Layoffs, board resignations as OPay-Finja clash prolongs. What is the dispute and what else is happening behind the scenes?

In the midst of the deeply contentious sale of Finja’s Electronic Monetary Institute (EMI) licence to the Chinese owned fintech OPay, both companies are going back to the drawing board to strategize.

A dispute surrounding accounting technicalities have brought the sale to a grinding halt with Finja releasing very public statements to the press and exploring its options. Meanwhile, OPay is laying off staff in massive numbers and Pakistani representatives of the fintech have told Profit that it has become hard to convince their Chinese investors that Pakistan is a viable market for their future ambitions. 

But exactly what went on with the deal that has brought matters to this point? And more importantly, what are OPay and Finja thinking about for the future?

The deal that went bad

The story between Finja and OPay dates back to mid-2023, when Finja initiated the sale of its EMI business. The EMI had been bleeding money for many months, but Finja had kept it running in the hopes that they would be able to graduate to a Digital Banking Licence. When the State Bank of Pakistan (SBP) announced that Finja’s bid had failed, the company’s management quickly realised they had no option but to sell. 

A deal quickly materialised with OPay. A Chinese-owned company, OPay is backed by Sequoia and Softbank and has found great success as a major player in the digital financial services scene in Nigeria, having scaled to over 35 million users in the African country. OPay was also in the running to get a Digital Banking Licence but was rejected by the SBP along with Finja. Their backup was to buy an EMI, so the deal with Finja seemed a match made in heaven. 

A deal was struck at a maximum price of $2.65 million. After making some partial payments and some mutually agreed upon deductions, OPay owed Finja another $1.65 million. It is this figure that has become a bone of contention. The technicalities and details of the deal and everything that went wrong with it have been previously covered by Profit. They can be found at the following link: 

Read more: Can Pakistan’s financial ninja pull off another great escape? 

The details have also been explained in a section at the very end of this article. But to cut a long story very short, matters started souring between the two companies in October last year. OPay has found technical grounds to withhold $823,000 from the remaining $1.65 million and also has arguments to withhold the remaining $872,000 that it concedes it owes to Finja. 

This is a major problem for Finja. For starters, the company was not making the sale in happy circumstances. They were selling off their EMI business to keep their lending operations afloat and had no other option. This means they needed the money to keep running with massive losses causing deadly leaks and creditors knocking on their door with bills that make the leaks look like a vacation. To put this into context, since its inception in 2019 up until January this year, the lending business had a cumulative loss of Rs91 crores. 

One could argue that Finja should at this point accept the situation and take what it can get if the situation is as desperate as it sounds. The only issue is if OPay gives them the $827,000 it will not be enough to keep Finja running. They need to angle to get every last bit that they can. It is simply a matter of survival. 

What is happening at OPay? 

But there is more to this. Originally, OPay had got the EMI licence with the intention of following the same strategy as Finja: using an EMI licence along with a lending business to prove their worth and eventually getting a digital banking licence. In fact, the expectation following the EMI acquisition was that OPay would go on a major customer acquisition spree. This hasn’t quite played out this way. 

Instead, sources close to OPay tell Profit that the company has laid off staff in big numbers, including almost the entire team overseeing EMI operations, leaving the fate of the EMI in uncertainty. This decision has been taken by the company to cut costs all across as it focuses on slowing down growth and preserving cash. 

The decision makes sense. Besides the debacle with Finja, OPay hasn’t had the easiest time in Pakistan. The company had found great success in Nigeria and with $550 million raised for its global operations, they would have felt confident stepping into Pakistan. But the rejection of their digital banking licence application was a major blow. On top of this, they have also not had a good time on the lending end after their bid to acquire Advans Microfinance Bank fell through. 

