Profit E-Magazine Issue 290

09 SECP data scrape: Is there a silver lining?

12 After decades of sticking to spices, Shan Foods is bringing a new kind of product. Should National be scared?

16 The PMEX has lost half its board in 10 months. What’s going on?

20 Can Pakistan’s financial ninja (FINJA) pull off another great escape?

29 Is the banking sector worse off after the recent macroeconomic developments? 09 16

27 Value Trapped! Omar Farooq

SECP data scrape: Is there a silver lining?

Can something good come out of something bad?

By Zain Naeem

In July of 2022, the Securities and Exchange Commission of Pakistan (SECP) experienced a data scrape which led to much of its data being accessed in an unauthorized manner. The episode got so little attention that even SECP had to be informed regarding what had actually taken place from an outsider.

The data that was scrapped was up for sale on the dark web and was a serious breach of trust that is placed by the people in SECP in handling of this sensitive data. But could something good come from what actually happened?. The data was used to set up a website under the domain name of corporatehouse. pk which published the name of auditors, directors and chief executive officers of the respective companies.

The site has now been taken down. Part

of that was due to the fact that the site actually went as far as putting up listed personal addresses, phone numbers and other personal information which had nothing to do with the professional lives of these people. This should not have taken place. The question still remains whether such a website can add to the transparency of the markets and if there is a place for the SECP to manage a database for the betterment of the investors. Profit ponders this dilemma.

The need for information

SECP is the sole regulator overlooking the formation, registration of companies and the smooth operations of the capital markets. When a company registers itself, the benefit is that the company is able to trademark its name and function with the SECP. In return, the SECP asks the company for information relating to its directors, owner or Chief Executive Officer (CEO) and other particulars relating to the company.

Listed companies are mandated to publish all information to the market in the form of annual reports and announcements that are made through the system running in conjunction with the stock exchange. Many of the private companies are also required to provide data at regular intervals in order to keep their records updated with the regulator. Even though private companies and their data is not available to everyone, the SECP still makes sure that this data is recorded by the companies. The data scrape that took place was a violation as much of the data related to private companies was scrapped which is supposed to be protected.

The data scraping

Data scraping takes place when protected data is accessed in an unauthorized manner and an outsider is able to get information which is sensitive in nature. In the case of SECP, it was actually reported by Propakistan.pk back in July of 2022 after the data breach had occurred. The first signs of a data breach were seen and questions were sent by the representatives of the website seeking clarification.

The data scraping was carried out with ease as the SECP website had a weak digital link which was supposed to be tested against vulnerability and penetration testing which was due to take place in February of the year but that test was never carried out.

The article caught the attention of Zaki Khalid. Khalid is CEO and Intelligence Lead at Pantellica who saw the article and then tried to verify the claims that a breach had taken place. Khalid is one of the pioneers of Open Source Intelligence in the country.

When approached for this story, Khalid states that the episode was not a hacking but an unauthorized bulk scraping of content from the website which was made possible due to the vulnerabilities that existed. “[The scraping was] undertaken by an Indonesia-based company called EmerHub that sells corporate data to customers. The chief architect of this entire effort is an Esto -

nian-origin businessman named Lauri Lahi. Programmers were hired in Pakistan and Indonesia to work on the data that had been scraped which should not have been placed on the online server in the first place.”

Once Khalid contacted the regulator, he was contacted privately and the representative assured him that action would be taken, however, a detailed complaint was filed through the Citizens’ Portal while an email sent to functionaries of SECP was never responded to. In essence, it was Khalid who brought the breach to the notice of SECP itself as even the regulator was not purview to what had taken place.

“Before closing my complaint in Citizen’s Portal, SECP listed the measures taken by them. The website remains down but the data exfiltrated from SECP remains very much in the possession of EmerHub and is very likely still be sold through its internal channels to various clients.” says Khalid.

Further adding that “I count myself among those executives who believe in transparency especially after the fiasco Pakistan faced with the FATF. First and foremost, transparency lies at the core of investor confidence. However, publicizing or exploiting personal information including CNIC number and residential address (as compared to a business address) is absolutely unnecessary and opens avenues to threaten the personal safety and security of a Director.”

Value for transparency

Once the data had been collected, Emerhub set up the website under the name of companieshouse.pk which disclosed the information regarding the CEO, directors and auditors of the private companies which is usually not known. The issue with the website wasn’t that it was disclosing something new. Even SECP allows for some of this data to be accessed once an individual applies for it and pays the relevant fees. The outcry was over the fact that personal information of the individuals was also accessible which no one should be allowed to see. It is an understood fact that the releasing of personal information is a breach of trust and should not be carried out.

But such an episode does raise new questions. Should people know about the key personnel of a private company and have access to their professional information?

Private companies are hidden behind a veil of secrecy as the information relating to its key personnel is not readily known. Companies carry out transactions with each other and sometimes have board members serving on them who are common between

many companies. This creates linkages between companies and develops an understanding of the ownership and control structure within them.

Suppose a person sets up a private company named Tigers (Private) Limited and is involved in manufacturing of road building materials. He also sits on the board of a cement manufacturing company which is planning to build a road from their factory to a highway. Right now, if Tigers gets a contract from the listed company, no one would know that there is a conflict of interest where the director is diverting funds and projects to his own private company. However, having an online database can help establish that link and bring to notice what is taking place.

Similarly, there are related party transactions where companies related to each other, due to a common board, transact business with each other. As both companies are privately owned, there is little that can stop such a transaction from taking place. The board of directors needs to approve such transactions which mostly goes through. The compensation and payment of any provision of goods and services is not based on any competitive bidding process and not transparent.

Having access to key personnel information can allow for such a transaction to be scrutinized in detail. This process becomes even worse when it is considered that related party transactions are evaluated on a value transfer basis where money never changes hands. The valuation of such a transaction needs to be looked at in detail in order to make sure a fair transaction has taken place. If professional linkages and connections are not known, these transactions will not be scrutinized to the extent that they should be.

This can also impact listed companies where a private company can be given a lucrative contract at the expense of the listed company. The director who runs the private company can make the listed company pay an exorbitant price and make a large chunk of change while taking money away from the listed company who has shareholders who are investing the company. This would be a simple case of the private company benefitting while the shareholders of the listed company end up losing out. Having this information can also cut down on trade based money laundering and can help make the markets and companies more transparent to the investors while closing an information gap that currently exists.

The SECP can even run the database themselves and make sure that the data is protected from any future breaches and make sure that only professional information becomes part of the public domain. n

After decades of sticking to spices, Shan Foods is bringing a new kind of product.

Should National be scared?

Shan Foods dives into convenient cooking sauces, a potential growth market but faces hurdles in brand awareness, competition, and marketing to modern cooks

By Saneela Jawad

There was a time when cooking wasn’t quite as easy as it is today. Just think about it. Before we had gas stoves, one had to cook with wood ovens. These were harder to control, more work to ignite, and likely to cause minor burns. Similarly, before refrigerators (which didn’t become common in the Western World until after the second world war) there was a limit on how much produce one could store and what kinds of food could be made.

It isn’t just a matter of tech. Access to ingredients has changed dramatically in the past fifty years alone. Perhaps nothing has symbolised this better than the rise of packaged “spice mixes” in the Indian Subcontinent. And the origin is not so long ago.

In India, for example, the first major spice mix company by the name of MDH was set up as a single factory in the Kirti Nagar

neighbourhood of Delhi in 1959. In Pakistan, the pioneers of this concept was National Foods which set up shop as a spice company in 1970. The concept was simple enough. Back in the old days, kitchens had to have separate spices stored and ready to be ground and mixed for whatever recipe was on the menu. Over time, cooks realised this was time consuming and laborious work. Instead of making mixes every single time, they would pre-prepare the mixes, add some water and turn them into small spice “patties” that could be broken off and used whenever a common recipe was needed. This ensured that the taste was the same every time and saved precious time. It wasn’t long before these spice mixes started to be sold in shops. And then matters were just a step away from industrial packaging and retail selling. For the first decade, National Foods in Pakistan was widely successful. In 1981, however, they would get their first taste of competition in the form of Shan Masala.

Originating as a small home based business, Shan Food established itself in 1981 and quickly became renowned for its convenient and high-quality spice mixes. Over the years the competition has been stiff.

On the one hand there is the corporately run and publicly listed National Foods. On the other there is the very-much-a-family-affair Shan Foods. Both companies have duked it out in Pakistan and beyond. The competition has been marked by the fact that while Shan’s spice blends are more popular, National manages to use its larger product portfolio of everything ranging from condiments to jams to perform better than its main competitor.

Throughout all of this, Shan has stuck by their line of spice products. That is until now. The company is introducing a product by the name of “Shan Cooking Sauces” to their portfolio of products. It is a really simple concept. With their spices, Shan would simply blend and make mixes that would be ready to put into the cooking pot. With these sauces

they are going a step forward and taking out another step from the cooking process. The sauces Shan is making include the traditional tomatoes, onions, and whatnot that get added to these recipes.

This product, if it works and is adapted, will save precious time that would otherwise be wasted chopping, dicing, and generally preparing the base in which most Desi Food is cooked. The only question is, will people take the bait and should National Foods be scared?

