Profit E-Magazine issue 22 by Pakistan today

8 Weekly Roundup 12 Renewed beginnings KK Shahid 14 What happened at Habib Bank in New York? 21 Start spreading the news Robert Kim

24 24 Robin Hood of the FinTech world 27 Inov8, Flying below the radar

31 Sound and stable, despite the rather steep fall 33 Dramatically transforming the way we travel Aqeel Shigri

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 ZulďŹ qar Butt (Lhr) l Mudassir Iqbal (Isl) Design & Layout: Rizwan Ahmad l Illustrator: ZEB Photographers: Zubair Mehfooz & Imran Gillani Publishing Editor: Arif Nizami Contact: proďŹ t@pakistantoday.com.pk

CONTENTS

“It is impossible to increase exports unless factories get electricity at affordable rates.” Federation of Pakistan Chambers of Commerce and Industry (FPCCI) President Zubair Tufail

QUOTE

BRIEFING

“We are not self-sufficient in water; if not used carefully, Pakistan will face serious impact in next fifty years” Foreign Minister Khawaja Asif

fall was recorded in the Pakistan Stock Exchange (PSX) during August, the most in the last seven years with the KSE-100 index touching 41,207 points, its lowest level for 2017. And this was the worst August performance recorded in nine years by the PSX since 2008. Stocks on the KSE-100 index got battered in the wake of a massive fine imposed by a US regulator based in New York of $630m on Habib Bank Limited (HBL), worsening Pakistan-US relations and planned secondary public offering of Mari Petroleum. Major losers for the week were reported to be HBL whose stocks declined 18.55pc, Lucky Cement 15.38pc, Mari Petroleum 14.51pc, UBL 6.37pc and Engro 12.75pc. Among the winners for the week were reported to be Standard Chartered Bank Pakistan, whose stocks went up by 11pc, Ibrahim Fibres by 10pc and Philip Morris Pakistan by 6pc.Daily trading volume on Thursday reached three years lows of 70.5m shares on the PSX as torrential rains in Karachi affected transportation within the city. Foreign buyer's net selling was reported to have reached $14.2m during last week’s trading as buying from local financial institutions cushioned this outflow to reach $5.2m and investment companies buying of stocks was reported at $13.5m.

10.4pc

Asian Development Bank (ADB) smart meter project has hit snags as the scheme is said to be facing two-year delays because of complex bidding process and loggerheads over technology. As per a recent monitoring report by the donor agency, half of the total $3.4b projects are said to be facing implementation delays and have been labelled as problematic. The smart meters project is not said to be one of those affected ones, said ADB. The aim of this smart meter’s project is to introduce advanced metering infrastructure (AMI) in all distribution companies in Pakistan. All of the country’s nine DISCO’s are slated to get these smart meters in phases. At the start, ADB picked up Islamabad Electric Supply Company (IESCO) and Lahore Electric Supply Company (LESCO) for installing these smart meters. These prepaid smart electricity meters are supposed to ensure 100pc collection of bills and in the pilot phase 2m of these and communication equipment will be installed by 2019 in areas under jurisdiction of IESCO and LESCO.

$400m

Rs1.864t is the highest ever budget for financial year 2016-17 deficit recorded in Pakistan’s history. This record budget deficit figure of Rs1.864t is Rs 654b which forms 2pc of GDP which is much more than the ceiling limit set by the government in last year’s budget. Rs1.864t is equivalent to 5.8pc of the country’s GDP against the limit of 3.8pc set by the government. This figure of budget deficit is the highest ever during the 4 year tenure of the incumbent government and it seems unlikely it will meet the target set of 4.1pc for this FY. To plug this gap of budget deficit, foreign loans worth Rs541b were received by Pakistan and Rs1.22t in domestic funding was received in this given regard. The gross amount of foreign loans was recorded at Rs1.058t and loans worth Rs544.3b were paid off by getting fresh loans. And not helping the situation was the ballooning current account deficit which swelled to a record $12.1b during FY 2016-17.

BRIEFING

“There is a need to get rid of the external influence to achieve self-reliance and economic stability” Lahore Chamber of Commerce and Industry President Abdul Basit

QUOTE

660MW

Kapco power project has been shelved by the government. after a shift in government’s stance toward LNG-based energy production, despite the fact that KAPCO received Rs 221 million in funds, the officials privy to the development confirmed. This project has been facing problems since the beginning. Kapco, Pakistan’s largest Independent Power Producer (IPP) incorporated a wholly-owned subsidiary KEL (Kapco Energy Limited) which was to set up a 600MW coal based power plant, back in 2014. Kapco registered an improvement in fiscal 2017 where load factor of the company grew by 8 per cent along with recovery in LHSFO price by 7.9 per cent, resulting in the top-line to surge by 28 per cent.

aid has been provided by Azad Jammu and Kashmir (AJK) government for the betterment of its education sector. Minister education Barrister Iftikhar Gilani told that the amount would be spent to improve the quality of education in the area and offering soft loans to needy students to carry on their higher studies. He said literacy rate in AJK was high as compared to other parts of the country but the quality of education was very poor to meet the standards and compete at national level. He said the government was facing of resources to distribute more funds in education sector to improve quality and meet the requirements. “This amount would be a gift for us from the Punjab government,” he said adding that would enable the department to meet the requirements.

Rs1.5b

was the annual growth in petroleum production during 2016-17,as compared to the financial year 2015-16. Production of six POL items, including Jet fuel oil, motor spirits, high-speed diesel, furnace oil, Jute Batching oil, and LPG, witnessed an increase, while kerosene oil, diesel oil, lubricating oil and solvent Naptha showed negative growth, according to official data. The petroleum products that contributed to the positive growth included jet fuel, production of which grew by 5.01 per cent during. The output of motor spirits grew by 13.64 per cent during the period under review while there has been 4.41 per cent growth in the output of high-speed diesel. The production of jute batching oil surged by 47.65 per cent, while the production of Liquefied Petroleum Gas (LPG) increased by 13.60 per cent. Production of furnace oil witnessed 4.41 per cent increase.

3.39pc

was the increase in imports of mobile phones during July 2017 in comparison to the same period last year (SPLY). Pakistan imported mobile phones worth $68.570 million during July 2017 compared to the imports of $46.204 during July 2016, according to data available from Pakistan Bureau of Statistics (PBS). However, on month-on-month basis, the mobile phone imports declined by 4.89 percent in July 2017 when compared to the imports of $72.549 million in June 2017, the data revealed. Overall telecom imports soared by 53.53 percent during July 2017 when compared to the imports of July 2016. The telecom imports in July 2017 were recorded at $114.015 million compared to the imports of $74.262 million in July 2016. Pakistan exported goods worth $1.631 billion in July 2017 compared to the exports of $1.475 billion in July 2016, showing upward growth of 10.58 percent.

48.41pc

Rs9.2b micro-finance loans were disbursed by Pakistan Poverty Alleviation Fund (PPAF), during July to March 2016-17. PPAF extended 246,142 new micro credit loans to the borrowers, including 60 per cent to women, sources said, adding that under the Prime Minister Interest-Free Loans (PMIFL) scheme, PPAF administered 93,427 interest-free loans, and 62 per cent women were facilitated in this scheme. In recent years, Pakistan’s microfinance sector has witnessed phenomenal growth and rose considerably in last five years. Within microcredit, number of active borrowers stood at 4.6 million at end of December 2016, recording a 22 per cent growth during the year 2016.

BRIEFING

“Production of yarn and fabric is higher than local consumption; hence the government should facilitate export of surplus quantity” MCCI President Jalaluddin Roomi

QUOTE

$940m

acquisition of Jazz’s (Veons) wireless towers is being undertaken by Dawood Hercules Corporation in partnership with Edotco, a local subsidiary of Malaysian telecom giant, Axiata group. Veon is the majority shareholder in Pakistan’s largest mobile operator Jazz, formerly known as Mobilink. By virtue of acquiring these 13,000 wireless towers in Pakistan, Edotco, the infrastructure arm of Axiata will become the biggest telecommunication tower operator in the country. Edotco at the start of the month had wrapped up a $89m purchase of 700 towers which were owned by Tanzanite Tower Pvt, according to Axiata.

increase was recorded in services sector trade deficit for July 2017 in comparison to the same period last year (SPLY). The figure of services trade deficit for July 2017 was reported at $489m in comparison to $344m in same period last year (SPLY), registering a 42pc increase. Constituents that form a major part of services trade are imports and exports. Imports increased at a faster pace of 29pc. Service sector imports registered a staggering increase of 22.28pc to reach $893m during July 2017 in comparison to $694m in SPLY. Transportation and travel payments contributed heavily to the service sector import bill forming 68pc of its total bill. Import bill of transport sector was recorded at $383m, rising 46pc from SPLY and travel sector figures reached $229m to increase by 35pc from SPLY. Services sector exports were recorded at $404m in July 2017 against $350m in SPLY, registering an increase of 13.36pc. In this period, $28m were earned by the government from travel services, $87m from computer and telecommunication services, $92m from government services and goods, $84m from transportation services, $82m from insurance sector. Payment for imports of telecom equipment stood at $34m, insurance payments of $12m, financial sector $9m, $20m for intellectual property usage and $32m for government goods and services.

42pc

Rs12.640b subsidy has been approved by the government for power supply to the industrial sector. It may be recalled that in 2016, the government had also provided industrial support subsidy amounting to Rs 5.6 billion. Finance Minister Ishaq Dar said that the government’s support to Industrial sector aims to boost the manufacturing activity and help to enhance exports of value added products. It also aims to stimulate economic activity leading to greater job opportunities in the country, the minister added. According to sources, the Ministry of Water and Power had earlier notified a support package for industrial consumers under which a reduction of Rs 3 per unit would be inclusive of any downward revision of fuel price adjustment notified in or after January 2016 and onwards. Furthermore, the difference between the relevant payment due from industrial consumers and special relief package notified and adjusted with any downward revision of Fuel Prime Adjustment shall be paid to the DISCOs and K-Electric by the federal government.

25pc

reduction is being undertaken in USAID to Pakistan by the US government. As announced by President Trump this year the grants under Agency for International Development (USAID) to Pakistan would be reduced by 25 per cent, which will affect over 23 ongoing social development projects. Besides, President Trump’s proposed budget for the 2018 fiscal year also includes cuts in funding for USAID and developmental assistance programmes. The budget plan would decrease US funding by more than eleven billion dollars, almost 30 percent. Under the development programmes of the USAID, at least $ 650 million have so far been released out from the committed $1.5 billion fund, sources said, adding that at least 23 projects were presently completed in different sectors, including education, health, energy, economic growth, good governance, earthquake reconstruction, and flood relief and recovery.

