CONTENTS
11 11 News in Numbers 13 Tania Aidrus’s big bet on creating a Digital Pakistan 18 Shaukat Yusufzai was (kind of) right. But the BRT is still a disaster. 20 How to grow a Big Five bank: the case of ABL
28 28 Project management: a job that is unlikely to be automated away 32 Could locally produced cheese make a dent on Pakistan’s imports? 35 Middle market banks continue aggressive expansion spree
36 36 Gul Ahmed’s pivot towards retail hits a slowdown 38 How valuable is your bureaucracy? Nadeemul Haque 41 For the stock market, the worst may be over, but the recovery is not here yet
welcome
Are the banks being lazy?
...or - plot twist - being responsible? Lending to the government is not banking, Allied Bank Limited Chairman, Naeem Mukhtar told me over food at a family wedding in Lahore some years ago. It is the private sector that he’d want to lend to. You know, real banking. Years later, when going over ABL’s balance sheets for this issue’s cover story on the bank, I found its lending profile was still government-heavy. So they’ve finally settled in for lazy banking, then? Well, that’s debatable, actually. It’s been a long slog at Number Five for the bank, ever since it was nationalized in 1974. Though it might not have improved its position within Pakistani banking sector’s Big Five, none of the others have changed their positions either, barring Habib Bank Limited, which, at the culmination of a long arc, has finally bested National Bank of Pakistan. Since our cover story looks at ABL’s deposits side in great detail, it would be better to use this space to look at the lending side of the banking equation. Pakistani banks have been criticised since a while now for being lazy lenders. Why roll up their sleeves and get into the grind of evaluating risks of credit seekers when the biggest, and safest, borrower, always wants more money to borrow? Talking about the government here, of course, which, because of newer IMF conditions, has to shift even more of its borrowing to the private banking sector. But why shouldn’t the banks lend to the government? Where else should it lend its money? Consider consumer credit: because of the increasing mark up rates and low economic growth, banks that
were aggressive in their lending on the consumer side have been seeing ever increasing instances of loan defaults. Well, what about that other segment, oft-cited as a real growth market, that could even serve as an impetus of growth of the economy as a whole as well: the small and medium enterprises? Well, the idea of lending to the SMEs is alluring, granted. But it is only when the banks want to take a look at the books that it becomes clear why the segment doesn’t have a larger share in banks’ lending profile. For starters, there aren’t many ‘books’ to begin with. The general culture of informality regarding paperwork in the country is such that even God-fearing, honest small businessmen don’t have their complete (and correct) accounting, control and monitoring data. And in case of defaults, getting one's money back is difficult, with a torpid judiciary moving at a glacial speed and lawyers specialising specifically in dragging out cases over decades. Banks aren’t like other businesses. They are working on other people’s money. Yes, all businesses operate on OPM, but in the case of the banking sector, it is essentially the depositors’ money, not the investors’, that is being leveraged. For religious reasons, many depositors in Pakistan don’t even want interest. The least that the banks could do is keep their money safe. Having a governmentheavy lending profile isn’t merely the lazy approach. Till the legal and economic policy frameworks change, I am afraid it might just be the responsible approach.
Babar Nizami
ExecutiveEditor
Executive Editor: Babar Nizami l Managing Editor: Farooq Tirmizi l Joint Editor: Yousaf Nizami Reporters: Syeda Masooma l Taimoor Hassan l Abdullah Niazi l Meiryum Ali Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) Zulfiqar Butt (Lhr) l Mudassir Iqbal (Isl) l Layout: Rizwan Ahmad l Photographers: Zubair Mehfooz & Imran Gillani l Publishing Editor: Arif Nizami l Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk
FROM THE ExEcuTivE EDiTOR
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News IN NUMBERS
Inflation expectations are an important macroeconomic indicator that the State Bank of Pakistan has only recently begun to measure, which means that it is difficult, if not impossible to understand the impact that such expectations have had on the Pakistani economy. But it is undeniable that the level of inflation that people expect influences their economic decision-making, which in turn influences the wider economy. At Profit, we decided to use a proxy to measure what we think inflation expectations might have been historically, by looking at the rolling 10-year averages of inflation rates in Pakistan. What we reveal are two things: a clear sense of both the length and timings of Pakistan’s business cycles, and how economic expansions tend to drive down expectations of inflation and recessions increase them. All of this, of course, assumes that historical inflation averages are a reasonable proxy for inflation expectations, which they may well not be.
One of the most well-established – and intuitive – concepts in macroeconomics is the extent to which economic growth is tied to levels of investment in an economy. This chart illustrates the extent to which growth in gross domestic product (GDP) is correlated with investments in the economy, measured as a percentage of GDP. The data states the obvious: more investment results in higher economic growth. When we conducted a simple, single-variable linear regression, the relationship is even more clearly established. A regression between investment as a percentage of GDP and two-year lagged GDP growth rates results in a relatively strong coefficient of determination (0.24). But a more important insight is achieved when one sets the intercept of the linear equation thus derived to zero: that the average rupee invested in Pakistan has a rate of return of approximately 28%, which – even after accounting for Pakistan’s relatively high inflation rates – is a very respectable rate of return.
11
I
By Meiryum Ali
t started, as things often do in Pakistan, with a WhatsApp forward. On Thursday, December 5, a group of Pakistanis living in Singapore received a WhatsApp message from one of their fellow expats: Tania Aidrus. It was a link to the official YouTube channel of the Prime Minister’s Office Pakistan. At 5pm PKT, the Prime Minister was expected to deliver a speech on and inaugurate the ‘Digital Pakistan’ ceremony in Islamabad. ‘Folks, watch this space’, the message read. That link spread to others in the Pakistani diaspora, to tech people, bankers back home, and even the ‘Uncle’ WhatsApp groups in Pakistan. Shortly before 5pm, news channels in Pakistan began asking: who is Tania Aidrus? What’s the prime minister calling her on board for? Clad in a formal maroon shalwar kameez, Tania Aidrus delivered a 13-minute speech on her vision for a digital Pakistan in front of the who’s who of the state: the Prime Minister, the State Bank Governor, even de facto Punjab Chief Minister Jahangir Khan Tareen (yes, we know technically it’s Usman Buzdar, but come on… who are we kidding here?). That speech was almost designed to be viral. It had all the right ingredients to be blasted on TV
TECHNOLOGY
13
and forwarded again on Whatsapp: woman, expat, Google, Naya Pakistan. Seemingly overnight Tania Aidrus went from a competent but definitely unknown Google employee, to a public figure and the chosen messiah for Naya Pakistan’s digital vision. There isn’t much on her – ironically for someone leading the digital initiative, her own digital footprint is quite small. By her own account, she does not use Instagram or Facebook, is only really active on LinkedIn, and rarely tweets: she tweeted 12 times in 2018, and 8 times in 2019 prior to December 5. That has all changed. She has now amassed over 60,000 followers on Twitter. People online are debating everything about her: from her Urdu, to her resume, to even what is up with that weird spelling of her last name. So who is she – and can she deliver on what she has promised?
Aidrus who?
T
ania Aidrus is, in her own words, a “Pakistani at heart” first and foremost. “I am here for something very specific. I believe in the absolute potential of this country and its people,” she says in an interview with Profit. A native of Karachi, she completed a Bachelors in Science from Brandeis University in the United States, and holds an MBA from the MIT Sloan School of Management. This is not the first time she’s worked with a government: previously she consulted for the US government, and Fortune 500 companies at her job at the consulting firm Booz Allen Hamilton in the suburbs of Washington DC. She also co-founded ClickDiagnostics, a startup that helped connect rural patients in emerging markets to doctors globally. She then made the pivotal shift to Google in 2008, working in the Global Business Organization at Google in the United States, and then 7 years ago, switched to Singapore. It was in Singapore where Tania could finally concentrate on matters a little closer to home. She was in a unique role as the Country Manager for South Asia Frontier Markets, which allowed her to focus on Pakistan. Her responsibilities included expanding the internet ecosystem, production adoption amongst consumers and accelerating innovation. Google Singapore, as indeed most tech offices indeed around the world, has few Pakistanis. There are no special or controversial reasons for this, just perhaps a smaller pool of talent to choose from than other countries. The effect of this is that while few in number, Pakistanis in the tech space abroad are a close-knit bunch. While Profit could not print comments from current Google employees due to contractual obligations, it can definitely
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“Governments must rework regulations, define technical standards and protocols, invest in technology, and align financial institutions with the needs of merchants of — in particular small businesses — and consumers to deliver a trustworthy system that can drive innovation and growth” Google white paper on digital payments be said that Tania is considered somewhat of a leader among her peers, and there is widespread admiration for her executive vision. She eventually rose to the position of Chief of Staff and Head of Strategic Initiatives on the Next Billion Users (NBU) team at Google. The NBU team focuses on helping build new products and services which address emerging trends and the needs of users in growth markets. One of her roles was also to help launch Google Pay in India, formerly known as Tez. “I have been at Google for over a decade but the past three years I’ve been working on the Next Billion Users team with a focus on payments,” Tania explains. “I also spent time understanding digital infrastructure in countries and how countries have made the leap from cash to digital economies.” It was around this time last year that a member of the PM reform team cold emailed her asking her about a potential role in the Pakistani government. This led to a back and forth over a period of months, involving phone calls and trips to Islamabad, and also included meetings with Jahangir Khan Tareen and the prime minister himself, culminating in that speech on national TV.
The Digital Initiative
I
n her speech at the Digital Pakistan event, Tania spoke about five pillars that need centrally-planned strategies to enable innovation. Tania spoke about the first pillar, access and connectivity, as the greatest democratising force of our times, stressing that ‘roti, kapra, makan’ in our times needs to be revised to ‘roti, kapra, makan, aur internet.’ Coming to the second pillar, Tania emphasised that Pakistan already has the foundations for a digital infrastructure with NADRA, under which the entire country’s biometric information exists as a government database. Aidrus spoke of the potential to use NADRA to link services across sectors and build public goods such as payment systems, on which private players could then come innovate. On the third pillar, Tania focused on pro-
curement – of which the Pakistani government yearly does Rs3 billion worth, almost entirely on paper – emphasising just how much Pakistan would have to gain by digitising this process. Her fourth pillar emphasized preparing the future generation for transitions, saying, “our children are not ready to participate in the digital economy.” Finally her fifth pillar – Tania spoke of the need to create a comfortable environment for investors to invest, making it easy for small startups to open, set up accounts and access money when they need to in order to scale up. The speech was an interesting combination of Pakistani patriotism, Silicon Valley optimism and old-fashioned corniness (i.e., the ‘Siachen Jawan without internet’ made an appearance). But some mild military pandering aside, it was easy to appreciate what Tania is trying to do. In a country that thinks digital means an increase in the number of computers, she is instead trying to forge a digital narrative in a Pakistani context at a national scale. The question she is asking us to consider is this: what does a digital Pakistan even look like?
