a politically motivated flation as price levels across the board increase. As global food subsidy which encouraged demand for fuel in a supply stressed market, prices continue to increase, we will find it increasingly difficult a regime-change during a tumultuous economic period, and a new to ensure affordability of basic staples given our ever increasing government which is running around like a headless chicken. As the poreliance on imported edibles. The usual panacea is of structural reforms, but that has not worked in the last sixty-four years.

The way things are going, the groundhog day may continue for the next sixty-four years or even more. Countries are transitioning away from one state of development to another, but in The writer is an absence of a productivity oriented outlook, we seem to be largely comfortable with repeating the same loop independent every few years. A monetary boost induced high growth, fueled by imports, followed by an up-tick in inflamacroeconomist and tion, a twin-deficit, and a monetary contraction resulting in growth lower than the population growth rate. energy analyst.

Rinse and repeat.

Every day in the cult classic starts with the radio playing, I Got You Babe by Sonny & Cher. If we continue on this track, a time will come where we may not have any friendly countries to say I Got You Babe.

Repeating like a broken record, it is time to change orientation of growth, and focus more on investment and export driven growth, else we may have to live the groundhog day till infinitum in the multiverse.

Well what if there is no economy.

There wasn’t one before

I

COMMENT

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As Tajikistan’s

ALIF BANK

plans entry into the Pakistani market,

uncertainty for Digital Banks looms

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By Taimoor Hassan

n Punjab’s rural south, landlords of nobility stature and ones that are moneyed are received by bank managers at their respective branches.

Donning boski suits with a coterie of servants around, these landlords are escorted to the manager’s office instead of queuing up at the branches. Drinks are served and the manager treats them with respect deserving of their nobility, and money. Their paperwork is filled on priority, their loans approved in an instant and the manager will favour them in matters outside the bank as well. Building a personal relationship with such customers helps the manager get deposits from these landowners who are wealthier than many of the other bank customers.

Outside the manager’s office, the average farmer stands in line to deposit his cash and his loans are most likely not going to be approved because of an uncertain income. Outside the bank, a farmer would not even be allowed entry into the bank because of how he looks.

Barring the landlord, the other two types of customers are what keeps the policymakers at the central bank up at nights. One of these is the underbanked which gets to have an account at the bank but has limited access to financial services. The other is unbanked, which has no account at all for one reason or the other. So if you are a central bank that has to ensure that constraints for both these types of customers are removed, what do you do?

In 2022, the answer to everything seems to be technology. In the financial sector too, financial technology companies have entered the foray to solve problems related to banking the unbanked. In Pakistan, the fintech companies are only starting. In January this year, the State Bank of Pakistan introduced the Digital Banks Regulatory Framework to solve the problem of financial inclusion which is broadly caused by the unbanked and the underbanked segments of the population.

Following the regulations, the SBP received twenty applications for a digital banking licence. The applicants include domestic commercial banks, microfinance banks, electronic money institutions and fintech companies, as well as foreign financial institutions already operating in the digital banking space in other markets.

One of these applicants is Tajikistan-based financial technology company Alif Bank which operates as a digital bank in the home country and has a presence in Uzbekistan where it offers digital financial services.

It now seeks entry into the Pakistani market and aspires to get a digital banking licence. Alif is in-fact the only fintech company to come

out openly with what it plans to do under the newly introduced digital banks regulations.

Alif’s plans for the Pakistani market also give a glimpse into the good and bad for digital banks and what the Pakistani market holds for not only Alif but rest of the aspirants as well.

A brief history of Alif Bank

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lif Bank was founded in 2014 by Abdullo Kurbanov, Firdavs Mirzoev and Zuhursho Rehmatulloev as a microcredit organisation in 2014. The entity was initially called Alif Capital. Within nine months of operations, Alif managed to triple its loan portfolio and became the fifth largest microcredit organisation in Tajikistan.

In 2016, Alif received the licence as a Microcredit Deposit Organisation (MDO), allowing Alif to open deposits, conduct exchange transactions within the country and abroad, and to provide broader financial services, essentially making Alif a mini-bank. Later that year, Alif ventured into the online world with the country’s first online acquiring platform which allowed cardholders to make payments online. The same year, Alif also launched an online shop which allowed customers to buy goods on instalments. This was Alif’s advent into the buy-now-pay-later segment (BNPL) and the online shop also went on to become the largest B2C marketplace in Tajikistan.

One of the biggest achievements that Alif claims for itself is writing its own core banking system, as well as all other major systems which makes it self-sufficient and stable. In 2018, Alif launched its fully in-house developed mobile wallet called Alif Mobi which is now the largest and most widely used mobile wallet in the country, according to the company, and in 2019, the company entered the Uzbekistan market with BNPL offering and lately launched its mobile wallet – all Shariah compliant.

It has now scaled to a bank in Tajikistan after securing a banking licence in January of 2020 and planning an expansion into markets beyond Tajikistan and Uzbekistan.

“In 2021, we concluded that we have very strong managers in Tajikistan and Uzbekistan that can take over daily operations and the co founders should now focus on exploring new markets to enter and launch products in,” says Firdavs Mirzoev.

