RESEARCH BY BUSINESS RECORDER RESEARCH
TEXT (February 01 2010): INTRODUCTION: Launched nearly 45 years ago, Pakistan's oldest daily newspaper on business and finance, Business Recorder is today one of the leading newspapers in the country. Also widely known as BR, its news coverage in particular is known for comprehensive sweep of economic policymaking, corporate developments and market trends.

In this Industry Review 2009, we seek to provide you an in-depth analysis of various sectors/segments of business and finance in relation to their performance, challenges and prospects. Our assessment is based on our objectivity of opinion, the originality of our insight and our advocacy of economic freedom and fair market competition in the country. Enjoy! Editor

CONTENT:

ECONOMICS

STOCK EXCHANGE

BANKING

ENERGY & ELECTRICITY

TELECOM

AGRICULTURE

TEXTILE

MEDIA & ADVERTISING

CONSTRUCTION

PHARMA & HEALTH

EDUCATION

TEA

INTERVIEW

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ECONOMICS: Economic Stabilisation agenda not exuding normalcy

An old car driven at a speed of 50-km per hour seems to function well, but if raced at 120-km/h, it starts rattling, with parts making strange and sometimes alarming noises.

The story of Pakistan's economic recovery earlier this decade is similar to that of an old car. When growing at 2-3 percent it felt too stagnant. Then the economy got a booster from external inflows and sped with a growth of 6-7 percent in the last few years. But then came the noises with external balances, inflation and in turn fiscal deficit, all of which soared to alarming levels.

This decade of economic boom was concentrated more in the service oriented sectors - telecom and financial sector, while not much was done to enhance the indigenous demand and promote exports. The brunt of global financial crises pushed Pakistan at the verge of default in 2008 with foreign exchange reserves sharply depleting by 59 percent to $6.7 billion in the span of just one year to cover mere two months of imports in October 08 from seven months of cover, a year earlier.

This forced the country's economic managers to go the doors of IMF for bailout package and enter into IMF program with a standby facility of SDR 5.17 billion ($8.07 bn) in October 08 which was later enhanced to SDR 7.24 billion ($11.30 bn) to curb the balance of payment crises.

After remaining stable at around Rs60/$ mark for number of years, the rupee fell sharply by over 25 percent to Rs84-85/$ in just a few months. The stock market, which had crossed 15,000 points in April 2008, was reduced to mere 5000 points in less than a year, despite three months price floor.

Real economic growth, as measured by the GDP, was reduced to mere average of 2 percent in FY08 and FY09, after exhibiting an average of 6.6 percent in the preceding five years. Inflation peaked to 20.8 percent in FY09 versus an average of 8.3 percent in the previous five years, as global commodity prices surged before the global financial crises shoved food and fuel prices lower.

The twin deficit problem, with external and fiscal imbalances ballooning to 8.3 and 7.6 percent respectively in FY08 leaving the economic managers helpless. There was no other way out than to entering into IMF program and follow its directives.

Ever since Pakistan got in IMF's program amid a gradual recovery in global economy, macroeconomic indicators have started showing some signs of recovery -- the current account gap and fiscal gap being reduced to 5.1 and 5.2 percent respectively.

This process continued in the first half of this fiscal year and likely to improve in near future; inflation is reduced to half, reserves are over $15 billion to cover six months of imports, twin deficits are expected to remain curtailed - especially the current account deficit is likely to be reduced to 2.5-3 percent of GDP in FY10. Even the benchmark KSE touched 10,000 points in January 2010 - its highest level in 17 months.

However, growth, especially the manufacturing sector, still remains a point of concern. Some argue that IMF led tight monetary and fiscal policies are not a right model for the economy. When the developed world and developing countries, including India and China, are doing all sorts of tricks to stimulate economy, the curbing of demand will facilitate the capital flight. And this has already started to happen with a lot of high net worth individuals taking their investment to the Middle East.

Although, there are arguments against running tight monetary policy as until of late private sector credit was on constant decline, tight fiscal policy by curtailing subsidies was a necessary evil. But more importantly institutional reforms initiation by IMF is the right step in the right direction.

The country's tax-to-GDP ratio remained stagnant at 9-10 percent of GDP in the last decade while our neighbour India enhanced it to over 15 percent. Its only time that tells the strong claim of Finance Minister Shaukat Tarin who plans to enhance the tax-to-GDP ratio to 20 percent by 2020.

As termed by the chairman of the government's Advisory Panel of Economists, Dr Hafiz Pasha, Pakistan is a 'war economy'. "The cost of terrorism comes to around Rs700 billion or roughly 5 percent of the GDP" said Pasha, adding that the costs are in excess of aid including the Kerry-Lugar Bill.

Unfortunately, this war on terror is undermining the efforts of economic reforms, at least in the short to medium term, by not only ballooning fiscal spending but more importantly hurting the investment climate for both domestic and foreign investors. Thus, slow process of economic easing with real interest rates well in green has a profoundly negative impact on both the demand of private credit and banks' reluctance to lend to the ailing industrial sector.

The State Bank of Pakistan -- which sharply increased policy rate by 450 bps in the span of nine months to 15 percent in 2008 to curb import demand and put reigns on inflation -- has not eased interest rates enough, as critics argue, to meet the needs of the industry.

Since the start of monetary easing in April, SBP has reduced it by 250 bps. Some says that SBP is functioning at the directives of IMF. However, it's the constraints on fiscal financing that is primarily limiting the money managers to cut rates further despite the fall in inflation and relatively better external account position.

The silence on FoDP pledges, delay in USA's Coalition Support Fund, inability to attract foreign private investors, and IMF's limits on high powered money creation, has shifted the onus of fiscal gap financing on the shoulders of domestic savers, which is also on decline. Thus, to attract domestic money, a lucrative rate on government bonds and securities has to be maintained that hinders SBP to aggressively cut policy rate.

Lately, mild recovery in some industrial sectors has created demand for private credit from banking channels. This coupled with the increase in lenders' confidence, has made crowding out of domestic investment a loud and clear phenomena. The fate of this recovery is now contingent upon foreign flows including FoDP, US Coalition Support Fund, the proceeds from Kerry Lugar Bill and other multilateral agencies.

Nonetheless, this recovery thesis is for the short term to run the economic machinery in coming quarters. The lack of institutional reforms and justice at the time bleak security situation has forced domestic and foreign long-term investors to shelve their business plans. Lately, there are indications that domestic businesses are moving to less developed but more secure and investment friendly neighbouring countries.

Even if these indicators suddenly turn positive by some miracle, the long-term socio-economic indicators of a healthy economy - equitable resource allocation, poverty eradication and infrastructural development - will stay depressed if the politicians of past, present and the future remain short sighted.

An engine overhaul is direly needed to ensure a smooth ride at a faster speed. The structural changes, institutional reforms and improvement in governance - economic justice must balance the bettering of macro indicators. Surely, Pakistan doesn't need another round of lost decade, as one senior economist put it, when the institutions remained stagnant despite high GDP growth.

Investing for a prosperous Pakistan

Procter & Gamble was established in Pakistan in 1991 and since then, the Company has grown to become one of the leading consumer product companies serving the Pakistani consumers with premium quality brands and a series of community development programs. As a global company with over 170 years of history, P&G has built a rich heritage of touching consumers' lives with brands that make life a little better every day. For the past 18 years, P&G has strived to bring to Pakistanis, consumers brands that meet their everyday needs and improve the quality of life. Today, many P&G brands, including Ariel, Safeguard, Pantene, Head & Shoulders, Pampers and Always, have become famous household names.

