Mergers and Acquisitions are terms almost always cross border car service hong kong used together in the business world to refer to two or more business entities joining to form one enterprise. More often than not a merger is where two enterprises of roughly equal size and strength come together to form a single entity. Both companies’ stocks are merged into one. An acquisition is usually a larger firm purchasing a smaller one. This takes the form of a takeover or a buyout, and could be either a friendly union or the result of a hostile bid where the smaller firm has very little say in the matter. The smaller, target company, ceases to exist while the acquiring company continues to trade its stock. An example is where a number of smaller British companies ceased to exist once they were taken over by the Spanish bank Santander. The exception to this is when both parties agree, irrespective of the relative strength and size, to present themselves as a merger rather than an acquisition. An example of a true merger would be the joining of Glaxo Wellcome with SmithKline Beecham in 1999 when both firms together became GlaxoSmithKline. An example of an acquisition posing as a merger for appearances sake was the takeover of Chrysler by Daimler-Benz in the same year. As already seen, since mergers and acquisitions are not easily categorised, it is no easy matter to analyse and explain the many variables underlying success or failure of M&As.
Historically, a distinction has been made between congeneric and conglomerate mergers. Roughly speaking, congeneric firms are those in the same industry and at a similar level of economic activity, while conglomerates are mergers from unrelated industries or businesses. Congeneric could also be seen as (a) horizontal mergers and (b) vertical mergers depending on whether the products and services are of the same type or of a mutually supportive nature. Horizontal mergers may come under the scrutiny of anti-trust legislation if the result is seen as turning into a monopoly. An example is the British Competition Commission preventing the country’s largest supermarket chains buying up the retailer Safeway. Vertical mergers occur when a customer of a company and that company merges, or when a supplier to a company and that company merges. The classic example given is that of an ice cream cone supplier merging with an ice cream manufacturer.
The ‘first wave’ of horizontal mergers took place in the United States between 1899 and 1904 during a period referred to as the Great Merger Movement. Between 1916 and 1929, the ‘second wave’ was more of vertical mergers. After the great depression and World War II the ‘third wave’ of conglomerate mergers took place between 1965 and 1989. The ‘fourth wave’ between 1992 and 1998 saw congeneric mergers and even more hostile takeovers. Since the year 2000 globalisation encouraging cross-border mergers has resulted in a ‘fifth wave’. The total worldwide value of mergers and acquisitions in 1998 alone was $2.4 trillion, up by 50% from the previous year (andrewgray.com). The entry of developing countries in Asia into the M&A scene has resulted in what is described as the ‘sixth wave’. The number of mergers and acquisitions in the US alone numbered 376 in 2004 at a cost of $22.64 billion, while the previous year (2003) the cost was a mere $12.92 billion. The growth of M&As worldwide appears to be unstoppable.
What is the raison d’etre for the proliferation of mergers and acquisitions? In a nutshell, the intention is to increase the shareholder value over and above that of the sum of two companies. The main objective of any firm is to grow profitably. The term used to denote the process by which this is accomplished is ‘synergy’. Most analysts come up with a list of synergies like, economies of scale, eliminating duplicate functions, in this case often resulting in staff reductions, acquiring new technology, extending market reach, greater industry visibility, and an enhanced capacity to raise capital. Others have stressed, even more ambitiously, the importance of M&As as being “indispensable…for expanding product portfolios, entering new markets, acquiring new technologies and building a new generation organization with power and resources to compete on a global basis” (Virani). However, as Hughes (1989) observed “the predicted efficiency gains often fail to materialise”. Statistics reveal that the failure rate for M&As are somewhere between 40-80%. Even more damning is the observation that “If one were to define ‘failure’ as failure to increase shareholder value then statistics show these to be at the higher end of the scale at 83%”.
In spite of the reported high incidence of its failure rate “Corporate mergers and acquisitions (M&As) (continue to be) popular… during the last two decades thanks to globalization, liberalization, technological developments and (an) intensely competitive business environment” (Virani 2009). Even after the ‘credit crunch’, Europe (both Western and Eastern) attract strategic and financial investors according to a recent M&A study (Deloitte 2007). The reasons for the few successes and the many failures remain obscure (Stahl, Mendenhall and Weber, 2005). King, Dalton, Daily and Covin (2004) made a meta-analysis of M&A performance research and concluded that “despite decades of research, what impacts the financial performance of firms engaging in M&A activity remains largely unexplained” (p.198). Mercer Management Consulting (1997) concluded that “an alarming 48% of mergers underperform their industry after three years”, and Business Week recently reported that in 61% of acquisitions “buyers destroyed their own shareholders’ wealth”. It is impossible to view such comments either as an explanation or an endorsement of the continuing popularity of M&As.