“In September 2021, the first country we visited for the purpose of exploring was Pakistan. We looked at different indicators and after two weeks of research and being in Pakistan, we were very positive about this market.

In January 2022, the SBP announced Digital Retail Bank regulations which reinforced our commitment to enter Pakistan because you need proper regulations in place to make it work,” Firdavs says.

Today, Alif says it is the market leader in BNPL segment, mobile payments and mobile remittances in Tajikistan, one of the leading BNPL service providers in Uzbekistan and has about a million users in two countries and a significant revenue run rate.

It aspires to provide a similar digital ecosystem of payments, BNPL, short term lending for consumers and SMEs and cross border remittances under its Digital Retail Bank licence applied for in Pakistan.

Understanding the opportunity for Digital Banks in Pakistan

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oming to our earlier mention of landlords, the banks, because of their presence in the financial services for decades, have managed to find ways to attract deposits from the wealthy in Pakistan. In another example, Habib Bank’s Prestige Branches give an exclusive and luxurious treatment to its rich depositors. This exclusive treatment is loved by the ultra rich and makes them stick with their bank. While it may sound conjectural that the digital apps might not be able to eliminate the divide between the rich depositors and not-so-rich depositors, it might not totally be an unrealistic scenario.

Nonetheless, conventional banks have their rich depositors firmly in place for now.

These banks have also dominated the middle-income segment attracting these deposits through salaried accounts. According to a top banker, banks are also very efficient at securing salaried accounts.

The deposits that are attracted from these sources are used in lending to make money for conventional banks. While banks attract bulk of the deposits from consumers, the bulk of the bank lending, however, is done to corporate clients and the government. As a consequence, Pakistan’s consumer financing has been only 1% of the total financing by banks in Pakistan.

Lack of financing for consumers is what makes the banked underbanked: there aren’t enough consumer financing products for retail customers of commercial banks. “Banks only have credit cards or personal loans for most consumers and auto loans and home loans for the salaried class,” says Mahmood Shamsher, country head for Alif Bank in Pakistan.

For digital banks, the opportunity to serve customers lies in lending and value added services. Corporate and government lending, however, are saturated and clutched by legacy banks, leaving only consumer and SME financing open for rest of the players. Both these segments have not been penetrated by legacy banks for one reason or another.

Services such as P2P payments, bill

The Founders of Alif (L to R) Zuhursho Rahmatulloev, Firdavs Mirzoev and Abdullo Kurbanov payments and bank transfers are hygiene factors, according to a banker, which have to be provided in a robust manner and can not be considered as the basis for creating commercial viability.

On the other hand, the sources of deposits for any new entrant are significantly less.

Officials at Alif agree with the assumption that there is uneven distribution of wealth in Pakistan and that the top 10% occupies majority of the wealth which have been occupied by banks and form the Rs17 trillion worth of total industry deposits. What they further agree is that it is going to be a while before any digital bank would be able to tap into the deposits of legacy banks.

“Commercial banks have been there for decades and they have created the trust with their depositors and it would be a while before digital banks are able to build a similar trust,” says Firdavs.

The other avenue to attract deposits for the digital banks remains the bottom 90% of the depositors which occupy only 10% of the wealth. These are the financially excluded which the banks do not chase because serving them comes at a cost higher than the money that can be made off of them.

The challenge is going to be managing the need to raise deposits, particularly with the

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unbanked, and doing so economically. To be able to offer a range of other financial solutions for the unbanked. Including BNPL, which is an age-old problem with a modern technological solution. The credit scoring and the access to customers with a range of products and services, means the ability to also deeply understand and serve SME. Also a possibility with a digital banking license. A space that has long been ignored.

The problems do not end here, however.

On the lending side, the case of microfinance banks shows that lending to customers such as SMEs has resulted in high NPLs for these microfinance banks and consequently high interest rates. On the BNPL side, one of the leading BNPL startups has rolled back its operations in Pakistan because of a high default rate of customers and merchants’ lack of understanding of technology.

“Our focus now is on a different market now for BNPL where these barriers are less forceful,” an official from the company told Profit. “We entered with great ambition but realized that Pakistani market was not mature yet for a technology driven BNPL service,” he said.

Firdavs recognises the concern and allays it by saying that no one formula is guaranteed for success. “What we will bring in the space

is the expertise of doing similar things in very similar markets,” he says.

“In terms of economic developments, in my view, Tajikistan and Uzbekistan would not be that different from Pakistan. The challenges for emerging markets are to some extent similar. Nonetheless, it does not mean that if one of your products becomes successful in one market, you would replicate that in the other market and that would be a success, especially in financial services,” he adds.

The key to success, according to him, is to improve by way of testing. “You have to be flexible and ready to change your products and offerings on the fly. It is very difficult to say how a particular product of Alif will be successful in Pakistan compared to how successful they are in the current markets. We have some assumptions that certain product of ours might do well in Pakistan, while the others might not, however the only way to get a proper answer to that is by way of proper testing and adjustments,” he adds.