Since its inception in Pakistan, P&G has made significant investments in multiple avenues including industry, community programs and human resource development. P&G's continued investments have helped improve the risk profile of Pakistan, setting a positive example for other multinationals to consider making investments in the country.

The journey of P&G investments in Pakistan began in 1994, shortly four years after its inception, with setting up of a soap manufacturing plant at Hub, Balochistan. In 2004, the P&G Pakistan Hub Plant started producing PuR, a water purifier making, this P&G Plant the first of its kind in the world. To date, P&G Pakistan Hub Plant, through the production of PuR, has provided over a billion litres of clean drinking water across the globe to communities in need.

In 2008, P&G announced an investment of approximately $100 million in Pakistan with the groundbreaking of its second manufacturing plant facility at Port Qasim Authority (PQA), Karachi. The Company has acquired 25-acres of land with a long-term vision to set up plant facilities for a range of P&G products. The facility will be set-up in two phases. The first phase - the laundry detergent manufacturing facility is expected to commence operations in 2010 followed by the diaper plant in phase two.

P&G's investment in a manufacturing plant at PQA is its largest single investment in the country, to date, and will bring FDI amounting to $100 million into the country. Through this plant P&G will bring about significant import substitution and create around 7000 direct and indirect job opportunities. In addition to bringing in the latest P&G technology, the plant will realise extensive local skill development as P&G experts from all over the world train Pakistanis to set-up and operate the plant.

P&G strives to fulfil its purpose of improving the everyday lives of Pakistani consumers not only through its brands but also its various community programs. Keeping in view the Country's needs in the area of health and education, P&G currently has several community development programs which have helped improve the lives of around 5 million Pakistanis in 2008-09 alone.

Under its global corporate program 'Live Learn and Thrive' P&G Pakistan has focused on the development of Pakistani children in need between the ages of 0 - 13. Several P&G programs are currently empowering Pakistani children with a healthy start to life, access to education and skills for life.

P&G Pakistan is setting up an orphan home in Islamabad called the "P&G Home" - in partnership with SOS Children's Villages of Pakistan, to promote the well-being, education and housing of Pakistani orphans. "Keeping the HOPE Alive" is a P&G Pakistan initiative through which 60 informal P&G-HOPE schools are operational across Karachi and Thatta. More than 2,000 children studying in P&G-HOPE schools are gaining primary education in their own neighbourhoods for free.

P&G Pakistan has also partnered with READ Foundation under the "Safe Schooling For Building Futures" initiative, immediately after the October 2005 earthquake. Through this partnership, P&G Pakistan and READ Foundation have built two purpose-built, seismic compliant schools in Azad Jammu & Kashmir, imparting quality education to more than 2,000 students. The talented children studying at P&G-READ Foundation schools have time and again delivered excellent academic results in national examinations. Encouraged with the success of this program, P&G recently established the third P&G-READ Foundation School in rural Islamabad which started operation in 2009.

P&G's corporate philosophy of touching and improving lives is inherently imbued in its brand efforts as well. Since 2004, the Safeguard "Sehat-o-Safai" initiative in partnership with Pakistan Medical Association and Infectious Diseases Society of Pakistan has empowered more than 5 million children in over 14,000 Pakistani schools with hygiene education, sharing the importance of hand washing with soap in preventing infectious diseases. Moreover, Safeguard has also embarked on a mission to build sanitation facilities in 100 primary schools in Pakistan within 100 days, in partnership with Save the Children. This project will benefit 40,000 school children in Quetta, Karachi and Lahore by providing them improved sanitation facilities and health and hygiene education.

The Pampers-UNICEF campaign has so far donated approximately 800,000 vaccines to help save the lives of new-born babies and mothers across Pakistan. Whether at their doorsteps or in hospitals, the Pampers Hospital Education Program and Babycare Mobile Clinics have to date educated 5.6 million Pakistani mothers about health baby care practices.

The P&G Always brand is also making a significant investment in the area of health and hygiene through its school education program, Aagahi. The program is conducted in partnership with the Society of Obstetricians and Gynecologist of Pakistan and World Population Foundation, educating young girls about good health and hygiene habits and coping with the pressures and demands of growing up. To date the program has reached over 4 million young girls in schools across Pakistan. The Always Mothers Education Program has educated over 600,000 mothers on how to help their daughters cope with the changes they face as they grow up and the current "Always Girls Can" mega TV show is a part of the brand's mission to encourage confidence building amongst young girls so that they realise their true potential.

Employee volunteerism is an integral part of all P&G community initiatives, bringing to life the different causes supported by the Company. P&G Pakistan employees enthusiastically participate in the numerous causes that P&G is committed to by investing personal time and energy. Over the past two years, P&G Pakistan employees have volunteered their time, effort and skills in building confidence and communication skills and simply spending time with the children benefiting from P&G community projects. Amongst their many endeavours are interactive visits to one of Pakistan's oldest school for the hearing and vision impaired - Ida Rieu, guided tours of students of P&G-HOPE schools to educational places and painting of the P&G-READ schools in the earthquake affected regions of Muzaffarabad.

P&G strongly believes in local skill development and enabling employees to realise their true potential. The talented pool of P&G employees is one of the Company's greatest assets; in Pakistan, the Company employs approximately 300 people, 99% of whom are Pakistanis and creates more than 4,000 jobs through its wide distribution networks. To date, more than 40 P&G Pakistan employees have been transferred abroad and are currently working on challenging international assignments in the Company.

P&G Pakistan's Summer Internship Program has become the key source of future talent for the company, ever since its inception. It gives young and aspiring students across Pakistan the unique opportunity to work in the Company, undertaking real-life projects. The internship program reinforces P&G's commitment to developing human resource in Pakistan as it invests in preparing future leaders by recruiting and developing Pakistani talent year in, year out.

P&G Pakistan will always have the prosperity of Pakistani people at the core of its financial, corporate and social investments because doing business is a means to achieve the P&G purpose- which truly is to improve the quality of life for Pakistanis, now and for generations to come.

STOCK EXCHANGE: Much between KSE's ebbs and flows

At the Karachi Stock Exchange in 2009, it was the worst of times; it was the best of times. After having being haunted by echoes of silence that prevailed in the last quarter of 2008, the market dropped sharply at the start of the year.

The removal of price floor sent the market tumbling to 4815 points by January 26 -- its lowest since September 2004. Although, the KSE-100 index nearly doubled from its lowest level to 9377 points by the year's close, it is still down by 33 percent in the last two years.

Another depressing factor for the market is the continuous decline in average daily volumes that was valued just $90 million in 2009 versus $290 million in the preceding year (excluding floor period). In its heydays, KSE's cash market saw average daily turnover of $400-600 million.

Interestingly, however, April 2009 changed the foreign portfolio directions; firstly by halting the spree of outflows in first quarter following which foreign inflows remained muted for three months. Finally, after foreigners started buying in August, volumes at the bourse gradually started picking up in September. Yes, it's the foreigners who set the direction for Pakistani equity market, albeit, ironically, empirical evidence suggests that they are normally wrong in reading the market's direction.

After the exclusion of Pakistan in emerging market index, thanks to floor imposition, at the end of last year, it rejoined MSCI's Frontier Market Index in May. Although, Pakistan was second best performer, after Sri Lanka, within that index of 25 markets, it couldn't match the top emerging economies including India, China, Brazil and Russia.

