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CONTENTS

12 How on earth are Sarya manufacturers consistently coming up with great ads? And why all of a sudden now? 16 10 focus areas for Pakistan’s economic prosperity Samad Dawood

18 Can Careem crack the super-app code? 24 The locusts are new, the wheat crisis is not 29 No lockdown, no problem: oil volumes increase in May

32 Why foreign investors love MCB Bank 34 Despite surge in Corona cases, what makes traders push for a complete opening of the economy?

38 Mobilink Microfinance claims to be Pakistan’s largest digital bank. Is it?

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 l Hassan Naqvi l Shahab Omer 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

WELCOME

If you're not paying for journalism, you're paying to not have journalism Quality is the staple product of this stapled product. Or so we think. As do you, if reader feedback is to be believed. This leads to an important question: if, in such a brief period of time, Profit has managed to get on top of the business journalism segment, why didn’t the rest of the news media houses, with decades upon decades of experience in journalism, even try to get in on the game? Granted, they all do have a business section. But it seems to be there mostly to report macroeconomic developments. The reason is that reporting on business can be far more risky than reporting on (most parts of) the government. The print edition that the reader goes through is largely - and the online edition entirely - paid for by the advertisers. And who is the advertiser? The very entities that business journalists are supposed to report on. That makes matters extremely tricky. Profit - in its mission statement - did not want to fall into the mediocrity of compliance that other business journalism outfits are waist deep in. That mission statement of making businesses accountable wasn’t just hollow words. Since our launch, we have demonstrated our willingness to take on big advertisers if a story demanded it. There’s Nestle, Engro, Abu Dhabi Group, Standard Chartered Bank, Packages group, Habib Metro Bank, Habib Bank, Bahria Town, Akzo Nobel, Careem, the entire insurance industry, the list is long…. The communications departments of corporates were nonplussed in the beginning at this hitherto unknown standard of reporting. Some adapted well to the new reality and kept making advertising decisions based on merit, regardless of how they were covered. Others were more vindictive. --------------------------------------

The need for the media to cover private businesses in the first place is lost out on many. First of all, private companies can, at times, do shady business with the government itself, or capitalise off some negative externalities that can cost the taxpayers money. Second, there might be corruption in the businesses. Third, there might not be corruption in the businesses but they just might be grossly mismanaged. But the second and third reasons don’t make sense, you say? Well, why not? For publicly listed companies, the shareholders need to have someone looking out for them.

FROM THE EXECUTIVE EDITOR

Furthermore, even in the case of private companies, it should be kept in mind that these businesses are thriving organisms. Surely their creditors and more so their employees need to know that the organisation isn’t being steered to oblivion by reckless mismanagement. Profit also seeks to serve the business community by framing the national debate on the economy from a perspective that does not place a negative value on the profit motive itself. Terms like munafa-khori are used in the vernacular press as synonymous to racketeering. It’s not. --------------------------------------

Navigating the already sketchy monetisation models that the news media is facing in the age of the internet became far tougher for Profit than for other news outfits. But the third of the triple whammy is the Corona crisis, which has made matters worse. But there is also a fourth problem: our urge to give the readers more content rather than less. To scale up our coverage, rather than, well, be sensible about it. To - in what is ironic for Pakistan’s leading business reporter - make bad business decisions. To that end, one thing is clear: ad revenue alone cannot, and in case of business journalism, should not cut it. The readers keep telling us how much they value our reportage; it’s time for them to put a price on it. From today, we are going to put some of our best content behind a paywall. It will cost as little as Rs 300 per month to get access. Cherry on top, subscribers will get complimentary full digital access to the Wall Street Journal, otherwise sold at USD 28.99 per month, including the Apps and ePaper. Stephan Pastis, creator of the syndicated comic strip "Pearls Before Swine," nailed this with his sketch of a conversation between Goat and Pig. Pig thinks he has spotted a case of financial corruption. Goat replies such corrupt behavior would surely have been exposed by the media. Enters a former journalist, recently laid off. "If you're not paying for journalism, you're paying to not have journalism." Time to sign up for our paid subscriptions.

Babar Nizami

Executive Editor

Readers Say Well done to the Profit team, this was a very well written article and was enjoyable to read, but only insofar as the writing. The content is scary and ominous. However, it was well written, well researched, and I sincerely hope that somebody in a position of power reads this and feels the pain of the farmers. It is only if they feel the pain of the farmer that they will want to take measures that are strong, which are the need of the hour. Appropriate action needs to be taken by the government, which has been lacking up until this point. For now, all I can do is pray and for the farmers, and thank you for highlighting the plight of the poor. Apropos: Hey shehri babu, here is why you need to pay attention to the locust invasion Iftikhar Ahmed, Websit That’s the reason IBA is better. LUMS talent pool is among the rich elites who afford to pay such high fees. So lets say in our country, 50000 families can afford to pay that high fee for their kids interested in pursuing management sciences. Many of them would have their kids study abroad. Out of the remaining, those who pass the LUMS test get selected. For IBA, that talent pool is considerably higher and hence theoretically, better quality and more talented students get selected in IBA, compared to LUMS. However, the teaching methods and quality of teachers in LUMS are far superior than that in IBA (although IBA is catching up on that). But overall, the quality of students matters more as the brilliant ones don’t really need the teacher to gain proficiency, especially over complex subjects such as Finance, Maths, Accounting etc. Apropos: The LUMS price hike: how not to handle higher education in a pandemic Anonymous, website

facebook.com/Profitpk twitter.com/Profitpk linkedin.com/showcase/13251020 profit.com.pk profit@pakistantoday.com

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What about foreign exchange then? This nation, and particularly this government, wanted increased exports to an obsessive extent. A shortage of dollars will lead to rupee depreciation, which will lead to more inflation. Do people even know what they are saying? Of course you or I cannot personally go and export these mangoes, but the least we can do is not laugh and be happy about it because there might be more and cheaper mangoes on the market. I mean, what else do we want as a nation? Our exports just declined and we are talking about eating mangoes

rather than being mature and feeling sorry about it. What else do we export then? Machinery? Meds? God help this nation because clearly we are simply concerned with sucking on sweet mangoes in the moment and do not give a single worry about the future. It seems Iqbal was right, the last generation couldn't do anything, so it is now up to the young minds of the current generation, who must, with revolutionary zeal, lead the way forward. Apropos: Pakistan’s mango exports take huge hit amid Covid-19 restrictions Hassan Abbas, Facebook It will only enable a black market for cigarettes. Nothing good will come out of this. The campaign against cigarettes should be done by institutions other than the government, like mosques, schools, media, and most importantly, families. Only these institutions can help reduce the use of cigarettes. Apropos: Anti-tobacco activists demand Rs20 increase in FED on cigarettes Sediq Heran, Facebook The tajirs of this country cannot digest anything legitimate. Immediately after praying, the next task is to make money selling fake goods to the public. And when those products are things as crucial as PPE and hand sanitizers in the middle of the global pandemic, they are putting the lives of the public at stake. But this does not seem to bother them in the least. The government will not do anything as all departments are paid commission to let these fake goods flood the market. Apropos: Covid-19: Ineffective hand sanitisers flood local markets in absence of regulatory oversight Usf Max, Facebook Since hand sanitizers are alcohol based, with the added requirement that they be at least 70% alcohol based to be effective against coronavirus according to the World Health Organisation (WHO), Murree Brewery is actually a suitable option to start producing hand sanitizers. This is not even unprecedented, in the UK for example, many breweries have stepped up and come forward to meet the increasing demand of sanitizers by stopping beer production, and switching to producing hand sanitizers instead. Apropos: Covid-19: Ineffective hand sanitisers flood local markets in absence of regulatory oversight Maria Mustafa, Facebook

COMMENTS

IN BRIEF The price of roti has increased from Rs6 to Rs10, while naan has increased from Rs10 to Rs15. The unpopular decision was taken by the Muttahida Naan Roti Association in an emergency meeting. Not all state enterprises are failing: Pakistan Post saw its revenue increase by 110% last year, according to Minister for Communications Murad Saeed.

Pakistan International Airlines (PIA) runs a loss of around Rs6 billion every month, according to the airline’s CEO Air Marshal Arshad Malik.

“Lockdowns are a luxury of the rich. Countries like Pakistan cannot afford them.” State Bank of Pakistan Governor Reza Baqir in a webinar held by the World Bank.

Nadeem Haque, the vice chancellor of the Pakistan Institute of Development Economics, in a since deleted tweet. The former IMF staffer later tweeted asking for names of women for a panel on markets and energy; the group ‘Women in Energy - Pakistan’ responded with 50 women experts.

“So ppl ask me to gender balance my panel. Ok how? Should I put in the poor lady who knows nothing or the well dressed one with English who knows nothing?”

Rehan Shaikh has been appointed the CEO of Standard Chartered Bank Pakistan, replacing former CEO Shazad Dada. Shaikh is the current CEO of Islamic Banking at Standard Chartered in Dubai.

Taking matters into their own hands: Taxpayers Alliance Pakistan, a voluntary network of citizens, was set up earlier this week. The alliance wants to lower taxes on businesses and individuals, and claims the Federal Board of Revenue needs to be more ‘professionally competent’.

The OECD has forecast a global slump of 6% this year. However, if a second wave of the Covid-19 pandemic hits, the OECD predicts a contraction of 7.6%.

The Economic Coordination Committee has approved the Electric Vehicle policy for motorcycles and rickshaws. A similar policy for cars is expected later this year. 11

acter by depicting a father and the sacrifices he makes for the greater good of his family. Industry experts told Profit that surprisingly the best of Pakistani advertising is coming from the least expected industry. At this rate who knows, maybe one day the highest paid brand managers might be working for the seths in the cement sector.

Practitioner Verdict - 90% Fresh!

By Babar Khan Javed

omewhere around the middle of the 1990's, the paint industry started to place monetary tokens inside paint cans in order to incentivise the painter and the contractor to recommend a certain brand of paint. It still does. Without much effort to communicate the product differentiation to their final consumers, most of the marketing budgets for different paint companies went towards the tokens instead of building their brands. Only multinational paint brands ICI Dulux and Berger Robiallac could be seen on television. Even though the practice of token prevails to this day, one can see a major shift even in the marketing budgets of local paint companies like Master and Brighto, from tokens to building their brands, and all the while trying to generate the pull from the actual consumer. Similarly, the steel rebars category which has historically relied on dealings on a business to business (B2B) level with architects, builders, and contractors and has very recently started to evolve its marketing for a business to consumer (B2C) audience pioneered by the trend-setting ads from Mughal Supreme in 2018 and 2019. Similarly, in an effort to build top of mind recall and create an emotional bond with its end consumer, Amreli Steels Limited has launched a new integrated marketing campaign that aims to position itself as the preferred company for those with the strength of char-

layed by Shabbir Jan, the lead character of the ad is a father whose actions demonstrate the difference between doing what is right and what is popular. This is depicted with him waiting at red signals as other motorists pass by him, keeping meetings on track, rejecting bribes to the dismay of colleagues, denying requests to use his goodwill to secure a job for his son, and sacrificing his short term dreams so his daughter can study abroad. According to Sohaib Hasan, deputy brand manager at Amreli Steels Limited, the production side of the advertisement was ready by March 2020, with plans to release nationwide after Pakistan Day - the 23rd of March - with the lockdown due to C19 stalling the launch. He said that when markets opened in May and there was an ease of doing business, the brand team considered releasing the campaign after Eid with a digital-first route. The channels on digital span YouTube, Facebook, Google Display Network, Instagram Stories, and various local publishers. The advert has largely gotten nods of approval from advertising gurus and industry experts. “What we need to understand is that consumers don’t want functional ads about the nuts and bolts,” said Nida Haider, managing partner at IAL Saatchi & Saatchi. “Consumers don’t want reasons to buy our self-aggrandized claims, they want emotion. They want to feel something. They want to be moved. And that is what leads to recall, consideration, and purchase. The brand that can move people can control categories.” Sidra Salman, creative director at Synite Digital, probably had the best and simplest insight on how Amreli steel was able to nail it, saying this was advertising and brand building done right. “Identify the bulls-eye, find

“As there are very few points of differentiation in our product category and everybody says ‘sarya sarya hota hai’, we thought to take this route to touch our [target groups] heart and be there as a brand in their heart and mind,” Sohaib Hasan, deputy brand manager at Amreli Steels Limited