Alif officials think that one way digital banks are going to have a better success rate of digital financial services is that at their core, they would be technology companies with banking licenses, and any innovations in the product, which will directly impact chances of success are going to happen in weeks and may-

be even days, instead of months in the case of banks. So the success of digital banks is really going to be contingent upon how friendly the app user interface and experience are, besides solid investment in absence of certain deposits and the ability to absorb losses.

The threat of the incumbents

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ccess to a digital bank license has not been restricted by the central bank to fintech companies or any particular type of financial institution. It is in-fact a free for all license in which the legacy banks have been given the space to apply as well and some of the contenders for the license include some of the big banks in Pakistan. HBL, UBL, Bank Alfalah, to name a few.

If in fact the digital banks are able to establish themselves in smaller segments such as BNPL or SME lending, banks that have the digital bank license would enter the same segment with better resources. Even if the banks do not get a digital bank license but see digital banks make headway in smaller segments, they might pull together their resources to enter the smaller segments too to keep their competitors from getting big enough to threaten their deposits in the future.

At the same time, the smaller segments that digital banks would enter into would saturate very early on because these smaller segments would have to be shared by multiple digital banks. “What is foreseeable is that the small segments that these digital banks would move into would form a smaller chunk that would be shared by multiple competitors,” says a top banker.

“If a fintech company pumps in an equity of Rs2 billion and builds a book of Rs20 billion out of which it is able to lend Rs13-14 billion, it looks doable. But multiple fintech companies doing the same in one segment would not mean each player would be able to lend Rs13-14 billion in that segment,” he adds.

And if the incumbents try to enter as well, being rich on resources mean that even if for instance a bank like Habib Bank manages to enter one segment and turns losses on the entire segment, Rs13-14 billion on its book would not hurt it but it would damage digital banks.

“Banks would come in and cut rates.

For them it is too much work too much hassle and very little business which is why banks have been reluctant to enter such segments like BNPL and SME lending or female focused lending in the first place. But imagine a situation where the market has matured in say 8-10 year’s time, the banking industry has the muscle to either capture it or ruin it,” says the banker.

Allowing incumbents entry into digital

banks space is being perceived as a means for incumbents to frustrate any potential competition. For the central bank, as long as financial inclusion goals are met, it doesn’t matter who does it.

The question in the minds of the fintech players is that if the existing regulations for commercial banks actually allow them to do whatever the digital banks would potentially do, why do the commercial banks need the new license.

This question was directed at Muhammad Aurangzeb, president and CEO of HBL, which aspires to get a digital bank license, at a panel organised by the central bank to create awareness of digital banks. Aurangzeb responded that traditional banks seeking a digital bank license is along the course of natural evolution for these banks, and this would apparently help greatly with financial inclusion. “Where the banks have to step up in a very very big way is in terms of the financial inclusion agenda. We need to accelerate our journeys in accessing and banking the unserved and the underserved,” he said.

“I would like to give example of my own bank. Just through brick and mortar, HBL had a client base of 12 million by 2018. By 2021, we closed with a client base of 25 million. And ofcourse it was mobile first approach, but also the [HBL] Konnect platform which was enabled by the branchless banking regulations of the SBP sort of got us there. My point is that with the branchless banking, and large merchant acquiring presence, it [the digital bank license] is a natural evolution because it is also an opportunity to move the deposit and algorithm based lending product services into digital bank model sort of right away.”

Auragnzeb further said that banks have

the ability to transition the portfolio through a digital bank license with a strong balance sheet from day one. What is further enabling for commercial banks to become a digital bank as well is the ability to leverage the skillset of the parent entity especially in areas of compliance risk and finance so that the banks don't have to worry about building the teams and structure immediately from day one.

Conventional banks also see the technology-first digital bank license as the means to capture VC investment. “For traditional banks, it is also an opportunity to partner with the new economy and bring in strategic investors with specialised skills which would generally had not been possible with the large parent entity because that’s the reality that these are not being seen as attractive destinations for the new economy VC and tech investors,” Aurangzeb commented.

These are uncharted waters for everyone.

The hype of digital banks is at crescendo, and the sentiment is that if users are to be flipped to app-based banking at a mass scale, the operating model of the banks is not the right way to do it and digital banks are the way to go. However, in the presence of the aforementioned challenges, there are also doubts whether such digital transformation would be achieved if digital banks end up not being able to sustain for a duration long enough.

Alif, too, said that at this point in time they had preliminary expectations and it would need three years to say if their goals were achieved or not. Right now, for them a digital bank license is not certain because the SBP has to give away five licenses out of 20 applications received. Alif is really keen on serving the customer in Pakistan, and waiting eagerly to hear from the State Bank of Pakistan. n

VRG is seeking Rs1bn to

capture the unbanked.

What makes it tick?

Backed by PathFinder, the fintech company wants to bank the unbanked. How are they any different?

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By Taimoor Hassan

f you are an investor, would you place your bet on a fintech company that has based its business case on what the banks have actively tried to avoid? Lets flip the question to make it more easily comprehensible: would you place your bet on financial inclusion?