Through a complex corporate structure, OPay is also said to be the beneficial owner of Seedcred which owns and operates the infamous Barwaqt nano lending app. SeedCred has been a regular target of the Securities and Exchange Commission of Pakistan (SECP), as well as a subject of media scrutiny for predatory lending practices through the Barwaqt app. And even though the SECP has reallowed the Barwaqt app to operate, due to the new stricter rules now in place, the business model does not seem as lucrative anymore.

Amid this uncertainty, another point of concern for high-ups at OPay has been the growing uncertainty about Pakistan’s economy overall. “Frankly, it has become difficult to sell Pakistan to our Chinese investors,” a high-ranking official at OPay told Profit. 

On top of this, there is another problem. The SBP is in no mood to even hint at when they might be offering more digital banking licences. This would be detrimental to OPay’s business plans. Therefore, Opay has found it prudent to take cost-cutting measures and slow down growth overall. The EMI business is also a target of such measures, and according to the official, the company has, for now, halted plans to pump any money into the EMI business, with another source claiming that OPay only has one member in the team left that overlooks the EMI. 

At this time, one wonders what OPay would be thinking. It all does come down to the money. It is a difficult situation at OPay to decide whether they should pay the undisputed amount without having any clarity on what is going to happen with the disputed amount. For the record, OPay says it is willing to pay the undisputed $827,000 because they have to be a regulated entity. Sources close to the company also say that paying a few hundred thousand dollars extra to resolve the dispute for a company as big as OPay is not a big deal. The problem, however, is that the undisputed amount is a leverage to get Finja to settle the amount that is disputed. 

Board resignations and the thinking at Finja

This has turned out to be unacceptable for Finja which needs all of the money to save the sinking lending business. The mindset at Finja is that it is “not going to go down without putting up a fight”. Finja is doing all it can to recover the money that it thinks OPay owes it. They have tried seeking support from the State Bank of Pakistan to consider Finja’s technology as capitalised. It has complained to the Securities and Exchange Commission of Pakistan about OPay’s conduct and asked the regulator to halt/cancel the transfer of shares of Finja Private Limited, the company that owned the EMI, to OPay.

It has taken the fight to the public by issuing a press release against OPay for the recovery of this money. OPay responded in kind by issuing its press release, saying that it will not pay a penny more than what is due. OPay has retaliated further by serving Finja a legal notice for issuing defamatory statements in the press. 

Funnily enough, sources at OPay say that when they served a legal notice to Finja and to the company’s directors, it learned that two of the three directors had already resigned from the company. 

Profit was able to confirm from Finja, that Monis Rahman, who co-founded Finja along with Qasif Shahid, resigned from the three-member board in mid-March, along with Dave Nangle who represented Vostok Emerging Finance (VEF), on the company’s board. 

Both directors resigned to reduce exposure to legal issues that could have come their way concerning disputes with OPay as well as to reduce exposure to problems with creditors. The source also says that the resignation of directors gives flexibility to Qasif to navigate the current crisis, and also removes the threat from the board moving to remove Qasif as the CEO. 

At the same time, the negotiations from Finja are not being led by Qasif anymore. He has asked the company’s lawyers to negotiate with OPay for recovery of the pending amount. 

Finja has also found legal grounds to create further problems for OPay. As per the legal terms of the deal, the Share Purchase Agreement (SPA) for the sale was valid until March 31 of this year. 

According to one interpretation, because the SPA was not fully executed by March end leading to its expiry, it has to be renewed by both parties, both aggrieved with each other. If it is not renewed, one option is that the State Bank could even contemplate cancelling the EMI licence altogether.

We can expect more legal fights to follow because as per a source in Finja, SECP never transferred the shares to OPay, and Finja is trying hard to stop the transfer. Without the transfer of the shares, OPay recently held the annual general meeting (AGM) of the company, to approve the contentious annual accounts (more on that in the last section). Finja has hence also sent a notice to OPay for doing what it calls an illegal AGM.

Is Qasif still the best owner of the lending company?

