Jameel Khadaroo: Future developments in the banking and financial
sector in Mauritius
Address by Dr Jameel Khadaroo, Second Deputy Governor of the Bank of Mauritius, at the
University of Technology Mauritius, Port Louis, 25 August 2008.
* * *
Good morning. It gives me great pleasure to be here, at the invitation of the Accounting,
Banking and Finance Society of the University of Technology Mauritius (UTM), to address
you on the future developments in the banking and financial sector in Mauritius. The
Society's initiative to invite practitioners to share their experience with the academic world is
certainly useful in helping to bridge the gap between academia and industry and in promoting
exchange of ideas on latest issues. Well done and keep it up!
Today's theme is surely topical. The Mauritian authorities are committed to transform our
island into a service-oriented economy. In a very recent speech, the Prime Minister stated
that "financial services are well positioned to be the engine of growth in the development of
the services sector as a whole".
Introduction
By virtue of my position, I shall reflect on the topic of the day from the central bank's
perspective whilst also tracing out progress achieved to date. Basically financial sector
developments refer to developments in three pillars, namely financial institutions, markets
and supporting infrastructure. I shall focus on how I see the evolution of each pillar over the
next few years, starting with financial institutions.
Financial institutions
The financial system in Mauritius, as in most developing economies, is still dominated by
banks. For the year 2007 for Mauritius, banks held 73 per cent of total financial sector assets
- the insurance sector accounted for 13 per cent, non-bank deposit taking institutions for 8
per cent. Leasing, credit finance, investment funds and other financial institutions accounted
for the remaining 6 per cent. In terms of value addition to domestic output, the financial
sector contributed to 10.4 per cent of 2007 GDP - banks accounted for 6.4 percentage
points while the insurance sector for 2.8 percentage points. Employment in the financial
sector has increased by about 25% since the beginning of the present decade. Moreover,
financial sector growth has on average outpaced overall economic growth - this pattern is
likely to persist in future, given the emphasis placed on development of banking and financial
services in Mauritius.
The continuous development of the banking and financial sector has been the outcome of
carefully designed strategies implemented over time. The Bank of Mauritius has been taking
a series of policy measures, consistent with a gradual shift from a directive-based to a
market-based environment, with a view to foster integration of the Mauritian banking sector
with the Mauritian economy as well as with the international financial system. This process of
continuous improvement is set to strengthen further, with policy geared towards enhanced
transparency.
Non-performing advances as a proportion of total advances have declined steadily over
recent years, helped to a significant extent by the coming into operation in 2005 of the
Mauritius Credit Information Bureau (MCIB) which is housed at the central bank. The
resilience of the banking sector to shocks has increased, in part due to diversification of the
sources of banks' income. Indeed an increasing share of banks' income is generated by what
we call in our jargon "Segment B" activities - basically foreign-source income, i.e. all lending
and related activities undertaken with non-residents. Banks, which used to be very
dependent on domestic economic developments, now generate as much as half of their
income from foreign sources. In 2007 banks' foreign-source income grew by 43 per cent,
much higher than growth of 11 per cent in domestically sourced income. With the Mauritian
economy and financial sector set to become more open, the banking sector should be able to
further improve resistance to shocks provided, of course, exposures continue to be managed
judiciously.
In line with the spirit of consolidation, legislation was amended in 2004 to cater for single
bank licensing, implying the phasing out of separation of banking activities into offshore and
onshore. The tax regime for income from domestic and foreign sources of business was
made uniform. Banks licensed in Mauritius may undertake both "Segment A" and "Segment
B" activities, that is, domestic as well as international banking. Legislation was also been
amended in 2004 to encourage non-bank deposit taking institutions to merge into banks.
Since 2007, three non-bank deposit taking institutions have been granted banking licences -
one of them opened a new bank while the two others took over existing banking business.
This trend is likely to become more prominent in future.
The two largest domestically-owned banks have already looked beyond Mauritian shores by
incorporating branches and subsidiaries in the region. They have joined the syndicated loan
business and lent substantial amounts to non-resident companies. The reputation of
Mauritius as a credible financial centre, the expertise built up over time, and the favourable
legislative and regulatory framework should continue to contribute to the success of the
banking sector.