Digital Pakistan
T
here are two ways of answering that question: the slightly abstract national long-term pivot required, and the more tangible tools that Pakistan has, or will have, at its disposal. To the first point: Digitally speaking, Pakistan is not really a unique country. What’s applicable in India, Indonesia, Thailand, or the Philippines is just as applicable in Pakistan too. Pakistanis in the tech world have some gripes: essentially that Pakistanis themselves are so caught up in the narrative of Pakistan being unique in its problems. Those problems are often geopolitical: say Afghanistan-Pakistan relations, the Middle East, Iran, etc. Why is this relevant? It's such a common narrative that we forget that instead of looking at the west at our problems, we could look east at what a potential future could look like. People in the tech world confirm this view, with some saying while there was a lot of
interest in Pakistan as potential market, it was difficult to disassociate Pakistan from these dominant geopolitical narratives. And even when foreign companies are genuinely interested in the country, they are often lost, and rely on a government narrative to guide them. The problem is the current government, and the governments before it, also have not been able to provide that narrative themselves. When is the last time you heard a Pakistani government official talk about what we could learn from Southeast Asian countries? Tania, in her speech, actually addresses that head on, saying “Pakistan is now where Indonesia was 8-9 years ago. In the last decade, 5-billion-dollar-plus companies have been created in Indonesia. There is no reason that 5-billion-dollar-plus companies can’t be created in Pakistan in the next five years.” And yet, the development model that persists in the popular Pakistani imagination is either Dubai (obscene wealth) or some place in the West, like London (colonised wishful thinking). What is required is instead a radical shift in reimagining a digital future. Especially when it comes to digital transformation, many trends are similar across emerging markets. You see the same tech companies popping up in Asia, Africa and Latin America: ride sharing, democratizing transport, ecommerce, digital wallets. (Pakistan has: Uber/Careem, Airlift/SWVL, Daraaz, Easypaisa/Jazzcash). That long-term digital future will also include tough conversations about what it means to be a digital citizen. In India, Aadhaar, introduced in 2009, is often touted as a model for biometric tagging, that has has helped digitize the country. Aadhaar has also faced vehement opposition in the years from citizens concerned about data privacy, now that companies have
LOW PENETRATION
21.3%
The proportion of all adults in Pakistan who own a transaction account of any kind, of which only 7% are held by females
access to sensitive citizen data (with companies not accountable the way a government is). That conversation in the public imagination about such a system’s adoption does not yet exist in Pakistan. That is despite the fact that Pakistan already has an identification system in place, which it in fact introduced nearly 20 years prior: NADRA. It is just that till now, no one in the government or tech sector – or indeed someone in NADRA itself – has considered the implications of NADRA or how to best integrate it with the existing banking and fintech structure, healthcare, or education. It is when those conversations happen that Pakistan will have moved beyond its current nascent stage in digitization. A digital Pakistan does not just mean an influx of apps, or internet connectivity – it is about creating a fair and free digital economy in Pakistan, where everyone is cognizant of their rights as a digital citizen. To the second point about tools at our disposal: It has been an interesting few months in the digitization space in Pakistan. Though this initiative was launched in December, earlier in November the State Bank of Pakistan launched the National Payments Systems Strategy. To understand what that means, it actually helps to look across the border at India's UPI, or the Unified Payments Interface system. Coincidentally, Tania worked on Tez (now Google Pay) in India at her time during Google, which works off of the UPI system. The UPI is a form of a Real Time Payments (RTP) system, which is one that facilitates bank-to-bank transactions at low cost. As per a November 2019 white paper from Google, creating an RTP is actually pretty difficult. “Governments must rework regulations,
POTENTIAL FOR GROWTH
69.3 MILLION
The number of adults whom, the State Bank of Pakistan believes, can be provided with transaction accounts with the implementation of its new payment system, by 2025
define technical standards and protocols, invest in technology, and align financial institutions with the needs of merchants of — in particular small businesses — and consumers to deliver a trustworthy system that can drive innovation and growth.” the paper says. But it is worth it. The paper cites the statistic that a cashless model adds more than 3 percentage points to the annual GDP of emerging economies. According to Google, at least 54 countries have rolled out RTP systems, and by 2020, that number is projected to grow to 70. In India, the UPI was introduced in 2016. This created the foundation on top of which a digital economy can be fostered and thrive. It was wildly successful, with an eightfold increase in transaction volumes in 2019. In fact, by 2025, digital transactions in India could be worth $1 trillion annually. This is the kind of success that the State Bank of Pakistan is considering mimicking. As per the SBP report, Pakistan’s stats are abysmal: in 2019, only 21.3% of all adults in Pakistan own a transaction account, of which only 7% are held by females. And cash continues to dominate the economy as it is considered “safe” by almost all the retailers and suppliers. Pakistan already has an existing RTP: 1Link. But 1Link was made and is managed by banks, and their primary motive is profit. Instead, the SBP is planning on making a seperate, coexisting RTP, with the underlying premise not profit but financial inclusion. That RTP is the Micro Payment Gateway for branchless banking transactions. According to the SBP report, “By expanding the market and the legal/regulatory environment, approximately 69.3 million adults can be provided with transaction accounts, while an additional 9.2 million adults can obtain
BOOSTING GROWTH
7%
The amount by which the SBP believes the total size of the Pakistani economy can be boosted with the implementation of the new system, by 2025
TECHNOLOGY
“Pakistan is now where Indonesia was 8-9 years ago. In the last decade, 5-billion-dollar-plus companies have been created in Indonesia. There is no reason that 5-billion-dollar-plus companies can’t be created in Pakistan in the next five years” Tania Aidrus, head of the government’s Digital Pakistan Initiative access to transaction accounts through the implementation of a financial inclusion strategy in Pakistan.” This is in turn (or so the SBP hopes) will “boost Pakistan’s GDP by 7%, creating 4 million jobs, resulting in $263 billion in new deposits, representing a potential market of $36 billion, all by 2025.” That is one potential future. However, the real question is how will the SBP and Tania collaborate? The State Bank’s job is to provide the RTP – it is Tania’s job to figure out how to link it and connect it to her goals.
So why now?
S
peaking to Tania, one is instantly aware of how committed she is. “Technology and Pakistan have always been a passion, and I feel like in the last couple of years, a lot of the pieces in the ecosystem have really come together. The country is really poised for phenomenal growth,” she says, adding, “Every sector has a role to play. The government's role is to facilitate that growth.” Another important point to consider is how much of being an expat matters. When she referred to expat and diaspora talent in her speech, the camera panned Dr Reza Baqir – another highly educated Pakistani now working
INCREASED EMPLOYMENT
RISING DEPOSITS
4
$263
The number of new jobs that the SBP believes can be created with the implementation of the new system, by 2025
Amount in new deposits that the SBP believes can be generated for the nation’s financial system through the financial inclusion strategy, by 2025
MILLION
16
in his home country. When asked why she came back now, she replies: “To be honest, would have I considered it earlier? Maybe not?” “With this government, I felt that there was a desire to engage Pakistanis like me. There was a willingness at every level. I also genuinely feel that this government cares about the future of every Pakistani and wants to do something for the average person, not the select few. That deeply resonates with me. That has to be the starting point when you begin with anything.” “The PM has seen the power of technology in driving transparency, accountability and efficiency in the hospital he built, Shaukat Khanum, and he knows about the transformative power [of technology]” Does it all sound explicitly pro-PTI? Tania is extremely clear in stating that creating a digital Pakistan is beyond party lines. “This is not a one-woman or one-man show… And we can’t change things overnight, but I am clear on what we need to do and what I can bring to the table.” What the ruling Pakistan Tehrik-e-Insaf (PTI) had managed to do, however, is create excitement among the diaspora – and it is important to not that this government, while perceived very differently in some quarters of
BILLION
this country, still carries massive weight among its supporters abroad. Tania says she has received not hundreds, but thousands of resumes from all over the world since her speech “...and it’s just day 3”.
The future
S
o what is next in the future for Tania? For one, she plans on visiting a lot of cities across Pakistan. She consistently reiterated that she wants to build an inclusive model, and one in which all provinces are equally paid attention to. “It’s really important to get a pulse of the entire country, not just the big three cities,” she says. Secondly, she plans on building up her team. Currently, the team is made up of around 3-4 people, and is essentially the PM reform team that brought her on to begin with. “We have to first identify the right type of people – passionate, driven and incorruptible and have to identify the kind of structure we want to create that will allow us to execute nimbly. We have to identify the key stakeholders in those 5 pillars. There has to be a 3-month and 6-month plan before we can develop longer term roadmaps for each of the pillars that we will be working on.” Tania says. She also hopes that her future team not only features representation across genders, but also to be socioeconomic classes: “you can’t solve problems for every Pakistani without having people who can relate to those problems.” And third, Tania and her future team will hope to introduce the digital version of fireside chat: a monthly live-stream where she shares what her and team have been up to, and what her thoughts are moving forward. But for now, Tania says she wants to be able to ‘put her head down’ for the next 3 to 6 months to be able to work efficiently. If she gets what she wants – we might actually have a digital economy similar to other developing countries – and all the concerns, problems, and challenges that come with it. Are we ready for that collective digital future? n
TECHNOLOGY
Shaukat Yusufzai was (kind of) right.
But the BRT is still a disaster. The recent comments made by KP Information Minister Shaukat Yusufzai set off a chain of economic claims that differed widely at every step. But what is the state of the BRT project, and did Shaukat Yusufzai actually have a point? By Abdullah Niazi
T
he lunatic, the lover and the poet are of imagination all compact, the bard teaches us. The same can be said about the anchor, the politician and the analyst. Each sees devils, and Helens and heavens where they please, making mountains out of molehills. The cast and characters of the latest fastpaced comedy of errors we have on our hands includes Khyber-Pakhtunkhwa Information Minister Shaukat Yusufzai, Geo News’ lead anchor Shahzaib Khanzada, and the army of Whatsapp and Twitter analysts providing freeof-cost but unwarranted hot takes.
The BRT disaster
I
t all started with the Peshawar Bus Rapid Transit (BRT) project, and if the beginning point is anything to go by, it was always going to be a bumpy road (pun intended) for the ruling Pakistan Tehrik-e-Insaf (PTI) and their loyalists. After years in the
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opposition spent deriding Punjab projects such as the Metro Bus and propagating ‘jangla bus’ vitriol, the PTI during their previous tenure in KP from 2013 through 2018 decided to build their own shiny bus service running through the heart of Peshawar. With a Rs55.8 billion price tag, the project was to be the most expensive BRT system in Pakistan, and 88% of the financing was being done by the Asian Development Bank (ADB). The ADB promised a long term, 20-year loan of $350 million to the KP government for the project, which would be converted into Rs48.8 billion to spend on the project. The project was inaugurated in October 2017, and has since then not seen the announcement of a completion date, with the estimated time of completion being delayed time and again. Since October 2017, reports by the KP government itself has seen accusations of upwards of Rs7 billion in kickbacks, and the current PTI Chief Minister in the province, Mehmood Khan, has expressed his reservations regarding the project, saying it was initiated with zero planning. Earlier this year
in May, the ADB also sent a list of 30 observations to the KP government, telling them the way the project was currently being undertaken was unacceptable. It goes without saying that things are bad. The project is not just an eyesore, but an eyesore that has caused significant pain to Peshawar locals in the form of traffic congestion, loss of business and even life. While the project is undoubtedly politicised by now, the first non-partisan voices of sanity have already started suggesting that it may be time to start dismantling the whole monstrosity. So when KP Information Minister Shaukat Yusufzai had to answer questions regarding the cost being incurred by yet another delay in the project, he probably would have rather faced another Facebook Live press conference with the cat filter on. (Oh, did we forget to mention that Shaukat Yusufzai is that same one whose press conference went viral all the way around the world? Yes, it is the same person.) Except this time the minister did have some semblance of an answer... sort of. The most recent delay has meant that
the loan from the ADB that would have been converted to rupees at around Rs104 to the dollar would now be converted at Rs155 to the dollar, theoretically giving the KP government more spending power – at least in rupee terms – than they would have had last year. And according to the minister’s own vague, unexplained calculations, the costs incurred (which he in passing estimated at around Rs3 billion) by the delay were actually less than the benefit that the higher dollar rate was providing. And that is where our story begins.