The popular belief, that Pakistan has a hugely unbanked population therefore the

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opportunity to provide financial services therefore create a great business is massive, comes with a caveat: the financially excluded are poor and there is not enough money that can be made off of them. This argument is enough for the banks to rest their case of not banking the unbanked or serving the underbanked. Unless these segments do not have money, it does not make sense for the banks to chase them.

The flag bearers of financial inclusion, fintech companies JazzCash and EasyPaisa, have done phenomenally well in banking the unbanked

up until Covid-19. Without spreading physical brick-and-mortar branches like banks, both these fintech companies built a sprawling infrastructure of branchless banking agents to provide financial services to the segments untouched by the banks because it did not make a commercial case for them.

The abilities of these fintech companies, however, were severed seriously when the State Bank of Pakistan (SBP) slashed IBFT charges during the pandemic, and kept most of the transactions free later as well, dampening

the prospects of making money for these financial institutions. The bulk of the money that these fintech companies make is by charging customers an IBFT fee each time they send money to someone through a branchless banking agent. The SBP completely waived these charges for consumers during the pandemic, restoring the charges later on transactions of over Rs25,000. According to the central bank, 80% of the IBFT transactions are below Rs25,000. This has hit them hard. Both EasyPaisa and JazzCash are now rethinking their model of branchless banking, now that less money can be made on financial inclusion.

So ask the banks and they will tell you that financial inclusion is not seductive. Ask the branchless banking companies and they will tell you that financial inclusion is not seductive anymore. Would you, then, want to invest in financial inclusion?

Your answer would probably be yes, if the company you are investing in is Virtual Remittance Gateway (VRG), a Pathfinder Groupbacked fintech company that was launched in 2018 by Ikram Saigol - a war veteran, diplomat, commentator and a businessman who frequently represents Pakistan at the World Economic Forum (WEF). Saigol’s fintech company, VRG, is uniquely positioned to push Pakistan’s financial inclusion numbers though it has some challenges to overcome. The company boasts impressive performance, raking in 4 million accounts under Asaan Mobile Account (AMA) scheme and billions processed on these accounts since its soft launch earlier this year.

The company is passively helped by the central bank which has to increase financial inclusion numbers and reach 65 million new accounts by 2024, and is now raising Rs1.05 billion to scale the fintech platform for financial inclusion.

VRG has been extensively covered by Profit earlier and works on the principle of infrastructure sharing between banks and the telcos under a many-to-many model to power the Asaan Mobile Scheme of the central bank.

Through partnership with banks and telcos, VRG has created that interoperability whereby users of any telecom operator can open an AMA account with any of the partner banks to carry out banking transactions on a USSDbased channel. (USSD channel allows operating a bank account on feature phones without the need of an active internet connection: think *111# to check your account balance on a Jazz sim). The interoperability is further amplified by the availability of the network of branchless banking agents of branchless banking players for cash-in and cash-out, and assisted banking services. This is a solid and inventive arrangement made possible by the third-party service provider (TPSP) regulations of the central bank. The bulk of the masses that are financially excluded either have a feature phone or don’t have an active internet connection which

prevents them from getting formal financial services. Since all the telcos are involved, the outreach can increase massively to virtually anyone who has a cellphone, and multiple partner banks makes this arrangement the melting pot of financial inclusion.

VRG, being at the centre of creating the interoperability, makes money by charging telcos and banks for each transaction that is processed on the VRG platform. The company boasts about 4 million AMA accounts opened so far, and over 32 million transactions worth Rs31.9 billion processed on these accounts.

These numbers have been achieved even before the commercial launch of the project.

For the first few years until January 2022, VRG was bearing all the costs on its own. Since the soft launch which allowed VRG to start charging partner banks and telcos, the CEO of the company, Salman Ali says that VRG has been able to successfully hit breakeven each month since, validating the success of their business model.

What makes VRG tick?

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proactive central bank can work really well in your favour, but then it is working well in everyone else’s favour too. The SBP has been very aggressively pushing financial inclusion measures and has introduced numerous regulations for fintech players to enter and serve the unserved and underserved segments of the population.

EMI regulations were introduced in 2019 for the same purpose and this year, the central bank announced the digital banks regulatory framework.

Both EMIs and digital banks would be out there to capture the unbanked and the underbanked. So if EMIs and digital banks would be out there to do what VRG would be out there to do as well, is there scope for VRG’s offering? Further, VRG’s case is based on the assumption that most of the financially excluded people use feature phones and have lack of access to the internet. What happens in case the number of smartphones increases?

Salman Ali allays these concerns saying that VRG will actually be a facilitator for EMIs as well as digital banks who want to have an outreach to the masses. “VRG’s offering is that it has the transactions acquired. We acquire the transaction and give it to any financial institution. So I am like a highway for them.”

RAAST is the highway on which fintech companies can build their offerings and what Salman means to say is that VRG would be a RAAST on top of RAAST for these fintech companies. The way VRG works is that an EMI like SadaPay or NayaPay can operate solo to offer financial services to say people in Lahore where more people are considered to

have smartphones and better internet connectivity, and then partner with VRG for offering of financial services to people who don’t have better internet and smartphones, to increase their own users. VRGs users will instinctively increase when such partnerships consummate.