Traditionally, explanations of M&A performance has been analysed within the theoretical framework of financial and strategic factors. For example, there is the so-called ‘winner’s curse’ where the parent company is supposed to have paid over the odds for the company that was acquired. Even when the deal is financially sound, it may fail due to ‘human factors’. Job losses, and the attendant uncertainty, anxiety and resentment among employees at all levels may demoralise the workforce to such an extent that a firm’s productivity could drop between 25 to 50 percent (Tetenbaum 1999). Personality clashes resulting in senior executives quitting acquired firms (‘50% within one year’) is not a healthy outcome. A paper entitled ‘Mergers and Acquisitions Lead to Long-Term Management Turmoil’ in the Journal of Business Strategy (July/August 2008) suggests that M&As ‘destroy leadership continuity’ with target companies losing 21% of their executives each year for at least 10 years, which is double the turnover of other firms.
Problems described as ‘ego clashes’ within top management have been seen more often in mergers between equals. The Dunlop – Pirelli merger in 1964 which became the world’s second largest tyre company ended in an expensive splitting-up. There is also the merger of two weak or underperforming companies which drag each other down. An example is the 1955 merger of car makers Studebaker and Packard. By 1964 they had ceased to exist. There is also the ever present danger of CEOs wanting to build an empire acquiring assets willy-nilly. This often is the case when the top managers’ remuneration is tied to the size of the enterprise. The remuneration of corporate lawyers and the greed of investment bankers are also factors which influence the proliferation of M&As. Some firms may aim for tax advantages from a merger or acquisition, but this could be seen as a secondary benefit. Another reason for M&A failure has been identified as ‘over leverage’ when the principal firm pays cash for the subsidiary assuming too much debt to service in the future.
M&As are usually unique events, perhaps once in a lifetime for most top mangers. There is therefore hardly any opportunity to learn by experience and improve one’s performance, the next time round. However, there are a few exceptions, like the financial-services conglomerate GE Capital services with over 100 acquisitions over a five-year period. As Virani (2009) says “…serial acquirers who possess the in house skills necessary to promote acquisition success as (a) well trained and competent implementation team, are more likely to make successful acquisitions”. What GE Capital has learned over the years is summarised below.
1. Well before the deal is struck, the integration strategy and process should be initiated between the two sets of top managers. If incompatibilities are detected at this early stage, such as differences in management style and culture, either a compromise could be achieved or the deal abandoned.
2. The integration process is recognised as a distinct management function, ascribed to a hand-picked individual selected for his/her interpersonal and cross-cultural sensitivity between the parent firm and the subsidiary.
3. If there are to be lay-offs due to restructuring, these must be announced at the earliest possible stage with exit remuneration packages, if any.
4. People and not just procedures are important. As early as possible, it is necessary to form problem solving groups with members from both firms resulting, hopefully, in a bonding process.
These measures are not without their critics. Problems could still surface long after the merger or acquisition. Whether to aim for total integration between two very different cultures is possible or desirable is questioned. That there could be an optimal strategy out of four possible states of: integration, assimilation, separation or deculturation.
A paper by Robert Heller and Edward de Bono entitled ‘Mergers and acquisitions and takeovers: Buying another business is easy but making the merger a success is full of pitfalls’ (08/07/2006) looks at examples of unsuccessful mergers from the relatively recent past and makes recommendations for avoiding their mistakes. Their findings could be generalised to other M&As and therefore is worth paying attention to.
They begin with the BMW – Rover merger where they have identified strategic failings. BMW invested £2.8 billion in acquiring Rover and kept losing £360,000 annually. The strategic objective had been to broaden the buyer’s product line. However, the first combined product was the Rover 75, which competed directly with existing BMW mid-range models. The other, existing Rover cars were out of date and uncompetitive, and the job of replacing them was left far too late.
