Rundheersing Bheenick: Fostering Africa's growth in the new reality -
from vision to action
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the opening
plenary of the SWIFT Africa Regional Conference, Balaclava, 30 May 2011.
* * *
It is a pleasure to be here this morning and to address you at the Opening Plenary of the
SWIFT Africa Regional Conference. Let me add my own words of welcome to the foreign
delegates, especially those visiting our country for the first time. I have no doubt that you will
be joining the ranks of satisfied repeat visitors as you discover for yourself how right one of
our earliest publicists was when he claimed boldly that Heaven was copied after Mauritius.
The name of the publicist? A certain Mark Twain. He may have been exaggerating - but just
a wee bit! I thank SWIFT for giving me the opportunity to share with you some thoughts on
the theme of "Fostering Africa's growth in the new reality - from vision to action".
I shall focus on the need to strengthen Financial Market Infrastructure (FMI) in our region.
FMIs play a key role in promoting financial stability and economic growth. When financial
markets get the jitters, the world economy grinds to a halt, as we have just painfully re-learnt.
It is difficult to think of a more appropriate topic for a gathering such as this at a time when
we have all become acutely aware of the importance of strong financial markets for
economic prosperity. It is true that much progress has been made in strengthening FMI in
Africa; it is equally true that much remains to be done as African financial systems are still
lagging behind and are weakly integrated with the global financial system. As policymakers in
advanced economies direct their efforts towards global reforms for a more robust global
financial system, it may be a suitable time for some FMI initiatives in the African region.
First, let me briefly recapitulate the scope of SWIFT's activities and operations in the global
FMI, just to give the uninitiated some idea of its systemic importance and explain why
regulators take such a close interest in SWIFT. A few metrics will suffice to give you an
indication of the criticality of SWIFT to the operation, safety and soundness of the global
financial system. Since it was set up in the mid-1970's, SWIFT has rapidly become an
indispensable element of the global FMI. It connects over 9,000 financial institutions in more
than 200 countries and territories. We learn from SWIFT's 2009 Annual Review that
3.76 billion FIN messages - FIN is SWIFT core store-and-forward messaging service - were
exchanged in that year. That means 15 million messages everyday. SWIFT has experienced
exponential growth since it sent its first message in 1977. And it is extremely reliable. With
99.99 per cent availability of FIN and SWIFTNet, SWIFT truly lives up to its motto: "Failure is
not an option".
The use of SWIFT allows FMIs to support near real-time payment services using a single
standard messaging platform within a private, secure and reliable environment. This leads to
lower costs, lower operational risks and less operational inefficiencies. Because FMIs
facilitate the clearing and settlement of monetary and financial transactions, safe and efficient
FMIs are particularly important for maintaining financial stability. Their critical role comes to
the fore in times of crisis when, given the interconnectedness and interlinkages of the global
financial system, systemic risk is at its peak. If FMIs are not properly managed, they can
pose significant risks to the financial system and be a potential source of contagion.
An efficient cross-border clearing and settlement process is a sine qua non for global
markets to operate seamlessly and efficiently. Cross-border credit transfer services are a
legitimate concern of regulators. They must be rapid, efficient, reliable, cheap, and able to
cope with a rapidly-changing financial landscape. By transporting financial messages, SWIFT
is at the heart of the global clearing and settlement system. If SWIFT didn't exist, something
looking like it would have had to be invented.
SWIFT is part of the plumbing of the international financial system. Plumbing plays a vital
role in our homes; but it is normally hidden away, tiled over, and taken for granted. It is
certainly not the subject of polite dinner table talk. Until, that is, when it springs a leak,
malfunctions, or clogs up - when fixing it becomes the utmost priority, on pain of having no
dinner, never mind the talk. So it is with SWIFT. And it is because of this systemic
importance that the central banks of the G-10 countries agreed in 1998 that SWIFT should
be under cooperative oversight by central banks. As SWIFT is established under Belgian
Law, the National Bank of Belgium functions as the lead overseer.