I shall now turn to the second pillar for financial sector development, namely markets.
Markets
The development of the financial sector cannot be envisaged without the promotion of
strong, well-functioning and deep financial markets.
Significant progress has been achieved in positioning the domestic stock market on the
international financial arena. The stock exchange of Mauritius (SEM) is endowed with a
state-of-the-art trading infrastructure and, as a result of its good performance, was the
second African exchange after the Johannesburg Securities Exchange (JSE) to attain
membership status of the World Federation of Exchanges (WFE) in November 2005.
Moreover, in about a month, on 1 October 2008, the Mauritius stock exchange is scheduled
to join the Dow Jones Wilshire Global Index.
In 2007, market capitalisation in US dollars on the SEM increased by 70 per cent
year-onyear, with non-residents' gross inward investment in the equity market registering a record
high. The remarkable track record of the SEM should induce the private sector to take better
advantage in securing long-term funding. The amendments brought in 2007 to the Securities
Act 2005 could give a boost to securities trading on the stock exchange.
There is significant room for improvement with regard to development of fixed income
markets, which have remained rather shallow and illiquid despite recent interest from foreign
investors. Traditionally, fixed income markets are important channels through which public
and private institutions avail of financial resources for medium- and long-term projects. Bond
markets also constitute good investment opportunities for long-term investors such as
pension funds and insurance companies. There have been a few bond issues lately -
including one launched by the European Investment Bank - and this should be encouraged
for the benefit of all stakeholders.
In the light of limited success experienced with the secondary trading of treasury bills on the
stock exchange of Mauritius, the Bank of Mauritius is currently undertaking a review of the
primary dealer system. The central bank is also working on the issue of benchmark bonds in
collaboration with bankers.
A commodity exchange, named Global Board of Trade (GBOT), is scheduled for launch in
Mauritius in January 2009 with the collaboration of Financial Technologies India (FTI) Ltd.
This commodity exchange, which intends to trade commodities and derivative products in
metals, oil and agriculture, shall take the Mauritian financial system a step further by enabling
better enterprise risk management and financial planning. Mauritius will also seriously need
to contemplate the development of full-fledged currency futures in the near future - that
would assist in formation and management of exchange rate expectations.
I shall now turn to the third pillar for financial sector development, namely supporting
infrastructure.
Supporting infrastructure
Under supporting infrastructure I would distinguish three important themes, namely legal
infrastructure, technological infrastructure, and human resource infrastructure.
Legal infrastructure
Recent legislations passed in the Finance Acts of 2007 and 2008 are expected to
significantly impact the banking and financial sector in Mauritius.
With regard to the banking sector, the Bank of Mauritius is reviewing its guidelines to give
greater operational autonomy to banks without losing sight of prudence. Further to recent
amendments brought to the Banking Act 2004, banks may subject to approval by the Bank of
Mauritius and authorisation by the Financial Services Commission engage in new lines of
business - such as financial leasing and agency services - without having to set up a
subsidiary.
With a view to broaden the array of services, new legislation allows non-bank deposit taking
institutions to engage in lending and such other investment as may be approved by the
central bank, while foreign exchange dealers may offer money and value transfer services.
Banks may provide selective products such as private and investment banking services to
high net worth customers, which complements government policy of attracting these
individuals to invest and work in Mauritius.
A key legislation that could propel the Mauritian banking and financial sector to new heights
relates to Islamic banking, more broadly called Islamic finance. Islamic banking adheres to
Islamic law by offering banking services and products where banks earn profits and fees on
financing facilities extended to customers, instead of interest. Islamic banking is one of the
world's fastest growing financial segments. Financial centres worldwide are competing for oil
revenues of the Middle East. The Asian Development Bank estimates total assets held under
Islamic finance rules at around $1 trillion USD, with annual growth of 10 to 15 percent.