The unraveling
O
n paper, it makes sense. Admittedly, on a very microscopic, coincidental, not-really-the-point kind of paper, but it is an argument that could be made. Theoretically. Yet somehow it turned out to be a cat-ears level scandal for Yusufzai. Once again, on the very convoluted piece of paper, it has to be said that the ADB did indeed granted a long term loan to the KP government, and one that does indeed have a repayment period of 20 years, and the first payments for which do not start until five or six years after the first disbursement. Which means that on some level or the other, there was indeed a cash flow benefit to the government in converting dollars to rupees. Somebody on the KP government team must have undoubtedly pointed this out thinking themselves quite clever. Whether it was out of desperation or sheer lack of understanding or both, Shaukat Yusufzai decided to roll with it. The devaluation of the rupee has nothing to do with the BRT project, nor was it engineered to provide any such benefit. The delay was not planned in tandem with the devaluation either, but the coincidence seemed happy enough to the spokesperson to tout it in press conferences. By this time, the Twitterverse was already up in arms, and clips of Yusufzai were already making the rounds on WhatsApp. Somewhere in a news studio, Shahzeb Khanzada was smelling blood. A lot is said about the state of the media in Pakistan, especially the electronic media. And while ‘they’re-all-takingmoney’ narratives are less than desirable, most anchors are shouters and rabble rousers. Shahzeb Khanzada is different. On the spectrum of news anchors, he has slowly become a standard. With a robust research team to back him, he asks tough questions and does not back down with half smile answers but persists. So when Shaukat Yusufzai came out on the show, it was always going to be a grilling. The question he asked were reasonable. If it was indeed such a desirable situation,
how would the government pay back the loans, which the ADB would want back in dollars and not rupees? There was an answer to this, but Shaukat Yusufzai floundered. The best route was to admit that this was a rather shaky silver lining. What he did instead was speculate that by the time the loan was to be returned, the rupee might have gone up to Rs75 per dollar. At this point, you could almost hear the music and Robert E Weide credits roll.
The complication
T
he video started circulating, as it was bound to. But where there is usually cheering from Khanzada’s usual fans and discontent but embarrassed murmurs or stony silence from PTI stalwarts, something else started to happen as well: the WhatsApp groups began to ping. As many of the readers might know, and many others might be horrified to discover, there exist numerous WhatsApp groups with hundreds of members each where there is regular, often vicious debate. The members of these groups are rarely friends or family, and the entire purpose is essentially to discuss such tidbits. But the debate within the groups raged, and these WhatsApp analysts soon raised some valid points. Shaukat Yusufzai was unable to defend himself at the point of Shahzeb Khanzada’s sharp questioning, but that does not remove the fact that he had originally had a point. In whatever small, accidental way, the dollar rate had helped the government to an extent. Shaukat Yusufzai had proven his shaky grasp on economic concepts, but the onus shifted to Shahzeb Khanzada, who was found lacking for once in his research, and in perhaps being too hard on a minister admittedly clutching at straws. This got some excitement from the PTI’s side, and then came the best bit. Debate on these WhatsApp groups reached a point where it began to be claimed that since the loan was to be returned in dollars, it was going to be dollars that would be earned through trade and remittances, and would thus have nothing to do with exchange rates.
This was just bad economics. Dollars are earned, but not by the government. The only legal tender they have are rupees after all, and that is the currency they are backing. So if a company like Nishat earns dollars and brings them in to Pakistan, it will convert them to rupees by selling them to other willing market participants in exchange for those dollars at whatever the rate of the dollar in rupees is at the time. The same goes for remittances. So for all intents and purposes, these ‘earned’ dollars are bought at the market rate and exchange rate very much continues to be in play. So once again, it went back to being very flimsy straws that the KP government was clutching at.
The state of the disaster
I
n the gaffe that has caused so much hue and cry on all sides, with no one understanding completely and being both right and wrong at the same time, what has been lost is the pain and discomfort that the BRT project continues to cause. Peshawar has been ripped up at the belly and it continues to bleed as the project sets in and festers like an infection. The extent to which it has been mismanaged goes well beyond gross neglect, and it is a shock that it has not become a larger issue than it has. But even if we were to remove the comedy of errors surrounding the claims made by the KP information minister, and take it completely at face value, it is a frivolous case to make. Even if the government admits that it is a happy coincidence, it is only so much posturing and gloss. Even with the benefit caused by the high dollar rate and the delay, the delay has at the end of the day been a loss making machine. More important even than that has been the continued pain that it has caused to those losing business and time because of the mess and traffic caused by the project. It is also a case in astounding incompetence and relentless stubbornness in the face of what has clearly proven to be a mistake. That, at least, cannot be explained away by a happy coincidence. n
INFRASTRUCTURE
20
FINANCIAL SERVICES
A
By Farooq Tirmizi
llied Bank is the type of institution that makes that “Lazy Big Five Banks” stereotype look true. The bank has been – almost without interruption – the fifth largest in Pakistan for the last four decades and it appears perfectly comfortable staying there. While the bank has among the cheapest deposit bases in the industry, it has grown slower than the industry as a whole over the last five years (a compound annualised growth rate of 10.1% versus 12.1% for the industry). On the surface, the bank’s strategy for profitability has largely relied on not rocking the boat too much and essentially adopting a “steady as it goes” approach towards both deposits and lending. Add in four management changes since its second privatization (well strictly speaking it was a recapitalization, more on that later) in 2004 and to many this might not look like a particularly good bet on the Pakistani banking sector. But Allied Bank (ABL) offers much more than just the story of boring old big bank. The story of ABL is the story of banking in the country: the post-Partition era of competition, the Bhutto nationalisation debacle and its bailout-filled aftermath, and then the struggle to privatise. Much more than all of those, however, is a story that has implications for businesses in multiple sectors: how do you grow a business that is already big, and already has a dominant market share? ABL may not be as big as the other members of the Big Five banks in Pakistan (the other four being Habib Bank, National Bank, United Bank, and MCB Bank), but it shares challenges all of them face: there is no more room left to grow by taking market share, only by expanding the size of the market itself, which is easier said than done.
History of the bank
A
llied Bank has quite possibly the most interesting history among the Big Five Pakistani banks. It started its existence in 1942 in Lahore as Australasia Bank, founded by a silk trader named Khawaja Bashir Bux. Bux’s father, a Kashmiri man who was born and raised in Lahore, was orphaned at an early age and was raised by his grandmother. His family were silk weavers so he knew the family trade from an early age. In the 1880s (the precise year is unknown), he traveled to Bombay and began working on ships with silk traders. He went on several voyages to Somalia
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“Since 2004, our numbers demonstrate a remarkable turnaround story. Based on the board’s vision we are also pursuing a strategy of transforming ABL into a digital bank” Tahir Hassan Qureshi, CEO of Allied Bank Ltd and Singapore before finally making it to Perth in Australia. The elder Bux appears to have had taken a liking to Perth and decided to settle down there, continuing to offer silk wares to the Australian market, building himself a small fortune in the process. His business and family allowed him to stay connected to Lahore, however. His son Bashir was born in 1911 and appears to have joined his father’s business from an early age. However, by 1942, young Bashir’s ambitions led him away from the family trade and into banking, and he started the Australasia Bank in Lahore with Rs120,000 given to him by his father. Partition was good for Australasia Bank, when the main banks serving the Pakistani side of Punjab – primarily the State Bank of India and the Punjab National Bank – closed shop and left. The bank continued to grow right up until 1974, when the leftist Prime Minister Zulfikar Ali Bhutto’s administration nationalized all banks in Pakistan. Australasia Bank was small back then, with a presence largely confined to Punjab. So, in addition to nationalizing the bank, the government also merged it with Sarhad Bank, Lahore Commercial Bank, and Pakistan Bank, making it one of the five large nationalized commercial banks (NCBs) in the country. The nationalization era was the predictable disaster that one would expect it to be. By 1988, the five nationalized banks collectively cost the government of Pakistan 8.8% of the country’s GDP in what had by then become an annual tradition of bank bailouts. When the center-right Pakistan Muslim League Nawaz (PML-N), led by Prime Minister Nawaz Sharif, first came to power in 1990, bank privatization was high on their agenda. Within weeks they had privatized Muslim Commercial Bank (now MCB Bank), selling it off to a consortium led by industrialist Mian Muhammad Mansha. Allied Bank was also put on the auction block but was bought by its
employees. The year 1991 seems to have been marked by employee buyouts. Exxon Pakistan’s employees had bought out their US parent’s stake in the nation’s second largest fertilizer manufacturer. Many populists felt that Allied Bank’s management buyout would be no different, resulting in an employee-owned bank that would be profitable and no longer a headache for the government. That assessment proved to be disastrously shortsighted as Allied Bank became the only Pakistani bank to have to be privatized twice. The key difference between the Exxon management buyout and the one at Allied Bank was that the Exxon employees had always been part of a private sector organization, one that was accustomed to running at American levels of corporate efficiency. Allied Bank was the child of populist nationalization, and was more used to giving out loans on personal whims or possibly political connections rather than any real credit analysis. While MCB Bank cleaned up its balance sheet and became a financially healthy institution, ABL lagged behind, showing no real improvement in its operations and continuing to lose money almost at the same rate as when the government was a majority shareholder. Non-performing loans were at 16% of the loan book when the management buyout was completed in 1993. They hit a record 36% a decade later, in 2003. The first two post-privatisation CEOs of the bank ended their tenures by being sentenced to prison on corruption charges. (And this was in the 1990s. To get caught and jailed for corruption, you had to be really corrupt.) In 1999, one of the bank’s largest clients (newspapers from the time refuse to say who and current bankers claim not to remember) borrowed heavily from the bank to buy a 35% stake in ABL itself, and then defaulted on those loans (a real genius, this one must have been). At that time, the State Bank of Pakistan (SBP) – still a 49% shareholder in the bank
– stepped in and froze share transfers from existing employees to outside shareholders. By that time, the Musharraf Administration had come into office and appointed Dr Ishrat Hussain, a Boston University-trained economist at the helm of the central bank. Hussain determined that Allied Bank’s first privatization was not enough and that the bank needed to be sold again. Hence came the second privatization. But before that plan was set into motion, the government put in place a management team led by the highly capable Khalid Sherwani, a former United Bank (UBL) executive who had spent most of his career at UBL and had helped turn around that bank prior to its privatization at the turn of the century. Sherwani has a fascinating background. The man is a chemist by training, graduating with a masters in analytical chemistry from the University of Karachi in 1966. He began his banking career in 1968 at the then-nascent UBL, starting off as a software developer (somewhat shocking that UBL had computers back then, let alone in-house software developers), became head of the IT department in 1974, and retained that position for 18 years. In 1992, he was promoted to senior executive vice president for finance and planning, and helped the bank’s management prepare UBL for its eventual privatization. However, before he could see that process through to the finish, Sherwani was hired as Allied Bank’s CEO in 2000. He immediately began a cost-cutting programme that saw the bank shut down 194 (~21%) of its lowest performing branches and lay off 2,228 employees (~25% of its workforce) over a span of four years. These actions were not in the least bit popular, but it helped that the economy was booming in Pakistan at the time and there were plenty of alternative employment to be found. Sherwani’s new management was supplemented with changes at the board level
The bankers at Askari and NIB, despite all of their sophisticated knowledge of finance, ultimately thought the premium the government was demanding for the shares was too high. The Ibrahim Group was the only one that appears to have figured out that every rupee paid into the bank was a rupee saved on recapitalizing the bank as well. In August 2001, SBP Governor Dr Ishrat Hussain removed three board members, including the chairman, and put new people in place. By February 2004, the Allied Bank was stable enough for both the government and the SBP to feel comfortable putting it on the auction block. ABL’s balance sheet, however, was in a terrible state. It was (and still is) the fifth largest bank in the country and had a non-performing loan infection ratio of 35.7% at the end of 2003. Anybody who bought the bank would have to inject a massive amount of capital into the bank. Hence, a strategy different from its previous privatization transactions was devised: instead of selling its own shares, the government simply issued new shares, meaning that any buyer would be injecting every penny of their capital directly into the bank rather than paying the government anything. Six parties submitted bids for the bank, with three going all the way to the final round: the military-owned Askari Bank, NIB Bank, and a textile and energy conglomerate called the Ibrahim Group. The bankers at Askari and NIB, despite all of their sophisticated knowledge of finance, ultimately thought the premium the government was demanding for the shares was too high. The Ibrahim Group was the only one that appears to have figured out that every rupee paid into the bank was
a rupee saved on recapitalizing the bank. In the end, the other two bidders backed off and Ibrahim Group paid Rs14.4 billion ($237 million) to buy a 75% stake in Allied Bank.
