After gaining a wealth of experience at leading financial institutions, Samir Ahmed has established himself as a definitive authority on Pakistan’s financial and capital markets. During his tenure as Managing Director of the Lahore Stock Exchange, Samir was part of the unprecedented reform programme which strengthened the capital markets. Presently at the National Commodities Exchange Limited, Samir reflects on his career and shares his views on Pakistan’s capital and commodities markets.
You gained a wealth of experience in the capital market during your time at the Lahore Stock Exchange. Can you tell us about this, along with your views on the capital market?
Samir Ahmed: “I came in at a time in 2001 when we were in the early stages of a radical markets reform programme, so it was a very interesting time to be there. The SECP at that stage was newly activated under a new chairman, Khalid Mirza. They had a fresh regulatory framework and a new organisation and we worked very closely with the SECP as a frontline regulator.
This was an opportunity to make a huge difference and most people would agree that over the next few years the markets went through a sea change. The exchanges were restructured in the way the boards functioned. The enhanced powers of the MD and the separation between the members and the management was a key area. The code of corporate governance was brought in for listed companies. Better risk management and market surveillance was adopted for trading. The National Clearing Corporation was set up etc.
It was tough politically because obviously in any reform process, there are winners and losers and to a certain extent, you have to take the losers with you and compensate them. But there was a lot of kicking and screaming going on.
All of the reforms, of course, were combined with the period when the markets were starting to come out of a recession and start a long term bull run. And so, the volumes went up greatly. All things considered it was a very exciting time to be in the middle of it all. Speaking on a personal level, I think those three years, in terms of management experience, were probably the equivalent of 10 years in a ‘normal’ job. There was so much crammed into those three years. It was tough and occasionally stressful but a very valuable experience.”
How do you see Pakistan’s capital markets evolving, particularly given the recent turmoil?
SA: “I think, unfortunately, there was a bit of a rollback in the last few years as far as the reform process is concerned. The stock exchanges and the members reasserted themselves. The low point was when the former chairman of the SECP, Tariq Hasan was sacked in 2006. I think that sent a very bad message to the markets that if there is a regulator you don’t like, you can actually bring enough pressure to get rid of them.
Financial regulation to my mind has a moral dimension. While you don’t want to put obstacles in the running of the economy and the markets, you have to have a strong sense of right and wrong. There is only so much ‘business as usual’ you can put up with and at some point the regulator has to step up and draw a line in the sand and say, ‘this is what we have to do and the regulatees better do it’.
I think the SECP needs still more capacity, in numbers and in expertise. I think it needs to re-assert its independence vis-à-vis the regulatees. It needs to reassert itself vis-à-vis the government because its supposed to be an autonomous body.
In the last few years, the SECP has given in in too many areas. The worst instance was the closing of the stock market for four months last year on the ‘advice’ of the KSE. I think this was one of the worst things that happened in the history of our economy and it compares with the forfeiture of foreign currency accounts in 1998 in terms of the damage done to the economy and the markets.
I think a much better example has been set by the State Bank as a regulator. It has come a long way in the last 10 years. So, I hope that the SECP is also able to do the same over the next few years.”
After your time at LSE, you joined IGI. Please tell us about that.
SA: “Yes. I personally feel that there needs to be a movement of people between industry and the regulatory bodies. Each side brings a certain outlook and experience that is very valuable, but there needs to be that cross fertilisation. I had spent three years at the LSE and before that, two years as an advisor with the Dubai Financial Market, so after five years in financial regulation it was a good time to make a move back into the trenches. Luckily, this opportunity with IGI Investment Bank came up. IGI is a part of the Packages group, one of the best names in Pakistan known for their integrity and professionalism. So, it was a good opportunity to get back into the market.”
You recently completed your tenure at IGI Investment Bank as CEO. What was your experience there like?
SA: “Great fun and immensely satisfying. Any success is always a team effort. We restructured the bank completely. We turned away from the quasi-commercial banking mindset which most investment banks in Pakistan had gotten into and became focused on capital markets. We established a financial products distribution business which is the market leader. We started a portfolio management business. We reactivated the corporate finance advisory business which helps companies to raise money through capital issues — TFCs, IPOs etc. We established two subsidiaries. One is IGI Securities, which came about through an acquisition we did. It is a full service securities firm. The second subsidiary is IGI Funds which is an asset management company. The investment bank and its subsidiaries are pretty much doing everything in the financial sector, except commercial banking. And, of course, the parent company IGI Insurance does insurance.”
