Profit Issue 15

WElCOME

BUSINESS ETHICS he recent verdict in the Panama Case read like a crime novel and began with the famous words, “Behind every great fortune lies a great crime”

by Honoré de Balzac. This quote also appeared in Mario Puzo’s novel The Godfather. These words could not be more apt for a country like Pakistan where anyone with wealth is branded corrupt and questions are asked later.

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In our cover story this week we take a look at the cut throat industry of paint in Pakistan and how the high level of competition has forced companies to adopt dubious marketing techniques and methods to defraud the taxman.

As far as marketing is concerned, paint companies offer a sort of ‘kosher bribe’ to the painter rather than the end consumer by placing a token at the bottom of the paint can. The tokens vary in value, from Rs20 – Rs 400 and are redeemable at the paint retailer’s store.

Paint companies know very well that their end customers, more than 70% of the time, employ cheap labor to suggest and buy the best quality of paint and do the job. The differentiating factor for the painter between is which brand offers the highest value token he gets at the end.

This practice has been called into question by relevant regulatory authorities who forced the companies to make the process more transparent so that the end customer is not affected. However paint companies like Master Paint who we spoke to said they never have used tokens, something that has had an adverse

affect on their sales.

Defrauding the tax system to take advantage of tax rebates on exports is another common practice we found. The CEO of Diamond Paints claims that there are bigger paint companies than Diamond (a possible reference to Brighto Paints) but because they cannot maintain straight books and submit those with the SECP their sales/receipt etc are undervalued.

While our focus is on the paint industry in this issue, these practices are common in other industries as well. Incompetent regulatory bodies, a flawed outdated tax system, an easily corruptible bureaucracy and a general lack of respect for business ethics makes these offences easy to commit and get away with, Those who don’t see their bottom line suffer, therefore the first casualty in the cutthroat business world of Pakistan are business ethics.

Apart from this we also sat down with Shaukat Tarin, currently the Advisor Chairman of Silk Bank, a former Finance Minister and ex President of various banks. We have given him the title of the ‘Turnaround King’ for his ability to step in and bring back institutions on the brink of failure - be it a bank or the country’s economy – to becoming profitable and efficient. His own bank has seen some tough times as well but he remained steadfast throughout and came out the other end with a 700% increase in profit year on year.

Babar Nizami

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

FROM THE MANAGING EDITOR

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Advancement in science and technology is one of the basic requisites for a robust economy” Federal Minister for Science and Technology Rana Tanveer Hussain

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“People involved in power theft will not have electricity facility in their areas” Minister for Water and Power Khawaja Asif

3.46pc growth was recorded by the agricultural sector for the FY 2016-17 as per the Economic Survey 2016-17. According the Economic Survey 2016-17, released here Thursday, the positive growth was attributed to the greater availability of agriculture inputs like water, agriculture credit and intensive fertilizers off-take. The growth in crops was registered at 3.02 percent against the negative growth of 4.97 percent during the same period last year. The growth of sub sector of important crops grew by 4.12 percent, other crops and cotton ginning posted growths of 0.12 percent and 5.59 percent, respectively. However, during the period under review the production of vegetables and oilseeds posted negative growth of 0.73 percent and 5.93 percent, respectively. Livestock sector witnessed a growth of 3.43 percent compared to 3.36 percent during corresponding period last year.

worth of financing could be withheld from National Electric Power Regulatory Authority (NEPRA) by various donor agencies which include International Monetary Fund, Japan International Cooperate Agency and the Asian Development Bank. According to sources, this is happening as a result of the proposed changes in the NEPRA Act 1997, which will curtail and reduce the powers of the regulatory authority which includes the provision of licences for transmission and distribution purposes and regulate the electricity tariff. The government recently decided to curtail the powers of NEPRA which would empower them with the ability to impose additional surcharges aside the tariffs determined by the regulator. These changes threaten the independence of NEPRA and makes it vulnerable to political jockeying and influence. (Insert Rs300m in big font).

$300m

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266.5MW of renewable energy could be added to the national grid from five projects soon. Five potential power companies have shown their interest by seeking generation licenses from the National Electric Power Regulatory Authority (NEPRA). These companies are interested in investing $368m in the country’s renewable energy sector. A solar project of 100MW capacity costing $103m will be initiated by Zorlu Solar Private Limited which has also applied for a license from NEPRA in this regard. It has been learnt from sources, that Mehran Energy Limited and Hamza Sugar Mills are interested in developing and installing bagasse power plants of 26.5MW and 30MW capacity. These two companies will be investing around $35m and $30m in these projects.

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“Pakistan offers opportunities for software businesses and a large number of startups are pouring into the country” Punjab Information Technology Board Chairman Dr Umar Saif

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2.15pc

mark-up rate is being annually by Water and Power Development Authority (WAPDA) for the Neelum Jhelum Hydropower Project (NJHP) to the government. It has been learnt that Economic Affairs Division (EAD) is charging 15pc interest on re-lending to different government organizations, although these loans are being secured at much lower mark-up from foreign entities. Provinces are being charged a lower mark-up in comparison to that being offered to other government organizations. And for the NJHP project, the government is charging a mark-up of 15pc per year on the re-lending of foreign loans to WAPDA.

of electricity is being planned to be generated through Hydel power by end of 2030. According to Parliamentary Secretary for Planning, Development and Reform Dr Ibadullah, the projects will be completed under the China-Pakistan Economic Corridor’s (CPEC) long-term plan. During a question-hour session, Ibadullah said that Khyber Pakhtunkhwa (K-P) has its due share in CPEC projects; however, if the province wanted any more projects included it could approach the federal government with a proper plan. Additionally, he informed three energy projects under CPEC had been shelved, including China Sunec (50MW), Salt Range Coal-based power project (300MW) and Zonergy Solar Project Bahawalpur (900MW).

41,000MW

is the electricity bills recovered from end consumers by the Ministry of Water and Power in the financial year 2016-17, the highest figure in a decade. Line losses also decreased to 16.3pc during the period mentioned above. Pakistan’s installed capacity of power generation reached 25,100 megawatts in financial year 2016-17 in comparison to 22,900 MW a year ago. According to the survey, the power generation had actually registered a fall in the first 10 months of FY 2016-17 and stood at 85,206 gigawatt hour (GWh). It also mentioned that the power subsidy which had stood at Rs 464b for the power sector in FY 2012 had been gradually brought down to Rs217b by end of FY 2016.

94.9pc

is the economic growth target for the next fiscal year 2017/18 said Ishaq Dar. In an interview with Japanese the Nikkei Asian Review, the minister said Pakistan was determined to funnel more money toward infrastructure, small businesses and the poor, and the government has found an array of international partners to make it happen. Dar pointed to a recent agreement with the US-based International Finance Corporation (IFC) to partner on creating a Pakistan Infrastructure Bank (PIB). The PIB will provide financing for infrastructure projects by the private sector, he explained, describing the new lender as an “equal partnership by the Pakistan government and IFC for 20% each.”

7. 6pc

$295m base price has been by Jazz to win the auction of Next Generation Mobile Services (NGMS) (3G/4G) spectrum. Official sources at Pakistan Telecommunication Authority (PTA) informed Pakistan Today that Jazz is the sole operator to participate in the scheduled auction of Next Generation Mobile Services (NGMS) (3G/4G) spectrum on 24 May 2017. And, it is expected that Jazz will win the 3G/4G spectrum at the base price of $ 295 mln in a very swift manner. The spectrum included in the NGMSA comprises of 10 MHz of paired spectrum in the 1800 MHz band, however, exact lot details will be finalised later as per the reframing plan, sources said.

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“Pakistan’s leather sector is facing heavy losses and it is detrimental to the entire industry” Pakistan Tanners Association Chairman Anjum Zafar

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Rs14.298b

budgetary allocations have been proposed by the Revenue Division under the Public Sector Development Programme (PSDP) for the upcoming financial year (2017-18).

The proposed allocations included Rs12.768b for new projects the division has proposed for inclusion in the upcoming budget, official sources said. Among the new projects, the Revenue Division has proposed Rs10,500m for development of integrated Transit Trade Management system (ITTMS) under Asian Development Bank (ADB) Regional Improving Border Service Project.

is the new borrowing limit that has been increased for the provinces in the new financial budget for the financial year 2017-18. This move would allow all the provinces to get loans domestically to the tune of Rs300b double the amount that was given previously which stood at Rs153b. Although the provinces had failed to fully utilize the limits available in the current financial year, the limit has been increased to 0.85pc of GDP by the NEC which stood at 0.5pc in 2016-17. This policy of allowing domestic borrowing to the provinces was started in June last year by NEC. At 0.85pc of the GDP, the borrowing limit domestically for all the provinces stands at a maximum of Rs307b. Any loans already borrowed by any provinces from the federal govt will include this maximum borrowing limit.

Rs300b

is the growth rate achieved by the Pakistani economy in financial year 2016-17 according to the economic survey 2016-17.

GDP grew slower than targeted rate of 5.7 per cent set by the government, primarily because of lower than the anticipated growth in the industrial sector. Industrial sector grew by 5 per cent as against the target of 7.7 per cent. Industrial sector’s (20.9 per cent weight in GDP) output stood at 5 per cent lower than the targeted 7.7 per cent and lower than last year’s growth rate of 6 per cent. Large scale manufacturing (LSM), the biggest component of the Industrial sector, posted growth of 4.9 per cent, which is considerably below government’s target of 8.1 per cent.