Ibrahim Group takes over ABL: Industrialists decide to buy a bank, then leave it alone
S
heikh Mohammad Ibrahim was a cloth trader in Punjab when Partition happened in 1947 and he found himself caught on the wrong side of the newly created border. Like the more than 14 million other people in South Asia, Sheikh Ibrahim made the journey from the Hindu and Sikh dominated side of Punjab to what was about to become the Muslim-dominated side of Punjab. In 1947, he took his family to what was then a relatively small city called Lyallpur (which would later be renamed Faisalabad) and re-established his trading business there, originally calling it Ibrahim Agencies. Ibrahim’s son Sheikh Mukhtar Ahmad joined the family business in the mid-1950s and began expanding the scope of the business rapidly, first expanding from cloth trading into yarn trading and then – in 1975 – into manufactur-
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ing yarn. Sheikh Mukhtar’s business style can be characterized as one in pursuit of relentless growth. He had a habit of plowing back the bulk of the cash flows from his businesses back into growth, which is what appears to have set him apart from the thousands of other cloth and yarn traders who also started at roughly the same time in Faisalabad. At first the group started off small-scale manufacturing. By 1980, they were able to set up a spinning mill called Ibrahim Textile Mills Ltd, with tens of thousands of spindles. In 1984, the group expanded to set up another unit called AA Textiles Ltd, and in 1990, set up a third unit called Zainab Textile Mills Ltd. To serve the energy needs of their rapidly growing textile empire, Sheikh Mukhtar set up a 32-megawatt power generation unit in 1991. By 1996, the group expanded into manufacturing polyester staple fibre, starting off with a capacity of 70,000 tons. Between 2002 and 2003, Sheikh Mukhtar merged all of his other textile units (and the power plant) under the Ibrahim Fibres umbrella. In 2004, the group was able to complete a capital investment project in Ibrahim Fibres that tripled its polyester staple fibre production capacity. By 2004, Sheikh Mukhtars’s son, Naeem Mukhtar, who had been helping with the family’s business since having graduated from a business school in the UK in 1992, began taking over more of his father’s responsibilities. Indeed, it was Naeem who led the group’s bid for ABL and subsequently became its chairman. While the Ibrahim Group has largely focused on textiles for almost the entirety of their existence, they were not alien to the financial services sector. In 1992, the company established a leasing company and in 1995 established a modaraba (an Islamic investment vehicle). The two companies were merged in June 2001 to meet minimum capital
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requirements instituted by the central bank for leasing companies. In 2004, when the Ibrahim Group took over Allied Bank, Ibrahim Leasing was merged into the bank to form a single financial services entity owned by the conglomerate. Despite his success in business, however, the Mukhtar family appear to know the limits of their own abilities. Naeem could see that Khalid Sherwani had done a good job in turning around the bank and so he asked the CEO to stay on.
CEOs post recapitalization Khalid Sherwani
2004 - Oct 2007
Aftab Manzoor
Nov 2007 - May 2010
Sherwani stays on: After the cost-cutting, the consolidation
S
herwani was only too happy to stay on at Allied Bank, given the fact that he would then be given the chance to build upon his success as a turnaround architect. From contracting the branch network, by eliminating the unprofitable branches, he could begin expanding. And he could also use the newfound financial strength of the bank to expand into other avenues of business within financial services, such as asset management. Sherwani’s tenure as CEO under the new sponsors was as successful as his time before them. Costs as a percentage of revenue kept declining every single year – and almost every single quarter – of his time as CEO. Deposits per branch, initially significantly below industry average, kept rising faster than the banking sector as a whole, and significantly closed the gap. Net income rose by an average of 14.8% per year between 2005 and 2007 to reach Rs4.1 billion ($67.1 million). Between the recapitalization in 2004 and the time Sherwani left towards the end of 2007, deposits grew by an average of 27.8% to Rs263 billion ($4.3 billion). However, that record was helped by three key factors, only one of which was attributable directly to him: a rising interest
Khalid Sherwani
June 2010 - June 2013
Tariq Mehmood
July 2013 - Dec 2016
Tahir-Hassan-Qureshi
Jan 2017 to present
rate environment coupled with an unusually depressed cost of deposits, the ability to take full advantage of Ibrahim Group’s good reputation by bringing in significant new deposits from the new owner’s friends and family in the Faisalabad business community and the payoff from having taken all the lumps on the non-performing loans prior to privatization. All these factors combined explain almost the entirety of the expansion in profitability at Allied Bank. In other words, Sherwani was a good CEO, but his record is helped by the fact that he led the bank between 2004 and 2007, a time when virtually every financial institution on the planet was making piles of money. It is true, of course, that under the supervision of
SBP he was able to right the ship at Allied Bank prior to 2004, a task at which all of his predecessors since 1974 had failed miserably. He gave the bank a solid foundation on which to build success prior to 2004 and to make the bank ready for sale. Perhaps it was an impeccable sense of timing, or perhaps sheer luck, but Sherwani chose to retire as CEO from ABL in October 2007, just a few months before all hell broke loose in the Pakistani and global financial markets. He left ABL with a record he could be proud of, though it was not the last time he would be at the helm of the bank.
Aftab Manzoor’s tenure: Stability, but not much else
I
f Sherwani had impeccable timing, his successor Aftab Manzoor could probably not have picked a worse time to take the job. His benchmark would be 2007, the best pre-crisis year. And his tenure would be marked by the worst financial crisis in two generations. Of course, he had no way of knowing any of this when he took the job in November 2007. Manzoor had spent the bulk of his career at Citibank in Pakistan. In 1998, he had joined MCB Bank as head of credit and risk management. In 2000, he was promoted to CEO, a position he held until 2007, when he moved to Allied Bank. Considering the time he arrived at the bank, Manzoor’s record is nothing short of stunning. Between the end of 2007 and the middle of 2010, a time of immense difficulty in the financial services sector, he managed to grow profitability by an average of 29.3% per year (in rupee terms) to Rs7.7 billion ($92.6 million). And he did this by prudently expanding the asset book. At no point during his tenure as CEO did the non-performing loan ratio exceed 7.4% of all loans. Even a year after he left, the ratio
The last time ABL showed interest in acquiring a bank was in 2012 when it’s request to conduct due diligence of HSBC’s Pakistan operations was turned down by SBP along with those made by HBL, UBL and MCB. The SBP had apparently used the ‘too big to fail’ doctrine while rejecting these requests did not exceed 8.2% of the total loan book. Given the tumultuous time during which he presided over the bank, it is no wonder that Manzoor was cautious in growing the asset book. The size of the loan book grew at an annualized average pace of 14.1%, which sounds impressive until one considers the fact that inflation during this time was 14.2% per year, on average. Still, keeping the bank stable and growing profitability at a time when most bank CEOs had their hair on fire is no mean feat. Yet, for reasons best known to Manzoor, he left Allied Bank in May 2010. He went on to head KASB Bank of all places, that disastrous balance sheet time bomb that made twice as many bad loans as good ones (that is not an exaggeration). Though he did leave KASB Bank within seven months for Soneri Bank. Nonetheless, his departure meant that Sherwani got one last stint at the helm of Allied Bank.
Sherwani again: Sharp accounting to boost profitability
S
herwani, it seems is great for when you need to cut costs and stop the bleeding, but not when you need to grow the business. In June 2010, when he was called back from retirement, Sherwani had effectively been out of the game for three years. He would proceed to build up a record that looked better
than it actually was. The headline numbers were impressive. Between the second quarter of 2010 and the second quarter of 2013, a period almost exactly corresponding to Sherwani’s second stint at ABL, the bank’s assets grew by an annualized average of 16.5% and deposits by an even higher 17.4%. Book value grew by an average of nearly 23% per year. Even when accounting for the 10.7% inflation during this period, those are some seriously impressive numbers. The problem arrives when you get to profitability, and there Sherwani’s record is less than stellar. Net income during this period rose by 11.3% per year, marginally above inflation. And these were the years when industry-wide net interest margins were expanding. And this meagre record of profitability is despite the neat little accounting exercise that the ABL management used more than any other bank in the country. Until 2014, while the profits on regular banking business were taxable at a full 35%, a bank’s investment in mutual funds was exempt from taxation, meaning that the bank could make investments in mutual funds operated by its own asset management subsidiary and legally save money. It’s a neat little maneuver that allowed for preferential tax treatment and ABL benefited from it more than any other bank. In fact, ABL was so brazen with it that the bank was specifically cited in the Senate Finance Committee as the biggest beneficiary of this tax provision because of which the law was later changed.
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The change in this law, coupled with the new super tax on banks, had led to the effective tax rate of ABL going up from 26.5% in 2012 to 40.6% by the end of 2015. Return on equity had dropped to a still healthy 18.8% by the end of 2015, though down from 27.1% in 2012. Had the tax rate remained the same in 2015, that return on equity would have been around the 26% mark.
Tariq Mahmood takes the helm: Jovial number two takes the top spot
I
n June 2013, Sherwani decided to bow out of Allied Bank again, paving the way for Tariq Mahmood, the Chief of Banking Services Group, to become the new CEO. Mahmood started his career in 1971 at Habib Bank, where he stayed for nine years. In 1980, he left to join a new Kenyan bank called the Middle East Bank. He worked at MEB for 12 years, joining Askari Bank in 1992, when it was formed. Mahmood stayed at Askari for 15 years, being promoted to senior executive vice president in 2003. In 2007, he was offered a spot at Allied Bank and he took it. Under his watch, Mahmood supervised completion of Allied Bank’s shift to a better technology platform called Temenos 24. He also initiated the separation of the retail and commercial branches, in order to better focus the bank’s resources on the two different segments instead of trying to go after them with the same set of marketing staff which was later reversed during his own tenure. Mahmood’s tenure as CEO was a modestly successful one. Net income was up by an average of 9.5% per year for the three and a half years that he was CEO. The asset book grew by 13.7% per year during the same period, though loan growth is only 6.9% per year. Deposits rose by an average of 10.4% at a time when inflation averaged 5.1% per year.
