Muhammad Farrukh Saleem

Research and Analysis Project Oxford Brookes University, UK Table of Contents 1 1.1 1.2 1.3 Project Objectives and Research Approach ....................................................................... 4 Research Questions ............................................................................................................. 4 Topic chosen and its reason ................................................................................................ 4 1.2.1 Reason to choose the Company ............................................................................. 4 1.3.1 Ratio Analysis ......................................................................................................... 5 1.3.3 Understanding the organization and its environment ........................................... 5 Objectives and Research Approach..................................................................................... 5 1.3.2 2 a) b) 2.1 2.2 3.2 3.3 3.4 PEST Analysis ............................................................................................. 6 Sources of Information ........................................................................................................7 2.1.1 Primary Sources...................................................................................................... 7 2.1.2 Secondary Sources ................................................................................................. 8 2.2.1 Ratio Analysis ......................................................................................................... 8 2.2.3 SWOT Analysis ........................................................................................................ 9 a. Limitations faced and ethical issues and how I dealt with ........................ 7 Accounting / Business Techniques Used ............................................................................. 8 2.2.4 3.1 SWOT analysis ........................................................................................... 6 Information Gathering and Accounting / Business Techniques Used .............................. 7 2.2.2 3 Competitor Analysis ............................................................................................... 5 Competitor Analysis ............................................................................................... 9 PEST Analysis ........................................................................................................10 Business and Financial Analyses and Conclusions ........................................................... 11 Company Profile ................................................................................................................11 3.1.1 3.1.2 Vision Statement ..................................................................................................11 Services.................................................................................................................12 Introduction to Takaful Industry .......................................................................................12 Sharia Compliance ............................................................................................................13 Quantitative Analysis.........................................................................................................15 3.4.1 i) ii) iii) 2|Page Ratio Analysis .......................................................................................................15 Gross Contributions..............................................................................................15 Operating Analysis................................................................................................15 Assets Analysis......................................................................................................17 Research and Analysis Project Oxford Brookes University, UK iv) Gross Profit Ratio .................................................................................................18 vi) Liquidity Ratio .......................................................................................................20 v) vii) viii) 3.4.2 Competitor analysis ..............................................................................................24 Earning Per Share .................................................................................................23 Qualitative Analysis ..........................................................................................................26 3.5.1 SWOT Analysis .....................................................................................................26 a. Conversion of Weaknesses into Strengths ...........................................................27 3.5.2 PEST Analysis .......................................................................................................28 i) ii) Conversion of Threats into Opportunities and capitalizing on opportunities .....27 Political Factors ....................................................................................................28 Economic Factors .................................................................................................28 a. Global economy....................................................................................................28 iii) Social Factors ........................................................................................................29 b. iv) National economy ................................................................................................29 Technological Factors ...........................................................................................29 Conclusions........................................................................................................................30 3.6.1 Industry Overview and environment ...................................................................30 3.6.3 Financial Analysis..................................................................................................30 3.6.2 3.7 Investor Ratios ......................................................................................................22 Return on Investment ..........................................................................................22 b. 3.6 Equity Comparison Ratio ......................................................................................21 a. b. 3.5 Net Profit Ratio .....................................................................................................18 Business Analysis ..................................................................................................30 Future Outlook and Recommendations ...........................................................................32 3|Page Research and Analysis Project Oxford Brookes University, UK 1- Project Objectives and Research Approach Oxford Brookes University (UK) provides ACCA students with the opportunity to get a world recognized degree through passing a research and analysis project. Being in UK, I knew the value of OBU degree and was highly motivated to gain it. I had a plan to visit Pakistan summer 2011 for two months and decided to capitalize on this opportunity and do my research project during this period. Therefore, I started work soon after reaching there and met with Mr. Sufyan Zubair to act as my mentor and with his consent, proceeded further. 1.1 Research Questions As a first step, I developed some research questions for myself so that I could develop my objectives based on them which are the following: 1. Which should be the topic, industry and company should be researched for RAP? 2. After selecting the above two, what are the main objectives and aims of the project and how shall I meet them? 3. What information would be needed, from primary or secondary sources and how to gather it? 4. How to analyze the business and financial position and performance of the selected company? 5. Extent of IT, communication, writing skills I have to demonstrate to pass the RAP? 1.2 Topic chosen and its reason Before choosing the topic, I read OBU RAP and discussed with other ACCA students who already passed the thesis about the available options. After consultations, I selected topic number 8 which was to evaluate the business and financial performance of an organization over three years time. This topic was highly relevant to my ACCA studies and opportunity to practically use different financial and business models to assess performance of an organization in an independent and professional manner. Another plus point was that most of the required data for this topic was efficiently available. I discussed the topic selection with my mentor and he inquired me about my understanding of topic scope and tools which I intended to use to evaluate performance. He also emphasized on assessing ‘business’ performance as well as ‘financial’ performance. On his go ahead, I started work expeditiously. 1.2.1 Reason to choose the Company I wanted to do research on some Islamic financial institution. Therefore, I searched into different companies and came across a venture between Qatar and Pakistan namely “Pak Qatar General Takaful Limited”. It was started in 2006 as one of pioneer Takaful companies and currently is a rapidly growing institution with aggressive marketing strategy. I did analysis over the period 2007 to 2009 because the latest annual reports of 2010 were not available at that time. 4|Page Research and Analysis Project Oxford Brookes University, UK 2- Information Gathering and Accounting / Business Techniques Used 2.1 Sources of Information To achieve the report objectives, information needed to be collected from a variety of sources both internal and external to the subject organization. For Topic 8, most of financial information was readily available in the form of published financial statements. However, financial statements were not containing answers to many questions I set to address in the report for the analysis purposes particularly business performance. These sources can be divided into two main categories: 2.1.1 Primary Sources Information gathered directly from the source including management, employees, customers, investors etc. through surveys, observation, interview, emails or other methods during the research process is called Information from Primary sources. This is most authentic source because the researcher derives it directly from the information source specifically for the research purposes while at the same time difficult to collect being its nature. Oxford Brookes University (2009) BSc Info Pack.1 Wikipedia.org (2011) Primary source (Definition).2 a. Limitations faced and ethical issues and how I dealt with When I contacted to meet Mr. Kamran Saleem, CFO and the Company Secretary, for the project, only a telephone discussion was possible and we briefly discussed the current situation of the company and their planning about the future. Keeping in view of the sensitivity of information, I assured him about the confidentiality of data because they are a private company and not bound to public their financial information and that any information will be used solely for the research purposes. I also told him about the internal controls of OBU that this will not be published anywhere in the world and will be checked in confidential manner by the university. He acknowledged importance of this issue and appreciated that I was aware of professional research ethics and expressed his satisfaction. Since he had busy schedules those days, he asked Mr. Mufti Ismatullah, Sharia Advisor, to cooperate with me and he responded to my queries satisfactorily in a pleasant manner. He gave me his personal mobile number in case of any further clarification which was a kind act of him. Similarly, I found difficulty in getting the financial statements of PKTCL (competitor) through their website or other internet sources and their management was kind enough to send me a hard copy through courier. I also assured them regarding confidentiality of their information they provided to me for research purposes. 