In terms of price multiples; KSE is at a high discount to both its own historic peak and its historic discount to regional markets despite better dividend yield in the offing during 2010. The bleak security situation, constant depreciation of Pakistani currency and economic stabilisation at the helm of foreign flows justified this anomaly.

Aside from this anomaly, there are other fundamentals factors that show trouble ahead. The old economic philosophy that supply creates its own demand is questioned in the aftermath of the global financial crises. To get out of these complicated financial instruments, the basic demand of the modern world - food and energy - is the order of time.

No wonder, hedged demand has yielded healthy returns to investors in food and energy sectors in the outgoing year. This coupled with high dividend yield amid low leverage, allowed energy exploration & production firms (151% return), fertilizer (113%) and power generation (78%) companies steal the show at KSE.

Despite favourable movement in crude prices, the circular debt curtailed the gains, especially in oil and gas marketing companies (50%) and to some extent the refineries (88%). Commercial banks which were the star of pre-crisis days managed to move in tandem with market. However, they lacked the focus in their core business and remained busy filling the fiscal appetite of the government.

But given the heavy weight of E&P and other high performers in the index, KSE-100 gained 60 percent during the year in spite of the relatively poor performance of less weighted and less important industries.

There is no doubt on the need to boost infrastructure including dams, roads and low income housing schemes. But tight liquidity amid fall in purchasing power changed the priorities, as cement (9%) and chemical (45%) significantly underperformed the market.

The change in consumption pattern and shortage of credit to consumers could not be more visible than the auto sector which underperformed the market by 38 percent last year. And, although cellular companies are not listed in telecom sector as such, saturation in the cellular market was visible through PTCL --- which also owns the cellular subsidy, Ufone - that drove the sector's underperformance.

In upcoming months, the market may continue its current rally based on foreign flows both in equity market and the overall economy. But, the absence of leverage product (i.e. Badla) will keep the volumes under pressure.

Higher fiscal deficit owing to war spending and lack of financing avenues will not allow money managers to aggressively cut discount rates, hence the valuation of scrips may not improve at the stock exchange, where as the imposition of capital gain tax may also dampen investor confidence near the budget.

BANKING: Banks found lacking on commercial banking

The banking sector in Pakistan was sailing smoothly with quality assets generating an average return of equity of 21 percent between FY04-FY07. Bad loans were at mere 7.2 percent of total advances at the end of 2007. However, the balance of payment crises that stemmed in later part of 2007 had most profound impact on the banking sector, as ROE sharply dipped to 7.8 percent in 2008 with toxic assets ratio soaring to 10.5 percent.

The misery for banks continued in 2009; although the return for shareholders marginally improved to 9 percent, toxic assets ratio surged further to 12.4 percent by September. Despite the fall in bottom line and deterioration in assets quality, prudent regulatory checks and retention of equity for past many years, capital adequacy ratio of banks continued to improve in the last two years. The Capital Adequacy Ratio (CAR), which was standing at 11.3 percent in 2005, improved to 14.3 percent by September 09.

The key ratios may imply a mixed year for commercial lenders in 2009, but the worrisome fact is the shift in banks' assets allocation lately. Although, the shift might not impact industry numbers in the short to medium term, but it has a significant impact on real economy which is dependent upon banking borrowing.

Mind you, banks' presence in agriculture, SMEs and low to middle income households was never exciting in Pakistan. But, their bread and butter were corporate, which constitutes 60 percent of their lending portfolio.

Yet, in the last twelve months banks have not been effectively lending to industrial sector. Instead they are happy off earning from this side business called investments while the government keeps on gobbling up private sector's share in total credit.

In 2009, the deposits of banking system increased by Rs521 billion (14%), out of which only Rs121 billion on net basis were deployed in advances, as virtually all the incremental supply was used to plug the government revenue-expenditure gap.

The investments (read government borrowing) increased by Rs659 billion (68%) in 2009, while on the other hand, advances-to-deposits ratio declined by 590 basis points to stand at 69.6 percent in the first nine months of 2009.

This explains the grim position of Pakistan's economy, where commercial banks are merely routing the liquidity emanating from foreign flows, commodity operations and private domestic savings to finance the government machinery and security related expenses.

For the first nine months banks were reluctant to lend to corporate and individuals owing to skyrocketing bad loans amid lack of demand from industries who were avoiding high financial charges.

But, with some sign of economic recovery, lately, with inflation tapering off amid marginal growth in large scale manufacturing sector, the demand for corporate credit gradually rose. However, attractive rates offered by government bonds still remain lucrative enough - wooing banks to put depositors' money in low risk papers instead of meeting the demand of private sector.

Yes, it's crowding out. Mind you, one main reason for bank's persistence reluctance to lend private borrowers despite signs of demand for latter is surge in toxic assets ratio, as NPLs to total advances, surged to 12.4 percent in the third quarter, after remaining stagnate during the second quarter at 11.5 percent.

Let's revisit a basic undergrad course called 'Commercial Banking 101'. The job of bankers, primarily, is to channel money from the hands of savers to that of private investors, while earning decent spreads.

But Pakistani bankers haven't been doing that of late; they have been mostly channelling private savings to public investment i.e. the government. Here comes the role of the regulator to streamline banks' core business. But then, there is little hope of remedy when the central bank, under the influence of a government shepherded by the IMF, is running a monetary policy in support of excessive government borrowing.

To avert this behaviour and to spur demand, the central bank not only reduced its policy rate by 250 bps to 12.5 percent in a staged manner but also relaxed the forced sales value benefit for the commercial banks.

The State Bank of Pakistan allowed banks to net off its provisioning against bad loans by 40 percent of FSV on industrial land and building and enhance the benefit of 10 percent to 40 percent of FSV on pledged stocks, residential and commercial properties.

The impact on banks' profitability by the relaxation of 40 percent of Forced Sale Value on industrial land and building is just a fraction of benefit that could have been accrued in case the central bank had allowed the inclusion of other industrial property i.e. plants and machinery.

However, incorporating the additional benefit of 10 percent of FSV on pledged stocks, residential and commercial properties, the impact is meaningful for some banks. (See table for the impact of reversals in provisioning for nine top listed banks)

In addition, SBP also allowed banks to reschedule the loans classified as substandard to regular category and doubtful to substandard category. The benefit will be attained in a staged manner under certain conditions. Initially the provisioning for substandard will be reduced by 50 percent and doubtful by 25 percent. However, the benefit is allowed to be booked only in equity and not a reversal in profit and loss accounts.

The impact of these benefits has yet to be seen, as most banks would start booking its impact from the last quarter - numbers not released. The bottom line of these lenders, as a result of tough economic conditions, turned weak during the period. Net profits of top 10 commercial banks declined by 9 percent year-on-year for the Jan-Sep period, as net interest income of the banks remained sluggish -- exhibiting a growth of mere 19 percent.

While this is explained by poor lending performance, a more concerning element is the increasing share of core earnings in operating revenues by 270 bps to 73.1 percent in the Jan-Sep for all banks - non-interest income fell by 6 percent, year-on-year during the period.

This either implies bankers' inability or lack of business opportunities to generate fee commission and other income. However, to the good of banks, they managed to operate more effectively, as cost-to-income ratio declined by 20 bps to 50.1 percent by September for overall sector.

This performance points to the most worrisome fundamental of banking industry that mirrors the performance of overall economy, especially the corporate sector. Wounds from non-performing loans are getting even worse in consumer sector than in corporate segment, but the formers' overall performance is still better than the latter.