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their deepest dilemmas, understand their real aspirations and build a story around it - this is and will always be the perfect recipe,” she said. “It is a reminder that good ideas/stories come to those who respect the process. It is about time that the local advertising fraternity put some method to our unhinged creativity to consistently create such relatable stories.” “A huge segment of the middle class can relate to the insights used,” said Sidra Jung, CEO of Team Reactivate. “For sure the brand has been missing for most of the dwell time, even though it was refreshing to see ads that are less brandled but there was a slight awkwardness when connecting the product to the insight towards the end. I feel it because the insight picked was not too close to the product. It was closer to the user.” “There are two ways one can review this ad; as an ‘accha’ critic or a ‘sahi’ critic,” said Umair Kazi, a partner at Ishtehari. “By the ad’s own narrative, I decided that the unapologetic yet unvarnished approach would be more apt. I watched the ad three times… taking mental notes so I could surgically dissect it to mere fragments of fails. Alas, I couldn’t find any fault. It pains me to say this, because our agency had also pitched (unsuccessfully) for this brand. But kudos to Amreli; they’ve chosen the right message, the right agency, and the right approach.” His lavish praise continued, adding that the ad did not become stale, and that he watched it thrice to look for flaws, but only found greater depth in the story each time. “To those that might say the brand comes in too late, or that it could’ve been a Vital ad, or that 2 minutes is stretching it… these are all things we’ll keep trolling about in marketing circle jerks while the rest of the country is busy Whatsapping this to their

“What we need to understand is that consumers don’t want functional ads about the nuts and bolts. Consumers don’t want reasons to buy our self-aggrandized claims, they want emotion. They want to feel something. They want to be moved” Nida Haider, managing partner at IAL Saatchi & Saatchi

“For sure the brand has been missing for most of the dwell time, even though it was refreshing to see ads that are less brandled but there was a slight awkwardness when connecting the product to the insight towards the end.” Sidra Jung, CEO of Team Reactivate

family groups and tagging that one unsuccessful but ‘sahi’ mamoo. Granted, the ad feels like almost everything else out of Zaheer’s zambeel (the man is a walking concept archive)… but at this point, I’m just nitpicking. I do, however, wish that the cinematography was a little grittier. The overproduced shots make it look like an ad; I’d prefer it looked like content… which it undoubtedly is. A fine specimen at that, too.” “This ad focused on the narrative building through which they strongly communicate the strength of value in building a strong character of a person with principles and then beautifully connecting it with the strength of their steel,” said Sheikh Danish Ejaz, CEO of Madvertising. “A job very well done I must say and the link between connecting the emotional and functional

elements of the brand is outstanding. Kudos to the team who conceived the idea!” “In my opinion, the TVC hits all the right spots,” said Adeeqa Nazir, Head of Influencer Marketing of Digitz. “It communicates the emotional value of having your own house, of working towards it one pay cheque at a time. It gives the due importance to responsible construction as compared to a fancier one. And most of all, Amreli Steels addresses the stereotype of a male dominating field of work in a very beautiful, non-confirmative way. That’s what makes it one of the best ads I have seen in some time.”

Overview

“A

s there are very few points of differentiation in our product category and everybody says ‘sarya sarya hota hai’, we thought to take this route to touch our [target groups] heart and be there as a brand in their heart and mind,” said Sohaib Hasan, the earlier mentioned deputy brand manager at Amreli Steels Limited. “And yes, with all this marketing to support the sales team in achieving [their] targets.” The steel rebars manufacturer is implied through the ad as being the right choice as opposed to competitors which are just popular choices. This positioning is verbalized as the difference between “Sahi” and “Achay”. The overall theme of reliability has been consistent with how Amreli Steels Limited positions itself, with the 2019 campaign focused on strength to withstand earthquakes while the 2018 campaign centered around resilience as a strength of character. “In our category, there is no impulse or immediate buying and in many of the cases it is just one time but, so a sales lost once is lost for life,” said Hasan. “Moreover, as per the [research

from AC Nielsen], the product one ends up buying is eventually the product one ends up recommending.” Research from AC Nielsen told the brand team at Amreli Steels Limited that there are two types of categories - imagery driven and familiarity driven. Speaking to Profit, Hasan said that since the steel rebars category is familiarity driven - with a highly undifferentiated market - the research agency advised the brand team to go with an emotional concept - in line with findings from the brand health tracker. They were told that doing so would help the Amreli Steels Limited brand stay top of mind whenever the target audience thought of making a purchase. “Initially we thought would the viewers be able to understand the difference between ‘acha’ vs ‘sahi’ but when the storyboard was pitched to us backed by a strong key insight we all said solid hai boss,” said Hassan. “Thanks to the Nielsen Team - Rubina Asad and Omer Rizwan - as the findings from our previous [brand health tracking] also supported this clutter-breaking and emotional concept.” Hasan credits the minds behind the memorable Kingtox commercial - iD Creations and Arey Wah with cracking the campaign big idea - “Aap ki tarha SOLID” - with Zaheeruddin Ahmed at the helm. “This campaign was conceived after months of rigorous brainstorming, numerous strategy sessions, and countless revisions with the aim of creating an emotional connection with our target audience,” said Mohsin Ali Sadiq, senior marketing manager at Amreli Steels Limited. “The essence of the communication is knowing the difference between what is popular i.e. “Acha” and what is right i.e. “Sahi” and choosing what is “Sahi.”

Digital

“I

nitially we planned to do some digital PR also but due to the kind of response we have received from and the earned media we have received so far, we have cut down on it,” he said. “In ATL, we plan to come on TV early in the coming fiscal year and from next week we will be on air on the radio. As far as [out of home] is concerned we have our adapt to this campaign [which] will be live on all screens of Jinnah Terminal as we have a year-long deal with them.” He credits the thought leadership at Starcrest Communications in coming up with a plan that eased any apprehension on the route. Sadiq said that with the change in media consumption habits brought about by C19, this campaign will be driven on digital platforms exclusively. Currently on YouTube and Facebook, the DVC has nearly 50 thousand and 2.3 million views respectively so far.

Sidra Salman, creative director at Synite Digital, probably had the best and simplest insight on how Amreli steel was able to nail it, saying this was advertising and brand building done right. “Identify the bulls-eye, find their deepest dilemmas, understand their real aspirations and build a story around it - this is and will always be the perfect recipe. It is a reminder that good ideas/stories come to those who respect the process. It is about time that the local advertising fraternity put some method to our unhinged creativity to consistently create such relatable stories.” Hasan credited Mindshare with being part of the creative process, with the media agency offering inputs during creative development as well. “So, while we were deciding between the concepts we had their input on the concepts as well as started planning because it was the first time we were coming up with such a long ad,” he said. “So since day one, they have been there with us on this project but due to COVID-19, we took [the] digital route.” He added that Mindshare is now working with Amreli Steels Limited on the radio plan for the coming week with the TV plan rolling out early in the coming fiscal year.

Return on Marketing Investment

“

Our expectations have been exceeded so far with the kind of responses we are receiving,” said Hasan. “We wanted that whenever somebody thinks of steel rebars Amreli Steels Limited in the top of mind and most preferred brand. From the sentiment analysis on social media, and a significant in-

crease in leads generated from social media and influx of calls on IVR we are glad that within a few days of campaign launch we are on the right track.” n

Campaign Credits Production House: iD Creations S. Zaheeruddin Ahmed, COO Hamza Imam, Director

Creative Agency: Arey Wah Kamran Sarfraz, COO

Digital Agency: Starcrest Communications Zameer Qureshi, CEO Faisal Sheikh, Consultant

Media Agency: Mindshare Naveed Asghar, CEO Agha Zohaib, MD Altamash Kohati, Business Director Mustafa Sabir, Senior Buying Manager Hamza Jafri, former Media Strategist [with OPPO since June 2020]

Research Agency: AC Nielsen Rubina Asad, Associate Director - Customer Insights Muhammad Omer Rizwan, Senior Research Executive - Customer Insights

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OPINION

Samad Dawood

10 focus areas for Pakistan’s economic prosperity In order to build long-term competitiveness and prosperity in the Pakistani economy, here are some things that merit the government’s attention

n times of political manoeuvrings and the understandable focus on the Covid-19 crisis, it is important to remind ourselves that we still need an economic system that provides prosperity to our people. Here are my top ten most important things for the government of Pakistan to get right in order to have sustained economic growth. This is by no means an exhaustive list. I acknowledge that I have had to leave some really important issues out. The government should have a clearly defined understanding of the problems in these areas, develop critical key performance indicators (KPIs) to track its own performance, and provide periodic progress updates to the public to ensure better accountability.

1. Introduce market-based reforms in the energy sector.

is the vice chairman of the board of directors at Engro Corporation, chairman at Frieslandcampina Engro Pakistan, and a board member at Dawood Hercules Corporation, Engro Fertilizers, Enfrashare, Reon, Dawood Industries, and the Pakistan Business Council

2. Establish world class science based academic institutions in partnership with Chinese.

These knowledge spillovers will be critical to support longterm productivity growth. We also need the government to support e-learning and upgrade the primary and secondary school curriculum to include problem solving (logic/mathematics), critical thinking/reasoning (science/philosophy), creative expression (art and humanities) and principle-based decision making (values/ethics).

3. Price water usage and stop agriculture support prices, especially for sugar cane.

About 90% of water in Pakistan is used to generate only about 5% of the GDP. And GDP productivity is only $1.5 per cubic metre of water, versus the global average of $8 per cubic metre. Water is already scarce – we have less than 1000 cubic metres per capita in Pakistan – yet we are producing water thirsty, low value-added crops which can easily be imported, and yet at the same time we are importing water value added crops like vegetables and legumes. Fun fact about Pakistan: agricultural productivity actually increases during droughts due to lower “market failure” as farmers switch to more water productive crops

The government needs to introduce market-based reforms in the energy

Samad Dawood

sector – for both electricity and natural gas – based on a transfer of control over the distribution infrastructure to provinces. The government should also bring market-based reforms in the petroleum sector. Currently, the government of Pakistan sets the wellhead price, the retail price, refining margins, as well as investor returns, all of which incentivises rent seeking behaviour and poor resource allocation. This has also caused Pakistan to have the highest electricity rates in the region at 12 cents per kilowatt-hour (kWh) as well as reduced annual gross domestic product (GDP) growth by 2%. The government has to move away from actively participating in markets to a role of a regulator of markets through empowered institutions that encourage competition.

4. Increase the tax net through proper documentation whilst reducing taxes on the formal sector. This will help access to formal financing for the small and medium enterprise (SME) sector, which currently accounts for only 5% of bank financing. The government also needs to push for the elimination of the practice of double book-keeping, as well as encouraging greater use of

technology-based solutions, which will lead to more productivity gains. In addition, the government of Pakistan must take immediate and meaningful steps to increase credit to the private sector – such as through tax incentives. Private sector credit in Pakistan is currently at just 18.8% of GDP, versus 50% in India. More credit to the private sector will have a multiplier impact on GDP growth.

5. Diversify and expand the export base through new products, new services, and new markets.

Our exports have not changed much since the Indus Valley Civilisation traded cotton and grain with Mesopotamian empires over 5,000 years ago. Cotton textiles and foods still account for over 70% of Pakistan’s exports. We need the government to create specialised industrial zones that will be based on manufacturing of goods to export but for new products and markets (such as engineering, chemicals, electronics and food products). Also, the government needs to support the development of formalised information technology services export sector – IT consultancies, business process outsourcing (BPO), etc. – through a cluster approach. No country has ever gone from developing to developed without exports. and we need to target having an exports-to-import ratio of 2, from the current 0.5.

6. Encourage the development of a digital infrastructure in order to bridge the digital divide and democratise learning and market access.

Every 10% increase in broadband penetration increases GDP growth by 1.2%. Fixed-line broadband penetration – the most reliable and high-quality kind – is still only 0.25% of the population. Over 50 million people live in areas that have 3G or 4G cellular coverage but still do not have access to a smartphone. This needs to change.

7. Introduce market-based reforms and investment in the transport industry, especially high-speed rail, port infrastructure and intra-city transport.

Currently, about 92% of all land transport is through trucks, which is among the highest in the world. Poor logistical efficiency leads to a loss of competitiveness for local industries, poor city planning, environmental degradation,

and poorer living standards.

8. Encourage local and international tourism.

The potential for large scale employment and foreign exchange inflows through tourism is enormous. Plus, it gives the country a softer image and allows for more exchange of ideas and capabilities. There is a tremendous opportunity in this sector, given Pakistan’s natural, historical, religious, and cultural assets. Yet a total of 17,823 tourists visited Pakistan in 2019 compared to 1.9 million visiting Sri Lanka, 10 million in India, and 39 million in Thailand.

