For modern trading platform PMEX be required to broadly help farmers
Interview with Mr Zafar M. Sheikh — President & CEO, Security Investment Bank Ltd
Mr Zafar M. Sheikh is having a successful career spanning over three decades of international and domestic banking experience with primary emphasis on treasury and fund management covering both conventional and Islamic banking. Over the years, he acquired skills and expertise in setting up, organizing, managing and developing institutions in the government and non-government sector mainly to develop capital and debt markets along with corporate and retail marketing/financial strategy to improve distressed balance sheets. He also possesses strong understanding of Reserve Management and developed various prudential benchmarks. He served as Director General of Central Directorate of National Savings (savings wing of the Ministry of Finance, Govt. of Pakistan) and successfully managed and enhanced cost effective total portfolio from Rs 1030 billion to overRs2500 billion (equivalent US$24 billion) and fetched more than Rs20 billion against the challenging target of Rs5 billion. During the assignment of more than two years as Additional Director General, Debt Management, Ministry of Finance, he effectively managed Domestic/External Debt and played a pivotal role in issuance of Sukuk and Commercial Bonds in international markets. He developed domestic and international investor base for selling short and long dated government securities. He introduced, for the first time in Pakistan, 30-year government bond. Bailed-out government corporations/public sector entities through suitable financial engineering. Presented a comprehensive strategy for prudent hedging on exchange as well as interest rates on substantial external non-USD loan portfolio of G.O.P. totaling approximately USD 38 billion. He provided prudent technical support to the Corporate Finance Division at the Ministry of Finance in raising and restructuring the financial needs of Government Corporate entities in conventional and Islamic finance modes. During the assignment with the State Bank of Pakistan, he managed to almost achieve the ideal trinity of low interest rates, stable exchange rates and comfortable foreign exchange reserves. He achieved milestone in historic build up of foreign exchange reserves/stability in exchange rate and played a key role in the establishment of reserve management and risk management departments at the central bank. Rigorously selected fund managers via assessment of their suitability against benchmark performance criteria. Established close liaisons with several central banks, international commercial banks and some of the top global fund managers. Introduced and developed KIBOR as prudent benchmark in the banking history of Pakistan. During the 18 years stay in Dubai/London/New York with various financial institutions, he played a key role in establishing new institution/branches, mainly focusing on Treasury and Corporate Banking. Managed substantial portfolio in bonds and currency trading and designed various product in combination with FX/Bond and derivatives for High Net-worth Individuals.
WORK HISTORY Currently, he is holding a position of President and Chief Executive Officer at Security Investment Bank Limited For last one year, he is on the board of Security Investment Bank Limited (SIB) and also holds position of Chairman Human Resource and Remuneration Committee of SIB. His ambition is to revamp the Company structure into new dimension. Member investment committee, Federal Employees Benevolent Fund & Group Insurance, Establishment Division, Government of Pakistan, Islamabad. Member Investment Committee, E.O.B.I. Ministry of Labour, Government. of Pakistan, Islamabad. Nov. 2007 to Oct. 2013 – Director General, Central Directorate of National Savings, Ministry of Finance, Islamabad. May 2005 to Oct. 2007 – Additional Director General, Debt Management Office, Ministry of Finance, Islamabad. Jan. 2001 to May 2005 – Central Bank of Pakistan, Advisor to the Governor on FX &Debt Management/Head of Treasury
- Chosen for the task in an environment of low reserves, depreciating domestic currency and spiraling interest rates.
- Succeeded in not only stemming the free fall in currency, but also reversed the trend with the currency appreciating by around 10% in due course, and fine tuned the PKR market to trade normally in range with a positive bias.
- At the same time facilitated lowering of interest rates from 15% per annum to a level of 4-5% per annum, which stimulated economic growth.
- While stabilizing the currency and bringing interest rates lower, managed to almost triple the foreign exchange reserves of the Central Bank in less than a year by exploring and managing FX flows in the banking system. At the end of my tenure the net reserve rose to US$13 billion from US$1 billion in addition to prepayment of high cost loan of US$ 1.3 billion to donor agencies.
- Successfully managed to rectify the rate mechanism prevailing in the informal currency market to an extent that the premium over bank rate that used to be around 10% previously eventually converged considerably to the official market.
- Directly responsible for management of the country’s Foreign Exchange reserves amounting in excess of US$13 billion. This included selection of external fund managers, selection of benchmarks, appointment of custodians, and defining investment guidelines. Concurrently developed in-house human resource capacity in this area to ultimately take over the function.
- Technical advisory to Government of Pakistan on successful flotation of the benchmark US$500 million sovereign Bond in 2003 and the latter issues of Islamic Sukuk (asset backed) and other conventional bonds for Government.
- Appointed as member on Government’s debt committee that overlooks the country’s US$38 billion external debt and reports/recommends on its management strategy to the Prime Minister.