That is not all, a source in Finja disclosed that Qasif is no longer relying on just the amount that is due from OPay to save his lending company. One option is to sell controlling shares in the holding company to one of the smaller, but more effective existing shareholders of the company, the source disclosed. 

Qasif might have been an ideal founder for Finja in the past, but as per the best owner principle, he might need to let a better owner take charge from hereon. This means even though he could stay on as an employee, Finja’s owner now has to be someone with the required financial heft and power to see the company through this crisis.

The technicalities of the dispute

To recall, both companies are embroiled in a dispute over payment of $823,000 against Finja’s technology. The dispute arose when Finja released management control of the company in October last year and handed it over to OPay before receiving full payment and capitalising its technology in audited accounts. OPay used its management control of the company to impair Finja’s technology assets in audited accounts for 2023, decreasing capital.  

It is important to understand that the $2.65 million of the sale was the maximum valuation of Finja’s EMI business but not the final one. This meant that this was the maximum amount OPay would give to Finja but not the minimum. 

How does this work you ask? Well, for example, during due diligence, Finja had conceded to deductions worth $457,000 under various heads such as shortfall and pending dues of Finja Private Limited. OPay had already made a partial payment of $543,000 to Finja. After accounting for these deductions, the final sum receivable from OPay came out to $1.65 million according to Finja’s calculations.

Similarly, whenever financial institutions are created, the State Bank has what is known as a Minimum Capital Requirement (MCR). This is a sort of safeguard. The SBP wants these institutions to have ‘Capital’ (assets minus the liabilities) worth a certain amount in case it needs to be liquidated at some point. Due to persistent losses over the years Finja Private Limited was already not quite meeting this MCR requirement. 

Except there was a catch here too. In the accounting books, technology is sometimes not counted as an asset, since it is not tangible like land and building. That means if a technology company like Finja has an app and other backend softwares, it is possible that there is no valuation for the application and it is not counted as an asset on the company’s balance sheet. This is normally not a problem but if the company is not doing well and also wants to sell itself the technology not being on the books as an asset can mess up the MCR calculation.  

But there is a process to fix this. The SBP has certain conditions for it, but there is a process known as ‘tech capitalisation’ whereby a company can have its tech assets counted as assets on its balance sheet. Finja decided it would do this which would fix the MCR and OPay would then pay them the even $1.65 million in cash that had been agreed upon. The only problem was that as part of the sale agreement, it was stated that if the MCR was not met OPay would deduct that amount from what they would pay Finja for the EMI. 

The obvious remedy was to capitalise Finja’s technology and beef up the capital. Finja started doing that but perhaps moved a little too fast for their own good. 

It is important to understand the timeline here. Finja and OPay had reached a deal in April 2023 whereby they would buy Finja’s EMI for $2.65 million. After all deductions, the amount still to be paid out in cash would come to $1.65 million. The only problem was that Finja did not meet the SBP’s MCR value and had to capitalise its tech to have a healthier balance sheet. 

Whenever a company has to capitalise its tech, the first thing they do is go to their auditor. Finja had not at this point released its financials for 2022 because it was already in the process of this tech capitalisation. The first step was that its auditor, which in this case was BDO Pakistan, would check if Finja’s claim for tech capitalisation meets the criteria of recognition, if expenditures were actually made and if the worth of the asset is as much as claimed. Since tech is often outdated very quickly, both the buyer and the seller in such a situation have to agree to its future usability. For future usability, Finja management would obviously respond in affirmative that the tech is usable for say 10 years. The auditor would capitalise the technology and it would be considered as an intangible asset in company accounts, leading to increased capital. But since the accounts for 2022 were audited in 2023 and the transaction with OPay had already begun, auditors would have taken into consideration OPay’s opinion about the future useful life of Finja’s intangible technology assets as well. As Profit has come to know, OPay initially declared that Finja’s technology was useful for them.