9. Reduce the propensity for real estate to be used to park black money. This artificially increases asset prices, thereby reducing the ability for people to buy homes through mortgages. Pakistan has one of the highest home price-to-annual income ratio at 11:1 versus 8.35 for the UK, even though interest rates are much lower there. Loans to bank

employees are more than the entire mortgage market of the country. Also, the government should consider federal insurance schemes to kick start mortgage-based financing, which will substantially increase private sector credit and create demand for many ancillary local industries.

10. Invest in environmental and social assets.

Pakistan is the 7th most vulnerable country to the effects of climate change and has one of the lowest forest cover, currently at 2% of our land area. Furthermore, the health impact of a poor environment is large due to poor water and air quality-related medical issues, especially amongst the most vulnerable segments of the population. About 75% of medical issues in children in Pakistan are due to water- and airborne diseases. In addition, greater involvement of women in the labour force will also drive economic growth. The female labour force participation rate in Pakistan is 18% versus 59% in Thailand. n

COMMENT

TECHNOLOGY

By Farooq Tirmizi and Syeda Masooma

ho would have thought that it would be ride-hailing, of all services, that would get Pakistanis used to the idea of spending money over the internet? Entrepreneurs and companies have been trying their hand at e-commerce in Pakistan for at least a decade now, but it took the arrival of ride-hailing giant Careem in Pakistan to get people used to the idea of paying for services or goods that they bought over the internet. So, if you are Careem, and you have just achieved what was – in the Pakistani imagination – considered almost impossible, it would be downright irresponsible not to take it one step further and try to grow and capture as much of the e-commerce market in the country as possible. That seems to be the idea behind Careem’s launch of its super-app – something that Careem founder Mudassir Sheikha has been talking about publicly since at least early 2019 – which launches for the Pakistani market on Monday, June 15. Here is how it works: Careem has already created the infrastructure that allows people to use its ride-hailing services and pay for them through the app, either through payment information stored in the app – such as a debit or credit card – or through credit that they have added into their Careem wallets by paying cash to the drivers (known as “captains” in Careem parlance). Why not use that infrastructure – both the app and the payment mechanism – to get people to pay for other goods and services that they may currently be buying through other apps? “Super App by Careem will be like a virtual mall, where there will be two models – services owned and offered by Careem itself (ride hailing, food, same-day-delivery capped at Rs5,000, and payment from CareemPay), and other third parties on board offering any sort of services that need communication of the vendor to the customer base,” said Zeeshan Baig, CEO of Careem Pakistan, in an interview with Profit. “The third-party vendors [marketplace] will begin to unroll towards the end of the current year or early next year,” he added.

The move towards building a super-app is the latest evolution in a business that has had to undertake a gargantuan effort in getting its target markets used to the concept of its services and building a sustainable business. In this story, we take a look at how Careem has evolved in Pakistan, and how the super-app is likely to build on the features the company has been able to add onto its platform in the four years that it has been in operation in the country. For this story, Profit was given exclusive access to Careem’s internal data, which provides a never-before-seen look at how this business has changed from when it opened its doors in Pakistan in 2016.

Building a market out of thin air

areem started off in 2012 as an app that simply provided access to existing cab and limousine services, initially in Dubai and then in other cities around the Gulf Arab region. It always had the ambition to become the region’s answer to Uber (which ultimately bought the company in early 2019 for $3.1 billion). But it was operating in a region that was very different from the United States, the home market for Uber. Uber had started off in 2009 in the middle of the biggest recession in nearly 80 years in the United States. It was a unique moment in

In the Pakistani context, Careem’s super app could be the equivalent of Apple’s use of the iTunes store to become the base for the iOS App Store on iPhones: an existing digital payment relationship successfully extended to a bigger marketplace 20

a unique country. The US at the time had three key ingredients that allowed Uber to succeed: 1. A large workforce that was out of work at the time and actively looking for sources of income 2. That population owned, or otherwise had access to, cars 3. They, and the wider US population, had access to both smartphones and 3G/4G mobile broadband internet connections. Of those conditions, the United Arab Emirates market had two of the three: plenty of people in the UAE are there for all sorts of employment, and by 2012, smartphones and mobile 3G connections were widespread in the region. What it did not have – at least at the start – was the second factor: in the UAE back then, there was a disconnect between the people who owned the cars, and the people who would be willing to drive them around for an income. Careem bridged that initial gap by partnering with existing rental car and limousine services, and extensively marketing its services to customers, proving its ability to connect cars with riders. Once it was able to demonstrate that it could do that – and do so profitably for the drivers and car-owners – it then branched out to allowing owner-drivers to offer services on its platform as well, which was the initial plan all along. Something similar happened in Careem’s evolution in Pakistan. The company waited to launch in Pakistan until 2016, around the same year that 3G and 4G connections started becoming widely available in the country. And when it did so, it partnered with car rental companies or with small business owners who would be willing to own multiple cars and hire salaried or fare-sharing drivers to operate them on the platform. In 2016, according to the company’s

“The current Covid-19 crisis made the demand for home deliveries shoot up by a great deal. Careem thought it was a prudent time to enter into the delivery business – food and other deliverables. The lockdown and the conditions changed consumers’ behaviour significantly and it was the right time to start these extra services.” Zeeshan Baig, CEO of Careem Pakistan

internal data, about 84% of the cars on its platform were driven by drivers who were salaried employees of a car rental company or other small business that had signed onto Careem. Only 16% were people who owned their own cars. This model got the company off the ground, but it had its limits. “When we started operating here, the easiest thing for us was to go to rental companies and offer them our platform,” said Baig. “They already had the fleets, drivers and everything. But that model means a lot of shares to lots of parties. The margins are already low in this type of work and that model further diluted it.” Needless to say, Careem wanted to move to a business model more similar to that of Uber in its mature markets, and that meant spending intensely in order to grow, offering artificially low fares to customers and bonuses and all sorts of other cash incentives to drivers. “As with any startup and anywhere in the world, in the initial days there is the ‘buying growth’ phase,” said Baig. And Careem was aggressive in its effort to buy that growth. Between 2016 and 2018, average fares per ride for its ride hailing business went down by 35.7%, from Rs364 per ride on average, to just Rs234 per ride. And this was not driven by people using the app for shorter rides: while the average distance traveled did decline somewhat – from 10.7 kilometres in 2016 to 9.5 kilometres in 2018 – the bulk of the difference came from a 27.6% reduction in average fare per kilometre, which went down from Rs34 per kilometre in 2016 to Rs24.6 in 2018. Drivers during this time, meanwhile, kept getting higher compensation to continue driving on the platform so that there would always be enough cars for people whenever they needed to hail a ride. In other words, Careem did not care if it made money on each ride. It cared about the total number of rides, the number of customers, and the number of drivers using its platform, and it was willing to spend the money to get them. That growth strategy – termed ‘blitzs-

caling’ by LinkedIn founder Reid Hoffman (blitz is German for lightning) – does not come cheap. In the first four years of the company’s operations in Pakistan, Careem has invested $85 million in this market, the bulk of which has gone towards that blitzscaling strategy of ‘buying growth’. It did work, however. By the end of 2019, Careem was the largest e-commerce business in Pakistan, by a wide margin. During a year when Daraz was doing close to $50 million in annual revenue, Careem was handling closer to $250 million in annual bookings, according to sources familiar with the matter. (The company’s management did not confirm these numbers. While they shared many data points about their operations, they were not willing to discuss revenue or profitability numbers.) More importantly from the company’s perspective, the growth came as a result of more independent drivers signing onto the platform. By 2018, well over half of the drivers on the platform – 62% to be precise – were independent drivers who owned or leased their cars. That number has since grown even higher

to 86% as of early 2020. “It makes more economic sense to have independent vendors with their own cars to work with us,” said Baig. “From the quality point of view as well, a salaried driver has less opportunity cost when it comes to being efficient and following rules.” Having more independent drivers also lowers Careem’s own operating costs in Pakistan. “We used to manage vendors very strictly when we had more salaried drivers, but with independent vendors with their own cars and own investment, they are more motivated as well. So, this model also means better cars, better services, and obviously makes more economic sense,” said Baig. The platform now has 150,000 monthly active drivers across Pakistan, according to Careem’s management, out of 700,000 registered drivers, a number the company hopes to grow aggressively. “The goal is to reach the number of 1 million [registered drivers] by the end of 2020,” said Madiha Javed Qureshi, Careem Pakistan’s spokesperson, in an e-mail to Profit. “Karachi, Lahore, Islamabad happen to be our main

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centres.”

Growing the business… and profitability

fter Uber acquired Careem in early 2019, the company was able to begin taking away those incentives for drivers and raise fares for customers. The average fare per kilometre rose 12.9% in 2019, and by another 6.7% in 2020. While those increases are roughly in line with inflation for both years, it does represent a shift in Careem’s business: it no longer needs to spend money to convince users to start using its core ride hailing services and can raise prices in line with costs. The change in approach has not gone unnoticed by both riders and drivers. Many riders have noticed the rising fares, and drivers complain that the bonuses and other incentives that they used to get, and expected to continue getting, were no longer available to them, attributing the change to the Uber acquisition, which has significantly reduced competition in the Pakistani market for ride hailing services. Management, however, believes that it was time to make those changes, and insist that the Uber acquisition has not shaped their decisions on this matter. “At some point, businesses need to start making economic sense,” said Baig. “We consider both the captains and customers when we make our model, and our pricing is done after including fuel prices and other cost factors for captains so they can still earn from it, and then that pricing is offered to customers. The discontent comes when businesses move from buying growth to actually running a business. But we are confident that our model is still efficient for both captains and customers and

they will stay on board.” Yet while the management sought to downplay concerns around competition, the government did not share that view. In approving the merger, the Competition Commission of Pakistan (CCP) placed several conditions on Uber. These include a “no contractual exclusivity” clause to ensure that drivers can continue to offer their services on any platform of their choosing. It also capped Uber and Careem’s service fee at a maximum of 27.5% to ensure that it could not use its monopoly power to decrease drivers’ earnings. And it even capped the surge prices at no greater than 2.5 times normal fares. All of these conditions limit the extent to which Careem and Uber can use their combined market dominance, with limits on prices charged to both riders and drivers. These limits are set to stay in place for three years, or until another ride hailing service enters the market

and gains at least a 25% share of the market, or if multiple competing ride hailing companies enter the market and collectively gain a 33.3% share of the market. Of course, this was all before the pandemic.

Covid-19 strikes

t some level, the business suffers from both bad luck and good timing. Just as Careem’s business in Pakistan was stabilising and had achieved sustainable scale, the coronavirus pandemic hit the country – and much of the world – earlier this year, dramatically reducing the need for mobility by most of Careem’s customers. Worldwide, Careem’s business declined by 80% during the month of April, causing the company to lay off a large portion of its employees. “There is no easy way to say this, so I will get straight to the point: starting tomorrow and for the next three days, 536 of our colleagues who make up 31% of Careem will leave us. We delayed this decision as long as possible so that we could exhaust all other means to secure Careem,” wrote Careem founder and CEO Mudassir Sheikha in an e-mail to the company’s staff in early May 2020. Careem caught its fair share of flak on social media forums for making this unpopular decision. But as difficult as this time has been for many businesses – including Careem – it also represents an opportunity to streamline operations (nothing like a crisis to make you realise about which job functions you can do without) as well as more keenly look for new revenue opportunities. In the case of Careem, that new revenue opportunity has been the delivery business. In 2017, Careem acquired the Karachi-based start-

up Delivery Chacha, and fully integrated it into its operations by 2018, allowing it to diversify its revenue streams. Delivery revenue, however, did not seriously start growing until earlier this year, when it skyrocketed. The average fare per delivery rose from Rs110 in 2018 to Rs181 in 2020, an increase of 65% in just two years, helped in part by the fact that the app now does more than just restaurant delivery. “The current Covid-19 crisis made the demand for home deliveries shoot up by a great deal. Careem thought it was a prudent time to enter into the delivery business – food and other deliverables,” said Baig. “The lockdown and the conditions changed consumers’ behaviour significantly and it was the right time to start these extra services.” In other words, this was as good a time as any for Careem to launch its super app.