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LIke his father, however, Naeem also appears to believe in the value of professional management. He knows the textile business and hence runs the textile company – Ibrahim Fibres – as its CEO. While being the chairman, he continues to have bankers run ABL, with succession planning within the organisation to ensure smooth transitions between CEOs In terms of growth strategy, however, Mahmood and his team seemed to have trotted out the same tired old ideas that every banker in Pakistan talks about: trade finance, and Islamic banking. ABL’s strategy to break away the best trade finance clients from the powerhouses at Habib Metro Bank and Bank AL Habib seemed unlikely to succeed. And as for the latter, ABL made a strategic decision to start its Islamic banking operations in 2014 by following the model of 'bank within a bank', instead of forming a full fledged separate islamic subsidiary. This decision was probably motivated by the biggest impediment to the growth of Islamic banking in Pakistan: a severe lack of Shariah compliant options to deploy funds. In December 2016, Mahmood stepped aside to make way for his successor, Tahir Hassan Qureshi, who had served as the bank’s chief operating officer since 2015 and, before that, had been the bank’s CFO since 2008.
The current management: How to grow the already big
Q
ureshi faces an unenviable task: trying to grow a bank whose ownership seems interested in stability and low risk, and whose market position
makes it difficult to make big moves. ABL commands a 7.3% share of total bank deposits in Pakistan, making it the fifth largest bank in the country in a highly concentrated market. The bank’s market share has fluctuated around that 7% market for virtually all of the last two decades. So that then begs the question: how does one grow this bank that is already so big, with over Rs1 trillion in deposits and a balance sheet with Rs1.5 trillion in assets? How do any of the big banks grow at all? For any business that reaches this stage, there are effectively two routes: grow market share through acquisition, or growth of the market itself. Both of those are easier said than done. On the first route -– growth through acquisition – it has been somewhat slim pickings in the Pakistani banking market, until recently. The two most recent transactions involving banks being sold were both highly distressed sales: KASB Bank, and NIB Bank, former being considerably more distressed than the latter. However, ABL decided not to pursue either of these. The last time ABL showed interest in acquiring a bank was in 2012 when it's request to conduct due diligence of HSBC's Pakistan operations was turned down by SBP along with those made by HBL, UBL and MCB. The SBP had apparently used 'too big to fail' doctrine while rejecting these requests. There are, of course, other banks that may
go on the market, but based on ABL's past experience and the post merger integration issues that usually come with an acquisition, it might not be easy for ABL to find the right fit. “For us the organic growth strategy has paid well, rather than acquiring a bank. There were few opportunities available for acquisition but we as a strategy would not look at those opportunities merely to enhance market share but also keep in mind synergies more closely associated with technologies and human resources,” said CEO ABL, Tahir Hassan Qureshi, without completely ruling out the possibility of an acquisition in the future. That leaves the strategy of growing the market itself, which is a task usually left to either the market leader – in this case, Habib Bank – or to a disruptive player that brings about a new product line or a new way of doing business. In Pakistani banking, the last big innovation was the advent of Islamic banking, which Meezan Bank brought to the market in a big way and continues to remain the clear market leader in it. As for growing the conventional banking market itself, that is an uphill battle. Over the past five years, ABL has opened 397 branches, growing its branch network by a whopping 42% filling the footprint gap that it had with its peer banks. That kind of growth in branch network should have yielded significantly higher deposits, but deposits per branch appear to have somewhat stagnated, meaning that the bank would probably have struggled to grow even as much as it has, had it not been as aggressive in opening up branches nationwide. Obviously, a slowing economy and the introduction of a withholding tax on bank transaction, factors outside the control of ABL, also had a role to play. The next big phase appears to be the expansion of digital payments and banking the unbanked, two areas in which the banks face stiff competition not just from each other but also from well-financed technology giants such as China’s Alibaba, which bought out EasyPaisa, the largest digital payments platform in Pakistan, previously owned by Telenor. If you are a bank in Pakistan, in other words, growth is hard to come by, especially if you are a bank like ABL, which is used to
THE SPONSORS
Sheikh Mukhtar Ahmad
Mohammad Naeem Mukhtar
steady cash flows. The bank to its credit has paid out a dividend every single quarter since the fourth quarter of 2011, paying out like clockwork. When asked what the bank’s core growth strategy would be, Tahir said in a somewhat restricted manner, “Since 2004, our numbers demonstrate a remarkable turnaround story. This journey of achieving sustainable growth will continue. Based on the board’s vision we are also pursuing a strategy of transforming ABL into a digital bank. With the lowest infection ratio and highest capital adequacy ratio (CAR) in the industry, the bank is consistently following a strategy to invest in human resource, technology and risk management systems.”
Ibrahim Group: And now, a word about our sponsor
B
y many accounts, the Ibrahim Group had a “clean start” meaning they seem to have earned their way into the upper echelons of Pakistan’s economic elite in a fair manner. Indeed, the family appears to take a considerable amount of pride in playing by the rules. Sheikh Mukhtar and his two sons – Mohammad Naeem Mukhtar and Muhammad Waseem Mukhtar (both on the ABL board, with Naeem as chairman) – are three of the five highest-paying individual taxpayers in Pakistan. They have also collaborated with Syed Babar Ali in the creation of the Lahore University of Man-
ABL may not be as big as the other members of the Big Five banks in Pakistan (the other four being Habib Bank, National Bank, United Bank, and MCB Bank), but it shares challenges all of them face: there is no more room left to grow by taking market share, only by expanding the size of the market itself, which is easier said than done
Muhammad Waseem Mukhtar
agement Sciences (LUMS), easily Pakistan’s best university. “They are an unusually professional group when it comes to Faisalabad. Most Faisalabad groups tend to be highly unprofessional when it comes to paying their vendors,” said one person who serves as a vendor to the group. “These guys are almost always ahead of the curve. They dominate the market for polyester synthetic fibre with the highest quality product. You have to pay them advance deposit. They don’t like using old machinery and love upgrading to the best state of the art equipment available.” “Not only do they pay their vendors on time, they also make it a point not to waste your time. They only generate inquiries when they are serious. When they just need information, they will tell you. When they want to buy, they will tell you. They have a stronger technical team than almost anyone else. They pay well, significantly above market.” Naeem, who has run the family’s interest in ABL since the second privatisation, has had experience running some of the group’s other businesses as well. He has degrees in textile engineering and was intimately involved in that part of the group’s business, in addition to taking a keen interest in the mutual fund business, which operates through ABL Asset Management. LIke his father, however, Naeem also appears to believe in the value of professional management. He knows the textile business and hence runs the textile company – Ibrahim Fibres – as its CEO. While being the chairman, he continues to have bankers run ABL, with succession planning within the organisation to ensure smooth transitions between CEOs. But that non-seth attitude also means that a strong push for growth is unlikely to come from the board. And in light of the management’s strategy of “sustainable growth” and the cut throat competition in the digital space, it remains to be seen what ABL or for that matter any other member of the Big 5 club can do to increase its market share. n
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By Syeda Masooma
P
rofit is doing a series of stories that aim to serve as a guideline for students, as well as members of the workforce looking to switch careers to new, innovative, fields that are evolving and adapting with the changing times. For this article, Profit will look at ‘Project Management’ as a career, and what the future holds for this role. There is a lot of talk about the ‘jobs of the future.’ Nobody is quite sure what these jobs are, where you will find them, or what you need to do to be qualified for them, but there is a general, meandering understanding that things are changing, and jobs are changing with them. Uncles around the world have started advising young people to look into new kinds of careers, throwing around buzzwords like internet, connectivity, and adaptability. Despite the uneasy understanding that the winds have changed course, the reality is indeed that a large number of jobs are on their way out, and it may be time to start considering employment options that still hold value and relevance in the world. The obvious answer is technology. It is, after all, the force driving the wavering tides in terms of work. But what if someone does not want to sit behind a computer all day and write code? More importantly, what if they are just not good at it? Then there is medicine, with everyone from Medium to Forbes in agreement that healthcare professions are going to become more and more significant and with earning potential. The problem, however, remains the same. It is a criminal simplification, but the question has to be asked, what ‘jobs of the future’ are there for people that do not have the scientific bent in their heads? One possible answer Profit will be looking at in
this edition is project management. ‘Project Management’ is more a designation than a solid career, but it does encompass a breed of professionals that have in their skill set problem solving, team leadership, and spur of the moment decisions. Depending on the industry you choose, your starting salary can range from Rs50,000 to Rs120,000, and with relevant experience you might be able to hit it off till Rs450,000 to Rs500,000. According to data from Glassdoor – one of the biggest job recruiting sites worldwide – this number can go as high as Rs2 million with more experience as a “senior project manager”. But how do you get into the world of project management, and what in the world does it entail?