Bad loans provisioned for the corporate sector mounted to 12.7 percent, up 377 bps between Jan and Sep 2009, with about 61 percent share in total advances. On the flipside, consumers who behaved much better in first quarter could not maintain it in next six months, with NPLs rising 420 bps to 11.1 percent, with 9.1 percent share in total loans.

Within the corporate sector, the toll of bad loans in textile segment (nearly 30% of total NPLs) increased by 597 basis points in nine months to stand at 20.6 percent by the end of September 09, followed by energy sector with 358 bps increase in NPLs to 7.0 percent.

This clearly mirrors the fragile picture of macroeconomic stability, as falling textile exports and acute power shortage are the biggest impediments to economic growth. Likewise, the cement sector also seems ailing, with NPLs rising 450 bps between Jan and Sep to 11.1 percent.

On the other hand, the farming sector that saw an improved growth last fiscal year on the back of higher wheat support price and bumper cash crops, has been relatively shielded from the bad loans problem. Data shows that agribusiness sector NPLs declined by 64 bps to 8.3 percent during the period.

Although, overall bad debts ratio remained stagnating in the second quarter, the infection ratio of non-performing loans jumped by 90 bps to staggering 12.4 percent in June -Sep-- leaving the proponents of recovery thesis perplexed.

Absolute growth in bad loans, including that by specialised banks, almost remained at the same level (6 percent) as in the first half; while that by commercial banks (as per raw data) reduced from an average of 9 percent growth to 4 percent in third quarter. However, decline in loans growth (1.8%) versus an increase of 5 percent in the second quarter caused the bad loans ratio to march upwards.

The worrisome fact is that a substantial part in overall NPLs occurred in the last category - payments overdue more than one year. This explains the over 5 percent increase in provisioning during quarter ending September. Although, the relaxation in FSV benefit may put brakes to the growth in provisioning for the last quarter of this calendar year, the deterioration in balance sheet quality will keep the aggressive industrial sector lending at bay.

However, with LSM index showing marginal growth in October and credit to private sector in green during the second quarter, the disbursement of multilateral and bilateral aids and soft loans and chances of monetary easing in the first half of 2101, some improvement in non-performing loans cannot be ruled out.

=========================================
Increase in EPS after FSV benefit
=========================================
EPS 1HCY09      (Rs)    (Rs)   Annualized
                                    Impat
=========================================
ABL            4.30      0.74          9%
AKBL           1.15      0.96         42%
BAFL           0.94      0.57         30%
FABL           0.35      0.66         94%
HBL            7.20      1.82         13%
MCB           11.22      1.94          9%
NBP            5.84      0.80          7%
NIB              NA      0.49          NA
UBL            5.03      1.71         17%
=========================================

Source: Latest company reports, SBP & BR Research

ASSUMPTIONS:

Relaxation of FSV by 40% on industrial land and building is on all corporate loans

he 10% additional benefit on non industrial FSV is computed as difference between the required provisioning in the absence of any FSV benefit and actual provisioning

-Only 15% of collateral is industrial land and building and the rest as residential, commercial, pledged stocks and industrial other property

Normal tax (35%) is applied on reversal of NPLs provisioning

A comprehensive NBFC

Recently, the NBFC Sector of the country witnessed an important development. Al-Zamin Leasing Modaraba and Al-Zamin Leasing Corporation Limited merged with and into Invest Capital Investment Bank Limited (ICIBL) by completing all regulatory and legal requirements. The merged entity shall operate under the brand name of Al-Zaamin InvestBank and include the major business streams of all the merging entities.

The recent merger has resulted in building up an equity of about Rs.1,000 million and assets of Rs.8,000 million. It is in fact a carefully planned synergy of two professional groups to consolidate their operating skills, management capabilities, product range and valuable clientele in order to meet the current challenges of the marketplace. The regulators all over the world and also in Pakistan have been encouraging consolidation of financial institutions in order to increase risk management capacity of the financial sector.

In line with the commercial banking sector, non-banking financial institutions have also been trying to join hands with a view to increase their equity and income streams. Al-Zaamin InvestBank is a practical example of implementation of the aforesaid policy supported and facilitated by the regulators.

Al-Zamin Leasing Modaraba with its track record of eighteen years has been a significant member of the Islamic financial system. Building up its balance sheet on prudent and progressive pattern, the Modaraba pioneered important Islamic products. For example, it developed and floated Musharakah-based Term Finance Certificates for the first time which were widely appreciated and subscribed in the market. It also designed specific leasing products for small, medium and energy sectors. The Modaraba over the time acquired Ghandhara Leasing Corporation Limited, First Professionals Modaraba and International Multi Leasing Corporation Limited and merged their operations in order to enhance its size.

Al-Zamin Leasing Corporation Limited (formerly Crescent Leasing Corporation Limited) was incorporated in 1987 as a public limited company. The name of the company was changed to Al-Zamin Leasing Corporation Limited from Crescent Leasing Corporation Limited with effect from 6th February, 2008. The prime business of the company was leasing and investment finance services. The company had a large equity and asset base comprising of finance leases, operating lease portfolio, finance credit, investments and corporate advisory products and services. The Universal Leasing Corporation Limited was merged with and into Al-Zamin Leasing Corporation Limited during the year 2007-08. The company has eight branch offices throughout the country which are providing various services to our clients.

Invest Capital Investment Bank Limited generally known as InvestBank has also a track record of very successful operations of over thirteen years and provided multifarious services in the field of investment banking. It has a diverse client base which includes financial institution, public and private sector corporations and high-networth individuals. The bank provides a complete and comprehensive range of financial services which includes equity and debt brokering, foreign exchange trade, corporate advisory and portfolio management.

Al-Zaamin InvestBank will provide all products and services which were being operated by the merging entities. Consequently, it has become a supermarket of the NBFC operations ranging from investment banking, advisory services, brokerage business, treasury operations, portfolio management, financial leases, operating leases and corporate finance, besides offering whole range of Shariah compliant products like Ijarah, Musharakah, Murabaha and Istisna. The Board of Directors and senior management of the bank comprises of very senior bankers and professionals with proven track record and image in the domestic and international financial services. The Chairman of the Board Mr. Zafar Iqbal is a senior bureaucrat having established and managed National Development Finance Corporation with an exemplary successful record of performance. Mr. Saeed Chaudhry is a former President of Prime Commercial Bank.

Mr. Basheer A. Chowdry has more than forty five years of experience in commercial and investment banking in local and overseas assignments of very senior nature. Mr. Muhammad Zahid is a Chairman of the Zahidjee Group which is one of the major textile exporters of the country. Mr. Aamir Saeed is a professional banker with valuable experience with international banking organisations. Mr. Rehman Ghani is a very successful entrepreneur having developed and run successful businesses of various natures in Pakistan and abroad.

Mr. Najib Amanullah is Chartered Accountant from the United Kingdom with a long corporate experience of handling financial matters. Mr. Nusrat Yar Ahmad, the Chief Executive Officer, is a well-known banker who has successfully accomplished important assignments in the investment banking and advisory fields. In fact, the individual and collective caliber of the Board and management will ensure that the organisation becomes a symbol of high quality operations with multiple streams of business, well-diversified risk profile, well-integrated structure and a recognisable presence in all major towns of the country.

The brokerage arm of the bank namely Invest Capital and Securities (Pvt) Limited (InvestCap) is a leading financial management and advisory Company with very successful track record. Its research and market commentaries have continuously earned recognition and appreciation in the marketplace.

