description
stringlengths 27
553
| text
stringlengths 0
341k
⌀ | bank
stringclasses 118
values | Year
int64 2k
2.03k
| Month
int64 1
12
|
|---|---|---|---|---|
Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the official inauguration of the New Co?operative Bank Ltd, 9 August 2002. | R Basant Roi: A central banker’s piece of advice to bankers Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the official inauguration of the New Co-operative Bank Ltd, 9 August 2002. * * * The Rt Hon Prime Minister Hon Deputy Prime Minister and Minister of Finance Hon Ministers Chairman and Members of the Board of Directors of New Co-operative Bank Ltd. Ladies and Gentleman Good Afternoon I am privileged to address this audience of bankers and representatives of co-operative societies on the occasion of the official inauguration of the New Co-operative Bank Ltd. Nearly a hundred and forty years ago, in December 1863, the Comptroller of Currency and later Secretary of the Treasury of the United States addressed a letter to all national banks that had just come into operation. Retrospectively, I strongly believe that this is rightly an occasion for me to quote 7 very short paragraphs from the nearly 140-year old letter, more so as I recognise a good number of bankers and representatives of co-operative societies in this audience. Each of the seven paragraphs that I am about to share with you remains invaluable pieces of advice to bankers - even after nearly 140 years. First advice “Let no loans be made that are not secured beyond a reasonable contingency. Do nothing to foster and encourage speculation. Give facilities to legitimate and prudent transactions. Make your discounts on as short as the business of your customers will permit and insist upon the payment of all paper at maturity, no matter whether you need the money or not.” Second advice “Distribute your loans rather than concentrate them in a few hands. Large loans to a single individual or firm, although sometimes proper and necessary, are generally injudicious and frequently unsafe. Large borrowers are apt to control the bank; and when this is the relation between a bank and its customers, it is not difficult to decide which in the end will suffer.” Third advice “Treat your customer liberally, bearing in mind the fact that a bank prospers as its customers prosper, but never permit them to dictate your policy.” Fourth advice “If you doubt the propriety of discounting an offering, give the bank the benefit of the doubt and decline it; never make a discount if you doubt the propriety of doing it. If you have reasons to distrust the integrity of a customer, close his account. Never deal with a rascal under the impression that you can prevent him from cheating you. The risk in such cases is greater than the profits.” Fifth advice “Pay your officers such salaries as will enable them to live comfortably and respectably without stealing; and require of them their entire services. If an officer lives beyond his income, dismiss him; even if his excess of expenditures can be explained consistently with his integrity, still dismiss him. Extravagance, if not a crime, very naturally leads to crime. A man cannot be a safe officer of a bank who spends more than he earns.” Sixth advice “The capital of a bank should be a reality, not a fiction; and it should be owned by those who have money to lend, and not by borrowers. The Comptroller will endeavour to prevent, by all means within his control, the creation of a nominal capital by national banks, by the use of their circulation, or any other artificial means; and in his effort to do this, he confidently expects the co-operation of all well managed banks.” Seventh advice “Pursue a straightforward, upright, legitimate banking business. Never be tempted by the prospect of large returns to do anything but what may be properly done under the National Currency Act. ‘Splendid financiering’ is not legitimate banking, and ‘splendid financiers’ in banking are generally either humbugs or rascals.” These are the seven chief mantras of good banks and good bankers. They are atemporal - indeed timeless. They were valid more than century ago; they are valid today and they will continue to remain valid. The New Co-operative Bank Ltd is starting operation. A note of caution is appropriate on this occasion. Never attempt to grow big too fast. Make sure that all loans are adequately and legally backed by valid securities - whether the loans are made to co-operative societies or to individuals. When a bank lends few thousands of rupees it is the borrowers’ headache to repay the loan; when it lends millions of rupees it is not the borrowers’ headache but the bankers’ headache to recover the money lent out. A small bank with a healthy and sound balance sheet is stronger than any big bank with a weak balance sheet. I seize this opportunity to reflect on one particular aspect of the way policy decisions in some banking enterprises are made in Mauritius. Of all the five revocations of banking licences in Mauritius, three were clearly motivated by problems the roots of which were found at the level of Boards of Directors. Members of the Boards of Directors obscenely took advantage of their positions to influence imprudent credit decisions making. The Bank of Mauritius issued 9 Guidelines to the banking industry so far. Two more Guidelines have been issued to the industry for consultations. The Guidelines on Corporate Governance, effective June 2001, and on Related Party Transactions, effective January 2002, put the roles and responsibilities of Boards of Directors of banks in the right perspective. The Guidelines, as I said in my address to the private sector in November last, are not obituaries but principles that should be adhered to by the Boards of Directors of all banks, including the Board of Directors of the Bank of Mauritius. The quiet and sybaritic lives of Board members are over. The Banking Supervision Department of the Bank of Mauritius is already assisting the staff of the New Co-operative Bank Ltd to come to grips with all the Guidelines. I urge all the Co-operative entities to familiarise themselves with the Guidelines in order to understand and fully appreciate the new regulatory environment in which the New Co-operative Bank Ltd is expected to operate. May I wish the New Co-operative Bank Ltd the very best of success. Thank you. | bank of mauritius | 2,002 | 8 |
Keynote address by Mr R Basant Roi, Governor of the Bank of Mauritius, Port Louis, 8 March 2003. | R Basant Roi: Indian Ocean International Bank Ltd - opening of the on-going training programme Keynote address by Mr R Basant Roi, Governor of the Bank of Mauritius, Port Louis, 8 March 2003. * * * Chairman of the Board of Directors of the IOIB Staff members of the IOIB Ladies and Gentlemen I am privileged to address you on the occasion of the opening of the first training programme for the staff of the Indian Ocean International Bank Ltd. Your training programme is starting at a time when animated talks regarding the latest bank fraud have wrought up to a high pitch of concern. Although I have been invited by your bank today to reflect on ethics in banking to mark the opening of your training programme, I shall attempt to highlight some cases of fraud from which we may all draw some lessons. Philosophers in ancient as well as modern times have debated lengthily on ethics. Aristotle and J.S. Mill could not definitively sort out our ethical problems. It is unlikely that the business gurus of today can resolve the problems with a few well-constructed and captivating sentences. A commentator from the European media once stated that he found himself ill at ease to start a television programme ‘with a lecture by currency manipulator George Soros, of all people, on ethics’. The commentator was quick in qualifying his remark with a statement to the effect that George Soros had spent quite some millions of dollars made in speculating against the Pound sterling in 1992 on charities. Unethical ethics? Ethical dilemma or what? I do not intend to dwell lengthily on such an overarching concept as ethics. We all have our own definition of ethics. The Oxford English Dictionary defines ethics as a set of moral principles. Ethic is a singular word but is often used in plural. Perhaps that is why its definition tends to be so elastic. It is, as you all must be knowing, not a mathematical concept and I, for one, would not venture here to give you any precise definition of what ethics in banking is all about. Let me content myself with ethics in its simplest sense, that is, as one writer has put it, “choosing the good over the bad, the right over the wrong, the fair over the unfair”. And what is good, Phaedrus, And what is not good Need we ask anyone to tell us these things? Ethical behaviour stems from within us, not from without. “Nothing external, … no guideline, no regulation, no sophisticated system, no well-articulated ethics programme is going to make yourself any better. The self is an internal image, who you perceive yourself to be, a composite of your thoughts and beliefs. If that self does not change, then you will continue to act and feel as you did before.” This is one way of looking at the whole problem of ethics. Perhaps that is why universally economic agents went for some sort of a do-it-yourself philosophy in the past. However, questions relating to ethics in the wake of several corporate scandals the world over are being increasingly asked since the 1980s. Over 500 business ethics courses are offered in the US and nearly all business schools teach ethics. As a reaction to cynicism schools of business and law are increasingly offering courses in ethics as if morality, like algebra, can be taught and applied. An article in the Journal of Economic Literature with the title ‘Economics and Contemporary Moral Philosophy’ highlighted four aspects of the relationship between Economics and Moral Philosophy. Interestingly, one of the four relationships emphasizes how the moral beliefs of an organisation, be it a financial or a non-financial institution, influence its behaviour in the marketplace. Evidently, by virtue of having fiduciary responsibilities bankers are naturally expected to readily understand what Amartya Kumar Sen calls ‘basic value judgement’, that is what society regards as being good, right, fair and acceptable. The Asian crisis amply demonstrated that banks and non-bank financial institutions cannot indefinitely overstep ethical values. As one central banker has put it the crisis ‘increases the need for organisations to adhere to a strong set of values to steer them through the minefield of ethical choices with which they are faced as they make business decisions. It is also necessary to ensure that the behaviour of the organisation is in practice aligned with these values and that employees buy into them, so that the organisation actually practises what it preaches.’ Bankers occupy a position of trust. Nearly two years ago, in one of my addresses I mentioned that good corporate citizenship and adherence to core ethical values form the basis of honest bankers. Is it good, right and fair for a bank officer to accept or extort gifts in any form whatsoever in return for loans extended to borrowers or to cheat customers of banks? I do not believe that anyone of us should undergo a rigorous training in business ethics at Harvard Business School to answer this simple question. Historical record reveals that mania engenders systematic misfeasance, malfeasance or defalcations. Swindles are a response to the greedy appetite for wealth stimulated by not only economic booms but also by depressions. The 1920s recorded the highest number of swindles in the US. As bankers, and particularly as senior managers in our individual institutions, we have to be well aware that as firms and households see others getting rich through speculative purchases and sales, they generally tend to imitate. ‘Monkey see, monkey do.’ As the number of firms and households indulging in such practices grow large speculation for profits leads them away from rational behaviour to manias. And manias engender swindling. Bankers are householders, too. In the world of finance, we, as bankers, should be familiar with swindles that have assumed the character of ‘Ponzi finance’ - a type of game in finance played by the archetypal swindler, Charles Ponzi. Economic theorists have elaborately analysed how a borrower, and possibly even a banker, who has control over the price in the market in which he issues his own personal debt may choose to play ‘Ponzi game of financing’: repay old debt with issuance of new debt to a point where either the borrower runs away with the money and disappears or, if the borrower is a banker, he dips in the bank’s till. Castanier in Honore de Balzac’s Melmoth Reconcilie is a cashier. Mme Aquilinia de la Garde, mistress of the cashier, has expensive tastes. The cashier issues promissory notes to meet expenses. At some stage the cashier adds up his debts. He could rescue himself by leaving his mistress but he could not give her up. Eventually his debts mounted. Interest due swelled. The cashier’s financial manipulations could not be continued and it became evident that he should fail. The cashier decided to defraud rather than to declare bankruptcy. The cashier plunged his hands into the bank’s till. Financial felony has many forms and character. Outright stealing, paying dividends out of capital, dealing in stock exchange on inside knowledge, selling securities without full disclosure, altering banks’ books, diverting funds from pre-determined use to another, extending loans to controversial individuals and dubious persons deliberately ignoring established procedures are only some in a long list of financial felony. The foregoing is intended to simply draw your attention to the ways and means employed by officers of financial institutions to defraud. ‘There is perhaps no record of a bank fraud extant of which the perpetrator was not honest yesterday.’ (Clapham, Bank of England, Vol. 2). Never allow a bank officer to stay in a key position for too long a time. Rotation of officers in fraud-prone areas of any bank’s operations is essential. Bank officers should compulsorily go on vacation leave once a year. This is an elementary principle in the management of any financial institutions. The Bank of Mauritius receives numerous complaints from bank customers. May I say that there is much scope for improving the quality of services offered by several banks. Unfair charges and fees on banking transactions, inadequate and often misleading information supplied to bank customers, rather than advising borrowers how to get out of a temporary setback in their businesses squeezing them to the point of bankruptcy are a few items in the long list of complaints that could bring the banks into bad disrepute. Is it ethical to impose inordinately high charges and fees? I am sure you know the right answer. Is it not ethical for banks to supply their customers with information about the charges and fees? All in all, the culture of any bank does matter. How much the staffs of banks appreciate the value that senior managements themselves attaches to what is good, right and fair in the conduct of the business they are in is of critical importance. Good corporate governance is indeed the pacesetter for ethical behaviour in banks. As I said earlier the moral beliefs of an organisation shape the behaviour of its employees. Several months back I had a working session with the Board of Directors of your bank wherein I outlined the various parameters set in the Bank of Mauritius guideline on Corporate Governance. I am pleased to note that your Board of Directors has initiated corrective actions. I urge your Board of Directors to carry the implementation of all the guidelines issued by the Bank of Mauritius through to the finish. Your progress is being monitored. The Bank of Mauritius will carry out similar exercises with the Boards of Directors of other banks also in the near future. The Bank of Mauritius has, in the past few years, issued several guidelines to banks and other deposit taking institutions. I do not wish to go into the details of those guidelines here with you. I do not wish to be l’évangile de l’intégrité, le Dalai Lama de la transparence et l’apôtre de la bonne governance. We have been urging all deposit taking institutions to enforce the guidelines. The guidelines are of international standards. Once enforced, management of banks should be less apprehensive of frauds and unethical behaviour in their respective organisations. In the new Banking Bill we are introducing a penalty system. Banks that fail to adhere to the rules of the game will be fined. I am delighted that new Board of Directors of your bank has decided to give training to the staff. I am given to understand that it is the first training programme organised for you all. Let me wish you the very best of success. | bank of mauritius | 2,003 | 3 |
Keynote address by Mr R Basant Roi, Governor of the Bank of Mauritius, at a seminar organised by the Mauritius Export Processing Zone Association, Pointe aux Piments, Mauritius, 23 April 2003. | R Basant Roi: The monetary policy stance of the Bank of Mauritius Keynote address by Mr R Basant Roi, Governor of the Bank of Mauritius, at a seminar organised by the Mauritius Export Processing Zone Association, Pointe aux Piments, Mauritius, 23 April 2003. * * * President of MEPZA Ladies and Gentlemen I am pleased to be here with you this morning. I am equally pleased to have been given the opportunity to speak on an aspect of economic policy that has been for one reason or the other the subject of recurring sound-biting criticisms. Let me at the outset put it clearly that I am not here to reply to the criticisms that have been leveled against the Bank’s policy. Criticisms do provide opportunities for central bankers to come out and explain their policy stands. Criminologists claim that few acts of violence are committed after a good meal. This prolongs the lives of speakers. I have had a hearty breakfast this morning. I do not intend to deliver a long speech on account of my throat. The risk is that one of you might cut it. Central bankers are accustomed to saying the right thing at the right moment and to leave unsaid the wrong thing at the most tempting moment. Central banks, anywhere in the world, are never short of criticisms. The Bank of Mauritius has never been exempt of vitriolic remarks. Before July 1994 when the Exchange Control Act was suspended repeated releases of repressed emotions through random shootings of caustic remarks against the Bank’s policies were quite common. In the wake of the liberalization of our financial system the monetary policy stance of the Bank has received less appreciation than it deserves. While the objective of the monetary policy of the Bank is well appreciated by some of us it is less so by others presumably because of considerations driven by self-interest. A short-term view or rather a myopic view of the Bank’s monetary policy stance in a world economy that is highly demanding in terms of economic and financial efficiency is tantamount to losing sight of the forest because of the trees. I shall attempt to give a perspective to the monetary policy of the Bank for your benefit. I view this as being important simply because a full appreciation of the Bank’s work and results does require a perspective beyond a few months or even beyond a single year. A single day, a few months or even a year is rather a short time to really gauge what monetary policy of the Bank can accomplish on a lasting basis. Monetary policy takes time to make its beneficial effects felt in any economic society. But I do also reckon that a few months or even a single month or a single day may sometime appear to be a long time. Events having undesirable consequences for the economy can take place in minutes. We live in an economic society wherein the role of money is taken for granted. The basic importance of money in the economy is unwittingly overlooked. Buyers and sellers, savers and investors and borrowers and lenders are, as you are aware, linked through money. It goes to say that money which links them should have our confidence if our economy has to perform well. Money that keeps its value will have the confidence it deserves. As is usually said among central bankers it is the democratic right of every citizen to see that the length of a metre or the weight of a kilogramme does not vary over time. Why then should the value of money change over time? Clearly, the basic objective of monetary policy of the Bank, which is the sole issuer of currency in the country, should be to preserve the value of money. The Bank of Mauritius is the nucleus in the process of money creation in the economy. It is mistakenly believed that the Bank has the intrinsic power of simultaneously achieving a multiplicity of objectives. This is a gross misconception. Paradoxically, there is also a common tendency for some in the exporting community to believe that inflation need not be the prime consideration of the Bank. This is also an incorrect view of what should be the objective of our monetary policy. Our business community and the public at large would be badly served if the Bank’s monetary policy stance irresponsibly fuels inflation. Suffice to say that inflation creates uncertainty, breeds inefficiency and makes the economy less productive. Worst, it creates inequity. Those who gain from inflation necessarily gain at the expense of others. In fact, the Bank’s power to print money is limited by the leverage available to monetary policy. The Bank uses this leverage to enhance the economic performance of our country. In simple terms, the Bank manages liquidity in the economy - which in turns affects expenditure – in such a manner that is consistent with the capacity of the economy to grow but, as far as possible, without giving rise to inflationary pressures. Monetary policy would not be doing justice to all of us if it unleashes forces that create inflation. What is the ‘ideal’ rate of inflation then? Ours is a small economy and highly open to international exchange and international economic and financial influences. As such it is quite inflation-prone. There is no such thing as an ‘ideal’ rate of inflation. The best policy outcome can only be price stability. Taking into consideration the character of our economy, an inflation rate of 3 to below 5 per cent sustained over time is believed to be tolerable. A rate of inflation in this range may be kept in sight as an anchor for the monetary policy of the Bank of Mauritius. The sustained policy effort in the last few years underpinned by the absence of a consequential increase in wage bill in the economy helped bring down the rate of inflation. For the current fiscal year the rate of inflation is expected to be around 5 per cent. Importantly, the pressure behind inflation appears to have lost some of its intensity. I wish to underscore that the problem of inflation would have been greater today had not the Bank of Mauritius progressively pursued a restrictive monetary policy stance in response to the intensified inflationary pressures following the rapid depreciation of the rupee in 1996, 1997 and 1998. Beginning 1999 we pursued a policy of monetary tightening with a view to arresting the rapid depreciation of the rupee thereby stopping the flight of capital. Had the depreciation of the rupee and the resulting flight of capital not been arrested the foreign exchange reserves of the Bank would have dwindled to only a few weeks of imports. Inflation rate would have eventually risen to double digits. Seldom do we realize that with the least policy mistake in 1999 we would have subsequently knocked at the door of the IMF for a Stand-by Arrangement. Monetary tightening, that is, the high interest rate policy relentlessly pursued over time helped stabilize the foreign exchange market and also check monetary expansion to a rate consistent with the objective of reducing the rate of inflation. It is therefore a misconstrued view that the Bank of Mauritius is pursuing a high interest rate policy. This is not how I would like to put it. The Bank is pursuing an inflation fighting policy. All of us know it well. Savers do demand higher interest rates to protect themselves from higher inflation rates. A monetary policy stance that eventually brings about sustained low and stable inflation rate creates conditions for sustained low interest rates. We are all well aware that it is only in those countries that have a good track record of confidence in their money through policies that generate low and stable inflation that we find low interest rates. A good track record of low inflation does set the ground for low interest rates. Low inflation rates precede low interest rates. The converse is invalid. Lending rates of commercial banks are often said to be on the high side. There is no doubt an element of truth in this contention. However, it does not necessarily go to say that commercial banks alone are to be blamed for the high lending rates. Often borrowers too share the blame. You might recall I have since 1999 pressed upon banks to reduce their non-performing loans to a tolerable level. Non-performing loans are one of the reasons that explains the tendency to charge high lending rates to borrowers. In any banking system the ‘free lunch’ has to be paid by someone. Generally depositors and honest borrowers are made to pay for the bad and doubtful debts through lower deposit rates and higher lending rates respectively. I do not see any justification for rogue borrowers to clamour for low rates of interest. Banks need to make good credit appraisals while making lending decisions failing which lending rates would continue to be prohibitive even to honest borrowers. The good news is that banks have seriously undertaken to bring down their non-performing loans to acceptable limits. Let me now turn to the exchange rate of the rupee. Exchange rate is evidently important. Its movements and levels have a strong bearing on medium and long-term growth prospects of our economy. As such the exchange rate of the rupee has a lot to do with monetary policy. Monetary policy is effective only in a market based financial system. In any capitalist system the financial markets are the most market-oriented. Undue intervention in such markets over a protracted period of time will most likely turn out to be counterproductive. In such a framework confidence is fundamentally an important ingredient that the Bank of Mauritius can provide to financial markets in the formation of judgements regarding interest rate and exchange rate. It goes without saying that the Bank of Mauritius should constantly seek to build confidence in the rupee. Confidence in the external value of the rupee cannot be maintained if confidence in the internal value of the rupee is not maintained. This is what price stability is basically all about. Let me stress that it does not go to say that we should have an exchange rate target. As you are well aware, the exchange rate of the rupee reflects international as well as domestic market conditions. Over the 12-month period ended March 2003, it may be observed that the US dollar has weakened significantly on international financial markets. The Japanese yen, Pound Sterling and the Euro have appreciated against the US dollar. The rupee depreciated on average by 10.2 per cent against the Euro, 6.7 per cent against the Pound sterling and 1.7 per cent against the Japanese yen but appreciated by 0.5 per cent against the US dollar. In trade-weighted nominal effective terms, the exchange rate of the rupee depreciated by about 8 per cent. In real effective terms, the rupee recorded a depreciation of about 5 per cent. There is nothing to suggest that the exchange rate of the rupee is in any way responsible for the erosion of international competitiveness. Once again concern has recently been expressed about the appreciation of the rupee vis-à-vis the US dollar. In pressing their claim for a higher rate of depreciation of the rupee, some have even leaned on the Turkish case. What is not mentioned, however, is that the double digit rate of depreciation of the Turkish currency has also been served with a helping of high inflation rate of 27 per cent and high short-term interest rate of 42 per cent. Let me say once again that this is far from being a Turkish delight! It is more appropriate to view exchange rate developments over a period of time. The more we integrate with international financial markets, the more we have to allow markets work their way through. The exchange rate of the rupee has recently been likened to price determination in a specific market. Well, in so far as we are trying to promote a competitive foreign exchange market, the Bank of Mauritius is quite comfortable with this reference. Indeed, we welcome it because the market under reference is the only market in Mauritius that is closest to the textbook model of perfect competition. Currency appreciation or depreciation cannot be a panacea for all our economic ills. We should not forget that appreciation or depreciation of a currency could be a mixed blessing. In terms of macroeconomic policies, the authorities usually have to make a policy trade-off between the extent of exchange rate adjustment and the inflation rate. It must, however, be emphasized that the way forward for Mauritius is for it to become competitive through the achievement of real productivity gains. A deliberate policy to depreciate the rupee can only be a temporary solution and not a permanent one. A lasting solution to long-term competitiveness depends not on exchange rate changes but on productivity growth. Short-term exchange rate accommodation can only serve to postpone the need to address the real issues relating to restructuring, good management and productivity improvement. Any attempt to rescue employment in the Export Processing Zone through the depreciation of the rupee cannot but be a temporary one. Finally, let me reassure firms in the Export Processing Zone that the Bank of Mauritius will continue with the pursuit of a monetary policy stance that does not jeopardize the maintenance of low and stable inflation keeping in view certain short-term considerations. The monetary scene in Mauritius today does not at all support the view that the economy is in a state of ‘fundamental disequilibrium’. There is no precise definition of ‘fundamental disequilibrium’. The IMF has a working definition to judge whether or not an economy is in a state of ‘fundamental disequilibrium’. Of the six broad criteria that define the presence of fundamental disequilibria in an economy none of them is palpably present in the current state of the Mauritian economy. Instead, Mauritius is for the first time in its history recording four successive years of current account surpluses in its balance of payments. The overall balance of payments surpluses are significant. The foreign exchange reserves position of the Bank of Mauritius has attained unprecedented level. Inflationary pressures in the economy are contained. Inflation is on a declining trend. Although the rupee has in the past months appreciated against the US dollar partly due to the surpluses generated in the current account of the balance of payments there is no evidence that the exchange rate is mis-aligned. The Bank of Mauritius is pretty conscious that persistent appreciation of the rupee over a protracted period of time could potentially lead the economy to a state of ‘fundamental disequilibrium’. While guided principally by the objective of sustaining low and stable inflation, monetary policy will continue to strike the desired balance between short-term and long-term considerations in the best interest of the economy. Once I likened the conduct of monetary policy to drawing a heavy paperweight with a piece of elastic – either the heavy paperweight does not move or it flies across the table and hits you in the face. This analogy seems closer to reality than the organized sound-biting criticisms. I wish you well. Thank you. | bank of mauritius | 2,003 | 4 |
Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the Annual Meeting of the Offshore Group of Banking Supervisors, Pointe aux Piments, 22 July 2003. | R Basant Roi: Regulatory and supervisory infrastructure in Mauritius Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the Annual Meeting of the Offshore Group of Banking Supervisors, Pointe aux Piments, 22 July 2003. * * * Honourable Minister of Economic Development, Financial Services and Corporate Affairs Mr Colin Powell, Chairman of Offshore Group of Banking Supervisors Distinguished Guests Ladies and Gentlemen Good morning I am delighted to welcome you to the Annual Meeting of the Offshore Group of Banking Supervisors in Mauritius. It is my privilege to welcome Mr Colin Powell who has been the Chairman of the OGBS since 1981. I am pleased to note that a seminar on the New Capital Accord and Corporate Governance was held yesterday with the collaboration of the Financial Stability Institute. Mauritius is a member of the Offshore Group of Banking Supervisors as from the time offshore banking activities started here. I wish to stress right at the outset that the Bank of Mauritius has been pursuing a selective licensing policy with a view to bringing into our jurisdiction players of international repute. The maintenance of a clean international image has always been an overriding consideration. Of late there has been mounting demand for tighter surveillance of offshore centres to guard against money laundering and international financial instability. More than ever it is necessary to enhance supervisory co-operation between banking supervisors in offshore financial centres through the implementation of international standards for cross-border banking supervision. The globalisation of financial services companies, coupled with the development in information technology have greatly facilitated movements of funds from one jurisdiction to another. Often funds are moved by a ‘simple click of the mouse.’ It is imperative for all jurisdictions to observe acceptable standards of banking supervision. The efforts made in one jurisdiction to combat money laundering can be nullified by the deficiencies and lax regulations existing in other jurisdictions. We fully appreciate the role of the Financial Action Task Force (FATF) that carried out evaluations of anti-money laundering regimes in different countries. Naming and shaming non-cooperative countries does seem to produce the desired results. I wish to express my appreciation of the Customer Due Diligence (CDD) document - a joint product of the Basel Committee on Banking Supervision and the Offshore Group of Banking Supervisors. While the document recognises the cross-border implications of financial transactions, it also favours exchange of information pertaining to customer adoption policies and procedures of financial institutions. The essence of the Customer Due Diligence paper has been included in the revised version of the Guidance Notes on AML/CFT. The Bank of Mauritius has issued the new Guidance Notes to the industry on a consultative basis. The Customer Due Diligence document also attributes the responsibility to national supervisors for ensuring that banks have minimum standards and internal controls that allow them to know their customers. Given the increasing responsibilities of bank supervisors, I have proceeded with a significant capacity building in the Supervision Department of the Bank. The staff has been almost doubled and is being intensively trained to meet the challenges in the years ahead. Last year, we underwent an FSAP assessment at our own request. The Bank of Mauritius Act and Banking Act are being revised to further enhance compliance with the “Core Principles” and to take into consideration the recommendations made by the FSAP team following its detailed assessment of compliance with the 25 core principles for Effective Supervision and Transparency of Banking Supervision. The Bank issued on November 2002 a Guideline on Public Disclosure of Information by financial institutions. Rigid bank secrecy laws are no longer acceptable in the global fight against money laundering. Information has to be shared with competent authorities. In this connexion, the Financial Intelligence and Anti-Money Laundering Act 2002 established the Financial Intelligence Unit. The FIU has explicit power to gather, analyse and disseminate information. In the last few years we have made a great leap forward in improving the regulatory and supervisory infrastructure in Mauritius. We have since quite sometime adopted a prophylactic approach in our regulatory and supervisory policies in respect of our banking industry. The job of regulators and supervisors has never been an easy one. It is often misunderstood. It’s a highly complex one full of invisible hurdles. The hurdles stemming from inside the country are relatively easy to overcome. Those stemming from abroad are not that easily overcome. Regulators and supervisors across the world have however been doing an excellent job. They are never congratulated for their good performance. And never expect to be congratulated. So let us congratulate ourselves. Let me wish the Annual Meeting of the OGBS the very best of success. May I also wish you a pleasant stay in Mauritius. Thank you. | bank of mauritius | 2,003 | 8 |
Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the seminar on Financial Sector Assessment Programme, Pointe aux Piments, 8 September 2003. | R Basant Roi: Review of the financial sector in Mauritius Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the seminar on Financial Sector Assessment Programme, Pointe aux Piments, 8 September 2003. * * * Hon. Minister of Economic Development, Financial Services and Corporate Affairs Mrs Ann Rennie, Deputy Mission Chief Ladies and Gentlemen Good morning I am pleased to be here in your midst, this morning, for the opening of this Seminar on the Financial Sector Assessment Programme. Over three years ago, on May 26, 2000 the Financial Stability Forum had issued a Press Release in which it categorised Mauritius in the third and last group of countries regarding their perceived degree of supervision and co-operation. The categorisation was carried out on the basis of a survey, including questionnaires that were, according to the Press Release, forwarded to supervisors the world over. We were not even aware of this survey. Yet, Mauritius was categorised in the last group. Worse, Mauritius was never given a hearing before its categorisation in the last group. In spite of all the statements of good intention made in the Press Release, some damage had already been inflicted to the image of Mauritius as a financial services centre. Voices against this approach were raised at various international meetings of Governors of Central Banks. Subsequently, the IMF was urged and, rightly so, by the Financial Stability Forum to take a lead role in the assessment of jurisdictions’ adherence to international standards. The IMF held a Consultative meeting to hear the views of outside experts from onshore and offshore centres and international agencies. This initiative was formally and fully backed by Mauritius. The World Bank joined in with the IMF. The assessment of Mauritius by the joint IMF/World Bank Mission has been fair and just. The FSAP Mission has given the authorities of Mauritius a fair hearing. The assessment has been thorough and has been carried out in a manner that should help all of us here to further strengthen the soundness and safety of our financial sector. A careful reading of all the recommendations made in the Report does allow us to spotlight certain areas that are really vulnerable to risks. With a financial system like ours that is fully integrated with the world’s financial system we cannot afford to take lightly the vulnerabilities highlighted therein. Despite certain disagreements that we have had with the FSAP mission’s views, I must say that the quality of the recommendations is very much appreciated. I seize this opportunity to commend the FSAP Team, in particular Mr Abdessatar Ouanes and Mrs Ann Rennie, for having given a well-balanced assessment of our financial sector. The Report does not merely refer to the weaknesses and vulnerabilities of our financial sector. It does also underline the strength of our financial sector and the progress that has been made in recent years with regard to our supervisory framework. I am particularly pleased to note, among the findings of the FSAP Mission, the following: 1. Overall, the Mauritian financial sector is currently in good health, and the short-term stability risks are modest. 2. Mauritius has a relatively large and well-developed domestic financial system and a growing offshore sector. 3. The authorities have embarked on an ambitious program to transform the economy, and the Government, in partnership with the private sector, is taking decisive measures to build a knowledge economy based on higher value-added services, notably in information and communication technologies. 4. The assessment of Standards and Codes found a high level of compliance with internationally accepted norms and best practices. 5. Mauritius’ strong economic performance has spurred the development of a large, profitable and sound banking sector. 6. The banking system of Mauritius is profitable, well capitalised and generally sound. 7. The quality of banking supervision in Mauritius has improved significantly over the past few years and is of a generally higher standard than in most African countries. 8. The Bank of Mauritius Guidelines on Corporate Governance, Internal Control and credit are all of a commendable standard reflecting international best practices and the capacity of the Bank of Mauritius to enforce the Guidelines has improved with the development of knowledge and skills within the Supervision Department. We expect that, on the basis of the FSAP Report, the Financial Stability Forum will issue another press release announcing the removal of Mauritius from the third category. Our commitment to proceed with the various recommendations is already evidenced by the actions that have already been taken by the authorities in Mauritius. We are thankful to the IMF and the World Bank for the prompt response given to our request for Technical Assistance to beef up our supervisory and legal framework. A few laws have, under the whip of the Honourable Minister for Financial Services, been enacted: the Anti-Money Laundering (Miscellaneous Provisions) Act to further strengthen our institutional and regulatory framework with respect to money laundering; the Convention for the Suppression of the Financing of Terrorism Act which lays the basis for Mauritius to ratify the Convention. Regulations under the Financial Intelligence and Anti-Money Laundering Act 2002 have been promulgated. Another law on Mutual Assistance in Criminal and Related Matters has also been enacted. Guidance Notes on Anti-Money Laundering and combating the Financing of Terrorism have been updated and aligned with international standards as acknowledged by the FSAP Mission. The ambiguity as to whether the Bank of Mauritius is empowered to issue such Guidance Notes has been dealt with in the Anti-Money Laundering (Miscellaneous Provisions) Act. Furthermore, a few additional guidelines are being worked upon. A draft Guideline on Credit policy has already been finalised and is due to be issued to the industry shortly. In February 2002, at the Quarterly meeting of the Banking Committee, I proposed to Chief Executive Officers of banks, the establishment of a Credit Information Bureau in Mauritius. Bankers enthusiastically welcomed the project. A Sub-Committee, comprising senior officials of all commercial banks and headed by the Manager Legal of the Bank of Mauritius was appointed to make recommendations on the way forward. The Sub-Committee submitted their report in August 2002. I am happy to note that the FSAP mission is supportive of this initiative. The National Bank of Belgium houses one of the most sophisticated Credit Information Bureau in the world. I accordingly solicited the assistance of the Governor of the National Bank of Belgium to guide us on this project. A delegation headed by the Managing Director of the Bank of Mauritius, comprising bankers, will proceed to the National Bank of Belgium for a prospecting visit in November this year. In all the assessments that have been made so far a common thread is perceptible. The strong willingness of the authorities in Mauritius to co-operate and to promote the country as a sound and clean jurisdiction runs through the assessments. Even before the Financial Sector Assessment Programme started we, at the Bank of Mauritius, had already identified certain areas of vulnerability of our banking industry. We did initiate several remedial actions and I am particularly pleased to note that the FSAP Report does make mentions of the various initiatives. The FSAP Report is a critical assessment of where we stand today. The recommendations are expressions of views regarding what need to be done now and in the immediate future. But we need to constantly review our supervisory and legal framework in the light of changes taking place in the domestic economy and in the dynamic international financial system as well. We have a panoply of rules, guidelines and laws for the proper conduct of banking business in Mauritius. As regulators and supervisors we need to exercise discretion failing which the very purpose of the rules, guidelines and laws could be defeated. Let me share with you a brief paragraph from Sammuel Brittan’s Economics and Ethics: “Most real-world situations are more complicated that the simple prisoner’s dilemma, and the possibility of choosing an inappropriate strategy is a real one. This possibility arises because the way in which strategies are normally determined is via the application of widely accepted rules - whether these are obviously moral, such as ‘do not kill’; conventional, such as ‘drive on the left’; or habitual, such as ‘do not scatter litter’. But many widely supported moral practices and rules are double-edged. Frank cites a hypothetical Jones who sacrifices a day’s earnings of $300 to prosecute Smith for stealing a $200 briefcase. The motive here can only be described as vengeance. Frank is inclined to regard Jones as a social benefactor because his action discourages theft. May be. But encouraging vengeance as a general practice is playing with fire.” Regulators and supervisors or any other authorities should make productive use of the rules, guidelines and laws in the best interest of our financial sector. Misuse of the rules, guidelines and laws by anyone of us could only jeopardize the achievement the authorities’ objectives. The goal should be the promotion of the growth of our financial market without excessive constraint. Let me wish all the participants in the Seminar a pleasant working day. Thank you. | bank of mauritius | 2,003 | 9 |
Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the Financial Markets Association of Mauritius workshop on treasury and risk management, 10 September 2003. | R Basant Roi: Treasury and risk management Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the Financial Markets Association of Mauritius workshop on treasury and risk management, 10 September 2003. * * * President and Members of the Financial Markets Association of Mauritius Ladies and Gentlemen Good morning. Thank you Chairman for the invitation to briefly address this gathering of financial market participants this morning at the opening ceremony of the Treasury and Risk Management Workshop. As far as I recall, this is the first time that such a Workshop is being organized by your Association for the benefit of its members and for professionals involved in Treasury and Risk Management. Since the breakdown of the Bretton Woods system in the early 1970s treasury management has assumed an increasingly greater importance in our economic life. With the globalisation of financial markets treasury management has become more demanding than before. Until five years ago Treasury management was not assigned the same importance that ought to have been given by corporate bodies in Mauritius. It is absolutely essential that in today’s world efficient treasury management occupies a seat of importance in the management of enterprises. I congratulate your Association for having taken the initiative to hold this workshop. I strongly believe that we should keep ourselves abreast of the latest developments in asset and liability management, risk management techniques and derivative instruments. This workshop is positively a first step forward. I would first and foremost like to make an observation. Treasury management is not specific to banks and other financial institutions. It does concern all of us who are in the business of managing financial resources in a globalised financial market. Enterprises producing goods and services, exporters, importers or any other economic agent that has got to manage its finance necessarily requires expertise in treasury management. In 1999, I was surprised to learn that an exporter with a turnover of over Rs2 billion did not have any expertise at all in managing its own finance. In a world economy characterized by stiff competition, every enterprise needs to be good in treasury management. In the last few years I have stressed a lot on good corporate governance as the basis for best business practices and highlighted the urgency for restructuring and consolidation of individual firm so as to enhance micro-economic efficiency. Traditionally much of the knowledge and skills of professionals in the wholesale financial markets has been learned on the jobs. This approach has varied from the simple “Sit, watch and learn” approach to the sophisticated mentoring system used by some large financial Institutions. Today treasury operations have grown into one of the key administrative areas of financial institutions, responsible for the processing of all financial market transactions, including a crucial role in the control of risk. Professionals constantly have to re-tool, re-equip and fully update themselves to meet the exigencies of the marketplace. With so much of innovation and technological progress taking place in the world of finance, there is no place for players having limited skills and knowledge in treasury management. The market punishes those who lag behind. One of the challenges in treasury management is to keep abreast of latest techniques and trends in the marketplace and make the most out of them. The biggest challenge for most of our market participants remains the interpretation of economic indicators, changes in policy signals and predicting the course of economic events that affect financial markets. It’s tantamount to becoming good crystal ball readers in the money and foreign exchange markets. Treasury Management is also the Management of Risks. With the globalization of financial markets, financial institutions around the world are exposed to a multiplicity of risks. Movements in the rates of interests and volatility of exchange rates in an increasingly complex environment have made the process of managing risks a critical aspect of treasury management. May I however state that my recent experience in the domestic financial market tends to suggest that our treasury managers seem to be acquiring expertise in predicting changes in the interest rate policy stance of the Bank of Mauritius. But a very limited number of treasury managers seem to be able to foresee at times movements in exchange rates. This is quite understandable; it is not in the realm of mortals like us to accurately predict exchange rate movements. Credit risks, market risks, exchange risks, payment and settlement risks and so on and so forth are all risks that textbooks teach us how to mathematically measure. Textbooks also teach us the various ways and means of protecting against risks. Operational risk however is a type of risk that no financial institution has ever been able to guard itself against. No financial institution or any other enterprises, in particular treasury management units in any of these organizations, should ever dare to overlook operational risks. It is worth stating that many of the lessons learned from those headlines cases cited violations of the fundamental tenets of internal control, particularly those pertaining to operational risks. Lately we have observed that some institutions have been reviewing their treasury operations. The Bank of Mauritius views these undertakings as positive moves towards improving efficiency in management. In any treasury management unit it is essential to have a modularly flexible treasury system, which can adapt to the conditions of a fast moving market. One of the basic tenets for the treasury unit in a bank is the strict segregation of duties and location between the front, middle and back office, the latter controlling confirmation and settlement transactions. You can trust neither your subordinates nor your superiors. Errors can be expensive. Correct your errors. If you do not do so, your errors become fatal mistakes in treasury management. The events of the past two years demonstrate how quickly a corporation’s reputation can be tainted by accusations of inappropriate activities or lack of attention to regulations. Success in banking still is heavily dependent on winning and keeping the trust of customers, employees, and the public at large. When corporate reputations are tainted, it does take time to rebuild customer and community relationships. Last year I met with one of the foreign exchange dealers at a reception. I told him that he was taking too much time to become a market maker in our money and foreign exchange markets. Pat came the reply from your friend that Rome was not built in a day. It took time to build Rome. I listened and did not utter any single word. This is an appropriate time for me to respond to that statement. Yes, it did take time to build Rome because they did not have the technology. You have the technology. Go ahead and develop skills in market making. It will serve all of us to have good market makers in our financial system. I am aware that the experts from the Republic of South Africa are competent persons and I trust they will do an excellent job. I wish all my good friends from the Financial Markets Association of Mauritius here the very best of success in their endeavours. Thank you | bank of mauritius | 2,003 | 9 |
Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the annual dinner with major economic shareholders, Sugar Beach Resort, 28 November 2003. | R Basant Roi: Present challenges of monetary policy in Mauritius Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the annual dinner with major economic stakeholders, Sugar Beach Resort, 28 November 2003. * * * Ladies and Gentlemen Good evening I am pleased to welcome you to the Bank of Mauritius Annual Dinner. Right from the year I set the tradition of holding an annual dinner with the major economic stakeholders in the country I focused mostly on regulatory and supervisory issues in my addresses. Intentionally, I chose certain regulatory and supervisory issues as the leading themes of my addresses for reasons that I strongly believe should be clearer by now. Tonight I shall briefly outline the present challenges of our monetary policy in the context of an external environment characterized by uncertainties. Before I proceed with the main theme of my address let me reiterate a few remarks I made in the post February 2003 months this year. The perceptions that emerged in the wake of the discovery of a fraud at the Mauritius Commercial Bank (MCB) inevitably make it compelling that I should re-emphasize some of the remarks. The guiding principle of any regulatory and supervisory authority in any economic and financial system is to first and foremost attempt to save troubled financial institutions. The legal frameworks of regulatory and supervisory authorities are designed to promote financial stability rather than to jeopardize financial stability. This is what is envisioned in the Bank of Mauritius and the Banking Acts. The Acts are an instrument that empowers the Bank of Mauritius to promote and sustain monetary and financial stability. Regulatory and supervisory authorities the world over do not use any of the provisions of their laws to defeat the very objective of the laws. Arbitrary decisions motivated by emotional or even personal considerations should be set aside in favour of a genuinely professional approach of sustaining the soundness of banks in situations similar to the one the Mauritius Commercial Bank found itself in. The regulatory and supervisory authority cannot but exercise its independence of mind. Without being presumptuous the MCB/NPF case was handled by the Bank of Mauritius in a manner that best serves the interests of our financial sector and of our economy. I should like to re-underline that supervision of banks is control and procedure oriented and not transaction oriented. Viewed in the light of determined steps taken by the MCB in the realm of risk management along with a number of other prudential measures taken in the months after the discovery of the fraud, the MCB/NPF case is expected to be over soon as far as the Bank of Mauritius is concerned. Regulatory issues relating to the Worldcom and Enron scandals in the US were dealt with and settled within a few months. Our banking industry is blessed in having to surmount only one tyranny: adverse publicity motivated by considerations that go beyond acceptable norms of conduct. The Bank of Mauritius will ensure that the steps taken by the MCB to fully revamp its internal controls and procedures are carried through to the finish and that internal controls are appropriately exercised and procedures are strictly followed. Suffice it to say that the MCB/NPF episode, despite the traumas associated with it, serves a good lesson to our financial industry. Having said that let me turn to the main theme of my address tonight. As I explained in April last at a Seminar a full appreciation of the Bank’s monetary policy stance requires a perspective stretching beyond a few months or even beyond a single year. A few months or even a year is rather a short time to really gauge what monetary policies of central banks can accomplish on a lasting basis. Monetary policy tends to impact on economies with a long and variable lag. Unforeseen events having undesirable consequences for economies can take place in minutes. Predictability of the course of monetary policy is disturbed in such circumstances. Policies in the post World War II were quite predictable. They were predictable because of the steady economic performance of the leading economies of the world in the context of a remarkably stable international socio-political and economic and financial environment. Central banks and governments all over the world enjoyed full sovereignty in policy making. In sharp contrast, the international sociopolitical and economic context is far from being that predictable today. Additionally, in the wake of financial liberalization across the world, with an estimated US$1.2 trillion being traded daily, capital moves in and out of countries with a remarkable ease and at a speed never witnessed before. The monetary policy stance of one country affects the monetary policy of another and in this process part of our sovereignty in monetary policy-making is thus lost. Central bankers necessarily have to constantly watch their radar screens and determine for themselves how to steer their monetary policy in the best interest of their economies. “The manner in which central bankers must operate can be compared to the decisions people make whenever they cross the street. If there is no traffic, there is little risk, and pedestrians don’t need to worry about the speed with which they cross the street. But if the road is heavy with fast moving traffic, it’s a different story, and safety demands that pedestrians wait until they are confident they can make it to the other side. The same holds true for central bank governors.” The introduction of the Euro, the September 11 attacks that impacted seriously on the US economy which is an importer of the last resort, the ever growing instability in the Middle East, the disagreements over trade policies and tendencies for countries to resort to protectionist measures in one form or the other, volatility in the exchange rates of major currencies in the international exchanges as well as the weak performance of most economies across the world have not made monetary policy making here and abroad a plain sailing endeavour. Successive years of uncertainties intensified by events beyond the control of central banks have increasingly blurred visibility. Central banks have to constantly chart a safe way forward in this world of unexpected twists and turns of events. Five years ago, substantial capital outflows triggered by a loss of confidence in the rupee had brought down the foreign reserves of the Bank of Mauritius to unacceptable levels. The rapid weakening of the Euro in the international exchanges following its introduction in January 1999 translated into a significant appreciation of the rupee. And that appreciation of the rupee was a quick reversal of the preceding three years of rapid depreciation of the rupee. The mood of pessimism that emerged in the wake of the September 11 attacks brought down the world economy to the throes of deflation. Central banks around the world effected a series of cuts in interest rates in a bid to revitalize their respective economies. Notwithstanding the policies adopted by central banks, the leading world economies entered a period of balance sheet recession in recent years. In the wake of drastic fall in equity prices, many companies the world over could no longer afford to maximize profits. They chose to restructure their balance sheets for corporate governance so demanded. However, the household sector continued to save money and the business community almost stopped borrowing money even at low rates of interest. This is a peculiar situation or rather a fallacy of composition problem that exacerbated the recessionary trend in the world economy. Monetary policy becomes much less effective when only few companies are willing to borrow in this type of a recession. Fiscal policy takes over as an absolutely important instrument to boost up aggregate demand as well as to keep money supply from shrinking. In such troubled waters the navigational hazard is impaired visibility, which is quite often the case. Monetary policy judgments become a question of balancing risks more so in a small open economy like ours with all its vulnerabilities. Observers from outside the walls of the central banks may find monetary policy making a mechanical process as described in textbooks hardly realizing that in such circumstances policy decisions are more about weighing probabilities. This is an area in policy making where even thinking people do differ in the judgments regarding the course of policy actions. I cannot claim divine insight. Nor do I think anyone of us here may claim having been gifted with such an insight. However, it would be surprising if all of us always agreed in the judgments. When everyone agrees with each other all the time no one is really thinking enough. Criticisms of the Bank of Mauritius policy stance are profoundly appreciated so long as the criticisms are educated criticisms. The hazard posed by troubled waters abroad and the third party threat to the competitiveness of our Export Processing Zone has rendered the conduct of our monetary policy quite a puzzling exercise. Basically, the conduct of monetary policy in recent years has aimed at bringing down the rate of inflation. The informal inflation targeting approach of monetary policy making has paid good dividends. The average inflation rate in the first five years of the 1990s was 6.8 per cent, 6.1 per cent in the second half of the 1990s and 5.2 per cent in the last five years. For the current year the rate of inflation is forecast at close to 4 per cent. Clearly, the tendency is for the rate of inflation to either post a further marginal decline or to stay at the current rate of around 4 per cent. That excessive monetary tightening could adversely affect growth performance of our economy is a consideration that is well borne in mind. The successive cuts in interest rate like in several other countries have induced borrowings but not to the desired extent. The pace of bank credit expansion is currently subdued. Some corporate bodies are borrowing in foreign currencies substituting for borrowings in rupees. While the rates of interest on foreign borrowings are lower compared to the rates of interest charged by local banks, borrowers need to be mindful of the risks involved. Risks associated with external borrowings could turn out to be high. With the upside risk of inflation being minimal in the foreseeable and the need for re-aligning interest rate parity being felt in order to prevent a built up of short-term foreign liabilities, the Bank of Mauritius effected a further cut in the rate of interest yesterday. Against a backdrop of four successive years of surpluses recorded in the current account of our balance of payments and less than buoyant aggregate demand in the economy, the Bank faces a policy dilemma. The market is flushed with liquidity for quite sometime. Excess supply of foreign exchange has given rise to a situation of excess rupee liquidity. In the last two years the Bank of Mauritius purchased foreign currencies on the domestic market for an amount equivalent to over US$500 million. The rupee counterpart of the purchases amounted to around Rs14 billion that has ultimately landed in the balance sheet of the Bank of Mauritius as well as in the balance sheet of Government. The interest burden on this rupee counterpart of the foreign currencies purchased by the Bank is indeed heavy. To what extent the Bank can keep buying foreign currencies on the market remains a complex policy question should the considered view that the current exchange rate level have to be maintained. Given the volatility of exchange rates on the international foreign exchange markets should we take the exchange rate of the rupee as a given price to us ignoring all considerations regarding domestic economic fundamentals? Economics textbooks teach us that in a market economy, the invisible hands of the market promote economic efficiency. Do we systematically take what the international financial markets decide as given to us despite the common belief that the invisible hands of the market often suffer from arthritis? Sometime back a Council member of the European Central Bank likened the behaviour of currency markets to herds that all ran in the same direction. He had this to say, “I have met a lot of sheep who know they are running in the wrong direction. But they only want to run in the opposite direction if they are certain the rest of the herd will follow.” The problem is how best the determination of the exchange rate of the rupee in our foreign exchange market reconciles domestic economic fundamentals with what the international financial markets dictate to us. The Bank’s policy concern is about the need for stemming excessive foreign exchange inflows while sustaining the current exchange rate levels. This is a policy dilemma not only specific to Mauritius but also to giant economies like China and others. The Bank of Mauritius has but only one instrument to strike an appropriate balance and that is interest rate. In the last 30 months the Bank of Mauritius reduced interest rate on 9 occasions. The Lombard rate was reduced step by step from 12.5 per cent to 9.75 per cent. The Prime lending rates of banks fell from 11 per cent to 8.5 per cent; it will be further reduced as a result of yesterday’s cut. However, borrowers with default risk pay a premium over the Prime lending rates of banks. The higher the default risk the higher is the premium. Monetary policy has its limits; it cannot influence the premium in either direction. In this policy scenario savers face the vicissitudes of interest rate not only in Mauritius but the world over. Our household sector has traditionally placed its savings with banks. Risk averse investors, particularly those depending on their pensions for a living, have not had the benefit of riskfree investment avenues. In December 1998 the Bank of Mauritius started with the sale of Treasury bills over-the-counter to individuals. Over Rs4 billion from more than 11,000 individual investors were soaked up by the Bank of Mauritius. Evidently the market for Government debt instruments has a growth potential in Mauritius. The sale of bills was subsequently suspended in view of our decision to develop a secondary market for Government debt instruments. There have been many requests from the public to the Bank of Mauritius for the regular sales of Treasury bills over-the-counter. Though helpful as a rudimentary method of conducting open market operations in a less developed market, the sale of Treasury bills over-the-counter by the Bank of Mauritius is not the way forward. We have decided that Treasury bills and over time other Government debt instruments be traded on the Stock Exchange of Mauritius. Our Stock Exchange has good operating characteristics for trading in Government papers. We expect the market to eventually develop into a bond market with an efficient system of good price discovery. The Bank of Mauritius, the Stock Exchange of Mauritius and Stockbrokers have made united efforts to start trading sometime in the next few weeks. The Stock Exchange of Mauritius and stockbrokers will come up with more details this December. The Bank of Mauritius has a keen interest in the development of the market for Government debt instruments. Such a market would provide the Bank with a good medium for the conduct of its monetary policy. Ladies and gentlemen, my address tonight is based on a decision to make the monetary policy stance of the Bank of Mauritius increasingly more transparent. It is an adopted practice among central banks in most countries to move for transparency in the area of monetary policy making. I for one do really believe in it and will move further in this direction. Before concluding may I say that the Bank of Mauritius will live up to the challenges of monetary policy in the years ahead. In an uncertain external environment the Bank has so far charted the best possible course to support non-inflationary growth. The Bank will pursue the course in the same spirit. May I on behalf of the Board of Directors of the Bank of Mauritius and on my own behalf wish you and your family Merry Xmas and a Happy New Year. | bank of mauritius | 2,003 | 12 |
Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the official launching ceremony for introduction of government securities at the stock exchange of Mauritius, Port Louis, 12 December 2003. | R Basant Roi: Introduction of government securities at the stock exchange of Mauritius Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the official launching ceremony for introduction of government securities at the stock exchange of Mauritius, Port Louis, 12 December 2003. * * * Ladies and Gentlemen Good afternoon It is a great pleasure to address you this afternoon on the occasion of the Official Launching Ceremony for the introduction of Government securities at the Stock Exchange of Mauritius. It is a greater pleasure still to see that Government securities have finally found their way to the Stock Exchange after several timid attempts made in the past. Indeed the Bank of Mauritius has been striving for more than a decade to develop a secondary market for Government papers. In November 1992 when the Bank started with the weekly auctioning of Treasury bills a strategy for the development of a secondary market was devised. It remained a paperstrategy and did not find its way through. In February 1994, the Bank made a second attempt. A Secondary Market Cell was set up in-house with a view to kicking-off, with some determination, the development of a secondary market for Government papers. This in-house Cell was initially expected to play a market-making role. Commercial banks did not respond positively to the initiative. The market did not take off. Brokers were eventually invited as participants to play a decisive role in the endeavour. The then strategy of the Bank was not well received. It was not appealing to brokers. As a result of miscarriages, the in-house Secondary Market Cell laboured in routine operations. In December 1998, the Bank of Mauritius started with the sale of Treasury bills over-the-counter to individuals and non-financial corporations. One of the important objectives of this initiative was to let individuals from all strata of the population familiarize themselves with Treasury bills as an investment instrument. This initiative triggered competition for deposit resources in the banking industry. Individual investors derived some experience with Treasury bills as an investment instrument. The sale of bills over-the-counter by the Bank was a success. Investment in the bills reached a peak of over Rs4 billion. Some 11,000 individuals and financial corporations invested in the bills. Pursuing its objective to eventually take Government papers for trading on the Stock Exchange of Mauritius, the Bank of Mauritius established, effective 1 February 2002, a Primary Dealer System. At the weekly auctions for Treasury bills four banks, the Mauritius Commercial Bank Ltd., State Bank of Mauritius Ltd, HSBC, and Barclays Bank Plc., were appointed primary dealers. The Bank of Mauritius had decided that traditional bidders for bills at the weekly auctions would be gradually cropped out. Between February 2002 and November 2003 transactions by Primary Dealers with banks amounted to Rs1.9 billion. Their transactions with Corporate bodies amounted Rs10.8 billion. With individuals their transactions amounted to Rs1.6 billion. These give a total amount of over Rs14 billion worth of bills transacted by Primary Dealers. This value of transactions in bills reflects the potential that exists for the trading of Government papers on the Stock Exchange. So far the number of eligible bidders at the weekly auctions held at the Bank of Mauritius that are not primary dealers has been reduced from around 250 to 11. Over time only the Primary dealers will be eligible to bid at the weekly auctions. Institutional investors like the National Pension Fund, the National Savings Fund and all the remaining banks and other financial institutions will be required to purchase Government papers on the secondary market. This would definitely require major changes in the investment decision-making process within these organizations. They would stand to gain in the medium-term. Sometime in May last I initiated discussions with Mr. Sunil Benimadhu, Mr. Vipin Mahabeersingh and Mr. Chota Moollan at the Bank of Mauritius on our intention to sell Treasury bills through brokers on the Stock Exchange. Several meetings were since held with myself, the Managing Director and the staff of the Financial Markets Department of the Bank of Mauritius. Discussions were held with stock brokers also. A set of rules and procedures has been defined and was submitted for approval by the Financial Services Commission. Some six weeks back I had a stimulative exchange of views with the Honourable Minister Sushil Khusiram on this project. The swiftness with which the Honourable Minister made Regulations to that effect reflects his personal commitment and determination for the development of the market for Government papers. I am thankful to him for having supported this initiative. With hindsight the decision to sell Treasury bills over-the-counter at the Bank of Mauritius was a decision taken in the right direction. I am happy to see that finally the trading of bills will soon take-off on solid foundation. The Stock Exchange of Mauritius, the Central Depository & Settlement Co. and the brokers have put in lots of efforts in the project and I am confident that it will not suffer the miscarriages of the past. Should the Stock Exchange and the brokers require any further assistance from the Bank of Mauritius we will be glad to do so. May I wish all the stakeholders the very best of success. | bank of mauritius | 2,003 | 12 |
Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the inauguration of the Mahebourg branch of MPCB Ltd, 8 July 2004. | R Basant Roi: Banking in Mauritius Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the inauguration of the Mahebourg branch of MPCB Ltd, 8 July 2004. * * * Hon. Minister of Tourism and Leisure Chairperson and Members of the Board of the MPCB Ladies and Gentlemen Good afternoon I am pleased to be here with you all for the opening of the Mahebourg branch of the Mauritius Post and Cooperative Bank Ltd. In the last two years I have been asking Chief Executives of all the banks operating in Mauritius to upgrade the layout of their bank branches to international standards. I am particularly delighted to actually see that the premise housing the Mahebourg branch of MPCB Ltd. is of the desired standard. Having a pleasant looking building is a good thing. The quality of services provided as well as the balance sheet of any bank should match the good setting of the premises. Every week I receive numerous complaints from bank customers from across the country. Seldom do I come across justified complaints. Let me clarify a fundamental point. Banking, as we are all aware, involves risk. No banker, anywhere in the world, is absolutely certain that money lent out will be fully repaid in time. The risk of default is ever present. And many borrowers do default - often in an obscene manner. In such circumstances bankers have no other alternative than to take unpleasant actions for the bankers are answerable to their shareholders. Never borrow sums of money if your repayment capacity is limited. Never borrow sums of money thinking that in the years ahead your own financial standing will somehow improve and along with it your repayment capacity will improve. Your financial standing might never improve. The securities you have provided to the bank would be at stake. Let not the infectious greed catch you. Borrow such sums of money that you are certain to be able to repay in time. Already banks have become mindful of risks involved in their lending operations. In the wake of financial liberalization, regulatory and supervisory authorities are requiring banks to give due weight to credit risk, amongst other things, in their operations. Less than two weeks ago, the G10 Governors of central banks reached a consensus on Basel II that requires banks to exercise far greater discipline in their lending activities. All the banks in Mauritius have been requested to adhere to the principles laid down in the Accord. Gone are the days when one could obtain credit through a mere telephone call to the manager of a bank. Let me move on to a specific development that has been of serious concern to me as well as to international bankers watching our banking industry from overseas. Financial institutions are subject to an obligation of secrecy. In a democratic society citizens are entitled to the protection of their privacy. The obligation to maintain banking secrecy applies to all those who are employed by banks as well as to the banks’ external auditors and board members. However, while the importance of public interest cannot be readily disregarded privacy of individuals cannot be taken that lightly. Confidentiality of information and banking secrecy have been and remain an important pillar of banking business throughout the world. Once the trust placed by individuals in banks is lost, it cannot but be a one-way ticket to irrecoverable damages to our financial system and to our economy as well. In the banking industry we are very much aware of the grave consequences of a loss of confidence in banks. All of us, particularly those of us having an elevated sense of responsibility should size up the gravity of the consequences for our economic and financial system, more so at a time when the present international environment is so inhospitable to the plight of small island economies like ours. Having said that, I am pleased to learn that the MPCB is proposing to increase its capital from Rs 280 million to Rs 750 million by the end of next year. Let me wish the Chairman, members of the Board of Directors, the Chief Executive and staff of the Mauritius Post and Co-operative Bank Ltd. the very best of success. | bank of mauritius | 2,004 | 7 |
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. | 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. * * * 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. | bank of mauritius | 2,004 | 9 |
Address by Mr Rameswurlall Basant Roi, GCSK, Governor of the Bank of Mauritius, at the Bank of Mauritius¿ Annual Dinner with major economic stakeholders, Flic-en-Flac, 3 December 2004. | R Basant Roi: Monetary policy objectives in Mauritius and its operational framework since 1994 Address by Mr Rameswurlall Basant Roi, GCSK, Governor of the Bank of Mauritius, at the Bank of Mauritius’ Annual Dinner with major economic stakeholders, Flic-en-Flac, 3 December 2004. * * * Honourable Chief Justice Distinguished Guests Ladies and Gentlemen Good Evening I am pleased to welcome you all to the Bank of Mauritius Annual Dinner. In my last six addresses I dealt mostly with regulatory and supervisory issues that the business community and the public at large need to be aware of. The addresses are purported to enhance transparency in the Bank’s policy decision-making. The theme for my address this evening is: A perspective of our monetary policy objective and the evolution of its operational framework since 1994 when our Exchange Control Act was suspended. Let me start with a remark - a remark that is generally valid. Often, commentators make observations that are so framed, either unwittingly or intentionally, as to lend the impression that monetary policy, on its own, should be capable of achieving all economic objectives at the same time and all the time. This is indeed an unrealistic demand on monetary policy. Monetary policy, though a very important arm of macro-economic policy, is only one of several elements in the economic panorama. We need to have a realistic appreciation of what monetary policy or any other policy in any other field can be reasonably expected to deliver. It’s a fact of life that we cannot have all that we want at the same time, all the time and under all circumstances. Whether it’s monetary policy, fiscal policy or social policy, choices are made between conflicting or potentially conflicting objectives in the short term. Between the choices made in the short term and the choices available in the long run there is what economists call the long run opportunity cost. Policy choices made today do often constrain the range of choices available in the longer run. Those of us outside the economics profession and even those in the economics profession frequently tend to overlook the long run opportunity cost when it suits them. Whenever expectations of a particular sector are not met, there emerges pressing demand to intervene and set right sectoral problems while dismissing the long run adverse implications of the intervention for the economy as a whole. In any dynamic society with ever changing priorities, the relative importance of any single objective varies over time. A switch from one policy to another as demanded by particular economic sectors out of unrealistic expectations to best serve their exclusive interests is likely to cause unintended damage to other longer term objectives. High level of employment is a desired policy objective. But we simultaneously want low and stable inflation rate. Consumer protection is warranted in the same way as investor protection is warranted. But we also want free-market competition. The rupee depreciates. Exporters are silently happy. Consumers are not. The rupee appreciates. Exporters are angry. Consumers are silent. And so goes the story on interest rate changes. We will have “expectations gaps” all the time. There are “trade offs”. However, policy makers constantly strive to strike the right balance between competing ends. Sound minded people cannot reasonably expect conflicting objectives to be met at the same time. If the Bank of Mauritius were to meet everybody’s expectations, its policy would swing, quite often violently, from one extreme to the other. The end result would be much less success in the achievement of its longer-term objective. Prior to the 1980s, monetary policy did not have a precisely defined role in an overwhelming majority of countries across the world. Monetary policy was expected to achieve a number of objectives: price stability, balance of payments equilibrium, promotion of economic growth and full employment. These objectives are conflicting in the short term. With one major policy instrument, central banks were expected to achieve the conflicting objectives simultaneously. As priorities changed following pressures from politicians, industry and commerce, monetary policy shifted legs from one to the other, frequently at short intervals. The monetary policy stance of central banks swung from one extreme to the other giving rise to business cycles and higher and higher inflation rates as also higher and higher unemployment levels - an excellent way of sharing misery but not of creating solid wealth. Central bankers became increasingly disappointed. What should central banks systematically aim at to finally achieve the ultimate goals of growth and high employment levels? Academics and central bankers debated the question. Researchers emphasized the monetary nature of inflation. Lasting price stability came to be accepted as a necessary condition for sustained growth and high employment levels. Country experiences supported this perception. Those countries with a history of low and stable inflation had also performed well in terms of growth and employment. Over the years, lasting price stability as a policy goal for central banks won broad-based support. Monetary policy came to be assigned the specific objective of achieving and sustaining price stability. Rather than pursuing different policy stances depending on the exigencies of the day to meet the expectations of different pressure groups, it is best to consistently pursue policies with a precisely defined objective that best serve society as a whole in the medium and long-term. There is a general tendency to believe that the Bank of Mauritius is not concerned with growth and employment. This is a mis-perception. The Bank is not insensitive to the unemployed. Indeed, the Bank does take into account these considerations in policy-making, not with a short term but with a medium and long-term view. Monetary policy does not directly promote growth and help create employment; it does it indirectly through the achievement of sustained price stability. Durable growth can only be achieved, inter alia, within a framework of monetary stability. This is what central banks can be reasonably expected to deliver. In the Bank of Mauritius Act 2004 this is what is expected of the Bank. There are however several underlying and fundamentally important assumptions for monetary policy to succeed. Rather than enumerating the assumptions, let me set a few questions and leave them to you for reflections. Are there serious imperfections in the determination of prices of goods and services in the domestic market? Why prices of goods and services do not positively respond in both directions to movements in the exchange rates of the rupee? How rational are consumers in making decisions? Is the labour market flexible? How many traders, producers, exporters and importers have reliable annual balance sheets on the basis of which banks make decisions to lend? Have our financial markets attained a level of development that facilitates transmission of monetary policy impulses readily? Years ago we had less national savings and more investment. Today we have are flushed with funds but investment is sluggish despite a panoply of investment incentives. Indeed, national savings exceed investment by far. Haven’t we overstretched the “welfare state” for too long a time to a point that has suppressed entrepreneurial instinct, blunted creativity, inventiveness, and undermined work effort? Hasn’t the “welfare state” been overstretched to a point that has given rise to a society of free riders? The more free riders there are in a “welfare state” the heavier is the burden on Government finance and the more difficult is the task of monetary policy in achieving the desired objective. The point I want to make here is that monetary policy does not operate in a vacuum, independent of a host of other critical factors, and it alone cannot perform miracles. Deprived of a number of allied factors, the achievement of monetary policy objective and ultimately durable growth could be rendered difficult. Lasting price stability is, as I stated earlier, a necessary condition but not a sufficient condition for growth and employment. A number of catalytic factors should imperatively accompany monetary policy for it to succeed. Along with the change in the aims of monetary policy in the last fifteen years, the operational framework for the conduct of monetary policy underwent several stages of evolution across the world. Here, in Mauritius, since 1994 the operational framework for the conduct of our monetary policy was based on monetary programming, with broad money as an intermediate target and inflation as the final target with a time horizon of 18 months on a running basis. The first Monetary Policy Committee under the Chairmanship of the then Minister of Finance was established in 1994. The monetary programming exercise ought to have produced the desired results. The only snag - a critical one indeed - was the issue of independence of the Bank with regard to interest rate policy decisions. Notwithstanding this snag, the first operational framework for indirect monetary control was at least set. In 1996 the monetary programming was given a different twist. In essence, both exercises had the same objective. The framework changed in its form but not in substance. The first was the top-down and the second is the bottom - up approach of operating in the balance sheet of the Bank of Mauritius. In the following two and a half years, the Bank was at the helm of the ship but could not control the storm for reasons that I suspect you may already be aware of. The Bank had the powers to pursue a realistic interest rate policy but it did not. Even if the Bank had decided to change its interest rate policy, it would have taken several weeks to do so with no meaningful impact on the interest rate structure of the system. The Bank Rate, which is the predecessor of the Lombard rate, used to be determined by the market at the weekly auctions of Treasury bills since 1994. The Bank Rate moved weekly like flotsam and jetsam without signalling any definite direction to the market. This system of determining the Bank Rate was anathema to the financial system of a small highly open economy that had passed the post of financial liberalization. Despite the liberalization of exchange control, which by definition allowed for the free movements of capital, the “flotsam-jetsam” Bank Rate was retained. Towards the end of 1998, the systematic pursuit of a realistic interest rate policy along with an imaginative and well-crafted strategy, that is, the sale of Treasury bills over-the-counter to individuals re-established a number of equations in our system. This strategy remedied to some extent the inadequacies of our money market. In 1999, our operational framework was again reviewed. This framework encapsulated repurchase operations between the Bank of Mauritius and commercial banks along with the concept of a key interest rate, the Lombard rate for signalling the interest rate policy decisions. Admittedly, the connection between the Lombard rate and the money market is not sufficiently strong. This is not because the concept of the key rate itself is wrong but because our money market has not attained the desired level of development and sophistication. The link between the Lombard rate and the money market has to be robust for any shift in the interest rate policy stance to be instantly transmitted. However, as you may have observed, changes in the Lombard rate have been having the intended impact on our interest rate structure. In time to come our operational framework for the conduct of monetary policy will be refined with the progress in the development of our money market. Depending on the pace of development of our money market in 2005, the Lombard rate will be replaced by a Repurchase rate, commonly referred to as the Repo rate. As an aside, let me say that monetary policy making has never been and can never be a purely mechanical process; it is basically an interpretative and therefore a judgemental process requiring a battery of information collected from every available source, including the on-site inspection of banks carried out by our Banking Supervision Department. The judgemental process is what makes monetary policy decision-making difficult. I need not overstate that what is judgemental is susceptible to mis-judgements. The Bank, however, does its best to avoid erring on the wrong side. It sounds simple. But it isn’t. Central bankers endeavour to have a clear view of its monetary policy transmission mechanism. Our policy decisions involve a good understanding of the roles of short-term interest rates, exchange rate, and money and credit in the economy. The Bank heavily counts on dependable inflation forecasts. A fan chart for probabilistic outcomes on the inflation front, duly supported by a highly reliable inflation forecasting model plays a decisive role in our policy-making process. This is a key element since our monetary policy framework is necessarily forward-looking. Academics and central bankers agree that there is no such thing like an “ideal” rate of inflation. The specificities of our economy coupled with the weak predictable relationships between certain key monetary and other economic variables have not made targeting a specific inflation rate that easy at this stage. I suspect you must be aware of the saying: “To be sure of hitting the target, shoot first and call whatever you hit the target.” Price stability will continue to be given central importance and will be kept clearly in sight as the anchor for monetary policy. Precisely, this is what the Bank of Mauritius Act 2004 expects us to deliver. Much progress has been made in the recent past in the achievement of price stability. Wide fluctuations in the rate of inflation have been drastically reduced over time. Inflation rate in the 1980s reached a peak of 44 per cent and a low of less than 1 per cent. In the 1990s, it attained a high of 14 per cent and a low of 3 per cent. In the last 5 years the highest rate was 7 per cent because of the introduction of VAT coupled with an increase in the VAT rate and the lowest was 4 per cent. These figures are the headline inflation rate as published by the Central Statistical Office(CSO). It captures changes in the cost of living based on a typical household consumption basket. Central banks have gone deeper into statistical analyses of inflation. For quite some years they have come up with the concept of core inflation - an indicator of the underlying movements in consumer prices. Core inflation irons out the effect of temporary disturbances and shocks to prices that are not attributable to economic and monetary policy. For instance, the impact of the current increase in world price of oil on our inflation rate is a disturbance for which monetary policy is not responsible. That part of inflation due to such disturbances and shocks are statistically isolated from the headline inflation rate. The resultant rate of inflation provides a measure of and an indicator of underlying long-term inflation. We have carried out this exercise for Mauritius. We have had some difficulties in arriving at a specific core inflation rate for Mauritius because the prices of around one-third of the items in our consumption basket are set by Government. Having used two different methods, we obtained a range for our core inflation. For the 12-month period ended September 2004, the core inflation ranged between 2.9 per cent and 3.3 per cent lower than the headline inflation rate of 4.1 per cent as published by the CSO. On average, our core inflation is likely to be between 1 and 1.5 percentage points below the headline inflation rate. We expect the core inflation for the current fiscal year to be in the region of 4 per cent. I may say that we have made considerable headway in achieving price stability in recent years. The operational framework for the conduct of monetary policy combined with an increasing degree of transparency has led to a higher level of appreciation by the market of policy decisions of the Bank. This has clearly aided expectations building. In the past central bankers believed that unanticipated changes in their policies were more effective. Contrary to this perception, experience demonstrated that policy induced shocks rather harmed economic agents than helped sharpen the effectiveness of the policy. Central bankers have thus adopted a stand – not that much palpable - that allows market players to formulate a view and anticipate their likely policy moves. We have growing evidence of this phenomenon in Mauritius in the last few years. Let me use an anecdote to express what I mean. In the 19th century a leading newspaper in France announced the death of a famous ailing French author. The author, upon hearing the news about his own death, said, “Eh! I have started living again.” A week later the author actually died. The day after, the same newspaper came with a headline: “We were the first to announce the death of the author.” We have observed such capabilities emerging among our market players and commentators. And that augurs well for the stability of our financial industry. Ladies and gentlemen, so strong is the weakness of mankind to fall into mutual animosities, that the most fanciful artefacts have been sufficient to excite unfriendly passions. Let me conclude with two observations: the first is about profits of the banking industry. In our type of an economic system profit making is not regarded as a sin. Banks make fat profits. But banks also take high risk. Banks also make fat provisions for debts that have gone bad. Banks also need to build reserves and strengthen their balance sheets. Strong and sound balance sheets make strong banks. The rate of growth of pre-tax profit of commercial banks is observed to be lower than the growth rate of their total assets. Moreover, in the last ten years profits of the banking industry have grown at about the same rate as the nominal growth rate of the economy. My second observation relates to the idiosyncratic view that commercial banks in Mauritius operate as a cartel. No; that is not simply barking up at the wrong tree, but being in a different forest altogether. It’s a view that is distilled badly, blended poorly, and bottled upside-down. Deposit and lending rates do vary from bank to bank. Fees, charges and commissions also vary from bank to bank. This is what we have seen during our on-site inspections of banks. Now, let me assume for a moment that, for instance, the same rates of interest were offered on deposits by some banks. Should it be necessarily seen as an evidence of collusion among banks? Even elementary economics textbooks on the theory of competition teach us that the inter-play of forces in a competitive market drives down prices of goods and services to the same level. Over time one price for the same product prevails throughout the market not because of necessarily a monopolistic situation but because of competition within the industry. The contention that commercial banks operate as a cartel simply because some of the rates applied by them are the same does not make commonsense. And Mr. Sneer-well said: “I went to the pictures next Tuesday And took a front seat at the back I said to the lady behind me I cannot see over your hat.” Seated in an armchair, I cannot feel the fire of competition underneath. Ladies and gentlemen, on behalf of the Board of Directors and staff of the Bank of Mauritius and on my own behalf I wish you and your family a Merry Xmas and a Happy New Year. Thank you. | bank of mauritius | 2,004 | 12 |
Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the premier event in Islamic finance, Grand Baie, 25-26 July 2005 | R Basant Roi: The Mauritius Islamic Finance Forum - premier event in Islamic finance Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the premier event in Islamic finance, Grand Baie, 25-26 July 2005. * * * Hon. Deputy Prime Minister, Minister of Finance and Economic Development Hon. Minister of Arts & Culture Director of the Islamic Cultural Centre Members of the Diplomatic Corps Ladies and Gentlemen Good Morning I am very pleased to be here with you this morning for the Premier Event in Islamic Finance in Mauritius. May I first of all express my deep appreciation to the Islamic Cultural Centre for having taken the initiative to promote awareness in Islamic Finance in Mauritius. I do fervently hope that the two-day forum will provide an excellent opportunity to share views and ideas on the principles underlying Islamic finance and the way forward towards the promotion of Islamic financial services. The concept of Islamic finance dates back to ancient times. However, formal Islamic financial institutions are known to have been in existence for over 30 years. In the recent past, the growth of Islamic financial services worldwide has gathered momentum. Islamic financial institutions are today present in more than sixty countries across the world with total assets running in hundreds of billions of US dollars. The services are certainly not confined to Islamic countries. They have increasingly expanded beyond the frontiers of Muslim countries and are slowly taking roots in western financial systems. I am sure that all of us here are aware that Islamic laws, or the Shariah, strictly prohibits fixed or pre-determined rate of interest, the Riba as it is referred to, on financial instruments or such interest arising from dealings and transactions in risk instruments. Here, in Mauritius, we do have bank customers of 2 Islamic faith not claiming interest rates on their deposits. In fact, as of today, there are about 260 holders of deposit accounts who do not claim interest. This is not a recent phenomenon. It is a feature that has marked our banking industry for several decades and relatively unknown to the general public in Mauritius. It obviously follows that issues relating to Islamic banking need to be discussed and fully appreciated by all of us who are in one way or the other concerned with banking in Mauritius. Before I proceed further with my remarks, let me underline one aspect of Islamic finance that could give rise to ill-conceived interpretation. Financial institutions in general keep adapting to changing socio-economic environment. Finance does not have to do exclusively with any specific ethnically or religiously defined groups. Islamic financial products are suitably carving out a market. There is indeed a market need for these products and that market is expanding quite fast. Be they Muslim or not, individuals and corporate bodies in western markets are increasingly purchasing, for instance, Shariacompliant mortgages thus supplying funds to Islamic financial institutions to create more and more Sharia-compliant mortgages. The Sharia-compliant mortgage is a product that is not subject to the vagaries of interest rate volatility and as such this instrument is found to be the most appealing to bank customers. Having said that let me give a very broad brush-stroke of recent trends in Islamic banking. In a few countries the entire banking system has been converted into Islamic banking; in some others the banking system is dominated by conventional banking institutions operating alongside Islamic banks. Over 250 Islamic financial institutions are presently operating worldwide. Several international banks like the Citigroup, HSBC and Lloyds TSB are offering Islamic financial products and services either through ‘Islamic Banking Desks’ within their conventional banking businesses or the establishment of separate banks or subsidiaries that specialise in financial products. Indeed, these banks have successfully added targeted services to their broader platform. The sources of funds of Islamic financial institutions as well as the types offinancing proposed by Islamic financial institutions have evolved over time. The main sources of funds are classified broadly into current accounts, savings accounts and investment accounts – such as in the form of Amanah and Qard-hasan deposit 3 understood as conventional deposit for safekeeping the face value of which has to be guaranteed by the financial institutions. Mudarabah, refers to contracts in which a financial institution purchases goods upon the request from a client and the profit or loss is shared between them at an agreed upon ratio. This is classified as a loan. Participation term certificates and Profit and loss sharing certificates: these certificates resemble shares in a company and are generally classified as deposits. The principal types of financing are generally categorised into investment financing, trade financing, lending and services – in the form of Qard -hasan loans, Murabaha, Musharaka, Ijara, Ijara Wa Iktina and Salaf. These are but a few of the financial products. The modes of financing in Islamic banking emphasise principally profit-andloss sharing, although there are also some non-profit and loss sharing modes of financing. Theoretically, Islamic banks are relatively more concerned about the feasibility and profitability of a project while conventional banks tend to rely more on collaterals. This is one of the features of Islamic banking that could be of tremendous assistance to small-scale businesses. Conventional banking requires comprehensive criteria that need to be satisfied for an applicant to become eligible for loans. Smallscale enterprises throughout the world generally face greater difficulties in obtaining finance than large -scale enterprises do. The services sector is made up of a large number of small entrepreneurs who usually do not have ready access to finance. It is a matter of fact that small entrepreneurs who were able to obtain credit facilities on the basis of collateral in the past are now finding it difficult to raise funds for their operations. With the implementation of Basel II in the years ahead, there does exist a potential risk that conventional banks would be less inclined to lend to small-scale enterprises. Given the characteristics of Islamic banking, the small and medium enterprises is an economic sector where Islamic banking could play a central role in giving a fillip to entrepreneurship. In short, Islamic banks can play a catalytic role in fostering economic development although it has been observed that, in practice, Islamic banks tend to favour short-term projects and trade finance which are less risky. This is principally due to a lack of adequate techniques for project appraisals in an Islamic banking 4 context. Because of these weaknesses, it is advisable to address the need for having staff with the required skills to learn the new processes for operating Islamic banks. The provision of Islamic financial products and services has expanded beyond the market for households, businesses and institutions to governments. They have made inroads into capital markets. The Sukuk bonds – which differ from ordinary bonds to the extent that they are Shariahcompliant – have gained prominence. The market for Sukuk bonds is expected to register rapid growth in the years ahead as more and more conventional financial institutions are expressing keen interests and are actually participating in it. The expansion of Islamic banking across the world has inevitably drawn the attention of central bankers and regulators in the Middle East and elsewhere to the risk factor associated with it. Like conventional banks, Islamic banks also need to be effectively regulated and supervised. Their strength and soundness are unequivocally as critical as for conventional banks. However, the nature of risks associated with Islamic banking business brings forward an array of issues in risk measurement, income recognition, adequacy of collateral and disclosure standards. Effective prudential supervision for Islamic banks the world over is still in its infancy. The very fact that Islamic banking differs from conventional banking in important ways poses regulatory and supervisory problems. The risks taken by Islamic financial institutions are not directly comparable to those of conventional financial institutions. In most of the countries where conventional banks operate alongside Islamic banks, the same regulatory and supervisory standard is being applied to the extent possible. So far the tendency has been to apply the standard set by the Basel Committee on Banking Supervision. It is however recognized that the same standard as is applicable to conventional banking cannot be made rigorously applicable to an Islamic banking framework. Designing a comprehensive set of standard regulatory prescriptions and supervisory norms for an Islamic banking framework that are valid for all countries is a task yet to be accomplished. A prominent obstacle in the accomplishment of this task is the lack of uniformity in specific forms of Islamic principles in Muslim countries. Certain Islamic banking procedures and financial instruments that are accepted in one Muslim country may be rejected in another 5 Muslim country. The variants of Islamic banking practices make generalisation difficult as to what constitute standard and universally acceptable Islamic banking principles. It is deemed imperative to reach a paradigm version of Islamic banking that could be used as a benchmark for the crafting of an effective regulatory system and supervisory norms. In short, the regulatory challenges raised by Islamic financial institutions are yet to be resolved in a comprehensive manner. Some regulatory authorities have already started looking into the appropriate regulatory framework. However, there is still quite a distance to travel before regulatory authorities could come up with a standard and comprehensive set of regulatory prescriptions and supervisory norms for Islamic banking. Recognising these facts, the IMF supported and facilitated the establishment of the Islamic Financial Services Board (IFSB) in 2002 with a view to promoting, disseminating and harmonizing best practices in the regulation and supervision of the Islamic banking industry. The IFSB also aims at promoting good practices in Islamic financial institutions in risk management through research, training and technical assistance. It recently released exposure drafts on risk management standards for Islamic financial institutions. The work of the Accounting and Auditing Organisation for Islamic Financial Institutions is also of crucial importance. In the same vein, the work carried out by Shariah supervisory boards for Islamic financial institutions is of commendable importance for regulatory authorities. In conclusion, let me reiterate that banking is a universal concept that knows no boundaries – be they geographical, ethnic or religious. Any form of banking, so long as it is conducted within the parameters of the laws and regulations to provide services in the best interests of society, is most welcomed. May I wish all the participants in the Forum fruitful deliberations. To the distinguished visitors participating in the Forum, I wish them a pleasant stay in Mauritius. Thank you. | bank of mauritius | 2,005 | 8 |
Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the Bank of Mauritius' annual dinner with major economic stakeholders, Flic-en-Flac, 2 December 2005. | R Basant Roi: Overview of macroeconomic policies in Mauritius Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the Bank of Mauritius’ annual dinner with major economic stakeholders, Flic-en-Flac, 2 December 2005. * * * Honourable Judges Ladies and Gentlemen Good Evening I am once again pleased to welcome you all to the Bank of Mauritius Annual Dinner. In my last seven end-of-the-year addresses, I persistently focused more on regulatory and supervisory issues than on monetary policy issues. The repeated emphasis on the desirability of a sound and strong banking industry was motivated by several critical important considerations. Against the backdrop of recent developments in our export markets and the evolution of our balance of payments position I find it quite appropriate to briefly look back in order to throw some light on future orientation of our macro-economic policies. The 1980s witnessed a rapid process of financial sector liberalization in most parts of the world. The long repressed financial sector in developing countries underwent a process of gradual deregulation. Layers upon layers of direct controls in the financial sector, fashionable in the 1950s, 1960s and in the early years of the 1970s, were gradually removed. Decision makers in Mauritius rightly bent with the then prevailing wind of change. Direct controls on interest rate determination, ceilings on bank credit expansion and exchange control were done away with. With hindsight, it appears that the wideranging implications of the move from a system of direct controls to a fully liberalized financial system have not been fully appreciated. Financial sector liberalization imperatively requires monetary discipline, fiscal discipline, financial market discipline, labour market discipline and very importantly a sound and solid financial industry. These requirements are all, in one way or the other, closely related. The lack of appreciation of the complexity of the relationships among them seems to trigger the on and off criticisms against the Bank of Mauritius regulatory and supervisory policy and other policy stance. The emphasis on regulatory and supervisory issues relating to the banking industry has been driven by four principal considerations:1. Financial sector liberalization intensifies competition. Obviously, banks operating in the country necessarily have to be sound and strong, as otherwise competitive forces would drive out of the market the inefficient ones. I need not overstate that it takes only one small bank to fail to undermine confidence in our banking system and threaten financial stability in a small economy like ours; 2. The process of financial sector liberalization, throughout the world in the 1980s, was quite likely to be followed by a process of trade liberalization at the level of individual countries, regional level as well as the global level. Having taken the view that, at some stage, trade liberalization might eventually affect the balance sheets of banks thereby undermining their soundness, the Bank of Mauritius far-sightedly intensified its regulatory and supervisory activities in a bid to stave off as far as possible its adverse impact; 3. There exists a solid body of research strongly suggesting that improvements in financial arrangements precede and contribute to economic performance. Developing countries with relatively deep and efficient financial markets in the 1960s and the 1970s grew faster than those with relatively shallow markets. The Bank of Mauritius has thus been committed to initiate credible regulatory and supervisory measures with a view to strengthening the banking industry; and 4. The efficacy of monetary policy implementation in a liberalized financial system depends greatly on the strength and efficiency of the players in the financial marketplace. We have a bank-centered financial system. In other words, banks are at the epicentre of our financial system. Evidently, the players in our market are banks and bankers. Banks are the medium through which the monetary policy impulses of the Bank of Mauritius are transmitted to the rest of the economy. The weaker the medium for transmission of monetary policy impulses the lesser is its efficacy in achieving the desired objectives. The medium, that is banks, had to be strengthened and hence the repeated emphasis on the need for a sound and solid banking industry. These have been the inter-related objectives envisioned in the approach adopted by the Bank of Mauritius in the last seven years with regard to the banking sector. Despite a number of hurdles and unforeseen happenings, the Bank of Mauritius relentlessly pursued its objectives, for it is in the best interests of the economy to have a banking industry sufficiently strong to meet emerging challenges. All through the road traveled so far, the Bank of Mauritius has not been short of criticisms from commentators. In January 1992, the Financial Times carried a headline “Man bites Watchdog”. The man was Robert Maxwell. In the list of watchdogs, pension fund trustees, external auditors and accountants, institutional shareholders, the Bank of England and a number of other regulators were identified as potential scapegoats. In private conversations and in the media everyone had his favourite scapegoat. Some carefully avoided including themselves in the list of potential candidates for the scapegoats, as is the case in Mauritius. The history of troubled financial institutions is littered with eventful episodes of “Men biting Watchdogs”. “Watchdogs biting watchdogs” is however an uncommon happening. I guess you must be familiar with the story of the man who discontentedly wailed, “We were so poor in our childhood, we could not afford a dog; we ourselves had to do the barking.” Certain recent remarks against the regulator of the banking industry gave an incorrect perspective of the role of regulators. Some smart – pretentiously smart - but not necessarily persons of enviable integrity and probity have attempted to advertise colossal untruths. I refer to them as smart persons, for they are fully conversant with the laws that bind the Bank of Mauritius with regard to its duty of confidentiality of banking transactions. They are equally aware that the Bank of Mauritius has certainly no interest in street fighting with “respected” delinquent borrowers however provocative the unpleasant and unfair remarks. Any form of public retaliation against certain “law-abiding” delinquent borrowers is obviously not the business of any regulator. The Bank of Mauritius wisely chose to take the aspersions leveled against it cool headedly – with an elevated sense of respect to the laws governing the banking industry. They have talked the talk. We have walked the walk. In the last six years the Bank of Mauritius has been involved in clearing the banking system, through thick and thin, of outdated practices. We are today at the tail end of the clearing process. And we have had a rich experience in tackling problematic banks and ‘gentlemen’ delinquents – I mean habitual delinquent borrowers making a good, open and public show of piety of monks in monasteries. It is generally wondered why the Bank of Mauritius does not aggressively resolve problems that afflict certain financial institutions, whether at the board of directors level or the managerial levels. Ailing financial institutions can never be brought back on rail by simply applying mechanical procedures to complex operational problems. It’s like a man undergoing several medical procedures simultaneously. One physician is in charge of the head injury, someone else is setting the broken leg, another physician is working on the displaced shoulder and still another one is getting rid of the gallstone. Each operation is perfect and is indeed a success. But to the dismay of the physicians the patient dies - dies of shock. It is certainly not in the interest of any regulator - nor is it in the interest of society - to give shocks and kill financial institutions; its primary concern is rather to rescue ailing institutions, help restore their financial soundness and sustain overall financial stability. Breaking problems into small pieces and then managing the pieces, more so if the problems stem from the highest level of decisionmaking in a financial institution, is the surest way to a crash. The regulator’s responsibility in such cases is to manage the dynamics, not the pieces. No regulator would ever envy the plight of an ambulance crew at the scene of a car crash. I regret having to use metaphors for I am bound by a duty of confidentiality even in respect of the ‘gentlemen’ delinquent borrowers. Institutional shareholders or any individual shareholder in any enterprise, be it a financial institution or a non-financial enterprise, are expected to be the first and foremost watchdog of its operations. The watchdogs are supposed to look after the best interests of the enterprise rather using their authority to advance their own agendas. As is generally observed the sinews of good behaviour can hardly be reinforced by regulation. Financial regulations are not designed to catch deceit but to create markets and promote good corporate habits - habits that are indeed transparent to savers and investors who can vote with their money and why not with their feet, if the need arises. The dissemination of reliable information to the public at large and the ability to trust each other are the pillars of market-based economies. A former professor at Harvard rightly observed that trust constitutes a decisive ingredient of a society for it to be a successful capitalist society. People, who do not trust their neighbours, do not trust other groups, do not trust distant people, cannot trade among themselves. The economy is reduced to the level of a bazaar economy. The regulator needs to be trusted. I am absolutely certain that none of us would ever wish our economy to be reduced to a bazaar economy. As I said earlier, we have reached the tail end of the clearing process. We are now in the process of constructing a framework for the implementation of Basel II, taking into account the specificities of our economy. The year 2006 will quite likely be marked by acquisitions in the banking industry. We have had a number of expressions of interest for take-overs from several banks of good reputation. Despite a few consequential setbacks beyond our control, business confidence in the economy is not as bad as is being painted. Once an economic system is on a path of financial sector reform, the process is self-reinforcing; it cannot be stopped as one measure of reform engenders other reforms. The Mauritius Credit Information Bureau launched on Wednesday last is an innovative step that is expected to go a long way towards imposing discipline in the credit market. In the longer term this Bureau will definitely play a catalytic role in improving the quality of our financial sector. Let me clear one misconception. The Bureau is a repository of credit information on borrowers. When processing application for loans banks are required to consult the Bureau through an electronic network before deciding whether or not to approve the application for the loans. The decision whether or not to approve the loans however rests with the banks themselves, not with the Bank of Mauritius. Ladies and gentlemen, right at the outset I mentioned that financial sector liberalization necessarily requires monetary discipline, labour market discipline and fiscal discipline. Wages and salaries levels over and above productivity levels persistently lasting for a protracted period of time combined with unsustainable budget deficits are bound to influence monetary policy-making. I have to reiterate the point I stressed here, during previous annual dinners, and elsewhere that the Bank of Mauritius does not operate in isolation, irrespective of developments in the domestic economy and of developments in our major trading-partner countries. Its policies are designed in the light of the dynamics of the domestic economy and developments in foreign exchange markets abroad. In most large and resourceful economies, economic growth is to quite an extent driven by consumption expenditure. Consumption expenditure, amongst other things, is a propelling force to investment that, in turn, generates economic growth. In small economies like ours it is investment that propels economic growth that, in turn, gives rise to consumption expenditure. Ours is an investment driven economy and is not a consumption driven economy. The point I wish to make here is that in a highly open economy like ours, overwhelmingly dependent on imports, rising levels of consumption expenditure, not matched by production for exports, rather leads to deficits in the trade balance. After four successive years of surpluses, the current account of our balance of payments posted a deficit of over Rs5 billion in fiscal year 2004-05 - close to 3 per cent of GDP. The Goods Account, commonly understood as the Merchandise account, posted a deficit of over Rs20 billion, roughly twice the deficit recorded in the preceding year. May I underline that the rupee value of petroleum products imported in fiscal year 2004-05 amounted to Rs11 billion, twice the value recorded only three years ago. It is projected to attain over Rs13 billion in the current fiscal year. For every Rs100 worth of imports, Rs13 account for petroleum products. Only in a society that embraces self-criticisms can decision-making processes produce real facts to cope with real problems. A back-of-the-envelope arithmetic shows that in certain organizations, employees, after making allowances for week-ends, vacation leave, casual leave and sick leave entitlements, are at work for only 200 days in a year; I do not wish to say that they consume during 400 days in a year. Household consumption expenditure grew by 8 per cent in 2005, twice the average growth rate of 4 per cent in the four years ended 2003. Fortunately, the incisiveness of the Bank of Mauritius led to an accumulation of net international foreign currency reserves amounting to Rs54 billion today. We cannot lean against the wind for long. The policy implications of these developments are fiscal rectitude and strong demand management policies. Why fiscal rectitude? Let me explain. Two different hypotheses exist in regard to the relation between trade deficits and budget deficits. One of them is the twin deficit hypothesis postulating that budget deficits cause trade deficits. The policy implication of this theory is that budget deficits need to be reduced to restore trade balance. The other hypothesis is what economists refer to as the Ricardian Equivalence hypothesis: an increase in government expenditure is absorbed by a rise in private savings and therefore no increase in consumption expenditure, which in our case, means no increase in imports and therefore no impact on the balance of trade. Contrarily, our consumption rate has gone up meaning that savings rate has gone down. Trade deficit has widened. The first hypothesis seems to be more valid in the case of our economy. Although there is no one to one relationship between budget deficits and trade deficits in our context, the case for a reduction in budget deficit is strong. Fiscal dentistry needs to be carried out; the cavities need to be filled in. On the monetary policy side, stringent demand management policy is the order of the day. Finally, let me share with you the reflections made in the 1980s by a former Prime Minister of the U.K. on the state of mind of the British public, “I think we’ve have been through a period where too many people have been given to understand that if they have a problem, it’s the Government’s job to cope with it. ‘I have a problem, I’ll get a grant.’ ‘I’m homeless, the Government must house me.’ They are casting their problems on society. And you know there is no such thing as society. There are individual men and women, and there are families. And no Government can do anything except through people, and people must look to themselves first. It’s our duty to look after ourselves and then, also, to look after our neighbours. People have got their entitlements too much in mind, without obligations. There is no such thing as entitlements, unless someone has first met an obligation.” Aren’t these reflections equally valid for Mauritius? Ladies and gentlemen, the way forward is to carry out a really big and rapid change rather than proceeding with small gradual changes. A plunge in cold water is less painful than a slow submersion. We have to open up the economy, without any form of deleterious barriers. Problems do exist and will continue to exist. They exist to be redefined and transformed. They exist to be tackled and overcome. A problem shared is a problem halved. Let me on behalf of the Board of Directors, the staff of the Bank of Mauritius and on my own behalf wish you and your family a Merry Xmas and a very prosperous New Year 2006. Thank you. | bank of mauritius | 2,005 | 12 |
Introductory remarks by Mr Baboo R Gujadhur, First Deputy Governor of the Bank of Mauritius, at the Workshop on "Challenges and Solutions to Implementing Internationally Compliant and Domestically Robust Banking Regulations in Emerging Economies" in collaboration with the Commonwealth Secretariat, Balaclava, 6 ¿ 7 April 2006. | Baboo R Gujadhur: Challenges and solutions to implementing internationally compliant and domestically robust banking regulations in emerging economies Introductory remarks by Mr Baboo R Gujadhur, First Deputy Governor of the Bank of Mauritius, at the Workshop on “Challenges and Solutions to Implementing Internationally Compliant and Domestically Robust Banking Regulations in Emerging Economies” in collaboration with the Commonwealth Secretariat, Balaclava, 6 – 7 April 2006. * * * Professor Avinash Persaud Mr. Percy Mistry Miss Cheryl Bruce, Commonwealth Secretariat Members of the Board of BOM Distinguished Guests Colleagues and Friends Good Morning My first duty is to welcome you all this morning on behalf of the Bank of Mauritius which is cosponsoring this Workshop together with the Commonwealth Secretariat. I hope you have an excellent stay in our midst and that you will take away by the end of the Workshop some novel ideas on the issue of banking regulation, with specific reference to the implementation of Basel 2 in small and emerging economies. I would like to extend a special welcome to the Commonwealth Secretariat who have accepted to cosponsor this workshop along with the Bank of Mauritius. The Commonwealth Secretariat, as you know, have always held the interests of their members at heart and their participation in this event is a testimony of their commitment to the advancement of Commonwealth countries. Our friends from the region and ourselves stand to benefit from the experience the Commonwealth Secretariat has acquired from its exposure to a wider range of countries at different stages of development. From Basel 1 to Basel 2 This workshop comes at an opportune time, when the regulation and supervision of banks is undergoing a vast amount of change. Change, as you know, is often viewed with apprehension and is frequently met with resistance. It is true that change is accompanied by threats against those who are satisfied with the status quo. But we have to recognise that change brings along new opportunities and promises. It usually provides an impetus to unleash new potentials. In a situation of changing circumstances, success embraces those who not only adapt to change, but who also position themselves as agents of change. In fact, we should evolve so that change becomes our second nature. The financial system in different countries has been evolving for many centuries to match the demands of the real sector. However, the pace of change has been much faster and more global during the two last decades. Propelled by wider access to education and knowledge, advance of technology and intensification of competition, new financial products and services, with varying degrees of sophistication and complexity, have made their way to the markets and on the balance sheet of banks. Doubt has been expressed in certain very serious quarters as to whether the sum of the risks taken by financial agents in this regard the world over is fully contained. Banks play a prime and vital role in a financial system. A stable banking system is thus a pre-condition for a stable financial system. The importance of a stable financial system for the long-term growth of an economy cannot be over-emphasised. I recognise that we are still some way off from devising a framework for financial stability which is as comprehensive as that for price stability, but no one can deny the importance of a system for providing credit to business that is fair, efficient and reasonable. We cannot also deny the importance of an efficient and resilient payment system for a timely and reliable flow of funds through an economy. The importance of continued public confidence in a banking system, held together in a stable environment by an efficient control of risks taken, is also widely endorsed. It is in attempting to secure a higher level of overall financial stability that the Basel Committee on Banking Supervision (BCBS) has advanced the stage from Basel 1 to Basel 2, both of which are focussed on the amount of capital that banks should hold as a safeguard against risks taken. Stepping up the regulatory framework This is an audience that is knowledgeable about the reasons prompting the shift from Basel 1 to Basel 2. I do not therefore propose to dwell on this issue, except for drawing your attention to the fact that the concepts underlying the first Capital Accord of 1988 in respect of banks have evolved considerably to embrace a wider and more differentiated set of techniques for risk identification and measurement in the determination of the amount of capital that a bank should carry in relation to those risks. Moreover the approach of Basel 2 is principle-based and flexible. It provides amongst others for a wider range of concertation among banks, their supervisors, analysts and market participants in the process of risk assessment and is far superior to the ticking-off compliance driven culture of past practices. The complex implementation that Basel 2 entails should not be seen in isolation in the area of banking regulation. It is in fact part of a series of actions initiated at the international level since the late 1990’s to overhaul financial supervision and banking regulation in particular. The scale of the Asian Crisis of 1997 brought to the fore the notion of “macroprudential surveillance”. The overall aim was to get regulators from several jurisdictions together to devise the means to safeguard national and international financial systems, identify systemic flaws, promote governance and set out financial stability as an explicit goal of financial regulation. By September 1997, the BCBS presented its 25 Core Principles for Effective Banking Supervision. The Core Principles have since then become the very foundation of modern banking regulation. The final objective behind all this effort to strengthen banking supervision is to avoid market failure, which can have vastly disruptive effects on the functioning of entire economies and can spread out to wider regions or impact adversely on the global economy if not attended to in a timely manner. The direct impact of these international regulatory developments has been felt very closely by the industry in Mauritius. The Bank of Mauritius has issued a series of guidelines over past years on a wide range of subjects covering IAS 39, Corporate Governance, Internal Controls, Liquidity and Operational Risks Management, Public Disclosure and Outsourcing of Financial Services, to name but a few. A visible intensification of our onsite and offsite inspections of banks over several years has led to enhancing the regulator’s understanding of the precise framework in which banks actually operate. It has also led to a higher degree of appreciation by banks of the objectives behind supervision. The amount of trust and confidence that this interactive process has generated between the two sides will no doubt have its own positive impact on the ongoing implementation of Pillar Two of Basel 2. Better mutual understanding between the two parties, regulator and banks, will also ward off the risk of over-regulation. Besides, several forums exist for the purpose of concensus building between the Bank of Mauritius and the banking sector on major policy issues. This existing collaborative plan should assist in Pillar 2 implementation more effectively. Given also that the banking sector of Mauritius accounts for over 70% of total financial assets of the country, we cannot underestimate the relevance of applying sound and timely rules and principles towards maintaining the safety and stability of the banking system in the general economic context of the country. However, to be productive, those rules and principles have to be adapted to the ultimate objective sought by bank regulation to strengthen the domestic banking system. They should not merely reflect decisions taken in other contexts for other countries and in different market circumstances, or not have direct bearing on the realities of banking practices in Mauritius. Country-specific issues We have in Mauritius our own banking environment and specific banking culture. Of the 19 banks that have been licensed, a couple of banks only account for a dominant share of the domestic banking market. Many of the other banks are oriented towards providing almost exclusively global financial services to international markets. Side by side with a few other locally owned banks, that have a relatively small share of the market, affiliates of the world’s largest banks are also present in our jurisdiction. In general, the overall style of bank management has improved positively over the years under the impact of our guidelines to the industry, bringing it closer to best international practices. Nevertheless, we have a number of structural and historical factors going into Mauritian banking which need to be dealt with according to local specificities. Given this situation, it could represent a considerable effort on the part of some of our banks to invest in the major IT project that Basel 2 actually represents in terms of its complex risk management systems and database management. On top of the high level of technological architecture, Basel 2 involves cost of investment in human resources and skill development across the entire institution for effective risk profiling. It goes without saying that outright implementation costs are significant. Given the structural and other factors of the banking system of Mauritius, pragmatic regulatory decisions will be called for to justify additional costs to be incurred by individual institutions in their specific situations. At the end of the day, the test of adopting Basel 2 will lie in the extent to which it pays off to embrace the comprehensive risk control culture advocated particularly with reference to the Internal Ratings Based (IRB) approach which appears to be the ultimate objective of Basel 2. In other words, moving to the Basel 2 approach should be coupled with enduring tangible benefits to individual banks. Neither time nor resources should be wasted by an artificial adoption of international norms just for the sake of moving on alongside other countries. In this regard, we have to be careful to put our banks in fair competition with each other while sticking as closely as possible to the essence of the International norms underlying Basel 2. As a result of adopting Basel 2 in its appropriate form, our financial architecture should come out stronger and the country should also have reasonably priced access to international capital markets. Basel 2 implementation: choices to make In view of these considerations, it is of no use to fiddle with the rules or to focus on the arithmetic of risk management with a view to minimizing the amount of capital that each bank is eventually required to maintain. There is also no point in adjusting the scaling factor to “get it right” with the same objective. This is not the guiding principle of the new Capital Accord. Pillar two of Basel 2 advocates dialogue between banks and well trained regulators, able to apply the relevant judgment on the choices that have been exercised by each bank to quantify risks in their portfolio and hence to determine the commensurate amount of capital to be maintained as a buffer against those risks. Moreover, Pillar 3 emphasizes transparency in the capital allocation process through the provision of full information to analysts and market participants to enable the latter to judge whether the bank is adequately capitalized, given the nature of the risks taken by it. Pillars 1,2 and 3 cannot therefore be viewed in isolation from each other. However, as it is usually the case for rules and codes of universal application which transcend the original purpose for which they were initially formulated, not least in those jurisdictions that were expected to be the first ones to embrace it, there are difficulties of implementation. Issues have cropped up about the reasonableness and practicability of the ratings system inherent in the Standardized Approach. This factor has been highlighted specifically in environments in which smaller banks adopting the simpler approach of Basel 2, have no alternative to abiding by the system of ratings for their customers whereas there is no supportive borrower rating culture in these environments and it is unlikely that it would be so in the near future. This is the case for a jurisdiction like Mauritius. Issues have also been raised about competitiveness implications of Basel 2 adoption in mixed environments In this case, with certain banks adopting the simpler approach, the capital charge is expected to be higher for such banks as compared to other larger banks which go for the more sophisticated IRB models to allocate a lesser amount of capital on their lending to the same customers. The debate is whether the IRB capital advantage will price the blue chip borrowers completely out of reach of banks adopting the simple approach. If so, the structural impact of a shift in this direction would be far from negligible. Cross-border coordination issues for banks operating in distinct environments has become another issue in so far as banks do not want to be the disadvantaged due to differences in supervisory practices and approaches in different jurisdictions in which they have operations. This has raised the question as to whether there is effectively a level playing field and how far it can be achieved. Issues have also been raised on the assessment of LossGiven-Defaults (LGD’s) in the downturn phase of the economic cycle, the efficiency of supervisory validation and the quality of stress testing. These problems will have to be sorted out to avoid unwarranted fears and suspicions. More importantly, while Basel 2 advances the platform for risk management more comprehensively than ever before, it is not free from some practical problems that need to be addressed. We have to be realistic and patient. Given the increasingly complex transactions in which banks are continuously engaging in search of markets, a risk management system like Basel 2 is consistent with the primary objective of the bank regulator, which is to incorporate those risks into capital regulation with a view to making the whole banking system safer and more stable. We cannot expect a huge system like Basel 2 to be implemented without the normal teething problems. The difficulties of adaptation of the model to the practical situation prevailing on the ground in different environments are expected to spin off solutions. These solutions should not thwart financial sector development or introduce excess compliance costs out of keeping with the expected benefits. I repeat therefore that it would be reasonable for Mauritius to join the mainstream of Basel 2 implementation provided that, as a positive spin off for adopting Basel 2 in an acceptable form, banking practices over here become more solidly entrenched and bankers find full expression in their primary job of risk taking through a hands-on approach to their activities rather than outsourcing judgment to third parties. The judgment of the seasoned banker, capable of identifying and quantifying the risk he is taking on, is a significant value addition that we should not jettison by moving on to a purely ratings based assessment of risks as advocated in the simple approach. This is why the Bank of Mauritius and banks are discussing in detail the practicalities of Basel 2 implementation since last year and progressing the agenda on a concensual basis. Finally, I would like to state that we have adopted an open attitude in this respect in Mauritius. No specific Basel 2 approach is mandated to any bank, irrespective of its size and complexity of its transactions. Inevitably, banks will need to invest in more risk management systems responding to their present and foreseeable needs. Nothing is, in my opinion, more precious and worthwhile for a bank than maintaining and developing a deep and intimate in-house knowledge of its customers for the purpose of identifying the distinct risk each one of the customers represents. With Basel 2, this kind of knowledge has to be objective and systematic, and drawn up into a reliable database so that the information can be utilized, to the satisfaction of the regulator, for mitigating risks and defining the capital requirement on a case to case basis. This goalpost has already been set and we need to reach it in the most cost-effective manner, preferably keeping pace with other jurisdictions. I know that Professor Avinash Persaud and Mr. Percy Mistry have delved into the issues concerning Basel 2 at a deeper level, having had knowledge of how things are moving in the Commonwealth and other countries. I trust that they can enlighten us more fully about the direction we can practically take in our specific context of a small and emerging economy. It is therefore my pleasure to leave the floor to them to throw light on how best the regional economies can deal with the new challenge that the implementation of Basel 2 represents and I invite you to participate actively in the exchange of views due to take place over the next couple of days. I know that discussing about banking risks in the beautiful setting of this tourist resort is not the ideal thing to do but the trade-off may be well worth the while for the short duration of the Workshop. Thank you for your attention. | bank of mauritius | 2,006 | 6 |