Why a new product and why now?

Throughout this time Shan has stuck to its guns. The rise of this company and its modus operandi has been covered previously by this publication. But now, it seems, Shan is finally ready to give a new line of products a whirl.

Read more: Why Shan Foods should actively consider an IPO.

This marks a bold move for the company, as it becomes the first major spice brand to enter the burgeoning market for convenient cooking solutions in Pakistan. The preparation time for this format is zero, hence, the positioning has been set around the same; Pour, Cook, Serve. According to Shan Foods Co-Chairwoman Sammer Sultan, “Shan has

tapped into a niche market segment that values convenience without compromising on authentic taste.” Although challenges exist in establishing a new product category and driving consumer acceptance, the potential for growth, particularly among working women, newly married couples, and students, is substantial.

It is clear that the company has managed to identify a gap in the market for convenient cooking solutions and introduced its line of cooking sauces. Although the product may not target the masses directly, ‘its potential is substantial, estimated at around 5% of Shan’s traditional recipe mixes offerings,” Sultan points out.

With the lack of existing competitors in the market, Shan Foods has the freedom to set the pricing standard for pre-made cooking sauces in this region. Sultan further explained the pricing strategy and said that the strategy reflects “the added value and convenience these sauces offer compared to traditional spice mixes”. The higher input costs associated with pre-mixed sauces are also a factor.

With no existing benchmark in the market, they’ve opted for a price point that balances competitiveness with healthy profit margins. This approach makes sense. It capitalises on the growing demand for convenience in the kitchen. Busy individuals willing to pay extra for convenience. A 350g jar of Shan’s cooking sauces costs around Rs 500, whereas the dry spice mix ranges from Rs 80 to Rs 250 per single packet depending on the size.

Competition

One can’t expect the competition to not notice of course. National Foods, a larger and faster-growing company, it is pertinent to mention

that National Foods is not a direct substitute for Shan Foods as it has a much more diverse product portfolio. Although the brand has not introduced a similar product and is still dry spice mixes, Profit contacted National Foods multiple times for a comment on this story, but they did not respond at the time of publication. Thus, if they are planning to enter the market with such a product, it can be a challenge for Shan Foods, as the competitor being a publicly listed entity, National Foods enjoys advantages in terms of access to capital, transparency, and shareholder accountability. This allows them to invest aggressively in growth strategies and expand their product portfolio, giving them an edge in the international market.

More so, in 2023, National Foods exported Rs 2.4 billion worth of products whereas their local sales were at Rs 40 billion, this is because they also include the sales from their expanded business lines, such as A-1 packaging in Canada, as wholly-owned or majority-owned subsidiaries, enhancing the company’s overall strength. Similarly, Shan Foods exported Rs11.8 billion worth of products, which includes sales to Gourmet Foods FZC, Shan Foods UK and American Halal Foods, whereas their local sales were at Rs18.3 billion. This can be attributed to National Foods’ broader product range, encompassing condiments like ketchup and achaars, while Shan Foods focuses primarily on spice mixes and now the recently introduced cooking sauces.

For Shan Foods sales increased in 2023 to Rs25 billion from Rs 22 billion , however the cost of sales increased by a higher ratio leading to gross profit actually decreasing. This shows that the gross profit margin decreased from 37% to 31% in 2023, this can be attributed to raw material cost which went up from Rs 8.2 billion in 2022 to Rs 12.7 billion in 2023. This is an increase of 55%.

In the same time period, National Foods

saw an increase in sales from Rs 27 billion in 2022 to Rs 30 billion in 2023 and their cost of sales increased from Rs 18 billion in 2022 to Rs 19 billion this year. Their gross profit stood at Rs 10 billion in the recent year from Rs 9 billion in 2022. Their gross profit margin went up from 33.4% to 34.6%. Even though Shan has grown significantly over the last several decades and remains the market leader in masala mixes, it is not the biggest company in the overall market. That is National Foods, which is not only growing faster but evolving better with the market as compared to Shan.

Breaking down the sales figures for Shan Foods, exports made up 39% of the sales in 2023, while they were at 34.5% in 2022. In terms of the operating profit, the company saw similar figures of Rs 3 billion in 2022 which decreased to Rs 2.6 billion in 2023. This can be attributed to the increase in admin expenses from Rs 1.1 billion in 2022 to Rs 1.4 billion in 2023 - the impact of this can be seen on the operating profit margin which stands at 10.5% in 2023, whereas it was 14% in 2022. Similarly the operating profit margin for National Foods went from 10.3% in 2022 to 11.2% in 2023.

The saving grace for the company was the other income which doubled from Rs 1.1 billion in 2022 to Rs 2.3 billion in 2023. Major contributor in this regard for Shan Foods was the Exchange Gain, which went from Rs 0.9 billion 2022 to Rs 1.9 billion in 2023. This was due to the deprecating currency during the year.

Finally the net profit margin in 2022 was 17.6% which went up to 18.2% in 2023. This increase in net profit margin can be wholly attributed to other income even though the gross profit margin and operating profit margin was lower this year. Similarly, the net profit for National Foods in the same time period was Rs 2.2 billion which went up from Rs 1.9 billion in 2022 - the net profit margin did not see a major increase as it rose from 7.32% to 7.39%. According to their financials, the major contributor like Shan Foods was the other income and the exchange gain that went up this year to Rs 573 million.

The challenges

While the introduction of cooking sauces presents promising opportunities for Shan Foods, it also brings forth a set of challenges. The new cooking sauces can change the culinary landscape by creating a new category for convenient cooking solutions. However, carving out this space requires careful planning and execution.

Building brand awareness is crucial. Shan Foods must differentiate its sauces from existing offerings and educate consumers about their utility to drive acceptance within the target market. Further complicating matters is the current economic climate. With inflation on the rise, consumers are becoming increasingly price-conscious. Shan Foods needs to deliver compelling value propositions to attract these cost-conscious customers.

As Sultan, Shan Foods Co-Chairwoman, aptly noted, “While the opportunities are vast, tackling these challenges will be integral to unlocking the full potential of this new venture.”

How have they marketed it?

It didn’t come as a surprise when Profit asked housewives and other members of the society if they had heard about Shan’s new cooking sauces, to which they were left surprised. While Shan Foods utilizes TVCs and other mediums for established products, their cooking sauces haven’t received the same level of promotion. This strategic prioritization might be overlooking a potentially lucrative market segment. When compared to National Foods’ aggressive marketing tactics, particularly for new products, it showed that Shan has a more conservative financial approach as it is a family-run business.

Shan Foods prioritises cultural alignment in its cooking sauces, adapting flavours to suit diverse regional preferences, for example offering milder options in markets like KSA. Sultan further said that the company’s entry into Indian and Bangladeshi markets showcases its commitment to regional expansion, with

positive initial responses indicating strong growth potential. Initial market activation efforts, particularly free sampling initiatives promoting its Biryani sauce, have been met with positive consumer response.

“Shan Foods is confident that continued investment and focused efforts will lead to long-term success in these new markets,” said Sultan.

On the other hand, National Foods, being publicly listed, is under constant pressure from shareholders to prioritise market share and growth. This translates into aggressive marketing strategies, exemplified by their doubling of spending on marketing and distribution between 2015-2018, even at the expense of short-term profits as mentioned in an earlier report by Profit. The company is able to control the advertising and marketing costs as the brand has established their identity and can utilise the budget smartly.

This difference in ownership structures goes beyond marketing. For instance, despite familial ties, Shan Foods maintains a distinct identity from Dipitt & restaurant Wingitt, allowing both brands to operate independently while exploring collaborative opportunities which include co-locating stalls at events like Gulffoods. These ventures were started by Shan Foods CEO Sikander Sultan’s daughter and son-in-law.

The separate identity of Dipitt highlights a potential disconnect within the family businesses. While Shan Foods prioritises traditional advertising for its core products, Dipitt, targeting a younger, digitally-savvy audience, focuses on digital marketing strategies.

Similarly, as stated earlier, National Foods has also expanded its business lines, such as A-1 packaging in Canada, as wholly-owned or majority-owned subsidiaries, enhancing the company’s overall strength. While both public and family-owned models have merits, they differ in perspective. National’s management prioritises the company’s interests, leveraging its public listing for growth. In contrast, the family-owned company balances business objectives with familial considerations, reflecting an additional layer of concern for family well-being and relationships.

Despite contrasting approaches, both companies have developed a loyal customer base, especially Dipitt, in such a short period, it has carved a niche for itself in the premium sauce market.

Looking ahead, the management at Shan Foods needs to focus on innovation and market adaptation by acknowledging the changing needs of consumers and adapting their marketing strategies accordingly. It also envisions expansion in the spice market and beyond, targeting both ethnic and non-ethnic consumers globally. n

The PMEX has lost half its board in 10 months. What’s going on?

With reports of mass resignations, what exactly happened at the Mercantile Exchange?

By Zain Naeem

Ten months might not seem like a long time but in terms of director turnover at the Pakistan Mercantile Exchange (PMEX), it seems like a lifetime. In May 2022, elections were carried out and ten directors were elected who would, in an ideal world, have seen their terms end in May of 2025. However, a quick glance at the website of the exchange shows that it lists only five members who are active currently.

