Profit issue-19

WElCOME

BAHRIA’S BOLD NEW VENTURE BUT WILL IT SUCCEED? n the last two decades, Pakistan’s housing market has grown enormously before stalling in 2016. By then, since 1998, around 7.4 million new homes have already been built. Still the shortage is immense, with the shortfall estimated to be in the region of around nine million homes.

Our cover story in this issue looks at Malik Riaz and his flagship Bahria in some detail, focusing on how he has ridden this wave of real estate growth in the country starting in 2000 to become the most influential real estate developer in private sector in Pakistan.

With growth and revenues stagnating, the real estate mogul has been forced to do some out of the box thinking with the intent to wriggle out of this tight corner. The vexing issue for Bahria is that the rising real estate prices in the country has made it impossible for his core clientele – the middle class and lower middle – to buy land or housing units by paying the price up-front.

With that rise in prices there has not been a proportional increase in house financing options by big commercial banks. That brings us to Pakistan’s almost non-existent mortgage market. At 0.2% of GDP it is the smallest in the region – lagging behind by a distance.

For some time, Malik Riaz has toyed with an ingenious idea to acquire a financial institution that could be employed to finance his own housing projects for his potential clients.

In 2015, when he tried to acquire Burj Bank, the State Bank of Pakistan (SBP) threw a spanner in his works, denying him the opportunity by claiming it would be too dangerous to allow a controversial figure like Riaz to keep the general public’s money as deposits.

Not the kind to retreat, Riaz changed his tack and turned his attention towards an unsuccessful investment bank, and has finally acquired the Escorts Investment Bank. After satisfying the Securities and Exchanges Commission of Pakistan (SECP) he purchased 71%

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of it for 1 rupee – not per share but the whole lot.

Will he be able to execute his plan? It seems highly unlikely given Escorts’ terrible financial health, lack of expertise, limited relationships and most of all raising adequate capital. In addition to all this, the SECP may create regulatory issues to stop Riaz from implementing his new-fangled but nevertheless bold strategy of establishing a ‘one-window’ operation to sell land and houses and provide his patrons the financing facility.

Exchange rate policy We also take a look at the abnormal rupee depreciation episode of July 5 and the country’s exchange rate policy. That incident and many like it before are the outcome of the finance ministry under Ishaq Dar until last well clinging on to an artificial overvalued level of the rupee against dollar for too long.

The real level of Rs120/USD (maybe even higher) has remained unacceptable to Mr Ishaq Dar, who recklessly and without giving consideration to the enormity of our external debt kept it at much lower levels.

With the fiscal deficit at its highest, remittances at their lowest and dwindling exports the will to reform our economic policies was required. Sadly that remained an elusive thought given that most current policies are stop gap and politically motivated.

With forced removal of the finance minister, would the new economic tsar turn things around and salvage the economy at both macro and micro level, is a point of conjecture only time will answer. For the moment one can only wait and hope.

Yousaf Nizami

Managing Editor: Babar Nizami l Joint Editor: Yousaf Nizami l Contributing Editor: Farooq Tirmizi l Business Editor: Agha Akbar Editor Reporting: Farooq Baloch l Reporters Aisha Arshad l Arshad Hussain l Usman Hanif l Syeda Masooma l Ahmed Ahmedani Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) l Zulfiqar Butt (Lhr) l Mudassir Iqbal (Isl) Design & Layout: Rizwan Ahmad l Illustrator: ZEB Photographers: Zubair Mehfooz & Imran Gillani Publishing Editor: Arif Nizami Contact: profit@pakistantoday.com.pk

FROM THE MANAGING EDITOR

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US sanctions against Tehran are hindering progress on the Iran-Pakistan gas pipeline.”

Minister for Petroleum and Natural Resources Shahid Khaqan Abbasi

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“The country needs stability to ensure economic development and implementation of projects under CPEC” Khyber-Pakhtunkhwa (K-P) Governor Iqbal Zafar Jhagra

increase was recorded in direct investment during financial year 2016-17 reaching $2.410b. In June 2017, the country received an amount of $199 million in the head of direct investment, while investors pulled back their $672.3 million in total foreign investment compared to an investment of $340.6 million in June 2016.

During July-June 2016-17, the SBP has received an amount of $277 million in foreign public portfolio investment (debt securities), which increased by $286 million during July-June 2016-17 which was in (negative) $8.8 million in the same period last year, the data said. In the portfolio investment (equity market), the country recorded an outflow of $531 million in last fiscal year compared with $319.7 million withdrawal in the same period previous year.

Out of this investment, the Chinese companies under the China Pakistan Economic Corridor (CPEC) invested an amount of $1.185 billion in 2016-17, while a Netherland company Friesland Campina’s invested $463.4 million in Engro Foods in December 2016.

4.6pc

was the trade deficit in the last four years of the PML-N led government. According to official trade data, the trade deficits during financial year 2013-14, 2014-15, 2015-16 and 2016-17 were recorded $ 20 billion, $ 22 billion, $23.90 billion and $ 32.57 billion respectively making the total deficits to $ 98.66 billion. Apart from the increasing imports, the fall in exports contributed most to the big gap. According to the available statistics the export of rice was decreased from $2.16 billion to $ 1.46 billion during 2013-14 to 2016-17. The export of textile was reduced from $13.74 billion to $ 11.23 billion during the four years’ period. Besides, the export of fruits and vegetable reduced to $ 530 million from the $650 million during the same period. The overall exports which were recorded at $ 25 billion during 2012-13 were also reduced to $ 20 billion in FY2016-17 with the total reduction of over $ 5 billion in the last four years of this government which failed to implement its own trade policy framework under which exports were projected to be $ 35 billion by 2018. This figure now seems to a distant dream.

Under the Strategic Trade Policy 2015-18, the Ministry of Commerce notified five cash support schemes to improve product design, encourage innovation, facilitate branding and certification, upgrade technology for new machinery and plants, provide cash support for plant and machinery for agro-processing and give duty drawbacks on local taxes.

$99b

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3600MW capacity power projects are expected to be completed in Jhang, Sheikhupura and Balloki within the current year said PML-N lawmakers.

Member National Assembly Awais Leghari said the first unit of Haveli Bahadur Shah gas power plant had started production at a rate of 769 megawatts (MW). “Chashma IV, Bhikki, Bahadur Shah, Sahiwal Coal, Tarbela IV, Neelum-Jhelum and other projects would also help curb energy shortages in the country,” he predicted. While several projects are being completed with local financing, Leghari said Thar-coal project would be completed with the financial assistance emanating from the China-Pakistan Economic Corridor (CPEC). He said about 3,000MW energy would also be available through solar and wind projects, and work on hydel projects to generate 12,000MW was also in progress.

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“We are trying to increase our own resources as provincial receipts stand at Rs199b” Sindh Chief Minister Murad Ali Shah

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$50m

of military disbursements under the coalition-support fund from the US is being withheld for financial year 2016. Defense Secretary Jim Mattis believes that Islamabad has not done enough to blunt the Islamist militant Haqqani network, a U.S. official said on Friday. The decision was not the first time that the Pentagon has declined to make military reimbursements to Pakistan. Last year, it withheld $300 million. Pakistan has been reimbursed $550 million of the $900 million it was authorized to receive in fiscal year 2016. Of the rest, $300 million had already been reprogrammed for other purposes, but had not been previously reported. Mattis’ latest decision affects the remaining $50 million.

increase was recorded in the index on a tumultuous day at the Pakistan Stock Exchange in light of the Supreme Court’s decision to disqualify Prime Minister Nawaz Sharif on July 28th. The index had earlier plummeted 1,148.60 points within the first forty minutes of trading from its overnight close of 45,906 points on Thursday. Later, the KSE-100 index was trading at 45,186.28 points and had fallen 719.48 points by 12:10 pm.

However, the day which started with investors confused ended with the benchmark KSE 100 index at 46,000 level. The index nosedived to 44,235.94 with a 1,669.82 points loss at open of the second session but recovered all losses in the same. It recorded intraday high of 46,060.55 with a gain of 154.79 points. The KMI 30 saw a rise from low of 4.21 per cent up 0.14 per cent to land at 78,379.50. The KSE All Share Index added 142.21 points to its bag with 213 advancers and 134 decliners.Recovering from the nosedive earlier, the benchmark finally settled 6 points in green.

0.01pc

receivables have been recorded of the stateowned oil conglomerate, Pakistan State Oil (PSO). It has been attributed to a default of payments by Pakistan International Airlines (PIA) and power producers. The main reason for the cash crunch is attributable to the circular debt that has impacted the energy supply chain. Considering the dire situation, the Ministry of Petroleum and Natural Resources has sought the help of the Civil Aviation Authority and Prime Minister’s office to save PSO from the brink of collapse. In a letter written to CAA secretary by petroleum secretary, he requested that PIA’s outstanding liability of Rs15b owed to PSO on account of fuel supply be cleared, but no response was received, said an official. PSO had received a disbursement of Rs17b from the authorities a few weeks ago, after which no payments have been made till now.

Rs130.5b

Rs10b

growth has been recorded in the production of jeeps and cars during first 11 months of previous financial year 2016-17.

As many as 178,944 jeeps and cars were manufactured during July-May (2016-17) compared to the production of 168,363 units during July-May (2015-16), according to latest data of Pakistan Bureau of Statistics (PBS). On year-on-year basis, the production of cars and jeeps witnessed 19.35 percent growth during May 2017 compared to the same month of last year, according to the data. It added that 18,094 cars were manufactured during May 2017 against the production of 15,161 units during last May. Meanwhile, the production of motorcycles during the first eleven months of the fiscal year 2016-17 increased by 21.85 percent compared to the production of last year. As many as 2,294,708 motorcycles were manufactured during July-May (2016-17) compared to the production of 1,883,298 during July-May (2015-16), the data revealed.

have been set aside by the provincial government for the setting up of Balochistan Bank this financial year. It is expected to run as a commercial bank and also work as a government treasury in the remote areas of the province. In March, ex State Bank of Pakistan governor Ashraf Mahmood Wathra had sent the proposal to Chief Minister Nawab Sanaullah Zehri for the establishment of Balochistan Bank.

Back then, Mr Zehri had said “Establishing Balochistan Bank is my dream.” Wathra had stated that it was crucial to improve the banking activities in the province as the law and order situation province had improved and various developmental projects were underway under the China-Pakistan Economic Corridor project.

