Ship Breakers Ask for a Bailout

How international-trendy do we try to be? A lot. How stupid are we? Again quite a lot apparently. Ship breakers have asked the penniless Bangladesh government to 'intervene' in a bubble. This is a tactic taken out of the international rule book of asking for bailouts. In addition, they have sent a written request to Bangladesh Bank for an interest freeze on all their loans and even more fresh subsidized loans. I am trying to imagine the Governor of Bangladesh Bank in his WTF Kodak moment when he reads the request. And believe me he has had more than his share of WTF moments that I fear for his health.

As you may recall, earlier this year, we experienced the sky high prices of many construction materials including steel rods and concrete. This basically put off construction to a standstill and many contractors put off projects in hopes of better times. What did ship breakers do during the era of inflated prices? They went around aggressively buying more ships than they could accommodate. Refused to break down existing inventory in hopes of even more exaggerated prices. If Bangladesh doesn't buy overpriced rods, surely China and US will.

Do you remember oil traders who bought oil at $100 waited for it to reach $140, then $200 but all of a sudden its now worth $64. Do you have any remorse for these people who have caused so much havoc in the last year? Are they asking for a government intervention? Where was this government intervention when prices of rods/oil reached unimaginable prices? What makes speculation worth saving?

Even though local ship breakers have let their imagination run wild, their situation is extremely realistic and critical. Now construction materials are more affordable. This doesn't suit the ship breakers on the speculative and opportunistic empire that they built while dismantling the rational and conservative nature it once had. According to Financial Express, the industry raked up loans near Tk 5500 crore (close to $1 billion) to establish their companies and buy the now-useless junk at the price of gold. But many other newspapers pin the figure at around Tk. 15,000 crore (close to $3 billion) in loans and close to 10,000 crore in danger of going bad. And most of this, was debt financed involving a few select handful of local banks.

Which banks are these? As a reassurance not all banks are involved in this. The ones involved are those that you don't hear about, recognize, see, or even realize that they were banks until they report amazing profits in the neighborhood of Tk 200 crore to Tk 300 crore. And people always wondered how do these banks make money? The answer will now be publicized better. They finance these importers and ship breakers. Because of this opportunistic and speculative sector, these particular banks are going to have one hell of a write-off next year. This is after having yet another year of mind blowing paranormal profits in 2008. But the banks are certain to make it through with flying colors (they haven't asked for any assistance), but the steel breaking industry is in for a rapid change in status quo.

Update: Some of the articles that are published on this site are purposely delayed to give some 'face time' to other articles and to evenly spread them out evenly. This is fine because this is more of an analysis site rather than a news site. But time to time the analysis may come too late or be mistimed. Even though this article pointed some issues out on October 30 (and published November 3/4). The Daily Star is now reporting the same insights on November 5th. Although it is not plagiarism, it is wishful thinking that we may have some big-box media readers.

There is a Problem When the DSE Looks Like This:

Notice something awkward? That is list of the largest companies listed on the DSE. However banks now dominate 11 of the top 20 spots. This is more alarming than reassuring.

Reassurance
The good news first. Banks are a low risk and secure investments in most countries. This is characterized by their low beta factors. The beta factor, which usually ranges from 0.5 to 3, for a stock measures its volatility to the entire market conditions. New and fast growing industries, such as software, have a beta factor of around 2, meaning if the market goes up the stock shoots up 2 times. If the market does poorly, the stock does tend to do two times worse. Old and stable industries, such as banks, have a beta factor of around 1. This makes banks worldwide one of the safest investments.

The DSE fared better in the worldwide recession because all banks had localized investments. The DSE itself is still dominated by these banks. There was no reason to panic other than to a yearning to pose like a now-trendy distressed investor. Granted these effects will likely hit the garments in six months time, but regardless of this the DSE banks won't lose 80% of their market value. That's simply because they haven't invested 80% of their money in the wrong industries. So with more reassurance and relief, people are still shielded.