So, the expansion was quite rapid…
SA: “Yes, it expanded very rapidly. When I first went to IGI the capital of this company was about Rs. 350 million and now it stands at over Rs. 2 billion. It’s the largest investment bank in the country with a full suite of products and a top notch brand name.”
What about the financial downturn experienced within Pakistan and the liquidity crunch?
SA: “I think it has hit the financial sector very badly. With the market closure and subsequent fall, everybody was forced to mark down the value of investments. The brokerage industry was literally operating on zero revenues for months when the markets were closed. The asset management industry also took a beating and the funds under management came down to about one third of their peak levels.
More importantly, a fear mentality set in both globally and in Pakistan. Banks were hoarding cash and all credit disbursements stopped. This further intensified the problems.
If there is a silver lining, it is that the crisis has sorted out the good from the bad and the strong from the weak. The non-banking financial sector was very hard hit. I think IGI group companies stood out during this time. We took a fundamental decision that we would honour all our obligations in full and on time, regardless of the cost. It helped that we were well capitalised and had strong risk management and quality HR and these were the things that we had worked so hard on, for the previous few years. Trust and reliability is really the biggest factor for success in the financial sector.”
What are your views on the market turmoil and how the whole financial industry has been shaken up?
SA: “I would say two things: one, it has been a regulatory failure; and two, it has been a risk management failure. I think everybody was caught up in this whole triumph of capitalism mindset and that markets were the solution for everything. I can’t say that I foresaw all these problems but with hindsight I think, or at least I hope, we’re all a bit wiser.
Unfortunately, financial markets are prone to excess from time to time, although this time around things went horribly wrong. The good thing I think is that the major developed markets especially the US and the UK and to a lesser extent, Europe, have moved very aggressively to deal with it and averted a complete collapse, including a virtual nationalisation of several large banks.
In the financial sector, the result will be more stringent regulation, and a re-think of the universal banking model which led to too many institutions which were deemed ‘too big to fail’. We will probably see lower levels of leverage in the system and better capitalised institutions. Unfortunately, we will probably also see lesser innovation. The financial sector as a whole has had a fabulous two decades or so and it will probably shrink a little to more realistic and sustainable levels, with more relevance and connection with the ‘real’ economy.
In Pakistan, I think a big shakeout in the NBFC sector is already on. The smaller, less capitalised ones will have to merge or get acquired or may even wind down their businesses. The dependence of smaller financial institutions on the money markets for their funding can no longer be taken for granted. So those who have good deposit bases or other secure and long term funding will have an edge.
The possible negative is that some segments of the market may not get properly serviced e.g. leasing companies were focused on the SME sector, which the commercial banks do not serve well despite a lot of tall talk over the years. Similarly, there seems to be a pullback from the retail consumer market. In spite of all the noise which has been made, the fact is that less than 10% of the bank credit is in this sector, which is very low compared even to other developing countries. This sector needs to grow and not shrink.”
Tell us something about NCEL.
SA: “It is Pakistan’s first and only commodities and futures exchange. It is a fully demutualised exchange with several financial institutions as shareholders.
The exchange became operational in 2007 and so it is still in the early stages of its development. It will take another 2 year or so to become a fully thriving market with a complete product range.
We currently list and trade futures contracts in gold, rice, palm oil and interest rates (KIBOR). Crude oil and silver have been approved and are to be listed very soon. We have also designed currency futures products which are now under regulatory scrutiny.
Under development right now are contracts in cotton, sugar, wheat, maize, steel and copper. These will be listed from time to time in 2010 as and when they are ready.”
What is the role of a futures exchange?
SA: “Futures markets play a vital role in any modern economy. I would say they are a critical part of the financial infrastructure. Spot markets and futures markets interact with each other very closely. In a futures market buyers and sellers can hedge their requirements and so plan better for the future. Investors similarly can take a view on the price of various commodities and take positions. The price signals that futures markets send out allow governments and policy makers to plan ahead.”
What is the utility of futures exchange?
SA: “We have three broad categories of futures contracts — internationally traded commodities like gold and oil, financial products like interest rate and currency futures and agricultural commodities like cotton and rice. Each of these is very important.