6.28pc

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“The govts policy to borrow more to repay previous debt could create serious problems” Senator Saleem Mandiviwalla

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30pc

decrease has been recorded in the sales of packaged milk since the admittance of a case in Supreme Court on charges of adulteration a few months ago. And with loose milk eating into its sales, passing on the price increase onto consumers is expected to make things even more difficult for milk marketing entities. Prices of packaged (UHT) milk have been increased

by Rs10 per litre following Nestle and Engro’s announcement on the 7th of this month. The last price increase in the price of packaged milk was made in April 2014 as per an official from Nestle Foods who stated this decision had been undertaken in light of inflationary pressure. The price disparity between packaged and fresh milk, since the cost of the latter is lesser so people prefer to buy it, said industry insiders.

was the export figure of goods from Pakistan to the US in 2016. In a business community meeting held at the Faisalabad Chamber of Commerce and Industry (FCCI) on Thursday, Commercial Counsellor of the United States Stephen P Knode said that trade between the two countries was rising and exports from US were valued at $2.1b in 2016. He added that exports from Jan-May 2017 from the US to Pakistan stood at $1.3b. Knode said that small and medium enterprises from the US were working on making investments in the country, which would give Pakistani entrepreneurs an opportunity to work in conjunction with them and open new avenues for export of their products. And by partnering with these SME’s, the entrepreneurs could get access to vital capital and technological expertise, he added. He mentioned that the US’s commercial diplomacy was focused on the boosting of bilateral trade between the two countries. Knode explained that the reason for moving the offices of commercial counsellor to Karachi was carried out due to its status as the economic heartland of the country. Faisalabad which contributes 20pc to the gross domestic product (GDP) of the country, also has a counsellor office stated Knode.

$3.62b

growth was recorded in the country’s large scale manufacturing during first 11 months of financial year 2016-17. The Quantum Index Numbers (QIM) of large scale manufacturing industries was recorded at 140.32 points during July-May (2016-17) against 132.77 points during same period of last year, official sources said. The highest growth of 6.43 percent was witnessed in the indices monitored by Ministry of Industries, followed by 4.29 percent growth in the products monitored

by Provincial Bureaus of Statistics (PBOS) and 3.0pc growth in the indices of Oil Companies Advisory Committee (OCAC). On year-to-year basis, the industrial growth increased by 6.3 percent during May 2017 as compared to same month of last year, however, on month-to-month basis, the industrial growth decreased by 6.38 percent in May 2017 when compared to growth of April 2017, according to the data of Pakistan Bureau of Statistics (PBS). Meanwhile, the major sectors that showed growth during July- May (2016-17) included textile (0.72 percent), food, beverages and tobacco (11 percent), coke and petroleum products (2.73 per cent), pharmaceuticals (9.22 percent), non metallic mineral products (5.81 percent), automobiles (12.27 percent), iron and steel products (20.02 percent), fertilizers (1.81 percent), electronics (16.18 percent), paper and board (7.1 percent), engineering products (4.11 percent) and rubber products (0.21 percent).

5.69pc

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€60

million euro financing agreement has been inked between Pakistan and European Union improved nutrition in Sindh. It will help align and actively support the ongoing accelerated action plan for the reduction of stunting and malnutrition in Sindh. The objective of the financing agreement is to primarily increase the capacity of the government of Sindh so that it may efficiently implement its Nutrition’s multi-sectoral policy while providing direct assistance to significantly and rapidly reduce malnutrition in Sindh. Under this program, various activities will be carried out including policy and advocacy, support in improving national procedures, capacity building of local stakeholders, strengthening the provincial government’s nutrition-specific information management systems, and creating awareness about the significance of nutrition related issues.

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‘OUR TWO MAJOR SOURCES OF FOREIGN EXCHANGE TO OFFSET THE DEFICIT ARE EXPATRIATE REMITTANCES AND EXPORTS. REMITTANCES FELL BY 3.1% TO $19.3 BILLION IN FISCAL 2017 (FY17) AND EXPORTS WERE DOWN 3.13% FOR THE PAST ELEVEN MONTHS’

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To our economic sorrows, in particular an artificially strong rupee, falling exports and remittances By: Yousaf Nizami he rupee declined sharply against the US dollar during intraday trading on July 5 and neither the central bank nor the federal finance ministry has until now offered no rationale or clarification – other than the former finance minister, as is his wont, frothing at the mouth while giving vent to his spleen with cameras rolling. Ah, and a head was made to roll, with the acting governor biting the dust, replaced by a crony of a recently-retired bureaucrat for the all-important tenured position.

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This notwithstanding nothing to explain the steep and abrupt fall, by as much as 3.2% in a matter of hours, with the rupee falling by around 3.2% against the US dollar in interbank trading from 104.85 [a level that has by and large been sustained for more than two years] to 108.50.

In a decent, self-respecting nation the (now former) finance minister would have sacked himself, but unfortunately what is norm elsewhere is not the done thing in our neck of the woods. Well, the Supreme Court took care of that by directing NAB to issue a reference against him on Friday in the Pananma Papers Case against the Sharif’s.

Instead, our now-former federal finance minister Ishaq Dar called a meeting of head honchos of banks in the public and private sector to arrest the steep decline and retrieve the rupee to its pre-fall status.

Having worked in a treasury of one of the largest private sector banks, this scribe has personally dealt the rupee in volatile conditions. On September 26, 2013, for example, almost an identical fall was witnessed.

The resemblance is uncanny. Quite like July 5, ’17, on 9/26 the interbank market opened and trading commenced at a mundane, tepid pace. Within hours the landscape had changed diametrically, with the rupee hurtling into a sudden nosedive.

By the end of the ‘Ready Session’ (same day settlement), it had depreciated from 107.50 (the opening rate) to around 111.50 for a greenback – the highest quoted rate in the market on that day.

Quite curiously, in the second session the same day, a major correction was witnessed and the rupee appreciated as rapidly as it had gone down to settle at 105.50. Panic and uncertainty reigned in

‘MOST BANKERS NOW THINK THAT A WEAKER RUPEE IS INEVITABLE AND THE SBP WANTS TO LET IT SLIDE IN A CONTROLLED MANNER, UNLIKE THE JULY 5 EPISODE THAT SAW HUGE INTRADAY MOVEMENT’ the market, and as is the custom in such cases, the central bank called up treasuries of all banks, ordering them to immediately halt all trading, L/C retirements and subsequently trading in the prescribed range.

On the morrow, two teams, one apiece from State Bank of Pakistan (SBP) and Federal Investigation Authority (FIA), swooped on treasuries of all banks, public and private, to collect and examine the front and back office data of trades and deals from that fateful day.

That particular sudden volatility was, as the explanation summarised, was sparked by multiple major payments (including a quite substantive one for an oil import L/C and another for a due IMF repayment) falling on the same day. Mishandling and criminal negligence by the regulator – the central bank – had only exacerbated the situation!

The latest case in point was much different and, to a trained eye, the rupee’s slide seemed to be all the more intentional than it seemed. The level of Rs104.50 has been maintained, much to the consternation and ire of exporters, for more than two years now.

It has remained Ishaq Dar’s ‘comfort zone’, for to him, it augments the feel of the country’s economic health, making it look rosier than it is.

A source in the finance ministry divulged on conditions of anonymity, since Dar runs the central bank like his personal fief, trampling over its independence at will, letting the rupee slide and desisting

IN KEEPING WITH THE INCUMBENT GOVERNMENT’S GENERAL TENDENCY ON MOST SUBSTANTIVE ISSUES, ALL CRITICAL DECISIONS PERTAINING TO BUT NOT LIMITED TO THE ECONOMY ARE BEING MADE EXCLUDING THE CABINET OR STATE FUNCTIONARIES, WITH NEXT TO NO TRANSPARENCY, EITHER BY THE FAMILY IN JATTI UMRA OR THE KITCHEN CABINET 16

intervention when it was happening was the SBP’s riposte to the ex-federal minister to go take a hike.

Having said that, realistically it is not possible for such a major fall in the rupee’s value to come about without his blessing.

In order to keep the rupee/dollar parity range bound, Dar’s suggestions, actually diktats, verbal of course, dictate the course the central bank takes to intervene in the market through banks to manage the demand and supply of US dollar.

But the rub is that the kind of economic reform that adds value to exports and increases foreign exchange earning has not been pursued in the present electoral cycle – nor in the previous one, for that matter. Hence the current account black hole that has rendered the strong rupee useless. Having one of the strongest currencies in the region (vis-a-vis the dollar, of course) might make Dar sleep better, but it’s not doing the economy any favours.

There was also the narrative that the then prevalent political instability and uncertainty, which wouldn’t cease unless this whole Panama issue, with PM’s impending dismissal a possibility was resolved.

This is pure hogwash.

Here is why and how of it. The demand and supply of dollars in the market is hardly influenced by what is happening in the political arena. A source from the central bank, speaking on condition of anonymity, said that the recent fall was not a surprise and all relevant authorities (Read: Mr Dar) had signed on the calculated move to refrain from any market intervention and let the rupee slide.

According to SBP’s statement the day after the event, the rate will be maintained between Rs105 and Rs107 against the US dollar. At the time Dar said there will be a ‘comprehensive inquiry’ but that is an eyewash, a mere statement. The official line taken by the SBP is that this move was months in the making and had

to be done to balance the external account. The finance ministry, however, calls the decline ‘artificial’ that has negatively affected foreign exchange markets.

This public spat was bound to happen. Contrary to the IMF’s recommendations, no move has been made by the government to give independence to the central bank, where the finance ministry has absolute control since the PML-N came to power. In the past, crucial monetary policy announcements, like changes in the discount rate, for example, have been made by Ishaq Dar, not just much in advance of but instead of the SBP governor – something unheard of elsewhere in the world, for it impinges on the autonomy of the regulator.

Other than that, this particular incident brought into sharp relief two worrying aspects. One, that the rupee is overvalued and the real effective exchange rate (REER) is actually around Rs120, a concern that has been conveyed by the IMF innumerable times to the Finance Ministry, only to be disregarded by him. Two, the country’s economy is being run so shambolically that something as serious an issue as the value of the rupee is dealt with in a manner so bizarrely nonchalant – to gain political mileage with sleight of hand.

In keeping with the incumbent government’s general tendency on most substantive issues, all critical decisions pertaining to but not limited to the economy are being made excluding the cabinet or state functionaries, with next to no transparency, either by the family in Jatti Umra or the kitchen cabinet.

The exchange rate must be quite low on the priority list to warrant serious debate and discussion, that too among people whose technical knowledge about it is at best sketchy.

Dar doesn’t like seeing a weak rupee and has adopted the unsustainable model of intervening in the foreign exchange (FX) market with borrowed dollars (our FX Reserves). As the accumulated pressure mounts, or when someone makes a miscalculation (2013), or a decision is taken at the top to not intervene altogether (July), something is

How bank treasuries work n the Pakistani banking industry, treasuries are perhaps the most minuscule of all as departments go. But out of the public eye, those few understated backroom hawk-eyed men and women are capable of reading the pulse right every moment of the day, with their concentration unwavering and uncanny nous of where the market is headed well-honed.

On their judgement rides the banks' fortune in the niche of market trading. One bad call can cost millions and a good one can bring a smile to the most dispassionate amongst the worshippers of Mammon.

A fully functioning treasury, such an essential part each bank, has four sub-departments, or desks: Money Market, Foreign Exchange, Sales and Operations.

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Money Market he main objective of the desk is: to know at all times how much depositor money is parked with the bank and then employ that huge amount of money to make a profit on it every moment of day and night. In short, not letting money remain idle at any given moment is its responsibility. The safest way of investing funds is putting it in government paper (Pakistan investment bonds, treasury bills and Ijarah Sukuks).