5.3pc

of electricity will be added by the end of December to the national grid. The government wants to ensure an end to power outages before the elections next year and the Prime Minister has taken a specific interest and is keeping an eye on various power projects which he wants to be completed by the end of this year. The Prime Minister has directed the authorities to ensure completion of 11 power projects before the end of June this year having cumulative capacity of 3242MW capacity. The major power plants in this list are the LNG based Haveli-Bahadur Shah and Bhikki project, having capacities of 800MW and 760MW respectively. The other notable ones are 315MW Chashma Nuclear and 660MW Sahiwal coal fired power plant.

6,020MW

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5.28pc growth rate has been achieved by Pakistan after a decade, thanks to growth in agricultural and service sectors. An official source said that the robust growth in the agriculture sector, which had declined to negative 0.19 per cent last fiscal year, provided a strong push to the industrial sector as well as services sectors to perform better.

The growth of the agricultural sector during the current fiscal year remained 3.46 per cent against a target of 3.5 per cent, the industrial sector was recorded at 5.02 per cent as compared to a target of 7.7 per cent and services sector rebounded with 5.98 per cent as compared to a target of 5.7 per cent.

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By: Syeda Masooma Babar Nizami Yousaf Nizami

he career of a banker typically starts from an entry level position and consists of many shifts that include working at a variety of banks both local and international, small and big. The last stop is heading a bank as president and retiring. Shaukat Tarin however is a rarity who has done all that and much more. Apart from being an excellent banker probably his greatest ability is the capacity to lead from the front and turn around institutions that are in trouble. He did it with HBL as its president back in 1997, then in 2000 he built Union Bank from scratch only to sell it to Standard Chartered Bank for a very decent profit. He later joined politics and went on to become the Finance Minister of Pakistan but had to give it up to raise equity for his own venture, Silk Bank, formerly Saudi-Pak Commercial Bank. Silk Bank has not had an easy run but recent financials show that Tarin has turned it around as well and made it profitable.

Profit: How would you describe the tenure when you were Finance Minister? You took up the position at a time when the country going through a recession, how were the conditions back then?

Shaukat Tarin: When I took over the political scenario changed and the new civilian government came in, economically you had oil and gas at $144 a barrel, commodity prices had really gone up and Pakistan, because of election consideration, had not passed on the increase in prices in 2006-07 and early 2008 to consumers. There was major pressure on our balance of payments (BOP) and current account. Foreign Exchange Reserves were at a paltry $5 - 6 billion of which bulk was with Commercial Banks and depleting by the day. I was approached by the then government September of 2008 to come in and rescue the economy.

We were left with only a couple of weeks of reserves, our inflation was very high at around 22-23 per cent. The fiscal deficit was around 7.6 per cent with a current account deficit of 8.2 per cent. It truly was a crisis situation and they needed somebody who was strong and could take decisions.

These were the circumstances under which I joined although I did not want to join the government because I am not cut for politics because as in politics you have to make a lot of compromises. I have lived a very clean life and did not want to jeopardise my reputation. But they told me that if economy tanks, your bank will also tank, so you might as well save the economy to save your bank.

Profit: Since the interest rate has started to come down and margins begun to squeeze, has it affected the banking industry by much? And has the State Bank put a limit on the spread?

ST: I think this is a notional limit, but the limit is actually there because the discount rate has come down, so what you charge to the customer has also come down and at the end of the day you have to pay something to the depositor, so there the State Bank has put a floor of 4 per cent, which further depresses the spreads.

So what that means is that your spreads due to compression have come down and of course the customer will not like to pay more than he should, which is KIBOR plus whatever.

Another aspect of this is that the government has been borrowing heavily in the past several years and banks have become used to just investing in the government paper especially the long term paper (Pakistan Investment Bonds, 3 year, 5 year, 10 year bonds) which the government has been actively pushing and their yields obviously have to be higher than 3-month, six month and one year T-bills.

So that incremental spread gave them the kicker, and most of these banks who are sitting on large deposits, due to a large and wide branch networks, were enjoying pretty low cost of funds while making between 5 to 7 per cent of risk free spread.

When the discount rate started coming down and the government also started to consolidate its fiscal position, the fiscal deficit has also started coming down. This has brought down the government’s appetite to borrow which has affected the banks, because now they have to go back to the customer and lend to him at competitive rates and lower spreads.

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BANKING

Profit: Money market desks of bank treasuries have made a lot of money they had to from PIBs etc and now without spreads are low in ForEx as there is no very low in Pak Rupee, what do you think treasuries need to do to contribute to the bottom line as they have in the past?

ST: They have to come up with new products, derivatives, package their loans in a way whereby the importer or the exporter benefits. It’s not the question of only treasury. Treasury by own sense is never the only engine driving a bank. The driving engines of any bank depending on their strategy are either the corporate business,the SME business or the consumer business.

Then you also have asset Management and private equity businesses. Treasury will obviously work with these businesses and will make some money on top of it by either giving them protection on interest rates, or exchange rates or both.

Internationally now banks cannot do treasury business on their own, for their own balance sheet. They have to actually do it through a customer which is the DoddFrank act of 2009.

Profit: What do you think is the biggest challenge for Pakistan’s banking industry?

ST: The basic issue with banking in Pakistan is that it has a very small footprint.

We have coverage of only 33% of GDP as far as total banking with a loan to deposit ratio of 50%.

So in effect you know there is only 18% banking support to GDP that is very very low. Compared to this Bangladesh is 50% and India is around 70-80%. And to give you another comparison, banking sector of countries like South Korea is 180% of

WE WERE LEFT WITH ONLY A COUPLE OF WEEKS OF RESERVES, OUR INFLATION WAS VERY HIGH AT AROUND 22-23 PER CENT. THE FISCAL DEFICIT WAS AROUND 7.6 PER CENT WITH A CURRENT ACCOUNT DEFICIT OF 8.2 PER CENT. IT TRULY WAS A CRISIS SITUATION AND THEY NEEDED SOMEBODY WHO WAS STRONG AND COULD TAKE DECISIONS their GDP and China is around 225 %.

And this GDP is the coverage for documented economy's proportion and if we add the informal economy then it is even worse. That is where the challenge is.

Another challenge is that we are only lending to the corporates. Lending to the SMEs is about 7-8%, consumer is again 78%, and agriculture is 5-6%, so the bulk of your lending is going to the corporate sector. This has to change.

Geographically speaking there are only seven, eight or nine cities which consume over 80% of credit. The rest are actually net-lenders. For example, in KPK the depositor base is around Rs550 billion but lending is only Rs50 billion which is less than 10%.

A Similar situation exists in Azad Kashmir, South of Punjab, North of Sindh, and Balochistan. So the banking sector has to figure out what's going on, and how we should reach out to people living in these parts of the country. We really need to see what kind of products should be available to increase lending in rural areas, small towns etc.

Profit: In that respect talking about financial inclusion what would you say would be more important, investment in

branches, investment and technology, or digital banking and FinTech?

ST: I think the world is moving towards FinTech. Actually it's all about distribution, it's all about how you reach out to the customer. Therefore in a few years time you will not have the brick and mortar model, this will be gone. The very essence of Banking will be taken over by these large companies the likes of Google and Amazon, because they have the customer base.

All they have to do is to spin around that customer base with financial products.

Then you have large banks. The world of Banking is moving towards digital banking, which makes branchless banking possible.

All you have to do is to have a mobile and then through some service agents you do your banking and that's about it.

So my own sense is that the significance of brick and mortar will keep going down. You can't eliminate them because you need something just to show the names of different banks for people who like to see them.

Profit: Do you think this is going to happen in Pakistan very soon?

ST: There are around five banks which are already in the process of launching, and I am talking about classical state of the art digital banking, I am not talking about phone banking or internet banking, that almost all the banks have.

This will be something where customers will not have anything to do with the bank itself. There will be service through agents and through technology 24x7.

Profit: What about non-banking players essentially like telcos, MobiCash, EasyPaisa etc. Do you think they have an advantage because mobile penetration has increased significantly?

ST: Let me step back… these mobile companies with the help of banks are actu-

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ally doing funds transfers. That is their product - from point A to point B. That business is however coming under pressure now because they used to charge Rs 25/transfer which is now coming down due to competition.

But now some of the intelligent telcos are adding products, because they already have the customer base, so they have started selling insurance, loans and are even taking deposits.

But for this obviously they will have to set up their own risk management units if they wish to enter into the business of lending etc. Previously it was just securing the line and you were through, but when you are lending, taking deposits, then all the risk elements in these transactions have to be catered to and infrastructure has to be built.

So telcos will have to move towards that. Banks have to move the other way, they need to establish the medium to do digital work.

Profit: Almost every bank is starting their own or taking over small Islamic banks to become their arm? How impor-

THE VERY ESSENCE OF BANKING WILL BE TAKEN OVER

BY THESE LARGE COMPANIES THE LIKES OF GOOGLE AND AMAZON, BECAUSE THEY HAVE THE CUSTOMER BASE, ALL THEY HAVE TO DO IS TO SPIN AROUND THAT CUSTOMER BASE WITH FINANCIAL PRODUCTS tant do you think is Islamic Banking will be in the future? And how has your experience beenwith Emaan?