The super-app pivot

he tech world has been obsessed with the idea of a super app ever since Tencent’s Weixin (known internationally as WeChat) hit more than half a billion users in China in 2014. WeChat is the ultimate super app. It combines social media, messaging, maps, mobile payments, e-commerce of all sorts, all into a single app. In Pakistani terms, it would be as though Facebook, WhatsApp, Instagram, Google Maps, Daraz, and EasyPaisa were all a single app. Veon, the parent company of Jazz, had high hopes of launching Pakistan’s first super-app, but the app tries to add too many things too quickly become too that it died before it ever got off the ground. Careem, however, is different. Unlike Jazz, it already has a relationship with its users where they are used to paying for its services online, through their Careem wallets. And it

is launching at a time when people are getting more comfortable with the idea of non-physical ways of purchasing goods and services. Offering itself as the platform for that marketplace to flourish and grow – particularly if it can do so with a better payment mechanism than currently on offer – could unlock tremendous value for Careem from its existing digital assets. In the Pakistani context, this could be the equivalent of Apple’s use of the iTunes store to become the base for the iOS App Store on iPhones: an existing digital payment relationship successfully extended to a bigger marketplace. “The super app will solidify Careem as a brand that aims to ‘make people’s lives easier’ and it will be above and beyond ride hailing,” said Baig. “Every new app installed in Pakistan is deleted within the first seven days, but the retention rate of customers on super apps

is stronger. We have evidence from similar models in South East Asia and China, even though in China there is a part to be played by government support. But even without that government support, these apps succeed.” While the optimism about Careem’s super app may be somewhat warranted, there is reason to be cautious: digital payments in Pakistan are not yet as ubiquitous as they would need to be in order for these apps to succeed. Indeed, even on Careem, cash payments remain not just an option, but one of the most frequently used methods of payment. For the super app to work, Careem will need its digital wallet – Careem Pay – to succeed. On that front, there remain some regulatory hurdles that are still standing in the way. “We are in talks with the State Bank of Pakistan (SBP) for a license to completely turn Careem Pay into a digital wallet, and we have already gotten these licenses in Jordan and Saudi Arabia,” said Baig. “But in Pakistan, so far we only have closed-loop offerings for now.” Closed loop offerings mean that Careem can accept money into its digital wallet and only allow people to send money to other users within its app, or other vendors who have signed on to use the app. “We have opened ‘Daily Wallet’ for captains. Previously captains used to refuse rides on credit because of complaints that they get paid later. Now with this daily wallet they can withdraw their earnings on a daily basis,” said Baig. “For customers we have recharge and mobile top-ups, and peer to peer transfers. They can also make donations through our app, and with Super App we aim to have utility bills payment on board very soon too. And eventually we may also offer Careem cards as well.” n

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28 24

By Syeda Masooma

he locusts are finally catching up with us. How this has happened has been a sordid tale, one well recorded by the cover story of Profit’s previous issue. But in essence, it has been a long tale of neglect and the federal government turning its head and hoping the problem will go

away.

As per reports, the first swarm of locusts had come from the United Arab Emirates in mid-2019, and in the next few weeks time another new infestation arrived from Iran. There were early warnings that the problem could get out of hand. As early as May 2019, Muhammad Akram Dashti, a senator from Balochistan, was giving speeches in parliament urging the federal government to start preparing for the locust plague that had just emerged in his province. It took the government the rest of the year until they finally declared a state of national emergency in early 2020.

Originally, the Food and Agriculture Organization (FAO) had said the locust invasion was initially expected to subside by mid-November. The government decided to wait for this and let things smooth over, instead of actively trying to remove locust eggs and nests. This, along with weather conditions favourable for locust reproduction, has the FAO now saying that the second generation is 20 times bigger. Locusts move in swarms of up to 50 million, can travel 90 miles a day, and lay as many as 1,000 eggs per square metre of land. “It could have been prevented,” Senator Dashti now says. “I raised this issue when it was confined to a division of the Balochistan province. It was the responsibility of the federal government to help farmers against such destruction, but the federal government didn’t take it seriously. I requested for spraying of crops time and again. Nothing happened.” Now, he says, it is too late, and many people will starve. The senator is correct. There are now legitimate fears of food shortages sweeping through government circles, and farmers across the country continue to suffer. According to

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the FAO, Pakistan will incur losses of about PKR 353 billion in winter crops, such as wheat and potatoes, and a further PKR 464 billion in the summer crops being planted now. An update from the FAO last month warned that “it would be imperative to contain and control the desert locust infestation in the midst of the additional impacts of the COVID-19 pandemic on health, livelihoods, food security and nutrition for Pakistan’s most poor and vulnerable communities”. The Guardian reported looming catastrophe as well, saying it will be economically devastating for a country where agriculture accounts for 20% of GDP and 65% of the population live and work in agricultural areas. “Pakistan is already suffering from crippling inflation, which is now at a 12-year high, and the unprecedented economic burden imposed by the coronavirus pandemic,” the UK publication wrote. The cost of flour and vegetables had already risen by approximately 15% since the beginning of 2020, and the locust infestation, if not tackled timely and in a cost effective manner can lead to even basic food staples becoming unaffordable for the masses. State minister of Agriculture for the worst hit province, Sindh, Ismail Rahoo called the plague a “dangerous and catastrophic threat to the economy, agriculture and food security in Pakistan”. Speaking to a media outlet he said last month that the swarms would “be ten times worse than last year. They are attacking from three sides. The locusts and their eggs have now covered 50,000 square kilometres of farmland. We are expecting them to infest more than 5m hectares. And they are not just attacking Sindh province, but also the agricultural areas of Punjab and Balochistan.”

The questions you should be asking

ne positive is that the locusts have not gone unnoticed, garnering local and international media attention, with little remaining that has not

“The swarms will be ten times worse than last year. They are attacking from three sides. The locusts and their eggs have now covered 50,000 square kilometres of farmland. We are expecting them to infest more than 5m hectares.” Muhammad Ismail Rahoo, State Minister for Agriculture, Sindh already been covered by the mainstream media when it comes to locusts attack, potential wheat shortage and the price inclinations. But this kind of attention in the middle of a pandemic also shows the depth and seriousness of the problem. However, a shortage of food and a corresponding increase in both the imports and price of wheat and other food grains is not inevitable. And what is not being discussed is the impact that these higher imports will have on the economy in the long-run. It is not likely to be a one-time crisis where food fell short and the federal government jumped in with some extra borrowings and saved the day. Such a crisis, irrespective of what its shortterm solution is, leads to several deeper and long-term problems for an economy, especially an economy like Pakistan. There is a network of industries and an entire cycle of production at play here. When the wheat crops will be reduced, that would not only directly impact the farmers and landowners, but it will also have a trickle

down impact on the threshers, the flour mills, the transportation sector for wheat, as well as the marketplace for byproducts of wheat. In one glance, it is clear as day that the government might be able to make up for the end product quantity required for consumption in the country, but what about the entire chain of production and transportation that will suffer as a result of the lower wheat crop? What about the entire process mismanagement, and not to mention the vested interests for profiteering? There have also been reports of Pakistan exporting close to 0.7 million tonnes of wheat towards the end of last year despite the raging fears of wheat shortage brewing since as early as 2019. Some corners of the government have been heard saying that only 40,000 tonnes were exported to Afghanistan and that was also to be a mode of diplomacy more than a trade factor. Here, it might be notable to recall that despite exporting north of a million tonnes back in 2018, Pakistan faced

“I raised this issue when it was confined to a division of the Balochistan province. It was the responsibility of the federal government to help farmers against such destruction, but the federal government didn’t take it seriously. I requested for spraying of crops time and again. Nothing happened. Now, it is too late, and many people will starve.” Muhammad Akram Dashti, Senator

no shortage in home markets. Products like these are traded as a result of the stabilization policies for food crops, and not the other way round. Making a preemptive decision to export wheat, irrespective of whether it was done with or without the government’s knowledge of the impacts it would have, is undeniably a corrupt move, and one that will have long term and devastating impacts on the country’s economy.

What happens now that we are in the eye of the storm?

ne of the ways to see the potential impacts of the current wheat crisis and resulting requirements of imports will be to see the economic impact of a similar move that happened in 2007-8. The crisis might have taken a different form back then, but the turn of events was the same. The international price of wheat exceeded the local price and wheat was exported before, and more than it should have been in the first place. In 2007-8, when wheat stock was in surplus within Pakistan, the federal government under Musharraf administration Prime Minister Shaukat Aziz, exported around 4.3 million tonnes of wheat. The prices kept moving up and our local profiteers, possibly under the argument of earning foreign exchange for the country, kept exporting wheat until it started to present a shortage in the local market, which meant wheat had to be imported at a much higher price from the rate at which it was exported. In the later half of 2008, the Pakistan People’s Party’s Gillani administration increased the wheat support price by around 50 percent which corresponded to the international price falling down and remaining below local prices up until last year, except for a

small bump in 2011. Higher local wheat price led to food inflation across the food basket and also had a trickle down impact on inflation otherwise. It was not just the entire chain of production that saw an increase in their income as well as their prices, but the related products of wheat, such as a feedstock as well, which in turn increased prices for milk and meat. Now, the government has once again allowed unlimited import of wheat signing on the official import of 0.3 million tonnes of crops in May 2020, which is expected to rise a little further, and that too just for the first part of the year. The net impact of locust attacks and the rainy weather is yet to be seen for the rest of 2020. Considering the past data and the current situation in local and global markets, it is clearly a risky move as prices are heading upwards. Import price in 2020 would be higher than the prices at which we exported wheat earlier.

What is to be done?

or now, we seem to be repeating the 2007-8 actions, at least on a smaller scale, in 2020. To come up with the solutions, one should quickly revisit the causes of the problem. We did not have an accurate estimate of the extent of crop damage until April-May last year, and even then the government estimates did seem to show sufficiency despite the first locust attack. This can be seen in notices issued by the State Bank of Pakistan (SBP) in July 2019. There is also the factor of speculation when profiteering is factored in. in April 2019, when the news of crop damage began to make headlines, it caught speculators’ interest sooner than it did the interest of the government. The result has been higher flour prices instead of corresponding corrective policies and a corrective ban on exports. The solution to the above problem can be directly traced back to the competency and the willingness of the government to take account

of the situation at hand well before investors do, and to ensure that “diplomatic attempts” or outright brazen profiteering is not being done at the risk of local food shortage later. The government was warned time and again, but simply decided to bury their heads in the sand and hope the trouble would go away. There is not much to be recommended except perhaps that the representatives and governors of wheat policy are chosen based on merit and not on who pleases the one at the helm of affairs of the government of Pakistan. Secondly, one might consider the possibly lengthier but more suited model for imports of wheat for Pakistan, now that we are directly looking at a wheat crisis. With the option of commercial wheat imports on the table, the likelihood of cheaper wheat making its way towards Pakistan is now higher. Instead of investing on a government scale, and yet again allowing unprepared and corrupt elements opportunities to try to resolve the issue only on the end-level of making sufficient wheat available for consumption, our government will be better off by allowing those operating within the supply chain of farming and harvesting crops to bring in the required quantities from the foreign market. If this theory is correct, and the stakeholders directly related to the wheat crops start to bring in cheaper imported wheat, that would not only lead to stable prices, but will also preserve the chain of production, and thereby avoid the economic impacts created by the downfall of the related sectors of wheat production. The only negative impact will be for the seasonal profiteers, and some may say that is another added benefit more than anything else. Finally, a somewhat more permanent and blanket solution to prevent premature export of wheat is to just get rid of the price-fixing policy. By pegging our local wheat price to international prices, we can at least ensure no involvement from these profiteers with the sole purpose of making some quick bucks. n

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The lockdowns devastated consumer spending, but

food and pharmaceutical companies remain resilient

The first quarter of 2020 sees both profits and sales rise for consumer staples and pharmaceuticals, but a sharp fall for consumer discretionary and durables manufacturers

akistan consumer companies, a handy catch-all term, is a bit of a misnomer. The trajectory of a company’s revenue and profitability depends entirely on what kind of consumer good it is selling. Yes, overall, profitability in this country is not stellar: a survey of 22 Pakistani consumer companies, across staples, pharmaceuticals and discretionary items, found that total profits declined by 7% year-on-year (YoY) in the first quarter of 2020, according to Sunny