What happened to half of the board?

If reports are to be believed, they state that

directors resigned or more appropriately that they were made to resign. With no notifications, no announcements or disclosures, it seems that the matter is being kept hush hush. What exactly took place? Profit tries to piece together the puzzle.

Pakistan Mercantile Exchange

For people not in the know, the role of a mercantile exchange is to create a market for buyers or sellers who want to trade a commodity. When we hear the recent price of crude oil or gold, the price

being quoted is actually from the commodities or mercantile exchange where the commodity is being traded.

There are many commodities that are traded on international markets. These can include oil, gold, coal, cotton to more exotic ones like orange juice, cattle, corn and soya beans. The purpose of having a market is that trading is regulated and all the market participants have to adhere to a set of rules that govern them. The trading is more formalized and the exchange acts as the middleman in order to make trading fair and honoured between the participants.

PMEX is the alternative in Pakistan

which allows for commodities trading to be carried out in the country. PMEX was formed in 2002 and started operations in May of 2007. Commodities like gold, silver, oil, natural gas, cotton, wheat and even indexes like Dow Jones, Nasdaq and S&P 500 can be traded.

What function does such an exchange have?

The purpose of a commodities market is to allow people to trade by buying and selling based on what and how they expect the commodity to perform in the future. The biggest function of these markets is that they allow for hedging to take place.

Let’s say that you are an airline company. Based on your understanding of the trends, you see that oil prices might go up in the future. Oil is the biggest cost that airlines need to account for. Rather than ending up paying a higher price for oil in the future and incurring a loss, an airline company can lock in a price in the market by buying oil future contracts right now that will be delivered three months down the line. Once the price does go up, you can sell the contract in the future and make a profit on the trade which will offset the cost increase. On the other hand, when the fuel contract matures and has to be settled, you can take the delivery

of the oil contract that you had bought earlier rather than from the market and lower your cost that way as well.

This is how commodity markets are supposed to help and provide the function of hedging to its users.

Function of the board

As has been discussed previously in this publication, the role of the board is to provide guidance to the company by being representatives of the owners and their interest in terms of running the company. The board has the task to make sure that the company is running in a smooth manner and that the interest of the shareholders is being looked after. Companies are encouraged to have a diversified board of directors who come from different backgrounds and bring different perspectives that help the company face challenges and move forward. In addition to that, independent or outside directors and female directors are encouraged to take part to allow for better representation of people who bring an outsiders’ view to the board.

Read More: On the issue of board directors, the SECP may need to go back to the drawing board

PMEX held its most recent elections for board of directors in May 2022. Pakistan’s corporate law allows a board to exist for 3 years after which fresh elections have to be called for. The board members who were chosen in these elections were Abdul Qadir Memon, Ejaz Ali Shah, Ahmed Chinoy, Asif Baig Mirza, Dr

Fatima Khushnud, Faisal Ahmed, Farrukh H Khan, Dr Rashid Bajwa, Wajahat Aziz Qureshi and Zahid Latif Khan. From 2022 to June 2023, Faisal Ahmed left the board and he was replaced by Muhammad Humayun Sajjad.

It seems now that from there on in, the board went through a time of massive chopping and changing. The current board of directors lists only 5 people who represent the board that governs over the company. From the elected 10, it seems that 4 have been left at the helm. These include Wajahat Aziz Qureshi, Ahmed Chinoy, Farrukh H Khan and Zahid Latif Khan. In addition to that, the Acting Managing Director and Chief Financial Officer (CFO) has been made another member of the board.

This means that the names of Abdul Qadir Memon, Ejaz Ali Shah, Dr Rashid Bajwa, Dr Fatima Khushnud, Humayun Sajjad and Asif Baig Mirza are missing. Ejaz Ali Shah was the former Managing Director before he vacated his seat at the board. The seat vacated by Asif Baig Mirza is due to his sad demise in December of 2023.

So what happened to the remaining directors? PMEX usually has a profile of all their directors and the relevant directors have seen their profiles removed from there as well.

The two sides of the coin

When reached for an answer, the representative at PMEX stated that three independent directors had resigned

in January 2024 and no such announcement was made as they are not required to do so. The exchange is going to fill the vacancies as per statutory regulations. The vacancies left after the death of Asif Baig Mirza and seat left by Humayun Sajjad would be filled once the independent directors are appointed. The representative states that the Board cannot function without independent directors under Futures Exchanges (Licensing and Operations) Regulation, 2017.

“Mr. Ejaz Ali Shah was Chief Executive Officer/Managing Director from 2013 to 2023. He is no longer with PMEX because of a legal restriction of maximum 9 years. We are not aware of the reasons for leaving PMEX by other directors as there is no such requirement. They may be contacted directly,” adds the representative.

Credible sources have told Profit that the reality is much more serious. In essence, the sources allege that the Securities and Exchange Commission of Pakistan (SECP) entered into the situation and carried out a two step process which led to the exodus taking place. First of all, regulations were made in a haphazard manner which stated that none of the Managing Directors/CEOs serving at PMEX could serve more than two terms. Once this had been done, the next step was to humiliate and ridicule the remaining independent directors who sat on the board. Seeing the insulting and demeaning treatment being handed out by the SECP, the independent directors felt it was better to resign their position rather than bear the treatment going forward.

What can be the motivation behind it?

The sources further allege that the reason for getting the independent directors to vacate their positions was so that SECP could bring in directors that they wanted to be placed at the exchange. The usual process would have been that the shareholders would be asked to give new names for independent directors that they want elected on the board. The SECP bypassed the whole process and gave names to the shareholders that they wanted to be on the board. Once the candidates would be vetted and declared eligible by the SECP itself, the shareholders would be asked to vote for them. This would complete the sham that was the election of the independent directors who would be technically independent but would be handpicked by the SECP. This does not end there. The next step would be that even when it was the task to choose a Chairman, the sponsors would be told who to pick as the Chairman.

And so the whole kabuki theater would be complete and would come full circle.

The truth can only be known after the three directors who resigned come forward with their story.

Committees in jeopardy

Whether the board members have resigned or allegedly been forced out, the functionality of the exchange comes into jeopardy as there are positions vacant and need to be filled. The PMEX hsa committees that fall under the board and members of the board are supposed to run these committees. They serve the function of regulatory affairs, risk, audit and human resource. As the directorial positions have become vacant, all of these committees stand defunct. They need to be reconstituted in order to perform their function. “Only an independent director can chair the committees of PMEX under the law. Accordingly, committees will function after the process of appointment of independent directors is complete,” is the official statement by PMEX.

In a normal course of operations, even after elections take place, the first goal is to constitute these committees so they can focus on each of these functions and make sure the exchange is performing smoothly. When directors resign or are asked to leave, it is easy to replace one person and assign that person to the position that has been left behind. When half of the directors vacate or leave en masse, it places a challenge to the company on how to make sure the committees remain operational. The suddenness and unusual act of the vacating by the directors is underlined by the fact that these committees stand non-operational currently. The harm would fall on the market participants who will face difficulty in trading in the exchange as key matters would be left undecided that fall under the purview of these committees.

The board as it stands now

Currently the board has five members who are either nominated by the shareholders or are working in the exchange at some capacity. Shareholders get to nominate their choice of a board member that they want them to represent on the board. Based on the current composition, one member is from the company who would be classified as an executive director while the remaining four are from outside the company which makes them non-executive directors. By its own classification, PMEX believes that all their current board members are either executive or non-executive in nature but are not considered independent. The recent exodus saw many of the independent directors leave which means that the company has lost many of members who

would have provided an outside view into the company. There is a movement in the corporate landscape of Pakistan to move towards boards which have independent directors in order to enhance the diversity within the board.

The major shareholding of PMEX is owned by National Bank of Pakistan (34%), Pakistan Stock Exchange (PSX: 28.4%), Islamabad Stock Exchange Tower Reit Management (17.8%) and LSE Financial Services (7.2%). This leaves much of the control of the board among a few. In order to break their hold on the board, independent directors need to be elected.

SECP also promotes more independent and female directors to be elected on the board to make sure the company is not run by the majority shareholders and management of the company. In Pakistan, most of the time, majority shareholders are the original owners of the company who do not want the status quo to be ruffled and do not look after the interest of minority shareholders. By having independent directors, this practice is minimized.

At this point in time, the board members are all either shareholders or the chief executives of the company.

First of all there is Wajahat Aziz Qureshi who is a nominee director of National Bank of Pakistan who has been working in the field of banking for 23 years. There is Ahmed Chinoy who is a nominee director of Pakistan Stock Exchange. Chinoy is the Managing partner of Arch Group of Companies which is running businesses in investments, textiles, poultry and real estate. Next is Farrukh H Khan who is the other nominee director of PSX. Khan is the Chief Executive Officer (CEO) of PSX and has 30 years of experience working in senior management. Zahid Latif Khan is next on the list who is a nominee director of Islamabad Stock Exchange and is currently CEO of Zahid Latif Khan Securities (Pvt) Limited one of the largest brokers at PMEX. Lastly, there is Farhan Tahir who is the Acting Managing Director and CFO at PMEX. He has been working at the exchange for the last 17 years.