ST: Emaan is doing well, and we have broken even. But to answer your question first you have to understand what Islamic banking means. Islamic banking means that there is no time value for money meaning that for example if I give you 100 rupees today then in a year's time you will give me 100 rupees. I can’t ask for anything over and above the Rs100.

Now I can give you this phone for 100 rupees and when you give it back it will be 120 rupees. So I will have to pay to buy this back which will be my profit. Essentially all those items which cannot be consumed like a house, an automobile, and inventory etc., can be financed through Islamic banking

while all the consumables like the school fees, travelling expenses etc cannot be financed or rather you cannot charge for them.

Research in Islamic countries indicate that at one end of the spectrum 10% of people are indifferent towards Islamic or conventional banking as long as their needs are met. On the other end of the spectrum there are 10% who only do Islamic banking even if they have to put their money in current accounts and earn nothing.

In the middle are 80% of the people who prefer to do Islamic banking only if they have the products which meet their needs and are equally good. The dilemma for Islamic banking therefore is that it does not have too many products. As we develop new product like substitutes for credit cards,

BANKING

and substitutes for other things, as the new products are developed you will see more and more of the Islamic world moving towards Islamic banking.

Even in Pakistan growth in Islamic banking is twice the growth in conventional banking. So to answer your question I think islamic banking will do very well in Pakistan in the coming years.

There are many products that Islamic banking offers but people have not tested them because they think there is no need.

However, the pressure from the customer will lead to it. It will take sometime but these things will start happening and Islamic banking, starting from Islamic countries first and then outside, will gain some currency.

Profit: It was being said for a while that it is getting more and more difficult for smaller banks to survive. We also saw many mergers lately. Is it still the case?

ST: This idea has always been there that smaller banks will become financial boutiques. They will excel in certain kinds of products or services and retain their identity because if they continue to do what other banks are doing then they won’t be able to compete as their cost of funds is usually higher than bigger banks. But still a few small banks are still operating here and are doing well. The mergers that had to take place have taken place and a few more might happen, but overall the banking sector is healthy.

Profit: This cost advantage for banks is inherent or because of some other factor?

ST: It is because of the network. So if somebody has 1,400 branches and someone has 100 branches, like our bank has 100 branches, no matter how hard I try, our cost is almost 1 or 2 percent or 150-200 basis points higher than MCB, or Habib Bank or UBL, because they have a larger network and they can reach places where I cannot.

Then as a smaller bank I have to in-

RESEARCH IN ISLAMIC COUNTRIES INDICATE THAT AT ONE END OF THE SPECTRUM 10% OF PEOPLE ARE INDIFFERENT TOWARDS ISLAMIC OR CONVENTIONAL BANKING AS LONG AS THEIR NEEDS ARE MET AND ON THE OTHER END OF THE SPECTRUM THERE ARE 10% WHO ONLY DO ISLAMIC BANKING EVEN IF THEY HAVE TO PUT THEIR MONEY IN CURRENT ACCOUNTS AND EARN NOTHING dulge in activities where I specialize. Specialization is brought in and that is how we differentiate ourselves. If I go out and compete with the likes of UBL or MCB for corporate loans, they give out corporate loans at KIBOR plus 0.5% or 1%, I will be totally washed out. So what I do is that I go in consumer banking and SME sector. The spreads are there and my expertise is also in how to distribute those loans.

Profit: Bank Alfalah was eyeing Silk Bank couple of years ago. What happened there?

ST: This was way back in 2010-11, when Bank Alfalah was not doing well and there was this talk about merging the two banks. Shareholders of Bank Alfalah wanted to turn some of their equity into cash and everybody thought that Silk Bank, with me and a good management, will make more money and we will run things more efficiently. But that was just talk amongst senior management like myself and some others, and it fizzled out very quickly. Their shareholders and management thought that they can handle it and they have. Bank Alfalah is doing very well.

Profit: There used to be the big Five (banks) in Pakistan, now there is also mention of big Six which is essentially Bank Alfalah. How do you think they achieved this?

ST: They kept growing. There is not

EVEN THOUGH OUR OPERATING EXPENSES AS A PROPORTION OF OUR ASSETS ARE HIGHEST IN THE MARKET, WE ARE STILL INVESTING INTO PRODUCTS LIKE CONSUMER BANKING, CREDIT CARDS AND TECHNOLOGY 16

only Alfalah, with them you also have Bank Al Habib, Meezan Bank, Habib Metro, these banks are now Rs 500-600 billion plus, Alfalah is around 900 billion and even Bank Al Habib is 750-800 billion. They were run well and they kept growing their market share. Bank Alfalah isn’t an exception, in fact Bank Al Habib’s Return on Equity and Return on Assets is better than Alfalah. Standard Chartered is 500-600 billion bank and they are making a lot of money.

Profit: Going through the financial statements of Silk Bank there is a 700% increase in profit year on year. How did the bank achieve this result?

ST: We have been investing in new products. We started that in 2010-11 when we added consumer banking, and then we added Islamic Banking. At the same time we have also been cleaning our corporate side and our SMEs which is why our net interest income increased. Last year we cleaned up and took lots of reserves, posted a loss of Rs 1.7 billion, because we had a lot of capital.

But if you look at the operating profit, it has been consistently going up. This year we did not have to take any reserve, it’s not like we did not make profits last year but it was the cleanup that ate away all those profits. Now the returns are slowly picking up.

Even though our operating expenses as a proportion of our assets are highest in the market, we are still investing into products like consumer banking, credit cards and technology. So if our expenses went up by 5 per cent, the revenues went up by 30 per cent meaning that suddenly the jaws have started opening up. You will see these profits growing by at least 30-40 per cent year on year in the future too.

|THE REGULATOR REALLY HAS TO TAKE A PROACTIVE ROLE, AN INTELLECTUALLY PROACTIVE ROLE, AND THEN SEE WHAT IS HAPPENING IN OTHER COUNTRIES WHO ARE SMALLER OR BIGGER IN SIZE TO SEE HOW HAVE THEY INCREASED THEIR FOOTPRINT AND MADE THE WHOLE PROGRAM MORE FAIR” Profit: Talking about the challenges to the banking industry, to what extent does the monetary policy or the government play a part in catering to those challenges?

ST: Unfortunately the government has been dependent on the banking sector in the past instead of raising their taxed and have a prudent fiscal policy.

Most of the banks have taken advantage of that by going into government paper.

I have a sense that we will stay dependent on the government, as the government will not be able to balance its finances. Most of these banks have almost forgotten how to lend. So it will take them a long time to build the capacity to lend to customers. The monetary policy which targets inflation will be dependant on the fiscal policy and the governmnet directions.

Profit: So we should expect a drop in their profitability going forward?

ST: It already has. You have seen this year that most of the banks have actually seen their spreads compressed. They have seen their operating profits go down as well.

Probably the only way that they have supplemented is through sale of these long term instruments. The government also made a stupid mistake, When they saw that inflation and other things are coming down, they started issuing PIBs. They lent 1.7 trillion rupees of PIBs and then they put no restriction on the banks on what to do with the PIBs, which they had bought on their own account. Banks like CitiBank, Habib Metropolitan and others went out there and bought these bonds big time, and now they are selling them and making money.

Our operating profits are going up because we did not play that game, we bought few PIBs, so we made a little money but that's not our bread and butter. Now banks have to worry about maintaining their spreads and profitability and for that they

have to go back to their customers.

Profit: Even if you are not selling the bonds, their interest rates are coming down, but their value keeps increasing, do you keep updating that?

ST: Accounting principles do not allow for that unless you have realized the cash from selling, if the value goes down then you have to put that depreciation in, but you cannot increase the value unless it is realized.

Profit: As a regulator how independent do you think the State Bank of Pakistan is from the Finance ministry?

ST: During my time they were totally independent, during Ishrat's time also they were pretty much independent. But now I see the Finance Ministry exerting influence The more important question is where is the regulator when the banking to GDP ratio is only 33%, and where distribution of banking assets is so lopsided that 80 to 85% of borrowers are residing in only 9 to 10 cities and everybody else is deprived.

Where is the regulator when you do not have products, or rather banking products for segments which need credit, like the agricultural sector, the SMEs, consumers sector and when the banks are only lending either to the government or to the corporations.

Profi: Do you think it is fair to blame the regulator for something that the banks are not doing?

ST: But the regulator is there to regulate the industry. The biggest hindrance in banks’ ability to get things done is the regulator. The regulator really has to take a proactive role, an intellectually proactive role, and then see what is happening in other countries who are smaller or bigger in size to see how have they increased their footprint and made the whole program more fair.

I think they have to go and study that.

Here, they only study how much money the directors are getting and how much they are spending on travel.

Profit: You like to play golf? What is your handicap, and what does your usual day look like?

ST: My handicap is somewhere between 16 to 18, it does not improve because I do not play regularly but I am a great fan of golf. I also watch and read a lot about banking and economics etc. But more importantly I like to be ahead of the curve on what's happening in the world, in Pakistan, even in politics. So I'd like to be aware as these are my habits and hobbies.

I am not a great reader of books but if I have to know something I will go straight to the internet and pick up information from there.

I believe that at this time of my life I am pretty okay with what I am doing but lot of people ask if I will rejoin the politics and to that my answer is that although at this stage I'm not thinking about politics but it’s not out of the equation.