Kumar, research analyst at Topline Securities, a securities brokerage firm, in a note issued to clients on June 2. However, this figure does not show the whole picture. Pharmaceuticals – which includes five companies such as GlaxoSmithKline Pakistan, Abbott Laboratories, and AGP Pharma, among others – saw profits increase by 37% compared to the same period last year, to Rs2.6 billion. On the flip side, manufacturers of consumer discretionary items such as automobiles

did terribly. Kumar had grouped four companies under consumer discretionaries: the three car manufacturers Indus Motors, Honda Atlas, Pak Suzuki Motors, and Thal Ltd, which manufactures jute products. The total profits of all three fell by 39% to Rs2.9 billion. Meanwhile consumer staples – which includes 13 companies such as Nestle, Packages, Pakistan Tobacco, Colgate, among others – saw profits remain more or less stagnant, with a growth of 1% YoY to Rs8.35 billion. “Overall slowdown in economic activity and country-wide lockdown starting during the last week of Mar-2020 in the wake of COVID-19, resulted in lower consumers’ purchasing power,” noted Kumar. The pandemic, it seems, forced consumers to pause and consider exactly what they were opening their wallets for. In the midst of pay cuts, lay-offs, and general job uncertainty, consumers decided this was the worst possible time to buy a car. Food and cleaning products, or items that are manufactured by Nestle, Unilever or National Foods, are deemed more of a necessity, even though this sector saw an increase in overall prices. The same goes for pharmaceuticals, which are necessities that consumers will often cut back on other spending for in order to be able to continue to afford them. This holds particularly true during a climate of a global pandemic. This is reflected in the sales numbers as well. Sales for discretionary items (at this point, we will just call it autos), declined by 32% YoY in the first quarter of 2020. But the sales of consumer staples and pharmaceuticals, saw an uptick of 8% YoY and 7% YoY, respectively. “We believe, due to country wide lockdown amid COVID-19 outbreak, the overall sales of the consumer segment will be affected due to supply chain disruptions, wherein con-

“We believe, due to country wide lockdown amid COVID-19 outbreak, the overall sales of the consumer segment will be affected due to supply chain disruptions, wherein consumer discretionary firms are likely to take the hit most among others” Sunny Kumar, research analyst at Topline Securities

sumer discretionary firms are likely to take the hit most among others,” said Kumar. So first, let us look at the problem sector: autos. The overall slowdown in economic activity and country wide lockdowns, meant that sales took a hit. Foreseeing this, many such as Indus Motors and Honda Atlas sharply hiked their prices, in order to salvage some semblance of a profit. They should not have bothered: volumes witnessed a contraction of over 50% YoY, leading to a massive overall decline. Of the three auto companies, Indus fared a little better, with its sales only declined by 20% YoY, compared to Honda Atlas’ 35% YoY fall, and Pak Suzuki’s abysmal 48% decline. According to the report, Indus also helped buoy the overall gross margins of this sector, which increased by 0.11 percentage points to 8.8%. Now, to consumer staples. Much of the higher revenue in staples was actually driven by an increase in the prices of goods, as the rupee’s devaluation led to costs being passed on to consumers. There was also an increase in volumes compared to last year. Much of this growth in Kumar’s sample size was led by National Foods, which saw a 28% increase in sales compared to last year, and Unilever Pakistan Foods, which saw a 17% increase. However, it is important to note that simultaneously, general inflation has meant an increase in the costs of inputs for many consumer staple companies. The companies are then unable to fully pass on that cost to consumers, (even though the prices have increased), meaning that their own margins are affected. The gross margins of the staples business shrunk by 0.43 percentage points to 28%. In particular, the gross margins of Philip Morris, tobacco and cigarette manufacturers, fell 7.8 percentage points to 35%, while the gross margins of Pak Electron, cable manufacturers fell 4.7 percentage points to 22%. Pharmaceuticals also saw an improvement in revenues due to price increases and higher volumes. Much of this growth in this case was led by Searle, which saw a 13% increase in sales YoY, and Abbott Laboratories,

which saw an 12% increase. In this case, general inflation (linked to consumer price index) actually helped the gross margins, since it led to a rapid price increase, with gross margins rising by 1.8 percentage points to 34.3%. Within the sample size, Abbot laboratories saw an uptick in gross margins by 6.4 percentage points to 36%, and GlaxoSmithKline’s gross margins

increased by 4.3 percentage points to 33%. In fact, the general gross margins of consumer firms increased by 2.12 percentage points to 23.9% this quarter. This slow rise is indicative of consumer companies trying to figure out how to gradually pass on the impact of the rupee depreciation of the last two years, and also cost push inflation, to the consumer. n

No lockdown, no problem: oil volumes increase in May Most fuel types have seen a sharp recovery last month as pandemic-induced lockdowns ease, except for jet fuel

ne of the stranger side effects of the national lockdown imposed on Pakistan between April 1 and May 9, was witnessing perfectly empty roads in otherwise congested urban cities. No Careem, no Uber, no buses, no intra-provincial travel, no domestic flights. Who needed fuel now? With the complete lifting of restrictions later in May, oil marketing companies can rest easy: demand and sales for fuel shot right back up. Volumetric offtake increased significantly by 39% month-on-month to 1.5 million tonnes, according to Shahrukh Saleem, research analyst at AKD Securities, an investment bank, in a note issued to clients on June 3. However, volumes still declined 12% year-on-year, though this figure was expected, due to the impact of Covid-19.

However, different fuels had vastly differing rates of growth, with furnace oil and motor spirit emerging out of the slump of April, high speed diesel a little less so, while jet fuel was left somewhat crushed. Furnace oil, which is used primarily in Pakistan for electricity generation, saw its sales increase significantly by 109% in May when compared to April. There are several reasons for this: the easing of restrictions, but also the low base month of April, when not much is needed by way of surplus electricity generation, which is what furnace-oil-fired power generation units are typically used for. Some of that increase was expected, as every year in the summer there is an increase in demand for electricity (lockdown or no lockdown, something needs to run to our fans and air-conditioners).

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However, on a yearly basis, furnace oil sales declined by 51%. “We believe…[it has become] a casualty of cheaper power sources being utilized,” according to Saleem. For the last few months or so, pre-Covid, furnace oil has actually been in mild competition with natural gas, the other major fuel for power plants in Pakistan. With furnace oil prices steadily declining, it could make the difference between the cost of electricity generation from furnace oil and natural gas much smaller. If one follows Saleem’s view, natural gas just managed to edge out furnace oil, despite the decline in price. Motor spirit, or petrol, stands out for being the only fuel that has sales which not only rose on a monthly basis (by 46%), but also increased on a yearly basis (by 5% only, but still). “Apart from resumption of economic activity, we believe an increase in demand due to low prices must have played a part as well,” noted Saleem, referring to the spate of very low oil price brought about by the international oil crash. High speed diesel also saw its sales increase, (though not as significantly as the previous mentioned two fuels), rising 26% month-on-month. Much of this demand was fueled by the transport sector, and also from the agriculture sector due to wheat harvesting in April/May, according to Fawad Basir, analyst at Topline Securities, in a note issued to

clients on June 2. However, sales for high speed diesel on a yearly basis fell by 3%. One fuel that did not emerge intact? Jet fuel. The airline industry globally is basically non-existent at this point, and Pakistan’s domestic flight operations are no exception. With most flights suspended across the country. Jet fuel sales feel 22% on a monthly basis, and by a whopping 91% year-on-year. So, what does this all mean for the players in the market? Market shares for Pakistan State Oil, Attock Petroleum, Hascol Petroleum, and Shell in May stood at 42%, 9%, 8% and 7% respectively. In comparison to May 2019, PSO said its share fall by nine percentage points, while Hascol saw its share increase by 1 percentage point. May was not an especially kind month for Pakistan State Oil, despite the 58% increase in sales on a monthly basis. The company had a bit of a bungle with supply overhangs in the supply chain of independent power producers and refineries. Subsequently, there was a 93% decline in furnace oil year-on-year, which largely contributed to PSO’s own volumes declining by 27% year-on-year (compare that to the industry average of 12%). However, within retail fuels the company still retained an edge, with an increase of 61% year-on-year. This led to its market share increasing to 45.2% in May against 37.8% in April. Hascol also did well in retail fuels, with

an increase of 25% year-on-year, which took its market share to 8.6% in May, compared to 7.8% in April. Its volumes also rose by 36% MoM. PSO still might have a fighting chance, however. The Pakistan Energy Sukuk-II, which is worth Rs200 billion, was recently listed by the Pakistan Stock Exchange. The sukuk was designed to help reduce power sector circular debt. Should disbursements of payments be on the card (and the news indicates that it is being finalized), then PSO will stand to be a major beneficiary, according to Saleem. And yet, Saleem picks Attock Petroleum as the company to watch out for. Why is this? Attock’s low debt and ability to restrict inventory losses. “We maintain APL as our top pick from the sector with high refinery upliftment restricting the damage of inventory losses, while healthy working capital provides additional cushion and retrenched market share provides stability,” says Saleem. As for the future of the oil industry, the direction volumes completely depend on the easing of restrictions. As Saleem notes, “We believe there are thin chances of the government moving towards a lockdown hence the boom due to the ongoing crisis is behind us.” No lockdown might spell disaster for this country’s healthcare system and economy; but for now, at least, the oil industry is breathing easy. n

ENERGY

s there any silver lining for the automobile sector in the pretty awful year that has been 2020? Yes, and that is to just brace for whatever is happening this year, and instead focus on the years 2021 and 2022. Plus, it helps if you are Indus Motors, the Pakistani subsidiary of Toyota. This is what Hassan Arshad, analyst at Foundation Securities, a securities brokerage firm, argued in a note issued to clients on June 3: that despite the Covid-19 pandemic wreaking

AUTOMOBILES

havoc on the global and domestic economy, the firm’s outlook remains neutral on the sector, and even positive towards Indus Motors. Arshad expects demand for cars to fall 51% year-on-year (YoY) in fiscal year 2020, but rise 17% YoY in fiscal year 2021, and rise 24% YoY in fiscal year 2022. And while the three major players in the industry have somewhat low predicted earnings per shares for this year (and in the case of Pak Suzuki Motors, even negative), the predicted earnings pick up in 2021, and flourish

by 2022. To be clear, the year ahead is still going to be a bumpy ride (pun intended). Poor economic conditions have stunted growth in demand. “Low volumes have forced local players to stage multiple price hikes to keep their margins and earnings afloat,” noted Arshad. Companies have taken drastic steps, motivated by fears of rupee depreciation. For instance, Honda Atlas Cars had to increase its prices on average by Rs90,000, while Indus Motors had to increase its prices on average by

an astonishing Rs200,000. Pak Suzuki Motors has not increased its prices yet, but is expected to soon. The high prices are likely to have a spillover effect: there might be a larger market share of 1,000 and 1,300-cubic centimeter (cc) engine cars. (Car sizes are typically measured not by physical size, but by engine size, measured in cubic centimetres of displacement.) This is likely to impact Pak Suzuki Motors, which is already expected to suffer somewhat should it choose to increase its prices as well. Still – and this is important – these may be overly cautious moves. As Arshad points out, there has been relatively stable dollar and rupee parity. Additionally, the State Bank of Pakistan cut interest rates rapidly between March 17 and May 15, by a whopping 525 basis points, with the benchmark discount rate falling from the relatively high 13.25% to 8%. This cut in the policy rate is expected to reduce financing costs, and hopefully trigger consumer financing and an increase in sales. The international oil crash also means that Pakistan is currently experiencing extremely low fuel prices (In fact, as the current government recently tweeted, Pakistan has the cheapest fuel costs in South Asia). These combined factors are why Arshad expects growth to pick up in the next two fiscal years, at 17% and 24% respectively. Indus Motors – the Toyota subsidiary in Pakistan – is particularly well positioned, thanks to its new product. At the end of March, Indus Motors launched its new sedan, the Yaris. The average price of the Yaris is Rs2.7 million, which is significantly cheaper than the Corolla (at Rs3.7 million), and only Rs0.1 million more expensive than its competitor, the Honda City. Importantly, it has better features than the City. “We expect Yaris to absorb some of City’s market share due to Toyota’s high brand equity and the novelty factor of a new product,” says Arshad. Indus Motors is also protected from the drastic cut in the policy rate due to its strong

cash position. As of the third quarter of the current fiscal year 2020, it stood at Rs35.2 billion. Consequently, Arshad estimates an earnings per share of Rs70.6 for fiscal year 2020, Rs94.5 for fiscal year 2021, and Rs147.1 for fiscal year 2022. The future is not so bright for Honda Atlas, however. Unlike Indus, it has no shiny new product in the pipeline, and the company is not looking forward to competition from the Yaris. That means the overall lack of demand is expected to hit Honda Atlas a little harder. “The next two quarters are likely to be debilitating for the company due to sluggish demand pick-up following lifting of lockdown restrictions,” says Arshad. On top of this, Honda Atlas made the mistake of borrowing significantly in the shortterm, which as of the third quarter of March year, stood at Rs8.4 billion. Still, the company may just make it through. That cut in the policy rate could support the company’s earnings, and according to Arshad, improve its interest coverage ratio (or the ability of a company to pay interest on its debt) from the expected 3.1 in March year 2020 to 6.6 in March year 2021. Therefore, the earnings per share for Honda Atlas are estimat-

ed at Rs4.8 in 2020, Rs5.1 in 2021, and a jump to Rs22.4 in 2022. And, at least Honda Atlas still fares a lot better than Pak Suzuki Motors, which this report dubs ‘the major loser’. This year the company will face yet another loss, with the double whammy of increased financial costs and low volumetric demand. What happened? Well, the higher than usual finance cost is due to the company’s significant short-term borrowing, at Rs31.2 billion in the first quarter of this calendar year. This is much higher than Honda Atlas’ short term. The impact is also going to be felt for much longer, because Pak Suzuki’s inventory buildup and liquidity issues has made repayment of debts very difficult. It does not help that Pak Suzuki’s products have high demand elasticity - or more simply, that the demand for Pak Suzuki’s cars is very vulnerable to changes in price. There is a reason why Pak Suzuki has resisted increasing its prices so far: it simply cannot afford to do so, not with the intense foreign and domestic competition, like KIA, United and Prince. The end result: an estimated earnings per share of -34.2 in 2020, -0.7 in 2021, and Rs20.5 in 2022. n