BRIEFING

OPINION

KK Shahid Crude AwAkening

Renewed beginnings Unless tech miracles are in store for the nation over the next three and a half months, it’s safe to say that the first prong of the NPP would be binned, rendering the second irrelevant he 2013 National Power Policy was basically twopronged: eliminate an average power shortfall of 5,000MW and make sure it’s done with tangible improvement in the energy mix through incorporation of renewable energy. On May 7, 2017 with an average of 12 hours of load-shedding the shortfall went beyond 8,500MW. The day had started with a demand-supply disparity of 5,800MW at 9 am, which is roughly the average current power shortfall. So unless tech miracles are in store for the nation over the next three and a half months, it’s safe to say that the first prong of the NPP would be binned, rendering the second irrelevant. But at a time when the rest of the world is embracing renewable energy, it remains a long-term solution even for Pakistan that isn’t exactly spoilt for choice when it comes to options to over-

KK Shahid is Energy Correspondent, Profit

‘TILL THEN THE GOVERNMENT NEEDS TO FOCUS ON ENERGY CONSERVATION AS MUCH AS THE AIM TO GENERATE MORE POWER – CONSIDERING THE POWER LOSSES IN THE COUNTRY. THESE LOSSES NEED TO BE OVERCOME BOTH IN TRANSMISSION AND DISTRIBUTION, WHICH ALSO AGGRAVATES THE ABOVEMENTIONED POWER PRICING MECHANISM’

come the power shortfall. China, that was supposed to solve all our problems with CPEC affiliated energy projects, is building wind power plants worth 20,000MW. Pakistan’s cumulative wind power installation for the past decade has been 200MW. Of course, comparison between Pakistan and China on any front and any statistic is ridiculous, but the aim is to highlight the emphasis on the right kind of renewable energy that the global leaders are implementing. As far as renewable energy is concerned Pakistan, seems to be putting all its egg in the solar basket – just like we have the Chinese basket for all things diplomacy. Bahawalpur’s Quaid-e-Azam Solar Park, built with Chinese investment of course, is expected to start producing 1,500MW soon. Furthermore, Senator Mushahidullah Khan, citing a myriad of inaudibly named studies, says that Pakistan has a potential of ‘2.9 million megawatts’ of solar energy, which the government wants to tap into. The current solar generation, however, is less than 10 megawatts.

Benefits of pursuing solar With Pakistan receiving 200-250 watts per square metre every day, the ben-

efits of pursuing solar are clearly there. However, solar’s conversion rate is half of wind (35%). Similarly, constructing a wind power plant takes about half the time as conventional power plants (three years) – outside of hydropower. Where solar has a clear edge over wind is in supply – even though at 50,000 MW Pakistan has more wind potential than India! – considering the unpredictability of wind. Even so, with solar power tariff being high in the initial phase, its long-term feasibility can be improved if the payment is limited to power that the national grid actually gets, and not force the consumer to pay for the power losses and idle capacity. Crop residue, meanwhile, makes biomass energy another lucrative option for Pakistan. There is on average 50 million tonnes of waste produced from major crops in Punjab alone every year. Furthermore, municipal waste from urban centres can contribute 1,000 MW. Also, All Pakistan Textile Mills Association (APTMA) claims that another 1,000 MW per year can come from rice husk.

IF PAKISTAN HAS ALL OF THEM – SOLAR, WIND, BIOMASS, HYDRO – IN PLAY, THE RIGHT COMBINATION CAN DEFINITELY DEAL WITH A SIGNIFICANT PORTION OF THE BASIC LOAD’

‘OF COURSE, COMPARISON BETWEEN PAKISTAN AND CHINA ON ANY FRONT AND ANY STATISTIC IS RIDICULOUS, BUT THE AIM IS TO HIGHLIGHT THE EMPHASIS ON THE RIGHT KIND OF RENEWABLE ENERGY THAT THE GLOBAL LEADERS ARE IMPLEMENTING’ The government has underscored a plan, on paper, for diversifying the energy mix. Currently two-thirds of Pakistan’s power generation load comes from oil and gas, and one fourth from hydroelectricity. The share of renewable energy, once we factor in the nitty-gritties and apply the relevant formulae, can be safely approximated to zero. Renewable itself will only come into the limelight once the energy deficit gradually reduces. Even when things are well and truly up and running, renewable energy would never suffice in taking care of the base load. However, if Pakistan has all of them – solar, wind, biomass, hydro – in play, the right combination can definitely deal with a significant portion of the basic load. Till then the government needs to focus on energy conservation as much as the aim to generate more power – considering the power losses in the country.

These losses need to be overcome both in transmission and distribution, which also aggravates the abovementioned power pricing mechanism. The National Energy Efficiency and Conservation Act, 2015 maintains that “the National Energy Efficiency and Conservation Authority shall act as focal Federal agency for initiating, analyzing and coordinating (sic)” because “the conservation and efficient use of energy is pivotal for the development of Pakistan.” In effect, the entire document focuses on dealing with the centripetal and centrifugal forces that define the relationship between the centre and provinces – which though, an important factor in achieving the final, albeit unquantified, goals of the document, is surely not the be all end all of energy conservation. n

ENERGY

COVER STORY

WHAT HAPPENED AT

HABIB BANK IN NEW YORK?

…and what will happen next, now that HBL has become the first bank ever to be ousted from the United States By: Farooq Baloch he Grand Central Terminal in New York is, by some measures, the largest train station in the world, covering 48 acres in the heart of midtown Manhattan, with 44 platforms serving 56 tracks – more than any other train station on the planet. Its main concourse is one of the most filmed locations in television and movies. Small wonder, then, that nearly 22 million tourists visit it each year. As you leave the station from its southwest exit, you will find yourself across the street from (by New York standards at least) a nondescript building called One Grand Central Place, a 53-storey structure located on East 42nd Street. It is in this building, on the fifth floor to be precise, where the New York branch of Habib Bank Ltd (HBL), the largest

in Pakistan, is located. It is in this anonymous office, on an unremarkable floor of an unremarkable building in Manhattan, almost 11,671 kilometers from Habib Bank Plaza in Karachi, that is located the branch office the shady financial dealings of which resulted in Habib Bank becoming the first bank in history to be ousted from the United States by the New York State Department of Financial Services (DFS). How did this happen? What did Habib Bank do wrong? What are the consequences of this punitive action on Habib Bank and Pakistani banks in general? And most importantly, will anyone be held accountable for this national embarrassment? Before we dig into the accountability debate, however, we would like to give a little background to those who missed the most significant business news development of the previous month.

In an order dated August 25, DFS sought to impose a penalty of $630 million on HBL’s New York branch, saying the bank’s American operations failed to comply with its AntiMoney Laundering Laws and Bank Secrecy Act, and booked it in 53 violations of the state’s rules, regulations, orders, and agreements committed to by HBL itself since 2006.

Repeated failure, for over a dozen years he DFS report states that except 2009, violations of laws occurred in every exam cycle in the last decade. An examination in 2015 demonstrated HBL’s compliance function had deteriorated even further. The bank admitted to deficiencies in its compliance with the ‘written agreement’ and notified this to the Pakistan Stock Exchange. A year later, the DFS conducted

COVER STORY

‘IT’S PERFECTLY REASONABLE FOR PEOPLE TO ASK FOR ACCOUNTABILITY FROM THE CURRENT LEADERSHIP. HOWEVER, ONE IMPORTANT ASPECT THAT SEEMS TO BE MISSING FROM THE DEBATE IS THE ACCOUNTABILITY OF THE FORMER LEADERSHIP THAT IS RESPONSIBLE FOR ALL THE SUSPICIOUS TRANSACTIONS PROCESSED AT THEIR TIME’ Barrister Zahid Jamil, An expert on banks’ anti-money laundering laws another exam determining that the New York branch continued to suffer from severe weaknesses in its risk management and compliance with its laws. “The head office screening appears to be as weak as that of the Branch itself – if not even more inadequate,” the Department said in its report. For these reasons, DFS' most recent examination determined that the Branch should receive the lowest possible rating, a score of "5." Besides repeated warnings, the Bank was given more than sufficient opportunity to rectify its deficiencies, but it utterly failed to do so, it said. “Indeed, presently the New York Branch is losing key compliance staff due to resignations, including its chief compliance officer.” The report points towards the bank’s failure to screen and report transactions by a Karachi-based cyber criminal who is on the FBI’s most wanted list, a Chinese arms manufacturer, the leader of a Pakistani terrorist organization, an individual on the Specially Designated Global Terrorist list, and a politically exposed person – all these transactions were cleared by the bank. But HBL’s facilitation of Al Rajhi, the largest private bank in Saudi Arabia, which accounted for 24 percent of the New York branch’s total transactions, emerged as the most serious compliance failure. The Branch's deficiencies are all the

more alarming given that one of its largest US dollar clearing accounts has been Al Rajhi Bank, the report said, adding, for many years, Al Rajhi has been linked through negative media to Al Qaeda and terrorism financing. Specifically, Al Rajhi used HBL as essentially its front man to process billions of dollars of transactions through the United States, masking the identities of the Al Rajhi clients on whose behalf those transactions were conducted. HBL appears to have been unaware of who the ultimate beneficial user of each of those transactions was. But a local television known for its anti-government stance claimed that the ‘politically exposed person‘ the DFS report mentioned is no other than former Prime Minister Nawaz Sharif, who was ousted by the Supreme Court of Pakistan for concealing information during the investigation of the Panama Gate scandal. The program host showed on his screen details of transactions he claimed were made by Sharif from his account in Al Rajhi bank that routed through New York to the former premier’s account in Standard Chartered Bank, Lahore. The host publicly challenged HBL and the former premier to prove him wrong, but an expert told Profit the details he revealed were transcripts of Society for Worldwide Interbank Financial Telecommunication (SWIFT) cables, which do not prove money laundering. “Firstly, all dollar transac-