Another fly in the ointment was that the stated profits that Rover had supposedly enjoyed were subsequently seen as illusory. Subjected to BMWs accounting principles, they were turned into losses. Obviously, BMW had failed in the exercise of ‘due diligence’. (Due diligence is described as the detailed analysis of all important features like finance, management capability, physical assets and other less tangible assets (Virani 2009). Interestingly, the authors allude to instances of demergers being more successful than mergers. For example, Vodafone, the mobile telephone dealer, which was owned by Racal, is now valued at $33.6 billion, 33 times greater in value than the parent company Racal. The other instance is that of ICI and Zeneca where the spin-off is worth £25 billion as against the parent company being valued at £4 billion.
The authors refer to the fact that after a merger, the management span at the top becomes wider, and this could impose new strains. Due to difficulties in adjustment to the new realities, the need for positive action tends to get put on the back burner. Delay is dangerous as the BMW managers realised. While BMW set targets and expected 100% acquiescence, Rover was in the habit of reaching only 80% of the targets set. Walter Hasselkus, the German manager of Rover after the merger, was respectful of the Rover’s existing culture that he failed to impose the much stricter BMW ethos, and, ultimately lost his position.
Another failure of strategy implementation by BMW recognised by the authors was that of investing in the wrong assets. BMW paid only £800 million for Rover, but invested £2 billion in factories and outlets, but not in developing products. BMW hitherto had concentrated quite successfully on executive cars produced in smaller numbers. They obviously felt vulnerable in an industry dominated by large, volume producers of cars. It is not always the case that bigger is better. In fragmenting markets, even transnational corporations lose their customers to niche, more attractive, small players.
There was an earlier reference in this essay to the success of giant pharmaceuticals like SmithKline Beecham. However, they are now losing large sums of money to divest themselves of drug distribution companies they acquired at great cost; clearly a strategic mistake, which the authors’ label ‘jumping on the bandwagon’. They quote a top American manager bidding for a smaller financial services company in 1998 being asked why, as saying ‘Aw, shucks, fellers, all the other kids have got one…’ The correct strategy, they imply, is to reorganise around core businesses disposing of irrelevancies and strengthening the core. They give the example of Nokia who disposed of paper, tyres, metals, electronics, cables and TVs to concentrate on mobile telephones. Here’s a case of successful reverse merging. On the other hand, top managers should have the vision to transform a business by imaginatively blending disparate activities to appeal to the market.
Ultimately it is down to the visionary chief executive to steer the course for the new merged enterprise. The authors give the example of Silicon Valley, where ‘new ideas are the key currency and visionaries dominate’. They say that the Silicon Valley mergers succeeded because the targets were small and were bought while the existing businesses themselves were experiencing dynamic growth.
What has so far not being addressed in this essay is the phenomenon of cross-border or cross-cultural mergers and acquisitions, which are of increasing importance in the 21st century. This fact is recognised as the ‘sixth wave’, with China, India, and Brazil emerging as global players in trade and industry. Cross-cultural negotiation skills are central to success in cross-border M&As. Transnational corporations (TNCs) are very actively engaged in these negotiations, with their annual value-added business performance exceeding that of some nation states. A detailed exposition of the dynamics of cross-cultural negotiations in M&As is found in Jayasinghe 2009 (pp. 169 – 176). The ‘cultural dynamics of M&A’ has been explored by Cartwright and Schoenberg, 2006. Other researchers in this area use terms such as ‘cultural distance’ ‘cultural compatibility’, ‘cultural fit’, and ‘sociocultural integration’ as determinants of M&A success.
There is general agreement that M&A activity is at its height following an economic downturn. All five historical ‘waves’ of M&A dealings testify to this. One of the main reasons for this could be the rapid drop in the stock value of target companies. A major factor in the increase in global outward foreign direct investment (FDI) stock which was $14 billion in 1970, to $2,000 billion in 2007, was ‘due to mergers and acquisitions (M&As) of existing entities, as opposed to establishing an entirely new entity ( that is, ‘Greenfield’ investment’)’ (Rajan and Hattari 2009). Increased global economic activity alone may have accounted for this increase. In the early 1990s M&A deals were worth $150 billion, while in the year 2000 it had peaked to $1,200 billion, most of it due to cross-border deals. However, by 2006 it had dropped to $880 billion. Rajan and Hattari (op cit) ascribe this growth to the growing significance of the cross-border integration of Asian economies.