Why foreign investors love MCB Bank The bank’s coonservative lending style, coupled with a management that foreign investors have come to trust, explains much of the premium in its valuation recently

CB Bank and United Bank (UBL) command a presence in Pakistan, or so they think. MCB is as old as the country,

founded in 1947 by the Adamjee Group. Its majority stake is held by the Nishat Group, run by Mian Muhammad Mansha, possibly Pakistan’s richest man, who is also the chairman of both the group and the bank. Meanwhile, UBL was founded in

AUTOMOBILES

1959 by Agha Hassan Abedi (of BCCI fame), and is currently owned by Sir Anwar Pervez, the richest Pakistan-born Briton in the UK. Together, the two banks are part of the ‘big five’ banks of the country. So it is good to know where banks like MCB and UBL stand when compared to other banks on the frontier market, including in countries like Ghana, Rwanda, Kenya, Vietnam and Sri Lanka. Analysts Kato Mukuro, Murad Ansari, Ronal Gadhia and Muammar Ismaily at EFG Hermes reviewed 20 banks able to withstand Covid shocks in different frontier markets, in a report issued to clients on June 1. The consensus? MCB ranked in the top quartile of all banks, and was the top pick for Pakistan, with analysts highlighting its strong deposit franchise and conservative lending style. UBL was not far behind, ranking eight out of the 20 banks reviewed. The analysts were on the lookout for what they called ‘Bank Frankenstein’, or ‘an unbreakable monster, built with the best operating characteristics of the banks in our universe.’ The 20 banks were reviewed on the basis of four criteria: corporate governance (the brain and soul of a bank); balance sheet structure (the bank’s torso); liquidity and profit profile (the bank’s circulatory system); and digital platform (the real limbs of a bank). Bizarre literary analogies aside, both banks from Pakistan did very well. Both were well positive when it came to balance sheet penetration, and cost structure. Both also came out on top of the list when it comes to liquidity. In the specific category of corporate governance, both MCB and UBL scored highly on the level of disclosure (publishing reports and financial statements). There was some mismatch when it came to audit payments, with the authors of the report noting that MCB’s 2019 audit cost around 42% ($287,000) of UBL’s audit ($687,000), despite its 2019 balance sheet being 80% of UBL’s. (However, the report noted a lack of standardisation in payments, despite all 20 banks around the world being reviewed by the same big four auditors). The report’s author’s scored banks highly if they limited government ownership, (so full points to both MCB and UBL). However, in the interest of whether the controlling shareholder was aligned with minority shareholders or not, the report noted: “In Pakistan, although the Chairmen of both MCB and UBL are controlling shareholders, they have also built extensive non-financial conglomerates that may take precedence over their banks.” In this regard, UBL fared poorly. UBL has only one chairman, features a high board of directors’ ownership at 11%, and has limited

executive representation on the board of directors (only one of nine members). Not surprisingly, Pakistani banks scored poorly on diversity, with MCB placing second to last in percentage of female employees, and UBL not bothering to even provide that information. The report also noted unfavourably that Pakistani banks’ average CEO compensation was also quite high, at $673,000, more than double that of bank CEOs in Bangladesh ($249,000). Both UBL and MCB scored very high on asset penetration, with net loans at 34% of total assets for both banks, and investment securities at 43% and 47% of total assets respectively. MCB had a slightly more diversified loan mix, with 18% to SMEs, while UBL was mostly concentrated in corporate loans (84%): both banks scored poorly in this regard. On the bright side, UBL and MCB scored high points for controlling cost-to-total asset ratios. Both banks were also able to keep the cost per branch to below $300,000 (two of three banks in the entire survey that could do so). Both banks’ cost per employee was also less than $25,000. MCB had a cost per customer of less than $40, while UBL’s was a little higher, at $54. MCB was better at controlling the cost of the benefits paid to employees. In fact, UBL scored no points for its benefit expenses totalling more than 50% of personnel expenses. “In our opinion, a bank with structurally high levels of payments in kind (benefits)

is far less flexible in its ability to manage its headcount,” said the authors. On the liquidity front, UBL scored better than MCB on its lower than net loans to deposits ratio. MCB also scored maximum points for being able to re-price 87% of its loans within three months (UBL could reprice 64%). Both banks scored maximum points for having a ratio of net interbank positions-to-total assets of between -2% and +2%. MCB also had a high proportion of low-cost deposits with its CASA ratio – the proportion of its deposits that consists of current accounts and savings accounts – at 89%, while UBL’s was 74%. According to the report: “banks that have a higher mix of CASA and retail deposits will be best positioned to withstand the expected economic shock post these lockdowns, because these deposits are not only cheaper, but also stickier.” Finally, the authors stressed on digital platforms. Both banks did poorly, with MCB falling somewhere in the middle, and UBL on the lower end. To be fair, they were not alone: most banks had done poorly in reporting their newfound digital capabilities with their stakeholders. As the authors pointed out: “If a bank does not think it is important to share the number of mobile users, volumes/ value of mobile money transactions, POS terminal, ATMs and agents with its stakeholders in its annual report or corporate presentations, how is anybody supposed to trust in their ability to build an effective digital platform?” n

BANKING

By Shahab Omar

he trajectory of Pakistanâ€™s response to the Covid-19 pandemic has been more a response to the whims and wishes of the trading community than a response to the coronavirus. With the first cases popping up in the country, the government was slow to act in implementing a lockdown to curb the spread of the disease. When it finally did, not only was there continued mixed messaging from the center, it became clear that pressure from traders

and trading lobbies was starting to get to the federal government, and a premature easing of the lockdown was on the cards despite cases continuing to rise and testing capacity remaining low. Traders from all segments of the business community were beginning to become agitated by the lockdown. The lockdown had not even been in place for a full month when the government announced it was beginning the phasing out process already, announcing a â€˜smart lockdownâ€™ designed to get businesses back to work, and address the loss in income and mass unemployment that would have been a result

of a complete lockdown. The much touted smart lockdown, which was suppose to be the innovation that had put Prime Minister Imran Khan on the global map as a world leader, eased restrictions for a number of business sectors, and put the trading community back into the middle of the fray for four days a week from 9 AM to 5 PM with loose instructions to follow Standard Operating Procedures (SOPs) with a threadbare threat to reimpose a lockdown if SOPs were not followed. Traders, eager to make profits from the inevitable upcoming Eid shopping sprees, were quick to promise SOPs would be

“We wanted to open our businesses as many people were losing their jobs. These are people who work in shops for daily wages. We had requested the traders and shopkeepers to ensure the following of SOPs and necessary precautionary measures to be taken for combating corona,” Muhammad Ahmed, President of the Islamabad Chamber of Commerce and Industry

followed. What the government was hoping for was for people to exercise caution, instead what was released was a terrifying wave of Eid shopping that left the government overwhelmed with what to do, and traders unable to implement SOPs because of the sheer volume of people visiting their shops. Even the SOPs launched by the government were not thought out. While shops managed to restrict the number of people entering, the lines outside to get in became hubs for the virus to spread, with pictures of long queues outside fashion retailers making the rounds on social media. The videos of the lines filled with people standing nose to nose, with masks hanging off their faces caused an uproar. There was fear that the transmission during Eid would cause an upsurge in cases, yet the continued mixed messaging from the center and the assertions by the Prime Minister and the National Command and Operation Center (NCOC) head Asad Umar that the virus was a harmless flu had people flocking markets in droves. With such large crowds, even basic SOPs like hand sanitizing for customers and facemasks went unchecked. Sindh took the violation of SOPs more seriously, shutting down entire markets over violations, while matters in Punjab mostly remained a free for all. In Lahore, for example, commercial markets such as Model Town’s Link road remained clogged for weeks, with police only arriving once to threaten shutting down the market, before leaving without doing anything, and allowing the dangerous conditions to prevail. It was at this point that the Special Assistant to the Prime Minister on Health, Dr Zaffar Mirza, suggested that the government was mulling imposing another lockdown after witnessing the blatant disregard of social distancing regulations by traders. It seemed sense would prevail, but the Prime Minister was not on the same page as his special assistant. Soon after the disaster of Eid and the smart lockdown, when a reimposition was

most expected, the Prime Minister this time announced the lifting of the lockdown with very minimal restrictions, such as a 7 PM shutdown time for markets. Since then, traders have been continuing along with their businesses as if nothing has happened, ignoring the fact that cases in the country are rising by numbers that are some of the highest in the world, and that too with very limited testing capability. And even as Lahore has become a major hotspot for the virus, with no corner of the city left unaffected, it seems that the trading community has not realised the scope of the danger, or are even concerned for themselves.

Are the traders not afraid of Coronavirus?

ne of the problems that is seemingly plaguing the trading community is that they are just not taking the coronavirus pandemic seriously. Whether it is willing blindness for the sake of their businesses, the mixed messaging of the government, or the vast proliferation of Whatsapp information, there is little seriousness surrounding the virus. Muhammad Ahmed, President of the Islamabad Chamber of Commerce and Industry, tells Profit that traders simply are not afraid of the virus. “We wanted to open our businesses as many people were losing their jobs. These are people who work in shops for daily wages. We had requested the traders and shopkeepers to ensure the following of SOPs and necessary precautionary measures to be taken for combating corona,” he explains. The daily labourers schtick has been one that the government has made its central talking point, arguing for livelihoods over lives. Despite the better collective wisdoms of both the medical community and the rest of the world, it seems to be one traders are happy adopting as their own. The General Secretary of All Pakistan Anjuman e Tajran Naeem Mir was of the opinion that the traders and business class was

not afraid of the virus, and feared the unemployment and unavailability of money more than any chance of contracting the virus. “The people having shops and businesses were more afraid of not earning anything at the end of the day. The small shopkeepers are more interested in having customers, and do not want any customer to go back without purchasing anything,” he said. The president of Lahore Chambers of Commerce and Industries (LCCI), Irfan Sheikh, said that initially, a lot of traders had thought the virus might be a hoax or was not a serious enough disease. But now, with people around them being affected by the disease, it is being taken more seriously. However, this has still not been enough, since business concerns and the economy still seem to be a bigger issue for most traders. “Coronavirus is no doubt a grave issue, but the economic problems which the traders are facing are also very serious,” the LCCI President tells us. There was a lockdown for three months, and during this time the traders had spent all their savings. Traders, businessmen and shopkeepers had to run their houses as well as had to pay their employees on monthly or daily wages, which made them broke after a lockdown of three months. Even if the situation of corona gets better now, the traders cannot overcome the loss they have met with in the lockdown days.” Meanwhile, the president of the Karachi Chamber of Commerce and Industries, Agha Shahab Ahmed Khan, believes that people in Pakistan considered themselves invincible and would not realise the seriousness of the pandemic until it hit them personally. “In our country, people consider themselves heroes and are not afraid, whether they are shopkeepers or anyone else. People will understand only when their own loved ones fall victim to it. The attitude of people towards coronavirus is very irresponsible. People here think that their immune systems are very strong. This approach is wrong.” Not only is the approach wrong, it is frightening. Except, recent evidence suggests

MARKETS

“In our country, people consider themselves heroes and are not afraid, whether they are shopkeepers or anyone else. People will understand only when their own loved ones fall victim to it. The attitude of people towards coronavirus is very irresponsible. People here think that their immune systems are very strong. This approach is wrong” Agha Shahab Ahmed Khan, President of the Karachi Chamber of Commerce and Industry that even those affected by the virus are not taking it seriously, with families of corona patients protesting outside corona wards claiming the virus is a hoax. With such a situation, how can traders or the public be expected to take it seriously, and how much will the government’s mixed messaging cost Pakistan?