‘HOW DID THIS HAPPEN? WHAT DID HABIB BANK DO WRONG? WHAT ARE THE CONSEQUENCES OF THIS PUNITIVE ACTION ON HABIB BANK AND PAKISTANI BANKS IN GENERAL? AND MOST IMPORTANTLY, WILL ANYONE BE HELD ACCOUNTABLE FOR THIS NATIONAL EMBARRASSMENT?’ 16

tions have to be routed through New York and second, they were made from Sharif’s account and were not anonymous,” the expert said. “That politically exposed person can be former presidents Asif Ali Zardari or General Pervez Musharraf or even Afghanistan’s Hamid Karzai, but we don’t know unless the details are made public,” he added. After HBL and DFS ended the matter in a settlement, those details may never be public, that is at least what we learn from an article by Robert Kim of Bloomberg BNA, a website that writes about legal, tax, compliance, and government affairs. “There may be revelations far more interesting than anything publicly released up to now in an enforcement action,” Kim wrote in his article on September 6, before the settlement. He was of the view, if HBL contested the case, the hearing would likely be conducted in a federal court requiring the regulator to reveal all the details relating to those transactions. “In DFS’s Statement of Charges, the only indication of these remarkable events is the short and formulaic phrase ‘politically exposed person activity’,” he said. “Sharif and others involved in such actions will not like the exposure that they receive at the hearing,” he added. DFS’s Public Affairs Department, too, denied comment. “We cannot comment on the details of our negotiations and discussions with our regulated entities,” they wrote in an email to Profit. However, the report reveals that the volume of transactions involved was not small. HBL’s New York branch handled $287 billion in correspondent banking transactions in the calendar year 2015, of which nearly $69 billion were on behalf of Al Rajhi. The problem, according to analysts who cover the stock (but wished to remain anony-

mous for the purposes of this article), is that HBL never felt that investing in the technology to automatically detect money laundering and other fraudulent activity was worth it for a branch that only produced total profit of $10 million over the past decade, or less than 1% of the bank’s total profits during that period. According to the analyst, the compliance cost for DFS’s 2015 Order would have been too expensive to have been borne by the relatively small New York operations. So instead of deploying an automated detection system, the bank chose to do it through human analysis. To make screening easier, they reduced the volume of transactions monitored by capping it at $150 billion per year, far lower than the $206 billion the regulator required from them. Though risky, the decision was based on cost benefit analysis, he said. HBL management made three major mistakes, said the analyst. They preferred human analysis over automation, they turned down DFS when it offered a settlement on a significantly lower amount earlier this year, and they didn’t wind up US operations in 2015 when they received a serious warning. For these violations of the US law, the state regulator initially announced that it would seek to impose a $630 million penalty. By settling the dispute with DFS, and by agreeing to shut down its New York branch, HBL was able to get that penalty reduced to $225 million (Rs23.5 billion), equal to three quarters of its annual profits last year. HBL had been operating its New York branch since 1978, and was one of only three Pakistani banks to have a presence in the United States (the other two being the National Bank of Pakistan and the United Bank Ltd). With the closure of its branch, HBL will now rely on banks like JPMorgan, Deutsche Bank and others for its correspondent banking needs. By closing New York branch and paying a $225 million penalty HBL may have done away with a stringent regulator, but that doesn’t solve the main issue: its failure to adequately monitor for money laundering and terrorist financing. Whether it is the lack of banks’ cyber readiness or monitoring of money laundering, the State Bank of Pakistan seems to be sleeping, said one bank compliance expert. “How come the FBI’s most wanted cyber criminal was able to open and run multiple accounts with HBL in violation of the SBP’s KYC requirements?” he said. “Some Pakistani banks

‘WITH ANALYSTS YELLING ‘SELL’ AND INVESTORS HEEDING TO THEIR SHOUTS, HBL’S STOCK HAS WITNESSED ITS WORST TWO WEEKS EVER. AFTER HITTING ITS LOWER CAP (5 PERCENT OF OPENING RATE) FOR SIX CONSECUTIVE SESSIONS, IT LOST ANOTHER 4.6 PERCENT TO SETTLE AT RS152.94 PER SHARE – ITS LOWEST LEVEL IN THREE YEARS, AT THE CLOSE OF MARKET ON THURSDAY LAST’ are doing money laundering presently and we are also bringing in Chinese money,” the expert said. “The cost of management’s failure will now be borne by all shareholders,” an official said adding such mistakes are not expected of

a leadership that has a vast work experience in large American financial services firms and are familiar with America’s regulatory environment -- the CEO, Dar has spent 18 years in Bank of America and also served Citibank while Manochere Alamgir, Country Manager

HBL NY branch’s 12-year long brush with regulator

HBL gets the license for its NYC branch, mainly to do clearance of dollar transactions.

2006

The state of New York’s financial regulator identifies significant deficiencies within the HBL NY programs, both the parties sign a written agreement intended to maintain compliance with the economic sanctions laws overseen by the US Officer of Financial Assets Control and with its Bank Secrecy Act/Anti Money Laundering compliance.

Violations of the written agreement occur every exam cycle during the period except 2009. After another examination by NYDFS demonstrates HBL’s compliance function had deteriorated even further. HBL admits to deficiencies in its compliance and notifies this to the Pakistan Stock Exchange.

2016

1978

20062015

NYDFS conducts another exam and determines the New York Branch continued to suffer from severe weaknesses in its risk management and compliance with BSA/AML and OFAC laws

In an August 24 Order, NYDFS charges HBL NY Branch in 53 violations of Laws, Regulations. Orders and Agreements and seeks to impose a fine of $630 million. It revises the amount to $225 million, which HBL agrees to pay.

2017

COVER STORY

for NY branch, has worked with JPMorgan Chase Bank for more than 28 years.

The market reaction hortly after the damning report had hit the market, HBL’s stock came crashing down. “Habib Bank's shares have had their worst two days in nine years dropping by its limit after reports that NY regulator wants to fine them,” Bloomberg correspondent Faseeh Mangi tweeted on August 29. The bank’s shares were sold at about 20 percent below the market price in off market trades, he said. With analysts yelling ‘sell’ and investors heeding to their shouts, HBL’s stock has witnessed its worst two weeks ever. After hitting its lower cap (5 percent of opening rate) for six consecutive sessions, it lost another 4.6 percent to settle at Rs152.94 per share – its lowest level in three years, at the close of market on Thursday last. This translates to an almost 30 percent decline from Rs218.11 – its price before the DFS’ damning report went public. The market reaction clearly indicated investors were losing confidence in Pakistan’s largest private bank that sits atop Rs2.5 trillion worth of assets (as of December 2016). And just when talks regarding the top manage-

‘The reporT poinTs Towards The bank’s failure To screen and reporT TransacTions by a karachi-based cyber criminal who is on The fbi’s mosT wanTed lisT, a chinese arms manufacTurer, The leader of a pakisTani TerrorisT organizaTion, an individual on The specially designaTed global TerrorisT lisT, and a poliTically exposed person’ ment’s accountability started doing the rounds, HBL eked out a settlement with the Department. The New York State regulator reduced the fine to $225 million – the highest ever imposed on a Pakistani bank – late last Thursday. “DFS will not tolerate inadequate risk and compliance functions that open the door to the financing of terrorist activities that pose a grave threat to the people of this State and the financial system as a whole,” it said. The news of a reduced penalty came as a relief to the shareholders and HBL stock hit its upper cap at Rs160.58 per share minutes after the trade opened last Friday morning. Given it has 5.4 percent weight in the benchmark KSE-

100 Index, an upward movement in HBL’s stock quite understandably lifted the pall of gloom from the market in early morning trade. The index heavyweight dragged an already bearish market further down, contributing more than half (947 points) to the index, which shed 1700 points between August 28 and September 7.

a diﬃcult to live down moment e received mixed response from analysts over the latest development. Some were pleased, other seem disappointed. Surprisingly

NYDFS inflicts pain on errant large global banks In 2011, New York Governor Andrew Cuomo merged the New York State Insurance and Banking departments into a single financial services regulator titled the Department of Financial Services or DFS. In its first three years, it extracted more than $3 billion in fines from some of the world’s largest banks making headlines for its rigorous stance on anti-money laundering laws. Following are some of the major banks fined by the department in recent years:

2011

2012

2014

2016

2017

Standard Chartered Bank (England)

Bank of Tokyo Mitsubishi UFJ (Japan)

Standard Chartered Bank (England)

Agriculture Bank of China (China)

Deutsche Bank (Germany)

$340 million

$250 million

$300 million

$215 million

$425 million

HSBC (England)

Bank of Tokyo Mitsubishi UFJ (Japan)

Mega Bank (Taiwan)

BNP Paribas (France)

$1.9 billion

$315 million BNP Paribas (France)

$2.4 billion

$180 million

$350 million Habib Bank Limited (Pakistan)

$225 million

for people who get paid to state their opinions about publicly listed companies, none of them willing to be quoted. It is a moment of shame, not relief, said one analyst adding that even the much reduced fine is still humongous – especially if one considers that timely action by the management could have averted things coming to such a sorry pass. Most analysts have estimated that the fine will have an impact of Rs16.3 per share in the ongoing calendar year, or 70 percent of last year’s earnings. And that’s only the immediate aftermath. In order to maintain its Capital Adequacy Ratio above 11 percent as required by the central bank, HBL will have to reduce its dividend or might not even pay one for a whole year. The bank’s CAR ratio is expected to settle at 13.4 percent at year end, down from 15.4 percent of June. Besides stripping shareholders of all the capital gains they accumulated on the stock since July 2013, the one-time payment will also result in a 6 percent lower earnings per share on average for the four-year period ending December 2021, if analysts’ estimates turn out to be accurate. Besides, experts say there is also an intangible cost of this development. HBL had to surrender the New York State license for dollar transactions. Even if one ignores the meager profit of an average of $1 million a year it earned from its New York operations, losing this legacy business would mean HBL is back in the same league as other banks. Some senior bankers and experts we spoke to questioned as to why HBL could not avoid a penalty, which was inevitable as evident from the details of the August 25 order and the recent actions of the Department against large global banks who had failed to comply with its laws. The bank had received repeated warnings about the deficiencies in its New York operations and was under constant scrutiny by the regulator, which was penalizing global banks right left and center. Since its creation in 2011 by New York Governor Andrew Cuomo, through the merger of the New York State Insurance and Banking departments into a single financial services regulator, the Department of Financial Services (DFS) has extracted more than $8 billion in fines from some of the world’s largest banks, making headlines for its rigorous enforcement of anti-money laundering

‘HBL MANAGEMENT MADE THREE MAJOR MISTAKES, SAID THE ANALYST. THEY PREFERRED HUMAN ANALYSIS OVER AUTOMATION, THEY TURNED DOWN DFS WHEN IT OFFERED A SETTLEMENT ON A SIGNIFICANTLY LOWER AMOUNT EARLIER THIS YEAR, AND THEY DIDN’T WIND UP US OPERATIONS IN 2015 WHEN THEY RECEIVED A SERIOUS WARNING’ laws. Some of those fined are global banking giants, the likes of Standard Chartered Bank, HSBC, BNP Paribas, and Deutsche Bank. “Why didn’t the see it coming and what were they thinking?” said a banker who requested not to be identified. Profit’s queries to HBL’s management and the board’s Chairman Sultan Ali Allana of Agha Khan Fund for Economic Development – also the single-largest shareholder with 51 percent stakes – remained unanswered. The State Bank of Pakistan did not respond to our email either. We also tried to reach out to some senior bankers but most of them denied comments while those who spoke to us requested their names remain confidential. So will anyone be held accountable? On that score, there appears to be cause for pessimism.