Answering a question, Mr. Basheer A. Chowdry, Managing Director of the bank said that the merger of three entities brings manifold opportunities and challenges. He said that the expertise and knowledge built by the management teams of the merging entities brings reservoirs of energy and vision which Al-Zaamin InvestBank has planned to implement. He said that the Bank wanted to establish itself as a leading provider of the services in investment banking, brokerage, corporate financing, leasing and Sharaih compliant products. Being equipped with well-developed infrastructure and experienced human capital, the Bank aims to become a truly comprehensive NBFC with a capability to meet the changing needs of the marketplace. "Our valuable assets" he said; "are our high quality and committed human resource and a large base of important clients. Our challenge is to anticipate the increasing needs of the increasing clientele and to offer the best possible standard of service, efficiency, prudence and professionalism to them. My colleagues in the Board, senior and middle management levels, and their teams, are all committed to achieve this common vision and objectives."

ENERGY & ELECTRICITY: Energy sector needs huge investment

Pakistan's energy Exploration and Production (E&P) sector enjoys extremely favourable dynamics. Successful operational performance of this sector is the key to country's economic growth. The rising energy deficit, high vulnerability to oil prices, and expensive energy import options, all have resulted in significant government attention and incentives for the sector.

The government has been providing improving economic terms for investment in oil and gas exploration through its petroleum policies. Owing to the favorable policies, the Pakistan E&P sector enjoys high FDIs and diversity of local and foreign exploration firms. Several high potential areas in Pakistan's basin remain largely unexplored due to security concerns, whereas the offshore basin, hitherto untapped, also offers attractive exploration opportunities.

E&P sector has outpaced the growth of Pakistan's economy by growing at an average rate of 7.5 percent in the past five years, against the growth of 6.4 percent in broader economy in the same period. Owing to the massive energy deficit faced by the country, the Ministry of Petroleum and Natural Resources has been pursuing the import of gas through pipeline and LNG projects from the neighbouring region that is Iran, Turkmenistan and Qatar. The latter two projects are currently in infancy stage as no material development has taken place so far.

The Iran-Pakistan (IP) Gas Pipe-line, however, has been in the limelight of late. The project cost is estimated at $1.25bn with debt equity composition of 70:30. The target date for completion is 2013 and the pipeline is expected to deliver 750mmcfd gas. For crude price of $70/barrel, local gas fields under Petroleum Policy 2001 in Zone - 1 (Zone-1 is the most attractive zone in terms of pricing) are priced at $3/mmbtu, whereas the recently announced Petroleum Policy 2009 offers $4.62/mmbtu.

Considering the cost of imported gas could go as high 4-5 times that of local gas (and 3-4 times the cost of gas under 2009 policy), the development of unconventional hydrocarbon resources such as tight gas could offer significantly better economic terms to the country. This can come in shape of lower gas prices compared to imported gas, lower inflation, increased employment, lower pressure on balance of payments etc.

Pakistan's oil and gas reserve replacement has been impressive during the last decade. The country has managed a reserve replacement ratio of 196 percent for gas and 230 percent for oil, during 1998-2008. Oil and gas exploration firms have managed to discover 50 percent of country's total oil and gas reserves from 1980 onwards. In the last decade, 18 percent of the country's total gas reserves were discovered owing to significant increase in exploration activity, improved knowledge of the sedimentary basin, and utilisation of better exploration techniques.

The reserve life of oil and gas, however, has been on a consistent decline in Pakistan owing to significant increase in oil and gas production. The country's gas production has more than doubled since 1998, thus the gas reserve life fell from gradually from 35 years in 1998 to 23 years by 2008. The oil reserve life has remained stagnant at 12.5 years.

Of the 26 total operators in Pakistan's exploration sector, 16 are foreign players whereas 10 are local. The exploration and development expenditures carried out by foreign operators have increased by 48 percent to Rs43 billion in FY08 compared to Rs29 billion in FY02. Despite overall increase in oil production of the country, foreign operators' oil production has dropped primarily due to more than two-third decline in oil production by BP.

The story of gas production by foreign operators, however, is much more heartening as it has increased seven times from 88-bcf gas in FY98 to 618-bcf in FY08. The production share has also nearly tripled to 42 percent in FY08 from 13 percent in FY98. The overall share of foreign operators in country's hydrocarbon production has increased from 17.6 percent in FY98, to 40.8 percent in FY08, primarily due to increased gas production.

The single largest deterrent in the oil and gas exploration in Pakistan is the fast deteriorating security situation particularly in Balochistan and NWFP. The fact that out of 150 exploration wells drilled in Pakistan in the last six years, only nine have been in Balochistan and NWFP - mirrors the investors' confidence or the lack of it in these areas.

Oil and gas exploration is a high cost, high risk and technology intensive business and thus require attractive incentives and favourable working environment. Despite having a well defined petroleum policy, Pakistan has failed to attract large investors in the recent years - which would only turn into a reality if and when the security concerns are fully addressed.

Refineries' dilemma not being taken seriously

Refineries by virtue of being in the business of manufacturing petroleum products play a vital role and should be considered differently from other businesses. The oil refineries, whether private or state owned, are one of the strategic assets of our country.

They form the basis of the key support structure upon which a nation is built and run. Oil refineries directly help build infrastructure, support transpiration industry, provide employment's and help build pipeline networks for continuous supply of petroleum products throughout the country. What increases their strategic importance is the fact that they ensure fuel supply for the defence needs and ensure adequate fuel reserves in case of any untoward incidents.

More importantly, refineries also help saving the ever important foreign exchange for the nation - Pakistan saves around $700 million a year on account of oil imports courtesy refineries. Refineries in Pakistan have an annual production capacity of 13 million tons per annum, but unfortunately there efficiency has remained low due to variety of reasons. Their capacity utilisation, which stood near 87-90 percent during FY03-FY08, dropped to 67 percent during FY09, causing huge losses not only to the refineries but to the national exchequer as well.

A part of the problem is that most of the refineries in the country are hydro-skimming refineries and cannot fully exploit the crude by deep conversion. Refineries, for this very purpose were provided with an incentive to upgrade their plants through deem duty which kept varying between 7.5-10 percent between FY02 till now.

It was back in 2009, when refineries' pricing formula was revised and the deemed duty was reduced back to 7.5 percent from 10 percent. This decision invited outburst on the government by the refineries. The refineries consider that the reversal of pricing policy has seriously jeopardised their viability of the existing assets and the future investments. The manufacturers have even to the extent of threatening to shut down the industry if there concerns do not get addressed.

There, however, is another school of thought which believes that refineries are the ones to blame as they failed to invest a single penny in Euro-II implementation which was the purpose of deem duty. The issue is still pending and no solution has been reached yet despite several meeting among the stakeholders.

Refineries in Pakistan generally lack secondary processing facilities and mostly produce high yield of loss making products - which is why they normally operate on lower margins. Another issue affecting the refineries is that of circular debt which restricts their ability to operate at optimal efficiency and to build reserves for future investments.

The Integrated Energy Plan 2009-2022, perhaps, has the best solution for the industry that the refineries should be supported and be given a defined timeline to upgrade their plants which is the only way they can make positive margins. Moreover, hydro-skimming refineries should be discouraged and only those who can set-up deep conversion refineries should be encouraged and allowed.

One hopes that the vital sector is handled with care by the government and that the issues are resolved as soon as possible. But at the same time, the situation also demands refineries to be more responsible in meeting the deadlines as it is eventually the consumers' money which is being used for their up-gradation.

Poor priorities in gas consumption

Self sufficiency in Pakistan is a term used very rarely in Pakistan but thankfully the all important natural resource that is natural gas does not disappoint on this account as Pakistan manages to meet its gas requirement through domestically produced natural gas. The country's natural gas production has grown at a healthy pace of 8 percent in the past five years.