Introductory remarks by Mr Baboo R Gujadhur, First Deputy Governor of the Bank of Mauritius, at the Seminar on Basel II, organised by KPMG, Mauritius, Port Louis, 25 ¿ 26 May 2006. | Baboo R Gujadhur: Preparations for implementation of Basel II Introductory remarks by Mr Baboo R Gujadhur, First Deputy Governor of the Bank of Mauritius, at the Seminar on Basel II, organised by KPMG, Mauritius, Port Louis, 25 – 26 May 2006. * * * Mr. Wilfrid Koon, Senior Partner Colleagues from KPMG Mauritius & South Africa Distinguished Guests Ladies and Gentlemen Good Morning. This is just a short speech to get you started on the 2-Day Seminar on Basel II organized by KPMG, Mauritius. I must say at the outset that I am very pleased with KPMG’s initiative to host this Seminar, which comes as no surprise being given that the firm is closely associated with the banking sector as auditors of banks. But the firm also needs to be commended for being the first among the auditing firms to organize a Seminar on Basel II for our local banking industry and for the audit profession. First, a few words to set out the reasons for Basel II. The Capital Accord of 1988, now referred to as Basel I, was a major step forward in so far as it embodied the principle that regulatory capital requirements should be based on risks being taken by each individual bank. Important as it was in this regard, Basel I with its rather crude method of assigning fixed risk weights to particular assets, failed to capture the responsiveness of capital requirements to risk. In a world that became increasingly prone to a serious risk of systemic failure, as illustrated by the East Asian crisis and other subsequent events including the LTCM crisis, a more risk-sensitive and comprehensive framework for assessing bank capital adequacy was called for, especially for large internationally active banks involved in complex transactions. After many years of discussion and several rounds of consultation, including with non G-10 countries, the Basel Committee came up with a new framework of principles for supervising the largest and most complex banking institutions. This has become known as Basel II. The core objective of Basel II is to promote the stability of the financial system by setting out the parameters on which to base the safe and sound operation of banks. By definition, financial intermediaries are here to take different levels of risk which they manage differently from each other. Banks remain at the heart of this system of financial intermediation, whether at the individual country or international level. As such, their safety and soundness has implications for financial stability, for consumers of financial services, for banks across the board, for regulators and for entire economies. In very simple language, Basel II sets out therefore a rigorous framework tying the amount of capital which a bank is required to maintain with its specific risk measurement and risk management capabilities in as much as capital is seen as the last line of defence a bank has recourse to in the event of unexpected loss from risk-taking. Even though Basel II was intended originally to provide a capital adequacy framework for internationally active banks, it was clear that, for diverse reasons, a number of countries and banks of various sizes and importance, would eventually embrace its principles for determination of capital adequacy. Several options – the Simple Standardized, the Standardized, Foundation and Advanced approaches – have accordingly been formulated in the menu of options available to accommodate a progressive adoption of Basel II. One of the direct impacts of Basel II adoption will be the wide scale use of quality information, data warehousing and credit risk modelling with a view to improving risk management by banks. Whichever approach is adopted, the regulator and the external auditor as well as Board and Management of banks, all have a duty to exercise oversignt over the processes of capital determination and, hence the precise risks being taken necessitating specific capital charges. In this context, a system of consistent regulatory practices has to be aligned with the way banks are run and managed and, in this sense, Basel II creates the scope for regulators to adapt over time to innovations taking place in the banks and the markets. Unless they apprehend fully concepts underlying processes for the estimation of Probability of Default (PD), Loss given Default (LGD), Exposure at Default (EAD) and the parameters employed to calculate risk of loss based on these concepts, inadequacies will surface up since the supervisory validation process will not be up to the mark in such a case. Conscious of this factor, we have been earnestly raising at the Bank of Mauritius regulatory capabilities to meet this challenge. I would like to say in this context that we have a fully motivated and competent professional team of regulators at the Bank who have been receiving for the last year and a half the necessary training to deliver effectively on this assignment. The key role that regulators have to play under Pillar 2 and the importance of public disclosure and accountability under Pillar 3 have generally not received the attention they deserve in the Basel II context. It is absolutely necessary to re-emphasize the critical importance of these two pillars in the Basel II implementation process. We are conscious that a whole process of prudential re-adaptation is called for in this respect by both banks and regulators. I may add that we are well on course, fully aware that Basel II is more than a simple framework for fixing an amount of capital consistent with the specific risks taken by a bank. In fact, Basel II is expected to create a whole range of positive spinoffs. Among others, it will help put in place a wider framework for supervision and regulation to be conducted on a consolidated basis. Supervision will become increasingly more risk focused and that, not with respect to Basel II implementation alone, but along with a re-focussing of other prudential rules as set out in the Basel Core Principles. Moreover, a system is expected to evolve out of Basel II that will enable intervention on the markets much before a crisis sets in because the whole framework is intended to avoid having to take action before any wide scale financial distress is at the doorstep. Care will also be taken to ensure that costs of regulation and supervision do not weigh down on the benefits of efficient private market operation in the implementation of the associated regulatory rules. All these will add value and, hopefully, lighten the overall burden of financial regulation while promoting overall financial stability at the same time. We have therefore to look into a framework of benefits and market efficiencies to be gained beyond ordinary Basel II considerations. Those benefits will emerge after Basel II becomes part of the reality and gives rise to a new thinking about what may be called a more even level playing field than what prevails cur rently at the national and international levels . It is for these reasons and to be really effective that the Bank of Mauritius has adopted, together with banks, a consultative and participative approach for Basel II implementation. The target date for implementation has tentatively been set for beginning 2008. Much work has been done already at the level of the Basel II Implementation Committee. Proposal drafts on work done have been circulated for views and comments from the industry as a prelude to progressive Basel II implementation in the form of guidelines issued to the industry. It is not intended to impose any specific Basel II approach but banks are being encouraged from the start to go for an approach – such as the Internal Ratings Based Approach – by which they will effectively add value now and in the longer term to the inherent capabilities of their institutions. All this is being done without losing sight of the investments banks are making or have already made to progress towards that goal by first adopting the simpler approaches of Basel II. I hope I have given you a broad background in these introductory remarks to set the stage for the Seminar. I am confident that close cooperation by various stakeholders and specialized resource persons including creditors, regulators, risk management strategists, financial analysts and credit risk modelers, will go a long way to make for the efficient and productive implementation of Basel II in Mauritius. To that end, this Seminar represents an important contribution and I take the opportunity to praise KPMG once again for taking the initiative. I thank you for your attention. | bank of mauritius | 2,006 | 6 |
Speech by Mr Baboo R Gujadhur, First Deputy Governor of the Bank of Mauritius, on the occasion of the Workshop on Derivatives by the Financial Markets Association of Mauritius, Port Louis, 22 March 2006. | Baboo R Gujadhur: The value of derivatives markets to Mauritius Speech by Mr Baboo R Gujadhur, First Deputy Governor of the Bank of Mauritius, on the occasion of the Workshop on Derivatives by the Financial Markets Association of Mauritius, Port Louis, 22 March 2006. * * * President & Members of the Association Distinguished Guests I am pleased to be with you this morning on the occasion of the opening of the Workshop on Derivatives. I must in the same breath congratulate the Financial Markets Association of Mauritius for the initiative taken to bring up a Workshop on derivatives for the benefit of its members in Mauritius. I have also the pleasure to welcome Peter Skerritt in our midst who I understand will share with you his expert knowledge of the derivatives market over the coming days. As most of you should be knowing, the derivative market is a market for measuring and estimating the volatility of price movements and permitting investors to determine the price they are willing to pay to reduce the amount of volatility which they face. Although derivatives have become prominent on market places in the recent past, they have actually existed in various forms over thousands of years. The difference today is that they are more extensively employed on the global markets in modern times with the basic underlying principle of using another level of instruments to protect against primary risk. At end December 2003, the global OTC derivatives market accounted for outstanding trades amounting to US$197 trillion. As at end June 2005, the figure climbed up to US$ 270 trillion. Daily turnover is US$2.4 trillion on this market as regards foreign exchange and interest rate related products only. Other than banks, exchanges and financial institutions, funds, hedge funds and asset managers are also actively engaged on derivative markets, which goes to explain the phenomenal rate at which these markets have been growing. In Mauritius, a few banks started of late to offer a few derivative products, including currency options, but we have remained essentially outside of this massive global market growth over a long number of years. There may be several reasons why derivative trading has been eluding us for such a long time. One of them could be our relative distance from the mainstream markets where these products, are actively traded, notably in Europe, America and Asia. There is also not much active risk management based on derivative products in the countries of our region. South Africa could be an exception in this respect. Derivative trading requires the build-up of reliable exchange platforms based on a pool of available skills targeting diverse products. I am informed that our bank treasurers are not wanting in those skills but then they do not have the demand on which to exercise their talents on the markets. Further, it is a precondition for the sound and sustained development of an active derivative market that the underlying markets should be deep and liquid. For some reason, active interbank trading of forex has been absent from our markets. This situation is likely to persist if individual banks continue to hoard their holdings of foreign exchange to themselves without engaging in interbank trading with them. This lack of engagement has been observed to be the case whether the balance of payments is in good or less good shape. Individual banks could, however, consider the added scope that would be created to develop a derivative market over here if they were willing to relinquish a strong attachment to short term profit maximization from spot only and a few sparse forward forex dealings. The liquidity factor imparted by departure from the established pattern could then increase the depth of the market with time. I would say that it is never too late to go for an earnest sharing of forex resources among players to be able to deliver the necessary wider scope to the local forex market. Obviously, players will develop more confidence in each other if there was continuous two -way traffic with individual banks coming to the market as both buyers and sellers of foreign exchange from time to time. Geography should not be seen as an impeding factor today, given the vast advances made by technology interconnecting the markets. The cost of communications is also a matter that can be addressed if it is an obstacle in the way of market development. So, the real issue remains that of substance. Markets are formed on the basis of demand and supply : sometimes, there is a chickenand-egg puzzle when deciding which of these two should come first in order to create market activity of a reasonable scale. My answer to this would be that in undeveloped market conditions, development can be triggered if there is a driving initiative. Hence, since banks and other operators are potential suppliers of derivative products to the market, they are in a position to trigger latent demand by innovating and bringing the products at the doorstep of clients. By so doing, they may add to the market yet another layer of activity that has been absent for quite some time. In this manner, futures trading can become a reality in Mauritius and take concrete shape gradually. We would thus be positioning ourselves a notch or two higher on global financial markets and bringing to ourselves a share of the total incomes generated by the 270 trillion dollar global derivatives market. In addition to the scope that may thus be given to our financial market by fetching international derivative trades to our shores, we will be gradually building up, among business operators, core skills that accompany the development of the derivatives market in general. This is the context in which this Workshop and others that will follow it assume a relevance of their own in defining a more diversified future profile of our financial market. I can then look forward to a strong spirit of innovation in developing financial market instruments in this context. This process will no doubt be reinforced by continuous training and the experience gained by our operators through actual operation on the markets. Having encouraged you thus to engage in derivative trading to give greater scope to financial business undertaken from Mauritius, we can consider the positive spinoffs this will result in as we progress in this area in the future. Let us stop and take a look at the challenges of persevering in this line of action. It is generally acknowledged that derivative markets have a positive fallout on underlying markets in so far as they help to redistribute risk and increase market efficiency and liquidity. Derivatives have become an indispensable part of a modern financial system and will so remain so long as uncertainties will have to be provided for. In the context of new capital standards being introduced currently for banks, credit derivatives are seen as risk mitigating factors against portfolio risk to the extent they serve to lower capital charges of banks. Healthy financial sector development is thus supported by this activity if only by increasing the scope for risk management. The resulting control over volatility in portfolios of financial institutions has, in turn, the effect of improving the risk appetite of market participants for a higher volume of business. In one of Shakespeare’s plays, it was said that “Security is mortals’ chiefest enemy” The size and speed with which derivative markets have grown in the recent past to overcome uncertainties have also given rise to certain apprehensions surrounding derivatives themselves. Given also the totally liberalized markets of today, allegations have been made that derivatives would, in fact, be adding to market volatility. This has not been tested and proved. It is therefore not advisable to press down the growth and development of derivative markets and thus risk stifling their development due to such fears. As a regulator, the Bank of Mauritius will no doubt oversee the workings of this market to ensure that risks are properly controlled, that banks have adequate capital to support the risks taken and that there is adequate transparency regarding the size and nature of the derivates market as it unfolds in the future. I am personally hopeful that operators will put in place adequate systems for measuring, managing and controlling on-going risks being taken on board. Most people would have learnt the necessary lessons from the collapse of Barings. But other types of risks associated with derivative trading can crop up and it would be necessary to put in place an adequate number of safeguards against unexpected market movements to ensure prudent and sound management of the banking environment. Derivatives are seen in this context as a vital tool for risk management provided they are carefully handled and there is sufficient capital to support unexpected losses. I am confident that the additional dimension that can be given to our financial sector activity by embarking on the derivatives market will enhance the market environment and increase the job satisfaction of our qualified treasurers by putting into their hands a wider range of tools to work with. I am sure that the Workshop will help to reinforce your confidence in your ability to deliver on the products, given the extensive experience of your main presenter at the Workshop. May I wish you successful deliberations so that all of you come out better equipped by the end of this Workshop. Thank you | bank of mauritius | 2,006 | 7 |
Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the opening of IOIB branch, Curepipe, 25 May 2006. | R Basant Roi: Improving loans quality in Mauritius Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the opening of IOIB branch, Curepipe, 25 May 2006. * * * Hon. Deputy Prime Minister and Minister of Finance and Economic Development Chairman of the Board of Directors and Chief Executive of IOIB Ladies and gentlemen Good Afternoon I am extremely happy to be here with you on this special occasion marking the opening of the Curepipe branch of the IOIB. May I, to begin with, express my personal appreciation to the Board of Directors of the IOIB and the SBI team for having successfully met the various challenges that confronted them at the time of the take over of the bank last year. The new management of the bank was faced with the task of putting in place a robust policy framework including solid internal control systems and procedures and filling gaps in the overall management structure of the bank. Declining level of deposits, advances and profitability, skewed asset level with low yielding investments accounting for more than 60 per cent of the asset book, high cost of funds with fixed deposits accounting for over 65 per cent of total deposits, absence of investment friendly products, extremely high level of non-performing assets and total absence of any system of target setting and performance review. These were conditions in which the bank was operating in the very recent past. Worst, a constellation of obscure forces, known only to a few, militated against those who were really determined to bring the bank to safe haven. The regulator and a few faithful board members of the bank sailed against the strong wind. I am personally very happy to see that the Board of Directors of the bank and the SBI team have brought about a dramatic improvement in the balance sheet of the bank in the first year of its operation. On an annual basis, the deposit base of the bank grew by 21 per cent, advances by 55 per cent and its total assets by 50 per cent. Profit before tax Rs34 million; profit after tax Rs24 million. The ratio of gross NPA to gross advances fell from nearly 27 per cent in June 2005 to nearly 17 per cent in March 2006 – that is, by 10 percentage points. The ratio of net NPA to net advances has fallen from 16 per cent to 9 per cent and is expected to go down to around 3 per cent by March 2007. Without an iota of doubt, this is really an impressive performance. I have found it appropriate to mention these figures for one basic reason: the prime concern of any regulator is not to close a bank for the wrong reason but to save an ailing bank from collapsing. The regulator’s challenge is to turn an ailing bank into a really good and performing bank. In this challenge the Board of Directors of the IOIB and the SBI team have played an instrumental- indeed a decisiverole. Non-performing loans in the books of banks are an animal that the Bank of Mauritius has been combating since July 1999. One of the many reasons that motivated the Bank to combat this animal in the balance sheets of banks is the need to prevent lending rates of banks from rising inordinately. You will appreciate that the bigger is this animal in the books of banks the higher the lending rates. Good and productive borrowers pay for bad borrowers. And lending rates have never been generous in Mauritius. You may wish to note that in 1999 housing loans made by banks carried an interest rate of between 14 and 15 per cent. Today such loans carry interest rates that are below 10 per cent. I suspect the reduction in the size of non-performing loans in the books of most banks has had some positive impact on the level of lending rates. Hopefully with the reduction of non-performing loans on an industrywide basis would eventually help bring down lending rates in Mauritius thereby alleviating interest cost burden to the real sector of the economy. Prospects for improving loans quality are bright more so when there are 900 to 1000 queries per day by banks at the Mauritius Credit Information Bureau. Only yesterday I was given to understand that a habitual delinquent borrower had applied for additional credit facilities from a bank. Rather than obtaining an additional credit facility, the delinquent borrower was made to repay a large chunk of his debt – thanks to information culled from the Mauritius Credit Information Bureau. I am confident that the IOIB along with all the other banks operating in the country would successfully bring down the level of nonperforming loans thereby creating scope for bringing down lending rates to realistic levels. The IOIB, in particular, has made important strides in this area. May I wish the Board of Directors, the management and the staff of the bank the very best of success in their new endeavour. | bank of mauritius | 2,006 | 7 |
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the launching ceremony of the Accounting, Banking and Finance Society, University of Technology, Mauritius, Pointe aux Sables, 26 October 2006. | Yandraduth Googoolye: Meeting the challenges of a new financial era in Mauritius Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the launching ceremony of the Accounting, Banking and Finance Society, University of Technology, Mauritius, Pointe aux Sables, 26 October 2006. * * * President of the Board of Governors Director General Chief Executive of the Mauritius Bankers Association Limited Ladies and Gentlemen Good morning I am glad to address you this morning on the launching of the Accounting, Banking and Finance Society. I wish to commend this initiative to establish the Society, which I believe, will contribute towards improving the knowledge and skills of the young generation to better serve the fast expanding financial sector in Mauritius in an increasingly globalised financial system. Indeed, your entry in the financial services industry will be during a remarkably dynamic time. The future lies in your hands. Though you are still pursuing your studies – as I understand, the first batch will graduate in the near future – you have taken a good decision at this stage. You are the accountants, the bankers, the financial analysts and business leaders of tomorrow. You will be embarking on the profession just at a time when the demand for more sophisticated financial products coupled with enhanced regulation and supervision of institutions operating in the financial industry are the order of the day. This new architecture of the financial system aims at making our financial system more competitive, sounder and more resilient to shocks. As the world of financial business continues to evolve, it is vital that we respond quickly to meet the challenges of a new financial era in Mauritius. To this end, information sharing with the objective of improving the quality of knowledge and the ability of the workforce are of paramount importance. The Society should work towards promoting understanding of the challenges facing the financial industry, which will help create better opportunities for its fellow members. No doubt the Society must encourage the exchange of ideas and information among its members as well as with practitioners in the industry. You must be aware of recent developments occurring in the financial sector. I will not surprise you if I tell you that the Bank of Mauritius is presently reviewing the framework within which it has been conducting monetary policy. The new framework has been designed to replace the present key interest rate – namely the Lombard Rate, which the Bank of Mauritius has been using to signal its monetary policy stance so far – with a key Repo Rate that will be in line with interest rates on the short-term money market. By re-engineering its monetary policy framework, the Bank of Mauritius is endeavouring to adapt its management of the macro economy to the changing economic environment. The Bank of Mauritius is striving towards enhancing the attainment of its ultimate statutory objective which is to maintain price stability and to promote orderly and balanced economic development. The financial services sector, including the banking sector, fulfils an important function as financial intermediary in an economy. Mauritius has one of the oldest and most sophisticated financial systems in Africa, with the banking system currently representing around 6 per cent of GDP. Robust economic performance has strongly contributed to the expansion of the sector. Strong regulatory and monetary policy frameworks have contributed towards maintaining macroeconomic and financial stability. At the same time, the soundness and degree of sophistication of the financial system is facilitating diversification of the economy, thus establishing a virtuous cycle in which the financial sector and the other productive sectors of the economy are strengthening in parallel. The Bank of Mauritius views that the stability of the financial system depends on every institution involved and thus it diverts sizeable resources in ensuring the soundness and stability of each and every financial institution under its purview. Given the complexity and the dynamic nature of the industry, the supervision of an institution is becoming an increasingly challenging task. In this respect, the Bank of Mauritius has gradually adopted a risk-based approach towards regulation and supervision. A series of prudential guidelines – seventeen in total – have been issued to financial institutions so far. Adherence to the guidelines is monitored through both on-site and off-site inspections. Capital regulation is viewed as an important component of regulation of financial institutions. Basel II will soon supersede Basel I, which was established in 1988. Banking risks are far greater today and mindful of the potential benefits that Basel II may bring, the Bank of Mauritius embarked on and is committed towards implementing Basel II in Mauritius by early 2008. Given the intricacies of adopting a capital standard in Mauritius, a consultative and participative approach has been adopted with banks. The Committee for the Implementation of Basel II was therefore established to act as a steering committee for implementing the new capital adequacy framework. This is rightly an occasion for me to reiterate some reflections I always share with fellow students. Acquiring a diploma or a University degree is indeed a license to learn. Learning starts after academic achievements and should be a continuous process. Anyone who refuses to learn is doomed. At the workplace you always have to innovate, to move to new standards of perfection and to abide by new rules. You need the right attitude, the knowledge and skills to react in an optimal manner to situations that may come your way. You will some day leave the portals of the University of Technology, Mauritius, to start your career. From then on, you will be exposed to a very different world from what you may have known within the boundaries of university education: a world of fierce competition, filled with all types of risks. My advice is to let yourselves be guided by the very basic principles of social and professional lives – self-respect and honesty. Apart from the good educational background you may have acquired, you will continue building self-respect by persevering to learn and innovate throughout your career. If you wish to succeed, make perseverance your bosom friend. This is a character that will make a difference. I enjoin a quote from George Bernard Shaw “I am not a teacher, only a fellow traveller of whom you asked the way. I pointed ahead - ahead of myself as well as of you”. Persevere and invent your own future. I wish you the very best of success. The Bank of Mauritius is ready to support this kind of initiative aiming at creating awareness of what is happening in the financial sector, especially the banking sector. I believe that the central bank can play an important role and be a bridge between the financial sector and your newly born Society. I direct you to the website of the Bank of Mauritius where you will be exposed to loads of information on the financial industry and the way it is regulated and supervised. Thank you. | bank of mauritius | 2,006 | 10 |
Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the Bank of Mauritius' Ninth Annual Dinner with major economic stakeholders, Flic¿en¿Flac, 1 December 2006. | R Basant Roi: Overview of recent economic and financial developments in Mauritius Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the Bank of Mauritius’ Ninth Annual Dinner with major economic stakeholders, Flic-en-Flac, 1 December 2006. * * * Honourable Judges Ladies and Gentlemen Good evening I am pleased to welcome you all once again to the Bank of Mauritius Annual Dinner. On this very occasion last year, I had sounded concerns about the evolution of our balance of payments. In particular, I had underlined that in a highly open economy like ours, overwhelmingly dependent on imports, rising levels of consumption expenditure unmatched by production for exports lead to deficits in the trade balance. Persistent current account deficits in our balance of payments would steadily erode our net foreign assets and this cannot continue indefinitely. Against a background of low growth rate of exports, Mauritian consumers must either reduce their spending and with it their imports that would correct the deficit or if the source of the deficit lies in government’s own budget deficits then it will be for government to correct its own budget deficit by cutting spending or raising taxes or a combination of both. Do not rely entirely on monetary policy to do the job. Monetary policy alone cannot bring about the much-needed correction. In the case of a current account deficit arising from either consumer spending or government deficit or both, a tightening of monetary policy, that is higher interest rates, does not address the source of the current account deficit. It simply induces private investors holding foreign currencies to buy rupee-denominated assets thereby reducing the need to finance the current account deficit from the Bank of Mauritius foreign reserves. There is both theory and evidence that no firm in the private sector runs persistent deficits. Any such tendency would be self-correcting as its spending would reflect its wealth including its foreign assets. The household sector, too, cannot indefinitely run persistent deficits. Otherwise they will all go bankrupt. The source of persistent current account deficits in the present context cannot but be the government’s own deficit. This also has to be corrected failing which Mauritius would eventually have to face a balance of payments crisis should we target a specific exchange rate. Those of us who are familiar with the history of balance of payments crises since the 1950s must be aware that the political process could delay the adjustment and precipitate an eventual crisis. One way to find out whether there exists a potential crisis is to look at government’s own finances. Are government finances out of balance? Yes, very much indeed. Are corrections taking place? Yes, indeed. The current account deficit for the preceding fiscal year reached a high of over Rs 10 billion, that is, over 5 per cent of GDP, representing an increase of over Rs4.0 billion in just one year. Had the world price of oil and the volume of imports of petroleum products remained unchanged the current account deficit would have been smaller, that is, in the region of Rs5 billion, implying that the pressures on the domestic foreign exchange market would have been much less. Our balance of payments projections for the current fiscal year point towards the start of a containment of the current account deficit. Total imports on a c.i.f. basis, excluding exceptional purchase of aircrafts by Air Mauritius, are projected to grow by 6 per cent in the current fiscal year, way down from 20 per cent and 21 per cent in the preceding two years. In fact the current account deficit for the current fiscal year is expected to contract by nearly Rs 6.0 billion. The deficit is projected to be reduced to more than half the size of the deficit in the preceding year. Without any doubt, if the present policy stand is maintained, the current account deficit in the near future should thin out with the result that the tightness in the foreign exchange market would ease to quite an extent. A deficit in the current account reflects a deficiency of savings in the economy. Over the last few years consumption expenditure has been growing at a higher rate than the growth rate of GDP itself. Essentially, it means that the growth rate of consumption expenditure has been outpacing the growth rate of total value added by our active labour force in the economy. Although we are not through an economic boom period this phenomenon means what it means. After a period of economic prosperity, people get used to a certain level of income. They find it extremely difficult to adjust consumption expenditure downward when rationality calls for it. Those of us familiar with consumption theory will recall the Duesenberry effect. Simultaneously, we also face a disturbing phenomenon in the labour market. The labour market seems to be characterized by the “backward-bending supply curve”. This suggests that higher wages or salaries do not produce more work but less and the way to increase work effort is to lower compensation per unit. Let me share with you a reflection of Andrew Carnegie: ‘Years ago I distributed charity indiscriminately, and in doing so I committed perhaps the greatest evil in my life. Let a multi-millionaire take his millions to the slums and call the people together, saying: “There is a wrong distribution of wealth in the world; you have not got your share; I give to each one of you a share in my millions.” Let that be done in the morning and let the millionaire return at night to see what good his action has done. He will find not happiness but pandemonium.’ Many boards of directors in Mauritius must have faced this situation. To some extent, this is also my own experience at the Bank of Mauritius. A backward-bending supply curve in the labour market side by side with high rates of consumption expenditure and three successive years of current account deficits necessarily have serious labour market and macro-economic policy implications should we desire to survive in this globalized world. Against the backdrop of a huge current account deficit and expectations that sugar export receipts will decline, the domestic foreign exchange market has remained tight. The Bank of Mauritius intervened on the market as and when required. In fact, during the last seventeen months the Bank sold US$ 207 million with a view to easing market conditions. Several factors have contributed to the tight conditions in the foreign exchange market. Firstly, the current account deficit has been seen expanding at too rapid a pace and hence viewed as being unsustainable in the medium term. Secondly, the budget deficit was perceived as being too big for government to be able to contain it in the short term as well as the risk of government debt ballooning to a point of explosion. The deficit was unsustainable. Thirdly, shortfall in sugar export proceeds as a result of the announced sugar export price reduction has given rise to wild expectations about the poor prospects of adequate supply of foreign currencies on the domestic foreign exchange market. Exporters have since been holding on to their export proceeds and traders have quickened payments for their imports thereby exacerbating the already existing gap between demand and supply of foreign exchange. And fourthly, projects with large import contents that would otherwise have been either partly or wholly financed through borrowings from external sources are being financed by borrowings in rupees from local banks. These are in my view the four most important factors that have given rise to nervousness in the domestic foreign exchange market. I need not overstate that in a turbulent foreign exchange market speculators go out for a kill. The stock of foreign exchange held by residents, individuals as well as institutions, in Mauritius amounts to Rs80 billion. These are official figures. The actual figure could be much more than Rs80 billion. Anyway the known stock of foreign currencies held by residents and the Bank of Mauritius account for 60 per cent of the rupee deposit liabilities in the financial industry. There should not be such a shortage of foreign currencies unless some players are intentionally holding back their foreign currency receipts with a view to making speculative gains. Indeed, exporters are holding on to their export proceeds. One may argue that it is rational behaviour. Rational action in economics does not imply that all actors have the same information, the same insight, the same experience and purposes. Moreover, the fallacy of composition brings about from time to time that individual actors all act rationally but in combination produce an irrational result, such as spectators of a soccer match standing to get a better view as spectators of sport or theatre goers running for the exit in the event of a fire. The irrational result thus produced could defeat policy efforts being made to restore both internal and external balances in the economy. The projected substantial reduction in the size of the current account deficit is already a positive sign that quite some progress has been made in the correction of external imbalance. The exchange rate of the rupee has gone down to a level that is impacting on the rate of growth of imports. The exchange rate of the rupee has sufficiently borne the brunt of adjustment. Enough is enough. Speculators are warned. Ideally a competitive market, be it for goods and services or for financial services or foreign exchange, serves best the interest of an economy when all conditions for healthy competition are met. Perfect competition requires that no single or a limited group of sellers or buyers on the market is powerful enough to dictate prices. In the domestic foreign exchange market we have observed a few powerful sellers of foreign currencies dictating the prices. They defy the rules of competition. It is true that from Adam Smith to Marshall and Pigou a hundred years later and still later, Joan Robinson and E.H. Chamberlain, economists underlined circumstances in which competitive laissezfaire would not produce maximum efficiency. Their simplified leading ideas became widely absorbed as laissez-faire ideology. The technical qualifications that vitiate laissez-faire in many real world situations, though extremely important, were disregarded. The physiocrats, most of whom were medical doctors, used the term laissez-faire in arguing for the removal of their mercantilist government’s restrictions on the export of grain. They were Frenchmen, writing before the Revolution of 1789, who invented and inspired economic ideology relating it to the circulation of blood in the human body. They drew a diagram showing the interaction and interdependence of the several sectors of the French national economy as goods circulated among them. The physiocrats’ medical analogy went further. Just as the medical doctor should interfere only to remove those obstacles which prevent the self-healing properties of the body from working, so too should government interfere in the economic body of the nation only in circumstances which prevent the self-regulating supply and demand forces of markets from working towards equilibrium. To interfere otherwise is to create more bodily harm than good. We are all familiar with the analogy used by Adam Smith to make the same point: that the invisible hand of God has so arranged things that individuals in the competitive market, pursuit of their own maximum material interests also inadvertently serve best the public good. Most of us have come to agree with Lord Keynes that the invisible hand some of the time suffers from arthritis. The remedial action is Government intervention. A note of caution to speculators: the adjustment process has started. The current account deficit is narrowing in a big way. Let not the authorities have recourse to unorthodox measures. I mentioned earlier that monetary policy cannot be entirely relied upon to restore current account balance that is a major source of pressure on the domestic foreign exchange market. It is well established that short-term interest rate is a monetary phenomenon; it cannot be made too high in relation to the needs of growth and full employment. A substantial hike in the rate of interest could possibly help bring in foreign exchange through short-term portfolio investment by foreigners to finance the current account deficit but would not correct the deficit. A higher rate of interest, while helping to ease the domestic foreign exchange market, would at the same time stifle growth of those sectors that are emerging. In the macro-economists language, the rate of interest required for external equilibrium to finance deficits and/or to stop the currency from taking a beating on the domestic foreign exchange market may be way above that rate of interest required for internal equilibrium. Two years ago I said on this same occasion that the Lombard rate I introduced in 1999 would be replaced by a Repo rate depending on the evolution of the domestic money market. We have since studied a framework that would best meet the specificities of our banking industry. The key rate of interest in the new Monetary Policy Framework will be the Repo rate for signaling the Bank’s monetary policy stance. Basically the Repo rate will be the rate at which the Bank will intervene on the overnight inter-bank market to supply or absorb liquidity. As lender of the last resort, the Bank will continue to provide collateralized overnight advances to banks under a new Standing Facility. The rate of interest thereon will be above the Repo rate. The operation of the new Monetary Policy Framework will enable the Bank to conduct monetary management more effectively than the present framework. In the new framework the Bank will be guided by the objective of achieving and maintaining low and stable inflation in the medium and long term without jeopardizing growth prospects. Monetary policy is doing its job. Fiscal policy is doing its best. Growth of imports is decelerating. The current account deficit is projected to contract by over 50 per cent. Signs of a restoration of external balance are positively emerging. Barring any major setback, the rate of inflation is forecast to decline to marginally below 5 per cent by the end of the next fiscal year. Do not overplay on the domestic foreign exchange market. I repeat do not push the authorities against the wall. Many of us, particularly those outside the business sector, do not seem to really grasp what the struggle for economic survival in an era of globalization imposes on us all. The story of the lion and the gazelle in the jungle is worth recalling. Every night the lion goes to sleep bearing in mind that when the sun rises the next morning if it cannot outrun the slowest gazelle it will go hungry for the day. Every night the gazelle goes to sleep bearing in mind that if it does not run fast enough when the sun rises the next morning the fastest lion will have it for breakfast. One thing both the lion and the gazelle know: when the sun rises the next morning they had better start running. This is a struggle for economic survival that cannot be met with success should we, in the day-to-day management of institutions and enterprises, stick to old moulds of thinking. Someone said it at the World Economic Forum in Davos that we have moved from a world where the big eat the small to a world where the fast eat the slow. Don’t want to run fast; don’t blame your neighbour if he wins the race. Suffice it to say that the Bank of Mauritius has been the fastest institution in the last eight years. The Bank, not to say I, has been the first in sub-Saharan Africa to have a Real Time Gross Settlement System. The Bank has been the first to have a Credit Information Bureau in sub-Saharan Africa. The Bank has given Mauritius an unprecedented level of foreign exchange reserves despite difficult economic circumstances. The Bank has given Mauritius the lowest average rate of inflation in the last eight years. The Bank has been the first in sub-Saharan Africa to embark with full cooperation from all the bankers on the project for implementation of Basel II. The Bank has been the first in a few other areas. The Bank has successfully pushed private enterprises to go for efficient treasury management in the last eight years. All the Chief Executive Officers in the banking industry understood in 1999 the way forward. They have been running fast. And they are winning. The banking industry is far sounder and resilient today than it was eight years back. Ladies and Gentlemen, may I, on behalf of my wife and my two daughters and on my own behalf, wish you and your family a Merry Xmas and a Happy New Year. Thank you. | bank of mauritius | 2,006 | 12 |
Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the inauguration of the New Headquarters Building of the Bank of Mauritius, Port Louis, 18 December 2006. | R Basant Roi: Bank of Mauritius’ new headquarters Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the inauguration of the New Headquarters Building of the Bank of Mauritius, Port Louis, 18 December 2006. * * * Dr. The Hon. Navinchandra Ramgoolam, Prime Minister of the Republic of Mauritius Honourable Ramakrishna Sithanen, Deputy Prime Minister, Minister of Finance and Economic Development His Lordship Mayor of Port Louis Hon. Judges Members of the Diplomatic Corps Fellow Bankers Ladies and Gentlemen Good Afternoon I am pleased to welcome you all to the inauguration of the New Headquarters Building of the Bank of Mauritius. I am privileged and honoured to perform this inaugural ceremony in your distinguished presence, Prime Minister, Sir – a ceremony that is similar to the one performed by the first Governor of the Bank, Mr. Aunauth Beejadhur, for the existing building in the presence of His Excellency, Sir John Shaw Rennie, Governor of Mauritius and late Sir Seewoosagur Ramgoolam, then Premier and Minister of Finance on 31st May 1967. One of the major constraints in the operation of the Bank when it was established way back in 1967 was insufficient office space. The offices of the Bank were located at various places in Port Louis. Security vault for notes and coins was located at the back of the Treasury building, Exchange Control at the entrance of the present Government Centre and Main Office at the Anglo Mauritius Building. In August 1968, a banking office was opened at the Treasury Building to accommodate the increasing volume of banking business. The existing Bank of Mauritius building at the corner of Sir William Newton St and Royal Road was designed by Messrs Victor Heal and Partners of London. Construction, which began in 1969, was completed in 1972. The building was designed for about 150 employees. The vault was designed to store a limited amount of notes and coins. In about ten years the Bank started facing a severe space constraint once again. One of the former Governors of the Bank, Sir Indur Ramphul, initiated the building project of the Bank in the 1980s. The land for the project was acquired in the 1980s. The Senior Building Advisers from the Bank of England recommended that the acquired piece of land was too small for the construction of a Central Bank building. My immediate predecessor initiated the building project in 1996. In the year 1999 the new management of the Bank reviewed the entire building project with a view to cutting down costs and to making more space available. The Cost Controller of this building project is Widnell Ong Seng Goburdhun; Architect, Lampotang & Loebl Schlossman Hackl (Chicago); Structural Engineer, Servansing Jadav/Thales; Building Services Engineer, WSP (Mauritius); Interior Designer; Lampotang & Siew/Loebl Schlossman & Hackl. The Main Contractor is General Construction/Group Five of U.K. Construction started in the year 2000. This building comprises a lower basement for mechanical equipment, a basement for the vault and a basement for mezzanine linking to the existing vault. There is a podium consisting of ground, mezzanine, first floor car park, second floor car park and banking hall, third floor currency department. The third floor provides access to the garden. Above the podium, the tower comprises 12 floors and two plant room floors. The height of the building is 98 metres above ground level. The floor area is 16,834 square metres based on future staff of 445. The building is designed to last 100 years. The lower basement is 6 metres below ground level with foundation on 36 large diameter piles that go 14 metres deep down into blue basalt. Volume of concrete used has amounted to 11,000 cubic meters and 1,300 tons of reinforcement. In fact the volume of concrete used in the construction of this building is twice the amount ordinarily used. A particular feature of the building is the wide range of special security provisions, which I am prohibited from disclosing in details. Suffice it to say that once you get inside the building your picture is taken without your knowledge. Your body weight is automatically recorded at both, entry and exit points. Sensitive areas of the building are resistant to explosives, guns and thermic lances. Mantraps and proximity card access form part of the security system. Cameras shower the ins and outs of the building. Movements of individuals and objects are monitored closely at a Control Room. In the initial stage we were given to understand by the Mauritius Port Authority that the Bank’s tower would have fallen within the four degrees sight band that is generally kept free from any visual interference. To free air space for the construction of the building to proceed, a new navigation sector light system was installed for the Mauritius Port Authority. The Bank spent a total amount of about Rs8 million on a state-of-the-art navigational light system. It was donated to the Port Authority. The air space is now free and anybody planning to erect a high-rise building in the formerly restricted four degrees sight band should have no problem to obtain permit from the Port Authority. Wind tunnel tests were carried out in France to test the building against wind forces with a speed of 275 km/hr. This required that the stone cladding and the curtain wall with glass, aluminium members and fixings thereto constructed in stainless brackets resist pressure and suction forces in the order of 2/3 of ton per square metre. This means moving weight of 8 average bodied persons standing on an area of 1m x 1m. Total cost of the building, inclusive of fit outs and furniture, is expected to reach Rs1,890,700,000 of which Rs234 million went to the Exchequer in the form of VAT. At constant 1980 prices, the year when one of the first high rise buildings appeared in the Port Louis skyline, the cost of this building excluding VAT works out to Rs395 million. At constant 1994 prices, the year when yet another high rise building appeared in the Port Louis skyline, the cost of this building excluding VAT works out to just over Rs1,010 million. This building, taking into consideration that it is an intelligent building, is indeed the least expensive high rise building in Port Louis. Before concluding, let me, on behalf of the Board of Directors of the Bank of Mauritius and on my own behalf, thank the Mauritius Commercial Bank Ltd. for having allowed us to use the MCB building for the installation of the sector navigational lights. Thank you. | bank of mauritius | 2,007 | 1 |
Opening address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Launch of The Monetary Policy Committee at the Bank of Mauritius, Port Louis, 23 April 2007. | Rundheersing Bheenick: Launch of the Monetary Policy Committee at the Bank of Mauritius Opening address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Launch of The Monetary Policy Committee at the Bank of Mauritius, Port Louis, 23 April 2007. * * * In the presence of Deputy Prime Minister and Minister of Finance and Economic Development, Former Governor Sir I. Ramphul, Directors of the Bank of Mauritius, Distinguished Guests and Other Dignitaries It is a great honour and indeed a pleasure for me to add my own words of welcome and to address you today on the occasion of the launching ceremony of the Monetary Policy Committee as a statutory committee of the Bank of Mauritius. It is a landmark move. It is eloquent testimony of our determination to rid our structures and processes of remaining outdated practices, loopholes, and bottlenecks in our quest for excellence. It is designed to leverage our economy to its next level of excellence and it is all happening in the year when the Bank is gearing up to celebrate its 40th anniversary. It has a touch of history. It is fitting, therefore, that former governor, Sir Indur Ramphul, and so many of you associated with the Bank’s early days should be with us this morning. You will forgive me if I read some more history in today’s event. It was exactly 13 years ago, on 22nd April 1994, that the National Economic Development Council – of which I was the founder-Chairman, – published its report entitled Improving Efficiency in the Financial Sector in Mauritius. The report recommended “some major structural changes for a more efficient and dynamic financial sector, which can support and sustain the other sectors of the Mauritian economy to stay globally competitive”. The objectives are no less pertinent today than they were 13 years ago. If I may be allowed to plagiarise myself, the NEDC was set up as a tripartite, high-level, policy review and policy advisory body to the Government of Mauritius, with an open-ended remit in all matters related to the economic development of Mauritius. It provided a forum for informed debate on vital economic issues to contribute to the development of consensus regarding ways of improving economic performance and national competitiveness. A laudable objective, indeed, and one, I may add, that is being so ably pursued today under the baton of my friend Mohamed Vayid. What the NEDC did not have, at least in those days, was the resources to match its ambition. I had identified the late Maxwell Fry, then Tokai Bank Professor of International Finance at Birmingham, as the man we needed to support our work in finance and I was unwilling to settle for a more affordable second-best alternative. We were thus forced to innovate and do a little bit of public-privatepartnership well before PPP became flavour-of-the-month. That is how I was able to draw on such cosponsors as the State Bank of Mauritius, the Mauritius Commercial Bank, Air Mauritius, and IBL to be able to attract such high-powered financial expertise. The NEDC chose to focus on a “…relatively small number of reforms that .… would have maximum immediate impact in improving the efficiency of the Mauritian financial sector”. In other words, we recommended that we go in for the low-hanging fruit first. The point of this short trip down memory lane is to remind ourselves that the seeds of the MPC that we are launching to-day were planted a full 13 years ago. There were nearly 3 dozen of us, bankers, economists, accountants, insurance executives and financial services specialists, who were roped in by the NEDC for the exercise. To drop some names, they included the likes of Muni Reddy, Rana Tacouri, Tim Taylor, Iqbal Rajaballee, Yvan Lagesse, Radhakrishna Chellapermal, Pierre Guy Noel, the late Alain Cheong, Jean De Fondaumiêre, Mootoosamy Sidambaram, Omar Rawat and many others…. The establishment of the MPC figured prominently among the NEDC recommendations. Let me quote Maxwell Fry’s own words: “In order to coordinate policy formulation and implementation, a monetary policy committee might be formed …. [to] formulate policy and agree on the way in which the policy would be implemented … effectively and efficiently … [to] benefit everyone.” You will agree with me that we were definitely on the right track. We could have established the grandfather of all MPC’s in 1994, a full 3 years before the Bank of England set up its own MPC, which now commands international headlines each time it meets. The MPC, as envisaged originally by us, was admittedly of a slightly different vintage than the one we are launching today. In contemplating how we were then very much on the right track, I am reminded of the words of Mark Twain, an early tourist here: “Beware if you just stay on the right track, you may be run over by the next train that comes along!” Rest assured: there is no risk of that happening to us. We are on the right track. More than that, we have caught the right train and we are moving in the right direction. Today, more than 80 central banks take monetary policy decisions in a committee. Indeed, our launch vehicle of this morning is now recognised as a key element of how central banks the world over have transformed themselves. As Alan Blinder, of the US Federal Reserve, puts it “One of the elements of the quiet revolution in central banking has been a change in the way monetary policy decisions are taken: the ‘dictatorial central bank governor’ of the past has increasingly been replaced by committees taking monetary policy decisions”. The MPC, then, is part of the transformation of our Bank. It is being established under Section 54 of the Bank of Mauritius Act 2004, with specific responsibility for the formulation of monetary policy. In addition to the Executive side, comprising myself as the Chairperson and my two Deputy Governors, the MPC has two Board Directors and three external members with experience in the field of economics, banking and finance. The Deputy Prime Minister and Minister of Finance and Economic Development has appointed Jacques Li Wan Po, an old friend going back to our primary-school days, and Shyam Seebun as the two Board Directors on the MPC. He has appointed Pierre Dinan and Jagnaden Coopamah, my former Civil Service colleague and friend, as external members. I am circulating, for your information, some background information on all the members of this first MPC. We are also privileged to be able to draw on the experience of somebody as distinguished as Mario Blejer who has kindly agreed to support our work as Honorary Adviser to the MPC. Mario is a respected academic, a former Fund staffer, a past Governor of the Central Bank of Argentina and he is currently Director of the Centre for Central Banking Studies at the Bank of England – a position previously held by the late Maxwell Fry, to whom I referred earlier. Thank you Mario for being with us today and convey our thanks to the Bank of England for allowing you to do so. I am also pleased to welcome Stefan Gerlach as observer to the MPC. He has extensive experience in monetary policy, having held a number of positions both in central banks and in academia. He is currently the Head of the Secretariat of the Committee on the Global Financial System at the Bank for International Settlements, which is the central bankers’ central bank. He serves as Adviser to the Hong Kong Institute for Monetary Research and is Adjunct Professor of Economics at the University of Basel. Central banks are sometimes accused of practising a culture of secrecy and of suffering from inbreeding. We, at the Bank – and here I am including my Second Deputy Governor and myself, both newly-minted central bankers of only nine weeks’ standing, as part of the “in” crowd – place tremendous value on “outside” talent and expertise. Outsiders bring a much-needed fresh perspective to old issues – this is even truer when they come from outside the country. Let me observe here that committee decision-making in central banks is in line with trends in other sectors: juries, not individual jurors, rule on guilt or innocence; parliament, not individual lawmakers, decides upon bills and legislates and so on. Perish the thought if any of you were reminded of horses and camels! A fresh perspective is vital for innovation. With the passage of time, some of the old ways of doing things have become just that – old! Changes in the global environment, in perceptions and approaches force us to think differently – out of the box, if you will – and adapt international best practices in all areas. Innovation is at the heart of our strategy. For we shall achieve nothing unless we help to fulfil the strategic objective of the Government, so deftly promoted by the Deputy Prime Minister and Minister of Finance, to create a new economic model and open up the economy to fundamental change. It is a new architecture that we are seeking to create. But the purpose of gleaming new tall towers like this one is not for the de-fenestration of bankrupt investors, bankers or central bank governors but to provide a new vision into the future and beyond our shores. The core focus of our strategy is to improve the banking industry and financial services generally to bring them in line with best international standards and make them internationally competitive. The launch of the MPC is a part of the re-engineering process of the central bank. We have set up an MPC Unit, reallocated staff to it, and tasked it to coordinate all work relating to the MPC. My Second Deputy Governor will chair an in-house Monetary Policy Review Committee to ensure a continuous monitoring of the economic situation. We are also proposing that the MPC meet at quarterly intervals. The dates on which the meetings will be held will be communicated to the public well in advance. However, there is provision for the MPC to meet in between should the need arise. The MPC will decide on the key Repo Rate by voting. All these are tentative at this stage and are subject to revision or confirmation by the MPC when it meets later today. Inflationary pressures have built up lately in our economy and the inflation rate is expected to cross the single digit level by June this year. We are experiencing the highest rate of inflation in a decade. It is a cause for concern, but certainly not for alarm as the rate is expected to decline as the pass-through effects of recent price hikes taper off. This of course assumes that we do not compound the problem by inappropriate fiscal and wage policies. Eternal vigilance on these fronts is the price we have to pay to combat inflation. In any case, we must remind ourselves that the primary objective of the Bank is to maintain price stability and to promote orderly and balanced economic development. Thus, in our mandate as given by the Act setting us up, price stability is not an end in itself. Rather it is a means to an end, which is sustainable macroeconomic growth. We therefore need to weigh real sector issues adequately in our monetary policy decisions. In this respect, the Bank intends to institute regular contact with stakeholders of the real sector in addition to those of the financial sector we normally deal with. And I very much welcome the presence among us this morning of employers, trade unions, economic operators, exporters, and their respective associations and chambers. I am convinced that there is a lot more that must be done – and done fast - within the Bank. We are expecting shortly the arrival of a consultant from another central bank to help us with a strategic review of our existing structure. As a pro-active institution, we want to make sure that our staff is equipped with the right tools, given state-of-the-art training and imbued with the level of professionalism that the situation calls for. I hope I shall be able to count on the support of the staff and the union as we press on with the re-engineering that we have already embarked upon. We shall proceed in a measured manner, with full consultation every step of the way. I have been able to draw on the pool of talent in the Bank as we launched different initiatives in several directions simultaneously. The very first task-force that I set up completes its mandate today with the launch of the MPC. There are several others still at work on a range of issues such as the strategic review I just mentioned, the celebration of the 40th anniversary of the Bank, the move to the new Headquarters, the review of our approach to retail forex trading, and one on such a mundane but serious issue as the flooding of the Bank’s vault. Looking down the line, we have on the drawing board our move into Islamic banking services which constitute a global business opportunity. We can rapidly roll out a new financial product and service, with some re-engineering of our approach to banking regulation and supervision to make it possible. In the next few weeks, we have a training programme, organised jointly with Deutsche Bank, for our own staff and also for staff from commercial banks, to pave the way for our move to full conformity with Basel II principles. Both regulators and regulatees will be given the same training to ensure they are on the same wavelength. And later this week, a joint Bank of Mauritius/ Mauritius Bankers’ Association delegation leaves for East Asia as we make final preparations to introduce the cheque truncation system. This will reduce paper processing, speed transactions and reduce their cost, and make us all cheque-users a little bit more efficient and productive. As you can see, we have many balls up in the air. Our vision is clear. Our goal is set. We continue the exciting journey of modernisation with renewed determination. We do not have the luxury of time. This time round, we do not want to wait another 13 years to do what must be done. The future does not belong to the hesitant. We must get on with the job, come what may. To achieve all this, we need resources. We require new blood. And this is the reason why the Bank has recently advertised for a range of positions for such openings as Bank Examiners, Research Officers and Communications Manager. The response has been very good, indicating that the Bank has a good reputation and enjoys credibility as an employer. Allow me to conclude by making two specific observations. First and foremost, let me point out that this first MPC meeting is not an interest- rate- setting meeting. Today the MPC will discuss the operational aspects for the conduct of its future meetings, take stock of the current and future economic and monetary developments, and agree on its future work programme and the way forward. So, the markets, the media and the public should not expect any interest rate decision today. Second, the monetary policy decision-making process as established in the Bank of Mauritius Act has an unusual feature. Currently, the MPC can only recommend its decision to the Board of Directors of the Bank, which shall then determine the monetary policy stance of the Bank. However, this situation is far from optimal and warrants revision. As an interim measure, I will shortly be seeking from my Board a specific delegation of authority enabling the MPC both to formulate and implement its monetary policy decision. In this way, the MPC which we are launching this morning, before this august assembly of dignitaries, will operate in line with international best practice. Ladies and Gentlemen, today is the start of a new era in monetary policymaking in Mauritius. It marks the end of a long journey that began nearly four decades ago, with direct controls, directed interest rates and credit ceilings on lending, to say nothing of exchange controls which disappeared more than a dozen years ago. I am confident that the MPC, with its high-powered membership and even higherpowered advisory support, will fully deliver on the Bank’s monetary policy mandate. The time has now come for that “dictatorial central bank governor” of yore that we spoke about earlier to step definitely into history. And for the current one of yours who is now speaking to step aside and make room for our guest speaker! Thank you for your attention. | bank of mauritius | 2,007 | 4 |
Opening address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the 6th Meeting of Governors of the Association of African Central Banks, Eastern Africa Sub-Region, Port Louis, 9 May 2007. | Rundheersing Bheenick: Towards the African Monetary Union Opening address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the 6th Meeting of Governors of the Association of African Central Banks, Eastern Africa Sub-Region, Port Louis, 9 May 2007. * * * A very good morning to all of you. And a very warm welcome to my Fellow Governors, former governors, central bankers and other overseas visitors who are with us this morning. I feel very privileged and honoured to address you this morning at the opening ceremony of this Sixth meeting of Governors of the Eastern Africa chapter of the Association of African Central Banks. For my colleagues and me at the Bank of Mauritius, this meeting assumes even greater significance as we prepare to celebrate the fortieth anniversary of the Bank in three months’ time. It is just twelve weeks since I was appointed Governor of the Bank of Mauritius. I am acutely conscious that I am very much the new boy on the block. It makes me understandably nervous to address such an august assembly of governors and high officials of central banks from the region. The novice in central banking that I am does, however, claim a passing familiarity with regional cooperation and regional integration, which constitute the backdrop for our meeting. My involvement in regional integration dates back to the days when I was Director-General of the Ministry of Economic Planning and Development. With the assistance of a few very dedicated colleagues, I was able to position my former Ministry to play a leading role in various aspects of regional integration. It was under our impulse that Mauritius successively became a member of PTA, the Preferential Trade Area which was the precursor of the present COMESA, the Indian Ocean Commission of which I was a founder-member, SADC, the Cross Border Initiative and the Indian Ocean Rim-Association for Regional Cooperation. Indeed, I was instrumental in getting two of these agencies to set up their headquarters here in Mauritius. Between 1997 and 2000, when I served as Minister of Economic Development, Productivity and Regional Cooperation, I had the privilege of chairing the Council of Ministers of the IOR-ARC, the COMESA Council of Ministers, and the CBI, which actually became the Regional Integration Facilitation Forum under my chairmanship. Somewhere along the line, I was also associated with the African Economic Research Consortium and, more recently, I got roped in to advise the East African Community on benefits asymmetry. I thought I should fill you in on this as regional cooperation looms large in the African Monetary Cooperation Programme that you have embarked upon. Today, all countries – rich or poor, big or small – are confronted with the various challenges thrown up by globalisation. Smaller countries face bigger challenges and even greater risks, as we know only too well. We have to reckon with unpredictable external shocks, such as oil price hikes, drop in the export price of our commodities, or of our manufactured exports. How should we react in the face of globalisation? Should we, like one Latin American country did last week, pull out of the IMF and the World Bank? It would be disastrous to envisage such a scenario on our continent as most of our countries are still indebted to these institutions, which for all their imperfections, have done a creditable job. Of course, we are not denying that there is considerable scope for achieving a better and more equitable international financial architecture more suited to the needs of our region. Faced with the challenges stemming from globalisation, we have to build greater economic resilience into our economies. Turning our back on globalisation is not an option. Protecting our markets and insulating our labour force from competition can buy short-term peace and create the illusion of growth and welfare. Sustainable growth does not lie in that direction. Burying your head in the sand was never a good strategy. Nations across the world are integrating their economies with those of their neighbours, to create larger and more competitive regional economic groups, and to engage in international trade – not as individual states but as regional powers. In Africa, now more than ever before, regional economic cooperation and integration has become a necessary condition for longterm sustainable development. It is in this context that we must focus on the objectives of the African Monetary Cooperation Programme. This Programme requires us to adopt collective policy measures to achieve a harmonised monetary system and create a common management institution. The harmonisation of the monetary cooperation programmes of the various sub-regional groupings constitutes the first stage. These will then serve as building blocks for the single African monetary zone, which we expect by the year 2021, with a common currency and a common Central Bank. To move in this direction, the AACB has adopted a set of quantitative macroeconomic convergence criteria, that should be observed by at least 51 percent of AACB members, before we can launch the African Monetary Union. There are some encouraging signs. Growth performance during the last three years in Sub-Saharan Africa has been the best in more than three decades, and higher oil revenues and increased debt relief have been used to make progress toward the Millennium Development Goals. Despite spending pressures, most countries have managed to preserve macroeconomic stability with policies intended to support and sustain the region's higher growth. However, while current growth rates in Africa are high by historical standards, they are not sufficient to have a decisive effect on poverty and help Africa attain the Millennium Development Goal of halving poverty by 2015. One of the primary convergence criteria in terms of the African Monetary Cooperation Programme is the maintenance of an annual inflation rate of less than 3 per cent. The achievement of this inflation target is indeed a heroic challenge for many of our countries. Here in Mauritius, inflation has just nudged up into the very lowest of double digits, at 10.5 percent for the current fiscal year, for the first time in fifteen years. It is exercising our mind and causing some discomfort all round. We can hardly imagine what it must be like to grapple with quadruple-digit inflation, which is currently confronting a Fellow-Governor on the continent. This four-digit inflation rate certainly makes us extremely uncomfortable and underlines the need for continued vigilance in the fight against inflation. It is also a stark reminder of the very long road we still have to travel before we achieve our common vision of the African Monetary Union. To paraphrase Lao-Tse, the longest journey begins with but a short step. We have taken many steps and we are well on our way. And, in our sub-region, we have made great strides since Governors last met. We are aware that much remains to be done to make a bigger dent on poverty and to raise living standards. We need to accelerate growth through more trade, more private sector development, more effective use of public resources and a deepening of our respective financial sectors. There are wide disparities in the financial sector across Africa. Middle-income countries have a larger financial sector and broader institutional coverage than low-income countries. The latter typically have a narrow range of institutions. Many people do not even have access to basic payment services or savings accounts and cannot obtain credit. This inevitably handicaps economic transactions and impedes growth. In low-income countries, banking transactions form the bulk of financial activity. In contrast, middleincome countries have a more diversified financial sector. This would normally include an insurance sector, a stock market, non-bank financial intermediaries and microfinance institutions. A country with a less diversified financial sector is more vulnerable to credit risk. A fall in commodity prices, with adverse impact on exports, can rapidly impair bank loans. Hence, the need to have a high capital adequacy ratio and prudential ratios on exposure to any single customer. Another characteristic of banks in our region is the high operating costs and high net interest margins. This reflects low efficiency. Banks with high operating costs need a high spread to cover these costs. What can we do to make our financial sector more resilient? First and foremost, macroeconomic stability should be consolidated. If this is lacking, there is no growth, no rise in incomes and no reduction in the incidence of poverty. An increase in investment is also required. Gross domestic investment as a share of GDP is very low in Africa. We attract only a marginal share of world FDI to Africa, and it tends to go into extractive industries. Global investors will only be interested in the rest of our countries in Africa if we can offer peace, stability, good governance, the rule of law and the absence of corruption. Africa needs to strengthen its financial systems. Weak banks should be restructured through measures to address the stock of nonperforming loans and accumulated losses. Bank regulation and supervision should be improved through greater compliance with the Basel Core Principles for Effective Bank Supervision. Help is at hand as our own experience in Mauritius shows. The Financial Sector Assessment Program, initiated by the IMF and the World Bank, aims at strengthening financial systems and providing a comprehensive framework for identifying strengths and weaknesses in a country’s financial system. I can confirm that we have used the FSAP to good effect to achieve institutional strengthening and to build a more robust financial and banking sector. To stay within the theme of financial systems and financial stability, allow me to share with you some preliminary thoughts, not to say emerging preoccupations, on the quality of FDI. The volume of Foreign Direct Investment flowing into Mauritius has increased very fast in recent years, and stood at Rs 6.4 billion in 2006, having risen more than sixfold since 2002. We are doing nicely on this score and I certainly do not want to sound like a carping critic. Normally, one would have expected the Central Bank to busy itself with ways and means of sterilising these inflows. But – and I am not here talking only about Mauritius – I am getting increasingly concerned on the economic repercussions and the systemic risk implications of unbalanced and poorly-conceived foreign direct investment policies. With the elimination of trade preferences in an increasingly global economy, countries sharing similar characteristics as Mauritius find it increasingly difficult to compete for foreign direct investment in traditional sectors. In these circumstances, FDI in the property and real estate sector can be a rather interesting and viable alternative. However, policy-makers and regulators have to perform a fine balancing act between, on the one hand, the imperatives of economic and financial sector growth and, on the other, concerns about a potentially disruptive speculative property bubble which could defeat the very purpose the policy was meant to fulfil. Specifically, we have to reckon with the fact that poor implementation of such policies can lead to an increase in banks’ exposure should foreign investors have recourse to domestic bank financing instead of bringing in their own funds. Should this happen, the host country could eventually not only end up with lower-than-expected foreign exchange inflows but also find itself stuck with an unbalanced investment programme heavily skewed towards a sector with a very limited capacity to sustain growth. Still another negative fallout from increased lending to high-net-worth foreigners would be its crowding-out effect on domestic investment, either denying local investors adequate access to bank finance, or hardening their terms. It is abundantly clear that the quality of FDI does matter. FDI should be strongly linked to local enterprise development and not confined to small enclaves as the benefits of FDI do not accrue automatically and are not uniform across sectors and countries. Experience shows that the authorities need to go beyond traditional liberal FDI policies. They need to pay more attention to the broad set of regulatory and institutional frameworks conducive to an enabling environment both for foreign investment and for domestic entrepreneurship. Perhaps a few words about the local banking and financial sector could provide some useful context. Ours is a small middle-income economy, with a population of only 1.2 million, but we have an economy which is fully monetised. Financial intermediation, overwhelmingly banks and NBFIs’, will make up nearly 11 percent of GDP this year. Let us pause a moment to reflect on this percentage contribution. It is higher than almost all the real sectors. It is higher than the tourism sector, where Hotels and Restaurants are expected to contribute a little less than 9 per cent of GDP. It is higher than the Export Processing Zone, which will account for 7.4 per cent. And it is of course much higher than the sugar sector, whose contribution to GDP is forecast at 3.3 per cent. How has the sector come to occupy such an important place in the local economy? How is it structured to play such a leading role? There are 19 banks and 13 non-bank financial institutions licensed to transact deposit-taking business. Three new banks should open by the end of this year as the banking licenses granted at the end of last year are operationalised. There are currently nearly 160 branches and 329 ATM’s, which leads some observers to jump to the erroneous conclusion that we are overbranched and overbanked. The sector is marked by a very high degree of market dominance, with the two largest banks, both domestically-owned, controlling around 70% of rupee deposits, with the next two, both among the top ten international banks, accounting for slightly above 20%. There are also many other international banks who are relatively new to Mauritius, and who have brought in their own special expertise and financial sophistication, and are busy carving out a lucrative niche for themselves in this allegedly overbanked country. They are playing a very welcome role. They increase competition. They give the established players a run for their money. This is good for the domestic consumer. It dampens any tendency towards cartelisation which could otherwise be encouraged by the market dominance I referred to earlier, with the smaller players slipping comfortably into “follow-the-leader” mode. Internationally, the presence of these foreign banks raises the profile of the country, enhances its reputation and reinforces its role as an offshore financial centre. I look forward to the three new bank licensees entering this dynamic financial landscape, with their own business models and their complementary financial products and services. All in all, we should have a very interesting year! Let me now touch briefly on how the Mauritian economy is coping with the challenges of globalisation and adapting to life in the post-Lome and post-Cotonou world. A less resilient country would no doubt have been tottering under the impact of the triple shocks that have hit the economy, namely the dismantling of the preferential price for our sugar exports under the Sugar Protocol, the erosion of trade preferences in textiles, and the surge in oil prices. The factor-intensive, export-oriented growth strategy, based on comparative advantage and fuelled by trade preference, with sugar, textiles and tourism as the three main pillars of the economy, has given way to a new strategy. We are now building competitive advantage in targeted sectors. The new strategy is based on • the development of a high-tech, innovative financial and business services hub, with new activities such as ICT, BPO, biotechnology, as well as financial and medical services, • manufacturing activities such as printing and publishing and light engineering and • restructuring and consoliding the existing sectors, which can adapt to the Brave New postWTO World. The strategy also provides for the development of Mauritius into a regional platform for a variety of activities, ranging from the storage, processing and distribution of seafood, and the repair and maintenance of fishing vessels, to warehousing and distribution. As regards the traditional sectors, their restructuring is in full swing. The sugar industry, hit by a 36 per cent cut in the price of sugar exported to the European Union, is undergoing a complete transformation into a “cane cluster” producing special sugars, bagasse for electricity generation, and molasses for distillation into ethanol and value added spirits. The dismantling of the Multifibre Agreement in 2005 forced the textile and apparel sector to downsize. This sector now revolves around a core of firms that have invested heavily in sophisticated design and fabrication machinery which enable Mauritian products to reposition away from the commodity end of the market. As for tourism, which was always built on its underlying competitive strength, the strategy is to double its bed capacity to capitalise on the liberalisation of air access. The objective is to attract two million tourists in the next 10 years. This multi-pronged strategy is expected to inject still greater resilience into our economy to enable us to face further external shocks that are beyond the horizon. Allow me to dwell briefly on monetary policy in Mauritius. Over the years, the Bank of Mauritius, like most central banks on the continent, went through a phased programme of monetary policy reforms. It switched from direct to indirect monetary control. This was in line with the general move towards increased reliance on market forces, economic liberalisation and regulation and away from directives, controls and subsidies. Exchange controls disappeared more than twelve years ago. After using Reserve Money Programming and liquidity forecasting as its framework for the conduct of monetary policy for more than ten years, the Bank introduced a new framework in December last year. The Lombard Rate was replaced by the Repo Rate as the key policy rate to signal changes in the monetary policy stance of the Bank. Just over two weeks ago, I had the privilege of launching the Monetary Policy Committee as a statutory committee of the Bank of Mauritius, in the presence of the Deputy Prime Minister, and Minister of Finance and Economic Development. This marked the start of a new era in monetary policymaking in Mauritius. It was the culmination of a long reforming process that began nearly four decades ago. I am looking forward to the next meeting of the MPC which should take place in the second fortnight of June, just after the Deputy Prime Minister has handed down his budget. So much for monetary policy! Let me say a few words about the Bank’s involvement in regional integration activities. I can vouch that it dates back at least to the early 1980’s when, wearing a different hat, I managed to persuade the then Governor to support our economic and trade overtures to Madagascar. In the early 1980’s, when exchange controls had yet to be dismantled, we entered into a bi-lateral agreement with Madagascar which provided for payments settlement in respect of bilateral trade between the two countries to be effected through a compensatory mechanism agreed between the central banks of the two countries. Subsequently, the Bank hosted in succession a Meeting of the Preferential Trade Area, followed immediately by a Meeting of the AACB. When we joined SADC in August 1995 – after some private behind-the-scenes bargaining with my friend Kaire Mbuende who was then the Executive Secretary – I requested the Finance and Investment Sector to be allocated to us. Had our request found favour, the Finance and Investment Sector Coordination Unit would have been located in Mauritius. However, the decision was taken to reallocate the Tourism sector away from Lesotho to us while the Finance and Investment Sector went to South Africa. In 1998, the Bank hosted the 6th Meeting of the Committee of Central Bank Governors of SADC. The Bank has just participated in the 24th Meeting of the CCBG in Tanzania last month (April 2007) and, at that meeting, we have been assigned the Permanent Chair of the SADC Committee of Banking Supervisors. To conclude, let me assure all of you, Fellow-Governors, that we are firm believers in regional cooperation and integration. We go further; we believe that economic salvation for small countries like ours lies definitely in that direction. The African Monetary Cooperation Programme, and its ultimate objective of the African Monetary Union, hold considerable appeal for us. On what better note could I end my address than by re-dedicating the Bank of Mauritius to this noble cause? I thank you for your attention. | bank of mauritius | 2,007 | 5 |
Speech by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on the occasion of the Signature of a Protocole D'Accord and Launching Ceremony of the Joint BOM/FSC Coordination Committee, Port Louis, 12 July 2007. | Rundheersing Bheenick: Consolidating the overall supervision of the financial sector in Mauritius Speech by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on the occasion of the Signature of a Protocole D’Accord and Launching Ceremony of the Joint BOM/FSC Coordination Committee, Port Louis, 12 July 2007. * * * Members of the Board of Directors of the Bank of Mauritius and of the Financial Services Commission The Chief Executive of the Financial Services Commission Chairman of the Mauritius Bankers Association Operators in the Non-bank Sector Staff of the FSC and Bank of Mauritius Ladies and Gentlemen It is a great honour and indeed a pleasure for me to welcome you all to the signature of a Protocole D’Accord and the launching ceremony of a Joint Bank of Mauritius/Financial Services Commission Coordination Committee in an effort to promote a more structured and active collaboration and coordination between the two regulatory and supervisory authorities. You will appreciate that, as financial institutions increasingly operate globally and diversify their businesses, it has become important in the interest of financial stability for supervisory bodies to oversee the safety and soundness of these institutions on a consolidated basis. While the Bank of Mauritius has the lead supervisory responsibility for the banking and nonbank deposit-taking sectors, there is an urgent need to conduct consolidated supervision to complement the supervision of licensed entities on a solo basis. This will contribute to a more accurate assessment of the risks to which a financial institution may be exposed. Responding to the changes in the financial services industry, the Bank of Mauritius and the Financial Services Commission have agreed to collaborate more closely with a view to consolidating the overall supervision of the financial sector. As consolidated supervision is undoubtedly an essential element of effective financial sector supervision, we are today formalizing this process of collaboration and co-operation between the Bank of Mauritius and the Financial Services Commission through the signature of a Protocole D’Accord and the setting up of a Joint BOM/FSC Coordination Committee. The main purpose of the Protocole D’Accord will be to expand on the scope of the Memorandum of Understanding (MOU) signed between the two regulatory and supervisory bodies in December 2002. The Protocole D’Accord makes further provision for the parties to agree on the extent of their responsibilities and harmonization of their procedures with respect to financial institutions which are regulated by both institutions. The Memorandum of Understanding sets out a framework of co-operation between the Bank of Mauritius and the Financial Services Commission in their common pursuit to maintain a safe, efficient and stable financial system in Mauritius. Both supervisory bodies will, under the terms of the MOU, work in close collaboration to ensure the setting up of appropriate arrangements to respond to threats to financial stability, to coordinate information sharing and avoid duplication. Financial stability remains a major concern to both the Bank of Mauritius and the Financial Services Commission, given their statutory responsibilities to supervise and regulate the financial markets. Achieving financial stability is not a destination but rather a journey. It is an on-going concern for both regulators given the continuous developments and challenge s in the economic environment. Presently, our financial sector is under the regulatory and supervisory purview of these two bodies. Currently, the asymmetry of information makes it difficult to evaluate the state of financial stability. As the final resting place of risk is hard to observe, as regulators, we can at least try, through this collaboration, to track its passage through the markets. There are, therefore, compelling reasons for both authorities to strengthen collaboration with a view to improving the sharing of information relevant to their respective responsibilities. The process of effective consolidated supervision involves qualitative as well as quantitative dimensions. Supervisors must therefore be aware of the ownership structure, the overall organizational structure, the corporate governance and risk management systems and all material risks within a conglomerate. As regulators, we must have knowledge of the entire group to properly assess risks which may emanate either from the licensee’s core activities or from its affiliation with entities that may or may not be directly regulated. As conglomerates are showing increasing interest in banking business, we regulators have the duty to evaluate the risks that would spill over directly or indirectly from the non-bank or non-regulated entities of the groups. We must by all means avoid supervisory grey areas. Enhancing information sharing between regulatory authorities right from the licensing stage helps to minimize the risks arising from supervisory gaps. As you are aware, Mauritius had undergone two Financial Sector Assessment Programmes (FSAP) by a Joint IMF-World Bank Mission in recent years. The launching of this Joint Coordination Committee shows the commitment of the regulators to promote best international practices that meet the expectations of international organizations and of the Basel Committee on Banking Supervision which also advocates that banking groups should be supervised on a consolidated basis. I now have the pleasure of announcing to you the names of the representatives of the Bank of Mauritius on the Joint Committee. Mr. H.O. Jankee, Chief Economist, Mrs N. Sajadah Aujayeb, Legal Officer and Mr G. Gonpot, Senior Bank Officer will represent the Bank on this Committee. The Bank of Mauritius and the Financial Services Commission have also agreed to the principle of rotating Chairmanship, with the Committee being chaired alternately by the Chief Economist of the Bank and the Acting Deputy Chief Executive of the Financial Services Commission. Let me add that while we are a dynamic sector, we have observed that quite some poaching of staff goes around in our sector. We do not want this to happen between our two institutions. Quite a few employees of the FSC have applied for posts at the Bank. On this note, I would like to thank you for your presence at the Bank today and look forward to your support and collaboration in enabling this Joint Committee achieve its objectives. Thank you for your attention. | bank of mauritius | 2,007 | 7 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the official 100th Foundation Day Celebrations of the Bank of Baroda, Port Louis, 20 July 2007. | Rundheersing Bheenick: Brief look at the commercial banking sector in Mauritius Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the official 100th Foundation Day Celebrations of the Bank of Baroda, Port Louis, 20 July 2007. * * * Honourable Deputy Prime Minister and Minister of Finance and Economic Development His Excellency the High Commissioner of India The Vice President of the Bank of Baroda Distinguished Guests Ladies and Gentlemen It gives me great pleasure to be present today and share this historical moment with you. Let me first congratulate Bank of Baroda on reaching this milestone in its history. Allow me also to commend all those whose work and dedication have positioned the bank as a successful and respected global bank. A centenary should indeed be celebrated. This celebration, however, cannot start without saluting the founder of Bank of Baroda, Maharaj Sayajirao. Under his rule, a hundred years ago, Maharaj Sayajirao erected a tiny building in the princely town of Baroda. His vision, I understand, was to set up a bank which would “prove to be a beneficial agency for lending, transmission and deposit of money and a powerful factor in the development of art, industries and commerce of the state of Baroda and adjoining territories”. The vision of the Maharaj is today a legend which has etched footprints in the sands of time. The small Baroda building has today grown into an empire with an impressive network of around 2700 branches in India. Bank of Baroda has also created history beyond the frontiers of India. The bank migrated with the Indian diaspora and settled in over 20 countries, of which our very own. Indeed, this year marks the 45th year of close association of Bank of Baroda with Mauritius. Bank of Baroda started operations in Mauritius in 1962 at a time when we were still an underdeveloped country. We had, at that time, only three full commercial banks; the Mauritius Commercial Bank Ltd, Barclays Bank DCO and Mercantile Bank of India. There were, in addition, two other quasi banks, namely the Mauritius Cooperative Central Bank, a “bank” operating for the benefit of cooperative societies, and the Post Office Savings Bank. We cannot overlook the contribution of the Bank of Baroda in the economic and social development of our country over the years. We all recognise the social mission of the bank. Bank of Baroda brought banking to the unbanked. It pioneered mobile banking giving access to banking services to needy segments of the population in villages throughout the country. The mobile bank is today a legacy. Bank of Baroda also made significant contributions towards financial literacy and commercial education. A couple of years later, Habib Bank joined the Bank of Baroda in this mission, followed by the State Bank of Mauritius Ltd. A centenary bank has past successes. However, it cannot afford to be complacent about its success stories. A centenary should also be an occasion to look at challenges ahead. The world today is fiercely competitive. Innovation, creativity and re-engineering should be on the business agenda of our banks. Our banking sector should be always on its toes and tap new markets. The banking sector will be faced with stronger competition by the end of this year with the opening of three new banks, which have been granted banking licences last year. Also, as part of the outfall of the Honourable Prime Minister’s visit to China, we expect a Chinese bank to be part of our financial landscape before long. The sector is becoming more and more competitive and consumers can only stand to gain in this process. As the regulator and watchdog of the banking sector, we at the central bank shall keep an eye on developments to ensure that credit standards are not lowered, that depositors’ interest are safeguarded and that our reputation as an international financial centre is not at risk. Our consumers expect no less from its central bank. Mauritius enjoys cultural and economic ties with Asia and Africa and offers huge potential for the provision of banking services in the region. I strongly urge our banks to take full benefit of opportunities that lie ahead. Islamic financial services are being introduced. In this context, I will shortly be meeting with the Islamic Financial Services Board of Malaysia to discuss the adherence of the Bank of Mauritius to this international standard setting body comprising regulatory and supervisory agencies worldwide which have interest in enhancing the soundness and stability of the Islamic Financial Services Industry. I believe that the time is now right to envisage a suitable currency exchange system between our two countries. There has been significant expansion in trade and tourism between India and Mauritius. I understand that around 50,000 tourists from India are expected to visit Mauritius this year and that 20,000 Mauritians would have travelled to India. This measure will avoid the inconvenience for travellers having to convert their Indian rupee banknotes into a foreign currency first when travelling to Mauritius and secondly, to reconvert them into Mauritian rupees for spending in Mauritius. I believe that the flow of tourism between India and Mauritius may be enhanced under a suitable exchange system between our two countries. Bank of Baroda can be called upon to play a prominent role in this respect. The application of a mechanism similar to this one has helped to maintain a steady and growing level of tourism between South Africa and Mauritius over the years. South African rand banknotes are today freely exchanged by South African travellers in Mauritius. I now wish to commend the recent marketing initiatives of Bank of Baroda to make itself more visible in our banking industry. “Rapid Funds2India”, a service free of cost to the bank’s customers in Mauritius and India, is a laudable effort towards lower cost of banking services. The bank has made substantial investment in IT and its entire banking operations have now migrated to state-of-the-art IT platform enabling global connectivity. It is a fact that technological innovations have today significantly brought down administrative costs. I strongly believe that such reductions in costs should be passed on to customers through lower fees and charges. In today’s world of financial globalization, banks can no longer limit themselves to geographical areas. I understand that Bank of Baroda ranks among the top 400 banks worldwide and they are not alone. Two other Indian banks namely, the State Bank of India and ICICI are also performing very well. I again congratulate the Bank of Baroda on its 100th Foundation Day and wish it another 100 years of success. Thank you for your attention. | bank of mauritius | 2,007 | 7 |
Remarks by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the launching ceremony of the Over-The-Counter sale of Treasury Bills/Treasury Notes at the new Headquarters of the Bank of Mauritius, Port Louis, 24 July 2007. | Rundheersing Bheenick: OTC sales to the public Remarks by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the launching ceremony of the Over-The-Counter sale of Treasury Bills/Treasury Notes at the new Headquarters of the Bank of Mauritius, Port Louis, 24 July 2007. * * * Distinguished Guests of the Financial Community Chairman of the Mauritius Bankers Association Ltd Our first customers to the OTC sales Ladies and Gentlemen I am grateful that you are all here with us this morning to share the launching ceremony of the Over-The-Counter (OTC) sales to the public. The reasons for which we are re-launching the sale of Treasury Bills and Treasury Notes directly to the public are manifold. As you would already know, the Honourable Rama Krishna Sithanen, Deputy Prime Minister, Minister of Finance and Economic Development announced in his 2007/08 budget speech that the Bank of Mauritius will re-launch the retail sale of Treasury Bills/Treasury Notes directly to the public. This practice had been stopped for some time. You would also have no doubt noted that saving performance of the country has been doing downhill. The Saving Rate fell from 22.6 per cent in 2004 to hardly above 16 per cent in 2007 and this at a time when secondary market sales are open and the Stock Exchange has been encouraged by the central bank to offer Government papers directly to the public. Just to provide you with an indication of this low performance, the sale of Government of Mauritius Treasury Bills and Treasury Notes through stock broking companies on the stock market have amounted to a grand total of barely above Rs1 Million in July 2007. So, we thought we need to do something to stop the decline and encourage our savers to invest in treasury instruments. We thought we have to work on ways to stimulate the development of the secondary market for Government securities and provide an additional investment opportunity to individual investors. For these reasons, we are offering this morning a whole range of instruments ranging from short-dated Treasury Bills to 4-year paper. These instruments will give us a term structure and also an indication of the appetite of our savers for papers of different maturities. Furthermore, primary bidders and dealers will have a better feel of where the market is heading. We are today logging quite a few Firsts. Let me mention a few of them: • Today, for the First time Members of public are having access to the Banking Hall of the new Headquarters Building • Today, for the First time and we are using our counters; and • Today, for the First time the Banking Hall of the new Headquarters Building is being used. We are today starting the migration process of our whole banking operations from the old to the new building. We are hopeful that two to three weeks down the line we would have completed the move to the new Headquarters. So, we have three impressive Firsts for a small occasion. I am pleased to invite Directors of the Board of the Bank as well as our first customers to move forward for the formal launch of the OTC sales. (Unscrolling of Display) After the formal launch, we shall move towards the counters. I believe that whenever there is something new, there must also be something old. So, to mark the start of transactions at our new counters and with a view to coining this momentous occasion, I found it most auspicious to strike the gong which was offered to us by the central bank of Kenya at the time of the inauguration of our old building in 1972. I thank you all for your presence with us this morning. | bank of mauritius | 2,007 | 7 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on the occasion of the Commemoration Dinner for the 40th Anniversary of the Bank of Mauritius, Bank of Mauritius, 24 August 2007. | Rundheersing Bheenick: Escaping the fate of the Dodo Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on the occasion of the Commemoration Dinner for the 40th Anniversary of the Bank of Mauritius, Bank of Mauritius, 24 August 2007. * * * A very warm welcome to you Mr President and Lady Jugnauth, to you Mr Prime Minister and Mrs Veena Ramgoolam, our Deputy Prime Ministers and their spouses, members of the Board and to all our guests this evening, who honour us with your presence, at this special Commemoration Dinner. And let me wish to all of my colleagues in the Bank of Mauritius here today, Happy Birthday! Happy 40th Birthday! and especially those benefiting from the pension fund: many…many…Happy Returns of the Day!! I have to admit to you now, that, faced with the formidable history of the achievements of my predecessors, many of whom we welcome here tonight, I am feeling rather modest. A most unusual state to be in as Governor! Some would say, I suspect, a most unusual feeling for this particular Governor, often taxed – in the past, and wrongly, as I would say – with a certain arrogance and an “effortless sense of superiority”! At the inception of the Bank in 1967, I had just completed my time at Oxford, broke, as is the fate of all students, and wondering what I would do with my life. Yet it was at this moment that Robin Harrison, the Warden of my college, Merton, Oxford introduced me to his old friend Professor James Meade 1 who came down from that other place, Cambridge, for an excellent lunch. Over lunch, Meade steered me towards demography and the runaway population explosion that he had identified as the biggest threat to Mauritius, which was then a world leader in the fertility stakes! Meade was pleased to see me to exchange views on the prospects for Mauritius. For it was he who with his team had planted that vital signpost in the early story of the economic and financial outlook for our country in 1961, with the seminal Report on the Economic and Social Structure of Mauritius. The then Prime Minister, Sir Seewoosagur Ramgoolam 2 , sent me a letter through Sir Dayendranath Burenchobay 3 , the then Permanent Secretary at the Prime Minister’s office – actually transmitted through no less a person than Raymond Chasle, then running the newlyopened Mauritius High Commission in London, inviting me to return to Mauritius, and detailing a list of openings in the economics field. The list included the Economic Planning Unit, The Development Bank of Mauritius, The Bank of Mauritius and the University. Since February this year, I can say, I have been associated with all the institutions on that list, in one capacity or another! We have come a long way! James Edward Meade, 1907-1995, economist, author of “The Economic and Social Structure of Mauritius” (Methuen & Co, London, 1961) and “The Economic and Social Structure of Mauritius: Report to the Governor of Mauritius” (Publisher: London, Cass, Date: 1968.), chaired the Economic Survey Mission to Mauritius, 1960-1961. He prophesied in the early 1960’s that Mauritius's development prospects were poor – that Mauritius was a strong candidate for failure, with its heavy economic dependence on one crop (sugar), vulnerability to terms of trade shocks, rapid population growth, and potential for ethnic tensions. History – or, rather, Mauritius – proved Meade's dire prognostication famously wrong. Sir Seewoosagur Ramgoolam, known as the Father of the Nation, LRCP, MRCS (18 September 1900-15 December 1985) was the Prime Minister of Mauritius from 1961 until 1982. As decolonisation swept the third world, he led his country to independence from the United Kingdom in 1968. He was Governor-General of Mauritius from 28 December 1983 until his death in December 1985. Sir Dayendranath Burrenchobay, (24 March 1919-29 March 1999), served as Governor-General of Mauritius from April 26, 1979 to December 28, 1983. In truth, reflecting on the story of the forty years of banking, as we are doing now, makes me full of wonder and admiration for what has been achieved. I remain therefore heavily conscious of the responsibility we inherit for sustaining the course. Meade was to become a Nobel laureate in 1977, but this year 2007, is also significant, as it is the 100th anniversary of his birth. His work in economics as an adviser to us in Mauritius and to other countries is perhaps not as widely celebrated as that of Keynes 4 , with whom he collaborated, but it is more significant for us today through his contribution to the linkage between development theory and monetary practice. In his invaluable report of 1961 to which I referred earlier, he produced about 100 detailed recommendations but just gave us one option for averting the fate of the Dodo 5 itself; invest and industrialise! The question was, should it focus on import substitution or on exports. The great and somewhat fruitless debate was engaged, the answer being not either but of course both. But Meade gave us the shock we needed to get us going. He continued to be a wise counsellor on policy and planning in developing countries. In his Banquet speech on receiving the Nobel prize he had this to say about economists: “The well-balanced economist …(has)… his warm heart on the Left, his practical work-a-day hand on the Right, and his clear and thoughtful head in the Centre.” A sage prescription for the profession. The history of the Central Bank here in Mauritius has, I believe, admirably reflected that balance. Our saving grace, in the face of all the challenges which he outlined in such stark and ominous terms, has been the foundation of a secure financial system, firmly laid at Independence, and the period leading up to it, respect for law and order and a productive relationship with the colonial powers that was to ease open the gateways to the future and, not the least, at the heart of the economy, the banking sector. William Kogan, a distinguished economic journalist has referred to Meade’s approach as “a model of globalization that doesn’t leave anyone behind.” He adds, Meade’s “was a pragmatic approach to management of economic stability, embracing globalization, but taking responsibility for handling its social and economic consequences.” Meade would be in the league now with those macro-economists who today are concerned for the “losers” from Globalization such as Joseph Stiglitz 6 , and Lawrence Summers 7 . Meade also had some sharp things to say about our need for technical transition. He referred to the: John Maynard Keynes, (1883-1946).Noted principally for his 1936 publication “The General Theory of Employment, Interest and Money.” The Dodo (Raphus cucullatus) was a flightless bird that lived in Mauritius. The dodo has been extinct since the mid-to-late 17th century. It is commonly used as the archetype of an extinct species because its extinction occurred during recorded human history, and was directly attributable to human activity. The phrase "as dead as the dodo" means undoubtedly and unquestionably dead. Joseph E. Stiglitz, (1943-), 2001-winner Nobel Prize in economics, cabinet member of the Clinton Administration, served as Senior Vice President and Chief Economist of the World Bank, author of “Globalization and its Discontents”. Lawrence Henry ("Larry") Summers, (1954- ), American economist and academic. He is the 1993 recipient of the John Bates Clark Medal for his work in macroeconomics, was Secretary of the Treasury for the last year and a half of the Clinton Administration, and served as the 27th President of Harvard University from 2001 to 2006. “startling ignorance (in Mauritius) of modern ideas about education and its true purpose” and he encouraged a greater attention to technical inefficiency then rampant in the public sector with its lack of Organisation and Methods study to link inputs to outputs. We now begin to see in Mauritius forty years later a more problem-oriented approach to education and continuing professional development as core principles for human capacity-building. In the new Medium Term Expenditure Framework of my friend the Deputy Prime Minister and Minister of Finance and Economic Development we now also have a target date for establishing results-based budgets for the whole of the public sector. Change does not always come fast; we must be patient. Some reforms can take a generation to flower, as they have to press against the embedded climate of inertia inherent in our traditional culture and values. In 1961, when Meade was reviewing our gloomy prospects, we not only had no Central Bank and no Stock Exchange but we also had to confront a kind of unholy alliance somewhat opposed to such ideas of regulation and standardisation. Surely, some might have mused, Independence would mean just the opposite: a free operation of the market, de-regulation and an escape from colonial-style central control. In the early days the old Chamber of Brokers convened, informally in a little room, for quietly facilitating the buying and selling of private shares in local family companies. Rather different today; but did reforms come about in a seamless way, an inescapable progression in our unfolding destiny? Indeed no; and many here can offer evidence of the immense efforts expended in achieving the difficult transition from the third to the first world – or at least the doors of the first world, for we are certainly not there yet. Reform requires first inspiration, then perspiration, with determination and courage aplenty to overcome the innumerable setbacks and the disappointments on the way! James Meade’s seminal report was a shock from which we have mercifully recovered, more than once! But I suspect it was always intended to be a wake-up call, not a requiem. In his summary section, he declared: “Continuous and self-sustaining improvement in production and in the real standards of living can be achieved in Mauritius only if over the next five years or so there is a relentless effort to introduce all those economic reforms which are essential to set this process of economic growth to work. “ If there is a secret to the continual forward impulsion of the country it is set in the foundations of the state itself and the capacity of its leaders and the sturdy fortitude of people of our country to want something better for their country and for their children. We have now so much we owe to the aspirations of our parents and the strength of our family life! In one of the formative policy documents which set the scene for Independence, Sessional Paper No.9 of 1966 8 , we find the following context for our work: “Ministers of Finance have their ears to the political ground; A Central Bank should concern itself with the economic facts of life and above all should be “in” and “of” the financial and business community.” Tellingly, this paper refers to the Central Bank as the “Government’s Bank” and the “Bankers’ Bank”. That was a key formula for the times, defining the role of the new Bank-to-be in providing advice to Government and to business on domestic monetary and economic matters. Parliamentary Paper in Mauritius. I am the sixth Governor of the Bank of Mauritius. It is a great honour to follow the lead of those five men before me. The life of a Governor in this part of the world for those who are statistically-oriented is about 8 years, but with a large deviation, from the shortest 2 years to the longest 14 years. Sir John Shaw Rennie 9 , Governor of Mauritius, at the inauguration of the Bank, and addressing its Governor, remarked that his wife had drawn his attention to a dictionary definition of governor: “an automatic attachment to an engine for controlling the speed, usually by regulating the supply of working fluid.” Happily not a phrase appearing on my job description! The first Governor Mr Aunauth Beejadhur 10 , having just opened the shop for business on 14 August 1967, responding to the immediate challenges on his desk, had this to say at the official opening three weeks later: “We intend to proceed cautiously…The Bank would not have seen the light of day if it were not for the imagination, the sagacity and drive of the Premier and Minister of Finance. He has untiringly brought one more financial institution into being and continues to watch over its fortunes, with undiminished interest… “ But the first Governor was a man in a hurry. For he proceeded in short shrift to take over the Exchange Control Department on Friday 1st September, and on Monday 4th September, to issue bank notes, in the name of the new Bank, sent under close security by our good friends at De La Rue. I salute the presence of the CEO of De La Rue, Mr Quinn, at our commemoration dinner tonight. The actual origins of the idea of the Bank were disclosed in the Second reading of the Bank of Mauritius Bill, no. 33 of 1966, on the 5th July that year, when the Premier mentioned that he had been thinking of a central bank since the 1940’s, citing the then leader of the Opposition, Jules Koenig, in support of his claim. If we are commemorating the birth of the Bank in 1967, we should I suppose cherish the thought that the first twinkle in the eye of the father of the nation, the creative urge, was some twenty years earlier. Some gestation! Our debt to our founding fathers is truly immense. At its birth the Bank inherited a fixed link with the pound, at Rs 13.40!, Now there is some nostalgia for you! I have been reminded of one of the early tests for the Bank, by a good friend 11 , a scrupulous analyst and commentator on financial affairs of state, with his store of memories from a vantage point very close to the centre. The courage of the Bank was immediately tested in its capacity for taking an independent line in September 1967, when the pound sterling was devalued. After some consultation with expert opinion and in concert with the then internal adviser seconded from the Bank of England, who was also the Managing Director of the Bank of Mauritius, Mr. Donald George Herbert Cook 12 , it is reported, the consensus was that the rupee should follow the pound sterling. The Bank presented documentation to the Premier Sir John Shaw Rennie, (1917-1981), was Governor-General of Mauritius from March 12 to September 3, 1968. Previously, he was the British Resident in what is now known as Vanuatu from 1955 to 1962, and the governor of Mauritius from 1962 to 1968, when Mauritius gained independence and Rennie served his brief term as Governor-General. Mr Aunauth Beejadhur, first Governor of the Bank of Mauritius from July 1967 to December 1972. Philippe Hein, who was then serving as the first Mauritian Executive Director of the Mauritius Employers Federation from 1968 to 1974. Mr Donald George Herbert Cook, first Managing Director of the Bank of Mauritius, from July 1967 to June 1968. and Minister of Finance to devalue the rupee in line with the pound sterling. Un moment critique! To say there was hesitation by the Premier, is to lightly paraphrase my informant’s account! I understand an official communiqué some days later, presented the remarkable paradox to the faithful people, in language worthy of Sir Seewoosagur Ramgoolam: “The rupee is not being devalued; the Government has decided to maintain its relationship with the pound!”. With a heavy reliance on sterling trade, this was one way to resolve the dilemma and preserve the independence of the Bank, even if it stretched the meaning of the English used to its very limits. Tonight, however, is not the time or the occasion for me to try to trace the blow-by-blow history of the crises met and resolved by my predecessors and their gallant teams. In the course of this year we are to prepare a series of events and publications which will more thoroughly explore that history, the dilemmas, the decisions and the people involved. It is a fascinating story, which culminates with us tonight being able to commemorate forty sturdy years of this Bank in its fearless service of the country. But I cannot let the opportunity go without making some mention of the pathway we have travelled, some passing reflections on the bases of policy development and a few of the principal “dramatis personae”. So I am glad to say that we have with us tonight a wondrous clutch of previous Governors, Board members, leading lights from the commercial banking sector, the chambers of commerce and government, and distinguished actors from the wider world of economics and finance, many of whom together have contributed to the undoubted success of the venture embarked upon 40 years ago, plus others here who will continue to guide our future. I am especially pleased that we are honoured by the company of two of our former Governors of the Bank: • Sir Indurduth Ramphul, appointed Governor – in 1982 and who continued until 1996, and • Mr Mitrajeet Dhaneshwar Maraye, appointed Governor in 1996 who continued until 1998. In a different capacity, I was instrumental in ensuring a smooth transition between the two of them. I very much regret that my immediate predecessor • Mr Rameswurlall Basant Roi, appointed Governor in 1998 and serving until 2006, was not able to be present with us tonight. I am very pleased that, marking the history of the Bank, we have with us tonight the son of our first Governor Mr. Beejadhur, and the young nephew of the second Governor Mr Bunwaree 13 , who is also here in his capacity as a former Minister of Finance. May I say I am delighted that Lady Ringadoo the widow of our first Minister of Finance on Independence 14 is with us tonight. The other former Ministers of Finance who are sadly unable to be present here tonight are Mr Paul Berenger 15 , Mr Vishnu Lutchmeernaraidoo 16 and Mr Pravind Jugnauth 17 who have sent their good wishes for this historic occasion. Goorpersad Bunwaree, Former Financial Secretary before becoming Managing Director of the Bank of Mauritius, from 1969 to 1973 when he became Governor. Sir Veerasamy Ringadoo, GCMG (1920–2000), was Minister of Finance from 1968 to 1982. He was Governor-General of Mauritius from January 1986 to March 12, 1992, when Mauritius became a Republic. Ringadoo then served as acting President of Mauritius until late in 1992. Paul Raymond Bérenger, (1945- ) is a Mauritian politician and former Prime Minister of Mauritius from 2003 to 2005. He was Minister of Finance from July 1982 to March 1983. Finally, I want to say, how glad I was to know that Mr Leo Quinn CEO of De La Rue plc has been able to make the long journey from the UK, to represent our banknote and security printers, as we were amongst their first colonial clients. I wanted also to refer to certain milestones along the pathway we have travelled together, which have helped to consolidate the role of the Central Bank, as an indispensable institution of governance in a modern democratic state. In talking with people, however, about the history of the Bank, it is evident that there are many quite different perspectives, making a kaleidoscope of impressions of the journey made in the passage of time. Some see the story in terms of the issue of new currency; the banknotes and the coins with the images of monarchs and presidents and the great and the good. Some consider the milestones are the laws which have prescribed the duties and powers of the Bank, one account even citing the legendary UK Bills of Exchange Act of 1882, the model on which subsequent legislation for Mauritius was built, followed by the Banking Ordinances of colonial times and then the Banking and Companies Acts of the Parliament of Mauritius. Others see the story in terms of the changing structure of the Bank to respond to the need for implementing those laws and providing the operational mechanisms increasingly adapted to the needs of modern banking. They cite for example the coming of Departments for Research and for Information Technology, which strengthen our back-office capacities and with the Administration Department itself, serve the needs of the continually-developing frontline Departmental functions of the Bank; the Departments concerned with Financial markets, with Accounting and Budgeting, with Banking and Currency and with the Supervision of financial institutions. Other people, when you ask them about the significant events in the life of the Bank, will talk of appointments, disappointments, personal careers, departures, marriages, deaths, fires, even a strike; these are the sagas of the internal and personal life of the people here who make the Bank a working living organism at the service of the State and the people. Beyond the internal workings of the Bank itself there are other perspectives too, those of the wider Banking and commercial community in Mauritius, our investors and creditors, the global banking community, the Governments who have accorded us our role and last but not least the citizens of this country on whose trust we depend. In mapping the history of the Bank over the coming months we shall try to bring together these strands in the real life story of this complex Institution, warts and all. At the silver anniversary of 25 years of the Central Bank in 1992, the then Prime Minister, now President 18 , had this to say about the place of the Bank in Mauritian society; the Bank is, he said, “a centre of moral authority, an authority capable of expressing constructive criticisms in moments of exaggerated optimism or exaggerated pessimism. To succeed in this mission the Bank required from the outset public friendship and support and public confidence” Indeed, as we well know, trust and confidence are the primordial qualities for a central bank: Vishnu Lutchmeenaraidoo, Deputy Prime Minister, Minister of Finance from 1983 to 1991. Pravind Jugnauth, Deputy Prime Minister and Minister of Finance from 2003 to 2005. Sir Anerood Jugnauth, KCMG, QC (1930 - ) is now President of the Republic. He served as Prime Minister from 1982 to 1995, and again from 2000 to 2003. Sir Anerood Jugnauth is credited with the paternity of Mauritius’ "economic miracle" of the 1980’s – a set of liberal policies such as the creation of a duty-free trade zone and establishing Mauritius as a leader in textiles production – which allowed the island to develop into an economic powerhouse in the region. “Who steals my purse steals trash; ’tis something, nothing… but he that filches from me my good name, Robs me of that which not enriches him, And makes me poor indeed” As in Shakespeare’s Othello with this delineation of the political values in the 16th century Venetian court, so in Banking today name, trust and reputation are all. The reputation of any Bank takes years to build and can be lost in moments. That good name of this Bank, and of banking in Mauritius in general for that matter, has been bought by the diligent toil of so many here in Banking past and present. Over the next year as we set down the history of the Bank of Mauritius, chapter by chapter, we shall be also capturing something of the social dimension to show the character of the changing times and the pattern of working of our dedicated staff. In opening this chapter recently I have been reminded of some of the social elements of those early days and I hope that many of you here will help in the coming months to paint in these aspects of the picture with anecdotes from times past. For example, we have been reminded by the longest-serving members of staff, of the initial days when there was not one building for the Bank of Mauritius as now; the staff were scattered in as many as five different locations. In 1967 there were no computers, no electric accounting machines, no electric calculators nor even electric typewriters. All was largely done by hand, mostly in pen and ink. Many of the junior staff were recruited straight from school but had to sit for an exam including a précis and questions to be answered on the scope and content of the 1966 Banking Ordinance, before they would be taken on. Hours of work were generally 9-4 but on Thursdays and Saturdays they were 9-12. Long gone are those days of Saturday banking. Trousers for women were banned; no married women were recruited to any Bank in Mauritius and when a girl on the staff announced her marriage, she was forced to resign. This rule was only revoked in 1974 after continued protests, and by a special edict from the Prime Minister’s Office; but women who came back had either to repay the compensation they had received on their early departure, or lose seniority. That was a different world that we must document before the passage of time buries these secrets of the past from our collective memory. If I refrain from elaborating on the history now, let me make two points about monetary policy and investment. Economists are commonly expected to have a position on macroeconomic matters derived from theory covering monetary policy and practice as a basis for shaping advice on decision-making. These theoretical principles may derive from the 18th century classical economics of the Free Market, the neo-classical developments of the late 19th century Alfred Marshall 19 , from John Maynard Keynes’ postulates for promoting fullemployment in the post-Depression era, the post-Keynes developments by Nicholas Kaldor 20 and his colleagues, to respond to the challenges of wage inflation, from the modernist positions of Milton Friedman 21 to control money supply, and from even the post-modernist evidence-based approaches of Jeffrey Sachs 22 . It was Sachs, one of today’s “big shots” in Alfred Marshall, (1842-1924), British economist, noted for his 1890 publication “Principles of Economics”. Nicholas Kaldor, (1908-1986), British economist. His works on macro-economics had a major impact on the application of economic theory to government policies of western countries. Milton Friedman, (1912-2006), Nobel Prize winner in Economics, noted for advocating the free market system and monetarism. Jeffrey Sachs, (1954- ), Director of the Earth Institute and Professor of Sustainable Development at Colombia University, USA. macro-economics, who at a stroke put the brakes on hyperinflation in Bolivia in the 1980’s. Each of these iconic scholars represents schools of thought which to the outsider have something of the appearance of coteries or clubs of isolated sects. Now on such matters of economics schools, clubs and theories I tend to keep an open mind, without going to the extreme position of my friend Marx… Groucho 23 of course! He once famously declared: “Any club that would have me as a member… I would not want to join!” You see monetary theory has been growing wildly for years and I guess is just about approaching its infancy, that is as an evidence-based arena of positive economics. On an occasion such as this, I am sure you would not want me to further explore the intricacies of this very complex subject. Yet as we celebrate all those medals gained in the Jeux des Iles 24 , although as a central banker I have to say unhappily rather more in bronze than gold, as we enjoy the opening of the new Season of the Premier League, and as we come fresh from the third meeting of the Monetary Policy Committee, I cannot resist offering a sporting metaphor, as a vehicle for my take on Monetary Theory and its application to national economic policy. In doing this I would like borrow from the “Maradona theory of interest rates” as enunciated by an elder in the metier, our colleague from the Bank of England, Governor Mervyn King, in his Mais lecture in 2005. It is a football metaphor, that beautiful game for gentlemen commonly played by ruffians! The Maradona Theory of interest rates is, I believe, a really innovative and apt contribution to the bulging portfolio of macroeconomic theory. The Maradona theory is named after the famed Argentinian footballer Diego Maradona – and was there a greater ruffian than he in the annals of that beautiful game? If I may be allowed to elaborate just a little, this theory encompasses, iteratively both a classical free-market approach to theory and a postmodernist line. The field-work setting is the World Cup in Mexico in 1986 when, you may well recall, the Argentinians swept a strong England team out of the world competition when Maradona notoriously scored two remarkable goals. The first goal aptly illustrates the Adam Smith 25 principles of the free unregulated market and the operation of the “invisible hand”, or as the great Diego subsequently called it, “the hand of God”. The second goal, Mervyn King declares, admirably illustrates the power of expectations in the modern theory of interest rates. As with the Manchester United Portuguese star, Ronaldo of the modern game, when his legs are crisscrossing to deceive the tackler, the ball itself continues rolling straight on with its initial forward propulsion. The five defenders, confronting the Argentinian star in 1986, fell in turn to one side or the other expecting a corresponding feint. Maradona ran some 60 yards from inside his own half, beating the whole defence and then the goal keeper, keeping in virtually a straight line. This, King declares, illustrates the misguided power of expectations: the conflict between appearance and reality. Monetary policy, says King, works in a similar way: market interest rates react to what the Central Bank is expected to do. Thus, no simple rule must be applied if the object is inflation Groucho Marx, Famous American film comedian in the 1930’s. Jeux des Iles: Regional sports competition involving Indian Ocean islands. The competition is held every four years. Adam Smith, (1723-1790), noted as father of classical economics through his 1776 hugely-influential “An inquiry into the nature and causes of the Wealth of Nations”. targeting and the stability of the markets. The precise rule that Central Banks follow is less important than their ability to condition expectations. But once the cat was out of the bag, neither classical nor post-modernist theory could help even Maradona to score again in the match. So monetary policy must be embedded in a continuous process of learning; or what Jeffrey Sachs refers to as “the process of clinical economics”, an evidence-based iterative process of the continuing testing of fresh hypotheses. In the short run monetary policy, wisely attuned, does affect output and employment and so has the potential to be an effective stabilisation tool. Inflation targeting requires two elements, a medium-term target and a short-term response to economic shocks. King calls this “a framework of constrained discretion”. Together with the Minister of Finance, the members of the Monetary Policy Committee, and the research staff at the Bank, we are now getting these elements more firmly in place. The second big point I want to make, if I may crave your further indulgence, is on the urgency of the promotion of savings in line with the new economic framework of the Government. Without wishing to upset the apple-cart with my commercial banking colleagues, we must extract ourselves from what have been referred to as the “disasters of a culture of wild speculation and debt delinquency” that are eroding economies of the world. Whilst the Polonius 26 financial policy “never a borrower nor a lender be” was never good news for banking, we must be concerned when these days it seems easier to spend on credit than to save; I’m told you can even borrow money from one credit card company to pay off a loan from another! In the past weeks there has been a spectre hanging over the banking world emerging from the sub-prime market in housing loans in the US and ricocheting off most other components of the complex market in credit. For every loan there has to be a clear reciprocal relationship between debtors and creditors. Here in Mauritius we can see in microcosm the problems of the failure of this relationship emerging in the sale-by-levy traumas and the new processes of regulation and family support that have been so rapidly put in place by the Government to help the poor debtors subjected to such foreclosures. Ultimately there are of course no free lunches and no free loans; people must be persuaded that in the end, if you borrow, you have to pay it back and the sooner the cheaper. It is certainly a concern if we are to drift on the Moody’s scale of reliable debtors. One of our tasks ahead is no less than to change the culture and the forms of access to services. Just as the Government and even our Civil Service are trying to become more and more people-oriented, so this Central Bank needs to achieve that transition from being The Bank of Mauritius to being the Bank for Mauritians; the Bank of the People. We must make the sound financial choices for every family, the easy choices. We must also re-orient our communications accordingly. If we want to penetrate a new market, we must adopt a marketing strategy to compete with the other goods and services ordinary people buy. We will need a new language for getting the message across. As has been said in a recent IMF seminar on finding this new market, the people out there have a different set of priorities in terms of the trends and the shape of the economy and their options for saving or spending: Polonius, Courtier in Shakespeare’s play Hamlet offering advice to his son before the latter leaves for England. “They don’t care about the shape of the Phillips curve, but they do want to know if their mortgage payments are going up”. We may even have to start giving away pens rather than chaining them up at the counter. We must also beware of viewing the world of banking just as a bunch of accountants and economists, of whom George Bernard Shaw said: “they know the price of everything but the value of nothing!” For in Mauritius, in these forty years that we celebrate today, we have come to treasure not just the Treasury Bills, but also the non-traded assets of these islands. Trust, probity, friendship, truth and beauty. Let us cherish these values above all in the years ahead; the natural and human assets of our homeland. So what is the agenda for the next forty years. Who can say? It is tough to make predictions, especially about the future! Much experience in forecasting suggests that its principal function is better to illuminate the known unknowns. As we establish more elaborate computer-based models for our planning we should perhaps test-run them through the 1967 data when we opened for business and see how far they would reveal the shape of things now. Something for our research team to use as the litmus test for any new mathematical modelling kit! In recent years, the world of finance has encountered what Taleb from the US, a professor of the science of uncertainty, denotes as the “Black Swans” of economic life, the unexpected eruptions which sharply deviate from the smooth transitions of the Gaussian bell-shaped curve. We must be ready for the unexpected and nurture a capacity for resilience to withstand the future shocks and crises. IBM forty years ago was predicting little future for the PC, entrenched as they were in mainframe systems; when “Big Blue” failed, Bill Gates was the beneficiary. In the US they used to consider the profession of accounting straight, if rather boring, and company accounts a fair presentation of the financial state of affairs. That is all being swept aside in the light of unexpected events, with the new tighter company regulatory systems; adieu Arthur Anderson and the rest. That is the Black Swan bad news; but a fairer wind blows: now Goldman Sachs is telling us that socially-responsible companies are out-performing the global stock index by a stunning 25%. Those companies, that have more concern for their ecological footprint, get a larger payoff and are increasingly attractive to investors. We should anticipate that here and, indeed, promote it to be ahead of the game. Despite the future uncertainties, to say nothing of the uncertainties of Futures, we are reshaping things here at the Bank, by what might be called a little light re-engineering. Supported by its own dedicated research unit, the new Monetary Policy Committee is now in place. The outcome of its third meeting was announced this week. In the last fifteen years, inflation targeting has taken the central banking world by storm and through this MPC vehicle we are hoping to get on top of this elusive matter. Let me also mention some of the other steps we are already taking to change the face of the Central Bank whilst preserving its essential role. We recognise that in these small islands, banks should take more of a role in community-leadership and in conserving the natural capital of our country and its heritage. So, working hand in hand with our colleagues in the banking and finance community in promoting these principles, we are developing a new ecofriendly theme to extend the idea of garden cities and the eco touch into the capital, the major towns and various districts. We are planning to entrench our presence in the island of Rodrigues. Islamic banking is coming, and other financial facilities are on the agenda too, with guidelines still awaiting to be developed in many of these areas. We are bringing in more outside talent to promote an R&D theme in our work to assist our drive to adapt international best practice to our changing needs. Whilst combating inflation is in sharp focus as it should be, we see that as just one element in the primary functions of the Bank to maintain price stability and to promote orderly and balanced economic development. That can only be done with closer links with the world of employers, trade unions, and other economic operators through their respective chambers and associations. We are also establishing a process of continuing education and development for professional staff, aided by commercial banks. Consultants from another central bank are reviewing our organisational structure and practices. High on our immediate priorities is completing the implementation of Basel II with its risksensitive components in our supervision of banks. But we are also aware that our regulatory function needs to be increasingly extended to the wider range of financial dealers. Forty years ago there were just five banks and very few others in the formal business of money transactions; now we have 18 Banks, 13 non-bank financial institutions with deposittaking transactions, 3 registered bureaux de change, and 5 registered foreign exchange dealers. That makes some 40 in all; an eight-fold increase in forty years! This is a sign of the expanding economy but at the same time it translates into an increasing challenge for our key function in keeping the system reliable and clean. In the speech of the then Minister of Finance, Mr Rama Sithanen, at the 25th anniversary of this Bank, he wisely observed that throughout history we see that: “evolution depends on small currents as well as great tides…the ability to sense a trend, the will to act on understanding and intuition.” Amid the flux of the future life of the Bank, we must do several things: ensuring continuity, probity, and above all adaptability; securing a stable state within a changing world; making investment more accessible; bank-rolling effective innovation; and playing our part on the regional and global stage. We must be willing to learn, though we do not always like being taught! As we are opening our doors to over-the-counter sales of Government and Bank instruments to the general public, so we are opening our ears to the best practice and best advice from beyond our walls. We are committed to playing a lead role beyond our shores in regional and global banking. The African Union has set the future targets to which we are signed up: this agenda includes an African Central Bank; an African Monetary Fund, and an African Development Finance Institution. It is of course no state secret that our friends in De La Rue have yet to be asked to tender for printing the new Afro, which must remain for some time to come more an ethnic hairstyle than a unit of regional currency. You might ponder on the fact that from Jean Monnet to Jean Claude Trichet – that is from the concept of European money to the final trick of issuing the new notes for Europe – took over 50 years. I think we could do better than that! My vision of the future includes a wider role for us in promoting greater transparency in Banking, better communication with the public and the banking sector, and greater consumer protection. At the heart of transparency and consumer protection are education and effective communication not just with the banking community but with the country at large. That is a vital task for all banks in a modern world and especially for the Bank of Mauritius in setting the tone and style for sustainable development. We are now becoming the institution that Sir Seewoosagur Ramgoolam called for in that 1966 debate I referred to earlier, one worthy of developed countries, along with the Development Bank and the Economic Planning Unit. In 2004, the International Development Research Centre (IDRC) reflected on the success of the development of Mauritius and its banking and financial sector. It did not see the story as one of seamless progress. Where Meade had presented the haunting vision of catastrophe ahead in the 1960’s, the IDRC paper highlighted the downside, for example in the 1980’s, and listed the challenges ahead. The IDRC underlined the severe economic setbacks of 25 years ago, soaring unemployment, rapid inflation, acute foreign exchange shortages, low reserves, public sector finance in a shambles, low investments, increasing debt and the rest of it. But by 1988, with the success of the EPZ sector, more favourable terms of trade and falling oil prices, those dark clouds had dissipated and near full-employment was reached. The relative success of Mauritius which is evident in a regional perspective, was not dependent on a single factor or a formula that could be replicated elsewhere. Key elements included the following: political stability – Mauritius is not considered a high risk country politically – strong chambers of agriculture and commerce, an educated population, a probusiness government, fresh COMESA preferential trade (with many opportunities yet to be exploited) for niche markets, the unfolding of the policies of the regional hub, delocalisation of production, and more investment in other countries in the region such as Madagascar, Mozambique, Lesotho, Cote d’Ivoire by then being exploited. The IDRC recipe for continued success requires sound macro-economic management to sustain international competitiveness, bringing unemployment down to 2% without jeopardising inflation, reducing public sector expenditure to 22% of GDP, bringing more banks into the financial sector to promote competition, a foreign-exchange management monitoring committee, greater productivity and competitiveness, co-ordinated mechanisms for promoting investment, R&D, low and uniform level of protection, and more effective negotiations at the WTO. We give thanks for the lives of those who over the last forty years have given their services to this Bank; the foundations on which a great Bank is built. In the Jeux des Isles one of the concluding events is the relay where the athletes complete their run and then pass the baton to the next and so on towards the winning line. At this anniversary event we take on that baton passed to us from the former Governors here, Board members and staff, with the determination to compete in the future to match and outmatch their performance, adapting our stride to the new course as it unfolds. In keeping with the occasion we are presenting to the President and to the Prime Minister a newly-carved large wooden Dodo. This bird is the traditional icon of the Bank of Mauritius. In the English language, our bird has achieved an unenviable notoriety representing, as it does, the grim finality of species extinction. We are taking the liberty of also placing a replica of this carving in the new entrance hall of the brand-new Bank of Mauritius Tower, as a continuing reminder to all of us who work here of the fate that becomes a species that fails to adapt to its ever-changing environment and the threat from new predators! Once again, thank you for honouring us with your presence tonight. Enjoy your dinner. And thank you for your attention. | bank of mauritius | 2,007 | 9 |