The crisis has been a stressful time for all financial sector players and their regulators. FMIs
performed quite well during the financial crisis. The severity of the crisis has brought to light
important lessons regarding effective risk management. This has led international
standardsetters to review and upgrade existing standards. In March this year, the Committee for
Payments and Settlement System (CPSS) of the Bank for International Settlements, in
collaboration with the Technical Committee of the International Organisation of Securities
Commission (IOSCO), reviewed the principles for FMIs, again highlighting their critical role in
fostering financial stability. This review supported the Financial Stability Board initiative to
strengthen core financial infrastructures and markets. I will not bore you with the detailed list
of standards for FMIs. Let me mention a few salient points. First, they are mainly expressed
as broad principles that CPSS/IOSCO strongly recommend that their members should
implement to the fullest extent possible. Second, they aim principally at harmonization across
FMIs and countries. Third, the report also outlines the general responsibilities of central
banks, market regulators, and relevant authorities responsible for FMIs, in implementing
these standards. You might think that this renewed interest in beefing up standards would
have got the regulatees and their lobbyists up in arms. Quite the contrary. Gottfried
Leibbrandt, Head of Marketing at SWIFT, supports these moves:
"Standards underpin all hope of progress to a more efficient global financial
services industry".
And I fully agree with the Chairman of SWIFT when he says that, as the world slowly
emerges from the worst crisis of our generation, regulation and supervision will continue to
be crucial elements for maintaining financial stability. The contrast with the reaction of global
banking leaders to the proposals of the other Basel Committee, BCBS - the Basel
Committee on Banking Supervision - to tighten supervisory standards and increase capital
requirements for banks, especially those deemed to be systemically important, couldn't be
more striking.
There are currently many market initiatives in various parts of the world. These seek to
address the gaps identified during the global financial crisis in the FMIs in the leading
financial centres of Europe and North America. But, interesting as it may be, it will take us
too far afield to wander off in that direction. Let me turn to FMIs in the African region.
Financial market infrastructure in Africa
Modern attempts to build Pan-African payment systems actually started in the eighties.
These sought to strengthen regional cooperation and facilitate trade between neighbouring
countries. But well before that, in 1946, several decades before the Euro, the 14 countries of
the West African Economic and Monetary Union (WAEMU) had already adopted a single
currency and had actually set up their central bank in 1962, the Banque Centrale de États de
l'Afrique de l'Ouest (BCEAO). 1981 saw the establishment of the Preferential Trade Area, a
free trade agreement between east and southern Africa, of which Mauritius was a
foundermember. This was succeeded in 1994 by the Common Market for Eastern and Southern
Africa, which has emerged as one of the pillars of the proposed African Economic
Community. The Southern African Development community (SADC) was launched in 1992,
building on the Southern African Development Coordination Conference (SADCC), itself set
up since 1980. Mauritius joined SADC in 1994. SADC has worked on the harmonisation of
payments systems among its member states with the result that today all members of the
SADC either have, or are in the process of implementing, a Real Time Gross Settlement
(RTGS) system. There have been initiatives to integrate African capital markets and one of
these is the Regional exchange, the Bourse Régionale des Valeurs Mobilières (BVRM). In
SADC, a number of initiatives have been launched to create a FMI by 2018 on the
assumption that there will be monetary convergence and a SADC Central Bank by that date.
There are parallel, if not overlapping, programs and projects at the level of COMESA, AACB
- the Association of African Central Banks -, and the African Union. All of these draw their
inspiration from the desire for greater integration in Africa, culminating ultimately in the
distant future in the realisation of the vision of a United States of Africa, with a common
currency and a common central bank.
However, despite this grand, overarching, vision - and a flurry of loosely-coordinated actions
and initiatives to realize it -, the reality on the ground is that, African financial markets remain
fragmented and costly. The integration of African payments systems into an FMI has a long
way to go. The financial infrastructure of continental Africa can best be described in terms of
adjectives of extremes. Payment systems range from the highly advanced to the
underdeveloped; banking systems range from highly regulated to purely market-driven
systems; and banking penetration ranges from several bank accounts per head to the
highest proportion of unbanked people. Over the years, Africa has become the testbed for a
number of a number of innovations in payments. Technology has made a remarkable
breakthrough allowing banking services to reach the unbanked - the M-Pesa Mobile Banking
in Kenya is a case in point.