The valley of Sindh has the lion's share in country's natural gas production, whereas Balochistan comes a distant second, with negligible contributions from the other two provinces. But there is a worrying sign in the years to come as natural gas reserves of Pakistan are fast depleting and can only account for 17 more years to come.

Power sector is the major consumer of natural gas consuming more than one-third of total gas produced. This highlights the inefficiency of Pakistan's energy model because the scarce resource should rather be utilises for productive purposes instead of being burnt as fuel. But the inability of the energy managers deprives the ever so important industrial sector from using the gas as feedstock - which in turn is causing huge losses to the exchequer.

What is more worrying is the ever rising trend of natural gas consumption by the transportation sector in the form of CNG - the share of which has increased by six times in as many years. Back in 2002, the policy makers did not realise the growth potential of the sector as it offered cheap alternative fuel for the economy class - but this is now hurting the economy very badly. The government has failed to curtail the gas usage as CNG and has time and again succumbed to the pressure of the strong transport lobby in the country.

There has also been a lot of criticism from the industrial sector especially by the textile manufacturers on feedstock gas supplied to the fertilizer sector at heavily discounted rates. Fertilizer sector has 13 percent share in the consumption pie of gas used as feedstock, but nearly 70 percent of its gas comes from Mari gas field which produces gas of low quality. This gas can only be optimally utilised in the manufacturing of urea and therefore somewhat justifies the discounted prices.

The security situation in Balochistan is a threat in the future as many studies reveal a large potential of gas reserves is still undiscovered in that area. Moreover, the government needs to address the problems faced by the gas distribution companies and must revisit their decade old plea of revising the fixed asset based return formula. The current formula restricts the distribution companies' ability to engage in massive infrastructure development as it does not cover the cost of debt incurred in the process.

To conclude, there is a dire need for better utilisation of gas resources and government needs to incentivize E&P companies to operate in such security situation in certain areas. Moreover, the allocation of natural gas also needs to be done more effectively and alternate sources -- such as hydel, wind and solar energy -- should be worked on for the power sector to ease off the pressure on the fast depleting natural gas reserves.

Pakistan's power woes

Pakistan's electricity generation is heavily tilted towards thermal power generation which produces accounts for roughly two-third of the country's total power generation. Needless to say that the high dependence on thermal generation leads to the high import of furnace oil given that Pakistan does not produce sufficient crude oil to meet its requirements.

Out of the 67 percent electricity produced from thermal sources, nearly half of it comes from natural gas which is a problem in its own right. With its fast depleting gas reserves, Pakistan cannot afford to rely heavily ion gas being burnt as fuel for power as it leads to massive losses for industrial sector that has to face the music of gas shortfall in the peak season.

The never ending politicking on the issue of water storage in the form of construction of dams has also cost the country a lot in monetary terms over the years as electricity generation from hydel sources has been stagnant in the past ten years. Hydel electricity generation in Pakistan only accounts for less than one-third of the total power generated, which is only because of inefficient policy making.

With the threat of global warming and melting of glaciers fast becoming a near term reality, there exists an opportunity in the problem to build large water reservoirs to avoid catastrophic situation five years from now. This will present us with the chance of generating hydel electricity and reduce our reliance on largely imported thermal electricity generation.

Another problem is that of inefficiency - which ranges from the inefficient plants to the inefficient billing collection system - all of which adds to the worrying situation in the power sector. Firstly, a vast majority of power plants operating in the country run on less than optimal level and the average capacity utilisation according to the industry sources is a shocking 34 percent.

The reason for such inefficient plants is that not enough investment has been done in the power plants which were originally imported from Western countries and were old even at the time of installation here. Their inefficiency does not only lead to the failure in meeting the electricity requirement but also leads to heavy consumption of the imported furnace oil and the precious natural gas - hence resulting in higher tariffs.

Then there is the devil of transmission and distribution losses, which is the major cause behind the massive load shedding leading to industrial losses and social unrest. The fact that the infrastructure set-up of the power distributers is not up to the mark, hurts the IPP's as 20 percent of what they produce is lost on its way to the consumers.

Although, the official numbers show a gradual decline in transmission and distribution losses, but those close to the industry reveal that the actual picture is much worse and the losses range somewhere between 30-35 percent. Then there is a lot of electricity being stolen from the system that cannot be billed, hence, resulting in huge operating loses for the power distributors.

The dilemma is that in most cases, the thieves are known but cannot be put on trial because of the lack of political will. There is no other solution to this problem than to take strict actions against the culprits, which is only possible if the government intends to act against them.

Finally, comes the inefficient billing collection system as a large number of customers specially those having strong links in the set-up delay their payments to the distribution companies, which in turn reduces the IPPs' ability to procure furnace oil and thus a power shortfall. This is where the vicious cycle of circular debt starts and adversely affects the economy.

The government therefore, needs to be proactive in this regard and must find ways to provide continuous power supply. The hastily arranged RPPs won't serve the purpose because of the controversies surrounding the issue. There is a dire need that the government accepts its failure to fulfil the promise of a load shedding free country by the end of 2009, and instead of coming up with excuse should formulate a sound long term strategy to ensure cheap electricity to the end users.

TELECOM: Transforming the future of communication

Communication leads to community, that is, to understanding, intimacy and mutual valuing. Nokia is the bridge between your world and the world around you. Today Nokia is one of the most trusted brands in the world and Nokia has earned this status by providing the highest standards that consumers have come to expect from Nokia. Nokia envisions a world where connecting people to what matters to them empowers them to make the most of every moment. Nokia believes in providing the kind of solutions that add value to your life and the way you connect with people.

Nokia is the world leader in mobility. It has been a pioneer since the industry's infancy in the 1980s and is now at the forefront of transformation. Nokia's first priority has always been a consumer-centric approach. That's why Nokia makes products that perfectly compliment the consumers' lifestyle. Nokia is not only the world leader in mobile phones, it is also the world's largest camera manufacturer, a leader in digital music, world's largest manufacturer of converged devices and the first mobile phone company to introduce torch and radio in a mobile phone.

Headquartered in Finland, Nokia wants to connect people around the world who want to benefit from communications technology. With strong R&D presence in 16 countries, device manufacturing in 9 countries, infrastructure equipment manufacturing in 4 countries and Sales in more than 150 countries; Nokia is a truly global company.

To cater to changing consumer needs more elaborately, Nokia brand has transformed into a solutions business. The solutions approach is a winning combination of devices, services and gear. Nokia will now offer its solutions based on each of its five themes:

-- Play - This solution will offer Nokia's Music & Touch portfolio along with Nokia headsets and services like Nokia Music Store and Ovi Store. To maximise the exclusive music experience, Nokia is also entering into partnerships with leading artists and record labels.

-- Work & Life - Nokia Email Solutions offer growing portfolio of email-enabled devices which is inclusive of affordable phones and high-end Eseries phones which are further complimented by services like Instant Messaging, 90% of world's email accounts, Corporate Messaging as well as Bluetooth gear range.

-- Mobile Computing - This solutions category includes internet tablets and Nseries mobile computers available with support for all Nokia services such as Ovi Services, Nokia Maps and Music Store.

-- Community - Community solutions are targeted towards social butterflies who always want to stay connected with friends and family one way or the other. The mobilephones in this category are fresh and vibrant with social networking and media sharing features that support instant communication with friends and family. Available with Nokia Maps, this solution helps you connect in more meaningful ways.