After the previous Managing Director ends his term, a new Managing director has to be appointed by the board after consideration.This would mean that candidates will have to be assessed and the best choice will be appointed. As this deliberation has not taken place, an acting Managing director exists in its place. This process becomes more complex based on the fact that recommendations for Managing Director have to be made by the human resource committee according to the terms of reference agreed upon by the PMEX which means that first the committee needs to be put in place before a new Managing director can be appointed. n

By Taimoor Hassan and Babar Nizami

Can Pakistan’s financial ninja (FINJA) pull off another great escape?

A deal to sell Finja’s EMI licence to the Chinese OPay has gone sour.

Finja claims OPay acted with ill-intent. OPay says Finja just forgot to read the fine print. So where exactly did Finja’s founder, Qasif Shahid, lose focus?

For decades Harry Houdini, the famous stuntman and escape artist, dazzled audiences with his feats of incredible daring. Every risk he took was bigger than the last and somehow every time, against all expectations, he would manage to do what he was best at: escape unhurt.

Until one day when he didn’t.

In Houdini’s case the end was quite unceremonious. One of the great magician’s simplest acts was his ability to absorb punches to the stomach. During one such demonstration, he forgot by a split second to tighten his abdomen and the boxer’s punch that landed on his stomach ruptured his appendix. Within a week Houdini was dead. The split second had cost him his life.

That is the thing about risk takers. The crowd’s roar is deafening when you’re winning but it only takes one wrong move, one step out of place, one second of concentration lost for it all to come tumbling down. Pakistan’s fintech ecosystem is currently harbouring one such Houdini, and we’re afraid he may just have made his small mistake.

The man in question is Qasif Shahid. Depending on who you talk to, he could be a visionary or an unreasonable eccentric. Either way, he is not your typical banking professional. He is also perhaps the earliest mover in Pakistan’s fintech space. From launching digital wallets for legacy banks at a time when digital financial services were unheard of in Pakistan, to deploying QR payment codes at merchants like street vendors and biryani shops — Qasif has tried it all. What has been characteristic is his ability to always get back up. But this time around he might find it a little harder to find his feet.

At the centre of this increasingly difficult situation is Qasif’s dream venture, called Finja. The fintech company until recently owned two entities in Pakistan. The first is an Electronic Money Institutions (EMI) registered as Finja Private Limited. Their product is a mobile wallet, more simply an app that lets you open a bank like account. The second is Finja Lending Services which is involved in the business of giving out loans to micro, small and medium enterprises (MSMEs) such as convenience stores in the FMCG supply chain to help them manage their daily cash flows.

It was always an ambitious proposition to run a mobile wallet and a lending company concurrently. The idea was that Finja Private Limited would use the EMI licence granted by the State Bank of Pakistan (SBP) to run a wallet which could accept deposits from the public. Separately, under an non-banking financial company (NBFC) licence given by the Securities and Exchange Commission of Pakistan (SECP), Finja Lending Services would be able to lend money, not from the EMI deposits but from the lending company’s own resources. Now we know accepting deposits and lending are essentially core functions of a bank. If a fintech company gets two completely separate and unrelated licences that allows it to do both, theoretically, the owners of this company could posture as being owners of a bank. In fact in a previous interview, Qasif said that this arrangement made them “a featherlight

digital bank.”

The only problem was that this combo didn’t quite work. Because unlike a bank, which is in the business of attracting cheap deposits and lending them out profitably, Pakistani EMIs, including Finja have found it very hard to attract cheap deposits, and even if they do, they are not allowed to lend them out profitably. Meanwhile Finja’s lending business has also started suffering, especially due to the rapidly rising interest rates. High rates meant that the cost of funds for Finja Lending Services to finance its lending operation became very high, and it found it difficult to pass on this increased cost to its borrowers, most of which were small convenience stores. Perhaps this is where Qasif would have surely realised that an NBFC and an EMI don’t maketh a bank.

In fact, in 2022 Finja did try to become an actual bank by applying for a digital banking licence with the SBP, but they could not make the final cut. More on that later.

Not to worry. Any great escape artist has a backup plan. So did Qasif. He had identified a very profitable opportunity in lending to the ecommerce logistics supply chain. You know the small to medium sized online merchants who have their cash on delivery (CoD) payments stuck with delivery companies for weeks. But to execute this, he needed some breathing room.

What do you do when you’re drowning, you shed the extra weight and you find a way to stay afloat. So Qasif decided to sell the EMI business and use the proceeds from the sale to not just save, but also possibly grow Finja’s lending business.

Very quickly Finja sold the EMI wallet off to the Chinese-owned fintech company Opay, and for a moment it seemed that Qasif was pulling off yet another recovery. That is until recently. It has turned out that the deal to sell to Opay was conducted in a way that Finja is now getting substantially less money than anticipated from the deal. At the same time one of Finja’s main backers Habib Bank Limited (HBL) is putting in all the motions to pull their money out.

It seems like the attempted escape has only made things worse. Finja is fast running out of time. The only question is does Qasif have one more dazzling escape up his sleeve? For inspiration, we turn back time to some of his greatest hits.

Setting up the stage

There are three things you need before you become a startup founder. The first is self-belief. You need to know that the idea you’re bringing to the table has the legs to make it all the way. The second is a sense of fearlessness. You need to be willing to fail and take the loss on the chin.

And the last thing is guile. You need to be able to recognise when an idea is beyond its expiration point and have the ability to spin it into something else. All three are connected to each other. Without belief there can be no fearlessness and without the confidence in one’s abilities to turn things around fearlessness becomes stupidity.

Qasif proved that he had the first factor in him well before Finja was even a concept. In his career as a banker, he was responsible for launching a mobile banking application in 2012 for MCB Bank at a time when the concept was still difficult to comprehend. Qasif’s ideas and concepts were well ahead of their time in Pakistan but he believed they would work one day.

He believed enough that in 2016, along with Monis Rahman and Umer Munawar, he launched Financial Ninja popularly known as Finja — a financial technology startup. This is the part where fearlessness comes in. In 2016 Pakistan was only a few years into the 3G revolution and people were still rather hesitantly adopting debit cards and internet banking. The SBP had still not introduced any EMI licences. To announce a war on cash at the time was ambitious to put it mildly. Despite the restrictions they pulled through.

In 2017 SimSim was launched by Finja. This was a simple mobile wallet the likes of which are quite common now. The app was free to use, transactions were free and there was no charge whatsoever to either the user or to the merchant. Since there was no regulatory framework for stand-alone mobile wallets, Finja decided to introduce SimSim using the licence of a small microfinance bank called Finca. SimSim could technically offer not just free payments but also other banking solutions including small loans through the microfinance bank as well. But the focus was free and seamless payments.

The idea was to incentivise behaviour change by initially subsidising the users. For instance, a biryani vendor’s transactions were actually subsidised by offering biryani for Rs1 to customers if the customer chose Finja wallet to pay the vendor. Similar discounts were offered on many other merchants to boost the number of users that would use the Finja wallet to make payments. Another such example was the Coca Cola Food Festival in Lahore where visitors could get discounts at stalls if they used Finja wallet to pay.

But as soon as similar incentives were offered by a different wallet, the customers would move over to that wallet. In fact, the very next year, JazzCash replaced SimSim at the Coca Cola Food Festival in Lahore. Apps like EasyPaisa and JazzCash eventually dominated the market by offering similar incentives as Finja but unlike Finja, these apps could afford to keep on giving these discounts. They

had brand recognition, more resources, and a wider net to cast due to their existing network of telecom users. This eventually led to the death of the SimSim wallet.

The timing of SimSim’s launch was perhaps wrong. Detractors would call it premature. Others might be kinder and say it was ahead of its time. Whatever the case, SimSim couldn’t keep up with the heavy customer acquisition cost, and particularly the cost of changing behaviours. One could say that SimSim had done the work of preparing the field for their own competitors.

And this is where we get our first example of guile. What in the world would Finja do now?

Setting up the escape

This is often the point where many startups fail. After all, more than 90% of startups are bound to go down from the moment they are conceived. At the point that it became clear SimSim wasn’t going to be feasible, Finja had two options. The walls were closing in and everyone was watching. Either the company could make its peace and get crushed or make an escape. In 2019 it found a rope it could dangle from.

The SBP introduced the EMI regulations and Finja turned up to be one of the aspirants for the EMI licence under which it would create a wallet again. But how was this any different? The company had already tried creating a wallet in the form of SimSim at a time when EMI licences were not a thing and failed. On this occasion they wouldn’t even have first mover advantage as there were others applying for the licence too. The plan, however, was different. After all, a great magician never does the same trick twice for the same audience.

This time Finja’s wallet would serve a very different purpose. Most readers might not even know that Finja has a mobile wallet. That is specifically because it is not mass marketed to people. Qasif had learned during the SimSim experience that acquiring wallet customers was expensive and keeping them was a steep slope.

As a result of this, the wallet became secondary to the lending business. Finja already had a Non Banking Financial Company licence granted to it by the State Bank through which they could lend money. “You spend a lot of money on acquiring wallets and payment led customers. And then when anyone else offers those incentives, those customers are lost,” says Qasif.