A culture of impunity nd on the eighth day God looked down on his planned paradise and said, ‘I need someone who can flip this for a quick buck.’ So God made a banker,” Marketwatch columnist Brett Arends wrote on February 6, 2013. “…I need someone who doesn’t grow anything or make anything but who will borrow money from the public at 0 percent interest and then lend it back to the public at 2 percent or 5 percent or 10 percent and pay himself a bonus for doing so … “…I need someone who will take money from the people who work and save, and use that money to create a dotcom bubble and a housing bubble and a stock bubble and an oil bubble and a commodities bubble and a bond bubble and another stock bubble, and then sell it to people in Poughkeepsie and Spokane and Bakersfield, and pay himself another bonus …

“A

‘So God made a banker’ o God made a banker...” Arends’s dripping-with-sarcasm post was actually a Wall Street parody of popular radio broadcaster Paul Harvey’s 1978 speech, ‘So God made a farmer’. Harvey’s speech was a heartfelt tribute to America’s hardworking farmers whom he considered ‘caretaker’ of God’s planned heaven. By contrast, the Marketwatch columnist took a jibe at bankers implying the latter make quick money by doing nothing. Arends was criticized for his article, which many commentators said was based on mere assumptions as opposed to facts – apparently with some reason. Banking is the engine of economic growth after all, and an economy like the United States’ can collapse if big banks fail. Or why else would Federal Reserve bail them out in times of crisis? His post also earned many endorsements and sparked a fresh debate on what remains a topic of much discussion globally: are top bankers – who receive insanely inflated pay cheques along with a host of other executive benefits – accountable vis a vis their performance? The question is even more relevant in the Pakistani context, where banks have long been making risk-free spreads through investment in government securities instead of lending to private sector (An issue Profit has already featured in a separate report). Given they sit on a huge pile of deposits, making money from government securities is a nobrainer, still bank presidents remain the highest-paid, some say overpaid, executives in corporate Pakistan. “Bank CEOs are at the helm of for-profit organizations, with assets running into hundreds of millions of rupees. I don’t find it surprising at all that their remuneration is relatively higher than that of their counterparts in other sectors of the economy,” a bank presi-

“S

COVER STORY

dent said speaking to a national daily in 2014. The banker went on to say shareholders hold executives accountable and can fire them for bad performance – and we couldn’t agree more. However, that claim sounds hollow when it is belied in the case of HBL’s reaction thus far to the DFS fine and its departure from the US market.

A singular lack of accountability arket analysts argue HBL is one of the best-run banks in the country and one would have to agree as long as one ignores customer service issues at the branch level operations. HBL offered 18 percent return on equity, highest among the big five banks in 2016. Foreign investors are in love with this stock, owning 29 percent, as of December 2016. Based on financials for the last five years, HBL is Pakistan’s best-performing bank according to an independent study by Profit. In fact, it is the only large bank of its size in the country where management faces no intervention from the board other than legal requirements – a strategy it is widely praised for. One would argue that rewarding the top management for a good financial performance is justified, but that is only one side of the story. “Is maximizing profits the only job of a CEO,” a senior banker who wished to remain anonymous asked. The CEO is also responsible for compliance, he said in the same breath. “This was an absolute management failure,” he said. And equity analysts, including those bullish on the stock, agreed, saying there were no two opinions about it. HBL is a publicly-listed company and has responsibility towards public (depositors), shareholders, the regulator and the market, a senior banker said. “When you are not able to perform well, you step down and let someone else do the job, which helps gain investors’ confidence,” he added. Far from being laid off, the top management was not only able to retain their positions but also walked away with increments, bonuses and stock options in the years the bank was being investigated for money laundering and other compliance issues. HBL’s President and CEO Nauman Karamat Dar, who is one individual with the ultimate responsibility for operational risk and

compliance, received notable increments during the period the bank was under scrutiny. This was in addition to other benefits and stock options offered to him during the period. It is difficult to calculate the exact compensation of the CEO but based on publicly available data, Dar’s annual remuneration increased by 120 percent to 81.3 million compared to Rs36.84 million of 2013. This does not include another Rs60 million the board showered on him in long-term benefits during 2015 and 2016. Moreover, the CEO was given stock option for purchasing 373,800 shares in 2014 and another 107,054 shares in 2015. The bank had a huge team, the senior banker said, adding the entire top management including directors is responsible for this negligence and failure. “The DFS gives you a warning long before knocking at your door. But when they come to you, they have done their work already,” he said questioning why the management did not act in time to avoid the penalty. “They [top-tier executives] earned bonuses while the inquiry was going on,” he added. In the year ending December 2016, the directors’ remuneration increased to Rs37.2 million, up 18.4 percent from Rs31.4 million in 2015. In the same period, another Rs1.13 billion were paid to the key management personnel in short–term benefits. Whether a group of top executives deserves to be rewarded as richly as those of HBL’s for their failure to comply with risk management shall best be answered by the board’s chairman. But the display of such largesse, say experts, can send negative signals to shareholders and investors who worry about corporate governance and senior management’s accountability when they fail.

No heads roll t’s perfectly reasonable for people to ask for accountability from the current leadership. However, one important aspect that seems to be missing from the debate is the accountability of the former leadership that is responsible for all the suspicious transactions processed at their time,” said Barrister Zahid Jamil, an expert on banks’ anti-money laundering laws. “It should be transparent, bringing out in the open who those people are, because they may currently be providing consultancy or advisory services to other banks or even the government,” he said.

“I

In September 2012, Dar had replaced Zakir Mahmood who had joined HBL as president and chief executive officer in 2005. After leaving the bank’s presidency, Mahmood continued to serve on the bank’s board of directors till March 2015, according to the bank’s financial reports. “The company’s board should fire the president and file damages suit against all other officials responsible for this penalty,” said one senior banker. The New York branch compliance officer, the country head, the legal head should all be questioned by the board, he said. By doing so, the board can demonstrate to shareholders that there is accountability, which will help restore investors’ confidence in the bank, he said, adding it will also show the regulator that the bank is taking it seriously. Shareholders may wish for the accountability, but no one from the top management had resigned, nor did HBL’s board of directors fire any executive, as of the filing of this report. In fact, the bank’s handling of the matter implies it is not even thinking along those lines. “The bank was not charged for any criminal wrongdoing,” said HBL CEO Nauman Dar at a press conference and at analyst briefings. “The penalty was a consequence of the bank’s outdated clearing system as a result of which its soundness and safety was compromised, and the DFS’ decision to impose such a big fine [the unrevised $630 million] came as a surprise.” Dar admitted that the bank’s system was still using human analysis as opposed to an automated system to analyse transactions. He acknowledged the bank made mistakes but objected to size of the fine, saying it was disproportionate. Though he hinted the bank would pay the fine if it was reasonable, Dar told the media that the bank would vigorously contest the penalty in American courts. The hearing of HBL’s case was scheduled for September 27, but HBL signed the Consent Order for a settlement at $225 million on September 7. The management has not fired anyone so far. Meanwhile, some of the market analysts who invest in HBL’s stock seem to throw their weight behind Dar. “The US is a high-risk market and such fines are imposed on big banks every now and then. It is business as usual,” said one analyst. “It is a good bank and it will continue to perform well in future.” n Edited by Farooq Tirmizi from New York

COVER STORY

OPINION

Robert kim

This article originally appeared on bna.com on the 6th of September,2017, a day before HBL announced that it had reached a settlement with DFS

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those laws and regulations, this New York state action has, not surprisingly, become subject to questionably accurate reporting and multiple interpretations. Understanding the nature of both the NYDFS action and the foreign affairs context in which it occurs is necessary to comprehend its full impact both domestically and abroad.

Pakistan’s largest bank is leaving today. The federal government apparently does not want to be a part of it.

$630 Million in the air for the big City

NYDFS is seeking to penalize HBL without joint action by federal authorities despite previous federal and joint federal/NYDFS actions against HBL. In December hen the New York Department of Financial Services 2006, there was a Written Agreement between HBL and (NYDFS) announced last month that it was seeking the Federal Reserve Board (FRB) requiring HBL to remto impose a penalty of approximately $630 million edy deficiencies in compliance by its branch in New on Pakistan’s largest bank for violations of federal York City with economic sanctions and with AML reand New York anti-money laundering (AML) regulaquirements under the Bank Secrecy Act. The FRB and tions, it acted in the absence of joint action by federal NYDFS later conducted a joint action that, on Dec. 15, authorities and with potentially significant effects on 2015, concluded with an FRB Cease and Desist Order U.S. national security, signaling a nationally important trend for the state and NYDFS Consent Order requiring HBL to remedy agency. AML compliance program deficiencies. On Aug. 24, This action against Habib Bank Ltd. (HBL) has had effects far beyond the 2017, however, NYDFS issued a Notice of Hearing and enforcement of financial regulations. Occurring one week after the White Statement of Charges that announced its intent to seek a House announcement on strategy in Afghanistan and South Asia that included a $629.625 million monetary penalty, without any joint accall for Pakistan to stop harboring terrorist organizations and the Taliban, it has tion or public statement by the FRB. affected U.S. relations with Pakistan and may turn out to be part of a shift in The NYDFS has not actually imposed this approxithat relationship that will influence the course of the long war in Afghanistan. mately $630 million penalty yet, contrary to many press Based on AML laws and regulations that are not widely understood, with reports, but if it does so it would be the largest AML civil effects on foreign affairs issues only distantly related to the original purpose of monetary penalty assessed by the NYDFS or any federal government agency. The largest NYDFS penalty for AML violations is the $425 million penalty assessed on Deutsche Bank in January 2017, and the largest single federal penalty is the $500 Robert kim million penalty assessed on HSBC by FinCEN and the OCC in December 2012. For is a legal editor with Bloomberg BNA. HBL, with $24 billion in assets and $458.5 million in reserves as of 2016 according He previously served as a senior to its 2016 Annual Report, an approximately $630 million penalty would have a far counsel on the Securities and greater impact than the smaller penalties assessed on Deutsche Bank and HSBC. Exchange Commission staff, manager of the Bank Secrecy Act regulatory enforcement program for the Financial Crimes Enforcement Network, and Deputy Treasury The fact that this action is being brought by New York instead of federal authoriAttaché at U.S. Embassy Baghdad ties is a distinction made by not all U.S. observers and by few in Pakistan, but it is