Lack of Inventories
Now that most investors believe in banks is a good sign of stability and investment security. Banks dominating the stock exchanges also has to do with the nature of their business. For starters there is very little scope for accounting wizardry. Accounting wizardry's main playing field is usually in inventories. The closest thing that banks have to an inventory is 'cash'. And as you know cash is extremely easy to valuate. To realize the full potential of accounting wizardry we have to look into the diamond industry. Diamond is not a commodity and its price depends on very particular characteristics which include the shine, cut and purity. The diamond company can overstate assets and inventories as they please. And most industries extend this shining example in every way possible. But because banks lack this cloudy assets, it is nearly impossible for this magic to take place.

Assets
The second reassurance is that most banks have not reevaluated their assets. This means that the land that they paid Tk 10 lakh for in 1988, is still considered to be worth the same to the bank despite the astronomical increase in land prices. This may give an undervalued and inaccurate picture but it is better than the alternative. When a company tries to reevaluate its assets, it is considered highly controversial. Since no one has a certain valuation, the company in most cases overstate their assets justifying things like competitive-edge and potential for future earnings. This in turn ends up being more harmful and inaccurate rather than undervalued assets. But thankfully (not yet) banks haven't taken this step.

Anybody but Alamgir
The third reason that banks are dominating the DSE is that they use big-box accounting houses for their auditing instead of hiring Alamgir across the road. This is more reassuring because even though Alamgir will find it hard to apply his magic, big accounting firms will clearly look for any possible danger signals. This goes to show that despite the short term idiotic moves here and there by DSE investors, in reality they have a brain. One that works in the long term but clearly it doesn't function on many day to day issues.

The Alarm
But the domination of banks goes to show that the SEC has failed miserably. The telecoms haven't listed yet. Banglalink is not willing to list. AKtel keeps setting a year end date. And GP might list with a $1 at the rate they are slashing their IPO. This in the middle of when the entire industry now has less phone lines than earlier (how is that even possible?). While the telecom industry remains stodgy in their dry spell, the SEC continues to pursue other future Z category stocks instead of other multi-nationals like Unilever.

It was mentioned in one blog that GQ Ball Pen earned all their money in the first 6 months and had losses for the last 6, leaving very little as stock dividends. Yet the SEC continues to pursue future Z category stocks of this caliber and force them to list. The problem is not for them to list, but the fact that these list of Z-ers ask Alamgir to do their accounting holding a fat wad of cash if the magic is applied correctly. The SEC, from day 1, should simply have a list of acceptable accountants that the listed companies must use. If the accounting firm's company does poorly despite auditing then the firm should be removed from the list. What is the point of forcing to list these companies if they won't register a trade in the next century?

Recently in support of future Z-ers, BGMEA during another round table meeting asked entrepreneurs (Zers) to pursue the capital market as a source of funds. This was in reaction to banks already tightening up their belts. But the cost of asking the market to fund your company will appeal to many for the wrong reasons. Like many who have performed this extravaganza in the past, the money disappears right then. DSE still lingers of the stench caused by this bait in its nascent years.

And no one, for the right reasons, will not take funding from the market because as everyone knows, the cost of this money is extremely high when compared to a bank loan. Even in the rare case if an established entrepreneur does raise money through the capital markets he/she is more inclined to pay back the bank and himself first before paying a dividend. The entrepreneur will not care about dividends because he has got himself covered with a fat salary. So as both a top level manager and a shareholder of the company he has no intention to control the salaries paid out. To see why this is very crucial, in banks management and shareholders are in two groups. By keeping an eye on management salaries the shareholders are increasing their dividends. There is no conflict of interest for the shareholder representatives.

What we don't need is SEC to pursue a bigger version of this same capital market lie. Thankfully, as of now, this lie isn't working as evident how banks dominate the top positions. But creating a balanced market place is also necessary and crucial for the future of DSE. The SEC needs to clean up DSE's Z as well as set up accounting standards that prevent the Zs. But as usual, nothing has happened yet.

Grameenphone vs 40 Banks: India Weighs In

The Background

I will start out with some background info. Late last year Grameenphone proposed its own biased version of a 'mobile banking' guideline. This shocked all the local banks as it did the international ones making them group together in opposition because mobile banking has nothing in similar to what Grameenphone had proposed.