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The SBP places certain minimum and maximum limits on how much money a treasury can keep on its books. So another function of the money market is to stay within those limits and for that, they tend to borrow or lend from other banks – the interbank market – directly or through brokers. Large main branches have to remain in close contact with the treasury to report major inflows and outflows, so the money market desk can make instant decisions.

This management of money is crucial to minimise the opportunity of cost while keeping in mind the time value of money.

Foreign Exchange uch like the SBP, banks also have foreign exchange reserves. The total number of the country’s foreign exchange reserves is made up of reserves with the SBP and all other banks. The desk handles the flow of foreign exchange going through its respective bank. Similar to the money market, the FX desk

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has to manage the Bank’s foreign currency book.

The greenback being the base currency against which the rupee is valued, a great bulk of this trading is done in US dollars.

The desk will buy or sell from other banks in the market, called the interbank, directly or through brokers to generate foreign exchange or get excess funds off its books.

In addition to this, the desk has to support the sales desk that deals with clients with FX flows. So, for example, if the PSO (Pakistan State Oil) has to pay a $50 million oil import L/C, the FX desk will have to buy those dollars for the sales desk to sell it to the oil marketing behemoth to settle with the oil seller.

going to snap, and it can’t be anything other than the rupee taking the plunge.

The kind of depreciation in the exchange rate might not impact the exprime minister’s shopping binges in the swank stores on Bond Street on his toofrequent London vacations, but is surely a serious blow to small traders and importers who regularly open L/Cs and make budgets that allow only for reasonable movement in the exchange rate.

Their hearts must have skipped a beat or three when the dollar went up Rs3.5 a pop in a few hours.

Looking at the current macroeconomic indicators another dip in the rupee’s value seems highly likely – though it maybe not as severe and as

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Essentially the FX desk first buys dollars from the interbank which it sells it to the sales desk who in turn sells those dollars to clients. At each step, a margin is being made on this trading. So the money market’s income is interest and the FX desk’s earning is margin it charges on USD trading.

Third currencies (Pound Sterling or the Euro) have fewer volumes but are traded in more or less the same way.

Often in volatile market conditions, the FX desk can either make or lose a lot of money depending on which position it has taken on the USD/PKR parity.

The FX desk will speak to the SBP treasury multiple times

abrupt. A host of seasoned bankers and it includes savvy treasury managers are found to be endorsing this sentiment.

At a whopping $12.1 billion Pakistan’s current account deficit is now double what it was last fiscal year which translates into 4% of GDP. Though the increase was forewarned owing to CPECspawned imports from China and elsewhere, the extent was supposed to be this deep. The reported figure definitely is far more frightening.

Our two major sources of foreign exchange to offset the deficit number are expatriate remittances and exports.

Remittances fell by 3.1% to $19.3 billion in fiscal 2017 (FY17) and exports were down 3.13% for the past eleven months; the glitch

is that in both cases there are no quick fixes.

No method, pure madness t the top of it, this propensity to borrow and worry about it later definitely has no method to it, it’s just pure madness. Borrowing at usurious interest can only be dubbed that.

No wonder our external debt at $58 billion is at its highest ever, and a significant portion of it has employed only to boost up our foreign reserves so that our former finance minister could feel cosy. These reserves are then used to pay back other long term loans and also control the rupee dollar parity.

All loans have repayment deadlines.

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in a day to report any large outflows and inflows of foreign exchange in addition to its position (long or short on any given amount of dollars). The frequency/content of those conversations can vary depending on the choppiness of the market on any particular day.

Sales he sales desk handles FX clients of the bank. At its core, the desk will attempt to maximise the margins it charges clients on their FX transactions. So, for example, in the case of a USD import payment, the sales desk will be selling dollars to the client. As such he/she will attempt to sell at the highest possible rate.

For example, the interbank rate is at 105.50 and a $100,000 import L/C is to be retired. Let’s assume the client has limited knowledge of this rate. The sales dealer quotes a rate 105.75 and the deal is finalised at 105.70. The profit the sales desk books is Rs20,000 {(105.70-105.50)*(100,000)}.

The opposite will be the case for export or inward remittances and encashment as the dealer will attempt to buy USD (or any other currency) at the lowest possible rate from the interbank rate at the time.

The desk also attempts to sell government paper (Pakistan investment bonds/ Treasury bills, Ijarah Sukuks) to its clients to help the money market meet its volume targets set forth by the SBP. In addition, the sales desk is also responsible for generating volumes from existing clients while getting new clients on board as well. To this end, other client dealing departments,

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A significant number of foreign loans reached maturity in the last six to seven months. No wonder foreign reserves held by the SBP dwindled by 15%, falling from $18.28 billion at end-December 2016 to $15.5 billion in mid-July 2017, despite injection from here and there.

“You can hardly call this a strategy let alone a sustainable one. You’re borrowing at undisclosed interest rates to replenish foreign reserves that are already mostly made up of loans. It was a matter of time when the rupee fell the way it did and it is bound to happen again minus some significant reforms in our FX policy”, commented a leading bank’s treasury sales desk dealer.

Inevitable, a weaker rupee

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common perception about the relationship between the SBP and finance ministry is that the former can do very little without the

like corporate and retail banking, have to liaise closely with treasury sales.

The desk will also try to provide hedging solutions to clients with products like forward booking and currency options (derivatives). The sales desk can make more money in volatile conditions as the rate is fluctuating and the client may not have an accurate idea of where the rupee dollar parity really is.

The only tradable rates for the rupee can be provided by the treasury. The reason for this is that the rupee is not traded in a volume similar to say that of the Euro. So while the rate on the Reuters website for Euro can be quite accurate as it is updated by the second the PKR (Pak Rupee) rate on the same website can only be an indication but no transaction can be done on that.

Treasury Operations ften known as the back office, this department is crucial to the working of the treasury, though it never gets to bask in the glory. It is responsible for settling all transactions that happen during the day on each of the three main desks. Other functions include clearances, record maintenance, regulatory compliance, accounting, and sometimes even IT services.

Treasuries require constant IT support/backup because if a bank’s internet or phone lines are down or their dealing systems (Reuters/Bloomberg/In-house trading platform) are not fast enough it can result in financial loss. For this, a dedicated IT team and offsite dealing rooms are on standby. n

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latter’s approval. After speaking to treasury professionals at various local banks it seems that is slowly but surely changing, at least when it comes to the rupee.

Most bankers now think that a weaker rupee is inevitable and the SBP wants to let it slide in a controlled way, unlike the July 5 episode that saw huge intraday movement.

“It was an unsustainable model, to begin with, and, quite frankly, I am surprised it has lasted for two years with such a stable rate. Better sense has hopefully prevailed but only time will tell how independent the SBP really becomes of the finance ministry to let the rupee settle close to its actual value,” explained a senior banker.

Inherited mess?

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rue economic reform takes time and more than that the will to see it through. It therefore doesn’t take a genius to see the issue at hand. The

policies that are required to get a hold of this macroeconomic mess can take longer than the five-year term limit of a government in Pakistan. So what is easier to do is label the economy’s condition an “inherited mess” for the first half of the tenure while doing very little to fix it.

Then comes the latter part where you have to deliver. By then the stop gap arrangements will have made the hole so big and deep that it is difficult to climb out of. Add to that the risk of by some miracle fixing the mess and not coming in for another 5 years – the credit is taken by the next party in power.

This selfishness accompanied by placing incompetent cronies in top financial policy making positions is the real malaise. n *All the treasury professionals, both senior and junior, were unwilling to utter anything on record owing to restrictions by corporate communication departments of all banks.

FINANCE

Coke, Telenor, and China Mobile want to reach new affluent consumers By: Chris Kay lectronic dance music pulsates as revellers wave their arms in unison and coloured spotlights crisscross the ceiling of a lakeside wedding hall. It’s Saturday night in Islamabad.

Armed guards stand at the entrance to the Elements Music Festival, an invitationonly affair sponsored by wireless carrier Zong. They frisk guests and sniff bottles for

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traces of alcohol, which is banned among the nation’s Muslim majority. Inside, local DJs Faisal Baig and Fuzzy Nocturnal play sets of bass-heavy, looping music that ends Sunday morning to chants of “One more song!”

China Mobile Communications Corp., which owns Zong, is one of the several foreign brands trying to grab Pakistan’s young consumers by their ears. Coca-Cola, Telenor, and PepsiCo have also sponsored raves. About two-thirds of the population is under 30, and the economy is projected by

the International Monetary Fund to grow at more than 5 percent annually over the next five years. Household consumption’s contribution to gross domestic product hit 80 percent in 2015, higher than the global average of 58 percent, according to the World Bank.

A July 11 report by Moody’s Investor Services said that while Pakistan’s mediumterm growth outlook is strong, the economy is also showing signs of vulnerability, noting “the government’s debt burden is high, and fiscal deficits remain relatively wide.”

The fallout from a probe into corruption allegations against Prime Minister Nawaz Sharif could also dampen growth.

Sharif has denied any wrongdoing.

Although annual GDP per capita is just $1,561, according to the Pakistan Bureau of Statistics, the country of more than 200 million is home to a sufficiently large cohort of young, liberal, and affluent consumers willing to pay the 2,500-Pakistanirupee admission (about $24) to the Elements Festival.

People just ‘want to disassociate’ here’s no nightlife here, there’s no clubs… Pakistanis want to just have a crazy night out. They just want to disassociate,” says Bilal Brohi, 30, a Karachi-based DJ and producer.

Many young Pakistanis developed a taste for house music, techno, and other Western genres while studying abroad.

They’ve been able to support their habit after returning home thanks to the growing availability of cell phones, coupled with better internet service. Smartphone shipments increased 28 percent in the first quarter from a year earlier, says International Data Corp.

China Mobile’s Zong says it has a 20 percent share of the smartphone market.

The company declined to comment on its involvement in the April 1 Elements festival. Djuice, the local mobile phone brand of Norway’s Telenor ASA, sponsored the Liberate Music & Arts Festival on May 6; more than 4,000 people were drawn to a Lahore water park by European DJs such as Nick Muir and Teenage Mutants. Coca-Cola Co.

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‘THERE’S NO NIGHTLIFE HERE, THERE’S NO CLUBS… PAKISTANIS WANT TO JUST HAVE A CRAZY NIGHT OUT. THEY JUST WANT TO DISASSOCIATE’ Bilal Brohi, Karachi-based DJ and producer

‘THERE ARE TWO PASSION POINTS FOR PAKISTANIS… ONE IS CRICKET, THE OTHER IS MUSIC’ Fahad Qadir, Coca-Cola spokesman and Alphabet Inc.’s Google were co-sponsors. Telenor’s goal was to reach 18- to 29year-olds with limited entertainment choices, said Saad Warraich, an Islamabadbased spokesman, in an email.

People now have the power to spend ullenLowe Rauf Group, a Karachi-based marketing and communications firm, estimates that foreign and domestic companies have ramped up spending on advertising more than 60 percent since 2012, to about 70 billion rupees a year. “People want entertainment,” says Saad Salahuddin, a media director at MullenLowe Rauf.