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Session on Trade Finance at the FICC-IBA Conference on "Global Banking: Paradigm Shift", Mumbai, 13 September 2007. | Yandraduth Googoolye: Trade finance in a global economy Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Session on Trade Finance at the FICC-IBA Conference on “Global Banking: Paradigm Shift”, Mumbai, 13 September 2007. * * * Ladies and Gentlemen Good afternoon It gives me great pleasure to be in Mumbai for the conference on “Global Banking: Paradigm Shift” jointly organized by the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Indian Banks Association (IBA). I am also very pleased to chair this session on Trade Finance this afternoon at Hilton Towers. I wish to extend my appreciation to the FICCI and IBA for hosting this Conference. I also extend a warm welcome to the distinguished speakers and to all delegates from South Asia, Middle East and Africa. Before getting into the crux of the subject, may I mention that we are meeting at a very auspicious moment as the people of this state and the Hindu community at large are celebrating Ganesh Chaturthi. May Lord Ganesh bless us all! Trade finance is a very specialized area requiring a thorough understanding of the mechanics and the linkages among the various participants, and a good grasp of the risks involved in trade finance. In the global economy, trade finance is gaining momentum. Participants, particularly banks, are rethinking the way global transactions are currently being done. Finance and trade are linked in a number of ways that are not always obvious. Both are important engines of growth in today’s economies and the expansion of their share in output shows their growing importance. Indeed trade finance has been a core business for banks for decades. Traditionally, banks have offered to the trading community products that include among others Letters of credits, Factoring, Early Pay or Dynamic Discounting and Asset Based Lending. Document-intensive letters of credit have indeed proved to be instrumental in the development of international trade finance but it must be recognized that there are a number of problems associated with traditional trade finance, for example the limited connectivity among buyer, supplier and financial institution; limited controls for the supplier and most importantly, the uncertainty of payment. The traditional way of doing business can sometimes prove to be administratively cumbersome and inefficient and the costs involved are high. Moreover, there are a number of risks associated with trade finance that, if not properly managed, can prove to be fatal for the different stakeholders. In a global economy, efficiency is the order of the day. Players in the international trading arena – banks, suppliers, buyers and shippers are all striving to make the processes easier, faster and cheaper. This is where the physical supply chain and the financial supply chain have come together. This “marriage” is resulting in a shift from a SINGLE PRODUCT solution to a SUPPLY CHAIN finance solution. Increasingly, banks, buyers, sellers, insurance companies and logistics companies are joining hands to find solutions. On the one hand, banks are setting up operation centres to centralise Letters of Credit, Document Collection, Letters of Guarantee etc with a view to enhancing efficiency and professionalism, and reduce costs and operation risks. They are more and more offering non-traditional services which may include sophisticated imaging technology that can assist with dispute and discrepancy management coupled with data storage, insurance products, document preparation services, cash flow modeling etc. On the other hand, the logistics companies are providing banks with two key elements – firstly the warehousing and transportation of the goods and secondly the visibility into the movement of those goods. This increased visibility into the supply chain encourages banks to extend credit to trading partners instead of issuing letters of credit. The “marriage” of the physical and financial supply chain processes therefore injects additional and more cost-effective liquidity into the system. At the base of this shift from SINGLE PRODUCT solution to SUPPLY CHAIN finance solution are advance in connectivity – the internet, new IT technology and applications and efficient capital markets. For instance, readily accessible information improves the ability to see where the goods are in the supply chain. If you send goods to Europe, you can log on to DHL and track exactly where the goods are. In the same vein, banks which are extending lines of credit against inventory or deciding when to make payments to sellers on behalf of buyers need to know the whereabouts and the integrity of individual units rather than simply knowing where the large shipments are in transport. It is clear that banks not only provide finance but need to understand the entire supply chain to give value added to their customers. In the process, there can only be a win-win situation for banks and the other stakeholders. I believe that collaboration brings benefits to all participants. Buyers are able to negotiate better terms and conditions with the suppliers. Suppliers may have cheaper access to capital and reduced costs. Funds providers may benefit from higher return on corporate risk than on other products, they may have cross sell and increased lending opportunities. The collaboration may also result in reduced risk for the country and the supplier. However, the financial supply chain needs to be properly managed. There are numerous challenges in embracing financial supply chain management. Invoices and inventory need to be reconciled in a timely manner. If shipping information and payment information cannot be combined, payments can be delayed that may result in increased costs. Managing foreign exchange risk and cash flow liquidity risks may become a challenge. Contrary to banks, the non-bank organizations participating in the financial supply chain may not have systems and processes in place to manage credit risk and operational risk. There may be issues like the legal enforceability of the collateral documents. As I see it, the way forward to manage the financial supply chain is to fully embrace the use of technology. However, one must keep in mind that systems alone cannot solve all problems. It is people who need to first understand their environment in depth and come up with the necessary solutions for an optimal global chain finance efficiency. Mauritius is an open economy dependent on trade. Our geographical location may serve as a linkage between Asia and Africa. The new opportunities arising in financial supply chain management are relatively unexplored by our banks. I am confident that the representatives of our commercial banks here today will benefit a lot from the expertise and experience of the other bankers who have started providing financial supply chain solutions. May I conclude by saying that the future of trade finance is very much dependent upon the collaboration of all stakeholders – the buyer, the seller, the financial institution and the logistics and insurance companies. However, from a regulator’s perspective, there are issues that need to be addressed such as the development of common standards and rules, the long-term implications for the financial system of the partnership between banks and nonbanks, and the proper management of the legal risks involved. I now invite the distinguished experts in the field to enlighten us on the prospects and challenges facing trade finance. I am sure that the ensuing discussions on the matter would prove be very constructive. Introducing the speakers 1. Mr J Chandrasekaran Mr Chandrasekaran is the Chief General Manager, State Bank of India…… 2. Mr Asif Raza Mr Asif Raza is head of Asia Pacific trade & logistics Management for JPMorgan Treasury Services and based in Singapore. In this capacity, Asif is responsible for origination, structuring, product management, insurance, distribution activities and continue business growth in Asia-Pacific. He leads a team of trade professionals specialized in trade relationship management, risk mitigation strategies, logistic management, structured trade, new trade services and emerging payment channel instruments to provide integrated solutions to financial institutions and corporate clients. Prior to his current role, Asif was head of Trade Sales for Europe, Middle East and Africa as well as for the firm’s global network trade business. He also worked at JPMorgan New York for 7 years and managed various trade teams. Asif is a regular speaker of trade industry conferences and has written articles on trade & logistics Management. He is also member of Asian Advisory Council of Bankers’ Association for Finance and Trade. 3. Mr Subin Subaiah Mr Subin Subaiah is a Senior Vice President of Bank of America, heading their Global Treasury Services business across the Financial Institutions client space in Asia. Prior to joining Bank of America in June 2005, Mr Subaiah spent 6 years with Deutsche Bank, Singapore where he held the position of Managing Director in charge of FI Relationship Management and had business line responsibilities for Deutsche’s cash and trade business in South/South East Asia and Australia. Mr Subaiah spent his first twenty years in banking with Bankers Trust Company holding a variety of senior positions in India, Hong Kong and Singapore in their transaction banking and investment banking businesses, covering clients across Asia. Thank you. | bank of mauritius | 2,007 | 10 |
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Special Banking Committee on the implementation of Basel II in Mauritius, Port Louis, 21 September 2007. | Yandraduth Googoolye: Implementation of Basel II in Mauritius Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Special Banking Committee on the implementation of Basel II in Mauritius, Port Louis, 21 September 2007. * * * Chairman Chairman of the Mauritius Bankers Association Chief Executive of the Mauritius Bankers Association Chief Executives of banks Representatives of banks Dear colleagues It gives me great pleasure to address you on the implementation of Basel II. As we all know, Basel II is a major challenge for small economies like ours. However, we must take pride in the fact that all our banks, regardless of their size, are committed to the implementation of Basel II. Right at the outset, the Bank of Mauritius has favoured a consultative approach to the implementation of Basel II. Since the setting up of the Main Committee, I must say that considerable work has been achieved. We take pride in the fact that we are having recourse to our in-house expertise and as we move forward we are creating synergies for nurturing our local jurisdiction. As you are well aware, the implementation of Basel II is a daunting and challenging task for all regulators the world over. It is also the case for Mauritius. Much progress has been made by our in-house staff and the representatives of banks, at the level of the working groups. Despite uncertainties at some stage, we are confident that the project has regained momentum and that we will reach the March 2008 target for the parallel run. The Bank has set up a new Basel II Unit, the members of which are present here today. May I seize the opportunity to extend our appreciation to the dedicated representatives of banks that have relentlessly put in efforts to reach where we are today. We look forward to their ongoing collaboration. Basel II framework Today, I would like to briefly touch upon the evolution of the revised framework, its broad structure and the preparatory measures taken by the Bank for implementing this framework, and the challenges facing the industry in its migrating to Basel II. We must bear in mind that the Basel II framework allows for flexibility and we, at the Bank of Mauritius, will exercise our discretion to adapt the new framework to the specificities of our jurisdiction. The need to achieve greater financial inclusion and to provide an efficient credit delivery mechanism remains our overriding consideration. The Basel I Accord dates back to 1988 when the Basel Committee on Banking Supervision released a framework for capital adequacy. Mauritius adopted the framework in 1993 at a time where it was felt that the local jurisdiction should align itself to international standards of banking supervision. Our banks have since then maintained capital adequacy ratios higher than the 10 per cent minimum required. Over the years, the international banking sector has evolved, so has our local banking industry. It was observed at the presentations made by banks on their progress towards the implementation of Basel II that advances have been made in risk management, information systems, and banks’ internal processes. Our banking industry is on track. With its three pillars, Basel II provides a rigorous framework that ties the amount of capital that banks require to maintain with their specific risks, thus establishing an enterprise-wide risk management framework. Pillar I provides a range of approaches to calculate the capital charges for credit, market and operational risk. Pillar 2 requires banks to develop an Internal Capital Adequacy Assessment Process (ICAAP) that set capital targets that are commensurate with the banks’ risk profile and control environment. Pillar 3, Market Discipline, complements the minimum capital requirement and the supervisory review process. It aims at encouraging banks to disclose to market participants essential information. In other words banks are also monitored by the markets. State of readiness of our banks The presentations organized by the Bank of Mauritius turned out to be very fruitful exercise. I wish to thank the banks for their participation in this exercise. I have to mention here my regrets for not being able to attend the presentations made by the banks during the last two weeks. Nonetheless I have been duly briefed by my staff of the Basel Unit who were present, on progress made by individual banks with respect to the implementation of Basel II. A number of issues were raised that would need to be taken up at the level of the Main Committee and Working Groups. Some of them would be addressed today in the presentation to be made by the Basel Unit in the course of this Special Banking Committee meeting. It came out during the presentations that banks are striving to build up their capabilities to move to the new framework. We noted the contrast in approach between the international banks and the local banks. The former are getting full support from their head office while some local banks are having recourse to the service of consultants to upgrade their systems. Overall most banks, with the exception of one or two banks, will be able to meet the March 2008 target for the parallel run. It was also felt that individual banks had a number of issues specific to their banks that they would wish to discuss. It was reported to us during the presentations that banks were more willing to share their individual views with us, which enabled us to have a better understanding of real issues. We should pull our efforts together to get all banks on board. Accordingly, the Bank of Mauritius invites banks to solicit individual meetings during which those issues could be discussed. Challenges ahead Following the issue of the Guideline on Operational Risk Management and Capital Adequacy Determination, banks have made significant progress in the setting of an operational risk management framework. Some of them have been ambitious enough to set the stage for the transition to the more advanced approaches. The setting up of an operational risk database would be an important tool in this transition. However, there exists a number of issues that need to be addressed. I have in mind the GOLD database of the British Bankers Association which is operated by the banks in the UK. We could draw our inspiration from this concept in the building of our own operational loss database. We urge the Mauritius Bankers Association to examine this issue. Our concern as regulators is to have a stable financial system with well-capitalised banks that are stable and able to withstand periods of financial distress. The recent subprime loan crisis reminds us of the necessity to build up a financial system that is resilient to shocks. Risk-taking is the essence of banking. However, banks should manage their risks so as to preserve depositors’ interests. This crisis has triggered issues like the necessity to regulate rating agencies. The Basel Committee would have to review its approach towards the reliance on the external ratings of credit agencies. The focus would then be on the advanced approaches of the Basel II framework where banks would have o rely on their own internal models for the calculation of their capital requirements. In this context, the setting up of a centralized database for credit risk is more than ever on our agenda. However, a number of overarching issues need to be addressed at the level of the CEOs, which will be enumerated during the presentation to be made shortly. To conclude, I wish to comment on an issue, which is of interest to all of you. The Bank is sensitive to the representations made by banks to reduce the capital adequacy ratio. During the course of the supervisory review process, the Bank shall assess the capital adequacy ratio of banks taking due consideration to the risks and the capital requirements of banks. Any trade off in capital would have to be matched by better risk management systems. A policy decision for a reduction would have to be taken in consultation with the banking industry in the light of the ICAAP assessment. The new framework provides an incentive for better risk management. Banks should seize this opportunity. I now leave the floor to the Mr Chinniah, Assistant Director Supervision for a presentation. | bank of mauritius | 2,007 | 10 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Launch Ceremony of AfrAsia Bank Limited, Port Louis, 2 October 2007. | Rundheersing Bheenick: Banking in Mauritius – a central banker’s viewpoint Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Launch Ceremony of AfrAsia Bank Limited, Port Louis, 2 October 2007. This is the transcript of the impromptu remarks of the Governor. Footnotes have been added to provide context for some of the issues which would have been obvious to the original audience. * * * I am delighted to be here this evening in such distinguished company for several reasons. It is the first time that I, as Governor, have given a banking licence to a new operator. It is normal therefore that I should take some pride in the launching of its operations this evening. I am also delighted that AfrAsia Bank is the first of the three banks, which were granted a licence in principle just before I assumed office, to get going. I hope that the fact that it is first out of the stalls does not mean that the other two must tarry too long in the starting stalls and that they would soon be joining the race to give the other established 19 banks in Mauritius a good run for their money. And that is exactly what our consumers expect. We as regulator, together with my colleagues from the Financial Services Commission, can only take pride in the fact that there are more and more people who are knocking at our doors and asking for a licence to operate in our financial sector. It is a sign that our jurisdiction is respected locally and internationally. I arrived this afternoon, barely a few hours after the Chairman of this bank, after attending a meeting where I am happy to say that Mauritius had pride of place 1 . People showed great interest in setting up shop here and were asking questions about us. They believe that we have a serious team in government; they believe that we have people here who know what they are doing; they believe that the currency is stable and that this country has a bright future. And that, I think, is what banking is all about. In a country where there is no confidence there is no banking. Banking is built on trust. Banking is built on the future. Our colleagues from AfrAsia Bank have taken a very long time before they applied for a bank licence. They just told us that it's more than a century since Groupe Mon Loisir, the main promoters, have been in business here. So it makes me wonder why they took so long. After all, The Mauritius Commercial Bank has been here for more than one and a half centuries. But better late than never! Having started late, the promoters of the new bank that we are launching this evening have taken care to put all the potential for growth that they can get, all the possible source of competitiveness that they can find on their side. That's why they have searched far and wide from Australia, South Africa, Singapore, India and Canada 2 to get the best talents they can find to buttress their team to ensure that “Bank Different 3 ” is not just an empty slogan, that Standard Bank Emerging Financial Markets Conference 2007, Cape Town. Mauritius made headlines on the eve of this conference by ranking first in the Mo Ibrahim Index which rates governance in Africa. It made headlines again the very next day by ranking first in the Global African Competitiveness Index of the World Bank and the International Finance Corporation. The company has shareholders from Mauritius and South Africa; Board Directors from Mauritius, South Africa, Singapore and India. The Chief Executive Officer is Canadian and the software provider is Australian. This is the slogan unveiled by AfrAsia Bank at the launching ceremony. “Bank Different” actually means something that will be a win-win not only for the bank’s promoters but also for the consumers of banking and financial services here in Mauritius. So, I am delighted to be here for all these reasons. I am delighted because it means more competition. I am delighted because there will be more pressure on banks to revise their spreads to give still better value to all our economic operators in Mauritius. We want our island to be internationally competitive. That's the only way to us to survive. With scarce natural resources, and with only our brain power and skills going for us, we have to make sure that we are efficient. The Minister of Finance, I am sure, was delighted to hear about the excellent profit record of the banking community, which Mr Arnaud Lagesse, Chairman of AfrAsia Bank, has been talking about earlier on. This must be giving the Minister some ideas for his next budget! We have nothing against profits; we encourage banks to make profits and we hope that AfrAsia Bank will become very profitable, very quickly. Because if there is one thing that Central Bankers do not like, it is insolvent banks! Just ask Mr Mervyn King about what's happening right now in England and he will tell you that it is largely because one particular business model, followed by one particular operator – Northern Rock – which did not prove to be resilient to some shocks arising from some distant markets that he is having a such tough time. What I want to say, is that your business model is your business and the business of your directors, your Chief Executive and your shareholders. It's up to you to ensure that you are profitable. “Bank Different”, yes, but Bank Prudent as well. “Bank Prudent, Always!” is what I say. We, at the Central Bank, have put rules and guidelines in the interest of the wider jurisdiction. We have to protect the consumer, the borrower and the lender as well. We want to have an efficient financial sector that can be benchmarked internationally. We want a clean jurisdiction. We are too small a jurisdiction to be able to afford a crisis like Northern Rock. Banking is about risks. You must take risks but you must be aware of the risks that you are taking. The Central Bank may not know the risks, but you as bankers know your clients. We look at systemic risk but the risks of your bank, the threats to your business model, that's your business. We intend to allow the market to operate fully, whether it's the interbank market or the foreign exchange market. May, I draw your attention to the fact that we have not been intervening on the foreign exchange market lately inspite of pressures to do so. Our policy at the Bank is to intervene only if we are faced with excessive volatility. We cannot go against economic fundamentals. We are certainly not averse to market-supporting interventions. But we have no other specific targets to achieve. May I conclude my remarks with the hope that AfrAsia Bank will build on the competence of all its partners including Loita Capital Partners, whom we welcome to our shores and to our financial jurisdiction. I hope that it will build on the long and rich history of Groupe Mon Loisir, within this historic setting which served as head office for one of our old colonial trading houses. This building has a very special cachet and its own atmospherics and with it, AfrAsia Bank acquires an instant history! May it serve it well. I wish AfrAsia Bank the very best of success. Thank you for your attention. | bank of mauritius | 2,007 | 10 |
Address by Professor Rundheersing Bheenick, Governor of the Bank of Mauritius, at the University of Mauritius proposing the conferment of the degree of Doctor of Civil Law honoris causa upon Dr Y V Reddy, Gov. of the RB of India, Port Louis, 3 Dec 2007. | Rundheersing Bheenick: Honouring Dr Yaga Venugopal Reddy Address by Professor Rundheersing Bheenick, Governor of the Bank of Mauritius, at the University of Mauritius proposing the conferment of the degree of Doctor of Civil Law honoris causa upon Dr Yaga Venugopal Reddy, Governor of the Reserve Bank of India, Port Louis, 3 December 2007. * * * It is my honour to present to you, assembled here today, at the University of Mauritius, the distinguished and scholarly Dr Yaga Venugopal Reddy, academic at Universities in India and in the United Kingdom, and Governor of the Reserve Bank of India, for conferment of the degree of Doctor of Civil Law, honoris causa. The conferment of such a degree is a coveted distinction and brings Dr Reddy into the illustrious company of Dr Nelson Mandela, Dr Indira Gandhi and Dr I G Patel, on whom, in the recent past, this University has seen fit to bestow this honour. The occasion also confirms the importance that this University attaches to its International role in promoting the application of intellectual endeavours into the processes of human and economic development. The University was founded on the application of agricultural science to national development. Today in this conferment we see that process being extended into fields of applied economics and finance in keeping with the structural transition of this country further into the industrial, business and service sectors in keeping with the original vision of this institution as a “developmental” university. Dr Reddy has an outstanding international record in academic and financial affairs, principally in a nation thousands of miles from our island state. India is a country over 1,500 times the size of Mauritius, and with a population nearly 1,000 times as great, and I dare not try to compute how many times our small financial capital, expressed in Mauritian rupees, can be divided into the vast riches over which Dr Reddy has served as Governor of the Reserve Bank of India. Moreover, we must recognise that India is a nation whose civilisation stretches back to the dawn of history itself, some 5000 years before man set foot on little Ile Maurice. Despite these differences our two countries have much in common, as the first Prime Minister of India, Jawaharlal Nehru, recalled 60 years ago at that historic Independence day assembly in 1947: “We think of our brothers and sisters who have been cut off from us by political boundaries…they are with us and will remain of us whatever may happen and we shall be sharers in their… fortune.” Mauritius is a part of the great Indian Diaspora, with enduring links to the motherland, from which more than half our population are derived, and who continue to cherish many of the cultural and religious traditions, and I am told, even cricket here, is now seeing some reviving interest. Allow me to detail some of the most notable points in Dr Reddy’s life and work which commend him so strongly to us in this formal assembly today. His career in the past 43 years embraces service in India at state level in Andhra Pradesh and in national administration, finance, planning, monetary policy and public enterprise reforms. Since 2003, he has been Governor of the Reserve Bank of India and prior to this he was India’s Executive Director on the Board of the International Monetary Fund. He has been internationally honoured and noted as one of the key players in the restructuring and reform of the Indian economy in recent years, now so better placed on the world stage in terms of high growth and low inflation. Dr Reddy has been especially concerned to recognise the plight of the poor in India and to protect the stability of banking in the face of the global financial turbulence of recent times. For him banking and money, in a social democracy, are means to the end of securing social welfare, not ends in themselves. For Dr Reddy, a safe bank is a secure stronghold for sustainable development and its reliability must be continually tested against the changing pattern of risks. Dr Reddy is a well-travelled adviser and counsellor in the banking and finance sector world wide, working with the IMF on fiscal policies in China, Bahrain, Ethiopia and Tanzania. He also contributes significantly to the work of the Bank for International Settlements, the Bank for Central Banks, and in his regional role in ASEAN 1 1 and SAARC 2 2, which can serve for us as an important stimulus in our regional activities. Business Week, the US finance journal, this year placed him amongst the elite group of leaders helping to transform India into a 21st century power in Asia. It depicted him as: “the jovial governor walking that fine line between holding on to his integrity as the central banker and giving in to the pressures of a populist government. Reddy won!” Dr Reddy in addition to his distinguished banking career, at home and abroad, has maintained a strong commitment to academic activity, through published work, teaching and research. He has been visiting Professor in international relations at the London School of Economics, Visiting Professor in the Department of Business Management, at Osmania University and a visiting Faculty member at the Administrative Staff College of India. It is most fitting that in the 40th Anniversary year of the central Bank of Mauritius and the 60th Anniversary year of Independence in India, we have such as distinguished visitor who will be assisting us in the future in our regional development work at the Bank of Mauritius and for banking education for small and island states. We shall greatly benefit from his vast store of knowledge, experience and wisdom, applying the lessons from so great a country to one so small, but with so much in common in our joint heritage and personal links. [May I add, as an aside, that in just the last 24 hours, in meeting with Dr Reddy here, we have established a close accord, exchanging ideas and reviewing opportunities for the future. He has been inspired, I believe, by the range of our 40th anniversary activities, and we have learned of a fresh mechanism for policy review; he engages his Minister of Finance in dialogue, by inviting him to a meeting of the Board of the Reserve Bank of India after the annual Budget speech. I wonder if we might just try that here as an anniversary gift from a firm friend! A Bon Entendeur, Salut!] Mr Vice-Chancellor, it is now my very great pleasure, to present to you today, Dr. Yaga Vengopal Reddy, as a most worthy candidate for you to confer on him the degree of Doctor of Civil Law, honoris causa. The Association of Southeast Asian Nations The South Asian Association for Regional Cooperation | bank of mauritius | 2,007 | 12 |
Speech by Professor Rundheersing Bheenick, Governor of the Bank of Mauritius, at the dinner to mark the conclusion of the 40th Anniversary celebrations of the Bank of Mauritius, Port Louis, 6 December 2007. | Rundheersing Bheenick: Bank of Mauritius – 40th anniversary year highlights and outlook Speech by Professor Rundheersing Bheenick, Governor of the Bank of Mauritius, at the dinner to mark the conclusion of the 40th Anniversary celebrations of the Bank of Mauritius, Port Louis, 6 December 2007. * * * “Our revels now are ended…” The Vice-president and our guest of honour; former Vice-presidents; Former Deputy Prime Ministers; Ministers; Former Ministers; Excellencies members of the Diplomatic Corps; Honourable Governor of the Bank of Ghana Dr Paul Acquah, our special guest this evening; Members of the Board of the Bank of Mauritius, Chairman of the Mauritius Bankers’ Association; Chairman of the Joint Economic Council; Deputy Speaker; Honourable Members of Parliament; Mayors and Chairmen of District Councils, Members of the Press, Distinguished Ladies and Gentlemen: The first necessity for good speaking is a goodly audience: and I must say we certainly have that tonight! I am delighted that we have with us on this occasion our special guest Dr Paul Acquah Governor of the Bank of Ghana. We are here for the finale of the celebrations of the 40th anniversary year of the Bank of Mauritius. I should add our congratulations to the Mauritius Bankers’ Association, who are with us in strength tonight, also in their 40th year. At our opening banquet, we dwelt on the milestones we have passed since those heady days of Independence and the opening of this Bank, as part of the process of shedding the mantle of Colonial times. Tonight I will focus on the fresh developments of this 40th year itself, with just a glance into the crystal ball of years ahead. There are quite some tasks that confront us to secure a sure sustainability for banking into the future. We hover still in a shadow of the looming clouds, of recent months, from the global credit crisis unfolding from the US sub-prime debacle. Dr Reddy our good friend from the Reserve Bank of India has emphasised the uncertainties in the unstable state of banking. These are nothing less than a climate change for us. They are the inescapable shifting of the tectonic plates of global trade. We shall be seeing the west, and even the “green back” as a global currency, recede, and the Asian giants move in. For the present, let me say, 2007 has been not just a year of celebration, but a year of real progress and development in banking in this country. In reviewing this year of real progress, so far, I shall touch on: • The formal institutional developments, • The internal light re-engineering or restructuring, • Our new relationships with stakeholders, and • Some of the events in our pageant of 40th anniversary year celebrations. Institutional developments Allow me to list a few of the critical institutional reforms that have already changed the pattern of our work together. For the first time in our history, we have a Monetary Policy Committee, which, with its new independence, will ensure a more adaptive capacity for determining the best monetary interests for the country. We have had the Amendment to the Banking Act, which gives the MPC decisive powers. We have instituted a new departure in communications policy that ensures that, you know as much as we do, about both the decisions and the analysis. Yesterday, in our fifth meeting, we came to an historic decision on interest rates, by unanimous vote: BUSINESS AS USUAL; no change! For those new to these matters, I must confirm that it is not a requirement that the members of the MPC are signed up adherents to Monetarist theory. We have a more liberal perspective here; rather taking the view that Monetarism, like Marxism, has suffered the only fate for a theory worse than death; it was, for a time, put into practice. History teaches us that men and nations behave wisely once they have exhausted all other alternatives. What worries me, and I guess most other bankers, is that when great men get drunk with theory, it is the little men who wake up with the headache. We now have a new formal accord on our complementary functions with the Financial Services Commission the FSC. This will I believe set a new tone for harmonious cooperation between the several actors in promoting safe more efficient and stable leadership and management in the sector. This accord is the start of a journey we are making, together. It is not a final destination we have already attained. We are passing through a tense period globally in the supervision of banking and credit. There are compelling reasons to take stock now. So we have made an important step in establishing this new accord on our relative roles in supervision of the ownership structure, corporate governance and risk management. It is this latter field that has been in the sharp focus of worldwide concern, starting with the so-called sub-prime market in the US. This has not been a local storm in a tea-cup, but a tsunami rapidly engulfing not just the core activities of a few institutions in one region. It is surging across the oceans. It is submerging the interlinked archipelago of loosely affiliated entities, subject to varying degrees of regulation. Some of the regulatory links are so obscure and vulnerable to the sea level rise they have been quickly overwhelmed. Central banks, and even governments, have had to mount rescue operations, at unusually sympathetic rates, at great financial cost and at even greater moral hazard. I trust that this new accord with the FSC will help us here to tighten our controls and limit the risk arising from such supervisory gaps. The accord with the FSC is based on international best practice, commended by international bodies and the Basel Committee on Banking Supervision. This joint BOM/FSC committee will ensure continuity of monitoring and partnership. Yet uncertainty of the underlying risks remains. However confident we are in our institutional strengths, we must beware of that notion of progress which mistakes comfort for invulnerability. We must be rethinking the instruments of monetary policy. This is essential as we move, slowly but surely forward, into the higher realms of financial globalisation and the process of regional economic, financial and monetary union. As we move into closer union in Africa, we shall continue to work with all our international partners, western and eastern. Although I suppose we have to admit the Europeans remain our best of friends, in terms of markets for our exports products and services. Now for a little light re-engineering Now let me pass on to our little light engineering, here at the Bank. We are not only moving into our new building, but at the same time undertaking some modest reform of our internal organisational structure and processes. In the past in Mauritius we have come to rely on a time lag of some years between the perception that something ought to be done, and any serious attempt to do it. We have dared to reduce this lag to months, even weeks in some cases. I am glad to say that all the staff have collaborated well. We have encountered little of the paradox of reform where the office becomes a hotbed of cold feet. In all this we have been greatly assisted by a fine Malaysian expert review team, who have brought both fresh ideas and a new stimulus to the continual process of adaptation to our changing market in banking and to the changing needs and perspectives of government. We now have a flatter structure, sloughing off some of that cellulite, producing a faster more relevant response to the needs of our times and customers. We are seeing meetings more as means of resolving issues rather than just continually restating them. We look to very positive results from our new Communications Division, with a fresh vision drawn from the wider realms of the media and communications practice. Our mission is to transform the Bank of Mauritius into the People’s Bank. We have a new Corporate Services Division with a knowledge-management function as its core discipline. One new focus will be on applied teaching and research with the University, to foster our sustained adaptation in the face of the global financial, commercial and economic climate change. We have marked this with a series of five open lectures on banking, applied economics and monetary policy, which should become a staple part of our diet in years to come. Our new relationships with stakeholders Let me now pass to our improving relationship with our stakeholders, many of whom, I am delighted to see here tonight. I am also pleased to say how constructive the new Banking Committee meeting is emerging. It is a new breeze in our more open relationship with our stakeholders. We have had a series of refreshing meetings. These meetings have developed into a series of consultations with private sector stakeholders. Through them you are airing your prevailing concerns and we are learning how better to gauge your perceptions on key issues, and the ways in which a central Bank can best respond. We have touched on such trends in the main macroeconomic indicators, labour market developments, access to finance and the nature and impact of the main constraints that you face in getting on with business. These consultations have involved the chambers of commerce, merchants, export associations, the tourist industry, shop owners, consumers’ representatives, maritime agents, insurers and those in the agriculture and in the transport sectors amongst others. Issues raised at these meetings have ranged widely from globalisation, banking practices, bank charges, security of on-line transactions, cyber-crime, varied levels of competitiveness, transparency of exchange rates, effectiveness of the sme partnership fund, widening the participation in the sme’s chamber, communications and the heavy technical content of our traditional Bulletin and other reports, the role of the new Communications Director and how best to tap into the intelligence, vigour, resilience and leverage of the private sector. We have been exploring benchmarks for performance, efficiency and, may I add, inefficiency, the profitability of banks at the expense of customers, variation in bank charges, re-investment rates in companies, development of Mauritius as a duty free island, and the time taken to process cheques. These are not meetings for taking votes. They are more important than that. For they give airtime to the softest voices. I have always had a sneaking feeling, you know, that in the long run, we discover that the minorities with the softest voices are almost always right. This open approach to our consultative meetings has been extended to our over-the-counter banking; more open than ever this year. This is a trend sweeping though the banking sector in general. 40th year celebrations Now let me briefly take you through the highlights of our anniversary year. This has served as a celebration of the wisdom and courage of our founders, a rite of passage into a new era in banking, and a preparation for the difficult journey ahead. I have been immensely grateful to the staff past and present who have put so much of themselves into each of these unfolding events. We began with a gala dinner with the great and the good, at which we received expressions of most generous support from the Prime Minister, from the Deputy Prime Minister and Minister of Finance, and from our colleagues and friends in the banking and business community, many of whom are also with us tonight. I was particularly delighted that De La Rue’s were represented here. That is a link to this country that goes back over 150 years. Our new building has been formally opened and we are gradually becoming accustomed to its special architectural features and added security measures. Staff and their families greatly appreciated the inter-faith ceremony and blessings for their work, from the leaders of many religious communities, who graced that occasion with prayers and hymns of praise. Amongst other celebratory events this year, were: • The interclub youth athletics tournament, • A health week, • The launching the new Rs20 coin, • The issue of a Commemorative Rs 200 coin, • The design competition for the new bank notes, • The Charity night for Epilepsy and Alzheimer Associations, and • The opening of the ecological bamboo garden. Revisiting the future Finally, as we close our anniversary celebrations, we must look into the future and work towards the accomplishment of a new era for banking. Another forty years takes us beyond 2020; into Vision 20-20 +. The prime requirements for us will be to nurture a strong adaptive capacity, and a healthy appetite for problem solving. Seven years ago the technical version of the 20-20 vision document, Into the 3rd Millennium, 1 referred to the past decades, as a story of unmitigated success. Then we put in a note of caution: “But peel away the layers of this remarkable success and there are immense challenges ahead to be overcome if growth is to be achieved and sustained…” How right we were to sound the early warning! Sustainable development is not easy; it really is post-graduate philosophy, politics and economics, especially for a small island developing state. I have been a lifelong socialist with a strong affinity to the Gini-coefficient. A long way back socialists thought that making a profit was a vice: whereas the real vice, in the pursuit of sustainable development, is making a loss, especially a loss of capital and of natural resources. In 1989 The World Bank referred to Mauritius as a “miracle of development”: the worry now is that the genie has retired back into the bottle, and in the meantime we seem to have forgotten the trick of rubbing. Ministry of Economic Planning and Development (2000) Into the 3rd Millennium, Government of Mauritius. I am encouraged therefore to see that youth is on our side. For I observe that the number of Mauritian students registered in Tertiary education has increased from the year 2005 to 2006 by 15%. with a gross enrolment rate of nearly 20%. To keep pace with our competitors the target for the enrolment rate is to exceed 30%. That is the benchmark already achieved by our competitor countries. The overall increase in students in the finance sector in the year was 14%, which broadly matched the general increase of 15% in total tertiary students. But in banking the increase in registered students in the year was 32%, double the general trend. I hope they all have their sights on our jobs. We must ensure the banking doors are open wide to the best of them. We together as a sector must eagerly respond to their commitment. We must see more and more careers open to merit. High performance must bring financial rewards and accelerated advancement. We need to cherish the vigour and ideas of each new generation. We must no longer overwhelm the vitality of youth with stifling traditional procedure-based management. A key to our very sustained survival in the next four decades is working with the lighter feet of youth. Rapid response is not only relevant to survival from marine tsunamis. I have to say I am impressed by the changing culture of our banking world today. I sense a new eagerness to explore the future with new vigour, armed with fresh ideas. The curtain As we draw the curtain on our anniversary pageants, I am reminded of that Shakespearian scene, with Prospero, on the desert island in his exile, entertained by ethereal figures from legends past, Juno and the goddesses, in bright illuminated revelling. “Our revels now are ended,” he declares, “These our actors were all spirits… We are such stuff as dreams are made on and our little life Is ended with a sleep.” The Tempest past, his exile from the affairs of state is over. Now reality resumes. And so it is for us. But are we equipped, skilled and wise enough to grasp this opportunity and accept the challenge of the future? Together we must grasp the realities afresh. This is the 40th year of our celebrations in Banking; next year it is the nation itself that will be looking back on its record since Independence. With renewed vigour we must recommit ourselves to further progress in all sectors. We must value and enhance the outstanding but fragile natural beauty of this land, as our ultimate source of wealth. We must explore and more effectively play our role in the wider regions, to which we adhere, in the years to come. Only then can we turn to those, who have with so much courage, laid the foundations of banking here in the last forty years, and say to them, we have worthily followed your lead. Thank you. | bank of mauritius | 2,007 | 12 |
Address by Professor Rundheersing Bheenick, Governor of the Bank of Mauritius, at the official opening of Grand Bay Branch of the HSBC, Grand Bay, 18 December 2007. | Rundheersing Bheenick: Thinking globally, banking locally, and branching out… Address by Professor Rundheersing Bheenick, Governor of the Bank of Mauritius, at the official opening of Grand Bay Branch of the HSBC, Grand Bay, 18 December 2007. * * * I’m delighted to be here, opening a new branch, of a famous bank. The history of the HSBC Group, in Mauritius, can be traced back to 1859, when the Chartered Mercantile Bank of India, London and China, established a branch in Port Louis. One well-known project, that this bank assisted in financing, was the construction of the Port Louis to Curepipe Section of the railway, in 1864. Those were the days! And how we struggle now to get back on to the fast track! Opening a new branch is always a pleasure; one only to be surpassed, for a central banker, by opening a new bank! This year we have done both. I come to open this branch, having only recently opened a newly-licensed commercial Bank in the country, and having just laid the foundation stone of a new branch of the Bank of Mauritius in Rodrigues. It is one of those habits I don’t want to break. I hope this trend, reinforced today, in our 40th anniversary year, will be continued in 2008, the 40th anniversary year of the Independence of Mauritius, bringing new life and strength to the banking sector. About this time last year, contemplating the prospect of becoming Governor of a central Bank, I speculated that my life might be even more exciting than that of James Bond. You will recall that 007 had a singular license to kill. We central bankers have a triple license, and it seems none of then come with the risks Bond was running from fast cars, faster guns, and still faster women. The dream of a central banker is first to have that wonderful Midas touch, a golden gift, at this time of the year: • The license to print money! and then he gets that really expansive gift: • The license to open new banks, And finally the third great gift, that salutary power: • The license to close them again! But you may be pleased to know, that today, as your invited guest, on this opening day of a new branch, I have brought none of these licenses with me! I must say I am glad to be here as a guest of an expanding Bank, which has such a welldeserved worldwide reputation, as a safe pair of hands. That is good news for you and your staff; good news for your customers; and very good news for the country as a whole. I recall, from the not-so-distant past, a famous phrase in the money business. • “Safe as houses!” Do you remember that one? It just seemed to go out of use in banking circles in 2007! Safe as houses! Which is interestingly translated into French, in Harrap’s dictionary, by • “cela ne presente aucun risque”! Now there is a language lesson in great need of some urgent revision for us all, as we move together towards Basel II. Or dare I recall another, once timely, banking phrase? • Safe as a Bank, or, even safe as the Bank of England Harrap’s renders that as: • “c’est de l’or en lingots” I trust this branch of this Bank will serve to revive such public faith in banking. Service to the customer must be our new gold standard, even if there remains uncertainty about our reserve currency in the future, as the dollar hovers on the brink of something we know not what! If we have learned one lesson from this traumatic year, 2007, it is that all banks need to revisit their criteria for decision-making; commercial banks in judging today’s risks, and central banks for using those triple licenses we hold on your behalf, and on that of the people of this country. In 2002, HSBC launched a campaign to differentiate its brand from those of its competitors, with that pithy phrase: “The world’s local bank” Now we do not speak for the world but you and your bank are most certainly “local” around here. In 2006, you incorporated a subsidiary in Mauritius, the HSBC Bank (Mauritius) Ltd. Thus, you are now able to enjoy a multitude of advantages, such as tax benefits and independence at the level of your Board. One does not agree to be the Governor of a central Bank to be loved; and I have not been entirely disappointed in that. Indeed, I sometimes rank my position in public life, as a central banker, little higher than that of an honest policeman, whose usefulness would disappear if there were no malefactors in the risk business. As a policeman, however, I have every confidence, that those working in this branch, will only enhance the fine reputation that HSBC has so well established in the world of banking. • A Bank, safe as houses; qui ne présente, a nous, aucun risque. We look to banks, such as yours, to save us from the contagious risks of the growing, global, credit delinquency of the past decade. This, previously subterranean, force erupted in 2007, sweeping like a terrifying tsunami, across the oceans of the banking and finance world. And we, as bankers, were, frankly, as ill-prepared, as were the tourists and hoteliers, faced with the Indian Ocean tsunami, at this festive season, just three years ago. And now as a climate change is approaching, I look to you and all our colleagues in banking, to find the courage and leadership to adapt our early warning systems and take corrective action. There are few white knights left to come to our rescue. Our destiny is in our own hands. We must never forget, that, despite our splendid buildings, and may I say your kind festive hospitality, despite these smart new surroundings, each bright new dawn, that you will see rising here over the beauties of Grand Bay, is not the herald of paradise to come, but merely a fresh light on the cold realities of the banking world. Banks are fragile institutions. Banking is a delicate business. For banks are like pretty girls and roses; they last, while they last! In the Global Business sector, HSBC is a market leader. We are all looking to such global leadership to help to move us from the tidal waves of 2007 into calmer waters in 2008. Mauritius is at a critical phase in its economic development. The country is undergoing significant reforms. Inflation is coming down into single digit, the currency is stronger, tourism and investment are growing. Banks, like yours, have a vital role to play with their potential to promote the principles of sustainable development through sounder lending and wiser investment. I trust you will continue to play your undisputable role in promoting the continued social and economic welfare of this country. In Mauritius, bank branching, remains an indispensable strategy for banks. Customers view nearness to a branch as a determining factor in the choice of their banks. HSBC has thus extended its network and now has 11 branches and 13 ATMs across the country. Today, this new branch is for us, and for the people of Mauritius, a most welcome addition to the family of 20 licensed banks, with a total of 180 branches both in Mauritius and Rodrigues. I wish this infant branch a happy and profitable future. And I wish a prosperous New Year, 2008, to all your staff, in all your branches, and in your headquarters. But I especially wish prosperity to all our customers, on whose patronage, ultimately, we all depend. Thank you. | bank of mauritius | 2,007 | 12 |
Speech by Professor Rundheersing Bheenick, Governor of the Bank of Mauritius, at the launching ceremony of new notes and coins, Port Louis, 6 December 2007. | Rundheersing Bheenick: Bank of Mauritius – brief review of activities in Speech by Professor Rundheersing Bheenick, Governor of the Bank of Mauritius, at the launching ceremony of new notes and coins, Port Louis, 6 December 2007. * * * I welcome you all to this finale of the celebratory events of our 40th anniversary year. Over the last four months, on a more serious theme in our festivities, we have had a series of lectures on banking, money and finance. Professor Bishnodat Persaud addressed us from the West and spoke on trade, finance and currency. This was preceded by two reviews of monetary policy from Sweden by Professor Stefan Gerlach from the Bank for International Settlements, which is the central bank of central banks. Then, from Switzerland, we had Professor Philippe Bacchetta on Financial Market Development and Economic Growth. This week, we had a fascinating review of the changing axis of global finance and the rise of India and China by Dr Y. Venugopal Reddy, the Governor of the Reserve Bank of India. Finally, only yesterday, we had a special address at the Bank from my good friend Dr Paul Acquah, Governor of the Central Bank of Ghana who covered the raging debate on the performance of the IMF over the past decades. The heart of our job, or rather what we formally call our Corporate Responsibility, is to contribute to and I quote from the Bank of Mauritius Act 2004: “the orderly and balanced economic development of Mauritius”. As part of this, we are giving special attention to the importance of being a good corporate citizen. One special moment for me was in laying the foundation stone of our new building in Rodrigues to better serve the large community of our sister island. But the corporate function probably works best when it is done with a lighter heart and a looser step than was the practice of bankers of the distant past with their bowler hats and their pin stripe suits. Let me mention now some of our other activities in this anniversary year. • We have launched what we called originally a “Financial Literacy and Outreach Programme”. Now, if you mull over the acronym of a “Financial Literacy and Outreach Programme”, “FLOP”, you will understand why we changed this name to “Consumer Outreach Programme”, for “COP” sounds better than “FLOP”. • We have opened our doors to over-the-counter sales of security bills and bonds. • We had a Charity Dinner in this very venue in aid of the Epilepsy and Alzheimer associations. • Last week, I inaugurated with the Minister of Agro Industry and Fisheries, Dr A. Boolell, a bamboo garden at Midlands and we trust that other banks present here will follow suit with their own contributions to sustain the bio-diversity of our island. • We have also sponsored the Inter Clubs Youth Championships for boys and girls. • You have just heard about the Banknote Design Competition that we launched. The idea behind this was that people of my generation normally look to the past for our heroes and then we proceed to put their faces on our notes and their effigies on our coins and we thought that, perhaps, the younger generation may have a different take on this issue. So, we thought to give them a chance to design the future family of our banknotes. The results of this competition were just announced by the Chairman of the Jury Panel, Mr Tristan Bréville. I would like here to thank Mr Bréville and all his colleagues who worked on the Jury Panel and all those who participated in the competition and of course, a special word of congratulations to the winners. I am now pleased to move to the next stage of our event. We have three different launching events here tonight: (i) The first is the launching of a special commemorative coin which marks our 40th anniversary. It is a silver-proof coin and will go on sale as from Monday 10 December. (ii) The next, a sort of double first, is the twenty rupee coin we are launching today, the first of its kind in Mauritius. And the second part of this double first, is that this new coin, is the first bimetallic coin we have ever had in Mauritius. (iii) And the next item today involves a triple, a triple signature. As you know, the Central Bank now has two Deputy Governors. The new banknotes being issued today from the old family carry, for the first time, three signatures. So, if I may say, rather pleasingly, we celebrate today a first, the commemorative coin; a double first, the bimetallic twenty rupee coin; and a triple first, the new notes with three signatures. Now it is my pleasure and honour to invite our Vice-President, the Honourable Angidi Chettiar to unveil the coins and notes which will join our family of notes and coins. I thank you for your attention. | bank of mauritius | 2,007 | 12 |
Letter by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, to stakeholders, Bank of Mauritius, 28 December 2007. | Rundheersing Bheenick: Comprehensive reflections on economic and financial activities in Mauritius during 2007 Letter by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, to stakeholders, Bank of Mauritius, 28 December 2007. * * * Dear Stakeholders As you may be aware, in its endeavour to foster a rapid and sound development of the financial sector, and a stable macroeconomic environment, the Bank of Mauritius has heightened its interaction with stakeholders in 2007. I welcome the positive response of economic agents to the Bank’s new communication strategy and wish to emphasise that the Bank is committed to pursuing this strategy, as transparent communication is crucial in enhancing the credibility and impact of its policy decisions. The participative approach adopted by the Bank has permitted prompt handling of issues affecting the banking industry. The Bank hosted seven meetings of the Banking Committee in 2007, a marked departure from the previous quarterly schedule. Special meetings were convened to discuss specific issues for rapid implementation. I have to thank Chief Executives of banks for their collaboration and continued support in all the on-going projects. As we close 2007, it is with pleasure that I review developments in the economic and financial landscape during this year, and look forward to some of the most important tasks awaiting us in 2008. This year has seen a rebound in economic activity with real GDP growth rate forecast at 5.6 per cent compared to an estimated 5.0 per cent in 2006. This was mainly driven by the tourism and construction sectors where growth rates are forecast to jump from an estimated 3.5 per cent and 5.2 per cent, respectively, in 2006 to 13.1 per cent and 15.0 per cent this year. These high growth rates compensated for (i) the slowdown to 3.5 per cent, from 4.0 per cent in 2006, forecast in Manufacturing despite a significant recovery noted in Textile, and (ii) the contraction of 6.8 per cent forecast in Agriculture, including sugarcane. Most economic indicators have improved during the year. Capital formation, excluding the purchase of aircraft and marine vessel, accelerated. The unemployment rate went down to an estimated 8.8 per cent in 2007 compared to 9.1 per cent in 2006. The budget deficit fell to 4.3 per cent of GDP, down from 5.3 per cent in 2006, as Government pursued its fiscal consolidation efforts. From January to October, broad money liabilities grew by 10.0 per cent while bank credit to the private sector increased by 5.2 per cent, compared to 8.6 per cent and 13.8 per cent in 2006. Inflation, which was at 8.9 per cent at end-2006, climbed to 10.7 per cent in June before gradually trending down to stand at 9.1 per cent in November and is now expected to fall to 8.8 per cent in December. On the external front, during the first three quarters of this year, the current account registered a deficit of Rs8,659 million, with the deficit in the third quarter lower than the deficit recorded during the same period last year. Foreign direct investment (FDI) in the country from January to September, estimated at Rs9 billion, was already higher than the total of Rs7.2 billion recorded in 2006. FDI flowed mainly from the United Kingdom and the United States into Tourism, principally the Integrated Resorts Scheme. As a result of the improvement in the current account balance, reflecting combined higher surpluses on the services, income and current transfers accounts, and higher FDI and portfolio flows, the overall balance of payments showed a surplus of Rs12,114 million up to September, as against a deficit of Rs4,573 million in 2006. Against this background, expansion of the Financial Intermediation sector was sustained with a growth rate of 7.3 per cent forecast this year. The banking industry has been particularly dynamic, with the entry of new participants and existing banks carrying on the expansion of their local and regional branch network. Three licences to newcomers in the industry were due to be delivered this year. However, only one new licence has been issued. The other two proposed licensees have instead taken over two existing banks. Three new branches opened in the country during the year and approval has been granted for the opening of a regional branch. In addition, 27 new Automated Teller Machines were installed by banks during the year. Market players continued to broaden their offer of banking products and services with competition growing fiercer for market share. New segments are opening up in the industry and next year will see additional entrants as the Bank is contemplating the issue of licences to more moneychangers. In this respect, the Bank has reviewed the regulations and licensing procedures of money-changers and foreign-exchange dealers to encourage more competition and raise standards. In general, the growth in banking stems not only from domestic operations but also from international business. In fact, business conducted with non-residents has increased by 30 per cent since last year, indicating that banking is surging beyond geographical boundaries, with our banks able to compete successfully both regionally and internationally. It may be highlighted that out of total growth of Rs135 billion in total banking assets during the year, over 80 per cent is attributed to business conducted with non-residents and Global Business Licence holders. Banks are growing not only in size to meet the growing demands of a buoyant economy, but also in sophistication. Needless to say, increased activity in the sector has heightened competition for skilled manpower, giving rise to lateral staff movement and even staff poaching in many cases. Consequently, the sector has seen a sharp rise in salaries at middle-management and higher levels. The continuous evolution of the domestic financial environment and the need for domestic banks to keep up with competitors in an increasingly globalised economy has led the Bank to formulate appropriate strategies in various domains to shape the Bank for the future, and review its internal organisation structure. In 2007, the Bank implemented a number of changes to its policy-making process and operations. The Monetary Policy Committee (MPC) was set up on 23 April. Following the amendment of the Bank of Mauritius Act 2004 in August, the MPC is empowered to formulate and determine the monetary policy of the Bank. The MPC consists of the Governor as Chairperson, the two Deputy Governors, two Board Directors, and three external persons having recognised experience in the field of economics, banking or finance, one of whom is a Professor of Monetary Economics at the University of Frankfurt, Germany. The MPC also benefits from the wide-ranging experience of an Adviser, a former Governor of the Bank of Argentina and the current Director of the Centre for Central Banking Studies of the Bank of England. In the current setup, there is a possibility that the Bank’s executives may find themselves in a minority position in the MPC. The MPC met three times this year to decide on the stance of monetary policy. The key Repo rate was increased by 75 basis points at the June meeting as inflation was hovering in the double-digit region, and there were significant upside risks with regards to international commodity prices. The two subsequent meetings of the MPC maintained the tight stance of monetary policy taking into consideration domestic developments and the potential downside effects on the US economy of the sub-prime crisis. The outlook is that, barring any potential shocks stemming from high oil and commodity prices, inflation will continue on its downward trend. An important prerequisite in the fight against inflation is for the central bank to disseminate information effectively on monetary policy issues. As provided in the Bank of Mauritius Act 2004, the Bank publishes a Monetary Policy Statement after each MPC meeting to explain the main assessments and findings of the MPC. The Statement also discloses the voting pattern of the MPC members. In the implementation of monetary policy, the Bank has as far as possible limited its market interventions and allowed free play of market forces. In the domestic foreign exchange market, the Bank intervened to sell foreign currencies for an amount of US$48.8 million to alleviate excess demand in the first two months of the year before purchasing an amount of US$252.8 million between February and April as the situation turned around and the rupee stabilised. With an appreciation in the rupee exchange rate of about 9.4 per cent against the US dollar from January up to November, the Bank intervened again in early December to purchase Euros 40.5 million from the market. In the same vein, the net foreign assets of the Bank are estimated at around Rs51 billion as at end-December, that is, an increase of some 16 per cent since the beginning of January. In the domestic money market, this year provided the first occasion to test the new monetary policy framework introduced in December 2006. To reduce excess liquidity prevailing in the system and to keep the overnight interbank interest rates within the corridor around the key Repo rate, the Bank conducted a number of reverse repos and issued some Rs14 billion of Bank of Mauritius Bills. As participation at the weekly auctions did not always reflect the forecast excess liquidity positions of banks, and there seemed to be a risk that the Bank’s intervention would actually lead to more volatile yields, the Bank became reluctant to use reverse repos after May. There seemed to be a wedge between effective excessive liquidity, as showed in the bidding behaviour of banks, and liquidity levels forecast by the Bank’s models. In an attempt to tackle this, a new facility in the form of a Special Deposit was established in November whereby banks were invited to deposit their excess funds with the Bank for a period of 14 days at a rate that was below the lower bound of the corridor. It is expected that further adjustments will be required in 2008 to the monetary policy framework to take into account the apparently quasi-permanent excess liquidity conditions in the domestic money market. In an effort to enhance market liquidity, improve the price-discovery process, and develop a more effective transmission of policy decisions, the Bank re-introduced over-the-counter sales of Bills and Treasury Notes on 24 July. The number of primary dealers was also increased from five to eight to spur more competition in the secondary market. A total of Rs306 million of Bills and Notes have been sold over the counter to date. For comparison, since January, Bills sold on the Stock Exchange totalled Rs118 million. Generally, the outcome of the measures to develop the secondary market has been fairly moderate but it constitutes a basis to build upon in the coming year. With a view to assisting the Bank to achieve its objectives, and given that real sector issues play an important part in monetary policy decisions, the Bank embarked in September on a series of consultations with private/real sector stakeholders to gauge their perceptions with regard to specific issues, such as the evolution of the main macroeconomic indicators, labour market developments, access to finance, and to identify the domestic and external constraints they face. The Bank intends to maintain regular contact with stakeholders of the real sector as we need to weigh real sector issues more adequately in our policy decisions. The implementation of Basel II by the March 2008 deadline constituted another major challenge for the Bank this year. Substantial progress was made in 2007 towards the implementation of the standardised approach to credit, market and operational risks. The Bank has tried to adapt the Basel II framework to the specificities of the Mauritian banking sector, which is set to benefit substantially from the new capital adequacy framework. The Bank adopted a collaborative approach with commercial banks for the implementation of Basel II, with working groups comprising both central bank and commercial bank Officers. A special Banking Committee meeting was held in September to review the implementation of Basel II by banks, which seem well poised to meet the set deadline. Although we are still at an early stage on this long journey, improvements in the risk management systems of banks have already been noted as the requirements of Basel II are gradually being applied by banks. It is expected that Basel II compliance will create the required platform for improving business decisions and increasing competitiveness in the sector. In this perspective, and taking into consideration changes in international accounting standards and the legal framework, the Bank has been reviewing its Guidelines to enable a more effective capture of risk management and market disclosure. The challenge of Basel II has necessitated the training of staff in Basel II compliance. The Bank has deployed the necessary resources to that effect. The Bank, jointly with Deutsche Bank (Mauritius) Limited, organised a training course aimed at the Bank’s staff as well as staff of commercial banks on Basel II implementation. The Bank’s staff also attended courses offered by the Financial Stability Institute and the Bank for International Settlements (BIS) in Switzerland. It goes without saying that such training is on-going to ensure that our staff acquire specialised knowledge for successful implementation of Basel II. Still on the supervisory side, and as part of the process of promoting a more structured collaboration and co-ordination between the two domestic regulatory and supervisory bodies, a Protocole D’Accord was signed on 12 July. A Joint Bank of Mauritius / Financial Services Commission Co-ordination Committee was set up to activate and expand on the existing Memorandum of Understanding between the two bodies with a view to consolidating the supervision of the financial sector and harmonising the regulatory framework. The modernisation of the cheque-clearing system in Mauritius has reached an advanced stage, with the cheque truncation project expected to go live next year. Cheque truncation refers to the process by which cheques are cleared electronically without any physical movement. Banks can also utilise this technology to facilitate the clearing of cheques over the counter to provide a better service to their customers. Cheque truncation represents a paradigm shift in the processing and clearing of cheques and is a milestone in the modernisation of the cheque clearing and settlement process started in November 2002. Currently, it takes two days to clear a cheque after its presentation for clearing. Some 21,000 cheques for an amount of Rs900 million are presented for clearing every day; this gives an indication of the scope for faster and more efficient cheque clearing. In its endeavour to enhance credit quality in the banking sector, the Bank is progressively lowering the reporting threshold for credit facilities at the Mauritius Credit Information Bureau (MCIB). The threshold, which stood at Rs100,000 for individuals and Rs500,000 for corporates, was reduced to Rs25,000 for all categories in November, and as from 1 March 2008, the threshold will be abolished altogether. In 2008, non-bank deposit taking institutions, in particular leasing companies, the Mauritius Housing Corporation, and possibly insurance and finance companies, will be joining the MCIB to enable a wider capture of credit data for better decision-making. It is expected that improving overall credit quality in the financial sector will contribute to lower costs and narrow interest rate spreads, a subject of concern to us. As regards the MCIB itself, it should be noted that early this year, the Bank turned down the offer of a reputed rating agency to acquire the MCIB. During the year, the Bank has been actively setting the pace for the implementation of Islamic banking services in Mauritius so as to enrich the panoply of services already offered by the industry. The Banking Act 2004 was amended in August to accommodate the setting up of Islamic banking. In November, the Bank has been admitted as an Associate Member of the Islamic Financial Services Board, an international standard-setting organisation whose prime objective is to promote and enhance the soundness and stability of the Islamic financial services industry worldwide. The Bank is presently finalising the regulatory and supervisory framework that will govern institutions offering Islamic financial services. Existing banks can opt to offer such services through a window, or alternatively, such services could be provided through a full-fledged Islamic bank. Draft guidelines will be issued to the industry for consultation early next year. Striking the right balance between regulation, supervision and market discipline is a big challenge for all regulators. While overregulation may impede the development of the financial system and slow down growth, deregulation may bring about banking fragility. Therefore, it is also the duty of all market players to act in a responsible manner. The financial system of Mauritius was evaluated by the joint IMF/World Bank Financial Sector Assessment Programme (FSAP) mission during 2007. A first FSAP mission that assessed the overall financial sector in February has already submitted its Aide Memoire as well as an action plan. A second mission conducted a thorough examination of the Anti Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework and practices in Mauritius in September/October and has already submitted its draft report. The recommendations of the FSAP missions should serve as a basis to foster sound development of the financial sector. The Bank has also received Technical Assistance missions from the IMF on Balance of Payments statistics and on the functioning of the foreign exchange market. In addition, a “Report on the Observance of Standards and Codes” mission of the IMF conducted a review of Mauritius’ statistical systems and assessed its data dissemination practices against the prescriptions of the Special Data Dissemination Standards in early December. Following discussions with data producing agencies, and responses from data users, the mission has developed a set of recommendations designed to increase our adherence to internationally accepted statistical practices and enhance the analytical usefulness of produced statistics. The Bank intends to implement these recommendations early next year. One area where progress has been limited during the year relates to the designation of an Officer to be the Ombudsman for banks, as provided by Section 96 of the Banking Act 2004. According to the Act, one of the functions of the Ombudsman would be to deal with complaints against financial institutions by their customers. Consultations are on-going with the Commissioner for the Protection of Borrowers and the Mauritius Bankers Association to find a way forward on this issue. In 2007, the Bank continued its active involvement in regional and international fora. The 6th meeting of Governors of the Eastern Africa Sub-Regional Committee of the Association of African Central Banks (AACB) was held in Mauritius from 9 to 10 May 2007. On that occasion, the chairmanship of the Committee was passed on to the Bank for one year. The Bank has also been deeply engaged in the Southern African Development Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA) committees and workshops to achieve macroeconomic convergence, among other goals. The Bank holds the permanent chair of the Sub-Committee of SADC Banking Supervisors. The relationships with other central banks in the region were further reinforced on the occasion of our 40th anniversary when the Bank had the honour to receive Governor Y.V. Reddy from the Reserve Bank of India and Governor P. Acquah from the Bank of Ghana to deliver memorial lectures. We expect even more co-operation next year with the visits of Governors from the central banks of Kenya, Belgium, and France. During the year, the Bank was represented at a number of meetings held by regional and international organisations. I attended the World Bank Group and the International Monetary Fund 2007 Spring and Annual Meetings held in Washington DC, USA. I also represented the Bank at several meetings of Governors of central banks, notably the BIS Annual General Meeting in Switzerland, the BIS Roundtable of Governors in South Africa, and the meetings of Governors of francophone countries, of the Commonwealth, and of the AACB. I was also privileged to attend the Pre-Monetary Policy Committee Meeting of the Bank of England in November as a special guest of Governor King. The First Deputy Governor attended the meetings of the Offshore Group of Banking Supervisors on two occasions, in London and in Macao. He also represented the Governor at the FICCI – IBA Conference on “Global Banking Paradigm Shift” in India, and led a delegation of ten officers from the Bank of Mauritius and commercial banks to Hong Kong and Singapore on a fact-finding mission in connexion with the implementation of cheque truncation in Mauritius. The Second Deputy Governor attended the Meeting of the SADC Committee of Central Bank Officials and Governors in Tanzania, as well as the AACB meetings in Ethiopia. He also attended two conferences on Financial System Strategy and Opportunities and Challenges on Development for Africa in the Global Arena in Nigeria and Ethiopia, respectively. He represented the Governor on two occasions, at the 50th Anniversary Celebrations of the Bank of Ghana, and at the Board Meeting of the African Export-Import Bank in South Africa. The Chief Economist represented the Bank twice during the year in the SADC and COMESA Committees of Central Bank Governors. He also attended the Ad-Hoc Expert Group meeting of the UN Economic Commission for Africa-Southern Africa Office, and the COMESA Committee of Central Bank Experts on Finance and Monetary Affairs. The Head of Corporate Services represented the Bank at a Symposium on Central Bank Independence. This year, the Bank celebrated its 40th anniversary and we used this event as a good opportunity to revamp the Bank’s corporate image. A number of activities were undertaken to this end, amongst which a Charity Dinner to aid Epilepsy and Alzheimer associations, sponsorship of the Inter-Clubs Youth Championships for boys and girls, a blood donation day, and the turning of the first sod for the establishment of a bamboo garden in the Midlands region. The festivities also had another dimension. The Bank initiated a Financial Literacy Programme (FLP) aimed at raising the level of awareness among the public about the roles and functions of the Bank and of the financial system in general. The FLP, which is expected to be an on-going programme, comprised such activities as an Essay-writing Competition, a Monetary Policy Challenge, a series of memorial lectures with key guest speakers on money, banking and finance, and a Consumer Education week. A banknote design competition was launched in preparation for a new family of banknotes, and a special commemorative coin marking our 40th anniversary as well as a new twenty-rupee coin was launched. As it reached its 40th year, and in order to meet the challenges ahead with greater efficiency, the Bank engaged in a major restructuring of its internal organisation with the help of resource persons from Bank Negara Malaysia. The structure is now flatter, with the creation of Divisions within the Bank that are responsible for particular focused areas. The Bank has adopted an open and transparent staffing strategy, with the promotion of thirty-nine existing staff and recruitment of fourteen additional staff from outside to ensure necessary competencies to build a workforce that would ultimately add value to the organisation and contribute directly towards the attainment of our organisational goals. The Bank has also enhanced its training strategy to develop the full effectiveness of our most important resource, our people. Sixty members of staff have followed training courses or seminars worldwide at, or under the auspice of, such institutions as the World Bank and the IMF, the United Nations, the BIS, SADC, and other central banks. The Bank’s communication strategy has been reviewed. Its website has been re-designed in line with latest developments in technology and information dissemination engines. The new website was launched in October 2007. It provides timelier information on a broader range of subjects. In 2008, the Bank intends to revisit its approach to the dissemination of data and other publications. The concept of a centralised database was introduced during the year and work has already started to that effect. We are being guided in that project by the Reserve Bank of India, and the central database should be operational towards the end of next year. As part of good corporate governance practices, thirteen statutory Board meetings were held during the year. For the first time, a two-day retreat regrouping Board Directors, our external legal counsel, and top Bank management was organised to discuss corporate governance issues. The event was held in Rodrigues, and we were pleased to have among us the Secretary-General of the Central Bank Governance Forum of the BIS as resource person to share his experience of other central banks on governance matters generally. For the year ended 30 June 2007, the Bank realised an operating surplus of Rs1,763 million. It remitted Rs900 million to Government, a 50 per cent increase over the amount transferred the preceding financial year, after making adequate provision for open market operations and effecting necessary statutory transfers. The move to the Bank Tower, our new premises, has almost been completed. The old building will be refurbished to accommodate a Knowledge Management Centre, an Auditorium, a Conference Room, and a Museum. The development of the Rodrigues branch was also a priority for the Bank during this year as we explored better ways of serving the community there. The foundation stone for a new building for the Rodrigues branch was laid on 24 November. While the international economic outlook may be marred by the recent sub-prime crisis, we expect Mauritius to withstand the effects of the crisis reasonably well. Strong growth in tourism and a well-behaved currency augur well for 2008. Of course, we do not expect the sailing to be plain. The Bank has already expressed its concerns about the financing arrangements for the Integrated Resorts Scheme and highlighted the need to guard against speculative asset bubbles. Several challenges, notably on the inflation front, and those arising from the erosion of our trade preferences and growing global competitiveness, will provide a severe test for the resiliency of our economy, and of our financial sector in particular, and indeed of our society and country as well. As this year closes, I wish to express my thanks to all those who have contributed in one way or another to the fulfilment of our mission throughout the year. In particular, I wish to thank Chief Executives of banks and the Mauritius Bankers Association for their collaboration and continued support in all the on-going projects, the Institute for Consumer Protection and the Association des Consommateurs de l’Ile Maurice for their help during the Consumer Education week, the Honourable Minister of Agro Industry & Fisheries who leased a plot of land for the establishment of our bamboo garden, and the Island Commissioner of Rodrigues who leased the plot of land for the construction of our Rodrigues branch. In closing, I must record my gratitude to the Prime Minister for his constant support since he called upon me to take up the position of Governor of the Bank in mid-February. I must also extend my thanks to the Deputy Prime Minister and Minister of Finance and Economic Development, Board members, and members of the MPC for their help during the year. A special “thank you” to members of the staff of the Bank at all levels, and in particular to my Deputy Governors. I am pleased to note that we have moved forward on many fronts during this year. I am confident that we will pursue our mission in the coming year with even greater dedication. May I wish you and your family a very happy New Year 2008. | bank of mauritius | 2,008 | 1 |
Talk delivered by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Reserve Bank of India, Mumbai, 14 March 2008. | Rundheersing Bheenick: How does a small open economy faced with unprecedented capital flows conduct monetary policy? Talk delivered by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Reserve Bank of India, Mumbai, 14 March 2008. * * * It is a great honour and privilege for me to be invited by the Governor of the Reserve Bank of India to address this distinguished audience at the seat of this august institution this morning. Allow me to place on record my deep appreciation for the invitation extended to me by Governor Reddy. I had the immense pleasure of welcoming him to Mauritius in December last when he delivered a Memorial Lecture as part of the 40th Anniversary Celebrations of the Bank of Mauritius. India and Mauritius have enjoyed a very special relationship spanning over several centuries and cutting across vast swathes of human endeavour in the economic, social, cultural, linguistic and political fields. I cannot think of anything that symbolises this more eloquently than the plain simple fact that our currency - like its more famous cousin issued by your institution - also goes under the name of “Rupee”. But then a central banker would say that, wouldn’t he? The theme of my talk today is: “How Does A Small Open Economy Faced With Unprecedented Capital Flows Conduct Monetary Policy?” I believe this subject, or at least some aspects of it, will be of interest to both the Bank of Mauritius and the Reserve Bank of India in the context of current economic developments in our two countries against the backdrop of the international economic environment confronting all of us.. The structure of my talk today will be as follows: In the first part, I begin with a thumb-nail sketch of the Mauritian economy to provide some context. In the second part of my presentation, I focus on some of the important financial and economic reforms that Mauritius is now embarked upon. The third part addresses some of the challenges emerging from globalization for a small country. Finally, I touch upon the monetary policy challenges stemming from unprecedented capital flows for a small open economy. This is a subject which is exercising my mind considerably, causing sleepless nights and swallowing in large gulps the reserves at my disposal as Governor of the Bank of Mauritius. You will discover that I have more questions than answers. Part I: General background on the Mauritian economy As most of you are no doubt aware, Mauritius is a small island economy in the South–West Indian Ocean. It has been independent since 12 March 1968 and became a Republic in 1992. A couple of days ago, we celebrated our 40th Anniversary as an independent nation. In spite of several handicaps like limited natural resources, remoteness from major markets, a small domestic market and vulnerability to cyclones and man-made external shocks alike, Mauritius has achieved one of the highest per capita GDP in Africa. In 1968, Mauritius was, by all measures, a poor country with per capita income of less than US$200. Prospects were so gloomy that Nobel-prize-winning economist James Meade, who headed an Economic Commission sent by the British colonial administration in the aftermath of one of the most devastating cyclones in the country’s recorded history, recommended emigration as a key part of the solution to the island’s problems. One of the first World Bank missions to visit the country, led by Jean Baneth, opined “… this country exudes an air of hopelessness.” Another Nobel prize-winner, V.S Naipaul, titled an analytical piece on Mauritius “The Overcrowded Barracoon.” And a French writer followed suit with a book entitled “Maurice – Quelle Independence?” It will take me too long to take you down the road we have travelled over the last four decades. I have been part of the journey, occasionally as an observer, but mostly as a doer, a mover or “agent provocateur.” Suffice it to say that the prophets of doom and gloom have been proved utterly wrong, that the Malthusian nightmare has been exorcised, that Mauritius is now the poster boy of the IMF and the World Bank when it comes to successful economic development in Africa. By 2007, for a population of nearly 1.3 million, per capita GDP has increased to nearly US$6,000. Real GDP has grown, on average, by about 5 per cent per annum over the last two decades. For 2008, real GDP growth is estimated at 6 per cent, up from 5.6 per cent in 2007. This has been one of the most remarkable policy-driven economic transformations in modern history. The Bank of Mauritius has played a key role in this economic transformation. The modalities of conducting monetary policy in Mauritius have evolved from strong reliance on controls and directives to more market-based mechanisms. The 1970’s were turbulent years for the conduct of monetary policy: external price shocks, together with expansionary domestic policies, led to an acceleration of inflation to an all-time record of 42% in 1979. I played a key role in devising, marketing and implementing appropriate adjustment policies as part of IMFand World-Bank-supported stabilization and structural adjustment programmes. Macroeconomic stability was regained in the early 1980’s and maintained successfully thereafter. The monetary authorities pursued sound monetary and exchange rate policies, which contributed to foster an environment favourable to sustained growth. The Bank has, since its establishment in 1967, given prominence to the objectives of diversifying the economy and fostering growth and employment through supportive actions. Freshly liberated from the tight corset of the Currency Board system - and here, let me add for those of you who do not know it, the Currency Board of Mauritius is the very first one of its kind on record, just as Mauritius is also the first known customer for the noted banknote printing company Thomas De La Rue - it was natural for the Bank of Mauritius to strike out in new directions. An expansionary policy was followed by keeping interest rates low and providing concessional credit to what were called “priority sectors”. Concessional credit was provided to industrial enterprises, which were being supported to promote growth, diversification and employment. Export Processing Zone companies and manufacturing companies were the targeted beneficiaries, along with the sugar sector which then constituted the backbone of the economy. As part of our colonial heritage, the Mauritian rupee was pegged to the Pound Sterling until 1976, when we gave up the link in the face of continued depreciation of the British currency. We then achieved a world first by pegging our rupee to the IMF’s Special Drawing Right, which turned out to be an unmitigated disaster. In 1983, after a period of political and economic turmoil, accompanied - if not caused - by currency devaluation, we moved from a fixed to a managed exchange rate regime. Over the next few years, exchange rate policy was aimed at protecting competitiveness, and the real effective exchange rate steadily depreciated until 1987. As the net international reserves situation improved and became more comfortable, policy aimed more at achieving a stable real effective exchange rate. Exchange controls which were the bread and butter of the Bank of Mauritius at its creation were gradually liberalized. In September 1993, Mauritius accepted the obligations of Article VIII of the Articles of Agreement of the IMF and all current account transactions were liberalized. Within a year we fully liberalized the capital account. An interbank foreign exchange market was established with a greater role assigned to market forces in the determination of the exchange value of the Mauritian rupee. The long and the short of it is that Mauritius, which at independence was a monocrop economy depending entirely on sugar, has over the intervening years diversified successfully by adding such new pillars of economic activity as export manufacturing (mainly textiles), tourism and financial services. Information and Communication Technology and the seafood hub are two emerging sectors of the economy with very promising prospects for the future. Part II: Financial and economic reforms Today, Mauritius can boast of having a sound and dynamic financial system. The banking industry is highly profitable, underpinned as it is by a sound regulatory framework and a supportive monetary policy geared to macroeconomic stability. The entry of new banks, and the expansion of the local and regional branch network of existing banks, has combined to instil a new dynamism in the industry. We are in the final stages of rolling out Islamic banking and financial services which, we believe, represent a new window of global business opportunity for Mauritius. Since April 2007, a new era of monetary policy-making has also dawned at the Central Bank with the establishment of an independent Monetary Policy Committee, which comprises members from outside the country. Let me add some comments on how, in the wake of the continued development and increasing sophistication of the banking industry, the Bank of Mauritius has relentlessly pursued its efforts to strengthen its supervisory arm. The regulatory framework was reinforced with the promulgation of the Banking Act 2004 and the Bank of Mauritius Act 2004. From a regulatory perspective, the change in the licensing regime stemming from the Banking Act 2004 has also contributed to the new dynamism which characterises the banking sector. This legislation provided for the integration of domestic and offshore banking business and eliminated the previous distinction between Category 1 “domestic” and Category 2 “offshore” banks. Offshore banks had been generally perceived as being less regulated and more prone to money-laundering and other illegal activities. The new legislation served to dissipate such misapprehensions regarding the regulation of offshore banks and has enhanced the image of our financial sector. Under the single banking licence approach, banks are free to undertake the whole range of banking business. According to the “Guideline on Segmental Reporting under a Single Banking Licence Regime,” issued by the Central Bank and which became effective in July 2005, banking business in the country is divided into two categories, Segment A and Segment B. Segment B activities encompass banking business conducted essentially with non-residents and Global-Business-Licence-holders. Segment B is thus essentially directed to the provision of international financial services generating “foreign source income,” which is taxed under a special preferential regime. All other banking business is classified under Segment A. This favourable tax treatment of foreign source income has acted as a catalyst in the expansion of the regional and international banking business of banks. The unification of the banking licence has subjected banks to increased competition in both Segments of their activity. The challenge for banks which are now operating under the same single regime, is to be innovative in order to be able to tap specific and niche markets, both locally and overseas. To give you a better picture of the monetary challenges confronting a small open economy like Mauritius, I believe it would be useful if I dwell a little on the new framework for the conduct of monetary policy that was introduced by the Bank in December 2006, that is just a few weeks before I joined. Under this new framework, the Bank established a “corridor” that would effectively provide a ceiling and a floor for overnight interbank interest rates. Effective 18 December 2006, when this framework was introduced, the Repo Rate was set at 8.50 per cent. In order to manage the overnight interbank interest rate in an effective manner, the Bank stated that it would supply, or absorb, liquidity against collateral at its discretion and in whatever volume was required to hold the overnight interbank interest rates close to the Repo Rate. The Bank initially established a “corridor” that was symmetrical around the Repo Rate. Thus, the Bank was expected to lend money to banks at the ceiling of the “corridor” which was set at 50 basis points above the Repo Rate. In a similar manner, the Bank was expected to absorb excess funds at the floor of the “corridor” which was set at 50 basis points below the Repo Rate. The ceiling and the floor of the “corridor” were expected to move in the same direction, and with the same magnitude, as the changes in the Repo Rate. Currently, the Repo Rate stands at 9.00 per cent. The experience so far with the new monetary policy framework has been a mixed one. While banks’ deposit and lending interest rates have generally moved in tandem with changes in the key Repo Rate, market interest rates at the short-end of the yield curve have tended to move away from the key Repo Rate. This has been particularly evident since last November. This phenomenon has been caused by the excess liquidity on the interbank money market and partly by the sizeable reduction in the primary issues of bills mainly by the Government relative to maturing bills. The Central Bank’s absence in the reverse repurchase market reflected our concern not to mop up any “hot money” or money just transiting through Segment B activities – which I detailed earlier. We attempted to address systemic excess liquidity by introducing a Special Deposit Facility whereby banks were invited to place special deposits with the Central bank for a period of 14 days at a rate of 125 basis points below the key Repo Rate. The “disconnect” between the key Repo Rate and short-term market interest rates is a source of concern to us. The Bank is contemplating a widening of the corridor as the ± 50 basis points might be too narrow for a small open economy like ours which is vulnerable to shocks and subject to volatility in international capital markets. We are also currently debating internally whether the corridor should be “symmetric” or “asymmetric.” Moreover, there are issues relating to “discretionary” as opposed to “automatic” conduct of repurchase operations by the Bank which need to be addressed. These technical issues have been taken up with the recent IMF Article IV Mission that visited Mauritius during the last two weeks. Obviously, we are looking for a solution that fits more comfortably with the Mauritian situation, characterized as it is by a highly-concentrated banking structure. Let me also make a point about our legal mandate. In terms of the Bank of Mauritius Act 2004, the primary object of the Bank is to maintain price stability and to promote orderly and balanced economic development. In this respect, real sector issues are duly weighed up in our monetary policy decision-making process. As part of our other objectives, we must also ensure the stability and soundness of the financial system in Mauritius. The process of fiscal adjustment in Mauritius has been set in a medium-term framework. Corrective measures to address fiscal imbalances and restore fiscal discipline have been initiated. The budget deficit, as a percentage of GDP at market prices, declined from 5.3 per cent in Financial Year 2005-06 to an estimated 4.3 per cent in FY 2006-07. For the current financial year, it is estimated at 3.8 per cent. I should perhaps also mention here that there is a separation of debt management from monetary management. Government Securities are issued only for purposes of financing the Government’s borrowing requirement whereas Bank of Mauritius Bills are issued for purposes of monetary management. The policy of issuing central bank bills to mop up any excess liquidity thrown up by incoming foreign exchange flows has a direct relevance to the main theme of this talk. Faced as it is today with the triple shocks stemming from the erosion of trade preferences in the sugar and textile sectors and the surge in oil prices on the international market, Mauritius has no choice but to embark on bold structural reforms. This is precisely what we are doing. Efforts at fiscal consolidation with a view to maintaining medium-term fiscal sustainability, the achievement of a stable macroeconomic environment and the maintenance of social consensus are some of the key ingredients for ensuring the success of these economic reforms. The achievement of higher job-creating growth remains a central policy challenge for Mauritius now and in the years ahead. To make any significant dent in the unemployment rate, standing at around 8.8 per cent, Mauritius needs to move to a higher growth path of at least 7 to 8 per cent per annum. In developing new growth poles, we must take care to consolidate the existing pillars of the economy, a consideration not without implications for the conduct of monetary policy. The erosion of trade preferences for its main exports, coupled with the challenges stemming from globalization, make it imperative for Mauritius to raise productivity and become globally competitive. As the country shifts progressively toward a service-dominated and knowledge- based economy, labour-market flexibility has become vital. The central wage-setting framework that characterized the labour market since before independence allowed for little wage moderation, did not favour wage differentiation across sectors and enterprises, and focused more on job preservation than on job creation. The recent establishment of the National Pay Council, which aims at broadening practices in wage agreements to reflect better sector- and firm-specific conditions, represents a breakthrough in labour market reform. It will enable us to link wage growth to productivity gains. This, together with the implementation of the proposed changes in labour regulations, will give the much needed flexibility in the labour market. As regards the external accounts, the deficit on the current account represented 8.1 per cent in FY 2006-07, compared to 5.2 per cent of GDP in FY 2005-06. This deterioration reflected mostly the worsening merchandise account deficit which was itself due largely to the purchase of two aircraft. This was however offset to some extent by the combined surpluses on the services, income and current transfers accounts. If we exclude the purchase of aircraft, the current account deficit for FY 2006-07 represented 5.0 per cent of GDP, or a slight improvement on the preceding year. For the current fiscal year, the current account deficit, including the purchase of aircraft, is estimated at 4.8 per cent. Policy must now reckon with some evolving fundamentals emanating from the external sector, particularly in the capital and financial account of the balance of payments. The fundamentals of the balance of payments are no longer determined by the trade balance alone. The overall balance of payments posted a surplus of Rs 6.6 billion in FY 2006-07 and a surplus of Rs 13.5 billion in calendar year 2007, as against a deficit of Rs 4.6 billion in calendar year 2006. Gross total tourist earnings amounted to Rs 40.7 billion in calendar year 2007, up from Rs 31.9 billion in 2006. Foreign Direct Investment (FDI) is estimated to have reached an unprecedented peak of Rs 11 billion in 2007, up from Rs 7.2 billion in 2006. FDI is growing rapidly in response to reform efforts, and there are good prospects for attracting still more significant FDI flows to Mauritius in the medium term on account of the numerous mega projects in both the public and private sectors. These relate mainly to the tourism Integrated Resort Scheme projects, a Chinese integrated industrial project, and some real estate development projects. Coping with these unprecedented capital inflows remains a major challenge for the conduct of monetary policy for the Bank of Mauritius. Today, the Bank of Mauritius finds itself confronted with the important challenge of reducing the rate of inflation, which stood at 9.0 percent at the end of February 2008, and preserving the competitiveness of the export-oriented sectors, given the tendency for the capital inflows to generate pressures for exchange rate appreciation of the rupee. There is a tendency in some quarters to think of exchange rate adjustment as an easy solution to the type of problems that we are currently facing. Unfortunately, currency appreciation or depreciation cannot be a panacea for our economic ills. We should not forget that both appreciation or depreciation of a currency are at best a mixed blessing. While appreciation may help us to contain inflation, it may also lead to a loss of international competitiveness. Similarly, a depreciation of the currency, while being beneficial to the export-oriented sectors, would also have potential inflationary consequences for the rest of the population and for the wider economy. In terms of macroeconomic policies, there is a policy trade-off between the extent of exchange rate adjustment and the inflation rate. The way forward for a small open economy like Mauritius is for it to aim to become more competitive through the achievement of real productivity gains. Long-term competitiveness depends not on exchange rate changes but on productivity growth. Short-term exchange rate accommodation can only serve to postpone the need to address the real issues relating to productivity improvement and good management. Mauritius has a managed floating exchange rate regime with no pre-announced path for the exchange rate. As a matter of policy, the Bank has allowed the free play of market forces to determine the exchange rate. Intervention by the Bank of Mauritius in the domestic interbank foreign exchange market aims at smoothing out volatility in the rupee exchange rate and improving the functioning of the market. It is not aimed at offsetting market forces or at targeting any specific exchange rate as the Bank does not have any exchange rate target. The policy approach used by the Bank of Mauritius in the face of incoming capital inflows has also been validated by the recent Article IV Mission of the IMF. The conduct of monetary policy has to be freed from sectoral considerations. It is not the role of the Central Bank to support a particular sector at the expense of other sectors. Policy should aim at promoting the general interest of the country and that is what we have been trying to do. Part III: Challenges emerging from globalization After these remarks relating to the specific context of Mauritius, what can we say about the implications of globalization for the conduct of monetary policy in this kind of situation? But, more generally, some of us are beginning to wonder whether globalization should lead to a reassessment of central banks’ primary objective of price stability. Especially now, in the light of the recent actions by the US Federal Reserve which seems to be more concerned about staving off recession and kick-starting the economy. Should we revisit the entire framework of economic and monetary analyses in central banks? How do we react to a range of variables that have now assumed greater importance in global markets? Has globalization altered the way monetary policy influences inflation and output? In other words, has it affected the transmission mechanism of monetary policy? Not that we knew much about this in the first place, as some people would have you believe! Should monetary policy react directly to exchange rate movements or should it only focus on inflation and real GDP? It is often asserted that the more we integrate global markets, the more we have to sit back and let markets work. Can central bankers in small open economies faced with unprecedented capital flows afford to do just that? How interventionist should a central bank be under such circumstances? How resilient are our monetary policy frameworks? Do we need more sophisticated economic and monetary models to address the monetary policy challenges stemming from globalization? With globalization, small open economies receiving unprecedented capital flows face the daunting task of managing these external flows in order to ensure macroeconomic and financial stability. Monetary management has to contend with the vicissitudes of capital flows and the increased volatility in exchange rates. While the distinction between short-term and long-term capital flows may be conceptually clear, from an operational viewpoint, there are severe problems in distinguishing between the two. At any given time, some of the inflows could be of an enduring nature whereas others could be temporary and, hence, reversible. In the face of such uncertainty in determining the temporary or permanent nature of inflows, is it justified to blame your central banker if, out of prudence, he assumes that the flows are temporary until their permanent nature can be established? There are some underlying similarities in the challenges faced by India and Mauritius in the face of capital inflows. There is also, however, a very significant difference in that. India does not have full convertibility of the capital and financial account of the balance of payments. This difference translates into some additional leeway for the Reserve Bank of India in managing capital flows. Mauritius with its open capital and financial account, since the abolition of all capital controls in July 1994, does not have some of the tools which RBI has at its disposal. Introducing capital controls under any guise is certainly not an option for us. Part IV: Challenges for monetary policy What, then, are the challenges faced by a small open economy in the conduct of monetary policy when confronted by unprecedented capital flows? As I said in my opening remarks, this is a question which has been troubling me ever since I took the helm of the Bank of Mauritius one year ago. As most of you are no doubt aware, in economics, simultaneously targeting an exchange rate and maintaining an independent monetary policy, with an open capital account, is considered an impossible trinity. This famous trilemma follows from the Mundell-Fleming model, which states that countries cannot simultaneously fix their exchange rate, have an open capital account, and pursue an independent monetary policy. Only two of these three objectives are mutually consistent. Even with a fully floating exchange rate, it has become more difficult for a small open economy facing unprecedented capital flows to run an independent monetary policy. And, boy, don’t I know it! Governor Reddy, in his recent address last week, in Paris at the International Symposium of the Banque de France on “Globalization, Inflation and Monetary Policy”, underlined the simultaneous challenges, from several angles, to the conduct of monetary policy arising from recent financial market turbulence, the growing importance of global factors relating to abrupt and large policy shifts in monetary policy measures of the major economies, and the unprecedented inflationary pressures due to food and energy prices. I fully endorse Governor’s Reddy’s view that these developments certainly warrant significant and innovative ways of cooperation among central bankers. Interventions by the Central Bank to purchase large amounts of foreign exchange from the market have an expansionary impact on the domestic money supply and pose challenges for the conduct of monetary policy. Just to illustrate the point I am trying to make, only yesterday we at the Bank of Mauritius had to intervene to purchase Rs 1.8 billion of foreign currency in dollars and Euros from the domestic forex market to prevent this market from seizing up altogether as major players reached their foreign currency exposure limits. This was a new record, improving on the previous record for a single transaction of Rs 1.6 billion which we conducted just before Christmas 2007 when we purchased Euros 40.5 million from the market. I suspect the present record will not stand for long either. To appreciate the relative enormity of these transactions, remember that the Bank’s capital base is currently Rs 1 billion and our general reserves stand at Rs 23.5 billion. To sterilize the excess liquidity stemming from these capital inflows, the Central Bank has to issue Government or Central Bank securities. In the case of Mauritius, where we now have a separation of debt management from monetary management, this entails the issue of a huge amount of Bank of Mauritius Bills for monetary policy purposes, with a potentially adverse impact on the Central Bank’s balance sheet and its profit and loss account. It is instructive to recall here that in the recent past, more precisely in FY 2003-04, the Bank of Mauritius incurred a loss accruing largely from its monetary operations at a time when its returns on its foreign exchange reserves were also at a very low point, with rates on the US dollar hovering around 1 per cent. With the current apprehension of an imminent recession in the United States and the aggressive easing of interest rates by the US Federal Reserve, conducting such levels of monetary operations to sterilise the projected volume of capital inflows would, in all likelihood, move the Central Bank into negative territory. Such an outcome becomes a near certainty given the significant interest rate differential that exists between the yields on Central Bank securities, currently around 8.0 per cent, and placements in US dollars which stand at around 3.0 per cent. Globalization has indeed complicated the task of monetary management .With globalized capital markets, a small open economy, faced with such unprecedented capital flows, must grapple with a potentially very serious challenge of keeping inflation under control, if it is to prevent exchange rate appreciation from undermining external competitiveness. There are clearly costs for the Central Bank in running monetary policy that have to be explicitly recognized. I believe that the instruments and operating procedures of monetary policy have also to be constantly refined to meet the challenges that arise from unprecedented capital inflows. Moreover, central banks are required to strengthen their balance sheets in order to manage the shocks impacting on the economy. A central bank’s capital and reserves have to be strong enough to be able to sustain repeated intervention in the money market. Given the uncertainty surrounding the nature of capital inflows, it would also be prudent for the central bank in small open economies to build up reserves as a cushion against a possible change in investor sentiment, leading to a sudden stop syndrome and the even mare dreaded reversal of capital flows. In these circumstances, should the Governor sound the alarm bell and seek help from the Minister of Finance? To offset the strong impulse on aggregate demand from the large capital flows, isn’t a hefty dose of fiscal consolidation just what the doctor ordered? Or will the Governor be accused of being a spoilsport in such good and buoyant times? To sum up then, I would say that central bankers are indeed living in very interesting times. It is taken for granted that they are a smart bunch. But being smart is no longer enough. We must also be lucky. I have tried to demonstrate that, at the present juncture, the conduct of monetary policy is nothing short of a gargantuan task for the lilliputian economy that Mauritius is. To meet some of the emerging and unprecedented challenges of the financial sector, the Bank of Mauritius, which as I said earlier celebrated its 40th anniversary last year, is pursuing with renewed vigour and determination the exciting journey of modernization. We have enlisted the support of the Reserve Bank of India in the area of bank supervision, thus renewing with a tradition going back to the early years of our existence when RBI officers helped to establish the Bank of Mauritius. We are now engaged in a major restructuring of our internal organisation with the help of resource persons from Bank Negara Malaysia. The structure is now flatter, with the creation of Divisions within the Bank that are responsible for particular focused areas of activity. The Bank has adopted an open and transparent staffing strategy, with the promotion of fifty-five existing staff and recruitment of twenty-three additional staff from outside the Bank. To appreciate how fundamental is this transformation, just remember that our total staff strength adds up to only 250 persons. We are enhancing our skills and knowledge base to add value to the organisation and contribute directly towards the attainment of our organisational goals. | bank of mauritius | 2,008 | 3 |
Opening address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Workshop on Local Currency Bond Trading and Risk Management, organized by the Financial Markets Association of Mauritius, Balaclava, 24 March 2008. | Rundheersing Bheenick: Local currency bond trading and risk management Opening address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Workshop on Local Currency Bond Trading and Risk Management, organized by the Financial Markets Association of Mauritius, Balaclava, 24 March 2008. * * * It is a great pleasure for me to address you this morning at the opening of this Workshop. I consider the theme which you have chosen “Local Currency Bond Trading and Risk Management” quite topical at this juncture of the development of our domestic financial market. I salute the initiative of the Financial Markets Association and I would also like to add my own welcome to our resource person, Dr Graeme West. I understand that this is the third workshop organized by the Association after those held in 2003 and 2006 which focused on Treasury and Risk Management, and Derivatives, respectively. Do I detect a slight increase in frequency here? Does this reflect the quickening pace at which things are happening in the financial sector these days? Be that as it may, such workshops help to enhance the skills of participants and enable them to keep up with the continuous innovations that characterize the changing financial landscape. Skilled professionals and technicians are at the root of all innovations. A well-functioning bond market will help to create more growth and stability, not only in Mauritius, but also in the region. As we all know, a deep and liquid bond market is a key component of a thriving financial centre. An efficient and mature bond market contributes directly to macroeconomic and financial stability. It constitutes an alternative source of funding which can help the corporate sector to reduce over-reliance on short-term foreign currency loans. Currently, in the absence of a properly functioning local bond market, issuers who qualify for bond financing must have recourse to international financial markets to finance their local projects and have to bear the attendant exchange rate risk. Local currency bonds can thus help to protect such issuers from foreign currency shocks. The improved financial intermediation resulting from an active bond market also brings such microeconomic benefits as efficiency gains and diversification of tools for both borrowers and savers. Let me reaffirm that, as a trusted partner in economic development, the Bank of Mauritius is committed to promoting the development and efficiency of all markets, whether the foreign exchange market or the domestic money market and we keep a watchful eye on the stock market and other asset markets. We see a need to add greater depth to the market. Central banks and governments share the responsibility to facilitate and promote the development of local bond markets, remove market friction and unnecessary restrictions, and provide an environment that is conducive to both supply and demand, that is to both the issuers and investors. Bond market development has been targeted by the central bank over the past years through various initiatives. This included the establishment of an appropriate market infrastructure that facilitates costeffective and secure trading, and a transparent price discovery process. With regard to secondary market development, you all know that we set a Secondary Market Cell within the Bank in 1994. We established a Primary Dealer System in 2002. Treasury Bills have been listed on the Stock Exchange of Mauritius since 2003. We have re-introduced sales of Treasury Bills and Treasury Notes at the counters of the Bank of Mauritius last July. The deepening of local currency bond market across a range of maturities will encourage increased participation by institutional investors. We have started issuing medium – to long – term bonds on a more regular basis to develop a benchmark yield curve for Government securities across the whole spectrum. This will facilitate the development of a corporate bond market. In 2007, the European Investment Bank, with the State Bank of Mauritius and West LB from South Africa as lead managers issued Synthetic Mauritian Rupee debt in the international market. We are now considering a proposal from the World Bank for the Government to allow them to issue Mauritian rupee denominated or linked bonds In the end, however, there is only so much that the authorities can – or should – do. Whilst these initiatives add up to the necessary conditions for market development, they are unlikely to prove sufficient on their own. However good the infrastructure may be, it is for the players themselves, that is the issuers, investors and the financial intermediaries to eventually determine the shape and size of the market. It is also of paramount importance that market players adopt a participative approach for the development of the money market, as the existence of trading limits are impeding the development of these markets. Allow me now to dwell a little on the challenges that a small country like Mauritius is currently facing in the conduct of monetary policy. Today, the Bank of Mauritius finds itself confronted with the important challenge of reducing the rate of inflation, which stood at 9.0 percent at the end of February 2008, and preserving the competitiveness of the export-oriented sectors. And we must meet this challenge against a backdrop of unprecedented capital inflows which are driving up the exchange rate of the rupee. With globalization, a small open economy receiving such large capital inflows faces the daunting task of managing these external flows to ensure macroeconomic and financial stability. Interventions by the central bank to purchase large amounts of foreign exchange from the market have an expansionary impact on the domestic money supply and pose severe challenges for the conduct of monetary policy. Since mid-December 2007 the Bank has purchased a total amount equivalent to US Dollars 193 million from the domestic foreign exchange market. To sterilize the excess liquidity stemming from these capital inflows, the Bank has to issue central bank paper as we now have a separation of debt management from monetary management. This entails the issue of a huge amount of Bank of Mauritius Bills for monetary policy purposes, which has a potentially adverse impact on the central bank’s balance sheet. The Central bank, as regulator, has a different role and a slightly different perspective compared to commercial banks, Our mandate is price stability, financial stability and the promotion of economic development. In the pursuit of these objectives, profitability becomes a secondary issue and at times like the present, we have to dip into our reserves to meet the costs. When balance sheet considerations conflict with other public interest, there is no doubt in my mind which way the Central Bank should lean. We must explicitly recognize that there are costs for the central bank in running monetary policy. That is why the central bank is required to strengthen its balance sheet in order to manage the shocks impacting on the economy. The central bank’s capital and reserves have to be strong enough to be able to sustain repeated intervention in the money market. Given the uncertainty surrounding the nature of capital inflows, it would also be prudent for the central bank in a small open economy to build up reserves as a cushion against a possible reversal of capital flows. Presently, we have Treasury and Bank of Mauritius Bills with maturities of 91 days up to 364 days. Treasury notes with maturities of 2, 3 and 4 years and bonds with maturities ranging from 5 years to 29 years are issued on a regular basis. Lately we have introduced a 14 day Special Deposit facility. We feel that there is a gap between the 14 day Special Deposit Facility and the 91 day bill and in order to close the gap and manage the persistent excess liquidity in the system, the Bank is contemplating the issue of Central Bank papers with maturities of 1 and 2 months. Let me say a word about exchange rate, a subject of much interest right now. As a matter of policy, the Bank allows the free play of market forces to determine the exchange value of the rupee. Our intervention in the domestic foreign exchange market is not aimed at offsetting market forces, or at targeting any specific exchange rate. Our only objective is to smooth out unwarranted volatility in the rupee exchange rate and improve the functioning of the market. In a brief interview that I gave to the “Business Standard” newspaper in India last week, I said that even if our economy was suffering from a deluge of foreign exchange inflows, most of the foreign exchange operations were confined to the spot market. This is why we want to encourage the development of a vibrant futures and forward market that will help in creating an active foreign exchange market and introduce newer instruments for exporters and entrepreneurs to hedge and trade in the financial services sector. As regards the issue of risk management, it is a correct practice these days to use derivatives to hedge against unwanted volatilities. Derivatives can bring substantial benefits to the commercial community, in facilitating hedging and business planning. Such instruments enable financial institutions to offer a progressively wider range of services and achieve greater efficiency in the intermediation process. Unfortunately, this is one area where Mauritius is lagging behind. The market for derivatives has not picked up significantly compared to other emerging market economies. I strongly believe that the domestic financial market is mature enough to engage in derivatives trading under proper regulation. The Bank is now considering the necessary measures that need to be implemented to stimulate the development of this market. I know that. In many quarters, derivatives have a murky reputation. We do not believe that derivatives necessarily lead to market manipulation, which would be bad for a small market like ours. Rather, we see derivatives as enhancing the efficiency of financial markets and this is why we are determined to put in place in the near future the necessary building blocks for its rapid development. We are conscious that derivatives involve multiple extra policy responsibilities for the Bank. Derivatives and derivatives-trading have the potential to bring disaster if not properly supervised. Therefore one of the areas that the Bank will concentrate upon therefore is to ensure that risks are properly identified, and managed, and that downside risks which might threaten systemic stability are avoided. As we move into these new pastures designed to deepen the financial market and broaden the range of financial products and instruments, we feel that it is also the right time to encourage Rating Agencies to start operations in Mauritius. In any case this move will also be beneficial to the sector as we move on to implementation of Basle II. The Bank has already stated its intention to sell data held by the Mauritius Credit Information Bureau to accredited Rating Agencies. All these concerted initiatives will certainly take us in the direction of developing the local bond market. We also welcome the recent initiative taken by the Mauritius Bankers Association to kickstart discussions relating to the netting of financial contracts and applicable law of securities, based on the Model developed by the International Swaps and Derivatives Association (ISDA).We hope to move rapidly in this direction at the level of the legislative support required. The Bank is once again pleased to associate itself with events such as the present one. My predecessor, Governor Basant Roi initiated this arrangement with your Association and I am happy to follow. We believe that it is part of our role to develop the skills of our treasurers and we try to achieve this through our participation in events such as this one. Finally, I would like once again to commend this initiative of the Financial Markets Association to organize this workshop and I am sure that participants will make the most of it. I now have the pleasure to declare this Workshop open. I hope you will find it instructive and rewarding. Thank you. | bank of mauritius | 2,008 | 3 |
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Opening Ceremony of the COMESA Regional Payment and Settlement System (REPSS), Bank of Mauritius, Port Louis, 14 April 2008. | Yandraduth Googoolye: Payment and settlement systems in Mauritius Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Opening Ceremony of the COMESA Regional Payment and Settlement System (REPSS), Bank of Mauritius, Port Louis, 14 April 2008. * * * It is a great pleasure and privilege for me to welcome you all to the Bank of Mauritius on this opening ceremony of the COMESA Regional Payment and Settlement System (REPSS) Pilot Training Workshop which the Bank is indeed very pleased to host. This training programme is a joint effort of the COMESA Clearing House and the Bank of Mauritius, in conjunction with CMA Small Systems AB, the service provider selected by the COMESA Council of Ministers for the delivery of a turnkey operation for REPSS, and Fin-X, COMESA’s SWIFT Service Bureau and responsible for the Regional Payment and Settlement System Operations Centre at Orange in Johannesburg and the SWIFT Representative. The Governor would have very much wished to be here but he had to attend the IMF Spring Meetings which is attended by Governors around the world. In that context, the Governor met the Chairman of the SADC Central Banks Governors, Governor Tito Mboweni and in the light of the political problems which the Comoros is now facing, it has been decided in common accord with the Governor of the Central Bank of Comoros and other Governors that the next meeting of the AACB will be held in Mauritius in June this year. May I also extend a very warm welcome to participants from member states of the COMESA who are all concerned and committed to bring about improvements in cross-border retail payments in the COMESA region. A special welcome to Mr Alexey Nazarov – Managing Director of CMA Small Systems AB; Mr Willie Stoman – Managing Director of Fin-X and Mr Ekkehard Starck – Senior Business Manager, Market Infrastructures & Payments at SWIFT Brussels. Our distinguished visitors will also address you during this ceremony. We should recall that in its efforts to modernise the financial infrastructure for the benefits of free trade to flow in the region, this project, originally named as the COMESA Payment and Settlement Systems – COMPASS was initiated in 1999 and saw the active participation of Mr Ali Mansoor, the present Financial Secretary who was seconded by the World Bank to the COMESA Clearing House for two years. During his tenure at the COMESA and in the context of the restructuring of the Clearing House, Mr Mansoor designed and moved forward the process of setting up three main facilities that would greatly assist in the promotion of intra-regional trade and included a cross-border payment system to replace the COMESA Clearing House System that no longer met the needs of the region, as a result of the liberalization of most of our economies. After having moved back to the World Bank in August 1999, Mr Mamood Mansoor took over the responsibility of coordinating the regional efforts towards implementation of this project. Payment systems play a pivotal role in the soundness of all economies and as such the safety and efficiency of payment and settlement systems have always been a major concern for central banks around the world as one of their principal functions is to be the guardian of public confidence in money. This confidence depends crucially on the ability of economic agents to transmit money and financial instruments smoothly and securely through payment and settlement systems. Cross-border trade is growing rapidly as more companies source goods and services globally. International trade has doubled over the past decade. Most crossborder trade payments are handled through correspondent banking relationships, whereby a series of banks and domestic payment systems are typically linked together to move funds. While volume continues to grow pressure is being exerted on both banks and payment systems to improve the cross-border payment process. Today, cross-border payments are time-inefficient and costly for banks and businesses. Increase in global trade and improvements in physical supply chain efficiencies are creating demand for process improvements. Improvement in the efficiency and effectiveness of crossborder payments is likely but all stakeholders are being required to increase investments to change the processes and systems of corporates, banks and payment systems. International experience suggests that even in a liberalised environment, a regional payments system can facilitate trade and payments by lowering risk, reducing costs and expediting payments. In that respect, the COMESA Clearing House has been mandated to implement a system to facilitate cross-border payment and settlement between Central Banks in the COMESA region. This system, named "Regional Payment and Settlement System – REPSS" will provide a single gateway for Central Banks within the Region to effect payment and settlement of trades. It will be a complete real-time online system with an open, published interface based on S.W.I.F.T standards. The COMESA Clearing House acts as the agent of the Central Banks and bilateral limits would be set by each Central Bank at the Clearing House. Bilateral agreements between Central Banks would be formulated to further ensure that settlement would be a successful event each day. The cornerstone of the REPSS operational model is a settlement agent which will hold accounts of participants and carry out end of day procedures. REPSS is expected to stimulate and increase intra-regional trade by enabling importers to pay for goods and services in their local currencies, whilst exporters will be able to be invoiced for their products in their local currency. Local banks will access the payment system through their central banks. Any participating bank will, therefore, be able to make payments to, and receive payments from, any other participating bank. The linkages through central banks will avoid the payment chains that can sometimes occur in correspondent bank arrangements. The system will be operational through the use of the infrastructure of each member country’s central bank and commercial banking payment system. Each country will, however, need to put in place adequate enabling legislation. It is further intended to establish a Trust Fund to assure daily settlements in the event of an inability to settle by one or more participating banks. REPSS is expected to bring about multiple benefits namely a reduction in (i) settlement transactions; (ii) liquidity requirements to secure settlement; (iii) exposure to foreign counter-parties; (iv) foreign correspondent banking charges; and (v) transactional and operational costs. These benefits would immediately be passed on to traders and other stakeholders and give everyone the needed comfort to expand their trade within the region. The setting up of a COMESA Clearing House Closed User Group and the admission of all Participating Central Banks and commercial banks into the Closed User Group will greatly facilitate interactions amongst all members of the group and get all our commercial banks to have their cross-border transactions carried out securely through their respective Central Banks, without having to go through third parties outside our region. At the Twelfth Meeting of the COMESA Committee of Governors of Central Banks held in Tripoli on 8 and 9 November 2007, it was decided that a REPSS participating Central Bank acts as the Settlement Agent for the COMESA Clearing House and opens a US Dollar and a EURO account for the COMESA Clearing House at its Central Bank. Ladies and Gentlemen, the Bank of Mauritius is committed to mark its presence in the Region and the REPSS is yet another step in the commitment of the Bank towards regional cooperation, in our commitment to consolidate our relationship with the COMESA, I am pleased to announce, that the Bank of Mauritius has, on an initiative of the Governor of the Bank, decided to act as Settlement Agent for the COMESA Clearing House. We have, in this context opened a US Dollar and a EURO account at the Bank of Mauritius for the COMESA CLEARING HOUSE, pending the opening of these Accounts at the Federal Reserve Bank of New York and the European Central Bank respectively. We shall also, for settlement purposes, request all participating Central Banks to open a EURO and a US Dollar Account with us at the Bank. In order to familiarise our stakeholders with the System, we have organised a brief Information Session on REPSS just before the tea break. In an increasingly global marketplace, the COMESA Clearing House’s REPSS was a bold initiative to fulfil the funds transfer requirements of corporates, the financial institutions that serve them, and the payment systems that enable the payments. The project will also require a regional approach to structural reforms in such key areas as reducing and harmonising tariffs legal and regulatory reform, modernising and rationalising domestic payment systems, harmonising tax systems and labour market reforms. This project is the result of collective efforts from all our Central Banks in coming up with a cross border payment and settlement system appropriate for our region and possibly for the African continent. We are indeed pleased to see that our hard work is now bearing fruit and the system, which will contribute immensely towards the expansion of intra-regional trade and towards COMESA’s Regional Integration Agenda, will soon be operational in all COMESA countries, as per decisions of the COMESA Authority of Heads of State and Government. Allow me, Ladies and Gentlemen, to briefly comment on a couple of issues that are on the minds of everybody these days. In one of his recent speeches, US Federal Governor Frederic Mishkin said, and I quote, “The ultimate purpose of a central bank should be to promote the public good through policies that foster economic prosperity”. Unquote. This is specifically what is also required for the Bank of Mauritius. The primary objective of the Bank of Mauritius as laid down in the Bank of Mauritius Act is to maintain price stability and to promote orderly and balanced economic development. These two objectives are obviously connected since preserving price stability encourages stronger economic activity in the long run. This obviously implies that we do need to keep an eye on inflation. However, I rather view that the fight against inflation should be a cause of concern not only for the central bank but also for all economic players and each individual in the society. The ongoing global financial market turmoil as well as the rising global commodity prices is reminiscent of the fact that nowadays, no economy is sheltered from shocks stemming from outside its territory. While we all recognise that globalisation has provided for great opportunities, well, it has also brought with it challenges. Right now, as you are all aware and as being widely broadcast, food and other commodity-driven pressures which also include the high oil prices are impacting on headline inflation across the world. Mauritius does not stand immune to these developments. Being a net food importer, the high food bill is already impacting on our current account. In addition, over half of the domestic inflation rate results from food inflation. The situation which we are facing is not unique to Mauritius. Other economies are also witnessing this phenomenon. In such an environment, it is vital that all economic players in our economy tune in their concerted efforts and it is expected that the gains from the recent appreciation of the Mauritian Rupee be fully passed on to consumers. As you are aware, we have since November 2007 been purchasing a large amount of foreign currencies on the domestic foreign exchange market. Simultaneously we have been issuing our own instruments, BoM Bills, to sterilise the Rupee counterparts. You will realise that these foreign currencies are invested abroad at interest rates currently prevailing on international markets. The BoM Bills are issued at a much higher rate. Recently some enterprises have been complaining of lesser profits being realised. We, at the Bank of Mauritius, are very much concerned about the performance of the enterprises operating in the real sector. You will recollect our first meeting with Mauritius Export Association (MEXA) in the first week of January 2008 where in an attempt to help those enterprises, we offered to buy foreign exchange from them. We had a second meeting with them in the first week of April 2008 and we reiterated our support. Our decision to reduce the key Repo Rate at our last MPC meeting was also, to some extent, to alleviate the costs of funds of exporting enterprises. It may be reminded that all our foreign transactions are not denominated in one currency only. We also gain when we deal in a currency which is depreciating vis-à-vis the Rupee. With the restructure and re-engineering which has taken place at the Bank, the Bank is now more apt to meet those challenges. We thank you very much indeed for your presence this morning and wish you a very pleasant stay in Mauritius. May I now request Dr Moyana, Executive Secretary of the COMESA Clearing House, to say a few words. | bank of mauritius | 2,008 | 4 |