The audting process was completed in September 2023 and Finja also capitalised their tech in older financials all the way back to 2020. This tech capitalisation led to an amount of around $823,000 showing in Finja’s audited assets. The next step was for the SBP to get these accounts and approve the technology capitalization for MCR calculation. And if the auditor has capitalised it, the State Bank is unlikely to reverse it, thus ending the issue of a shortfall in MCR. 

Finja now felt they were easily in a position to secure every last penny of the $1.65 million that had been agreed upon by OPay. 

With everything seemingly sorted, Qasif Shahid, the CEO of Finja, decided he would push for an even faster deal. Up until September he still had control of the EMI and was bearing its operating costs. Originally Finja was supposed to hand over control of the EMI to OPay in March 2024 and up until then had to bear the operating costs. Tired of the continued burden, Qasif decided to hand over operational control to OPay early in October 2023. 

This was a decision that would later put Finja in a fix. It meant releasing control of the P&L sooner and giving OPay the responsibility to manage expenses for a company that was bleeding money and Finja could not go on with it. It was also in OPay’s interest and they did not hesitate either in taking control of the Finja EMI because the fintech company wanted to enter the market sooner rather than later. 

Control was handed over on the 2nd of October 2023 and both Qasif and Monis resigned from the board of the EMI. 

But the audited accounts for 2023 were still to be finalised. For 2023 as well, Finja in its accounts capitalised the technology and sent its accounts to BDO, the auditor. This time, however, the management that had to approve the intangible asset and its future usability is composed of people from OPay. 

Now the people from OPay didn’t think that Finja’s tech was of much use to them and therefore told the auditor that the technology did not have a useful life in the future. The consequence? The auditor does not capitalise technology, Finja’s assets drop by $823,000, and the minimum capital requirement shortfall resurfaces. And if there is a shortfall, as per the share purchase agreement signed between OPay and Finja, any minimum capital requirement shortfall is going to be deducted from the $2.65 million price for the EMI business. Finja’s technology was valued at $823,000, potentially what OPay can deduct from payments due to Finja against the deal. 

And that is where the problem hits. Why would OPay think initially that the tech was useful for them and, therefore, let the auditors capitalise it as an asset but later retract? One explanation is that when OPay took control of the company it was then that the technology was also handed over to OPay in Pakistan, which is controlled by OPay high-ups in China. Sources say that when OPay in China saw the technology, they decided that they did not consider the Finja technology useful and that they would build and use their own, hence the later retraction to the auditor.  Profit had learned from credible sources that auditors have impaired the company’s technology in the 2023 accounts because OPay does not think it is useful for them.

At the same time, auditor BDO capitalising tech in 2022 but not doing so in 2023 under a new management has raised questions about conflicts in auditing practices. The aforementioned instance of tech capitalisation is an example of the conflict of interest situation where an auditor is going to get its remuneration from the new management of a company it is auditing, and is therefore unlikely to confront the management that is responsible for compensating it. On the flipside, all auditors including BDO could have a perspective that whatever they do is within the accounting standards. Not only that, the auditor could reasonably argue that if the management of a company itself thinks its tech asset is impaired, who is the auditor to disagree with this? 

When contacted by Profit for a comment on the case, BDO declined to respond citing “client confidentiality protocols”. 

The management at Finja is, however, now trying to seek support from the State Bank of Pakistan to consider its technology as capitalised, and claims that the State Bank agrees with them. OPay on the other hand argues that if the State Bank recognizes Finja’s technology as capitalised, they should say it in writing. Although if the regulator decides to recognize Finja’s technology as capitalised it would supersede everyone else’s decision, the reality is the State Bank would not give a decision on this because the regulator comes later in the process. If the management, which is now controlled by OPay, does not itself want to capitalise technology and has asked the auditor to impair it, the State Bank is in no position to tell the company to capitalise it. 

Since both the companies agreed at the time of the sale that any minimum capital requirement shortfall would be deducted from the final price, OPay says it now has grounds to do that. Finja argues that OPay is acting with malintent since it purchased technology as a part of the deal.