“They want more avenues to have fun.

They have the power to spend now.”

Still, it’s not easy to stage a rave in Pakistan. A spate of terrorist attacks in February killed at least 92 people and prompted organisers to push back the dates of the Liberate and Elements festivals by several months. Also, the country’s religious authorities and conservative politicians generally oppose the playing of Western music and the mixing of genders.

“We do face a lot of backlash,” says Mohammad Shah, 28, half of the DJ duo Fake Shamans, who discovered dance music while attending university in London.

“People do want places they can have fun.

We’re fighting through our music.”

Most events are clandestine affairs for a few hundred people vetted by promoters and organisers. Locations typically are disclosed only hours in advance through social media to help minimise overcrowding and the possibility of being shut down by police, local bureaucrats, or armed militants.

“We have to ensure security,” says Shahbaz Sharif, the chief minister of Punjab province and brother of the prime minister, while noting that his government has worked to promote some events.

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“The big achievement is that we’re getting multinational companies on board,” says Fuzzy Nocturnal, the 35-year-old Lahore-based DJ and promoter. “A lot of people want to do festivals, want to do club nights.” (Fuzzy declined to give his real name.)

Coca-Cola spends millions of dollars a year on concerts and other music-related activities in major cities in Pakistan, according to Fahad Qadir, a Lahore-based spokesman for the company. Since 2008 its local subsidiary has sponsored a TV show called Coke Studio that features in-studio performances by local artists. The program has proved so popular it’s been duplicated in India, the Middle East, and North Africa.

“There are two passion points for Pakistanis,” says Qadir. “One is cricket, the other is music.”

That said, many Pakistani DJs and promoters at the raves have learned that theirs can be a dangerous profession: One says he was beaten up for not playing a track requested by a politician. Another says police raided a concert and arrested a DJ on charges of soliciting sex workers, alleging the women weren’t attending by choice.

And sometimes popularity gets in the way of the music. Police shut down the Liberate festival at midnight – before some of the acts could perform – because of concerns about the size of crowds gathering outside the venue. n –with Faseeh Mangi Courtesy Bloomberg

MARKETS

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COVER STORY

WHAT IS

MALIK RIAZ

UP TO NOW? The curious case of Bahria Town — Pakistan’s largest private-sector real estate company — acquiring a bank By: Farooq Tirmizi n the surface, it is a transaction that makes absolutely no sense: why on earth is Bahria Town, Pakistan’s largest private sector real estate developer, buying the unfortunately named and even more unfortunately managed Escorts Investment Bank? Buying a commercial bank to start offering financing to its buyers would make sense, but an investment bank? This acquisition cannot also be about mortgages, can it? Yes, ladies and gentlemen, it can. It absolutely can. Occam’s Razor: the simplest explanation is the one most likely to be correct.

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To understand why this acquisition is taking place – and why any observer of Pakistan’s economy, and specifically its financial service sector should care about it – one first needs to understand Bahria Town’s history, its business model, and its place within the larger context of Pakistan’s real estate development sector.

A brief history of Bahria Town trictly speaking, Malik Riaz Hussain, the founder and largest shareholder of Bahria Town, does not have a rags-to-riches story in that he was born to a relatively well-off construction contractor in Sialkot. The family, however, fell on hard times when Riaz was relatively young, and the money troubles were stark enough that he had to stop his education after matriculation (10th grade) and start working several irregular blue collar jobs, including many involving manual labour, to help the family’s finances.

Lacking in a completed formal education though he may have been, Malik Riaz was a shrewd businessman, and concentrated his early business efforts in the

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‘IN THEORY, SUCH AN INSTITUTION SHOULD BE THE FARTHEST THING FROM BEING THE KIND OF INSTITUTION THAT WOULD ALLOW BAHRIA TOWN TO GET INTO THE MORTGAGE BUSINESS. BUT INVESTMENT BANKS ARE ALLOWED CONSIDERABLE LEEWAY BY THE SECP IN TERMS OF WHAT THEY ARE ALLOWED TO INVEST IN, AND LENDING IS TECHNICALLY A FORM OF FIXED INCOME INVESTMENT’ old family business: residential real estate construction. Over the quarter century following his father’s bankruptcy, Riaz built up a small but thriving business. It was not until the 1990s, however, that his business really took off, when he started cultivating contacts with senior military officials to become a preferred contractor for many real estate projects owned by such officials (including some that were later subject to criminal investigation).

He got his big break in the early 2000s, when a joint venture with the Pakistan Navy fell through, but through litigation, Malik Riaz was able to keep the rights to the name Bahria Town. (Under

the 1984 Companies Ordinance, no nonmilitary-owned business in Pakistan is allowed to have the names Askari, Bahria, Fauji, Fazaiya, or Cadet, but since the Navy had previously owned a share in Bahria Town, the name was legal, and Malik Riaz was able to keep it even after they pulled out.)

The timing of this break was crucial: the year 2000, the beginning of Musharraf Administration and the rise of a burgeoning Pakistani middle class which led to, among other things, a rise in the demand for suburban housing, which Malik Riaz and Bahria Town specialized in providing.

The company built large, Levittown-style

gated communities that frequently built their own infrastructure for electricity, water, and sewage in order to compensate for the government’s lethargy and inefficiency in providing these services in most parts of most cities in Pakistan.

In that respect, Bahria Town has a lot in common with the largest real estate developer in Pakistan, the military-owned Defence Housing Authority (DHA), which also builds large developments that have a level of infrastructure considerably better than the average for most Pakistani cities.

Indeed, in some respects, Bahria Town’s developments are often considered second in order of consumer preference only to DHA itself and sold to consumers who cannot afford the best of DHA’s offering.

While Bahria Town’s business practices have been the subject of constant investigation and litigation – and Malik Riaz has openly admitted on national television to bribing senior government officials and politicians to get the necessary approvals and land acquisition for his projects – neither the company nor Malik Riaz personally have been convicted of any major felonies.

The suburbanization of the Pakistani middle class

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his article, however, is not focused on Bahria Town’s business practices, but rather how it fits into the larger context of Pakistan’s urban

geography and its relationship to expanding middle class incomes and their related propensity to spend on real estate.

When Bahria Town won its litigation against the Pakistan Navy in 2000, Karachi and Hyderabad were two separate cities 100 miles apart and Sheikhupura was a small city an hour’s drive outside Lahore. Seventeen years later, the Karachi and Hyderabad metropolitan areas are about to merge (on the verge of becoming Pakistan’s equivalent of the Tokyo-Yokohoma megalopolis) and Sheikhupura is now effectively a suburb of Lahore.

How did this happen? Well, for starters, the length of the national highway network nearly doubled in the two decades between 1997 and 2017 – from 6,587 kilometers to over 12,000 kilometers according to data from the National Highway Authority (NHA) and the Pakistan Bureau of Statistics (PBS) – and both the number and length of provincial highways increased by even more. And per capita income more than tripled from $490 in 1997 to $1,510 in 2016, according to data from the World Bank.

With the shrinking of geographic distance (through better roads) and expanding middle class incomes, the demand for housing – especially suburban housing – has

dramatically increased. While data from the 2017 census are not yet available, they are expected to show a substantial increase to the 19.2 million housing units that existed in the country at the time of the 1998 census.

The population is expected to have increased by at least 50% since the last census. Meanwhile, the average household size has declined by approximately 8% since 1998, according to the 2016 Household Integrated Economic Survey conducted by the PBS. Those numbers imply that the total number of housing units in Pakistan reached 31.3 million in 2016, an increase of 12.1 million units in 18 years. The World Bank estimated in 2010 that approximately 61% of housing in Pakistan consists of permanent structures, suggesting that approximately 7.4 million new housing units have been constructed in the country since 1998.

Trying to grow real estate demand without mortgages he above numbers suggest astounding growth in the Pakistani housing sector. Yet the country is still considered to be short by at least 9 million housing units, suggesting that there is still plenty of pent-up demand in the country.

The reason for the shortage is simple: while there are plenty of people in Pakistan who wish to buy homes, and a suffi-

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MERGERS & ACQUISITIONS

cient number of real estate developers willing to construct those homes for people, the buyers often do not have the kind of large sums of money required to buy a house outright. The obvious solution, of course, would be to get a mortgage from a bank, but that would assume that the entire Pakistani banking sector is not filled with lethargic institutions utterly disinterested in actual lending activity.

Pakistan’s mortgage market is shockingly small, even by regional standards.

The Indian mortgage market equals about 9% of the Indian gross domestic product (GDP), according to the World Bank, For Bangladesh, the equivalent number is 3% of the total size of the Bangladeshi economy. For Pakistan? A measly 0.2% of GDP, and even that is an improvement over the absolutely appalling numbers witnessed in 2009.

The total amount of mortgages outstanding across the entirety of the Pakistani financial sector was Rs65.8 billion, as of September 30, 2016, the latest period for which data is available from the State Bank of Pakistan. If the Pakistani mortgage market was as developed as India’s, that number would be closer to Rs2.8 trillion.

Why is Pakistan’s mortgage market so underdeveloped? There are several reasons, but three major ones.

Firstly, between 2004 and 2008, it looked as though Pakistan’s mortgage finance industry, along with consumer finance in general, was about to take off.

Then came the inevitable crash in late 2008, followed by bad loans hangover so bad (over one-third of the total volume of outstanding loans went into default) that the financial services industry as a whole

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‘IN AN IDEAL WORLD, BAHRIA TOWN SHOULD HAVE ACQUIRED A HOUSING FINANCE COMPANY. THAT, OF COURSE, WAS NOT A REAL POSSIBILITY, SINCE THE ONLY SUCH COMPANY IS HBFC, WHICH IS GOVERNMENT OWNED AND THE GOVERNMENT HAS BEEN UNWILLING TO SELL IT TO ANYONE’ appears to have sworn off consumer finance altogether.

Secondly, the government of Pakistan has historically been discouraging of using bank deposits to finance a mortgage market, and it was seen as too risky. Until the 1980s, the banks were outright forbidden from mortgage lending altogether.

While the banks were eventually allowed to lend again, there are very strict limits on the total volume of loans that banks are allowed to deploy towards consumer lending as whole.

And lastly, the only mortgage lender in the country is the state-owned House Building Finance Corporation (HBFC), a highly mismanaged lender that has a dominant share in the mortgage market but accounts for even more of the non-performing loans.

The anemic mortgage market, in turn, means that many people who might otherwise become homeowners are not able to do so. That matters especially to Pakistan’s largest private sector real estate developer, which has seen its spectacular growth stall in the face of a lack of financing options. After growing by an astounding average of 75% per year between 2012 and 2015, Bahria Town’s revenues effectively flatlined during the financial year ending June 30, 2016, end-

ing at Rs66.8 billion.

In other words, Bahria Town has run out of upper middle class Pakistanis who can afford to buy its houses and apartments outright and needs to go one level lower: to people who can afford a 20-25% down payment on the price of a Bahria Town home and can comfortably afford the monthly mortgage payment.