Opening address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the 7th Meeting of Governors of the Eastern African Chapter of the Association of African Central Banks, Port Louis, 15 July 2008. | Rundheersing Bheenick: The triumph of hope? Opening address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the 7th Meeting of Governors of the Eastern African Chapter of the Association of African Central Banks, Port Louis, 15 July 2008. * * * A very good evening to all of you. And a very warm welcome to my fellow Governors, former Governors, central bankers, other overseas visitors, and the representatives of the fourth estate, who are with us this evening. We are here to share our experience on monetary matters and to anticipate our convergence into a closer union as we together pursue the road map agreed for the African Monetary Programme. Happy as I am to see such a gathering of those involved in central banks in the sub-region, I am sure I speak for you all, when I say, we look forward to the day when we are joined by our friends from those other parts of our sub-region, who are not with us tonight. We are missing tonight governors from the Horn of Africa and from the Seychelles. If we are to travel together we need to integrate the hopes and the experience of all the countries in our region, not just those that have made it here today, or who are thriving best. I feel very privileged and honoured to say just a few words of greeting and to provide some preliminary observations at the start of this 7th meeting of Governors of the Eastern Africa chapter of the Association of African Central Banks. For my colleagues and I at the Bank of Mauritius, this meeting assumes even greater significance, as we are celebrating this year the fortieth anniversary of the Independence of the State of Mauritius. Whilst the Bank of Mauritius is one year older than the Independent State, the Independence of our Monetary Policy Committee remains in its infancy. Though I am bound to ask if it is early showing signs of emerging as an enfant terrible! Our Millennium Development Goal target figure for Infant Mortality is well down into single digits; I am determined that our MPC will not be lost in its infancy. Hopefully cutting infant mortality rate can be twinned by cutting our inflation rate, hovering as it is here just below the double digit mark. I see from the country reports on our convergence programme that Mauritius has sadly not the lowest inflation rate in this company. But mercifully none here has moved into the dizzy levels of the regional astronomical inflation record. Some may see the control of inflation as a fiercely complex technical matter. But I continually wonder if there much room for wildly differing opinions on monetary policy and its management. Do we need really need to take a vote on whether the world is flat or on the proof of Pythagoras’ theorem? The menu Not wishing to disturb your digestion, I shall pass lightly over the menu for the coming days. I trust you will find this more light and enjoyable, than the heavy diet of national Budget speeches and debates that have been challenging your gastric juices over recent weeks. For those who have found these too troubling, I use the word loosely, I can reassure you, that your Finance Acts themselves will be a relief when passed; there is nothing more binding than an Act of Parliament! We have chosen for our conference menu, three extra delightful dishes: • Monetary policy challenges in the region, • Financial sector stability and development, and finally • Exchange rate management with capital flows problems. The latter is the dish we have chosen in Mauritius, for our contribution to this banking culinary festival. These dishes have been added to our normal menu after extensive consultations with my fellow Governor from Kenya, Professor N’Dugu, who sadly is not able to be with us tonight, due to a last minute hitch. But that is the menu ahead. It is not really for this evening. So to whet your appetites, I thought I might, in way of an appetizer, explore a special “smorgasbord” concerned with that old conundrum: “Sed quis custodiet ipsos Custodes?” I hesitate to raise the spectre of Juvenal, who satirically posed, some 2000 years ago, the very question. A question that may haunt us yet, as we take one further step on that long road to convergence on economic and monetary union. If I may freely translate, for those whose Latin escapes them tonight, and for those of the fourth estate, who never encountered it; Juvenal was asking: “But who will govern the governors?” Governance for governors Many of you will know that the IMF itself has boldly announced that it is reforming its forms of governance, to provide more accountability and more power to the people, who are its constituents. I have been reflecting on this, within the context of the choices in governance that are open to central banks at national level and the prospects and choices that are ahead for the region. At our last meeting, you may recall, we planted a tree ( to be precise a Dombeya Friedmani tree); located at Verange Sur Morne. Le Morne itself I am delighted to say is now a UNESCO National Heritage site, celebrating that period in our history, when the slaves, from continental Africa, fought for their freedom. Dombeya Freidmani, is an apt name for our tree, for it is both a reminder of one of the giants of the monetary revolution, Milton Freidman, and the name marks our hopes for future regional banking independence! Our tree of Independence is doing well, nurtured by our experts. But like us, it has yet to mature, and we can only dream of its potential fruits. I am told by our Minister of Finance in Mauritius, that it is harvest time for the economy. I can only reply that we have yet early seedlings in our regional banking estate. Their continual growth is less certain than that of inflation in the price we must pay to nurture them. We thus must remain cautious about the futures market for the flowering and fruition of our regional banking union. So in banking what should good Governance mean for us? What are the key decisions that need to be made in providing the framework for our governance? What is independence and what forms can it take? There may be no one prescription; my point is to highlight some of the issues. I note that the Commonwealth Secretariat 1 , at their recent heads of government meeting, urged members to review three broad options for the revision of the Bretton Woods Institutions. Difficulties are engaging the FED, Jean Claude Trichet in the Euro-zone, Sweden and further afield at the Reserve Bank of India. Across the continents of the world, at international, regional and national level, there is growing debate on banking and its governance. Even the UK’s iconic 1997 model of separation of powers, is coming under review. The current global monetary and fiscal difficulties are fuelling the fire. 2 Rising oil, food Professor N Woods (2008) A Commonwealth Initiative to Support Reform of the IMF and World Bank, paper presented at Commonwealth Heads of Government meeting, June. Also see related Marlborough House Statement 10 June 2008. Credibility at Stake The Economist 14 June 2008, p 39-40; also see BBC business news Inflation in Eurozone at new high, www.bbc.co.uk/1/hi/business 7/4/2008. and commodity prices and the speculative impact of futures trading, are adding to the heat and the rising inflationary pressures. Major commercial banks are tottering and other financial institutions are going to the wall. Issues for debate So now in our national and sub-regional debate about arrangements for the future, let us touch on some issues that are now being seen in a new light, not so much of principle, but in terms of the performance and results that ensue. We are fast moving from management arrangements based on the theory of banking, to results-based governance. In our own Bank of Mauritius Act 2004, members of the MPC have a statutory duty not to be subject to the direction or control of any other person or authority, in the discharge of their duties. But what are the sanctions to enforce this duty if they should be tempted or persuaded to take a line fed to them by business or the Government itself. How can we govern to achieve evidence based results if jobbery prevails? Questions for governance Let now us explore a little some of the hot questions on governance of central and regional banks. • Who should decide interest rates? Should a Central Bank be truly independent on these technical matters or its assessments continually second-guessed by political placemen appointed by the government? • Who should supervise commercial and other banks and other financial institutions? Is this the proper field for the central bank or as in the UK should that role be displaced to a financial services authority? • What is the meaning of “policy” and “strategy” reserved for the Boards of Banks and how does it differ from “policy objectives” enshrined in the Bank constitution? Should “policy” be allowed to stray into the field of “operational management”, where this is entrusted to the Governors and their staff? Should the Board have its fingers in the appointment of staff, the organisation of staff and decisions on the detailed deployment of the budget of the central bank? • Who should hire and fire the governors and on what grounds? What are the implications for governance in the choice of options, whether by direct appointment by the Board of the Central Bank; or direct appointment by the Minister of Finance; or direct appointment by the PM or the Head of State? • Who should appoint the Board of the Central Bank? If, as is often the case, the only shareholder is the government, and for other reasons the Bank must have operational autonomy, how do we ensure an effective separation of powers? • How should voting be regulated on the Board of a central Bank, whether on a national or on the regional bank we are contemplating? What matters should be decided by unanimity, what by a simple majority? Should we consider proportional representation, consensus, or, for the regional matters, touching on discrete national interests, should we have a requirement for even double-majority voting, that is, after an agreement by the Bank, a reference back to each nation for ratification ? • What should be the tenure of office for Boards and Governors? Should they have fixed, or open tenure like some judges dependent on “good behaviour”; should these jobs be open to competition on merit, and with freer movement of labour, should the choices for employment with national and regional banks be limited on grounds of nationality? This issue is hotly debated now with the World Bank and the IMF, where, at least for the Fund, the next Managing Director will be appointed in a different manner than has been the case since its creation. • How is accountability to be ensured? Is that a matter solely for the Board, or the shareholders; at national level should there be a cross-party Parliamentary committee of scrutiny; and what do we envisage for our regional bank to safeguard probity and avoid even the suspicion of loose practice? • What is transparency? Should documents be open to examination by the Board, or by Parliament or indeed by the people, under freedom of information? How far should voting behavior be reported; should it be just the overall outcome or the detailed voting by individual members, as in many Parliaments? • Who should be the shareholders? Should this be limited to the states or opened to the private sector and to others; and, with the rise in shareholder interest in management in many companies, what should be the shareholder rights and powers in central and regional banks? • Are central banks for the Governments, or for the people? How should this choice be reflected in the forms of governance? Architecture and performance These are some of the issues emerging, haltingly, on the agenda at national, regional and international levels. The mere fact of raising the questions suggests some answers, or some possible avenues for searching for them. In the final statement from the Commonwealth meeting in June, this year, reflecting on the performance of the Bretton Woods institutions, the judgment was unequivocal: “…such institutions do not have adequate capacity, governance structures, or built-in responsiveness either to anticipate or to address global needs in a timely fashion…” This critique is essentially about the functioning of the financial architecture not the architecture itself. It is the proof of the pudding test! It is not merely what is on the menu, nor just what is in the recipe itself, but how it affects the palate! The design standards may be seen as providing a necessary framework for the rocket; but does it get take-off and does it reach its target? Those are the ultimate requirements in rocket science: it is necessary to have a viable design but the ultimate test is in the performance itself. Or as Marchamont Nedham put it, in 1657, in his Letters from Utopia 3 : “There is no everlasting Principle in Government, as to any one particular Form…;…it…must be alterable according to the variety of emergent Circumstances and Accidents; so that no certain Form can be prescribed at all times, seeing that which may be commendable at one time, may be most condemnable at another.” Or as Alexander Pope put it, perhaps, more succinctly in verse: “For forms of Government let fools contest; What e’re is best administered is best.” 4 Thus, in designing systems for the governance of Banks, we should be concerned with what delivers the goods, the very outcomes. The task before us is to explore, in the variety of Worden B (2007) Literature and Politics in Cromwellian England, Oxford. Pope A (1734) Essay on Man, Epistle 4. experience available, what works best, looking at developed and less developed countries, looking from the North to the South, from the East to the West. We may recall that for example in West Africa they have had an economic and monetary Union since 1994. There was a Rand monetary area. There was a French franc area, the CFA. All these examples can enrich our debate, even if they do not provide the specific building blocks we need. We should explore in all this experience the association between Forms and Outcomes. Then we can better see what are the necessary and the sufficient conditions for getting the results we seek. The issue, it seems to me, is not so much in the architecture, but in the durable capacity of the systems for delivering results. We must build for resilience of the systems. They must be secure in the face of accidents and unforeseen circumstances. We need to recognize the importance of biological models and their capacity for adaptation. Or perhaps we need more pointedly to acknowledge both the binding power of statutory law and the more subtle capacities of Common Law that survive, resilient, through the manifold tests of time. Performance criteria The Commonwealth Heads of Government at their meeting in June this year formally addressed the governance of international banks that: “global crises require truly global and universal response…” And they called on these institutions to exhibit: more legitimacy, fairer representation, more responsiveness, flexibility, transparency, accountability and effectiveness… They made a commitment to pursue these matters with the UN and in other international fora, as a matter of urgency. But for us now, this very critique of governance of international banks can provide the tests for our future plans. Are we giving enough weight in our plans for regional union to these seven critical tests: legitimacy, representation, responsiveness, flexibility, transparency, accountability and, above all, effectiveness? How do we score on these test at national level? Tough talk from the Commonwealth; tough tests for us! Yet are these not the very pertinent principles we should adopt for governing the Governors? As we look forward to our regional banking and our closer monetary engagement, what import do these performance criteria have for any future contract of marriage? What do these principles imply, indeed, for the governance of central banks at national level? Will they help to provide a new more relevant architecture, to ensure the resilience we shall need, to confront the looming crises of confidence and sustainability in our region and beyond? For as A P Herbert, that wit and lawyer of yester-year, once remarked: “The critical period in matrimony is breakfast-time” The cyber-state Financial services and their ICT dependent back-up are rapidly becoming the over-riding powers in our economies. Our leaders here refer to our “cyber” city. Now that word “cyber”, derives from the Greek, meaning “steersman”. It has become a metaphor for guiding the ship of state. But after breakfast when we go ahead in regional banking, if the governments are at the helm; the private sector, the engine, are the central banks to be confined to be merely the brakes? The trouble with the IMF and the World Bank is not in their lack of capacity for applying or releasing the brakes, but they ran off the road when they tried their hand at navigation and driving. This sorry tale has lessons for us at national level at the interface of the governance of banking, finance and political government. The lessons are even more pertinent as we move towards the new vision of the regional and global banking roles for the future. The continental financial plates have been undergoing an intractable process of geophysical shifts. The fulcrum has migrated from Washington to Dubai and Beijing. It is not just the Washington consensus that has collapsed, under the rising tide of globalization. We are now engulfed in a climate change in economic and financial affairs. Superseding Authority and History, we now have the evidence based test of performance. We now have the call for essential legitimacy, relevance and effectiveness. Complaints on the Bretton Woods Institutions are not new. But the difference is that these protests have at last reached the ears and conscience of those running the Bretton Woods Institutions themselves! The charges are manifold but in the midst of the current crises in global finance, the worst charge against any bank is that it has become “a fire brigade that is too far away.” Emerging economies and developing countries have become so disenchanted with the existing global financial architecture, not least countries in this region, that there is emerging what Professor Woods has termed “Anger in Africa” towards those ageing financial global dinosaurs. No wonder at it, so locked in the past are they seen to have become, so inflexible and prescriptive, so inept at responding to a changing world. A long engagement As we look at our tasks ahead, we might do so in the light of that common family experience of preparing for the marriage of a daughter or son. Joy tempered with Realism. So I guess we are in for a rather long engagement in sub-regional banking. This is our seventh encounter and at present we are just about holding hands. The prospect of formal registration and the very act of consummation is, have no fear, yet a long way off. But as George Meredith ironically declared: “Kissing don’t last: cookery do!” Thus if we are to progress from flirtation to commitment, we must enter the kitchen, roll up our sleeves and encounter the heat, global warming and all! Beyond the looking glass For this our 7th meeting here in Mauritius we have a clear agenda on important current aspects of monetary and financial matters. At this time when banking has become a rather hot issue of geopolitics, we might wish to heed the grinding of the underlying geopolitical plates. It is, I believe, an opportune moment. Let us, then, over these days, give some thought to the implications of the structural issues of governance, I have touched on tonight. Let us reflect on the guiding principles which should govern the longer-term strategy of our central banks. For we are moving step by step, from merely holding hands, towards that undiscovered country, the terrors and delights of a regional monetary and economic matrimonial bed! As we peer then, beyond that looking glass, to glimpse the reality of that distant event, we should endeavour to ensure that our future marriage becomes more than a mere “.. triumph of hope over experience” 5 For as we navigate through today’s troubled waters, we should reflect on Harold Nicholson’s prescription for surviving such matrimony when he once opined: “The great secret of a successful marriage is to treat all disasters as incidents and none of the incidents as disasters” Let us now together rise; I call on you to raise your glasses to our long, fruitful, disaster-free engagement, and to our absent friends. Dr Samuel Johnson. | bank of mauritius | 2,008 | 7 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on the occasion of the re-branding of First City Bank Ltd to Bank One Ltd, Port Louis, 8 August 2008. | Rundheersing Bheenick: “Thou art translated” Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on the occasion of the re-branding of First City Bank Ltd to Bank One Ltd, Port Louis, 8 August 2008. * * * A very good evening to all of you. Today is a propitious day. Indeed a palindromic day. A day when forwards and backwards it remains the same. We have the quintuple palindromic zeros of the Olympics, opening today. Then today itself of course is palindromic (the triple 8’s of today’s date: the 8th day of the 8th month of the 8th year of this century). So I am delighted to be present here on this occasion when we witness the translation of the First City Bank Ltd into Bank One Ltd. The first Bank into Bank number one! How fitting a symmetry for a palindromic day! My name is Bheenick. Manou Bheenick. And I am a double O too; or perhaps a double O three. For those of you who are familiar with the opus of Ian Fleming, that’s one better than the eponymous James Bond. I have three licences; and for the very first time, I shall be operating all three licences on the same propitious day. I have a licence to print money: we are always doing a bit of that, though in the name of St. Milton, not too much! Then I have two other licences: a licence to open banks and a licence to kill them. Mercifully, today I am operating those in reverse order. Killing off one Bank and then opening Bank One! Here, I have to confess to a secret dream…a monthly recurring dream, about applying this power to certain of my committees operating at the Central Bank! But let us examine how the translation procedure for this bank has come about. Our hosts have had, if I may use the phrase, a rather chequered past. No secret this. First in the guise of BCCI, which became quite notorious in international banking. Then a makeover to become Delphis Bank Ltd, whose promoter seems to have done a fair bit to live up to BCCI’s unsavoury reputation. Then transmuted to be fashioned as the First City Bank which became the first bank in the city which I had to worry about when I became Governor. And now, its warmly anticipated reincarnation. The new management of Bank One Ltd is in the hands of a well-regarded Kenya-based Investment and Mortgage Bank and a prominent local business house, CIEL Group. Bank One Ltd. is now being set up to become a fresh and exciting player on the field for a new premier banking season full of promise. You might ask, what’s in a new name? But changing names is often a special event. On marriage for example; what was she before she was Mrs. Thatcher? On stardom: to take a couple of well-known examples from Tinseltown, what was the name of John Wayne or Marilyn Monroe? On religious conversion; that great Olympian with that great punch will surely be always renowned as Mohamed Ali. And it was not just for a change of name that we as a nation underwent mass conversion into the Republic of Mauritius. Thus a new name is an integral part of re-branding. It is a signal to the world; a break from the past. A much-needed one in this case. But as such it must not be merely a signal for the outside world; it must also be internalized in the very spirit of operation of the bank. The essence is in the transformation of the inner space. This re-branding exercise must renew the very gears of this bank, to give it the capacity to adjust effectively to the ever more challenging banking world. New customers come to you if you offer a distinct and improved level of service. The new branding makes the promise; it is now for you and your staff to deliver on it. These good first impressions will only yield returns if they are matched by the lasting reality of the accessibility, profitability and security of transacting business with you, and your positive contribution to the economic growth and development of this country. We at the Central Bank, share in the joy of this occasion with you today. Yet we shall keep an ever-watchful eye on your development, as a watchdog must, to safeguard this country’s reputation for probity as an international financial centre. A central bank always welcomes new ventures; and a failure or two: “pour encourager les autres!”. Today we have in a nutshell one of each; a demise and a resurrection. Looking beyond our shores, it is not a good time for banks. Many, today, are suffering from a liquidity crunch from the extremes of the credit delinquencies of the past. Can we be sure that the Basel II framework can provide greater protection in the future? Capital adequacy, even when risk-based, is no substitute for liquidity when markets dry up. You will know that we at the Central Bank have also embarked on a review of the operational guidelines to give banks more functional freedom, without losing sight of prudence. Growth in the financial sector must be matched with the best standards of governance. It is heartening to note that the banking system in Mauritius has remained insulated from the meltdown in the west in the wake of the sub-prime mortgage lead crisis. Today, looking back over the twelve months ended June 2008, we are seeing strong growth in the banking sector. The number of bank branches in the country has increased from 178 to 186. The number of ATMs has gone up from 334 to 382. We are now on the threshold of issuing licenses for the first Islamic Banks. These fresh players will keep you all on your toes. June to June figures show the total balance sheet of our banks growing from about Rs 624 billion to Rs 729 billion in June 2008, that is an increase of over Rs 100 billion in one year. There is more than adequate liquidity in the system. The declining trend in the percentage of NPLs to total loans continued. Profits during the year shot up by Rs 1 billion, or 11 per cent higher than the previous year, and were just shy of Rs 10 billion. The capital base of banks continues to be strong. The shares of the two listed banks have held steady on the local stock exchange. So much so that these two banks now account for an astounding 42 per cent of total market capitalisation, compared to little above 30 per cent in June last year. We trot out these figures with some satisfaction. We are nevertheless, aware that there is no room for complacency either on our part as regulator or on the part of the banks themselves. We will maintain our vigilance and we will be proactive in dealing with any asset bubble or liquidity crunch, should we foresee any on the horizon. As a regulator on banking, one has to say, that in the past there has been rather too much inertia in the area of consumer choice, unrelated to evidence-based assessment. We want to achieve greater transparency regarding spreads, fees, charges, commission and the like. We are currently looking at ways of promoting both more “shopping around” and enhancing consumer financial literacy. We are also working with our friends in the Mauritius Bankers Association to stimulate competition in the cash segment of the foreign exchange market. We have just licensed 14 new money changers. To bring them on stream in an orderly manner we are putting in place an on-line real-time monitoring system. This is all part of the vigilance necessary to improve on our record in the implementation of the Financial Intelligence and Anti-Money Laundering regime. You are all aware of the tough times we are going through now and the even tougher times that lie ahead as inflationary pressures intensify. Sustained monetary and credit expansion have compounded these pressures. Broad money and private sector credit have been accelerating, almost doubling their rate of growth. Credit to the private sector increased by 22 per cent during the fiscal year 2007/08, compared with 12 per cent last year: Broad money supply expanded by a hefty 17 per cent, as against an increase of 8.6 per cent in the fiscal year 2006/07. Headline inflation has climbed to 9.1 per cent in July 2008, while the year-onyear inflation, has crossed into double digits to stand at 11.5 per cent at the end of July 2008. How I wish I had been wrong when I forecast precisely this kind of outcome two months ago! At this present juncture, we at the central bank have been examining the various options available at hand. Here, I feel I must preface what I am going to say by pointing out that I was actually looking forward to abolish the Cash Reserve Ratio. Such a step would level the playing field between domestic and offshore banks, or more precisely in our jargon between Segment A and Segment B activities of banks. It would enhance our status as an international financial centre. It would naturally have to be preceded by other measures relating to depositor protection and prudential requirements. These are all issues that we have on the drawing board. I still hope to be able to implement them on my watch. But they are not to be ….. not just yet. We have to put them on the back burner. We have other, more urgent, fish to fry. We cannot allow an inflationary psychology to take hold. We must protect the purchasing power of the people. Much as we would have liked to avoid it, we seem to have very little option than to raise the Cash Reserve Ratio requirement. Let us remind ourselves that this tool is being resorted to by several central banks around the world in their own fight against inflation, often in conjunction with steep rate hikes. Therefore, after careful consideration of all aspects, the Bank has decided to raise the Cash Reserve Ratio from 4 per cent to 6 per cent. I must reiterate here that any tightening of monetary policy stance is always a painful exercise for central bankers. Finally, while I am on this subject of inflation, let me add that in the debate surrounding the recent discussions of our Monetary Policy Committee and on inflation generally, it is important to distinguish between the medium and the message. I depart somewhat from Marshall McLuhan’s message that the medium is the message. This is certainly not the case here. As Chairman of the Monetary Policy Committee, I am reminded of some other more appropriate words of McLuhan who said on one occasion “I don’t necessarily agree with everything I say”. As Governor, I must stay on message with the mantra of monetary stability. Let us focus the debate on the evidence, the options in dealing with inflation and the signals to be made. Forget the medium. Hear out the message. And yes, don’t shoot the messenger. With these words, I sincerely hope that this re-branding exercise will steer a new path for this new bank. I wish the new owners and the new management all the very best in their endeavour. So, as Governor of the Central Bank of Mauritius, on this most propitious day, I do now exercise two of my powers and hereby revoke the licence of the First City Bank……Oh yes, of course, ….. and it is my great pleasure to inaugurate a new licence for Bank One Ltd. Thus in the words of Peter Quince: “Bless thee …Thou art translated!” Thank you. | bank of mauritius | 2,008 | 8 |
Address by Dr Jameel Khadaroo, Second Deputy Governor of the Bank of Mauritius, at the University of Technology Mauritius, Port Louis, 25 August 2008. | 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. | bank of mauritius | 2,008 | 9 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on the occasion of the re-branding of South East Asian Bank Ltd as Bramer Banking Corporation Ltd, Port Louis, 29 August 2008. | Rundheersing Bheenick: All change now Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on the occasion of the re-branding of South East Asian Bank Ltd as Bramer Banking Corporation Ltd, Port Louis, 29 August 2008. * * * A very good evening to all of you. I always like to open a new bank – • It is good for aspiring staff • It encourages others to do better • It is good for competition in the high street • It is good for customers • And it is good for the country There is much goodness in new banks. Let’s have more of them. Competition is at the heart of good governance. A new bank forces us all to re-examine our credentials, our levels of service, our standards, and our performance in this highly competitive and unforgiving world. I heard recently of a case where someone wanted to open a new account with a large sum of money – one established bank proposed one week to complete the procedures to do so while a new bank, just a couple of yards up the road, did it on the spot within five minutes. Such is the nature of the market – continued renewal. An upstart can take on a giant ……….. and win! A new bank is like “the gentle rain from heaven upon the place beneath” – “it brings fresh showers to the thirsting flowers from the seas and the streams”. It is a refreshing breeze. So, I am delighted to be here on the occasion of the refreshing of South East Asian Bank Ltd as Bramer Banking Corporation Ltd. It is indeed becoming quite a refreshing season, especially as this event today signals the entry into the domestic banking scene of the British American Investment Group – a Mauritian conglomerate with a well-established presence in other segments of the financial sector, both locally and overseas and, which, based on total assets, ranked 9th in the local business league in 2007. 1 So, on this new breeze, we have insurance, foreign exchange, leasing, and much else. I therefore see this event having more far-reaching consequences going well beyond the domestic financial sector and reflecting the broader economic ambitions of the country. For we need banks, not just in the business of money lending, but at the heart of sustained economic and social development. In this specific case, the brand change brings with it the promise of a fresh focus for its business and the type of customers it will target. In this new spring, we need our banks to be promoting fresh growth and enhanced customer services. The confidence of the customer has to be won, retained and constantly refreshed. Quality of service is key, as are financial strength, good corporate governance, customer-friendly practices and trust. I am confident that this bank, now under a new name, new ownership and new management, will lead to a fresh flowering of innovation and quality in all these areas. As the banking sector literally explodes, driven by new players and relentless financial innovation, the central bank, which is here to oversee and regulate, cannot remain static in Source: ‘The Top One Hundred Companies’, Business Publications Ltd 2007 Edition, Mauritius. the way it is organised and discharges its responsibilities. We at the Bank of Mauritius must rise to the challenge. My colleagues and I, we must be prepared to leave our comfort zone. We must question our rules, our regulations, our practices, our processes, indeed ourselves. That is the price to pay to achieve our ambition of graduating to the status of a well-regarded international financial centre. That is a price we are prepared to pay. The ambition drives our action. But, as always, some want the end but would deny us the means to achieve it. There are pockets of resistance which are building up steam in an overheated and misguided attempt to cling to the past and derail us from this shared national vision. I have also taken up the challenge of promoting Mauritius as a friendly international financial centre. As we must, we are refreshing our core services to confront the new challenges and to tap the new opportunities that beckon. But change-management is never easy. Change-management is post-doctoral studies, often conducted under withering and concentrated fire, by kamikaze supporters. Doing good by doing better is what ultimately drives these supporters and myself, not any suicidal instinct to commit collective hara-kiri. Mr Bruno Julie, whose feat in the boxing ring in Beijing we now celebrate as a nation, well demonstrates the spirit of achievement and the determination which we need to galvanize us. With his bronze medal, Bruno Julie has got tiny Mauritius a coveted place in the Hall of Fame among the giants of the global sports world. But his incomparable performance led me to a wry reflection which I would like to share with you. On a distinctly less celebratory note, the Bank of Mauritius and the South East Asian Bank which we bury tonight, have a common in-house culture of anonymous letters. If poison-pen letters and anonymous tracts were also, like field and track events, an Olympic discipline, the Bank of Mauritius would have won a gold medal a long time ago! Well before the current avalanche of sleaze allegations and malpractices targeting my person. It pains me to see the time and resources spent by some disgruntled staff in tarring management’s image. But I must say that I often admire the fertile imagination and creative instincts behind some of these concerted attacks. It is sadder still to see some of these smear reports being taken up by the mainstream press. Your bank would probably have got home with a bronze medal for the preposterous allegation that an unnamed high official of the Bank of Mauritius has bribed your CEO for some unfathomable reason. You must be wondering what happened to the silver medal. Let me tell you that this would go to an equally nasty piece of work alleging that a senior member of the political establishment and one family member are involved in money laundering. Now all these crossed my desk in the last four weeks. This must have been the kind of thing which Malcolm De Chazal, a famous Mauritian artist, writer, philosopher – and the closest we have had to a polymath – was referring to when he said that “A Maurice on cultive la canne à sucre et les préjugés”. Now, there’s a culture that we could do without. But these are mere diversions. They may detract us. But they certainly do not distract us from the mission and the mandate that are ours. We at the Bank of Mauritius have been advocating a culture of transparency for greater accountability. We have been canvassing the idea of establishing a Select Committee of the National Assembly for hearings of the Governor and his associates on the Bank’s policies and strategies. We believe this will help to clear the air and expose the sensational headlines to more rational debate. Indeed, we have plenty of reason to be satisfied with our record so far. This is not the time or the place to give you chapter and verse of all the changes that we have brought since assuming office in February last year. It will have to wait for another day. Despite the gloomy tales from abroad of the demise of the banking sector here, in Mauritius we can take some pride and comfort that, in the past year, our banking sector in particular, and the financial sector in general, have registered consistent growth, profitability and strength. We are all delighted that the Mauritius Commercial Bank now figures among the Top 20 banks in SubSaharan Africa: this sets a new standard in the field. I am mentioning this en passant to encourage the new bank to be ambitious and set its sights high. We look forward to the day when the Bramer Banking Corporation will pass this post too. Just don’t take that long to get there! The fresh wind of Islamic banking is also keeping us all on our toes. We have moved fast from idea to action. We have consulted far and wide. We have issued guidelines. We have joined the international standard-setting body for Islamic Banking. We have invited applications. We have processed them. And, tonight, I am pleased to announce that a few days ago we issued our first two “in principle” approvals for full-fledged Islamic banking licences. As they say, watch this space for a further announcement! In the meantime, we are pressing ahead with our plans to roll out Sharia-compliant Treasury products before these first two banks open their doors – and others open their windows – for Islamic banking business. Very often, when we discuss the performance of the banking industry, whether conventional or Islamic, we tend to focus on issues of profitability, capital adequacy, asset quality and so forth. We tend to forget the “people” issues. Do you know, for example, that our banks have a combined total of 2 million deposit accounts? That is an average of 1.55 accounts by head of population, man, woman and child included. Do you know that we have 180,185 credit cards in issue? That makes 150 cards per 1,000 inhabitants. Do you know that everyday, we issue an average of 21,160 cheques? And did you know that at last June, the sector employed 6,100 people? And that was mostly in white-collar jobs? And that employment has been growing at a compound rate of nearly 15 per cent per year over the last two years? That makes it one of the fastest growing sectors in the country. The Bank of Mauritius keeps a watchful eye over all this and makes sure that it keeps ticking over nicely, oiling the wheels of trade, commerce, and financial transactions. Consumers, borrowers, lenders, depositors, importers, exporters can all sleep in peace knowing that the Bank is on the job. On a recent occasion, I expressed my satisfaction at the profitability of our banks and the buoyant economic environment generally. I also expressed my concern about the excessive growth of credit which we were witnessing. I had at the back of my mind the truism that bad loans are made in good times. I was determined to ensure that we do not rediscover this through bitter experience. I am happy to report that the situation is firmly under control. So much so that we are actually envisaging repo operations, for the first time in more than a year, to inject liquidity in the system. The determination of the Central Bank to press ahead, in spite of criticism, has paid off. If we are happy with the profitability of our banks, we remain concerned about their efficiency and the affordability of their services. For instance, the average return on assets (ROA) of banks in Mauritius last year was 1.8 per cent, 2 as compared to an ROA of 1.3 per cent in our neighbourhood giant, South Africa. While strong earnings are important and the higher ROA could point to greater operational efficiency, it could also reflect higher costs being levied on the customer. No doubt more competition leads to better price discovery. We have 19 banks operating in Mauritius. Although, there is a high degree of market concentration, we do not believe that there is any active collusion among them. To stimulate greater competition and enable customers to make informed choices, we are working with banks to devise a common template for displaying applicable fees, charges and commissions in a comparable manner on their respective web sites. A better-informed customer is the best guarantee of greater efficiency in financial intermediation and the sustainable profitability of our banks. It is a fact of life that some banking transactions will go sour, lead to recrimination, and result in costly and protracted lawsuits. If we are keen to reduce transaction costs, and the cost of doing business generally in Mauritius, we must address these issues in a more efficient and timely manner. The provision relating to the Ombudsperson for banks in the Banking Act of 2004 still remains to be implemented. You may reasonably ask why. And we owe an explanation on this score. It is my firm conviction that our jurisdiction is too small to have a multiplicity of Source: Annual Report 2007: Bank Supervision Department, Reserve Bank of South Africa, Pretoria. bodies with overlapping jurisdiction in this area. We have the Financial Services Commission which has some parts under its purview. We also have a Commissioner for the Protection of Small Borrowers, an Office instituted after the Banking Act 2004. We have the Ombudsman as well. We thought that it would be more efficient for all those institutions to provide a onestop-shop to address all complaints relating to the banking and financial sector. We have unfortunately not been unable to make much headway in this direction. We will therefore appoint an Ombudsperson for banks as provided by law and we shall work towards harmonising our position with the other players. I take this opportunity to reiterate our resolve to be transparent in our operations and pursue a consultative approach to decision-making, while scrupulously observing all the laws and regulations applicable to our activities. So, with my powers as Governor, I formally revoke the licence of South East Asian Bank and I now officially announce the issue of a fresh new banking licence to the Bramer Banking Corporation Ltd. With these words, may I once again convey my best wishes to the Management and staff of Bramer Banking Corporation Ltd and wish the owners and shareholders every success as they take on the established players on the domestic banking scene. Thank you for your attention. | bank of mauritius | 2,008 | 9 |
Keynote address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at a Visa Briefing on the Economic Benefits of E-Payments, Port Louis, 8 October 2008. | Yandraduth Googoolye: E-payment developments in Mauritius Keynote address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at a Visa Briefing on the Economic Benefits of E-Payments, Port Louis, 8 October 2008. * * * Good Morning I am indeed glad to be here to share a few thoughts on the importance of Electronic Payment System for economic development. There is no doubt that the advent of Electronic Payment System has resulted in numerous benefits for consumers and suppliers in both developed and developing economies. Empirically, it has been established that increased use of credit cards is positively co-related with economic growth and exports. In Mauritius, the growth of e-payments, which cover the entire spectrum of use of the electronic media for settling transactions and would hence include among others, credit and debit cards, internet banking and mobile banking, has been tremendous. We, thus, had 382 ATMs in July 2008 as against 334 a year before and 293 in June 2005. The number of transactions using credit and debit cards went up from 3 million in June 2007 to 3.7 million in July 2008 while the aggregate value of monthly transactions increased from about Rs 5 billion to Rs 6.8 billion during this period. More than 1.1 million credit and debit cards were in circulation at the end of July 2008, an average of more than one card per head of adult population. A few banks are already offering internet banking facilities while some others are in various stages of doing so. It is heartening to note that the use of electronic media is spreading to many other types of transactions rather than being confined to purchase of goods and services at points of sale, withdrawal of cash and to put through transactions on the B2C portals. Thus, for instance, this year MRA allowed on line payment of taxes through select banks which, coupled with efiling of tax returns, is a major step forward. The Central Bank has the responsibility of maintaining the stability of the payments and financial system. The Bank of Mauritius operates and manages Mauritius Automated Clearing and Settlement System which is the communication backbone for inter-bank settlements and for the Real Time Gross Settlement. We also play an enabling role by adopting a positive, though cautious, approach to development of e-payments in the country. The orderly development of any segment of financial sector would require sound regulatory framework. The present approach requires financial institutions under its purview to seek the Bank’s prior approval for offering internet banking services. At the same time, banks are free to open ATMs at any location they choose without the prior approval of the Bank of Mauritius. Before granting approval for introduction of internet banking, we at the Bank look at the risk management framework, the data and physical security and safety of the processes apart from the technological platform. We are in the process of revising the existing guideline on internet banking to make it more comprehensive and to align it with recent developments. Let me now dwell on some of the major benefits of e-payments. At the macro level, it enlarges consumer market, and thus contributes to economic growth. I am sure you are all aware of the tremendous advantages of e-ticketing, for instance. The advent of B2B and B2C portals enhances transparency and facilitates better price discovery. Further, e-banking helps spread banking facilities to areas that might, for economic reasons, have been unviable for opening a brick and mortar branch. Thus, e-banking could facilitate greater financial inclusion. At a micro level, e-payment reduces the threat of physical loss of funds to the holder of a card and for the seller too, the ease of settlement helps in better cash flow management. There are some concerns too. The safety of the system is highly dependent on the robustness of the technology, the anti-hacking features, continuous effort at improving risk management framework and regular information system audit. The cardholder faces risks arising from the threat of counterfeiting; now cards can be morphed in quick time and used for unauthorized withdrawal of funds. The Bank encourages financial institutions to have adequate anti-counterfeiting features in their cards, insists on 24 hour help lines and requires safe delivery of PINs etc. Simultaneously, the Bank of Mauritius also embarked as part of its 40th Anniversary celebrations on a customer education programme to create better awareness among the public. Another significant risk arises from the use of cards for trans actions with the B2C portals through less secure payment gateways over the internet. There is need for adequate caution in using such websites for making purchases through e-cards. In some jurisdictions, financial institutions issue separate cards exclusively for on-line payments, with such cards having a smaller sub-limit out of the main cards. Perhaps, issuers of cards in Mauritius could explore this possibility. Credit cards are subject to high delinquency; in most countries the nonperforming advances pertaining to credit cards as a percentage of the outstanding dues under the cards are very high. These often arise as a result of inadequate appraisal of the cardholder and to an extent can also be attributed to the high interest rate charged on the carry forward balance. In fact, one could see a chicken and egg relationship here since the high interest rate is sought to be justified by the high percentage of delinquencies in the card segment. Another manifestation of e-payments is the use of e-money which is popularly called e-wallet. This product is not yet available in Mauritius. They are like prepaid cards which can be used for different types of transactions. These cards could cause problem for the payment system, may result in loss to the card holder or merchant in the event of failure of the issuer and has implications for the monetary policy formulation as they function as store of value. But we will all agree that the benefits of the e-payment system for economic developments far outweigh the concerns which, moreover, can be mitigated through proper systems, processes and adequate awareness among the public. The fact that at the initiative of European Commission and European Central Bank, efforts are underway to develop a new European Payment Card System within the implementation of Single Euro Payment Area agreement shows how important e-payment cards are becoming for the stability of payment system both from a financial and the social stand point. In the Mauritian context, it might be worthwhile to explore the feasibility of introducing Shari’ah compliant e-payment instruments given that we have decided to introduce Islamic Financial Services in the country. No address by a Central Banker at this juncture would be complete without a reference to the current global financial crisis. The present turmoil which originated in August 2007 as a fall out of what is now famous as the sub-prime crisis has accentuated in the wake of it taking a toll of systemically important financial institutions in the USA and later in Europe. The various measures being taken by the different central banks and governments are also too well known. As far as Mauritius is concerned, we can vouchsafe that the banking system is stable and sound. However, we have constituted a multi disciplinary cell comprising Senior Officials from different functional areas of the Bank of Mauritius to monitor the domestic and international events on an on-going basis. This cell meets daily, reviews the developments and makes its assessment of the situation. The banking system in Mauritius of late witnessed some tightness because of local seasonal factors. As you are aware, September end is a tax payment time and around this period importers start procuring goods for year end sales. To ease the situation, the Bank of Mauritius intervened both in the rupee market by conducting repo transactions in quick succession and on the foreign exchange market by selling foreign exchange and our last intervention was on 6 October when we sold USD20 million. Thus, the Bank of Mauritius will continue to play an effective role whether in the orderly operations of the financial markets or ensuring the safety and soundness of the financial system or for that matter the development of e-payments in the country. Thank you all for your attention. | bank of mauritius | 2,008 | 10 |
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Financial Stability Institute, World Bank and International Monetary Fund Seminar, hosted by the Reserve Bank of India, Mumbai, 5 November 2008. | Yandraduth Googoolye: Supervision and regulation of state-owned banks Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Financial Stability Institute, World Bank and International Monetary Fund Seminar on “Supervision and Regulation of State-Owned Banks”, hosted by the Reserve Bank of India, Mumbai, 5 November 2008. * * * Distinguished guests, Ladies and Gentlemen, I am very pleased to be in Mumbai today to share a few thoughts on supervision and regulation of government-owned banks. I must at the outset compliment the Financial Stability Institute, World Bank and International Monetary Fund for having chosen this issue as the theme for this seminar. No subject could be more topical in the current context given that we are seeing in the West a reverse process of private banks getting wholly or seminationalized. Therefore, the lessons of this seminar, which is targeted at the emerging economies, could be useful for the developed world as well, in a more meaningful way than perhaps they might have been a few weeks ago. Before getting to the theme of regulation and supervision of government-owned banks, let us see the different ways in which Government can have stakes in banks. Firstly, government ownership can arise at the initial shareholding stage, i.e. an entity in which Government has majority shareholding applies for a banking licence. Secondly, Government may set up a bank or nationalize existing bank(s) through an Act of Parliament to further its social and developmental objectives, and thirdly Government could acquire shares in an existing bank to bailing out a failing bank, something quite fashionable these days! Indeed there is an extensive literature and a lot of debate on the role of government ownership in banking. It would perhaps be useful to briefly touch upon some of the theories that have been put forward on government ownership in banking. The views that have been more frequently associated with state ownership of banks are the social view, the political view and the agency view. The social view suggests that government-owned banks contribute to economic development and improve general welfare (Atkinson and Stiglitz (1980)). The political view highlights the role of politicians in pursuing their personal goals, for example maximizing employment of their electorate or financing favoured enterprises (Shleifer (1998)). The agency view relates to the agency costs in government bureaucracy that may result in managerial inefficiency (Banerjee (1997), Hart, Shleifer and Vishny (1997)). Various studies have also been conducted to assess the impact of government ownership on banks. Caprio and Marinez (2000) demonstrated that government ownership is significantly and positively associated with increases in bank fragility; Barth, Caprio and Levine found no conclusive evidence on the relationship between government ownership in banks and the likelihood of a banking crisis. Those inconsistent results seem to suggest that in spite of the implicit deposit protection arising out of government ownership of banks, such banks are not immune from insolvency risk. Even if the depositors’ interests are not jeopardized, it might be at the cost of general public interest. These observations are meant to show the implications of government ownership of banks on the banking system and on economic growth, and put into perspective the critical importance of regulation and supervision of government-owned banks. In fact, it is rather easy to see that the best way to get the maximum benefit of the government ownership of banks is to subject them to proper regulation and supervision. The whole issue of regulation and supervision of the public sector banks assumes a special significance only because there is a notion that the regulator may not have de facto independence because the Government, as the shareholder of the regulator, may influence the regulatory process as applied to the banks owned by it (Government). However, if government-owned banks have to function as commercially viable entities, the regulatory process should be able to shield them from being used in a manner detrimental to depositors’/public interest. This would also be necessary from the point of view of creating a level playing field for both government-owned banks and private banks. The issue of differentiated regulation or regulatory process may take various forms. There could be differences in the way the directors are chosen by Government. If the board of directors of a government-controlled financial institution comprises only representatives of Government, there may be a tendency for the broader goals of Government to override the commercial objectives of the bank and thereby depositors’ interest. The objectivity with which the regulator deals with nominations of persons who might not pass the fit and proper test in such cases will be an indicator of the independence of the regulator and the uniformity of supervisory practices. Another issue, also emanating from the corporate governance perspective, arises from the fact that while in the case of most enterprises, the shareholder gets the prime place among various stakeholders, in the case of a bank, the protection of depositors’ interest is the central area of focus. In the case of a public sector bank in which the shareholder/controller of the central bank or the regulator is the sole or majority shareholder, a question arises as to how the regulator (whether the central bank or any other authority) would focus on depositors’ interest as opposed to shareholders’ interest. One might wonder whether those interests are in conflict. It may not be so all the time but there do exist situations where conflicts might arise. For example, the various principles of prudence that the regulator requires financial institutions to adhere to might curtail the risk-taking ability and thus channel resources into safer, but not so remunerative activities. A third area of perception of different treatment arises in regard to lending policies. For instance, how would a regulatory authority view a public sector bank lending for socially justifiable objectives that may not be bankable in the strict sense of the term? Would the regulator treat such lending by all banks alike or would it condone the lending by the public sector bank as an extension of the social objectives of the Government? A fourth aspect could be over regulation because of public accountability associated with government ownership. Thus the government may directly or through the regulator impose too many restrictions on the functioning of a bank owned by it and these could impede the fleet footedness one would expect a commercial entity to display. For example, decisions on write offs, restructuring involving financial sacrifice by the bank may go through the bureaucratic rigmarole leading to delays and failure to clinch critical settlements. Very often government ownership is associated with excessive emphasis on the process without regard to and often to the detriment of the expected outcome. The regulator too may view these passively, if not positively, as all such decisions or indecisions may be justified on the principles of propriety as also because of the comfort of the bail out of the depositor in the event of insolvency. The Mauritian experience Let me now turn to the situation in Mauritius. Before I go into the details of the regulatory and supervisory process, I would like to outline the structure of the financial services industry in the country. The major financial institutions in Mauritius are banks, insurance companiesboth general and life, non-bank deposit taking financial institutions, cash dealers comprising money changers and foreign exchange dealers. Banks account for 80% of the country’s financial sector. The legal framework for the regulation and supervision of financial institutions is provided mainly by the Banking Act 2004, the Bank of Mauritius Act 2004 and the Financial Services Act 2007. The Banking Act is administered by the Bank of Mauritius and applies to banks, non-bank deposit taking institutions and the cash dealers while the Financial Services Act is implemented by the Financial Services Commission which oversees all other segments of the financial sector including insurance and leasing. The non-bank deposit taking institutions engaged in leasing business are regulated and supervised by both the Bank of Mauritius and Financial Services Commission, such overlaps not being uncommon in other jurisdictions as well. There are conglomerates having business in segments coming within the purview of both regulators. We have a joint coordination committee to exchange notes and we are moving towards the concept of a lead regulator. The Bank of Mauritius Act basically sets out the responsibilities and functions of the Bank and thus its provisions have a bearing on the Bank’s regulatory and supervisory role. There are in all 19 banks and 13 non-bank deposit taking institutions. Out of these institutions, at present there are two banks and three non-bank deposit taking institutions in which Government has a majority stake – directly or indirectly. The shares in a bank in which the government-controlled development financial institution held a majority stake were divested to private entities recently. The Government’s interest in the five institutions is held in different ways. For instance, in one of the banks Government of Mauritius directly holds a part of the shares while the remaining is held through government-controlled organizations like the Pension Fund etc. In another case, Government stake is partly held by the government-controlled Post Office. One of those banks is listed on the Stock Exchange as well. Two of the non4 banks are subsidiaries of government undertakings. In the final analysis though, the manner in which the Government stake is held may not have any bearing on the control exercised by Government on the entities’ management. All these institutions are regulated and supervised by Bank of Mauritius like any other institution under its purview, as I would explain later on. However, a deposit-taking development financial institution in the public sector is not yet brought within the purview of the Bank. A uniform regulatory approach In certain jurisdictions, the legal framework for regulation and supervision makes a distinction on the applicability of certain provisions of the legislation to privately-owned and public sector financial institutions. In India, some of the provisions of the Banking Regulation Act (1949), particularly relating to the appointment of the Chief Executive and directors, are not applicable to the public sector banks. However, in Mauritius, all the provisions of the Banking Act apply in the same manner and to the same extent to both types of institutions. As such the regulatory authority of the Bank of Mauritius applies on all aspects of the functioning of a public sector financial institution as it does to those of similar institutions in the private sector. Perhaps it would be worthwhile to outline some of the more important aspects to illustrate the uniformity of approach, namely in the areas of licensing, regulatory limits, audit, onsite examination, offsite surveillance and corporate governance. The Chairman, Chief Executive officer, the directors and other senior officers of a government-owned entity are scrutinized for the fit and proper test in the same manner as a private sector entity, when examining an application for a banking licence. All guidelines apply equally to the public sector banks and the private sector banks. As an example of the extreme application of uniformity, I should cite the fact that lending by a government owned bank to a public sector entity is considered a related party exposure and subject to the discipline governing connected lending. The Bank of Mauritius vets the credentials of the external auditors of both private sector banks and public sector banks before giving its approval for their appointment. The offsite surveillance and the onsite examination are conducted in the same manner for private sector banks and public sector banks. Further, the various principles of corporate governance enunciated by the Bank are applied with the same rigour to a public and a private sector financial institution. As such the public sector institutions are required to even constitute Conduct Review Committees to examine related party transactions – which in their case would mainly mean credit facilities to or transactions with other public sector enterprises. Given the importance of corporate governance in banking institutions, the independent functioning of the Board of Directors cannot be overemphasized. Our Guideline on Corporate Governance requires the Board of a banking institution to have a healthy proportion of independent directors and encourages a minimum of 40 per cent. The Board should also put in place an appropriate structure and procedures to achieve and project its independence. The directors of the Board should meet the “fit and proper” criteria at the outset and on an ongoing basis. These requirements have contributed to ensure that political interests do not take precedence over the bank’s commercial interests. As such the uniformity, de jure enshrined in the legal framework, is de facto extended to the supervisory process as well. Performance of banks in Mauritius Before moving over to my concluding remarks, I would briefly deal with the performance of the banking sector in Mauritius. It is a matter of great comfort that of late the sector has been witnessing robust growth in most parameters coupled with a decline in the ratio of nonperforming loans to total advances. The deposits of banks increased from MUR435 billion to MUR537 billion between end June 2007 and end June 2008; while advances grew from MUR305 billion to MUR356 billion during the same period. The pre-tax profit increased from MUR9.9 billion for the year ended March 2007 to MUR11.1 billion for the year ended March 2008. Non performing loans represented 2.4 per cent of the gross advances at the end of June 2008. There are 186 branches and 382 ATMs in the country and on an average more than one electronic card is in use per adult population. The public sector banks have also turned in good performance. In fact one of the two public sector banks is the second largest bank in the country. The return on assets for the year ended March 2008 of the two public sector banks was 2.84 per cent and 0.74 per cent as against the average of 1.7 per cent for the industry. Similarly the return on equity of one of them was 20.93 per cent as against the industry average of 23.26 per cent. It is therefore evident that the banking sector, including the entities in which Government has controlling interest, has performed well. I must also assure you that they are resilient enough, thus vindicating our faith in applying a uniform legal, regulatory and supervisory framework. Let me make one final comment on the performance of public sector banks. There is a general perception that public sector institutions are not as innovative as private sector entities. Well this may not always be true. In fact one of the public sector banks in Mauritius won the Euromoney and The Banker Award for the “Best Bank in Mauritius” on a number of occasions. Concluding remarks It is undoubtedly a good practice not to let the ownership structure influence the regulatory and supervisory process. This has two positive effects. First, the public sector entity functions like any other commercial organization within the risk management guidelines issued by the regulator. Secondly, the privately-owned entities in the sector would not feel discriminated. This is necessary to attract private capital in the sector. Obviously, a regulatory process that favours one segment vis-à-vis the other within the same industry would not be conducive for fostering healthy competition. Having said all this, there is an important issue, which we cannot lose sight of. One of the major comforts that a regulator seeks as part of its depositor interest centric function is the reputation and the financial strength of the promoter. From this perspective the nation’s sovereign as the main shareholder gives a lot of comfort to the regulator. The recent events, even if one may consider them exceptional, demonstrated that those perceived as invincible also do not have the financial muscle of the sovereign. However, the regulator should not bask under the comfort of the sovereign being the promoter nor should it let any instruments of Government abuse this comfort. The punch line, if one has to sum up the whole gamut of issues relating to regulation and supervision of public sector banks, could read – Feel comfortable, but don’t relax! Thank you all for your attention. | bank of mauritius | 2,008 | 12 |
Opening and closing remarks by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the working session at the Federation of Indian Chambers of Commerce and Industry and Indian Bank's Assoc. Conference, Mumbai, 7 November 2008. | Yandraduth Googoolye: Credit risk and market risk – the journey ahead Opening and closing remarks by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the working session on “Credit risk and market risk – the journey ahead” at the Federation of Indian Chambers of Commerce and Industry and Indian Bank’s Association Conference on “Global Banking: Paradigm Shift” Theme: “Navigating successfully in an uncertain world” Mumbai, 7 November 2008. * * * Ladies and Gentlemen It is a pleasure for me to chair this afternoon session on Credit risk and Market risk, a subject whose importance is gaining momentum among policymakers these days. Economic theory tells us that Credit risk and Market risk are intrinsically related to each other and are not separable (Jarrow and Turnbull: 2008). With financial innovation, the interaction between Credit risk and Market risk has itself become even more complex today. The recent financial crisis has indeed showed us how a credit risk event can trigger other market related and liquidity related risk events. The sub-prime crisis in the United States, which has its origin in protracted low interest rate policy, has shown us how our interest rates setting decisions impact on credit risk – a linkage that has been somehow neglected over recent times. As we coordinate our efforts to ease monetary conditions to curb the growing risk that our economies would dip into recession; we need to be vigilant on the long term consequence of our decisions today, to avoid another financial turmoil in future. Financial innovation has spurred the development of risk management tools but it has also brought together various other forms of risk into financial products, making the art of risk management even more sophisticated. The rapid growth of derivative instruments blurs the dividing line between the established concepts of Credit risk and Market risk. The trading of credit derivatives and other exotic securities has transformed credit risk into market risk. When the credit conflagration morphed into a fully-fledged panic in financial markets over the last few weeks, the major stock markets plunged. A decade or so ago, technological innovation produced securitized and other credit derivatives to help financial institutions to manage risks (credit or liquidity). Those instruments quickly gained popularity among practitioners as they promised to transfer credit risk to those who were supposedly in a better position to bear those risks while contributing to financial stability. As these instruments grew in complexity, existing risks were transformed into other risks and new risks emerged. Those risks were typically measured and managed in isolation from one another, whereas in reality, they are closely linked. A credit event that drives down the value of a particular asset is likely to reduce the liquidity and price of that asset as well, at least in the short term. Therefore, as trading in those credit instruments grew, new portfolio models were developed to take on board the interaction between Credit risk and Market risk. Traditionally, regulation has distinguished between Credit risk and Market risk, and has treated both risks independently. The Basel II Accord requires banks to keep capital for Credit risk for banking book exposures and Market risk for trading book exposures. However, it does not provide an implicit capital cushion for correlation between the two risks, other than a capital charge for counterparty credit risk for certain trading book exposures. However, emphasis is put on stress testing credit portfolio for these types of events. The recent events in financial markets have brought Central Bankers, Regulators and risk managers to rethink and question the reliability of these new risk management systems for Credit risk and Market risk; and the diversification effects and the relevance of risk aggregation embedded in these instruments. Having said this, it may also be opportune to reflect over the future of regulatory practices for Credit risk and Market risk. Ladies and Gentlemen, as my time is almost over, let me take the next few minutes to tell you more on our distinguished speakers for this session. We welcome today, experts from McKinsey & Company. (Presentations by the speakers) Concluding remarks I thank you all gentlemen for your fruitful presentations on such an interesting topic. This session has indeed been very informative for all of us present today and I hope that we may all draw lessons from your presentation on Credit risk and Market risk, particular on part of the presentation that was focused on the experience of Indian banks in managing those risks. I now wish to quote a few sentences from the report: “Towards Superior Risk Management in Indian Banking.” “Banks will need to continuously refine today’s practices. It is important to constantly revisit the risk architecture through the on going refinement of models, stress testing scenarios, revalidating limits, redesigning customer facing processes and restructuring of the organization. This also implies broadening the traditional purview of risk management to include newer practices such as reputational risk, business process re-engineering and concurrent audit improvement.” To conclude, as banking gets more sophisticated, risk management systems should be able to size up the newer risks the operations expose a bank to. Therefore, while the banking sector has grown rapidly and displayed high resilience, the need for continuous vigil on the part of bank managements and the regulator can hardly be overemphasized. For me therefore, it is the systems and processes for being able to anticipate risk events in time in a complex financial world that should be the focus area for banks the world over including the banks in India. Thank you all for you attention. | bank of mauritius | 2,008 | 12 |
Letter by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, to stakeholders, Bank of Mauritius, Port Louis, December 2008. | Rundheersing Bheenick: Comprehensive reflections on economic and financial activities in Mauritius during 2008 Letter by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, to stakeholders, Bank of Mauritius, Port Louis, December 2008. The original speech, which contains various links to the documents mentioned, can be found on the Bank of Mauritius’ website. * * * Dear Stakeholders As we begin 2009, every central bank Governor around the world must be asking himself whether the worst is over yet. Except for a few überbears and habitual doomsayers, no one anticipated the troubles of 2008. Now that we are caught up in a global slowdown, with most of the major economies actually in recession, we have new concerns. What are the prospects for 2009? Will the bail-out work? Why has Mauritius so far escaped the wreckage of financial systems and banking around the world? Shall we see the end of the crisis this year and if so, when? The lessons are becoming clear and I believe it is possible to reshape the global financial system to make it do its job again in promoting development, growth in jobs and the relief of poverty. I am hopeful that the global economy will emerge fitter from this crisis. But there are no quick fixes. The ability of Mauritius and other small states to elude the immediate impact of the crisis can be put down to two broad factors; first: avoiding the worst aspects of global credit delinquency through appropriate banking regulation and supervision; second: stability and probity in accounting and banking methods, recognising risks for what they are, and reducing exposure to potential losses, rather than grabbing gold-plated opportunities for making a fast buck. In 2007, we launched a new strategy for communication which culminated in the End-of-Year Letter to Stakeholders. The essential idea here is to share with you the experiences of the Bank of Mauritius, the highs and lows of the year, and also to bring to you the outlines of our future policy. This year, we continue with this tradition. 1 We present a review of developments in the banking sector in 2008, discuss some of the initiatives taken by the Bank and adumbrate a foggy outlook for the year ahead. The year 2008 has been unprecedented in global banking history and this has deeply affected the pattern of our work at the Bank. It began with massive inflows of foreign exchange powered by portfolio flows, investments in IRS projects and gilts, causing our currency to appreciate significantly. The second part of the year saw global currency movements and the scaling down of investments by foreigners. We closed the year with a reverse situation. Between these two extremes, the Bank navigated sometimes in rough seas but despite the storms, the Bank and its many partners have consolidated the financial sector by keeping a steady course and taking some exceptional measures to protect our economy from the effects of the global turmoil. At the Bank, we have stepped up our vigilance and taken prompt action to sustain investor confidence and long-term financial stability by tasking a special multi-divisional cell, comprising senior officers from various disciplines, to monitor closely the evolution of the crisis. We are presenting this letter in a new computer-friendly format. Sections are segmented into principal points and detail. You can either navigate to the detail by clicking on the access points or skip the detail and read on. We hope that this will help in finding the points of special interest to you. In the midst of all these uncertainties, I must admit we have also been lucky. Our banking system has been steady and stable throughout the year, maintaining strong capital buffers and high solvency ratios, all of which have ensured its resilience. The judicious lending and investment practices of our banks have protected them from exposure to the toxic assets and complex derivative products fatally linked to the US sub-prime credits and the over-valuation of real estate. A key element in the soundness of our banking practices has been our greater reliance on deposit funding rather than on money market or external funding. These classic and simple safety measures have kept us relatively unaffected by the global financial crisis. If banking has remained safe and secure in Mauritius, what can we say of the wider aspects of the domestic economy? Or, in U.S parlance, what about Main Street? Mauritius has not of course entirely escaped the spillover effects of the global crisis on the real economy. Indeed, the impact is becoming increasingly visible. We are witnessing a slowdown in levels of production and investment in Mauritius. This will have knock-on effects on banking activities and there will be need for a revaluation of assets that are pledged as security. Yet, the strong performance of our banks during the past year, their solid deposit base, their low level of non-performing loans, and the continuous monitoring of all banking matters under the watchful eye of your Central Bank, comfort us in the view that we are wellplaced to confront the anticipated levels of external shocks that our wider economy will face. (Click here for further details on Performance of the Banking Sector) In the second half of 2008, the Bank has been working closely with the Treasury to respond to the unfolding global crisis and further buffer the domestic economy. The Additional Stimulus Package announced by Government in December was prepared in consultation with the Bank as part of the closer policy dialogue between the Bank and the Ministry of Finance. Furthermore, in response to tight liquidity conditions in global credit which might have exerted an adverse impact on the cost and availability of short-term trade finance, the Bank took pre-emptive action by making available a Special Foreign Currency Line of Credit of US$ 125 million. This allowed local banks to maintain the flow of credit for international trade, which is a vital lifeline for an open economy like ours. Regulation and supervision The flaws in the national regulatory systems of the major economies have been cruelly exposed by the global crisis and its attendant financial scandals. Effective and timely regulation, built on prudent, transparent and sound supervisory practices, must be at the heart of a stable financial system. In the course of last year, the Bank reviewed its supervisory structures and revisited most of its regulatory guidelines to ensure that the supervision of the banking sector remains ahead of the game and meets a high standard when gauged by international norms. (Click here for further details on Supervisory issues) The Bank has been actively engaged in both on-site and off-site supervision of banks. The objective is to strengthen our system-wide approach to supervision and to prevent any spillover into the system of any specific risk from individual banks. The exercise includes cross-border banks, that is, subsidiaries as well as branches of banks outside Mauritius. This is done through a mechanism of cooperation and information-sharing with home and host supervisors. (Click here for further details on Memoranda of Understanding) Financial stability Enhancing financial stability became a core task in 2008, and in this area, the Bank took two important steps during the year. First, the Bank ensured closer coordination with the Financial Services Commission through the new Joint Coordination Committee (JCC). The enhanced collaboration helps to avoid regulatory gaps and the JCC will improve cooperation on supervision, by establishing a lead regulator for each financial institution. The second initiative in the pursuit of financial stability is the publication of the Bank’s very first Financial Stability Report (FSR) in line with an explicit requirement of our enabling Act. As I mentioned in the Foreword of the FSR, “The Financial Stability Report provides a useful communication tool about existing and potential future risks to financial stability and can serve as a means of focusing efforts to mitigate the key risks.” The FSR identified certain areas of vulnerabilities and proposed specific measures. It also unveiled the Mauritius Exchange Rate Index to track the average value of our currency against currencies of our trading partners. The FSR will be published twice a year. (Click here for details on the Mauritius Exchange Rate Index) Basel II Notwithstanding some weaknesses in Basel II which have been brought to the fore by the global crisis, the Bank endorses the stand of the Basel Committee on Banking Supervision for a prompt implementation of the Basel II framework with its increased sensitive measurement of risks and enhanced market transparency. The Bank issued various guidelines required for the implementation of the standardised approaches of the Basel II framework. The way was thus cleared for the Basel II framework to become operational as from the quarter ending 31 March 2009. (Click here for the January 2009 Communiqué on Basel II) Islamic banking and Islamic money market In 2008, we made significant progress in the introduction of Islamic banking in the country. We issued guidelines on Islamic banking after a process of intensive consultation through a multi-disciplinary sub-committee which the Bank spearheaded. The Guideline for Institutions Conducting Islamic Banking Business became effective at endJune 2008, and amendments were brought to the Income Tax Act and other relevant Acts to take into account the specificities of Islamic banking. The Bank approved two Islamic Banking applications and we expect these institutions to start operation soon. One of these entities is headquartered in the Gulf region. The Bank has recently embarked on another major project, the development of an Islamic money market and liquidity management framework. This will allow Islamic banking institutions to conduct interbank transactions for the management of short-term liquidity and have access to Sharia-compliant money market products. The Bank is working closely with the Islamic Development Bank in this respect. In May this year, we shall be hosting an international seminar on Islamic Capital Markets in collaboration with the Islamic Financial Services Board. AML/CFT measures The maintenance of our reputation as a clean financial centre continues to be one of our priorities. The Report of the Joint World Bank–IMF Financial Sector Assessment Programme (FSAP) mission of 2007 commended the Bank on its Anti-Money Laundering and Combating the Financing of Terrorism regime. (Click here for excerpts of the FSAP Report on Money Laundering) Reinforced regional presence I have always been a firm proponent of regional economic cooperation as I believe that building ties with other countries in the region is vital for a small country like Mauritius. In 2008, we have seen much progress on this front. Following a decision of the COMESA Committee of Governors of Central Banks (Tripoli, Libya, November 2007), the Bank was appointed to act as the settlement bank for the Regional Payment and Settlement System (REPSS) of the COMESA Clearing House to allow cross-border payments between COMESA member-states. In April 2008, the Bank organised a workshop for all COMESA central banks on the functioning of the REPSS. During the year, the Bank also hosted the Eastern Africa Sub-Regional meeting of Governors of the Association of African Central Banks and facilitated the Board Meeting of the African Export-Import Bank, which was held in Mauritius. The global financial crisis also brought African Central Bank Governors together to explore the way forward. • I attended the meeting of African Ministers of Finance and Governors of Central Banks (Tunis, November 2008), which was convened jointly by the African Development Bank, the African Union, and the United Nations Economic Commission for Africa, to assess and exchange notes on the evolving situation and to identify measures that could effectively be taken. At the end of the meeting, I was privileged to join a handful of Ministers/Governors in a teleconference with the US Treasury on the eve of the first G-20 Summit in Washington on the global crisis. • In December I attended the meeting of francophone Governors which the Banque Centrale de L’Afrique de L’Ouest hosted in Abidjan to examine the impact of the crisis on the countries of the African Francophone Group at the IMF and the World Bank. The comparative performance of our country in the region was very creditable, as illustrated for example, by the World Bank’s 2008 “Banking the Poor Report”. Mauritius is the league champion in terms of financial access with over 2000 accounts per thousand adults. We came third, behind Malaysia and Singapore, in this global survey. This publication, which explores associations between banking policies and practices with the level of financial access in the selected countries, had its world-wide launch at the Bank of Mauritius Headquarters in November 2008. Monetary policy The exceptional capital inflows at the beginning of 2008, to which I alluded earlier, put significant pressure on monetary matters for our small economy. They cause the rupee to appreciate and fuelled the rising rate of price inflation, already affected by the unprecedented spike in oil prices and the steady increase in prices of food and commodities. The Bank was therefore confronted with the combined challenge of combating inflation and preserving the competitiveness of the export-oriented sectors. The Monetary Policy Committee (MPC), normally set to meet on a quarterly basis, met eight times in 2008 with interim meetings having to be called to deal with rapidly-changing conditions. (Click here for further details on the work of the Monetary Policy Committee) With rising inflation, the Bank continued with its tight monetary policy in the first quarter of 2008. Unpredictable developments on the international scene in the second quarter, coupled with our own projected inflation, compelled the Bank to ease its stance a little in the second quarter. An expansionary budget, handed down in June 2008, coupled with a generous wage-award for the civil service which raised the spectre of wage push inflation, further complicated the situation in the third quarter before currency volatility, stock market nervousness, financial turmoil and the global economic slowdown threw things in complete disarray in the last quarter. Policy actions were coordinated with Government. During 2008, the Key Repo Rate was cut by a total of 250 basis points to stand at 6.75 per cent at the end of the year. (Click here for evolution of the Key Repo Rate in 2008) The decisions of the MPC, which are taken by simple majority, became mired in controversy. This, in turn, provided fertile ground for lobbyists and other pressure groups to seek to influence outcomes in their favour. In addition to the interest rate decisions of the MPC, the Bank had recourse to other tools to respond to abnormal monetary and credit conditions. Owing to structural excess liquidity in the system, the overnight rate had remained persistently outside its set limits (the corridor) since the framework was introduced in December 2006. The Bank increased the Cash Reserve Ratio (CRR) from 4 per cent to 6 per cent in August. This resulted in the rate falling rapidly back within the limits of the corridor. However, in view of the rapidly-changing global environment, the Bank subsequently reduced the CRR first to 5 per cent and then to 4.5 per cent in December, to ensure that the system had sufficient liquidity. Another measure that I considered necessary in the circumstances was the widening of the corridor from the symmetric band of 50 basis points to a band of 125 basis points around the Key Repo Rate. (Click here for further details on other measures aimed at strengthening the Monetary Policy Framework) When we compare with many other emerging economies, which are as dependent on imports as Mauritius, we have little reason to be too unhappy as we have managed to keep inflation at reasonable levels. And this year, we have the extra burden of having to counter the knock-on effects of the global economic slowdown on Mauritius, especially on our exportdependent sectors such as tourism and manufacturing. To deliver on our mandate to fight inflation, the Bank invested resources in capacity-building. In July 2008, the Bank hosted a regional seminar on Inflation Targeting, Modelling and Forecasting, in collaboration with the Centre for Central Banking Studies of the Bank of England (CCBS). Held at the Bank’s Headquarters, and attended by central banks in the region, the seminar set a new attendance record in the entire history of the CCBS. We also published our first Inflation Report in November, to fall in line with a requirement of the Bank of Mauritius Act 2004. This report retraced the historical pattern of inflation in Mauritius, and offered valuable insights into the critical factors affecting fluctuations in prices, which may serve as a guide for the future. We intend to publish Inflation Reports twice per year. Domestic debt management An important development in 2008 was the take-over of debt management functions, both Domestic and External, from the Debt Management Unit of the Ministry of Finance and Economic Empowerment. The new arrangement, which took effect from 1 July 2008, under an agreement reached by the Bank with the Ministry of Finance and Economic Empowerment, also requires the Bank to advise on the debt management strategy. Jointly with the Commonwealth Secretariat, the Bank organized, at the end of 2008, a two-week Workshop on Debt Recording and Management for staff members of the Bank, and officers from both the Ministry of Finance and Economic Empowerment and the National Audit Office. Domestic foreign exchange market During 2008 there were erratic movements in the foreign exchange market. This reflected rapid and substantial global fluctuations. The Bank intervened regularly on the market and by the end of the year, we succeeded in significantly dampening volatility. (Click here for further details on Intervention on the Foreign Exchange Market) There have been different views, some quite vociferous, on how “weak” or how “strong” the rupee should be, depending from which side of the market one is operating. Any orchestration of demand for a central-bank-led depreciation of the Mauritian Rupee fails to appreciate the serious ill effects of a highly devalued currency for a small import-dependent open economy like ours. Its consequences could be disastrous if a self-accentuating expectation is fuelled with instant pass-through into domestic inflation. The Bank believes that both sellers and buyers should get a fair price. One way of achieving this is by reducing the cost of intermediation. The Bank has been addressing this in two ways. First, the Bank has agreed to buy and sell foreign currency directly in a structured manner from/to those in the market that have, or require them, in large quantities. Second, with a view to spurring greater competition, the Bank issued licences to 14 new Money Changers and one Foreign Exchange Dealer on a revised set of conditions. Whilst the Bank does not target any specific exchange rate against any particular currency and is not itself in a market-maker, we do have a key role in market management. This is a matter of continual review by the IMF which commented favourably on the functioning of our interbank foreign exchange market in its 2007 FSAP Report. We can say that the foreign exchange market has functioned well in 2008. (Click here for excerpts on Exchange Rate from the IMF) Changes in our financial landscape The year 2008 witnessed some significant reshaping of the banking scene in Mauritius. Two banks had new shareholders and two others merged into one, leading to three new names being added to the list of operating banks, while four were de-listed. Whereas the current trend worldwide is to effectively nationalise banks as part of the response to the credit crunch, in Mauritius we have the reverse situation – the public sector selling its majority interest in one of the banks to private sector operators. Strengthening of interaction with the banking industry At the apex level, collaboration between commercial banks and the Bank occurs through the quarterly Banking Committee meetings in which Chief Executives of all banks and the Mauritius Bankers Association (MBA) participate. The Banking Committee is not confined to supervision and regulation alone but covers the entire gamut of issues relating to banks. I have increased interaction with the banking industry since June 2008 when I initiated meetings with the Bureau of the MBA, comprising the Chairman, the two Vice-Chairmen and the Chief Executive, in-between the regular Banking Committees. The Banking Committee operates a number of sub-committees to examine certain areas in detail – compliance, treasury and payments system. Information technology Banking technology has been evolving rapidly and has become a key driver of financial sector efficiency. On the technological front, the Bank has embarked on various projects which are at different stages of implementation: • The Cheque Truncation Project • The Mauritius Automated Clearing and Settlement System • The Regional Payment and Settlement System • The Mauritius Credit Information Bureau (Click here for further details on Information Technology projects) Towards a more modern and efficient Bank In 2008, we have moved to a new building, the Bank of Mauritius Tower. This has been a key element in the transformation of the work of the Bank now that it is properly housed and equipped with advanced information and communication technology. (Click here for further details on the New Headquarters Building and the Regional Office in Rodrigues) The restructuring A modern and efficient institution requires a workforce that has the requisite skills and knowledge. In 2008, we rejuvenated and strengthened the workforce by recruiting additional staff and promoting others in some critical functions of the Bank. To meet the need to constantly upgrade and develop skills, more than 50 officers, out of a total professional staff complement of around 125, were sent on training courses abroad. These covered a wide range of topics, such as Monetary Policy, Payment and Settlement Issues, Supervision, and Accounting and Auditing for central banks. The programme of continuing education and training will make further progress in 2009 with a special focus on International Financial Reporting Standards. In 2009, we are organising a calendar of in-house training sessions for all levels to make the Bank an organisation in which staff are multi-skilled, flexible, adaptable, innovative and able to think laterally. Some of the courses include customer care, executive programmes for effective management and leadership, efficient communication and a better understanding of applicable law, including the Bank of Mauritius Act itself. This year we are also targeting our Rodrigues Office for special attention. The staff will have the chance to come to the head office at regular intervals on induction courses to involve them more in the development of the Bank’s operations and functions. Bank charges – shop window for customers Many people have complained to us about the variations in charges between banks and the difficulties in finding out what they are. This is where a central bank can help to make banking easier for the customers we all serve. We have addressed this issue during the year. Since, November 2008, information on the fees and charges relating to normal services are available, on a standard comparable template, to all customers online at http://bom.intnet.mu. Launching of commemorative gold coin To mark the 40th anniversary of the independence of Mauritius, the Bank launched a limited edition of a Commemorative Gold Coin to pay tribute to the Father of the Nation, Sir Seewoosagur Ramgoolam. The Prime Minister attended the launch event. This gold coin proved to be the fastest-seller in the Bank’s history. The whole edition was sold within a week. In 2009, we plan to launch a “Father of the Nation” platinum series. Future projects The Bank’s financial markets function In keeping with our modernization plan of the financial system, I will continue to encourage the development of a vibrant futures and forward market. By mid-February 2009, the Bank intends to move away from paper-based auctions of Government securities and Bank of Mauritius instruments to online auctions. Since I joined the central bank, it has been my aim to improve the returns on our foreign exchange reserves. When I attended the International Monetary Fund/World Bank Annual Meeting in 2007 and the BIS annual meeting of Governors last year in 2008, I engaged in consultations with those bodies for a peer review of our reserves management function. In June 2008, a team from the World Bank Treasury’s Sovereign Investment Partnership (SIP) conducted an on-site peer review of our reserve management operations. In September 2008, the BIS, which manages a part of our foreign reserves, conducted a similar review as well as an evaluation of our investment and risk-control processes. The recommendations of the BIS and SIP are under study and appropriate changes will be made to our Financial Markets operations. We will, at the appropriate time, revisit our accounting, provisioning and profit allocation policies, in consultation with our shareholder, the Government of Mauritius. We envisage to recruit an expert with international experience in financial markets to give effect to the changes that we shall be introducing. Special Data Dissemination Standard In 2009, we shall graduate from the current General Data Dissemination System of the IMF, in which Mauritius has been participating since September 2000, to the Special Data Dissemination Standard. This will enable us to meet the needs of global financial markets in the provision of timely and quality macroeconomic data. We are committed to develop the quality of data in the areas where the Bank has responsibility within our national statistical system. We are improving the coverage of the balance of payments and the international investment position through the conduct of surveys of the Global Business Licence Holders. The Bank has enlisted the collaboration of the Financial Services Commission, our sister regulator, in this exercise. (Click here for further details on General Data Dissemination System and Special Data Dissemination Standard) Ombudsperson for banks I am confident that in 2009, the Bank will proceed with the appointment of an Ombudsperson for banks. As I have said on many occasions, for a small country of our size and the expected workload, a single Ombudsperson for the entire financial services sector would have been more appropriate so that the customer does not face jurisdictional issues. Financial Literacy and Outreach Programme We started a Financial Literacy and Outreach Programme when the Bank commemorated its 40 years in 2007. In 2008, talks were delivered by eminent financial sector personalities, including Central Bank Governors. Dr Guy Quaden, the Governor of the National Bank of Belgium, spoke on “The First Ten Years of the Euro. Achievements. Challenges. Lessons for Other Parts of the World”. We also recently had a lecture on “Applicability of International Financial Reporting Standards to Central Banks” by Mr Ian Ingram, Director of Internal Finance from the European Central Bank. The Bank also organised programmes in local languages on the local radio/television. The Bank intends to make such programmes a regular feature. I thought I should mention here that the Bank does not have a specialised unit to take care of communications, events and functions. All events hosted by the Bank are co-ordinated by the Governor’s office and organised by Staff who volunteer for the assignment. Meetings attended by the management The Governor and the Bank’s two Deputy Governors, the Chief Economist and the Head of Corporate Services attended a wide range of international meetings and seminars in 2008, as part of the remit of the Bank for furthering international contact and for keeping abreast of international developments with a view to improving the effectiveness and efficiency of our services. (Click here for further details on Participation in International Meetings and Seminars) Very sadly, 2008 witnessed the tragic loss of one of Mauritius’ most reputed bankers, Mr Anil Guness, who died in the terrorist attacks in the Taj Hotel in Mumbai in November 2008 in the same week in which he last came to the Bank to attend our Banking Committee meeting. We shall miss his wise counsel and the sound judgments he brought to the work of the State Bank and within the banking sector in Mauritius and beyond. Finally, I must emphasise that both the Management and the Board are strong in their resolve to take the Bank of Mauritius to greater heights in the days to come. If we are to achieve our objectives, we need sufficient autonomy to do so, built on a close working relationship with the Government to ensure our polices and actions are complementary in our joint pursuit of economic and social development in this country. 2008 has been a year that will go down as a turning point in the history of global banking and finance. Even, as the Bank wishes a very happy and prosperous year to all our stakeholders, we must all be conscious of the trials and travails that lie ahead in 2009, a year that could prove still more turbulent as the global crisis may very well intensify further. In 2009, the Bank needs to continue to be alert to the global financial and banking volatility and must be especially vigilant in protecting our interests and judiciously managing our reserves. No country has been immune to the crisis, but as light craft can in safe hands weather a storm, so this small, vulnerable and highly open economy of Mauritius may be buffeted but will maintain course and shall not be sunk. The Bank of Mauritius will do all that is possible to ensure a safe passage through these difficult times in matters of banking and financial policy and practice. Best wishes for 2009. | bank of mauritius | 2,009 | 2 |
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the launch ceremony of a Visa Awareness Campaign on Card Safety and Security, Port-Louis, 16 March 2009. | Yandraduth Googoolye: Maintaining the stability of the payments and financial system in Mauritius Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the launch ceremony of a Visa Awareness Campaign on Card Safety and Security, PortLouis, 16 March 2009. * * * Mr Niehaus 1 Distinguished Guests Ladies and Gentlemen Good afternoon It is indeed a great pleasure for me to be among you today to launch this “Card Security Week”. The immediate effect of an awareness campaign on card safety and security is that users of cards are encouraged to exercise greater care in keeping their cards safe, and other stakeholders, banks, card issuers, merchants to better appreciate the risks involved in the use of cards. As time passes, people tend to relax their attitude because they start feeling that it won’t happen to them or firms start believing that they have foolproof systems. Therefore it is important to run such campaigns regularly. In the course of this week, a lot will be said and discussed on card safety and security. Card safety and security forms part of a broader issue, which is the fight against financial crime. Today, I have chosen to share with you some thoughts on how a proper understanding of the responsibilities of the main stakeholders, that is the Bank of Mauritius, financial institutions and consumers can help in that fight. Before proceeding any further, let me set the scene and briefly touch on the situation regarding the use of cards in Mauritius. Background The growth in ATMs and in the number of transactions using credit and debit cards has continued to be positive. In December 2008, we had 364 ATMs and the number of transactions using credit and debit cards stood at around 5 million for an aggregate value of Rs11 billion. The number of cards in circulation was 1.2 million, that is more than one card per adult population. The increased use of cards mirrors an increased sophistication of users of financial products as well as increased financial capability. Further, as I had mentioned in one of my previous addresses, it has been empirically established that increased use of credit cards is positively correlated with economic growth and exports. One of our banks introduced some two or three years ago the Chip and PIN card, an innovation in the card business. I won’t go into the technical details of this type of card, but as Sandra Quinn of APACS, the UK payments association remarked in the Banking Technology Magazine, Chip and PIN has proved to be instrumental in reducing card fraud in the UK high street. The increase in card fraud losses in 2008 in UK was due, according to her, to UK card details being stolen and cloned for use in countries not yet upgraded to Chip and PIN. This brief overview gives you an indication of where we actually stand. I now return to the theme I want to address you today, the responsibilities of the central bank, financial institutions and consumers in fraud prevention. The Bank of Mauritius has a critical role to play in creating an environment where adequate standards are maintained. It establishes Mr Charles Niehaus is the General Manager, Sub-Saharan Africa, Visa International CEMEA Region. expectations, norms and responsibilities through regulation. Financial institutions on their part need to have adequate IT systems and controls to address the risks in their businesses. They also need to provide access to relevant information to consumers of their financial products. Informed consumers have the responsibility to protect themselves from the risks that they can best manage. Bank of Mauritius The Bank of Mauritius has the responsibility of maintaining the stability of the payments and financial system. This responsibility hinges on the orderly development and efficient functioning of the system. The Bank has taken a number of initiatives to further modernize the payments system among which are the Cheque Truncation Project, the implementation of the International Bank Identification Number (IBAN) and the upgrading of the MACSS. The main objective of Cheque Truncation is to enable cheques to be exchanged and cleared on the basis of electronic presentment of cheque images and cheque MICR Codeline data. It provides a number of benefits: faster clearing cycles, faster cheque tracing and cost reduction, the most important one being operational risk reduction through enhanced security and automatic detection of forged instruments. Our banks are increasingly engaging in cross border transactions and the Bank of Mauritius implemented the IBAN, which provides a secured and transparent means of international fund transfer via Straight Through Processing (STP). With a view to furthering facilitation of cross border transactions in the region, the Bank will be a participant and the settlement bank in the Regional Payment and Settlement System (REPSS) of the COMESA Clearing House. The MACSS represents the main architecture for local electronic payments involving the Bank of Mauritius, banks, government and large taxpayers. This core application, which is based on international best practice, was recently replaced. It provides for advanced queue management for liquidity purposes, enhanced security, increased availability and reduced transaction costs. The application is very versatile, allows for multi-currency transactions to be effected and provides a single platform for local and cross border payments. The Bank is currently carrying out on-line auctions of Treasury Bills, and their automatic settlement using the new MACSS application will follow shortly. A sound regulatory framework for financial institutions under the purview of the Bank of Mauritius complements these initiatives. Our action is targeted at making financial institutions understand that financial crime risks of which fraud risk is an integral part, are risks that need to be managed like any other. In our Guideline on Operational Risk Management and Capital Adequacy Determination, we require banks to collect information on internal loss for business lines, which includes loss related to internal and external fraud. This information allows us to compare fraud experience across the industry and to better understand the anatomy of fraud risk events. We are not directly engaged in fight against financial crime but our objective is prevention. So, as regulator, our focus is on building the defences, our regulatory framework. For example, a financial institution, as defined under the Banking laws cannot do business without the authorization of the Bank of Mauritius. Before granting a licence to a financial institution, the Bank does an intensive screening of the shareholders and senior officers, as we need to be satisfied that persons of doubtful integrity are not in control within or appointed at top positions in financial institutions. We set down requirements for financial institutions to establish and maintain effective systems and controls for managing their risks, including countering the risk that their institutions are used to perpetrate financial crime. If a fraudster forces the gate i.e. if an actual fraud is perpetrated, it’s not our role to investigate into the fraud, it’s that of the police. However, we would look at the systems failures and require corrective measures from the financial institution. Our action complements that of other stakeholders i.e. financial institutions, police, government, other regulatory bodies, other institutions engaged in fighting financial crimes, as well as the consumers themselves. Financial institutions Financial institutions have strong incentives to fight fraud. Frauds cost money. Frauds can have damaging effects on financial institutions’ reputation, customers and markets. In this context, financial institutions usually develop fraud strategies, and put in place policies and processes to manage fraud risk. However, for any fraud strategy to be effective there should be strong internal governance. Board members and CEOs should be involved. The Board and senior management should be proactive in taking responsibility for identifying and assessing fraud risk and the adequacy of the controls put in place. They should allocate the responsibility for the day-to-day management of fraud risk to a senior officer. There should be clear lines of communication whereby fraud incidents are reported to senior management and the board. Two areas which financial institutions need to address with respect to card fraud immediately come to mind. Firstly, there should be appropriate technology to protect against cloning and adequate IT security to prevent data leakage. Secondly, frauds are not the work of outsiders only. Sometimes they come from within the financial institutions themselves. This is where financial institutions are called upon to exercise due care when recruiting. There should be proper screening of employees, anti-fraud training of staff, staff need to apply customer due diligence and take appropriate measures to prevent money laundering and credit delinquencies. The culture of compliance should be embedded throughout the organization. Financial institutions have more and more recourse to outsourcing in their endeavour to cut down costs. This is not a bad thing in itself. However there is too much reliance on the terms of the contracts and not enough assurance for example on how third parties vet their employees and on how secure customer information is. Our Guideline on Outsourcing for Financial Institutions sets down the risk management framework and assists financial institutions in identifying the nature of risks involved in outsourcing and in addressing them effectively. Consumers In the fight against financial crime, consumers also have an important role to play. While financial institutions and the regulator need to make available easily accessible information, consumers have the duty to inform themselves. An informed consumer is a better protected consumer. The Bank of Mauritius launched as part of its 40th anniversary celebrations a customer education programme to create better awareness in the public. The Mauritius Bankers Association is also actively involved in informing and educating consumers. There are things though that consumers can best manage themselves; it may happen that they become victims of fraud out of their own negligence. They are responsible for the safekeeping of their cards, they should keep their PIN secret or disclose their Card Verification Value (CVV) only in secure payments sites. Consumers have the responsibility to be honest and may also become whistle-blowers. This leads me to an important aspect of the fight against financial crime, the need for the collaboration of all. Cooperation Financial crime causes real harm to society, from the retired consumer losing his life savings, to the financial institution losing hundreds of millions of rupees and reaching as far as financing terrorist activities. It just cannot be the job of only one body. Already there exists industry cooperation but it needs to go further. There should be increased sharing of intelligence. Collaboration is crucial; financial institutions, government, regulators, police, consumer associations and public need to work together in this fight. Conclusion There are already plenty of good practices in the industry. In the face of the increasing inventiveness of fraudsters, the industry is most of the time lagging behind. We have more and more sophisticated criminals constantly on the lookout for new methods to defraud. The Financial Services Authority UK has recently published its Financial Risk Outlook 2009 and has highlighted that the tighter economic conditions could increase the incidence or discovery of some types of financial crime. This poses real challenges to the financial sector and brings the importance of effective regulation to the forefront. Regulatees often view regulation as an impediment and this is where a change in mindset is required. In most cases of frauds, it has been found that they had occurred because regulations were shortcircuited. Regulations are here to help regulatees conduct their business better and should not be viewed as a barrier. To conclude I would like to add that just like the financial crisis has triggered the need for concerted efforts to prevent the global financial system from crashing, I am of the opinion that the fight against financial crime can only be effective if each stakeholder brings in his own contribution. The financial sector can then become a very uncomfortable place for fraudsters. It is a matter of comfort, though, that we in Mauritius have not had to experience serious frauds in recent years, which is a testimony to the good regulatory framework we have, the effective processes at the financial institutions and the fact that the public is well informed. Thank you for your attention. | bank of mauritius | 2,009 | 3 |
Interview with Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, and Mauritius Times, published on 10 April 2009. | Rundheersing Bheenick: Interview with Mauritius Times Interview with Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, and Mauritius Times, published on 10 April 2009. * * * * The Minister of Finance has expressed his apprehensions regarding the budget deficit, which he says is going to be manageable this year but likely to worsen in 2010. Are we really in for bad times? These are very abnormal times of a kind not witnessed in living memory, so whatever we have inherited as the acceptable norm in terms of the level of fiscal deficit for a country like ours should not be a constraint right now. The major priority today is to get out of the present crisis afflicting the world economy, where our major markets are disappearing, which implies that the economic model that we have been applying is being redefined under our very noses. We should not be prisoners of outmoded ways of thinking whereby the fiscal deficit should stay around or less than 3%. That is the norm-in normal times! Even in Europe, where they have all signed up to this, they are happily giving themselves exemptions from these commitments because the priority right now is to get the economy going again. * Even at the cost of a higher deficit? Absolutely, because that has become a categorical imperative. Yes, even at the cost of a higher deficit in the short term so long as that deficit is substainable and can be financed. There is no point to have a very low level of deficit at the price of a collapsing economy. Our notion of the acceptable norm for the fiscal deficit arises from the need not to crowd out the private sector; it also derives from the capacity to finance the deficit either from taxpayers or from capital markets. Neither is the private sector investing right now, nor are capital markets functioning. So, temporarily while all the rules of the game are being changed, we have to give up this mode of thinking, do whatever it takes to get the economy started again, and make sure that once the global recovery starts we are well-positioned to be able to capitalise on that recovery. * What does it take to kickstart the economy? The answer to this question does not depend very much on what we do or don’t do in the tiny economy of Mauritius, a large part of it depends on what happens at the global level. The G20 meeting has in that respect exceeded my expectations. I was involved in the preparations for it at the African level; we went to meetings with African ministers and Governors in Tunis, Abidjan and Dar Es Salaam, organised by the ADB, African Union, Economic Commission for Africa, and others and I can tell you that few of us were expecting this kind of highly positive outcome and coherent vision; we can say that this has been one of the best summits in recent memory. The global community at the level of the G20, which accounts for three-quarters of global GDP, has shown what are the possible avenues to explore to find a speedy solution out of the current crisis. That’s happening and it’s going to go beyond rhetoric. There is a commitment to review progress on these undertakings by the end of this year, there is a change happening here, and the US hegemony in these matters is frittering away before our very eyes to usher in the new world economic order that we have been talking about for as far as I can remember. Responsibility for the surveillance of the global financial system and for extending that surveillance to non-banks, and commitment to keep trade flows open and to keep capital markets working – all these are acquired. That is part of what it takes to get the global economy going again and prevent it from slipping back into protectionism and monetary/financial mercantilism, which is its new avatar. For us it vital that we do not compound the problem by having the wrong policies domestically. * Namely? Basically the types of policy reforms that we have been engaged in for quite some time through successive governments have turned the country into what it is today. We are quite respected for having the right policies in place: we do not have the heavy hand of government interfering everywhere; we have policy predictability and the absence of arbitrariness in economic decision-making; we have plenty of space for the private sector to operate – these are things which not very common in Africa. We should safeguard all this because our underlying policy stance is basically correct so long as we do not yield to shortterm temptations which will create problems for us down the line. The G20 leaders have said that they are going to monitor progress themselves to make sure that there, the prospect of recovery which they hold out becomes a reality which is going to be with us very quickly. While the global economic problems are being addressed by global leaders, we in our tiny part of the world should make sure that we keep the Mauritian economy on an even keel. There are voices clamouring for special attention for their particular sector but we must not allow ourselves to go overboard. We must be prudent, we must make sure that the entire economic apparatus of Mauritius, which has served us so well over the years, survives this crisis. * But we have not felt the full impact of the storm as yet. Is there much that we can do to weather the impending storm? We are a completely open economy; it was never on the cards for us to be completely immune from what is happening in the major economies, whether they are source markets for tourists or capital flows or destination markets for our exports. There was no question about our being immune… it was just a question of the leads and lags in the system catching up with us. If it seemed as if we had weathered it very well in the first round, it was only because the effects of the storm in our major markets had not yet worked themselves out in ways that matter to us: export orders or tourist flows or capital flows. As the slowdown became a recession elsewhere, the effects are beginning to be felt here. We feel that there is probably worse to come… the same drag in the system which immunised us on the way down will delay the transmission of the recovery on the way up. * When is that going to happen? That will depend on the time it is going to take for the measures adopted by the G20 to work themselves out and to begin to show up in rising investor and consumer sentiment in the major markets. Till then, there won’t be any change in consumer spending or in capital flows which affect us, and we will not as a result see any improvement in our underlying conditions. That will only come when the consumers in western markets start buying our export products. Or when the traveller starts travelling again to distant tourist destinations. Or when the investor starts investing again in far-away markets. When is this going to happen? It’s anybody’s guess! There is at present very poor visibility a few months ahead; forecasting right now has become a very dangerous thing. Your paper last week quoted JK Galbraith's quip about economic forecasting being an activity invented to make astrology look respectable. How true this is today! What we can say for sure is that the crisis is going to be over before long. Exactly when… we don’t know. No crisis has lasted forever in the past because things cannot keep getting much, much worse forever. But for things to show the first sustainable signs of improvement, consumers must start consuming, investors must start investing, and banks must start lending. None of these conditions apply at this point in time at the global level. Until these three things happen, nothing much will change in the underlying economic conditions. The best forecast as of now: it won’t happen for the next four quarters at the earliest. A few knowledgeable observers called the bottom of the market months ago. Others have seen the green shoots of recovery. Let us by all means look at the bright side of things but let’s not hallucinate. The recovery is not for tomorrow, and this in spite of the best efforts of the G-20. We’ll probably see the first signs of a recovery same time next year. We will have to survive until then and make sure that economic conditions in terms of employment, social stability, financing our yawning balance of payments deficit, reserve level, indebtedness etc. do not become worse pending the recovery. And we must not in the meantime take wrong policy measures in response to short-term pressures. Whatever policy measures we take right now should be temporary, reversible, flexible and affordable; and there be must a clear exit strategy especially if we are moving away from market-determined measures. * No need for redefining or revisiting the economic model then? We have been revisiting our economic model constantly. For example, when the Cotonou Convention with the EU did away with the Sugar Protocol, we carried out some reengineering of the industry, and it is still going on – the sugar sector reform package is part of it. When the Multi-Fibre Agreement was dismantled, we had to go and fight for ourselves on open markets with no quota protection. When AGOA provided us with a small, temporary respite, we knew it was not to last forever. There is thus some reengineering going on constantly; “Alterations-as-usual-during-business” – should be put up on the door of Mauritius Inc. We keep altering things and we have to continue doing that. The global crisis has thrown up a new set of challenges for us; for us the good thing about it is that many of them are temporary challenges. But no crisis leads to a situation where, at the end of it, it’s back to square one in the pre-crisis mode of operation. The world will be different whether in terms of regulating the banking sector, market access or whatever. There are some lessons to be drawn from this crisis which should lead us to make some changes. The government, private sector operators and employees cannot do as if the crisis did not happen. The crisis has happened, it has highlighted some structural weaknesses in some parts of the economic apparatus, and we have to draw the lessons that are required because everybody else in the world is doing precisely that. You have to adjust to the brave new post-crisis world. * Is all the talk about regulating more firmly the financial sector and taking action against “tax havens” merely a screen to deal with a situation that even the West and its economists may not have fully understood? There is an element of scapegoating in picking on the tax havens. It is not an essential part of what brought the world to the crisis we are living through presently. It may be quite important for some countries that lose tax revenues in these havens; it is quite normal that people should pay their taxes and the way you pay your taxes must be linked to the place where you have your normal operations or where you derive your revenue from. We should by all means discourage harmful tax competition or regulatory arbitrage. But this is nothing new. If you go back historically the whole talk about transfer pricing, especially by multinationals as they were then called, started from this. If we go even further back, we had the likes of Luxembourg, Liechtenstein and others of this world, that were harbouring these very opaque and murky entities. It was there, as far as I remember before the Second World War. What is new now is that you have many other jurisdictions that have joined in this exercise so that you have many more of these offshore financial centres some of which are tax havens. I must here dispute any allegation about Mauritius being a tax haven. We are not one, we have never been one and we have always rejected this kind of charge. We have never rolled out the welcome mat for money launderers and tax dodgers. We have a transparent and cooperating jurisdiction, and we are proud of it. * Are you saying that our level of financial regulation and international commitment have been beyond reproach for years? So, why was it an issue at all to go and persuade OECD about the obvious? We never had any difficulty with the people who come to supervise our compliance with international rules and regulations. The IMF and the Financial Action Task Force and, subsequently the FSAP, have jointly with the IMF have been monitoring our jurisdictions for more than 15 years now. We also always pass through with flying colours with respect to the Report on Standards and Codes, which deals with compliance with all international norms, specially with regard to tax compliance. We are a clean, reliable and trustworthy jurisdiction. And since the list of tax havens has been produced by the OECD the day after the G20 meeting, I think it was worthwhile for us to make our case known just in case there was a danger that somebody somewhere might include us in the wrong list. For me personally this risk was very remote in the sense that we have always been aboveboard in this matter. The Financial Services Commission, our sister regulator, is doing a great job since we set it up a long time ago as MOBAA. We have no reason at all to reproach ourselves. The FSC and all the management companies and others involved in this business have a shared responsibility for keeping this good image for Mauritius. To come back to your question, I think the attempt to pin the blame for part of the crisis on tax havens was very much a case of scapegoating. The real issue was a critical failure of supervision and regulation in some key markets. There was also a real failure in global surveillance, in the lack of an early warning system, in ensuring that the right incentives systems were in place in crucial areas of the banking, especially the shadow-banking and finance sector. A system which allowed people to get bonuses based on bad risks that they were accumulating for their enterprises, or which closed its eyes to rating agencies getting paid by the very people they were rating or which provided for walk-in loans at loan-to-value ratios which would make a prudent banker shudder, just could not last. So there was a total failure all along the line and if you add in that picture things like hedge funds, hot money flows, securitisation, credit-default swaps etc., you have the perfect recipe for disaster. Why pick on tax havens? * You were speaking earlier about the wrong policies that we should not adopt in the wake of the financial crisis. What is your view of the Stimulus Package proposed here? Are we not simply aping countries in the West that have a completely different dynamic compared to Mauritius? You must go beyond the title of the reform package that we have announced; they can be called stimulus packages because that is what the IMF has called all countries, which have the fiscal space to do so, to launch to be able to shore up the economy while waiting for the global recovery. I have no difficulty that we embarked on that because we did have the necessary fiscal and monetary space. That’s what we did, last September, when we started working, that is the Central Bank together with the Treasury, to launch the Stimulus Package. And I would like to bring out here something which many people in Mauritius have not quite appreciated: the G20 communiqué makes mention of a quarter billion dollars being made available for trade financing. There is no better way to emphasise the importance of this instrument to keep trade flowing. Here, in Mauritius, we did precisely the same thing, a full four months earlier in the context of our Additional Stimulus Package, whereby the Central Bank has made available a package of $100 million for the purpose of trade financing. We blazed a new trail. This is the first time in our history that the Central Bank has come up with such a package. We had to go for it because we depend critically on open trade channels and we resorted to it at a very critical time to keep trade flows going, both inward and outward, when credit lines had been called off. This is an example of one measure tailormade for our own specific requirements. Now where the Stimulus Package differs from that of other countries in two crucial respects: first, the latter have a liquidity problem, so that they have to inject liquidity across the board, or second, they have a banking crisis, so that they have to recapitalise banks. We are not recapitalising banks, and we are not injecting liquidity – we have excess liquidity, we are doing the reverse, in fact. Our problem relates to our exporters’ order books – orders have disappeared or the order flow is disrupted. That will have a knock-on effect on their employment, which will in turn have a knock-on effect our balance of payments. We are coming to their help right now to prevent them from going under. The export manufacturing enterprises must keep their whole chain of production going because if you allow them to collapse now they will not be able to resume production at the same level of efficiency when the recovery is here. We do not want to compromise the export sector, and that is why our Stimulus Package contains a large element of burden-sharing between government, commercial banks and the operators themselves based on a viable, sustainable business model. * Aren’t we throwing good public money after bad money just to save a few industries? We could have been accused of doing that if we had not put not extra conditions in place to be able to access public money. I must add that the Central Bank is actually participating in the Working Committee because we need to make sure that our economic operators who can survive the crisis are not driven into bankruptcy because of cash flow problems arising from temporary export difficulties. We know the world economy is going to recover; the western consumer is going to start consuming again, and we want to make sure that our exporters are there with the right products at the right price when that happens. It is a transitional device, a shared burden. We are not providing public money free, it is not a grant. We are either taking over assets of the private sector, asking them to inject new capital and asking their own regular commercial bankers to provide some money as well. So this is very much a shared responsibility. One should expect no less from a responsible, caring, and concerned government, acting as a good paterfamilias. * Private sector spokespersons are saying that you can’t save jobs and industries at the same time. Are these two considerations mutually exclusive? I would not wish to get involved in a narrow sectoral squabble; a two-cornered fight between le patronat and the trade unions, or a classic tri-partite debate. I understand the concern with lightening their wage bill which I suspect is what this argument is all about. For the country’s interest, we must make sure that once the crisis is behind us, Mauritius is in a position to pay its way internationally. To do that, we need to have exporters and investors and workers. Our exporters must be able to export at internationally competitive prices. Now if to be internationally competitive, they have to get rid of some of their labour, that is a business decision that the exporter must take. It’s not possible for us, at our level, to say to exporters that they must get rid of X% or Y% of their staff. Exporters must themselves decide what kind of staff and productivity level they require just as they decide what export markets to target, what specific niches or products or product ranges to zero in on …. As a general approach, I do not think that any government which is providing public money to shore up any sector in the face of a crisis will agree to provide a financial lifeline without asking further questions regarding staff being laid off and so forth. It will seem too much like coming to the help of the fat cats while the small fry are being laid off. We have to provide support across the board in an equitable manner, for what is sauce for the goose is sauce for the gander. * What you are saying is that government must make sure that it not only supports the fat cats but also shelters the vulnerable members of the population from the adverse effects of the crisis? There is one crucial dimension which we very often tend to forget when we discuss such issues of social support. In Mauritius we have a very extensive Welfare State, which we have preserved in the face of sustained attacks from the Bretton Woods institutions at different points in time when they have tried to get the public sector to back down on provision of universal healthcare or to restrict itself to primary health care only and to give up other parts of the health care system. They have also tried to get us to give up on our free education system, on universal old-age pension and all this because it was not in keeping with one essential tenet of the Washington Consensus: Moins d’Etat, Mieux d’Etat. We have maintained all these social support measures, which are lacking right now in the West. Today we are a tremendous increase in poverty levels in the United the States and in those parts of Europe where they do not have much welfare support. So whenever we address social support issues, bear in mind that we have a huge social transfer budget. We tend to take this for granted. There is now an extra effort to be done in terms of trying to help the families that may be affected by job losses. I do not think anybody can guarantee that there will be no job losses. I think that there is no way for us to expect realistically that there will be no job losses in Mauritius when our target markets are breaking new records of joblessness with each new batch of data releases. We must resign ourselves to the prospect of job losses, especially in the tourism sector and in the EPZ sector where orders are getting few. I hope that job losses will be limited in both numbers and duration and that they will be very much a measure of last resort. But if that were to happen, the Workfare Scheme, that is tailor-made for this kind of situation, will be of tremendous help for workers laid off during this transitional period. But we must also bear in mind that some of the people who are likely to be put on shorter working weeks or laid off may have other commitments. For example, they may themselves be indebted to banks, and we must also try to persuade the same commercial banks that are coming to the help of the big operators to try to apply a moratorium or standstill on loans given to the “ti-dimounes” in a spirit of solidarity. And this to ensure that the “ti-dimounes” as well may be able to survive until the end of the crisis. * We do not need to legislate for that to be possible? I think it is very difficult to legislate to tell somebody to love his neighbour – either you are disposed to do it and you don’t need any law to encourage you, or you are not disposed to do any such thing and it’s difficult to force you to do it by law. This is an area where the spirit of social solidarity beats the law hands down. We have been hearing a lot about corporate social responsibility …… it’s in the eating that we’ll see the proof of this particular pudding! Banks have a symbiotic relationship with their clients, whether big or large; they have no interest in driving their clients bankrupt. We have to find a way of surviving this crisis jointly so that banks can resume lending. An appeal to the bankers’ solidarity especially when their profit margins are still comfortable should do. * You expect banks to love their neighbours especially that they are making supernormal profits? Our banks have made good profits and we have good reason to be happy about it. If the banks were not making profits, then we will be involved as taxpayers in recapitalising the banks and possibly taking them over in the process. But what we ask right now is for the banks not to allow the real economy and real sector operators to collapse. So prop up the real economy without departing too much from market-based lending principles. It is a temporary problem, it is a transitional difficulty and we must find flexible approaches that are reversible once the recovery is here – and, believe me, the recovery is coming. And all of us, government, employers, workers, and yes, bankers and your central bank, we have shared interest in ensuring that this incoming tide lifts our boat somewhat higher than others. How else can we preserve our lead on our competitors on the African continent and elsewhere. | bank of mauritius | 2,009 | 4 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the official launching of HSBC Amanah Islamic Banking Mauritius, Les Guibies, Pailles, 5 May 2009. | Rundheersing Bheenick: Putting Mauritius on the world’s Islamic finance map Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the official launching of HSBC Amanah Islamic Banking Mauritius, Les Guibies, Pailles, 5 May 2009. * * * Ladies and Gentlemen A very good morning to you all. It is always a pleasure to do business with our friends from the Hong Kong and Shanghai Banking Corporation. They know so well the business of business. HSBC – a reliable partner over the years The presence of HSBC in our local banking history traces its roots back to 1859 when the Chartered Mercantile Bank of India, London and China established a branch in Mauritius. The bank boasts therefore over 150 years of significant contribution to the economic development of the country. Today HSBC, subsidiary and branch combined, ranks first in terms of assets, deposits and advances. HSBC has always adapted and evolved to meet new challenges in our financial sector. Now it is helping us write a new chapter in the history of banking and finance in Mauritius. We are pleased that HSBC Amanah has included Mauritius in its global strategy. HSBC, with its distinct Hexagon logo, needs no introduction in our part of the world. It is indeed “The World’s Local Bank” as their slogan has it. As Confucius said, “A man who reviews the old so as to find out the new is qualified to teach others”. As we search for solutions for the current global economic and financial crisis, it is well that we go back way beyond the days when our present, so-called, “whizz-kids” were born. That is the very ones that have now led so many bankers and the world into so much trouble. So we look now to our friends from Hong Kong who fuse together a sublime sense of history with a zest for the future to take us forward. In Mauritius, we have tended to look to Singapore for our benchmarks of performance. But Lee Kwan Yew, celebrated doyen of development theory and practice, in fact saw Hong Kong as the standard-bearer of development for small states and for Singapore itself. In his perceptive autobiography, “From Third World to First”, he wrote “I saw Hong Kong as a source of inspiration and of ideas …. before visiting Hong Kong I did not understand the importance of talent …. the yeast that transforms a society and makes it grow.” We are proud that as we take our first tentative steps in Islamic finance we have a prestigious global name such as HSBC Amanah to support us in our ambition to position Mauritius as a jurisdiction of choice for world-class Islamic financial services. It is an irony that we have driven conventional banking, Western style, so far beyond its carrying capacity that we now have to delve back, for new solutions to the question of sustainability, into that quite different tradition of banking derived from the principles of the Shariah. Our approach to Islamic banking/our challenges Central Banks, such as Bank Negara Malaysia and the