“In Pakistan today, even on the motorway, there are areas where there is no internet.

But AMA is working there. All these fintech companies operate in metro cities and have internet limitations for financial inclusion. So if any of these new entrants really want to reach out to the bulk of the unbanked, VRG can help them do that because the bulk of the unbanked can only be reached on the USSD channel,” Salman says.

As far as the number of smartphones increasing than feature phones, Salman says this does not, at all, limit the scope for VRG because then VRG will have an app itself which will be operational on smartphones.

It’s just that this app will still be using the USSD technology instead of an active internet connection. So someone in a village moving to a smartphone but no internet connection, would still be able to operate an AMA account on his SadaPay app on that smartphone, which would be using VRG’s USSD technology to replace the internet.

Another proactive measure of the central bank that goes in VRGs favour is the introduction of RAAST. While RAAST makes transfers more instantaneous than the archaic IBFT system, the State Bank has mandated zero charges for consumers on RAAST. One of the reasons why less people have bank accounts is that banking is expensive. So if funds transfers are free under RAAST, the unbanked are more likely to be banked than if there is a fee on such transactions.

“RAAST is the biggest game changer.

RAAST system was built to serve the masses.

The fee is waived for these masses which cannot be tapped without a USSD based system.”

So RAAST appears to be one of the positive measures by the SBP that helps increase financial inclusion and helps VRG’s chances of success because the financially excluded need free transfers and USSD based banking.

But the biggest threat, and what is perhaps going to be a poisonous sting which can give a death knell to VRGs business and the broader plans for financial inclusion, is exactly what is required to improve financial inclusion: no charges on RAAST and IBFTs. Branchless banking agents of EasyPaisa and JazzCash are key for the TPSP arrangement, which created the VRG business model.

People that use services of branchless banking agents use them for either one of the two reasons: cash-in and cash-out, or assisted banking services. The financially excluded are poor and not well educated, which is why they can not operate JazzCash and EasyPaisa wallets

BANKING

on their phones and need services of branchless banking agents for funds transfers. These agents charge commission to users for these services. So if RAAST is free and IBFTs are also free for the majority of the transactions, branchless banking players would not be able to keep up these networks.

The growth in the network of branchless banking players is expected to slow down because of the reduction in IBFT charges.

According to our conversation with branchless banking players, they are very interested in keeping the agent network intact. Branchless banking financial institutions provide liquidity to these agents and pay them commissions, and used to recover the costs and get some earnings from IBFT charges. In the absence of IBFT charges and zero-cost RAAST, branchless banking players are bleeding money to keep the agent network intact.

The numbers haven’t yet decreased but if money isn’t earned and burn rate is high, a decrease in agent network might be on the cards which will adversely impact the prospects of VRG as well. The branchless banking agents are the mainstay of these arrangements which replace bank branches that banks would not open in areas because it is a bad business case. If branchless banking agents also start decreasing in number, users would need to go to bank branches to open accounts and carry out transactions, because most of them would not be literate enough to operate bank accounts like AMA on their mobiles.

There is hope too, however. Covid-19 pushed the adoption of digital payments and according to Salman Ali, digital payments via the USSD channel also witnessed an uptake which means that people were forced to learn about digital payments during the pandemic which, by some quantum, would reduce the need for branchless banking agents for assisted banking services. Salman also asserts that even in case of a decrease in the number of branchless banking agents, the interoperability created by VRG increases the utility of a branchless banking agent and less number of agents would be able to handle more financial transactions, compared to a higher number of agents without interoperability. Add to that VRG is the only company that is creating this interoperability means it has the space all for itself to claim, though it needs the central bank to act generously for that to happen.

In January 2022, all banks were verbally informed of soft launch, and that there would be a commercial launch of the AMA scheme.

While the soft launch has allowed VRG to charge banks and telcos after bearing the costs for years on its own, commercial launch will come with a SBP endorsed and backed marketing campaign which VRG believes is what they need to really take off the AMA scheme.

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“The marketing campaign that is going to be run for 6 months is going to give AMA the real uptake. When it is launched successfully, AMA will propagate all over Pakistan,” says Salman.

Launching the marketing campaign for AMA can help the central bank attain its own goals of achieving financial inclusion quickly.

The central bank has a goal of increasing, till 2024, 65 million new bank accounts - a target set under sustainable development goals. From a VRG perspective, if it has 4 million accounts right now, the marketing campaign will help it reach 20 million accounts fairly quickly than without a marketing campaign. And if this number is achieved because the central bank launched this campaign quickly, VRG would be better off, the central bank would be better off and the country would be better off.

This marketing campaign, estimated to have cost billions of rupees, will run TV ads propagating the AMA scheme. Since the AMA scheme is owned by the central bank itself, the marketing expenditures would be borne by the SBP too along with participation from commercial banks.

While VRG is set on its strategy to achieve its goals even if the marketing campaign hits a wall, its business goals would be achieved faster if the central bank goes ahead with the campaign. The quicker, the better. For instance, VRG has been testing the aforementioned application for smartphone users but wants to hold it from launching until there is some clarity on the marketing campaign. VRG believes, and rightly so, that if they are to introduce new features, they would be better off if there is better awareness of the AMA scheme which would be created by SBP marketing.