The Burj Bank acquisition attempt iven these circumstances, the easiest and most logical move for Bahria Town would be to partner with one or more commercial banks to start offering mortgages for wellqualified borrowers to buy its properties.

Yet despite being in business for several decades, Bahria Town has been unable to cultivate those relationships.

Kazim Alam, a financial reporter for Dawn, elucidated on the reasons as to why that might be on his personal blog: “Few banks offer mortgages on Bahria Town properties. Housing finance for Bahria Town is scarce for the same reason it is scarce for the rest of Pakistan’s urban centers: banks require clean, undisputed titles of land ownership for any house/flat they finance… According to mortgage

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bankers at several lending institutions, the land titles of Bahria Town properties are not as clean and transparent as they appear to the general public. This means that bankers look at Bahria Town properties with as much suspicion as they would look at a housing project in, say, Korangi (an industrial and low-income residential area in Karachi).”

The lack of financing was becoming a limiting factor on Bahria Town’s growth in 2015, right in the middle of its first foray into the highest end of the Pakistani real estate market. That year, Bahria Town’s most expensive property – the 62-storey BT Icon in Karachi, the tallest residential building in Pakistan – was being marketed to upper middle class buyers and coming onto the market.

Something had to be done and Malik Riaz Hussain would stop at nothing to keep the growth of his company going.

Riaz is not the kind of person who lets obstacles get in his way. When it was becoming clear that the roads in front of the BT Icon were not equipped to handle the traffic from a 62-storey high-density building in a city without mass transit, Malik Riaz spent $18 million to build a series of overpasses and underpasses to ease congestion. He certainly was not going to let the banks’ refusal to lend to his buyers stop him.

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

The SBP worried that Bahria Town and Malik Riaz were not the kind of people it wanted to entrust with retail deposits from

the general public.

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

In late 2016, he found just such an entity in Escorts Investment Bank. On February 8, 2017, Bahria Town announced its intention to acquire Escorts from the family-owned business group that controlled over 71% of its shares.

The Escorts transaction o call it an acquisition would be somewhat laughable, considering the fact that Bahria Town is getting Escorts almost literally for free, paying the princely sum of one rupee for over 71% of the shares of the company.

Nonetheless, for a moment it looked like a too-clever workaround. It was

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clearly a transparent bid to get around the State Bank. And two days later, it looked like Bahria Town would be rebuffed again, when the Securities and Exchanges Commission of Pakistan (SECP) announced that it would not allow the transaction to go through.

It turns out, however, that the SECP was not trying to halt the transaction in solidarity with the State Bank (or for the same concerns), but rather because Escorts had not followed the necessary procedures for an acquisition: under the Pakistan’s securities laws, a company’s majority shareholders cannot simply sell away their shares without also offering minority shareholders to sell their shares at the same price or better.

In their haste to undertake that transaction, Bahria Town and Escorts forgot to make the offer to the (very few) minority shareholders of Escorts. They finally got around to fulfilling that requirement on July 24, when Bahria Town announced that it had acquired over 71% of the shares in Escorts Investment Bank for a grand total of one rupee.

Not one rupee per share, mind you.

One rupee total.

‘BAHRIA TOWN HAS A LOT IN COMMON WITH THE LARGEST REAL ESTATE DEVELOPER IN PAKISTAN, THE What Bahria Town gets MILITARY-OWNED DEFENCE HOUSING AUTHORITY (DHA), out of the deal hen you get something for WHICH ALSO BUILDS LARGE DEVELOPMENTS THAT HAVE just one rupee, you get what you pay for. Escorts InvestA LEVEL OF INFRASTRUCTURE CONSIDERABLY BETTER ment Bank is without quesTHAN THE AVERAGE FOR MOST PAKISTANI CITIES’

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MERGERS & ACQUISITIONS

tion one of the worst-run financial institutions in the country. Indeed, it is a wonder it still exists given just how consistently it has been unable to make money.

Before we get to Escorts’ financials, however, let us examine exactly what an investment bank is and how Bahria Town might be able to benefit from owning one.

An investment bank – in the Pakistani context – is very similar to an investment bank in the United States: a lightly regulated financial institution that primarily engages in trading and investing in equities, fixed income, and money market instruments, in addition to advising and underwriting capital raising and mergers and acquisitions, as well as providing its corporate clients with strategic advice.

In theory, such an institution should be the farthest thing from being the kind of institution that would allow Bahria Town to get into the mortgage business.

But investment banks are allowed considerable leeway by the SECP in terms of what they are allowed to invest in, and lending is technically a form of fixed income investment.

It is often incorrectly assumed that investment banks cannot engage in retail finance operations. Strictly speaking, this is at least partially true: investment banks cannot accept retail deposits and can only raise money market term deposits from institutional investors and high net-worth individuals, and they cannot advertise on any venue that would be available to the general public at large.

Lending, however, is another matter entirely. Investment banks frequently offer personal loans and even offer car leasing (Escorts, in fact, offers such a product). As stated above, lending is technically a form of fixed income investment, and that is completely within the purview of investment banks. The government’s financial regulators justify this lax attitude by pointing out, correctly, that the risk to the broader financial system from

investment banks is limited by the fact that they cannot accept deposits from ordinary citizens and instead only from entities that have the capacity to bear higher levels of risk.

Nonetheless, just because investment banks can lend to consumers does not make them ideal vehicles for doing so. Indeed, investment banks have historically had a horrendous record of consumer lending.

Escorts is among the very worst in the country, with its interest income from its lending activities amounting to less than half of the interest it has to pay out to its institutional and high net-worth depositors.

In an ideal world, Bahria Town should have acquired a housing finance company. That, of course, was not a real possibility, since the only such company is HBFC, which is government owned and the government has been unwilling to sell it to anyone. The next best option would have been to create a housing finance company from scratch, but perhaps the hassle of having to create a financial institution with no expertise in building one were simply too much for Bahria Town and they decided to buy the third-best option.

So will this work?

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bsolutely not. This transaction does not have a snowball’s chance in hell of working out.

THE WORLD BANK ESTIMATED IN 2010 THAT APPROXIMATELY 61% OF HOUSING IN PAKISTAN CONSISTS OF PERMANENT STRUCTURES, SUGGESTING THAT APPROXIMATELY 7.4 MILLION NEW HOUSING UNITS HAVE BEEN CONSTRUCTED IN THE COUNTRY SINCE 1998 28

Bahria Town is the wrong company to try to revolutionise mortgage lending in Pakistan, having absolutely no experience in consumer finance in the past. An investment bank is far from an ideal instrument to select in order to embark on a mortgage lending spree.

And even if it was, Escorts is far from the best institution to pull it off. It has neither the capital, nor the talent, nor the relationships to be the kind of innovative institution that Bahria Town would need it to be for this experiment to work.

We hate to be the bearers of bad news. The mortgage market in Pakistan clearly needs to be infused with new energy and the idea of a real estate developer – particularly the largest private sector developer – is not a bad one. But this is not going to achieve the results Bahria Town is hoping for, even if we assume that the SECP will not eventually step in and stop Escorts from effectively transforming itself into a mortgage lending institution.

One day, some institution will do something that will truly jump-start Pakistan’s mortgage market. Unfortunately, we are nowhere there yet, though we applaud Bahria Town for trying. n

MERGERS & ACQUISITIONS

OPINION

nida Jaffery

no pandemonium, for the moment mran Khan is not the only one celebrating ‘Yom-eTashakkur’, many at the stock market are doing the same. The Pakistan Stock Exchange is finally taking its much awaited sigh of relief, turmoil may not be over but the aircraft has gained some control. The breather may last a few more days till the dust is settled.

The KSE-100 Index fell 1,670 points or 3.6% after the disqualification verdict on Friday. However, as the initial mayhem was over, it recovered in the afternoon and closed 6.27 points or 0.01% higher – attributed to the ruling PML-N choosing not to resort to chaos and accepting the Supreme Court’s verdict.

Since the news of the MSCI rerating of PSX to the emerging market status, hefty investments in the bourse were expected.

Much of it materialized in the beginning but, the market began to slow down since the start of 2017. Pressure came from political uncertainty due to the involvement of the Sharif family in the Panama Case as well as the overvalued price of rupee.

The uncertainty continued until Friday, when the prime minister was disqualified, rather dismissed, from his position on accounts of corruption. In Pakistan’s 70 years of existence, not one prime minister has served a full five-year term. To expect Nawaz to break the legacy was nothing less than a pipe dream, which eventually shattered in wake of the Panama investigation.

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nida Jaffery The author is a freelance writer

opinion

Recipe for chaos Nawaz, however, is not the only one under the radar who affects the economic stability of the country. Finance Minister Ishaq Dar was also simultaneously dismissed on Friday. That brings us to the question mark that our economic policy has become. Representatives of several chambers of commerce in Pakistan are of the opinion that the economic policies of the government will continue without much change until the general elections in 2018.

But, we cannot eliminate the factor that Dar was playing the firefighter in the rupee/dollar race – the firefighter has no fire extinguisher now. What to make of it is thorny question businessmen have no answer to.

“To eliminate the fear, a depreciation spree is much needed,” said Zeeshan Afzal, of Insight Securities.

“Once rupee slides to its real value, investments can be expected across the board, especially foreign.”

The interest likely to remain low

The business community here and abroad has a perception that Sharifs are the answer to their corporate and economic woes with Pakistan – a trader family is expected to support the growth of business. However, evidence suggests otherwise. Others being worse does not make Nawaz any better.

The current account deficit of last year is unprecedented driven by a massive jump in imports. The State Bank of Pakistan subscribes to the view that import of machinery and material for the gigantic infrastructure projects with China is the cause. The money is coming from record borrowing mainly from our wealthy Northern neighbours. The GDP growth rate, say experts, is inflated and the local bourse is uncertain hence unstable. In a situation like this, a country without a plan is nothing less than a recipe for chaos.

Currently, some analysts are saying the market will touch 50,000 points by the end of 2017.

Yet there are many external factors to be noted, most importantly the rupee-dollar situation.

Analysts at Topline Securities predict that the index will trade in the range of 43,000-49,000 points till the end of the year. Afzal, from Insight Securities, concurs. The market is expected to remain volatile, however, with the investor sentiment, maybe subtle and low, it will not be as pressured as in the first six months of the year.

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By Ghulam Abbas

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r Muhammad Irshad superannuated as Chairman FBr/Secretary revenue Division on the last day of June this year after an illustrious professional career spanning over three decades of diverse experience. Joining Civil Services of Pakistan in 1985 in the Income Tax Group, since renamed as Inland revenue Service, at his re-

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tirement he was in the highest grade in BS 22. Prior to entering the elite service, he had already served as a captain in Pakistan Army.

In IrS, he held numerous key positions, including Member Ir Operations, Chief Commissioner, regional Tax Office at Sargodha, Lahore and Karachi, and as commissioner Large Taxpayers Unit (LTU), Karachi. His assignments have ranged from heading some of the most vital field formations to spearheading the administration of

Ir Operations at the FBr Headquarters.