“So that increases the customer acquisition cost but those new age digital customers are not loyal. They only arrive because you throw some money at them. So we decided that we could not do this and we would give the wallet to those customers that were in

lending business with us. The EMI was giving payment rails to the lending company.”

The goal now was not to be like SadaPay or NayaPay for instance. It was instead to lend to micro, small, and medium enterprises. For those not in the knowhow, MSMEs are vastly unbanked and provide a massive opportunity. This was a much bigger gamble than focusing on retail transactions. The wallet would just be a small part of that.

The company created different layers of technological solutions to enable smooth lending operations. The company initially started lending as salary advances to employees of different companies but discontinued it during Covid pandemic as job security became an issue. One business that wasn’t affected during Covid were the small neighbourhood grocery stores, we usually call kiryana stores. Finja pivoted to lend to these kiryana stores now.

Finja would use its Finja Business app to credit score a kiryana store for loans and disburse those loans into the EMI wallet of the store. In this arrangement, Finja would disburse a loan as a productive loan, for example by creating a credit line for merchants to buy inventory from distributors. “The loan disbursed in this form is a productive loan rather than a consumption loan. In the latter case, cash is disbursed to the merchant and it is up to the merchant to use it for whatever purpose they want to. In our case the loan could only be used to order inventory from already onboarded distributors of FMCGs” says Qasif.

On the lending side, Finja has done some impressive work: numbers shared with Profit show Finja has disbursed 200,000 such loans amounting to Rs 12 billion, and on-boarded 30,000 retailers. Its collection stands at Rs11.5 billion.

But this was only the beginning. If Finja was going to pull off the escape, they had to do more. And the next rope was just about to appear in the form of Pakistan’s Digital Banking landscape.

Gearing up to be

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come a digital bank

Since 2016, the company has raised over $25 million. Out of this total funding, $10 million came after they ditched SimSim and adopted the new model of lending to MSMEs. And perhaps nothing bolstered their confidence more than the fact that the Series A round in 2022 that raised $10 million was joined by HBL. However, Finja knew that in the long run, the present source for financing their lending operations, both equity and debt, would not be sustainable nor profitable. No source of financing is as cheap as current account deposits raised

from the public, which only a bank is allowed to do. The investment was also drying up and there would always be a limit to how much more they could raise.

Using the NBFC licence and the EMI together was only a temporary solution. The company used these as an example to demonstrate to the regulators, primarily the SBP, its ability to run not just a deposit taking business (EMI), but also a lending business targeting the under-banked MSMEs. In fact Finja wanted to now become a full fledged digital bank if it was to grow and become sustainable.

The investment and support from HBL was massive for Finja because of the timing. At least that is what Qasif thought at that time. In January 2022, the SBP announced the digital bank regulations and opened applications for the first five digital bank licences. Finja had HBL on board as an investor and the two placed a bid together for a digital banking licence. HBL is the largest bank in the country, and Finja the oldest player in the fintech space. They would have felt supremely confident that they would ride off into the sunset together with the licence.

The arrangement would have been that Finja would have been responsible for running the digital bank with Qasif as the CEO, while enjoying all the synergies that HBL lent. Qasif and Finja were on the brink of rising from the ashes. The only problem was the SBP was dragging their feet.

Dangling in the air

By 2022 Finja found itself adrift.

The company had taken a hit in 2019 when it became apparent that SimSim was not going to work out. All of that time, effort, and investment had gone to waste other than the experience they gained. With that experience, they applied for an EMI licence and quickly began lending through their NBFC licence and managed to steady the ship.

A second assist came to them when the SBP announced they were giving out five Digital Banking Licences. Backed by HBL, Finja felt that they would be a shoo-in and the licence would allow them to scale their business. The only problem was Finja was running out of time. The ropes they were clinging on to were about to break. Both entities owned by Finja, Finja Private Limited as well as Finja Lending Services Limited, were losing money each passing day.

At some point while the State Bank was still deciding the digital bank licences, Qasif admitted he did think about withdrawing from the digital bank race because Finja was taking monetary hits each day the State Bank was delaying the announcement

of digital bank licences. But he chose not to do so because he “did not want to hurt the prestige of the biggest financial bank in the country” by choosing to withdraw its bid for the licence. The patience did not pay off. When the State Bank finally announced the licences, HBL and Finja were announced as out. Reason: what Qasif assumed to be his strength had in fact turned out to be his biggest weakness. Sources say that there was a lot of pressure on the SBP not to give digital banking licences to existing banks, and that would include HBL backed Finja.

This was a massive blow. Finja had been sustaining the wallet and lending business, which were both making losses by the way, in the hopes that their course would be corrected by the digital banking licence. Now they had to manage their losses for that time period and also decide what to do next. Another escape act was needed.

“We thought we could not make payments. Neither did we get the Digital Bank licence and neither did we get the money. So our effort was to try and get rid of this licence. The moment the digital bank licences were announced, it was a crucial time consuming process.”

Just how bad are things?

So this is where we stand. Finja’s hopes have been dashed in 2022 with the announcement that they did not qualify for a Digital Banking Licence despite being backed by Pakistan’s largest bank. Before we get into the next escape effort, let’s see just how dire the situation was over at Finja.

Finja’s EMI business was not doing well and was bleeding money. Roughly $100,000 a month. For the 9-months of 2023 ending on September 31 for which financials are available with Profit , Finja had a net loss of Rs 24 crore, which translates into a monthly loss of Rs 2.7 crore or roughly $100,000 at Finja Private Limited, the company that operated the EMI business.

Even without scaling the wallet, it had horrible losses. The reason why an EMI would bleed money without any growth is because of regulatory compliances. “When you take people’s money, then you need to have such technology infrastructure and then man it with firewalls, transactions monitoring systems and all, 24 hour service, audit internal compliance which actually makes the licence worthy to get as well,” explains Qasif. “When you are spending significantly to stay compliant, then you have to scale. But then you can not do what Finja was doing. So if you are not scaling but have to bear the weight of licences, then obviously you are

going to bleed.”

The lending business was equally in a disastrous state. Finja Lending Services had also been running losses and its equity had fallen to Rs65 million only as of December 31, 2023, Rs35 million short of the Rs100 million minimum capital requirement of the NBFC license and later turned negative. More on this later.

This was mainly because interest rates had been climbing in the midst of an economic downturn and lending was becoming expensive. Finja was afraid if they started lending at these high interest rates their clients would walk away so Finja kept bearing the losses. And while the EMI wallet seemed a lost cause without a digital banking licence, even the lending company clearly needed a bailout. But this was also the time when funding had dried up and they had a choice between losing something and losing everything.

This one was less an escape really and more a case of cutting off your foot to get free from a bear trap. And the way it was happening was by selling the EMI licence and using that to fund the lending business.

The logical solution

It was a severely unsentimental decision.

Finja saw that its Digital Banking dream was dead in its tracks. Despite all they had hoped to achieve, the logical answer was to get rid of the EMI and instead focus on lending, which is where they felt the money was now at. But who would buy out the EMI licence?

Enter OPay. The Sequoia and Softbank-backed and Chinese owned OPay is a major player in the digital financial services scene in Nigeria, having scaled to over 35 million users in the African country, providing them with payments, lending, savings and investment products and services. The company already has interests in Pakistan. Through a complex corporate structure, OPay is also said to be the beneficial owner of Seedcred, the company that operates the infamous Barwaqt nano lending app, which has been a regular target of the SECP.

Sources close to OPay say that because of the success of its fintech in Nigeria, OPay believed that it could create a similar financial services ecosystem in Pakistan as well. OPay has the willingness to do it in Pakistan, has expertise and has big money to see this plan through even if it takes a while. It has raised over $550 million dollars for its global operations and was valued at $2 billion in its last round in 2021. Which is why when digital banking licences opened, OPay was one of the applicants. Albeit for different reasons, but just like Finja, they struck out

with the SBP. And just like Qasif Shahid, OPay also had a backup plan and a backup backup plan. The first idea was to buy out an existing microfinance bank as an entry into the financial services market in Pakistan. They reportedly tried buying Advans Microfinance Bank but the deal faltered. In the face of this second failure, OPay decided it was left with no option but to start operating as an EMI and launch a mobile wallet for the time being. Buying a fresh EMI licence would have taken at least two to three years. Luckily for them Finja was looking to wash their hands of their EMI.

Caught in a bad romance

The Finja-OPay romance proceeded like any relationship. The two companies were introduced through a mutual friend. The President of OPay in Pakistan is Ali Mubasher Kazmi, a former banker and an ex-colleague of Qasif from his days at MCB. Mr Kazmi also runs his own company by the name of Knightsbridge Capital. Interestingly, it was agreed between the two friends that Knightsbridge Capital would be paid a small success fee of $150,000 by Finja for arranging a meeting with the Chairman of OPay International, and also for seeing the deal through.

Like any bad romance, it initially seemed that the match was made in heaven. There was a common link in between. Finja needed money which OPay had and OPay needed a licence which Finja was in a rush to get rid of. In fact, Qasif was in such a rush to get rid of the company’s EMI that a deal was struck for a paltry $2.65 million. It was a move that reeked of desperation.