Paradoxically, Africa is the third-fastest economic growing region in the world, behind Asia
and the Middle East, with an annual average growth of around 5 per cent, driven by the rising
global demand for commodities from the BRIC countries. Investments in Africa are now
based on a new trade-related model. For example, as India and China become the major
trading partners of Africa, and increase their dependence on the continent, they are investing
more than the colonial powers did in the development of natural resources, building
infrastructure such as roads and airports, and providing services such as banking. So there
are now tremendous business opportunities for the African continent, as it hitches its wagon
to the rising stars of the global economy. Its economic outlook can only strengthen further,
driven by high commodity prices and strong external demand.
The question that arises is whether African countries will be able to put in place rapidly the
FMI to support and stimulate these trade and investment flows? It is recognized that the
development of a healthy financial sector is critical for countries that experience rapid growth.
A recent World Bank publication, released about a week ago, "Global Development Horizons
2011", comments on how Mauritius witnessed a further acceleration of economic growth in
2009 as private consumption rose. This new phase of growth was accompanied by the rapid
expansion of domestic credit and the development of financial markets more broadly. Failure
to develop the appropriate FMI can dampen growth prospects and thwart development
efforts in Africa.
Regional financial integration
However, solo and unco-ordinated efforts by countries acting individually and independently
may not bring the African continent to a new level of development. For me, part of the
solution clearly lies in hastening the process of regional financial integration. As I mentioned
earlier, there have been significant strides in the direction of regional trade integration in
Africa. But, drawing from the lessons learned from the problems encountered by the
European Union, I firmly believe that regional trade integration should go hand in hand with
regional financial and monetary integration. And we must reckon with our African realities.
We all know the PIIGS story, where some believed that pigs could actually fly! As countries
in the Eurozone periphery face a severe sovereign debt crisis which threatens the
foundations of the Euro, they are being bailed out by other, much-stronger, partners. It is not
clear whether any African countries are either prepared, or indeed able, to bail out their peers
in case they confront similar difficulties. A fiscal union and a transfer union cannot be far
behind monetary union. We must therefore proceed cautiously. We should not rush into a
monetary union. Financial integration can very well take place without monetary union in the
first instance.
Limiting our sights to regional financial integration, does not imply any lack of ambition. It
does bring many benefits for Africa. First, it would provide incentives for domestic financial
reforms. Second, it would increase the scale of operations. Third, it would spur competition.
Fourth, it would increase FDI inflows. And it would enable African systems to become
regional, and ultimately global, players in financial markets. But, to achieve regional financial
integration, there are certain conditions that must be met and a key requirement is
macroeconomic stability. And this is a pretty tall order, if you take into account the fact that
African economies are so vastly different on so many counts.
There are problematic asymmetries ranging from production structures to institutional
effectiveness - such as democratic accountability, the incidence of corruption, and
government efficiency. All these contribute to major disparities in economic performance,
including public finance, and dependence, public debt, balance of payments performance,
inflation, and growth. Between 2000 and 2007, annual growth in sub-Saharan Africa was
around 6.5 percent - the highest rate in more than 30 years. This was accompanied by low
or moderate inflation and growing macroeconomic stability. Then the region was hit by two
global economic shocks, the sharp increases in food and energy prices of late 2007 and
early 2008, and the onset of the recession later in 2008. The crisis came at a time when
subSaharan Africa was in a much better shape than it had ever been before, and was resolutely
heading for higher growth and faster poverty reduction. Although, at the beginning, the
effects of the crisis were not felt, given the limited integration of the African financial system
with the global financial system, their second round impacted negatively on macroeconomic
convergence and regional financial integration efforts.
This led many to argue that the process of regional financial integration should be delayed or
put on hold while awaiting better times. This view has been reinforced by the recent
geopolitical tensions in the North African region, which has added grist to the mill of the
confirmed Africa-skeptics who point out that Africa heads the hit-parade of failed states.
For the optimists, the crisis brings new opportunity as Ms Antoinette Sayeh, - coming herself
from a failed state, and now Director, of the African Department of the International Monetary
Fund - said in a speech entitled "Sub-Saharan Africa: Challenges for 2010" at The Brooklyn
Institution (November 2009) : "...new engines to drive strong growth will be needed in the
post-crisis period. Measures to improve the business environment, develop well-regulated
capital markets, increase labor productivity, and enhance efficiency in the public sector will
be crucial".