-- Entry - My First Nokia (MFN) is highly relevant to Pakistani market due to our large rural population. This solutions category reflects the most affordable Nokia devices with basic features. Supported by Ovi Mail, Nokia Life Tools and Nokia Money, the entry solutions help minimize the digital divide and create more opportunities for first-time mobilephone users.

Part of the Nokia Middle East & Africa (MEA) region, Pakistan is a high growth potential market for Nokia. With cellular teledensity of 58.2% and growing, Nokia Pakistan is growing fast and strong with a large untapped market at its disposal. Pakistan is a lucrative market for manufacturers of mobile handsets and other telecom equipment as 20 percent of mobile users in Pakistan change their handset thrice a year. A similar percentage of mobile users change the mobile handset once a year and this could be a successful business model, according to a regulator Pakistan Telecommunication Authority (PTA).

Being the market leader since inception in the country Nokia stands out as the clear market leader in Pakistan and independent sources claim that all other players share combined is one fourth of Nokia market share.

Nokia's main focus in Pakistan is to reduce the total cost of ownership for consumers and bring more affordable yet feature-rich mobile phones in the market. Nokia continues to enhance its solutions targeted towards professionals and business users. This includes a growing portfolio of email-enabled devices, softwares, services and accessories.

Nokia Messaging:

Around 300 million people world-wide* have experimented with mobile email but only 10% of accounts, or 30 million accounts, have actually been activated on the mobile phone. ** With over 100 million email-enabled devices from Nokia in people's hands - the biggest choice available in the market today - mobile email is now more accessible than ever. Nokia's messaging solutions are simple to set up, easy to use and offer people the freedom to communicate whenever and wherever they are. People don't necessarily have to buy an Eseries phone to enjoy mobile email. Nokia devices with email support are available starting from PKR 4,200 and upwards with a choice of both QWERTY and touch screen keypad. Nokia email-enabled devices are now more affordable than before.

NOKIA E72 NOKIA E63 NOKIA E52

Nokia email is push messaging service so that email is received in your inbox as soon as it is delivered. UI interface is similar to what you experience on PC/laptop to streamline the user email experience on mobile phone. Nokia mobile phones allow users to access up to 10 different email accounts on the same device which is 3 times more accounts compared to competitors' offerings.

Nokia Messaging gives you quick and easy access to the world's most popular email accounts - thousands, in fact - and chances are that you have an account with one or more of them. One device is all you need to manage multiple accounts. With fixed data plans making costs more predictable and affordable. Nokia Messaging is quick and easy to install, all you need is your email address and password and you'll be reading emails and replying to them - on your mobile device - within a couple of clicks. Nokia has worked with all the major ISPs (Yahoo! Mail, Windows Live Hotmail, Gmail, AOL Mail). Nokia mobile phones support both global and local ISPs. For example, To a Pakistani user, both Google mail and Cyber mail accounts will be accessible. More information about Nokia Messaging can be found at http://email.nokia.com.

Many people in emerging markets like Pakistan have Nokia devices, which unknown to them, are email-optimised. Now - to help them along the path of digital connectivity - Nokia has developed Ovi Mail, an email service that gives them a personal digital identity, and which could probably be their first step in discovering the mobile internet. Ovi Mail gives first-time email users the opportunity to set up and start using an email account (username@ovi.com) right on their mobile phone.

According to research, 25% of the world's mobile phone users are connected, but for the remaining 75%, there's Ovi Mail, which completely eliminates the need for a PC to create and use an email account.

Ovi Mail is a secure and spam-free personal email service designed especially for Nokia Series 40 devices. Mobile phone users who have any of the more than 40 Ovi Mail-optimized devices* can set up their email account for free within a few minutes, and start using the account right away. They can choose to create a new Ovi Mail account or activate email for an existing Ovi sign-on profile. Ovi Mail is also available on the web at https://mail.ovi.com.

Nokia for Business:

Today, work or corporate email on the mobile device is not only the privilege, but also the right, of many. Nearly half of corporate email accounts depend on the Microsoft Exchange server. Nokia's Mail for Exchange lets you wirelessly synchronise your Microsoft Exchange email, calendar and contact data, as well as providing easy and instant access to your global company. In newer devices like the Nokia E72, Nokia E75 and Nokia E63, Mail for Exchange is pre-loaded in devices, so setting up the account on the mobile device is only a few steps away. In other devices, such as the Nokia E71 or Nokia N96, Mail for Exchange can be accessed from the Download! folder. Mail for Exchange is enabled on more than 50 Nokia devices, including the Nokia E75, Nokia E71, Nokia E63, Nokia N96, Nokia N95, Nokia N79, Nokia N97 and Nokia N86 8MP

IBM Lotus Notes Traveler synchronises the Nokia device to the Lotus Domino server, bringing real-time IBM Lotus Notes push email and PIM (Personal Information Management) synchronisation, with no additional server or middleware required. Email (with attachments), calendar, address book, journal and to-do lists, are available to the Nokia device that the customer loves to use, including all Nokia Eseries and Nokia Nseries phones. The email service is available at no extra cost with new Lotus Domino servers and is delivered securely by IBM and IBM Channel partners.

To configure Mail for Exchange and Lotus Notes on Eseries mobile phone, slightly more information is required compared to consumer messaging for security purposes which can be easily obtained from your organisation's IT manager.

Nokia E72 - Boost your work

Nokia E72 is the latest arrival in Nokia's Eseries family that maintains essential elements of its predecessor, whilst still improving its capabilities in a number of areas. Nokia E72 offers a desktop like email experience and has new optical navigation key for more intuitive scrolling through menus, emails and fast panning of images. It comes with 5 megapixel camera and a standard 3.5 mm audio jack.

On top of these developments, for the first time, Eseries owners will be able to set up instant messaging (IM) accounts provided by Nokia Messaging direct from the homescreen. In just a few steps, device owners will be able to connect to their favourite IM accounts such as Yahoo! Messenger, Google Talk and Ovi, amongst many others.

-- Strategy Analytics, MyMetrix ComScore 2008, Canalys 2008

-- According to industry analysts Gartner, June 2008

Is m-banking a success story?

One of most resounding words in Pakistan's telecom industry last year was mobile banking. Experimenting with the concept of "branchless banking", telecom operators in the country have been quite successful.

After the successful launch of "Mobile Money Order" and "Mobilink Genie" by Mobilink, the launch of Telenor's "Easy Paisa" - a product that allows the payment of utility bills through its retail outlets in addition to facilitating domestic remittances - was the second major breakthrough in sowing the seeds of m-banking industry in Pakistan.

Both telecom firms look set to gain popularity, as branchless banking through agents and mobile phones is far more efficient and convenient than going to a branch. M-banking services can fulfil the needs of both urban and rural community; on one hand, it can save time of the urban community and on the other, it can provide banking services to rural community.

This concept is truer for a developing country like Pakistan, which is marked by limited access to banks mainly because lenders haven't penetrated in rural and sub-urban areas where the majority of country's population lives.

Low penetration of branches can be gauged from the fact that there are just seven branches per hundred thousand people and 0.22 braches per thousand kilometers. Similarly, there is a lack of availability of ATM facility; on an average there are only 0.10 ATMs per thousand kilometers.

Such dearth in banking when seen in the backdrop of significantly high penetration of cellular technology shows that growth opportunities in the m-banking sector are fairly lucrative. According to a UN report, mobile subscription in Pakistan expanded at a cumulative growth rate of 102 percent in past four years, while on the contrary, bank account holding stood as low as 226 bank accounts per thousand adults.