This was the stage of the relationship where one side realises the other needs them more. After all, Finja was bleeding money and $2.65 million was around the exact sum they needed to stay afloat. So despite the fact that Qasif readily admits if he had sold the EMI earlier it would have fetched a better price and a competing EMI like Sadapay selling reportedly for a minimum of $30 million, the deal was as good as done. But the cracks would soon begin to appear.

You see much like in relationships, sales are complicated affairs with lots of moving parts. In particular, the sale of tech based businesses can become a bit of a web. Just take a look at how this already very low figure of $2.65 million played out.

It is important to understand that this figure of $2.65 million of the sale was the maximum valuation of the Finja’s EMI business but not a final one. This meant that

this was the maximum amount OPay would give to Finja but not the minimum. How does this work you ask? Well, for example, during due diligence, Finja has conceded to deductions worth $457,000 under various heads such as shortfall and pending dues of Finja Private Limited. OPay had already made a partial payment of $543,000 to Finja. After accounting for these deductions, the final sum receivable from OPay came out to $1.65 million according to Finja’s calculations.

Similarly whenever financial institutions are being created or sold the State Bank has what is known as a Minimum Capital Requirement (MCR). This is a sort of safeguard. The SBP wants these institutions to have ‘Capital’ (assets minus the liabilities) worth a certain amount in case it needs to be liquidated at some point. Due to persistent losses over the years Finja Private Limited was already not quite meeting this MCR requirement. Except there was a catch here too. You see in the accounting books, technology is sometimes not counted as an asset, since it is not tangible like land and building. That means if a technology company like Finja has an app and other backend softwares, it is possible that there is no valuation for the application and it is not counted as an asset on the company’s balance sheet. This is normally not a problem but if the company is not doing well and also wants to sell itself the technology not being on the books as an asset can mess up the MCR calculation.

But there is a process to fix this. The SBP has certain conditions for it, but there is a process known as ‘tech capitalisation’ whereby a company can have its tech assets counted as assets on its balance sheet. Finja decided it would do this which would fix the MCR and OPay would then pay them the even $1.65 million in cash that had been agreed upon. The only problem was that as part of the sale agreement, it was stated that if the MCR was not met OPay would deduct that amount from what they would pay Finja for the EMI.

The romance, ladies and gentlemen, was suddenly filled with conditions. But then again Finja was in no place to find other suitors. So they got right to work on capitalising their tech. Except maybe, just perhaps, they moved a little too fast for their own good.

The technicalities

It is important to understand the timeline here. Finja and OPay had reached a deal in April 2023 whereby they would buy Finja’s EMI for $2.65 million. After all deductions, the amount still to be paid out in cash would come to $1.65 million. The only problem was that Finja did not meet the SBP’s MCR value and had to capitalise its

tech to have a healthier balance sheet.

Whenever a company has to capitalise its tech, the first thing they do is go to their auditor. Finja had not at this point released its financials for 2022 because it was already in the process of this tech capitalisation. The first step was that its auditor, which in this case was BDO Pakistan, would check if Finja’s claim for tech capitalisation meets the criteria of recognition, if expenditures were actually made and if the worth of the asset is as much as claimed. Since tech is often outdated very quickly, both the buyer and the seller in such a situation have to agree to its future usability. For future usability, Finja management would obviously respond in affirmative that the tech is usable for say 10 years. The auditor would capitalise the technology and it would be considered as an intangible asset in company accounts, leading to increased capital. But since the accounts for 2022 were audited in 2023 and the transaction with OPay had already begun, auditors would have taken into consideration OPay’s opinion about the future useful life of Finja’s intangible technology assets as well. As Profit has come to know, OPay initially declared that Finja’s technology was useful for them.

The audting process was completed in September 2023 and Finja also capitalised their tech in older financials all the way back to 2020. This tech capitalisation led to an amount of around $823,000 showing in Finja’s audited assets. The next step was for the SBP to get these accounts and approve the technology capitalization for MCR calculation. And if the auditor has capitalised it, the State Bank is unlikely to reverse it, thus ending the issue of a shortfall in MCR.

Finja now felt they were easily in a position to secure every last penny of the $1.65 million that had been agreed upon by OPay.

With everything seemingly sorted, Qasif decided he would push for an even faster deal. Up until September he still had control of the EMI and was bearing its operating costs. Originally Finja was supposed to hand over control of the EMI to OPay in March 2024 and up until then had to bear the operating costs. Tired of the continued burden, Qasif decided to hand over operational control to OPay early in October 2023.

This was a decision that would later put Finja in a fix. It meant releasing control of the P&L sooner and giving OPay the responsibility to manage expenses for a company that was bleeding money and Finja could not go on with it. It was also in OPay’s interest and they did not hesitate either in taking control of the Finja EMI because the fintech company wanted to enter the market sooner rather than later.

Control was handed over on the 2nd

of October 2023 and both Qasif and Monis resigned from the board of the EMI.

But the audited accounts for 2023 were still to be finalised. For 2023 as well, Finja in its accounts capitalised the technology and sent its accounts to BDO, the auditor. This time, however, the management that had to approve the intangible asset and its future usability is composed of people from OPay.

According to information received by Profit , now the people from OPay didn’t think that the Finja’s tech was of much use to them and therefore told the auditor that the technology did not have a useful life in the future. The consequence? The auditor does not capitalise the technology, Finja’s assets drop by $823,000, and the minimum capital requirement shortfall resurfaces. And if there is a shortfall, as per the share purchase agreement signed between OPay and Finja, any minimum capital requirement shortfall is going to be deducted from the $2.65 million price for the EMI business. Finja’s technology was valued at $823,000, potentially what OPay can deduct from payments due to Finja against the deal.

And that is where the problem really hits. Why would OPay think initially that the tech was useful for them and, therefore, let the auditors capitalise it as an asset but later retracted? One explanation is that when OPay took control of the company it was then that the technology was also handed over to OPay in Pakistan, which is controlled by OPay high-ups in China. Sources say that when OPay in China saw the technology, it was their decision that they did not consider the Finja technology useful and that they would build and use their own, hence the later retraction to the auditor. Profit has learned from credible sources that auditors have impaired company’s technology in the 2023 accounts because OPay does not think it is useful for them.

At the same time, auditor BDO capitalising tech in 2022 but not doing so in 2023 under a new management has raised questions about conflicts in auditing practices. The aforementioned instance of tech capitalisation is an example of the conflict of interest situation where an auditor is going to get its remuneration from the new management of a company it is auditing, and is therefore unlikely to confront the management that is responsible for compensating it. On the flipside, all auditors including BDO could have a perspective that whatever they do is within the accounting standards. Not only that, the auditor could reasonably argue that if the management of a company itself thinks its tech asset is impaired, who is the auditor to disagree with this?

When contacted by Profit for a com -

ment on the case, BDO declined to respond citing “client confidentiality protocols”.

The management at Finja is, however, now trying to seek support from the State Bank of Pakistan to consider its technology as capitalised, and says that the State Bank agrees with them. Opay on the other hand argues that if the State Bank recognizes Finja’s technology as capitalised, they should say it in writing. Although if the regulator decides to recognize Finja’s technology as capitalised it would supersede everyone else’s decision, the reality is the State Bank would not give a decision on this because the regulator comes later in the process. If the management, which is now controlled by OPay, does not itself want to capitalise technology and has asked the auditor to impair it, the State Bank is in no position to tell the company to capitalise it.

All of this means that the shortfall in minimum capital requirement for Finja EMI persists and clauses in the SPA would require Finja to let go of some money. It would be now up to OPay to decide how much they are willing to pay because let’s be real, they did buy Finja’s technology as part of the deal.

The lending debacle

One thing that seems certain is that the deal is going to get closed soon and Finja would most likely have to let go of some more amount from the original $2.65 million agreed. Sources close to the deal say that whatever money OPay saves from this would be pumped into the EMI business now under OPay.

What this also means is that Finja EMI would thrive but under OPay, which has big money to pump into its fintech operations globally. It would deduct the money from the transaction and use that to fulfil the MCR. It would very likely also inject more equity in the EMI and try to make it a formidable competitor for other EMIs.

But the money from the sale of EMI is doubly important for Finja whose lending business is in disarray. Finja’s shareholder, Pakistan’s biggest bank HBL which owns close to 5% of the fintech company, has asked for its money back from Finja. The bank is a debt financier for Finja’s lending operations and it also provides Finja off-balance sheet lending facility. In its public announcement, HBL announced that it had invested Rs 176 million in Finja, without full disclosures about how much was equity, how much was the rest. What we do know is that HBL has also given a separate working capital loan to Finja Lending Services, and has now served a notice to Finja for recovery of this loan.

Qasif has gone on the record to say that if he doesn’t get the complete money

as initially agreed ($2.65 million or roughly Rs75 crore) from the EMI sale including the $823,000 (Rs23 crores) for the technology, Finja Lending Services could go bankrupt.

But how did the lending business get into this mess? The respectful overtures to provide working capital to MSMEs had been a money losing business with distorted unit economics, according to a company insider.

For the year 2021, the average loan size of the company was Rs25,000 for a 30 day period on which the company charged a 2.5% service fee, yielding a revenue of Rs625 on each loan. On the other hand, the cost of debt to finance such lending on average was 21% for the year or 1.75% for a month, yielding a cost of debt of Rs 437.5 per loan.