At least implement the SOPs

he lack of seriousness, however, is further reflected in the fact that even with the lockdown practically lifted and social distancing non-existent, even the SOPs are not being implemented. To this end, Muhammad Ahmed says this is a problem on the part of shopkeepers, and that the industry is doing its part. “If we talk about the implementation and following of SOPs, the industries are surely doing that. The SOPs are not being followed on the part of the shopkeepers,” he says. “We have a clear stance on this, there should be a strict crackdown on such shops. The shops not following the SOPs should be sealed and heavy fines should be imposed. We have talked to the traders in Islamabad to strictly follow the SOPs and they are doing so. Shops are having sanitizers, using masks and keeping social distancing.” “The issue is that there is a difference between the situation inside the shops and outside. The shopkeepers do follow the SOPs inside the shops but with rush and long queues of people outside the brands’, shops cannot be controlled by the shopkeepers and that disturbs the social distancing. People are bumping into each other outside the branded clothes stores and do not maintain distance, and I suggest that this should be managed by the government and administration of the area.” He has a point. For the implementation of SOPs, the government must not only manage a robust public outreach programme and plaster the walls with literature, they must also ensure through policing that crowds are not milling outside shops or in markets.

If the lockdown has been lifted, it is their job to manage people going out and about with government approval. But, the government must also ensure that there is some strictness in the implementation of SOPs, and there are consequences to irresponsibility. Irfan Iqbal Sheikh agrees, and says that traders must also hold each other accountable, and to implement the SOPs, the government and traders had to be on the same page. “The government and traders should use their human resources together to overcome this situation, and wherever there is a problem of SOPs not being followed, the government and traders’ teams should immediately take action. The government must make sure that they crack down on those not following the rules for the protection of public safety, but traders also have to keep tabs on each other.” Meanwhile, Agha Shahab was of the opinion that the markets and shops were too small given how large the populations of cities like Lahore and Karachi were, and that some sort of system to control entry of a certain number of people into markets at certain times must be adopted. “Discipline is essential for the implementation of SOPs, which is something we severely lack. When it comes to social distancing, the population is high and the markets and shops are small in size, which leads to a rush situation all the time and social distancing cannot be maintained.” The government, at least in Punjab, however, seems to be following the line of the Prime Minister and insisting that it is the responsibility of the public and the shopkeepers to fight this disease on their own. The Punjab provincial minister for Trade and Industries, Mian Aslam Iqbal, recently told the media that the responsibility of following the SOPs was on the shoulders of the shopkeepers and traders, and that the government could not be expected to keep track of every single shop. “If any customer visits a shop without wearing a mask, then it is the responsibility of the shopkeeper to provide him a mask,” he said. “The shopkeeper who cannot provide the mask to his customer can shut down his

shop. We will not tolerate anyone who violates the SOPs. If anyone is found in violation, then we will close the whole market. We are giving surprise visits in different markets and also sealing the shops which are not following the SOPs. This is also the responsibility of the business community to spray their markets during those two days when markets are closed. Irresponsible behaviors are causing the spread of Covid-19.”

Was lifting the lockdown really this critical for traders?

rofit has already explained how and why a lockdown was possible. And not just possible, but affordable with a welfare outlook. Since the beginning of the lockdown, there have even been calls for universal basic income, all of which have fallen on deaf ears. But the government has continuously held that a lockdown is not the solution, even though literally all good advice has repeatedly said it was. And this thinking has pervaded the traders community. “It was imperative to lift up the lockdown because it is not the solution to coronavirus,” says Naeem Munir. “There should be some other way forward to fight corona. If the government had not allowed the opening of small shops, then those shopkeepers would have died of hunger and poverty.” It is ironic, that people have such fatalistic thinking about people going hungry from a lockdown and yet no fear of an actually fatal disease. The reality is, that the government did not want to do or did not think it was capable of doing the hard work needed to keep people fed during a lockdown, even though, it very much could have been done, as even the government’s own Ehsaas programme is proving with the help of data from the BISP. But the thinking among trading circles has stuck at a single point, and looking from Prime Minister to trader and from trader to Prime Minister, it has become hard to tell

which is which. “It was necessary to end the lockdown,” says Irfan Iqbal Sheikh, before quoting Imran Khan. “Now we need to learn living with corona like people are living and adjusting with other diseases. Lockdown is not the solution. People should now learn to live with this situation.” Even Agha Shahab, perhaps the most sobre of the people we spoke to for this story, was of the same opinion. “A lockdown could not be maintained, markets are very essential to run the circle of the economy,” he said. “Economic activity cannot be resumed without ending the lockdown. The shopkeepers can bear the loss for up to two months, but later the situation becomes very difficult for them.” “There are two types of countries in the world. One is capital abundant countries which have capital, and the other are labor abundant countries that do not have money but have human capital,” he explains. “One of our problems is that we have a large population and our overseas Pakistanis, who were the major source of foreign exchange, are also coming back because the corona virus has changed the whole world. It is also a huge challenge for Pakistan’s business community to accommodate our overseas Pakistanis and provide them jobs.”

What are the real issues of traders?

espite the constant easing in conditions, however, the trading community remains largely unsatisfied, even though it is for them that lockdowns have been eased constantly. Even though the government has been portraying itself as champions of daily wage earners, traders have during this entire time cut workers to make up their profits, since there has undoubtedly been an economic slowdown that has impacted traders like everyone else despite the lockdown being lifted. “If we look at the economic impact of Corona on traders, many of them have been ruined already. Eid and summer is the biggest shopping season, but with this pandemic, shopkeepers and traders have gone hand to mouth. There is no business at the moment which has not faced a loss of less than fifty percent. If the traders have the intuition of when this pandemic would end, then the situation would have been different, but at present we have no clue of it,” says Muhammad Ahmad. “In case the lockdown is extended for another month or so, then many shopkeepers and businessmen would have been bankrupted and some could have been defaulters. The government has benefited the industry by giving construction packages, but to make it more fruitful we have requested the government to waive off the condition of identity cards. Our

“Coronavirus is no doubt a grave issue, but the economic problems which the traders are facing are also very serious” Irfan Sheikh, President of Lahore Chambers of Commerce and Industries (LCCI) target is to revive those businesses and shops which have gone down during the pandemic and lockdown. Sales tax should also be decreased to single digit. We lack liquidation due to which the issue of damages is arising and we need to resolve it.” Agha Shahab also told Profit that the issue of demurrage charges is a big issue for importers, and many meetings have been held on this topic in the KCCI. “The goods in containers are stuck on the ports. The foreign companies that have taken over our ports and terminals are doing their own thing. And the government’s agreements with these companies may not have been read properly,” he says. “We need to support each other in this extraordinary situation. These companies have made huge profits from Pakistan, and now they are not even ready to give any relief to our importers. These companies should also understand how the importer, who is unable to sell his goods due to closure of markets, cannot pay them to retrieve his container. These foreign companies should not play the role of the East India Company. Our government should also visit this issue. The importer is really upset. These companies should wave off the demurrages charges.”

What do the traders want?

ven as the cases in Pakistan continue to rise in unbelievable numbers, with the fifth largest daily count of new cases despite being 27th on the number of tests conducted, the demands of the traders are to go back to pre-corona times as soon as possible. According to Naeem Mir, the solution is to re-open the business like they were pre-corona. “If the businesses are open the people will be relieved that their shops are open and they can earn their livings. If the shop owner knows that he has limited time to open the shop then his focus will be on having customers instead of following SOPs. Also as the summer season is here, people avoid going

out and thus the markets are already free from rush. Moreover, people do not have the buying power at the moment and the entire business is slow.” This may be one point on which the traders make sense, because it has been argued by experts that restricted shopping timings actually end up spreading the virus more, since more people go to buy products in the same amount of time increasing footfall in shops. A system could be implemented where there are phases for people to visit markets. However, as the summers get hotter, it is true that people will all rush to the markets at coller hours. “We had also given a proposal to the government that property tax on rental property should be reduced to half and that would give a relief in the rent amount,” says Muhammad Ahmed. “This is a doable mechanism and one also understands it. The utility bills are a huge burden on us and by decreasing tax on it the government can give us more relief. The financial implications of utility bills and rent amount are an issue for us.” According to Irfan Iqbal Sheikh, the government could not provide any benefits to the traders, but it could impose the lockdown, so there was no choice but to open up the economy. “If there is no activity in the country for one month, according to our estimates, the loss is almost two billion dollars. All types of social classes, whether the traders or labourers, all have been affected by the lockdown. On the other hand, the expenses are the same but due to lockdown the income was zero for all. We had no earnings during lockdown and export orders were also cancelled.” Agha Shahab said that the job of the government is to govern, not to feed businessmen, and that they should facilitate business rather than giving out handouts. “The traders want the government to do its job and let us do our jobs. Yes, when it comes to small traders, the government should provide bailout packages for small traders. They need to be facilitated in utility bills. People’s purchasing power has decreased while the expenses of traders have not decreased.” n

MARKETS

By Hassan Naqvi and Meiryum Ali

he beginnings of the microfinance sector in Pakistan can be traced back to the very earliest rural development projects funded by donors. As a category, microfinance are financial services that target individuals and small businesses who lack access to conventional banking and related services. Microfinance is a classic method of uplift in low-income and rural communities. Not only does it inject investment into these areas,

it does so in small doses and directly to the local community. What many may not realise is that microfinance as it is known today started in Pakistan and was the result of a collaboration between Pakistani social entrepreneur Akhtar Hameed Khan and the United States Agency for International Development (USAID). The first program they ran was called the Comilla Model, which started in 1959, on the outskirts of Comilla, East Pakistan (now Bangladesh). Following the 1971 war, microfinance in Pakistan took a backseat until it was revived by the Aga Khan Foundation, which launched the

Aga Khan Rural Support Programme (AKRSP) in 1982 to help improve the quality of life of the villagers of Gilgit-Baltistan and Chitral. Akhtar Hameed Khan himself had not given up on the idea either, having worked to help launch the Orangi Pilot Project in Karachi, also in the early 1980s, which sought to help alleviate poor living conditions in a working class neighborhood in Karachi and among the tools it utilised was microfinance. As international focus and funding grew, the importance of using microfinance to uplift rural areas steadily grew in Pakistan during the 1990s. Other Non-Governmental Organisations

“On the branchless banking front, we plan to add 100,000 new branchless agents and we have now started our QR-code merchants for payments. While on the branch banking front we are going to double our branch number just in the year 2020” Ghazanfar Azzam, CEO and President Mobilink Microfinance Bank

(NGOs) replicated the model of the AKRSP all across Pakistan. This would eventually become a major driving force for the establishment of specialized microfinance institutions in the formal sector: microfinance banks (MFBs). Profit, sat down with Ghazanfar Azzam, the Chief Executive Officer (CEO) and Chairman of Mobilink Microfinance Bank, which claims to be Pakistan's largest digital bank with 20 million registered and 7 million active users, to talk about the future of microfinance banking in Pakistan, and how telecom company-based branchless banking is becoming a game changer.