greenway to the Danger Zone for U.S. Foreign aﬀairs

banking

pivotally important to put this action into perspective. It is part of an apparent emerging NYDFS policy to act independently of federal authorities in major AML enforcement actions. The Deutsche Bank case earlier this year is another significant example. NYDFS penalized Deutsche Bank $425 million in January 2017, with the FRB following in May 2017 with a separate penalty of only $41 million. This assertion of state authority is significant not only for the timing and amounts of penalties, but also for its effect on U.S. foreign affairs. In the Statement of Charges, which lists 53 distinct charges, NYDFS based its enforcement action primarily on the HBL correspondent relationship with Al Rajhi Bank of Saudi Arabia. The stated basis for finding a “significant risk” in the Al Rajhi Bank correspondent relationship was a July 2012 U.S. Senate hearingabout the HSBC case, which included testimony about alleged Al Rajhi Bank links to terrorism financing in the 1990s and 2000s. There may be more information not disclosed in the Statement of Charges that the NYDFS is using as the basis for its action, which may come to light in further proceedings (more on that issue later), but if NYDFS is acting solely on the basis of information that federal authorities have not considered worth acting on for years, then it is establishing its own foreign policy in the financial sector over which it has regulatory authority. Advocates of U.S. action against either Pakistan or Saudi Arabia may cheer in this instance, but there are broader dangers from state government actions uncoordinated with the federal government. This New York state action has had effects overseas that a state government is not in a position to fully consider. Perceived as a U.S. action, it has become part of a growing rift between the U.S. and Pakistan, with the timing of the action creating suspicion in Pakistan that it is part of a U.S. campaign of political and diplomatic pressure connected to the U.S. strategy in Afghanistan announced only a week before. This perception has emerged although the idea of the U.S. federal government and the New York state government coordinating a complicated foreign policy action is absurd to those familiar with the U.S. government. Within the federal government, the National Security Council and the federal

interagency policymaking process exist to ensure that the full effects of an action receive consideration before a government agency takes it. Regardless of any current problems in these federal bodies, state government actions focused on individual state interests – in this case, in the banking sector in New York – are far less able to take the full interests of the U.S. into account. One does not have to be familiar with the “Cabinet Battles” in Hamilton to understand this basic principle underlying federal primacy in foreign affairs.

Forget About Who’s Right, When You’re Ready to Surrender – Not This Time The record high monetary penalty sought in this case has made HBL the first financial institution to refuse to settle an AML enforcement action since the expansion of U.S. AML laws and regulations after 2001. Financial institutions have been willing to settle AML enforcement actions by agreeing to pay monetary penalties and undertake corrective actions, without formally admitting fault, but the escalation of monetary penalties since 2009 has increased the likelihood that some will decide to refuse to pay the penalties sought by regulatory agencies and contest their allegations. HBL has decided on this course of action. As a result,

HBL has announced that it will surrender its New York banking license and withdraw from New York and the U.S., memorialized in the bemusingly titled Tender to Surrender, and NYDFS has scheduled a hearing for Sept. 27, 2017. HBL has stated that it will fight the charges in the administrative hearing and afterward in the courts if necessary. It is possible that NYDFS and HBL will negotiate a lower penalty amount to end the dispute, but if not, NYDFS may face a protracted legal battle in the courts to enforce a penalty assessment. The court would likely be federal, and arguments about federal vs. state authority and the significance of the federal government’s absence from this enforcement action may become factors in the litigation.

Sharif Won’t Like It

The Sept. 27 hearing may provide the most revealing look heretofore possible at alleged violations of AML laws and regulations, and arguments against them, in an AML enforcement action. There may be revelations far more interesting than anything publicly released up to now in an enforcement action. For example, domestic news in Pakistan has reported that millions of dollars sent from accounts at Al Rajhi Bank to HBL from 2007 to 2017 by relatives of recently deposed Prime Minister Nawaz Sharif, revealed in the Panama Papers, are part of the suspicious transactions that HBL failed to report that led to enforcement action by NYDFS. These Panama Papers revelations led to Mr. Sharif’s resignation on July 28, after a Pakistan Supreme Court ruling to disqualify him from office for life. In NYDFS’s Statement of Charges, the only indication of these remarkable events is in the short and formulaic phrase “(iv) politically exposed person activity” in the very last paragraph describing the findings of NYDFS’s investigation (paragraph 28). Sharif, HBL, and others involved in such actions probably will not like the exposure that they receive at the hearing. It is possible that the Sept. 27 hearing will consist mostly of less colorful legal and regulatory interpretation arguments, but even if it does, that discussion will be an unprecedented debate over the meaning of AML laws and regulations. It should be a precedent-setting event in the field. n

BANKING

By: Syeda Masooma n 2001, in Karachi, he forecast on the cell phone penetration in the country: by 2010 a hundred million people in Pakistan will have feature phones – a prediction deemed as ‘outrageous’ by the audience. Some of them walked out on him while others chose to be more expressive in showing their indignation. He though turned out to be right. Continuing to speak up his mind without giving a whit about what others may think, presently he is bent on making Pakistan a cash-light economy in the next three to four years. He is Qasif Shahid – the founding CEO of Financial Ninja, named Finja. Another of his initiatives is called Finsurgents, perhaps derived from ‘resurgent’ or ‘insurgent’ – readers may take their pick. These days he’s working on a product quite aptly titled ‘SimSim’ – again derived from the Abbasid-era ‘Arabian Nights’, his own door to the treasure trove of digital payments. Dubbing Finja as the David of the industry, he believes it is pitted against the Goliaths. Qasif Shahid also believes he is “the modern-day Robin Hood”. To him, if Hood lived today, he wouldn’t need to rob the rich to give to the poor. “Instead he would make a fintech.”

The objective: Free digital payments rofit spoke to Qasif about SimSim and Finja. At the Finja office, the environment is quite relaxed, and you find casuallydressed young men and women indulging in light banter while punching on their keyboards. The walls are plastered with motivational, entrepreneurial quotes, and scribbled sticky notes abound. At the conference hall, a birthday party was goingon. About Finja, Qasif speaks eloquently – and with passion. The Finja website, so describes the company: ‘Finja, founded by veterans of tech and banking industry, is a Pakistani fintech with a mission to make payments free, frictionless and real time.’ Free digital payments thus is the objective. “Whether the cost is one rupee or a million rupees, it ought to be free.”

‘OUR WALLETS ARE ACTUALLY FOR THE BANKED, SO THEY CAN DIGITALLY LOAD THE MONEY INTO IT. AND THEN THEY GIVE IT TO OTHERS WITH WHOM THEY ARE EXCHANGING TRANSACTIONS. SO OUR WALLETS ARE FOR THE RICH AND THE AFFLUENT AND THEY REACH OUT TO OTHERS AND GIVE THEM THIS WALLET’ Here is how.

Would Finja be as good a channel for lower income groups? he first thing to understand is the relation between FINCA and Finja. Finja is the first entity to have become a super-agent of a bank without buying the bank. The arrangement is: whatever money is made is split equally between the bank and Finja. In this model, the money in this case is made only as float. Lending the money coming into system as current accounts, banks lend it to T-bills and others. It’s about 7 to 8 percent in Pakistan. The payments in the model are free. It is different from everyone else because everything here is free. The minute you start playing like this, you have a partnership not confined to the bottom of the opportunity pyramid because the products that we create are where consumers are using the product on a mobile phone. So it doesn’t matter if you partner with a commercial bank or a micro finance bank because the consumer is going to download the app and digitally load money in it and then he is going to go out and start spending it digitally. So that doesn’t confine me and means that I can go hunt anywhere. Our wallets are actually for the banked, so they can digitally load the money into it. And then they give it to others with whom they are exchanging transactions. So our wallets are for the rich and the affluent and they reach out to others and give them this wallet. My plumbing is with microfinance banks but it doesn’t mean that we are targeting the lower SECs directly. Behavior change in financial services always happens from top down. It’s the rich man that tells about the feasibility

of a bank being a good one or a bad one, not the poor guy. Most people with money are control obsessed and they only do things that allow them greater control over their money and also the people whom they are giving money too. I know this thing about people with money so I am giving them a product that increases their control over it. So we are actually going after people who already have a smartphone or already have one. And by the time I will get to those who have it, another 50m will have it too. My product is only for smartphones, and not for laptops, because I believe that the future of the world is in smartphones.