We are using the cost of debt for this calculation because the cost of debt gives a more conservative estimate because the cost of debt is lower than the cost of equity. The overall cost of funds is a weighted average of debt and equity. Since equity is always expensive, the weighted average would always be higher than calculations based on cost of debt alone. Finja’s lending business was funded by money raised as equity as well as debt and off-balance sheet financing.

Based on numbers provided to us, Finja’s cost of loan collection was Rs140 per loan. So here we have a situation where each loan yields a net revenue of Rs 47.5. But if we also add the 1% bad debt provision on each loan, the situation changes to a negative net revenue of Rs 202.5 on each loan. Later the company raised the service fee to 3% when KIBOR went up and the average loan size increased to Rs 30,000 which still led to the company losing money on each loan after provisioning of bad debt.

The company’s financials testify to this. As per the financials available with Profit , Finja Lending Services booked a loss of Rs 11.6 crore for a roughly 14-month period from October end 2019 to December 2020. For the complete year 2021, net loss of the company was Rs 17.8 crore.

In the month of January 2024 alone, Finja Lending Services booked a loss of Rs13.7 crore. The total accumulated losses at Finja’s lending business since its inception till January 2024 have been a whopping Rs91 crore.

In conversation with Profit , Qasif has acknowledged that his company did not act quickly in bringing efficiencies in face of a high interest rate environment, which led to this situation.

As of December 2023, the equity of Finja Lending Services had dropped to Rs6.5 crore, Rs 3.5 crore short of the Rs10 crore minimum capital requirement for NBFC licence holders, according to a correspondence between Finja

and the Securities and Exchange Commission of Pakistan, seen by Profit

Finja assured the SECP that its MCR requirements for Finja Lending Services would be met after receiving the rest of the payment from OPay. Further it also informed SECP that Finja Lending Services is also in the process of capitalizing its tech assets with an anticipated value of $2.5 million. “Upon completion, this amount will be added to our paid-up capital, resulting in a net equity exceeding Rs1.3 billion,” the company stated.

All this is good but for now, Finja Lending Services’ accounts for January 2024 show that its equity has turned a negative Rs85 million, making the company technically insolvent. Meanwhile, Finja has issued a press release against OPay, highlighting that payments are due from their side, effectively taking the fight public. OPay responded in kind with their press release claiming they will not give a penny more than what is due. In fact, OPay has not even released the approximately $700,000 due besides the disputed tech capitalisation amount from the total $1.65 million. Evidently, OPay has played a very smart game, some would even call their style of play evil, and even now they are holding all the aces in this fight.

Saving Finja

So while this would be the end of the EMI business for Finja, it would also cast a shadow on Finja Lending Services, possibly leading to a complete shutdown. Qasif tells Profit that he wants to continue the lending business but the current situation doesn’t allow him to do so.

What this means is that Finja Lending Services would also be scrambling for survival. Any other avenue of raising money for Finja Lending Services is shut. But Qasif does say that if the weight of the EMI business is shed, there’s a chance. And the company has a lifeline for the lending business is the P2P (peer-to-peer) lending licence under which Finja can crowdfund money from individuals and institutions and lend it out. After successfully graduating from the pilot program, Finja says that under this licence it has been able to lend Rs1.5 billion to 7,000-8,000 customers to whom 25,000 loans have already been disbursed. As much as 500 individuals and institutions have invested in Finja under this licence. Finja is the only company that has uptil now received such P2P license in Pakistan.

At the same time Qasif is on the move and focusing on consolidation as a means to survive, talking to other startups to merge or get acquired. The money from the sale of the EMI would only give it breathing space till

this consolidation is achieved. Finja is talking with other players for cross industry mergers, for instance with logistics companies to create a hybrid of logistics and fintech, a concept initially launched in Pakistan by PostEx. PostEx’s fintech unit provides invoice factoring to eCommerce merchants and its logistics unit does the deliveries for these merchants. Following the model of PostEx, Abhi Finance acquired BlueEx.

Finja also thinks the hybrid of logistics and fintech is impressive and is exploring a consolidation that leads to a similar model. But the dire situation at Finja would perhaps force it to get into any model.

“Once we have concluded the OPay transaction and become a clean lending company which has some money and is at a break even, from that position we will consolidate cross industry, whether old school or new school so that we grow in that configuration,” Qasif says.

“Our P2P licence can be used as a platform that can initiate collaborations with startups in other sectors. If a startup is for instance a logistics company, Finja can bring them on the P2P platform and whoever wants to invest in this logistics company they can do that based on our rating for the company,” Qasif said.

The process of negotiations for this arrangement has already started with logistics companies, with Trax being one logistics company that Finja is exploring this consolidation with. If none of this materialises, Finja might have to sell its lending business and the P2P licence. In fact a source has told Profit that OPay has offered to pay Finja’s tech capitalisation amount if Finja throws in its P2P licence as a freebie in the deal.

We started our story with Houdini. How the great illusionist spent decades escaping outrageous situations until one wrong move led to his death. The thing about taking risks, however, is that you can truly be out for the count at any moment but you can also get up again. Finja and Qasif Shahid have proven time and again that little has stopped them.

The company went through SimSim before trying to become a Digital Bank “Light” and then eventually a full Digital Bank. All of their efforts failed. When there was no option left, they tried selling off a big part of their original business and found problems in that process as well. At every stage it has seemed like it might be curtains for Finja, and it has seemed likelier every single time. Will this be the end? Or will we see another miraculous escape? After all, it isn’t quite miraculous if it didn’t seem hopeless, is it?

Editing credits: Babar Nizami and Abdullah Niazi n

Omar Farooq OPINION

Value Trapped!

Will high inflation turn the tables in favour of local brands?

Global brands have long been considered superior to home-grown brands or private labels.

These brands have been commanding price premiums above local options to sustain their bulky business models involving state of the art manufacturing, imported ingredients and big brand budgets. For these big multinationals delivering the requisite return on investment, year on year basis is an axiom without consideration for long-term implications. But have the tables been turned in favour of the local brands?

Have Pakistani consumers begun to see local brands equivalent to multinational brands in quality? Do multinationals need to think beyond the bottom-line and build their foreign-yet-local credentials to sail through 2024?

The ability to charge a premium has always been a question at the heart of all brand studies. Brands tend to take price increases based on their equity or the percentage inflation that year. Last year most FMCGs companies posted a double digit increase in value through price increase. This price increase was mainly a function of inflation causing a shift in the baseline for ability to charge premium for a brand. Consumers remained on the receiving

The writer is a marketing professional

end of this change, and since this increase was propelled by inflation and brand equity, we saw some dramatic shifts in their purchasing habits.

For most FMCG companies 2023 was a difficult year all around, starting from political unrest to the highest ever inflation recorded in the history of Pakistan. Depleting foreign reserves in a dollar-strapped economy and the government’s overall outlook on the imports kept companies jittery about the future pricing strategy. We came very close to an economic default, or defaulted and never knew about it according to some economic experts. Just to put things into perspective we became the 17th most expensive economy to live in on the list of 190 countries. That caused a major shift in how organisation operated too, especially from the companies that had raw material sourced from outside Pakistan. Their problems varied from sharp price increases to potentially more threatening questions. The one on the top of the list was, will they be able to sustain production if the hold on opening (Letter of Credit) LCs continued during FY 23?

In a normal year a 10% price increase coupled with some de-grammage on the low-priced SKUs would require a lot of research and different pricing scenarios played out. Followed by a begrudgingly taken decision to increase the price with a compromised topline. Not this time however! The chaos for the most part was managed through bulk buying in the beginning of the year, followed by a sharp increase in prices in Q1 & Q2 as the dollar domino impact continued. What did that mean for the FMCG overall? We saw a massive increase of 36% in price, which includes your food and non-food sectors. Normally an increase of 10-15% is a good benchmark in terms of price increase. If this massive price increase was not enough, it was paired with multiple de-grammages throughout the year to maintain a profitable outlook for the business. We will get to what it meant for the consumer in a little bit, but what it meant for most companies will make for a very interesting case study.

For the giant manufacturers of categories like tea, personal hygiene, and homecare their volumetric sales took a steep decline. The bottom line is, however, an entirely different affair. They have posted a 25-30% increase in their bottom line, this value increase, however, comes at a cost. The trend seems to follow throughout the FMCG industry regardless of the nature of business baring few categories.

This followed a spiralling maze of price discounts and promotions to ease the price increase, while some brands chose to talk more about the message of value for money. One of the

badly hit categories by this ongoing situation is packaged masala and frozen food.

In both the categories we witnessed an increased advertising airtime, to increase TOM around the value for money message. Many companies launched new price sensitive SKUs to keep their brand relevant. However, which one of these approaches will work is yet to be seen. But one thing remains clear, understanding consumer behaviour and a quick response has become a key to success in these trying times.

Now let’s get to how all of this has changed consumer behaviour. Households that did monthly groceries are now shopping weekly to manage their budget. The ones who were buying weekly have now moved to daily buying. The consumer is in constant war to manage her budget while making the best choices for her family. Contrary to the common belief, research shows that rather than switching brands consumers look for value for money and settle for a somewhat good brand

with a slightly lower price rather than choosing the one that’s the cheapest.