The first steps of microfinance in Pakistan

he entire decade of the 1990s would go by, and it would not be until 2000 that the Khushhali Bank Ordinance was issued under the Musharraf Administration, establishing Khushhali Bank, Pakistan’s first specialised microfinance bank. The ordinance was fast followed by the 2001 Microfinance Institutions Ordinance, which paved the way for establishment of new microf-

inance banks in the country. As Ghazanfar Azzam explains it, the ordinance is the cornerstone of MFBs and the microfinance sector in Pakistan, and regulates microfinance institutions, aiming to protect the interests of depositors and borrowers. The ordinance defines the area of operations for MFBs, capitalisation requirements, regulation and supervision conditions by the State Bank of Pakistan (SBP), and penalties to be imposed on MFBs in case of non-compliance with the ordinance. The regulations allow the microfinance sector to provide financial solutions to low-in-

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come households – defined by the State Bank as people earning Rs500,000 a year (Rs41,667 per month) or less – or microenterprises that employ fewer than 10 people (including seasonal labour) and have a net income of Rs500,000 or less. It is important to look at it closely exactly because microfinance in Pakistan has been touted by many as the solution for the financial problems of a vast number of working class people, and the most efficient way to empower poor, rural areas. By targeting small businesses and investors that want to form grassroots connections and establishments in their local communities, the microfinance sector has been aiming to financially include marginalised communities, and have achieved at least some degree of success in that goal. In recent years, the branchless banking segment has enabled the government and other entities to reach large numbers of people and make payments with great ease and speed. This telecom-led branchless banking is the latest addition to Pakistan’s microfinance scene. Over the decades, microfinance institutions in Pakistan have been a key factor in driving financial resources towards informal sectors, have improved the financial access for women, rural and ignored areas and populations, and increased the banked population of the country. They have also financially educated the people through their vast network. With the new telecom-based approach, these benefits could spread faster and wider than ever before. Microfinance in Pakistan now consists of 10 financial institutions, and three of those are backed by telecom companies: Telenor Microfinance Bank (Telenor Pakistan), Mobilink Microfinance Bank (Jazz), and U Microfinance Bank (Ufone). And since 2012, deposits for the sector have grown at an average of 41.5% per year, compared to an average of just 11.8% per year for the banking sector as a whole. Yet, there is still a long way to go. As of March 31, 2020, the industry has an estimated deposit base of Rs263 billion, which is equal to about 1.8% of the mainstream banking indus-

try’s deposit base. For context, Soneri Bank – the 15th largest bank in the country – has more deposits (Rs306 billion) than than the entire microfinance industry combined.

Mobilink Microfinance

obilink Microfinance Bank currently has 74 branches, and 91,000 branchless banking agents. Branchless banking essentially involves unconventional banking methods, in which financial services are provided not through bank branches, but through agents and relying on information and communications technologies to transmit transaction details – typically card-reading point-of-sale (POS) terminals or mobile phones. The concept is fast gaining traction generally, but is particularly fruitful when it comes to microfinance banks, something that is clear in how Mobilink is planning to expand the number of banking agents they have out in the field. Backed by Veon, an Amsterdam-based global telecom giant, Mobilink Bank’s brick and mortar branches and branchless banking agents offer micro enterprise loans, micro housing loans, savings, domestic remittances, utility bill collection, mobile wallets, life insurance & G2P & B2P payments through a strategic alliance with Pakistan's largest telecom operator Jazz under the umbrella of Jazzcash. “On the branchless banking front, we plan to add 100,000 new branchless agents and we have now started our QR-code merchants for payments. While on the branch banking front we are going to double our branch number just in the year 2020,” Azzam tells us. “We, here at MMBL, feel that considering the market dynamics of Pakistan we need to move forward both on digital and conventional banking fronts. As adoption of digital channels grows by our customers, the need for traditional or brick and mortar branches would decrease and eventually completely transformed into just digital.” However, the focus on digital is a place

where Mobilink Microfinance is a little ahead of the curve in Pakistan, or at least they claim to be, saying they are the largest digital bank in Pakistan. The metric they use for this claim is their over 20 million registered and 7 million active mobile wallet customers who can use their mobile wallet for basic banking services such as savings, money transfers, utility bill payments, receiving welfare payments, paying taxes and fees and buying airtime. “A mobile wallet is basically a digital bank account and with the largest customer base in wallets, we can very justifiably claim to be the largest digital bank in Pakistan,” Azzam explains. “In recognition of our position in the industry, we were conferred with the Bank the Unbanked Awards in 2018 and 2019 in a row in annual banking awards by the Governor of the State Bank of Pakistan.” This metric, while useful, needs some context: while Mobilink may well have a significant number of active users, by deposit mobilisation, it is the fourth largest microfinance bank in Pakistan, with Rs29.2 billion in deposits as of March 31, 2020, the latest period for which financial data is available. One thing that Azzam is right about, however, is that traditionally in Pakistan, commercial banks have primarily focused on corporate, commercial and consumer banking segments from the very beginning. Micro entrepreneurs and farmers remained by and large unserved. The government tried to bridge this gap by establishing specialized banks like ZTBL & SME bank, but these institutions were not able to perform as per desired objectives. Small farmers in Pakistan still lack proper access to finance. While this is all disheartening to hear and think about, it is also an opportunity and a market, one that Mobilink seems ready to seize. “We, at Mobilink Bank, saw this as an opportunity and focused our resources towards this segment. Our loan for small farmers called the “Khushhal Kisan Loan” has become our flagship loan and holds 52.62% share in total loan book. This loan does not need any physical collateral and is very easy to get. We also launched

“We, here at MMBL, feel that considering the market dynamics of Pakistan we need to move forward both on digital and conventional banking fronts. As adoption of digital channels grows by our customers, the need for traditional or brick and mortar branches would decrease and eventually completely transformed into just digital” Ghazanfar Azzam, CEO and President Mobilink Microfinance Bank other loans like Livestock loan, Tractor loan and Passbook Loan for the same market segment and they too were well received and have been quite a success,” Azzam tells us. The bank’s total lending book stands at Rs16.2 billion as of the end of the first quarter of 2020. Yet despite the relatively light lending conditions, Mobilink Bank’s loan portfolio appears to be largely healthy: the bank’s non-performing loan ratio is just 3.8%, much lower than those of most mainstream banks. “Since the commercial banks generally don’t focus much on financing small businesses, State Bank of Pakistan has recently opened this space for selected microfinance banks in Pakistan. Mobilink Bank is one of those microfinance banks that have welcomed the opportunity and we consider MSME as a key growth segment in our future Business Strategy.” Another very important and popular loan package that they have is targeted towards empowering women. Generally, microfinance is supposed to uplift not just the lower classes that usually would not have access to banking, but the marginalised within those classes. Their most popular programme for women is the ‘Bint-e-Hawa’ scheme. “Not only have we made the account opening process simpler, we also have waived fees and special saving rates are offered on this account. We also have hired female loan officers at our branches and have

provided them the bank vehicles to go in the field and provide financial literacy to working women and help them get into the banking system for their financial needs,” says Azzam. “Nearly 18% of our borrowers are females and we hope and accept this number to grow in future for more inclusive growth. There is a long way to go as far as female financial inclusion is concerned but we’re very happy that we are doing our bit and would keep adding more and more to it.”

Growth strategy

hazzanfar Azzam has a natural air of optimism that surrounds him. CEOs tend to project an air of confidence about their products and the abilities of their team and company, but Azzam exuded a real sense of hope. And with that hope comes a very aggressive growth and expansion strategy. “With the population approaching 220 million, the 5th largest in the world, Pakistan is a land of opportunity and full of potential both in microfinance and branchless banking terms,” he says. “We have a very aggressive growth strategy and we believe we will continue to increase and improve our contribution in improving access to finance in Pakistan in a big way.” One of the things that Azzam and

Mobilink will be banking on is their view that the rapidly increasing use of smartphones will become a major catalyst in promoting digital banking in Pakistan. Being the subsidiary of Pakistan’s largest telecom player, Jazz, they could very well be poised to take complete advantage of this. “We hope to have over 50 million customers in our fold in a few years compared to the 20 million that we have in our portfolio at this point in time. We are also striving to enrich and expand our products and services menu and adding more use cases to make mobile wallets or digital accounts as the key enablers of digital financial services.” The direction of and priorities of Mobilink Bank have been shifting since 2012, which is when Azzam came on board at Mobilink over from FINCA as its inaugural CEO. “Our strategies and tactics have evolved overtime since we launched Mobilink Bank in 2012. However our overarching goal and ambition has remained the same from inception and that is 'Serve the underserved' and 'Bank the unbanked,'” he tells us. His words are picked carefully, in a way that Azzam becomes almost indistinguishable from even the organisation’s past before him. However, there have been changes. “Eliminating paperwork, reducing turnaround time and improving delivery has been

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some of the other key priorities. The idea is to serve customers on a real-time basis with flawless processes, maximum accuracy to ensure great customer experience,” he says about how Mobilink Bank has been changing post 2012. Personally, Azzam has had an impressive career. In a career spanning over 30 years, Ghazanfar worked for some of the best banks in Pakistan including HBL, Union Bank, Prime Bank, and Bank Alfalah. A Fulbright scholar at Penn State between 2000-01 under the Hubert Humphrey Fellowship, Ghazanfar has also worked with Shore Bank International, a leading international consulting company in SME and microfinance based out of Washington DC and operating globally, as a senior consultant and Head of a USAID funded SME downscaling project in 2005-7. It was from here that his journey in microfinance really began, and his first major ‘Pakistan’ posting and project was FINCA. And the ethic he established there, was brought over to Mobilink with him. “When we started FINCA (then Kashf Microfinance Bank) in 2008, our idea was to serve the underserved segments through traditional delivery mechanisms i.e. brick and mortar branches and increasing our geographical footprint.” “At Mobilink Bank, though our market focus is more or less still the same, there is a huge departure in terms of operating strategy,” he tells Profit. “Having a world class technology group behind us, our focus is to reach out to the majority of Pakistan’s over 100 million adult population through digital technology and offer products and services that can be accessed by customers while sitting in the comfort of their homes and workplaces. No matter whether big or small, banking is going to be very different in coming years than it used to be or is even today. Self-service banking is the future.”

Financials

he year 2019 has been a good one for Mobilink Microfinance Bank. The company saw growth in their branch network, adding 13 new units. Their gross loan portfolio increased by 21% from the previous year, and they closed their net advances at more than Rs15 billion. Meanwhile, deposits saw an increase of 32% from the previous year and it closed at Rs.29.2 billion as of December 2019. Net income clocked in at Rs921 million, a 12.6% increase over the previous year. Azzam is satisfied with the performance, impressed even, saying that the bank has performed exceptionally well. “Mobilink Microfinance Bank stands at number one position in return on equity, return on assets and profit margin among all microfinance banks in Pakistan for the year 2019. Considering the age of our institution,

this is a huge achievement, and it shows how efficiently and effectively we have been using our resources,” he says. And while the bank’s loan portfolio is healthy overall, non-performing loans did tick upwards sharply in 2019, from Rs162 million to Rs584 million, a rise of 261% over the course of a single year. The non-performing loan ratio went up from 1.3% to 3.8. Azzam says that this is simply a high-risk high-reward scenario. While some increase in NPLs was bound to happen, the bank pins some of this on 2019 being a very difficult year for the economy due to double digit inflation and falling incomes. “NPLs significantly increased in the entire microfinance sector,” says Azzam, “however, our NPL was far less than other microfinance banks and our credit quality remained better than the rest of the sector.” This kind of problem, however, seems to be one that comes with the business of microfinance. Microfinance is globally more expensive due to smaller ticket sizes and higher delivery costs. Furthermore most of the microloans are generally unsecured and therefore highly risky. Most of the intuitions are still young and lack scale. In addition to this, a bad economy and high interest rates constantly impact them. “On top of all of that is a high inflationary economic environment that makes cost of funding of the microfinance institutions. Interest rates are therefore high and will remain high till underlying conditions remain as stated above,” says Azzam.

There are other things, such as changes in banking laws and courts that the microfinance sector would like to see to help it grow. While the State Bank has been very helpful and key enabler in development of the microfinance and branchless banking sector in Pakistan according to Azzam, there are still various measures that are still required to enable microfinance banks to play a higher and better role in the Pakistani economy according to Azzam. “For instance denial of scheduled bank status is disadvantageous to micro banks in resource mobilization compared to commercial banks. Higher capital adequacy ratio requirements reduce the growth potential of microfinance banks. There are several other issues that once resolved will provide a more conducive role for growth and expansion of microfinance banks in Pakistan.” But for now, what is clear is that Mobilink and other microfinance banks want to grow, to this end, they are ramping up their outreach efforts, and their focus is on maximizing the use of technology to bring down operational costs, promote the paperless environment, improve credit quality further and so on to cut waste and improve profitability. “Profitability in turns helps in freeing up resources for further growth, providing more jobs and creating more value. Continuous improvement in all areas of our operations therefore it is an ongoing task reduces cost, improves profitability and benefits all stakeholders.” n

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