If there are the right set of people, the right type of environment, and I have the opportunity to play a role for my country, like I have already done twice I will not mind doing it for the third time only if I can add value.

I became a senator to become a finance minister, I didn’t have to hold rallies because I got a seat in the parliament and that helped me conclude the seventh NFC award. If I hadn’t been the minister than I wouldn’t have been able to conclude that. n

BANKING

GIVEN A STRONG ENOUGH INCENTIVE TO ENGAGE IN UNETHICAL BEHAVIOUR, A DISTRESSINGLY LARGE NUMBER OF PEOPLE WILL DO SO, REGARDLESS OF THEIR LEVEL OF WEALTH OR POWER. AND TO BE THE RECIPIENT OF AN ILLICIT PAYMENT, ONE NEED NOT BE WEALTHY OR POWERFUL, BUT MERELY IN A POSITION TO OFFER AN UNDUE ADVANTAGE TO AN ENTITY LOOKING FOR IT

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How cut-throat competition in the paint industry leads to dubious marketing practices, tax evasion and fraud

By: Babar Nizami and Syeda Masooma his is the story of dodgy payments and shady business practices involving some of the largest, most powerful companies in Pakistan, at least two of which are publicly listed subsidiaries of large, powerful European conglomerates. At stake is the prize of becoming the dominant brand of paint in a country on the verge of a boom in construction activity. These companies will stop at nothing, pay whatever they have to, in order to win that prize.

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The recipient of those dicey payments? A high-ranking government official?

An elected politician? A wealthy businessman? A high court judge? Nope. The recipient is the daily wage labourer, barely earning more than minimum wage, whom you might hire to come and paint your house.

“Behind every great fortune lies a great crime.” These words, originally written by Honoré de Balzac, and quoted by Mario Puzo in The Godfather and Supreme Court Justice Asif Saeed Khosa in a dissenting opinion on the Panama Papers case, reflect a common perception that wealth generation requires financial malfeasance.

It also creates the mistaken impression that only the wealthy are involved in questionable financial transactions.

This story will demonstrate, however, that corruption is not a matter of wealth and power, but incentives. Given a strong enough incentive to engage in unethical behaviour, a distressingly large number of people will do so, regardless of their level of wealth or power. And to be the recipient of an illicit payment, one need not be wealthy or powerful, but merely in a position to offer an undue advantage to an entity looking for it.

The case of the ‘token’ onsider the simple act of getting your house painted. Give most middle class Pakistanis’ aversion to a do-it-yourself attitude, the vast majority of painting of residential and commercial properties is done by professional painters who are often daily wage labourers who earn barely above the minimum wage.

You would not think that bribery (or at least something that has the strong appearance of bribery) would be involved in a matter so simple as that. And yet, you would be wrong.

Why would anyone need to bribe a daily wage labourer? The reason is simple. While the labourer is poor, and usually not very well educated, he (it is almost always a he) has something that the middle class family getting their house painted does not have: expertise on which paint and how much of it, is required for a paint job. Most people rely on the painter to recommend which paint they should get in order to do the job, and that reliance on the expertise of the painter is what gives him the kind of mar-

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“IN OTHER INDUSTRIES, YOU HAVE PROMOTIONS GEARED TOWARDS THE END CONSUMER, NOT THE RETAILER. BUT IN THE PAINT INDUSTRY THAT DOES NOT HAPPEN. PAINT MANUFACTURERS ARE SELLING TOKENS, NOT THEIR PAINT” Farooq Amin Sufi, Director Marketing, Master Paints

ket power that paint manufacturers are willing to pay big money for.

It all started in the mid-1990s, when a small boom in construction, combined with a large number of new entrants in the paint manufacturing market, led to a serious increase in the level of competition in the paint market in Pakistan. Companies were desperate for market share and willing to offer massive discounts in order to be able to get it.

According to market research conducted

by Nippon Paint Pakistan, 60% of paint buying in Pakistan is conducted by the labourer doing the actual painting. And a study conducted by ICI Pakistan found that 70% of consumers and painters stated that the advice of the painter was critical to the decision of which paint was purchased for a paint job.

Under these circumstances, while offering a discount on the wholesale or retail price of the paint would help somewhat, the companies looking to entice more buyers of their paints had to find a way to make sure that it was the labourer who got the discount, even though he was not the one paying for it.

Enter the ‘token’ he token was an innovative practice invented by ICI Pakistan in the mid-1990s, and it was meant to solve the decision-maker/purchaser dichotomy. Paint manufacturers started placing tags or stickers on each paint box with an amount of money written on it. That tag or sticker came to be

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known as the token, and could be redeemed at any paint retailer or wholesaler for cash.

In order to ensure that it is the painter and not the homeowner who gets the cash from the token, paint companies place the token inside the paint bucket at the bottom, in a concealed packet underneath the actual paint. This is designed to ensure that the person doing the painting would be the first person to be able to access the token.

With the introduction of the token, the labourer all of a sudden saw their incentives flipped. Prior to the advent of the token, the labourer would either buy the cheapest paint or the one with the highest quality, or else a good combination of price and quality, depending on the needs and ability to pay of the person getting their house painted.

Now, however, the labourer did not care about price or quality, but instead about which paint company was offering the highest redemption value for the tokens on their paint boxes. In other words, the painter was being offered a bribe.

“In other industries, you have promotions geared towards the end consumer, not the retailer. But in the paint industry that does not happen. Paint manufacturers are selling tokens, not their paint,” said Farooq Amin Sufi, Director Marketing, Master Paints, one of the largest paint manufacturers in Pakistan and the only one that does not use tokens to promote its business.

Tokens take over the market okens were initially a secret practice used by paint manufacturers to promote their products, but quickly took on a life of their own after labourers – and some customers – became aware of their monetary value.

“It has become an alternative currency,” said Sufi. “You cannot sell paints without a token. It has become such a mafia.”

Sufi has reason to be bitter about the practice of tokens. His is the only company among Pakistan’s 16 paint manufacturers that does not use tokens and as a result saw its business suffer. “People have told me that when they called painters and asked them about what choice of paint they should use for their houses, they were told that if they used Master Paint, it will destroy the walls of their homes. ‘There is some chemical in it that will spoil the walls.’ So painters won’t let the Master Paint to be used, just because it does not have that token worth a few hundred rupees,” Sufi said.

Sufi is being perhaps a bit glib about the value of the token to the painter. The average painter in urban Punjab makes between Rs500 and Rs600 a day, according to data from the Punjab Finance Department.

A bucket of paint can have a token of Rs200, meaning that a painter can increase their average daily earnings by up to 40% by choosing a paint brand that offers a token versus one that does not offer a token.

Nonetheless, the impact of the token is massive and the signal from the painters and paint retailers and wholesalers to the manufacturers is quite clear: either offer a token, or be prepared to see your sales suffer.

“In Pakistan, there is no culture of painting your walls yourself. Most people call a team of painters and then take their advice on which paint to use. Painters have besmirched Master Paints’ brand so much in the market that dealers even stopped stocking it. However, now things are changing and I see our products in paint shops,” said Sufi.

Paint shop owners and dealers seem to have mixed views. Luqman, the owner of a two-story paint shop near Bhatta Chowk in Lahore does not have any Master Paint in stock and said that there is not that much demand for it.

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SINCE MANY COMPANIES ALREADY UNDERSTATE THEIR SALES IN THE LOCAL MARKET, IT IS NOT VERY DIFFICULT FOR THEM TO BRUSH THE EFFECT OF TITANIUM DIOXIDE SALES UNDER THE CARPET AND PUT THE REVENUES UNDER EXPORT REVENUE CATEGORY” Umar Malik, CEO, Gobi Paints

“We have invested millions in [building inventory for] other products. What do we have to lose if we buy some Master Paints stock too? But there is no demand for it in the market.”

Another dealer, Haji Abdul Latif, who sells paints in the busy area of Defence Housing Authority in Lahore was of a somewhat similar opinion. “We have some buckets [of Master Paint] in our stocks but there are so many other brands with good quality as well, so we don’t get many customers asking for Master Paints.”

Painters were unambiguous in their views. Two painters taking a tea break under the shadow of a tree during a job painting a house in Lahore Cantt said: “We are using ICI on this house. It is the best and we get a token from it too. All paints should have tokens. We have to do the same amount of work with almost all brands, so what’s wrong with getting some extra money to have tea or lunch while working?”

Meanwhile, a homeowner of a 300square-yard (10 marla) house in DHA said that he does not mind if painters keep the token. “If I force them to give that token to me, I will only have to give myself the extra hassle of having to go and convert them into cash by going to a paint shop. Furthermore, they adjust it in the wages they ask me for, or if they don’t, it’s hard to tell. It is easier this way because fighting over a Rs200 token in a bucket costing almost Rs10,000 is not even smart.”

Where the law stands

n 2011, the Competition Commission of Pakistan, then chaired by activist chairman Khalid Mirza, decided to take action against the practice of placing tokens that were clearly designed to benefit the labourer at the expense of the end consumer. Over a period of seven months, beginning in June 2011, almost all of the major paint manufacturers in Pakistan submitted public documents explaining their marketing practices of using tokens for the very first time.

The hearings were a fascinating insight into the corporate culture of the companies involved in the paint industry.