Policymakers therefore face the daunting challenge of coming up with key policies aimed at
reducing gaps, inequality and income differences across the region in order to transform it
into regional single markets and regional production bases that are fully integrated and more
competitive in the global economy. Melding the different countries into a regional bloc, with
free movement of goods, services, skilled labor and free flow of capital, implies that there will
be an increasing flow of funds, or payments, between economic agents in different countries
and greater cross-border trading of securities. FMIs, that are harmonized, standardized,
inter-operable, and inter-linkable, are fundamental requirements to achieve truly integrated
markets in the region. While I am convinced that this is the way forward for Africa, I am
perfectly aware of the many hurdles that that need to be overcome before this kind of
ambition can become a reality. For example, the efficient functioning of a payments and
settlement system, a vital component of FMIs, relies on the appropriate infrastructure being
put in place i.e. telecommunications, acceptance networks, internet access etc. While many
countries in the African region have made significant efforts towards implementing RTGS
systems, in setting up ATMs, or effecting payments through mobiles, many still lack reliable
telecommunications, good road networks, or even electricity. Another area that requires
attention would be region-wide regulatory frameworks, and adequate supervision to keep
pace with the expansion of cross-border banking and other financial services areas.
Financial market infrastructure in Mauritius
That's enough about the continent for this morning. Let me tell you a few words on our own
efforts to enhance our FMI. In spite of the smallness of our economy, the FMI in Mauritius is
quite developed. It has gone through a series of transformations over the years. These were
made possible because we could piggy-back on state-of-the-art telecommunications
infrastructure, providing global connectivity. As we welcomed global players in our jurisdiction
and as our economy developed, the Mauritian financial system became increasingly
integrated with international financial markets. On the downside, we also became
increasingly exposed to the risk of instability, and more vulnerable to external shocks. The
Bank of Mauritius has the responsibility to ensure the stability and soundness of the financial
system of the country. While this financial stability role of the Bank is not a new one, it was
brought into sharper focus by the legislative changes to the responsibilities of the Bank in
2004. In practice, the Bank would look at the robustness of the core financial infrastructure,
which includes the payments and settlement system, and identify potential triggers, in times
of stress, that could lead to a crisis. The safety of the payments and settlement system is a
major concern for us not only because of the risks embedded in the system, but also
because we are a fully-monetised economy where a small hiccup in the system can rapidly
lead to a major economic disruption. Also, the payments and settlement system is the
channel through which monetary policy is transmitted - failure of the payments and
settlement system would translate into a failure of the monetary transmission mechanism
and monetary policy would be ineffective.
The Bank is concerned with the efficiency and effectiveness of the payment system. As
operator of the system, we have influenced its design and evolution. We directed our efforts
to modernize the system, to make it more efficient, and more resilient to the risk of potential
financial market instability. What distinguishes our payments and settlement system is that it
is an integrated system. Our system has become a model for the region - we have been
receiving a steady stream of delegations from other central banks in the region interested to
look at its intricacies.
Modernisation of our payments and settlement system
The first phase of the modernization of our payments and settlement system started with the
implementation of MACSS - the Mauritius Automated Clearing and Settlement System. It
links electronically all banks operating in Mauritius as well as the Ministry of Finance to the
Bank of Mauritius. MACSS was designed to use the SWIFT infrastructure as message
carrier, instead of a private proprietary network, and was a première in the region at the time
of its launch. MACSS processes over 2,000 transactions per day to a value of nearly Rs10
billion - or nearly 3% of our GDP. Then PLACH - the Port-Louis Clearing House - was
automated, with the standardization of cheques using Magnetic Ink Character Recognition
(MICR) technology and, in turn, PLACH piggy-backed on the MACSS communication
network. Well before the global financial crisis had begun to unfold, I had zeroed in on the
Payment Systems as a key contributor to financial stability and economic growth. I therefore
decided - against quite some opposition - to create a division within the Bank, dedicated to
payment system issues, as is the practice in most central banks.
The establishment of the MCIB - Mauritius Credit Information Bureau - under the aegis of
the Bank of Mauritius, was a key element of our FMI. MCIB is a public registry of borrower
information and provides factual information on the creditworthiness of borrowers. It
improved the provision of credit information. It was also instrumental in lowering the ratio of
non-performing loans in banks. In other words, it improved the quality of banks' loan portfolio.