Furthermore Grameenphone had 'accommodated' consultants to fly around the world, and to report back how mobile banking is a good idea (it is). But they also indicate indirectly that Grameenphone's version is the one used worldwide (far from it) because GP is the payee for accommodation and airfare.

This had led to a spark in newspapers who were divided whether to publish the truth or get to get a year's worth of GP advertisements which even Standard Chartered, HSBC and Citibank cannot match. Prothom Alo published an astounding editorial by the former deputy-governor of Bangladesh Bank lambasting Grameenphone's scheme for confusing people about the nature of mobile banking. This was the best Bangla composition I had read in a long time. The Financial Express published another article despite censoring Grameenphone's name. The Daily Star started out as pro-Grameenphone but soon turned the other way realizing that this news was too far of a stretch.

What differences are there? Even though there are numerous fallacies in GP's proposal, it boils down to GP attempting to hijack 40 backs by preventing to access the mobile infrastructure and in place allow GP to benefit from this vacuum. Although this may seem minor this has very large consequences as no where in the world does such an idea exist.

India weights in

Bangladesh has a history in following the Indian regulatory bodies. WiMax gets issued in India, then its time for Bangladesh to issue WiMax. The Reserve Bank of India (RBI) is the regulatory banking body, exactly what Bangladesh Bank is to all the local banks. Much to the delight of Grameenphone, RBI halted all mobile banking transactions throughout India to create a framework.

GP had assumed that since mobile banking in India was conducted by banks, the temporary halt would mean more liberties to the telecom sector in line with GP's version of mobile banking. Many others had assumed similar fate as India's mobile phone companies are owned by powerful and vested quarters capable of flying and accommodating more consultants, place more TV and newspaper ads than GP.

The RBI, just last month, concluded on the guidelines. They are:

• Mobile banking only between one bank account to another (GP only wanted mobile number to mobile number, wanted to prevent bank account to bank account and even bank account to mobile number)
• A limit of Rs 2500 (Tk 3,523.46) and in exceptional cases and under strict supervision Rs 5000 (Tk 7,046.25) for these bank account transactions. (GP proposed a base limit of Rs 21,287 (Tk 30,000) which is 8x larger than Indian limits)
• As with mobile banking in the rest of the world, phone companies are not a stakeholder in this issue. (GP wanted to be the in the center of the issue by making the laws and preventing banks from mobile banking)
• Only banks can authorize transactions (GP wanted GP to authorize transactions)
  
• Only banks can accept money (GP wanted to open up a network of GP bank branches to accept money)

Many consultants and people have pointed out that mobile banking will take banking facilities to everyone as more people have phones than bank accounts. I strongly agree, but this vision is not applicable to Grameenpone's butchered version of mobile banking. India not only has a larger population but one that is more rural and spread out further than Bangladesh. Yet out of all the benefits they went for mobile banking, but not GP's version of mobile banking.

Similarly in Vietnam, less than 10% of the population have bank accounts but clearly more phone customers. But according to the consultants visiting Vietnam on GP's money, Vietnam should let GP solve this by bringing GP's version of mobile banking. What did Vietnam do instead? They got rid of more regulations that lets banks off the leash to serve the 'unbanked' and more freedom to expand further. Phone companies are strictly a medium, they were never equated to banking or mobile banking.

Much like GP's IPO valuation, its version of mobile banking follows the same logic as a supermodel's cure for world hunger and poverty. It is funny when they propose it, self-delusional and some misinformed people may be touched but yet we all move on in the end.

Grameenphone Attempted to Rob 40 Banks

Grameenphone single-handedly attempted the biggest bank heist in history. They were getting ready to rob 40 banks at once. (I wish I was being sarcastic). Even the Bangladeshi operations of Standard Chartered, HSBC and Citibank were perturbed by the attempt which also involved them. Clearly you have never heard anything about this white collar crime because the diversion was media advertisements.

Secondly after the most anticipated IPO in Bangladesh failed so horribly, I am beginning to suspect if Anders Jensen is purposely being made into a scapegoat. Ironically Anders Jensen had his own scapegoat, ex-CEO Erik Aas. But the media seems to be buying into the story that the blunders of Telenor and Grameenphone was all because of Anders Jensen. But the image, corporate culture and intentions of GP have always been immaculate?

