R Basant Roi: Corporate governance guidelines and monetary policy stance in
Mauritius
Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the opening of the Goodlands
Branch of the Indian Ocean International Bank Ltd, Goodlands, 20 August 2004.
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Hon. Deputy Prime Minister and Minister of Finance
Chairman of the Board of Directors of the IOIB
Chief Executive and staff of the IOIB
Ladies and Gentlemen
Good Afternoon
I am pleased to be here in your midst for the opening of the Goodlands branch of the Indian Ocean
International Bank Ltd.
I understand that the Indian Ocean International Bank has for quite sometime been implementing a
plan for strengthening its financial standing and is also in the process of enhancing its corporate
image. The bank has so far made a good measure of progress in this endeavour. I would like to urge
its board of directors to maintain the speed of progress with the same zeal and vigour to the finish.
Poor corporate governance has been the major cause for the weakness of banks and bank failures in
Mauritius. To the board of directors of the Indian Ocean International Bank and to the boards of
directors of all other banks operating in Mauritius, I would like to say that adherence to good corporate
governance principles is indisputably the key to the maintenance of the sound and solid financial
standing of financial institutions. A bank, however small, with good corporate culture is far stronger
than any big bank with poor corporate governance principles.
In the past few years the Bank of Mauritius has issued to banks a comprehensive set of guidelines,
including corporate governance principles that they are required to adhere to. While virtually no banker
disputes the necessity to impose those principles and other guidelines, many in the industry view them
as cumbersome and too demanding. It is true that relative to way banking business used to be
conducted until very recently in Mauritius, the regulatory requirements are indeed demanding. We
cannot, however, overlook the fundamentally important fact that regulatory requirements do serve the
best interests of depositors. And the Bank of Mauritius, as regulator of the industry, is here to protect
the interests of depositors.
Regulations are not designed to shape good behaviour of bankers. They aim at establishing discipline
in the conduct of banking business and promoting corporate habits that are not only fair but also
transparent to market participants. In this process, regulations do also help create conditions
conducive to the sound development of financial markets. Often we come across rogue shareholders
and rogue board members. Companies commonly face a typical problem; it's the agency problem that
sits at the very heart of corporate governance. Certain board members in the banking industry, rather
than being guided by such principles that best serve the interests of their banks, often use their
authority to advance their own agenda. This attitude is anathema to the principles of good
governance.
In the banking industry, integrity should be a palpable mark of distinction. By integrity I mean that
board members do not make decisions just for a quick buck. It means board members are not solely
transaction-driven; they are in for the long-term benefits of their companies as well as of their clients. It
also means that, if things do not go well, board members stand by their clients and if things do go well
they do not take unfair advantage of it. While profit making remains the principal motive for any
enterprise in a capitalist system, a usurious attitude in the banking business does quite often bring with
it the seed of self-destruction. The good banker formulates an educated view before executing any
decision in his professional life.
I have been receiving many complaints from bank customers in the last five years. Few of the
complaints that I receive seem reasonable. Most of the complaints, after investigations, are found to
be unreasonable. It is a common feature that borrowers do not pay sufficient attention to the contents
of contracts they sign before borrowing. Often borrowers tend to swallow more than they can chew. It's
panic when the banker finally applies the sword. My appreciation of such a situation leads me believe
that both bankers and borrowers share the blame. To borrowers I would like to say: refrain from
borrowing sums of money that is beyond their repayment capacity. To bankers, I would like to reiterate
that they should, right from the outset, ensure that borrowers do have the repayment capacity before
disbursing funds to them. Some banks do it; some don't. We are contemplating anti-collusive
measures.
Lately, various interpretations have been given to the monetary policy stance of the Bank of Mauritius.
Five years ago, the Bank of Mauritius tightened its monetary policy stance with the rate of interest
having gradually risen to high levels. The then prevailing conditions did warrant the tightening. It is
commonplace that economies do undergo cyclical changes. The same set of policies that is
appropriate for a particular phase of the economic cycle may not necessarily be appropriate for a
different phase of the cycle if the objectives of the Bank's policies are to be achieved. That is why the
Bank of Mauritius re-oriented its policy stance and brought about reductions in the rate of interest
during the last two years. The successive reductions in the rate of interest helped alleviate the
financial burden of enterprises in the Export Processing Zone (EPZ). To what extent monetary policy
can go on accommodating the interests of the various economic sectors without compromising the
very mandate of the Bank of Mauritius is clear to the enlightened observers. There are limits to what
monetary policy of the Bank can deliver.
The problems of the EPZ are mostly management and market-related. The emerging problem of our
sugar industry is also market-related. The problems are definitively not rooted in the exchange rate of
the rupee. It is inappropriate to speculate that a deliberate step to cause the rupee to depreciate is in
the policy agenda of the Bank of Mauritius. This perception is incorrect.
World price of oil has attained unprecedented levels. It will evidently impact on the domestic price
level. A depreciation of the rupee, triggered by oral stimulus, would exacerbate inflationary pressures
in the economy.
Ladies and gentlemen, having said that let me reiterate my support to the Board of Directors and the
management of the IOIB for the efforts they have been putting in so far to steer the bank out of
troubles. I wish them the very best of success.
Thank you.