Dr Muhammad Irshad has multiple educational degrees in various disciplines, such as medical (MBBS), law (LLB), business and finance (MBA Finance) and public administration (post graduate diploma).

The following are excerpts of an interview with Dr Irshad post his retirement.

Profit: What to you are your accomplishments as the head of FBR? Dr Muhammad Irshad: For a govern-

ment employee, the foremost achievement would be completing one’s term with respect after completing assigned duties with honesty, dedication. You may ask around at FBR about my performance and achievements; they should be the best judges on my role as head of the department. With whatever role was given to me during my job, I am satisfied that I fulfilled it. I have set a precedent as member operation at FBR. In judging the role of chairman, unfortunately, recoveries and revenue targets have been the parameters at FBR, which I think should not be the case. Revenue targets each year are not based on statistics but on assumptions. Instead of merely going after the revenue targets, I focused on team-building and harnessing and development of human resource etc.

Profit: What were major challenges for you at the FBR? MI: The major challenge was to rectify or improve the tax machinery, as I believe the tax machinery actually determines the writ of a government. I faced a lack of resources, inspecting tools [to dissect] fake businesses, accommodation for the young team, accessibility to various locations etc. Whatever improvements I could bring in the tax machinery with the given resources would not go up unless more resources are provided to my successors.

Profit: What's your present workforce and how many of them are tax inspectors, do you think you were understaffed? How many people does the FBR need?

MI: There is a lack of support staff at the FBR as no recruitment has been made during the past 10 to 12 years. Many experienced and qualified people have retired during this period. However, the number of officers has increased since the tax reform was introduced in 2001. There were only 15 officers when I joined the

academy. Presently there are 60 to 70 officers but without enough support staff and facilities. An assistant commissioner can do nothing without proper machinery. The policy of decreasing lower staff and increasing number of officers was, I think, a self-defeating policy.

Another issue I must highlight here is related to Universal Self-Assessment Scheme (USAS) introduced in the Income Tax Ordinance 2001. This scheme authorised the taxpayer to assess his own tax liability. This scheme has no doubt made the tax laws modern and facilitated the taxpayer but the number of taxpayers and ratio of tax collection have gone down.

People were happy to see revenue increasing but it caused a reduction in compliance level and tax to GDP ratio.

The tax department has already lost its teeth because of the USAS. It needs patronage and authority to bring the authoritative and affluent class into the tax net. The scheme, which was misused by

‘ONLY 0.7 PERCENT OF THE TOTAL TAX COLLECTION IS SPENT ON TAX MACHINERY, WHICH IS UNFORTUNATE INDEED. EVEN IN AFGHANISTAN, INDIA AND OTHER DEVELOPING COUNTRIES, THIS PERCENTAGE IS HIGHER. HOW CAN YOU EXPECT EXTRAORDINARY PERFORMANCE WHILE SPENDING A PITTANCE?’

the taxpayers, ultimately de-motivated tax officers. When I took charge, the institution was completely demoralised for the last 10 years. There was apathy among services and the officers with resource constraints were largely unhappy.

With limited resources, I tried my best to improve the system with the same workforce. Only 0.7 percent of the total tax collection is spent on tax machinery, which is unfortunate indeed. Even in Afghanistan, India and other developing countries, this percentage is higher. How can you expect extraordinary performance while spending only a pittance? At least one percent of the collection should be spent on the department. This would still be puny in comparison to other countries where over five percent of total tax collection is spent on tax collecting institutions.

Profit: How are the groupings, political intervention, corruption and irregularities were impacting FBR’s performance?

MI: I agree; there are black sheep in FBR but an overwhelming majority is honest, dedicated and talented. Especially the younger lot recruited through FPSC during the past 10 years is very good in FBR. Since the perception of being corrupt has already demoralised the institution, I

INTERVIEW

would request that nobody is called corrupt without evidence. At the same time, I would call for stricter internal accountability system in the FBR. I must say the cancellation of transfers by my successor even before taking charge of the department was not right. I had ordered the transfers and postings before leaving office as I had forced some employees to continue against some officers’ desires.

Profit: What tax reforms you have to your credit MI: I have been a member of Tax Reform Commission when it was formed. The commission comprises highly competent members. I loved working with them. As head of FBR, the first step regarding tax reforms was to divide the corporate and non-corporate sector. I opened a Large Taxpayers Unit (LTU) in Karachi and two corporate Regional Tax Offices (RTOs), one apiece in Lahore and Karachi. In the rest of the country, we established corporate zones. I also assigned duties to officers as per their expertise in corporate or non-corporate sectors.

There are multiple examples in which we tried to discourage the tax evasion in the corporate sector. I noticed that in companies with bottom lines in the red, directors’ led a plush lifestyle, and tooled around in expensive vehicles, so we focused on them.

In the non-corporate sector, I tried to monitor businesses through RTOs. For instance, I wished to set up offices and assign the commissioners duties in Defence, Anarkali, Jatti Umra and others areas and outskirts of Lahore to not only monitor the businesses but also facilitate the taxpayers.

Apart from these, I had only recently introduced the concept of District Taxation Officers (DTO) to expand the tax net to every part of the country. Through this

‘PEOPLE DON’T PAY TAXES VOLUNTARILY AS TAXPAYERS ARE NOT SURE THE TAXED MONEY WOULD BE SPENT ON THEIR WELFARE AND SERVICES.’ Dr Muhammad Irshad, Former Chairman, FBR

initiative, the intent was to bring more people into the tax net. The DTO offices established under the newly introduced reforms will be autonomous and miniRTO office having financial and administrative powers to recruit staff. District Tax Officer will be in-charge of the district and will have representation at Tehsil level so that they could report about the overall performance of tax collection.

DTO will have a separate office and will have the powers of rectification, which will simplify the verification system and will be the appellate authority in deciding taxpayer related problems. The state will provide expenditure for DTO offices and instead of Additional Commissioners, they will directly report to Commissioner Office. As per the news system for the resolution of tax-related problems, the commissioner will have to visit the DTO office in the first week of every month with Chief Commissioner paying quarterly visits to these offices.

This system will provide correct data and record for the formulation of national reforms policy. I have introduced it in Attock, Wah Cant and Charsadda during my last days at the FBR. The model system would be copied in rest of districts of the country. The DTO will be given a resi-

‘WHY PARLIAMENTARIANS ARE NOT BEING ASKED WEALTH RECONCILIATION CERTIFICATES BEFORE CONTESTING AN ELECTION? THEY ARE ONLY ASKED TO SUBMIT TAX RETURNS. IF SOMEONE IS SPENDING RS5 MILLION ON ELECTION CAMPAIGN AS ALLOWED BY THE ECP, IT MEANS HE/SHE HAS SURPLUS CASH’ 32

dence, staff, administrative and financial authority and shall be provided security under this system. I hope my successors will continue it in future.

People don’t pay taxes voluntarily as taxpayers are not sure the taxed money would be spent on their welfare and services.

Profit: What advice will you give to your successor?

MI: I would suggest to him to focus more on human resources instead of pushing files.

Profit: As FBR misses revenue collection target again, what were the reasons behind this shortfall? Why has FBR accepted another challenging target of collecting Rs 4trillion in 2017-18?

MI: Honestly speaking, FBR should not be blamed for missing target as policy measures taken by the government actually affect the target. For instance, there was a differential of around Rs130 billion in the collection from the petroleum sector. As chairman FBR, I did not know how to compensate for it. Secondly, the government reduced the tax on fertiliser from 17 to 5 percent, affecting revenue loss of another Rs30 billion. The extension of zero-rating regimes also affected losses to the tune of Rs32 billion. Besides, the government introduced export bailout package worth Rs180 billion.

Then taxes on pesticides were waived.

These are quantifiable facts. Interestingly these policy initiatives were taken after fixing the revenue target!

The revenue growth must be 16 to 17 percent in 2016-17 if the policy measures

are excluded. It was the same team which made record revenue generation in 201516. I would not comment on how the target of Rs4 trillion has been fixed for 2017-18. The FBR team may give better results provided they are given due respect.

Profit: Despite tall claims of an increase in the numbers of filers, it is still at 1.158 million. What went wrong?

MI: I have already mentioned the reason: the FBR is not present everywhere. The concept of DTOs is aimed at expanding tax collection as well as encouraging filing tax returns. This will be very unjustified if the new system introduced through the tax reform commission is not expanded throughout the country.

Profit: Is the government not overtaxing the at least 50 percent amongst common citizens who are non-filers?

Millions of cell phone and internet users are not filers despite paying taxes in advance?

MI: This is an issue but FBR should focus on the major tax evaders. The DTOs are needed to watch people on high networks and taxing the rich will have a trickle-down effect. I suggest that wealth reconciliation certificate and tax record of a government officer should also be mandatory for promotions.

Why are parliamentarians not being asked wealth reconciliation certificates before contesting an election? They are only asked to submit tax returns. If someone is spending Rs5 million on election campaign as allowed by the ECP, it means he/she has surplus cash. I also agree that making filing mandatory for cell phone and internet users would be the right course.

Profit: What did you do to deal with the

‘REVENUE TARGETS EACH YEAR ARE NOT BASED ON STATISTICS BUT ON ASSUMPTIONS. INSTEAD OF MERELY GOING AFTER THE REVENUE TARGETS, I FOCUSED ON TEAM-BUILDING AND HARNESSING AND DEVELOPMENT OF HUMAN RESOURCE’ issue of double or multiple taxes, especially on exporters and traders? Removal of federal-provincial multiple indirect taxations was also an issue which has remained unresolved?

MI: I admit that the issue is still unresolved. This is completely wrong to slap notices on a trader from four different quarters. I tried to address this issue but due to the reluctance on the part of provinces, it could not be sorted out.

Provinces after getting right to collect some taxes following the 18th Amendment have established their own tax authorities. This case is needed to be tackled at Council of Common Interests. The FBR can do nothing in this regard until and unless the law is changed. The issue needs to be resolved immediately as it is causing an increase in the cost of doing business and also shattering the confidence of taxpayers in tax department.

Profit: What measures have taken so far been taken to discourage under invoicing and tax evasion?

MI: Pakistan is facing losses in terms of tax and duties due to Free Trade Agreements (FTAs) signed with various countries. I think the environment in which these agreements were signed was not right. The Ministry of Commerce should revise the terms and condition of FTAs as Pakistan is the loser while other nations are prospering at our expense. We need to take steps for border management besides minimising human element and computer-

‘I AGREE THAT INDIRECT TAX IS A REGRESSIVE TAX, HAVING NEGATIVE IMPLICATIONS ON THE SOCIETY. INDIRECT TAXES LIKE SALES TAX, EXCISE DUTY, CUSTOMS DUTY, ETC., ARE LEVIED ON ALL PRODUCTS/SERVICES WITHOUT ANY DIFFERENTIATION, WITHOUT CONSIDERING THE CONSUMER GROUP'S INCOME/FISCAL STATUS WHICH CONSUMES THE PRODUCT/SERVICE’

ising the system at ports. The FBR only considers the exit and entry points and has initiated a foreign-funded project of Integrated Transit Trade Management System (ITTMS) for the construction of facilities at Wagha, Torkham, Chaman and border crossing points to deal with the taxation issue effectively. However, if goods are coming from FTA countries with zero or relaxed duties, FBR cannot do anything.