How would the funds be utilised?

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he sponsors of the company have invested heavily to get VRG across through the hurdles, which not only include setting up the technology in-

frastructure and licensing, but also putting up with lobbying and court cases which delayed the launch and increased the costs. Now that the business is finally up and running, fundraising is part of the natural course of the business. Three years down now, VRG plans to raise Rs1.05 billion (approximately $5.5 million) from private equity investors against an equity giveaway of upto 10%.

The idea of raising VC funding was not shunned completely but a stable Pathfinder-group backed VRG perhaps did not fit the VC investors’ criteria of backing unstable companies to help them attain stability. The company, solely owned by Ikram Saigol, is majorly equity financed, with debt forming a very small portion, details of which were not disclosed to us.

“We are hosting aggregation of 13 banks and four telcos so our infrastructure needs to be robust to perform transactions in fraction of seconds. If transactions get lost, it is revenue lost for all the parties,” Salman says about the utilisation of funds. “At this stage, we have 4 million accounts and we are looking to expand our infrastructure in terms of computing, in terms of storage, in terms of capacity and with respect to human resources.”

While Salman laid out a few technicalities, he summed up why the investment was required: “I would say we need the new funding for growth capital where my infrastructure growth is required. This comes along with more licensing requirements.”

The company says that funds have been planned to be utilised for a period of 1-1.5 years, after which a new round could be considered. But the SBPs kindness with regards to helping with the uptake of AMA could help them achieve profitability sooner in which case a new fundraising might not be a consideration. While Salman appeared confident that raising these funds shouldn’t be a problem for the company, in case the push comes to shove, they would seek funds from other categories of investors, or lenders to go ahead and lead the company to achieve its targets. n

BANKING

Regulating capital formation Will increased transparency aid investor confidence?

By Ahtasam Ahmad

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apital formation has become an essential part of the strategy for growing modern day businesses. The capital markets provide these business opportunities to raise financing to embark on a journey of growth and expansion. However, the corporation at times, blinded by self interest, may mislead investors by painting a rosy picture of their business prospects.

In these cases, the role of the regulator is important as it recommends legislation to protect the interest of investors while also ensuring that ease of doing business is not compromised in the process.

Security Exchange Commission of Pakistan (SECP) in an attempt to achieve the aforementioned, has published a concept note to enhance the transparency of further issue of share capital by moving towards a more disclosure based regime while also streamlining the process by benchmarking against comparable international markets. The experts in the subject matter have analyzed it to be an attempt to revamp a regulation that was becoming obsolete. However, they have criticized the lack of use cases presented by the commission in its proposal.

The methods available for further issue of share capital

There are multiple avenues for existing companies in Pakistan, especially the listed ones, to

ANALYSIS

raise further equity capital. The most popular one is the right issue which has enabled the listed companies to raise around Rs 49 Billion during the current year as per SECP. Right issue, as the name suggests, gives the right to the existing shareholders to subscribe to additional capital being offered.

The offer is made in proportion to the existing holding pattern of the shareholders and thus, prevents dilution of control of the existing investors.

A method, other than right issue, that the law permits the companies to raise equity capital through is offering equity to private investors. This method also enables the company to accept non-cash consideration for shares issued. This method has also been used in case of debt restructuring that enables the company to issue shares to financial institutions as a repayment of its debt obligation.

Further, the Law of the land also provides for the issuance of stock options to employees.

This allows the company to raise capital while simultaneously offering an incentive to the workforce by enabling them to buy shares at a preferential rate.

Regulation for further issuance of share capital

I

t was permissible for the companies under the Companies Act 2017 to raise further share capital subsequent to initial public offering or the capital raised at the time of incorporation. However, the procedural details for such were missing which led to each entity

itself shaping up the procedures of raising capital. Therefore, to standardize the way equity was raised and to mitigate risk, the SECP published the further issue of share capital regulation in 2018 and an updated version in 2020.

The aim of the aforementioned regulations was to streamline the process of capital formation while also enhancing investor confidence through steps like detailing about the purpose of raising capital and the utilization of proceeds.

Triggers and the regulatory amendments

W

hile the existing regulations helped standardize the capital formation structure, they failed to address some key issues. These included; minimal disclosures for right issues which in cases were as high as 1000% of the existing share capital, No provision was there for cancellation of an issue, Shortcomings in the valuation reports in cases where the consideration received was other than cash (e.g. shares issued to purchase a manufacturing plant), procedural complexities in employee share issuance.

In order to counter these issues a number of changes are proposed to the regulation by the SECP. One of them is an adoption of disclosure-based regime that as per the commission includes, preparation of offering documents containing enhanced disclosures, seeking public comments, comments of the Apex and Front-line regulators and publishing final offering document after incorporating the comments.

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The purpose of revamping the existing disclosures is to provide more information to the investors for decision making while also aligning the local regulations with regional best practices.

Further there is a proposed regulation for imposition of lock-in clause on the sponsors.