7|Page Research and Analysis Project Oxford Brookes University, UK 3.1 3- Business and Financial Analyses and Conclusions Company Profile PAK-QATAR General Takaful Ltd is registered under companies Ordinance 1984 with SECP. It has 307 million rupees in paid up capital by some of the strongest Qatari financial institutions and Fawad Yusuf Securities (pvt) Ltd from Pakistan. It is operating with 6 (2008: 5) branches as compared with its competitor Pak Kuwait Takaful with 5 branches (2008: 5). It is given A minus (having stable outlook) rating by JCR-Vis credit rating agency. It distinguishes itself by claiming to be a technology driven company and won “Best Use of Technology” Award in December 2009 at Dubai. It also emphasizes the efforts and success of its marketing department and won “Marketing Strategy Award – 2009” in London continuing from 2008. Further, it has re-takaful arrangements with world’s leading re-takaful its management team consists of a group of highly motivated professionals. A shariah board operates under supervision of Mufti Dr Muhammad Taqi Usmani, an internationally renowned scholar. Pakqatar.com.pk (2011) 10 3.1.1 Vision Statement “to become a result oriented Shariah compliant provider of risk mitigation through the principle of Takaful based on mutuality, team spirit and brotherhood” Mission Statements •Participants: Committed to provide customized and innovative Shariah based Takaful products and services to the complete satisfaction of our customers. •Shareholders: Consistently delivering optimal return on capital. •Employees: To create a dynamic, progressive, positive culture of innovation and skill development within employees. •Community: Ensure our support to the community and the environment with excellence. Pakqatar.com.pk (2011) 11 11 | P a g e Research and Analysis Project Oxford Brookes University, UK DIFFERENCE BETWEEN A TAKAFUL AND GENERAL INSURANCE COMPANY TAKAFUL COMP ANY 1- Premium is a voluntary contribution. 2- Policyholders are entitled to get share from surplus. 3- Company does not own contributions (premiums). 4- Returns on investment belong to fund not company. 5- Objective is cooperative risk sharing not business 6- Company acts as “Trustee”. 7- A Sharia board is mandatory to ensure compliance with Islamic principals under Takaful rules 2005. GENERAL INSURANCE COMPANY 1- Is a part of contract of compensation. 2- Surplus only belongs to insurance company. 3- Company owns the contributions (premiums). 4- Returns on investment belongs to the company 5- Objective is to run commercial business. 6- Company acts as “Owner”. 7- No such requirement. All claims are paid out of PTF fund and in case of deficit, interest-free loan is provided by the company. A simple graphic explanation of takaful operations is given below: Carlos Wong-Fupuy et al. (2008) Takaful (Shari'a compliant) Insurance Companies (AM Best’s rating methodology). 14 Securities & Exchange Commission of Pakistan (2010) Industry Outlook. 15 PQGTL (2009) Takaful, an Introduction. 16 13 | P a g e Research and Analysis Project Oxford Brookes University, UK 3.4 Quantitative Analysis 3.4.1 Ratio Analysis i) Gross Contributions PQGTL earned gross contribution of 171,701,983 rupees in 2009. Break-up of which is given below: Gross contribution share 2009 (Rupees) 6,644,145 22,343,503 10,526,689 Fire Marine Motor Miscelleneous 132,187,646 Commentary PQGTL has achieved a growth of almost 100% from 2008. Major contributor (77%) to this growth was motor takaful contributing 132 million (2008: 86 million) owing to increasing lease of cars by Islamic banks and leasing Modarabas in the country. ii) Operating Analysis OPERATING ANALYSIS FY 2007 - 2009 RATIO (AMO UNT IN T HOUS AND RUPEES) FY 2009 FY 2008 FY 2007 6,764,805 (1,528,257) Gross Contributions 171,701,983 86,420,975 Cumulative Loss before tax (3,835,733) (41,158,434) Net Contributions Cumulative Loss after tax 15 | P a g e 52,146,390 (42,440,840) (30,268,016) 1,621,080 (7,590,307) (7,598,412) Research and Analysis Project Oxford Brookes University, UK 200,000,000 150,000,000 100,000,000 Gross Contributions Net Contributions 50,000,000 (50,000,000) Loss before tax 2007 2008 2009 Loss after tax (100,000,000) Commentary A major reason for 100 % increase in the Gross contributions in 2009 (53 times growth in 2008 over 2007 but it was due to start-up and was 86M below management of 100M) was the rationalization process and of Marketing department in 2008 to make it more target oriented and increase in staff commissions which thus resulted in remarkable performance in 2009. Net contributions also have shown positive trend. Major expenses and reductions to reach net contributions are: Wakala (trustee) fee which has reduced from 46% in 2008 to 30%. Re-takaful expenses have reduced from 28% to 22% in 2009. Un-earned contribution has reduced from 31% (2008) to 17% (2009) and was around 81% in 2007 due to start-up. Cumulative loss before tax has been affected positively by changes from management efforts to improve profitability. Net wakala income grew by 3 times in 2009, however, claims to net contribution ration has fallen from 3.3 times to 1.9 in 2009. Management fee also reduced from 1.87 times (2008) of net wakala fee to 1.28 in 2009 whereas no wakala fee was charged in 2007 due to start-up. Management expenses also reduced from 97% to around 50% in 2009 (more than 200% in 2007). Cumulative loss after tax, a negative provision for deferred tax credits reduced loss after tax by 11 million in 2008. However, tax losses credits remained 4 million in 2009 (2007: Nil). 16 | P a g e Research and Analysis Project Oxford Brookes University, UK 3.4.2 Competitor analysis Comparison is done with Pak Kuwait Takaful Company Pakistan is as follows: PROFIT AND LOSS COMPARISON FY 2009 RATIO (AMOUNT IN THOUSAND RUPEES) PQGTL Gross contribution revenue Net Contribution revenue Profit before tax Profit after tax 171,702 52,146 (3,836) (42,441) PKTCL 438,815 159,952 12,345 10,151 % - -) BALANCE SHEET COMPARISON FY 2009 RATIO (AMOUNT IN THOUSAND RUPEES) Total Assets Paid up Capital Current Assets Fixed Assets Creditors and Accruals Waqf / Participant's Equity Claims paid PQGTL 394,579 307,800 72,348 52,458 50,888 (55,842) 71,991 PKTCL 528,760 400,000 180,176 35,942 68,256 (180,858) 199,210 RATIOS COMPARISON % - FY 2009 RATIO (AMOUNT IN THOUSAND RUPEES) Share (%) in total Contribution: Motor takaful Marine takaful Property & Fire takaful Misc. takaful Gross Contribution Growth (%) GP Ratio (%) NP Ratio (%) EPS (%) Current ratio (%) 24 | P a g e PQGTL PKTCL - - - 71 77 Research and Analysis Project Oxford Brookes University, UK 3.5 Qualitative Analysis These are essential to understand company performance because only numerical information is insufficient to meet research objectives of a complete analysis. 