The advertisers attempted to capture consumers’ attention mainly through two messages in their communication 1) value for money 2) low priced recruiting packs. Another topic that came to the forefront in 2023 was made in Pakistan. It became a big issue for the soft drink & the fast-food chains in the fall out of boycotting foreign brands. Multiple ad-hoc research has indicated a negative impact of ongoing Palestine-Israel conflict on the overall foreign brand association.

While Q1 of FY 24 looks heavily loaded with advertising budget for most brands, the larger question remains whether they will be able to grow topline. And whether they will get lucky, and meet last year’s bottom line, especially for multinationals that have posted yearly results of highest profit ever. Given that an increase in the dollar rate is inevitable in Q2 of FY 24 there will be another round of price increases. This will further have an impact on

the low and mid-priced portfolio of businesses. Because after a certain point, the consumer’s willingness to spend more, plummets for the same quantity especially for middle income households. What we know from similar markets as Pakistan, is that during inflation the middle-income household downgrades to the value segment for a mid-range product. Whereas upper middle-class moves to the premium segment if they see a price increase in the mid-range products because they see more value in it. Regardless of how the market reacts to the new onslaught of economic changes, it will be interesting to see how H1 pans out for Pakistan’s FMCG companies.

Whereas upper middle-class moves to the premium segment if they see a price increase in the mid-range products because they see more value in it. Regardless of how the market reacts to the new onslaught of economic changes, it will be interesting to see how H1 pans out for Pakistan’s FMCG companies. n

Is the banking sector worse off after the recent macroeconomic developments?

The expectation of monetary easing not materializing is likely to put pressure on commercial banks’ interest margins

By Ahtasam Ahmad and Mariam Umar

The ongoing week has been an eventful period for the country, with major economic developments keeping analysts glued to their screens. It commenced with the State Bank of Pakistan (SBP) announcing its decision to maintain the policy rate at a record high of 22% for the sixth consecutive time.

Following this announcement, the markets welcomed the news of the country reporting a current account surplus of $128 million for February 2024. The improvement in the current account position can be largely attributed to the ongoing demand suppression measures implemented over the past several months.

However, the highlight of the week occurred the next day, with Pakistan and the IMF reaching a Staff-Level Agreement on the second and final review of the 9-month Stand-By Arrangement (SBA).

The sequence of events effectively encapsulates the economic strategy anticipated for the upcoming fiscal year. The approach prioritises fiscal consolidation and demand compression to safeguard reserves, complemented by a prudent monetary policy aimed at controlling inflation. These measures align with the roadmap to stability outlined by the Fund, albeit entailing increased austerity measures.

However, we will refrain from commenting on the ramifications of these policies on the macroeconomic outlook for the country, at least not in this article. What we are more interest-

ed in is the fallout of the monetary and fiscal position for Pakistan’s glorified hedge funds aka commercial banks.

“Banking” on a cut

Profit, over the past month, has extensively covered how banks and financial institutions have benefited from the advantageous repo borrowings available through the SBP. However, the predicament facing banks is that the borrowings used to invest in government securities are now proving to be a costly endeavour.

The cost of borrowing and the interest paid on deposits held with banks are linked to the policy rate. On the other hand, returns on banking assets; investments and advances, are influenced by secondary market sentiments, as demonstrated by the Karachi Interbank Offered Rate (KIBOR) and the secondary market yields on T-bills and PIBs.

“Higher interest rates typically benefit the banking sector, where the same was witnessed during 2023 with record-high core income and profitability reported by the sector, despite high

inflation and 50% tax rate. The ongoing drop in yields, secondary market yields and KIBOR, would impact revenue from banking assets. On the other hand, as in Pakistan, the savings deposit rates and the borrowing rates are pegged to the policy rate, the banking sector’s cost of funds would remain unchanged. This would result in contraction of core income from the first quarter of 2024, till the monetary easing cycle initiates and reduces cost of funds,” explains Amreen Soorani, Head of Research at JS Global Capital, in her post-MPC analyst note.

This means that the longer the rate cut is delayed, the more would the banks suffer in terms of their profitability.

Reiterating similar concerns, Mustafa Pasha, Chief investment officer at Lakson Investments, pointed out: “The issue with banks lies in the mismatch between their assets and liabilities. He highlighted the negative spread resulting from borrowing at 22% through OMOs and investing in treasury bills at 20.5% or 21%. This negative spread, ranging from 0.5% to 1%, could have a significant impact on their earnings per share (EPS) depending on the size of the repo position. If the

If the risks highlighted by the MPC statement materialise and the policy rate remains unchanged for the fiscal year, the banking sector could face some challenges. Increased inflation stemming from IMF demands for tax hikes, energy sector reforms driving up energy prices, and external factors like fluctuations in global oil prices could elevate borrowing costs for consumers and businesses, potentially leading to higher defaults on loans and eroding the asset quality

Saad Hanif, deputy head of research at Ismail Iqbal Securities

With the yield curve downward sloping, rates are anticipated to decrease later in the year, possibly beginning around budget time. If the high policy rate prevails, it bodes well for the banking sector, which is projected to perform exceptionally. High-interest rates typically limit private sector activities, but being the primary client of the banking sector, the government is less affected by interest rate fluctuations. Consequently, the banking sector is expected to achieve record profits once more

Naveen

Ahmed,

an investment banker and a development consultant

rate cut is further delayed, banks may face greater losses on their profit and loss statements.”

However, the issues are not confined solely to the investment book but also extend to the loan book of the sector. Recent reports indicate that the corporate clients of commercial banks are experiencing the impact of the record-high policy rate. Prominent sectors affected include textile (particularly spinning and weaving), steel rebar manufacturers, and poultry feed mill businesses. The concern for these sectors is not only the high financing costs but also the fact that demand-suppression measures, as mentioned earlier, have significantly impacted their revenues.

Resultantly, a deteriorating loan book and negative spreads on investments could pose a double whammy for commercial banks if interest rates do not decline soon.

“If the risks highlighted by the MPC statement materialise and the policy rate remains unchanged for the fiscal year, the banking sector could face some challenges. Increased inflation stemming from IMF demands for tax hikes, energy sector reforms driving up energy prices, and external factors like fluctuations in global oil prices could elevate borrowing costs for consumers and businesses, potentially leading to higher defaults on loans and eroding the asset quality,” remarked Saad Hanif, deputy head of research at Ismail Iqbal Securities.

Downside risks remain

The risks Hanif is referring to cannot be underplayed. The recent MPC meeting and the governor’s responses during the briefing session further emphasise that the confidence expressed in January regarding the erosion of price pressures has diminished considerably.

Further, external conditions including global oil prices and high interest rates being maintained by Western central banks also do not present a strong case for a rate cut currently.

US officials on Thursday, as reported

by Bloomberg, reached a unanimous decision to maintain the benchmark federal funds rate within a range of 5.25% to 5.5%, marking the highest level since 2001, for the fifth consecutive meeting. The US Federal Reserve also adjusted its estimate to three reductions expected in 2024, down from the four cuts forecasted back in December according to the median projection.

As per the global news agency, the Fed’s post-meeting statement closely mirrored that of January’s, reiterating that rate adjustments will not be considered until officials are more confident that inflation is effectively progressing towards the 2% target.

This also leads us to the third and probably the biggest impediment for a monetary easing cycle. In the chain of events explained at the beginning of this article, we described how the sequence perfectly sums up Pakistan’s economic predicament. The last of those events was the completion of the IMF review.

Customary to every review is the Fund issuing a press release on the completion. Two noteworthy statements in the recent press release were: (i) restoring the energy sector’s viability by accelerating cost-reducing reforms including through improving electricity transmission and distribution, moving captive power demand to the electricity grid, strengthening distribution company governance and management, and undertaking effective anti-theft efforts; (ii) returning inflation to target, with a deeper and more transparent flexible foreign exchange market supporting external rebalancing and the rebuilding of foreign reserves.

These statements underscore the ongoing challenges in the energy sector, implying that addressing circular debt would lead to upward revisions of energy tariffs by the government. Additionally, the SBP may adopt a more cautious approach towards monetary easing to align with the Fund’s objectives as the country.

However, analysts are of the opinion that when it comes to a rate cut, we are almost there.

“The chances for the policy rate remaining unchanged are very low. There are two upcoming MPC meetings scheduled in the current fiscal year 2024: April 29 and June 10 and the street consensus suggests a total of 400 bps cut by the end of calendar year 2024,” remarked Nida Gulzar Siddiqui, Economist at Ktrade.

Naveen Ahmed, an investment banker and a development consultant from Karachi also shared a similar opinion. “With the yield curve downward sloping, rates are anticipated to decrease later in the year, possibly beginning around budget time. If the high policy rate prevails, it bodes well for the banking sector, which is projected to perform exceptionally. High-interest rates typically limit private sector activities, but being the primary client of the banking sector, the government is less affected by interest rate fluctuations. Consequently, the banking sector is expected to achieve record profits once more.”

It remains to be seen if the predictions about the policy rate will materialise, but it is safe to say that there could be some anxious individuals in the banking treasuries hoping the central bank sticks to its forward guidance. n