The board of directors of issuing company will decide the minimum level of subscription for the right issue to be successful (cannot be less than 90% of the amount intended to be raised) and the directors of the company will undertake to subscribe to their proportions of share while the unsubscribed portion would be taken up by a an underwriter that cannot backout.

Further, to ensure the subscriptions process is completed successfully, an additional concept of application supported by blocked accounts.

As the name suggests, the concept is similar to having an escrow account to secure transaction money while the process of right issue takes place. As per Profit’s sources in SECP this clause is to oblige the sponsors and prevent them from backing out from an issue.

Rizwan Manai, a senior corporate law advisor based out of Karachi, while talking to Profit stated, “ The (existing) regulation itself is becoming obsolete and the changes made by SECP are a proactive measure to address issues prevalent in the country’s corporate sector.

However, as per my knowledge, there has not been any big case of sponsors or underwriters backing out of an issue and it seems like the SECP has proposed the relevant clause to prevent anyone from exploiting the loophole in the law.”

The proposed regulations also include an exit opportunity to the shareholders in case the issuer changes the purpose of proceeds utilization. As per Profit’s sources in the SECP, there have been multiple instances where proceeds were raised through right issue for particular projects, disclosed as per the law, however, not all funds were expended for that purpose and amounts were diverted to fund other business activities.

As per the proposed regulation, “In exceptional circumstances, the issuer may change the purpose of proceeds’ utilization subject to passing of special resolution and offering an exit opportunity to dissenting shareholders who have not agreed to the change in utilization of proceeds.”

Further, the responsibility to monitor proper utilization of funds is given to the external auditor of the company. As per the proposed regulation, “The Statutory Auditors shall monitor the proceed utilization till 95% of the proceeds are utilized in the manner referred to in the final offer letter, and shall submit a quarterly report to the issuer. The issuer will include the report, along with its comments, if any, in its quarterly financial statements.”

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The procedures for cancelation of a right issue have also been stated out in the proposal.

However, commenting on this, Rizwan Manai told Profit, “As far as the cancellation of right issues is concerned. The law already states that if an issue is not subscribed to within a certain period, it will lapse. However, SECP is of the opinion that regulations were necessary for such unsubscribed issues so that it is kept up-todate regarding instances of such cancellation.”

Dr. Ikram ul Haq, corporate law practitioner and advocate supreme court of Pakistan, commented on the proposed changes, “The proposed regulations do not state that in peculiar situations, how these issues were mitigated.

Further, GAP analysis pertains to current regulations applicable in Pakistan with International best practices. How these practices are relevant in Pakistan is again an issue and needs to be considered. Every solution must have an issue log so that the relevant situation (suggested) is evaluated in proper perspective. However, the cases which have highlighted the need for such regulation haven’t been disclosed.”

Additionally, the proposed regulation also specifies the minimum contents of valuation reports and procedural requirements to be complied by the issuer for issuance of shares by way of other than cash. Explaining the rationale behind this amendment, Rizwan Manai told Profit, “Valuations are a very judgemental thing and their credibility is always under doubt.

Therefore, additional disclosures are a necessity to maintain the trust of the investors.”

An important amendment that has been proposed is the approval for issuance of shares to employees through Employee Stock Option Schemes. Last year, the SECP inserted the section 83A to the companies act that permitted private companies to issue shares to its employees as a part of their compensation package. However, before the insertion of the aforementioned clause, issuance of shares to employees was a difficult task for the private entities as according to the law their existing shareholder had the right to first refusal of such shares which made it possible for them to block the issuance to employees.

The newly proposed amendments are a follow up on the procedure for issuance of shares to employees. Profit reached out to legal experts who were of the opinion that this step was taken to facilitate the startup sector that has grown substantially in the recent past and needs to retain top talent through such fringe benefits as they are cash strapped in the initial years of their existence.

The new regime, if implemented in its existing shape and form will bring more transparency to the process of capital formation and prevent investor exploitation. However, the increased compliance will add to the time it takes to complete the whole process. While some legal experts are of the view that by imposing these regulations, SECP is attempting to formulate company law in a manner similar to capital markets regulations which is against the ease of doing business narrative. n

ANALYSIS

Will Cash Margins curtail imports at the cost of

digitisation?

The current account deficit is in dire straits. But what are we willing to give up on for its sake?

By Ahtasam Ahmad

T

hose at the helm of the country’s administration have newfound admiration for the telecommunication and the IT sector. In almost every address to the public on the revival of the economy, praises for the sector are part of the agenda and emphasizing on its potential is a recurring theme. Further, proactive policy making like in the case of Digital Pakistan Policy, Cloud First Policy and Draft Broadband Policy makes one believe that probably the government is willing to see this transition through.

However, the ground reality is completely different. The Telecommunications sector has seen a chain of events starting from the government tracking back on its promise of reduced withholding tax to the latest implementation of 100 percent cash margin on equipment imports of the sector.

The measure comes as an attempt to curb current account deficit through discouraging imports. However, it fails to distinguish between consumption based imports and equipment imports that are part of a collective effort to develop the country’s infrastructure, specially in the case of IT and Telecommunication sector.