Bank of England amongst others, have been important sources of inspiration for us. One has emerged as the Islamic finance powerhouse of the world and the other is by far the most renowned conventional financial centre. The UK had a visionary leader in Eddie George, Central Bank Governor between 1993-2003. Sadly, Lord George left us recently. I had the pleasure of meeting him last October on a day trip to Robben Island laid on by South African Governor Tito Mboweni and he spoke very fondly of his visit to Mauritius. He was an easy conversationalist. It was precisely a conversation with his neighbours, a well-established professional couple, deploring the fact that they were unable to access mortgages in the United Kingdom on the ground that they were based on riba, and thus not in accordance with the principles of their faith, that moved him to envisage Islamic finance in the UK. This casual chit-chat between good neighbours has today resulted in a financial centre that harbours six authorised Islamic financial institutions and another two dozen or so institutions offering Islamic financial products as well as over twenty sukuks listed on the London Stock Exchange. Meanwhile, driven by petrodollars and rising prosperity in the Gulf and Southeast Asia, Islamic finance has literally exploded. Increasing demand for Shariah-compliance augurs even better days ahead for the Islamic finance industry as we prepare to enter the field. In these circumstances, how could we resist stealing a page from Eddie George’s book? Just like the British FSA did over 10 years back, we steered our thinking towards having a regulatory framework that accommodates both conventional and Islamic financial institutions. We have also drawn guidance from the experience of other countries which have embarked on Islamic finance but we have had to map out our own route. For instance, we have opted not to impose a single Shariah on our financial institutions Board. We have left it to individual institutions to set up their own Shariah Committee and nominate their own Shariah experts. The Bank will recognize Shariah experts from reputable jurisdictions. It is good to be clear about what Islamic finance is not? As we view it, Islamic finance is not just for people of Muslim faith. The sound ethical principles underlying Islamic finance represent an attractive alternative to conventional financial products. Islamic finance offers advantages to Muslims and non-Muslims alike. The traditional bank/customer, borrower/lender relationship changes considerably into a partnership in Islamic finance. We have already amended legislation and issued the necessary guidelines, but the challenge goes well beyond the legal changes and setting up a regulatory framework. The challenge begins when marketing Mauritius as a destination of choice for Islamic finance. It is a very competitive field that we are entering. Other challenges for this secular country include the integration, the merging of this novel way of doing business within our present conventional financial landscape as a seamless addition so that it is perceived as just another financial product. There is also the challenge of attaining full regulatory and Shariah compliance simultaneously. There is also the wider or meta-challenge for all Islamic financial industry stakeholders to mainstream the industry with conventional finance systems. The present global financial delinquency constitutes an opportunity for the more ethical, risk-sharing, approach of Islamic finance. But it is early days yet for us in Mauritius to join that debate! Let us get our feet firmly on the first rung of the ladder as we are doing now! As I speak to you today I am aware that I am not an expert in Islamic finance and I am certainly not very likely to issue a fatwah anytime soon! And I guess many of you present here today are fellow-novitiates! Our bankers and their legal advisers would need to develop a thorough understanding of Islamic law to ensure that the financial products which they offer meet full regulatory and Shariah compliance. Shariah advisors should be able to combine their in-depth knowledge of Islamic law with a familiarity with conventional financial and economic concepts. We therefore need to develop the know-how as we would require a pool of experts in the field. Issuers of Islamic financial products on their part have a role to play in creating awareness, and in educating the public on the merits of Islamic finance. As for us, the regulator, we also have a steep learning curve ahead of us. Two years down the line When I joined office as Governor two years ago, I recognised that the potential of Islamic finance to bring diversity to our financial markets, boost business opportunities, and exert a positive impact on the economy. I jumped on a moving train. The work had already started. In October 2005, Government had set up a steering committee to explore the possibility of implementing the establishment of Islamic financial services in Mauritius. There was however some confusion about the “aiguillonage” and the destination. The first meeting was held under the chairmanship of the Minister of Arts and Culture. After some time, he quite reasonably asked the Ministry of Finance to take over the chair. It began to look suspiciously like a game of musical chairs when, in June 2006, the chairmanship was passed on to the Bank of Mauritius. But the train seemed finally to be on the right track and heading in the right direction. A report was rapidly finalized in June 2007. This is when the challenge started for our small island. We had to chalk out a Way Forward to position our country in the first Division of the Islamic Banking League. I am happy to say that in only two short, but eventful, years we have: (i) Joined the IFSB as member – which crystallized after my very first meeting with the Secretary-General, Professor Rifaat, when I attended the BIS meeting in Basel in 2007; (ii) Brought the necessary amendments to domestic banking laws to accommodate Islamic banking; (iii) Issued the Guideline for Institutions Conducting Islamic Banking Business in June 2008; (iv) Approved in August 2008 the application for an Islamic bank from two promoters, one from a group operating in the Gulf and the other from a leading financial conglomerate in Mauritius; (v) Approved the application from HSBC to operate an Islamic window; and (vi) Embarked on a project to develop Shariah-compliant money market products for the emergence of an active Inter-bank Money Market for Islamic financial institutions. Shariah-compliant Treasury and Central Bank paper Let me say a word about this. We have in mind to introduce Treasury and central bank paper which would be the equivalent of Treasury Bills/Notes/Bonds and Bank of Mauritius Bills, but without the interest rate element attached, to make them Shariah-compliant. Such instruments will help banks offering Islamic financial services to manage their liquidity. I understand that we may be among the first central banks to introduce such instruments for banks to park their excess funds or manage their liquidity. As Governor of the Central Bank, I take a personal commitment to do whatever is required to help our licensees implement Islamic banking successfully and make it work. Islamic finance and the global crisis The launching of Islamic banking in Mauritius comes at an opportune time. Economic thinkers, who are trying to figure out how the world sleepwalked into the financial mess, which we are now mired in, are now beginning to appreciate the need to redesign tomorrow’s financial architecture based on sound ethical principles. In this sense, Islamic finance is gaining added credibility as a viable alternative. Dr Zeti, the much-admired Governor of the Bank Negara Malaysia, has in numerous addresses recently underscored the relative resilience of Islamic finance to withstand global stress. Indeed, if we take the UK example, many banks have collapsed, or have been effectively nationalised, but there has been no failure of any Islamic financial institution. I am glad – as I am sure are the shareholders, customers, and other stakeholders of this global financial giant – that HSBC is not among the victims! Let me make a commercial break here and tell you about the forthcoming Seminar on Islamic Capital Markets. In two weeks’ time, we will be hosting a Seminar on Islamic capital markets. This is the first event that the Bank is officially launching in collaboration with IFSB. I am pleased that our sister-regulator has agreed to join forces with us in this exercise. This is as it should be. The border between banks and non bank financial institutions – which can be drawn not without difficulty in conventional finance systems – become very blurred in Islamic finance. We therefore lean on the Memorandum of Understanding which the Bank signed with the Financial Services Commission to ensure that there is no regulatory overkill. The Seminar aims at creating awareness on the Islamic capital market and its role in the Islamic financial services industry. We have invited Expressions of Interest from the public wishing to attend the Seminar. I am pleased to say that we have been overwhelmed by the response. Given the huge interest to participate in this event, we at the Central Bank are now contemplating to extend the planned event and organise sessions to accommodate all those who have expressed an interest to participate. This would thus be an additional contribution of the Bank in disseminating knowledge of Islamic Finance among the general public. Watch this space for a further announcement on this as soon as we finalise the logistics. Let me, therefore, once again congratulate HSBC on its strategic decision to start Islamic finance operations here in Mauritius, and welcome HSBC Amanah to our shores. Today, my colleagues and I who have worked on this subject for two years now feel a legitimate sense of fulfillment. And I can tell our friends from HSBC: You add depth to our financial sector. And give a new dimension to your long-established presence here. You also comfort us in our ambition to grow and develop our country as a major international financial centre. In these very difficult times that we are going through, when we inspect every passing cloud for any trace of silver lining, can we perhaps expect Amanah to be the spark that we are looking for to re-energise our faltering economy? All our very best wishes to you and your team, and a very good day to all of you, Ladies and Gentlemen, who are here with us this morning for the launching ceremony of the very first Islamic finance operation in Mauritius. | bank of mauritius | 2,009 | 5 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Opening Ceremony of the Seminar on Islamic Capital Markets, Port Louis, 19 May 2009. | Rundheersing Bheenick: Islamic finance and its developments in Mauritius Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Opening Ceremony of the Seminar on Islamic Capital Markets, Port Louis, 19 May 2009. * * * A very good morning to you all. It is my great pleasure to welcome you all this morning and to offer a prelude to our important international seminar on Islamic Capital Markets. The word “Seminar”, Seminarium, derives from the Greek work for seed – semen – and thus our task is the spreading of seeds. At our meeting, God willing, these seeds are for a fresh garden for the world freed from the perils past, and very present, in which the now-globalised economies of the world have been put at such grave risk by mistaken systems of management of global financial and capital assets. A past in which, some declare, western bankers, finance professionals, accountants, market players, and those regulating and supervising them have fatally wounded the golden goose of the market economy and even called into question some of the fundamental tenets of capitalism itself. It is as well we hit on the word seminar for our task, rather than the other commonly-used Greek term for such encounters – Symposium. For “Symposium” derives from the ancient term for a drinking party, beloved of Plato, Aristotle and their friends and scholars, which might include not only the common supping of fermented grape juice, but also a goodly supply of lightly-clad dancing ladies. I am not sure our friends and brothers, from the distinguished Islamic Financial Services Board, would have entirely supported such a venture. So an international seminar we have – that is, a meeting for discussion or training; and through that, the planting of seeds for the future. We are honoured by the presence of Dr The Honorable Rama Krishna Sithanen, Vice Prime Minister and Minister of Finance, who has taken time off to be with us, only days before he presents his next budget at the end of the week. We are proud to be co-hosting an event for the first time with the Islamic Financial Services Board; and we are delighted to have the full collaboration of our sister regulator, the Financial Services Commission, in this exercise. It is no coincidence that this seminar takes place at a time when we at the Bank have just launched our first Islamic finance operation, HSBC Amanah Mauritius. We have been working towards this for the last two years, and it is heartening to see our efforts have started to bear fruit. The Dodo is finally meeting the Camel! But you might ask why this image of the Dodo and the Camel that appear on our posters for this event? For our overseas visitors who may not know it, the Dodo is that legendary but extinct species of bird that died out in Mauritius not long after man first set foot on our previously uninhabited island. The Dodo failed to adapt and paid the terrible price of this failure. Its memory lingers in the logo of our central bank. It serves as a symbolic warning and a reminder of the fate that awaits those who do not adapt to change. The Camel, of which I believe none exists in Mauritius, comes to us today, as a symbol of that species that is well adapted to that harshest of environments, the deserts of Arabia; it is that seasoned traveler who, when water is scarce, carries it on its back in its God-given hump. This meeting of the Dodo and the Camel is not an image from Samuel Huntington’s “Clash of Civilizations”, in which those of sharply differing cultures are doomed to eternal conflict. No, indeed, our meeting here is just the opposite. It is a meeting of minds intent to seek fresh thoughts on sustainable banking and this, not merely to avert the fate of more species like the Dodo, threatened by global warming and the carbon imprint of man, but to also avert the very recurrence of the financial and economic crisis that engulfs the world today, capital markets and banking in particular. About the IFSB For those who might not be in the know, the IFSB, a Kuala-Lumpur-based organisation, was set up in 2002 to promote soundness and stability in the Islamic financial services industry. Since its inception, the IFSB has been actively engaged in the development of international standards and guidelines for the Islamic financial services industry. The prudential standards adopted by the IFSB are globally accepted and are contributing to the smooth integration of Islamic finance with the conventional financial system. The IFSB also provides a platform which brings together all the stakeholders of the industry: regulatory agencies, private sector operators, rating agencies, professional associations, as well as regional and international financial institutions. Islamic banking is a multi-billion dollar industry in global and national finance. It also happens to be growing at a very rapid pace. In the midst of financial and economic crisis, the IFSB brings to us the principles and practices of Islamic banking and the management of capital markets. This will contribute to our search for a new focus for resilience in investment and banking to withstand the shocks that have undermined the credibility of much current international banking practice and nearly forced the collapse of capital markets. I wish to commend the IFSB for their remarkable work and for the catalytic role they have played in turning Islamic finance into a truly global phenomenon. From humble beginnings in 1975, when the first formal Islamic Financial Institution was established, Islamic Finance has spread well beyond the confines of the Middle East. It now spans the globe from New York to Hong Kong, via London and Singapore. To-date, there are over 300 Islamic Financial Institutions in more than 75 countries. Mauritius, an observer-member of the IFSB since 2007, is one of the newest additions to the Islamic Finance map. Now that we have proved our credentials in Islamic finance, we look forward to be admitted to full membership status in the near future. This morning, I would not wish to engage in a lengthy discussion on Islamic finance. I leave this to the experts and I am glad that so many of them have joined us for this event. Instead, I will focus my intervention on those aspects of Islamic finance that are, according to me, relevant to the successful implementation of Islamic finance in Mauritius, namely its ethical dimension and the ability of Islamic finance to meet the transaction needs of the market. Ethics in Islamic finance: sowing the seeds for success In Islamic finance, the moral dimension is its raison d’être. Islamic finance is firmly anchored in the Sharia, which derives from the Qur’an and the sayings and deeds of the Prophet Mohammed in the Sahih hadith. At the very core of Islamic finance is the concept of Riba which is where a buyer demands more of one item in exchange for just one item of equal value; this does not mean zero profit but zero interest. As many countries now have the lowest levels of interest on capital in living memory – and in Mauritius we have for some time now had negative real interest rates – it is time to ponder anew on the role of central banks in capital markets and the utility of interest rates as a guiding system. Our friend Aristotle, the eager symposiast who I referred to earlier, was deeply opposed to positive interest rates. If negative rates are bad for saving, positive rates are not an unqualified blessing either. Too positive, and they become “usury” which the Oxford Dictionary defines as lending at an exorbitant rate of interest above the level allowed in law. In Islamic banking, the legal level is zero and any rate above that is usury and therefore prohibited. But we would risk gross reductionism if we were to introduce Islamic finance, to the uninitiated, merely as faith-based finance. Islamic finance does propose a morally-inspired economic behaviour. It envisages a partnership between capital, business acumen, and entrepreneurial ability. Any activity that promotes the common good finds its place within the spectrum of Islamic financial instruments. Islamic banking tries to maximize both investment in the real economy and consumption so that development is promoted fast. Any incremental value, which generates from this productive enterprise, is shared; and if there is a loss, the entrepreneur goes without reward. The distributive justice, which follows from risk-sharing, and the promotion of public good are ideals that most of us share. This integration of ethics and values into finance is viewed positively by many. Such ethical safeguards are however not exclusive to Islam. To take another example from a different faith, St Thomas Aquinas opposed usury; but then you might say that was history, before modern banking; indeed it was well before the excesses of modern banking and financial engineering, and the mismanagement of capital markets got us into the state we are in today. Let us not forget that we also live in the age of ethical consumerism. There is a growing number of people who are constantly on the lookout for products that are “organic” or “green” – in short, for anything that espouses the principle succinctly summarized in the following four words: “First, Do No Harm”! What sets Islamic finance apart, though, is the degree to which its prohibition on Riba requires that its adherents rethink the way they make their money. The sacred principle is that money should not produce money, and bankers from Islamic financial institutions make no compromise here. This commitment is translated in the fact that to every credit extended there should be an underlying asset. Money should be used only to finance the real economy. Adherence to this principle affects the relationship that each nurtures with money, whether we are an individual or an enterprise. An entity cannot borrow more than the total value of its listed shares while a person cannot de facto suffer from over-indebtedness. Most certainly, such principles cannot be harmful to borrowers! Another principle in Islamic finance that sets it apart from conventional finance – and which assumes a particular relevance in the global financial crisis – is that uncertainty in contractual terms and conditions is not permissible. All the terms and conditions of a financial transaction need to be clearly understood. This principle has insulated Islamic financial institutions from exposure to toxic assets. Fools rush in where angels fear to tread, they say. Then the herd instinct takes over … and before you know where you are, you find yourself in the kind of crisis that has engulfed conventional finance, in particular, the world of shadow banking. Islamic finance operators do not have this option. They can only enter ground that has been declared compliant by Sharia scholars. Global financial crisis The current global financial crisis has brought into sharper focus some worrisome aspects of contemporary financial markets. At the heart of our current global crisis has been the fateful distance of much of modern finance from the real economy. Per contra, at the heart of Islamic banking and Islamic capital markets is the salutary insistence on bringing these two elements closer together. We cannot turn the clock of globalisation and of global finance back. But we do need to look for a better way of managing our affairs insofar as money and finance is concerned. To quote Raghuram Rajan, former Chief Economist of the IMF, the time has come for “regulatory soul-searching”. The economic model which follows from Islamic finance is very different from the “originate and distribute” model which has failed conventional finance so spectacularly. The founding principles of Islamic finance, the prohibition of interest and the close linkage between the real economy and finance, offer a viable alternative to the conventional financial system. At a time when global conventional finance markets are in such a state of turmoil, Islamic finance does represent an appealing alternative. The short-term fixation on private benefits by hook or by crook, which has turned yesterday’s financial wizards into today’s leading exponents of white collar and financial crime, must give way to a clearer focus on the longer term and the public good aspects of our financial interaction with our fellow-man. Now, in today’s world, Keynes and his precepts are experiencing a revival. It has taken open clamouring for government interventionism and the introduction of fiscal stimulus measures on a mind-boggling scale to remind us that “we are all Keynesians now.” As Greenspan reminds us in his autobiography, Time Magazine declared this way back in 1965, that is well before those words became indelibly associated with US President Richard Nixon. Along with stimulus measures and public spending, we are re-discovering the Keynesian concern with zeroing down interest rates. “What enormous social changes would result from the gradual disappearance of a rate of return on accumulated wealth…” he declared in his General Theory. His principal preoccupation at that time was relief of unemployment and poverty in Europe. Keynes saw unemployment and its social and economic consequences as the essential target for action. He said it would be better to employ people to bury money in bottles and then employ others to dig it up, rather than put up with rampant unemployment. We find much common ground between Keynesian theory and the Islamic concept of Capital markets. This is particularly evident in their shared focus on closing the gap between the function of money as a repository of value and the function of the economy to promote trade and employment. Islamic finance is just finance I mentioned earlier that Islamic finance has transcended borders and regions. What appeals in Islamic finance is its ability to transform products and services from mainstream finance into Sharia-compliant equivalents. In many ways, the development of Islamic finance has rivaled the innovations in mainstream finance in recent years. The growth of Sukuks (Islamic bonds) has been dramatic; the London Stock Exchange has already listed over 20 Sukuks. Some governments have been considering the idea of sovereign Sukuk issue. This is indeed a remarkable achievement for an institutional arrangement which was formalised less than a generation ago. Here, in Mauritius, Ijarah (leasing) and Takaful (insurance) services are already available. The range of Islamic financial products is set to expand further with HSBC Amanah starting operations here early this month and the expected launch of two other full-fledged Islamic banks soon. The development of Islamic finance in Mauritius forms part of our strategy to become a world-class financial centre, offering a whole range of financial services at a competitive price to an international clientele. Experts on Islamic finance concur that it is now emerging as a competitor to conventional finance on efficiency grounds. The development of Islamic finance in Mauritius can encourage new levels of dynamism in the sector and attract more foreign direct investment and portfolio flows especially at a time when our economy is showing signs of slowdown. It can smooth out the disparities between levels of financial development and capability, as well as foster deeper regional ties in Africa. This first event in Islamic finance, which we are starting this morning, has generated a lot of interest among all stakeholders. The response has been simply overwhelming and bears testimony to the eagerness of each and everyone here to learn more about Islamic finance. We are acutely aware of the need to build up rapidly a local pool of experts in Islamic finance. Seminars such as these provide the appropriate platform for sharing and developing expertise. A bridge has been created between the IFSB and Mauritius and we hope to be able to organize other seminars and workshops in future. We are confident that this will create the necessary synergies to enable Islamic finance to gather momentum in our part of the world. Regulatory challenges for Islamic finance The ethical dimension of Islamic finance is an essential ingredient for its success. What matters even more to us in Mauritius is its smooth integration with the rest of the financial system. This hinges on a sound regulatory framework embedding best international practices. There is no denying that there are regulatory challenges facing the Islamic finance industry in Mauritius. As is the case in any burgeoning enterprise, some of the real challenges are still in the domain of the unknown. The experience of other jurisdictions provides us with precious insights and helps us to avoid certain pitfalls. Indeed, this is not the case only with Islamic Finance, but applies to the entire financial sector. In this sense, the global financial crisis can have a salutary effect. It serves as a wake-up call for modern finance to review the regulatory apparatus, in terms of our operating framework, processes and procedures. Standardisation with regard to Islamic finance laws and regulatory practices and the interpretation of the Sharia, is an essential ingredient in increasing the marketability and acceptance of Islamic products. There is a need to foster greater transparency and credibility. The work of international institutions such as the IFSB and the Accounting and Auditing Organisation for Islamic Financial Institutions on the harmonisation of standards is absolutely crucial. There is one key aspect in which there is absolutely no difference in our regulatory approach to Islamic finance as against our approach to conventional finance. And this is our uncompromising and steadfast adherence to global prudential standards and the adoption of international best practice for risk management and corporate governance. Additionally, we want to achieve a smooth integration with the conventional financial system. While doing all this, we must bear in mind that Islamic finance is just finance – it provides an alternative mode of financing that may appeal to all depositors and investors, irrespective of their religious beliefs. Conclusion Today, as we find ourselves at the centre of a turning and troubled world, we at the Central Bank are privileged to bring together the flower of our entrepreneurs, bankers, financiers, and economic thinkers under the threat of the fate of the Dodo to meet with our distinguished and experienced brothers from afar to, if I may use the phrase, distill what we can from the meeting of minds on this great issue of our times, the better management of capital markets. Can the Camel supplant the Dodo in our quest for a better future? I thank all stakeholders who have contributed to this event – the IFSB for sharing their experience and wisdom in the preparation of this event, the FSC for joining hands with us, the speakers, discussants, participants and the organising committee. Events such as these provide excellent networking opportunities and I fervently hope that participants will take advantage of the interaction to emerge wiser and richer. Thus I have the honour and great pleasure to welcome you warmly and to declare the Seminar open for those who wish to sow the seeds and reap the harvest generating fresh species that can survive the rigours of our troubled times. Thank you for your attention. | bank of mauritius | 2,009 | 5 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Presentation on Afreximbank to the Mauritian Business Community, Port Louis, 16 June 2009. | Rundheersing Bheenick: The role of international trade and trade finance Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Presentation on Afreximbank to the Mauritian Business Community, Port Louis, 16 June 2009. * * * Good morning ladies and gentlemen It is with great pleasure that I welcome you all today to this Presentation of the Afreximbank. I extend a particularly warm welcome to Dr Oramah and Mr Chafa. This is a critical element in what might be called our frontier expansion policy, creating extended links between the core role of a central bank and the wider pastures of trade and the real economy. Last month at about the same date, the Bank was co-hosting the first Seminar of the Islamic Financial Services Board in Mauritius. Today’s event is the fruit of the collaboration of our two institutions, Afreximbank and Bank of Mauritius. On the occasion of a Board Meeting of Afreximbank held in Mauritius in December last, I had drawn the attention of the President and Chairman of the Board of Afreximbank, Mr JeanLouis Ekra, on the lack of awareness about Afreximbank’s programmes and facilities by the business community and I had expressed my views on how a knowledge of Afreximbank’s products could represent a useful tool in the promotion of market and product diversification of our trade. I am extremely delighted that the President of Afreximbank has responded positively to my request and I convey my heartfelt thanks to him. Today’s event gives me the opportunity to share with you a few thoughts on the role of international trade and trade finance, especially in the context of the current economic turmoil, and as Paul Krugman has put it in his seminal book “The Return to Depression Economics”; that “Malign neglect” of the “shadow banking system” that has led to the “Loss of traction” of the central banks in steadying the real economy in the storm. International trade Over many years, we have seen that most countries have progressively opened their economies to international trade, either through the multilateral trading system, increased regional cooperation or as part of outward-oriented domestic reform programs. We have gone beyond the system with the third world being merely the exporter of raw materials and the importer of manufactures. International trade nowadays backed by the Internet has created the efficiency for raising standards and conditions of living. It has enabled all nations to produce on a higher efficiency scale. It has helped increase productivity. It has allowed the instant spread of knowledge and ideas so that the range of choices available to consumers has expanded continuously. Trade and globalization have without doubt brought enormous benefits to many countries and citizens of the world. We might disagree on the exact modalities and the sequencing of trade and tariff reforms, but few of us would dispute that international trade has been a major driver of global economic growth since the end of the Second World War. Trade expansion boosted post-war economic recovery in the leading economies of today; Germany and Japan are notable examples that come to mind. It figures large in the “growth miracles” of the Asian Tigers, Mauritius, but also China! But this has not happened without those countries facing their own crises. The impact of the crisis on trade finance Today we are facing the worst economic crisis in generations and this crisis is threatening to undo the economic development that many countries have achieved so far. Undoubtedly world trade has been one of the worst casualties in the global financial crisis. This is even threatening to “erode people’s faith in an open international trading system.” The negative impact on world trade finds its way through two main channels. First the credit crunch resulting from the financial market turbulences has led to a fall in the supply of trade finance, which has rightly been described as the oil of the wheels of international trade; and secondly the spillover of the financial crisis into the real economy has caused the worst recession since the Great Depression and fuelled a contraction of trade volumes. And those of us who believe in open trade almost as an article of faith, have watched with growing disbelief as the threat of protectionism started to rear its ugly head. As economic activity collapsed and unemployment soared in many countries, protectionist sentiment has risen along with the attraction of other trade-distorting policies. Many countries have implemented domestic stimulus packages aimed at protecting their businesses and industries, favouring domestic goods and services sometimes at the expense of imports. Policy-makers are perfectly aware that such policy actions have international implications – in the short term they can boost domestic demand but in the long term, they undermine the international trading system and global wealth and welfare. Outlook for world trade for 2009 If we look at the prospects for world trade for 2009, we see that the World Bank has predicted that the volume of world trade in goods and services will decrease by around 6 percent. According to the World Trade Organisation (WTO), the collapse in global demand is expected to drive manufacturing exports down by roughly 9 percent in volume terms. International trade is thus forecast to continue deteriorating and there is even the emergence of a wide consensus arguing that in 2009 the global economy will shrink as recession strikes. Against this bleak backdrop, I believe it is important to put things into the right perspective. Yes, trade can be a powerful engine to transmit shocks, whether positive or negative, from one part of the globe to another. But, no, it is certainly not the cause of the collapse in demand. The financial crisis, which transmuted into a global economic crisis, is what has driven the world economy to where it is now! Lessons from previous crises Crises are, without a doubt, challenging times but they bring along a wealth of lessons and opportunities for those willing to learn from past mistakes. As US President Obama has recently put it: we must not waste the opportunities this crisis presents. The destructive protectionist streak in the aftermath of the Great Depression serves as a stark reminder about the dangers of reverting to the beggar-thy-neighbour policies of the past. We have learnt the lesson that the scarcity of trade finance is unavoidable during crises. The experience of South East Asian countries at the time of the Asian Financial crisis a decade ago; of Russia during 1997-98; of Turkey in 2000-01; and of Brazil and Argentina during the Argentine crisis of 2001-02, still resonates in our minds. Another lesson learnt is that multilateral cooperation can also help make trade finance more affordable and resilient in times of crisis. WTO has advocated cooperation among all stakeholders in the trade finance market to keep the flow of trade finance going. Among the measures proposed at the G20 Summit is the injection of some USD250 billion to support trade finance. Here in Mauritius, despite the resilience of our domestic banking sector, on the first signs of difficulty last November, the Bank of Mauritius acted pre-emptively and created a line of credit of USD100 million for trade financing purposes. Doha Round Reviving the Doha Trade Talks – which were not so long ago considered to be as dead as our dear departed Dodo – is now increasingly seen as vital for global economic recovery. Political leaders and policy-makers of the G20 have committed to expedite the conclusion of the Round. This view is shared by WTO Director-General Lamy, who, underscoring the importance of concluding the Doha Round, warned that “the stress test of the multilateral trading system is still to come”. I align myself with the view that the mutual benefits of trade are too important not to be preserved and it is in the interest of one and all to maintain and enhance trade openness at all costs. Indeed I strongly believe that, protectionist sentiment notwithstanding, trade continues to function as the hand-maiden of economic growth and will support global economic recovery. Regional cooperation/economic integration In Mauritius, our trade policy has always been one of openness, whether it is to the world economy or to the region. We have of course, never been averse to drawing benefits from preferential trade arrangements. We are a member of various important international organisations such as WTO and of regional blocks such as COMESA and SADC. More importantly, we have been in the front line of African countries to benefit from the African Growth and Opportunity Act. For little Mauritius, Africa represents a sizeable market for our products and services and has untapped potential. Many local companies are exporting to SADC and COMESA countries and they envisage extending their export network to other parts of the continent. The Mauritian Banking Sector has been quite resilient to the financial market turbulence, but the interconnectedness that comes from living in a highly integrated world means that our banks are not immune to contagion effects. In the words of Ngozi Okonjo-Iweala, the managing director of the World Bank, we, in the emerging economies, are "innocent bystanders" in the global recession created by developed countries. But we are determined to avoid becoming victims of the credit crunch. We do recognize the need for collective action in order to get through these harsh economic times. This gives me the opportunity to articulate my position regarding the strong lobbying of some of our exporters in favour of the continued depreciation of our currency. Export lobbies have been clamouring for a depreciation of the Rupee to ensure their competitiveness, if not to guarantee their very survival. But we need to look at the other side of the coin – consumer and producer price inflation arising from pass-through of higher import prices. At a time when one of our main concerns is protecting people and their purchasing power, intervention by the Bank of Mauritius to keep the Rupee at a depreciated level would not only be inappropriate, it would also be irresponsible! And to put to rest, once and for all, the Rupee depreciation mantra, I need to add that a recent IMF mission has proposed to re-classify our exchange rate regime from managed float to freely floating. I am reminded here of the French writer, Jean Baptiste Poquelin – many of you probably know him under his more famous name, Molière. Molière had one well-known play, “Le Bourgeois Gentilhomme”. Le Bourgeois Gentilhomme in Molière was surprised to discover that he had been speaking prose all his life! We are surprised to discover that for the last year or so, we’ve been a free floater, not a managed floater. And the Fund has offered to re-classify us in the light of our past performance as a free floating regime. This puts us in the top category of countries in the likes of UK and the US. This is not an opportune time to embark on a drastic overhaul of our exchange rate regime; this proposal however does offer food for thought about the shape of things to come under the emerging new economic order. Financial mercantilism, whether at the level of countries or institutions, is simply not a viable way to national economic competitiveness. The Additional Stimulus Package and the Budget Speech has made it clear that life support for moribund enterprises is not on the agenda. “Preparing for recovery” is! In addition to the inescapable “regulatory soul-searching”, the financial crisis and the global recession also warrant a revolution in the ways we think about and conduct business. Going down the well-trodden path of pessimism while waiting for the tide to turn is certainly tempting, but ultimately our ability to harness the potential of the new internationalism will depend on how willing we are to move away from established “comfort zones”. Afreximbank – opportunities for Mauritius Today’s event with Afreximbank is intended to serve as a reminder of the vast possibilities that beckon for enterprises and financial institutions that choose to view this crisis as an invitation to do things differently; to do things better! The initiative of the Bank of Mauritius to lend its platform for Afreximbank to market its products is one more step in the direction of regional cooperation and economic integration. I know our local investors are looking forward to receive Afreximbank’s support for their trade with African countries and other countries in the region as well as with the rest of the world. The Bank of Mauritius has always favoured an approach geared towards opening up the banking sector to other players. We firmly believe that healthy competition always results in more choices, coupled with a better service for the users of financial products. Traders around the world rely on a high level of trust and confidence in the counterparty to a trade operation. One of the things that traders look for in their exchange with buyers in other countries is the assurance that they will indeed receive their payments. The 2009 Budget Speech has proposed the setting up of an Export Credit Insurance Scheme. This reminds me of the major role played by the Bank of Mauritius in the 1980’s in setting up the Export Credit Guarantee Scheme and in providing financial backing in setting up the Export Credit Insurance Scheme. This scheme was meant to protect Mauritian exporters against credit risks – both commercial and country risks. Both schemes were managed by the Development Bank of Mauritius but it was the Bank of Mauritius that guaranteed settlement of all claims in respect of the two schemes. The two schemes did not meet with much success and were short-lived. I hope we’ll have better luck with the new version now on the drawing board. Afreximbank is bringing to us today years of experience and know-how in providing insurance and guarantee services covering commercial and non-commercial risks associated with African exports. The experience and expertise of Afreximbank in this area could be quite useful. REPSS As you know, the developing COMESA system, the Regional Payment and Settlement System – REPSS will facilitate cross-border payment and settlement between Central Banks in the COMESA region; it is presently in the final stage of testing and will be launched soon. The system will stimulate and increase intra-regional trade by working in local currencies, thus reducing costs and saving time. I extend an invitation to Afreximbank to join our clearing system. I now leave you in the able hands of Dr Oramah who will make a presentation on the range of products of Afreximbank. Those of you who have booked slots with the delegation from Afreximbank for one-to-one encounters will be able to attend the bilateral meetings in the afternoon and tomorrow morning. I hope and wish you to make the most of this presentation by Afreximbank. Thank you all for your attention. | bank of mauritius | 2,009 | 6 |
Remarks by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the launch of the "New Business On Line" project by Standard Bank, Port Louis, 20 May 2009. | Rundheersing Bheenick: Developing banking technology in Mauritius Remarks by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the launch of the “New Business On Line” project by Standard Bank, Port Louis, 20 May 2009. * * * Good evening, ladies and gentlemen It is my pleasure to be here at this Product Presentation as you prepare to roll out the “New Business On Line” project in Mauritius. You operate in a very competitive environment and it is quite appropriate that you should always be on the lookout to extract every inch of competitive advantage that you can from having a state-of-the-art technology platform and thus strive to stay ahead of the field. How I wish I could say as much for my own institution! If you had to contend with the built-in inertia and resistance to change existing practices and structures, that I have encountered, you would not be rolling out this world-class technology to the domestic corporate and institutional market. You would not be coming with the technological enhancements that make Mauritius more attractive to Multinationals with centralised African Regional Hubs and Shared Service Centres. Your product will stimulate the flow of foreign capital into the country, by creating a new banking environment that provides increased choice, control, security and accessibility. We all know how critical it has become to transform the physical flow of funds to an electronic delivery channel without undermining the security and confidence of the banking public. And, at the Central Bank, we are acutely conscious of the role of a smooth functioning payment system to the effective functioning of the economy. Since Standard Bank started operations here in Mauritius in November 2001, it has made significant progress. Its asset base (2008) now stands at around USD850 million and its total deposits amount to USD745 million, having almost doubled over the last two years. Standard Bank has been a pioneer when it comes to adapting its business model to the rapidly-changing market conditions. In 2006, it became the first offshore bank as they were then called, to shift to universal banking. Its new strategy comprised two main elements, namely (i) international corporate and investment banking (ii) domestic corporate and investment banking, with appropriate treasury/global market and private banking. Since then, the bank has launched several initiatives such as (i) provision of global custody services to foreign offshore funds and private equity funds, (ii) the establishment of a private banking suite, and (iii) the launch of internet banking platform for wealth management and private banking clients. I understand that this "New Business On Line” project of your bank forms part of a broader plan of Standard Bank Group encompassing the African region to provide an enhanced service to the Group’s corporate and institutional clients. And, in terms of initiatives, there was the coup d’éclat when the Group became the first to partner with a major Chinese bank, namely Industrial and Commercial Bank of China (ICBC) to support its strategy to expand its African and international networks and capabilities, including in China. And they did this before the global financial sector got embroiled in the current turmoil. The Bank of Mauritius has every reason to be satisfied with the performance of Standard Bank in our country. We value your contribution to our regular dialogue with the Mauritius Bankers’ Association. We are currently engaged in a sustained dialogue with your bank regarding the development of the domestic bond market, an area where Standard Bank has made a big contribution in Africa. It is no coincidence that Standard Bank Mauritius was nominated for several awards by the 2009 Euromoney Private Banking and Wealth Management survey. I wish to commend your bank for being at the forefront of innovation. Role of ICT and online banking We all know the pivotal role that Information and Communication Technology plays in business development. The ability to transfer information through shared electronic files and computer networks considerably enhances business efficiency and lowers transaction costs. We recognize that our banks have been investing heavily in technology. Most of them have developed sophisticated information systems to support their operations. It seems now that they are waking up to the call of e-networking – following the example of our youngsters who now develop social ties through Facebook. On a more serious note, the creation of networks through ICT has tremendous advantages from an economic perspective. By rapidly increasing firms’ networks, ICT is able to reduce the gap between more established businesses and newcomers. Online banking bridges the distance between geographically remote locations, creating new business opportunities. It is an imperative in the era of financial globalisation. Risks Online banking presents a wide range of potential risks and has led to heightened concerns about the vulnerability of bank and electronic payment systems. These concerns cannot be overemphasised – the lack of trust in e-business processes and legal protection with regard to confidentiality of data and transactions can be a major constraint to the adoption of this alternative way of doing business. This is why we, as regulator, consistently insist on the need for financial institutions to properly ascertain the vulnerabilities and threats potentially affecting individual online systems, and to establish compensating internal controls with a view to mitigating those risks. We need to have robust systems that would ensure integrity of online transactions and backup mechanisms in case of failure. The smooth functioning and confidence in the payments system are areas that are very dear to a regulator’s heart. Indeed the extent of that confidence determines to a large extent the decision of investors and businesses on where to place their funds or to locate their company’s ventures. Therefore all initiatives geared towards ensuring a modern, efficient and safer banking environment are most welcomed. In fact, innovation, whether in the banking sector or elsewhere, is subject to important network externalities. To illustrate the point I am making here, let us take the example of the TGV (Train à Grande Vitesse – high speed train) having to share rail networks with an old-fashioned steam engine train. It probably would not get very far and run the risk of damaging the whole rail network. In the same way innovation by an individual bank is greatly enhanced if everybody else is innovating, not least the regulator. The global financial crisis has very clearly exposed the dangers of the failure of regulators to keep abreast of developments taking place in the financial arena. The Bank of Mauritius is fully aware that it has a role to play in supporting innovation by individual banks. It has also been active on this front with a heightened role in the area of regional integration. Central banks’ concerns are however of a different nature. Central banks look at the critical role of a smoothly functioning payment system in maintaining financial stability and in promoting the orderly and balanced development of the economy. The Bank initiated a number of projects, regrettably those projects have been unduly stalled – for reasons that I would not wish to evoke here. However I will give you an overview of the changes that the implementation of those projects would have brought to the payments, clearance and settlement system in our country. REPSS As cross-border trade grows, the increased volume of transactions and migration to open account terms, that is, supplier credit extended to buyer at time of sale, are exerting pressure on banks as well as on the payment systems to improve the cross-border payment process. The current system of cross-border trade payments handled through correspondent banking relationships is slow, inefficient and costly for banks and businesses. Improvements require significant investments in terms of changed processes and systems. In this context, the COMESA Clearing House was mandated to implement a system to facilitate cross-border payment and settlement between Central Banks in the COMESA region. This system, named "Regional Payment and Settlement System – REPSS" will provide a single gateway for Central Banks within the region to effect payment and settlement of trades. It will be a complete real-time online system with an open, published interface based on S.W.I.F.T standards. The main aim of REPSS is to stimulate and increase intra-regional trade by enabling importers to pay for goods and services in their local currency, whilst exporters will be able to invoice for their products in their local currency. Local banks will access the payment system through their central banks. Any participating bank will, therefore, be able to make payments to, and receive payments from, any other participating bank. The linkages through central banks will avoid the complex payment chains that may sometimes occur in correspondent bank arrangements. The system will use the infrastructure of each member country’s central bank and commercial banking system to make it operational. Each country will, however, need to put in place adequate enabling legislation. In addition, a Trust Fund will be established to assure daily settlements in the event of an inability to settle by one or more participating banks. The cornerstone of the REPSS operational model is a settlement agent which will hold accounts of participants and carry out end-of-day procedures. At the Twelfth Meeting of the COMESA Committee of Governors of Central Banks held in Tripoli on 8 and 9 November 2007, it was decided that a REPSS participating Central Bank acts as the Settlement Agent for the COMESA Clearing House (CCH) and opens a CCH USD and a CCH EURO account at its Central Bank. In this context, the Bank of Mauritius has been designated to act as Settlement Agent for the CCH and relevant EURO and USD accounts are being opened for participating member central banks. When we recall that COMESA is a grouping of 19 countries, with a population of 425 million, a GDP of USD345 billion, and an external trade of USD200 billion, you wonder why we at the Bank of Mauritius have had so much difficulty in getting equipped to deliver on this commitment. Cheque Truncation The Bank of Mauritius has embarked on the modernisation of the clearing and settlement of cheques in the country through a system called truncation. This process enables clearing to be achieved in a more speedy and secure manner through images of cheques instead of the physical movement of cheques to the Clearing House for exchange. The modernisation of the cheque clearing and settlement process started in November 2002 when all cheques issued by banks were standardised and the use of Magnetic Ink Character Recognition cheques was introduced. Since then, banks started exchanging code lines through the Mauritius Automated Clearing and Settlement network. The project on Cheque Truncation was first discussed at the Port Louis Automated Clearing House Committee in September 2005 and a Steering Committee was set up in August 2006 for the project implementation. It was initially envisaged to develop the application for image based cheque clearing at the Bank. However, given the resources required to develop such a system and the fact that a number of Cheque Truncation System applications existed on the market, it was decided in April 2008 to purchase an off-the-shelf solution. The Request for Proposal was prepared and the Bank organised an international competitive bidding process where suitably qualified vendors were invited to bid for the project in June 2008. While all this was happening – some skeptics might say, while nothing was actually happening – the value of cheques cleared has been steadily rising from Rs187 billion to reach Rs254 billion last year. What this means is that some five million transactions that could have been done instantly now take three to five days to be cleared in a very inefficient and antiquated matter. That is the heavy price that all of us in Mauritius, banks, customers, economic operators have paid needlessly. It is a matter of regret for me that we are lagging behind, while Bank Negara Malaysia which started the same project in 2006, has already implemented it in 2008. Closer to us, Botswana and Madagascar already have Cheque Truncation as part of their payment systems. Modernisation of MACSS The MACSS, a real time gross settlement system, provides the means for real time interbank payments and is used to settle cheque clearing positions of the Port Louis Automated Clearing House for the final settlements of the Contribution Network Payment to the accounts of the Mauritius Revenue Authority and for settlements for the Central Depository System. The pressing demands of the growing financial sector and increasing cross-border transactions poses new and complex challenges to the current payment system infrastructure. The need for a more dynamic, flexible and business-friendly payment system capable of better resisting systemic shocks and providing for international exposure is increasingly felt. In that respect, the Bank has decided to replace the existing MACCS application with new application based on best international practice and built on a more resilient architecture, supporting multi-currency transactions with extended settlement windows and providing for low cost messages. The core application is operational as from 14 January 2009 and all advanced features will soon be implemented. Online reporting and monitoring system The Bank sees also a need to enhance the data collection, collation and dissemination process by developing an online application available across banks. Banks currently report information to the Bank through mails or hardcopy documents. Recognising the drawbacks of the existing system, the Bank decided to launch the Central Database System (CDS) initiative in July 2007 designed to bring all data used for analysis and decision making into a single repository. The CDS would also provide a Customised Dashboard for Management to retrieve crisp information for decision-making purposes. The CDS initiative would also be extended to licensed Cash Dealers and moneychangers with a view to exercising a closer monitoring of the market. Our efforts to modernise the payments, clearance and settlement system have taken many twists and turns over the last two years. My determination to push these projects through has not flagged. And this must be done; and must be done fast, in the interests of the efficiency of the banking sector and of the economy generally. The new platform of Standard Bank serves both as an encouragement and a reminder for us that status quo is definitely not an option in this rapidly-changing world. I therefore congratulate Standard Bank for yet another milestone and wish you every success with this new suite of products. I hope it will help you to live up to your promise to deliver corporate and business banking “at your [client’s] finger tips with its 24-hour availability, anytime, anywhere….. and access to… entire… banking portfolio(s) across products, countries and currencies” and all this with a single login. Thank you for your attention. | bank of mauritius | 2,009 | 7 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at The Seminar on Currency Derivatives, organised by Global Board of Trade, Port Louis, 16 July 2009. | Rundheersing Bheenick: The first Pan-African Derivatives Exchange in Mauritius Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at The Seminar on Currency Derivatives, organised by Global Board of Trade, Port Louis, 16 July 2009. * * * It is a great pleasure for me to be with you this morning at the opening ceremony of this Seminar on Currency Derivatives, organized by the Global Board of Trade. The launch of the first Pan-African Derivatives Exchange – which is what GBOT is – here in Mauritius marks a milestone in the development of our financial sector. The waves of financial sector liberalization first touched our shores in a big way in 1994 with the suspension of exchange control which was how we had kept our external accounts in balance until then, supported much of the time by steep import tariffs, administrative controls, lending ceilings and directed interest rates. Our financial sector has attracted favourable reviews from international financial institutions and has emerged over the past few years as an important contributor to the economy. It has also been a key driver in our efforts to participate fully in globalization, supported by other measures such as tariff reduction and fiscal consolidation. In 2008, the financial sector was the second-fastest growing area of activity, just after the booming construction sector, with a growth rate of 10.1 per cent, against 7.5 per cent in 2007. It employed 12, 500 persons and its share in GDP was just below 11 per cent. And this year, when the global economy has stalled as Western economies have nosedived in what has been called the Great Recession, our financial sector continues on its growth path. Its contribution to GDP is predicted to rise to 11.5 per cent in 2009 and to keep rising thereafter as the contributions of traditional sectors to GDP continue on their declining trend. Although our financial sector witnessed an impressive development over the last decade following the suspension of capital controls, the focus remained on sound bank lending, securities issuances and trading, and foreign direct investment. We relied on domestic retail deposits, not foreign wholesale money markets. We, as regulator and supervisor, did not fall asleep at the wheel and our banks have continued to be profitable and have not become wards of the state! Our financial system is of course far from perfect and suffers from several deficiencies – e.g. markets for bonds, currency and derivatives are thin! In a brief interview I had given to the “Business Standard” newspaper in India in March last year, I said that even if our economy was suffering from a deluge of foreign exchange via Foreign Direct Investment inflows, most of the foreign exchange operations were confined to the spot market. I added that I wanted to encourage the development of a vibrant currency futures and forward market. I took the view that such a development would help in creating an active foreign exchange market and introduce newer instruments for exporters and entrepreneurs to hedge and trade in the financial services sector. Forward transactions accounted for less than one-fifth of total reported foreign exchange transactions during the last two financial years. Of this, options comprised only a tiny fraction. This was the prevailing situation despite the fact that, the Bank had authorised one bank to engage in cross-currency options in major currency pairs with corporates as far back as 2003. Clearly, some more robust action was called for if we were to dampen the volatility arising from over-reliance on a fairly thin forex spot market with too few players. I have underscored on various occasions the importance of an efficient financial system to sustain our growth as a small export-oriented economy, situated far from its main markets, and forced by globalization and trade liberalization to compete without the protection of the preferential trading arrangements which we relied on earlier to pay our way. It is a truism to say that the financial system can be efficient only in so far as it has efficient financial markets to support it. Let me borrow the image of a four-legged table from Randall Dodd , Director of the Financial Policy Forum and Derivatives Study Centre, in Washington DC, to illustrate this notion. His four-legged table is made up of (i) securities markets, which issue and trade bonds and equity shares, (ii) banks which issue loans and provide payment and settlement services, (iii) insurance and pension funds which provide future income and collateral for lending, and (iv) derivatives markets, which facilitate risk management and price discovery. Dodd concludes: “All four legs serve to support the table, and it is no more stable than its weakest leg.” Indeed! No wonder our table proved rather wobbly: one leg has been missing all along! Measures such as the elimination of centralised controls over prices and resource distribution, trade liberalization, freeing nominal interest rates and abolishing exchange controls, fundamentally alter the economic and financial risk exposures of financial institutions and companies. They generate a demand for effective risk management products that cover both liquidity and price risk. As the financial system develops, the sophistication of financial products increases. Borrower and investor choice is widened; and products that better match their specific requirements are more likely to be on offer, thus encouraging greater use of the financial sector. In addition, financial products, like instruments with market-determined returns (for example, government bonds), derivatives (for example, financial futures), and foreign exchange products facilitate arbitrage that links prices across time, markets, and countries. Derivatives perform two economically-useful purposes: (i) risk shifting, also known as risk management or hedging, and, (ii) price discovery, which is the process of determining the price level for a commodity, asset or other item, based on supply and demand factors. Derivatives provide excellent opportunities to hedge risk for different kinds of participants, importers, export-oriented enterprises etc. Here, I have particularly in mind our dear exporters, relentless and unabashed champions of sustained depreciation of our Rupee. I am sure that once GBOT would have explained the complexities and risks of currency derivatives and how those risks are mitigated, our economic operators and other market players will appreciate that there would be commensurate reward for those who are willing to assume the risk as for those who are seeking to shift the risk. A market for foreign exchange hedging instruments can help domestic corporates in managing currency mismatches in their assets and liabilities. Our banks can also become members of the exchange in the foreign currency segment. In spite of the fact that forex futures, like all futures, are in the nature of a zero-sum game, differences in risk appetites mean that there is a potential for win-win outcomes all round. Let me comment briefly on the evolution of the derivatives markets worldwide just to provide some context. The latest BIS Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity shows that derivatives markets worldwide witnessed explosive growth during the period covered, that is the three years from May 2004 to April 2007. The OTC derivatives segment, the average daily turnover of interest rate, as well as nontraditional foreign exchange contracts increased by 71 percent to USD 2.1 trillion over the three-year period, maintaining an annual compound growth of 20 percent witnessed since 1995. Turnover of foreign exchange options and cross-currency swaps more than doubled to USD0.3 trillion per day, outpacing the growth in “traditional” instruments such as spot trades, forwards or plain foreign exchange swaps. In the wake of the financial crisis, it has been found that the explosion of the derivatives markets was partly due to speculation and an abuse and misuse of derivatives. The ballooning of trade in derivatives across all categories to a staggering total of $596 trillion in December 2007 was driven by strong speculative interest and did not reflect economic fundamentals. In the two years to December 2007, currency derivatives grew by 78 per cent to reach $56 trillion. The semiannual statistics on OTC derivatives of the BIS indicate that currency derivatives had fallen to $50 trillion by December 2008. The growth in the market for currency derivatives is likely to decline further as regulators contemplate limits on trade in view of large losses which drove the South Korean won to a decade low; led to lawsuits in India; and caused shares of China's Citic Pacific Ltd. to collapse. So, there is a downside and it is as well that we should be aware of the potential dangers that lie ahead and that we should guard against. I must say that I have seen lately the first encouraging signs of the maturity of our exchange arrangements: the recognition of the greater role assigned to market forces in determining the exchange value of the Rupee. I have already mentioned recently the proposal of the IMF to reclassify our exchange rate regime from “managed float” to “free float”, based on our performance in the recent past. We have come a very long way indeed since the collapse of the Bretton Woods system of fixed exchange rates in 1971. Countries of our size were paralysed by the fear of floating. They did not have the credibility to have independent monetary and currency regimes. By being recognized as a free-floater, we have truly come of age as an independent nation, with an independent currency. As an aside, let me recall that currency futures, which we are discussing this morning, were also made possible by the collapse of the system of fixed exchange rates. The Chicago Mercantile Exchange launched the first forex future in 1972. Let me make a few comments on our Exchange Rate Policy! Over the past year, the Bank has limited its interventions in the foreign exchange market but we have nevertheless ensured that the Rupee did not suffer from any undue volatility despite the spillover effects of the financial turbulence in other parts of the world. If we are upgraded to the category of “free floater”, this would mean a continuation of our policy of limited intervention and would imply a greater role to the market in managing the exchange rate. We expect that trade in currency derivatives can assist this area, by relieving pressure on the spot market and contributing to eradicate erratic and opportunistic behaviour, and thus reducing volatility. The launch of a global derivatives exchange in our jurisdiction is yet another indication of the growing sophistication of our financial system. I strongly believe that the domestic financial market is now mature enough to engage in derivatives trading under proper regulation. I would like to mention in the same breath the efforts of the Bank to develop a secondary market for Treasury Bills and Bank of Mauritius Bills. This will add greater depth and liquidity to the official paper segment of the market and perhaps pave the way for a bond and interest rate futures market. Another initiative worth mentioning is the introduction of Islamic financial services and the need for Islamic Treasury Products. Discussions have been ongoing with GBOT for several months now to provide a platform for launching and trading such products. Yesterday itself, the press reported that the Stock Exchange of Mauritius (SEM) and the Central Depository & Settlement Co Ltd had approached the Financial Services Commission to launch index futures trading, targeting the SEM-7 Index. All these initiatives aim at remedying the deficiencies of our financial system to which I alluded earlier and which need to be addressed to achieve greater financial system efficiency and realize our ambition to become an international financial centre. The development of a vibrant market for trading currency derivatives, not just for the domestic market but for the region, is another element that would contribute to position Mauritius as a world-class financial centre. It would help in forging deeper economic ties and strengthen our commitment to regional integration. Such ties are mutually beneficial – for Mauritius they can help to overcome the constraints posed by the small size of our domestic market and for our regional partners in Africa, they can contribute to accelerate the pace of development. Perhaps there can be no better testimony to our commitment to regional integration than the determined drive by some of our major banks to expand their operations in the region. As the process gathers momentum, others will follow suit; and currency derivatives are set to take on greater importance in the risk management toolkit of our banks. This seminar comes at a time when policy-makers across the world are reflecting deeply on the role of the financial crisis in the global recession and the necessary changes to be made to the financial system to make it more resilient. Amid the chaos and confusion surrounding the debacle of the global financial system, it is important to remind ourselves of the role of the financial sector in allocating resources and risks. We may disagree about the precise role which complex financial instruments played in the financial crisis, but there is broad agreement that the way forward is not a turning back of the clock of global finance, but for better understanding by all market-players, including regulators, about the nature of sophisticated financial instruments. This seminar is therefore both timely and pertinent in enhancing our understanding of complex financial products, and in dispelling misconceptions, as we prepare for recovery and transition to a new world order. A word of caution: the regulator’s perspective One word of caution before concluding my remarks – while currency derivatives are hedging products, and therefore, risk mitigating instruments, the absence or inadequacy of robust risk management practices and oversight surrounding this activity could have disastrous consequences. Our banks should therefore ensure that their dealers are well-trained, that there are clear-cut controls on their operations, and that the activities are audited on a concurrent basis, at least in the initial stages. While the exchange has the responsibility to ensure against settlement risks, it is the institution concerned that must address the internal procedural issues. Let us not forget that the scandals that affected such institutions as Barings and Société Générale, although related to derivatives, had their origin in a failure of the internal controls of the banks. As much as the Bank of Mauritius recognizes the wealth of opportunities which the development of a currency derivatives market can bring, we are also mindful of its potential implications for financial stability. Derivative activities can contribute to build up vulnerabilities and adverse market dynamics, particularly if the necessary supporting financial and legal infrastructure is not in place. We would not have been here this morning, if the new Insolvency Act had not made provision for the netting of financial contracts drawing on best international practice in this area. This set the stage for the development of the derivatives market in Mauritius. The mechanisms in place to ensure that these instruments are used to hedge risks and not for speculative purposes must also be there. To conclude, let me refer to the Bond-Currency-Derivatives nexus that Percy Mistry, Director of Oxford International Group, had laid emphasis on in his Committee Report on converting Mumbai into an International Financial Centre. He had indeed taken a similar position earlier when he led a Commonwealth Secretariat team to Mauritius to examine ways and means to dynamise the export of tradeable services. He concluded that Mauritius needed to “develop the ability to provide such specialized international financial services with the knowledge and skills set necessary to give it an added advantage in developing suitable financial derivative (risk-hedging) contracts for African securities markets….and over time……Mauritius might develop the ability to offer and trade more sophisticated derivative contracts…..”. Mistry provides the script for the derivatives play. We at the Bank of Mauritius consider the development of a futures market one of our priorities to further our financial sector development agenda, in collaboration with our sister-regulator, the Financial Services Commission. The Bank and FSC have a major role which – to stay in the theatrical world – may be likened to that of Lord Chamberlain – producer, controller and censor! So, here we are with all the elements falling in place: the stage is set; the playwright’s script has been passed; the Lord Chamberlain is watching over everything; the players are busy rehearsing their roles and learning their lines (which is what the seminar is all about); and the curtain will soon go up. Excited and expectant, I say to all of you: let the show begin. I wish GBOT and all players every success in this endeavour. Thank you for your attention. | bank of mauritius | 2,009 | 7 |
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Launching Ceremony of the Conference "Leasing: Fuelling the Economy", organized by the Association of Leasing Companies, Port-Louis, 6 October 2009. | Yandraduth Googoolye: Leasing – fuelling the economy Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Launching Ceremony of the Conference “Leasing: Fuelling the Economy”, organized by the Association of Leasing Companies, Port-Louis, 6 October 2009. * * * Ladies and Gentlemen Good morning At the outset I must congratulate the Association of Leasing Companies, Mauritius, for coming out with this initiative of organising a conference to underscore the significance of leasing as a vehicle of economic development. I am happy to note that the Association, intends, among others, to play an educative role of increasing awareness of the benefits of leasing and asset finance to specific legislative and business audiences as well as to the general community and that this conference is being organised in furtherance of this objective. I do recall that Mr Jugurnauth had during one of the meetings with us some time back mentioned about the Association wanting to hold this conference and had sought our support. I had told him then that the Bank as a regulator would support such efforts. A study by International Finance Corporation (IFC) observes that leasing plays an important role in promoting a strong and sustainable private sector in emerging markets, particularly as it supports underserved markets, such as micro, small, and medium enterprises, to gain access to finance. Moreover, in emerging markets, leasing can be a major financing tool to enable growth and investment in infrastructure, construction and the services sectors. Leasing is also seen as a favoured vehicle for SMEs as it bridges a significant gap in their access to finance arena. This is because, • firstly, as an asset-backed term financing product, leasing helps avoid need for collaterals; and, • secondly, leasing institutions are expected to develop or possess critical skills that give them a strong comparative advantage on the SME client segment. This seems to be the case in Mauritius too which is perhaps why the Government chose the leasing companies to channel its assistance to the SME sector as part of the stimulus package in the wake of the global crisis. As a base definition, leasing can be considered as a written agreement under which a property owner allows a tenant to use the property for a specified period of time and rent. However, over time leasing has evolved into a method of financial intermediation where people who have capital or access to capital buy assets for use by economic operators in need of those assets. As this activity evolved, it developed different variants and its own rules of the game. This led to the evolution of a regulatory framework to deal with the sector. In Mauritius, the regulation of the leasing sector does not come within the purview of the Bank of Mauritius but that of the Financial Services Commission. However, a number of leasing companies also accept public deposits to finance their leasing business and there we have a role since deposit taking requires a licence from the Bank. In fact, eleven out of the twelve entities involved in leasing are deposit taking institutions too. The non-bank deposit taking companies which engage in leasing are thus subject to dual oversight, one from the Bank for their deposit taking activity and the other from the Financial Services Commission with regard to their leasing business. This dual regulation could have different implications. • It might mean overlaps leading to excessive supervision; • It might result in supervisory gaps leading to regulatory arbitrage; and • It could also lead to lack of supervisory focus resulting in wastage of resources of the supervisors and the regulated entities. Very often it results in all these three consequences. The key to avoiding these is coordination among the supervisors. As you are aware, in Mauritius we have a formal mechanism for coordination between the Bank of Mauritius and the Financial Services Commission through the Protocole d’Accord signed between the two of us under which we have set up a Joint Coordination Committee which meets periodically to discuss issues of common interests and exchange notes. While this is working reasonably well, I am sure Mr Meetarbhan shares my view that there is a lot more to be done to strengthen coordination and cooperation. For instance, one area where we need to move forward is to conduct coordinated on site examinations so that the supervisory resources of both organisations are optimally used. Moreover, and as we move forward, we also need to determine the lead regulator for financial sector conglomerates. Until recently, banks were not permitted to undertake leasing business directly but only through a subsidiary. In 2008, banks were permitted to offer financial leasing themselves. This was done by including financial leasing activity in the definition of “banking business”. However, barring a few cases, this has not resulted in any large offering of leasing products by the banks. Therefore, within the spectrum of institutions regulated by us, leasing is still largely in the domain of the non-bank deposit taking institutions. The orderly growth of a sector requires a proper legislative framework. The legislative framework envisages that the non-bank deposit taking institutions and the banks should be subject to the same prudential regime. In furtherance of this, the Bank of Mauritius decided to extend several guidelines to this segment and we are soon bringing it under a risk weighted capital adequacy measurement system. There is another important aspect that I need to highlight here. The legislation envisages that we encourage merger of deposit taking institutions among themselves or with banks or even their conversion as banks. The contribution of financial intermediation in the GDP of Mauritius has been growing steadily and has gone up from 10.3 per cent in 2005 to 10.5 per cent in 2007. It is forecast to be about 10.8 per cent in 2008. While the specific contribution of leasing is not captured in the data, it is important that leasing also plays a significant role. What is heartening though is that the outstanding lease assets have been growing at a rate of 10 per cent or more over the last five years. If we look at the leasing business of the non-bank deposit taking sector we see that outstanding leases have gone up from Rs10.1 billion in December 2006 to Rs11.5 billion in December 2007 and further to Rs12.6 billion at the end of 2008. While the leasing sector has been growing steadily, there is need for leapfrogging if the sector has to catch up with other segments within the financial intermediation industry. The share of deposits of leasing companies in total deposits declined from 6.5 per cent in December 2007 to 6.2 per cent in December 2008. An IFC study identifies financial management skills, access to diversified sources of local currency financing, good governance and performance management framework besides development of a sustainable competitive niche as critical for the growth of the leasing sector. In this context, I would highlight the proper assessment of credit risk and post disbursement management as very critical. Delinquencies in the leasing segment are comparatively higher than in the banking sector. Now that non-bank deposit taking institutions have access to the Mauritius Credit Information Bureau (MCIB) data base we hope to see tangible improvement in this area. If leasing has to grow fast, it must be cost advantageous too and a lower rate of delinquencies will help operators to keep their margin with a lower spread. Before concluding, let me say that I am sure the deliberations of this conference would help identify what needs to be done in the times ahead for the leasing industry to be able to play its role to its fullest potential in a fast growing emerging economy like ours. I am confident it will lead to greater awareness of the leasing business among all stakeholders in Mauritius and eventually pave the way for the sector emerging as a significant contributor to our growth in general and the SME segment in particular. Thank you for your attention. | bank of mauritius | 2,009 | 10 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Opening Ceremony of the 14th Meeting of the COMESA Committee of Governors of Central Banks, Balaclava, 29 October 2009. | Rundheersing Bheenick: Commitment to regional cooperation in Africa – COMESA Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Opening Ceremony of the 14th Meeting of the COMESA Committee of Governors of Central Banks, Balaclava, 29 October 2009. * * * In the past year in this region of Africa we have been the innocent bystanders in the maelstrom following a major upheaval in the western economic system. I said innocent bystanders, but it is perhaps more appropriate to say intelligent bystanders in the face of this western debacle. Whilst the count of banking failures in the USA now reads like the death toll in Afghanistan, we in COMESA have had no banking failures, no collapse of confidence, no credit crunch, no gross excesses in risk taking, no gigantic bailouts and no government take-over of vast swathes of the financial services, creating an unprecedented moral hazard for the whole finance sector. In truth, banking in COMESA is safe in our hands, fellow-Governors, in this sane corner of a financial world, elsewhere gone mad. We have set an example to the West in thrift, in probity, in sound management, in transparency and in prudent regulation. There are of course some states in the wider region of Africa which, it is alleged, often confuse Swiss banking accounts with their own central bank reserves. But broadly speaking, in this bleakest of times, Africa has come out rather well. So I am delighted that we are here together to spend some hours basking in the glories of our recent past and looking ahead to review our prospects for, what I believe is, an even brighter future for our region. Some financial commentators in the west are heralding 2010 as the time for getting back to normal: others are more cautious. They are talking, not about “business as usual”, but rather about getting on to a “new normal”. Let me then reflect on how I see this “new normal” from the perspective of our banking business in COMESA and our opportunities for promoting greater economic and social prosperity in the region. But, first of all, let me say on behalf of the Bank of Mauritius, what a pleasure it is to welcome you all here this morning on the occasion of this opening ceremony. I wish to extend a very special welcome to my fellow-Governors, central bankers and representatives of regional and international organizations who have joined us this morning. I welcome Dr Mkwezalamba, the Commissioner for Economic Affairs at the Africa Union Commission and Mr Ghosh, Mission Chief of the IMF. I also recognize in the audience our special guest, Mr. Bingham, Secretary-General of the Central Bank Governance Forum of the Bank for International Settlements. This 14th Meeting of the COMESA Committee of Governors underlines our commitment to regional cooperation. As COMESA pursues its “variable geometry” approach and consolidates the Free Trade Area, the Customs Union and the Common Investment Area, we gather here to chart the way forward in the specific area of monetary cooperation, on the pathway towards closer economic integration. Some have previously talked of a target date of 2012: that is getting awfully close. So we should remember that the fuller Union in the United States after the War of Independence, the joining together of North and South in peaceful co-operation, took more than half a century; closer to us the EU which started in 1956 with the Treaty of Rome – and some say even earlier with the Coal and Steel community – the EU is still unsure, more than half a century later, about the passage of the Treaty of Lisbon, to achieve full integration across its wider region. So we should not be too hasty, but we must move forward step by measured step. Central Bankers are cautious by nature and can be relied upon not to rush things. In these fraught times, we may be forgiven for being somewhat over-cautious. I believe this is a propitious moment of real opportunity for COMESA. For whilst we may have watched in the past year, with growing alarm, the assets of the western banking system melting away, and its leadership status in tatters, we can with advantage learn from this discomfiture. For the gigantic western financial liabilities remain, as the balance sheet recession is not so much about flows but about stocks. The big issue for us all is not about the future of capitalism but about the future of capital management. The media may keep banging on that the western crisis is all about a burst bubble in house prices. Not at all! The real challenge is not about revaluing houses but about stimulating the potential of the real economy, stupid! The crisis in the USA and the European Union has moved in three distinct phases: we had, first, the collapse of finance; then there was the collapse in consumption and manufacturing; and now we are witnessing the demise of the labour market as jobs evaporate. But for us, in emerging markets and developing countries, the situation is quite different. We remain as before relatively solid in each of these three areas. Indeed, for us in COMESA, the real economic problem is not so much about those matters which are plaguing the developed world but more about how best to make use of our basic natural assets of land and other natural resources, the much neglected third pillar of all economic systems. The paradox here is that our underlying assets of natural resources are threatened, not from western financial mismanagement and their bloated bubble valuations of doubtful assets, but from our undervaluation, rather than overvaluation, of them. So we must now focus more on how finance can better release the potential locked up in the real economy. At the same time, we must beware of those – whether from the West, or from the East, – bringing gifts tied with strings to promote post-colonial re-colonisation and expropriation of our land, our natural resources and our cultures. The old Roman adage “Timeo Danaos atque dona ferentes” bears repeating for we forget its timeless lessons at our grave risk and peril! We must therefore now use our monetary strengths to focus more on our natural riches, for therein lies our unrealised potential. The time is prime for the region to play a major part in global affairs. The time has come for Africa. Some commentators continue to assert that growth in Africa continues to depend critically on provision of adequate external financing. But in truth we should now be setting goals to release ourselves from the financial and cultural strings of aid. What we need is more trade, not more aid. This is the big challenge for us since it is closely aligned with our successful pursuit of the COMESA Macroeconomic Convergence criteria. This is on our Agenda this week and I believe the solution to this dilemma is very much in our own hands. We are now working closer together in this region to promote our own internal market and to attend to the grave issues of poverty and social need. The foundation for our internal market lies in the development of effective regional institutions that facilitate trade. And the keystone for the overarching institutional structure, is the Regional Payment and Settlement System (REPSS) which is now being put in place. This home-grown payment system, will reduce the cost of payments in intra-regional transactions by more than 50 per cent. Over half of the COMESA members are in the process of opening accounts. The Live-Mode pilot earlier this month (October) has proved a success. And I trust, before the year is out, all our Central Banks will have signed up as full participating members. For REPSS is not only the springboard for further liberating trade within the region, but also the point from which we can make that final leap from convergence to Monetary Union. It is an essential point for the take-off for us to emulate in Africa the economic and commercial achievements of our partners in Europe, whose proven experience is a continuing source of inspiration to us. This process of institutional capacity-building is essential for promoting overall regional development. This was indeed the foundation of the prosperity of the European Common Market, as it picked itself up in the 1950’s, and provided regional support to the poorest countries so that they could also step up as local partners and develop the wider market. Post-war Europe and our neck out of the woods have this much in common. Regional integration under COMESA offers a valid way through some of the global challenges that confront us. Who can deny the enormous synergy packed in a regional group like COMESA, with its combined market access of more than 415 million people? The larger economic space is already encouraging increased inter- and intra-regional trade. In 2008, intra-regional trade within COMESA stood at over US$15 billion; it has more than doubled since 2003, and quadrupled during the decade. Moreover, with REPSS, we not only offer faster settlement of payments but we also cut the transaction costs by more than a half, thus giving a further boost to trade. With REPSS in place, each member-state will have cheaper access to bigger markets and with the Common Investment Area, it will stimulate foreign direct investment in our region. It will help to diversify our productive export base. This must go hand in hand with progress towards the achievement of the Millennium Development Goals on poverty, education, gender challenges, better health, a sustainable environment and more effective partnership for sustainable development. Exploiting the economies of regional scale is already strengthening our national resilience to exogenous shocks, reducing the prevalence of conflicts, enhancing our voice in international fora, and improving our terms of trade with other regions, on top of expanding intra-regional trade. In this process, the Monetary Cooperation Programme, ultimately to achieve the goal of Monetary Union, is absolutely essential. Monetary cooperation will foster belief in the wider policy goals and reduce the risk of policy reversals. Here we can learn much, not just from European experience, but also from experience elsewhere in Africa such as the Western African Economic and Monetary Union which has made significant progress in this area. I am glad to note that we shall also be examining the framework for financial sector development and financial stability during our meeting. Financial Stability has come to the fore as a subject of vital interest to all of us. Soon after I took office in early 2007 I set about restructuring the Bank to enable it to respond in a dynamic manner to the new and emerging financial sector issues that I could see on the horizon. One of the changes that I brought about was the establishment of a Financial Stability Unit in October 2007, with a clear crosscutting mandate to identify and assess financial stability issues. But as the sky was then a spotless blue and the financial crisis not even a distant prospect, this initiative hit a wall of incomprehension and ignited a raging turf war. I did not do myself any favours either by talking of a financial stability czar, with an oversight of work across various divisions of the Bank and indeed beyond the Bank. Since then, the Bank has published three Financial Stability Reports at six-monthly intervals. We are now in consultation with the Financial Stability Institute for the Bank to host a regional seminar on financial stability next year. I therefore welcome the proposal to set up Financial Stability Units in COMESA central banks and we stand ready to exchange our own experience with COMESA member-states. At this meeting, here in Mauritius, we shall also be looking at some of the missing elements as we seek to create the conditions and institutions to achieve convergence. We expect to get on with the job of creating the COMESA Monetary Institute which we have been talking about for quite some time now. We know the critical role that the European Monetary Institute has played in paving the way for the advent of the Euro. We believe that the COMESA Monetary Institute is vital for undertaking the preparatory work for the COMESA Monetary Union. A word about the prospects for the continent. The IMF expects a growth rate of 1.2 per cent in 2009 for Sub-Saharan Africa, compared with an estimated 5.5 per cent in 2008. If government policies remain supportive, and global economic growth recovers, as currently expected, Sub-Saharan African growth should pick up to around 4.1 per cent in 2010. By comparison, the prospect for the USA in 2009 is that it remains in recession throughout this year, along with the rest of the developed world. Africa thus stands out with the promise of substantial positive growth this year along with China, Australia, India, Indonesia and a few others. Our prospects for 2010 are thus up with the leaders in the world. In Mauritius, there are abundant signs of continuing economic improvement – growth remains positive, inflation is down, we have an overall surplus in our balance of payments, net international reserves are at a historical high – all indicators showing a genuine capacity for resilience in the face of unprecedented external shocks. Most of all, the crisis has been grasped by Mauritians as an opportunity to open new dimensions in development, not least confronted as we are with the impact of climate change. The Vice Prime Minister and Minister of Finance and Economic Empowerment, whom we are pleased to have with us this morning, will be presenting the nation’s budget later next month and he has already announced that “Shaping The Recovery” will be his main thrust. This is all in the spirit of the national strategy of “Maurice Ile Durable”, the policy for securing sustainable development, announced last year by our Prime Minister at the United Nations General Assembly. Mauritius, with many friends from Africa, will be asserting our case at the Copenhagen meeting on climate change. Allow me, fellow-Governors, to place on record our gratitude to the Bureau of the COMESA Committee of Governors of Central Banks and to the Secretary-General of COMESA for their support to Mauritius as we offered to host one of the two new African Technical Assistance Centres which the IMF is establishing in Africa. As we know, Mauritius has now been chosen as the location for AFRITAC (South) and the Bank of Mauritius must now make up for lost time and refurbish its former offices to accommodate this Centre to make it operational as rapidly as possible. So, fellow-Governors, thank you very much for trusting us with this important assignment. We welcome the decision from the Tripartite Summit of COMESA, in Kampala in October, that the three African Regional Economic Communities should work together towards a single Free Trade Area, with fast-tracking the attainment of the African Economic Community, as first envisaged in the Treaty of Abuja in 1991. Institutions that we have set up in years past – some of which go back to pre-COMESA days – are busy advancing this agenda. In monetary co-operation in COMESA, we have the PTA Bank, the PTA Reinsurance Company, the African Trade Insurance Agency and the African Commerce Exchange which are all very much involved. Among the new institutions, I am pleased to see that the COMESA Fund will soon be up and running with its two windows, the Adjustment Facility and the COMESA Infrastructure Fund, based here in Mauritius. The first window addresses the problems related to liberalization of the economies of member-states while the second window addresses infrastructural problems of the region. Out of the EU allocation of €78 million, a sum of €5 million has already been disbursed. The pilot Aid-for-Trade programme for the North/South Corridor has mobilized nearly US$3 billion, with a further programme planned for the rest of the COMESA region. We have every reason to believe that the COMESA Fund will hit the ground running! So, with all this ferment of activity, it is difficult not to get excited about the continent. Africa is moving on, so move over in front, you are blocking the way, we are now in the fast track. For our meeting this morning we have before us a wide-ranging and important Agenda. Let me just single out six key points that I believe will provide a focus for our discussions and give a real added boost in our exciting journey towards economic integration. We shall • First, review the choice of Monetary Policy Regimes and we shall be guided by the Distinguished Governor of the Central Bank of Kenya, Prof Ndung’u. • Second, listen to a presentation by the international expert Gavin Bingham of the Bank for International Settlements on issues in the Governance of Central banks, to be enlightened on emerging best practices and improve on our current performance. • Third, receive country reports on progress towards macro-economic convergence – which is the acid test of how well-prepared we are for closer union. • Fourth, hear of progress in the establishment of Financial Stability Units and the production of Financial Stability reports by Central Banks, to enhance our surveillance and increase our resilience. • Fifth, consider the Draft Charter of the COMESA Monetary Institute towards strengthening our regulatory and supervisory framework. • And finally, agree on the choice of a host Central Bank to house the COMESA Monetary Institute. That is quite an agenda. I have underlined what I believe are some of the crucial issues for us, and the opportunities before us, for further solid progress. And let us not forget that, whilst the West debates the merits and demerits of the Anglo-Saxon, the Swedish and the Japanese finance models, to get them out of the current disaster zone, we here in Africa are refining our own African model. Our model has served us well to avoid our economies being sucked into the maelstrom of the western self-made crisis. So, as we are getting well on the way to our own Economic Union, and things are looking up, we can truly boast: Now Africa is going places! Let us keep moving. And enjoy the ride. Thank you very much for your attention. | bank of mauritius | 2,009 | 11 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on the occasion of the Launching Ceremony of the first commemorative platinum coin of the "Father of the Nation - Platinum Series", Port-Louis, 30 October 2009. | Rundheersing Bheenick: First commemorative platinum coin of Mauritius Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on the occasion of the Launching Ceremony of the first commemorative platinum coin of the “Father of the Nation − Platinum Series”, Port-Louis, 30 October 2009. * * * Life has not been treating Central Bankers at all well since Lehman Brothers went belly-up. Those who found themselves at the epicentre of this perfect storm have been doing a creditable job, keeping the global economy on an even keel. The economic jargon has been much enriched with such exotic terms as toxic assets, TARP, and quantitative easing. There was even a brief period when banking ran the risk of once again becoming – one of the less reputable professions! Tonight, as I welcome you all to the Bank, we are putting these concerns aside. Tonight, I am exercising one of the powers, and indeed, one of the great privileges, of being Governor of a central bank, by issuing a new coin. I am the only person in this country with the license to do that. If anyone else here has a go, he goes straight to jail. So, thank you all for being with us tonight. And a very special “thank you” to our Prime Minister, Dr the Honourable Navinchandra Ramgoolam, for having agreed to officiate at this launching ceremony. We have some special overseas guests tonight and I extend a very special welcome to my fellow-Governors and Deputy Governors from COMESA Central Banks, to the Commissioner of Economic Affairs of the African Union Commission, to the Secretary-General of the Central Bank Governance Forum at the Bank for International Settlements, and to the members of the IMF Article lV consultation. Some of you were here last year when we launched a gold coin to mark the 40th anniversary of the Independence of Mauritius. You may recall that, on that occasion, I promised to go one better this year. Tonight, I redeem that promise. Tonight, we are going not just for gold but for platinum. And tonight, we launch not just one coin but we inaugurate a series of three coins. I do not know how to better this one in future, but I promise to give it some thought. The coin we are formally issuing today is the first in our platinum series. It is a fitting tribute to Sir Seewoosagur Ramgoolam, our first prime minister, and subsequently Governor-General, and acknowledged by one and all as the Father of the Nation. The coin is the first of a series of three commemorative coins, dubbed the “Father of the Nation” Platinum Series, to be issued over three years, one coin being issued each year. The first coin depicts on the obverse, the State House, Réduit, with the inscription “Rs1500” underneath, with the surrounding inscription “FATHER OF THE NATION PLATINUM SERIES * MAURITIUS 2009 * STATE HOUSE – REDUIT *”. The platinum content of the coin is ¼ oz, its weight is 7.8 grams and it has a diameter of 25mm. The second and third coins will be issued in September 2010 and in September 2011, respectively. Both coins will have the inscription “Rs1200” underneath, with the surrounding inscription “FATHER OF THE NATION PLATINUM SERIES * MAURITIUS 2010 * AAPRAVASI GHAT *” and “FATHER OF THE NATION PLATINUM SERIES * MAURITIUS 2011 * LE MORNE BRABANT *” respectively. Their platinum content will be 1/5 oz; their weight will be 6.2 grams with a diameter of 22mm. After the third year, a set of three coins will be issued. All three coins will bear on the reverse the effigy of Sir Seewoosagur Ramgoolam with the surrounding inscription “DR THE RIGHT HONOURABLE SIR SEEWOOSAGUR RAMGOOLAM KT *”. The coins will be minted by Monnaie de Paris, and will be legal tender for their face value. We are putting the first platinum coin for sale at Rs14,000. For the benefit of our visitors from abroad, the State House, also known as Château du Réduit; Aapravasi Ghat and Le Morne Brabant form part of our national heritage. The Château du Réduit was built under the French Occupation in the mid-18th Century. The Château du Réduit became the official residence of former governors and that of Sir Seewoosagur Ramgoolam in his last official function as Governor-General of Mauritius. It is presently the official residence of the President of the Republic of Mauritius. The Aapravasi Ghat, or Immigration Depot, in Mauritius was inscribed on the World Heritage List at the 2006 session of the World Heritage Committee as "the site where the modern indentured labour diaspora began". The Morne Brabant which was at the time of slavery a shelter for runaway slaves was classified as a National Heritage site by UNESCO in July 2008. A word now about the metal itself. Platinum has a very curious history and is now used in industry, in the jewellery trade and, in very few countries for special coinage. Platinum is rare in Nature; much rarer than gold; hence it has an intrinsic value greater than gold, weight for weight. It is curious, isn’t it, that in these days of currency volatility, we hear a lot about “gold bugs”, vaunting the merits of the yellow metal as a “safe haven”, but have you ever heard of a “platinum bug”? It was not known to the Egyptians, to the Romans, to the Greeks, to the Babylonians, to the Hindus, to the Chinese and other people of the Ancient World. It first emerged, in the 15th century, in Central America. Platinum was found basically within the diggings of other mineral mines and was considered a nuisance metal or a trash metal, difficult to be got rid of to get to the copper and the gold and the silver with which it was often associated. The first European reference to platinum appears in Italy, in 1557, where it is described as a metal found in Mexico, "which no fire nor any Spanish artifice has yet been able to liquefy." Its name actually is derived from the Spanish term platina del Pinto, which literally translates as "little silver of the Pinto River." A detailed account of platinum as a metal was only presented to the Royal Society of the UK in the mid-18th century. Since then, lots of work were done to find the merits of platinum for different uses. And then we hear nothing about it until about 1875 at a time when, you will recall, the gold standard was the bedrock on which economies and currencies were being built. Platinum came up for a mention as the basis for another International Standard, the measure of length – the International Standard Unit. This was defined as the distance between two lines on a standard bar of an alloy which comprised ninety per cent platinum. So platinum became, so to speak, the gold standard for the measure of length. I think I must pause here to tell you the story of how I myself first heard about platinum, if you can spare me a minute. Like most Mauritians, we speak a mixture of Creole, French, English, Indian languages and other languages; some speak Mandarin, Cantonese and so forth. We speak lots of languages. In the old days we used to run British cars as part of the legacy of imperial preference. Cars from other countries would only be allowed after paying extortionate rates of import duty. British cars in those days were not as reliable as cars tend to be today and one would spend probably as much time going to see the mechanic as we do these days to call at the petrol pump station. So I used to run this old Hillman car which had some problems with its engine. It seemed to be having some screws loose and it was not firing on all cylinders. Probably, as some of you will say, it was just reflecting the state of the owner himself! Be that as it may, when the mechanic had a good look at it, he pronounced authoritatively “Missié, problème platine ça!”. For those of you who don’t understand our local language, what he said was: “Sir, I’ve got it! You’ve got a problem of platinum!”. Now that I must have got you thoroughly bemused, let me explain. “Platinum” in the English language has nothing to do, or at that time had nothing to do, with the internal combustion engine. But its french-language equivalent platine stood for what you call “points” or “contact points” in the English language. And those of you who are familiar with the English terminology – with carburettor, with the air intake, with the mixture of fuel and air and the technology to send the spark in the right cylinder at the right time – you will readily appreciate there was a critical role for a contraption called the French equivalent of “platinum” there. So that was my first contact with platine or platinum, and I am sure that’s what it meant for most Mauritians in the streets if you asked them about platine in those days. But those of you who are tech-savvy know that now carburettors have almost vanished as fuel injection has taken over. If you happen to open the bonnet of a car, you can’t recognise anything anymore! Platine may have left the front part of the car but platinum is still very closely associated with the ubiquitous internal combustion engine. It’s now present at the other end – no longer on the intake side, but now on the exhaust side – as platinum is also a “green” metal. It’s very ecologically-friendly. It’s a key element in catalytic convertors to reduce our carbon footprint. Let me end that diversion and continue with the platinum story. Did you know that the bulk of platinum that we have today is mined in just two parts of the world: South Africa and Siberia in Russia? They produce two-thirds and one-quarter of the world's platinum supply respectively. Another curiosity relating to platinum is the fact that it was not until the 19th century that this rare metal was first used in rather special platinum coins. Russia started the fad in 1828. Spain produced platinum coins in the 19th century. But we have to wait until much closer to our own times, the 70's, before any more platinum coins come to be issued. The first was a medal issued in Israel in 1973, followed by Panama in 1976. The Russians perhaps come closest to qualifying as “platinum bugs”. The USSR produced platinum coins from 1977 to 1980. Perestroika and glasnost did not dim their fascination with the metal and the newly-independent state of Russia issued platinum coins from 1992. Nearer to us, Lesotho issued a platinum coin of half an ounce of platinum in 1981. Other countries producing platinum coins include Australia, Canada, France and Portugal. Tonight, therefore, we continue the coinage chapter of the platinum story. Tonight, Mauritius joins this select and fairly exclusive list. We now rank among the three countries in the southern hemisphere to have issued platinum coinage. And we are the only small island developing state to do so. The gold coin we issued last year became one of the fastest-selling coins in the history of the Bank – the bulk of the edition was sold out within five days. The value of platinum is greater than gold and so today we are issuing a collectors’ coin that goes one better than last year’s gold coin. Moreover, bearing in mind the strange story of platinum, the choice of this metal with its special range of qualities and uses may well be claimed to reflect those of the reputation of the great statesman it commemorates, Sir Seewoosagur Ramgoolam: exceptional, precious, rare, durable and, as we can go to pay our respects at his “Samadhi” at the national Botanical gardens, environmentally-friendly! Let me say a word before I conclude about a project that I have at heart. The downward trend in the savings rate in the economy has been a subject of growing concern to us for quite some time. It has continued tumbling from nearly 30 per cent at its peak in 1992 to 26 per cent at the start of the millennium and now stands dangerously close to 12 per cent. The launch of the platinum coin gives me thus an opportunity to kick-start our “Saving for a Better Future” programme which, we hope, will help foster a better culture of savings for our population. We think our dodo has too easy a time, just sitting there in the logo of the Bank. We plan to press-gang our dear, daft, and defunct dodo into service to advance this cause of saving. Hopefully, domestic savings will do what the dodo never did – that is fly off the danger zone. Do not be surprised therefore if piggy-banks in our part of the world will never look the same again! I thank you again for your presence at this launch ceremony. Thank you very much for your attention and I look forward to some active sales this evening. | bank of mauritius | 2,009 | 11 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Chartered Institute of Management Accountants Southern African Regional Conference, Pointe aux Piments, 5 November 2009. | Rundheersing Bheenick: Coping with uncertainty – a central banker’s perspective Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Chartered Institute of Management Accountants Southern African Regional Conference, Pointe aux Piments, 5 November 2009. * * * It is a pleasure for me to be here with you this morning on the occasion of the Chartered Institute of Management Accountants (CIMA) Southern African Regional Conference. I thank the Mauritius Branch of CIMA for its kind invitation. The theme of the Conference – Surfing the waves: Coping with uncertainty in the global village – conjures up images of how the great upheavals of the last two years have taken us straight from the Great Moderation to the Great Recession. The Goldilocks economy – and, for that matter, much of the global economy – has been brought crashing down by a lethal combination of three G’s: • First, Glass-Steagall – which abolished the distinction between retail banking and investment banking. • Second, Greenspan – who would not recognise a bubble if it was staring at him in the face, to say nothing about not doing anything about it until the bubble had actually burst. • Third, Greed – sheer, naked, money-grubbing greed that seized savers, investors, bankers, brokers, advisers, indeed everybody involved in finance. These upheavals have created a very uncertain world. Central bankers have of course always had to deal with uncertainty. By definition, bankers must live with uncertainty. In fact, uncertainty is at the very heart of the financial intermediation business. The measurable uncertainty is often termed risk. Risks arise because banks convert short-term liabilities into long-term assets. Uncertainty does not occur only because of this maturity transformation, but there is also uncertainty about depositors’ behaviour, about the sustainability of the business of the clients to whom banks have lent, and so on. In this new era where it seems that many deep beliefs have been challenged, central bankers are faced with an even greater degree of uncertainty. The sustainability of the timid global recovery, the sustainability of the new world economic order that is still unfolding and indeed the sustainability of the new international financial architecture that is being jerry-built in response to the crisis – these are so many challenges confronting us if we are to reduce uncertainty to manageable levels. Personally, my life-long career in policymaking has provided me with plenty of experience in attempting to predict the next wave and to position our own small economy to profit from it by purposeful actions. Unfortunately, these days, as the wag put it, it is difficult to make forecasts, especially about the future! This morning as I stand in front of an audience comprising largely members of the accounting profession, I intend to remain firmly in the shoes of the central banker. I propose to tell you how we have surfed the waves during the recent crisis. I shall focus my remarks on six key themes: • First, the need for vigilance • Second, the way we have coped with macroeconomic challenges • Third, the conduct of monetary policy in an uncertain world • Fourth, the resilience of our banking sector • Fifth, the orderly functioning of the market • And sixth, and last, – but certainly not least, especially in front of an audience comprising CIMA members – the responsibility of the accounting profession. 1. Need for vigilance First, the need for vigilance. By and large all of us know that banking is a public good and therefore there is little need to look for additional justification for prudential banking supervision. Because we are committed to provide banking and other financial services through the markets, we need to have a very strong regulator. There is a price to pay if we don’t have a strong regulator – as indeed there is a price to pay if we have too many regulators with their attendant regulatory overlaps or regulatory gaps. There is still a heavy price to pay if we have regulators and regulations, but regulators fail to enforce the regulations. For all these reasons, and particularly because banking is a public good, there is an overwhelming case for the central bank, or for whoever is regulating the banking sector, to do what no other body is allowed to do, namely regulate, inspect, and supervise the business of banks. Once the crisis started unfolding, we at the Bank of Mauritius saw the need to step up our vigilance and to take prompt action to sustain investor confidence and buttress long-term financial stability. We set up in the Bank a special multi-divisional cell, comprising senior officers from various disciplines, to monitor closely the evolution of the crisis and react quickly and appropriately to any sign of stress in the banking sector which, if left unattended, could lead rapidly to distress in the economy. We initiated close monitoring of the operations of banks through scrutiny of enhanced and granular data. These returns are analysed on a weekly basis and information submitted to management regularly. These reports, in conjunction with feedback on market activity generated by the multi-disciplinary cell, enable us at the Bank to keep a close tab on the financial systems’ activities. As the crisis developed, we began sharing some of the data with the Treasury as part of the coordinated response that we felt was warranted. We all know the importance of trade channels for a small open economy like ours which basically relies on inward and outward trade to survive. By and large, the availability or nonavailability of trade credit was not directly under the purview of the Central Bank in as much as this was taken care of by the commercial banks and their network of correspondent banks in all the major countries. But as the crisis began to pinch and as banks became nervous about lending to one other, we saw some signs of potential difficulties for some local banks due to the non-availability, or inadequacy, of foreign exchange credit facilities from their usual sources. The Bank immediately decided to make available to commercial banks operating in Mauritius a Special Foreign Currency Line of Credit, aggregating USD125 million, to finance the country’s requirements in trade. That line of credit represented more than 5 per cent of the total resources available to the central bank. This showed how concerned we were and how prompt we were to react to emerging financing difficulties which would have made it impossible for us to keep our economy on an even keel. There were a few other things that we did even before the crisis unfolded. We at the Bank were the first to warn about a possible real-estate bubble in the Integrated Resort Scheme sector which prompted a few well-targeted attacks on the Governor but did lead to greater caution on the part of banks. Similarly, well before the sub-prime crisis had assumed the dimensions it took, the Bank had debated the efficacy of allowing all mortgage-related exposures of banks being allowed the lower risk weight of 35 per cent under Basel II. 2. Coping with macroeconomic challenges Let me now move on to the 2nd theme, Coping with macroeconomic challenges. Mauritius, as a small open economy, has of course not been immune to the effects of the global crisis. Although we weathered fairly well the first-round effects of the global financial crisis and the ensuing economic downturn, the global financial crisis began to impact on economic activity in the country in the second half of 2008, hitting the export-oriented sectors, with spill-over effects on the rest of the economy. This new situation required greater cooperation and a higher level of understanding between policy makers at the national level, in particular between the Treasury and the central bank. The last quarter of the last year saw an unprecedented level of concerted action by the Bank of Mauritius and the Treasury in an attempt to shore up economic activity and restore confidence in the economy. As a preventive measure to mitigate the adverse effect of the crisis on the economy, the Bank reduced the Key Repo Rate by a cumulative 250 basis points since October 2008 to stand at 5.75 per cent at the end of March 2009. In parallel, the Treasury unveiled an Additional Stimulus Package to the tune of Rs10.4 billion, equivalent to about 3.8 per cent of GDP, in mid-December 2008 to boost economic growth, protect jobs and maintain purchasing power. The Bank also reduced its Cash Reserve Ratio, from 5 per cent to 4.5 per cent, with effect from the fortnight beginning 19 December 2008, which led to an immediate injection of an estimated Rs1.2 billion of extra liquidity in the system. Our relentless efforts to contain the adverse impact of the crisis on our economy have borne fruit. Economic growth for 2008 stood at 5.0 per cent, slightly below the 2007 level of 5.5 per cent. At the beginning of this year, it appeared that our GDP growth rate would be closer to 2 per cent. As the crisis began to be addressed effectively, we revised this forecast and our GDP growth rate is now expected to be around 2.7 per cent in 2009, despite our major export markets being in recession. The need to sustain the growth momentum requires us to come up with the right policies to build up and maintain resilience even in the current challenging times characterised by an unusually high degree of uncertainty and very poor visibility beyond a couple of quarters, if not a couple of months. Our Vice Prime Minister and Minister of Finance and Economic Empowerment has already set the tone by announcing “Shaping the Recovery” as the main theme of his forthcoming Budget, which he will present later this month. We at the Bank will remain focused on the primary object of the Bank which is to maintain price stability and to promote orderly and balanced economic development. We believe that the enhanced coordination with the Treasury, without sacrificing the Bank’s policy autonomy and independence, has reduced the uncertainty confronting economic operators and households and added to policy predictability. That, briefly, is how we coped with the macroeconomic challenges thrown up by the crisis. 3. Conducting monetary policy in an uncertain world Let me move on to my third theme. Almost by definition, central banks operate in an uncertain world since monetary policy works with a well-known lag – a long and variable lag. Conducting monetary policy against the backdrop of the global financial crisis and the ensuing economic downturn is a challenging task, particularly for small open economies like Mauritius. The Bank had to react appropriately and in a timely manner. Here again, extreme vigilance was the order of the day. As I mentioned earlier, we reduced the Key Repo Rate by a cumulative 250 basis points over a period of six months. There were extraordinary Monetary Policy Committee Meetings. The recent IMF Article IV Consultation Mission which left over the weekend qualified the monetary and exchange rate framework applied by the Bank as “hybrid-inflation targeting” and declared it well-suited to the needs of the Mauritian economy. The IMF has gone further and concluded that, in its view, the Mauritian regime can be usefully considered as a model for other emerging market countries. We are much encouraged by this high-level positive endorsement – which stands in sharp contrast to the brickbats thrown at us regularly in the local press, the business press as well as the popular press. While there are some positive signs of a budding recovery in our major export markets, the global economic outlook is still subject to a very high degree of uncertainty. The cycle of monetary easing by major economies appears to have bottomed out and increasing attention is now being focused on so-called “exit strategies” without, however, jeopardizing the nascent recovery. In the Mauritian context, we do not really have an “exit” problem: the magnitude of fiscal adjustment required is not all that significant as the budget deficit is under control and our debt-to-GDP ratio is within normal prudential limits. The headline inflation rate has declined significantly from 9.7 per cent at the end of December 2008 to 3.6 per cent at the end of October 2009. However, over the medium term, the inflation outlook remains uncertain. Potential risks stem from the future course of oil and food prices on international markets, which are factors beyond the reach of domestic policy-makers. On this score, too, policy has been very supportive by lowering inflation and stabilising inflation expectations. Our much-maligned stewardship of the Bank, including our monetary policy – with accusations of policy zig-zagging, questions about why the Governor was still in post, and in one notorious editorial in a major local daily, in November 2008, calling the Governor the chief putschist who would no doubt meet the same fate in the “ides of December” as befell Caesar in the ides of March, a near-incitement to murder the incumbent – that policy has earned kudos from knowledgeable observers who have examined the evidence and have pronounced that it can serve as a model for others in our situation. 4. The resilience of our banking sector In an economy whose financial system is largely dominated by banks, major uncertainties in the market can emanate from the banking sector itself. While intermediation by banks necessarily involves risk-taking, the regulation and supervision of the system should ensure that: first, banks clearly know the risks they are exposed to and second, banks take steps to measure, control, manage and mitigate those risks effectively. The question is how do we achieve this? How do we ensure that the banking system is stable and sound and thus does not generate any excessive uncertainties in the market? We may not agree with banks about the extent and reach of regulation. But we need adequate regulation and supervision. We need a regulatory framework that encourages prudence, requires maintenance of adequate capital in relation to the risk in the balance sheet, and that deals with issues in liquidity management. And this must be coupled with close off-site and on-site monitoring of compliance with the regulatory requirements. In Mauritius, the banking system continues to be sound, stable, well-capitalised, liquid and profitable. This has been possible because of seven key factors. Let me enumerate these one by one. First, banks in Mauritius have stuck to the basics of lending out of stable customer deposits. The advances to deposits ratio has remained at around 70 per cent. There is virtually no reliance on inter-bank or volatile wholesale deposits for meeting funding needs. Volatile deposits represent only 1.6 per cent of total deposits. The average daily turnover in the interbank market is as low as 0.2 per cent of the total assets of the banking system. The quality of the deposit base has a bearing on the ability of a bank to meet its funding requirements in a crisis situation. This, combined with a strong capital adequacy ratio, is reflected in the resilience of the banking sector. Second, domestic banks did not have a huge trading book. The Bank recently issued the final guideline on Market Risk Management after analysing the trading book of commercial banks over a period of more than a year. Our analysis revealed that the trading book accounted for only 2 per cent of the balance sheet of banks. Banks did not have any large exposure to assets prone to asset price bubble valuations. Even their liquid assets comprise largely investments in Government securities and paper with no credit risk. Third, the Bank adopted a prudential approach to regulation, not only from the viewpoint of financial system stability but also to protect the interest of depositors. This prompted the review of several guidelines to enhance prudence in an environment of increasing uncertainty. The transition from Basel I to Basel II was effected seamlessly in March 2009, after a year-long parallel run. While applying the Basel II risk-weighting system, the domestic scenario and market conditions were always borne in mind. Banks were not given the option of moving over to advanced approaches because of serious reservations and uncertainties regarding the reliability of models built on a thin database. The lower risk weight of 35 per cent on residential mortgages was only allowed to be applied very restrictively. Moreover, considering the importance of liquidity management, the guideline was revised to address new concerns that the crisis threw up. Banks have been advised to net-off deposits received by them from corporates and parastatal entities which are part of their customers’ treasury operations given that such deposits tend to be highly volatile. Fourth, enforcement. Given the systemic importance of the banking system as a whole in a small country as ours, the Bank tightened the supervisory process by increasing the frequency of on-site examination of banks, enhancing the levels of exchange with the regulated entities and more intensive analysis of off-site prudential returns. Fifth, unlike many other countries, we did not have the problem of transmission of the crisis through foreign banks. Although the banking system in the country would appear to be dominated by foreign banks at least in terms of numbers, with 12 of the 18 banks being either subsidiaries or branches of foreign banks, the important positive factor has been the larger share of the domestic financial intermediation business that rests with local banks. In fact, more than 60 per cent of domestic banking assets are held by these banks. Moreover, none of the parents of the foreign banks having a presence in Mauritius have had to avail of support from their respective governments for shoring up their capital in their home jurisdiction. None of them have become wards of state. Sixth, even in the absence of credit ratings, banks have been able to gauge their clients’ creditworthiness. This has been made possible because of intensive knowledge of their clients and their businesses resulting from the small size of the country and the prevalence of relationship banking in a context of great customer loyalty. The establishment of the Mauritius Credit Information Bureau (MCIB) under the aegis of the Bank increased the ability of banks to assess their borrowers and thus contributed to enhance the quality of their assets. For instance, the non-performing loans ratio of the banking sector to domestic borrowers which was 8.4 per cent in June 2004 declined to 3.8 per cent in December 2008. Even in the crisis situation, NPL’s have gone up only marginally to 4 per cent in June 2009. We anticipate a further improvement in credit quality as we extend the coverage of the MCIB database. Seventh, the limited role of ratings agencies. In Mauritius, banks did not have a large portfolio of loans extended to domestic borrowers on the basis of dubious ratings by the rating agencies. We now know that a part of the added uncertainty can be attributed to the quality of ratings and the doubtful ethics of the credit rating agencies in their conduct of business. While these ratings are supposed to help investors take decisions without their having to do too much due diligence of their own, over time rating agencies have come to play too important a role in the system while they themselves went largely unsupervised. But, in spite of their limited role in domestic financial intermediation, ratings agencies have not been all that benign in our part of the world. With the worst possible timing, based on doubtful data and faulty analysis, they added to the nervousness and uncertainty on our small domestic stock market. I am referring here to the inexplicable decision of Moody’s to place on watch the ratings of two of the largest banks in Mauritius for a possible downgrade, on concerns that we fail to understand. I don’t need to tell you the importance of these two banks in Mauritius. They hold 60 per cent of assets in the banking sector. They account for 40 per cent of the domestic stock market capitalisation. They generate a full 60 per cent of the average daily share transactions on the local stock exchange, if I take last week as a reference. And you have this credit rating agency threatening to put these two banks on watch for a possible downgrade and, to add insult to injury, going further to warn that the country was facing unsustainable debt dynamics. In our view, these seven points are key to the resilience of our banking sector. The sector obviously also has certain characteristics which add to its vulnerability, thus warranting vigilance and close monitoring. First, although the small number of clients enables banks to have a good knowledge about their businesses, concentration of credit in a few groups of closely-related borrowers accentuates credit risk. This could have serious potential consequences for financial stability. The Bank is therefore watching with keen interest developments in other parts of the world with regard to macro-prudential supervision to cope with the impact of such inter-linkages. Secondly, the two large banks to which I referred earlier and a few others as well would readily qualify as “too big to fail” and thus raise issues of moral hazard. The complex structures of banks, the need for the larger banks to write down their “living will” are matters receiving attention world-wide. We are closely following these developments. 5. The orderly functioning of the market This brings me to my fifth key theme. In conditions of uncertainty, the orderly functioning of the market is a major prerequisite. In the domestic foreign exchange market, the Bank has allowed the free play of market forces to determine the exchange value of the rupee. Our intervention has not been aimed at offsetting market forces or at targeting any specific exchange rate. Our objective has been rather to smooth out any unwarranted volatility in the rupee exchange rate and to improve the functioning of the market. This has resulted in greater stability in the exchange value of the rupee. It is very easy to give in to pressures from various sectors in conditions of uncertainty. Central banks have a natural tendency to intervene anyway. It is not easy to turn a deaf ear to incessant appeals from export lobbies and their friends in high places to play around with the domestic currency. The Bank has resisted these pressures. For a full year now, the Bank has not intervened in the foreign exchange market – in sharp contrast to what central banks in many other countries have been busy doing. Perhaps the domestic forex market has now matured and learned to function in an orderly manner without the intervention of the central bank. This track record of non-intervention by the Bank since November 2008 has recently led the IMF to reclassify our exchange rate regime from “managed floating” to “free floating” in the 2009 issue of the Fund’s Annual Report on Exchange Arrangements and Exchange Restrictions. I believe that this hands-off attitude of the Bank has reduced idiosyncratic behaviour and empowered market-players. The possibility of Central Bank intervention at any time and the increasing firepower we wield, should we wish to do so, keeps the market well-behaved. 6. The responsibility of the accounting profession Let me now come to my sixth and last theme, which directly concerns your own profession. Accountants and auditors play a key role in contributing to the level of trust required for the proper functioning of a modern market economy. They prepare financial statements and audit them so that various stakeholders of the economy are able to make informed decisions. In the aftermath of the crisis, bankers and regulators have paid a very heavy price and they have been in the front line, incurring the wrath of the public. But we all know that we, bankers and regulators, are basing our actions on your accounts and that accounting principles have played a major part in accentuating the crisis. Let’s just look at what the mark-to-market valuation principles have led to. By definition, mark-to-market valuation principles are procyclical since they inflate the value of an asset in an upswing and bring it down in a downturn. Thus, they accentuate the volatility of bank balance sheets. Issues relating to accounting practices have become the focus of recent G-20 meetings. In the context of the financial sector, there is a need for juxtaposing fair valuation principles with prudence. The accounting profession may wish to reflect on the need for provisioning for potential loss based on Full Fair Value Accounting within the Current Accounting Framework. It used to be said that war was too important to be left to the generals. Is it not possibly the case that accountancy has now become too important to be left to accountants? Let me digress here for a moment to bring up an issue that the Bank faced with accounting principles. In a year when we were deluged with FDI inflows and the Bank had to intervene in the market to mop up excess liquidity through the issue of Bank of Mauritius Bills in exchange for foreign exchange assets that we purchased, we felt the need for dynamic provisioning because of very clear “negative carry” in these transactions. However, our pioneering attempt to apply this approach had to be undone in the midst of much incomprehension and recrimination. The proposal did not meet the approval of our accountants and auditors because of their steadfast adherence to their accounting principles, to the great delight of our single shareholder who thus got an unusually large second transfer of profit from the Bank in a year when it would have been more prudent to provide for expected losses on the horizon. There is therefore in a world of uncertainty a need for everyone to be a bit less hide-bound by current practice and to be a little more forwardlooking. Let me conclude by mentioning that bankers, accountants, regulators and for that matter, all of us, function in a world of increasing uncertainty. As Keynes put it, “anticipating what average opinion expects the average opinion to be..” leads to herding behaviour. We cannot altogether eliminate uncertainty but we should certainly use our judgment to anticipate, even act pre-emptively and respond with alacrity to emerging situations. I have detailed how we at the Bank through various actions and measures have endeavoured to ensure the stability of the domestic financial system. To recapitulate, we were vigilant and took anticipatory measures where possible and responded with promptitude to emerging situations. A banking system working on sound principles, aided by prudent regulation and close supervision, ensured that the sector remained sound and stable. We concerted our action increasingly with Government initiatives. We facilitated the orderly functioning of the market. We adopted an appropriate monetary policy and exchange rate management framework. All this contributed to Mauritius weathering the storm. As a parting remark, let me add that for policy-makers in a small island state, situated quite far from its major trade partners, and surrounded by a sea of uncertainty, an ocean of threats and perils, the price to pay to ensure our continued economic salvation is eternal vigilance. It is a price that we are prepared to pay. It is a price that we pay everyday. Thank you for your attention. | bank of mauritius | 2,009 | 11 |