An article published in The Financial Express clears the 'bhera' Jensen over the fence. More importantly it raises the issue that even though GP did everything right business-wise, their image and IPO took the hit due to the internal machinations and schemes developed perpetually on a corporate level (and not Anders Jensen). Its not a coincidence after the entire world said 'no' to the IPO, the 40 banks, held hostage, let the ball drop to the floor. Everyone would have believed GP's $3 billion valuation and even a $300 billion valuation if Grameenphone didn't take Bangladesh for granted so often.

I will end the talk right here, I won't spoil the details for you (as much as I am inclined to). The article is posted below:

Special thanks to The Financial Express for publishing the article. Even though 'Grameenphone' is not mentioned due to an advertisement embargo, the message is clear.


Pros and cons of phone companies doing mobile banking

MOBILE Phone Banking allows banks to make transactions and allow banking activity with the use of a mobile phone. The concept is not new and has existed since the '90s as banks try to take the next step in technology. However, the procedure and guidelines for mobile banking proposed by the country's leading mobile phone operator to the Bangladesh Bank is suspiciously unconventional.

The conventional, orderly method is what we see adopted in North America and Japan. In these regions the phones are merely a medium of banking communication. Mobile phones in the banking landscape serve solely as a method of convenience much like ATMs and bank branches.

Bank accounts are linked directly with the phone, the money transacted is done on the phone and the changes are applied onto the bank account. The phone company never transacts money or accepts money in accordance with the banking laws. What the concerned operator has proposed in our case is the opposite.

It wants the phone company to have the right to accept money and carry out financial transactions that have nothing to do with phone time. The related operator wants a mobile banking license for a mere Tk 350 million while banks will have to raise their paid up capital to Tk 4.0 billion. Simply put, the related mobile phone operator is buying a license to kill the Bangladeshi banking industry for Tk 350 million.

Banks in Bangladesh are governed by the strict Banking Act and centuries of banking traditions and norms. But the concerned mobile service-provider has not had to abide by any of the high standard regulations of the banking industry in its entire history. Instead, it has been fined repeatedly for deliberately manipulating and blatantly disregarding its own less-stringent regulations. Giving a banking license to it for an industry that is extremely regulated is absurd. Banks in Bangladesh are shocked at the possibility that it is only in Bangladesh that a phone company can get access to a banking license. The related mobile phone service-provider's initial proposal calls for the innocuous feature of local remittance. But the limits are extremely high on this feature. For instance, if a person does not withdraw the entire remittance at one time, the phone starts being a bank account. With a phone license, the concerned operator easily becomes a bank.

It -- the mobile company under mention -- has made an ethical claim to the issue stating that if it receives a mobile banking license, it will be taking banking facilities to the poor and 'unbanked'. Unknown to it, for the last three years, private commercial banks (PCB) have lobbied the Bangladesh Bank for rural booth licenses. Because the costs of running a full-fledged branch is high, a stripped down version or a booth would be the answer for delivering world class banking services to all corners of Bangladesh. However, the Bangladesh Bank opposed this step by PCBs. Now the related mobile phone operator wants to copy this concept and market it as its own by labeling it 'mobile banking'. The playing field is clearly not level for banks as the mobile phone service-provider's rural outlets will be subsidized by their phone business. Furthermore, the implications for state-owned banks are more morbid. State-owned banks are already hanging by a thread and a banking license for the related mobile phone operator will make the situation even worse for them. It is also notable that despite the lack of bank booths, banks use each others' branches to full capacity and also signed up with the post office to offer remittance services to rural areas as much as possible.

If concerned mobile phone service-provider receives a banking license, there are some issues that are of great concern. The first is money laundering. Never having been trained in financial forensics, without having knowledgeable staff or being regulated by strict money laundering rules, the said operator expects the Bangladesh Bank to believe that despite these high-risk shortcomings, the mobile phone service-provider has overnight become best suited to offer mobile banking. In reality it will jeopardise the financial security and integrity of Bangladesh by making the country vulnerable to external claims of illegal activities.