- Entrusted to represent Pakistan, the central banks of Bangladesh, Sri Lanka, Bahrain and Malaysia in mutual deliberations on issues ranging from financial markets and issue of Government Bonds, to alternative trade settlement systems such as Gold Dinar, amongst others.
Developmental projects completed so far towards growth and modernization of the Financial markets in Pakistan are:
- Introduction of Karachi Interbank Offered Rate (KIBOR) for uniform and stable benchmarking for pricing of bank loans and advances.
- Introduction of Financial Derivatives market in the country along with its regulatory essentials. Initially, foreign currency options and interest rate swaps have been permitted, to be followed by PKR options and other relatively complex derivative products.
- Development of a Pakistan Government Bond yield Index for facilitating and promoting investment by foreign emerging market funds.
- Development of a project to promote a zero-coupon bond market in Pakistan by stripping the existing long-term government bond issues.
- Development of monitoring of a system of Primary Dealers to participate in Government Bond auctions, towards development of a secondary market.
- Formulation and implementation of a policy to regulate money market/foreign exchange brokerage houses towards promoting market discipline and elimination of malpractices.
- Developed strategy to develop currency options trading in Pakistan.
September 2000-January 2001 – Head of Wealth Management, Mashreq Bank Dubai, UAE Financial Engineering and Marketing of new Products in Equities, Currency and Fixed Income. Focus on relationship banking and wealth management, targeting high net worth clients in the Emirates for in house financial products.
September 1991-August 2000 – Head of Treasury, Arabian General Investment Corporation, Dubai UAE
- Managed the treasury, meeting all performance targets on a sustained basis.
- Responsibilities included foreign exchange trading and hedging; handling entire fixed income portfolio.
- Provided technical support to corporate banking.
- Development and implementation of risk management systems.
- Development of operations in the interbank market.
October 1985- August 2000 – Regional Manager — Habib Bank Limited, Bahrain (3 Branches and on OBU)
- Profitably managed foreign exchange and money market activities.
- Over the years was also responsible for tapping the Euro market for long term funding.
- Structured Islamic Financial transactions on morabaha basis. Loan portfolio of US$500m.
- Special Assignment to Sydney, Australia for expansion and promotion of treasury and other usual banking business.
October 1982-October 1985 Chief Dealer, Arabian General Investment Corporation, Dubai, UAE
- Successfully set-up and managed the dealing room which entailed foreign exchange and money market operations, both for inter-bank market and the corporate sector.
- Obtained substantial credit and trading lines from international institutions.
- Actively traded in major currencies, interest rate swaps as well as covered interest arbitrage.
October 1976-July 1982 – Chief Dealer, Middle East Bank Head Office Dubai/London/New York
- Played key role in setting up new Bank and its network in UAE, Egypt, London and New York.
- Profitably managed the foreign exchange and money market operations, after playing pioneering role in the establishment of the institution.
- Was also responsible for setting up several branches within UAE as well as in London and New York
- Was also responsible for trading in major currencies, provided management and institutional support to corporate banking division and regional branches.
- Actively participated in the computerization of Banking Treasury Functions.
COURSES, SEMINARS, WORKSHOPS
- Over the years attended several training programs including Executive course on money market and foreign exchange at Manufacturers Hanover Trust, London; International treasury management course with Euro-money Training Centre in London
- Attended various seminars on Foreign Exchange/International Money Market and Derivatives in Dubai
- Underwent Central Banking Training in June 2001
- RTGS Bank of Japan, Tokyo and FX Reserve management at World Bank workshop in September 2001 at Washington D.C.
- Attended a seminar on ‘Central Banks’ Reserve management for Sovereign Nations’ organized by UBS, Warburg. – Recently attended a Seminar on Debt Management in London and Jakarta
- Authored an article on ‘Development of Capital and Debt Market in Asia’ in Dakka, Bangladesh
PAGE: What should be the role of banks in general and the investment banks in particular in Pakistan?
ZAFAR SHEIKH: Savers have mainly three avenues in Pakistan i.e. banks, National Savings Schemes and mutual funds. Rates of return on saving and fixed accounts of banks have been on the decline for over two years due to monetary policy easing. But as banks are bound to maintain a minimum deposit rate (MDR), linked with the policy rate, depositors now know that their banks cannot cut rates arbitrarily.
However, today the retail investors are getting less than 4% from banks. At banks, people just put their savings considering the security of the principal amount and their need to set aside the money for a certain period. More or less the same is true for NSS products which generally offer higher returns compared to banks. Contrary to bank deposits and NSS, mutual funds attract investors mostly from financially more literate class either because of marketing through banks and brokerage houses which own these funds or because initial investors have some exposure to stock market. Saving culture is to be developed in Pakistan to promote the economy.