The most forthright was Nippon Paints Pakistan, which admitted that it started the practice in 2009, two years after entering the Pakistani market and discovering that tokens were standard market practice. They admitted that the target of the token is the painter, and not the end consumer and that the purpose is to persuade the painter to buy their paint, or recommend to the homeowner to buy their paint.

Nearly all of the local manufacturers admitted up front that it was a marketing practice born out of intense competition in the market for paint and that they would rather not use tokens to promote their business and erode their profit margins in the process. Many also gave the Competition Commission a list of the brands and sizes of paint buckets and the value of the token on

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each of those buckets. The numbers varied by both company and size of the bucket, ranging from Rs20 to Rs400 per bucket.

The one company that admitted absolutely no wrongdoing and would not even admit that the tokens had anything to do with marketing was ICI Pakistan (the paint manufacturing business of which is now known as AkzoNobel Pakistan), which claimed that the tokens were a means of trying to combat counterfeiting of their paint brands. One can practically hear the commissioners scoffing at the mendacity of that claim in the written report about the hearings.

After three hearings over a period of seven months, the commission issued an order on January 13, 2012, and found that the use of tokens constituted deceptive marketing practices, and were a violation of Section 10 of the Competition Act of 2010.

The commission ordered paint manufacturers to begin disclosing both the existence and the redemption value of tokens on the paint buckets.

The vicious cycle of tokens aster Paint does not use tokens to promote its brand of paint, and Sufi claims the decision was made at least in part for ethical reasons. But he also says that another reason was that the company simply did not want to enter the race to the bottom of trying to continually increase and match token values of its competitors. And in part, Mas-

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“THERE HAS TO BE AT LEAST ONE OTHER COMPANY WITH HIGHER SALES BUT IT CANNOT CLAIM SO BECAUSE ITS BOOKS SUBMITTED TO SECP WILL DISAGREE AND IF THE SAID COMPANY REPORTS ITS ORIGINAL FIGURES IT WILL HAVE TO PAY A HIGHER SALES TAX AND THEN A HIGHER INCOME TAX ON THE NET PROFIT” Mir Shoaib, CEO, Diamond Paints

ter Paint also had some luck on its side: the bulk of its sales come from enamel paint -, a category of paint in which none of its competitors uses tokens owing to its relatively lower price point - rather than vinyl or decorative that are the main products in which most companies use tokens as a selling technique.

Nonetheless, even its competitors admit that tokens are an expensive way to promote their sales. Mir Shoaib, CEO of Diamond Paints, said he agrees that using tokens without disclosing their redemption

value to the end-buyer is an unethical practice. Shoaib, a religious man who is an active member of the Tableeghi Jamaat, goes so far as to refer to the practice of using tokens as a “sinful activity”.

Beyond the ethics of tokens, there is also the economics of the matter: tokens have become big business for painters, and the amount of money every company has to spend on tokens is growing every year, and growing faster than overall revenues. In 2002, the paints division of ICI Pakistan spent 10% of its revenues on discounts and tokens. In 2016, the successor company – AkzoNobel Pakistan – spent closer to 18% of its gross revenues in discounts and tokens.

And the amount of money involved in tokens is no small matter. In 2016, AkzoNobel estimates the total value of paint sold in Pakistan was just over Rs30 billion. AkzoNobel and Berger Paints, both Pakistani subsidiaries of European companies and the only three publicly listed paint companies on the Pakistan Stock Exchange, account for just over a third of that number.

The two companies spent Rs1.4 billion and Rs1.3 billion respectively on tokens and other discounts. Given the relatively similar levels of token redemption values used by most companies in the industry, it seems safe to assume that other companies in the industry spend a similar amount on their token market-

ing strategy. That would imply that Pakistan’s paint industry spent approximately Rs7.3 billion in 2016 on tokens and other discounts.

Defrauding the government okens are not the only deceptive practice used by paint manufacturers in the country. Another common practice involves taking advantage of poorly written and poorly enforced tax rebate laws with respect to import of raw materials and export of paints to Afghanistan.

In a bid to promote Pakistani exports of value-added industries, the Musharraf Administration introduced a policy measure called the Duty and Tax Remission (DTRE) scheme in June 2001. Using a statutory regulatory order (SRO) to amend customs regulations, the government decided to allow the exporters to claim tax rebates on the value of customs duties and taxes paid on any imported raw materials used to manufacture goods for export.

The DTRE tax fraud occurs in two separate ways. The first is the more commonly known practice of over-invoicing of exports: companies claim they have exported far more paint to Afghanistan than

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THE MORE DEPRESSING REALITY IS THE FACT THAT, WHEN FACED WITH STIFF COMPETITION, RATHER THAN INVESTING IN RESEARCH AND DEVELOPMENT, AND SEEKING TO INNOVATE THEIR WAY INTO MAKING A HIGHER QUALITY PRODUCT AT A LOWER COST, TOO MANY COMPANIES IN PAKISTAN LOOK TO DECEPTIVE MARKET PRACTICES AS A MEANS TO GAINING A COMPETITIVE EDGE they actually have so that they can claim a rebate on the taxes paid on a larger share of their imported raw materials.

In the second scenario, companies claim a high proportion of their most expensive imports are used to manufacture their exported products. Specifically, some companies, according to Sufi, claim that as much as 60% of the cost of the exported paint consists of the cost of titanium dioxide, a very expensive metallic ore. In reality, less than 20% of the cost of high-end paints consists of the cost of titanium dioxide.

“They then use some of that duty-free imported product in their locally sold paints as well and also sell some of it as a raw ma-

terial to other local manufacturers,” said Umar Malik, CEO of Gobi Paints. “This has two effects. Firstly, it allows these paint manufacturers to produce their products at a lower cost as compared to other paint manufacturers who are importing titanium dioxide the proper way and at a higher cost due to import duties. Secondly, it also yields revenues for them as they sell it at a higher price in the local market than the cost they had to incur in purchasing it. Since many companies already understate their sales in the local market, it is not very difficult for them to brush the effect of Titanium dioxide sales under the carpet and put the revenues under export revenue category.”

Malik says that this added advantage allows such companies to fight competition more aggressively at the expense of paint companies like Gobi Paints who do not defraud the DTRE scheme by claiming a higher quantity of titanium dioxide is being used for products to be exported.

Not all players in the market agree that such a fraud is common practice, however.

Commenting on the matter, an official from Berger Paints said, “That is not true. There is massive demand of Pakistan’s paint in Afghanistan.” Diamond Paints claims to be the market leader with highest sales. They draw this argument on the basis of sales figure reported to the Securities and Exchange Commission of Pakistan (SECP) by almost all big players in the industry.

However, CEO of Diamond Paints, Mir Shoaib, believes that there has to be at least one other company with higher sales, (a possible reference to Brighto paints) but it cannot claim so because its books submitted to SECP will disagree. He attributes this to tax evasion because if the said company reports its original figures it will have to pay a higher sales tax and then a higher income tax on the net profit.

COVER STORY

Different ways in which companies are displaying the token on their paint cans after the ruling of the Competition Commission Of Pakistan (CCP) The CEO of another paint company (speaking on condition of anonymity) said that it takes years of keeping straight books and abiding by rules if one has to move towards an IPO, which is impossible to find in Pakistan’s paint industry.

He said that this business is so severely marred with unethical and illegal practices that none of the companies can afford to open their books to scrutiny and auditing. According to him the continuous practices of paint companies are also convoluted enough to make them unfriendly for

any of the rules and regulations binding publicly listed companies.

The broader malaise egardless of the specifics of how precisely paint manufacturers are defrauding consumers and tax authorities, the more depressing reality is the fact that, when faced with stiff competition, rather than investing in research and development, and seeking to innovate their way into making a higher quality prod-

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MOST PEOPLE RELY ON THE PAINTER TO RECOMMEND WHICH PAINT THEY SHOULD GET IN ORDER TO DO THE JOB, AND THAT RELIANCE ON THE EXPERTISE OF THE PAINTER IS WHAT GIVES HIM THE KIND OF MARKET POWER THAT PAINT MANUFACTURERS ARE WILLING TO PAY BIG MONEY FOR 26

uct at a lower cost, too many companies in Pakistan look to deceptive market practices as a means to gaining a competitive edge.

For much of the past year, the country has been enthralled by the Panama Papers case, where documents uncovered by the International Consortium of Investigative Journalists (ICIJ) revealed the existence of offshore companies owned by the families of powerful Pakistani politicians, including the Prime Minister, as well as powerful businesspersons.

The entire media was whipped into a frenzy about corruption at the highest levels of Pakistan’s government and economy. Yet as the example of the paint industry suggests, at some level, we are all complicit in the system of questionable business tactics and transactions, from the daily wage labourer all the way through to the Prime Minister’s office.

The rot, in other words, goes far deeper than one court case, and will take far more to fix than one guilty verdict.n

COVER STORY

Where does AlShaheer, Pakistan’s biggest name in the meat business, stand post its IPO? By: Aisha Arshad n what is so far the highest difference between floor price and strike price (Rs52) in the last five years, AlShaheer Corporation got publicly listed at a per share price of Rs95 against the offered Rs43 by the company. Profit sat down with the CEO of the Shariah compliant company, Kamran Khalili, to look at the company’s journey since its nascent public offering in Pakistan Stock Exchange in 2015 till today.

For Khalili, a decade long stint at the Pakistan Stock Exchange was enough to tell him that he wanted to build something on his own.

Venturing into the food industry – particularly the meat segment - seemed an attractive option.