During 2003-06, the share of developed economies (EU, Japan and USA) in M&A purchases had declined. From 96.5 percent in 1987 it had fallen to 87 percent by 2006. This is said to be due to the ascendancy of developing economies of Asia both in terms of value as well as the number of M&As. Substantiating the thesis that economic downturns appear to boost M&A activity, sales jumped following the Asian crisis of 1997-98. While in 1994-96 the sales were put at $7 billion, it had increased three-fold to $21 billion between1997-99. Rajan and Hittari (2009) attribute this increase to the ‘depressed asset values compared to the pre-crisis period’. Indonesia, Korea and Thailand affected most by the crisis reported the highest M&A activity.
China is one of those countries not suffering from the effects of global recession to the same extent as most Western economies. China has been buying assets from Hong Kong, and in 2007 the purchases amounted to 17 percent of the total M&A deals in Asia (excluding Japan). Rajan and Hattari looked at investors from Singapore, Malaysia, India, Korea and Taiwan. This led to the hypothesis that the greater size of the host country and its distance from the target country is a determinant of cross-border M&A activity. They also found that exchange rate variability and availability of credit are factors impacting on M&As, and have generalised this to conclude that ‘financial variables (liquidity and risk) impact global M&A transactions… especially intra-Asian ones’.
On the other hand, it is reported that overall M&As were hit by the global recession and had lost valuation by 76% by 2009. While 54 deals worth $15.5 billion occurred in 2008 between April and August, during the same period 72 M&A deals were worth only $3.73 billion in 2009. The industries dominating the M&A sectors were IT, pharmaceuticals, telecommunications, and power. There were also deals involving metal, banking/finance, chemical, petrochemical, construction, engineering, healthcare, manufacturing, media, real estate and textiles.
The influential Chinese consulting firm, China Center for Information Industry Development (CCID) has concluded that although some enterprises are on the brink of bankruptcy during the global recession, it has ‘greatly reduced M&A costs for enterprise’. As industry investment opportunities fall, investment uncertainties increase, M&As show bigger values…. As proven in the 5 previous high tide of global industry capital M&As, every recession period resulting from (a) global financial crisis has been a period of active M&As’.
Most commentators believe that in addition to the empirical research as quoted above, research from a wider perspective to encompass the disciplines of psychology, sociology, anthropology, organisational behaviour, and international management, is needed to make continual improvements to our understanding of the dynamics for the success or failure of mergers and acquisitions, which are increasingly becoming the most popular form of industrial and economic growth across the globe. The evidence regarding how the current global financial crisis affects the proliferation of M&As has not been straightforwardly negative or positive. Many intervening variables have been hinted at in this essay but more systematic work is required for an exhaustive analysis.
A Karachi-based banker receives the latest update on stocks from his counterpart in Hong Kong in a blink of an eye. That information is then relayed to a customer in Doha who then orders electronics made in Chengdu transported across the proposed CPEC route and then by sea on a bulker ship to its final destination. The breakneck pace and the astonishing volumes at which goods, information, and money move from one part of the world to another is conquering inhospitable terrains, exploring new sea lanes, defying traditional methods of communication, taking the world online, and exploiting untapped energies. Global interconnectedness through trade has always and is constantly determining, redesigning, and reshaping human life at a scale never imagined before. London shoppers buy garments made in Pakistan. Chinese watch American TV seasons. Arabs use software developed in Silicon Valley to instigate an earth shattering revolution. The overbearing influence of international trade on human lives is remarkable in the truest sense of the word. Both literally and otherwise, international trade is having a great impact on the way humans conducted life and business.
But the idea of global interconnectedness is not new, in fact, it can be traced back to the time of Han Dynasty in 221 BCE when all of China came under one supreme rule. About the same time, the conquests of Alexander established a veritable contact between the Western and Eastern societies widening existing road networks and creating new trade routes. Over the course of next several centuries, a gigantic web of trade networks emerged which spanned continents drawing from China silk, tea, porcelain, and jade while gold and glass wares travelled from Rome, the western terminus of the famous Silk Road. Along the way, many items were picked up from many regions and local kingdoms of Middle East and India which eventually benefited the local populations also. The trade links formed along the breadth and width of the 5000 miles long Silk Road were commercial, cultural, technological, but also financial in nature. The goods, technologies, and even diseases of all kinds were exchanged; such was the power of international trade. Back then, the roads were long, treacherous, and unpredictable. And crossing the inhospitable terrains was incredibly dangerous but the huge demand for goods led to the creation of a complex web of trade networks which were duly supported by local financial moneylenders and money-exchangers backed by local governments and fiefdoms.