3.5.1 SWOT Analysis i) ii) iii) iv)                              Strengths Strong capital base Re-takaful by stronger operators of the world Strong IT capabilities winning awards internationally Dedicated and qualified management team Being one of pioneer operators in Takaful industry of Pakistan Strong Marketing team and strategy winning awards internationally Economical service cost structure obtained through IT usage Appointment of Mufti Taqi in Shariah board adds to greater trust of the public Weaknesses Small branch network Lack of public awareness of takaful and insurance Shortage of skilled staff Too much emphasis on motor takaful Decreasing profitability Unstable political environment Poor law and order situation Increasing cost of living Opportunities Large potential client market in Pakistan Demand for Sharia-compliant financial services Transfer to other takaful areas Conventional insurers are not allowed to open takaful windows yet Diversification into foreign markets like Afghanistan, Central East, Sri Lanka etc. Terrorism cover for hotels and mega shopping malls. Threats War on terror may result in huge claims New entrants Public concerns regarding “selling through religion”. Capital flow from Pakistan to Gulf area due to lack of investor confidence Slow down in growth Concern among re-takaful operators regarding Pakistan’s security situation for providing their cover SECP approval to traditional insurance companies to open takaful windows 26 | P a g e Research and Analysis Project Oxford Brookes University, UK 3.5.2 PEST Analysis I analyzed the external environment factors which surrounded the company during the analysis period through PEST. i) Political Factors Pakistan has been undergoing worst political scenarios over past few years. Country remained under army control around ten years till 2008 till elections of 2008. Government of Pakistan Peoples Part has not performed too well and face charges of corruption and non-competence both nationally and internationally. Problem of electricity shortage has not been controlled. International Finance Corporation (2009) PAKISTAN: MICROFINANCE AND FINANCIAL SECTOR DIAGNOSTIC STUDY. 20 This state of uncertainty has resulted in loss of confidence of international business community for investments and doing business with Pakistan. Therefore, unfortunately, Belgian Export Credit Company has given Pakistan the worst rating of 7 for political risk from range of 1-7 for export transactions, given 6 rating in ‘war risk’ while rate 5 for ‘risk of expropriation and Government action’. Ondd.be (2011) Pakistan. 21 World Bank has noted that Pakistan's long-term outlook is ‘unpredictable’ and identified “terrorism, sectarian tension, security concerns and deepening socioeconomic divisions” as reasons for undermining stability. Economist Intelligence Unit (2008) Pakistan: EIU Country Report. 22 International Finance Corporation (2009) PAKISTAN: MICROFINANCE AND FINANCIAL SECTOR DIAGNOSTIC STUDY. 20 As noted by PQGTL’s management “Political and economic instability in Pakistan complement each other”. As a result, companies in Pakistan which have investments from outside are concerned about security of their investments and cautious for investing in new projects and growth plans. PQGTL (2009) Annual Report. ii) Economic Factors Pakistan’s economy has been deteriorating over the years due to several factors. It was flourishing at a GDP growth rate of 9% in FY 2004-5 and then crippled down to only 2% in-. Major factors which contributed to this include political instability, rising inflation, war on terror, corruption, effects of global financial crisis etc. a. Global economy The impact of the global financial crisis has deepening effect on the developing countries particularly financial sectors and insurance companies have to bear “large losses” like AIG. However, takaful companies have remained resilient, if not immune, concluded by Standard & Poor’s because Sharia law prohibits ‘interest-based’ financial products. Ministry of Finance, Pakistan (2009) Economic Survey of Pakistan. 23 Gregorio Impavido, Ian Tower (2009) How the Financial Crisis Affects Pensions and Insurance and Why the Impacts Matter. 24 Standard and Poor's (2009) Takaful companies resilient in the financial crisis. 25 28 | P a g e Research and Analysis Project Oxford Brookes University, UK 3.7 Future Outlook and Recommendations PQGTL seems to have a prosperous future owing to its current results, positive indicators and ratios, strategy announcements, further investment plans, diversification into other takaful services lessening the dependence on motor takaful sector. Management tone is confident which is a key indictor for organizational success. From our analysis, we recommend the company to consider the following factors:      Cheaper IT enabled takaful solutions should be made for SMEs and small businesses to capture this segment. Diversification should be made to new takaful areas to minimize risk concentration like a new area of terrorism might be exploit by making careful arrangements with least exposure. Stringent Sharia-compliance mechanism and its promotion should be done to build public confidence. Skill development and quality assurance in Sharia operations through staff trainings. Further investment may be requested to get more market share before the industry matures. 32 | P a g e Research and Analysis Project Oxford Brookes University, UK List of References 1. Oxford Brookes University (2009) BSc Info Pack. PP 26-27 2. Wikipedia.org (2011) Primary source (Definition). Available: http://en.wikipedia.org/wiki/Primary_source. 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