Increasing the scope of m-banking is also good for the broader economy. According to a recent study, mobile service facility reduces poverty using microfinance and cash management facilities. Another report points out that adding ten extra cell phones per 100 people in a typical developing economy, GDP growth per person boosts by 0.8 percentage points.

Quite naturally the industry is gathering pace, as revealed by the State Bank of Pakistan's annual report on retail payment.

Although, payments through mobile haven't penetrated the market as yet and have extremely low share in the overall pie, SBP data show that m-banking saw significant growth both in terms of volume and value of transactions in the first quarter of current year.

The number of transactions made through cell phones more than doubled to 54,009 in the first quarter from 21,733 in the last quarter of FY09. Total worth of m-banking transactions in value terms also jumped manifolds over the period, from just Rs4.9 million in the fourth quarter of fiscal year 2009 to Rs152 million in the first quarter of fiscal year 2010.

GROWTH

The success story, of course, comes on account of back to back launches of cellular banking facilities by bankers and telecom operators alike. And with the advent of these services and products, it seems that it will surpass all other banking channels in rural and far-flung areas, as it provides an effective way of doing banking business to the large un-banked region in Pakistan.

Given high mobile density in Pakistan, 54,000 per hundred thousand people, m-banking has been gaining quick market acceptance, since penetration of other banking channels such as bank branch, ATM, Point-of-Sale Terminals and internet is still quite low at 7.50, 3.39, 47.06 and 11,380 per hundred thousand people respectively, according to CGAP - a Washington based consultative group on global micro finance environment.

Besides, m-banking can target those un-banked areas much easily in areas where it is not feasible to expand services through ATM, POS due to high cost of infrastructure. Moreover, the speed and ease of access to banking facility through mobile is also high, in contrast to all other banking channels.

On top of it, the cost per transaction through mobile is also very cheap -- just $0.08 per transaction, which is nearly 10 and 50 times lower than that incurred for ATM and bank branch respectively, according to CGAP.

This cost effectiveness can help banks to gradually shift towards m-banking for retail banking service offerings. But while m-banking can be a big threat to ATM and POS, as all they facilitate small transactions, due to restriction on both volume and value of transaction, it can not entirely replace internet banking and the IVR - avenues that can also handle bigger transactions.

As for bank branches, it might reduce the frequency of visiting customers, especially those small account holders, which in fact is in great interest of the banks, as services to small account holders through bank branch is quite expensive.

But although m-banking has great potential in Pakistan - being at a nascent stage -- there is a huge gap for technological development and improvement in this regard. And one way to do so is to adapt the model applied by their peers elsewhere.

For instance, the model successfully launched by Globe Telecom in Philippine can offer an interesting insight. Globe's model provides facility through which cellular users can deposit cash into an e-virtual account, tied to their mobile connection through retail outlets. In addition, they can send funds from one personal account to that of another person, pay bills, make loan repayments and also shop by using the money deposited in their e-virtual accounts.

And it seems the industry is moving in the right direction. Reportedly, Telenor also plans to launch a mobile-account service that features savings and withdrawals. Anyone in Pakistan with a Telenor connection - more than 22 million people as of last update -- will be able to open a bank account at an EasyPaisa merchant. They'll be able to cash in and cash out at such merchants, too -- no bank branches required.

But unlike Telenor, not every operator has the same ease, chiefly because it can offer savings accounts because their management actually went ahead and bought a bank, Tameer Microfinance, which has a full banking license.

And that's why, in the wake of technological advancement and the growing need to expand microfinance facilities to un-banked areas, bankers, regulators and mobile operators are in a hot discussion these days to craft a workable model for mobile banking, or m-banking, in Pakistan.

REGULATIONS

The industry is currently studying the different types of m-banking models tried and tested elsewhere in the region and around the world. But the process of selection and the decision of whether to adopt or adapt is somehow complicated, as the choices offer different set of pros and cons -- requiring different regulations and policies.

Crucially, the major issue is whether the regulators should allow mobile users to open a 'virtual bank account' (via any retail agent) tied to mobile SIMs or whether they should make it compulsory for a user to open an actual bank account first before he/she can be offered mobile banking services.

For instance, in India, the guidelines put the onus of providing mobile banking services on conventional banks and that mobile-payment service providers - i.e. cellular firms -- can only serve as intermediaries in providing the technology framework for such services.

A similar hybrid model - one where bank co-operate with cellular firms -- is being offered in South Africa by the name of Wizzit, where the bank and the mobile operator jointly offer m-banking services.

Indeed the direct involvement of banks makes sense, given their expertise to handle money and monitoring to check money laundering, e-money risks and the protection of consumer rights. But in case of m-banking, these benefits would come at a cost of relatively lesser penetration in the unbanked areas, as most of the rural population in Pakistan lacks access to bank branches.

On the contrary, true motivation to target the un-banked market can be achieved if regulators permit the opening of a virtual bank account tied to mobile SIMs, as telecom operators can potentially have greater knowledge of actual target market owing to their vast network existing in the far flung areas.

The non-bank model has been found quite successful in Kenya and Philippine, where services like M-Pesa and G-Cash (respectively) have been offered solely by telecom operators without any sort of bank intervention.

And given Pakistan's resemblance to both these countries, perhaps the non-bank model can be adaptable in Pakistan as well. Branches per hundred thousand people in Pakistan and Philippine are 7.50 and 10.53 respectively, according to Financial Access, while a 2008 UN report noted mobile density in Pakistan is 10 percent higher than Kenya -- meaning that there is enough need and the potential to sow the seeds of m-banking in Pakistan.

Yet, one lesson that needs to be learnt from the non-bank Kenyan model is that telecom firms can't be left unmonitored in the sphere of banking. More recently, the conventional banking industry filed a suit against M-Pesa citing that its unregulated status puts customers at risk.

The crux of the issue isn't just cash conversion, i.e. how to set up a network of agents where you can get cash in and out of those accounts, but also that today's implementation of 'one bank-one telecom operator' model, might change to 'many banks-many operators' tomorrow.

The paradigm of the future is "if I want to send you money, the only thing I need to know is your mobile number," says Gerhard Romen, the director of financial services at Nokia. Details like which bank, mobile operator, or even brand of cell phone you're using won't matter, he says.

So, in short, the Joint Regulatory Committee formed by the State Bank of Pakistan and Pakistan Telecom Authority has plenty on its plate to deal with. But, while unnecessary haste in an uncharted territory may lead to bad policies, an unnecessary delay may create an unwanted monster. Last year's trends show that the industry is going to gather pace soon. And so must the regulators step the foot on the gas.

Perhaps, the setting up of a separate m-banking regulatory institution can also be considered in this context, while asking those telecom firms that are venturing into m-banking to list themselves at the bourses for better disclosure and public accountability to help avoid the too-big-to-fail syndrome.

======================================
Per-transaction coss by bankin channel
======================================
                                     $
======================================
Branch                       1.19 to 4
POS                               0.40
ATM                       0.62 to 0.85
IVR                       0.28 to 1.25
Internet                          0.10
Mobile                            0.08
======================================

Source: CGAP & Gemalto

Telecom has bright future

One of the few sectors that managed to somehow weather the financial and economic storm of 2009 was telecom. It was a year full of competition, growth, introduction of new services, consumer and operator friendly regulations and industry consolidation.

In the wake of declining subscription growth rate since 2007, the price war between cellular firms greatly benefited consumers who were being offered attractive new packages and value added services.

This near-saturation level in the backdrop of slowing growth and the