What is in it for FINCA? icrofinance banks over the past 40 years have not been successful. I believe, they failed the world. Professor Yunus launched the Grameen Bank 40 years ago in Bangladesh. Yet only 300m customers in four decades worldwide deal with microfinance banks. The telephone companies gained a clientele of five billion in 20 years. Microfinance banks have failed the world because their business model is analog. This means that they have the customers in real world by filling out forms, then move these forms between cities and open a relationship and then give their customers hard cash. It costs a lot of money and time. It’s all physical analog process. The forms and cash are cost prohibitive. The loans then make about 40 percent return annually and the cost of processing and collection of those finances is about 30 percent. So, the banks aren’t making much. On top of it they are not scalable. So when a microfinance bank goes out and partners with us, we say that

BANKING

you can become the first microfinance bank to become a five million customer bank, or 10 million, even 20 million. For a microfinance bank on its own, such growth is elusive. Having partnered with a Fintech and Finja is creating that new value. (People using Finja don’t necessarily have to have their accounts in FINCA.) Our value to the microfinance bank is that through this opportunity the bank has to grow exponentially, which has never happened before for a microfinance bank. While this is only possible by their collaboration with this Fintech, it needs to be commended that FINCA has been able to realize the opportunity here. The leadership of this bank is among the outliers who have been able to crack the fact that the growth is only possible if there is equality in the leadership. So the brand that has come out of this partnership between FINCA and Finja is SimSim. It is a shared trademark and the partnership is that when the bank gains millions of customers they won’t let go of us, save that they buy our share. But SimSim is co-owned, it’s a shared property, it is as much ours as it is of the bank. SimSim by FINCA bank and powered by Finja, this is the brand – the mobile wallet. The merchants that we are making are Finja’s merchants and Simsim would be accepted there. The brand is free, transactions are free, apart from the government charges and taxes. We aren’t charging any extra money, the app is free, the usage is free, transactions are free, top-ups are free, there is neither any charge for the merchant nor the user. We wish to digitalize cash. What Whatsapp has done to messaging, we want to do to payments in Pakistan. What Whatsapp has done is to change the way people communicate, it has killed the full stop. The exciting part is that Finja has a mission: to take Pakistan from a cashheavy economy to a cash-light one in

‘WHAT WHATSAPP HAS DONE TO MESSAGING, WE WANT TO DO TO PAYMENTS IN PAKISTAN. WHAT WHATSAPP HAS DONE IS TO CHANGE THE WAY PEOPLE COMMUNICATE, IT HAS KILLED THE FULL STOP’ Qasif Shahid, Finja Founder, CEO three to four years. We believe that it is a journey of 10 years. In one decade, the largest country of the world can convert itself to a cash-light economy. We wish to accomplish that in four years for Pakistan.”

The importance of keeping it gratis hen a country becomes a cash-light economy, lots of benefits accrue. It doesn’t stay an emerging economy anymore, its market expedites, its tax net widens, its proceedings get documented, the government to people relationship changes, corruption is eliminated and its discount rate management improves. One upshot is that people bring in their cash into the banking system, and since that is documented, tax collection is improved and corruption is limited. Moving hard cash is expensive. There is a lot of friction and it can get destroyed or corrupted in the process. If digital commerce remains free, Pakistan would be cash-light in four years but if not then it is a decade-long process. They will save digitally, spend digitally, buy insurance digitally, make payments digitally and all that. But this will happen if

‘CONTINUING TO SPEAK UP HIS MIND WITHOUT A WHIT ABOUT OTHERS MAY THINK ABOUT IT, PRESENTLY HE IS BENT ON MAKING PAKISTAN A CASH-LIGHT ECONOMY IN THE NEXT THREE TO FOUR YEARS’ 26

the digital commerce is free.This means that there is an opportunity for 100 million people in Pakistan to reinvent their relationship with money within the next three to four years. All the big changes happened in the world when the new thing was free and in real time. Here are some recent cases in point: emails are free in real time, and so are likes, social photographs and social media. If they were not free, they would not have brought significant change. So if payments are not free, they won’t kill cash and people would continue to use cash. The catch is: none of the big players is interested in making payments free – they are making hundreds and millions of rupees on these. So, they are hindering progress. Partnering with a small bank, we are saying that everything is free. We are telling people that this is the fastest way to change Pakistan and if you use us there will be enough pressure on the incumbents to free payments as well and when that happens, Pakistan changes as well. This thinking stems from our being a platform. There are two types of businesses: pipeline and platform. In pipeline businesses, all raw materials go into the process and output comes out and is distributed. In platform business the entire value is created by the users who are outside of the enterprise. Facebook is a platform; all value is created by users, they upload pictures, content and press a like. Like is the smallest unit by which Facebook grows. And we are exactly like a platform.

We have have no customers or merchants but we have personal and commercial users, and when they make transactions they transfer value in real time. Transactions are free like a like is free and when that transactions are made, we grow. I want to make transactions exactly like a like; as easy as a like, as free as a like, and as real time as a like. I don’t give a crap if it’s for one rupee or a million rupees. I want it to be free. I am a platform and my transactions are free. Right now there are 20,000 users and a few hundred merchants on our platform. When you have a platform business and you have a merchant or commercial user, and he goes and brings new customers for me, then I will put money in those customers that they will spend only here. So I go out and work with my users and at one level I free payments for them and at another I award them with monetary or discount benefits. I won't need to to have thousands of employees but my users are growing the platform for me; what they are getting is for free and it is improving their lives, their friends’ and families’ lives and they are playing a role in changing Pakistan.

An untried and untested model he way we have conceived, it has not happened anywhere in the world but elements of this are happening in different industries, in different geographies. There is a little bit of Uber in it, there is a little bit of Airbnb in it, there is Facebook here and there but in one place like a financial services base, something like that has never happened before.

FINCA says Aye...

‘BEHAVIOR CHANGE IN FINANCIAL SERVICES ALWAYS HAPPENS FROM TOP DOWN. IT’S THE RICH MAN THAT TELLS ABOUT THE FEASIBILITY OF A BANK BEING A GOOD ONE OR A BAD ONE, NOT THE POOR GUY’ hen I quit banking, the last thing I wanted to do was getting into partnership with banks. Having spent 18 years in banking, I knew that banks waste time, for their time scale is very different. My first job was ABN with digital and marketing head at Singapore with ABN AMRO, followed by digital head for Standard Chartered and then in similar position with MCB for six years – the last two in Pakistan. Then I did consultancy for banks in the UAE and Africa, but at a much smaller scale. We are already developing products for FINCA, afterwards looking at branchless banking strategy and advising them on how to approach it. Subsequently we realized that being a super-agent for them instead of selling them the product. FINCA could also see what we could do for them. Yet I’d say, FINCA indeed surprised us with their ability to create such a partnership.

Vostok’s venture capital ostok is a venture capital firm; it came on board with Finja, investing $1 million in seed money.

V W

Shared marketing e and the bank both have separate marketing budgets; combined this is quite sizable. Various promotions come from various pools. I am happy to put large parts of money back into users. No marketing is better than this type of

‘MOVING HARD CASH IS EXPENSIVE. THERE IS A LOT OF FRICTION AND IT CAN GET DESTROYED OR CORRUPTED IN THE PROCESS. IF DIGITAL COMMERCE REMAINS FREE, PAKISTAN WOULD BE CASH-LIGHT IN FOUR YEARS BUT IF NOT THEN IT IS A DECADE-LONG PROCESS’

marketing because if I don't get users, my money doesn't get spent.

Finja existed before SimSim ost of Finja’s activity right now is either related to SimSim or FINCA. For instance, if we are creating merchants for SimSim, they are our merchants, so most of the work that we are doing right now is going into launching this consumer financing brand. When we started Finja we were making products for two to three banks, FINCA was one of them. These were process engineering products, like how to digitalize a loan on board, or open a bank account and book a loan as and how would you use tablets to do that. We were a profitable company and then we came up with this.

Untested product, but not lacking in research or 18 years, I did digital banking and marketing and advised the State Bank on policy. Since 2005 I am in Pakistan – chasing this dream. All my work is in free payments and mobile commerce marketing. So while there is no real research on the back of these [assertions] but if you browse on internet, you’d find me speaking extensively on it since the last seven years or so. The 10-years time-frame is a very considered one. Having looked at Australia, Belgium, France, Denmark and Austria and also at India and China, I can assess how long it takes for a certain country size to move from a cash-heavy to a cash-light economy, and also the required policies, demographics and institutions. On the research side, after quitting MCB two years ago, I found another company called Finsurgents. One year-long Finsurgents study project with Karandaaz was on Fintechs, what these could accomplish and what sort of Fintechs should Karandaaz invest in. It was

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called, “Seeding innovation.” This study is being used across the country, but without crediting Finsurgents. Five people worked at it full time, with advisory body consisting of economists, financial analysts and others. So, my statements may sound sweeping, but actually these are well grounded. I recall predicting in 2001 that by 2010, 100 million Pakistanis will possess feature phones. I was laughed at. In 2008-9, I forecast by 2015, 50 million would have smartphones; it was surpassed. In 2009, I was called crazy when I launched MCB Mobile – Internet-based and smartphones only. Now I predict, if we make it free, it is possible to have 100 million people on mobile wallet in four years. If it's not free, it would take 10 years but happen it shall. That remains my objective, along the way educating people on how to make it free. All these 100 million customers would not be ours. I just want the genie to be out of the bottle. My rationale is: all the incumbents would not let go of the charges because it’s a huge pie. When a customer charges his card at a merchant’s, the latter pays 2.5% to the bank – all combined it makes the bankers Rs400 to 500 million every year. Nobody would be willing to let go of such stash.

Progress so far have a smartphone, the merchant has a smartphone, the customer pays. The merchant is doing all the transactions by himself, his cost is zero. And because there is no card, no other process is needed, and therefore no need to charge that merchant. The Indian government is opting for free payments, albeit at a slow pace. Mine is a new, radical model, the rationale being that in Pakistan digital commerce, digital credit is need of the time. Why this will happen: because when people go and digitize their payments, they can go out and get a loan. In Pakistan at the moment the brightest entrepreneurs are at the bottom or middle tier of the opportunity pyramid. Rehriwala, rikshawala, taxi wala, shopkeeper. They are the brightest

‘WE ARE TELLING PEOPLE THAT THIS IS THE FASTEST WAY TO CHANGE PAKISTAN AND IF YOU USE US THERE WILL BE ENOUGH PRESSURE ON THE INCUMBENTS TO FREE PAYMENTS AS WELL AND WHEN THAT HAPPENS, PAKISTAN CHANGES AS WELL’ because they have opted to, no matter what happens, they were not going to work for someone else. Instead they opted to work for themselves, and be self-employed. If somebody is doing one’s own business without any real means, he must be a bright entrepreneur – with the requisite skill, resilience and endeavour. In this country, they would never be rich. I have worked with rehriwalas. Each buys stock worth Rs1500 and sells it for Rs3000-4000 – making a profit of Rs2000 per day. All this is in cash. Everyone wants to have a house of his own, and even a modest one costs around Rs1 to 2 million. By the time they’ve saved enough to cough it up, it gets more expensive. They need digital credit, and they’d be able to get it. For instance, if a cab driver with SimSim wallet has custom with us for six months, he would become eligible for a loan worth Rs1.5 million. That loan doesn’t have to come from a bank. It could come from person to person (P2P) lending. Regular people like me will take a view on the cab driver and we'll decide that he deserved a loan, because we have his performance record. Such regular people can say, if we give him the loan, he would buy four more cabs and quadruple his income. And that loan does not even have to come from a single entity, as more than one person can put together money to offer it to somebody with a proven record for hard work and ability to pay back. Those who do not payback, their rating would go down. The P2P lending can, mixed with free digital commerce, has the capacity to enable entrepreneurs to grow rapidly. Friction needs to be taken out of the digital

‘WE WOULD NEVER PROCLAIM THAT OUR BATTLE IS WITH BIG BANKS – OUR FIGHT IS WITH CASH, THE NON-FREE SYSTEM, AND THE PAPER-BASED INSTRUMENTS’ 28

commerce. To make it share-worthy, both parties to the transaction need to be incentivised by instant discount and also by opening up the venue for loan availability. There are two ways to handle the loan part, with interest or fee. Since many in Pakistan are not comfortable with interest, the alternate is a fee structure. The essence here is people reaching out to others. In Pakistan, people do a lot of charity. If they are handed a loan to invest in extra rehris or more cabs, they would never run away with your money, because you care for them enough to offer them an opportunity and also because you have a face.