The long-awaited revival of the old Silk Road (as enshrined in the One Belt, One Road Project of China) has the potential to genuinely alter the world economics like never before in history. This largest ever financial undertaking since the Marshall Plan by USA for Europe post World War II will include over 60 countries and most likely to generate $ 2.5 trillion dollars in trade, if the regional plan works according to the design. This regional pact promises to economically benefit the countries included in it by linking them to global trade networks. Imagine a good chunk of that trade passing through Pakistan and affecting the life and finances of ordinary Pakistanis. This life altering, game-changing, golden goose transformed into a trade route is called China Pakistan Economic Corridor.
The $ 46 billion dollar China Pakistan Economic Corridor (CPEC) is an important part of this OBOR project which connects the Western parts of China and Central Asian Republics to the Gawadar port in the Arabian Sea. The deep sea port of Gawadar is strategically located just outside the Strait of Hormuz and near the main shipping route of global oil trade and it is the closest trade route to the landlocked Central Asian Countries which have enormous natural resources and untapped market potential. And Pakistan stands to benefit from all that because this CPEC is not just a trade route but a complete project for life which includes energy projects, railroads, 25 industrial zones, and cross border fiber optics which will connect Pakistan with the world both on technological and trade fronts.
Developing countries struggle in the wake of hindered access to markets, lack of finance, and limited infrastructure at home to support economic activities. In that context, the CPEC promises to take Pakistan straight into the international foray where big players play.
But here is the kicker: when the global trade fever kicks in through the CPEC, then Pakistan must be ready to welcome it.
The ability to meet the challenges of international trade head-on and that too with great success will largely depend on Pakistan’s banking & financial sector’s readiness in adjusting to the new trade environment.
The influence and impact of local and domestic players and a whole host of homebred economic forces may ratchet down with the increased international trade moving feverishly back and forth and back again across the CPEC routes. Pakistan’s banks will have to calibrate their strategic position in order to be able to take advantage of the money movements resulting from increased trade passing through the country.
Increased integration through increased trade and more of international trade passing through the proposed CPEC routes will create a new set of challenges, opportunities, and risks for the Pakistani banking and financial sector offering financial services to local businesses and their foreign affiliates, to the government and investors at home and abroad.
If history offers any guidance, then it is a known fact that Pakistan’s economy never really depended on huge trade volumes (with the current trade volume hovering at about $ 80 billion) as so much as it will do in near future. For once, the central bank of Pakistan (State Bank of Pakistan) in particular will have to use interest rate swings to keep inflation in check, and others banks may have to make considerable adjustments in their positions by administering some radical and some not so radical but smart changes and tweaks here and there in their financial offerings to meet the changing dynamics of the new trade environment in Pakistan. The economic shocks resulting from the new trade environment can be both positive and negative depending on how they are confronted. Therefore, adjustments have to be made accordingly which could result in a great earning opportunity for many.
The contrasting snapshot of Pakistan’s current trade environment juxtaposed with the picture of trade likely to emerge in near future offers a great insight into what the local businesses and financial & banking sector might have to deal with when billions of dollars of trade starts to pass through Pakistan. It is important to understand this because the CPEC is going to touch Pakistan on many levels. Pakistan’s current business environment is characterized by a massive shortfall of electricity which can reach as much as 5 million kilowatts in the summers. This electricity shortage acts as a bottleneck in the process of industrialization of underdeveloped economies which means that production lines and factories come to a grinding halt due to lack of energy. Many companies, banks, private businesses, government offices, and even the shopkeepers & students especially only those who have the means are forced to use private generators when the light goes out. But all that is about to change: the Neelum-Jehlum Hydropower plant which is the largest ever overseas power plant undertaking by any Chinese firm will alleviate 15% of electricity shortage. It will generate 45 billion Rupees or $ 400 million in revenues. It is just one of the 22 projects which are included in the CPEC. Thus, the CPEC is truly a game changer as it possesses the ability to get the infrastructure ready for integrating Pakistan with the international trade regimes.
The improvement in the macro environment is evidently in the pipeline with substantial investments taking place in the infrastructural development which if supported by the banking sector and small improvements in the basic micro infrastructure stands to give huge advantage to Pakistan on the back of three major global trends promising to alter fortunes of Pakistan for the better now and forever which include investments from China coming in, the return of Iran into the international economy, and the low oil prices.