Profit: Keeping the major subsidies intact in the present budget was a political decision. Is removing subsidy on power a good idea?

MI: Though it does not fall under my purview, I think subsidies are being used in Pakistan. Only targeted subsidies are given in the world but the case in Pakistan is different. If the government is targeting millions of poor people through the BISP why the same network is not being used to target the subsidies? I will only support targeted subsidy for a limited time.

Profit: Did you have full autonomy as FBR chief or was there political intervention?

MI: Honestly speaking, the credit of nonintervention in FBR goes to this government. The Finance Minister only wanted us to keep him informed about major decisions. He never interfered in my affairs.

I have been one of the powerful administrators in FBR. Profit: What is your take on some Western states and even Dubai where they have scrapped all kinds of income tax, which resulted in massive investment, job creation etc? Why can't we do it in Pakistan where tax evasion is rampant and big fish don't pay taxes anyway. What will be its implications?

MI: The idea is good but in an ideal world. This idea is good for the country where data is recorded even if someone buys soap or other small items from a grocery shop. He finds every record at the

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end of the year. On the contrary, we need huge investment to create such environment. Besides, the whole society needs to change to implement such a system.

Profit: How many FBR inspectors have you fired or suspended for not doing their job effectively or over misuse of power?

MI: I have avoided the traditional way of punishing the wrongdoers. I was used to talking to them separately. I have taken stern action against few people in the organisation but on merit.

Profit: We heavily depend on indirect taxes, and loss close to Rs1 trillion in tax evasion, what do we need to change that equation?

MI: I agree that indirect tax is a regressive tax, having negative implications on the society. Indirect taxes like sales tax, excise duty, customs duty, etc., are levied on all products/services without any differentiation, without considering the consumer group's income/fiscal status which consumes the product/service. So the poor or rich are equally impacted by this.

But since our economy is largely undocumented, no solution to avoid indirect taxes is in sight. Our society usually resists documentation of economy as we have experienced in the case of the tax on property.

Profit: Those earning above Rs400,000 are taxed, but there are two million merchants who earn much higher than this but pay little or no tax. This has been the same for many years. Why have you not been able to tax retail and wholesale sectors?

MI: As I have said earlier, we need to revisit the whole taxation system. The first thing we need to do is to shelve the USAS completely. It has badly affected compliance level. We need to introduce forensic audit, create deterrence and set an example by taking the major tax evaders to the task. These are steps needed to be taken at the government level. Being a govern-

ment employee, one can only implement rules set by the government. Let the rulers not be influenced by their political compulsions.

Profit: If asked to serve FBR again, what is that one thing you would do differently this time?

MI: I have never been interested in a position after I have left it once. However, I can serve on any other suitable post if I am offered one. I avoid self-praise, you may ask officials at the FBR how my initiatives were helpful in improving the performance of the organisation. Throughout my career as assistant commissioner, commissioner, chief commissioner, member operation and chairman FBR I have never been late to office. I never left office early.

I count the concept of DTOs, territorial approach, increase in tax machinery, action against wrongdoers etc. as best initiatives taken by me at FBR. Profit: There is a strong perception

‘I WOULD NOT COMMENT ON HOW THE TARGET OF RS4 TRILLION HAS BEEN FIXED FOR 2017-18. THE FBR TEAM MAY GIVE BETTER RESULT PROVIDED THEY ARE GIVEN DUE RESPECT 34

among the public at large that taxes collected are not spent on them, this is cited as a valid reason by many to either not pay taxes or avoid paying to the extent these are due?

MI: The taxpayer has every right to ask about money. The general perception that taxes are not paid in terms of services to the people is true. The government is yet to make a transparent system where the taxpayer can check where their money has been spent. The real issue is definitely on expenditure and not on collection side.

I will exhort the people to pay taxes and then boldly question the rulers on where their money was being spent.

Profit: How the Panama Gate impacted the FBR? Did it make things even worse for the tax collectors?

MI: Not at all. Whatever record was demanded by the Joint Investigation Team (JIT), FBR obliged. The FBR is controlling body but the tax record is available with commissioners; even chief commissioner is not the custodian of record. The FBR only forwards what record is shared with it by the commissioners and their staff. I think only a stupid officer can take the risk of tampering with the record. He or she should not take such risk for a government which changes after every few years. n

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‘PAKISTAN, A STRATEGIC HUB FOR NOKIA’ Far from giving up, the one-time Finnish mobile giant flexing for a comeback

By: Muzhira Amin witteratti went haywire on June 20, 2017. It wasn’t about JIT probing the premier and his family for tax evasion nor was it about a Pakistan-India cricket match. The top trending topic that day was rather unusual: the one-time mobile making giant, Nokia relaunched its flagship 3310 mobile phone and many tweeted about what was their first phone.

After a tepid four years, Nokia seems to be gearing up for a comeback and it chose to make a loud and clear statement by excessively marketing their most successful model in the country. First introduced in 2000, the feature phone is back with vibrant colours, diverse functions and long-lasting battery life, taking you to a trip down the memory lane but vastly improved newer version.

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Is nostalgia enough? ut is nostalgia and bright colours enough to force consumers to ditch modern technology? Has Nokia taken the right path this time or would we see a repeat of recent history yet again – and soon?

When new technologies like iOS and Android were making rounds everywhere in the world, Nokia kept relying in its Symbian operating system, which cost the company dearly. Fast forward to 2017, the

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company marketed this feature phone with a lot of enthusiasm when the market is rapidly shifting to the much advanced smartphones.

“If you look in the smartphone market, yes, there has been an opportunity lost but if we look at feature phones, I think we have done pretty well,” Kamran Khan, Head of Near East for the Home of Nokia Phones (HMD) told Profit in an exclusive interview.

Found in 2016, HMD Global is the sole licensee of Nokia phones across the world. After the shift from Microsoft, all

‘AFTER THE TURBULENT PERIOD NOKIA HAS BEEN IN, IT NOW CLAIMS ITSELF TO BE NOT ONLY A SOFTWARE COMPANY THAT SELLS PHONES, BUT A COMPANY THAT IS PASSIONATE ABOUT CELL PHONES. THEY AIM TO PROVE THIS WITH THE LAUNCH OF THEIR NEW SMARTPHONE, NOKIA 5 AND 6’

Nokia phones business is handled by HMD Global.

Khan says Nokia phones only exist in price points where entry level smartphones do and they sell a large amount of phones in this segment. The company refused to share the exact number, but according to a private study the company sells more than 150,000 phones a month and accounts for more than a tenth of overall market – when it comes to the price band of $30-$70, it has a whopping share of more than 60 percent, reflecting the company’s strength in feature phones.

That said, a market survey by Profit indicates the recently launched 3310 is doing just OK but other Nokia phones with more features are doing better.

“Customers say 3310 is very expensive and prefer buying a smartphone instead,” said Abdusalam of Yasir Communications, a mobile phone shop in Saddar’s Electronics Market. Similar views were echoed by Waqar Memon of Mobile Point.

“Nokia 3310 is not a hot model as it was expected due to its high price. The company should lower the price so that shopkeepers who deal in legitimate branded sets are able to sell it,” Memon said pointing to a copy of 3310, which has reached the market and is selling at Rs1600.

When Nokia announced the re-launch of its flagship phone, Nokia 3310 it was predicted by experts that it would cost $50.

However, the phones are available in the market at $60-$65, which according to many experts is high for a phone with limited features.

‘PAKISTAN IS A COUNTRY WITH DEMAND FOR A MILLION SMART PHONES A MONTH, CREATING MASSIVE OPPORTUNITY. THERE ARE NOT MANY COUNTRIES THIS BIG; THUS THIS IS A VERY IMPORTANT MARKET FOR US’ Kamran Khan, Nokia’s Head of Near East

Not making an impact in smartphone segment okia has sustained its market in the aforesaid price band but can it make any impact where the growth is: the smartphone seg-

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ment?

Pakistan is among top three countries in MENA for Nokia and is one of their focus areas, the head of HMD Global said, making it a strategic hub for Nokia.

“Pakistan is a country with demand for a million smart phones a month, creating massive opportunity. There are not many countries this big; thus this is a very important market for us,” said Khan who recently joined HMD and has a 20-year experience in leadership positions. He told Profit that this experience he has had helped him develop an understanding of the consumer psychology, which he plans to use at Nokia.

Once an irrefutable market leader, Nokia lost much of its dominance to emerging new players both locally and internationally. It is safe to say that they made mistakes and have been facing repercussions since the last five years.

Khan calls it a learning experience though for all the parties involved.

Nokia phones have always been known for being reliable, he said, giving example of a video of a woman breaking walnuts using the new Nokia smart phone and surprisingly there was not a scratch on it.

Although Nokia did lag behind in a few ways but its customers still had the same love for the brand that they had demonstrated in the past.

Passionate about phones fter the turbulent period Nokia has been in, it now claims itself to be not only a software company that sells phones, but a company that is passionate about cell phones. They aim to prove this with the launch of their new smartphone, Nokia 5 and 6. It has also partnered with Jazz, the largest cellular operator in Pakistan, for launch of its new range of smartphones including Nokia 6, Nokia 5 and Nokia 3 as well as its feature phone Nokia 3310. Jazz will offer promotions to customers on these phones under the deal.

Furthermore, the company is making efforts to up their game as proved by their latest partnership with Zeiss for improvement of their phone’s camera technology.

According to Khan, Nokia’s partnership with Google and Foxconn on Android would take them one step ahead of their competitors.

Coming back to competition, Kamran Khan elaborated that Q-mobile is one their major competitors because of their similar price band as mentioned above. Other companies however rank above $100, which is not Nokia’s target market.

Talking about their future strategies, Khan briefed, “Nokia is a phone for everyone with diverse products in all price bands.

We want to make sure that we focus on what we are good at, majorly maintaining a sharp consumer focus.”

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INDUSTRY

By: Syeda Masooma ifting its shutters for the first time in 1974 as a modest enterprise in the famed Bano Bazar of Anarkali – a haunt for women for ages – Stylo shoes has morphed into Stylo Group in about four decades.

From attaining the status of one of the most popular women’s footwear brands early on, to falling prey to well-resourced competitors like Servis, plunging to a mere 5 percent of the market share, and then lifting itself from its bootstraps to reach cloud nine by becoming the first retail network in the Middle East and North Africa (MENA) region are some ups and downs that make Stylo Group a nationwide standout.

Javed Iqbal, Director Stylo, shared with Profit his own experiences and Stylo’s spread to 46 cities across Pakistan.