Statement by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, Port Louis, 14 October 2009. | Rundheersing Bheenick: Positive response to the crisis and major financial developments in Mauritius Statement by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, Port Louis, 14 October 2009. * * * What a period of exceptional turbulence it has been for the finance and banking sector and for globalised economies like that of Mauritius! The year (FY 08/09) began ordinarily enough, with our focus resolutely on the achievement of price stability especially as inflation threatened to enter double-digit territory. Within a matter of weeks, Lehman Brothers became a household name for all the wrong reasons, engulfing companies, countries and continents far removed from the original epicentre of the crisis in the US subprime market. The downside of globalisation, until then a subject of little mainstream interest, manifested itself in the speed at which the contagion spread. Never since the Great Depression has the world economy come so close to the brink of collapse. For a small open economy which depends critically on open trade flows for both its imports of essential items, like food and fuel, and for the necessary exports to be able to pay its way in the world, the situation was fraught indeed! As fear gripped major markets, it became increasingly difficult for economic operators and regulators alike not to give in to panic and ensure a level-headed response to a situation which was not only rapidly deteriorating but also clouded with growing uncertainty. The rupee started depreciating as foreigners disinvested from both stocks on the local exchange and dumped Government paper. It did not matter one iota that domestic banks had no exposure to toxic assets and had reduced non-performing loans to a historically low level. And, for that matter, it did not help that an international rating agency chose this year to threaten the two largest domestic banks with a possible downgrade. How did we react to these various external shocks and threats? We put the banking sector on high alert, with daily monitoring of all major movements, to enable us to take pre-emptive and timely action at the slightest sign of any adverse development. Thus, no sooner had reports begun to reach us that trade credit lines, traditionally extended to domestic banks by large foreign banking institutions, were being withdrawn that the Bank decided to set up a Special Line of Credit in foreign currency to meet the shortfall, thus becoming one of the first Central Banks in emerging countries to provide trade financing which is the very life blood of a trading nation. And that was several months before the G-20 at its London meeting in April 2009 emphasised the importance of trade credit in supporting global economic recovery. The crisis also brought the Ministry of Finance and Economic Empowerment (MOFEE) and the Central Bank on a convergent path as fiscal and monetary policy entered a phase of maximum coordination where Government came up with a Fiscal Stimulus Package, approximating 3.8% of GDP, while the Central Bank embarked on a series of cuts in the Key Repo Rate (KRR) and a reduction in the minimum Cash Reserve Ratio (CRR). In parallel, both MOFEE and the Bank actively joined the international debate to search for a lasting solution out of the financial and economic crisis. We paid particular attention to destigmatising access to IMF resources. The Flexible Credit Line that was rapidly put in place by the G-20 was tailor-made to meet the requirements of the Mauritian situation in the face of an expected worsening of our external accounts. Without any ex-ante conditionality, this line provided a way of staunching any unexpected massive forex outflow and financing the growing balance of trade deficit that, under this scenario, could no longer be funded by the combination of net foreign investment inflows and the rise in earnings on the services account on which the economy depended to balance its books. Luckily for us, the situation never got out of hand and there was no need to have recourse to this facility after all. There was even an unexpected bonus for Mauritius as far as relations with the Fund were concerned: effective February 2009, our exchange rate arrangement was reclassified from “managed floating” to “free floating” as from 1 November 2008 – which is nothing short of remarkable given that this period witnessed interventions by many major Central Banks in support of their currencies. Let me now briefly highlight some major developments during the year. • The banking sector continued its growth during the period March 2008 to March 2009 – with an 11% rise in deposits from Rs503 billion to Rs557 billion, a 20% rise in advances from Rs342 billion to Rs409 billion, and a 22% rise in bank profits from Rs11 billion to over Rs13 billion. • The supervisory and regulatory framework was enhanced and modernised – with a seamless transition from Basel I to Basel II for capital adequacy after a frictionless year of parallel run, and the revision of some guidelines especially those relating to credit concentration and related party transactions. • The Bank initiated the publication of regular bi-annual Financial Stability and Inflation Reports starting with the first issues in July 2008 and November 2008 respectively, thus fulfilling one of the requirements of its enabling legislation. • The foreign exchange market saw growing competition with the issue of 14 new licences to money changers and one to a foreign exchange dealer: nine of these had commenced operations before 30 June 2009. • We enhanced our Islamic finance credentials by hosting a Seminar on Islamic Capital Markets jointly with the Financial Services Commission and the Islamic Financial Services Board, which the Bank joined as an Associate Member in 2007. We authorised the local branch of a major international bank to provide Islamic financial services through a window operation. • We achieved greater transparency regarding fees and commissions charged by banks by enforcing a standard template for reporting fees and commissions by all banks in Mauritius because we believe that a better-informed consumer can lead to more competitive outcomes and cheaper services. • We pursued our efforts to graduate to the IMF’s more demanding Special Data Dissemination Standards, thereby demonstrating our commitment to the provision of data of quality and frequency to rank with the best anywhere. • Faced with the deteriorating external environment and its knock-on effects on the domestic economy, the Monetary Policy Committee met six times during the year – including a special meeting in July 2008, when the relentless upward pressure on inflation with serious risks of high inflation expectations becoming entrenched, made it more appropriate to raise the policy interest rate by 25 basis points to 8.25% per annum. The Bank raised the minimum CRR effective 15 August 2008, which led to a rise in short-term interest rates, thereby further tightening monetary conditions. • Subsequently, the monetary policy stance was loosened, with the KRR being reduced by a cumulative total of 250 basis points in the period of six months to March 2009. This monetary easing was done in conjunction with the expansionary fiscal policy designed to shore up the domestic economy, which I referred to earlier. • The Bank took over the Debt Management function from MOFEE, including the responsibility for the drafting of the Government Debt Management Strategy. • Total Government debt stood at Rs134 billion as at end-June 2009 as against Rs122 billion at end-June 2008 – at less than 60% of GDP, a far cry from the rising debt levels in the major economies, some of which exceed 100% of GDP. The Bank has smoothed out the weekly issues of Treasury Bills and provided an advance monthly issuance calendar to the market. The Bank also introduced online auctioning of Treasury Bills on a pilot basis, thus paving the way for the issue of single-maturity instruments on different days and for greater efficiency in the money markets. • We revisited our portfolio management approach – which was designed for a context where our reserves were a fraction of their current level – in search of higher yield without sacrificing quality and without taking unnecessary risks. As I mentioned in my Statement introducing the Annual Report of last year, we had separate Peer Reviews carried out by both the Bank for International Settlements (BIS) and the Reserves Advisory and Management Program of the World Bank’s Sovereign Investments Partnership. Both reports have now been received. • Any change in our portfolio management strategy is tied up with changes in our accounting approach and the profit allocation framework as well as with the risk appetite that is now warranted in the circumstances. We envisaged changing our accounting approach to allow for dynamic provisioning of expected losses from “negative carry” resulting from forex sterilisation operations. Our first attempt to do this was unfortunately aborted with the Bank thus missing an opportunity to rank among the pioneers of this approach which has gained wide recognition after the crisis. The disallowed provision had to be remitted by way of a second transfer of profit during the year. • The Bank hosted the 7th meeting of Governors of the Association of African Central Banks in July 2008 and, in that same month, co-hosted with the Centre for Central Banking Studies of the Bank of England, a seminar on “Inflation Targeting, Modelling and Forecasting”. Later on during the year, the Bank co-hosted with the African Export and Import Bank an event to publicise the latter’s products to the Mauritian business community. • The Bank has been appointed as the Settlement Bank for the COMESA Regional Payment and Settlement System (REPSS). The REPSS project is now under implementation. • Since the IMF announced that it was increasing the number of African Regional Technical Assistance Centers (AFRITACs), the Bank joined MOFEE in lobbying for Mauritius to be the venue for AFRITAC (South). We expect to report on this in more detail in the next report. • The Bank has extended the coverage of the Mauritius Credit Information Bureau to allow collection of credit information from all institutions, including leasing, insurance, hire purchase and utility companies, which will lead to further improvement in credit quality. • The Bank entered into a Memorandum of Understanding with the Central Statistics Office (CSO), to provide for a more structured collaboration between the two institutions. This was preceded by a weekend brainstorming session between the Bank, MOFEE, and the CSO. • We give in this Report for the first time some metrics which will allow the informed observer to gauge our efficiency in meeting our mandate at least cost. It will be seen that an entire working month (23 meetings against a statutory minimum of 12) was taken up with Board meetings and the dividing line between governance and management became increasingly blurred – which would no doubt make an interesting case-study for institutions like the BIS, the central bank of central banks, concerned with central bank governance issues. • The Bank launched a commemorative gold coin to mark the 40th Anniversary of the Independence of Mauritius. The coin has been the fastest-selling coin in the history of the Bank, with the issue being sold out in less than five days. This feat has inspired us to come up with a “Father of the Nation” Platinum Series, made up of three different coins to be launched over the next three years, beginning in October 2009. In the previous year, we had already reached record levels in terms of training fellowships extended to our staff to widen the Bank’s knowledge base. This year, we continued with this tradition with a total of 85 training opportunities provided to staff, or about the same level as the previous year. We intend to pursue in this direction to enhance our skill levels to enable us to meet new challenges. On behalf of the Bank, I wish to extend my appreciation to our staff who have put in tremendous effort and hard work to allow the Bank to fulfil its mandate. The close working relations with the industry were continued through different fora such as the Banking Committee, involving the Mauritius Bankers Association (MBA) and all Chief Executive Officers of banks, the Bureau Meeting involving the MBA and the Management of the Bank of Mauritius, and various regular meetings at other levels such as those with Treasurers and Compliance Officers. Without this close collaboration, the transition to Basel II would not have proceeded as smoothly as it did. A special word of thanks therefore goes to the Chairman, the Chief Executive and members of the MBA for facilitating the task of the regulator. To conclude, let me thank the Prime Minister for his presence at the launch of the commemorative coin and his continued support during these trying times. I take this opportunity to also thank the Vice Prime Minister and Minister of Finance and Economic Empowerment for the close collaboration and support, which has helped enormously to maintain confidence in the economy and give it a much-needed sense of direction and cohesion in these troubled times. | bank of mauritius | 2,009 | 11 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual Dinner in honour of Economic Operators, Port Louis, 5 December 2009. | Rundheersing Bheenick: Positive developments in Mauritius against the background of the financial crisis Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual Dinner in honour of Economic Operators, Port Louis, 5 December 2009. * * * I am delighted to welcome you all to the Annual Dinner in honour of our principal economic operators, to celebrate a year of fruitful collaboration and to reflect on the critical elements for sustaining this effective partnership. We are delighted that His Excellency Tito Mboweni has accepted our invitation to be our special guest tonight. The Great Tito was until recently Governor of the South African Reserve Bank and is now a committed fisherman. Well may I say he is a great catch for us tonight. I first met Tito Mboweni as Governor Designate in Davos in the margins of a World Economic Forum meeting in February 1999, when I had the honour to accompany my Prime Minister as a Minister in his Cabinet. I have gained much from this illustrious man who shared with me glimpses of his vast and rich career. I must confess that my first meeting with him as Governor was even more memorable. It happened in Washington during the IMF/World Bank Annual Meetings in October 2007. It was as close to a telling-off as a Governor ever gets from another Governor: “My brother Governor from Mauritius”, Tito said drily, “I understand you have been on the job for nearly a year now … but you haven’t found the time to pay us a visit or to take an interest in our work in SADC”. I was cut to the quick by this stinging remark, especially as I had actually played a key role in getting Mauritius to join SADC in the first place. I am a quick learner and I learnt my lesson. Governor, you will be pleased to know that I currently luxuriate under the additional title of Chairman of the COMESA Committee of Central Bank Governors. And I had the singular honour to chair the Commonwealth Meeting of Central Bank Governors in Cyprus and report on our work to the plenary meeting of Commonwealth Finance Ministers. Indeed, some claim I have learnt my lesson too well! Some complain that I have taken the regional and international dimensions of the job so much to heart that I am hardly ever here. Now as Governor Mboweni steps from the limelight and has plans to pursue his great love of fishing, I invite him to elect Mauritius as his second home, so that he may indulge in his new hobby in our tranquil waters. You are most welcome Tito: it is our honour to have you with us. But, I am afraid, in this open and liberal economy we offer no “free lunches”. So we are going to ask you, a little later, to sing for your supper. But first, on a sombre note, may I ask you to remember our good friend and colleague, Anil Gunness, late CEO of the State Bank of Mauritius, assassinated in November 2008 in the Mumbai terrorist attack whilst on official duty. His death has been a great loss to us, a terrible tragedy for his family and a mark of the uncertain times in which we live. He was a man of integrity at the height of his powers, much loved and respected by all he met. So let us not allow the assassins their victory and, in this moment of reflection, let us recall the words of Dylan Thomas: “Though lovers be lost, Love shall not, And death shall have no dominion.” Let us rise and observe a moment of silence in his memory ... Thank you. Many of us here, last met in similar convivial circumstances in 2007, for the 40th anniversary of the Central Bank. Since then much has changed. The greatest economic and financial crisis of our generation happened. Indeed, it is still with us. So let us take time to reflect on the last two years and try to look forward to our role in the pursuit of our Prime Minister’s challenge of Maurice Ile Durable. But as we do so, there is just one thing ahead, of which we can be sure, in the immortal words of Yogi Berra, the US baseball star: “the future ain’t what it used to be!” This is not the moment to go over the now well-documented blowing away of so many star players in the western banking system and its knock-on effects in the real economy. That is all available in the roaring paperback trade; and those failed econometric models are just today’s pulp fiction. So as an economist I agree, somewhat with hindsight, with Kenneth Boulding, another economist – whose textbook guided my first steps in the field and figures among my most-prized possessions. Boulding succinctly expressed what many others have been thinking too: “Anyone who believes that exponential growth can go on forever in a finite world is either a madman, or an economist!” For what lies ahead for us is, nothing less than, a rethinking of western finance, and in the words of Kevin Warsh, a Governor at the US Federal Reserve: “We are witnessing a fundamental reassessment of the value of every asset everywhere in the world. (And) … a new financial architecture …” is taking shape before our eyes. As we look back across the debris of a collapsing western system of thought and practice on banking and financial matters, we might well ask, why did we miss the call to action before. Could the doctors in charge have saved the patient? What were the telling signs and symptoms? The very first cough maybe? When Barings Bank, with a Royal seal of approval, was hit by their own young man in Hong Kong, who sold them down the futures and derivatives drain, while senior managers were sipping cocktails … perhaps the pink champagne with which this Governor is allegedly permanently sozzled. If we look back, there was once a time when accountants were thought to be, if anything, rather boring, and absolutely straight: then there was Enron and Madoff. There was once a time when bankers led the field in asserting “safe as houses”; we don’t seem to hear that phrase too often now! But have we yet put in place a re-designed system to review the content of assets and their continuing value in the Books? We know Basel II is not the end of the road? But will even a Basel III be solid enough? Will the new codes of the International Accounting Standards Board, with the move away from current fair-value rules, set us up straight again? Will they reach an accord with the US Financial Accounting Standards Board, so that we have a unified western system? But while we are sorting out those books, who is keeping the accounts on the depreciation of the natural assets of the paradise isle and the costs of climate change and sea level rise? There was once a time when one could say “safe as the Bank of England”, but even that seems to have lost its currency! As we see major banks in key countries becoming wards of the state, we can’t help musing that there was once a time when bankers might have preferred defenestration to nationalisation! Is this the end of the history of the western financial and banking model and the public/private divide? “The old order changeth, yielding place to the new ...” as Tennyson intoned in La Morte d’Arthur, and with foresight warned: “lest one good custom should corrupt the world.” There was once a time when we spoke of the promise of a stable state and an end to poverty. Even development economics followed a set of well-established principles; and 163/2009 banking never hit the headlines. Now banking seems daily to be front page news. And over the last fortnight we at the Bank of Mauritius are contributing our fair bit as well. You know I’m not really one for conspiracy theories. But last year, when they made another James Bond film, I was reminded of the advice of Goldfinger to Bond, in that eponymous thriller: “Mr Bond, they have a saying in Chicago – Once is happenstance; Twice is co-incidence; The third time it’s enemy action.” Obviously, we must not become paranoid and see enemies and conspirators everywhere. But, maybe we bankers here should be heeding such advice, don our flak jackets and reexamine, with our economic partners, what banking is about, and what its future role should be in the real world. What exactly is the business we are in? I think the crisis has given some useful pointers. As bankers, we are not in the business of making money: that is where we have gone astray, giving too much latitude to the young man in Barings, or the young man in Société Générale, or the army of bonus-seekers playing hard and fast with other peoples’ money like Leeson and Kerviel. The business of banking is business. It is doing business with you, the operators in the real economy, to promote more business, and through that to secure economic and social welfare and sustainable development. The money is not an end in itself. The bottom line matters … but so does the top line. That is why I have been keen to explore another model here which brings the money closer to the action in the real economy – Islamic banking. Some of you may know I was not here last week. A pity, because they tell me there was a bit of street theatre that I missed. Last week, I was away in the Gulf States, as for some time I have been concerned that the champion we were counting on to support our move in Islamic banking, Dubai, was looking a bit wobbly and weak at the knees. I was right. And so with a few phone calls, some discreet and rapid negotiations in the Gulf, I have returned confident that we shall be signing up partners from a cash-rich Gulf state to establish a complete Sharia-compliant banking service in Mauritius. This will set a new pace for our business and banking world. And I am pleased to report that we are now a full member of the Islamic Financial Services Board, the international standard-setting body in this rapidly-developing area. Which makes us the second non-Islamic country, after Singapore, to accede to this coveted position. Islamic finance will bring a new model for banking and for business to revitalise our partnership with the real economy, in big business and in small. Watch this space. These Arab thoroughbreds move fast and are bred to be quick on the turn. For I sometimes fear the western model of banking has an inherent kamikaze conservatism; a bit slow on its feet under fire. In that sense it is rather like a former South African Archbishop’s depiction of his Church: “like a train that will not take a sharp turn” Now at this point, I must confess, I have heard mutterings that, sometimes at these events, I tend to drift a little beyond my allotted time! So let me reassure you of two things. First there will be for insomniacs a fuller version of my take on what we did this year in the Letter to Stakeholders to be issued in a few weeks’ time. It will be on our website. Which means I shall be the soul of brevity now. Second, echoing the words of Lord Birket, I do not object to people looking at their watches when I am speaking. But I do strongly object when they start shaking them to make certain they are still working! Briefly, then, I take my hat off to you all here tonight in your response, as innocent bystanders, to the financial crisis that has been shaking the world beyond our shores. Government fiscal policy has been bold, just and effective. We at the Bank have adjusted our monetary steps to dance in perfect cadence. To some applause from the Fund and the World Bank, I must add. Our banks have been prudent and a safe harbour in the storm. The private sector and our sanguine people in the market place have managed the business of business very well. I think tonight you can all take a collective bow! For unlike the general crash, abroad, here in Mauritius these last two years have definitely not been the worst of years. Indeed, all things considered, they shine through as some of our best, showing our fortitude and good judgment in weathering the storm. For here in Mauritius there is: • No crisis of credit, • No crisis in housing, • No collapse of banks, and • Regulation which is sound, just, timely and respected. What is more, here in Mauritius: • Inflation is coming down, • Public debt is declining, • The economy is buoyant, • Revenue is increasing, • Growth remains positive and • You (at least) are all pretty safe in your jobs. Here, I am reminded of the difference between recession and depression, as defined by Harry Truman: “It’s a recession when your neighbour loses his job; it’s a depression when you lose yours.” Now, as some of you may guess, I am very preoccupied these days but I am certainly not depressed. For we are: • Improving our forecasting methods, • Establishing more transparency, • Already rolling out added support to enterprises in distress and to SMEs, • Seeing more efficiency and more customer-friendly services, stimulated by our smart fresh high street entrants showing the old timers a new trick or two, and • Moving towards a regional role as a clearing house for COMESA. Total assets in banks here continue to grow well, both in deposits and advances, with scarcely a whiff of the toxic fumes that are besetting our distant neighbours. Thus, as you will appreciate from these brief remarks, my stewardship of the Bank has not been as negative as some recent press coverage might lead the uninformed observer to believe. Let me give you a few other strong positives. First, our management of foreign exchange reserves. Our net international reserves increased by nearly Rs18 billion to stand at Rs96 billion in October 2009. That’s an increase of nearly 23% since December 2006. This constitutes more that 40 weeks’ imports, as against 38 weeks of imports in December 2007, notwithstanding the rise in the value of imports during this period. Still on this topic, tiny Mauritius became the 2nd country to participate in the Fund’s gold sales this year, coming hard on the heels of the South Asian Elephant, India. 163/2009 Second, the exchange rate. The rupee exchange rate index MERI1 and MERI2 which we rolled out last year, has declined steadily since May this year to close at around 98 in November 2009, compared to its base of 100 for Calendar Year 2007, thus indicating an appreciation of the rupee. I understand that last week Bloomberg commented that the rupee appreciated by 2% vis à vis the dollar, in spite of our “Theatre de Boulevard”. The Bank also acted as lender of last resort in foreign exchange at about this time last year when trade credit lines dried up. I am sure the grand daddy of central banking, Bagehot, would have approved. Third, banking and finance. The banking sector, which is the bread and butter of the Central Bank, has seen its profit surge by a full 50% since December 2006 to reach Rs 12.6 billion for the year ended 30 June 2009. While banks in the rest of the world are drowning in red ink, we have seen non-performing loans declining to a historical low of 2.5% in September 2009. Thus, there is scarcely a whiff of the toxic fumes that are besetting banking elsewhere. Both banking sector assets and banking deposits grew by nearly 22% between December 2006 to September 2009. And there is not a trace of any credit crunch as advances have increased by over 60% to stand at Rs 427 billion at the end of the period, of which nearly 40% was directed to the domestic market. Banks have also expanded their footprint in the country, with the number of branches going up from 177 to 202, and the number of ATM’s increasing from 326 to 376 during the last three years. Employment in the banking sector has gone up by about 30 per cent from 4,923 in December 2006 to 6,365 in September 2009. Many central banks have sent their officers to our Bank on attachment and study tours to see how we conduct business in various areas of central banking. This redounds to the credit of the institution, which is a small player but is known and respected. Of course, when I look back over the past 2½ years, I do have some regrets about what might have been but did not happen. I realize that vision is not enough to effect organizational change to make the Bank perform at optimal level. I am dismayed by the resistance which I encountered when I tried to introduce what is now being termed “dynamic provisioning” last year to provide for future expected losses, which was then sheer anathema to the accounting profession, but which is likely to become accepted as a new standard soon. Thus, the Bank missed a golden opportunity to be a pace-setter in this area in the emerging world. Another regret is our failure as the main provider of data on banking, finance and international trade to the IMF to graduate to the IMF’s Special Data Dissemination Standards. Had other key players in the sector shared our vision, we would have ranked with Malta and Cyprus, both of which joined the league of SDDS countries last week. All is not lost, though, as we are working hard to join this higher reporting standard so that we can rank among the best. Punching above one’s weight has always been a key driver for many of my actions. This is done more easily if the entire team shares the same mind-set and is prepared to leave their comfort zone to reach ever higher and higher. Hilary Clinton, the US Secretary of State, has been lavishing praise on our government as an economic and moral leader in Africa. The World Bank has given our economy a clean bill of health. The IMF is holding what it calls our “hybrid system of inflation targeting” as a model for other countries to emulate. And, for good measure, the Fund has re-classified our exchange rate regime as “free floating”, going up one notch above “managed floating.” We do not have the vaulting ambition to aim for the next level, which is that of a reserve currency! To a troubled world we seem to have offered some fresh tuition. Yet we should beware of hubris. So let us be warned by H G Wells, one of the founding fathers of that fine institution, LSE – much beloved of our Minister of Finance, and my daughter – who asserted over 100 years ago: “Human history becomes more and more a race between education and catastrophe”. Thus we must learn from the current troubles, shrewdly building on our evidence-based approach to business, banking and finance. The World Economic Forum index may put us top of the African league on probity, but we still come low on the Global list; Hilary likes our form of democracy, but the Privy Council has probed some of our political election practices and found some of our customs wanting. We may be getting along in economic growth; but what about the degradation of our natural environment and the effectiveness of our response to the risks of climate change and sea level rise? Our lodestar must be the rule of law, and not those quaint misleading dubious customs of the past. Let us pay due respect to our electoral laws and codes, and our banking laws and regulations, and to the safe future of our natural environment. It is our commitment to these duties in business, that can best protect our state and our planet earth from degradation and our people and our leaders from unwarranted calumny. Now, perhaps as never before, we must face the music, and press on with those reforms in our practices that will keep us resilient and on the fast track to growth with equity and justice. Or we will all face the fate of the dodo. Finally, I must observe, that a core problem with business, as with fiscal and monetary policy, is knowing whether it will be a success. Last time I offered you the Maradonna theory of interest rates; tonight may I close by offering you the Albert Einstein theory of success. I hope this will help many in business who are addicted workaholics. Einstein proposed a very simple formula: A= X +Y+Z, where A represents success in Life, X is work, Y is play, and Z is keeping your mouth shut. I can hear your silent imprecations that I pay some heed to that last Z element! But, before I do so, let me call upon you all, to rise and drink a toast, to a prosperous new future for banking in Mauritius, coupled firmly with the real economy and the private sector and a firm commitment in our work to face the music and dance with agility to our own Mauritian tunes. Thank you! 163/2009 | bank of mauritius | 2,009 | 12 |
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Signing Ceremony of the Memorandum of Understanding between the Bank of Mauritius and the Mauritius Revenue Authority, Port-Louis, 31 December 2009. | Yandraduth Googoolye: Strengthening macro-prudential supervision in Mauritius Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Signing Ceremony of the Memorandum of Understanding between the Bank of Mauritius and the Mauritius Revenue Authority, Port-Louis, 31 December 2009. * * * Ladies and Gentlemen After a comprehensive address by the Governor, I will not have much to add to what he has said. But, what I would do is to brief you about the salient features of the Memorandum of Understanding. But before doing so, I must say that after the global economic crisis, the buzz word all over is macro-prudential supervision. It is built on the clear lessons of the crisis that a set of financial institutions that are sound on a stand alone basis is not an assurance of financial stability. The real economy has to be treated as an endogenous part of the whole framework if systemic stability concerns have to be identified and mitigated. Why I am saying this is because the MoU that we are going to sign today is a critical part of our effort to strengthen macro-prudential supervision. Let us look for instance one of the clauses of the MoU. It says that MRA will communicate to the Bank aggregate data on various taxes collected with a view to allow the Bank to gauge activities in the real sectors of the economy. This is an important data input for macro-prudential supervision. In fact this will make the process even more proactive rather than a reactive one. You will all agree that there is no alternative to being able to anticipate events and take remedial measures before a crisis assumes monstrous proportions. Let me turn to the broad features of the MoU now. This agreement has basically three important aspects: First, it contains the ground rules for cooperation between the Bank and the MRA. The MoU emanates from the respective legislative framework governing the Bank and MRA. It is therefore subservient to it and furthers the objectives laid out in the respective Acts. Secondly, it sets out the specific areas for cooperation by detailing broadly the nature of information that one will provide to the other, areas in which they will collaborate with each other and underscores the need for use of technical expertise in one institution relevant for the effective discharge of responsibilities by the other. Thirdly, it provides for a joint committee between the Bank and MRA that will meet at quarterly intervals to consider the implementation of the MoU and matters arising therefrom. I am sure that both the Bank and the MRA will be able to perform their responsibilities with better information than they would be able to without the MoU. We on our part will spare no efforts to reap the benefits of this arrangement for the overall good of the state in general and the economy in particular. Thank you for your attention. | bank of mauritius | 2,010 | 1 |
Letter by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, to stakeholders, Bank of Mauritius, Port Louis, December 2009. | Rundheersing Bheenick: Comprehensive reflections on economic and financial activities in Mauritius during 2009 Letter by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, to stakeholders, Bank of Mauritius, Port Louis, December 2009. The original speech, which contains various links to the documents mentioned, can be found on the Bank of Mauritius’ website (www.bom.intnet.mu). * * * Dear Stakeholders, This is the third annual letter that I am addressing to you as I end my third year as Governor of the Central Bank. I must say that I have received positive feedback on this new medium of communication that I initiated two years back. It has proved to be a very useful forum to share with each of you my summary assessment of the domestic and global economy and outline my perspective on future developments. This annual letter, I believe, also contributes to enhance transparency and central bank communication to the outside world. I hope it will become a tradition for the Bank. What a year 2009 has been for us! Certainly a year of great turbulence and uncertainty, but also – against all odds – a year of considerable achievement for the Bank! When I wrote to you last year, the global economy was going through one of its worst crises since the Great Depression of the 1930’s. There were serious concerns as to which way the world economy was heading. Doubts began to surface on the ability of our small and vulnerable island-nation to withstand the impact of the global recession in spite of the fact that we had skilfully managed our affairs for several decades. We shared those doubts and fears and maintained an outward calm, refusing to be alarmed by our own worst-case scenarios while working furiously on possible responses and lining up adequate tools. The full force of the adage “Gouverner, c’est prévoir” had never hit me home with such immediacy before. The economy, global and domestic, is in a much happier state now than a year ago. Most countries which were in recession are slowly pulling out of it. Stock markets have recovered, though not mercifully to bubble levels. Global trade is picking up as protectionist fears subside. But we would be wrong to believe that the problems are over. In advanced economies, growth is still very low; unemployment is high and still rising; bank credit is yet to pick up and de-leveraging is yet to run its course. Worse, there is the lurking danger of the downside effects of ill-timed and uncoordinated withdrawal of the massive monetary and fiscal accommodation that prevented the global economy from being sucked into what might have become the mother of all depressions. Closer to home, the year gone by was indeed challenging not just for the banking sector but for the economy as a whole. For our small open economy, surfing against the unruly and unpredictable waves of the global financial crisis, without losing our balance and being swallowed up, remained our topmost priority. As if battling against these unprecedented economic challenges was not enough, we ran into considerable internal turbulence which the institution did not deserve and could well have done without. In spite of these internal and external challenges during the year, my colleagues and I can look back on our record with a sense of pride. Some of our home-grown policies in our core functions have, after close examination, been hailed by the International Monetary Fund as worthy of emulation by other similarly-placed economies. Quite a turnaround for a country that, as carping critics claimed, was submitting its population to the “diktats” of the Fund! What is even more noteworthy is that we have been able to achieve this despite being the central bank of a very small country occupying an insignificant place in the global economy. In what follows, I shall comment on major developments that occurred during the past year, from a broad and rather general perspective. Those of you who want to go deeper in the issues raised, may wish to navigate the user-friendly links provided in this letter where you will find additional details. Economy Our country has fared relatively better than many others, with our economic growth rate remaining in positive territory at 2.8 per cent. The fiscal stimulus and the parallel easing of our monetary policy stance did contribute significantly to uphold business and consumer confidence. Growth is now forecast to pick up to around 4.3 per cent, which is the official forecast from the CSO for 2010 and also the average expected rate of growth for subSaharan Africa in 2010. But it may turn out to be higher depending on the strength of the global recovery. While other countries have seen unemployment rising to unprecedented highs, it is comforting to note that most people in Mauritius can feel pretty safe in their jobs. Reserves position The gross external reserves of the Bank increased by more than 23 per cent since December 2008 and stood at nearly Rs70 billion in December 2009, while the net international reserves exceeded the Rs100 billion mark for the first time in November 2009 and represented nearly 43 weeks’ imports. While the Bank pursued its strategy of investing in higher-yielding instruments, it also reviewed its investment policy to increase concentration in near-cash instruments to respond to the crisis. In addition, the Bank purchased two metric tons of gold under the limited gold sales programme of the IMF in November 2009 to diversify our portfolio of foreign assets and mitigate the impact of currency volatility. This more than doubled the Bank’s gold holding from 2.34 per cent to 5.69 per cent of total foreign exchange reserves as at 13 November 2009. Monetary policy We achieved major success in our efforts to maintain price stability. Inflationary pressures abated considerably in 2009. The Bank conducted a counter-cyclical monetary policy in the year with a view to cushioning our economy from the fall-out of the crisis. At the close of the year, the headline inflation rate was 2.5 per cent, a level not seen for 18 years. I would like to underline that our commitment and success in preserving price stability has been mirrored in anchoring inflationary expectations, as shown by our own fifth Inflation Expectations Survey, results of which have been released on the Bank’s website and confirmed in a survey conducted by a local consultancy firm (published in a local daily on 13 January 2010). Our monetary policy stance has been commended by the last IMF Article IV mission of October 2009 which considered our “hybrid system of inflation targeting” as worthy of emulation by other similarly-placed economies. Without any false sense of modesty, I can assert that such high-level praise, unprecedented in the annals of the Bank, reflects very well on the colleagues who helped me to deliver on this core part of our mandate. I foresee that managing imported inflation will be our major challenge for monetary policy this year. Domestic foreign exchange market The domestic foreign exchange situation remained relatively comfortable for most of 2009. The forex market was able to function without undue volatility and required no intervention on the part of the Bank. This was in line with our policy of allowing the free play of market forces to determine the exchange value of the rupee and we have not intervened on the market since November 2008 – another record! I was pleased when the IMF offered to reclassify us from a “managed floater” to a “free floater”, thereby placing us in the same league as top-notch economies of the likes of the US and the UK. The rupee exchange rate index, MERI1 and MERI2, which the Bank rolled out in 2008, declined steadily since May last year indicating an appreciation of the rupee. At the end of the year, the build-up of supply pressures arising from reduced demand from importers contributed to an acceleration in the appreciation of the rupee against major currencies. The strong rupee was definitely benefiting the consumer in our import-dependent economy but export-oriented enterprises and the tourism sector began to feel the pinch and murmurs of impending massive layoffs became louder. We also observed that the volume of transactions in the foreign exchange market was on the low side compared to the same period in the previous year as forex sellers began to hoard their currency. We actively engaged in discussions with the Treasury, the Mauritius Bankers Association, the Mauritius Exporters’ Association and the Association des Hôteliers et Restaurateurs de L’Ile Maurice to come up with a win-win solution that would neither distort the forex market – nor, for that matter, worsen the excess rupee liquidity which we have also had to reckon with for much of the year. We thus devised a made-to-measure mechanism in the form of short-term foreign currency swaps which we introduced just before Christmas to inject liquidity in the market, thereby avoiding the uncertainties that could have had financial stability implications, while also offering the option of T-Bills on tap to mop up any resulting excess rupee liquidity. Banking sector Performance Our banking sector emerged virtually unscathed from the global financial crisis. While bank failures made the headlines in other countries, our banks weathered these difficult times without any systemic or institutional failures. Banking sector assets declined very slightly by 0.4 per cent while banking deposits increased by 2.1 per cent between December 2008 and December 2009. There were no visible signs of credit constraint, as advances increased by 3.2 per cent over the same period. Overall profitability continued at satisfactory levels with a healthy year-on-year growth of 11.3 per cent posted for the year ended 30 June 2009. Our two major domestic banks recorded remarkable profit levels during the past financial year. This is, in my view, a great accomplishment and speaks volumes for the state of our banking industry and for the resilience of the real sector in our country. I cannot keep mum on the recent “downgrading” of our two major domestic banks by the rating agency Moody’s. This is a sore point indeed for our banking sector as the “downgrade” was a result of an internal change of methodology at Moody’s and was not attributable to any problems with the banks concerned. The downgrade of our two major banks came at an unfortunate time and could have unduly penalised us as we strove to come up with the right fiscal and monetary policies to cushion our small and vulnerable economy from the fallout of the global financial crisis. Such actions by rating agencies make us question even more their credibility and the reliability of their ratings. Regulation and supervision I believe that the banking sector resisted so well in the face of the crisis partly because, as it unfolded, we stepped up our policymaking and took pre-emptive measures even before the waves hit our shores. Although our financial institutions were already subject to rigorous supervision, we intensified our surveillance to ensure that toxic fumes did not choke up our system. Then, as now, we closely followed developments elsewhere to provide the best and most suitable regulations for our banking system. We do not believe that there is any need for a complete overhaul of the supervisory and regulatory framework here in Mauritius, however critical this may be for some of the developed economies. What we need is some tweaking and fine-tuning – as, indeed, we have been doing continuously in consultation with the industry and other stakeholders. Islamic banking The series of small but decisive steps we have been taking to implement Islamic banking in Mauritius began to bear fruit last year. We started with the organisation of an International Seminar on Islamic Capital Markets jointly with the Islamic Financial Services Board (IFSB) and with the local collaboration of the Financial Services Commission. Discussions for the Bank of Mauritius to become a full member of IFSB which started there culminated with the Bank acquiring full membership in October 2009. The Bank of Mauritius joins the Monetary Authority of Singapore as the only central banks from non-Islamic countries on the IFSB Council. I see this adhesion to the top-league of IFSB membership as a confidence-boosting move to provide a supportive environment for Islamic financial services to take root in Mauritius. The legal amendments having been made, the Bank is working with other central banks, including Bank Negara Malaysia, for the issue of an international sukuk bond. This will attract investors from a wider geographic base, lead to finer terms and open new avenues for our economic development. Public debt management As the agency responsible for managing Government Debt and for auctioning domestic public debt instruments, the Bank took a number of measures to discharge this function more effectively: We introduced an on-line auctioning system in February 2009 to modernise the system and reduce its labour-intensive nature. We lengthened the maturity profile of Government Debt. More instruments are now available for investment – Treasury Bills of 91-day, 182-day and 364-day maturities, Treasury Notes of 2-year, 3-year and 4-year tenors, and bonds of various maturities ranging from 5-years to 20-years, including inflation-linked bonds. We set up a Debt Management Committee and a Joint Working Group, comprising representatives of the Bank and the Ministry of Finance and Economic Empowerment, to formulate and implement Government’s Debt Management Strategy, along the lines of the recommendations of the World Bank. We also initiated work at the Bank relating to a major review of Government’s medium-term debt strategy to include benchmarks and targets for the overall debt portfolio, based on cost- and risk-analysis to optimize both the composition and tenor of the debt portfolio. Yield curve There were two notable developments with respect to the yield curve which I must mention. The yield curve shifted well below the levels of December 2008 and December 2007 and steepened significantly at the shorter end by December 2009. Payments and settlement system Modernisation of the system I was impelled by a strong motivation to upgrade and modernise the payments and settlement system of the country and benchmark it with international standards. A modern payments and settlement system is indispensable for the efficient flow of payments for goods, services and financial assets. Its smooth functioning is crucial for the effective implementation of the central bank’s monetary policy and for maintaining financial stability. An efficient payments and settlement system can become a source of competitive advantage and enhance our competitiveness as an international financial centre. In my last letter, I had already mentioned the various projects on which we had embarked. I have unfortunately encountered unexpected roadblocks in the articulation of my vision for the Mauritian financial system and its internationalisation. However, I must express my gratitude to the banking community which showed dedication by their contribution to the modernisation of this public good. Regional payments and settlement system I would like to share with you one achievement in which I take much pride. The Bank of Mauritius was chosen as settlement bank for the Regional Payments and Settlement System (REPSS) of the COMESA Clearing House against prestigious contestants including the Federal Reserve of New York. Just think of the enormous potential of a regional group like the COMESA with its combined market access of more than 415 million people and intraregional trade reaching over US$15 billion in 2008 – and compare it with our 1.2 million population and our US$8.5 billion GDP – and you can appreciate the sheer enormity of this achievement. The home-grown payment system will offer faster settlement of payments and is expected to reduce the cost of payments in intra-regional transactions by more than 50 per cent. Each member-state will thus have cheaper access to bigger markets. What a boost this will give to trade within the region! Over and above the incontestable benefits to trade within the region, I believe that the REPSS represents a springboard from which we can take the final leap to an African Monetary Union, while also allowing us to nurture some hope of playing a bigger role than our size would warrant in the African Community financial institutions and mechanisms that may be set up to buttress this Union. Mauritius Credit Information Bureau Recent press reports on the alleged over-indebtedness of the Mauritian population prompt me to highlight the key role that the Mauritius Credit Information Bureau (MCIB) plays in credit risk management. The enhanced credit information environment created by the MCIB has been a significant factor behind the lower non-performing loans in the banking system. We are extending the coverage of the MCIB to credit-offering institutions other than banks. Eleven leasing companies and the Mauritius Housing Company Ltd, a leading state-owned home mortgage provider, joined the MCIB in May 2009. Insurance companies, the Development Bank of Mauritius Ltd, – a state agency providing term-loans and which, despite its name, is not a bank regulated by the Bank of Mauritius and does not fall under the Banking Act, – the Employees Welfare Fund and The Mauritius Civil Service Mutual Aid Association Ltd will be connected to the MCIB early this year. We are working on the inclusion of other credit providers such as hire-purchase companies and utility companies in the MCIB. This extended coverage will give a more complete picture of the potential borrower’s indebtedness. The MCIB data base will allow us to develop appropriate policies to address the issue of over-indebtedness of vulnerable households. In fact, the issue of over-indebtedness may, in our assessment, be less severe than what some press comment would lead one to believe. Cheque truncation The Bank has embarked on the much-delayed Cheque Truncation Project jointly with commercial banks. The system, upon implementation, will provide a faster clearing cycle for cheques, help combat signature forgery and cheque alteration, while at the same time significantly reducing the cost associated with cheques clearing. Financial stability When the Bank of Mauritius Act was amended in 2004, the legislator had already provided that the Bank’s mandate should be extended to ensuring the soundness and stability of the financial system. In 2007, in fact well before the global financial crisis had unfolded putting at stake the stability of the international financial system, the Bank had anticipated rightly that a proper assessment of the risks and vulnerabilities of the financial system would be essential for ensuring its stability and soundness. I created a Financial Stability Unit to provide independent monitoring and analysis of financial stability on an on-going basis. Ancillary to this main function was the production of a Financial Stability Report on a bi-annual basis. In the light of our operating experience and in recognition of the need to inculcate a greater awareness of financial stability issues throughout the Bank, in August 2009, I decided to put in place a multi-layered structure comprising officers at various levels in other Divisions of the Bank to develop ownership so that we are better equipped to deliver on this mandate which is new to central banks around the world. Furthermore, I channelled significant resources to allow the Bank to build capacity in this area to help us fulfil this vital function more efficiently. The Bank’s balance sheet This year, the Bank’s balance sheet will reflect the full effect of the systematic and sustained cuts in interest rates by central banks in major economies, in whose currencies our investments are held or denominated. To put things into perspective, I need to go back to early 2008 when the domestic system was submerged by FDI inflows and the Bank was forced to intervene in the market to mop up the excess liquidity through the issue of Bank of Mauritius Bills in exchange for foreign exchange assets that we purchased. That is when we first felt the need for dynamic provisioning on account of the very clear “negative carry” in these transactions. Alas, our pioneering attempt to apply the dynamic provisioning approach had to be abandoned in the midst of much incomprehension and recrimination. This failure to change our accounting approach – which the Bank of Mauritius Act allows – left me with a feeling of deep regret because I sincerely believe that the Bank missed a golden opportunity to break new ground. Our balance sheet would have been in much healthier shape today. I intend to pursue consultations with the Treasury this year as I firmly believe that dynamic provisioning would allow us to provide for “rainy days” in times of plenty. Instead of dipping into our reserves, I feel that we should adopt a more conservative approach to keeping the books instead of slavishly adhering to standards which are anyway more applicable to commercial banks than to a central bank with a very different balance sheet structure. Regional and international presence The year 2009 saw the Bank playing a very active role at the regional and international level. We participated in various regional and international fora, namely the SADC Committee of Central Bank Governors, the meeting of Governors of the Association of African Central Banks as well as its Eastern African Sub-Regional chapter and the Commonwealth Central Bank Governors Meeting which I had the honour to chair, and whose report I presented to the Commonwealth Ministers of Finance Meeting in Cyprus. We were also closely involved in discussions at various fora convened to consider the African response to the crisis. We made our contribution to de-stigmatising access to Fund resources for countries like ours with an appropriate underlying policy framework in the event of crisis-induced balance of payments difficulties – a scenario that was very much on the cards in the first semester of the year. The situation improved rapidly thereafter and we could discard preliminary plans to draw on the IMF’s Flexible Line of Credit which, coming as it did without any ex-ante conditionality, was tailor-made to meet our kind of requirement. A lot has been said in some quarters about the travels of senior management including myself, to international meetings and conferences. Globalisation and the internationalisation of our banking sector require the central bank to enhance its role in professional, regional and international conclaves – just as we have sought to lend additional credibility to our Monetary Policy Committee by resorting at considerable cost to the services of two international professionals of repute as its members. At a time when there is re-thinking and re-modeling of the global financial architecture, I believe that participation of our central bank in such fora is a matter of strategic importance to ensure that Mauritius is on the world map. Now, more than ever, the “little-Mauritius” isolationist islander reflex will do a disservice to our national ambition. For the sake of transparency, I am providing, as in previous years, details on all my overseas engagements as well as those of my First Deputy Governor, Second Deputy Governor, and Chief Economist. COMESA Committee of Central Bank Governors We hosted the 14th Meeting of the COMESA Committee of Central Bank Governors during which we had the honour of welcoming Governors and their representatives to Mauritius. I raised the profile of the COMESA meeting by inviting two key speakers to make presentations on (i) “The evolving structure and role of Monetary Policy Committees” by a member of the Kenya Monetary Policy Committee and (ii) “Issues of Governance in Central Banks” by Mr Gavin Bingham, Secretary-General of the Central Bank Governance Forum at the Bank for International Settlements, often called the central bank of central banks. I also invited two private sector operators to make presentations to Governors on a currency/commodity trading platform and secure cash conveyance. These initiatives by the Bank – unprecedented in the history of the COMESA Committee of Governors – were so highly appreciated that the Committee decided to create space at its future meetings for invited speakers and private sector participants to address issues of direct interest to central bank Governors. At this 14th meeting, the Bank assumed the chairmanship of this key COMESA Committee, which I see as an opportunity for us to become more involved in taking forward the calendar of regional integration to which the Bank is deeply committed. The dynamism with which the Bank has gone regional, heightened our visibility on the international front and has earned us much respect. I am grateful for the support which COMESA Governors lent to our successful candidature to host AFRITAC (South), one of the two new African Technical Assistance Centres which the IMF is establishing in Africa, in the face of strong regional contenders. We shall soon begin work on refurbishing the old Bank building to house this facility. I am also happy to record that an increasing number of central banks in the region are sending their Officers on attachment to the Bank to learn from our experience in various areas of central bank operations. Surely, we must be doing a few things right! Dialogue with our stakeholders A distinguishing feature of last year was the heightened consultation and collaboration with all our stakeholders. This enhanced interaction was reflected in the long consultation process through which our regulatory and supervisory guidelines pass before being finalised and issued to the industry. Another egregious instance where we reach out to a wider community to inform and enrich our proposed policy moves is the pre-Monetary Policy Committee consultation process which I have initiated and where Chatham House rules are scrupulously followed. Representatives of major sectors of the economy and opinion leaders are invited in their personal capacity to the pre-MPC meetings to express their views. We have a schedule of regular meetings with the banks which we regulate and with other financial and nonfinancial institutions. We extended our network of regulators with whom we have Memoranda of Understanding to include institutions such as the Central Statistics Office, the Financial Intelligence Unit and the Mauritius Revenue Authority, because we firmly believe that we must work jointly to advance the common agenda of the Government. We hosted the Annual Dinner in honour of Economic Operators in December 2009 which gave us the opportunity not only to share with them some of our concerns but also to celebrate our fruitful collaboration with them all the year through. We were honoured by the presence of His Excellency Tito Mboweni, who had just retired as Governor of the South African Reserve Bank (SARB). He shared with us his rich experience at the helm of SARB. These illustrate the new orientation that the Bank has taken during the last two years. We remain firmly committed to pursue our dialogue and deepen our interaction with all stakeholders for the betterment of the industry and the country. Lest we forget, central banking is all about the public good and advancing public interest, as opposed to any specific narrow sectoral interest. Bank’s publications The Bank publishes several monthly, six-monthly and yearly reports. For the second year running, we published an advance release calendar of statistical publications and we have ensured that this calendar was adhered to, with the frequency of statistical data releases on our website ranging from weekly and fortnightly to the more traditional monthly and yearly ones, as we gear up to graduate to the IMF’S SDDS. I strongly advocate greater transparency with respect to the functioning of the Bank and for the first time in the Bank’s Annual Report, we have provided some metrics on meetings of the Board of the Bank and of the Monetary Policy Committee. Governor Tito Mboweni commended the Bank for what he termed “the wealth of information” contained in our Annual Report. The last two additions to the Bank’s list of publications, the Inflation Report and the Financial Stability Report have now run through three issues each. Capacity building and financial education The Bank has invested heavily in its human resources over the last few years. We have built capacity in policymaking and other technical areas directly related to central banking such as economic modeling, bank regulation, financial stability, risk management etc. The Bank will continue to build capacity in these areas. However, we now need to complement our growing technical knowledge to make the Bank more effective by providing training opportunities in leadership, team-building, management skills and talent management among others. There will also be study visits to other central banks with respect to cash management, currency handling, security and maintenance of the building, an area which I consider important now that we are housed in an intelligent building. We expect to boost up our financial literacy programme in 2010 as good policymaking requires that economic agents understand well the why’s and the how’s of the Bank’s policies. We also propose to launch an educational programme on the need to “Save for a better future”, aimed at disseminating knowledge on financial products and helping households to better manage their income. Platinum commemorative coin I am proud that last year, the Bank joined the exclusive league of central banks which have issued a platinum coin. We went one step further. We inaugurated a series of three platinum coins – one was issued last year and the other two will be launched this year and in 2011. The coin pays a fitting tribute to Sir Seewoosagur Ramgoolam, our first Prime Minister, and subsequently Governor-General, and fondly remembered by one and all as the “Father of the Nation”. This platinum series has enhanced the Bank’s collection of commemorative and special coins, which is now more visible and accessible to collectors and the public in general through greater promotion on our part. Overall assessment of the year 2009 These are some of the highlights of our activities at the Bank in the past year. I must admit that the year gone by was also marked by some avoidable events which we would prefer to forget. There were some distractions and turbulences which we weathered by fastening our seatbelts and remaining resolutely focused on our priorities. Unfortunately, we made local headlines for reasons which were not directly related to the core functions of the Bank, that is maintaining price stability and promoting orderly and balanced economic development. It saddened me terribly that the steep decline in inflation, our well-calibrated monetary policy stance, our prudent and judicious management of our foreign exchange reserves, and our exchange rate framework so well-suited to the needs of the economy, did not elicit any remotely-comparable press coverage. I am happy, however, that international institutions such as the International Monetary Fund gave us the pat on the shoulder which we so badly needed to stay on course. As I have mentioned time and again, the unhappy situation which prevailed in the Boardroom traces its origin in a conflicting interpretation of the role and responsibilities of the Bank’s executive management and its Board. I am hopeful we shall see the end of this unnecessary tussle, now that the matter has been referred to the Supreme Court as a by-product of a case where a Bank employee is suing the Bank as his employer. On 14 February 2007, the Prime Minister placed his confidence in my ability to head the central bank of the country. And, on his recommendation, the President appointed me as Governor and Chairman of the Board of the Bank for a specified term. I have made every effort to fulfil the duties devolving on me under the Bank of Mauritius Act to the best of my ability. I hope I have given satisfaction to my appointing authority and to all stakeholders. In this year when many Central Bank Governors from Argentina to Zimbabwe have faced a barrage of criticism, I have not been spared. But I understand that even my worst critics have admitted that my professional work does not occasion criticism although many decry my “bedside manners”. With hindsight, I look back at the past three years with a sense of accomplishment. But I also have a few regrets. Under my stewardship, the Bank has been endowed with a new structure that allows it to function more effectively but, unfortunately, we have been unable to provide the staff with the kind of remuneration package that would align their level of responsibilities and performance with their pay packet. This constitutes a major setback for me as I firmly believe that the productivity-related pay, by which I set much store, would have propelled the Bank to new heights in terms of the quality of staff that we would have been able to recruit and retain. I am, however, determined to ensure that the unfinished agenda, to the extent it is in the hands of the executive management, is taken to its logical conclusion, and I am confident of resolving all other issues in the best interest of the institution and the economy. Dear Stakeholders, as I conclude this letter to you on what I believe are some of the highlights of the year just gone by, may I leave you with a question to reflect upon? In the storm-tossed seas buffeting the global economy in the wake of the worst crisis that the world has seen since the Great Depression, don’t you find it remarkable that our small, open and vulnerable island-economy has been a haven of such incomparable stability- exchange rate stability, financial stability, monetary stability, price stability, employment stability and social stability? This happy outcome was neither serendipity nor happenstance. Our Bank contributed to it. And I am proud to have led the Bank in these troubled, testing and turbulent times. I wish you a happy and prosperous 2010. | bank of mauritius | 2,010 | 2 |
Statement by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, in the Bank of Mauritius Annual Report 2009-10 transmitted to the Vice-Prime Minister, Minister of Finance and Economic Development on 29 October 2010, Port Louis, 12 November 2010. | Rundheersing Bheenick: Surfing the second wave of the crisis and major developments in the banking and financial landscape of Mauritius Statement by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, in the Bank of Mauritius Annual Report 2009–10 transmitted to the Vice-Prime Minister, Minister of Finance and Economic Development on 29 October 2010, Port Louis, 12 November 2010. * * * What a challenging and eventful year it has been! From my vantage point at the helm of the Central Bank during these stressful and extraordinary times, there is so much to say. But, confined by space, let me stick to the pattern of my previous Statements, briefly recapture highlights of the year in review, touch on the present outlook and share my thoughts on the very uncertain future that lies ahead. The world economy in perspective The global context exerted a determining influence on our small open economy and heightened our vulnerability to external shocks, originating far from our shores. Governments in developed economies and their central banks responded to the global crisis, the worst since the Great Depression of the 1930’s, by resorting to unconventional measures and embarking on fundamental financial sector reforms. International financial institutions, and their governing bodies, having failed to be pro-active in anticipating and circumscribing the initial crisis, reacted with a plethora of initiatives while the economics profession, never a model of unity, polarised into opposing camps, with neoKeynesians plugging the virtues of fiscal stimulus and monetary easing pitched against “austerians” sounding dire warnings about fiscal profligacy and debt sustainability, even as all agreed on the need to dump failing hypotheses on the efficiency of markets and the faulty models that had brought the world to the edge of financial Armageddon. When the global economy showed signs of a gradual recovery in the second half of 2009, economists generally agreed that we had seen the worst of the crisis until the timid recovery hit another zone of turbulence in May 2010 with Europe’s Sovereign Debt crisis. The Euro 750 billion package, assembled by the European Union and the International Monetary Fund, the austerity plans as well as the results of the European banking sector stress tests which indicated that the banking sector was in better shape than feared, appeased some of the worst fears and restored some calm on nervous markets. As I write this Statement, the world economy is showing visible signs of recovery, with greater momentum coming from emerging-market economies. The exceptional stimulus from monetary and fiscal policies continues to prop up economic activity. There is growing concern that the recovery in the major advanced economies may stall as balance sheets are adjusted and the stimulus packages gradually withdrawn. As public debt, fiscal deficits and unemployment surge turning developed economies into “submerging economies”, fears of a double-dip recession and of a Japanese-style deflation exercise the minds of policy-makers. Considerable risks and policy challenges remain and central banks find themselves with a greater role in promoting financial stability and systemic oversight. On the home front Mauritius has faced formidable economic challenges this last year. Given our openness, we had very little lead time to respond to global challenges as they unfurled and this kept us on our toes all year round. As the Central Bank of the country, our role has probably never been more intense and our focus on macroeconomic issues never sharper. The challenge of maintaining a credible currency amidst difficult global conditions, coupled with the need to nurture the nascent signs of recovery of our economy, kept us on high alert. My first term of office as Governor expired in February 2010 and I was entrusted a new mandate late in May 2010. In the interval, the country went through general elections, a feverish moment for our vibrant democracy, and our export-oriented enterprises were buffeted by the Euro crisis. Our vulnerability is such that it suffices for a European butterfly to flap its wings for the Mauritian export sector to be ablaze. In the days preceding my return to the Bank of Mauritius, not a single day passed by without the Euro crisis making headlines in the local press. The speed and virulence of the crisis caused much distress to our textile companies which suffered severe export revenue declines, igniting calls for a quick fix via currency depreciation failing which, it was claimed, they would have to envisage leaner structures and significant lay-offs to remain in business. I was very much alive to the potential dangers of this crisis for our export-driven sector and could not be oblivious to its ripple effects on the rest of the economy. During the first week that I was back in office, this issue monopolised the agenda. I intensified dialogue with private/real sector stakeholders, to assuage their fears on this latest and most direct threat to our economic prospects, the more so that the Euro crisis was coming on the heels of the global financial crisis from which we were still reeling. It required a good dose of persuasion to appease markets and restore confidence. In December 2009, we had introduced a Short Term Foreign Currency Swap facility for the benefit of operators in the export and tourism sectors to reactivate the domestic foreign exchange market in the face of declining volumes of transactions. From December 2009 to June 2010, we conducted swaps for a total of USD89.2 million, or approximately Rs2.7 billion – a clear indication of the providential nature of this measure. Apart from our export worries which caused us sleepless nights, the crisis was also an opportunity for Mauritians to show their mettle and for our economy to display unusual resilience as we played to our strength – a quick and flexible policy response capacity, anchored in social cohesion and consensus. We can safely say that Mauritius has weathered the first wave of the global crisis quite well. Our timely policy response helped lower domestic inflation, shore up employment, avert an economic crisis and fight off the spectre of recession. Well-timed and concerted measures by the Bank and the Treasury were instrumental in keeping the economy on track. International institutions, including the International Monetary Fund (IMF), and other observers commended the economic performance of Mauritius and even cited us as an example of resilience during the crisis. Growth remained positive at 3.1 per cent in 2009 and is forecast at 4.2 per cent in 2010. Even as we remain cautiously optimistic about the future, we cannot escape the conclusion that the depressed growth prospects of our traditional export markets call for a strategic review of our export priorities in a world where the balance of economic power may be rapidly shifting. The new modern global configuration with its deeply-woven interdependence is such that imported contagion and domino effects will always represent challenges for small open economies like ours. It has become imperative to develop a framework for Contagion Management to trigger the alarm at the least indication of distress in the economy. Highlights of last financial year From the kaleidoscope of events which have marked the year, let me focus on a few chosen scenes. Performance of the banking sector – Our banking sector remained in good shape, and showed commendable resilience, due mainly to our prudent regulatory and supervisory framework. Although the growth of 1.8 per cent in total assets recorded by the sector in the period under review did not match the performance of 10.9 per cent in the preceding year, it should still be considered quite robust, viewed against the backdrop of the gradual recovery of the global economy from the economic crisis and the sorry state of banking and finance in major economies. – We did not relent in strengthening our regulatory and supervisory framework. We enhanced existing guidelines, e.g. on liquidity risk management, released new guidelines on country risk management, and finalised work on guidelines relating to fair valuation of financial instruments. All three pillars of the Basel II Capital Adequacy Framework have now been put in place with the issue of the Guideline on the Supervisory Review Process. – We admitted new players in the banking sector and, in my next Statement, I hope to report on our new full-fledged Sharia-compliant banks as they start operations later this year. – Preliminary work on the setting up a Deposit Insurance Scheme in Mauritius was initiated in consultation with the banks. I hope to elaborate further on progress in this area in our next Report. – Savings mobilization continues to be an area where I feel that more effort is needed. We will relentlessly pursue efforts to improve the savings rate, to induce our citizens to save for the proverbial rainy day and to reduce our dependence on external financing. Monetary policy – At the core of the central bank, our Monetary Policy Committee (MPC) helped us to fulfill our mission of maintaining price stability. – In the light of the conditions prevailing during FY 09/10, the MPC, which had reduced the key Repo Rate by 100 basis points in March 2009, considered it more appropriate to leave it unchanged at 5.75 per cent all through the five meetings convened from June 2009 to June 2010. – I am happy to record that our monetary policy stance succeeded in maintaining price stability. The headline inflation rate which stood at 6.1 per cent in July 2009 declined steadily to 1.7 per cent in June 2010, which was low by historical standards. – I take the opportunity here to express my appreciation to our two foreign Members, Prof Stefan Gerlach and Mario Blejer, whose extensive experience have greatly benefited the debate and enhanced the decision-making process at MPC meetings during these trying moments. Exchange rate developments – We can proudly say that we have been successful in maintaining monetary and financial stability in spite of uncertain and unusually volatile conditions. – Despite sustained criticism from certain quarters, we remained steadfast in our duty to conduct exchange rate policy in the wider national interest. We felt vindicated when the IMF validated the monetary and exchange rate framework used by the Bank as being well-suited to the needs of the Mauritian economy. The last IMF Article IV mission of October 2009 commended our monetary and exchange rate policy framework, which they qualified as a “hybrid system of inflation targeting”. The – Against the backdrop of high uncertainty in global financial markets, the rupee behaved well and, on a real effective basis, the rupee recorded a slight appreciation of 0.5 per cent over FY 09/10. We are satisfied that our free-float exchange rate regime worked well. – Our close monitoring of the domestic foreign exchange market indicated that it was not functioning in a satisfactory manner during mid-May 2010. We had reason to suspect that there might have been some domestic currency manipulation in the wake of the Euro crisis. In such an environment when the rupee was being talked down, adding fuel to domestic uncertainty in a thin forex market, we thought it proper to probe further. We enlisted the services of a forensic consultancy firm to conduct a review. – As we took these bold steps, exchange rate volatility subsided and the market returned to a fairly normal pattern, aided in this by our decision to meet the currency requirements of the State Trading Corporation, the largest local forex buyer. Open market operations Our money market remained liquid throughout FY 09/10. The build-up of excess liquidity towards the end of 2009 accentuated downward pressure on money market rates. We thus raised the minimum Cash Ratio by 0.5 percentage point in June 2010 and, despite severe balance sheet constraints, we undertook a series of open market operations, namely special deposits, reverse repo transactions, and the issue of Bank of Mauritius Bills, in an attempt to normalize liquidity conditions. Bank’s balance sheet Traditionally, the Bank has been very conservative in managing its foreign exchange reserves. Our foreign reserves are mainly invested with major central banks. – In the wake of the global crisis, these central banks systematically reduced the rate of interest payable on deposits. We suffered a drastic decline in our income derived from interest on foreign investments and this severely affected our profitability. Our operating profit for FY 09/10 has nosedived to Rs72.4 million, compared with Rs1.4 billion in the previous year. – This development only served to place in sharper focus the concern which I had expressed when times were better over the state of the Bank’s balance sheet and the severe constraints this might place on our ability to conduct monetary policy. It will be recalled that I had advocated dynamic provisioning during the last financial year. Dynamic provisioning is forward-looking and consists inter alia in making provisions out of profits in good times to meet expected losses in future years. It is an approach that is increasingly favoured by many central banks to finance open market operations. I am somewhat dismayed that our balance sheet has borne the predictable consequences and registered a significant hit during the year in review because my call went unheeded. – However, the current state of our balance sheet has strengthened my resolve to press for the early adoption of dynamic provisioning to preserve the integrity of the Central Bank’s balance sheet – to emulate the farsighted and hardworking Ant preparing for wintry times and not the laid-back Grasshopper enjoying the country’s sun and sand, to paraphrase Aesop slightly. Foreign exchange reserves management Last year we announced a review of our Foreign Exchange Reserves Management Strategy along with peer reviews conducted by the Bank for International Settlements (BIS) and the Reserves Advisory and Management Program of the World Bank’s Sovereign Investments Partnership (SIP). – We completed our review exercise and decided to entrust a fresh mandate for euro instruments to the BIS and a new mandate to the SIP. These arrangements still awaited finalisation at the time of writing. Purchase of gold We purchased two metric tons of gold from the IMF in November 2009 under the Fund’s Limited Gold Sales Programme to diversify our portfolio of foreign assets and to mitigate the impact of currency volatility. Our holdings of gold, as a percentage of the Bank’s total foreign exchange reserves, rose from 2.3 per cent to around 6 per cent after the purchase. Net international reserves The net international reserves of the country breached the Rs100 billion-mark for the first time in November 2009. Gross official international reserves stood at USD2.2 billion at end-June 2010. Our net international reserves represented roughly 48 weeks’ import cover – more than adequate to meet unexpected short-term external shocks. Public debt management Now that we have taken over debt management functions from the Government, we want to promote the development of an active secondary market for government securities in order to generate a yield curve that could be used as a reference for the pricing of corporate bonds. The Bank has started issuing benchmark Government of Mauritius bonds as well as auctioning single maturity instruments for the medium and long term. – We have also embarked on a project to modernise and streamline the auction process. The on-line auctioning system which is being run on a pilot basis is expected to go live this year, while the review of the primary dealers system is on course. Financial stability Let us rewind a little in time: an economic crisis surfaces, a financial institution – little-known beyond financial circles – fails, triggering a string of counterparty defaults across financial systems. The shock ripples across oceans and rapidly spreads globally. The contagion spreads at epidemic rates, threatening market functioning and financial stability – and the blame game begins. It was perhaps inevitable that central banks and regulators would be blamed after the crisis for having had a narrow and segmented vision of their mandate. – Financial Stability moved centre stage for central banks and became the main item on the agenda at Governors’ Meetings. – At the Bank, we embraced this new role well before it became fashionable. I set up a Financial Stability Unit at the Bank three years ago to identify vulnerabilities and risks in the system and develop tools and policies to incorporate financial stability in our policy framework. We introduced semi-annual Financial Stability Reports. – The domestic economic landscape is characterised by concentration of economic power, with a web of companies and local conglomerates operating across different sectors, and relatively large complex financial institutions. These raise a host of Payments system We modernised our payments infrastructure by switching to new-generation software for the Mauritius Automated Clearing and Settlement System. – Real-time interbank payments can be made in three major foreign currencies, the US dollar, the pound sterling and the euro, in addition to the Mauritian rupee – a première in Africa. – Central banks in the region are avid for placements and visits to study our payments and settlement system. The Bank thus hosted delegations from the central banks of Kenya, Rwanda, Uganda, Ethiopia, Seychelles and Nigeria during the year. Mauritius Credit Information Bureau We have extended the coverage of the Mauritius Credit Information Bureau to have a complete picture of the problem of multi-borrowing and over-indebtedness in the country. Memorandum of Understanding We extended our network of Memoranda of Understanding with other institutions, namely with the Financial Intelligence Unit and the Mauritius Revenue Authority, in an effort to combat money laundering and terrorist financing and fiscal evasion. By the end of the review period, we were at an advanced stage of discussion with the Competition Commission of Mauritius. Regional cooperation We hosted the 14th Meeting of the COMESA Committee of Governors of Central Banks in October 2009. The chairmanship of the COMESA Committee of Governors of Central Banks passed to the Bank of Mauritius. – To mark the event, we invited two renowned speakers to make presentations on two issues of critical importance for central bank Governors – “The evolving structure and role of Monetary Policy Committees” and “Issues of Governance in Central Banks”. This initiative to invite external parties to meetings of Governors was so well received and appreciated that the COMESA Committee decided that it would become a permanent feature in future meetings. – We marked our presence in regional and international fora and participated actively in the SADC Committee of Central Bank Governors, the meeting of Governors of the Association of African Central Banks and the Commonwealth Central Bank Governors Meeting, which I had the honour of chairing. Extending regional footprint The dynamism, with which the Bank has gone regional, has heightened our visibility on the international front and has earned us much respect. With the support of COMESA Governors, our country was successful in its candidature to host AFRITAC (South), one of the two new African Technical Assistance Centres which the IMF is establishing in Africa, in the face of strong regional contenders. – The Bank offered to house AFRITAC (South) on one of the floors of the old Bank of Mauritius Building which would be refurbished for the purpose. Membership of Islamic Financial Services Board During the year, we moved from being an Associate Member to full membership of the Board, with a seat on the Governing Council of the Islamic Financial Services Board (IFSB). – To support our plans to develop Islamic banking and finance in Mauritius, we joined IFSB initiatives to develop Islamic liquidity management instruments with other participating countries. We participated fully in the preparatory work for the launch of a Special Purpose Vehicle and envisage participation in its share capital. Bank’s admission to the Irving Fisher Committee We were admitted as a full institutional member of the Irving Fisher Committee (IFC) on Central Bank Statistics. Mauritius is the second country in sub-Saharan Africa, after South Africa, to become a full institutional member of the IFC, which has a total of 66 members. – Our membership of the IFC comes at a time when our efforts are currently being directed towards improving the coverage and quality of our data to enable us to graduate to the Special Data Dissemination Standards of the IMF. Platinum commemorative coin Mauritius joined the select list of countries that have issued platinum coinage. Three beautifully-crafted platinum coins constitute the “Father of the Nation” Platinum Series. The first coin was launched on 30 October 2009 by Dr the Honourable Navinchandra Ramgoolam, our Prime Minister. The second coin in the series will be launched later this year. Training The financial turmoil undeniably posed new challenges for central banks and imposed new demands and new burdens on them. The leadership of central banks are under pressure to ensure that their institution is equipped to deal with the challenges which this crisis brought – and ready to face the next one. – We put a lot of emphasis on training our key staff, expose them to new thinking and raise their professional competence and skills to enable them to deal with a rapidly-changing external environment. – In the course of the year, our Staff members benefited from 124 training opportunities in different areas of central banking from reserve management to talent building, an increase of 33 per cent on the previous year. – The credibility of our central bank rests on the quality of its Staff, its work culture and its leadership abilities. I wish here to thank the Governor of the South African Reserve Bank (SARB) who has graciously agreed to assist us in our endeavour to enhance the skills-set of our middle management with a dedicated programme on effective leadership and executive management. We were also delighted to have had the Honourable Tito Mboweni, former Governor of SARB, as a special guest to our Annual Dinner in honour of Economic Operators in December 2009. Salary review and staff matters In August 2009, a Report on the Review of Salary and Terms and Conditions of Service was implemented, following a majority decision (mostly external directors) of the Board of Directors of the Bank, with the Governor, the First Deputy Governor, and Me Kader Bhayat, external Director, dissenting. – This Report was commissioned by the Board after an earlier report by the Hay Group, a well-known pay and remuneration consultancy selected by the Bank after an open competitive tender, was rejected in toto by the Board. It followed the first report from the consultant proposed by the Board, which the Board also found unacceptable. The second report of the consultant was prepared along lines acceptable to the Board. – This last report was based on the organisation structure prevailing before the 2007 restructuring exercise. Predictably, its implementation led to much litigation in Court as well as to a string of cases before the Labour Tribunal, charging the Bank amongst others of breaching a fundamental tenet of labour law relating to “equal pay for equal work”. The Bank could have done without the strained industrial relations that resulted from this imbroglio. Following the judgment of the Supreme Court (see below), this matter is now taking a different course. The latest development at the time of writing is that the Bank has now been declared non-compliant by the Labour Tribunal. I shall come back to this in the next Report. – The introduction of new technology and new work processes – as well as the need to change the competency mix at the Bank to enable it to deliver effectively on its widening mandate – necessitated the introduction of a Voluntary Retirement Scheme. Fifteen long-serving officers of the Bank opted to proceed on early retirement under the Scheme. This will enable the Bank to recruit extra staff with a different profile without increasing our head count. – Well beyond the Salary Review exercise, it is my earnest resolve to channel more effort towards achieving operational excellence. We shall strive to align our business processes with international standards and best practices. We propose to implement a Performance Review system tagged to productivity. I believe strongly in periodically reviewing our scorecards. – We will also push for innovative approaches to manage and develop our people, fortify our management team, and continuously restructure in order to adjust to the requirements of an ever-evolving financial landscape. Landmark Supreme Court judgment and Fact Finding Committee Pursuant to an enduring feud between a majority of (external) Members of the Board of Directors of the Bank and the Executive Management, the Supreme Court delivered a significant judgment in March 2010, finding in favour of management. – The Supreme Court clarified that the Board’s statutory remit is to formulate general policy and not to be involved in the day-to-day administration of the Bank. This judgment not only helps to clearly situate responsibilities but also paves the way for much healthier deliberations in the Boardroom. – The year was also marked by the establishment of a Fact-Finding Committee, chaired by a highly-respected retired Chief Justice, Sir Victor Glover, Kt, GOSK. Coming just after the Supreme Court judgment, the report of the Fact-Finding Committee put paid to the smear campaign against the Governor and confirmed that he had acted intra vires, without any abuse of power or authority as charged by his detractors. Words of appreciation I wish to express my gratitude to Dr the Honourable Navinchandra Ramgoolam, Prime Minister, for his support and the confidence he has placed in me by entrusting me this second term of office. I also thank Honourable Pravind Kumar Jugnauth, Vice Prime Minister and Minister of Finance and Economic Development, for his support and an excellent working relationship. I am happy that we are guided by a shared commitment to serve the general good and by a common desire to build on the country’s strong fundamentals and make things better for our fellow-citizens. I extend my appreciation to the Chairman and the Chief Executive of the Mauritius Bankers Association, the Chief Executives of banks, the representatives of the various business chambers and associations and other stakeholders with whom I have a regular dialogue, and the members of the various committees and sub-committees at the Bank for their active collaboration during the past year. My sincere appreciation also goes to Mr Yandraduth Googoolye, First Deputy Governor, for his unflinching support during very difficult times. I extend a warm welcome to Mr Iqbal Belath, the new Second Deputy Governor, who assumed office in July this year. Looking forward If the past three years have taught us anything, it is that things are never static and we can never bank on the continuation of the status quo. Looking ahead, we need to continuously improve, strengthen our frameworks and re-engineer if we are to achieve greater levels of efficiency and promote financial stability. As Governor, I will ensure that as one team, we at the Bank – the Deputy Governors, the Senior Management team, and all our Staff – spare no effort in furthering the objectives of the Bank, that is improve the economic and financial well-being of all our countrymen, keep inflation well under check at low and predictable levels and participate in promoting strong, balanced, equitable and durable economic growth. | bank of mauritius | 2,010 | 11 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual Dinner in honour of Economic Operators, Port Louis, 27 November 2010. | Rundheersing Bheenick: Three sinister traps we need to face up to Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual Dinner in honour of Economic Operators, Port Louis, 27 November 2010. * * * First let me extend a warm welcome to you all here this evening at this annual dinner which the Bank hosts in honour of our economic operators. We are specially privileged to have with us, tonight, the managing director of De La Rue, one of the most historic partners, not just of the Bank but of our country. Our association goes back one and a half century. It was in 1860 that Thomas De La Rue, as the nascent company was then known, bagged their very first banknote printing contract, to supply Mauritius with three denominations. Would you believe it, they took three whole years to deliver on that first order! They must have improved on that pretty fast as they are today the world’s largest commercial printer. De La Rue is celebrating its 150th anniversary this year and we shall be screening a short video clip later to mark the occasion. The year has been one of change. The Prime Minister came back at the head of a new Government. All our banks thrived, not just survived. A new bank opens for business next month in December. Another one, an Islamic bank, is slated to begin operations in the first quarter of next year. And, just to remind, in 2010 I came back too, after a little lacuna, in which we had first, as a sequel of that little business of the street theatre, a Supreme Court judgment, followed by a judicial Enquiry, and then a new Minister of Finance. To adapt what the writer H.H. Munro, better known by his pen name Saki, said after his cook had left his service, The former minister was a good minister, but as ministers go… he went. Ah well, Sic transit Gloria mundi! If I may say, as in so many aspects of the market place, the outcome of this fiscal and monetary contretemps seems just to have followed the predictions of Newton’s third Law of motion, which you will recall, says that every action has an equal and opposite reaction. It has been, frankly, at times, a rather confusing experience, but as Alan Clarke, British diarist and former minister of defence, put it more colourfully, “If you have bright plumage, people will take pot shots at you.” That, unfortunately, is the fate of central bank governors, regularly fired upon, and occasionally just simply fired. The current Federal Reserve Chairman, the avuncular Ben Bernanke, may have created a new precedent after QE2 last month, by actually drawing fire from other governors and foreign governments. The eponymous Uncle Ben enjoys a solid reputation by guaranteeing the quality of his product, long grain rice. “Helicopter Ben”, critics allege, now flooding the world with liquidity, seems to be destroying his by becoming a serial debaser of his product, the greenback. One sad event this year was the passing of Vice-president Angidi Chettiar, who lived to a sprightly 83, even after five decades in the hurly-burly of politics. He was our Chief Guest at an event which the Bank hosted in this self-same venue to launch our 40th anniversary commemorative coin. We mourn his passing. Looking back over the past year we have much cause for satisfaction; but aren’t we just perhaps overdoing it a little? Why this sense of smug self-satisfaction? Why this palpable air of complacency engulfing us? This reflects a syndrome which we must combat for our own good. We should not gloat on our success. What Graham Greene said of his own profession, writing, is equally applicable to the economic performance of countries: “...success is always temporary, success is only a delayed failure; and it is incomplete.” Everybody tells us how well we are looking. Well done the government; well done the private sector; well done the workers; well done our bankers; well done the Press. Let us distribute satisfecits all round. I do not want to sound like a spoilsport but I want to raise the alarm. It does not suffice to be on the right track, as we undoubtedly are. We must also move fast, faster than the competition, if we are not to be run over. I venture to suggest that we are running the risk of falling into three particular traps, which await to ensnare unwary countries in our position. I call these three traps MIT, ELT and BLT, respectively. I shall turn to them in a minute. But, just to put us in a good mood for a moment, let us rehearse the good news, before we try to stomach the bad news. Our net international reserves have increased by a full third over the last three years, rising from Rs 75 billion in January 2007 and topping Rs 100 billion for the first time in November 2009. Rest assured that we took steps to reduce our exposure to the dollar, the euro and the pound sterling, which together accounted for over 97% of our portfolio in 2007. Now, this has fallen to a more prudent 70%, with our dollar and euro exposures having been reduced to 35% and 25%, respectively, from 40 and 41% previously. Our SDR allocation and gold holdings make up nearly 14% of the portfolio, the balance being commodity currencies like the Canadian, Australian and New Zealand dollars and the Japanese yen. The nominal value of that gold we controversially purchased from the IMF in November 2009, has risen by some Rs 570 million, perhaps the best investment the bank has ever made in its entire history; no wonder there is international talk about moving back to gold as a reference value, if no longer as actual backing, for paper currencies. The platinum coin we launched last year has increased 16% in terms of platinum value. The gold coin we launched here in 2007 did even better, its value increasing by 42%. That “barbarous relic of a bygone age”, as Keynes dubbed gold, has not lost its shine over the centuries and may still be pressed into monetary service! So in this initiative we are ahead of the game, brickbats notwithstanding. Our much-maligned exchange rate policy is another success story, to be celebrated, not decried. The MERI exchange rate index has been fairly stable, indicating that our policy has minimized volatility and maintained the stability of the exchange rate of the rupee. Had the Central Bank reacted, as many pressed us to do, and followed the euro in its wild gyrations, the economy would have suffered untold damage, with the poorest and most vulnerable strata of our countrymen taking the worst hits. In the course of the year, the Bank ventured boldly in two complementary directions. We spent more than Rs 11 billion to purchase the equivalent of US$ 375 million in foreign currency, partly in an attempt to contain rupee appreciation. We sold less than half of this, only US$ 156 million, to the State Trading Corporation at favourable rates in a parallel attempt to finance food and fuel imports and thus to contain the impact of exchange rate rises on consumer prices. We were criticized for both of these moves, for doing too little in the first case – where some held that we should have driven down the rupee to the point where the worst-performing exporter could break even –, and for doing too much in the second case – where others took the view that the Bank had no business selling anything to the STC, in the first place! We were somewhat vindicated when, together with a supportive monetary stance, the inflation rate tumbled from double digits not too long ago (10.8%, yearon-year in September 2008) to an all-time low of 0.1 % in October last year, although it has picked up since and stood at 3.2% in October this year. The domestic banking landscape has remained vibrant throughout, in stark contrast to the scene of distress and desolation in many other countries. While banks in much of the rest of the world are drowning in red ink, with bail-outs and nationalizations, our banks are thriving. Annual banking sector assets and banking deposits both grew by nearly 14% in Mauritius. Advances increased by over 16%. And this happened while non-performing loans declined in the past two years from 2.4% to 2.1%. Banking profits over the twelve months, ending June 2010, were running at Rs 1 billion per month. Come to think of it, that’s nearly Rs 50 million per working day. Quite an achievement for a population of less than 1.3 million, isn’t it? And that, too, when the world economy is going through its worst crisis in a generation! Little wonder, then, that the hard-pressed Minister of Finance couldn’t resist dipping deeper into that kitty. When the Chairman of the Mauritius Bankers Association reacted to what his members no doubt thought was confiscatory overreach and retorted that banks constitute an easy prey, I was reminded of the story of Mr William Sutton. The name may not be familiar to many of you as by profession he was a bank robber. He enjoyed quite a reputation in that disreputable profession. When asked by a reporter after being sentenced for the umpteenth time for the same offence: “Tell me, Willie, why do you rob banks?” “Because that’s where the money is!” was the classic reply. Sutton is probably the only bank robber in history to give his name to a law. Sutton’s Law states that in diagnosing a problem, start with the most obvious. Apart from tempting Ministers of Finance, this kind of profit level may also indicate that our banks are perhaps overly conservative and could be a little bolder in fueling the economy. The sector where the growth of bank credit recorded its worst performance has been the manufacturing sector. There was actually a negative growth in credit to the EPZ. This tight banking posture may look good in the books of the banks, but it does not bode well for economic growth and innovation. As many here will know, the G20 met earlier this month in Seoul to find ways of strengthening the global banking and financial system. Averting future crises is topmost on the agenda, neck to neck with stimulating and sustaining the recovery. The buzzword now is Basel III, whose tough capital requirements have got major international banks up in arms, lobbying furiously against the stricter provisions. Here in Mauritius, we have little to fear from Basel III as our banks are very well-capitalized. We have been proactive in this field with the imposition of a 10% capital adequacy ratio on our financial institutions, instead of the Basel II standard of 8%. On the regional front within COMESA, we scored another success with the Regional Payment and Settlement System which will be run by the Bank of Mauritius and will be aggressively promoted by all participating central banks. The COMESA Monetary Institute, which will be hosted by the Central Bank of Kenya, will become operational by January 2011. Now that is all pretty good news in anyone’s book. Hey didn’t we do well; we have survived. But where, as economic operators, is our vision beyond that? What legacy are we leaving for our children? I’m afraid the truth is, we find ourselves in a new third world of jobbing middleincome countries prone to be stuck with a future of uncertainty, volatility, and like many other SIDS, heightened economic and environmental vulnerability. As we face the coming decade, the awkward decade as yet without a name, the teenies perhaps, I fear we are likely to be overwhelmed by the three seemingly inescapable traps I mentioned earlier. MIT, ELT and BLT. Just to titillate your curiosity, MIT here does not stand for the famous seat of learning in Cambridge, Massachussets, familiar to the academic boffins. ELT has a key role in avionics and air safety where it stands for Emergency Locator Transmitter but our ELT is much less benign. As for BLT, no I was not referring to the bacon, lettuce, and tomato sandwich you had for lunch. What on earth could I mean by MIT, ELT and BLT? And why should I be so scared of them, singly or in combination? That’s enough titillation for now! Let me clarify the mysterious acronyms: MIT stands for the middle income trap; ELT is the extended life trap; and BLT is the banking liquidity trap. I hope that, by the time I resume my seat, some of you will begin to share my concern that this formidable trio packs a very powerful punch indeed, and constitutes a veritable trifecta of challenge confronting our country. This is not just my diagnosis of our current predicament. It is a recurring feature across the globe, especially common among middle-income countries. Hence the MIT label, the middle income trap. Nations from East to west, from Vietnam to Barbados, and from north to south, from Estonia to Botswana, suffer the same dilemmas. At the heart of MIT, we find the complacency which I alluded to earlier. A particularly virulent feature of MIT is the fact that those very factors that aided middle-income countries to effect the transition from low-income and underdeveloped status to their present more comfortable position in the middle income order, seem to undergo a genetic mutation and turn into factors which actually hold middleincome countries back, preventing their next transition to higher income. Educated, broad-minded and subtle government leaders, a small set of second-generation wealthy bright local business monopolies, a pool of educated but none-too-skilled workers, creaking infrastructure and utilities unable to keep pace with development, policy inertia when not downright policy paralysis, accompanied or not by flows of aid, remittances and foreign direct investment, will not facilitate the new transition. Prof Paul Collier reminded us the other day when he gave a lecture at the Bank of the tremendous pressure in slow-growing middle-income countries, which find themselves unable to keep pace with either the more dynamic developing countries fast catching up on them or the fast-growing middle-income countries getting further and further ahead of them. In the 2009 Industrial Development Report of UNIDO, Mauritius shows signs of becoming exactly such a slow-growing middle-income economy: we occupy the 55th position, far behind Malaysia (16th), Turkey (43rd), Tunisia (49th), and not that far ahead of Bangladesh at 87th position. In the “logistics performance index”, we do much worse, trailing in 132nd out of 150 countries. Something has clearly gone wrong here, don’t you think? The report offers a generic explanation. Middle-income countries that developed a niche for themselves some years ago are now facing intense competition from new lower-income countries, eager to move up the ladder to middle-income category. The dynamic ones have enhanced the diversity and sophistication of the products they produce. The laggards are competing with low-income countries for space at the bottom of the export sophistication ladder. Joining in a race to the bottom is hardly an appealing prospect. To avoid such a catastrophic outcome, we must spare no effort to reengineer, to plug the knowledge and skill gap with our Asian competitors, and do whatever it takes to restore our competitive advantage so that our exporters become once again a dynamic force of economic transformation. This calls for profound changes in the way we conduct our business; but therein lies the rub. We seem to have become deeply averse to change. To paraphrase Jean Monnet, the architect of the EU, when he observed the resistance to the formation of the European community and blind protectionism of their national interest by sovereign states in divided post-war Europe all heading for disaster: “Man has a natural instinct to resist change until it becomes a necessity, and he won’t recognise necessity until he’s faced with a crisis.” But, let’s ask ourselves, do we really need a crisis to jolt us out of the Middle Income Trap? We know we inhabit one of the most densely-populated countries in the world. We face a continued increase in population of some 5–7,000 people a year. Over the next ten years, this means an addition close to the size of the total population of the Seychelles. This increase is arising, not from increasing fertility which has been steadily declining from 2.05 to 1.5 over the last ten years, but rather from our longer life expectancy which has increased by 2 years for both males and females to stand at 69.5 and 76.6, respectively, over the same period. This is the ELT, the Extended Life Trap, the second leg of the trifecta to which I referred. It has some very serious social, economic, and financial implications, which are not selfevident. We are living longer, healthier lives and surely that is a good thing, isn’t it? Our very good performance on the Human Development Index is built on it. It is a feature we share with some advanced countries in the western world and surely that’s a good thing too! Nothing to worry about there, one would be tempted to say! Where’s the trap I’m going on about? It all boils down to a question of affordability. As baby-boomers move into a long and welldeserved retirement, the pensioner support ratio is worsening, which means there will be fewer and fewer people in employment per pensioner. The median age has risen by nearly four years in the last decade from 28.5 to 32.1 years. By 2019, our population pyramid will look more like one of the gleaming tower blocks going up all over the place and less like a pyramid. Unfunded old age pensions and universal health care providing costly high-tech medicine to a growing number of senior citizens in the last years of their life may rapidly outstrip our capacity to finance them. The recent experience of some countries such as France is there to remind us of the risks to which we expose ourselves if we do not undertake the appropriate reforms in time. The street demonstrations which followed in the wake of the French government’s attempt to extend the retirement age also explain why policy-makers are so reluctant to grasp this particular nettle. Why incur the wrath of an unbridled electorate today to tackle a problem which is building up to explode only some time in the future? The Extended Life Trap, which brings a panoply of problems relating to fiscal sustainability and intergenerational transfers, may overwhelm middle-income countries if the underlying problems remain unaddressed. Let me now come to the third component of my sinister trinity: BLT. This is the Banking Liquidity Trap. I do not need to tell an audience such as the one we have tonight of the importance of money and finance to a modern economy. With the global financial and economic crisis, there’s scarcely anybody around the country who has not been touched in one way or another by its after-effects. The problem there at the epicentre of the crisis was a credit crunch arising from a lack of liquidity in the system. The problem here is an excess of liquidity, coexisting back-to-back with a credit crunch affecting some sectors. There, governments have overborrowed, or are doing quantitative easing, making financial markets and bondholders nervous and demanding higher returns and driving up yields. Here, Government is not rolling over all its domestic maturing debt, making banks awash with cash, and driving down yields on treasuries. That is why solutions applicable there cannot and should not be transposed here. We have been cutting back the excess liquidity in the system. We did not panic when it hit nearly Rs 8 billion in mid-August this year when it equated to over 43% of the currency in circulation. This excess was partly driven by FDI inflows which we were forced to mop up in an attempt at partial sterilisation. We issued a rapidly-escalating volume of Bank paper during the year. In addition to short-term bills of maturity of up to a year, we found ourselves forced to issue notes of longer-term maturities, ranging from two to four years, to pick up the slack created by net redemption of Government paper. The amount of Bank of Mauritius paper outstanding now totals Rs 7.3 billion, comprising bills of Rs 3.8 billion and notes of Rs 3.5 billion. In spite of all these efforts, we still had an excess liquidity of nearly Rs 4.2 billion at the close of business yesterday. Now, it is quite possible, indeed very likely, that the demand for loanable funds has fallen off as a result of the knock-on effects of the global economic crisis and the timid recovery. There is a famous law in economics to the effect that supply creates its own demand. They say a certain Monsieur Say said it. That law has been suspended, it seems. Whether in the vaults of commercial banks or at the central bank, excess liquidity is idle money. It is equivalent to keeping money under the mattress and not using it to put people to work and help business to thrive. If we take that together with the low net non-performing loan levels we have achieved, currently standing at just above 2%, and the profits of our banks, now running at Rs 50 million per day, we have some difficulty in understanding why the flow of credit to the export manufacturing sector has fallen so steeply. In the mid-70’s, credit to the manufacturing sector accounted for 42 % of total bank credit. In the mid-80’s, this had halved to about 20%. In the mid-90’s, it fell to around 15%. In the last five years, this rapid decline continued and averaged a little less than 5%. What is still more disturbing than the relative decline is the fall in the actual volume of credit, which contracted from Rs 8.2 billion in June 2008 to Rs 6.6 billion in June 2010. The picture is not that dismal when we look beyond manufacturing at overall credit growth to the private sector. Here, absolute volumes are still rising, having more than doubled between June 2005 and June 2010, from Rs 102 billion to Rs 217 billion. But the rate of overall credit growth has also been decimated in this period, from an annual 26% to only 8%. All this gives us cause for serious concern. Are our banks perhaps becoming too riskaverse? Is there an unmet demand for loans in parallel with excess liquidity in the system? If so, aren’t we failing to tap our full growth potential? By becoming too conservative, are our bankers doing us a disservice? It would be foolish to suggest that the bottom line of banks does not matter and we are not saying that. We certainly do not want to add our island to the list of states such as Iceland and Ireland, coincidentally island-states, with a sad experience of what happens when banks become reckless and take excessive risks. Here, we are far from that kind of situation. I think it is legitimate to ask ourselves if our banks are just possibly focusing too much on their bottom line, to the detriment of the top line for the country as a whole? And if so, we should examine what measures we could take to get credit flowing again to the sectors in need. We should put our money to work for the people. That is the business of banks: fuelling business. So, there we are facing this sinister trinity of MIT, ELT and BLT. If we become complacent with our recent success, and rest on our oars, if we end up believing the picture-perfect image of our island of our tourist brochures, we run the risk of being swept downstream. If we do not carefully navigate our way out of the troubled waters that these traps generate, we may put at risk, not just our progress, but also our hard-earned gains in the economic sweepstakes if not our very survival in the global economy. We may be staring at nothing less than the perpetual and progressive impoverishment of our people if we don’t extricate ourselves from these traps. To escape these traps, we need to face up to the multiple challenges they pose. Most of them go well beyond monetary policy and the narrow remit of central banks. Some intensive soul-searching is called for. Is it healthy for many of us to continue to worship at the altar of a weak rupee? Should we saddle our poorer compatriots with the additional burden of paying for currency depreciation? A sliding rupee will push up prices in our import-dependent economy, reduce disposable incomes of consumers, and result in a net transfer of national wealth to richer exporters. Ultimately, what is at issue here is a question of social choice. To address it, a strong leadership is a must. But so is a clear and agreed framework for action in a context of continuing policy analysis. I hesitate to call it a five-year plan for fear that one of our honourable guests present here tonight might just find in it, with a little further stretch of the imagination, the confirmation of his recent startling observation that the Bank of Mauritius Tower is now leaning in a Leninist direction! Voltaire, the pre-revolutionary writer, political scientist and wit, observed that: “Governments need both shepherds and butchers.” We have got the shepherds. Bring on the butchers! Let’s be done with the sacred cows standing in the way, sapping our vitality! We need new champions to propel us to the next stages of development, which is about achieving fresh integrated economic, social and environmental harmony. Let us not just sit back and say well done the government, hurrah for our visionary Prime Minister and a pat on the back for the Minister of Finance. We need to snap out of our complacency. Above all we must escape our own hubris. But this is a celebratory dinner and I have somewhat wandered off course trying to foretell the future of our nation and provide some guidance through our troubled waters ahead. So I shall just leave you with a new law for survival. On similar occasions in the past, I have given you the Maradonna theory of interest rates, and the Einstein theory for success. I have this evening already made reference to Newton’s third law of motion and Sutton’s Law, a law grounded in solid bank robbing experience. So let me now offer, for your digestion, Winston Churchill’s law for survival in public office: “It is”, he declared, “…the ability to foretell what is going to happen tomorrow, next week, next month and next year; and to have the ability afterwards to explain why it did not happen.” Let me conclude, Distinguished Guests, Ladies and Gentlemen, with some wise words from a former chief executive of Shell Oil, which serve as a golden rule in his industry. Although couched in the language of the oilman drilling for oil, it is sound advice, readily applicable to public speaking, as you will appreciate: “If you are not striking, stop boring!” | bank of mauritius | 2,010 | 12 |
Letter by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, to stakeholders, Bank of Mauritius, Port Louis, 27 January 2011. | Rundheersing Bheenick: 2010 – annus horribilis and coping strategies Letter by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, to stakeholders, Bank of Mauritius, Port Louis, 27 January 2011. The original speech, which contains various links to the documents mentioned, can be found on the Bank of Mauritius’ website (http://bom.intnet.mu). * * * Dear Stakeholders, 1. Labelling 2010 “annus horribilis” does not even begin to do justice to the range and depth of “nasties” that this fateful year unleashed on us. Impervious to the concerted battery of policies and measures – many unusual and unconventional – rolled out to combat it, the global economic crisis raged on and completed its 4th year. The sovereign debt crisis in the Eurozone periphery which hit the world in April 2010 gave still another dimension to the global crisis, adding to the woes generated by the US subprime mortgage crisis in 2007, the British Northern Rock fiasco in 2008, and the global Lehman Brothers debacle in 2009. Closer to home, the “considerable internal turbulence” that I wrote about in my last Letter to Stakeholders of 28 January 2010 emerged into a full-blown crisis before the ink was dry. Within a fortnight, I found myself, as ex-Governor, embattled and embroiled in a very public Fact Finding Committee while the Bank found itself without a substantive Governor for three months. 2. As things turned out, my good name was cleared by the Fact Finding Committee and I was entrusted a second mandate. My position was further comforted by a landmark judgment from the Supreme Court whose ruling augurs well for good governance at the Bank. I am therefore delighted to be able to share with you, just as I have been doing for the past three years, the highlights of the past year, and my own reflections on developments in the banking sector and the economy at large. 3. Terms like “exceptional” or “extraordinary” have been used to describe the times which the financial world has been going through. As new challenges keep coming up, the “extraordinary” seems set to become the “new normal”. During most of 2010, the Bank of Mauritius Tower continued to battle strong headwinds and stormy waves, struggled to keep the country’s financial and monetary affairs in order, and contributed its share to the national effort to keep the economy on an even keel. At the helm of the Bank, I could feel the weight of the responsibility and the immensity of the task of steering the institution through these rough seas to calmer waters. Governing is not an easy job and will never be – these days central bank Governors are all in it together or as the French would say: Nous sommes tous logés à la même enseigne! Fellow-Governors would no doubt understand my plight! The story goes that King Solomon had tasked a servant with the specific job of whispering to him constantly – irrespective of whether things were going well or badly – “This too will pass.” Challenging as the current situation may be, we can confidently say that this too will pass but, when it passes, it is extremely unlikely that we shall revert to the status quo ante. 4. The economy, global or domestic, did not improve much compared to last year. After some signs of recovery at the end of 2009, the global economy was hit by another outbreak – the euro debt crisis which brought with it a fresh wave of uncertainty and heightened risk aversion. Global economic recovery turned out to be slow and uneven. Unemployment stayed persistently high. Consumer demand in our main export markets stayed weak. Our small and vulnerable economy continued to suffer from the slowdown in our main markets; driven by foreign direct investment inflows, our currency appreciated; our export operators shouted their “misery” at the top of their voice, casting a pall of pessimism over the business community. Policymakers moved decisively and in concert to take steps to revitalize the economy. BIS central bankers’ speeches 5. The Bank embarked this year on an unconventional journey and was quite innovative. When exporters started complaining about exchange rate volatility, we introduced foreign currency swaps to help exporters mitigate their foreign exchange risk. When we suspected that the foreign exchange market was not functioning as it should have been, we initiated a forensic investigation and ended up supplying foreign exchange directly to the largest domestic buyer of foreign currency. We came up with measures such as Special Deposits and revised our approach to monetary operations; in addition to the usual shortterm Bank of Mauritius Bills, we introduced Bank of Mauritius Notes of longer-term maturity to deal with the unprecedented level of excess liquidity in the system, itself accentuated by a mis-timed net redemption of Treasury paper. The Monetary Policy Committee boldly slashed the Key Repo Rate by a full percentage point at the first sign of further slackening of domestic economic activity expected in Q1 2011. The Bank took the parallel decision to raise the Cash Reserve Ratio from 5 per cent to 6 per cent. These policy actions were meant to complement the Economic Restructuring and Competitiveness Programme put in place by Government to foster and support long-term restructuring and deleveraging of firms in the export-oriented sectors. Towards the end of the year, the Finance (Miscellaneous Provisions) Act 2010 brought significant changes to the Banking Act 2004 and the Bank of Mauritius Act 2004, which gave the Bank more room for manoeuver. 6. In the press and among other economic commentators, much scepticism was expressed about the merits of some of our initiatives. Doubts were cast on the likely effectiveness of our policies. There was unrelenting pressure, beyond the business lobby, to rejig our exchange rate regime and depreciate the rupee. We maintained a firm and principled stand, focusing on price stability and its corollary, distributional neutrality. In the circumstances, our exchange rate regime proved robust – our rupee showed relative stability in the second half of the year, in contrast with the currency manipulation going on in other parts of the world. The historically-low inflation rates recorded during the year are another success story. Our banking sector remained one of the drivers of growth in the economy and, except for the tenacious excess liquidity, there were no signs of instability in the financial system. These contributed to lift business sentiment in the country in H2 2010. 7. Let me give a brief overview of the main developments of the past year. As in previous Letters to Stakeholders, some of the issues are explored in greater detail in the links at the end of the relevant paragraphs. 8. Economy The Mauritian economy maintained a commendable growth path despite a challenging external and internal environment. In 2010, the economy grew by 4.2 per cent, not much below the trend rate and significantly higher than the 3.1 per cent of 2009. The “Construction”, “Hotels and Restaurants”, “Transport, Storage and Communications” and “Financial Intermediation” sectors remained the main drivers of growth. The unemployment rate barely moved, rising from 7.3 per cent in 2009 to 7.5 per cent in 2010, in sharp contrast with rising joblessness in many advanced economies. We expect a growth rate of 4.2 per cent in 2011. This would depend on recovery in our main trading partners but could be faster if we succeed in reducing our export-dependence on slow-growing traditional partners. The time is ripe to develop a new economic model for Mauritius, more resilient to future shocks, and able to provide a firmer foundation for sustainable growth. 9. Monetary Policy Over the past year or so, the Monetary Policy Committee (MPC) attained its cruising speed. The inclusion of two distinguished foreigners as members of the MPC brought an international perspective and provided additional insights to enrich the deliberations of the Committee. Decisions were taken most of the time either by consensus or by unanimity, reflecting the growing maturity of the MPC while avoiding group-think. MPC members are functioning as one entity. This enabled the MPC to maintain a stable monetary policy stance for 18 months. Thus the Bank achieved with success its mandate of maintaining price stability. We brought down the headline inflation rate from 8.5 per cent in March 2009 to 2.3 per cent in January 2010, the period over which the Key Repo Rate (KRR) had been kept on hold at 5.75 per cent. We succeeded in containing inflation below 3 per BIS central bankers’ speeches cent until November 2010, with an expected surge in December in the wake of rising commodity prices. 10. At its September 2010 meeting, after weighing the risks to the growth and inflation outlook over the policy-relevant horizon, the MPC decided unanimously to cut the KRR by 100 basis points to support domestic recovery. We were swimming against the tide as many emerging country Central Banks had already started monetary tightening while others were on hold. The MPC left the policy rate unchanged at its last meeting of the year in December. The significant monetary easing provided additional support to the on-going economic restructuring and gave exporters of goods and services breathing space to embark on a major drive to improve productivity, diversify products and markets, and enhance national competitiveness. 11. Monetary policy formulation is a task that requires constant upgrading of skills and knowledge to stay ahead of the curve. This year, with technical assistance from the IMF, we embarked on the development of a macroeconomic model to provide greater consistency in policy advice and risk analysis, and help in the process of monetary policy decision-making. After three years of operating experience, the MPC is ripe for a review of its composition, methods and procedures. As the year ended, we were finalising details for hiring an independent consultant to carry out this exercise. I have no doubt that the review would lead to a stronger and more transparent MPC, with greater focus on the real economy and its intricacies, and clarify the role of the central bank in preserving macroeconomic and financial stability. 12. Financial and Money Market Excess liquidity continued to plague the banking system during the year. The resulting aggressive bidding for Treasuries drove short-term yields to all time-lows, accentuating the disconnect with the KRR. Two reasons can account for this unprecedented level of excess liquidity: (i) the substantial net redemption of Government securities and (ii) the slowdown in the pace of credit growth in the wake of slackening economic activity. 13. To contain the growing level of excess reserves, we revisited our approach to monetary operations with the introduction of new longer-term Bank of Mauritius instruments. In August and September 2010, we issued Bank of Mauritius Bills with maturities of 91-Day, 182-Day and 364-Day and Bank of Mauritius Notes of 2-Year, 3-Year and 4-Year maturities. Furthermore, we increased the Cash Reserve Ratio on two occasions, from 4.50 per cent to 5.00 per cent in mid-June 2010, and to 6.00 per cent in October 2010. With the implementation of these measures, banks’ excess reserves briefly returned to normal levels. They started increasing again in December. 14. Domestic Foreign Exchange Market Towards the end of 2009, the volume of transactions on the domestic spot foreign exchange market declined, causing some volatility in the market. We viewed the situation as being exceptional enough to warrant our intervention to maintain orderly conditions in the market. This led the Bank to devise foreign currency swaps facilities tailor-made for the needs of the export-oriented sectors, to inject liquidity in the market, thereby avoiding the build-up of uncertainty in the system and hampering economic activity. 15. With the introduction of the foreign currency swaps facility, activities in the foreign exchange market rapidly returned to normal and liquidity conditions remained comfortable throughout the year. The notable exception was the unwarranted volatility and nervousness observed in May 2010. Suspecting currency manipulation on transactions during the period 14 to 26 May 2010, we considered it vital to thoroughly investigate the matter. We retained the services of a forensic expert to probe into potential foreign exchange market irregularities and manipulation that could have taken place in the domestic foreign exchange market. 16. Euro weakness The Euro crisis was in full swing when I started my second mandate in late May 2010 and, as mentioned earlier, export sector operators and business lobbies shrieked about the threats of a weak euro to their business. I immediately set about BIS central bankers’ speeches calming the market and held a series of meetings with businesses and their associations as well as with consumer representatives, including the Mauritius Export Association, the Joint Economic Council, the Mauritius Chamber of Commerce and Industry, the Association des Consommateurs de l’Ile Maurice and the Institute for Consumer Protection. There were strong calls, relayed by the media, for the Bank to engineer an immediate depreciation of the rupee “before it was too late” – in the words of an influential leader-writer – or, worse to peg our rupee to the euro, failing which, it was claimed, there would be massive layoffs accompanied by a hollowing-out of our industrial fabric. Never before has vested interest masqueraded so brazenly as the public interest. We stood firm on our stand that a CentralBank-engineered fall in the value of the rupee could provide some immediate benefit to certain sectors but this would be at the detriment of the wider economy and against the country’s longer-term interest. We were severely criticised in many quarters, especially the business press, but, with hindsight, it is easier to appreciate the stand that we took. 17. A corollary to the rupee appreciation against the euro and depreciation against the US dollar in the early months of 2010 was the worsening of the excess demand for foreign currencies – importers, looking for dollars, were keen to purchase foreign currency and exporters, with export earnings mostly in euros, more inclined to stay on the sideline. At the request of the State Trading Corporation which encountered difficulties to obtain foreign currency from the market to meet the import bill for food staples and fuel, the Bank agreed to meet its foreign exchange requirements as from June 2010 through direct sales. In parallel, we purchased the foreign exchange from the market itself with a view to retaining a neutral position and preventing a build-up of supply pressures. Faced with unprecedented currency volatility, we began intervening in the forex market in mid-July 2010, after an unbroken spell of 85 weeks since November 2008 when prevailing conditions did not warrant intervention. We ended the year with a net purchase of foreign currency of USD315.6 million. 18. Throughout 2010, we maintained the foreign currency swaps facility that we had introduced in December 2009 but its range was extended to include swaps of shorter periods from one to three months. We continued to make available to banks the Special Foreign Currency Line of Credit, aggregating USD125 million, which we had introduced in December 2008 for the financing of the country’s trade when domestic banks faced unusual conditions and could not rely on traditional trade lines from their correspondent banks overseas. 19. As a result of our actions and initiatives during the year to ensure orderly conditions on the market, we observed some normalisation in the Domestic Foreign Exchange Market which recorded a total turnover of foreign exchange transactions that was slightly higher than that of last year. More importantly, we have been able to contain the volatility of the rupee exchange rate with the nominal effective exchange rate indices, MERI1 and MERI2, remaining quite stable and moving rather close to their trend level throughout the year. 20. Reserves Management Despite the turbulent times, the Bank has succeeded against all odds in maintaining a comfortable level of reserves. Our earlier fears that we might find ourselves in the grip of the sudden stop syndrome, and begin to lose reserves, proved unfounded. In December 2010, the gross external reserves of the Bank exceeded Rs78 billion while net international reserves crossed the Rs106-billion mark, representing around 44 weeks of imports. Our gold holdings amounted to around Rs4.9 billion as at 31 December 2010. 21. In my previous Letters to Stakeholders, I had mentioned the consultations which I had initiated with the Sovereign Investments Partnership (SIP) Department of the World Bank, and the Bank for International Settlements (BIS), since 2008. We were driven by the need to enhance the returns on our foreign exchange reserves which had witnessed a drastic fall in the low-interest-rate environment. We successfully concluded these consultations and, on behalf of the Bank, I signed an Investment Management and Consulting Agreement with the Vice President and Treasurer of the International Bank for Reconstruction and Development in Washington DC in October 2010, with the objective of BIS central bankers’ speeches diversifying our portfolio into new asset classes. We thus joined the nearly three dozen central banks and a dozen other international financial institutions that have chosen to entrust the management of some of their reserves to SIP, which currently manages around 90 billion dollars of assets. A second reserve manager, and one which is so big in terms of its placing power and reserves under management, will ensure competition in the management of our growing reserves which, until then, had been entrusted to the BIS only. We also signed an Agreement with the BIS for the management of a euro portfolio in addition to our existing US dollar and Pound Sterling portfolios. 22. As far back as 2007, when we were faced with significant Foreign Direct Investment inflows, I had mooted the idea of setting up a Sovereign Wealth Fund (SWF). Then, as now, we also had to grapple with the excessive focus of the National Pension Fund (NPF) on rupee instruments, with a consequential negative pressure on domestic rates. The SWF was envisaged as a vehicle to harness the resources of the NPF together with the “excess” reserves of the Central Bank – for which the Bank could have a bigger risk appetite than for its core reserves that it must manage conservatively – , supported by some investments from Government-linked institutions and the central Government itself. The whole fund would be managed under the aegis of the Central Bank and would still qualify as reserves in the IMF definition. That was our vision of a SWF through which we hoped to achieve several favourable outcomes simultaneously – to enhance our returns on our foreign exchange reserves, diversify the portfolio of partner institutions, and relieve pressure on Treasury rupee instruments. We welcome the announcement of the creation of the SWF in the 2011 Budget Speech. Prior to the setting up of the fund, there would be consultations with experts in the field to advise us on the model that would best suit our needs. 23. Stimulus Package Following consultations with Government and other stakeholders, the Bank made available to Small and Medium Hotels, and Small and Medium Planters two Special Lines of Credit of Rs1.5 billion and Rs0.5 billion respectively, to support these sectors in the wake of the euro crisis. This measure was announced as the Bank’s contribution to the Economic Restructuring and Competitiveness Programme. 24. Debt Management Our priority over the recent years has been the lengthening of the maturity profile of Government debt and the development of an active secondary market for Government securities. The latter would enable price discovery and the development of a yield curve which could be used as a reference for pricing other fixed-income securities, thus paving the way for the development of corporate bonds. Our ultimate objective is to broaden and deepen our financial markets. We thus came up with a series of measures ranging from auctions of single-maturity instruments and the issue of 10-year and 15-year benchmark bonds. We also issued an index-linked bond to diversify the Government debt portfolio and to extend the range of investment opportunities for investors. 25. We continued work on modernising the conduct of auctions of public paper. The process of on-line auctioning of Treasury Bills, which now relies on a web-based solution, will switch to live mode in 2011. This will result in reduced time for submission, processing and settlement of bids. We shall extend this to the auctions of Treasury Notes and Government Bonds at a later stage. 26. Market Development Since I first joined the Bank as Governor, I have endeavoured to create conditions conducive to the development of a liquid and vibrant money and foreign exchange market. Although we recognise that this is no easy task, given the small size of our market and the limited number of players, we have taken a number of steps in that direction. We worked closely with a Sub-Committee of the Mauritius Bankers Association on Capital Market Development to review the current setup of the Primary Dealer System and identify measures to boost secondary market trading. We have developed a reference money market rate, to be known as the PLIBOR – Port Louis Inter Bank Offered Rate – which will be used as a benchmark for both money and foreign exchange transactions, including derivatives transactions. BIS central bankers’ speeches 27. We welcomed a new player in our financial markets, the Global Board of Trade (GBOT), which was launched in October 2010. GBOT is the first international multiasset class tech-centric exchange that offers a basket of commodity and currency derivative products as well as currency pairs. GBOT started with brisk business in its very first days of trading. We expect that the launch of GBOT will stimulate the forward markets in currencies. One word of caution to those who might be tempted to use this platform for rupee speculation – the Bank is closely monitoring developments in this area. 28. Bank’s Balance Sheet The capacity of the Bank to conduct open-market operations to absorb excess liquidity is constrained by the low return on our foreign assets resulting from the successive cuts in interest rates by major central banks where our reserves are mainly invested. The significant decrease in income on our foreign assets impacted negatively on the Bank’s profitability. Thus during FY 2009/10, the Bank’s operating profit decreased to Rs72 million from Rs1.4 billion in the previous year. 29. Although profitability and profit-maximisation per se do not figure among the Bank’s objectives and, rightly, are not the focus of our attention, we need a central bank with a strong balance sheet at the apex of our financial system so that we are always in a position to play our role in safeguarding and upholding the public interest. Central banks are increasingly perceived as independent guardians of stability – we are conscious of the heightened expectation and trust that central banks inspire in the public. In addition to the search for yield via portfolio diversification and re-visiting our risk-return stance which I mentioned before, we need to envisage other measures to strengthen our balance sheet. 30. Banking Sector Performance Our banking sector continued to be resilient and strong. In year-on-year terms, total assets of banks registered a growth of 13.4 per cent and credit to the private sector increased by 10.9 per cent as at end Q3 2010. Segment A (domestic) assets grew by 7.5 per cent while Segment B (offshore) assets grew by 17.3 per cent. Domestic credit expanded by 11.2 per cent while Segment B credit facilities grew by 19.6 per cent. Deposits remained the major source of funding for banks, accounting for 73 per cent of total resources. Between September 2009 and September 2010, their total deposits grew by 14 per cent. Our banks recorded a slight decline in their level of profits but nonetheless remained quite profitable, with a Return on Assets of 1.2 per cent as at end Q3 2010, compared to 1.7 per cent for the corresponding period in the previous year. 31. The performance of Non-Bank Deposit Taking Institutions (NBDTIs) did not evolve much. A notional decline of one per cent in total assets was registered over the 12-month period ending September 2010 as a result of the migration of assets held by two leasing companies to the banking sector. To achieve regulatory convergence, there is now a requirement for NBDTIs to move over to a system of Capital Adequacy Ratio as the indicator of financial strength. In line with the provisions of the Banking Act 2004, ABC Leasing Company Ltd was the first NBDTI to graduate to a full bank – ABC Banking Corporation was licensed on 1 June 2010. With the coming into operation of this bank, there are now 19 banks operating in Mauritius. 32. Regulation and Supervision We sharpened and streamlined our approach to the supervision of banks and other financial institutions falling under our purview and remained vigilant throughout 2010. We followed closely developments in international accounting and supervisory standards and issued new guidelines to the industry to ensure that our banking industry follows international best practices. 33. Our onsite and offsite monitoring was strengthened further. We made our CAMEL rating more dynamic and broad-based. In consultation with the banking sector, we finalised plans to make the CAMEL rating of banks public as from Q1 2011. Given that many of our domestic banks are not rated, we take the view that the publication of the CAMEL rating will help to plug a vital information gap. In this area also, we are taking an unconventional step – it is not common for such ratings to be placed in the public domain. I must compliment our bankers for their sagacity in agreeing to go along with us on this front. BIS central bankers’ speeches 34. The reforms undertaken by the Basel Committee on Banking Supervision (BCBS), which were agreed by the Governors and Heads of Supervision and endorsed by the G20 leaders, culminated in the issue of new global regulatory standards, the Basel III framework. According to Nout Wellink, Chairman of the BCBS, Basel III, which prescribes higher levels of capital adequacy and incorporates a global liquidity framework, will reduce significantly the probability and severity of banking crises in future, protect financial stability and promote sustainable economic growth. The overall capital adequacy ratio of our banks was around 16 per cent on average under Basel II – higher than the minimum required. We do not foresee any major problem for our banks to attain the revised capital adequacy requirements of Basel III. 35. Islamic Banking As indicated previously, we granted our first Islamic banking licence in the Mauritian jurisdiction in October 2009 which was a major step in translating the vision of the Authorities to provide an alternative mode of financial intermediation, thus enhancing the options available to bank customers. We expect the bank to be operational by the end of Q1 2011. 36. We have taken some decisive steps forward in our quest to make Mauritius a centre of high quality Sharia-compliant financial services. First, building on our membership of the Islamic Financial Services Board, we participated actively in the preparatory work and became a founder member of the International Islamic Liquidity Management Corporation (IILM) – a Supranational body created to issue bench mark Islamic liquidity instruments – launched during the year and headquartered in Kuala Lumpur, Malaysia. This gives us membership on the Governing Board of IILM for a period of ten years and access to Shariacompliant financial instruments for better liquidity management. Second, the Bank entered into a Memorandum of Understanding with Bank Negara Malaysia, the central bank of Malaysia, which inter alia envisages support for building skills. We intend to use this support to sharpen our regulatory and supervisory oversight of Islamic banks in Mauritius. 