Imposition of Cash Margin

T

he State Bank of Pakistan (SBP) last month notified the imposition of a 100 percent cash margin on import of 177 items. The list of items also includes power equipment for telcos, lithium

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batteries, routers, main telecom equipment, telecom parts and servers.

The cash margin requirement means that the importer of specified goods will have to deposit the total value of their goods with a commercial bank before opening a letter of credit.

This is a tool widely employed to discourage imports and to ease up the downward pressure on currency. However, the targeted imports of such restrictions are usually non-essential and luxury ones. The latest margins requirements include automobile and textile imports alongwith the telecom equipment.

Problem for the Telcos

A

s per a letter of Ministry of Information Technology and Telecommunication (MOITT) to the SBP, “The decision of SBP impacts 90% of the Telecom imported equipment that will have a severe impact on the liquidity situation as well as the funding requirement for the telcom business.”

“Needless to mention that telecom

“If we consider the sustainability of business, our key cost elements are in U.S. dollars which is insane for a country like ours. It made sense back in 2004 when we entered into the market as an international investor, but now we are a player here. We are earning here. Our customers are paying us in rupees” Irfan Wahab, CEO of Telenor equipment being imported is neither manufactured locally nor falls into the category of a luxury item.” The letter further added.

The official communication aptly explains the underlying problem. Majority of the telecom service providers of the country are owned by foreign entities. Therefore, they have to plan their expenditure and timing of it in advance for timely sanction of funding from their global parent company. However, in this case, regulatory changes midway through their financial year not only disrupts the planning process but also poses a challenge to the liquidity of the telecom operators.

An example is Jazz, the leading operator of telecommunication services in the country.

The telco is ramping investment in the sector, primarily to develop infrastructure, contrary to many of its competitors. Jazz alone invested PKR 14.9 billion under its 4G ambitions during the first quarter of 2022, taking its overall investment in Pakistan to US$10.2 billion. A majority of its capital expenditure during the latest quarter ended was on the addition of approximately 500 new 4G sites.

These cellular sites consist of network and power equipment including base stations, microwave radio equipment, switches, antennas, transceivers, batteries and rectifiers all of which are imported as the country doesn’t have local manufacturing facilities.

The company further has plans to spend a cumulative figure of Rs. 38 billion in 2022 and Rs.48 billion as part of its network rollout strategy as per its budgeting documents obtained by Profit. The cost implication of imposing 100 percent cash margins is difficult to ascertain. However, as per VEON’s (Parent company of JAZZ) internal data, their cost of capital for investments in Pakistan is around

18.24% (see calculation below) which means that if equipment worth Rs 10-11 billion is imported at a credit term of 6 months, a 100 percent cash margin requirement would mean additional financing cost of around Rs 1 billion for the company. All this adds up to the cost of doing business in the country and acts as a deterrent to foreign investment.

Irfan Wahab, the CEO of Telenor, while in an interview with Profit also stated that the cost of doing business was having an adverse effect on the sustainability of their business

Telco’s annual rollout plans and may impede the expansion of 4G network, while adversely impacting liquidity and funding requirements for the network expansion. The referred equipment is core for the continuity of telecom systems in the country. With immediate change in regulatory requirements, the cash outflow which was expected to happen later in the year has to be made immediately which has a direct impact on the liquidity and financial health of the company.”

It is acknowledged by all stakeholders

Source: VEON Business Plan for Pakistan 2020-21

model. “If we consider the sustainability of business, our key cost elements are in U.S. dollars which is insane for a country like ours. It made sense back in 2004 when we entered into the market as an international investor, but now we are a player here. We are earning here.

Our customers are paying us in rupees.”

“All our equipment which we need to procure has to come from international markets in dollars. So if we could buy, say, ten base stations earlier, now we can only afford eight because of that.” He further added.

Profit also got hold of the official communication of Pakistan Telecommunication Authority with the SBP. The letter read out, “It would not be out of place to highlight that telecom operators devise annual rollout plans for expansion of their networks as per license obligations. However, sudden imposition of 100% cash margin by SBP is a serious concern for

that the telecom sector will play a pivotal role in changing the economic tide in favor of Pakistan. However, measures like the one recently imposed by the State Bank undermines the efforts of those involved in the sector and discourages further participation which is evident from the gliding Foreign Direct Investments.

It is extremely important that short term fiscal goals should not come at the cost of long-term policy objectives. n

TRADE

Loser, out of touch, uncle-type finance minister doesn’t even know how to lose fortune in crypto

I

n yet another example of dinosaurs running the national economy, Dr Miftah Ismail, the incumbent finance minister, has revealed that he has absolutely no idea how to sink in huge amounts of money in cryptocurrency.

“Let me me be very honest,” he said frankly, in response to a question about the hottest fintech development that has razed a number of retirement plans, at a function in Washington DC. “I don’t know much about it.”

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The frank admission, bordering on the shameless, that he had no idea about how to invest government revenue in the volatile financial technology, a key currency of which lost 99% of its value in a single month, is very concerning.

“It is about time that the League-make babaas relinquish their posts, and hand things over to those of us who know the future,” said former finance minister Asad Umar.

“Ummm….blockchain,” he added, apropos of nothing.

SATIRE