London, Singapore and Hong Kong have emerged as key centres of expertise in Islamic
finance, while Malaysia hosts nearly two thirds of the worldwide Islamic sukuk bond market -
an estimated $100 billion. Many smaller financial centres have passed legislation to enable
Islamic finance. With the drying-up of liquidity in the wake of the global financial turmoil,
nonIslamic countries have been increasingly looking to issue their own sovereign sukuk debt.
Mauritius has recently revised its legislation to accommodate Islamic banking and finance.
Regulatory hurdles have been removed as we move into Islamic finance. The central bank
has issued guidelines for Islamic Financial Institutions (IFIs) and the Government has
changed the Tax laws in order to facilitate conduct of Shariah compliant financial
transactions. Banks may opt to exclusively conduct Islamic banking or offer Islamic financial
products through a window. Through the Finance Act 2008, non-bank deposit taking
institutions have also been authorized to offer Shariah compliant financial products. Islamic
banking in Mauritius should become a reality in the near future.
A proposed Insolvency Bill seeks to amend and consolidate the law relating to insolvency of
individuals and companies and the distribution of assets on insolvency and related matters.
Moreover, a Netting and Intermediated Securities Bill provides for the validity and
enforcement of close-out netting arrangements and giving effect to The Hague Securities
Convention on the law applicable to certain rights in respect of securities held with
intermediaries. With a view to promoting Mauritius as a reputable and clean financial centre,
the Bank of Mauritius reviewed its Guidance Notes on Anti-Money Laundering and
Combating the Financing of Terrorism (AML/CFT) in July 2008 in the light of
recommendations made in the report on the evaluation of the AML/CFT regime of Mauritius
by the Financial Sector Assessment Program (FSAP) mission of the IMF/World Bank.
Technological infrastructure
The technological infrastructure - exchanges and systems used to clear and settle market
trades or cash obligations - plays a critical role in the development of the financial sector.
With the advent of modern technology, payments, clearing and settlements are effected in
real-time. The Bank of Mauritius launched in December 2000 a real-time gross settlement
system with guaranteed finality of payment known as the Mauritius Automated Clearing and
Settlement System (MACSS). Ongoing efforts have since been made to modernise the
payments system. Recent initiatives include the Port-Louis Automated Clearing House
(PLACH) set up in 2002, which performs netting on cheque data that are sent to the clearing
house by electronic means and the settlement at each clearing cycle on the MACSS. The
Bank of Mauritius is currently working on a Cheque Truncation project, whereby clearing and
settlement of a cheque will be done through images of cheques instead of physical cheques.
The Stock Exchange of Mauritius also operates a Central Depository System (CDS), which
allows for delivery versus payment of stock exchange transactions on a T+3 rotating basis
via the MACSS.
At a cross-border initiative level, the Bank of Mauritius is also participating in the COMESA
Regional Payment and Settlement System (REPSS) which will allow cross border payments
between COMESA countries. The objective is two-fold: to reduce costs of transactions and
time taken for settlement by not having to route the transaction through third parties outside
the COMESA region and to enhance security of payments. This system is characterised by a
T+0 settlement, with possibility of real-time payment at higher fees. Banks will access this
payment system through their respective central banks. The Bank of Mauritius is earmarked
to act as the settlement Bank in the system.
Let me now touch on human resource infrastructure, which is of direct relevance to
institutions like the University of Technology Mauritius (UTM).
Human resource infrastructure
The scarcity of skilled manpower could inhibit the development of the financial sector. In this
regard the Mauritian authorities have, rightly so, opened up the island to foreign talent. In
addition, tertiary institutions have been designing a range of courses to meet the exigencies
of the financial sector in terms of labour requirements. I am aware, for instance, that the UTM
has in the recent past set up courses in Banking and Finance at both undergraduate and
graduate levels. The point I am making here is simple -academia has a key responsibility in
safeguarding the sustainability of financial sector growth in Mauritius.
Concluding remarks
To conclude, I shall merely state that the Bank of Mauritius is committed to continue its
leading role in the development of the Mauritian banking and financial sector.
Thank you.