The second problem is while banks continue to use triple DES encryption and AES encryption to offer transaction security, the concerned operator wants to get away by relying on SMS. SMS has been proved to be insecure. This is the reason Japanese phone companies use an NFC Payment system (think of it as secure bluetooth) that is linked up with banks instead of SMS. Not only does the mobile phone service-provider see itself not cooperating with banks where bank involvement is crucial, but it has also disregarded any investment for a secure protocol. The lack of secure protocols will only shift the blame onto the customer in false claims and identity theft.

The related operator has selectively thrown around quite a few case studies: Kenya, Philippines and DiGi Telecommunications while systematically ignoring the entire continent of North America and Japan. It states that DiGi does mobile banking, but this example is biased to say the least. Digi Telecom is owned by a familiar multinational parent company (which also has a stake in the related mobile phone service-provider in our case). But the real icing is that DiGi had to partner with a bank, Citibank, for remittance/mobile-banking services. But the said operator is conveniently unaware of this. The situation with Kenya does not fare much better. Phone companies have held Kenyan banks hostage. Kenyan banks have claimed that they are being cornered by Kenyan foreign-owned phone companies, Safaricom and Zain.

Kenyan banks have alleged that the phone companies have taken their own liberty with the laws (similar to the scandal over the Bangladeshi VOiP) and are in the process of wiping them out. Since the Kenyan phone companies also have major foreign ownership, their foray into the banking industry takes out capital to Europe where it would traditionally be used for the improvement of the Kenyan economy. The interesting thing is that the concerned operator found Kenya's scrambled egg mess exemplary when compared to the tried and tested models which have served North America and Japan just fine.

Maybe we will find some insight in the way India decides to deal with its poor and 'unbanked'. India, as you may recall has foreign remittance that dwarfs Bangladesh's remittance. India not only has a larger rural population but a rural population that is spread over a landmass 23 times larger than Bangladesh. Yet Indian phone companies do not take the liberty to accept money for anything other than phone time. Mobile banking exists in the realm of banks, not the phone companies.

Indian banks and phone companies seem to be doing just fine without any cause of confrontation because each knows where they stand and the limitations of their respective licenses. Where is Bangladesh's unique headache for granting mobile banking licenses to phone companies stemming from?

It is not new for the concerned mobile phone operator in our situation to systematically ignore banking channels.

Its new service BillPay which lets users pay bills through mobile phones could have easily been tied up with a bank account. Instead it took the roundabout route and did it on their own terms ignoring banks entirely. The problem is that this writer does not recall the mobile phone license allowing the concerned mobile phone company, operator or service-provider to accept customer deposits for anything other than phone time. It might not disclose the fact that in western countries, all bills are paid through a bank account (be it mobile, branch or ATM).

Instead it takes the credit of bill payment by restricting banks from their mobile network while taking pieces of the banking industry piece by piece for themselves.

As for remedies to the hypocritical and contradictory views of the concerned mobile phone operator, there are a few solutions. If the Bangladesh Bank wants to take the risk and allow phone companies to do banking business, it should be done in the same conditions as in the US, where banks are the backbone and mobile companies act strictly as the vessel.

The second solution lies on the consensus that the unbanked cannot be bought under banking channels without mobile banking. If so, then why not provide a few mobile licenses collectively to banks so that they can bring the "unbanked" under their umbrella? But that wouldn't be fair to phone companies as the banks would be getting more for their highly regulated banking license. Or would it?

The Concert for Iceland

Henry Kissinger in 1971 remarked Bangladesh is the "basket case". Fast forward to 2008, Iceland, as a country, is threading on shaky ground after the sub-prime mortgage fallout. While I am not celebrating this news, I would like to remind everyone Bangladesh's accomplishment in preventing this type of 'basket case' scenario.

Clearly the laws of nature are against Bangladesh where we have been bombarded with every natural calamity possible. But bankruptcy is a man-made disaster and by the gesture of not acting (or doing anything) we have succeeded remarkably. We lack the financial instruments, the financial maturity and the financial knowledge that are being used in other developed countries. But even with this lack of knowledge our banks and financial institutions did not invest in "asset backed securities". Thereby avoiding a larger man-made disaster than puts some natural ones to shame. Congratulations.