Advice from across the bridge
W
hy project management is gaining popularity in Pakistan and how do you become good at this job is the topic of discussion for us today. And we will start it the same way Telenor Pakistan’s Head of Digital Partnerships and Innovation, Obaidullah Khawaja, did when he addressed the entrepreneurs of tomorrow at the National Incubation Center Islamabad. It was an instructive speech in what happens when the line of communication is not clear between a manager and their team. And while it may seem simple enough to delegate responsibility, a lot more goes into maintaining communication with several different departments, keeping your staff motivated, taking risks and somehow managing to steer clear of decisions that have the potential of being time bombs for your project, and the whole company. Khawaja outlined three requirements for being a project manager – empathy, ability to exert soft influence, and not waiting until you
It is a criminal simplification, but the question has to be asked, what ‘jobs of the future’ are there for people that do not have the scientific bent in their heads? One possible answer Profit will be looking at in this edition is Project Management. ‘Project Management’ is more a designation than a solid career, but it does encompass a breed of professionals that have in their skill set problem solving, team leadership, and spur of the moment decisions
have a perfect product. Again, we must stress that the correlation between degrees and jobs lies on a spectrum. A spectrum on which a medical professional, a graduate in literature or someone with a degree in management sciences could all be possible candidates for the same managerial spot. What is often more important is the right kind of, often innate, thinking, and mentorship. While you may be able to learn a lot about academic side of this job with a Master’s Degree in Project Management, the stories and tips from the Karachiite LUMS alumnus with 15 years of extensive experience in AdTech and Telecom industries that were shared with the attendees of the NIC session, and now being shared with you, will certainly aide you in your pursuit of this career. One of the things he laments about is the lack of any community in Pakistan for project managers, unlike software developers or other professions like doctors and lawyers. This is perhaps one of the reasons why not many students opt for project management in Pakistan. This might be apparent from the fact that a mere 37 universities out of 174 are offering this course. There might be one different angle to it, however, since a lot of students opt to enter the supply chain and operations management sector. While these are smaller categories of project management, they are more popular among educational institutes when it comes to degrees that earn money. Every industry from tobacco to steel manufacturing, banking, exploration and production of oil, needs project managers. The plain reality is that there is simply not enough attention being given to this line of study and qualification within Pakistan, and companies are having to rely on increasingly inexperienced and unqualified individuals as managers. One of the things that Khawaja shared was the importance of approach and the culture of an organization on its employees and the possibility of spinning it around when employees are given a chance to contribute. “I was working at Microsoft and across the table from it was Amazon. Nobody took them seriously back then. I had joined Microsoft almost immediately after the Vista reset had happened and everything was in disarray. But their concept of 2-pizza teams and constant renovation brought it back on the block,” he told the crowd. He elaborated that when it comes to project management, the person at the helm of affairs need to be the coordinator and know each job as if it is his own responsibility. “Even your employees don’t take your seriously, let alone your customers, if you are not aware of
CAREERS
“Your project is your blank canvas. There are colors of engineers, QA team, designers and marketing, and you are the only person who is responsible to paint a picture with all the resources that you have available. You cannot assume that different teams will talk among each other and resolve an issue. It is your responsibility” Obaidullah Khawaja, Head of Digital Partnerships and Innovation at Telenor Pakistan
what you want and how achievable it is.” He also believes that the concept of hiring external companies to manage your brand and marketing is also losing its appeal, and companies are slowly moving towards their in-house teams to draft marketing campaigns, indulge clients on social media and carry out sales on their own terms instead of having to give into the ideas suggested by marketing companies. There is a lot that goes into project management, but it all starts from being closer to the customers, and at the core of it is empathy. “You cannot run a product when it is not earning. Unless someone else is paying for it.” This is why a project manager needs to be closer to the general public. Interestingly, Khawaja has moved on to using the acronym PM which fit in well in any context – be close to people, do more work than their direct designation, and stay in touch with the realities of the market and trends instead of just ordering the team around. Quoting the case study of Uber vs Hailo, he said that even though Uber was 50 percent more expensive than Hailo, the simple fact that Uber remained in touch with what the customers demanded while Hailo tried to approach the market from the supply side, and tailored their product for drivers instead of passengers. “As a result, today Uber is on the top and Hailo is now not even in existence”. Hailo was absorbed by myTaxi in 2016 – approximately five years after its creation – which was later rebranded to the current Free Now. On the subject of staying in touch with the customers, and keeping your team focused on the same, Khawaja reiterates the power of soft influence, which he says will not be possible unless the project manager is clear on the objectives he requires from his team and product. He narrates examples from real life project managers, including Usman Gul – the
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mind behind Airlift. “I happen to know that when he [Usman Gul] would interview people for his company, he asked them to go out and sign a hundred people for Airlift. So this is how you analyze the skills and motivation of your employees too”. Moving on to the execution part, and the final factor of the trifecta – not waiting until you have a final product, Khawaja said that many entrepreneurs have a set idea in their minds of how they want their product to behave and then they keep delaying launching it until they believe the product is perfected. This is wrong for a project manager. “You would be in a better position to gauge the response of the customers and rather perfect the product according to what the market needs as opposed to making something that you or maybe your team only thinks is perfect”. The NIC session did not, oddly enough, includes a case study example here, but for anyone familiar with the textile industry, the example of the changing fortunes of Limelight will jump out. From a store featuring almost entirely western attire with all the sequins and belts that go into that sort of clothing, now Limelight is a completely eastern clothing brand. Along with this rebranding, footfall has also changed in Limelight stores, which once upon a time used to be open for a leisurely stroll even during the sales season, and now are jam packed with every launch of a new collection. Another factor that that would be pertinent here is that a project manager has to “Learn to accept change.” This was said by a project manager working in the advertisement industry, Younas Khan. He added that sometimes a change might come as a threat, but it is upon the person handling a set of objectives to see how it can be used otherwise. “I remember when social media advertisements and YouTube ads started to gain popularity. Many agencies either used
the exact same ads they had for TV on these platforms or shortened them a little. But the only catch was to either send the message in the first five seconds in which the viewer cannot skip the ad, or make it so catchy that they don’t skip at all. So it is all about finding opportunity even in a threat when you are the one responsible for setting every step of the way to complete a project that is your responsibility.” Obaidullah Khawaja also shared a similar anecdote, but with the lesson that not every target is achievable and that is also okay. “At Flickable, we had an app, OFFICEShoes, and it was a phenomenal success. Within a short span of time we had over 600,000 downloads and more than $4 million in sales. We also received data that most of the purchases and most of the time being spent on the app were coming from tablets as opposed to computers or mobile phones. So my team decided that we should make the interface for tablet app that gives a magazine like experience. But before we could do that, the initial application got a bug and threw our new app plans in delay. So even though the new app idea was great, had we not fixed the bug in the mobile app first, we might have lost more than we hoped to gain from the new version.” Summing it all up, Khwaja said that your project is your blank canvas. There are colors of engineers, QA team, designers and marketing, and you are the only person who is responsible to paint a picture with all the resources that you have available. “You cannot assume that different teams will talk among each other and resolve an issue. It is your responsibility.” At the end of the day a project manager is the person responsible for setting things in order and planning every part of the process from procurement to execution. So if you are looking for a career in the corporate world but you don’t want to become outdated due to robots or AI, then Project Management is one option you can explore and exploit. n
CAREERS
By Bilal Hussain
Y
ou hear it everywhere. We have too many imports and too few exports. How can a country be expected to progress when you are bringing in more things than you are sending out? Forget the impossibility of an even balance of trade, we cannot even bridge the gap just a little. It is all the usual drawing room drivel. One of those little nuggets of wisdom almost everyone will let you know for free as if they are doing you a favour. You can almost imagine an uncle leaning forward, teacup ever so slightly lifted from his saucer, explaining how we need to import less and export more, before he leans back and sips at his tea, content in his genius assessment, distraught that the lame ducks over at the government still have not managed to figure it out. As over emphasised a fact as it is, however, the reality is that Pakistan’s domestic industry continues to suffer because of this imbalance. This suffering has perhaps never been as striking as it has become in the last two
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decades, and the fountainhead can be found at the plethora of unplanned Free Trade Agreements (FTAs) that have brought a flood of imported goods, particularly from China, that have crippled domestic producers and industries. “We have had to close down our shoes factory because of the high costs we were incurring. Not only were costs rising, but China was putting up better quality products on the market for cheaper rates,” said Saleem Shah, a local businessman and former shoe factory owner. Once a 100% domestic producer of footwear and an important contributor to the local industry, he has since become a simple agent for the Chinese, importing shoes from there and used his old distribution channels to offload tons of them. The whole country remained in awe of the Chinese supremacy in production for a long period of time. However, China was not only offloading its products in Pakistan but it was doing throughout the world. The awe that Pakistan was in was partly due to Chinese genuine efficiency and cost effectiveness due to large scale production. Pakistan has been steadily increasing
the products it imports from China since 2007, when the two neighbours first signed an FTA. In the first year after the signing of the FTA, the imports from China rose to $4.1 billion from the earlier $2.9 billion. A decade down the line, and Pakistan has imported $15.3 billion worth of goods in 2017 from China. And while a part of the imports can be attributed to CPEC-related development works, Pakistan has been sluggish in increasing their exports via the FTA. From half a billion dollar in 2006 (before FTA), exports have only gone up to $1.5 billion by 2017. For Pakistan, the FTA then simply just becomes another receipt to import more goods and disturb local industry. The trend is not a new one. According to TRT World, Pakistan has more than 60 BITs with different countries - one of the largest portfolios held by a developing country. Ask the experts and they will tell you how most of these are unplanned and signed by officials who had no idea what they were doing. “Even government records admit that the Pakistani government did not fully appreciate the nature of the obligations they were undertaking,” says Poulsen of University College
London. “In many cases, Pakistani officials in the past looked at the BITs mainly as a photo opportunity; something for the press, a kind of a diplomatic token of goodwill.” This lack of insight when signing FTAs has proven a bane. In an attempt to stay politically afloat, successive governments continued to sign such unhelpful deals, all the while keeping the dollar at ankle length artificially. In this process of keeping the rupee up, billions of dollars were squandered. According to one assessment, Ishaq Dar’s tenure as Finance Minister saw the spending of $26 billion to this end. This subsequently changed consumption patterns of the masses, especially those living in urban areas. The tastes that developed in the wake of this import positive policy are ones that are hard to kick. From Nutella to imported crisps, drinks, erasers, pencils, makeup, and all manner of commodities as well as cars, the populace got an inkling of the good life. These products were imported at artificial dollar rates, and allowed to become mainstream, at least in urban centers. Perhaps one of the most interesting examples of imports and their effects on the market in the long term has been that of cheese. The good life was never going to last, however, and much of the current on the ground economic crisis has to do with the bubble of this import happy, care free attitude finally being burst at the hands of reality. Now, finally, the dollar has been given its due respect and has appreciated to its natural state. And the same imported goods that everyone had gotten used to are suddenly not being sold at the same old ‘reasonable’ prices. In fact, they have seen significant surge in prices. A single packet of sliced cheese, that humble yet vital key to so much goodness in so many different dishes, has soared from Rs 230 to around Rs 400. One is forced to wonder at the state of Pakistan’s industry. We cannot even produce an affordable packet of cheese apparently, and as soon as our import bubble burst, we have been in the long descent downwards, and we have lost our cheese somewhere in the fall. It is an unfortunate reality to confront, but if Pakistani industry cannot produce a packet of cheese below Rs400, how can one reasonably expect it to produce anything worthwhile at all? Last year, the government’s decision to ban cheese imports made headlines. Pakistan imported $3.34 million worth of cheese just last year. This is despite the fact that Pakistan is the third largest producer of milk in the world, and more than has the raw material potential to substitute imported cheese producing it domestically. On a larger scale than cheese, the govern-