37. Payments Systems The modernisation of the payments system has been on the cards since 2007 but, like many other significant projects at the Bank, got unfortunately entangled with protracted procurement difficulties arising from the Boardroom squabble referred to earlier. With these hurdles cleared, the Bank will soon be equipped with a stateof-the art payments system, a model for the region, which would serve as a platform to implement a series of innovative projects such as the Bulk Clearing System and the Cheque Truncation System. Already, the new software for the Mauritius Automated Clearing and Settlement System, which we commissioned during the year, allows us to provide extended multi currency services – a première in Africa. 38. Central Bank Statistics We directed our efforts towards improving the quality, coverage and timeliness of banking statistics as part of our contribution to the IMF’s Special Data Dissemination Standards. We made ourselves more visible in the international statistical community by our admission to full institutional membership in the prestigious Irving Fisher Committee on Central Bank Statistics in February 2010 and by participating, along with the Central Statistics Office, in marking the 1st World Statistics Day. The World Statistics Day is celebrated across the globe in recognition of the importance of official statistics and of the core values of service, integrity and professionalism in providing those statistics. As providers of data on banking, money, finance and international trade, we subscribe fully to these values. 39. Mauritius Credit Information Bureau The Mauritius Credit Information Bureau (MCIB) has proved to be an efficient platform for critical information-sharing to enhance borrower discipline and proper risk management by lenders. We extended the scope of the MCIB to other credit providers outside the banking sector and we are currently envisaging the inclusion of new products in the MCIB database. 40. Deposit Insurance Scheme The Bank is considering the establishment of a Deposit Insurance Scheme (DIS) as an additional safety-net for the banking sector. Two BIS central bankers’ speeches factors would facilitate the implementation of the DIS in Mauritius: first the Banking Act 2004 already provides for the establishment of the DIS and, second, the local financial environment is dominated by banks. A working group has been set up at the Bank to look into the development of a DIS framework for Mauritius. The Bank is endeavouring to secure participation in the International Association of Deposit Insurers as an Associate in order to be able to draw on professional advice and capacity-building technical assistance in this area. 41. Regional and International Presence We continued to mark our presence on the regional and international front. My Deputy Governors and I attended various meetings both in the region and further, and we ensured that the Bank was duly represented in regional and international fora when our own commitments did not allow us to be away from the Bank. In addition, we hosted and facilitated a number of regional and international meetings which improved the Bank’s visibility further. A sure sign of the growing interest of global financial players in our jurisdiction was the visit of a delegation from the Industrial and Commercial Bank of China – the largest commercial bank in China. This was the second time that a delegation of bankers from China visited the Bank – the first delegation came from China Development Bank. 42. The office of AFRITAC (South), one of the two new African Technical Assistance Centres which the IMF is establishing in Africa, will be temporarily located on the 15th Floor of the Bank of Mauritius Tower until we manage to complete the renovation of the old building – this was another project that fell victim in the prolonged Boardroom battle – where AFRITAC will have a dedicated floor. This office will also increase our visibility at both the regional and international front. 43. Overseas Missions As in the preceding years, I am providing details of the overseas engagements of the Governor and the Deputy Governors. 44. COMESA Committee of Central Bank Governors We had the pleasure to host the 31st Meeting of the Bureau of the COMESA Committee of Governors of Central Banks in August 2010. At the regular meeting of the COMESA Committee of Central Bank Governors held in Mauritius, it was decided that central banks should aggressively promote REPSS – the Regional Payment and Settlement System – in their country with all major stakeholders. The Bank accordingly launched a REPSS sensitisation campaign to present the system to the Mauritius Bankers Association, commercial banks, and to the Mauritius Export Association. 45. At the 15th meeting of the COMESA Committee of Governors held in Khartoum in November, I handed over the chairmanship to the Governor of the Central Bank of Sudan but continue as first Vice-Chairman. The Bank’s participation in these and other regional fora at the level of SADC, AACB, and ADB, translates the Bank’s willingness, involvement and commitment to take regional integration further. 46. Memorandum of Understanding The Bank continued to expand its network of Memoranda of Understanding (MoU) with other regulatory bodies and agencies. We signed an MoU with the Competition Commission of Mauritius relating to mutual consultation regarding competition in the financial system and to enhance cooperation and coordination in cases of anti-competitive behavior where both institutions may have overlapping powers. We signed an MoU with Bank Negara Malaysia to establish a collaborative framework aimed at enhancing mutual cooperation on capacity-building and human capital development in the financial services sector. The Bank also entered into an MoU with the Agricultural Research and Extension Unit of the Ministry of Agro Industry Food Production & Security for the development of a Bamboo Garden in Midlands. 47. Dialogue with Stakeholders We intensified our dialogue with our stakeholders during the course of the year. This dialogue process, that I have endeavoured to reinforce, has been able to build up a synergy among different economic actors rendering our policymaking more effective. As the Mauritian economy got buffeted by the turmoil in BIS central bankers’ speeches international markets, this exercise allowed us to feel the pulse of the economy and to come up with the most appropriate measures. 48. We closed our dialogue with our stakeholders by the traditional end-of-year Annual Dinner in honour of Economic Operators which saw a record attendance. This occasion was graced by the presence of the Managing Director of De La Rue, today the world’s largest commercial printer of banknotes, which obtained its first banknote printing contract 150 years ago to supply Mauritius with banknotes of three denominations. This was also the occasion for the Bank to launch the second platinum commemorative coin of the “Father of the Nation Platinum Series.” The third coin of the series will be issued in 2011. The second and third coins bear on their obverse Mauritian National Heritage Sites, namely the Aapravasi Ghat and Le Morne Brabant respectively, and on their reverse, the effigy of the Father of the Nation, Sir Seewoosagur Ramgoolam. After the third year, all three coins will be issued in a collector’s set. 49. Human Resources and Capacity Building During the course of the year, 15 staff members retired from the Bank under the Voluntary Retirement Scheme. We recruited two analysts while two left the Bank on 31 December 2010. Over the last three years, the size of the Bank’s workforce has declined from 261 in December 2008 to 241 in December 2010, and we are endeavouring to change the skills set and knowledge base of our staff to reflect the changing nature of the Central Bank’s functions. The challenges facing the Central Bank are becoming more daunting. Our staff benefited from a wide range of training courses in their respective areas of work, underscoring our ever-increasing need to keep abreast with the latest developments in the banking and finance world. The issues that central banks the world over have to deal with have drastically changed and we need to have very diverse and specialized skills within the Bank to meet the challenges. In the course of the coming year I intend to supplement our training calendar with an executive training program on leadership, team-building and management skills. 50. Corporate Social Responsibility I launched the Bank of Mauritius National Inter Club Youth Championship in 2007 in the context of the Bank’s 40th Anniversary celebrations. Today the Championship has become a regular fixture in the Bank’s calendar of activities and constitutes an essential part of our corporate social responsibility to the Nation. Our objective in organising this event is to give the opportunity to our youth, in Mauritius and Rodrigues, to show their talents in sports. We are proud to note that this event has been a very fertile ground for the establishment of National records. It is equally rewarding that 12 athletes, who first came to national attention at the Bank-sponsored championship, have been selected to represent the country in the “Jeux des Iles 2011” in Seychelles. 51. Overall Assessment of the Year 2010 In the preceding paragraphs, I have endeavoured to give you some of the highlights of the year that has just gone by. Against the backdrop of the continuing global crisis, complicated by a governance crisis at the Bank, the job of the Central Bank Governor has proved to be still more challenging than usual. The year started on a very uncertain note but ended on a quite different tone. It began with dark mutterings and a back-handed compliment from a local newspaper crowning the Governor “L’Homme (Controversé) de L’Année” – The “Controversial” Man of the Year. This was followed by deafening cries from various quarters that the Governor of the Central Bank had made abusive use of his powers. Ironically, the year ended on an altogether different note, with a newspaper headlining “Super Bheenick”, and claiming that the Governor was set to become a super Governor with wide-ranging powers. Such statements were prompted by some measures announced in the Budget Speech and by changes that the Finance (Miscellaneous Provisions) Act 2010 brought to the relevant banking and central bank legislation. I am sad to see that there has been a wrong reading of many of those measures in some quarters and this has distorted the debate somewhat. 52. The fact of the matter is that, with the amendments to the banking legislation and the measures announced in the Budget Speech, the Bank has been endowed with additional BIS central bankers’ speeches responsibilities. The amendments to the Bank of Mauritius Act 2004 are intended to give greater flexibility to the Bank and give us the means to operate expeditiously. We want to develop the foreign exchange and derivatives market, which is part of our financial market development and financial deepening agenda. We already have operations on derivatives – the foreign currency swaps. We will be able to promote the development of the Islamic money market and the issuance of Sharia-compliant instruments, and instruments other than the Bank of Mauritius Bills, for the management of liquidity in the market. The amendments to the Act will also allow us to grant loans to non-financial institutions in emergency situations to minimise costs to both the final borrower and the taxpayer. That is the logic behind all these changes – to allow the Central Bank to operate more efficiently as well as preemptively. We may also be looking at a revamping of the financial regulatory landscape with the potential merger of the Financial Services Commission and the Bank of Mauritius and we shall be guided by the expert advice of consultants in the field. 53. Let me summarise about how we have fulfilled our mandate this year. On the inflation front, we achieved a signal success – we have witnessed historically-low rates of inflation in the past two years. Our country has witnessed an annual pre-crisis growth rate of 5 percent on average – our biggest challenge would be to achieve higher growth rates. Our banks are healthy, profitable and well-capitalised, and we are ready to move to Basel III. On the financial stability side, we do not face much vulnerability as we keep enhancing our regulatory and supervisory framework. We have even been commended by international institutions for the appropriateness of our policies, especially our exchange rate policy. So I have a number of reasons to feel satisfied and happy. Most of all, I feel a sense of accomplishment with regard to my mandate. Having said that, we are perfectly aware of the challenges that 2011 will bring with it and we have no intention of resting on our laurels. 54. Dear Stakeholders, at the beginning of a new year, when the world economy is on a two-speed recovery path – with advanced economies, our main partners, still recovering slowly, and the emerging economies bubbling along to the point of overheating, in some cases – , the global economic environment still remains very uncertain. Our small and vulnerable economy is likely to suffer new strains and stresses. But I look at the future with cautious optimism. We have been able to stay the course at the height of the crisis and I am confident that we will be able to come out of it in pretty good shape. Let us therefore harness all our resources and efforts to make things better for all of our fellow-citizens. I wish you all a very happy and prosperous New Year. Rundheersing Bheenick BIS central bankers’ speeches | bank of mauritius | 2,011 | 2 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the launching ceremony of CIM Visa Card by CIM Finance Ltd, Port Louis, 23 March 2011. | Rundheersing Bheenick: Innovative financial services for the public in Mauritius Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the launching ceremony of CIM Visa Card by CIM Finance Ltd, Port Louis, 23 March 2011. * * * Let me begin by thanking CIM Finance Ltd for their invitation to be the guest of honour at the launching ceremony of the CIM Visa card. Outright I can say that you have moved today a step further in the financial sector by introducing your second credit card. You took your first step in 1996 when you started offering leasing services. In 2005, you became the first and to-date the only non-bank financial institution to issue a credit card with the MasterCard accreditation in Sub-Saharan Africa. Today your company has assets of around 4.4 billion rupees, including your HP and factoring business, and you describe yourself as a leading provider of consumer credit in Mauritius. Your company has come a long way indeed! You demonstrate your desire to continue to expand your financial products. The impetus does involve globalization. The Visa Card will enable your customers to gain access to the Visa global payments network, which reportedly operates in more than 200 countries. The launching of the Visa Card is in line with economic openness, an objective pursued by the Bank. May I therefore congratulate the Management and staff of CIM Finance Ltd for their commitment to enhance the quality, depth and outreach of the services that they provide? I understand that you will soon be launching the PayMobile, a mobile payment system. May I digress a little to comment on this new product which falls into what I would call a grey area? Let me share with you some of my thoughts on the matter. The Bank of Mauritius is not empowered, according to our interpretation of the law, to authorise mobile money transfers. On the other hand, the law requires us to manage the national clearing, payment and settlement system, in collaboration with other relevant supervisory and regulatory bodies, and if the PayMobile is a mode of payment, then it would come under our purview. These issues raise many questions, namely that of “e-money” regulation, consumer protection, stability of the financial system, and competition and interoperability. E-money has in some countries moved from a payment product to a full transactional banking product that could be used in other ways, such as a savings account. In Mauritius, where our mobile penetration rate is 99 per cent for a population of nearly 1.3 million (and around 375,000 fixed telephone lines), this means of payment seems very convenient for low-value transactions. If the service runs in the low-value segment, it would not have systemic impact. But the matter needs to be discussed further with all parties concerned – CIM Finance, the telephone service provider, the carrier or gateway, and other regulators, namely the Financial Services Commission and the Information and Communication Technologies Authority (ICTA). There should be some coordination between financial and telecoms regulators. In fact I have already had meetings with the ICTA in this respect. Regardless of what the law says, I don’t believe that it was the intent of the legislator that a payment product would go unregulated. Please do not get me wrong – we are not against this new product! But we need to be prudent and alive to any possible danger and ensure that there are not any pitfalls ahead. To come back to CIM VISA card – the Bank of Mauritius fully backs such developments and pledges the necessary support to all financial institutions which roll-out new products for the benefit of their clients. But as the regulator, we are fully aware that along with such initiatives comes a wide range of inherent risks. These risks should be carefully evaluated and credible mitigation measures must be put in place to ensure the safety of depositors’ funds and preserve the soundness of the financial system. BIS central bankers’ speeches My first advice to you is that you should conduct a proper screening of your clients to ensure that your credit card advances do not turn into bad loans. You should ensure that you have in place procedures to chase the bad clients and a good fraud investigation framework. Your recent participation in the Mauritius Credit Information Bureau will certainly contribute to a better assessment of the creditworthiness of your prospective borrowers and reduce your non-performing loan ratio. Therefore, prudence in credit risk management should be your priority. Growth in the use of credit cards has been, to say the least, spectacular. Between 2000 and 2010, credit card advances increased by more than 175 per cent. The credit card has grown to become a ubiquitous financial product used by households. There are presently more than one million credit cards in circulation for total advances amounting to 1.6 billion rupees – the biggest chunk, 1.5 billion rupees, represent personal and professional sectors – which means that there has been a notable change in consumer behavior. Consumers use credit cards for two purposes: (i) as a substitute for cash and cheques, and (ii) as a source of revolving credit. Therefore my concern is whether the consumer fully understands the costs and implications of using credit cards and whether credit cards are encouraging over-indebtedness, particularly for those least able to pay? In the US, for example, many households have thus been caught in the so-called “plastic trap” – consumers do not seem to be able to repay their balance, especially those who opt to pay only the minimum repayment amount by the due date of each month. In Mauritius, credit card advances currently represent around 3 per cent of total household credit. Concurrently, credit to the household sector by banks has been growing at a faster pace than nominal GDP (although the credit was mainly for property acquisition, generally viewed as a low risk investment.) As a regulator we need to remain vigilant and keep an eye on the delinquency rate of credit cards. And so should you for the health of your loan portfolio. My second concern which of course is more in the nature of an inducement, not a concern, for you is that card business is very good business. Financial institutions that are in the card business know that they make very good money from card-related fees. Since credit cards are unsecured in nature, interest rates on credit cards are very high – around 2 per cent monthly. There are also fees for late payments, fees for cash withdrawal, and other penalties, on top of the hidden “swipe fees” that banks and credit card companies collect each time a customer pays with his credit card. Unfortunately, most of the time, such costs are passed on to the customer. And I can tell you, time and again we receive complaints from the public that credit card fees are prohibitive. In the US there is what I call the Battle of the Swipe Fees raging on. The Senate passed an amendment directing the Federal Reserve to reduce “swipe fees” (on debit cards) and to limit them to the “reasonable and proportional” cost of each transaction. You can imagine the intense lobbying from banks to push for changes, or outright repeal of such a legal requirement, arguing that they are being deprived of a significant source of revenue and that they would be forced to trim down on some of their services to recoup the loss. On the other hand, you have merchants arguing that the fees levied by banks are too high and that without those fees, they could offer products at reduced price to customers. The battle over the swipe fees is in full swing – each party hotly defending his position. My concern as a regulator here is that financial institutions should of course be able to cover their costs but, at the same time, the customer should get a fair deal. This leads me to my second advice to you: Make sure that information on credit terms is available to your customers, and equally important, that they fully understand them – this will enable them to use their cards wisely. We can draw our inspiration from US Credit Card Accountability Act of 2009. The law protects consumer rights and abolishes the “predatory” lending practices I referred to earlier. One of the requirements is that monthly credit card statements should include information on how much that credit is actually costing the consumer. The statement now indicates the amount of time it will take for the client to pay off his balance if he only makes the minimum payments. It also indicates how much he needs to pay each month to get rid of that balance in three years. Such requirements go a long way BIS central bankers’ speeches towards a better management of credit card debt in a country which has about 54 million households with credit card debt – each carrying over 3,000 dollars. If these requirements are good for post-crisis US, they surely have some interest for us. Our Banking Act (2004) makes it mandatory on financial institutions to disclose information on credit terms, while not being as specific as the more recent US law. I would urge customers to pay attention to those terms to avoid paying interest which could instead have gone in a savings product. Financial institutions do not spare any effort to promote the use of cards – they offer exclusive discounts in restaurants and shops, insurance covers, gift vouchers; frequent card users can even win cars. We are becoming a consumerist society – which brings me to my third concern: The savings culture is losing ground. Over a ten-year span, we note that the savings rate nearly halved, declining from 26.3 per cent in 2000 to 14.4 per cent in 2010. Concurrently final household consumption has risen from 60.3 per cent in 2000 to 74.8 cent in 2010. We are witnessing a radical societal change since the last decade. A new economic model is taking shape – lenders are manufacturing more credit facilities, and consumers are borrowing more in order to keep spending. We in Mauritius need to be cautious about this drastic transformation – we should not fall into the trap of a credit culture but find ways to go back to our savings traditions. Many analysts relate the low savings rate to the fall in the Key Repo Rate – an argument that I do not fully endorse. In simple economic terms, savings is income minus consumption. So as our standard of living rises, our needs increase, consumption rises, and our disposable income gets squeezed. This is why we at the Bank of Mauritius have always resisted pressures from certain sectors to take monetary policy decisions in their favour – our major concern has always been the interest of the wider economy. Turning to the state of our financial sector, the last IMF Article IV Mission made positive comments on the supervision and regulation of the banking sector by the Bank. The regulatory and supervisory framework greatly contributed to the resilience of the sector. We will therefore continue to strengthen our supervisory framework, and our supervisors will continue to remind and badger institutions to hold firm to sound risk management principles. Another issue is competition in the banking sector. We believe that the best way to enhance competition in the banking sector is to make it more transparent and as competitive as possible so that consumers can make more informed decisions in their choice of financial products. The issue of transparency is very important for the Bank. Transparency enhances competition and competition is good because it promotes economic efficiency and ultimately growth. It maximizes welfare by ensuring that the greatest quantity of credit is supplied at the lowest price. After almost two years of hard work and consultation with banks, our framework for assessing the financial strength of banks, the CAMEL Rating has been refined and will be made public at the beginning of next month. For those who may not know it, the CAMEL rating framework is made up of five components – Capital, Asset quality, Management, Earnings and Liquidity – in respect of which each financial institution is assessed. We are working on devising a similar framework for non-bank deposit taking institutions (NBDTIs) to provide the public with vital information on the financial standing of NBDTIs. One final point I would like to raise is that the Banking Act stipulates that NBDTIs with a strong capital base be encouraged to graduate to full-fledged banks and go for a full banking licence. In June 2010, I had the pleasure of issuing a banking licence to our first NBDTI to convert into a bank – I would certainly like to see CIM Finance Ltd move in the same direction. I therefore congratulate your board, your management and staff for taking another step in widening the scope of your operations. I certainly welcome all initiatives that will deliver innovative financial services to the public. BIS central bankers’ speeches I wish you every success in your future plans and I have now the immense pleasure of launching the CIM Visa Card. Thank you for your attention. BIS central bankers’ speeches | bank of mauritius | 2,011 | 4 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Mauritius Institute of Directors' Breakfast Forum, Ebène, 22 March 2011. | Rundheersing Bheenick: Improving corporate governance in the financial services industry – a regulator’s view Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Mauritius Institute of Directors’ Breakfast Forum, Ebène, 22 March 2011. * * * I am a bit disappointed this morning with this breakfast event! I was looking forward to a hearty English breakfast – I believe this is the only breakfast that is worth inviting people to! But, I am delighted to learn that I am the very first Mauritian that you have asked to join you at your breakfast meetings. I’ll tell you why I was looking forward to this breakfast – my own first contact with the English breakfast was memorable. You might be interested to know that my very first encounter with the English breakfast was when I went up to Oxford as a Laureate and as a near-vegetarian. I immediately had to protest that the whole of the College menu was for me well-nigh inedible. I was forthwith summoned to the office of the Domestic Bursar, a very English gentleman, Rear-Admiral Denis Hetherington. “You’re from Mauritius, I believe?” he asked. “Yes, Sir”. “Ah! Mauritius! I was in Mauritius with my ship in 1926; wonderful place for a brief stop-over for revictualling”. I explained my revictualling problem and he resolved it forthwith; so, instead of the English breakfast staple of eggs and bacon, I had a diet of two fried eggs for breakfast …an omelet for lunch…and another omelet for dinner. I really went to work on eggs in my College days. Those of you who, like me, have lived in England for a while, will have mixed views on the quality of English cuisine. That fine, though sadly now out of fashion, writer W Somerset Maugham, when confronted by a friend who said he hated English food, responded with telling irony: “All you have to do is eat breakfast three times a day”. So, I’m sorry that the start we have made today is not based on that sound English culinary principle: “Go to work on an egg”. I am, of course, just being facetious to make sure that everybody is wide and truly awake! I must say it is a real pleasure to be here and I am most grateful for your invitation to introduce a breakfast discussion, with or without my college diet of eggs. So let’s get to work on the subject you have given me through your Chairman, my friend Georges Leung Shing: “Improving Corporate Governance in the financial services industry in the World and, in particular, in Mauritius from the regulators’ point of view” Not a narrow topic, I see. Each one of these elements might perhaps justify a lecture in its own right, if not a book! Corporate Governance is far from being a narrow subject but going into the intricate details might, I fear, provoke some indigestion this morning. I thought that, in his introductory remarks, my friend Georges has done a good job of setting up the boundaries within which to conduct our discussions on Corporate Governance. Among the previous guests that your Institute has invited at similar events in the past, I noted the names of Alex Berg and Prof Bob Garratt, who are well-known for their contribution in the area of corporate governance. I also see in the audience my good friend, Tim Taylor, who chaired a major committee locally on the subject. I understand some time ago BIS central bankers’ speeches Mervyn King – not Governor King from the Bank of England, but Prof King from South Africa – also paid us a visit and talked to many of you about Corporate Governance. He has been taking a key role in his own country, South Africa, which has established a name for itself in the area of Corporate Governance, with the King I, King II and King III Reports. What is corporate governance? The modern focus on corporate governance traces its origin at least as far back as the Cadbury Report. Cadbury, with his own Quaker background, would obviously be concerned with issues of corporate governance, with its ethical and moral dimensions. We don’t need to discuss Corporate Governance in great detail here this morning. Your Institute has been paying considerable attention to the subject over the years and you all know what it is. You are all aware of the various issues that crop up in this particular area. But I would all the same like to remind ourselves of the half a dozen or so key elements in Corporate Governance, which cut across different forms of organisation and areas of economic activity. Those elements are: Efficiency, Openness, Participation, Accountability, Transparency, Probity, Effectiveness and Coherence. These key elements stand out in the different treatments of the subject in any Report on Corporate Governance that you may come across. In addition to national reports such as the Cadbury Report of the UK in 1992, the US Sarbanes-Oxley Act of 2002, the three King Reports in South Africa, and here in Mauritius, the Taylor Committee report of 2003/4, the World Bank has also deliberated on the subject. It produced Standards and Codes of Conduct on Corporate Governance applicable to all countries, rich or poor, drawing largely on the principles outlined by the Organisation for Economic Cooperation and Development, a grouping of rich countries. These global takes on the subject have helped extend our vision of Corporate Governance beyond its erstwhile narrow focus on efficient internal management of a company to cover its impact on the economy, on society and on the environment. In other words, the scope and framework within which we have to judge Corporate Governance has been drastically changed. All these codes of conduct have special relevance for the banking and financial services sector – as well as for central banks and other financial sector regulators, which act as guardians of financial stability and promoters of economic growth. We, at the Central Bank, have issued many guidelines on different issues relating to Corporate Governance. One of direct relevance is, appropriately enough, our Guideline on Corporate Governance. All these guidelines have been reviewed in line with the Banking Act of 2004, the Companies Act of 2001 and The Report on Corporate Governance for Mauritius mentioned earlier. They give special attention to the composition of the Boards of banks and their operation, the limitations on tenure of office, the importance of independent directors, the qualifications of Board members, the responsibilities of the Board and its various committees, and the operation of the audit function. These are all factors that we, at the Bank, use in our monitoring and surveillance of the banking sector. That is basically the framework within which I am going to approach Corporate Governance in the banking and financial services sector. Let me now turn to the second leg of my remit this morning. What is the financial services industry? I am closer to home here, coming from the Central Bank and I think that some working definitions are helpful. Financial services is an omnibus term covering the wide range of services provided by a gamut of financial institutions of which banks are only one part and an increasingly smaller part as they are commercial banks increasingly overshadowed by nimble, but often undercapitalised and less regulated, entities driven by the pressure of BIS central bankers’ speeches financial engineering. We have foreign exchange bureaus, loan facilities providers, credit unions, private banks, investment banks, investment advisers, building societies and other mortgage providers, savings units, insurance companies, stock exchanges, financial callcentres, etc. – we could extend that to include credit rating agencies, suppliers of professional and technology services to the rest of the industry, and so forth. Financial institutions, such as these, have become an integral part of a modern economy: they have become a key element in the process of economic transformation from basic subsistence agriculture to the modern state where industrial production of goods and services, and financial services themselves, constitute the bulk of economic activity. Banks, along with the joint stock company, might be seen as the sine qua non of economic transition. All these institutions have to operate within a framework of commercial law and within codes of conduct and regulation to overcome what economists call “market failure”. In recent years, as the global economy got engulfed in an unprecedented peace-time crisis, the finger of blame has been pointing at the banking and finance sector as being the cause of it all. Loose regulation, poor supervision, inadequate enforcement, perverse incentives, and other practices bordering on the criminal have all been identified as the main culprits. It all adds up to a massive failure of governance – both within the sector itself and at the level of the regulators and supervisors. In 2009, when the crisis was in full swing, the Bank for International Settlements (BIS) issued a report proposing guidelines for designing effective governance arrangements for each of the major functions of central banks. The BIS-based Basel Committee on Banking Supervision (BCBS) has been working towards establishing a code of conduct for banks across the board in response to the crisis. But Basel II, as we all know, failed to forestall the crisis that we are living through, or even to forewarn of any impending crisis. Work on Basel III is at an advanced stage. It will take on board some of the lessons of the crisis and seek to minimize the frequency and severity of future crises. The Bank of Mauritius (BOM) itself is governed by the Bank of Mauritius Act of 2004, and those of you who follow les actualités in Mauritius, know that we had our own problems of corporate governance. It was widely publicised and had to be ultimately resolved by resort to the Supreme Court. So, on the local scene, we have the Bank of Mauritius Act and the Banking Act from which we draw our supervisory remit. In addition, the Mauritius Bankers’ Association (MBA) has adopted since 2007 a Code of Banking Practice, which encapsulates international best practice, for the guidance of all commercial banks in the country. On the international front, we are bound by the financial and commercial policies and practices of the major international players in the global financial system. A determining role in this is played by the so-called “Unholy Trinity”, that is the International Monetary Fund, the World Bank and the World Trade Organisation, which have all come under close scrutiny for various reasons in recent years, and many people think that all of them are ripe for radical reform and must fix their own governance and legitimacy problems in the first place before they can, once again, aspire to play a leadership role in these areas. What are financial regulators? Financial regulators, by and large, tend to be generally publicly-established institutions that go under different names in different jurisdictions, such as central bank, monetary authority, reserve bank, commission bancaire, autorité de supervision, financial services commission, etc, which have oversight, regulatory, and supervisory authority over the entire sector, or specific parts of it. All these regulators are there to enforce laws, issue regulations, and set standards and rules for the conduct of financial business. The financial regulations may cover, for example, the statutory registration of companies, the licensing of banks and the functions of the central bank. Other non-statutory rules may cover the extent and nature of reserves, liquidity, solvency, interest rates, foreign exchange dealings and holdings etc. The institutional framework for such regulatory control varies enormously across countries and is BIS central bankers’ speeches the subject of continuing debate. As you may be aware, many changes have been made or announced in the US and the UK for example, where Dodd-Frank and the Vickers Committee can best be described as work in progress. But change cannot be brusque in such a critical area as banking. For regional or international financial centres, change cannot ignore any potential regulatory arbitrage or its likely impact. There are many pending issues, here in Mauritius as well. In Mauritius, we often tend to pattern our institutions on what seems to be working elsewhere. But, in the banking and finance sector, practice varies from country to country. We must therefore be very careful when we are comparing to ensure we compare like with like. And even more careful when we reformulate supervisory mandates and redesign institutions to guard against importing models engineered to address an entirely different set of problems in an altogether different operating environment. Let’s go back to the economic crisis for a moment – I saw that in his presentation, my friend Georges had a slide telling us that the crisis can also be seen as a failure of regulation. In the case of the country where it began, the US, it was most certainly a failure of regulation. There was a confusing array of regulators, some with overlapping jurisdictions. There was undue reliance on self-regulation in broad swathes of the industry. There was considerable laxity in implementing those regulations that did exist! And there was, most certainly, a generalised failure of governance to ensure that incentives were properly aligned in the financial services industry. Banking and finance, and all sub-sectors within, are therefore all prime candidates not only for proper regulation but also for proper oversight by some overarching authority going beyond the sector being regulated. As things stand, there is a mixed bag of regulatory approaches which emphasizes the need to have greater coordination on regulatory reform and some international agreement. The BCBS has been doing some rethinking on what central banks should be doing and how financial services should be regulated globally. These are issues that have implications for Mauritius as an offshore financial centre and we must watch developments very closely. Self-regulation v/s overregulation Statutory regulation needs to be supplemented by self-regulation in well-defined areas within strict parameters, which should themselves be subject to oversight. A whole range of professional activities, such as accountants, actuaries and company secretaries, unit trust operators, life-insurance companies and independent financial advisors – all of them have, at different times, opted to be self-regulated to the extent possible, thus escaping financial regulation, – sometimes with disastrous consequences, like in the ENRON saga. Financial regulation covers many non-contentious areas. Examples would be the registration of companies, their licensing for different activities, the forms of company accounts, the frequency of their publication, the process of external auditing, the regulation of deregistration of companies, bankruptcy processes, and the control of fraud and malpractice. The crisis has heightened the long-running debate on the extent of regulation. As you know, until the crisis hit us, most of us were opting more for light-touch regulation, and wherever possible for self-regulation. And the debate was whether there was need for any regulation at all, and whether we should not simply put our trust in well-functioning markets and allow them to be self-regulated. The crisis has shown how wrong we were in thinking that those institutions could be left to regulate themselves. The proper role and function of regulatory bodies has come back to the forefront and, after the recent recession, it seems that the case for re-regulation is becoming very strong. Other issues have come into sharper focus as well, remuneration of financial services staff and boards, the influence of bonuses on risk-taking, as well as the role of credit rating agencies. All these are crying out for some regulation. When banks and financial institutions fail, it’s the public that ends up with the bill for cleaning up the mess. The criteria for bailouts need to be more explicit. The size and power of certain financial institutions has also become an issue of critical significance. We can surely sympathize with Mervyn King, Governor of the Bank of England, when he asked: “If it is too BIS central bankers’ speeches big to fail, is it not just too big?” The question is not just academic – it has many implications on the future of mega-banks. Do you start breaking them up to make them more manageable, to make them easier to supervise, and to make them easier to bail out in case they need bailouts? And when do you proceed with this break-up, assuming it’s the only way to combat moral hazard? At the peak of a crisis, when you have other pressing concerns to grapple with? Or in good times – when the TBTF institution is quite likely to up sticks and move to a more accommodating jurisdiction? So we might want to call for more regulation – and internationally-coordinated regulation, at that – but the evidence on the impact and cost of regulation remains incomplete. Instinctively, many of us believe that there is a strong case for self-regulation, although we know that there are limits to be drawn somewhere, beyond which self-regulation fails. We may invent new levers of control, but will they be effective? Or will they turn out to be counter-productive? Will regulation be able to catch the market-players that have previously dodged regulation, such as the US shadow-banking system around the infamous sub-prime mortgages? Or will the regulator trail behind resourceful operators perpetually seeking ways around rules and regulations? Credit ratings by the credit agencies tweaked market signals to the point that they failed to give early warning of the impending collapse. Worse, they were the product of a conspiracy as the credit agencies were being paid by people who were asking them for good ratings, and they all made good money out of it on the way to the blow-up. The field is a very complex one, and therefore, we must look for ways and means of trying to make practical reforms in Corporate Governance to prevent such catastrophic outcomes. Improvement in corporate governance This brings us to the third leg – what is deemed to be an improvement in Corporate Governance? From whose point of view is it an improvement? By and large, if you are an operator, you would want to have light-touch regulation; you would want to have maximum freedom to operate the way you want. If you are the World Bank, you would probably want greater “Ease of Doing Business”, which means fewer regulations. If you are one of the persons who have been ripped off by Mr Madoff, Grand Master of the Ponzi scheme, you might be asking what were the regulators doing when he was making off with your money? Taxpayers who have been bailing out western banks could also be asking for guarantees of greater regulation in the future – hence the pertinence of the question of Mr Mervyn King! There is a risk that we may now overreact and go to the other extreme of overregulation, which, in my view, would be a bad thing. For all its defects, light-touch regulation did stimulate financial engineering and brought financial innovation which led to reductions in transaction costs and facilated capital allocation to sectors that were looking for it. We would be doing ourselves a grave disservice if we start over-regulating. What we need is to find a middle way. In Mauritius, we have gradually developed our own way of doing it although we are quite happy to be guided by the work of the BCBS, the IMF and the World Bank. All these institutions have dedicated teams which are busy working out the contours of future regulation in different areas relating to banking and financial services. We have to distinguish here between perception and reality. Generally, politics is about perception; but business is about reality. We at the central bank straddle the divide between politics and business; and we have to be aware of both the perception side of the equation, and the reality on the ground. So, while politicians are busy watching the opinion polls and the press, you as economic operators have to check your books and your cash-flows. We, at the central bank, find ourselves at the intersection of these two worlds, pulled in both directions and predictably unable to satisfy both constituencies for long. We have to make sure you are improving your bottom line, but not at the expense of anybody else or of the country at large – that is our mandate: price stability in the context of balanced and orderly economic development. BIS central bankers’ speeches If we just read the world press, and inhale – a practice which is not recommended on health grounds – Mauritius looks to be doing rather well. But this should be a wake-up call for skeptics. Well done, all you Directors here. All of you in your own separate ways, in companies, big and small, have all become part of that world-famous Mauritius success story! On this subject, I have been reminded by a colleague of the wise words of Adam Smith, the grandfather of free-market economics, when he observed: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices” For “prices”, read directors’ pay or CEO’s remuneration, or share issues to the Board and the management. To complete his observation on the cupidity of the world, Adam Smith added this cool assessment of the prospects for regulation: “It is impossible indeed to prevent such meetings (of people in a common trade) by any law which either could be executed, or would be consistent with liberty and justice.” Such, indeed, is the dilemma that we, regulators, face in searching to improve our systems of international, regional and national management of the financial industry and how best to regulate and supervise a deeply-flawed market which is falling into moral hazard. Yet, Mauritius seems to have done rather well. The financial sector has largely escaped from the fallout from the great crisis and is expected to remain solid, resilient, profitable and financially stable. I see many of our CEO’s from banks here and I’d like to congratulate them for a job well-done. But that does not mean that they managed it on their own. We at the Bank did our best to keep them on the straight and narrow path. As I hinted earlier, if you have only self-regulation, you can be easily tempted to stray from that in the search of greater profits and greater returns for your shareholders. We believe that our banks have done very well, by and large. Their performance is absolutely remarkable when viewed against the backdrop of the ongoing crisis which has impacted both the domestic and offshore segments of their activity. In fact, a couple of months ago, the chairman of the Mauritius Bankers’ Association was stung to the quick when, in the course of an address to economic operators, I had the cheek to draw attention to the profits that our banks were raking in on a daily basis! It’s good that our banks make profits as it shows they are running their affairs well. But if they make excessive profits, then it could reflect badly on the regulator. It would mean we are not doing our job. Transparency This is the reason that we, at the Central Bank, are keen to have an extra dose of competition in the banking sector. We are busy welcoming new players – in fact, I see one of them in the room here this morning and he happens to represent the first of a new breed, our very first full-fledged Islamic bank. More players mean more competition – which can only be good for the consumer of banking services. We have changed applicable guidelines and introduced new measures to bring more transparency. We now require all banks in Mauritius to publish on our website, and according to a set template, the whole structure of fees, commissions and charges which they apply on various transactions and services, to enable the consumer to shop around. Obviously, there are still difficulties in moving business from one bank to one another. But we are making small, incremental, contributions to make that happen and we intend to persevere. We have recently moved into what I believe is entirely new territory for any central bank – a world first! Credit rating agencies, as you all know, have come under severe attack for their role in the crisis. Some of you may recall that I openly berated a leading rating agency for its threatened de-rating of a leading local bank – and I was one of the first central bank Governors to do so before the role of these agencies emerged as a legitimate source of concern for regulators. I BIS central bankers’ speeches considered the de-rating action unjustified and mistimed. The lesson which I drew from that spat with the rating agency is that we should share our information more widely to prevent any potential financial instability arising from ill-considered rating action by rating agencies. Most of our local banks are not rated by these agencies. We have thus avoided blind adherence to their ratings. These agencies do not have the database that we at the Central Bank have on each and every bank operating here. Indeed, we have our finger on the pulse of each and every bank, big or small, and we believe that we have a much better reading of the situation than anyone else. Starting in April this year, we begin publishing the ratings of all our banks on the Bank’s website. This is yet another major step in the same direction of greater transparency that we embarked upon when we began publishing all the fees and charges applied by banks. Earlier this year, we had the usual IMF Article IV Consultation Mission which pored over all figures relating to our fiscal, monetary, banking and financial affairs. The IMF and the World Bank also conduct a diagnosis of our economy every two years under the Financial Sector Assessment Program (FSAP). The IMF and the World Bank are of course not regulators of any country’s economy but they do set standards in many areas, lend for development activities, act as lender of last resort, and conduct regular reviews of all economies. A pat on the shoulder is not to be scoffed at! The IMF Mission was favourably impressed by our initiative to publish our own bank ratings – the so-called CAMEL Ratings. The acronym CAMEL is straightforward: C stands for Capital Adequacy, A for Asset Quality, M for Management, E for Earnings and L for Liquidity. The CAMEL framework is a much better grid for the analysis of banks from a comparative perspective. We have submitted all our banks to this assessment systematically, while refining the parameters and minimising the subjective element. About 18 months ago, when we first told our bank CEO’s, with whom we have regular meetings at the level of the Banking Committee, which I chair, and which brings together senior Bank staff and all the members of the MBA, that we intended to publish the CAMEL ratings, they almost fell off their seats! Until then, individual CAMEL ratings were discussed and shared only with the bank concerned. We embarked on a long process of discussion and clarification and reassured them that publication would lead to a better-informed consumer, which would redound to the benefit of all banks. We begin publishing on April 5th, not the first of April for fear that you might think I am playing a prank on you. This initiative, as I said, is a world première. Mr Stiglitz did not come to hear about it yet when he was here two weeks ago. He gave us very good marks for many things which we have been doing here for donkey’s years. Our tropical cyclone alert system, like our extensive social welfare system, and the provision of free education and health-care could serve as a model for the US, he opined. My absence at his lectures has been the subject of some negative comment in the local press – especially when Mr Stiglitz apparently had a go at central bank governors who were applying the wrong traditional remedies to counter the current inflationary surge. I did receive an invitation to attend, but it was an unusual sort of invitation as it came with a hefty bill! Mr Stiglitz thought we had a miracle here in Mauritius. Those of us, who have been working here for the last 30 to 40 years, know that there is no such thing as a miracle. It is all the result of patient, slow, hard work. The only miracle in my book is how the organisers managed to get many CEO’s to pay Rs23,000 (US$825, approximately) to come and listen to Mr Stiglitz when you could get most of what he said for free on the internet or from his books. Ombudsperson for banks Greater competition in the banking sector, enhanced transparency, and giving the consumer a fair deal are so many yardsticks for the regulator to gauge banking sector performance over and above banking sector profitability. A major weakness is our failure to establish the office of the Ombudsperson for Banks, which is provided for in the law. This office can BIS central bankers’ speeches provide a useful service for citizens to turn to if they have been subjected to unfair treatment and abusive practices in lieu of, or before, the more expensive and time-consuming recourse to the courts. The establishment of the office has become embroiled in the grey area between the Financial Services Commission, the Bank of Mauritius and the office of the Commissioner for the Protection of Borrowers, set up subsequently. Both the FSC and BoM have got core functions, each in its particular area, but I have taken the view that, for a small country like ours, there should be only one Ombudsman for all financial services, instead of having one Ombudsman for the financial services and for the institutions supervised by the FSC and another for the banking sector. The Minister of Finance actually announced a move in that direction in his budget speech in 2009 but, sadly, we have made no progress so far. Until the issue is de-blocked at the legislative level, there is little that the Central Bank can do. Review of the Monetary Policy Committee Another improvement in governance that we are working on is the review of our Monetary Policy Committee. The MPC, as you know, has been in business since April 2007. We have had 19 meetings to-date and it became clear quite early, since about the 8th or 9th meeting, that there were some major changes required in the way that the MPC conducts its business. There is a crying need for greater individual responsibility and more transparency which can be satisfied by making the individual voting patterns public. At the same time, we have proposed that the minutes of MPC meetings should also be published. A third area where we are proposing to bring modifications is the requirement that we can only reckon the votes of members who are physically present. Our MPC is rather unusual, at least by emerging economy standards, as we have two foreigners, based outside Mauritius, as full members. We propose to remove the physical presence constraint and allow participation by teleconference. To conduct this review, we are drawing on the services of Sir Alan Budd who has worn many hats in the world of academia and finance – at the London School of Economics, the University of Oxford, the Bank of England, the British Treasury, etc. With these proposed changes, the MPC will be able to meet the requirements of the Mauritian economy in a much better manner, while communicating better with the public. It would also render the MPC less prone to the charge of policy zigzagging. We have often been accused of “zigzagging”, but I can assure you that the Governor has not zigged or zagged. If there is zigzagging, the public has a right to know the identity, and motivation or rationale, of those responsible. The composition of the MPC and the profile of the people who sit on it, also figure in the remit of Sir Alan Budd. In a fully-monetized economy like ours, with our very heavy reliance on bank finance, the operations and decisions of the MPC exert considerable influence on the life of the average citizen as on the activities of all economic operators. The governance of the MPC itself is key to the smooth operation of the economic machine. Regional integration In this world of globalised finance, the perspective of the regulator can hardly be circumscribed by national frontiers. As Mauritian enterprises turn increasingly to the region and beyond, it is only natural that our banks accompany their customers overseas. We are encouraging many of our banks to go regional. But we also call for a dose of realism: countries in the region are not Mauritius writ large. They have their own specificities which must be taken into account. Whether you want to locate an enterprise in Madagascar or Bangladesh, or run a bank in Tanzania or India, there is a tremendous adjustment to be made. The regulator can facilitate this adjustment by having a framework for cooperation in place. Instead of trying to address the issues that are likely to arise on a bilateral country-tocountry basis, it is preferable to address them at the regional level. This is the objective which we are pursuing in such fora as COMESA and SADC. At the level of SADC, we have BIS central bankers’ speeches come up with a SADC draft Central Bank model law, which seeks to harmonise our approach to central banking to develop a fairly uniform framework for the region. Within COMESA, we have set up a regional clearing house, with a regional payment and settlements system so that our economic operators, exporters and importers, do not face a multiplicity of regimes and settlements systems when trying to tap regional trade opportunities. The Bank of Mauritius is the regional payment and settlement agent for the whole of COMESA for this operation. We are finalizing the operational details and should open for business quite soon. On the regional front therefore, we are playing a very active role as the banking sector regulator to ensure that most of the difficulties that one can normally expect to encounter in going regional – at least, those within our area of competence – are gradually ironed out. We are also engaged in a vast programme of monetary, financial, and macroeconomic convergence, with the distant objective of a single currency, at the pan-African level with the Association of African Central Banks where COMESA and SADC are just two of the building blocs. The current problems in the Eurozone periphery have admittedly thrown some cold water on our prospects of moving in that direction although the plans are to move there by 2018–2020 or thereabouts. Before we can seriously envisage that, we have to ensure that the necessary conditions are in place. Hence, the programme of monetary and macroeconomic convergence. At the level of COMESA, we have just set up the COMESA Monetary Institute which is based in Nairobi. This is basically patterned on the European Monetary Institute which, as some of you would remember, was the key driver of European monetary cooperation which led to the birth of the Euro. The problems in the Eurozone have thrown up some issues that were not sufficiently addressed in the construction of the Eurozone. We are aware of the challenges ahead: bringing so many disparate economies as the 53 economies in Africa, into one composite economic bloc is a tall order. Although the single African currency like the single African Central Bank, are not likely to see the light of day any time soon, we continue working on it with our peers in other countries. International financial institutions The last point I want to raise is that a large part of the blame for the current crisis lies at the door of the international financial institutions which play a leadership, monitoring, or supervisory role. Many institutions come in for criticism, much of it justified. Among them, one could mention the BIS, which is often called the central bank of central banks; the World Bank, which is supposed to look at the real sector on a global basis, and, especially, the IMF, which is supposed to monitor the monetary and financial sector of every country annually – the famous Article IV Consultation which I alluded to earlier – and ensure global surveillance. I mentioned earlier how, we in Mauritius adopted Basel II and were subjected to FSAP’s by the World Bank and the IMF. Would you believe that it was only last year that the IMF conducted an FSAP for the US? Leaving aside the fact that the Basel II approach turned out to be flawed, the US had made little effort to tighten its regulation and supervision in accordance with its precepts. The largest economy in the world got away with it, and brought the world economy to the brink of collapse. The US also got its way in bringing modifications to the report which the BIS was producing on the US sub-prime crisis. Uncle Sam has been throwing his weight around. If you are big, you can call the shots and you can change the rules and bend them to suit your own convenience. Just too bad if it causes inconvenience to the rest of the world! The international financial architecture that we now have, is, by and large, the one that emerged from the immediate post-Second World War period. And it was the victors of the Second World War who shaped it to suit their particular interests. We have been talking a long time now about voice and representation, and changing the voting structure in the governance of the World Bank and the IMF. In the throes of this crisis, some tentative changes have finally been agreed and are beginning to happen. So, for the first time ever, some of the glaring inequities in the voting structure have been corrected and we hope that this process will carry on. The current system is built on the convention that the CEO’s of the BIS central bankers’ speeches IMF and World Bank are respectively European or American. The WTO has also been headed by a European since its creation. To look at the governance of this unholy trinity, you would not know that the centre of gravity of the world has changed to China and India. There is a need now to recognise the new reality of the world. The next Managing Director of the Fund is most unlikely to be a European. There are other changes that are happening, in terms of the actual remit of the Fund to ensure global surveillance, global financial stability, and address problems posed by countries running large and persistent balance of payments surpluses. A fundamental weakness of the IMF – apart from being weak-kneed vis-à-vis the US – was the built-in asymmetry in its approach: a roaring tiger where deficit countries were concerned but a softpurring kitten when faced with surplus economies. As you know, the global cry at the level of the G20 is for rebalancing economies. We have to watch how this global re-balancing is going to happen, who is going to have the power to achieve it, and perhaps what shape the new emerging international financial architecture is finally going to take. There will not be any cut-and-dried solutions. Instead, it’s likely to be a long drawn-out process. The fear is that the receding crisis, itself a highly-desired outcome, may have the unintended consequence of abating the pressure for reform. In any event, the world as we know it is likely to change – at least in terms of the currencies in which most transactions are conducted. Whether the hegemony of the dollar is going to continue or not is an open question. All of you may have your own views on it. Is the euro going to survive? Will the EU find a lasting solution to the sovereign debt problem of its periphery? Or will the Yuan or Renminbi, or why not the Rand and others, emerge as quasi-reserve currencies? To sum up, what I have tried to do in this wide-ranging talk is to reassure you, CEO’s and operators at the cutting edge of business, that your regulators are very much on the job and fully-engaged. Unlike some of our counterparts in the US or the UK, we can hardly be accused of sleeping at the wheel. We are trying to anticipate problems that may lie ahead. We are trying to ensure that you get a good deal, and – more than that – that our population, and not just business, gets a good deal! They deserve no less! And I believe I deserve a real breakfast, now! BIS central bankers’ speeches | bank of mauritius | 2,011 | 5 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the inaugural seminar of GBOT (Global Board of Trade) EDGE (Empowerment and Development through Global financial markets' Education), organized jointly with the Mauritius Exporters' Association, Ebène, 4 May 2011. | Rundheersing Bheenick: Risk mitigation in futures market v/s exposure to market forces – the EDGE for Mauritius exporters Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the inaugural seminar of GBOT (Global Board of Trade) EDGE (Empowerment and Development through Global financial markets’ Education), organized jointly with the Mauritius Exporters’ Association, Ebène, 4 May 2011. * * * It is an honour for me to have been invited this afternoon to address you on an issue that is close to my heart. Let me begin by congratulating the organizers, the Global Board of Trade (GBOT), for yet another excellent initiative, and the Mauritius Exporters’ Association (MEXA) for hosting this event. Any initiative that helps to develop our foreign exchange and derivatives market will of course receive the full support of the Bank of Mauritius. And for those of you who may be inclined to believe that dabbling in derivatives by Central Banks is a risky business, let me assure you that promoting the development of the foreign exchange market and derivatives is very much part of the remit of the Bank. On a previous occasion when I had the honour to address a GBOT audience – it was on the occasion of the Seminar on Currency Derivatives in July 2009 – I had emphasized that financial development in Mauritius was incomplete and had a long way to go if we are to be reckoned as an international financial centre. I had then borrowed Randall Dodd’s image of a four-legged table to depict the financial system and argued that our table had one leg missing. I then welcomed the launch of GBOT, the first Pan-African Derivatives Exchange, which I believed would play a role in the development of our financial sector and help us to find that missing fourth leg. Today, I am very glad to note that GBOT has done some brisk business since its start of operation and its daily trading volume crossed the 50 million dollarmark two weeks ago. I congratulate GBOT for this achievement and wish them continued perseverance in the pursuit of their trading volume target of USD 1 billion a day, which I think is achievable. On several occasions, in previous addresses and during meetings with various stakeholders, I have stressed the importance of foreign exchange hedging instruments in helping domestic corporates, particularly our exporters to manage currency mismatches in their balance sheets. A typical reaction was: we know how to produce textile products for the markets that we know – that is our job. We need the dollar at Rs35, the euro at Rs45, and the UK pound at Rs55 – that’s your job! Now, among the tools I discovered when I joined the Central Bank, unfortunately there was no magic wand… But I believe the debate has moved on a little. I am very pleased to see that I am no longer a lone voice in the wilderness. I understand that many of you have started active treasury operations for a more efficient management of your foreign exchange exposures and the attendant risks that go along. Indeed, GBOT’s EDGE programme aims to support these efforts. The acronym is self-explanatory: Empowerment and Development through Global financial markets’ Education. I am also aware of GBOT’s efforts to familiarize operators with hedging. Much ink has been spilt on this issue of hedging in the local press in the wake of the unfortunate events at Air Mauritius and the State Trading Corporation. The airline ran into some unexpected turbulence, almost bankrupted itself in the process, and ejected management and boardlevel executives to claw its way back to solvency. Our State Trading Corporation found fuel imports to be an explosive issue which led to the premature departure of its former Chief Executive. But abuse, or misuse, of a tool does not make the tool useless. It only underlines the necessity of perusing the User’s Manual very carefully and familiarizing yourself with any health warning that comes with it, which is the object of this exercise this afternoon. It gives me great pleasure therefore to reiterate my full support to the EDGE initiative. BIS central bankers’ speeches As Governor, I have become used, if not inured, to the periodic recriminations of our exporters on the value of the rupee. There have been times when these were accompanied by direct threats to phase down operations, to lay off thousands of workers, and cause other mayhem, if we did not provide relief via currency depreciation. And my unfaltering answer to them has always been that we are in a free market with no capital controls and the foreign exchange market is also free. The Central Bank is non-interventionist and when we do intervene, it is only to smooth out unwanted volatilities, not to achieve any particular exchange value of our rupee vis-à-vis any particular currency. Hence, taking exchange risk is very much part and parcel of the game of our economic operators. Since the revolutionary idea that risk can be managed – which literally transformed the world – man is no longer left to the whims of the gods. The concept of management of risks actually drives modern society, and much of the progress made by man would not have been realized without the notion that risk not only can be managed, but can actually be rewarding. Indeed, risk and reward are the two faces of the same coin. The exporters’ outcries show their extreme vulnerability to the vagaries of global financial markets. At the same time they reflect a certain inability, or should I say reluctance, to seize the opportunity that modern risk management tools offer to mitigate their risk. I do understand your fears – trading in derivatives is quite complex and involves many risks. The memories of the collapse of Barings in 1995 and the more recent scandal at Société Générale in 2008 are still fresh in the minds of many people. These scandals have nourished the myth surrounding derivatives and their potential for leading to catastrophe. In both these cases, as indeed in the more recent cases like Bear Sterns and Lehman Brothers, the problem was not with the derivatives but with the controls those banks failed to put in place. And there was also a failure of regulation and supervisory oversight. Today, we are here to talk about risk mitigation through the futures market. Some corporates in Mauritius, as well as the Mauritius Sugar Syndicate, have traditionally hedged their foreign exchange exposure using forward instruments traded in the over-the-counter market. It is good to know that futures and forwards contracts are both contracts to deliver an asset on a future date at an agreed price but they differ in some respects. Futures are standardized and exchange-traded, while forwards are customized and traded over-the-counter. Thus futures face an exchange, while forwards face a non-exchange counterparty. Furthermore, futures are often margined, while forwards are not. They have significantly less credit risk, and their funding is different. Like the forward contract, a futures contract is a guarantee that a certain product will be sold at a fixed price at a certain date. Although the proliferation of mysterious-sounding acronyms and the complex trade jargon may indicate a recent origin, the concept is certainly not new. In fact the idea of entering into agreements to guarantee a fixed return in the future is mentioned by Aristotle. Gillian Tett, in her fascinating book “Fool’s Gold”, drawing on the aforesaid Randall Dodd, tells us of rudimentary futures and options contracts having been found on clay tablets in Mesopotamia, dating back to 1750 BC. The first futures exchange market was the Dōjima Rice Exchange in Japan in the 1730s, to meet the needs of samurai, who were being paid in rice and needed a stable conversion for the value of their currency which was the rice. The first-ever standardized “exchange traded” forward contracts, called futures contracts, were listed in 1864 by the Chicago Board of Trade, or C-BOT – surely the inspiration for G-BOT, our host today. Soon there were contracts created on a number of commodities, and futures exchanges developed all over the world. This was the birth of our modern futures market as we know it. Today, there are more than 90 futures and futures options exchanges and these include the London International Financial Futures Exchange (now Euronext.liffe), Deutsche Terminbörse (now Eurex) and the Tokyo Commodity Exchange (TOCOM). With the breakdown of the Bretton Woods system of fixed exchange rates, deregulation, and the advent of new technologies, the environment, in which banks and other financial intermediaries evolved, changed drastically. They responded by developing financial risk BIS central bankers’ speeches management products designed to better control exchange risk. They started with simple foreign exchange forwards that obligated one counterparty to buy, and the other to sell, a fixed amount of currency at an agreed date in the future. By entering in such contracts, customers could offset the risk that large movements in exchange rates could adversely impact the economic viability of their transactions. The World Bank, one of the Bretton Woods twins, concluded the world’s first swap deal in 1981, with IBM as the counterparty and Salomon Brothers as the arranger. Where Salomon Brothers led, others followed, piling innovation on innovation. An ever-increasing number of novel products designed to manage and control financial risks more effectively were gradually offered to customers. There is today an impressive array of financial risk management products available. When we compare the stage of development of our financial sector with that of the developed economies, or even with a few other emerging economies, it is evident that we are trailing quite far behind. India, for example, has a deep and liquid equity spot and derivatives market, a liquid forex OTC spot and derivatives market, an exchange traded currency futures, a market for Government securities, an interest rate swap market, a securitization market, a primary market for corporate bank and money market instruments, and a repo market in Government securities and corporate bonds. We are indeed trailing very far behind, aren’t we? But, by way of mitigation, I have to point out that the Indian exchanges remain largely domestic given that capital controls still exist there. Our banks deal very little in forward transactions and even less in options. We only have a thin spot market that does not offer adequate protection to our operators against the volatility of the dollar and the euro. If our system is still deficient, it is certainly not through want of trying. We have spared no effort to put in place the appropriate infrastructure to deepen the financial system. The enabling legislation has been put in place; there are continuing efforts at the Bank to develop a secondary market for Government paper; there are other initiatives by the Stock Exchange of Mauritius; and we have GBOT, the exchange which is hosting this event this evening. In December 2009, the Bank initiated foreign currency swaps tailor-made for the needs of our export operators when there was evidence that the volume of transactions on the domestic spot foreign exchange market had declined, and was causing some undue volatility in the market. This measure had a two-fold objective: first, to cater to the needs of the operators temporarily, and second, to encourage them to have greater recourse to hedging instruments for securing their rupee earnings. Although we maintained the swaps throughout 2010, they have not been used since July of that year. Participants still show reluctance to hedge their exposures – it is not easy to get rid of old habits. Most of the time, our exporters have evolved in a fairly well-protected market; they have developed a reliant client-base in Europe, and they relied on the expected depreciation of the rupee to sustain their operations. There was no need for them to have recourse to hedging instruments to control their risks. Well, as you all know, that era is over. Today, there is not a single exporter in this room who does not believe that the economic viability of his enterprise depends on the proper management of its risks, or to put it differently, there is not a single exporter who believes he can ignore developments on the currency front and his business will still flourish. Let me bring up some statistics to highlight the importance of the exportoriented sector in the Mauritian economy and the extent to which they are exposed. The EOE sector plays a key role in our economy and its sustainability and competitiveness are a matter of national interest. To take 2010 figures, the EOE sector represents around 6 per cent of GDP, accounts for 58 per cent of total export of goods, and provides employment to nearly 56,000 persons, which in turn represents a little over 10 per cent of total employment. However, the EOE sector and external demand-led sectors as a whole are subject to some structural weaknesses which make them particularly vulnerable to external shocks. A full two-thirds of our total export of goods was directed to European markets in 2010. This BIS central bankers’ speeches pattern of dependence on Europe is also evident on the services front. Two-thirds of our tourists also come from Europe. To complete the picture, half of total FDI inflows into Mauritius came from Europe in 2010. This geographical concentration on Europe for exports of goods and services, and inward investment, is not replicated on the import side. Europe provided only one quarter of our imports of goods. We are not only highly exposed to the European market; we also have to cope with the imbalance in the currency in which our trade is conducted. On the one hand, it is estimated that 41 per cent of our export proceeds is denominated in euros. The share of the US dollar and pound sterling stands at 39 per cent and 14 per cent, respectively. On the other hand, our imports are invoiced mainly in US dollars, with a share of 67 per cent. The euro represents 21 per cent and the pound sterling less than 2 per cent of imports. At one point in time, the combination of a downward slide of both the euro and the pound sterling on global currency markets, coupled with a stronger US dollar, raised serious concern in view of the negative implications of such a trifecta on a wide spectrum of economic activity in the country, including the sugar, textiles, tourism and BPO sectors. Today, fortunately the rupee has stabilized. We cannot, however, pretend that we are protected from all external instability, as the value of our currency in the domestic foreign exchange market is largely driven by the interplay of domestic and international factors. After almost 84 weeks of non-intervention in the foreign exchange market, the Bank started intervening again to correct emerging distortions in the market. So while we, as regulator are playing our part to stabilize the market, you exporters, who are the active participants, are also expected to play yours. You cannot continue to take one-way bets on the exchange rate or continue to try to pull the rug in your direction. It will come as no surprise to close observers of the Mauritian economic scene that, in its last Article IV Consultation Mission conducted early this year, the IMF finds that our currency is broadly in line with economic fundamentals. So let’s stop griping about rupee strength or weakness and take action to minimize currency risks. I have every reason to believe that our operators are beginning to appreciate fully the importance of managing their foreign exchange risk – the organization of this seminar with the support of MEXA, the exporters’ association, and the high turnout, are ample evidence of this. 2010 has been a very good year for our exporters in spite of the fragile recovery in our main export markets. Exports by EOEs rose by 11 per cent in 2010, nearly four times faster than the 2.8 per cent growth of 2009. The seafood sub-sector is said to be hauling in a very good catch and the textile sector remains stable, with full order books and recovering markets. However, we are conscious that the export sectors are facing daunting challenges in the wake of the uncertainty still surrounding the global economic environment, and, in particular, our main export markets. From our perspective, risks of subdued growth surround these traditional partners, although there are new opportunities arising in other parts of the world. But it is evident that now is the time, more than ever, for our export operators to rethink their business models to adjust to the new economic order. Now, more than ever, is the time for them to re-engineer their operations, achieve sustained rises in productivity and move into new products and new markets! Salvation can only come from diversification. Geographical diversification, sectoral diversification, and product diversification. Diversify, Diversify, Diversify – that should be our new mantra. This is more of a medium-term challenge though; the simplest way to start is to learn how to properly manage your foreign exchange risk and this is what you are here for today. Let me briefly comment on some misconceptions on the use of derivatives. There are indeed many old wives’s tales about derivatives, and believing in the fairly widespread myths may lead people to avoid them altogether. That would be a mistake. It is true that the tremendous growth of the derivatives market and the reports of major losses associated with derivative products have created a lot of confusion about those complex instruments. Derivatives have BIS central bankers’ speeches been considered as the villains in the collapse of the global financial system. In fact, companies and countries that bought derivatives in the form of mortgage-backed securities, credit default swaps and synthetic collateralized debt obligations as insurance, discovered, to their dismay, that the insurance cover was only as good as the counterparty at the other end of the contract. Some were of the view that the problem was not so much with the exotic nature of some of the products, or their volume, as with the fact that the derivatives were traded over the counter, that is, outside a transparent and regulated exchange. That is how the value of OTC derivatives reached ten times global GDP. Others blamed the lax regulation of financial derivatives and perverse incentives. This is why there are proposals on the table on either side of the Atlantic for the better regulation of all derivatives trading. Essentially what derivatives do is to hedge risks by reducing future uncertainties and managing them more effectively. Derivatives help to improve market efficiency because risks can be isolated and sold to those who are willing and able to accept them at least cost. But using derivatives requires a firm understanding of the tradeoff of risks and rewards, and the decision to use them should be driven by the participant’s strategic objectives. It is important that all users understand how their contracts are structured, the unique price and risk characteristics of those instruments, and how they will perform under stressful and volatile economic conditions. Derivatives users should establish a framework for effectively managing and controlling derivative activities. The dark side of derivatives is that, if they are used improperly or without a plan, they can inflict serious losses. So without a clearly defined risk management strategy, the use of derivatives can be dangerous. When used wisely, they can increase shareholder value by providing a means to better control a firm’s risk exposures and cash flows. A firm should be clear about the risks it is comfortable with, and the risks it does not want. Now that we have an exchange where currency futures can be traded, new opportunities are opened to investors. Besides offering better price discovery and lower transaction costs, the futures market is a major financial hub which provides an outlet for intense competition among buyers and sellers and, more importantly, a center to manage price risks. It is also a very liquid market. Currency prices are based on objective considerations of supply and demand and cannot be easily manipulated because the size of the market does not allow even the largest players, to move prices at will. Futures market prices depend on a continuous flow of information from around the world and thus require a high amount of transparency. It is an indeed very exciting time – watching the developments, albeit small, that are taking place in our financial system. We hope that after a few such training sessions we will soon see our exporters proactively seeking ways to hedge their risks. We have an exchange in Mauritius which is properly licensed and regulated, where there is price transparency. I can only encourage our operators to participate in it. GBOT currently offers gold and silver contracts and futures in five currency pairs: EUR/USD, GBP/USD, JPY/USD, ZAR/USD as well as USD/MUR. I have no doubt the exporters will find among these, the instruments that would most suit their needs. May I add that the Central Bank is also closely monitoring the currency trading. Since the start of operations until the end of April, the total turnover of transactions in the various currency pairs conducted by GBOT add up to nearly USD 1.4 billion. So far, so good, one may be tempted to say. But what is far from good is that trading in the rupee-dollar currency pair came to a grand total of less than USD 1 single million! There is considerable room for improvement, isn’t there? We will continue to support the development of professional training courses and investor education programmes to deepen expertise in the sector. One example of such training is the OptionsXpress® Investor Education Series of the Chicago Mercantile Exchange on futures options and which had the slogan: “Get your feet wet before you take the plunge”. I do believe this is what our exporters are precisely here for – to get their feet wet. It is important that you have a proper knowledge of the product and an understanding of the arithmetic of its leverage – which I am sure, should help dispel much of the mystique BIS central bankers’ speeches surrounding the world of derivatives. You should not overlook your treasury operations. This reminds me of General Motors (GM), the renowned US car maker which founded in 1919 the General Motors Acceptance Corporation (GMAC) to provide financing to automotive customers. Over the years, GMAC expanded to include insurance, online banking, treasury operations and so forth; it was at some point in time making more profits than GM itself. Eventually it applied to the FED to become a bank holding company and changed its name to Ally Financial Inc in 2010. I am not telling you that you need to go that far – by all means, do not stray too far from your core competencies or, put differently, stick to your knitting! But you should not overlook the importance of proper treasury operations and greater use of derivatives products that are now available to you. It might bring in some additional profits. Let me now conclude with a word of caution for the banks and foreign exchange dealers who are to be the main players in this game – the absence of robust risk management practices and adequate oversight surrounding this activity could have disastrous consequences. Banks and foreign exchange dealers should therefore ensure that their dealers are well trained, that there are clear-cut controls on their operations, and at least in the initial stages that the activities are audited on a concurrent basis. While the exchange has the responsibility to ensure against settlement risks, it is the institutions concerned that have to address internal procedural issues. We, the regulator, expect to see among all participants unrelenting emphasis on efficient risk management infrastructure. We encourage the ongoing development of a qualified talent pool with deep knowledge in the area, who will uphold proper market conduct. We intend also to maintain a close dialogue with all relevant stakeholders to ensure a robust and conducive regulatory environment for the development of a vibrant futures market in Mauritius. Whether you are reaching out to new markets, branching out into new products, or envisaging greater recourse to derivative products, it is change that is the order of the day. And I am reminded of Charles Darwin’s conclusion from his great study of species: “It is not the strongest of the species that survives, nor the most intelligent, but the one that is the most responsive to change”. I wish you all a very fruitful seminar. Thank you for your attention. BIS central bankers’ speeches | bank of mauritius | 2,011 | 6 |
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. | 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. BIS central bankers’ speeches 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 BIS central bankers’ speeches 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 BIS central bankers’ speeches 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 BIS central bankers’ speeches 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 BIS central bankers’ speeches 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 BIS central bankers’ speeches 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. BIS central bankers’ speeches | bank of mauritius | 2,011 | 6 |
Remarks by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Pre-Launch Event of the Cheque Truncation System, Port-Louis, 22 July 2011. | Rundheersing Bheenick: The new system for clearing cheques in Mauritius Remarks by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Pre-Launch Event of the Cheque Truncation System, Port-Louis, 22 July 2011. * * * I am very pleased to welcome you to the Pre-Launch Event of the Cheque Truncation System (CTS). We are today launching an awareness campaign on the new modern system for clearing of cheques, the CTS, which will soon be implemented in our country. The setting up of the CTS is a significant milestone in the Mauritian banking sector. It is the fruit of a very close collaboration between the Bank of Mauritius (BOM) and the Mauritius Bankers Association (MBA). I am very happy to have around me the Acting Chairman and the CEO of the MBA, as well as the CEOs of banks. As you may be aware, as per the provisions of the Bank of Mauritius Act 2004, the organization of the clearing house is done in conjunction with banks. So this is a BOM/MBA event. The Port Louis Clearing House Following the enactment of the Bank of Mauritius Act 1966, at the suggestion of the Bank of Mauritius, the Mauritius Bankers’ Association established, on 19th August 1968, a Mauritius Clearing House for the five banks which constituted the banking industry of the country at the time. The meeting place was the Bank of Mauritius. Later it became the Port-Louis Clearing House. Over the years, the Port-Louis Clearing House went through a process of modernization. First the cheques were standardised with the introduction of the Magnetic Ink Character Recognition (MICR) technology. Concurrently, information regarding clearing and settlement of cheques started being exchanged through the Mauritius Automated Clearing and Settlement System (MACSS). Nonetheless, the Port-Louis Automated Clearing House (PLACH), as it was renamed, continues to function on a manual mode, with the exchange of physical cheques. The CTS will do away with this manual process which, as you will see, is quite tedious. Let me briefly explain the process. The clearing process Cheques deposited by clients are collected from all bank branches (215) and transported to the respective head office. There, the cheques are sorted according to the respective banks, bundled together and transported to the PLACH twice a day, at 10.00hrs and 15.00hrs. The PLACH, a room of around 20 square metres is situated on the premises of the Bank – at times there can be around 20 people in a room of this size. There, the cheques are exchanged among the banks and the representative of each bank transports back his bank’s cheques to the head office where the verification of the cheques is carried out manually. The cheques that are in order are honoured, those that are not, are returned at the second clearing on the next day. The resources mobilized by the cheque clearing process total some 300 persons putting in some 325 person-hours on a daily basis, including the transport of cheques from the respective banks to the PLACH, and back. This process has been going on for the last 44 years. In 1968, the Mauritius Clearing House was processing an average of 2,000 cheques daily; today the number has multiplied tenfold. It is high time to move to a more modern system. The CTS will reduce work time and manpower and bring efficiency in the entire banking system. It will benefit customers who will find the waiting time to get access to their funds (float time) cut down from an average of two to five days to one to two days. BIS central bankers’ speeches With the CTS, we will align ourselves with countries like Singapore, India and Malaysia. In sub-Saharan Africa, we are among the pioneers of the system. The implementation of the CTS constitutes a key element of our Financial Sector Development Plan. The CTS In the CTS, the physical cheque which enters the banking system for clearing is processed from this point onwards by the digital image of the cheque – there will no longer be an exchange of physical cheques, as is currently the case. The CTS project is part of the Bank’s strategy of modernising the Payment and Settlement System. As you are aware, the management of the Payments and Settlement System is part of the functions of the Bank. The Bank with our commercial bank partners are endeavoring to make the system more efficient and reliable. The process of modernization started in 2000 with the implementation of the MACSS based on Real Time Gross Settlement principles for large-value transactions. Then, came the automation of the Port-Louis Clearing House which I mentioned earlier. Other important milestones were the legal amendments to the Bank of Mauritius Act and the Bills of Exchange Act to pave the way for the introduction of an electronic clearing system. Work on the CTS project itself started in 2005 under Mr B R Gujadhur, then First Deputy Governor of the Bank. The banking community has been closely associated with the project right from day one. In 2007, there was an exploratory mission to Hong Kong and Singapore, which was headed by the present First Deputy Governor of the Bank. The CEO of MBA also formed part of the delegation as did banking industry representatives. Unfortunately, we ran into some administrative hurdles on the way, and the project found itself delayed considerably. The CTS, which we are preparing to launch, is only the initial phase. In fact, more advanced systems of cheque truncation cater for image capture directly at Points of Sale (POS) and ATM’s – as is the case in India for example. As we implement other stages of the CTS, bank customers will not have to go to their banks; truncation will be done at the POS. We are also launching the Bulk Clearing System (BCS) which is a missing block in the Mauritian payment system. The BCS will cater for high-volume, low-value transactions such as salary payments, standing orders and direct debits. In the next phase, we envisage the implementation of a national switch to cater for card and POS transactions. The need for the CTS The cheque is currently the most visible and most widely-used instrument of payment in Mauritius. Currently it represents around 20 per cent of all non-cash transactions. In spite of several modes of electronic payment that banks have put at the disposal of their clients, an average of 21,000 cheques pass through the PLACH each day, for an amount of almost a billion rupees – representing 20 per cent of total MACSS transactions. If we take into account the number of intra-bank cheques, the daily volume of cheques approximate 50,000 for a value exceeding 2.6 billion rupees. These are serious numbers! Over the past five years, the volume of cheques handled by the PLACH has remained in the range of 5.2 million to 5.4 million annually, with the aggregate value constantly on the rise. We had to find a way to cope with this avalanche of cheques. Cheques, as debit instruments, come with an intrinsic settlement risk. A large proportion of unpaid cheques in the payment system may lead to systemic risk. It is our responsibility to ensure that such risks are well-contained in the interest of the stability of the financial system. To further this objective, the new system will identify high-value cheques for which BIS central bankers’ speeches there will be a fast track settlement. A system whereby clearing is done electronically with the use of digital images and the MICR Code will contribute significantly to reduce those risks. Awareness campaign This Pre-Launch Event will kick start the Cheque Truncation Awareness Campaign. I set up a Committee, chaired by the Deputy Governors and comprising representatives of the Bank and commercial banks, to drive the awareness campaign. I thank all members of the Committee for their dedication and commitment. The campaign which starts today will span over the next four weeks. Public awareness will be created through distribution of brochures (in French and in English); posters will be affixed in public places such as the Post Office, Mauritius Telecom, CWA, supermarkets etc. There will be press adverts and radio and TV spots in the following two weeks. We hope to have a dedicated programme on Cheque Truncation on MBC TV. We want to reach every household and sensitise every cheque user. There will be help desks both at the Bank and at individual banks, including branches of banks. Information will also be available on the Bank’s website as well as on the website of individual banks. We will have on our website a list of Frequently Asked Questions (FAQs). We count on you, ladies and gentlemen of the press, to help us in this campaign. What will change with the new system? The process of clearing will not change, except that the exchange of physical cheques will be eliminated and replaced by the digital images of the cheques. These digital images will be transmitted electronically by the presenting bank to the paying bank through the Clearing House. There will be no change for the consumer. It is in the internal plumbing of the system, in the invisible parts, that the change will happen. Clearing will be done from an IT-enabled platform; powerful servers linking all the banks will take over the process. The long and tedious manual handling of cheques will be replaced by a system that will not only reduce the float time before funds become available, but will contribute to combat fraud and forgery, and in the final analysis bring more efficiency to the entire banking system. The costs of implementing this system will be borne by the Bank and the Mauritius Bankers Association. There will be no additional costs to the consumer. Responsibilities of the drawer and user of cheques The new system will require that the drawer pays more attention when he draws cheques. He or she will have to adhere to certain norms. Some people still use the old format of cheques instead of the standardized cheques with the MICR code. We would strongly advise the public to ensure that they use the standardized cheques – after the 31st December 2011, the old format of cheques will no longer be accepted by the system but will have to be cleared manually. The system will keep track of people who make it a habit of drawing cheques with insufficient funds (chèques sans provision). This will help banks in drawing out the profile of their clients from their payment pattern. You will find more details on the differences between the present and the new systems in the brochures. It was my singular privilege to have welcomed you this afternoon, not just on behalf of the Bank of Mauritius but on behalf of the whole banking sector. The Cheque Truncation Project BIS central bankers’ speeches is one of a kind where both regulator and regulatees are united in a common resolve to modernize the Payment and Settlement system in Mauritius. The implementation of the CTS has only been possible with the active collaboration of the banking industry. I am therefore grateful to the MBA and all its members for the support they have given us throughout this process. Thank you. BIS central bankers’ speeches | bank of mauritius | 2,011 | 9 |
Welcoming remarks by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on the occasion of the Launching Ceremony of the Cheque Truncation System, Bank of Mauritius, Port Louis, 6 September 2011. | Rundheersing Bheenick: Clearing cheques – clearing the arteries of business and finance Welcoming remarks by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on the occasion of the Launching Ceremony of the Cheque Truncation System, Bank of Mauritius, Port Louis, 6 September 2011. * * * What a fine spectacle this is! To find the Bank of Mauritius and all the commercial banks in our jurisdiction – we have twenty of them gathered together on the same platform, looking in the same direction, with – in their midst − the top political and economic leadership of the country – the Prime Minister and his Minister of Finance, who, I cannot help observing, look perfectly at ease in our company. What a special symbol this is of the public/private partnership we enjoy as part of Mauritius Inc! I said “fine spectacle” because, these days, around the world, it is more usual to find bank regulators and their regulatees at each other’s throats, engaged in mutual recrimination. Over the waters, we see legislators and other policy-makers hauling bankers, labeled as greedy and irresponsible, if not downright criminal, over hot coals, breathing fire and brimstone and threatening to make up for past legislative and regulatory laxity by swinging the axe of overregulation. Judging from the language and the tone of the outrage and condemnation of bankers, it is a wonder that no bankers have yet been attacked by lynch mobs. In comparison, our own occasional grumbles are more in the nature of gentle parental raps on the knuckles of occasionally wayward children although one could be readily excused for thinking otherwise as our inventive press corps has made an art form of blowing up tiny molehills into towering Everests. But broadly speaking, this evening, we can feel proud that we have together navigated rather well, by judicious piloting, and perhaps a slice of good fortune, the turbulent waters of the economic and financial mayhem of the past few years, that has so troubled the western world and so many of its principal trading partners. Thus, in this general atmosphere of trust, respect and support, it is again an honour, and indeed a personal pleasure for me to be your guide to welcome you all to this launch event, which the Bank is happy to host on behalf of the entire banking community. Thank you for all being here with us. But there is more than mere symbolism here. The Bank has always viewed its statutory obligations relating to the clearing house and the payments system as a shared responsibility, to be discharged in conjunction with commercial banks. The Cheque Truncation System (or CTS) that we are launching today exemplifies that approach very well. A change in the way we process cheques was long overdue. And we would have rolled out the CTS long before, had we not unfortunately got ourselves embroiled in internal turf battles which almost paralysed decision-making at the Bank and led to serious operational and procurement difficulties. The Bank has a mandate to promote greater efficiency in the banking sector. The system of payments and settlements is the backbone of any economy; it forms the arteries for conducting trade, commerce and indeed all economic activities in a country; creating the momentum for economic growth, prosperity and welfare. It is an essential feature of the modern state. First, may I be allowed to offer a little dose of the history of the decision to modernize the way we process cheques. The Port Louis Clearing House (PLCH) has been functioning since 1968, meeting twice a day, at the premises of the Bank, every working day including once on Saturdays, that is when our high street banks used to work on Saturdays, (Ah! those were BIS central bankers’ speeches the days). At that time cheques of different banks varied in size and format, which did not pose any problem when cheques were handled manually. But a challenge was presented to all the banks when in the early 1990’s, the then Managing Director, Ranapartab Tacouri, tasked Anil Gujadhur, who was later to succeed him, to automate the handling of cheques by moving to electronic capture of essential fields. The first stage in the modernisation process, somewhat delayed for reasons we need not go into here, was the introduction of the Mauritius Automated Clearing and Settlement System (MACSS) in 2000. This provided the springboard for a quantum leap in the transformation of the payment system. A strategic decision was taken to focus on this electronic platform for real-time high-speed settlement of large-value transactions. The automation of cheque clearing was put on the back burner. I understand that they toyed with the idea of calling it MACH with obvious reference to the MACH number, which measures the speed of sound. This would have been quite ironical, given the leisurely speed at which matters progressed! After this, the next logical step was the extension of this electronic clearing to all cheques. At first, there was some resistance, especially from the smaller banks who were worried about the added cost. The resistance was overcome and, by 2003, all cheques were standardized and made machine-readable, which enabled the PLCH to transform itself into PLACH, adding the critical A for “Automated”. The process of standardization continued with the introduction of MICR-technology – Magnetic Ink Character Recognition − which is an electronic code line, in all cheques in 2002. But there were also some legal obstacles in the way and these were only resolved with changes brought to the Bills of Exchange Act in 2004. As part of our due diligence, we fielded a joint Bank of Mauritius and Mauritius Bankers’ Association mission, led by my First Deputy Governor and the Chief Executive of MBA, to Southeast Asia where the members could see for themselves how cheque truncation has modernized cheque settlement in Hong Kong and Singapore. They came back convinced that this was the way of the future. In the meantime, modernisation continued with the introduction, in 2009, of the RTSX, a system based on the then best international practice and supporting multi-currency transactions, with extended settlement windows. Now many of you will know that missions to Asia are the easy part; it is putting the lessons we have learned there into practice that taxes our resolve, our skills and our stamina. Since then, senior officials from commercial banks, at different levels and with different backgrounds, have worked diligently and hand-in-hand with Bank of Mauritius staff to take the project through to completion and now to the formal launch of the CTS. We might regret that we took so long to get us here and we owe an apology to all cheque users for the delays, but as the system unfolds it will be of immense benefit to all. We hope to move to the next stages, may be not quite at the speed which you measure in mach numbers, but somewhat faster than it took us to get here. This is a potted history of the process leading us to CTS. All this required close participation not only of the banking industry but of business in general and of representatives of that widening community of cheque-users, as so many more Mauritians have moved, in the past generation from keeping their cash and savings in little brown envelopes under the mattress, to the regular use of high street banks. Let me pause here to put to rest a canard about the cost of the CTS which is doing the rounds and seems to be gaining some traction. No, it is not costing Rs100 million. And no, it is not costing more than the cost proposed by a party which is styling itself as the “preferred bidder”. The initial costs work out at 35% of the costs of the self-appointed “preferred bidder”. After taking into account the costs of the software license and maintenance costs over five years, the project comes in at about 60% of the other offer. The cost over five years amounts to a grand total of less than Rs19 million – a far cry from the Rs100 million being bandied about! It is a simple thing to write a cheque and put it in the post. But most of us are blissfully unaware of the complex journey these ubiquitous cheques now make before the values they BIS central bankers’ speeches represent are transferred to the account of the payee. So long as it works, there’s no reason why the normal cheque-users should concern themselves with what is essentially a matter of the internal plumbing of our financial system and payments infrastructure. I’m sure you will be glad that only time inhibits me from revealing everything you always wanted to know about the plumbing arrangements for cheques, but were probably afraid to ask. But let me just give you a glimpse of the complexity of that everyday process which will throw some light on the full extent of the change that the, shortly-to-be-unveiled, CTS will bring us. In Mauritius, as elsewhere, plastic and electronic payments have made substantial inroads over the years. But cheques still constitute a full 20 percent of all non-cash payments in the country. We have half a million cheques passing through the Clearing House each month, that is 25,000 cheques each working day. Add to this the intra-bank cheques, that is cheques paid out from and paid into the same bank; and we are talking about 50,000 cheques each working day. Whilst this volume of cheques has been continually rising by about 3% since I have been at the Bank, the value transacted has been rising even faster, increasing by nearly 30 percent over the same period of four years. The total average value of cheques cleared at the Clearing House exceeds Rs 1 billion a day. If we add to that the value of intra-bank cheques, we are now clearing over Rs2.5 billion in cheques each working day. 50,000 cheques cleared everyday; Rs2.5 billion settled everyday – these are serious numbers. Now, just imagine those 21,000 cheques, or the 50,000 if you look at all cheques and not only those coming to the PLACH, beginning their journey at one of the 215 or so banks and bank branches dotting the length and breath of the country, laboriously finding their way to the main branch where they are processed, sorted and bundled, then being taken twice a day to the PLACH by the fourteen clearing banks, then beginning their journey back, and starting all over again if they bounce for any reason. Each of those cheques went through many hands, often travelling many miles. Everyday, some 300 officers – or 5% of banking sector employees − put in an estimated 325 person-hours to operate the system. No wonder it took three to five days before value was received for cheques cleared. This process, to which we say goodbye this evening, has served us well and I would not wish to run it down. It was quite efficient and reliable in its own way – few cheques went astray. But, in these modern high-tech times, it was clearly wasteful, inefficient, and antiquated. It had clearly done its time and was ripe for overhaul. As we proceed to bury it, spare a thought for all those wonderful people who kept it running so well for so long. Happily this evening our Prime Minister will officially launch its successor and present the very first cheque for clearance under the CTS. I’m pretty sure we don’t need to hold our breath in case it bounces, as I know this Bank’s financial credit is sure and has not been downgraded, unlike that of some who have been making the news. So what does the CTS do for us? To begin with, it does away with the need for the physical movement of cheques to the Clearing House. Instead, their images are captured electronically and used for transmission and processing. All this happens in the back-office and may not be visible to cheque users. The CTS is more efficient, has lower attendant risk, it is less time-consuming and less costly into the bargain. It has many benefits for both users and for banks. Cheque imaging makes it easier to detect fraudulent transactions as electronic processing facilitates signature authentication, curtailing forgery and other cheque alterations. It also clears the arteries of business and finance. Funds become available faster as the clearing cycle is shorter. The significant reduction of the float-time enables a better management of cash flows and working capital for economic operators. The CTS will add to the convenience of cheques and may even stimulate their greater use as there are, at present, many merchants who are reluctant to accept cheques for reasons of security and liquidity. Over and above its benefits, the CTS also has an emblematic value. It illustrates our unrelenting quest for change, for innovation and for new technology to achieve greater BIS central bankers’ speeches efficiency in the banking industry, to enhance our banking experience and to increase our competitiveness, especially on those vital pillars of the GEF rating for efficiency enhancement and technical innovation. It is not surprising therefore that the news of the new Mauritian system is already exciting the curiosity of other countries and we have had over the past two years delegations from central banks of Kenya, Nigeria, Papua New Guinea, Rwanda, Seychelles and Uganda, visiting us to learn more about our new system which we are putting in place. The CTS is here. But our quest for efficiency enhancement and innovation continues. So let me give you a very brief overview of what you may expect from the Bank of Mauritius in the months ahead. – First, we shall extend the CTS to the Accountant General’s Office so that Treasury officers will be spared their daily trudge to the bank’s counters, carrying a sackful of paper cheques. They will be able to scan and digitize their cheques and transmit them for clearance just like the clearing banks. – Second, we shall examine with the Mauritius Revenue Authority whether it may also benefit from similar arrangements. We greatly value our collaboration with MRA and it was in response to their requirement that we introduced a multi-currency payment facility which assisted us to obtain the mandate to run the COMESA REPSS (Regional Payments and Settlement System). – Third we are also implementing a Bulk Clearing System for deferred net settlements, compliant with the World Bank and BIS recommendations, This will allow low-value high-volume regular transactions such as payrolls, standing orders, direct debit cards and point-of-sale transactions to be incorporated in the electronic system. – Fourth, we begin work soon on a major project to introduce a National Switch, provided for under our Act, − a technological platform which will become a key element of our national payments infrastructure. It will serve as a sound, low-cost, platform for future e-payments. This ATM/POS switch will enable us to handle domestic ATM and POS transactions without incurring the extra charges which apply when the handling is done via the card networks. Once we provide e-clearing on a locally-provided network like the National Switch, we are confident that our payment system infrastructure can stand comparison with the best in the world. A word about the banking landscape and the global economy may be in order. We can crow as much as we want that our banks and our economy have been spared the worst effects of the prolonged crisis which has ravaged the banks and the economies of the developed world. The fact of the matter is that we live in an interdependent world and, whether we like it or not, we are an open and export-dependent country. Our large import and export elasticities mean that we are exposed in multiple ways. There are dark clouds hanging over the global economy and the recovery, which never quite got going, is now clearly faltering and growth is stalling. Plans to save the Eurozone succeed one another like one of those interminable soap operas, but they do not succeed. The doomsayers are out in full throttle and another recession is on the cards. The crisis, far from abating, may actually be mutating into an even more intractable form. For global economic recovery, we may well be in for the long haul. We shall have to take preemptive measures wherever we can to ensure that we minimise any negative fallout. Large universal banks are facing increasing balance-sheet pressure, under the double impact of past bad debts, including sovereigns, and the prospect of higher capital-adequacy and liquidity rules coming under Basel III. Several, like UBS, ABN/AMRO, Credit Suisse, Barclays, HSBC, and others have started laying off large numbers of staff. Others, like Citigroup and Santander, are disposing of overseas branches where they can unlock value to raise much-needed capital. This has at least three lessons for us: BIS central bankers’ speeches First, the worsening economic outlook underlines the need for cost-cutting measures and for increasing efficiency in the banking sector – which is exactly what we aim to achieve with the CTS which we are rolling out this evening. Despite our skilled navigation, we remain exposed to the financial distress and the sovereign debt crisis of the western world. Any step we can take to increase efficiency and complete financial transactions more rapidly to reduce the need for working capital, will help us to elude the general slowing of the world economy and the adverse impact of the faltering recovery elsewhere. Second, we should not be surprised if some of the international bank branches and subsidiaries which are operating in our country are affected by the policies being pursued by their overseas parent. We can seek to insulate our jurisdiction a little by insisting that any future international bank, that sets up operations in Mauritius, does so via a subsidiary. Third, it is vital that we address issues going under the seemingly-innocuous triple acronyms of LCFI, SIFI, and TBTF. Telling ourselves “It won’t happen here!” won’t do. We must come to grips with LCFI’s, large complex financial institutions, especially those that are SIFI’s, systemically important financial institutions, and may qualify as TBTF, or too big to fail. This last point is particularly troublesome for a small economy. We have a high degree of concentration in the banking sector, with the Hirshman-Herfindahl Index standing at 2024 in June this year, which is unusually high and well above 1800, the entry point for high concentration. The top two banks, both local, have total domestic assets which exceed by more than 30 per cent the combined assets of all the other 15 banks which have domestic operations. We have associated problems arising from the concentration of asset ownership in the country − which makes it very problematic to apply such notions as “independent directors”, “related party transactions”, or to have recourse to such prudential principles as the regular rotation of auditors and so forth. These may become a source of vulnerability and undermine financial stability as contagion can spread rapidly through the domestic banking and financial system. More pointedly, some of the banking groups have just become too large and too diversified for the central bank to supervise as effectively as we would wish with the resources at our disposal. We intend to work with the banking industry, and in particular with the banks directly concerned, to ring-fence domestic banking operations which will be subject to full supervision including risk-based and macroprudential supervision. To achieve that, we shall move away from the current bank-holding model to the bank-subsidiary model. This will require some re-structuring and re-engineering. That, and more innovation is for the future. Before I leave the changing face of the banking scene let me offer a final word on how the central bank is playing its role beyond our borders. We have been providing technical advice to many of our central banking colleagues from abroad who have come to assess our innovations in the payment system, credit information, the conduct of monetary policy, foreign exchange management, and even how we run the Governor’s Office. We now host the REPSS to meet the cross-border payment settlement needs of COMESA countries. We are now engaged in consultations to make REPSS the settlement platform for countries beyond COMESA. Our voice is increasingly heard in regional fora. And the hot news: we have just been invited, along with ten other countries to join the Financial Stability Board’s regional consultative group for Sub-Saharan Africa. The FSB, which functions under the aegis of the BIS in Basel, develops and promotes effective regulatory, supervisory and other financial sector policies to further financial stability. It comprises 24 countries and jurisdictions of systemic importance. The regional consultative groups will feed into FSB deliberations to support the work of promoting international financial stability. For so small a country, in so large a region, − this is a signal honour with a GDP of US$10 billion, or less than 0.6% African Continental GDP. So the process of banking and financial sector reform continues. Rest assured that your central bank remains both vigilant and innovative, seeking always to ensure that we have a safe, dependable, and efficient banking industry, which fulfils our role of clearing the way for BIS central bankers’ speeches local modern business and for all those who use our continually improving high’tech banking system. And so this evening as we focus on the new Cheque Truncation System, at a stroke the Prime Minister will now ensure that old process of manually clearing cheques passes into history! Thank you. BIS central bankers’ speeches | bank of mauritius | 2,011 | 9 |
Remarks by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the post-MPC Press Conference, held at the Bank, Port Louis, 14 June 2011. | Rundheersing Bheenick: Latest decisions by Mauritius’s Monetary Policy Committee Remarks by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the post-MPC Press Conference, held at the Bank, Port Louis, 14 June 2011. (English version of the creole transcript) * * * Ladies and gentlemen from the Press, I extend a very warm welcome to you all. I have invited you here this morning to comment on the decision taken by the Monetary Policy Committee (MPC) yesterday. I will also answer your questions. As usual, I have by my side my two fellow deputy Governors, who are also members of the MPC, and you may set your questions directly to them if you wish. It would be good to place the final decision of the MPC in its proper context. The context brings us to the end of last year, when, at the meeting of September 2010, the MPC had decided unanimously to lower the Key Repo Rate by 100 basis points because the Mauritian economy was showing signs of slowing down and business sentiment was gloomy. It would be good also to take stock of what other central banks were doing at the time. Indeed, there were no central banks lowering their policy rate, much less by 100 basis points. We were going against the tide, because we believed that the Mauritian economy was then in need of a lifeline. So we went for a very drastic cut of 100 basis points. It was a calculated risk. It was clear that after taking such a risk, the MPC would soon have to take things back in hand. And that is precisely what the MPC did after a period of six months – remember we had said we would leave the conditions unchanged in the market during that period. As from the month of March 2011, we began a process called normalisation of interest rates. Normalisation means that the interest rate must be positive in real terms, beyond the expected inflation rate – this is what we call, in technical terms, to stay ahead of the curve. When we raised the rate by 50 basis points in March, we emphasized that the interest rate had to be normalised. The message was clear: firstly, this increase of 50 basis points, and secondly, the normalisation process would continue. At the last meeting, the MPC considered the state of the Mauritian economy and, at the same time, reviewed global economic conditions. There are some encouraging trends at the local level, but also some potential source of concern that could increase downside risks in future – we will be coming back to these later. At the same time, there are signs of overheating on the domestic front, so that there is a school of thought that says we should leave the rate unchanged, keeping the monetary policy stance on hold, until the clouds, that threaten some economies at the global level, dissipate. Unfortunately, inflationary pressures have persisted. For the month of April, for example, the year-on-year inflation showed a small decline, barely measurable, from 7.2 percent to7.0 percent. It was too early to say that it was a reversal of trend. Eventually, when the May figures were released, the year-on-year inflation rose to 7.1 percent, no longer showing a downward trend. In other words, inflationary pressures still persist, despite the hike in interest rate of 50 basis points at the MPC meeting in March 2011. At the same time, if we look at other measures of inflation, that is to say, the Core 1 and Core 2 inflation, also based on the year-on-year methodology, they confirm that the underlying inflationary pressures still persist. This is an indication that we must continue to tighten our approach to monetary policy and this is what we have done on the domestic front. If inflationary pressures do not abate, we intend to continue on the same track in order to get ahead of the curve. In other words, the normalisation process will continue. BIS central bankers’ speeches There are some who believe that the economy is rapidly slowing down and the balance of payments is a major source of concern. They also point out that FDI flows fell significantly in the first quarter of 2011, and unemployment rose slightly from 7.3 to 7.8 percent last year. According to them, these are factors that should be considered to maintain the status quo, that is, no increase in the Key Repo Rate. But our reading is a little different – we believe that the performance of the Mauritian economy is fairly good. Earlier this year, we thought that growth would be around 4.4 percent. Presently, the growth forecast of the Central Statistics Office is 4.5 percent, and since March, we at the Central Bank, had forecasted that growth would be 4.6 percent. Now we have every reason to believe that it could be above 4.6 percent. Let me explain: growth of exports in our main sectors, whether textiles, seafood and tourism, is buoyant. The order books are full for the textile sector. Since our competitors have higher levels of inflation, for example in China, we believe that prospects are improving for our exporters. Our export revenues reached a record level of 15.2 billion rupees in the first quarter of 2011 (quarter on quarter) compared to the last five years. Tourist arrivals for the first quarter are also a record. We believe that the current estimate of tourist arrivals for the year, which is around 980,000, may in fact surpass the onemillion mark. There are unprecedented levels of growth to date, 25 percent in one case and 40 percent in others. Of course, these growth rates are for smaller markets, not for major ones, but they show that the diversification efforts and promotional campaigns, conducted by the MTPA and others, are beginning to bear fruit. There are constraints such as air access, and if these constraints are reviewed and corrected, there is no reason why we may not exceed the figure of one million tourist arrivals. So, the tourism sector is doing very well. But we need to focus on target markets; there are traditional markets, two or three markets that are in bad shape. The English Market and the Italian market are on the decline, so is the Belgian market. Europe is losing ground in some areas. Let me come back for a moment on what is happening locally before proceeding to the international front. I was saying that FDI flows had fallen very drastically. If we take the figures for the first quarter of 2011, they represent about 25 percent of the FDI flows we had received during the first quarter of 2010. As you are all aware, we depend mainly on these flows for our balance of payments equilibrium. Our balance of payments, in terms of visible trade, is in deficit. We make up for this deficit by the revenues from services and FDI flows and by draw downs from foreign currency loans by Government. If the trends we observed in the FDI flows do not reverse, we may have problems further down the line. These problems may affect our economic fundamentals drastically and could even affect the value of the rupee. We believe this is a concern not only for the Central Bank, but also for the country, and a signal to authorities concerned to redouble their efforts to continue to attract more FDI flows, which would enable us to continue on our path to development, in the same way as we have done so far. We hope that this decline is one-off and will be corrected rapidly. Anyway, a single quarter is not enough to make forecasts. And we have reasons to believe that the figure of 16 billion rupees, which the Board of Investment has estimated as FDI flows for 2011, could be achieved; otherwise we could face difficulties later. The third point is the issue of employment. If we make a very brief reading of the situation in terms of employment, we find that the unemployment rate has increased during the first quarter. Normally during the first two quarters of the year, the unemployment rate increases on account of seasonal factors. But in general, the rate of unemployment is not a concern, since the climate at the global level itself is not conducive to job creation. So, if in Mauritius, we have an unemployment rate which is just under 8 percent, there are countries where unemployment exceeds 15 percent and could even reach 20 percent. Given a crisis situation, we do not believe that we would encounter major problems with unemployment in macroeconomic terms. However, in microeconomic terms, we have a problem. There is a mismatch between the demand for jobs and job creation. Nevertheless, in 2010, there have been 11,300 jobs created, notwithstanding the employment of foreigners. We believe that BIS central bankers’ speeches this year, about 9,500 jobs will be created, including 500 jobs for foreigners. Job creation will therefore continue in Mauritius. But we must renew our efforts in re-skilling, in view of creating jobs in sectors that are growing, rather than in areas where people usually seek employment, like the civil service. The outlook is more interesting in the ICT and BPO sectors, for instance. So unemployment is not an immediate issue, but it is not the case for inflation. After a review of the situation on the domestic front, the MPC chose to rather focus on control of inflation than on fears over growth. Let us now move to the international scene. As you know, the crisis is still here. There are some major economies, very important to us, which are in very bad shape, especially the US market. The end of the QE2 could create more volatility for the dollar and we still do not know what will happen after that. So we must exercise great vigilance in relation to the value of our rupee which could appreciate on the back of a weakening dollar. The problems confronting the euro area still persist. China is having problems with inflation, and it is currently having recourse to outsourcing to Vietnam and Cambodia. So, internationally, there are major concerns. Despite this, the general view is that during the second quarter, the situation will improve and there will be recovery at the global level. There are concerns over food and commodity prices, as well as energy prices. You are probably aware that at the last OPEC meeting, no consensus was reached to increase production. And if demand in the global economy is too high and oil production does not increase, it may result in a hike in oil prices. The good thing is that Saudi Arabia has indicated its intention to continue to increase production unilaterally. If the global recovery for the second quarter is much stronger than the first quarter, there is a risk that food and commodity prices start going up again – we must be prepared for a further increase in food and commodity prices. A positive note was that, when the FAO index rose, there was no corresponding increase in the prices of the foodstuffs that Mauritians tend to consume, namely, dairy products, cereals and rice. But if there is recovery, there is a risk that food and commodity prices and oil prices might go up again – which will represent a new source of inflation for us. This brings us to the need of exercising control over rising prices in Mauritius – we welcome Government’s initiative to set up L’Observatoire des Prix. This is an excellent initiative indeed. But L’Observatoire des Prix alone will not solve the problem of rising prices. It is a tool among many others, just like monetary policy is a tool among many others. In the case of L’Observatoire des Prix, it must be supported by greater efforts geared towards making changes in the consumption pattern of people and those that determine prices, in other words, changes in consumer behaviour and price-setting behaviour. The two must go together, otherwise L’Observatoire des Prix would not contribute towards keeping inflation at reasonable rates. We hope that L’Association des Consommateurs and other efforts in the field of financial education would lead to changes in consumption patterns through better informed consumers. Some people have expressed concern that there might be in Mauritius what is called stagflation. Stagflation had made the headlines in the late 60s, early 70s, to describe the problem which the British economy was facing at that time. We are very far from this situation – we have a high growth rate, not far from our trend growth rate. Firstly, a feature of stagflation is that the economy should be stagnating. Growth of 4.6 percent is not at all what we could call a stagnant economy. Secondly, there must be a high rate of inflation, perhaps double-digit inflation, if not an inflationary trend that points to double digits. Our inflation rate, depending on which measure you are using, is 4.8 percent (CPI measure), or 7.1 percent (measured year-on-year) for the last month. It is true that the trend is upward, but unfortunately for the proponents of stagflation and fortunately for us, inflation is far from a double-digit inflation. Inflation expectations are well-anchored. Our last Inflation Expectations Survey brought it out very well – there is a majority of people who believe that inflation will remain within the range of 5 to 8 percent. 5 to 8 percent inflation is not what one would expect in an environment of stagflation. The last element of stagflation is that there is no job BIS central bankers’ speeches creation, and rising unemployment. In Mauritius, there is job creation – more than 9,500 jobs including 500 jobs for foreigners will be created in 2011. Therefore forget about the notion of stagflation in Mauritius! Our economy is quite buoyant; we are optimistic that we will go beyond the 4.6 percent growth. That is why we opted to continue the normalisation process so that inflation does not come to play the spoilsport. Some additional points: The Monetary Policy Challenge (MP Challenge). We will be launching our fifth edition of MP Challenge at the end of the month, and we hope there will be more participation this year. As you know, the MP Challenge is an invitation to college students and young academics to form a team to simulate the process of “monetary policy making” in Mauritius. And we set up a separate panel to evaluate entries. In this context, we have recourse to the University of Mauritius or the University of Technology. We are part of the panel, of course, but we trust the representatives of the universities to evaluate the entries. We hope there will be a good response – last year there were 23 participants, we hope that this year there will be still more. My Second Deputy Governor mentioned earlier about business sentiment. It is good to point out that there have been very positive feedbacks from the Business Sentiment Surveys conducted by the Mauritius Chamber of Commerce and Industry. We hope that by the end of the year, the Bank of Mauritius will be able to launch a Business Sentiment Survey, targeting a sample of respondents slightly different from that targeted by the Mauritius Chamber of Commerce and Industry, which primarily targets its own members. We hope to launch this survey before the end of the year since we have had good results from the Inflation Expectations Surveys. These surveys have been successful and we believe we can expand the range of surveys that we have in Mauritius. Another very positive point I want to make is on productivity in general and specifically, on capital productivity, which has consistently increased last year compared to the previous year. This partly reflects the investments made by our enterprises in previous years to enhance their level of technology. We have concerns about the decline in public investment, the GDFCF. We are still more concerned about the even more substantial decline in private sector investment. We hope that measures will be taken to reverse this downward trend. We hope firstly that there will be an increase in the GDFCF and that secondly its composition will favour private sector investment. The prospects are not good in private sector investment, most of which, excluding purchases of aircraft and ship, consists of construction projects, IRS projects and hotel projects that are now completed. Several other projects in the IRS are still pending and are unlikely to find financing. So investment is a source of concern. What about the savings side? The reduction in the gap between inflation and savings rates charged by banks has resulted in an increase in the level of savings in Mauritius. It was a source of great concern to us when two years ago, we had raised this issue. At that time, the level of savings had reached around 12 percent, now it exceeds 16 percent. It’s a good trend; we hope that, with this increase in interest rate, which should be reflected in the savings deposit rate charged by banks, investors will be even more encouraged. And to help you compare Mauritius with other countries, we will circulate two tables – one to highlight the rate of inflation in countries that are relevant to Mauritius or in comparable countries. From the table, you will see that there are only three countries that have a higher inflation rate than Mauritius, namely India, Indonesia and Romania. All other countries have an inflation rate lower than that of Mauritius. A big effort is required to bring back our inflation rate in the ranks. A continuous effort should be considered by everyone to control all sources of inflation. The second table that we will circulate will show that the monetary policy stance of the Bank of Mauritius is not different from that of other central banks. The table will show you what other central banks have been doing in recent months in terms of monetary policy and interest rates. These two tables will allow you to situate Mauritius vis-à-vis other countries, as it is important to gauge the differential between us and other countries. BIS central bankers’ speeches | bank of mauritius | 2,011 | 9 |