The minds and the muscles not tech savvy, business graduate, my value stems from my financial services background, and the strategy and the vision – the very raison d’etre. Monis buys into it, and his contribution is very special – having worked in the Silicon Valley, he is online, e-commerce, new age entrepreneur. For somebody like me, he is the best partner. The Finja workforce consists of 75, some of whom have been there since the inception. We do not work by ordering people around, but letting them do their own thing, so that everyone is emotionally involved, takes ownership and make mistakes, but learn from them. When I want something which they do not buy into, they fight back. That makes it imperative to explain it to them, so that eventually they buy into idea before setting out to do it. That is how we get the best out of everybody.

Dollars and cents n terms of dollars and cents it doesn’t cost that much. But it’s an ongoing process, we are continuously adding value to the app, and it’s changing for the better every week. The biggest expense is on the workforce.

Hiring them young e prefer younger people, just out of school and college, because when I come across those around 30, their worldview seems to be very hardened. But we have few senior people, and, the company also subscribes to my view that ‘anything of value cannot be created without women’. They bring diversity so essential to the product you are developing. For me the attitude, however, remains the most important attribute, and also the values one is raised with. Interviewing process involves a group, and we don’t hire after a single sitting – inviting the candidate over and over again to see

if we like them and vice versa.

Win-win for all ince the method is to win on their own, all banks and big businesses are badly designed. Our design is a win-win for all: the customer is winning, the merchant is winning, the partner bank is winning, and the regulators are winning. I am only interested in bringing people who understand and agree with the fundamentals of this design, because otherwise they wouldn’t put their heart and soul into it. Our fundamental thought process is different from others – Mobicash etc. So when we think of the shop mobs, for instance a Biryani

seller, we tell him that we will sell his Biryani for one rupee, lots of customers come and download SimSim. So people can come and copy me but for them it’ll be a marketing ploy, for me it’s the design. For example, all the Easypaisa and others’ contracts are not free payments. This is how we are different and whatever we do will be fresh. And if people copy it, I will be happier. We have this realisation that we’re the David in this struggle and everyone else is a Goliath. But people love the underdog. We would never proclaim that our battle is with big banks – our fight is with cash, the non-free system, and the paper-based instruments. n

was itself new for the country. He had to lift himself with his bootstraps and struggle for a decade – with no incubator or accelerator coming to his aid. The company through ups and downs, the lowest point being when the management had to layoff half its workforce, many of whom are now back at the company. Today Inov8 employs 200 people and has an impressive list of many ‘firsts’ in Pakistan, including the first multi-bank mobile payments platform, first utility bill payments switch, as well as some very technical stuff like Pakistan’s first Border Gateway Patrol. Still Hasnain choses to “fly below the radar” when it comes to marketing his company. With a clientele including some several Fortune 100 and Fortune 500 companies, Inov8 provides technology and consulting solutions for mobile and branchless banking ecosystem. Its operating area spans financial institutions, mobile operators, merchants, money transfer organizations, regulators and governments. They have Sheikh Nahyan Mubarak Al Nahyan from Dubai as a partner in equity, who is also the new Chairman of Bank Alfalah and owns multiple mobile payment companies around the world, including some stake in Mobilink. Here are excerpts of his take on Finja and its operations and where his own company stands in comparison: The GSM industry was beginning to grow and so was banking. It were early days of privatization of banks. So we felt that the natural synergy was in merging both. In 2006, we had our first platform ready. Since then we have launched world’s first multi banking mobile payments platform in Pakistan. We have five banks on board HBL, UBL, City Bank, KSB, and Atlas. We also set up the first utility bill payments switch, along with a host of other first including some very technical stuff like Pakistan’s first Border Gateway Patrol. Profit: What are your thoughts about FINJA as a competitor? Hasnain Sheikh: We are a B2B and we have completely separated FonePay as a separate entity which is B2C space. For the past 12 to 14 years we have been plumbing for our B2C play.

Inov8 FLYING BELOW THE RADAR Finja is not comparable to Inov8, not by a long shot; it’s a competitor to EasyPaisa and JazzCash By: Syeda Masooma ounder and Co-CEO of Inov8 Limited, Hasnain Sheikh, is a man of few but powerful words. He speaks with a confidence which is almost contagious. Having learnt early on that there is nothing you can’t achieve if you put your mind into it, he made it the mantra for his life. An alumnus of the Wharton Business School, Hasnain chose to return to Pakistan because he wanted to make a difference for his country. Back then there was no startup culture in Pakistan and it was far from being a land of opportunity for expats and IVY League graduates. In 2004, Hasnain and his partner, Bashir Sheikh, founded Inov8 Limited, and started talking about mobile payments when the concept

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Now we have created it. Finja is a competitor to EasyPaisa and JazzCash, but just because we are a QR based retail payment, it doesn’t make it our competitor. For comparison, let’s dissect Finja’s basic business model. To get Finja, you first have to open an account in FINCA Microfinance Bank, a requirement by the State Bank. Go out on the street and ask how many people have heard about it or have opened accounts, known as wallets. Finja claims to have opened around 25,000 wallets; my estimates puts the figure around 8,000. We are bank agnostic, which means that you are not bound by a single bank. The end goal is to make it possible for every bank but let’s evaluate who we have now. Do you know the reverse funnel mechanism, or how a jet engine works? It takes a mass of air, compresses into a very thin funnel and then opens it back out. So you need the input. Where is the input in Finja? So before they can even be considered in the same club, they have to spend hundreds of millions of dollars to acquire 12 million customers. On our platform is EasyPaisa with 12 million existing customers, JazzCash with 12 million existing customers, so for them to catch up to just these two players, it will take them ages and cost millions. Profit: What else? HS: We have Meezan – the largest Islamic Bank in the country, Allied Bank, Soneri Bank, National Bank, Alfalah is going to join, JS, BOP, Askari. FINJA has 600 merchants, we have 10 times more – 6,000 merchants across country. We have a live pool today with 30 million people using the service with an existing account – with access to our service so they don’t even need to open an account. They just need to link their account, or link their MasterCard. So customers from Faisal Bank, NIB, UBL, Askari Bank, alongwith 3.5 million MasterCard users and growing, expected to cross six million over the next year. That’s the banking side of it.

‘YOU CANNOT UNSEAT THE THREE BIGGEST POWER-PLAYERS IN THE WORLD WHO PRETTY MUCH CONTROL THE 90% OF ALL GLOBAL ELECTRONIC TRANSACTIONS. THOSE THREE PLAYERS ARE VISA, MASTERCARD, AND UNIONPAY’ Hasnain Sheikh, Founder/CEO, Inov8 Then how many apps do you need to conduct transactions. You can book tickets of any bus service and pretty much any cinema from FonePay. Profit: What about unbanked population? HS: According to Finja, it is not limited to them. But opening an account with Finja is cumbersome. Compared to that, to open one with us, if you are a Mobilink customer, you need to type *786# with our app and you can use FonePay even if you don’t have an account. Profit: What about free payments? HS: For OTT (over the top) services free payments are always better. But payments are not an OTT service, because as a bank when you acquire a customer you also have to pay the customer. The bulk of the money that a bank makes is through low-cost deposits. So banks don’t take money for free; then there is Capital Adequacy Ratio. And you cannot unseat this today. You cannot unseat the three biggest power-players in the world who pretty much control the 90% of all global electronic transactions. Those three players are Visa, Master-

‘FOR COMPARISON, LET’S DISSECT FINJA’S BASIC BUSINESS MODEL. TO GET FINJA, YOU FIRST HAVE TO OPEN AN ACCOUNT IN FINCA MICROFINANCE BANK, A REQUIREMENT BY THE STATE BANK. GO OUT ON THE STREET AND ASK HOW MANY PEOPLE HAVE HEARD ABOUT IT OR HAVE OPENED ACCOUNTS, KNOWN AS WALLETS’ 30

Card, and UnionPay. There are other areas where disruption will happen in terms of lending freemium model, but banks are not going to allow it and it is not going to work. Profit: That’s the point. As long as banks are involved, it is not going to happen, but what if banks are not a condition? HS: The fact is that people’s money is not going to be kept by individuals. It has to be kept by banking institutions and with that it is not going to work. I have tremendous respect for Qasif Shahid, and good luck to him, but we have a different vision. And I believe that free payments will only take you to a certain point. Our vision is that ultimately payments will not matter at all. It will only be the digital experience that you give the customer. Payments will be hidden in the app, like it happens in the US. You link your card to the app once and then the money itself doesn’t matter as much as the digital experience. So the concept of a super app is exactly focused on that. We are entering the healthcare sector, we have a fashion vertical, and we have autocare vertical, and these are all digital experiences. Profit: How do you see the industry changing in the next few years? HS: The banking is definitely going to be disrupted, banking and all other services. But the bulk of your business will still be in brick and mortar model for at least the next 25 years. E-commerce will grow, but even if we look at the most advanced e-commerce market in the world, the US, 93% is still in brick and mortar and 7% is online, so there is still a long way to go. n

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By: Arshad Hussain rom 52,000-plus, the KSE-100 index’s fall to 41,000 points or thereabouts in under three months, Haroon Askari, Acting Managing Director (AMD) PSX remains unperturbed. To him, PSX is still sound and stable – “I see no panic in the market”, he brushes off whatever concerns an ordinary investor may have. In an exclusive talk with Profit, the Askari maintained, the ongoing decline has been caused by the foreign investors cashing in their gains. Otherwise, “the PSX system is functioning smoothly, with no incident of default by any broker or clearing agent.” Having been entrusted with Acting Managing Director’s position on June 16 2017, for the second time in about seven years, Askari claims, Pakistan’s risk management system to be more competitive in

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comparison with other Asian stock markets owing to the absence of derivative trading. “In markets where derivative trading exists, the risks are higher.” In the last 50 years, he claimed with a sense of pride, “We don’t remember any PSX brokerage house having defaulted or being unable to pay to a client.”