Therefore, the new trade environment of Pakistan will be made up of the results of the CPEC which will offer greater, seamless, and hassle-free access to Central Asia Countries where the potential for business, banking, and trade is immense and the markets there virtually untapped, untouched, and not fully exploited or explored. This means that the trade volumes are going to skyrocket, or break the ceiling, or simply exceed expectations as new markets are explored and regional economies get ready for more consumption. Thus, the prospect of making some serious moolahs on the back of the CPEC is too alluring to ignore for both businesses and banks.
Where there is increased trade, there is a trail of money to be found, and there must be a bank nearby. And all trades since the ancient times required a most secure method for all kinds of financial transactions. And that is where banks jump right into the foray big time. Even in the old days when trade was happening through the Silk Road, local money lenders and money exchangers acting as small bankers were offering some kind of safety and security to the financial transactions taking place along the route. The safety and security of financial transactions is as important as giving a real boost to international trade.
There are two important things: first and foremost, no country can ever grow quickly and persistently over a long period of time by staying disconnected from the international trade. And second of all, no country can become a thriving economy on the back of trade without the active backing of an equally robust and thriving banking sector facilitating that trade.
In any trade environment, the most important thing for an exporter is to get paid and for an importer to get his goods. If the exporter is not getting paid, then he is sending gifts. The banks can facilitate the trade by offering guarantees and other financial services to both exporters and importers in Pakistan. The payment methods if made secure and mediated by banks can help both the trade and bank. The international trade has many payment methods which include Cash-in-Advance, Letters of Credit, Bills of Exchange or Documentary Collections, and Open Account etc. Cash in advance method is best for exporters and riskier for importers. However, LCs or letters of credit is considered to be the most reliable and secure method available to international traders which is basically a guarantee given by a bank on behalf of the importer that if the terms of the LC are met by the exporter, the exporter will get his agreed payment. Billions of dollars of trade in USA is made secure by LCs offered by their banking sector. Documentary Collections or Bills of Exchange is another product which banks offer and is available to international traders. In this method of payment, a bank is nominated which receives the shipping documents from the exporter and once the importer comes in with the money, the goods can be claimed and picked up by the importer. Even in the open account payment method, banks are used as intermediaries between international traders.
Therefore, the biggest question that confronts Pakistani banking sector is this: are they ready for what is about to hit them? Because there could be 1001 ways to make real wampum once the CPEC gets underway. Sooner rather than later, Pakistan’s trade environment will be truly global. The banks will have to offer new financial services or old financial offerings into a newly designed package but at an unprecedented scale and magnitude. The bank will to adjust to new trade environment taking shape in the country because it is no secret that international trade slows down if the financial banks are unable to offer secure payment methods.
According to the estimates of World Trade Organization, around 80 percent of world trade is backed up by financial offerings and credit guarantees offered by the banks. The reason is fairly simple: everyone wants to be on the safer and beneficial side when the trade happens. The exporter wants to receive payment as soon as the goods are delivered and the importer wants to keep his money with him until he has received the goods because there is an element of risk involved in international trade. Thus, the role played by banks in facilitating global trade is huge. For the developing countries, this role played by banks assumes greater significance because the growth of developing countries greatly depends upon trade volumes which are likely to stay strong and persistent if the banking sector is able to meet the demand for LCs, payment guarantees, and other insured financial services and help keep the wheels of trade moving along smoothly and surely. That is how the banking sector stands to benefit from the shifting trends in the trade environment of Pakistan which will be soon connected with the economies of the world that matter.
Pakistani banks will be able to explore new ways for making more revenues for themselves and for traders by forging new and unbreakable alliances with the corporate world, make cross border financial agreements, taking their services worldwide, and facilitating the trade so that the trade could move seamlessly across the borders.
Pakistani banks will have to find ways to offer cost effective solutions to international traders. The banks must offer these services in an efficient manner on an absolutely new scale and manage its own operations in a way that the banks can stay competitive and truly global over the coming decades. Their offerings of LCs and Bills of Exchange must be more efficient, robust, and really good if not better than those offered by international bankers. Pakistani banks can automate their financial services in the wake of the new trade environment.