At the age of 39, he began building AlShaheer Corporation in 2006. He began exporting meat

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to the Middle East in 2008.

“When I was three years into exporting, it struck us that all of the good quality meat is exported; hygienically prepared meat of good quality that is available abroad it is not available in the local market,” says Khalili, reminiscing about his company’s journey.

It was this realization that led to the inception of Meat One – a high-end meat retail chain – in 2011. Yet, much remained to be learned, as AlShaheer had ventured into a largely unchartered territory. Two years after Meat One started, the feedback indicated that although the meat quality was up to the mark, the high prices were making it inaccessible for most Pakistani consumers.

According to Credit Suisse, a global financial services company, Pakistan has the18th largest middle income group worldwide, com-

prising of some 6.27 million people. In order to tap into this middle-income consumers market, AlShaheer established Khas Meat, a low-cost model of Meat One. “The meat quality is the same; however, the business overheads are lower. There are fewer shops, a smaller staff, and lower rentals,’’ Khalili says , explaining the business model of Khas Meat. “At the end of the day, the business costs are paid by the customers. If there’s a lean and economically efficient model, the customer can get good quality product at affordable rates,” he adds.

AlShaheer Corporation is the institutional supplier to many major private and public institutions. Pakistan Air Force, Pakistan Navy and Aga Khan University Hospital are a few of AlShaheer’s clients.

On the winning stand as the largest meat exporter of the country, AlShaheer also boasts of being the only meat retail chain in the branded sector in Pakistan, and has a poultry processing plant underway.

Being the adroit businessman that he is, Khalili is looking at the challenges and opportunities that lie ahead of him.

“Unfortunately after our Initial Public Offering (IPO) in June 2015, things got

his company being in this tight spot. He calls the last year the toughest for his corporation in the nine years since its inception.

AlShaheer, as Khalili says, has been investing in the organization “Our human resource cost has increased by 200 million per annum; it has had a major impact”. The

Afzal, Director Research at Insight Securities, the Pakistani rupee’s depreciation actually results in an increase in the rupee revenue, assuming there is the same product price in the international market ”The depreciation will benefit AlShaheer and the overall export sector as most of the input costs

“WHEN I WAS THREE YEARS INTO EXPORTING, IT STRUCK US THAT ALL OF THE GOOD QUALITY MEAT IS EXPORTED; HYGIENICALLY PREPARED MEAT OF GOOD QUALITY THAT IS AVAILABLE ABROAD IT IS NOT AVAILABLE IN THE LOCAL MARKET” Kamran Khalili, CEO, AlShaheer Corporation

challenging and they still are. The main reasons are that the Pakistani rupee has not devalued, exports all over Pakistan have been hurt, and there’s 15-20% decline in overall export. We are affected by this.” Khalili explains, that citing the foremost reason for

Middle Eastern market has also shrunk recently, which, Khalaili says, has had a negative effect on the exports of his company which is already suffering the impact of the overvaluation of the rupee.

According to Khalili, Pakistani rupee is presently overvalued. In his opinion, the rupee has had a history of devaluation of 6% per annum on an average in Pakistan; however, this has not occurred during the last three years, resulting in an overvaluation of the rupee by almost 18%.

In the opinion of Zeeshan

are domestic.”

Recently, AlShaheer made rounds in the news for its upcoming processed foods line. Out of the Rs2.2 billion raised in the IPO, Khalili says that a major chunk has been invested in the poultry and processed meat plant in Lahore which will start commercial production by August this year. But till the plant begins generating revenues for the company, it remains an expense.

“The hiring has been completed for the project in Lahore but the team is not contributing to the revenue yet, as the project is not commercially operational at the moment,” said the 48-year-old CEO.

RETAIL

All this has contributed in depreciating the company’s share price by 73% since its IPO. However, according to Khalili, the actual depreciated value is 43%.

“We gave two bonuses after the IPO. One was of 35% and the other of 15% - a total bonus of 50%,” says Khalili. “After a bonus, the price of the stock gets adjusted because the bonuses are free of cost; so if anyone bought one share for Rs95, he has 1.5 shares now,” he further explained.

Thus, while AlShaheer’s stock price should have been Rs63 right now, these multiple factors have resulted in the price being 43% lower than that. On the day of this interview, it stood at Rs44.

“There are two reasons for [price depreciation],” explains Khalili candidly.

“One reason is that the strike price was very high, which it shouldn’t have been. Secondly, the performance of the company during the last was poor.”

In addition to the constraints on the business front, Khalili says that the Government’s policies are also unfavorable for the organized sector. “The cost of doing business in Pakistan is rapidly increasing; expenses have gone up, rents are high. All

tremendous potential. “Our strength is agriculture, and the Government should focus on it; there is no area other than agriculture where we can do wonders,” says Khalili, adding that the government’s focus needs to be diverted to animal health and welfare in the bigger interest of the country’s economy.

Despite the odds that Khalili and AlShaheer have been fighting against, he is optimistic about his company’s future. “We might have to suffer for one more year, but with the poultry line coming up the whole scenario is expected to change,” the CEO says.

After capturing a large share of the 1.25 trillion meat market locally, AlShaheer now intends to capture Pakistan’s Rs40 billion processed food market.

For this, a vertically integrated plant has been constructed in Raiwand, Lahore, which will have the capacity to produce 1200 tons of processed meat each month. In order to ensure that AlShaheer gets a strong

40-45kg.

“This market should have been twice the size it is,” he says. “This market can go up to 45 kg; when that happens, the market will be of Rs2.5 trillion. I don’t think that there’s any other category in food, other than meat, which has such a big contribution.”

Khalili is eyeing the exponentially growing middle-income group and their increasing buying power. “I believe that in the coming five years, Pakistan’s retail dynamics will change. There will be a lot of growth in modern trade and retail in Pakistan,” he says, adding that due to rapid urbanization, increase in education and living standards,

“ASSUMING THERE IS THE SAME PRODUCT PRICE IN THE INTERNATIONAL MARKET THE DEPRECIATION WILL BENEFIT AL SHAHEER AND THE OVERALL EXPORT SECTOR AS MOST OF THE INPUT COSTS ARE DOMESTIC” Zeeshan Afzal, Director Research at Insight Securities

costs are going upward but the efficiency is going downhill. And no one other than the Government can bring in efficiency. We need business-friendly policies,” he says.

Issues such as killing of young animals, smuggling of livestock and slaughtering of female livestock have become a hindrance in the growth of Pakistan’s meat segment Khalili feels, which otherwise has a

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footing in the processed food segment, Khalili is planning to make his product available at some 2,000 locations nationwide in the first year of its launch.

“Considering investment in the distribution channels and the tough competition, one should keep a margin of at least 6 to 9 months in mind for profits to materialize,” says Afzal, commenting on the growth prospects of the company.

However, Al’s aspirations do not end here. According to Khalili, Pakistan’s per capita meat consumption is 20-22 kg which is far below the region’s average of

and the formation of nuclear families in the country, priorities are changing, and that will enable the food segment to grow further.

“Health and hygiene probably wasn’t a big priority back in the day but today it is.

Today, people feel it’s okay to live in a small house, but wish to provide their children with a good upbringing and healthy food,” he says, commenting on the changing dynamics of the country “This is why this segment is growing rapidly; there’s a shift in progress. And this shift will result in a paradigm shift; people will look at things differently in the next five years.” n

RETAIL

By: Syeda Masooma icrofinance model was introduced four decades ago with the hopes of revolutionizing lending. There were high hopes of uplifting the not-haves of the society. However, even in modern times there is a serious lack of opportunities for the unbanked population of the developing countries and even the banked ones have to go through multiple stages to be able to qualify for obtaining a loan. Globally, the microfinance model has only been able to gain 300 million customers in the past forty years. There is a whole untapped poten-

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tial market, which if utilized properly by the microfinance banks can create a revolutionary impact on the world economy.

In Pakistan, conditions are no different. For starters there are only a few microfinance banks and are geographically limited in their operations. Even though the State Bank of Pakistan requires banks to open branches in unbanked areas, the geographical limitations remain the biggest barrier in bringing more people into the banked population category. Other measures by the Central Bank for banking facilitation, like basic banking account, and after 2005, Asaan account (simplified forms) have also been able to do little to assuage the problems in credit availability for the poor in the country.

Amidst such conditions, FINCA Microfinance Bank seems to have embarked on a new form of operations with aims of reaching the farthest corners of the country and creating a banking space for the unbanked.

FINCA’s partnership with FINJA, a FinTech company has also opened more doors to reach a wider range of people and play a part in the changing economic conditions of the country. Profit interviewed the Chief Operating Officer of FINCA Microfinance Bank, Shahid Kazi, for more details on the matter.

It is almost ironical that micro-financing is intended for the lower middle classes, while most of them are not even banked.

How can we expect people to benefit from microfinance banking, is the question that arises.

Answering this, Shahid said that the primary challenge was to reach more people and get them into banking. He also said that this was the area where the opportunity lied in Pakistan’s case. A significant population of the country lives below the poverty line which is most likely to benefit from micro financing. “The challenge is that with the traditional brick and mortar system only a limited number of people can be reached.” In his opinion a new model is necessary to surpass the geographical limitations.