Imran Saleh, founder of Farmer’s Cheese ment’s recent curbs have contracted imports to $54.8 billion in Financial Year 2019 as compared to $60.8 billion in FY 2018. It means the demand for imported goods have dropped by $6 billion - giving a margin to domestic manufacturers to tap. The lower imports reduced trade deficit by 15.3% in FY19. The moment is opportune, and it is only for the investors to go out and grab the markets being created in the vacuum created by imported products. But there are other barriers to industry, including in the cheese business. Imran Saleh, the founder of Farmer’s Cheese, said that business persons in Pakistan go after quick bucks and the cheese business is not that easy, especially in the production of non-processed cheese. “Pakistan has all the potential to not only substitute imported cheese, but also produce surplus cheese that could be exported. But dividends come slowly in this business, and people here want to make quick bucks and don’t know the concept of establishing strong foundations before moving on towards growing the business gradually” Saleh said. Saleh, who has over a decade of experience in the cheese business, estimates that even a billion rupee investment in cheese production would not be enough to cater to just the cheese demand of Lahore alone. Despite the curbs to imports, roughly 70% of Pakistan’s cheese demand is fulfilled by imports. However, he said that the restrictions on imports put in place by the incumbent government and dollar depreciation were now encouraging new players to enter the cheese market. He cited an example of a cheese importer, who was now preparing to start producing cheese locally. “The demand for cheese is increasing day
by day during the last decade. There used to be few pizza shops or places, who used to offer food that has cheese. But now they are everywhere. The problem, however, is that Pakistanis do not know the difference between cheeses, and which cheese is good for health and which is unhealthy” he explained. “Even doctors don’t know that cheese is good for health. If they want someone to control cholesterol, they would ask patients not to eat cheese. They don’t know that non-processed cheese are in fact good for health, and help in controlling cholesterol. It is the processed cheeses that are not good for health.” The past two decades have been good to importers and consumers alike. Now, it is time to face the music. In plain economic terms, the government has attempted to lay the ground for the revival of domestic industry for domestic consumption as well as export opportunities. Hiking duties on imports and leaving the rupee to market forces, which has depreciated by 49% since December 2017, is expected to put the domestic industry on the right track. However, according to some businesspersons, it has not accrued the desired results. Mohammad Adeel, who runs a leather import business that has been in his family since 1977, claims that most of the industries in Pakistan have to import raw material to produce final product for domestic use or final product because no viable industry has been established at a grass roots level for raw materials. This would mean that with increasing import prices, local production would still be affected. One can only hope that the government’s move will prompt enough activity in the market and encourage investment, rather than making frying pan problem into a fire problem. n
IMPORT SUBSTITUTION
Middle market banks continue aggressive expansion spree Bank AL Habib and Faysal Bank continue their branch expansions, despite a rising interest rate environment slowing down loan uptake
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one are the days when the middle market banks competed for the scraps from the Big Five banks’ table: they now aggressively compete for deposits and corporate clients and are expanding their branch network footprint in areas where previously only the larger banks had branches. Bank AL Habib and Faysal Bank continue to add to their branch network, even in a rising interest rate environment, when banks generally expect slower loan growth and a higher rate of defaults on their existing loan books. Bank AL Habib has grown rapidly over the past two decades to become the sixth largest bank in the country by both deposits
and assets. And management – including the first non-Habib family CEO ever – appears to be keen to continue its growth trajectory over the next few years. “Bank AL Habib has opened 27 new branches during the first nine months of 2019, taking the tally to 752 branches,” wrote Amreen Soorani, a research analyst at JS Global Capital, an investment bank, in a research note issued to clients on December 12. “Amid continuing expansionary mode, administrative expenses remain on an aggressive upward trajectory of 21% year-on-year during the first three quarters of 2019. The management apprised of a similar pattern to stay with a branch target of 800 by the end of calendar year 2020.” The bank is one of the three “banks named
Habib” in Pakistan, all three of which can trace their origins to the Habib family, who have been in the banking business since 1941, when they first set up Habib Bank in 1941 in Bombay. Bank AL Habib is owned by the Dawood Habib side of the family. Bank AL Habib is a trade finance powerhouse, which has decades-long relationships with some of Pakistan’s largest trading companies. As a result of the fact that the bulk of its loan book consists of loans to clients with whom it has long-standing relationships, the bank has the lowest non-performing loan ratio among the banking sector in the country. However, in the most recent quarter for which the bank reported earnings, the bank did report higher loan losses, though management
“We maintain our buy stance on the stock given three factors: its return on equity has remained at around 20% over the medium term versus 18.8% for the rest of the sector, normalizing to approximately 18% over the longer cycle as monetary easing kicks in, new branches beginning to roll deposits (197 branches or 26.2% of the current branch network added in the past three years, and cost efficiency with cost to income falling to historical average of less than 50% compared to a 56.6% in the first nine months of 2019” Hamza Kamal, research analyst at AKD Securities
CAREERS
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“Bank AL Habib has opened 27 new branches during the first nine months of 2019, taking the tally to 752 branches. Amid continuing expansionary mode, administrative expenses remain on an aggressive upward trajectory of 21% year-on-year during the first three quarters of 2019. The management apprised of a similar pattern to stay with a branch target of 800 by the end of calendar year 2020” Amreen Soorani, research analyst at JS Global Capital stressed that the rise was largely due to a oneoff instance that is unlikely to be repeated over the coming few months. “The bank reported provisioning expense of Rs375 million under loans during the first three quarters of 2019, contrary to its solid asset quality history. The provision was broadly on account of partial provision of loan to a telecom company,” wrote Soorani. Analysts largely concur with management’s view that loan losses are likely not a significant area of concern for the bank. “In-line with the sector, the management is keenly stress-testing for any potential fresh non-performing loans. The management is of the view of facing relatively lower risk of bad asset quality given its practice and target segment of lending loans to premium asset quality clients,” wrote Soorani. As a result of its branch expansion strategy, most analysts believe that the bank can expect a significant rise in profitability over the coming year. “We maintain our buy stance on the stock given three factors: its return on equity has remained at around 20% over the medium term versus 18.8% for the rest of the sector, normalizing to approximately 18% over the longer cycle as monetary easing kicks in, new branches beginning to roll deposits (197 branches or 26.2% of the current branch network added in the past three years, and cost efficiency with cost to income falling to historical average of less than 50% compared to a 56.6% in the first nine months of 2019,” wrote Hamza Kamal, a research analyst at AKD Securities, an investment bank, in a research note issued to clients on December 12. Meanwhile, Faysal Bank continues its dual strategy of both converting to a fully Islamic bank and rapidly expanding its branch network. “Faysal Bank is currently under the conversion process to convert all the operations of the bank to an Islamic Bank,” wrote Soorani. “The bank has opened all Islamic branches since
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2016 and hence has reached to a mix of approximately 3:2 of Islamic to conventional branches, respectively. The management targets to take the branch network to 600 branches by the end of 2020, from 488 as of September 30, 2019.” Faysal Bank started off its existence in Pakistan in 1987 as the tiny branch operations of Faysal Islamic Bank, a Bahraini bank owned by Prince Mohammad bin Faisal al Saud, the son of the late King Faisal of Saudi Arabia. His company Darul Maal al-Islami (DMI) originally created two banks in Pakistan. The first was the branch operations of Faisal Islamic Bank (set up in 1987), and the second was the Faisal Islamic Investment Bank (set up in 1996). In 1995, the branches of Faysal Islamic Bank were incorporated locally in Pakistan as a
conventional bank. In 2002, the Islamic investment bank was merged into the conventional bank and the whole entity lost all of its Shariah-compliant credentials. The decision to move to a purely conventional model seems to have been prompted by the management, rather than the shareholders. Over the past couple of years, there have been rumours that Faysal Bank may be up for sale and that the expansion may be designed to make the bank a more attractive asset for prospective buyers. The conversion to Islamic banking is at least in part to accelerate that growth, though the Faisal al-Saud family appear to prefer Islamic financial institutions. Faysal Bank’s conventional operations are the only conventional financial operations owned by the group anywhere in the world.
Gul Ahmed’s pivot towards retail hits a slowdown Management has been keen to grow out the Ideas brand, though the slowdown in consumer spending appears to be hitting local revenues, even as exports continue to grow
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or the past five years, Gul Ahmed’s management has been telling anyone who will listen the following: the company is shifting its focus towards its domestic retail side and away from its traditional export business. And while the company has had considerable success in doing so, the recent economic slowdown in Pakistan, coupled with the decline in the exchange rate, has meant that the company’s export business has done better this year than its domestic retail business. “Gul Ahmed Textile Mills Ltd topline shows a growth of 19% with 30% growth in export-based revenue while local sales shows meagre of 4% mainly because of slowdown in local sales from Ideas,” wrote Saad Hanif, a research analyst at Insight Securities, a securities brokerage firm, in a note issued to clients on December 11.
The slowdown in retail sales appears to be relatively recent, with the company having grown its domestic business by an average annual growth in sales of 26% per year for the past three years. The general economic slowdown appears to be at least part of the reason for the slump this past quarter. However, analysts believe the government’s decision to change the tax structure facing domestic retailers is also part of the reason. “We believe the imposition of the 13% sales tax on local sales will impact the sector negatively,” wrote Hanif. The sales tax referenced in the Insight Securities note is a 13% general sales tax imposed by the federal government on the retail sector, and represents a reduced sales tax for retailers who decide to register their businesses with the Federal Board of Revenue (FBR), as part of the government’s drive to document the economy. The new rules target large retailers like Ideas by Gul Ahmed in particular. As Shahbaz Rana writes in The Express Tribune, the government defines “Tier I retailers” as “those that operate a unit of a national or international chain of stores; retailers operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks; retailers whose cumulative electricity bill during the immediately preceding 12 consecutive months exceeds Rs600,000; and wholesalers-cum-retailers engaged in bulk import and supply of consumer goods on a wholesale basis to the retailers as well as on a retail basis to the general body of consumers.” Nonetheless, the imposition of the new taxes are likely to be a relatively minor bump in the road to Gul Ahmed’s plans to create a large national retail chain focused on serving
the needs of middle class Pakistani consumers rather than exporting clothes for global multinational brands where the bulk of the profit margin is captured by the owners of the brand rather than the manufacturers. The idea behind the pivot towards retail is something that management has been working on for a long time. Gul Ahmed, unlike many of Pakistan’s textile exporters, has had a domestic retail brand presence in the Pakistani market for decades. The Ideas shops have existed for well over a decade now. However, what is new is the notion that the company would seek to derive the majority of its revenue from retail. That decision appears to be driven by CEO Zaki Bashir, son of founder Bashir Ali Mohammad, a textile magnate whose family has been in the cotton business since the 1940s and, for several decades, also owned the largest Pepsi bottling company in Pakistan. Zaki, a graduate of Babson College in the United States, joined Gul Ahmed in 2005 where he learned the ropes from his father before transitioning towards becoming the CEO of the company in 2014, around the time that he decided that the retail business could become the core of the company. It was taken at a time when Pakistan’s textile manufacturers were suffering from a chronic shortage of reliable supplies of natural gas to run their manufacturing units. Given the process-oriented nature of their equipment, even the mildest interruptions caused delays for hours, which in turn made it difficult to meet tight export order deadlines. Meanwhile, domestic retail was beginning to boom off a rapid increase in female labour force participation. Between 2001 and
2013, the labour force participation rate for women in Pakistan jumped from just over 16% to a little over 24%, a leap that has translated into an extra 9 million women in the labour force. These women span the gamut of the labour spectrum, from blue collar work that was at times considered out of bounds for them, to white collar work in an increasingly sophisticated corporate sector in the country. And, as with any rise in female workforce participation rate, these women need clothes to wear to work, which in turn has led to a boom in clothing designers for women. And the clothing of choice for most working women is “lawn”, a type of light cotton cloth that is both cheap and tends to look good. Lawn clothing can be the kind of cheap clothes women wear to work in offices and service positions and it can be the kind of expensive clothes that rich women wear at high-society parties. In other words, it is a highly versatile segment of the clothing market, through which a textile company can serve pretty much every kind of woman in the country. And given their increasing labour force participation and economic empowerment, there are a lot more women to serve. Retailers such as Khaadi and Junaid Jamshed were beginning to make serious money off of serving the domestic market. Gul Ahmed, the original manufacturers of lawn could not afford to be left behind the trend. The recent slowdown in the company’s domestic sales are likely a minor hiccup from which the company will likely recover should management decide that they want to continue investing in their local operations, which appears likely based on the management’s stated priorities. n
TEXTILE
OPINION
Nadeemul Haque
How valuable is your bureaucracy? Contrary to popular perception, government jobs in Pakistan are well-paid, but what value does the country derive from the perks and privileges it grants senior civil servants?
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or decades now the issue monetization of perks has been on the table. No action has been taken because the powerful secretaries who monopolize access to perks block the reform and because our austerity mindset keeps us from financing a reform that accelerates growth and employment. This reform is most necessary in housing because the current distribution is iniquitous and because its holding back economic development and employment. Let us see how!
Inequity
Recall government-owned accommodation such as houses, bungalows or apartments located in the posh areas of metropolitan centers. The location and addresses themselves are prestigious and symbolizing power.