Let me tell you that the purpose of having investment banks has not been achieved. Investment banks are established to raise long term funding for projects/industrial development. Bilateral and multilateral agencies should have been approached in this regard and at the domestic level a lot was to be done as well which unfortunately could not be done. Professionals with expertise should have been on board for investment banks which was missing. Regulator might have been disappointed as well. There were 14 investment banks in Pakistan and currently there are just two.
Central bank recently said that investment banks have been slowly waning from the financial market as they are unable to compete with the investment strategy of the large commercial banks having a large pool of funds. In the absence of funding sources from commercial banks and limited equity, investment banks have slowly been waning.
In 2004, a great new future for investment banks in Pakistan was perceived. The investment banks of the region were thought to play such a role regionally, form strategic partnerships and help the region to prosper. The first investment bank came up in 1989 in Pakistan. Investors were encouraged to set up investment banks and gain experience, while they wanted permission to set up commercial banks, receive deposits from the general public, and prosper by that, as some did before the nationalization of banks in 1974, when having a bank was regarded virtually a license to print money. But they had over-indulged in the game and let the banks go to wreck and ruin, leaving only two commercial banks viable by 1974, when they were nationalized. When the private sector sponsors were refused permission to set up commercial banks and collect deposits from the public they lost heart. They were not interested in lending their own money to industrial investors on a long term basis instead of profiting by collecting and using the private sector deposits. So the government’s NDFC and the Industrial Development Bank had primacy in the area and, they too, soon realized it was easy to lend money to the investors and difficult to recover it, or well-nigh impossible. So the commercial banks took over their investment lending role and eventually acquired non-performing loans of Rs250 billion or more, one-third of the total bank advances.
The government was so excited about setting up joint ventures in investment finance that joint investment companies were set up in association with Kuwait, Libya, Saudi Arabia and Oman. It is essential to promote industrialization through investment banks which would solve the economic problems of Pakistan.
PAGE: Your views on the development of corporate debt:
ZAFAR SHEIKH: Nowadays, debt or bonds markets are an integral part of the financial sector and effectively supplement corporate funding provided by banks everywhere in the world. Bonds can be defined as a long-term contract under which a borrower agrees to make payment of interest and principal, on specific dates, to the bondholders.
Bonds are actually certificates or documents of debt issued by a government or an organization. Corporate bond is commonly called TFC Term Finance Certificate. Let me give you an example that in 2012, the domestic corporate bond market witnessed higher activity , with the government, being regulator and participant at same time, addressing the power sector crises by issuance of TFCs.
I think the available corporate TFCs offer investors a viable, high yield alternative to the NSS (National Saving Scheme) and bank deposits, as they provide a credit spread over the benchmark KIBOR. They are also an essential complement to risk free and lower yielding government bonds such as PIBs, with less interest rate risk as most of them have floating interest payments.
This feature of floating interest rate payments are usually aligned to prevailing interest rates throughout the maturity of instrument and has attracted banks and mutual funds which have become an active player in the secondary interbank market for trading their large TFC portfolios generating liquidity for an active market. Malaysia issued its first Sukuk bond in 2002 and now constitutes huge per cent of international Sukuk markets due to its efficient secondary market trading mechanism.
Product innovation, ensuring global compatibility and acceptance will also attract general public. The regulators and financial institutions have to ensure that more corporate bodies come forward to structure new and innovative compliant financial products along with an easy access to a single trading platform which can contribute to the promotion and growth of capital markets. It would offer an alternate, viable yield asset class to investors as well as provide an avenue for corporations to raise cheaper money from other than the banking sector.
PAGE: Your views on the benefit to the farmers through Pakistan Mercantile Exchange Limited:
ZAFAR SHEIKH: In 2015, the Securities and Exchange Commission of Pakistan (SECP) approved the launch of red chilli futures contracts on Pakistan Mercantile Exchange Limited (PMEX), thus making it the first ‘spice’ to be included in modern trading platform. The PMEX Red Chilli Futures Contracts are available for trading.
Undoubtedly, this has augmented the portfolio of agricultural commodities in domestic market. The contract has provided the processors an opportunity to procure good quality red chillies in an efficient, convenient and transparent manner. It was expected at the time of the launch that the exporters would also benefit from its trading by hedging their exposure.
I am of the opinion that a lot is still to be done and farmers are not getting the benefit they should be getting. The agricultural product portfolio of PMEX includes rice, wheat, cotton, sugar and palm oil as well. My concern is to do something which must help the farmers improve their lifestyle and living conditions.
PMEX should be used to hedge the pricing of the commodities to benefit the farmers and the economy. It should not be used for speculation or gambling. For pricing, it is essential that there should be strong coordination with the international agencies. Government needs to do something in this regard. The most important thing is to create awareness among the farmers letting them know what PMEX can do for them.