However, financial inclusion is not the only aim for microfinance banks because as Shahid said “micro financing has its own objectives as well.” Before getting into what those objectives were, he decided to explain what financial inclusion meant. He said, “Financial inclusion has many definitions. As any individual you have four financial needs.

Money to save, to make transactions, access to credit, and emergency (insure).

Micro financing is supposed to serve all these needs of the customers.” However, to achieve the ability to serve all these purposes, micro finance bank, like commercial banks, need to fulfill Capital Adequacy Ratio (CAR) as set by the State Bank of Pakistan. “So even though micro financing is geared towards financial inclusion, we need to make profits to be able to fulfill CAR and provide other serv-

“WE HAVE A PRODUCT FOR AGRICULTURE FOR WHICH WE TAKE INTO ACCOUNT CROPS, THE INPUT COSTS, RISKS ETC. LOOKING AT THE GDP, 42% OF THE COUNTRY’S WORKFORCE IS IN AGRICULTURE BUT THEY ARE CONTRIBUTING ONLY 19.8% (2015-16) TO THE TOTAL OUTPUT” Shahid Kazi, Chief Operating Officer, FINCA Microfinance Bank

ices.” This means that when it comes to operations, risk analysis and then profitability, micro finance banks are no different than their commercial counterparts.

Despite low operating rate on the lending side, micro finance banks aren’t any more restricted than commercial banks on the deposit side. The asset side of microfinance banks can only target those who don’t have access to credit or those whose needs are less than or equal to Rs 500,000, but there is no statutory limitation on the amount of the deposits that micro finance banks can have. This allows them room for obtaining high worth clients to fulfill their CAR requirements and therefore operating profitably.

Explaining how FINCA approaches its risk analysis, he said they follow a model in which their branches and officers identify potential areas and type of businesses and then they develop products for them accordingly.

“We have a cash flows-based and the doorstep approach and we want to be seen as a responsible institution. We also don’t want to overburden our customers in terms of deposits and the risk that is faced when those

SBP WANTS 50 MILLION PEOPLE ADDED TO BANKING IN THE NEXT FEW YEARS WHILE FOR NOW THERE ARE ONLY 4.5 MILLION CUSTOMERS. HE ALSO SAID THAT THERE IS STILL AMPLE ROOM FOR ALL THE PLAYERS IN THE MARKET TO GROW, NOT JUST FINCA

deposits are used to lend money. So we reach out through branches and 700 loan officers.”

Cash flow based lending model is the general risk assessment technique for FINCA. “We have skilled people that have been in this business for a long time, so they know how to operate in this market.” he also mentioned that since the model of micro financing is to enable people to earn more, so when the right people are provided money, their earning power increases and so does their capability to pay back the loan amount. “Our motive is to lend people so they can enhance their income so when that happens they obviously get to pay back.”

Shedding more light on the different types of products they have, he said, “We have a product for agriculture. For that we take into account crops, the input costs, risks etc. Looking at the GDP, 42% of the country’s workforce is in agriculture but they are contributing 19.8% (2015-16) to the total output. We are also active in SMEs as the bulk of the rest of the workforce GDP is in micro SMEs.” Answering a question about the financial statements of the bank that show provisions going up, but bad debts going down, he said, “We have a robust recovery system. We are a responsible entity and we do not adopt any such practice that harms our clients but we do have a strict system of recovery.” He added that the bank had been growing steadily. “We operate in 94 cities, with a branch network of 105.”

We can now reach out to a large per-

MICROFINANCE

centage of population.” In the past couple of years FINCA has extended loans to about 225,000 people, amounting to 23 billion rupees. While this success has allowed the bank to expand their operations and bring in more people to the credit recipients category, this has not made FINCA’s risk appetite to go beyond a rational limit. Shahid said, “Evaluating risk appetite depends on how you interpret risk. We are not taking extra risk because that means we are compromising on some principles of being a responsible institution and we might end up burdening our existing customers. So I believe that in our existing appetite, there is ample opportunity.

And within that we can have a diverse portfolio that fits in with our objectives.”

SBP wants 50 million people added to banking in the next few years while for now there are only 4.5 million customers. He also said that there is still ample room for all the players in the market to grow, not just FINCA. Regarding SBP’s role in promoting financial inclusion he said, “SBP has established an effective regulatory framework, so they deserve the praise for that but the potential of the sector as compared to where we are is still very wide.”

Talking about the recent growth experienced by the bank, he said, “The growth that has come is because of the base figures, the sector isn’t that old. Even a 100 percent growth wouldn't be surprising. There are still challenges like lack of investment in HR, technology and processes for example but once these issues are addressed they will allow for even higher growth.”

FINCA has also partnered with FINJA on a mobile app Sim Sim, that will serve as a mobile wallet and can be utilized by the un-

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THE ASSET SIDE OF MICROFINANCE BANKS CAN ONLY TARGET THOSE WHO DON’T HAVE ACCESS TO CREDIT OR THOSE WHOSE NEEDS ARE LESS THAN OR EQUAL TO RS500,000, BUT THERE IS NO STATUTORY LIMITATION ON THE AMOUNT OF THE DEPOSITS THAT MICRO FINANCE BANKS CAN HAVE banked population. The unbanked population however is not that well versed in technology so it might be difficult for them to understand a mobile wallet but Shahid is quite optimistic about the potential of the app.

“A lot is changing in a non-conventional way. Once upon a time we had Kodak reel with 36 pictures capacity and now every phone has a camera. The present time is digital. First youngsters endorsed technology and now parents are doing it too. So the opportunity we see in here is that in Pakistani banks there are very few people, but 39 million people have connections of 3G, 4G handsets.”n he explained.

Brick and mortar traditional ideology is not being completely eliminated but it is changing. So far banking has been serving the ‘need to borrow’ but now they can move on to other needs of financial inclusion as well.

He added, “The app is very easy. Few days back I was listening to BBC radio and they were talking about mobile phones.They installed tracking device on phones to see how many times one person checks his phone, some did it 60-70 times a day” FINCA is among the few banks to have received the certificate for customer rights’ satisfaction. This means that they are open to facilitate the people who are scared to come

to a bank because of the sort of treatment they might get. For that they hold such session in 5-6 places each year.

Talking about the potential effects on the economy due to FinTech’s addition in FINJA’s operations, he said, “People saving in microfinance banks leads to capital creation in the economy and has spillover effects including employment because we lend it out to under-banked areas”.

FINCA has a mixed portfolio with operations in agriculture lending, rural, urban, and micro SMEs among others and is also globally focused on women empowerment and women inclusion.

On the competitors’ landscape,several factors are aiding them in remaining ahead of the curve. With and aim to digitize everything, improving time management FINCA is able to achieve better product development and as a result also consolidate the bank’s operations.

“If the customers come towards digital side, we will have the advantage before our competitors do because we have already started moving in that direction, and I see that happening in the near future. Furthermore, our platform Sim Sim is network agnostic, so it can be used on any mobile operator, any smartphone.” Currently the app is in pilot phase and is waiting for approval.

Talking about the future of the industry, Shahid said, “The perfect storm is there for digital banking as lots of good things are happening like SBP outlining a vision of serving 50 million customers by 2020 and microfinance banks have the potential to chase that.

A lot need to be done from the country’s perspective. SMEs, micro SMEs and agriculture are the backbone of the country so it is important to work there.”

Currently SBP regulates microfinance banks by the maximum amount they can lend. Over time it has increased. Recently it was increased from Rs 300,000 to Rs 500,000 and the SBP is considering its revaluation again. So there will be more room to grow as the amount is increased. n

MICROFINANCE

The cycling scene in Karachi is picking up due to an improved law and order situation and the trend of cycling groups has also helped old cycle sellers of the famous Jackson Market By: Aisha Arshad

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ust a kilometer ahead of Native Jetty Bridge on the left side of the road opposite KPt port, the historic Jackson Market is located. Established in late 1970’s it is Famous for its second hand, imported and reasonable goods.

It was sunday and Karachi had witnessed a heavy rainfall the day before..

Mostly businesses in the city were closed due to the expected rain again. However, for Jackson Market sunday is that time of the week when the prospect of sales is highest. the market street was damp and remains of the previous day’s rain stood in form of small puddles, which allowed walkers to test their hop scotch skills but did not stop the visitors or the owners to carry out their sunday shopping spree.

In the second lane of the left side of the market, a metallic, rusty gate was half opened. this gate directs towards a small alley and a tall bearded man was welcoming his customers inside the gate where his shop is located in the first room on right. ‘’this [cycle] is for Rs 28,000,’’ Ghaffar Khan, standing in his small bicycle shop, told his customer. the tall, bearded Khan is in his early 50s and runs the second hand yet ‘’imported’’ – as he emphasizes – bicycles’ business since the last 16 years in Jackson Market, Karachi. the 144 sq feet room which Khan is using as his bicycle showroom has recently started to fill with customers, a scene which according to Khan was hardly seen a couple of years back. He says, ‘’Now young and educated people have started to show interest in cycling, they have come to know that

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there is a cycle market near Kemari and they frequently visit us.’’

While we were interviewing Khan who is famously known has Ghaffar Mama – a term used for uncle – about four to five customers visited his shop in less than 10 minutes. some were told that their picked item had been sold while others explored through the various types of cycles that Khan displayed, all in all Khan was having a rush hour on this wet day – the reason why all of the market was opened.