“This is our family business. Named after my little sister Naila Bano, my father Azhar Hussain Siddiqui started it in the mid-1970s with a small shop, its signboard reading Bano Chappal,” said Javed. Bano Chappal became popular among the local community pretty quickly, yet it had to be evacuated and eventually shut down in 1986 because of legal wrangling with the landlord.

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Not willing to let go of his success, while Bano Chappal was in a legal limbo, Azhar Siddiqui established another 15x17sq.ft. outlet, branding it Stylo. Javed got the responsibility of managing this new shop and by the time Bano Chappal shut shop for good, Javed’s elder brother, and now Stylo Group’s Chairman, Mazhar Siddiqui had also joined the family business.

Surprised by instant success irst and foremost target that Javed set himself was to become number one brand in the city. This was achieved quickly. “Our outlet was small, with little space to manoeuvre, yet

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the clientele was not discouraged from revisiting.” Such instant success surprised him. “We did not even know how much pull our brand had but customers liked us.”

In 1999, Javed’s neighbours offered to become silent partners in his business, leading him to move to the upscale Liberty Market. “Ilyas and Fayaz joined in and that brought a massive change for us. We felt that from a little pond, we had moved to a river.”

In 2003, his younger brothers Munawwar Hussain Sidiqque and Sajid Sidiqqui also joined Stylo. Javed also has two sisters, neither active in the business.

Javed explained that it was their own choice and not any restriction on religious or family grounds to not allow women in

‘JAVED DID NOT SHARE THE DETAILS ABOUT HIS MARKETING BUDGET, BUT HE SAID THAT IT IS CONTINGENT ON THE REVENUE. THAT SAID, IN THE SAME BREATH HE MENTIONS THAT OVER THE YEARS, IRRESPECTIVE OF THE GROWTH RATE IN THE INDUSTRY, STYLO’S REVENUE HAS SEEN STEADY GROWTH’ 40

business. “There is no gender discrimination in our family; sharia and our family’s spiritual bent allow women to engage in business.”

It’s far more competitive now aved is happy at this success but he doesn’t deny that the shoe market has recently become extremely competitive and Stylo has lost its initial lustre and domination. “We keep improving on design, using zircon and black and white contrasts to maintain our hold, yet there is no denying that competition has increased.

“We continue to be market leaders if compared on presence parameters, but an accurate analysis of the industry cannot be done because there is no formal data.”

Among the brands, he believes that Stylo captures less than 5 percent of the total industry.

Javed’s claim tallies with the statistics compiled by leading industry players in 2016, that signal Servis as the market leader with almost 10 percent market share, with Bata behind by a fraction,

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leaving Borjan, Hush Puppies and Stylo, sharing the next ten percent. It is notable that all these brands represent the organised sector of the industry.

While Javed did not share any revenue figures, Service Sales Corporation recently shared its revenues with a local English daily, quoting Rs15 billion for the financial year ending June 2016. Considering market share calculations by industry players and Stylo’s 5% share quoted

by Javed, it can be assumed that Stylo makes north of Rs7.5 billion.

Javed’s view of his competitors is beyond the overall industry, as there was no single brand pitted as Stylo’s rival, but it primarily depends on the geography. In Lahore, which is by far Stylo’s stronghold, he considers Metro and Ehsan Chappal Store as primary competition.

Still a household name nfettered by market dynamics, Javed said, “Competition is an enduring feature, with everyone feeling the pinch now and again, yet Stylo continues to be a household name.” Stylo saw a period of being a brand preferred by the upmarket consumers but jostled by competition, the brand made SEC B and B+ its primary target.

They do, however, capitalise on the opportunities they get to attract SEC A and often post success stories, such as launching winter boots, while no other local brand targeting masses realised the importance of this niche. Stylo has an inhouse research team to keep track of changing trends in the local and international market and keeping up with the ever-changing vogue by launching new segments.

Stylo’s marketing is not only constrained by the budget, but the company itself is not geared to aggressiveness in this area. Unlike Servis’ regularly updated

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‘WE CONTINUE TO BE MARKET LEADERS IF COMPARED ON PRESENCE PARAMETERS, BUT AN ACCURATE ANALYSIS OF THE INDUSTRY CANNOT BE DONE BECAUSE THERE IS NO FORMAL DATA.’ Javed Iqbal, Director Stylo advertisements, highlighting its ‘shoes for everyone’ campaign, Stylo is satisfied with its focus on digital platforms as opposed to regular TV advertisements. Another possible reason for Stylo’s lesser interest in TV ads might be its Shariacompliant policy that it embarked on in 2011-12, of not including any female models in its advertisements. Being a women’s shoe brand and not willing to use female models probably makes things harder for the brand when it comes to TV. Javed did not share the details about his marketing budget, but he said that it is contingent on the revenue. That said, in the same breath he mentions that over the years, irrespective of the growth rate in the industry, Stylo’s revenue has seen steady growth.

First to adapt to e-commerce and digital platforms tylo was one of the earliest local brands to adapt to e-commerce, and now it has also migrated to cloud. Cloud-based services are not only high in demand, according to reports cloud vendors are experiencing 50% annual growth rate and many resource-intensive businesses are also moving to-

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‘STYLO WAS ONE OF THE EARLIEST LOCAL BRANDS TO ADAPT TO E-COMMERCE, AND NOW IT HAS ALSO MIGRATED TO CLOUD. CLOUD-BASED SERVICES ARE NOT ONLY HIGH IN DEMAND, ACCORDING TO REPORTS CLOUD VENDORS ARE EXPERIENCING 50% ANNUAL GROWTH RATE’

wards cloud, but it also helps in better management of load and DR sites. About this move, Stylo’s Group Chairman Mazhar Husain Siddiqui spoke to an online technology media platform and said, “With added functionalities like Microsoft Social, Dynamics CRM, Clienteling and much more, together with our added advantage as the earliest movers to the cloud, we can continue to remain ahead of our competition.”

Stylo also caught up to Instagram becoming the favoured choice of social media platform for shopping. But even here it seems to be losing to giants like Servis and Bata. Stylo’s IG has 17,000 followers with 700 posts, falling a little short of Servis’ 18,000 followers with 480 posts, and missing Bata by a mile with almost 49,000 followers with merely 344 posts.

There are some factors in the global environment, however, about which Stylo seems indifferent. According to an article published on Pakistan Footwear Manufacturing Association’s webpage, ‘Men are the new footwear fans’. The article says, “Women being shoe lovers, (and having dozens of pairs of shoes in their wardrobes), is a stereotype that might just be at risk. Men, over the last few years, have been buying and spending more on shoes.” While Stylo is attempting to remain ahead in the race with its tech advancements, the challenges posed by brands such as Servis that produce shoes for both men and women might take a toll on Stylo in the future.

Since Stylo isn’t only a shoe manufacturing business anymore but is also involved in retail, the challenges it faces in

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Pakistan are also twofold. Javed is also the current Chairman of Pakistan’s Footwear Manufacturer Association and is well aware of the challenges the industry faces. One of the major problems he highlighted was that the vendor support which shoe manufacturers direly need is quite weak in Pakistan. “Our main industry is unable to grow because of that.” Without elaborating on what these steps are, he said that the association has taken steps to promote the strengthening of vendor support, hoping that the industry will grow as a consequence. “The growth in our exports is also barely 0.05 percent and that will also only improve if the support is strengthened.”

The undocumented sector the greatest industry bugbear e informed, the shoe industry has been growing by 10 to 20 percent in the organised sector over the past couple of years but the number of brands hitting the market has been greater, meaning that this growth is not reflected in the existing players’ share.

And, to him, the unorganised sector’s is the greatest bugbear of the organised industry. Not necessarily carrying a brand name, working out of small shops and stalls, its presence is an overwhelming 80 percent of the market. Shahid Hussain, CEO, Service Sales Corporation, had also echoed similar views in an interview to a local English daily a while ago. To Shahid Hussain, Pakistani shoe industry has missed the global fundamental shifts and has failed to capitalise on the global model that helps in strengthening of the unorganised (undocumented) sector.

Another factor highlighted by Shahid was the communication channels, media and social media being important influences on consumers’ choices. He said that such factors lead to higher imports as cus-

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‘STYLO HAS AN IN-HOUSE RESEARCH TEAM TO KEEP TRACK OF CHANGING TRENDS IN THE LOCAL AND INTERNATIONAL MARKET AND KEEPING UP WITH THE EVER-CHANGING VOGUE BY LAUNCHING NEW SEGMENTS’ tomers want more variety and branded products, thus posing challenges to local producers. However, dismissive of the excuses provided by the shoe manufacturers, he said, that consumers should not be blamed or restricted by reducing imports just because local manufacturers have failed to account for fundamental shifts.

Retail is growing egarding retail industry, however, Javed is satisfied. “Retail is growing and there is more room for its growth, but it is not without its own challenges. Here the challenges include a lack of training in-

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‘COMPETITION IS AN ENDURING FEATURE, WITH EVERYONE FEELING THE PINCH NOW AND AGAIN, YET STYLO CONTINUES TO BE A HOUSEHOLD NAME’ stitute for HR management. We have a young population and appropriate training can make a major difference.”

Taking about the mall culture hitting urban centres, Javed said, it could threaten smaller businesses but only in the short term. “Mall culture is only taking root now; our people go after new things, which explains the inclination towards malls. But it will not stay like this forever. Changes will take place. With new malls coming in and high street cul-

‘OUR OUTLET WAS SMALL, WITH LITTLE SPACE TO MANOEUVRE, YET THE CLIENTELE WAS NOT DISCOURAGED FROM REVISITING.” SUCH SUCCESS WAS SURPRISED HIM. “WE DID NOT EVEN KNOW HOW MUCH PULL OUR BRAND HAD BUT CUSTOMERS LIKED US’ 42

ture being developed, the malls’ allure might come down.” As of now, however, Stylo has made sure not to stay behind.

“We are in almost all big malls, including Centaurus Mall in Islamabad, Packages Mall in Lahore, and other major malls in Karachi too.”

Malls, more than just a shopping area ETRO Cash & Carry CEO Marek Minkiewicz had shared his viewpoint on malls with Profit a couple of months ago, saying that malls are more than just a shopping area for people. “More people are visiting malls just to browse and are not actual customers.”

Javed concurs with the view that the initial footfall in malls has a lot more visitors than customers. “With load-shedding so rampant, people find free entertainment in malls. Eventually, this footfall will reduce, replaced by actual customers with buying power.”

Irrespective of sales volume, he agrees, brands are compelled to flaunt their wares in malls despite overheads being horrendous. “The overheads in malls, including rental expense and maintenance costs, are steep. So all brands remain in a lot of stress when they go to malls, but they need to maintain their presence for brand image.”

Being Shariah-compliant, Stylo does not raise financing from having any bank on board when it comes to financing, but it is open to investor’s money. For now, Stylo remains a family business, but regarding future plans, Javed said, “We have a proper vision exercise and it is held regularly. We made a vision in 2010, for the next 10 years till 2020. We are on track, and we have achieved 60 percent of it.”

By 2020, Stylo aims to move towards an IPO. “It is in our vision that we will ultimately transform this business into a public limited company.” n

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