While we have been busy warding off pressing unsolicited offers to acquire it from us, we
have also been constantly expanding the coverage of MCIB. In 2009, we replaced the
MACSS software with a new application based on international best practice. It is built on a
more resilient architecture and supports multi-currency transactions including payment of tax
bills in foreign currency. Our RTGS is certified "SWIFT Gold Label" and we are the only
country in the region to have a multi-currency RTGS.
There was still a missing component in our payments landscape - we did not have a proper
automated clearing system for low-value payments. These make up the bulk of the payment
transactions in our economy. Last December, for example, we cleared a record number of
cheques: 562,000 of them in an amount of Rs29.4 billion - or a daily average of 26,800 for a
daily average amount of Rs1.4 billion. We have invested in a Bulk Clearing System as the
first phase in the implementation of a Cheque Truncation System. At the time that the
Cheque Truncation project was envisaged in Mauritius, we wanted to be the pioneers in the
region with this system which would do away with the need for physical processing of the
large number of cheques which I just mentioned. Unfortunately we got entangled in
boardroom squabbles and procurement delays. We have been overtaken by other central banks
which probably had more lee-way with respect to decisions to invest in new technology. We
are making up for lost time and expect to roll out our cheque imaging system by the end of
June.
Regional Payments and Settlement System (REPSS)
Let me round off this brief overview of our FMI, the part that is under the Bank's purview, with
an FMI initiative for the region where the Bank is acting as the Payment and Settlement
Agent, REPSS - the Regional Payments and Settlement System of COMESA. I am
reminded that the last time that a SWIFT Africa Regional Conference was held in Mauritius in
2004, Arthur Cousins, Director Strategic Financial Markets Projects, Standard Bank of South
Africa and Member of the SWIFT Board, had shared with delegates his vision of "TARGET
Africa" where he saw, as he put it:
almost the entire continent running interoperable SWIFTNet-based RTGS
systems by the end of 2008.
Today, we are not quite there, but the doors of African regionalisation are slowly opening up
with this FMI initiative for the COMESA region. Today, the project has made notable
progress. REPSS is fully in key with the "Target Africa Vision" and connects the 19 COMESA
member-states, through the SWIFT network for cross-border payments. Low-cost linkages
between the national payment systems of countries through SWIFT will no doubt reduce the
cost of doing business within Africa, but requires, beyond technological capability, a real
political will. And instead of duplicating similar systems in the other sub-regions, wouldn't it
be far more efficient to extend the reach of REPSS beyond COMESA countries, to take on
the entire continent?
Concluding remarks
We are looking at a different new world where no country is an island and none can envisage
their own economic prosperity in isolation. We need to unite forces to reap the benefits of an
integrated market, reduce costs and achieve greater efficiency. Regional financial integration
can help to develop domestic financial markets in Africa. Recently, a fellow Central Banker,
Mr Budi Mulya, Deputy Governor of the Bank of Indonesia, remarked that harmonized,
standardized and interoperable market infrastructures are fundamental requirements to
facilitate increased volumes of cross-border transactions within the ASEAN region. I believe
his observation is very pertinent and could apply equally well to the African region. But I have
one lingering concern - I am worried by the sheer multiplicity of regional initiatives in our
region. The experience on the continent shows that while regional organisations may be
easily formed, they can be quite difficult to take forward. Governments face difficult policy
choices emanating from national, regional and international programs. Multi-regional
agendas arising from multiple memberships in different regional groups can become an
obstacle to broader regional integration. Is it not high time to bring all the various building
blocs, like COMESA, SADC, WAEMU and others, together as part of one integrated
programme to deliver on the vision of a United Africa that we have been pursuing for so
long?
As for financial integration, I am an inveterate optimist. I firmly believe that we can build an
integrated financial market in our part of the world. It makes economic sense - we have the
know-how; we have the technology; and above all, we have the people. REPSS is a first step
in the direction of financial market integration. We need to continue to concentrate our efforts
and resources instead of duplicating them. The time has come for us to re-define our vision
of "Target Africa". Sometimes Vision has to be re-defined before it can be transformed into
Action.