Nadeemul Haque is an economist and the former Deputy Chairman of the Planning Commission of Pakistan, and the former Vice Chancellor of the Pakistan Institute of Development Economics. He previously worked for decades at the International Monetary Fund.
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What is less well known is that not all civil servants get these houses. Of the 447,155 civil servants, n 8% have the privilege of getting government-owned accommodation such as houses, bungalows or apartments located in the posh areas of metropolitan centers; n 20% are living in government hired accommodations, n the rest, 72% are getting house rent allowances which are equivalent to 45% of basic pay in Islamabad and some big cities while in smaller cities the allowance is 30%. n These disparities in entitlements have adversely affected performance in many ways. n Competition for the scarce resource happens through means other than performance on public service delivery. Performance on the job is no longer a focus. n Officers are distracted from their function and performance and focus in getting their privilege. Hence, they are compromised. n The availability of good housing can also be a control device. n Coveted housing such as in the posh areas of Islamabad, Lahore and Karachi could have a rental value of Rs300,000 whereas the comparable allowance that is given to a comparable office who is not given a house would be in the range of Rs45,000. Taxes exacerbate the situation: The officer with the house pays no income tax on the Rs300,000 compensation he gets while the latter does.
No transparency in expenditure on maintenance of housing
Government budget figures do a great job of hiding the cost of maintenance of these houses. It is well known that over the years, the powerful have been able to do more to their housing such as making additions, expensive renovations, even swimming pools and of course building boundary walls, etc., all at taxpayer expense. When asked, all divisions deny any knowledge of where this expenditure is. They are absolutely unable to quantify it. Given the lack of information, I think we would not be wrong in putting forward the hypothesis that maintenance expenditures are likely to also be distributed in a manner that is inequitable, wasteful and sets up perverse incentives.
Monetize for growth
The Framework of Economic Growth (FEG) that the National Economic Council accepted in 2011 put forward a major innovation in the development narrative of the country. Recognizing the importance
of cities in development and the large excess demand in all areas of city activities — housing, schooling, public places, commercial, leisure — FEG suggested a shift in paradigm for our city development. FEG argued for a move from current car-friendly, suburban-sprawl approach to cities characterized by increased density and high-rise, greater availability of mixed use and less use on cars and more walkability. A move in this direction would unleash a construction boom which will be employment friendly. Moreover, a high level of construction activity would have huge spinoffs which would create further growth and employment opportunities. In addition, as history has shown, the newer cities with increased commercial, community and public space can be expected to lead to innovation and entrepreneurship. An important factor holding back this vision that was embedded in the FEG is the large hold of the bureaucracy on urban development. Not only are all the zoning and building regulations in urban areas controlled by the bureaucracies — military and civilian — they also occupy most if the prime land for official housing and for giving free plots to themselves. Be that as it may let us examine the possibilities emerging from monetization.
Monetization in Islamabad
When I was at the Planning Commission in Islamabad, we estimated the gains from a monetization of housing reform only in Islamabad. Cost: The reform would begin by adequately compensating all civil servants so that their welfare is not reduced. Previous pay commission recommendations have failed because they recommended giving them only the existing housing allowance which was a mere fraction of the rental value that the powerful were getting. It is no wonder the reform was blocked. A better approach that is used in most countries was also considered. Link civil servant salaries to the market through periodic salary surveys of the relevant private sector. Of course, a certain discount would apply and that would be decided by policy. This is a preferable approach as it gets rid if the many allowances that have crept into the system over the years. Our estimates suggested that the cost of this reform would range from about Rs30 billion annually (restricted to housing monetization for grades 17 through 22) to about Rs165 billion (if all grades were included). Changing the system would cost about Rs140 billion annually since it would change the relativities within the system. Please note those figures are probably upper bounds since we are assuming that no reform such as changing the size of the civil service is made. Of course, a fuller reform would be able to control these costs with better
outcomes. Value if business as usual: The moment you mention this reform, many factions start salivating since the land we are taking about us the most prime in the country. For example, the incumbents would like to grab it at book value pocketing a huge gain. What we want is the land for complex, high rise, investment and employment friendly construction. For that the current use of housing in fact is a waste and needs to be urgently discontinued. CDA estimates suggested that about 864 acres would be available after if all these government houses were vacated in Islamabad. Importantly this land is available in large parcels of about 20 to 50 acres. Given CDA planning, finding such parcels for commercial development is now almost impossible. Such fragmentation has destroyed construction possibilities and hence eroded value. If we go the route of the usual CDA planning and sell this land in small housing parcels, the value is estimated to be Rs.233 billion. FEG Build for growth approach: Assemble the land into large parcels for mixed use complex development. Zoning and building laws would be changed to accommodate such construction. Even with a generous allocation (about 50%) for common areas and amenities, about 423 of the 864 acres would be available for complex modern development. Note that Centaurus has been built on 5 acres with an investment of Rs50 billion (worth $500 million at the time of construction). Let us say we build the equivalent of 80 Centauruses on this land we are looking at an investment potential of $40 billion. With generous height and use rules, it was estimated by the best experts available that this could result in an investment potential of Rs6 to 10 trillion. At the time we conducted this analysis, this was equivalent to about $60 to
100 billion or 30 to 50 % of our gross domestic product (GDP). Jobs: Looked at from any perspective, these are staggering numbers. If the construction of each it these building directly involves about 3,000 workers and indirectly another 3,000. We are talking of about 500,000 new jobs. It is estimated that up to about 60 million square feet could be added in Islamabad through this construction boom. Even if a third of it is devoted to flats, we could add on well over 15,000 dwellings to the housing stock. Let us say each apartment generates 0.5 jobs to service it, we are talking of over 7,500 jobs. If the remaining commercial development eventually yields 1 job for every 1,000 square feet, about 40,000 jobs will be generated. The numbers are so exciting I do not know why we all do not come in the streets and ask for this long overdue reform. We are begging for aid which is given to us in dribs and drabs with hardly an impact on the economy. Here we have billions of dollars of investment at our feet. Growth: Think about it! This development if done well without bureaucratic interference could take 10 years. Let us take a straight-line approach, investment would increase by 3 to 5% of GDP annually. Based on our existing growth-investment relationship, this could increase growth by 1–2 % annually over and above other initiatives. The value of bureaucracy: So, the current comforts of the bureaucrats are costing us about 3–5% of GDP in forgone investment, about a million jobs, and 1–2% of growth annually. Think about it are they doing that valuable a job? Finally, this is in Islamabad alone. What if we could do it in the whole country? It would transform Pakistan. Now do u see why we argued for it vociferously in FEG.n
COMMENT
For the stock market,
the worst may be over,
but the recovery is not here yet Analysts at EFG Hermes believe that the current recovery has some weaknesses to it, which means that many sectors of the economy will need to wait until 2021 for growth to truly kick in 40
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fter a brutal year of losses, the stock market looks ready for a recovery. Pakistani equities – as measured by the benchmark KSE-100 index have rallied 20% over the past six months and are up 10% for the calendar year thus far. But, caution analysts at EFG Hermes, an investment bank, that does not necessarily mean that an economic recovery is on its way just yet. In a wide-ranging analysis that covers several markets ahead of the 2020 calendar year, EFG Hermes sounds a largely positive note when it comes to investing in the Pakistani market, noting several key themes that signal the prospects for profitable investments in the country by equity portfolio
Implied returns
28%
The amount by which the benchmark KSE-100 index would need to rise for the market’s price-to-earnings ratio to hit the levels it has historically been at
investors. But it cautions against optimism just yet, noting that while some sectors may see a recovery this year the broader market is not likely to begin recovering until 2021. “We expect the performance in 2020 to be driven by the State Bank of Pakistan’s (SBP) monetary stance (a rate cut by the second half of 2020 looks likely), earnings delivery for banks, signs of a bottoming out for cyclicals and capital inflows,” wrote analysts at EFG Hermes. The main cause for hesitation appears to be the State Bank’s monetary policy and the speed and timing of the central bank ratcheting down interest rates in the economy, which
in turn is driven by inflation rates. Analysts at EFG – as well as other investment banks – believe that inflation has not quite peaked yet, which means there is likely some time to go before the SBP begins to decrease the benchmark discount rate from the current 13.25%. The broader macroeconomic picture appears to be stabilizing, particularly on the current account deficit and the fiscal deficit. “Pakistan’s macro economy is progressing confidently, with macro stabilisation in the first few months of its newly signed three-year IMF programme. In the first four months of the year, the country’s external adjustment gained further pace, the USD-PKR appreciated, fiscal deficit targets were achieved, and exports showed signs of recovery,” wrote analysts at EFG. However, there are some troubling signs within those numbers. For instance, while it is true that the current account deficit has turned into a surplus, what is causing that is somewhat of an area of concern. “The quality of adjustment has been, so far, relatively poor, resting far more on imports compression, which is clearly reflecting weakening domestic demand, rather than export growth. The latter has been, thus far, quite moderate (only 3.4% YTD), though there are a few reasons to believe this should improve gradually, including a pick-up in export volumes,” stated the EFG report. As a result of that underlying weakness, analysts believe that while the stock market will recover from recent lows, a broad-based recovery will likely take longer than the recent rally might imply. The year 2020 is likely to be marked with a somewhat selective recovery, with some sectors continuing to see a recovery, while others continuing to languish until inflation begins to decline and consumer spending power returns, likely not until at least 2021. Among the sectors most likely to recover are the consumer cyclical stocks, such as the automobile manufacturers, which have seen their stocks absolutely pummeled over the last few months as auto sales continue their painful and sharp decline this year. It is unlikely that auto sales will begin to recover until at least the latter half of 2020, according to some analysts. However, the stock may have over-corrected and are currently trading at relatively depressed values. Valuation is a theme that the EFG analysts believe will drive stock market returns in 2020. Pakistan equities are currently trading at approximately 6 times their expected earnings for the upcoming year. However, the historical average for Pakistani stocks is closer to 7.7 times expected earnings, which implies that a pure reversion to the mean alone would yield a nearly 28% return on stocks.
Depressed valuations
6.0x
The current multiple of stock prices to expected earnings over the coming year for companies listed on the Pakistan Stock Exchange, lower than the historical averages
Reversion to the mean
7.7x
The historical average of the multiple of stock prices to expected earnings over the coming year for companies listed on the Pakistan Stock Exchange
Another driver of recovery in the market will likely be the return of foreign investors, who have historically been a significant driver of prices in the market. Between 2015 and 2018, foreign investors were net sellers, selling about $1.7 billion more than they bought. Over the past few months, however, that trend appears to be reversing, and foreign investors have become net buyers again. “Foreigners have been net buyers this year (mostly concentrated in banks and materials). We expect that such flows will pick up in 2020, augmented by the rebalancing in the MSCI frontier markets index in May 2020,” stated the EFG report. The foreign investor interest in banking stocks is driven in large part due to the rising interest rate environment, when banks are typically able to reprice their loans higher much faster than they have to reprice the rate they pay out depositors. That results in an increase in net interest income (interest income received from borrowers, minus interest paid out to depositors), which in turn drives up profitability and thus stock prices. The risk, of course, is that the higher interest rates on loans causes many borrowers to start defaulting on their loans, which in turn would increase loan losses for the banks. While EFG highlights that as a risk, current interest rates are significantly lower than they were during the last financial crisis, when interest rates on some loans exceeded 20%. n
CAPITAL MARKETS