Interest rate futures allow borrowers and lenders to hedge their exposure to interest rate movements. Financial institutions and large corporates have a need for this product. Currency futures allow hedging to those who have current or future currency exposures — importers, exporters, travelers, students, indeed anyone who has a foreign currency transaction.
Perhaps the biggest difference that NCEL can make in Pakistan is in the agriculture sector. For example, once we have properly functioning agricultural futures, we should not see the price distortions and manipulations that we see every year in the major crops. This doesn’t mean that we will not see price rises if commodity prices go up worldwide, but we will certainly have more orderly markets with transparent pricing. And the price signals will give advance warning of possible problems to policy makers and growers and users.
An important side effect of a properly regulated and organised commodity market will be that we will get improvements in the warehousing/logistics infrastructure and greater ease in commodity financing.”
Don’t futures markets lead to speculation?
SA: “As with any other market, there is going to be a speculative element which will take part. If properly regulated, speculators can play a positive role in markets by providing depth and liquidity. And there are ways of dealing with the potential negative aspects through setting position limits and margins and market surveillance. Commodity exchanges are a standard worldwide model which has been around for 150 years. They have over the years proved to be very robust and strong institutions. We are confident that at NCEL we have the platform to build a thriving market.”
What are the future plans?
SA: “Very ambitious. All the hard work of setting up an exchange and making it operational is done. We have to build the business volumes now. It’s a fully electronic exchange which makes it a highly scalable business model. There are no limits on its geographical expansion throughout the country. We also have no limit on the number of members and that number is growing every month.
We anticipate our business volumes multiplying several fold every year for the next few years. In a lot of countries, commodities and futures exchanges are now bigger than the equity markets. That is something we should aim for in the medium to longer term.”
What drew you to a career in finance?
SA: “A couple of things: my first degree was in Economics from the University of Chicago, so I was headed in this direction. Moreover, when I started my career in 1983, finance was the glamour profession. It was the beginning of a long term uptrend in financial services and it was attracting some really good quality people.
I started my career with BCCI and spent seven years in China with them. I joined because it was the first job offer I got, but I stayed because I loved it there! The kind of exposure and responsibility and excitement levels that you got at a very young age was probably not going to be matched elsewhere. When BCCI closed down, I came back to Pakistan and joined a bank initially, but shifted very soon into the capital markets area. The capital markets in Pakistan were just taking off in the early ’90s and I thought it would be much more interesting than commercial banking, which gets fairly routine after a while.
I worked with KASB and Taurus Securities and then headed ING Barings’ equities business in Pakistan. Then, at the ripe old age of 38, I took a break and 16 years after my Bachelors degree I went back to school for my Masters degree! It was something I had been wanting to do for sometime and when I was accepted at London Business School, I just packed my bags and left with my wife. I really enjoyed myself. When you go back to school at that age it’s more fulfilling, because it’s voluntary, whereas when you are young, it’s more of a duty and something that has to be done. Sometimes, I think it may be good to go back and do yet another degree.”
Who are your role models?
SA: “Of course, my father. I remember him for his dedication and honesty and confidence. He lost his parents at a very young age and had to go through some very tough times. At Aitchison College, I was inspired by Mr. M A Usmani, who was my English Literature teacher. He was into the joy of literature and not grades and marks – that was an important lesson. The Principal of Aitchison, Mr. Ghulam Rasool Chaudhry was another one. He was a self-made man. He was Pakistan’s hockey captain and an Olympic gold medalist before doing his PhD and going into academics. He gave me the ambition to aim high. He taught us economics and encouraged me to apply to Chicago and concentrate on economics.
In my professional life, I have been lucky and blessed with some good bosses over the years. At IGI, I worked for five years with Syed Babar Ali, who is an inspiration for a lot of people. He has been successful and ethical at the same time. He has tried to contribute to society, of which his role at LUMS is only one example. He is Masha’Allah over 80 years old and still active and interested and always looking forward to the next thing. One quality of his that I greatly admire is that he has respect for people.
What do you think has been the secret of your success?
SA: “I’ve been very, very fortunate. Probably my mother’s prayers. Also my wife’s support and strength.
I’ve always tried to build good teams because no one accomplishes anything on his own. I think I have a reasonably good understanding of how things work. That may sound a little mundane but you have to understand how organisations and other eco systems function and what makes people tick.”
What qualities do you think are necessary to be an effective leader?
SA: “I think strength of conviction is important. Just staying on course and doing the right thing. It’s very important, more so than intelligence or education.”