The banks in Pakistan can make use of the latest technology which helps in automatically classifying LCs as they are generated in the form of invoices, purchase orders, agreements, and other certificates facilitating cross border trade. This wholehearted adoption of technology is going to put Pakistani banks on par with the rest of the banks in the world but will also prove to be less cumbersome, cost effective, and time saving. This in turn will help boost the trade big time. Pakistani banks will also have to ensure accuracy of their data in order to ensure compliance regulations. This can be done by the use of intelligent technology which helps in ensuring timely extraction, validation, and screening of the data and documents submitted with the banks. These are some of the things that banks in Pakistan must possess if they wish to improve their financial services for the facilitation of trade and also position themselves to better manage the trade happening and passing through the country. The adoption of the right kind of technology, better positioning of trade financial services, and making right adjustments to the scale and magnitude of the expected trade will definitely put Pakistani banks on the world map that helped the country become more competitive both globally and regionally.
The new Silk Road is estimated to generate $ 2.5 trillion in trade over the next ten years and some of that trade will pass through the proposed CPEC routes. China imports 60% of its oil from the Gulf and 48% of China’s oil is transported via tanker ships which have to travel 16,000 kilometers for up to three months through the Malaka Straits and through the South China Sea which is fast becoming a contested region marked by competing claims to the sea lanes. That makes the trade through that route somewhat unsafe, uncertain, and ridden with untoward risks. And due to this ensuing uncertainty Gawadar Port offers a much less expensive alternative route which offers savings worth billions of dollars. Just in terms of numbers, CPEC once fully underway will add two percentage points to the GDP growth of Pakistan which will effectively take the GDP beyond 6% growth rate annually. That figure in itself speaks volumes about the sheer money potential of this proposed project. It has the potential to bring in huge influxes of money which would definitely force the banking industry to grow.
In the wake of CPEC, a great number of opportunities are coming to Pakistan. The need for strategic management, strategic budgeting, forecasting, planning, overall project accounting, investment banking, new and improved financial services are going to surge. The sectors of shipping, storing, transportation, and finance are going to jack up with huge financial appetite requiring more innovative and improved fast-paced financial and banking services on a larger than life scale. The need for taxation and streamlining of the taxation regime post CPEC will be undeniably great.
Anti-money laundering specialists, branch managers, financial analysts, CFOs, financial consultants, tax managers, financial management, banking consultants, investment bankers, trade marketers, and trade accountants will be in great demand over the next decade. Financial services and financial and banking sector will be in full swing once the trade through CPEC begins to flourish.
Increasing trade is the key to alleviating abject poverty, boosting economic activities and achieving shared prosperity. Evidence shows that countries open to trade and with better access to markets and better financial support infrastructure and regime for businesses and trade are able to provide more opportunities to their people to become successful businessmen, bankers, traders, and entrepreneurs. With enhanced participation in world economy, Pakistan stands a chance to become a major world economy.
Pakistani banks can learn a lesson or two from the banks of China and India. 3 out of top ten banks in the world are Chinese. They got to the place where they are today by actively supporting the international trade and offering products that helped in transforming local traders into world beaters.This happened because in order to ensure double digit economic growth, Chinese banks stepped up their game and grew exponentially in order to provide funds and credit for China’s rapid economic development. Banks in India are reaching out to the remotest areas through a wide network of branch banking.
Risky investments are likely to go up as soon as the trade along the CPEC jumps into proper action. In a short span of time, economic wheels will start to roll with increased trade gyrations. With the increased privatization and undiscovered investment opportunities emerging in the economy, Pakistani banks could very well be looking at a rosy fiscal picture. Even an ordinary fruit exporter could be looking the way of the investment bankers to suggest ways for more financing opportunities for improving trade with the CARs.
In the wake of what is about to happen, Pakistani banking industry can do a few things to meet the ensuing challenges of CPEC: mobilizing savings through a wide network of branch banking; transforming savings into capital formation which could become the basis for more economic prosperity and development; finance the industrial sector and boost the capital markets; promote entrepreneurship by underwriting shares of new or existing companies; and help people acquire new skill sets in order to be able to better cope with the impending changes and major alterations expected to be caused by the new trade environment in Pakistan.
International trade is risky. Exporters want to be paid and importers want to receive their goods.To reduce the risk of losing money or goods, banks offer trade finance products like LCs etc., to facilitate trade. A shortfall in the supply of trade finance could result in trade also plunging – a scenario which Pakistani banks can avoid. G20 countries are already supporting trade finance. Now the ball is in the court of Pakistani banks to lead the charge. Now is the time to make or break: facilitate trade or run the risk of losing the game to other players.