Khan’s shop is one of the many in Jackson Market that have recently started to sell a greater number of cycles due to growing interest of Karachiites in cycling. this, some say, is on the back of improved law and order conditions while others claim it’s because of the formation of various cycling groups in the city.

BOTH GROUPS CLAIM TO HAVE A SEPARATE TARGET CUSTOMERS DUE TO THE VARIATION IN PRICE RANGES, QUALITY AND LOCATIONS Critical Mass Karachi (CMK), Chain Reaction and others are famous cycling groups recently formed in Karachi. the idea behind these groups was to mainly promote cycling as an alternative and healthy commuting mode as well as a healthy lifestyle.

However, over time, these groups proved out to be much more useful than the planned aspect. they have helped in reviving the cycling tradition in the city and it’s becoming common for Karachiites to witness cyclists roaming around in the city. such groups initially comprised of a few people but now they have expanded up to hundreds of members who regularly cycle – especially in sunday’s group rides. the same people are now Khan’s potential customers as well. ‘’If someone buys a cycle from me and likes it, he’ll tell others about it. It then brings more business,’’ he explained.

Khan thinks that both the cyclists groups and a better law and order situation helped him improve conditions of his otherwise uncertain business. “People were previously afraid to come this far into the

INSIGHT

market but that has changed now and they are more confident when coming to Jackson,’’ said Khan while pointing towards his customers.

The various cycles – out of which Hybrid and Road Bikes are the most sought after – range within the price of Rs 10,000 to Rs 50,000 and sometimes more. Khan says, it all depends on the customer and how much he wants to spend on a piece, thus the market provides him with the best according to his requirement and pocket.

Seeing the growing interest in cycling, various new businesses have also popped up to cater the cycle enthusiasts of the city.

Cycle Wala (an online shop), Bikestan and Bike Concept (shops in Defence and Clifton) are all the groups of cycle riders who converted their passion into a business seeing the demand and growing cycling trends.

According to Schallim Reuben, Cycle Wala’s founding member – a group that

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‘’NOW YOUNG AND EDUCATED PEOPLE HAVE STARTED TO SHOW INTEREST IN CYCLING, THEY HAVE COME TO KNOW THAT THERE IS A CYCLE MARKET NEAR KEMARI AND THEY FREQUENTLY VISIT US’’ Ghaffar Khan, Owner of cycle shop in Jackson Market

sells and rents second hand cycles – it was an idea that emerged in the minds of three friends who had joined CMK for cycling and saw the growing number of members every day. Eventually the group started its operations in the beginning of this year and so far their response has been positive enough to keep them motivated to grow it further. ‘’Our selling is directly proportional to our stock i.e. if we have more bikes [in-stock]

then more are sold,’’ said Reuben regarding the monthly sales. On an average, Cycle Wala sells 50 percent of its stock in a month and for rentals – given the weather conditions – all cycles are pre-booked on Sunday rides for a rent of Rs 500.

For Reuben and his group cycling is still not a mere business opportunity, they intend to motivate people towards cycling for health and environmental reasons as well. Reuben says that people should indulge more into cycling which will not only promote a healthy lifestyle among the people but also help to prevent the ever increasing traffic in the city.

On the other hand such businesses are competition for the shops in Jackson Market, however, both groups claim to have a separate target customers due to the variation in price range, quality and location.

Khan is confident about his market segment which comprises of mostly middle economic group of Karachi, he says, ‘’They [Bikestan] offer Mountain Bikes for Rs 35,000 whereas we offer a Hybrid for Rs 25,000; that is the difference.’’ Khan also mentioned that the quality of cycles varies too and the people who want to spend more might go to Defence and Clifton shops as they are offering brand new cycles but

CRITICAL MASS KARACHI (CMK), CHAIN REACTION AND OTHERS ARE FAMOUS CYCLING GROUPS RECENTLY FORMED IN KARACHI. THE IDEA BEHIND THESE GROUPS WAS TO MAINLY PROMOTE CYCLING AS AN ALTERNATIVE AND HEALTHY COMMUTING MODE AS WELL AS A HEALTHY LIFESTYLE Khan’s customers will always come to him for comparatively reasonable yet well maintained cycles.

Only time will determine where the cycling trend will head, as of now, Khan is happy with the business growth and plans to

expand his business further with the Rs 2,000 to Rs 3,000 profit he earns on each bicycle sold. While the cycling groups continue to paddle their way in the city, Cycle Wala and Bikestan have found a business in health awareness – a two in one venture. n

INSIGHT

By: Abbas Naqvi

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t’s alright to be a geek, and even better to express the kind of geek you are. Puts you right in the group of people you’d like to be surrounded with. People in Pakistan are beginning to express their likes, beliefs and choices through not only tailor-made T-shirts but via other accessories too.

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enter prisms and paintbrushes What may seem as an anomaly is now a trend. Take a look at a register with the cover page of Pink Floyd. It’s suggestive of your music preference – psychedelic rock.

People want such stuff. They like to express who they follow.

Unlike a famous quote from a Game of Thrones’ character or the album cover of a popular music band, Sadia Gilani - owner of Prisms and Paintbrushes, creates original content for people and tries to strike a chord with her customers’ thinking patterns, using puns and verbiage to incite a certain kind of response.

From funky badges to hardcover notepads to friendship and birthday cards, all the designs are made by Sadia herself, who is concurrently pursuing a bachelor’s in Fine Arts from National College of Arts in Lahore.

“I always loved to draw, but the overwhelming response I got from my first popup shop proved to be the moving force behind Prisms and Paintbrushes,” said Sadia, while showcasing her products at a popular bookstore in Lahore, The Last Word.

Later on in the same year, Crafter’s Expo Karachi also gave impetus to Sadia to carry on with her business idea as she saw a lot of artists exhibit their work.

Starting with merely Rs 11,000 as a loan from her father, Sadia quickly broke even and made sure that she could finance the future of the project herself.

who’s the target?

One very clear impression that you get from

starting off Prisms and Paintbrushes was launched in January 2013, after Sadia had a successful pop-up shop stint at an exhibition organized by late Sabeen Mahmud at The Second Floor (T2F) in Karachi.

From Funky badges to hardcover notepads to Friendship and birthday cards, all the designs are made by sadia herselF, who is concurrently pursuing a bachelor’s in Fine arts From national college oF arts in lahore cover pages suitable for both sexes, and a couple of products for men only; carrying taglines such as ‘Manly Notes’.

pricing strategy and business model Sadia has decided to have a mix of both when it comes to pricing: cost plus pricing and competitive pricing.

While the major determining factor is looking at the products made

by Prisms and Paintbrushes is that they are mostly for the fairer sex, perhaps a disappointment to some.

Sadia, however, defends her stance by saying, “I like to do what I can relate to myself.

That’s what I love to do, and yes it’s mostly for teenagers but people in their 20s and 30s are also my customers.”

She has introduced a few unisex products too, with

entrepreneurship

the cost, Sadia keeps in mind the prices of her competitors (average bookshops and stationery shops) so as to make sure she can offer a better quality product at a relatively lower price.

Badges are priced at Rs 200, small notepads at Rs 300-350 and big notebooks at Rs 800, amongst other products such as cards.

According to Sadia, pop-up shops at exhibitions account for the highest sales, followed by orders through her Facebook page and lastly, other bookstores such as The Last Word and Haryali Store in Defence Housing Authority Lahore.

Her bestselling products are notepads and badges. Sadia does everything herself except for the printing which is outsourced to local printers in Royal Park, Lahore.

Diversification and Expansion “I’m not sure if I’ll have enough funds to open a brick and mortar shop to sell these products, but I’m definitely planning on bringing more products to my current portfolio,” said Sadia.

Sadia is planning to introduce detailed planners, calendars, enamel pins, tote-bags, and notepads with checklists to increase the variety of products she is offering.

She also has another business named: Absolutely Booked. It’s a book subscription box service, wherein, a new theme is announced every two months and people order the box if they like the theme. The box contains a newly launched Young Adult original novel, following the theme of the box and other accessories such as

“I’M NOT SURE IF I’LL HAVE ENOUGH FUNDS TO OPEN A BRICK AND MORTAR SHOP TO SELL THESE PRODUCTS, BUT I’M DEFINITELY PLANNING ON BRINGING MORE PRODUCTS TO MY CURRENT PORTFOLIO” Sadia Gilani, owner of Prisms and Paintbrushes

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scented candles, bookmarks and stickers.

Her first book subscription box was launched in July this year and carried the book ‘Harry Potter and the Cursed Child’, along with several Harry Potter themed products. She managed to sell almost 200 of these boxes.

Challenges faced by women entrepreneurs “The biggest challenge I have faced is the outright harassment by men when I go to get my designs printed,” Sadia lamented.

She recounted her experience of dealing with different men, who, upon learning that she worked alone, started harassing her through calls and messages and inappropriate advances.

“They would offer me drinks and sweets, which I would politely refuse but then they would make sure I paid for the refusal by ruining the work they were supposed to do,” said Sadia.

This process of being harassed by a printer, refusal to deliver the right quality of product, and as a result trying to find a new, better printer is what impels women to shun entrepreneurship of such a nature and instead work at a reputable organization.

“This patriarchal society is blind to the urgent reforms that are needed to safeguard women entrepreneurs so that businesses can thrive in the country, instead of living in constant fear of men who will not work with you if you don’t get frank with them,” said Sadia.n

ENTREPRENEURSHIP