Having doubled in value since 2013 t around 22,000 points circa mid2013, despite depletion, the since rechristened PSX is now at almost double the value at 41,000-plus – with the possibility of bouncing back to regain the lost ground. In June 2017, the KSE-100 index had touched all time high to 52,300 points level – making it the best performing market in the Asian continent. Early in 2017, PSX had suspended licenses of seven brokers from Islamabad and

Lahore on the charges of cheating public money. These brokers never defaulted with PSX. The money of the clients was with the brokers and they did not pay them back, therefore, we have to take such measures to cancel the Trading Right Entitlement Certificate (TREC). Askari further claimed, “The Stock market had paid Rs1.2 billion to the PSX investors in the last few years. The claims we received were thoroughly investigated and the payback was in accordance with the rules and regulations. “Unfortunately, a few big clients could not get their entire investment back, but the small investors of up to Rs0.5 million or up to 90 per cent of the claims had been cleared. If you calculate in percentage terms, the clients who invested in millions of rupees received bigger sums compared to small investors.” Having been part of the PSX management since December 2005, Askari says the future outlook of the PSX is based on the fundamentals of national economy. “These are

strong. The economy is growing at 5.3 per cent of GDP; the profitability of the corporates has continued to improve in the last few years. Every listed company is sharing its gains with the investors. So, now we can say that overall things have improved and that there should be no panic among the investors.” Askari blames the recent decline on the investors anticipating far too much from PSX’s induction in MSCI–EM. “Post the MSCI-EM induction, the expectation that international investors will make a beeline for our stocks turned out to be untrue.” Whatever inflows PSX was expecting from the MSCI could not materialize and that turned out to be a dampener. And those who had purchased the MSCIbacked scrips awaiting appreciation bailed themselves out once upward movement in these was conspicuously absent.

Profit, the main motive ith the main motive being making profit, the big brokers only invest in equities, and never on management, directors or PSX. The brokers know very well in which company they should invest or which company’s share is worthwhile. “It is very difficult to calculate which broker is making an investment in which company, and how much was he investing.” The sale and purchasing of shares is driven by merit, with the investors making their decisions on technical grounds. The investors never see who is the director or MD of the PSX, who is coming or going, they only look at the stock they were buying, the market sentiment, prevailing political trends and the law and order situation. After induction of Chinese Directors, there is no change in PSX as it is a regulated entity. SECP is its major regulator of PSX and it has the right to do it. It (PSX) runs through a regulator.

‘IN MARKETS WHERE DERIVATIVE TRADING EXISTS, THE RISKS ARE HIGHER’ Haroon Askari, Acting Managing Director, PSX The recent federal budget was not good for the local and foreign investors. “The government ignored PSX’s recommendations in the budget for the ongoing fiscal.” “It is also true that the PSX latest were disappointed by federal finance ministry’s measures, making it one of the reasons for the bearish trend,” he added. We had requested the finance ministry to look at our recommendations and, we were confident that if implemented, our stock market would surely emerge stronger, to the extent of crossing the 55,000 point level, said Askari. “After the budget, we have sent a number of missives to the finance ministry as well as the prime minister’s office, with the plea to cut down the Capital Gains Tax. But we have yet to see some positive response from that end.”

Mutual funds growing fast ith the induction of Chinese directors, the stock market has improved its governance. “The best exchanges in Asia have through a consortium become the PSX partner – which is a good sign for our bourses and our economy. Now our local investors can proudly claim that we are the world’s best market.” A few months back, in the local media as well as internationally, we advertised for the post of PSX’s managing director, resulting

‘AT AROUND 22,000 POINTS CIRCA MID-2013, DESPITE DEPLETION, THE SINCE RECHRISTENED PSX IS NOW AT ALMOST DOUBLE THE VALUE AT 41,000PLUS – WITH THE POSSIBILITY OF BOUNCING BACK TO REGAIN THE LOST GROUND. IN JUNE 2017, THE KSE-100 INDEX HAD TOUCHED ALL TIME HIGH TO 52,300 POINTS LEVEL – MAKING IT THE BEST PERFORMING MARKET IN THE ASIAN CONTINENT’ 32

in a number of applications. The Board had shortlisted the name of a Canadian citizen, but nothing is final yet. The next Board meeting shall ponder over it. Amid so many positives, Askari candidly shared the negative: for the last one year, that is 2016 onwards, the foreign investors have been the net sellers. The reason behind it is that they purchased shares of local companies when the market was at 6,0007,000. Now they think that this is the best time for them to make hay. Despite their divesting, we are not witnessing any panic in the market, he claimed. The general observation is that short term buyers were not happy, as the market bounces up and down rapidly. And the investor-base is not on the increase significantly. “The new clients have come, but some old ones have left as well.” According to PSX data, as of June 2017, there were 245,758 total investor accounts in the equity market, of which 233,307 were individual. On December 2014, total investors’ accounts in PSX were 238,471, of which 217,758 were individual investors. By the end of December 2016, the investors’ account of ‘Open End Funds’ were 221,018 while such accounts had stood at 202,018 on December 2015. It clearly reflects that the mutual funds business is growing fast. Askari has been General Manager of Operations at Karachi Stock Exchange (Guarantee) Limited since December 1, 2005, and has previously served as KSE Acting Managing Director from November 2010 to April 2011. Prior to that, he was one of the directors at National Clearing Company of Pakistan Ltd. n

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OPINION

Aqeel Shigri

Dramatically transforming the way we travel The service culture in Pakistan is flourishing and now customers have choices ave you ever imagined riding on a car for hire despite owning several vehicles? Or riding a plush vehicle without ever having to own one? Until recently these ideas would have sounded very alien to you. The global launch of ride-hailing services a few years back that use mobile applications for booking rides have made it possible! Advancement in mobile phone technology gave way to the development of millions of mobile applications (apps) including ride-hailing apps that have become worldwide sensations. Uber (108 countries, 633 cities, 1 billion users) is fast becoming a household name as the pioneer of ride hailing services across the world. They were closely followed by the competition that caught travellersâ&#x20AC;&#x2122; attention in specific countries â&#x20AC;&#x201C; Lyft for the US, Ola for India and Didi for China, etc. In Pakistan, we either know Uber or Careem (12 countries, 52 cities, 10 million users) that have dramatically

transformed the way we travel. The agile, technology-driven and smart entrants into the ride for hire business are giving a hard time to regular services like the taxi cab, renta-car, on-demand car (radio/metro cabs), pick-anddrop providers etc. The worst hit seem to be taxi cab drivers with their ageing cars, preferential rates, and most importantly very basic service. They are no match to the convenience, quality, economy and accessibility of the new ride hailing services. No wonder they have been protesting against them. The service culture in Pakistan is flourishing and now customers have choices. Service providers ought to revisit their customer value proposition and

Aqeel Shigri is an expert in Corporate Communications & PR and has vast experience in IT & Telecom industry; he can be reached at Aqeelshigri@gmail.com

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think creatively about offering better services.

The flip side n the flip side, it isn’t exactly a walk in the park for ride hailing businesses. The evolving regulatory framework, social impact, protests and litigation are but a few issues. The absence of a consensusbased regulation has been a pain for them, though it has so far been dealt with at a provincial level. News of Careem and Uber services being banned in Punjab or their legal position being reviewed or policy clarifications coming through in Sindh were commonplace until recently. But these government reactions aren’t uncommon. How far the ride-hailing businesses foresaw the social impact of their innovative business idea is a question mark. The media (social, print, electronic) is now littered with reports of sexual harassment and misbehaviour internationally. Pakistan is no exception. The credibility of everything that lands on the social media platforms can be questioned but news items appearing in reputable dailies are also backing up the sentiment. (For instance one national daily reporting on June 27, 2017, under the headline: “Careem hits a bump in the road as allegations of harassment emerge”). Customer awareness on how to tackle the thorny social issues is crucial to the long term survival of this service in Pakistan. Some questions begging clarity are: what should a customer do if they are faced with an unruly driver who misbehaves or makes unsolicited advances? Who is responsible in case violence erupts and matters lead to registering a police case? What penalties are the companies placing on their ‘captains (as they are referred to)’ for misconduct? What does the company expect the customer to do?

The same questions also important for the driver who may be faced with an unpleasant customer. My initial research on Careem and Uber revealed cautious advice on ‘avoidance’ like sharing your route with friends and family, rating your captian, call masking etc. A clear statement on consequences for the drivers or recommended actions for customers is missing. Careem has provided a contact number within their mobile app which offers some, although limited, respite during the rides. They also offer in-ride insurance in the event of injury and accident for both the driver and the customer without any extra cost.

Enormous difference s a second step, I tried to contact both companies to get their comments, but couldn’t find any contact information. When approached through the ride hailing app, Careem responded by saying that their concerned department will revert soon. Till the writing of this article,

‘THE WORST HIT SEEM TO BE TAXI CAB DRIVERS WITH THEIR AGEING CARS, PREFERENTIAL RATES, AND MOST IMPORTANTLY VERY BASIC SERVICE. THEY ARE NO MATCH TO THE CONVENIENCE, QUALITY, ECONOMY AND ACCESSIBILITY OF THE NEW RIDE HAILING SERVICES. NO WONDER THEY HAVE BEEN PROTESTING AGAINST THEM’ I had not heard from them. Unless they step up their customer awareness through social media, run focus groups and take concrete actions to earn customer trust, both Uber and Careem risk losing competitive edge to previously established (legacy) transportation services. The challenges that they face today in Pakistan are not new, especially Uber that also launched in a similar market, across the border in India. The legacy services can only survive if they come up with more customer friendly interfaces and better riding options and developments are also happening. For instance, Daewoo, a premium inter-city travel company has launched their ride hailing app. The Telco market leader Jazz has also ventured into ride-hailing services through their contemporary app mLift. Notwithstanding the challenges, these ride-hailing apps have made an enormous difference in the lives of average Pakistanis. Not only by making comfortable travelling accessible but by also providing gainful employment in a country reeling from unemployment. n

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