Statement by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, Port Louis, 7 October 2011. | Rundheersing Bheenick: Review of the year gone by and reflections on the present and future outlook Statement by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, Port Louis, 7 October 2011. * * * As I settled down to write this, it struck me that what I had described as “stressful and extraordinary times” in my previous Statement seem set to last for quite some time. The global economy has become even more unpredictable and much of the traditional thinking is being put to the test as longheld paradigms are thrown overboard. Hopes of a quick and easy recovery faded away rapidly. New threats have emerged. Persistent Eurozone sovereign debt concerns have thrown markets into turmoil, driving bond-yields of vulnerable economies to record highs. The situation has been no less alarming on the other side of the Atlantic where Standard & Poor’s downgraded the credit rating of the US, a debt default was averted in extremis, and financial markets plunged. Business sentiment and consumer confidence have nosedived as businesses and households postpone spending and consumption. All these, together with jittery markets hungry for good news that, when they come, prove all-too-fleeting, make this super-cycle one of the most volatile ever witnessed. In most advanced economies, the global recession had a negative impact on budgetary conditions, with many governments gradually adopting austerity measures. Under the pressure of market sentiment, fiscal consolidation and structural adjustments have become the order of the day. Emerging economies could not long survive unscathed. So it has been for Mauritius. As we engaged to deal with these snowballing challenges, the Bank remained alert and nimble, taking decisive and timely action to protect the interest of the Mauritian economy. As in years past, let me recapture the highlights of the year gone by and briefly comment on the present and future outlook. The financial health of our banks was at the top of our agenda. They remained resilient and profitable, with aggregate pre-tax profits standing at Rs13.3 billion in 2010/11, as against Rs13.9 billion in the preceding year. A sure sign of the fine health of our banking sector was the entry of additional operators on the banking scene, with (i) the conversion of a non-bank deposit taking institution into a full-fledged bank in June 2010 and (ii) the first Islamic bank starting operations in March 2011. The Monetary Policy Committee (MPC) took a number of proactive measures during the year. When the economic climate showed signs of losing momentum, the MPC decided unanimously in September 2010 to lower the Key Repo Rate (KRR) by a full 100 basis points, to support the on-going restructuring of enterprises. This policy decision went in the opposite direction of the stance that most central banks were adopting at the time. We were vindicated in our decision when domestic data releases in the first half of 2011 indicated that the economy was performing well despite the uncertain global economic environment. However, since inflationary pressures started building up, the MPC adjusted its monetary policy stance and proceeded to two successive hikes in the KRR in March and June 2011. Inflation rose sharply from 1.7 per cent in June 2010 to 5.1 per cent in June 2011. The year was characterised by a system plagued with excess liquidity, a situation diametrically opposite to what prevailed in many leading economies. The Bank BIS central bankers’ speeches innovated by issuing instruments of longer maturity, namely Bank of Mauritius Notes of 2-Year, 3-Year and 4-Year maturities. To complement these measures, we raised the Cash Reserve Ratio in successive steps from 5.0 per cent to 7.0 per cent. The measures were so successful that the excess reserves disappeared, with the system even experiencing short bouts of liquidity stress. Faced with the impact of the low interest rates on our investments in the major currencies, we actively pursued our reserves diversification strategy – you will remember that we had more than doubled our gold holdings to around 6 per cent of our reserves. We reduced our percentage holdings of US dollars which stood at around 70 per cent in 2001 down to around 30 per cent currently. We increased our holdings in high-yielding currencies – namely New Zealand dollars, Australian dollars as well as the Danish krone and the Swedish krona – and our investment in Fixed Income Securities. We entrusted a new mandate for the management of 150 million euros to the Bank for International Settlements. We added the Sovereign Investment Partnership of the World Bank as a portfolio manager for an initial tranche of 100 million US dollars. These initiatives are already bringing results and have strengthened our balance sheet. Discussions are on-going for the investment of part of our reserves in the securities of some BRICS, namely India, South Africa and China. We have consolidated our foreign exchange reserves during the year. The gross official international reserves of the country increased from Rs70.1 billion at the end of June 2010 to Rs81.7 billion at the end of June 2011. Furthermore, the import coverage of the country’s net international reserves increased from 39.5 weeks at the end of June 2010 to 41.5 weeks at the end of June 2011. Currency markets showed very high volatility throughout Financial Year 2010/2011. In spite of this turbulence, we succeeded in maintaining a fairly stable exchange rate during the year under review. As observed by the International Monetary Fund in its Article IV Consultation Report of February 2011, our currency was broadly in line with economic fundamentals. While in most advanced economies, there was a marked deterioration in the public accounts, our public finances have proved to be quite resilient to shocks. Public sector debt remained quite close to the statutory level of 60 per cent of GDP. From 57.7 per cent as at end-December 2010, it fell to 55.9 per cent at end-June 2011. Moody’s rating of Baa2 and stable outlook for Government of Mauritius bonds reflected the healthy state of our public finances. We struck a major blow for transparency when we took the bold decision to publish the CAMEL Ratings of all banks in the country. The first ratings were published in April 2011 and it is hoped that making these ratings widely available will lead to a better-informed consumer while encouraging banks to keep up their performance. The Bank, now a full member of the Islamic Financial Services Board, pursued its efforts to consolidate the enabling environment for Islamic finance. We joined in the global initiative to launch the International Islamic Liquidity Management Corporation as a founder-member in October 2010, along with ten other central banks and two multilateral organizations. We provided for staff training in Islamic finance under the Memorandum of Understanding (MoU) which we signed with Bank Negara Malaysia in October 2010. We also joined the International Association of Deposit Insurers as an Associate member as we are actively working towards the establishment of a deposit insurance scheme for Mauritius. During the year in review, in collaboration with the banking sector, we put in significant efforts to accelerate the upgrading of our national payment system to BIS central bankers’ speeches enable the clearing of cheques electronically. I am pleased to report that the cheque truncation system is now a reality in Mauritius and cheques are cleared in real time. I shall come back on this development in my next Statement. We made much headway in consolidating our position on the regional front. The Bank of Mauritius was appointed as the Settlement Bank of REPSS, the Regional Payment and Settlement System, to assist the cross-border payment and settlement needs of exporters and importers of COMESA member-states through their respective Central Banks. We are all set for REPSS to go live soon. The System will allow for same day settlement at much lower cost as compared to the current system which relies on settlement via universal banks established in money centres. We are also looking into the possibility of extending the REPSS platform to countries beyond COMESA. In our endeavour to strengthen relations and bilateral ties with peers in the region, we welcomed Governor Laporte of the Central Bank of Seychelles at the head of a delegation to share our experience in certain areas of central banking. We hosted the 31st Meeting of the Bureau of the COMESA Committee of Governors of Central Banks in August 2010. A further focus this year was our enhanced Communication and Outreach Programme. The most direct form of communication was through a program of regular speeches by senior Bank officials, including myself. In fact, a record number of speeches have been uploaded on the Bank’s website to inform the public on the thinking of the Bank on various issues of topical interest. The MPC Statement and the post-MPC press conference have become reference points for the media and the public at large, including Mauritius-watchers overseas. The decision-making process of the MPC has thus become more transparent, enhancing its accountability. We also received the visit of eminent speakers from abroad, namely Paul Collier, Professor of Economics and Director of the Centre for African Studies, University of Oxford who delivered a talk on “Central Banking Challenges in Africa”, and Mr Steven Barrow, Head of G10 Strategy at Standard Bank London, who addressed the topic of “Making Policy in a Difficult Global Environment”. As indicated in my previous Statement, we concluded and signed an MoU with the Competition Commission of Mauritius to promote and maintain a competitive and sound financial environment in Mauritius. As a responsible citizen, the Bank brought its contribution for a greener Mauritius with the creation of a Bamboo Garden in the Midlands region situated in the central part of the island. We sought the expertise of the Agricultural Research and Extension Unit of the Ministry of Agro-Industry and Food Security to assist us in developing the Bamboo Garden and we accordingly entered into an MoU with them. At the time of writing this Statement, the project is under implementation. Still in the context of its programme of Corporate Social Responsibility, the Bank sponsored the National Inter Club Youth Championship for the fourth consecutive year in Mauritius and for the second time in Rodrigues. Tenders were launched for the construction, on a D&B basis, of the Bank’s regional office at Rodrigues. We pursued our policy to enhance the professional competence of our staff to respond to the new exigencies facing central banks. Human resource development continued to be one of our top priorities. Training was mainly in the fields of bank supervision and macroeconomic modelling. BIS central bankers’ speeches Looking ahead Our monetary policy framework has achieved commendable credibility in a short period and has even been held up as a model for similar countries by the IMF. But after four years of operation, our MPC was ripe for a review. Sir Alan Budd, a well-known figure in the world of finance in the UK and a founder-member of the Monetary Policy Committee of the Bank of England, conducted an in-depth review of the MPC. One of the areas he was specifically asked to look into was how to enhance transparency and communication. Sir Alan Budd’s recommendations took on board our proposals to publish both the minutes of meetings and the pattern of individual votes. The recommendations will take effect as from the next MPC meeting (December 2011). So we will be looking at a still more transparent MPC, which will without doubt enhance its credibility. We also have plans in the year ahead to deepen our financial market through the listing of Government securities on the stock market and conducting single-maturity auctions. By the time this Report would be in the public domain, we would be holding the online auctioning of Government paper. The global financial crisis has highlighted the issue of systemically important financial institutions. In our case, the concern is the high degree of concentration in the banking sector, which I have raised in recent public addresses. In view of the likely implications on financial stability, the Bank intends to deal with this issue in collaboration with the banking industry. Our country has garnered considerable praise internationally for what we have achieved so far. We continued with top rankings in leading league tables such as the Index of Economic Freedom, the Corruption Index of the Mo Ibrahim Foundation, the World Bank’s Ease of Doing Business index, the Global Competitiveness Report etc. But, as investment advisers are supposed to warn their customers, past performance is no guarantee of future results. The heightened uncertainty and the turbulent external environment mean that the winners of to-morrow will be those who can adapt and evolve faster than the competition to the changing environment. My gratitude goes to Dr the Honourable Navinchandra Ramgoolam, GCSK, FRCP, our Prime Minister, for his unstinting support during my second term of office. The year under review started with Hon. Pravind K. Jugnauth, MLA heading the Treasury. I record my thanks to him for the cordial working relations that we enjoyed during his tenure of office. After the Cabinet re-shuffle of August 2011, Hon. Charles Gaëtan Xavier-Luc Duval, GCSK, MLA, took over as Vice-Prime Minister and Minister of Finance and Economic Development. I look forward to a fruitful working relationship with him as the Treasury and the Central Bank, with collective resolve, move the country forward. I seize the opportunity to thank the Chairman and the Chief Executive of the Mauritius Bankers Association, the Chief Executives of banks and all the stakeholders with whom I had the pleasure of working and thank them for their collaboration and contribution to the considerable work undertaken by the Bank during this past year. I also extend my appreciation to my two Deputy Governors and to the staff of the Bank for their contribution to the Bank’s work. As this Annual Report goes to press, the crisis is very much on and no one can really say for sure where the global economy is heading. Against this brittle setting, we will put in every effort to shore up our economy, particularly the banking sector, to make it less sensitive to external shocks. We will ensure that we will not compound these external shocks by domestic policy mistakes. The challenges on the horizon call for an exceptional degree of vigilance and enlightened policymaking. I trust that our countrymen will live up to these expectations. BIS central bankers’ speeches | bank of mauritius | 2,011 | 11 |
Speech Mr Rundheersing Bheenick, Governor, Bank of Mauritius, at an international meeting of Rotarians, the "Rotary Institute Zone 20A", Balaclava, 4 November 2011. | Rundheersing Bheenick: Whither Africa? – Or how the African continent is facing up to the challenge of the global financial crisis Speech Mr Rundheersing Bheenick, Governor, Bank of Mauritius, at an international meeting of Rotarians, the “Rotary Institute Zone 20A”, Balaclava, 4 November 2011. * * * Rotarians from far and near, Good Morning! Thank you very much for your invitation, relayed to me through my old friend François de Grivel. Let me assure you, François, that the slight hesitation, which you might have detected, before I responded had nothing to do with any fear that this was perhaps going to be yet another skirmish in our long-running battle on the value of our domestic currency – which, I may add for the information of visiting Rotarians, regularly pitches us in opposite camps. It had everything to do with the other matter: today is the day when all Mauritians wait with bated breath for the Minister of Finance to deliver his annual budget speech this afternoon. But how can one not respond to a call from those who put “Service above Self”? I am delighted to address you at your Institute Zone 20A Convention today. Let me begin by extending a very warm welcome to our island-state to all visiting Rotarians. Four years have elapsed since the largest financial and economic crisis in living memory, and perhaps the most complex ever, unfurled upon us. Policymakers around the globe are still struggling to find remedies as the crisis mutates and spreads and fails to respond to any treatment, even unconventional ones. While we can now claim to understand better the origins of the crisis, we continue to be baffled by its many manifestations. And we are no nearer to a sustainable global recovery than we were at the beginning. And we are even further away from preventing financial crises from derailing global development in the future. In the OECD countries, where the crisis is concentrated, governments may have rounded up the usual suspects, and named and shamed some culprits – like investment brokers, fund managers and bankers – but they have yet to deal with them effectively or indeed to tackle the underlying causes of the disaster that unfolded. Some commentators have disingenuously claimed that the crisis was completely unforeseen and they were quite taken aback as it occurred following almost a decade of substantial global growth with low inflation. Terms like “the Great Moderation” and the “Goldilocks economy” became popular and well describe the mood of the times. Developing countries, and emerging markets particularly, had been doing well. Many countries in Africa seemed to have finally turned the corner, with their growth rates boosted by high demand for commodities. Global poverty was in retreat. There were reductions in civil conflicts. The democratic deficit decreased. There were improvements in governance. Changes in macroeconomic management and the policy environment held out hopes of fast and sustained growth. Africa was on the move, at long last. And then the crisis hit! Severely denting growth prospects and dashing some of those hopes and aspirations. The growing sub-prime mortgage loan defaults in the US and the failure of Northern Rock in the UK in 2007 were not just mere harbingers of a crisis. They undermined growth and development prospects for the developing world. They compromised recent gains in poverty eradication. Three points made the financial crisis surprising, I suggest. First, it originated in the US, the world’s largest and richest economy, which everybody thought was robust and secure. Perhaps with hindsight, we should say, not “secure” but too extensively securitised for its own security and for the security of global markets. BIS central bankers’ speeches The second surprise was that it originated in the private sector, from an entrepreneurial flaw in the banking sector which had been producing wildly, enviously large profits for years. And the third surprise was that it led to a calamitous contraction in global trade. Although initially feared, another “Great Depression” was averted, partly thanks to John Maynard Keynes, who taught that the Great Depression was “great” because governments in the 1930’s failed to prop up aggregate demand. This time advanced countries responded by applying the lessons learned from that crisis by bailing out banks whereas many had been allowed to go bust during the Great Depression. They announced huge fiscal stimuli when, in the 1930’s, only monetary policy had been initially engaged by the central bankers of the “big four” who blithely believed they could save the world. Keynes who had seen his major policy recommendations subjected to so much criticism in the years leading to the “Great Inflation”, must be turning in his grave. Some of you may recall the famous words with which he ends his General Theory The defunct economist who has enthralled the practical men trying so desperately to cope with the current crisis is Keynes himself. According to IMF estimates, the costs of stabilizing banks – in terms of injections of capital for bailouts, provision of liquidity, standby arrangements, and guarantees of loans and deposits – amounted to around US$11 trillion in developed countries, and another US$1.7 trillion in developing countries. US$13 trillion is a huge sum. It is, for example, about ten times the annual flow of Official Development Assistance from OECD’s Development Assistance Committee members in 2008. BIS central bankers’ speeches These problems of western finance, which induced a slowdown in the global economy over the past few years, are now referred to as the World Economic Crisis. One could ask why emerging and developing countries like us have not been as hard hit as Europe and the USA. Was it because of the immediate effectiveness of the stimulus applied in advanced economies? Was it because the bailouts extended to stabilize the financial sector, protected the innocent bystanders? Or is there some special element in the core resilience of these otherwise vulnerable states? The search for answers leads us to examine briefly the main channels through which this global turbulence is actually transmitted to Africa. We can identify five transmission channels. First, trade, in both goods and services, is obviously the main channel with the colonial legacy reflected in the continued dependence on EU member states as the largest trading partners of Sub-Saharan Africa. Second, the financial channel is also very important and works through four different but interconnected ways. First is the exchange rate, with increased currency volatility affecting countries with floating rate regimes while the currency peg effectively transmits Eurozone uncertainties to the CFA franc zone. Second, African stock markets were severely hit as foreign investors withdrew in droves in an elusive flight to safety. Third, spreads on foreign-currency African bonds widened. And fourth, the domestic banking sector saw its access to foreign currency lines drying up as it shared in the growing risk aversion with rising spreads and declining credit. The third transmission channel is Foreign Direct Investment which African countries rely upon to make up for their domestic savings deficit. FDI flows can hardly be expected to grow unabated when the home countries, where these flows originate, are caught in the throes of a deep crisis. The fourth channel is the flow of Official Development Assistance, which plays such a critical role in supporting development in some of the poorest countries. Despite repeated renewals and reconfirmation of commitments to raise ODA flows to 1 per cent of GDP since the so-called First Development Decade, this pledge is unlikely to be redeemed when the source countries are going through such critical times. And the fifth channel whereby the crisis in the West is transmitted to Africa is via a reduction in the flow of remittances as rising unemployment and stagnating wages in home countries affect migrant labour and the African diaspora. After this short detour to survey the various transmission channels, all of which affect African countries to varying degrees depending on the structure of their economies and their openness, let us revisit the question posed earlier. What accounts for the resilience of Africa BIS central bankers’ speeches to the global turmoil? The answer, I think, lies partly in a delay in the impact of this crisis – which is like a far-off tsunami taking some time to hit our shores. Part of the answer for the renewed resilience also lies in the major improvements in macroeconomic management, achieved by many African (and other developing) states over the last decade. Another part of the answer is found in the success achieved by many of them in diversifying their trade and investment partners. This was at the core of the policy response to the crisis and helped Africa weather the global turbulence. In the larger and stronger developing economies, such as the BRICs (Brazil, Russia, India, China and one might add South Africa), recovery has been surprisingly rapid. More surprises! Indeed, one constant feature of the saga is that economists, investors, and the commentariat are continually surprised, having been previously gently rocked into a belief in a stable economic state of the world, massaged for some by Keynesian principles and, for others, by a blind faith in the power of benign, self-regulating, markets. But I digress. This surprising recovery in the BRICs has been supported by the adoption of countercyclical policies, with a cumulative total spending of around 2.7 per cent of their GDP on fiscal stimuli. In many African countries, including the most fragile, governments have made bold attempts to shelter their economies. In those where there was adequate fiscal space, as here in Mauritius, agile governments launched expansionary fiscal policies to counter the downdraft affecting their economies through the various transmission channels. While in others who were running bigger budget deficits, assistance was sought from the IMF which made quick-disbursing facilities available. It goes without saying that no country anywhere can be immune to a crisis of such global reach and unprecedented severity. It is a credit to African decision-makers that their countries found their way back to the path of recovery so rapidly. BIS central bankers’ speeches In addition to prudent macro-economic policies, growth in Africa has also been propped up by timely financial support from other multilateral agencies apart from the IMF. To shield Africa from the second-round effects of the crisis, the African Development Bank spotted the most vulnerable countries and made emergency finance available. During 2009, it more than doubled its lending, from around US$5 billion to US$11 billion. The International Finance Corporation, the private-sector-lending arm of the World Bank Group, increased its loans to firms for private sector projects in Africa which reached around US$2.2 billion in 2011, or more than twice the 2007 pre-crisis level. The improvement in macroeconomic management in many developing countries, including Africa, followed in the wake of major improvements in governance. These were reflected in more robust democracies and more frequent elections, and accompanied by steps to reduce corruption, end conflicts, and empower women. From the 2011 Mo Ibrahim Index of African Governance, we learn that “27 out of 53 listed countries in Africa have improved in overall governance quality, and just under half have declined”. The report notes that the majority of countries had improved in such categories as “Sustainable Economic Opportunity” and “Human Development”. In other words, growth has become more equitable, more inclusive, and accompanied by more buy-in from local populations. Thus, better governance feeds into better economic outcomes, shores up resilience against shocks, and helps Africa confound its critics that it is a perpetual underperformer. Development is, of course, an unending struggle and a lot remains to be done. The World Bank’s Ease of Doing Business report shows that Africa counts only 4 countries (Mauritius, South Africa, Rwanda and Tunisia) among the top 50 countries ranked by the ease of doing business. Remittances play an important role in numerous African economies. Africa’s diaspora is variously estimated at around 20 to 30 million, mostly in the crisis-hit OECD countries. They send about US$40 billion annually to their families at home. Remittances constitute more than net official ODA in many economies. There was, thus, a tremendous fissile potential in both these channels and we, in Africa, can count ourselves lucky that they have not been put to the test, at least so far. BIS central bankers’ speeches However, we need to be wary that a continued slowdown in the West could cut demand for African exports of goods and services and curb private finance flows. Hence the need for Africa to look within the continent for greater resource mobilization while, at the same time, accelerating regional integration to safeguard against volatility in finance, employment, output and growth. Despite its numerous challenges, Africa seems to have emerged so far in a fair state of health. Experience varies but, generally, African economies have logged an impressive growth performance. This year, 2011, several African states rank among the fastest-growing economies in the world. Ghana outshines China and India. Nearly a dozen countries from Angola to Zimbabwe run neck-to-neck with them, outperforming Brazil and Russia. So far, so good, then. But what of the future? What are the prospects? Whither Africa? How far will the newly emerging element in northen Africa, the “Arab Spring” affect the picture? Will the ‘great leap forward’ acclaimed by Donald Kaberuka, Chairman of the African Development Bank, at the G20 meeting in Paris on 21 October 2011, mean, as he claims, that Africa has “left behind the stagnation of the past”? The optimism is grounded in a solid record of achievement. And yet, there is so much in Africa, that could be done better, smarter, and more efficiently. Take the regional integration agenda, for example. The complex political and economic affiliations of the 54 African states, – organised in an alphabet soup of 6 economic blocs, with many overlapping intra-regional groupings – can lead to wasteful duplication of efforts. The differing goals of these political and economic blocs, their differing timelines, and differing methods of operation can dissipate collective efforts towards the goal of many for African Union. They slow down negotiations for continental level integration. Can this shifting geometry of linkages really ease the overall continental integration process? Or, does it not cry out for simplification? BIS central bankers’ speeches Africa has undoubted untapped wealth and potential. It is no longer the dark continent! It has 70 per cent of world’s production of cocoa; 50 per cent of speciality coffee; 12 per cent of tea; 10 per cent of world reserves of oil; 40 per cent of gold, 64 per cent of manganese, 33 per cent of uranium and, nearly 90 per cent of cobalt, chromium and platinum – and it has all this at a time when prices are rising steadily for such commodities, which are crucial to global development. And yet Africa ranks among the world’s worst performers in so many categories, including poverty. It is largely unbanked, with poor access to finance for its population. It has inefficient financial institutions and poor institutions generally. It is generally trailing behind at bottom of the pile in education and health but, sadly, it tops the charts in illiteracy and epidemic disease. Let me address another challenge that the Continent faces: offshore farming. This is the growing phenomenon of international farm investment, in which countries short of productive agricultural land, but rich in capital and agricultural technology, are acquiring farmland overseas for large-scale agriculture. This may have been given a boost by the commodities boom and the weather-related surge in food prices which occurred during the crisis when some food-exporters applied export bans to keep domestic prices low, raising food security concerns in nervous importing countries, including ourselves here in Mauritius. The phenomenon rapidly assumed the dimensions of a global land rush, driven by sovereign wealth funds and multinational corporations on the back of bilateral state-to-state deals which raise the spectre of neo-colonial exploitation. China, South Korea and OPEC’s Middle East members, which face an explosive situation as they have more oil than irrigation water, are the most prolific deal makers. They have come to be seen by some as the neocolonisers, taking over from the former colonial powers who are now in retreat. As before, Africa with its untapped agro-ecological potential, is a choice target for such investment. The Food and Agriculture Organisation reports that 2.5 million hectares have been acquired since 2004 in five African countries alone which rank among the world’s poorest states, and have some of the highest levels of poverty and malnutrition. That’s an area BIS central bankers’ speeches almost the size of Belgium. If the analogy with Belgium suggests itself here, it is no accident: as some of you will recall, King Leopold, the King of the Belgians, joined the scramble for Africa by laying claim to the Congo basin as his private fiefdom. Farmland worth US$20 billion-US$30 billion has been quietly handed over on lease to Saudi Arabia, Kuwait and China for growing staple crops or biofuels, and shipping them home. The big question is what are the starving people in these African countries getting from such deals: if the deals are so good, why did the people in Madagascar throw out the government that signed one of these mega-deals? We should perhaps not be surprised by the findings of a recent (October 2011) IMF study on the matter. It comes to the startling conclusion that the investment climate of the host country actually weighs very little. What matter much more are poor governance and lack of transparency. This turns the conventional policy prescription on its head! Weak land governance and poor security of tenure for current users seem to enhance the attractiveness of countries for offshore farming. These perverse incentives need to be addressed if offshore farming is to lead to win-win outcomes for both home and host countries. Otherwise, they can rapidly erode hard-won gains in democracy, governance and transparency. With the ongoing troubles in the US and Europe, current global growth depends much more on growth in demand from developing countries and emerging markets. There is growing consensus that it will be quite some time before the tide turns for the better in Europe and the US. The euro may not actually be in its death throes as some doomsters have been predicting. But it is clear that the latest definitive solution to the Eurozone sovereign debt crisis is no more definitive than the half dozen or so that preceded it. The euro saga keeps rolling on, along with the debt rollover that threatens to sink the currency and the Eurozone economies. Many at the European Commission and at the European Central Bank must be kicking themselves for not paying heed to the ancient Roman adage: “Timeo Danaos atque dona ferentes!” For “dona”, read “referenda”! Beware of the Greeks! Or have I got it the other way round? It’s the Europeans and their partners who have come bearing gifts, a cool Euros 130 billion in the latest sovereign debt bailout. Beware of the Europeans, say the Greeks, looking this gift horse in the month. If the euro has its troubles, so does the dollar with “helicopter Ben” at the controls of the red-hot printing press. The US dollar remains the world’s reserve currency but confidence has been shaken by the fiscal brinkmanship in the US and the downgrade of its sovereign rating. The economy is doing poorly and there is little hope of any significant improvement in the near future. Against this gloomy backdrop, the only real glimmers of hope come from Africa’s nontraditional partners, the rising stars in the East, China and India. African policymakers do not need to subscribe wholeheartedly to the short-lived “decoupling” theory to seek to reduce their former dependence on OECD markets. Traditional patterns of trade and investment are changing. China has overtaken the US as Africa’s largest trading partner. Trade between Africa and India increased tenfold from 1997 to 2007, when it stood at US$ 70 billion. And trade between Latin America and Africa has more than doubled since 1994 and now exceeds US$26 billion. Our own trade exchanges with Chindia followed a similar trend. Mauritian imports from these two countries saw their percentage share in total imports more than double, rising from 16 per cent in 2000 to 36 per cent in 2010. Exports to Chindia, although still a trickle, quadrupled their percentage share. As the Western economies lost momentum and FDI outflows fell off, China and India readily picked up the slack. Businesses in emerging markets are doing particularly well from this. We read in the Indian press headlines such as Billionaires Go on Buying Spree in Africa. We learn they are investing in some 80 ventures in Africa, the new girl in town, winning every beauty contest. China is the largest investor in Africa. China and India are not being charitable. It is an open secret that returns on FDI in Africa are among the most attractive around. BIS central bankers’ speeches This expansion and diversification in investment and trade has brought notable improvements in additional know-how, technology and development experience from these emerging economies into the African continent. The crisis spurred this shift away from the advanced countries toward the East [China and India] and the South [Brazil and South Africa] for Africa and is transforming the gearing of the global financial and economic system. Africa is certainly not sinking into any depth of despondency, bewailing its lot that it has been let down by its traditional partners. It is alive and kicking. In this time of African renaissance and renewal, we should learn some lessons from the recent Greek sovereign debt crisis and default threat. There is a glaring difference in the way Greece is being treated and the treatment meted out to African countries when they faced a fairly similar debt predicament. The speed with which decisions are taken, funds made available, haircuts agreed with bankers and creditors, and the personal engagement of the high and mighty, all stand in sharp contrast to the slow and lumbering processes of the Heavily Indebted Poor Countries mechanism. HIPC came with its own jargon of “completion point” and “decision point”. It proceeded at a glacial pace. It was an obstacle course where strict performance criteria had first to be met before qualifying for any debt relief. The scheme started in 1996 and by July 2011, that is a full 15 years later, of the 40 countries eligible for the HIPC Initiative, only 32 had reached the so-called “completion point”. Twenty-six of these countries are African. If all 40 potentially eligible countries reach completion point, total debt relief provided by the World Bank and all participating creditors is estimated to reach around US$142 billion. As HIPC critics contend, it was a case of too little, too late, for too few countries. Contrast this with the case of Greece. In May 2010, the IMF approved a €30 billion three-year loan for Greece as part of a joint European Union-IMF €110 billion financing package to help the country ride out its debt crisis with about €5.5 billion immediately available. A haircut of 20 per cent was agreed without much ado, and raised with little difficulty to 50 per cent within weeks. And there will probably be still more support forthcoming for Greece, if only out of enlightened self-interest to forestall any contagion to the other vulnerable Eurozone economies. This differential treatment becomes still more glaring when we take into account the population affected: just over 11 million for Greece, as against 462 million for the African HIPC’s. One cannot escape the conclusion that the donor community had been pulling its punches with HIPC and could have done far more for the countries concerned. Well done Greece: hard cheese Africa! So, there should be more reliance on self-help in the future. Over the past decades, the financial sector in Africa has slowly begun to realize its potential to mobilize domestic resources and finance African growth. Across the continent, there are numerous examples of finance firmly serving as a catalyst to transform African economies. It is increasingly providing capital and credit to new businesses, or supporting the expansion of productive capacity in established firms. Cheap and rapid transfer channels for remittances dot the continent. SafariCom, in Kenya, has harnessed mobile telephony to deliver a range of services to meet previously unmet needs and stimulate growth. These include new products such as weather insurance to help farmers manage climate risks, equipment leasing to help small enterprises, and acceptance of warehouse receipts as security to push financing into agricultural value-chains. It enables low-income households to manage their lives more effectively through mobile payments, microcredit, no-frills accounts, and micro-health insurance. These developments are key transmission channels for growth and development. Long-term finance is crucial for Africa’s development for equipment leases especially for farmers, for investment in essential infrastructure such as power and roads, and to upgrade the housing stock. But getting banks to go in this direction remains a challenge across Africa. By international standards, African banking remains expensive and poorly adapted to local needs. BIS central bankers’ speeches African banks are starting to respond to the demand. During the crisis, some international banks turned out to be fair-weather friends, downsizing, retrenching, or even closing when African economies were at their most vulnerable. Others, based in international money centres, withdrew or reduced trade lines. Local banks, including central banks assuming their developmental role, stepped smartly into the breach. Although African banks are small, 40 of them made it in the Top 1000 World Banks in 2011. They are also among the world’s most profitable, according to a survey by The Banker, which supports the contention that Africa is a land of high returns. Of those who had not made it to the top 1000 banks, we find many African banks lining up to join their ranks. Of the top 10 global lenders in this next group of 1000, measured by return on capital (ROC), five are African. Of the top 10 with the highest return on assets (ROA), seven are African. Overall, African banks – there are 17 in this survey – made average ROA’s of 3.65 per cent [on an unweighted basis] and ROC’s of 35 per cent. These levels are far higher than the next profitable region, namely, South America, where banks made returns of 1.95 per cent on their assets and 19.6 per cent on their capital. The investment needs of Africa are huge. Africa has to grow and explore other ways of attracting finance and capital. There is ample room for public-private partnership initiatives in the continent and the concept has to be vulgarised. What is vital for the future is that business in Africa gives greater weight to quality, inclusiveness and equity, or the aftershocks from the Arab Spring will spread across the whole continent, feeding on the pentup grievances and aspirations of local people. Moreover, we must broaden our assessment of progress to include the protection of the environmental capital of the continent in the equation for measuring development, and not zero-value it, as too often in the past. This is essential to ensure that any fresh spurt of economic growth follows a sustainable path and does not end in further land and human degradation. Let me conclude. When the global economic and financial crisis struck, Africa took a hit like everybody else, although with a lag. As its traditional trade partners teetered on the brink of recession and seemed to make living on the edge their new way of life, lurching from one crisis to another, African growth faltered, falling off from its trend average of 5 per cent annually over a decade. The fall was steeper in the middle-income countries like Mauritius, but growth turned only marginally negative. Governance and policy reforms leveraged financial support from multilateral institutions to deliver a quick rebound in 2010. Africa also made some quick gains in re-orienting its trade and investment towards the rising stars in the East and South. The African investment climate attracts rising volumes of capital flows, both private and official. That’s the rosy view. But there is also a darker side to the picture. The global crisis is continuing, with no end in slight unless you are delusional. Africa is running out of fiscal space as inflation is hitting high double digits in, for example, East Africa. The Eurozone remains the continent’s main trading partner and prolonged slowdown in the EU and the US mean demand for exports of goods and services will remain constrained. International commodity prices, which have a determining influence on the economies of so many African countries, are likely to stay weak for quite some time, clouding African prospects. In this globalised, interconnected world, there is no place to hide. If a rising tide lifts all boats, a receding tide can play absolute havoc. On balance, weighing these two contrasting narratives, what can we say? Whither Africa? I think the African growth story will continue. Africa has built up a certain resilience and there is little reason to believe this will diminish. The dynamism that characterises the African policy space, with many countries being very pro-active, gives ground for optimism. However the global crisis plays out, Africa is not likely to shoot itself in the foot. For a concluding remark, let me draw on a recent World Bank publication on Africa’s future (March 2011) which encapsulates it nicely: BIS central bankers’ speeches “Putting these factors together, the Bank concludes that Africa could be on the brink of an economic take-off, much like China was 30 years ago, and India 20 years ago.” Whither Africa, you ask? Poised for an economic take-off, no less! BIS central bankers’ speeches | bank of mauritius | 2,011 | 11 |
Keynote address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the launch event of Visa Card Security Week 2011, Port-Louis, 11 October 2011. | Yandraduth Googoolye: Security and risk regarding the use of cards in Mauritius Keynote address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the launch event of Visa Card Security Week 2011, Port-Louis, 11 October 2011. * * * Ladies and Gentlemen It is an honour for me to be invited to this audience this morning to share my views on the security and risk environment regarding the use of cards in Mauritius. Electronic money is projected to take over from physical cash for a large part of small-value payments, and continues to evoke considerable interest both among the public and the various authorities concerned, including central banks. The electronic money developments raise policy issues for central banks as regards the possible implications for their revenues, implementation of monetary policy and payment system oversight role. Indeed, it is by virtue of this very last role – maintaining the clearing, payment and settlement system that we take an interest in cards, in the broader context of maintaining financial stability. Mauritians increasingly use cards to make payments. In recent years plastic cards (credit, debit and other cards) have gained wide acceptance and their use has become popular in the country. The total number of cards issued by banks and outstanding increased from 700,000 as at end-June 2001 to 1.3 million as at end-June 2011. Likewise, the actual usage has registered increases both in terms of volume and value i.e. from 1.6 million transactions amounting to Rs 2.4 billion at end-June 2001 to 4.1 million transactions aggregating Rs 7.7 billion at end-June 2011. These figures are expected to increase even further with the initiative of some banks to provide prepaid cards to an even more sophisticated and demanding clientèle. In view of such a widespread use of cards, issues relating to the regulation of this payment mode as well as those relating to customer protection assume considerable importance. The functioning of the card payment system should not present any risks to the payment and settlement systems in particular and to the country’s financial system in general. The use of cards is so entrenched in the habits of the population that a serious disruption that affects the entire card system, or large parts of the system, would have serious consequences for the ability of people to make payments. If card payments do not work, then the entire payment system will be disrupted. The Bank’s responsibility for a safe and efficient payment system therefore means that we also have an interest in ensuring that card payments work safely and efficiently. The popularity of cards is that such a means of payment is perceived as being convenient. People who prefer cards attribute it to the fact that they do not like to walk around with cash. There is also a generational aspect to the choice of means of payment. An increasing number of young persons feel a greater sense of security when using cards than the older age groups and are more than willing to use their cards to make small payments. It goes without saying that the use of cards exposes stakeholders to risks - but how do we manage these risks while respecting competition and innovation? This calls for collaboration of all those concerned. It is the combination of measures, together with the rigour with which they are implemented and administered, that will serve to reduce risks most effectively – there is no single security measure or set of measures that can be said to provide a guarantee of complete protection. We, at the Bank of Mauritius, require banks to have robust internal control systems, with appropriate oversight by their board of directors, to ensure that their systems are not used by BIS central bankers’ speeches fraudsters for illicit purposes. Indeed, in today’s IT-enabled banking environment, it has to be recognised that fraud possibilities have assumed international dimensions. It is therefore not only essential to set up a safe platform, but also to ensure that the so-called “Safety” is continuously benchmarked against international standards. With respect to cards, there are 3 issues relating to information security that assume immense importance, namely confidentiality, integrity and availability at all the relevant stages of entry, storage, and transaction. The threats which bother every one of us in this context are multifold, and range from password hacking, card copying/cloning to data and identity theft at various levels of transaction, information storage as well as transmission stage. Allow me to digress a bit here to underscore the importance of proper screening of staff at all levels, as frauds are very often perpetrated by employees themselves. Indeed, financial institutions are not only exposed to outside threats, but they are now faced with a new threat, inside violations. Today’s employees are able to easily export sensitive files and information via email or by copying data to portable media. It is imperative that financial institutions have control over their sensitive information, how it is used, and who obtains it. The real challenge in this environment goes beyond merely providing additional technology solutions and increasingly complex security layers. Another trend that we have observed of late is the outsourcing of credit and other payment card services to specialist third parties. This is mainly done to benefit from the expertise of the third party which may not be available in-house and/or as cost-cutting measure. However, there is very often over-reliance and inadequate diligence on the service providers. Our licensees are required to strictly follow the risk management principles enunciated in the Guideline on Outsourcing for Financial Institutions issued by the Bank of Mauritius and address the risks inherent in outsourcing. Outsourcing of those activities would have to be approved by the board of directors of the financial institution in the first instance and subsequently by the Bank of Mauritius. In addition, the outsourcing of such services is contingent upon the third party service providers agreeing that their services are subject to regulation and examination by the Bank of Mauritius to the same extent as if such services were being performed in-house. So much for the role of the Bank of Mauritius in ensuring that banks and other financial institutions have systems in place that deter card-related fraud. But the fight against fraud calls for the active involvement of other stakeholders. Customers, on their part, have to act in a responsible manner. Simple things like following the recommended fraud prevention advice – which is quick and simple to follow – can considerably reduce the chances of falling prey to fraudsters. It is however essential that card issuing banks and card associations regularly run awareness campaigns for the benefit of consumers. An ancillary issue relates to customer grievances in respect of credit cards. In this context, I make an appeal to banks for greater transparency and disclosure, since there is often an asymmetry of information, both written and oral, between the card-issuing bank who has complete information and the card holders who very often do not have complete information on their rights. In particular, we have observed that card issuing banks provide enormous information to their customers but the language used is legal terminology which is not easily understandable to ordinary customers. In addition, the written information is often printed in very small print which hinders easy readability, and important information is buried with other information. There are no standards in this regard among the card issuing banks. I take this opportunity to encourage card issuing banks to adopt a more customer-friendly approach with clear terms and conditions for card issue and usage, in simple language comprehensible to a layman, prominently displayed, easily readable and, most importantly, the crucial items highlighted. The card issuing banks may continue to send the document containing the normal terms and conditions as is being done now. It is widely recognised that traditional credit cards are most prone to frauds – the problem with the black magnetic stripe on the back of a credit card is that it’s about as secure as BIS central bankers’ speeches writing account information on a postcard: everything is in the clear and can be copied. Card fraud and the measures taken to prevent it, cost merchants, banks and consumers billions each year across the globe. In contrast, smart chip cards can’t be copied, which greatly reduces the potential for fraud. Smart cards with built-in chips are the equivalent of a safe – the information contained therein can only be unlocked with the right key, which means that the cards can not be replicated. One of our banks introduced the smart cards a few years back. Let me take this opportunity to encourage other banks to follow suit. This will entail in some cases complete upgrading of ATM terminals to support chip-based ATM cards, but the long-run benefits of such an upgrade will accrue to all stakeholders. We believe that a smoothly operating infrastructure can greatly enhance financial security. This concept includes the payment system, the technological infrastructure, as well as the regulatory and supervisory framework. An important function of the Central Bank is to oversee the payments system as inability to make payments in an economy would have a far reaching and widespread bearing on society. Technological infrastructure is perhaps the most important component to secure financial operations. Financial systems continuously need to adapt themselves to the rapidly increasing technological innovations. This includes new products, necessitating increased awareness by the users and supervisors of the risks and benefits inherent in them. On this front, the Bank of Mauritius took proactive steps way before the financial crisis in 2007 to re-structure the Payment Systems and market infrastructures area and to endow the country with a modern and innovative payment system. The world is rapidly moving towards a real time economy where all types of transactions are digital, automatically generated and completed in real time. Payment systems, being one of the most inter-related sectors of the modern economy, the call for innovation sounded, even more urgent for all its operators. The new software for the Mauritius Automated Clearing and Settlement System (MACSS) was the step in this direction with which, we have been able to provide extended services in multi currency – a premiere in Africa. In the course of this year the Bank of Mauritius came forward with a series of innovative projects – Bulk Clearing System, the Cheque Truncation and On-line Auctioning of bills – that will change the payments landscape of the country. Bulk clearing system is a new payment mechanism where low value inter bank payments are electronically cleared and settled in the MACSS. This system will cater for recurrent payments such as salary, direct debits etc. and will help banks better manage their liquidity requirements for the day. It will contribute towards lowering the cost of payments. Both systems went live on 6 September 2011. Closely coupled payment and securities systems contribute towards maintaining the stability of the financial system. In order to provide strict delivery versus payment for Government securities, the Bank of Mauritius has already tested on a pilot basis, a system for on line auctioning of bills. The first phase of this system was rolled out on 7 October 2011. Finally, I would like to thank the organiser, Visa, in bringing together the main players in the card business chain, the cooperation among which is vital for resolving the various security, risk and fraud issues facing the card payment systems. I wish you plenty of success for the Visa Card Security Week 2011. BIS central bankers’ speeches | bank of mauritius | 2,011 | 11 |
Address by Mr Iqbal Belath, Second Deputy Governor of the Bank of Mauritius, at the Annual Convocation Ceremony of the University of Technology, Mahatma Gandhi Institute, Moka, 8 November 2011. | Iqbal Belath: The importance of education in transforming Mauritius Address by Mr Iqbal Belath, Second Deputy Governor of the Bank of Mauritius, at the Annual Convocation Ceremony of the University of Technology, Mahatma Gandhi Institute, Moka, 8 November 2011. * * * Dr Sadasivam Reddi, GOSK, President University of Technology, Mauritius Mr Dharmanand Fokeer, GOSK, Director General, University of Technology, Mauritius Distinguished Guests, Ladies & Gentlemen Let me first of all thank Mr Fokeer for his kind introduction. It is a great honour and privilege for me to be invited to speak at the Graduation Ceremony for the graduands of the School of Business, Management and Finance. It is indeed a great day for all of us – for you, fine young men and young women, who will be rewarded for your many accomplishments in the course of the last three years, and for us, the privileged witnesses of your crowning moment. It is also a great moment for your parents and dear ones who must be feeling very proud of your academic achievements. You, graduands, must be experiencing a feeling of delight and pride as you prepare yourself to cross the first phase of your academic construction. Like all your peers before you, you may also be looking forward to take on the world, curing it of all its poverty, ailments, injustices and miseries. The country you are living in today has gone through a lot of changes. Let me quickly retrace this transformation. At the time Mauritius was acquiring its independence, our country was in depression, suffering from a mass exodus of its best brains whether from the banking profession or from the teaching profession – in fact all those who could afford it were leaving the country for other lands – for greener pastures. The unemployment rate had reached unprecedented levels. Notwithstanding the famous comment that the Cambridge economist and Nobel Prize winner, James Meade had made on Mauritius, an internal World Bank memo mentioned the “intractable nature of Mauritius’ economic problems” and painted a “rather gloomy picture about the development prospects” of the country. After independence, those of us who had opted to stay, worked very hard to give our children a brighter future. Those who understood the value of a formal education sent their children to school and those who had the means sent them abroad to pursue higher education. With the setting up of our first university in Réduit in 1965, more youngsters were able to get a tertiary education and we were able to produce a pool of highly-educated workers. Over four decades, we have moved from a USD 200 GDP per capita economy to a USD 10,000 GDP per capita economy. We have today an unemployment rate of around 8 per cent which we do not consider worrisome when we compare ourselves with what is happening in some advanced economies. This does not imply that we are complacent to have about 8% of our working population without a job. Real GDP growth has averaged more than 5 percent since 1970. Imports and exports have boomed. Efforts at economic diversification have been successful, allowing the country to move from sugar to textiles to a broader service economy. Mauritius’ reliance on trade-led development has helped the country achieve respectable levels of export performance. Mauritius is often referred to as a successful model in the African region. Mauritius therefore offers you, young ladies and young gentlemen, more opportunities now than our forefathers had at the time, and a standard of living that they could only dream of. I cannot foretell what the future has in store for you but what I can tell you is that the Mauritius you are going to step into after your graduation today is a transformed Mauritius. No doubt that you and your generation have also had to face and are facing challenges in your daily BIS central bankers’ speeches life. What I want to highlight is that, you are inheriting a country with much improved footings; a country that does not encourage the exodus of its best brains; on the contrary, it invites citizens from other countries to consolidate its development. Let me therefore congratulate you: you have made a good choice when you invested in your further education and you are today well equipped to face the challenges of a modern world in turmoil. But mind you, you will have to put in the efforts to develop your talents. Hard work is not always a guarantee to success but it does give you a chance. The ingredients of success in life amount to being adequately qualified, adequately skilled, taking calculated risks and being at the right place at the right time. Your degree is only the foundation on which you will have to build, stone by stone, the edifice of a successful career and life. You have to make use of every opportunity to develop and perfect your talents. You should ask yourself: what should your responsibilities be as a new graduate? First of all your responsibility lies with our country – your concern should be to continue to gain on the hard-won gains by our forebears. Our nation needs its capable young countrymen to take it forward and to continue to develop it into a progressive, prosperous and harmonious society for future generations. Once you step outside the portals of the University, what is awaiting you? Outside is the real world – very different from the academe world. You will certainly be looking for a job, a job that you feel is appropriate for the kinds of competence and skills that you have acquired during those years of study. Are you well-prepared to face the jungle that the workplace can sometimes be, a jungle where competition is raging? Would you want to join the fight for a handful of positions at the top regardless of the means to reach there? Or would you rather choose to earn your credibility the hard way? Gone are the days when you can retire on the same job. In a work environment that becomes increasingly demanding, you will face tremendous challenges. Today’s jobs require multi-skilling, multi-tasking and lifelong learning. Newton D. Baker1 once said: “The man who graduates today and stops learning tomorrow is uneducated the day after.” How very true in today’s world? The world is now a very uncertain place. Changes are happening every minute – the very foundations on which the global economic and financial system rest are being shaken. At the same time, the world demands more transparency, more accountability and good governance. Some view this with misapprehension and fear. But for others, what an exciting time it is! I am of those who believe that something great will come out of all the turmoil that the world is presently going through. I am reminded of a passage in Orson Wells’ The Third Man, which refers to the reign of the Borgias2 in Italy. I quote the passage, with all due respect to the Swiss people: “In Italy for thirty years under the Borgias they had warfare, terror, murder and bloodshed, but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland, they had brotherly love; they had five hundred years of democracy and peace – and what did that produce? The cuckoo clock!” The analogy stops short, of course, of the warfare, terror, murder and bloodshed. The point I wish to make here is that even when things seem at their worst, great things can happen. As they say, you can only see the stars when it is dark. I have no doubt that we will be looking at a “brave new world” in which there will be less inequity and disparity among nations. Both Europe and the US are at defining moments in their history. There are indeed many indicators of change that suggest that they are about to cross – or may even have crossed – watersheds in their economic history. The dollar is Newton D Baker was the US Secretary of War during World War I The Borgias, descendants of a noble line, originally from Valencia, Spain, that established roots in Italy and became prominent in ecclesiastical and political affairs in the 1400s and 1500s. The house of the Borgias produced two popes and many other political and church leaders. Some members of the family became known for their treachery. BIS central bankers’ speeches steadily being eroded as the world’s sole or dominating reserve currency. The days are gone when 85 per cent or more of international currency reserves were held in “greenbacks”, a more realistic figure today would be around 60 per cent. The growing surreal indebtedness of the US is putting into question the “safe haven” feature of the dollar. The dream of Jean Monnet and Robert Schuman’s of a “United States of Europe” is turning into a nightmare. Looking beyond what is happening on the two sides of the Atlantic, we see Asia and Latin America advancing to centre stage. And the new mantra of investors – Africa’s Success Story, the rise of the Economic Lions of Africa – speaks volumes about the “newly discovered” potential of Africa. Who would have forecast that Europe would turn to China for assistance. All these changes pose innumerable challenges for policymakers – for a central banker most certainly – decision makers, and implementers of government policies as well as for providers of goods and services. But what a fantastic time to be around! As new graduates, you can bring your contribution to the making of a new world order. You decide whether you wish to be passive onlookers or proactive players in this drama. Let me conclude by sharing with you some of the lessons that the crisis has taught us and which I believe will serve you well in your future career: – Do not be too greedy. – Do not abuse of the system. – Do not take short cuts. – Earn a good reputation – you cannot buy an excellent reputation, you must earn it. – Always have a positive and proper mindset I again congratulate you all for your academic achievement. The world is yours. Remember that it’s up to you to make a difference – you have the choice to be a passive onlooker or a proactive player. Remember your success, you owe it also to your parents who have given their support and for being present by your side, as you burned the midnight oil. I wish you all a very successful life. Thank you. BIS central bankers’ speeches | bank of mauritius | 2,011 | 11 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual Dinner of the Bank's Annual Dinner in honour of Economic Operators, Pailles, 1 December 2011. | Rundheersing Bheenick: A testing time Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual Dinner of the Bank’s Annual Dinner in honour of Economic Operators, Pailles, 1 December 2011. * * * It is an immense pleasure to welcome you all to the Bank’s Annual Dinner in honour of Economic Operators. This full house speaks volumes for the excellent relations that we enjoy with our economic operators in Mauritius. And now let me add my special welcome to our distinguished guest His Excellency Mallam Sanusi Lamido Sanusi, Governor of the Central Bank of Nigeria, and his charming spouse, Maryam. Sanusi Lamido Sanusi – or Sanusi2 – never does things by halves. He is the Central Bank Governor of the Year for Sub-Saharan Africa for the second consecutive year due, no doubt, to his reforms in Nigeria, where he cleaned up the banking scene, in the process firing several CEO’s and actually locking up a few of them. As many of you know, Abuja will host the African Central Bank when it is set up; but that is far in the distant future. Maybe, more immediately, I could draw on his expertise to advise me on how to deal with any recalcitrant bank CEO’s and errant directors. But, let me assure our bank CEO’s present here tonight that we don’t have any current plans to make jailbirds out of them. Mallam Sanusi is much admired in the central banking world, as is the leadership role of Nigeria in all things African. The strength of the Nigerian economy which has defied the crisis and posted GDP growth rates of 8% and 7% respectively in the last two years, is an inspiration to the rest of us. You are both most welcome. Now, I am glad to see that you look as if you are all eating well. For, as it is my custom on these occasions, I wish to make a few, just a few, short, very short, points. As Lord Reith, of BBC fame, remarked: “You can’t think rationally on an empty stomach… and a whole lot of people can’t do it on a full stomach either.” This event is important in the Bank’s calendar of activities. The first of its kind was held in 1999 when it was called “the Annual Private Sector Dinner”. The makeover as “Annual Dinner for Economic Operators” came under my governorship. It now forms part of the Bank’s ongoing dialogue with its stakeholders. We are happy to welcome here tonight the Entrepreneurs of the Year – this new breed of young entrepreneurs augurs well for the future of the SME sector in Mauritius. They are seated at Musgrave table. Let us give them a hand. You will notice that tonight we are also celebrating the economics profession. We decided to pay tribute to the leading economists who have made a signal contribution to the discipline. Each one of you, honoured Guests, is seated at a table named after a famous economist. As coincidence will have it, this Annual Dinner comes almost on the eve of the last Monetary Policy Committee Meeting for this year when you can expect some significant developments. No, I am not giving you a preview of the likely interest rate decision. Some of the recommendations of Sir Alan Budd to come into effect. This means that, henceforth, you will all be able to see the minutes of the meeting and the individual voting pattern published on our website. It may have taken us nearly two years to get to this stage. But there’s no denying that this is a major step forward. The dawn of a more transparent MPC is upon us. May I underline three points for the benefit of our distinguished Guest of Honour: first, our MPC is just over 4 years old; second, Bank management is outnumbered by outsiders; and third, – fait rarissime – two foreigners sit on our MPC as full members. BIS central bankers’ speeches But this evening I want to touch on some deeper underlying and worrying issues for the whole economy namely: the impact of the on-going global crisis and our economic prospects. First, the economic crisis We all observe with rising dismay how the crisis in the US and Europe has metastasised from sub-prime to sovereign debt, moving from recession to slowdown, aided and abetted by political ineptitude and economic incoherence. It seems to many that the leaders in the West keep being caught wrong-footed by the unfolding chaotic scene. They lack the boldness and the drive required to put the global economy back on a safe course. The West looks to be heading for the double dip recession whose spectre has been haunting us ever since the crisis struck. There was a time when sovereign debt was deemed to be risk-free. An exception was made for developing countries, whose debt had always been a bit dicey, with many of them becoming serial defaulters. The West could lecture the South on getting their economic policies straightened out before they could grudgingly extend some much-needed debt-relief. “It’s the economy, stupid!” as US President Bill Clinton famously put it. That was then. Now that the US itself is drowning in debt, and runaway sovereign debt is raising the spectre of a Eurozone break-up, it suddenly looks as if Clinton should revise his stand: “It’s the politics, stupid!” would be closer to the truth. Silvio Berlusconi and George Papandreou have already paid the price to placate the bond vigilantes. Others may follow if they fail to navigate the treacherous waters between citizen and taxpayer revolt, on the one hand, and investor rebellion, on the other. France faces a threat of downgrade. Even fiscally-upright Germany failed to place nearly half the amount of ten-year paper on offer at a recent auction. Moody’s is now threatening a generalized derating of Eurozone debt. The US has lost its triple-A rating, as Standard & Poors derated it. To rub in the point, the agency berated Washington politics and the fiscal brinkmanship characterising the US response to the crisis. In the words of Standard & Poors, the politicians have become “less stable, less effective, and less predictable.” And where’s Mauritius in all that? We can count ourselves lucky that we are not hooked on foreign commercial debt. We do not face any rollover risk. We are not at the mercy of unforgiving markets. And all of us, and not just our politicians, can sleep easy on this score. How many of us know that, in their monumental work on economic and financial crises, This time it’s Different, Kenneth Rogoff and Carmen Reinhart, paid Mauritius – and a handful of other countries – an ultimate accolade when they called us “debt default virgins”? And, while we are on this subject, may I invite you, when you get the time, to cast a glance at the shape of the yield curve for Government rupee debt? You may be surprised to discover how we have actually smoothed the curve and reduced volatility – and that, too, during a crisis. We do not know how the crisis will play out. The fog of uncertainty casts a pall over global growth prospects. Whatever happens, we must remain agile and alert to ride the slightest favourable wave even as the European and US economies flounder in its wake. This scene is all the more curious for the West does not lack advice on such matters. As George Burns has remarked: “it’s just a pity that those who really know how to run the country are just too busy driving taxi-cabs or cutting hair.” BIS central bankers’ speeches So let me add my two-pennyworth to the great debate on the financial and economic crisis and how well we have fared. I believe it was Talleyrand, Napoleon’s aristocratic Minister of Foreign Affairs, who on being asked what he did during the Revolution, gave a pithy reply: “I survived.” And we have survived, too, with scarcely an African country falling into recession, no banks going bust, and the African economy on the up and up. In Mauritius we have certainly done better this year than in the previous two years. In Africa, the impact of the crisis was felt mainly through the trade channel and the falloff of FDI flows. This was exacerbated by loose monetary policy in some countries where, not surprisingly, double-digit inflation was back in 2011. Your Bank was under constant pressure to loosen our monetary policy, to depreciate the currency just a little, to accept a little more inflation, allegedly to save jobs and stimulate growth. Let me ask you this. Do you really think we were wrong to resist those siren calls? Would you really really have preferred inflation in the high twenties to finish off the year? Mauritius fared well among middle-income countries, with GDP growth above 4% this year, or slightly below the trend rate of the pre-crisis decades. We reinforced our regional and international positions in a number of global rankings which I would have happily walked you through, but for the pressure of time. We are, of course, not insulated from the problems affecting the rest of the world and inflationary pressures have increased; but, with well-timed monetary steps, we have succeeded in containing inflation to an expected 5.1% in 2011. Let’s keep on course, steady as she goes. Now let me turn to our economic prospects and our high aspirations We are living in troubled and testing times. Several questions arise. Will we be agile enough to meet the severe tests ahead? What kind of growth should we seek? Should it not be more inclusive? And more equitable? We are trying hard to move into niche markets but is this enough? What else must we do to escape the middle-income trap, to be amongst the best small economies, not just in Africa, but in the wider world where our main competitors are to be found? We have seen the likes of Malta, Singapore, Hong Kong, Ireland and others raising the bar to achieve GDP per capita, adjusted for purchasing power, more than twice the levels we have achieved despite our continued economic growth. Can we make the breakthrough? Are we prepared to do what it takes to do so? I believe it is absolutely vital for the future of Mauritius that not only government but business as well give greater weight to innovation, quality, inclusiveness and equity. We could perhaps borrow a leaf from the book of Bhutan. How does Bhutan come in the picture, some of you may well ask? This small Himalayan Kingdom leads the world in the index of Gross National Happiness. And, while we are about it, we must also introduce a fresh dimension in our assessment of progress: the protection of our environmental capital must be included in the equation for measuring development, and not zero-valued as in the past. This is essential to ensure that any fresh spurt of economic growth is channeled into a sustainable path and does not end in further land and human degradation. Otherwise, we shall hand over to our children a country whose famed natural beauty has been sadly overwhelmed by infrastructure and blighted by urbanisation. Do we hear the silent cries of those lovely “flamboyant trees” – planted by our forefathers, now coming into full flaming bloom, and adding to the season’s festive cheer – as they are brought down by BIS central bankers’ speeches chain-saws to make way for road-widening schemes? Or do we really wish to become like Malta, developed most certainly, but to our mind, featureless, waterless, soulless and nothing but concrete from shore to shore? We shall never tire of saying that our people is our greatest asset. We must nurture an entrepreneurial culture. We have not fully capitalized on skills enhancement in our human resource. And we have failed to encourage R&D to turn it into a platform for creativity and innovation. We largely bring home what is fashion overseas. In sum, we are missing some of the critical ingredients of the recipe to add greater value and to move to the next stage of development. We certainly have the doers. But do we have the forward thinkers, the visionaries, the dreamers? We are in danger of falling in a pedestrian rut. We have just not dreamt big enough. It is a scene reminiscent of Einstein’s definition of insanity, which he saw as “doing the same thing over and over again and expecting different results”. I am afraid that if we stick to the beaten path, we would soon be writing our global epitaph: Mauritius –The Home of the Dodo Three major ideas spring to mind here: the regional service hub, innovation and excellence. The service centre or hub notion has been bandied around for years: indeed we have so many hubs thrown at us that I am beginning to lose count of the number of wheels on the wagon. The other two are vital ingredients which we largely lack: innovation and excellence. But what is really missing is an overarching vision of where we want to go and how we are to get there. Now the vision does not have to come from Government: there is a great opportunity for the private sector and the NGOs to pick up where we left off with Vision 2020 some fifteen years ago. I am sure I am not the only one here tonight who is looking askance at the progressive financialisation of the economy. The “Occupy Wall Street” movement, which grabbed the headlines this year, and its equally confused copycats elsewhere, seem to speak to the same concern. Citizens are in revolt at the excesses of the Lords of Finance paying themselves fat bonuses on the back of recent public sector bailouts while the real economy has tanked, spawning retrenchment, bankruptcies and unemployment. The most egregious example is that of a famous bank CEO whose pre-crisis take-home pay was 75 times higher than the average wage: with the crisis, it is a staggering 169 times the average wage. He has had a good crisis. He must be a very rare diamond indeed. But the situation is not all that rare. The same scenario is being played out on the home front. With the crisis now in its fourth year and placing severe strain on our economic operators, you would have thought that it was in the self-interest of our banks to reduce finance costs for their clients to help them adjust to depressed market conditions and declining profit margins. But you would have been wide of the mark. Oh, our real our sector operators, especially exporters, are hurting just as much as their competitors elsewhere, and indeed their customers as well. Our banks have also had a good crisis. Some of them have raised their fees and charges. Bank sector profits are running at Rs65 million a day. Unlike bankers elsewhere, our bankers are sitting pretty ...laughing all the way to the bank, you might say! We do want our banks to be profitable but we do draw the line at supernormal profits. Especially at times like these. When the lion’s share still goes to the lions, we may be asking ourselves a question or two. I hope we never see in our island the bank rage which has created such mayhem in the streets of Manhattan and by St Paul’s in the city of London. Bank bosses, recently bailed out at taxpayers’ expense, are increasingly seen as arrogant, greedy, and unrepentant. BIS central bankers’ speeches This is now emerging as the staple diet for stand-up comedians like Andy Borowitz, who has fantasized on a letter that might have been sent from the boss of Goldman Sachs to his investors: “We have taken note of the protests and have asked ourselves ‘how we can make money out of them?’ The answer is the newly launched Goldman Sachs Rage Fund. This will invest in firms likely to benefit from social unrest, such as window repairers and makers of police batons. For at Goldman we recognize that the capitalist system, as we know it, is circling down the drain, but there’s plenty of money to be made on the way down.” This may be a far cry from the situation here in Mauritius, yet. I am sure our bankers are not as insensitive as the profit figures would imply. The corporate board-rooms concerned should be reminded of their social role and urged to reconnect with reality unless they are keen to stoke discontent: How can we overcome this apparent disconnect? To begin with, we must all work to explode the notion that more money, by itself, is the true target of growth. It was a wise man who said: “Money is a good servant but a bad master.” And there is some serious re-thinking to be done Let us see remuneration relate more to ethics, with greater attention to shareholders, entrepreneurs and high street customers Let us break the current nexus between managers and their boards Let us move towards a new vision and diversify the composition of boards, so that profits and high returns do not become an obsession Let us move towards a vision of banking where financial return is not the only goal and the business and social role of banks is revived Let us move towards a vision where the interests of banks are more aligned with those of the wider population Let us together embrace a vision where the business of banking is the business of serving a thriving and just society. That is the real test of development Government has a role in mediating, to try to ease the problems of various stakeholders of the economy, to make it easier for them to co-ordinate their actions, and to act as an important arbitrator and facilitator to support the optimal course of action for the economy as a whole. But Government only acts on the information available. Therefore we need a wideranging process engaging the best people and best ideas in the land to develop the vision for all stakeholders. And banks are part of the system; they should not stand apart, turning a blind eye to financial stability and the impact they are having on the real economy. If we compare ourselves with Singapore and Hong Kong, the top performers in the small economies, we suffer from structural flaws that are inhibiting our progress. I have not seen any positive reaction to the wake-up call from the Global Economic Forum this year and last year. Wake-up Mauritius and grasp your future with vision and vigour. But now, if I may be permitted a little digression on the demographic time bomb. Its fuse is burning steadily, largely un-noticed, with dire consequences if we neglect its import. The population in Mauritius over pension age is expected to more than double over the next 15 years, and more than triple over the next 35 years. The ratio of people of working age for each person over pension age is expected to fall continuously over the next 35 years from about 7 now, to 2.5 by 2045. This demographic time-bomb, which is ticking away relentlessly, has deep significance for our economy, our pension schemes, and our society. Dealing with it must be one of the key elements of our future visioning exercise. BIS central bankers’ speeches And now to close, I will share with you another of those whimsical laws of nature that define our frailty. In the past, for some light diversion, I have taken you in the world of the premier league with the Maradonna law of interest rates. Then we moved into the domain of advanced science with Einstein’s law of success. We came down to the nitty-gritty business of banking with Sutton’s Law on why he robbed banks. “Because that’s where the money is”, he explained with irrefutable logic. Tonight, we make a foray in the world of linguistics. There are very important developments there which can change forever our view of bankers. For a profession that has done so much for the world as we know it, both good and bad – and perhaps also very bad, the view is gaining ground that the orthography of the word “banker” does not do full justice to the complexity of the profession. To prevent “banker” from being confused with a four-letter word, I understand that a proposal has been made simultaneously to the editors of Webster’s and the Oxford English Dictionary in the UK, the guardians of linguistic orthodoxy, to accept an alternative spelling. Henceforth, “banker” will be spelt “b-a-n-k-s-t-e-r”… to rime with gangster. Maybe the CEO’s which our distinguished visitor, Governor Sanusi, had locked up were this new breed of bankers, spelt with eight letters. This inspires me to move an amendment to Sutton’s Law to update it to fit the times: if you want to rob banks, make sure you do it before they rob you. And so I ask you all to be upstanding, as I propose a toast to Vision 2030, to our distinguished visitor, and to all of you, the economic operators of Mauritius. BIS central bankers’ speeches | bank of mauritius | 2,011 | 12 |
Transcript of impromptu remarks by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the prize-giving ceremony to reward record-setters and champions of the 2011 Inter-Youth Championship as well as winners of the Monetary Policy Challenge and Essay Competition, Port Louis, 20 December 2011. | Rundheersing Bheenick: Bank of Mauritius – improving financial literacy Transcript of impromptu remarks by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the prize-giving ceremony to reward record-setters and champions of the 2011 Inter-Youth Championship as well as winners of the Monetary Policy Challenge and Essay Competition, Port Louis, 20 December 2011. * * * Thank you all for honouring us with your presence here this afternoon. I can safely say that when I came here five years ago, this kind of event would not have taken place. You would probably never have been invited to the central bank, for the central bank was a very closed institution. It dealt only with banks and not with anything else. For our 40th anniversary in 2007, we decided to open up gradually. Part of that opening up was to reach out to other operators in the economy beyond bankers. We thus started the dialogue with private sector operators and real sector operators. While we were doing that, we thought we should also reach out to the younger generation. We launched several initiatives. We opened up the Bank to financial education and financial literacy and to many things which the Bank had never done before, for example the creation of a Bamboo garden. I am happy to say that gradually, staff started embracing the concept of Corporate Social Responsibility (CSR) within the Bank itself. And what we are doing today, guiding the tentative steps of the young in the direction of a brighter future, is precisely in the context of CSR. We believe strongly in what we are doing. We believe that inspecting banks, keeping them well-capitalized and well-supervised, is not enough. We must educate you and inform you of what we are trying to do – we must have informed citizens. Most people have not even heard of the central bank and when they happen to hear about it they hear bad things. When the press expects the central bank people to reduce rates, they are hiking up rates; when commentators on radios expect them to do one particular thing, they are doing the opposite. But when you look back over the years you find that the economy and the financial sector have been quite stable, and inflation is more or less tamed. So, the central bank people have not been doing things so badly after all. We are not as bad as you might tend to believe if you only read the press or the boohoos all day long on the different radio stations. We hope that you, young people who participate in our Monetary Policy Challenge will help us to get our message across much better and in a more efficient manner. I understand that the Monetary Policy Challenge, now in its fifth year, has been attracting more and more participation. Originally, we were not very sensitive to the academic year and the claims that having to sit for exams had on your time. Gradually, we learnt to live with your programme, hence the wider participation. We are glad to see so many of you and I want to congratulate all the winning teams. This year, on the boys’ side the two Royal Colleges have doubled the top prizes and on the girls’ side, it’s all Loreto and nothing else. So I look forward to more competition for both the boys’ side and the girls’ side. Competition is what keeps us going. Competition is what makes the country more efficient. Competition is what makes our bankers more efficient. A more informed citizen, a more financially-literate customer base is what is required in our country to make sure that our banks do not make what I call “supernormal profits”. BIS central bankers’ speeches We also welcome the young athletes who participated in the Interclub Youth Championships – the other part of our CSR outreach. Our athletes have been doing very well. Some of the early winners in the first year have actually made the whole country proud by turning in an excellent performance at the last Jeux des Iles1. And I understand from my good friend Vivian Gungaram2 that we have high hopes for a few who are present here. He even mentioned one to me as a future Buckland3. I hope that those dreams will be realized and we at the central bank are very happy to accompany you for part of that journey. We have a record number of records established this year. The year before we had 10 records established. This year I understand 14 records have been established. That’s what I mean when I tell you that you must become more efficient and more competitive. So, thank you very much Mauritius Athletics Federation for the work that you are doing and for which I encourage you. We hope that we have still better performance, bringing a rich harvest of gold medals next time not just bronze. Good luck therefore to our young athletes who are here, to your parents and your mentors. I say bravo, well done and wish you to persevere in your sporting career. And you can rest assured that your Bank will continue to take care of its major business which is to take care of the value of the rupee. I think we have taken a fairly good approach to it so far – the rupee has been quite stable and I see no reason why it should not continue on that track. I would like to thank all those who have participated in these competitions, all those who made the competitions possible, all those who marked the papers, Deputy Governors and my colleagues from the Bank who participated in the different activities that led up to making all this possible. Let me wish you all – the teams, parents, teachers, everybody dear to you, a very merry Christmas and a happy new year. Thank you for your attention. The Jeux des Iles (games of the islands) of the Indian Ocean is a multi-sport competition whereby athletes from the various islands of the Indian Ocean meet since 1979. They are held every four years and are currently gathering seven delegations: Mauritius, Seychelles, Comoros, Madagascar, Mayotte, Reunion Island and the Maldives. Mr Vivian Gungaram is the Secretary of the Mauritius Athletics Association. Stephan Buckland is a retired Mauritian track and field athlete who competed in the 100 and 200 metres. In 2001, Buckland became the first athlete in history to win the 100m, 200m and the 4x100m relay at the Francophone Games in Ottawa, Canada. BIS central bankers’ speeches | bank of mauritius | 2,011 | 12 |
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, on the occasion of the signing of an agreement for a Line of Credit to the Mauritius Leasing Company Limited by the European Investment Bank for SME financing, Caudan, 19 December 2011. | Yandraduth Googoolye: Small and medium-sized enterprises in Mauritius Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, on the occasion of the signing of an agreement for a Line of Credit to the Mauritius Leasing Company Limited by the European Investment Bank for SME financing, Caudan, 19 December 2011. * * * Ladies and Gentlemen It is a great honour for me to be among you for this memorable event and I welcome this opportunity to address this forum on a subject that has been much talked about lately, both at the national and international level. SMEs have played a key role in providing the necessary impetus to the advancement of some of the world’s economies like the United States, China, Japan, Taiwan, Korea, Hong Kong as well as many countries in Europe. Ninety-nine per cent of all European businesses are in fact SMEs. They provide 2 out of 3 of the private sector jobs and contribute to more than half of the total value added created by businesses in the European Union. In some countries, such as the UK, Governments have entered into an agreement with major banks to determine how much they will lend to SMEs. In South Africa, SMEs are said to contribute 40% of GDP and 40% of employment opportunities. There are currently over 100 million SMEs in Africa and this figure is deemed to grow even more. India and countries in South America have been concentrating their efforts in developing the SME sector. In developing countries, SMEs serve as a useful bridge between the informal economy of family enterprises and the formalised corporate sector. As such, most policymakers deem the health of the SME sector to be highly important for an economy Mauritius is not an exception to this. I believe that SMEs are critical for our future economic prosperity given that it has been placed on the national agenda by the Government. Indeed, the Government of Mauritius has endeavoured to bolster the SME sector by providing various incentives, including industrial space and special grants amongst other measures. Some of the former SMEs are now big players in the Mauritian corporate landscape. A survey conducted by Statistics Mauritius in 2007 revealed that there were around 92,000 SMEs which provided employment to some 209,000 individuals. These numbers are estimated to have reached 94,000 and 250,000, respectively, in 2010. SME jobs represent around 46% of total employment in the economy and are mainly concentrated in the “Wholesale and Retail Trade”. SMEs’ contribution to Gross Domestic Product amounts to nearly 37% or Rs120 billion. Estimates based on latest figures suggest that SME exports might represent around 20 to 25% of total exports. With a view to further support the sector, the Honourable Vice-Prime Minister and Minister of Finance and Economic Development had announced in the Budget Speech 2012, that the banking sector would extend credit facilities to SMEs for an amount of Rs3 billion over the next three years at 3 percentage points above the prevailing Key Repo Rate. Credit facilities granted to the SMEs at end-September 2011 amounted to about Rs16 billion. Following the announcement in the Budget Speech 2012, fourteen banks have been earmarked to grant credit facilities to the SMEs effective 1 December 2011. From that date up to 14 December, 59 applications for facilities by way of loans and overdrafts have been received for an aggregate amount of Rs99 million. The number of applications received for loans was equal to that of overdrafts. However, the amount applied for loan facilities doubled BIS central bankers’ speeches that of overdrafts. Out of the total applications received for Rs99 million, an amount of Rs17 million has been sanctioned. Since the announcement of the budgetary measure, banks have promptly taken various steps to promote the scheme by inter alia setting up SME desks, assigning a team/department to promulgate the scheme, informing SME customers of the various SME products through letters, communiques, website and advertisement, and personally visiting SME customers to promote key products. Financing the productive capacity of the economy is critical to long-term economic success. While large businesses have easier access to finance including capital markets, SMEs are heavily dependent on the banking system. Today, it gives me great pleasure to note that Non-Bank Deposit Taking Institutions are also participating in the development of the SME sector in Mauritius. I value this initiative of the Mauritius Leasing Company Limited to support the sector through a line of credit of EUR5 million funded by the European Investment Bank (EIB) with the aim of providing leasing facilities to SMEs. The EIB, the European Union’s long-term lending institution, has been a long-time strategic partner in the development of the Mauritian economy. Since 1975, it has provided more than EUR300 million for the financing projects in the country. We welcome the support of the EIB once more and appreciate that it has recognised the importance of SMEs and their contribution to the Mauritian economy as has been rightly pointed out by the EIB Vice President, Mr Sakellaris, responsible for Africa, Caribbean and Pacific lending operations: “The European Investment Bank recognises the essential economic role played by small and medium sized companies. We are pleased to be able to continue to facilitate private sector investment in Mauritius through a valuable relationship with the Mauritius Leasing Company Limited.”1 The Mauritius Leasing Company Limited was the first leasing company to be established in 1987. Since then, it has developed into an innovative and competitive company leading in various fields. Indeed, it was the first leasing company to be granted a deposit taking business licence by the Bank of Mauritius in September 1995, the first leasing company to issue debenture stocks and the first leasing company to be listed on the Stock Exchange of Mauritius. With total assets of over Rs3 billion and market share of 25% of the leasing sector, the company has recently embarked on Islamic Financing being the first leasing company to offer Ijara Financing. Today, another milestone has been achieved with the signing of the line of credit of EUR5 million with the EIB. I have no doubt that this agreement will give an impetus to the SME sector in Mauritius and will encourage an entrepreneurship culture that will drive the future of our economy. However, it is worth pointing out that financing SMEs is different as market information on family and smaller businesses is not as robust and efficient as it is for larger businesses. Credit providers must have effective risk management practices in place together with an understanding of the nature of business of the small entrepreneur to be able to service the sector in an effective manner. A deep customer relationship and strong knowledge of small businesses are fundamental for the success of the SME sector. Ladies and Gentlemen, let me end by quoting the words of the Honourable Vice-Prime Minister and Minister of Finance and Economic Development in his Budget Speech 2012: “In times of crisis SMEs are the most vulnerable. And in a world of rising competition they have to struggle to stay relevant and profitable. Yet when they do succeed, they can make an irreplaceable contribution to the economy”. Thank you. Joint Communiqué issued by the Mauritius Leasing Company Limited and the European Investment Bank on 19 December 2011. BIS central bankers’ speeches | bank of mauritius | 2,012 | 1 |
Letter by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, to stakeholders, Bank of Mauritius, Port Louis, 14 February 2012. | Rundheersing Bheenick: Main developments in 2011 and Mauritius’s economic outlook for 2012 Letter by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, to stakeholders, Bank of Mauritius, Port Louis, 14 February 2012. The original speech, which contains various links to the documents mentioned, can be found on the Bank of Mauritius’ website (http://bom.intnet.mu). * * * With the crisis in its fifth year since “sub-prime” became part of the international jargon, one could have been excused for thinking along the lines of Murphy that everything that could conceivably have gone wrong had already gone wrong and that 2011 was, at worst, going to be more of the same as we’d seen it all before or, quite possibly, turn out to be somewhat better since all manner of weaponry had already been deployed to take on the hydra-headed beast as it successively morphed from a US sub-prime crisis to a US banking crisis to a full-blown global financial crisis before emerging in its latest and most pernicious and destructive avatar as the worst global economic crisis in eight decades and, surely, this impressive arsenal – much of it never tried before on this scale – would at last begin to get the better of the beast. But, it was not to be. 2011 turned out to be the stuff of nightmares. A Hollywood mogul contemplating an economic disaster movie would have fired any script-writer who would have dared to come up with such improbable plots and sub-plots as these, in no particular order, as part of the global economic crisis storyline: a nuclear disaster in the third largest economy; a tsunami engulfing South-East Asia; large universal banks tumbling like the proverbial house of cards, scrambling for capital, losing their CEO’s and their prime rating; an acute sovereign debt crisis in the European periphery,, threatening contagion to the rest of the eurozone; a credit crunch in the midst of unprecedented Quantitative Easing; de facto nationalisation of banks in hard-core capitalist economies; a sex-scandal forcing the exit of the head of the International Monetary Fund (IMF); democratically-elected leaders being replaced by appointed technocrats in Greece and Italy, under the pressure of markets; the US caught in fiscal gridlock and losing its triple-A rating; an uprising in the Arab world,, toppling long-established dictators with a key role in the politics of oil; the death of a tinpot dictator in North Korea; the spectre of an unpredictable Iran joining the nuclear club; currency and capital markets in the doldrums but with nervous twitches as they see-saw between risk-on and risk-off modes; gold bugs having a field day – Goldfinger’s dream of world domination at last coming true? – as even the respected World Bank President re-discovers the merit of a gold-exchange standard to combat exhorbitant currency volatility; the euro doing very poorly with the prospect of its implosion leading to an explosion of summitry, but with sophistry more in evidence than solutions – all this, and more, against a back-drop, at the global level, of the world trade system still pursuing the elusive closure of the Doha round and, at the local level in many countries, an amorphous “occupy” movement gathering momentum to vent its frustration against all manner of crisis-related ills, real or imagined. Fact was indeed stranger than fiction. Our unfortunate script-writer would, in all likelihood, have been black-listed forever for bringing Hollywood and the guild of screenwriters in disrepute if he had also had the temerity to include in his screenplay of global financial and economic mayhem affecting the major countries and their systemically-important institutions a tableau with a starkly contrasting narrative: a tiny ultra-peripheral economy with a population of just 1.3 million; a fruit-salad of a nation with a rich diversity of languages, religions and ethnicities, and democratic to a fault; a success story sans pareil of: structural adjustment, demographic transition, diversification away from mono-crop dependence on sugar, export-driven industrialisation, off-shoring from banking and finance to business processes, and of economic transformation generally as it BIS central bankers’ speeches weaned itself away from trade-preferences to the post-WTO world; an economy that has kept growing throughout the crisis when bigger economies contracted; an unemployment rate that has stayed below 8 per cent; an inflation rate that has tumbled from 10.9 per cent in April 2007 – the date of the establishment of the Monetary Policy Committee – to a historical low of 0.1 per cent in October 2009, to reach 4.8 per cent in December 2011; a total public debt of less than 60 per cent of GDP, much of it owed domestically with the balance held by multinational or national financial institutions, not commercial banks; a rising level of net international reserves from Rs85.8 bn in 2007 to Rs109.6 bn in 2011; a fiscal deficit of 3.2 per cent in 2011; gross FDI inflows of Rs10 bn in 2011, not far below the record level of 2010; a record profitability posted by the largest bank in the country, a domestic one that has been in business since 1838; and a free floating currency that has adjusted flexibly without the benefit of any controls to appreciate during the crisis with the exchange rate index, MERI 1, standing at 91.6 in December 2011 from its base of 100 in calendar year 2007. Such a tableau, invraisemblable as it seems, is not the fruit of the imagination of our hypothetical script-writer. The country depicted does exist. And the experience highlighted is the result of the patient and combined efforts of policy-makers, real sector operators and its people generally, as they strived to adapt and re-adapt to the continuously-changing external environment confronting them. The picture that is painted is that of Mauritius: vibrant, resilient, and resolutely moving forward. And the Bank of Mauritius, that I have had the privilege of leading, has contributed to the rich palette that comprises the policy landscape, especially the financial and monetary aspects, adding our own touches and flourishes as we proceeded. In keeping with past practice, I next highlight the main developments of the past year before concluding with my perspective on the current year. Links are provided at the end of the relevant paragraphs for those readers who may be interested in delving in greater detail into some of the issues discussed. Economy The Mauritian economy continued to display a creditable degree of resilience despite difficult external conditions. Growth momentum was maintained in 2011 at 4.1 per cent, not far below trend, and projected to be slightly below 4 per cent in 2012. The unemployment rate was fairly stable at 7.9 per cent, a far cry from the rising joblessness in our main export markets. The fallout from the euro crisis will continue to affect our euro-centric economy. The call that we launched two years ago to diversify production and find alternative markets, which then fell on deaf ears, is increasingly finding a favourable echo among real-sector operators and decision-makers. (More on this issue) Monetary Policy Our monetary policy, continuously decried by business lobbies and regularly denounced by the press with an eye, no doubt, on their advertisers, confounded its critics by measuring up to its primary task of bridling inflation. At the beginning of the year, we had anticipated that higher commodity prices would drive up headline inflation but it would decline by end-2011. The Monetary Policy Committee (MPC) raised the Key Repo Rate (KRR) at two successive quarterly meetings in March and June by 50 and 25 basis points, respectively. These hikes contributed to contain inflationary pressures. At the September meeting, although inflation expectations were still high, the MPC maintained its stance as the global economy recovery was showing signs of losing momentum. In December, as the euro sovereign debt crisis had intensified causing the domestic economic outlook to be clouded by still greater uncertainty, the MPC proceeded to a very small cut of 10 basis points, the first time that the KRR was moved by less than 25 basis points, to 5.40 per cent per annum to manifest its concern about the low level of business and consumer confidence while avoiding undue risks on the inflation front. Headline inflation rose from 3.3 per cent in January to 6.6 per cent in November before declining to 6.5 per cent in December. Barring unforeseen shocks, we expect both year-on-year and headline inflation to moderate this year and gradually move within a narrowing range around our comfort level of 4–6 per cent. (More on this issue) BIS central bankers’ speeches Review of the MPC I had explained on several occasions the rationale for a thorough review of the functioning of the MPC in the light of its operating experience of four years. This was entrusted to Sir Alan Budd, a former Member of the Bank of England MPC. He made a number of recommendations in his Report which, I am glad to note, supported my own line of thinking. We have taken some decisive steps to enhance the independence and transparency of the MPC: beginning with the 4Q 2011 MPC meeting, the minutes of MPC meetings and the pattern of individual votes are being published; and there were legislative changes in December 2011 to sever the remaining formal links with the Board of Directors of the Bank. (More on this issue) Financial and Money Market Developments We addressed the issue of excess liquidity which could have fuelled inflationary pressures by a judicious combination of two measures. First, we raised the Cash Reserve Ratio from 6.0 to 7.0 per cent in February 2011 and increased the minimum daily cash ratio from 4.5 per cent to 5.0 per cent. Second, we stepped up the issuance of BoM paper to nearly Rs10 billion. To cope with persistent problems of liquidity overhang in different parts of the maturity spectrum, we extended the tenor of our paper well beyond the usual maturity of Central Bank paper of up to one year, and continued with the practice of issuing BoM Notes with maturities of 2, 3 and 4 years, which we started in August 2010. The operation was successful and was favourably commented by the January 2012 Article IV Consultation Mission of the IMF. (More on this issue) Another interesting development in the money market that occurred during the year is the daily publication of the Port Louis Interbank Offered Rate (PLIBOR) as from 26 August 2011 on the Reuters page at 12 00 hours. The PLIBOR, which is an average interbank rate, is computed and published for four tenors, namely Overnight, One Week, One Month and Three Months. These rates will be also available on the Bank’s website in early 2012. (More on this issue) Domestic Foreign Exchange Market The tumultuous conditions prevailing in international currency markets prompted us to take steps to prevent contagion from seeping into our small, but completely open, domestic foreign exchange market. The Bank intervened actively to smooth out excessive rupee volatility – while taking extra care to remain broadly neutral and avoid any unnecessary and dangerous balance-sheet risks – with total foreign currency purchases equivalent to US$533 million nearly matched by foreign currency sales equivalent to US$512 million. We continued to provide the State Trading Corporation, at their request, with their foreign exchange requirements to pay for food and fuel imports. We maintained the foreign currency swap facility, introduced at the beginning of the crisis in December 2009. We, however, decided to withdraw the Special Foreign Currency Line of Credit that had been made available to banks for trade financing since December 2008. I am pleased to note that, as a result of our vigilance, liquidity conditions on the foreign exchange market stayed comfortable throughout 2011, with a roughly similar total turnover of foreign exchange transactions as the previous year, and the rupee behaved fairly well during the year, contributing enormously to maintain price stability and real incomes in our import-dependent island. (More on this issue) Reserves Management Given “negative carry,” we did not seek to accumulate reserves. We managed to keep them at a comfortable level throughout the year. In December 2011, the gross external reserves of the Bank exceeded Rs80 billion while net international reserves amounted to almost Rs110 billion, representing around 37 weeks of imports. Our gold holdings amounted to around Rs5.7 billion as at end-December 2011, or around 7 per cent of gross external reserves. Our reserves are at a comfortable level when measured against the two traditional metrics of import cover and short-term debt cover. We actively pursued our diversification strategy into higher-yielding instruments and comparatively stable currencies. We thus invested in currencies such as the Norwegian Krone and the Swedish Krone. We intend to increase the share of our investment in BIS central bankers’ speeches fixed-income securities. Amendments have been brought to the Bank of Mauritius Act to support these moves. The Bank has negotiated with the Reserve Bank of India to invest in Indian government bonds and is currently negotiating with the People’s Bank of China to invest in Chinese government bonds. The diversification strategy adopted by the Bank, together with enhanced operational efficiency, were behind the improved financial performance of the Bank which realized a net profit of Rs258 million for the FY2010/11, compared to Rs72 million for the corresponding period last year, in spite of the continuation of the low-yield environment for currency placements. We have made some progress with the idea of setting up the Sovereign Wealth Fund which I had discussed quite lengthily in my previous Letter to Stakeholders. I have had follow-up discussions with the IMF and other central banks which have gone down this road. Together with my Head of Financial Markets Operations, I participated in the first Africa Sovereign Funds Roundtable in Morocco, which brought together central banks, pension/social security funds, sovereign wealth funds and finance ministries across the African continent. The Roundtable provided participants with guidance on ways to address strategic, governance and investment management challenges. Debt Management We scored some success in our attempt to improve the domestic debt profile of central government which we lengthened. In October 2011, we introduced 273-day Treasury Bills to widen the maturity spectrum of available instruments and smoothe the yield curve – I will take up the issue of the yield curve in the next paragraph. We built benchmark bonds by re-opening the issues of longer-term Government instruments several times during the year to stimulate the secondary market and establish a reference yield. In November 2011, we revamped the auctioning process by conducting single-maturity auctions of Treasury Bills and holding more frequent auctions during the week. This was facilitated by the implementation of a web-based on-line auctioning system now in its final stage. We are planning to extend the system, which now handles only Treasury Bills, to other Government debt instruments. (More on this issue) Yield Curve The year also brought a major development in the capital market with the correction of the yield curve. This curve – which shows the yields of Government securities of different tenors – had been relatively distorted at its shorter end since 2007 and was stressed downwards by factors such as the excess liquidity plaguing the banking system and the decrease in the KRR. I have detailed earlier the measures which we took to bring liquidity to reasonable levels. These helped to reduce the pressure on yields which started to move upwards, thereby removing the distortions at the shorter end of the curve. By the end of 2011, we had achieved a smooth upward-sloping yield curve. This smooth yield curve is expected, among other things, to benefit the development of a corporate bond market by enabling market participants to price their financial products. Development of a Secondary Market One of the obstacles to the proper development of a secondary market is the tendency for banks to hold their portfolio of Government securities to maturity. The marked preference of banks for official paper, even at the cost of driving down yields in the preferred part of the spectrum, and a growing risk-aversion which impeded the growth of credit prompted us to introduce a new tool in the form of a cap on banks’ holdings of Treasury Bills in their banking books. This cap was initially set at 20 per cent of daily average rupee deposits and tightened further to 18 per cent as from July 2011. There is no limit on banks’ holdings of Treasury Bills in their trading book. This is expected to encourage banks to direct loanable funds towards extending more credit and also promote the long-awaited development of the secondary market. (More on this issue) Banking Sector Performance Our banking sector continued to show remarkable resilience – in some cases, insolently so – in the midst of the global financial meltdown. As at 30 September 2011, unaudited figures show that banks realised profit after tax of Rs15.9 billion against Rs10.1 billion a year earlier. The banking sector continued to expand driven by the Segment A, i.e. domestic, business, while Segment B business contracted BIS central bankers’ speeches slightly. The ratio of non-performing loans to total loans hovered around 2 per cent. (More on this issue) Fee income is now a non-negligible component of banks’ total income and there have been complaints from various quarters that bank charges are on the high side. We decided to set up a Working Group on fees, charges and commissions to study the reasonableness of bank charges relative to the services offered. The Working Group’s main task will be to analyse banks’ pricing for their services, particularly with regard to basic banking services offered to the public. I reminded bankers at the last Banking Committee meeting of the year that the Bank is fully empowered to regulate fees and charges in the banking sector. Moves in this direction can be envisaged to ensure that customers get a fair deal. Regulation and Supervision We amended several of our guidelines and issued new ones in response to the changing financial environment. We adopted the risk-based approach to supervision by an optimum allocation of our supervisory resources to institutions that we believe pose greater risks to the financial and economic system. We fine-tuned the implementation of the Basel II framework by requiring banks to submit their Internal Capital Adequacy Assessment Process and prepared ourselves to move to the Basel III framework. (More on this issue) We firmly believe that transparency builds confidence in the integrity of the banking system. In April this year, after preliminary work spanning over two years, we took the bold step of publishing our CAMEL ratings of banks. At first, this initiative did not appeal to our bankers, but it favourably impressed the IMF Article IV Consultation Mission of January 2012, which did not hesitate to qualify it as a première in Africa. Today, the half-yearly publication of the CAMEL ratings seems to have been widely accepted in the country and forms an integral part of our framework for the public disclosure of information on the banking sector. We pursued our efforts to enhance supervisory cooperation and information-sharing with other countries. The Bank entered into Memoranda of Understanding (MoUs) with the Central Bank of Kenya and the Maldives Monetary Authority, which brings the number of MoUs signed with foreign regulatory bodies and agencies to ten. The Bank and the Central Bank of Kenya are setting up a protocol for joint co-ordination and conduct of on-site examination of financial institutions – which will come in handy as Mauritian and Kenyan entities have interests in the banking sector in one another’s country. We have established a framework for regular exchange of information at mutually agreed intervals with foreign “home” regulators for an effective supervisory oversight of international banking groups operating in Mauritius, and participated in the work of the related supervisory colleges. Islamic Finance March 31, 2011, marked another milestone in the development of our banking sector with our very first full-fledged Islamic bank, Century Banking Corporation, launching its operations. We are actively pursuing discussions with the International Islamic Liquidity Management Corporation, of which we are a founder-member, for the issuance of Islamic liquidity instruments that would mark our entry in Islamic capital markets, facilitate liquidity management by domestic banks conducting Islamic banking business, and enhance our attractiveness for Islamic finance. A Joint Committee of the Bank of Mauritius and the Ministry of Finance and Economic Development has been set up to study all issues relating to Islamic capital markets and, in particular, assess prospects for the issuance of Sovereign Sukuks. Small and Medium Enterprises Financing Scheme Less than a month after the Minister of Finance announced the creation of a Small and Medium Enterprises (SMEs) Development Fund in the Budget presented in November 2011, we acted promptly to set up the “Small and Medium Enterprises Financing Scheme” to facilitate access of SMEs to finance. Under the Scheme, the 14 participant banks – i.e. all the banks involved in Segment A activity – will provide credit facilities to SMEs at 3 percentage points above the prevailing KRR in an amount of up to Rs3 billion over the next three years. Over the period December 2011 to BIS central bankers’ speeches November 2012, funds of Rs1 billion will be disbursed to SMEs. Loans under the scheme are free of the processing costs and charges normally applied to such lending. They also carry a partial guarantee extended by a participating state-owned enterprise. The Bank is closely monitoring all funding provided under the scheme to ensure its smooth operation. (More on this issue) Deposit Insurance Scheme We made some progress on the Deposit Insurance Scheme in consultation with selected member banks of the Mauritius Bankers Association. We have approached the Swiss-based International Association of Deposit Insurers, of which Mauritius is an Associate-member, for their expert views and comments on the proposed Scheme. It is our fervent hope that we will be able to plug in an additional safety-net in our banking regulatory/supervisory infrastructure and minimise the risks now being implicitly underwritten by the monetary and fiscal authorities. Single Financial Regulator The twin-peaks regulation model has been listed among the possible suspects responsible for the financial and banking crisis in some jurisdictions. An important policy development was the announcement in the November 2010 Budget Speech of the possible move to a single regulator for all financial services in our jurisdiction. This will most certainly impact on the way the Bank currently functions. A team of experts of international repute has been identified to undertake a study on the way forward. Mauritius Credit Information Bureau Since its launch in 2005, the Mauritius Credit Information Bureau (MCIB) has rapidly emerged as an essential decision-making tool for system participants to assess any prospective borrower’s credit profile. The credit information system also provides reputational collateral to borrowers such as SMEs and small borrowers who often face difficulties in accessing finance due to lack of tangible collateral. An important amendment was brought to the Bank of Mauritius Act in uly 2011 empowering the Bank to impose sanctions on credit providers who refuse to join the MCIB. Another amendment enabled the Bank to become a participant of the system which the Bank formally joined in January 2012. Lenders are encouraged to share the benefits derived from the MCIB with borrowers by reducing processing fees, charges and lending rates. (More on this issue) Cheque Truncation System In my last letter, I had regretted my inability to deliver on the Cheque Truncation System (CTS) which had got entangled in procedural difficulties. This year, we took bold steps to steer this long-delayed project in the right direction. Amidst unfounded criticisms and baseless allegations of fraud and malpractice, the new system was set up in collaboration with commercial banks. On 6 September 2011, Dr the Honourable Navinchandra Ramgoolam, GCSK, FRCP, Prime Minister, Minister of Defence, Home Affairs and External Communications, came to the Bank to launch the CTS in the presence, amongst others, of the Honourable CG Xavier-Luc Duval GCSK, Vice Prime Minister and Minister of Finance and Economic Development, and the CEO’s of all banks operating in Mauritius. We chose to mark the occasion by donating a cheque of Rs1 million to the Prime Minister’s Relief Fund, with this Bank of Mauritius cheque being the first to be cleared by the CTS. The deployment of this new system which provides for the Bulk Clearing System for low-value electronic transactions marks the beginning of a new era for the payment and settlement system of the country. Cheque clearing is now faster and more secure. During the course of 2012, we will interface the system with the national switch, which we are now working on, to cater for the effective clearing of card-based transactions from ATMs and points-of-sales. With the CTS having been the object of so much unwarranted attack, I feel it my duty to provide assurance to all stakeholders that the Bank has acted in all fairness and legality as well as in the best interests of the entire community of cheque-users, and bank customers generally, in this matter. Technology never stands still and it is in the nature of competitive bids that many of them fail to win the contract. BIS central bankers’ speeches Dialogue with Stakeholders I have made regular dialogue with our stakeholders an integral feature of my governorship. It is my strong belief that there cannot be effective policymaking in central banks without effective communication and outreach. During the year, I continued with my open-door policy of meeting people from different walks of life and different areas of activity, from academia to private sector operators, and consumer associations. This allowed me to feel the pulse of the economy and fill gaps in the Bank’s staff reports, while also being sensitive to all shades of opinion, including those that rarely make the headlines in the local press. In addition to our regular schedule of quarterly meetings with the banking sector through the Banking Committee, I also held meetings with the MBA Bureau, an offshoot of the Banking Committee, to address the most pressing issues. We held a grand total of 49 trilateral meetings with CEO’s and Board Directors of banks and other deposit-taking institutions as well as with their external auditors to review their financial performance and to discuss regulatory issues. I personally chaired the meetings with the larger, systemically-important, institutions. My First Deputy Governor handled the rest but briefed me on the issues to be addressed prior to the meetings, and on the outcomes and any concerns thereafter. The Bank’s traditional Annual Dinner in honour of Economic Operators was marked this year by the presence of HE Mallam Sanusi Lamido Sanusi, Governor of the Central Bank of Nigeria, as our Guest of Honour. This annual event gave me the opportunity to express my appreciation to our stakeholders for the cordial working relations that we have had during the year. It allowed me to comment on the past year and to highlight future areas of concern for the regulator. The function, which was the first black-tie event ever organised by the Bank, turned out to be a runaway success. As part of our open and transparent communication strategy, I accepted invitations to speak from various institutions, at home and abroad. I began the year with a keynote address at the Future of Financial Markets Forum in Mumbai in January. I continued with an address at the SAID Business School at the University of Oxford in February. I delivered a dozen addresses to share my views on a wide range of topics, from economic analysis and supervisory matters to payment system infrastructure and corporate governance, on Mauritius and on Africa. There were two common threads in my addresses: overseas, the main thrust was to present Mauritius as an avant-garde banking and financial centre at the cutting edge of monetary policy-making and banking/financial regulation; locally, I highlighted the need to deliver on our core mandate. I did not elude the burning issue of exchange rate management when invited to speak at a Round Table on the exchange rate organised by the Mauritius Exports Association. It was the opportunity for me to underline the essential fact that our much-maligned monetary policy/exchange rate strategy has delivered the goods for the nation as a whole and done it in a more sustainable manner than the previous infernal spiral which banked on continued depreciation…which fuelled inflation…which sparked wage demands…which stoked up inflationary pressure…which necessitated further depreciation etc. (More on this issue) Corporate Social Responsibility Since I joined the Bank, I have integrated Corporate Social Responsibility as a key element of the Bank’s outreach to the wider Mauritian community to project a less technocratic and austere image. The Bank of Mauritius Inter-Club Youth Championships – now a regular feature in the Bank’s calendar of activities – were held for the fifth consecutive year on 24–25 September 2011. This fifth edition was co-sponsored by 14 commercial banks − namely ABC Banking Corporation, Bank of Baroda, Bank One, Bank International Indonesia, Barclays Bank, Bramer Banking Corporation, Deutsche Bank, Hong Kong and Shanghai Banking Corporation, Investec Bank, Mauritius Post and Cooperative Bank, SBI (Mauritius), Standard Bank, Standard Chartered Bank and State Bank of Mauritius. Around 725 athletes from 25 clubs participated, including the 15 best athletes selected from 400 Rodriguans who participated in the Inter-Club/School Youth Championships held in Rodrigues. A record number of national records – 14 of them – were established this year. BIS central bankers’ speeches We were proud to note that two athletes who first came to national attention at the Inter-Club Youth Championships won bronze medals in the “Indian Ocean Island Games 2011” held in Seychelles. The Bank rewarded the record-setters as well as the two bronze medallists at a prize-giving ceremony held at the Bank in December 2011, in the presence of their parents/families, trainers, and national sport officials. Financial Literacy Programme The Bank continues to play its role in the promotion of financial literacy. This year, the Bank launched a Financial Literacy–Essay Competition on the theme ‘The Importance of Saving for Youngsters’, which was open to students of Forms IV and V. We also organised the fifth edition of the “Monetary Policy Challenge” in June 2011. At the prize-giving ceremony held at the Bank in December 2011, the winners of both competitions were rewarded, in the presence of parents, teachers and college rectors of the winners. (More on this issue) Internship Programme As part of our outreach initiatives, we planned an internship programme but it took us some time to deliver on it. We first had to address very real concerns about data confidentiality and secrecy before we tentatively introduced an internship programme, limited to students of the University of Mauritius and the University of Technology. Five interns were selected after an interview and posted in different divisions of the Bank to acquire practical experience in Central Banking. The internship programme covered the period July to September 2011. In 2012, we intend to broaden the programme to accommodate interns from anywhere throughout the year. Training We continued to provide up-to-date training to staff to better equip them for the challenges ahead. IMF technical assistance in the areas of macroeconomic modelling and supervision was on-going. Training in these areas is expected to enhance skills and the analytical capacity of Bank staff. Capital of the Bank With the approval of the Minister of Finance, we doubled the Bank’s capital from Rs1 billion to Rs2 billion in November 2011. This injection of capital was rendered necessary on account of the significant increase in the volume of the Bank of Mauritius Instruments which we had to issue to cope with excess liquidity to maintain orderly conditions in the banking and financial sector. Issue of New Notes In October 2011, we issued banknotes of Rs200, Rs500 and Rs1,000 denominations with enhanced security features to extend the life of our ageing family of banknotes. These features have the advantage of facilitating authenticity verification by consumers and cash-handlers, thus enhancing protection against counterfeiting. The upgraded banknotes are legal tender concurrently with other notes of existing family of banknotes. (More on this issue) Launching of Third Platinum Coin During this year we launched the third platinum coin of the “Father of the Nation” Series, thus completing the collection, designed to pay homage to Sir Seewoosagur Ramgoolam who left his indelible imprint on the destiny of our country. The obverse of the third coin displays Le Morne Brabant, a rocky outcrop on the south-west coast of the island which served as a shelter for marooned slaves during the slavery period and which is inscribed on the World Heritage list of UNESCO since July 2008. We expect to issue a special collectors’ edition of all three coins in 2012. Central Bank Statistics A regular and timely flow of quality data is an essential characteristic of a modern economy. The Bank shoulders part of this obligation on behalf of the nation, and has specific responsibility for data relating to money, finance, and the balance of payments. The Bank is strongly committed to improve the quality of its data and to ensure that they meet international standards. A recent IMF Technical Assistance mission to the Bank validated the quality of our surveys of Global Business Corporations with a Category 1 licence and confirmed that we now qualified to join the top league of nations that subscribe to the Special Data Dissemination Standards – a project that I espoused since my early days at the Bank as I was alarmed by the rising Errors & Omissions component of our balance of payments. We were among the few central banks worldwide to participate in the BIS central bankers’ speeches very first Coordinated Direct Investment Survey initiative launched by the IMF in 2010. We have also initiated the process of compiling Balance of Payments (BoP) statistics in accordance with the sixth edition of the IMF’s BoP Manual – an exercise that we expect to complete by 2014. (More on this issue) Financial Stability Developments The year witnessed growing international recognition of the stellar role played by the Bank in our very small jurisdiction in addressing financial system vulnerabilities and financial stability issues against a background of strong regulation and supervision. We started the year by being invited – the second in sub-Saharan Africa after South Africa – to join the Financial Soundness Indicators Reference Group (FSIRG), set up under the auspices of the IMF. The FSIRG will assess the experience of countries in compiling and disseminating Financial Soundness Indicators and improve their usefulness for financial stability analysis. In November, in a public statement released on its website, the Financial Stability Board (FSB) listed Mauritius as a jusrisdiction taking actions recommended by the FSB after conducting an evaluation of our jurisdiction. The FSB, which is hosted by the BIS in Basel, was launched by the G-20 in April 2009 to build and expand on the work of the Financial Stability Forum, itself initiated in 1997 by G-7 Ministers of Finance and Central Bank Governors. It has a broad mandate relating to all aspects of the financial system from standard-setting to contingency planning for cross-border crisis management. We ended the year on an even stronger note by being invited by the FSB to join its Regional Consultative Group (RCG) for sub-Saharan Africa. The RCG for sub-Saharan Africa forms part of a network of six RCG’s established in 2011 following FSB’s decision in November 2010. The Bank is privileged to form part of such a group, together with eight other African countries, and contribute to the debate on global financial stability. (More on this issue) A major lesson learnt from the current global banking crisis is the need to reduce the complexity of banking and financial structures. Simpler structures facilitate risk assessment, effective supervision, and efficient resolution if financial institutions run into difficulties. We have studied the structure of our domestic systemically-important financial institutions − D-SIFI’s – and concluded that some simplification is called for. A prime candidate for reform is the bank-subsidiary model where a bank is the parent of subsidiaries in the group. We shall separate banking from non-banking activities to ensure that depositors’ money is not at risk. This will strengthen our financial system and reduce vulnerabilities, thus contributing to financial stability. Regional Cooperation We played an active part in regional cooperation initiatives within our area of responsibility. My Deputy Governors and I attended several meetings during the course of the year. The charters of both COMESA and SADC, the two major African regional economic organisations to which Mauritius belongs, provide in their governance mechanism, for a joint meeting of Central Bank Governors and Ministers of Finance co-chaired by a Minister and a Governor. Both bodies met for the first time since their creation in 2011. I was privileged, on behalf of fellow-Governors, to co-chair both inaugural meetings − the COMESA meeting in Lusaka in July, and the SADC forum in October in Mauritius. We hosted the Macroeconomic Sub-Committee of the SADC Committee of Central Bank Governors. We also had the privilege of welcoming the Ministers of Finance and Central Bank Governors of SADC for the inaugural meeting of the Peer Review Panel in October 2011, held back-to-back with the joint forum mentioned earlier. (More on this issue) The Bank continued its prominent role in the area of Payment and Settlement System in COMESA and is now hosting the software for the Regional Payment and Settlement System (REPSS) and the SWIFT Bank Identification Code for the COMESA Clearing House (CCH). In September 2011, we hosted a Workshop on the Live Operations of REPSS, attended by delegates from 15 countries and the CCH. Major technical issues were cleared and the REPSS software was ready to be rolled out with the first group of central banks which had signed the relevant agreements and prefunded their account at the Bank of Mauritius. BIS central bankers’ speeches The way we conduct our business at the Bank seems to be of increasing interest to our peers from the region and beyond. We welcomed a delegation of the Central Bank of Seychelles headed by my fellow-Governor in April 2011. The Personal Assistant to the Governor of the Central Bank of Rwanda came for a short attachment in the Governor’s office to see how we ran the office. We also welcomed delegations from central banks from beyond the region, e.g Papua New Guinea, for training attachments at the Bank. AFRITAC South In my letter of last year, I had briefly mentioned the impending establishment of one of the African Technical Assistance Centres (AFRITAC) of the IMF in Mauritius. AFRITAC South – as the centre set up in Mauritius is called – was officially launched in October 2011 by the Vice Prime Minister and Minister of Finance and Economic Development at the Bank where it is presently housed. We welcomed, for the occasion, an important delegation of the IMF which comprised, among others, Dr Min Zhu, Deputy Managing Director, and Ms Antoinette Sayeh, Director of the African Department. Dr Zhu delivered the 7th lecture in the Bank of Mauritius Lecture Series on Global Challenges and Policies in Sub-Saharan Africa. (More on this issue) Overseas Engagements of the Governor, the First Deputy Governor and the Second Deputy Governor in 2011 My two Deputy Governors and myself had a very busy schedule of meetings in 2011, as part of our commitment to various regional and international organisations and bodies. Given the critical importance for us central bankers to keep abreast with international developments, these meetings provided a platform for exchanging views and establishing and maintaining contacts with our peers. (More on this issue) Forthcoming events As I look ahead, I note with satisfaction that our efforts to heighten the Bank’s visibility on the regional and international front are beginning to bear fruit. In the course of the year, we will have the privilege to host several regional and international meetings, which I give below in chronological order: In April, we will host the meeting of the Committee of Central Bank Governors (CCBG). CCBG meetings are normally held twice every year – hosted by a SADC-member central bank in April on a rotation basis, and by the South African Reserve Bank every September. In May, we will host, for the first time in Mauritius, the 19th Summit of the Central Bank Governors of the Francophone countries. We expect the participation of over 34 Francophone countries. In August, the Reserves Advisory and Management Program (RAMP), an arm of the Treasury Department of the World Bank, will hold a workshop in Mauritius. RAMP manages a part of our reserves. In September, we will host a seminar of the Islamic Financial Services Board on the role of Islamic Finance in the development of Africa. In November, as Chair of the SADC Group of Banking Supervisors, we will be organising a regional seminar for banking supervisors jointly with the Financial Stability Institute. This will be open to other countries in the region and will help to promote cooperation among regional banking supervisors. Again in November, we will host the second meeting of the Official Monetary and Financial Institutions Forum to be held in Africa, after Cape Town last year. We have only just been approached by The Banker magazine, an offshoot of the prestigious Financial Times, and FT Global Conferences to hold their inaugural Global International Financial Centres Congress in Mauritius, possibly in November. We are yet to finalise the matter. These events will be the high points of the year as we celebrate the Bank’s 45th Anniversary. BIS central bankers’ speeches Closing Remarks Each year that goes by brings its share of good things that we would like to remember and celebrate, and less good ones that we wish never happened and that we would like to forget. 2011 has been no exception. The work of a Central Banker only gets more and more complicated as the environment in which central banks operate continues to be clouded with uncertainty and becomes increasingly challenging and demanding. On the global front, knowledgeable observers seem to converge on the view that the crisis will be even more prolonged than is now expected. Some believe that prospects in the eurozone are quite bleak as hard-core Europe will be unable to do what it takes to save the euro from the repercussions of fiscal profligacy in its periphery. The “decoupling” theory has been exploded as a myth and the prospect of a hard landing in China dashes any hope of global salvation from the East. Small open economies like Mauritius will be buffeted by the raging turbulence. I cannot help reflecting that the smallness of our economy can actually prove to be an asset rather than a liability, the more common view, because small size gives us an added adaptive advantage: a quick response capacity and the flexibility to continually adjust to the volatile external environment – to trim our sails to the prevailing wind, like a small craft, rather than blithely sailing on with the inertia of an ultra-large crude carrier. Such flexibility in some of our policies and strategies has so far played in our favour. We have been able to achieve a growth rate of 4 per cent on average in the last two years. We continue to remain cautiously optimistic for this year. Pessimism is unwarranted, and unhelpful in any case. There is now a greater need for policy-makers to align and coordinate their policies to maintain the growth momentum and shore up confidence and business sentiment in the country. The Mauritian economy was buffeted by an unceasing succession of challenges throughout the year as the world continued its fruitless struggle to engineer a sustainable recovery, with the oft-sighted “green shoots” turning out to be a mirage. Major economies were shaken to their very foundation and drew generously on the medicine chest to try expansionary remedies, for some, or a dose of austerity for others, as they coped with mounting unemployment, social instability, political turbulence, fiscal gridlock, currency volatility, nervous markets and the spectre of recession hanging over vast swathes of the global economic landscape. We at the Bank rose to the challenge and continued our successful record of delivering on our core mandate of price stability and orderly and balanced economic development. We had recourse to unusual tools to achieve our objective. In December, we even had a welcome relief from our usual regimen of being regularly pelted with brickbats by the local commentariat when The Banker, a professional magazine of the British Financial Times Group, awarded yours truly the title of Central Banker of the Year 2012, Africa – a trophy to add to the tableau vivant of the hypothetical scenario with which I began this missive. This recognition gives me and my team considerable satisfaction as it is the first time in the Bank’s history of nearly 45 years that we are garnering such an award. It rewards the determination and the consistency with which we have been conducting our policies in an extremely difficult and very uncertain global environment, without giving in to the strident siren calls for quick monetary fixes to give a temporary, but ultimately self-defeating, boost to our exports. Real gains for all Mauritians can only come from productivity increases. And the future? The IMF Managing Director has recently opined that the world economy is entering a new extremely dangerous phase. We must be on our guard. We need to coordinate our efforts, align our policies, and take concerted measures with other policy-makers to navigate the treacherous waters ahead. Above all, we must look in the same direction. And we must be always ready to deploy new policy tools, if we are to steer a safe and steady course while awaiting calmer weather. Let me end by quoting Micheal Mussa, a former Chief Economist of the IMF, on the merits of economic policy tools: “My favourite economic policy tool is prayer. It is not demonstrably less effective than the others and it carries none of the bad side effects.” BIS central bankers’ speeches Prayers, anybody? As I sign off this letter, five years to the day since I first donned the hat of Governor, I invoke Mussa’s twist on the Pascal wager and fervently hope and pray that 2012 will surprise us on the upside, with a much better outturn than current prognoses for the global economy and for our key partner-countries, and that – however pummelled, hammered and buffeted we may be – we shall be able to keep our economy on course to deliver respectable growth, more jobs and greater prosperity for all our stakeholders. BIS central bankers’ speeches | bank of mauritius | 2,012 | 2 |
Acceptance speech by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on receiving the Central Banker of the Year 2012, Africa Award from The Banker Magazine, London, 25 February 2012. | Rundheersing Bheenick: Working in the interest of Mauritius – Central Banker of the Year 2012, Africa Acceptance speech by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on receiving the Central Banker of the Year 2012, Africa Award from The Banker Magazine, London, 25 February 2012. * * * Thank you, The Banker Magazine; thank you, Mr Caplen, respected editor of The Banker; thank you, members of the panel for the generous acknowledgement of the Bank’s achievements during these most troubled and testing times in living memory. Thank you, Chairman of the Board of Investment, for hosting this event this evening and for your personal involvement in the organization of tonight’s function. I am deeply honoured to have been handpicked to receive this prestigious Award of Central Banker of the Year 2012, Africa, by The Banker Magazine. This is more, much more, than a personal honour. I see in it an accolade for my family, my friends, my teachers, my collaborators, my well-wishers and all those, including my critics, who have made me what I am; I also see this as an accolade for the institution which I lead, and for my country. I am truly humbled, and deeply moved, that such a distinction is being conferred on a Central Bank Governor from a small island lost in the Indian Ocean. My country has a population of just 1.3 million, a tiny fraction of the one billion teeming on the African continent. Our economy is pocket-sized, with a GDP of US Dollars 11 billion, against Africa’s US Dollars 4 trillion. These two metrics suffice to bring out the immensity and the extraordinary nature of this distinction – a first in our 45-year history of central banking. We are a gutsy nation; it is in our nature to punch above our weight. And we are the first ones to be surprised when we walk away with the prize. As I stand before you tonight, I am lost for words. Just as I was dumbfounded and incredulous when my long-suffering Chef de Cabinet first announced it to me at the end of a regular daily morning one-on-one consultation which had not gone well and had become unusually heated. She had been saving it for the end as a piece of good news. The prospect of such an award was not even remotely on my radar and I really thought she was joking or being ironical to defuse the tension. It took quite some convincing before I thought it was genuine and could be persuaded to talk to the editor of The Banker. And my first questions to him were: “Why? Why us? What have we done to bring us to your attention?” The news was followed by an avalanche of congratulatory phone calls, emails, text messages, and letters from well-wishers the world over. I can tell you it is a moving and overwhelming experience. Lost for words, for once in my career as Governor. I thought I should share these feelings with you this evening. I accept the Award. I accept it with great humility. I accept it on my own behalf. I accept it on behalf of my colleagues at the Bank of Mauritius, in particular my inner circle, my garde rapprochée, who put up with me (well, most of the time), who share my vision, and some of my convictions (and talk me out of others) – without their support, I would hardly have been effective, and would probably not have survived this long at the Bank. I accept the Award on behalf of my countrymen. I accept it on behalf of those who placed their trust in me. Here I have a special thought for the Prime Minister, Dr Navinchandra Ramgoolam, who nominated me to the position after I had served as Minister in his first Government from 1995 to 2000. A staunch believer in the rule of law, he respects the autonomy and independence of the central bank. Can a Governor ask for more? I was lucky to get more. He stood by me and believed in me particularly when I was subjected to a concerted attack from all sides. I may very well be in BIS central bankers’ speeches the top league of governors to have been most reviled during their tenure. Goethe had not got it quite right when he said “Viel Feind, Viel Her” – I was blessed with a plethora of enemies but found little honour in it. More than anything, it is the unwavering support of my Prime Minister that enabled me to maintain an equally unwavering focus on the statutory mandate of the Bank. This distinction is also a ray of hope for small jurisdictions like Mauritius. Let this be a source of inspiration for SIDS everywhere. Small Island Developing States, do not despair. We are not condemned to a life of me-tooism. We can plough our own furrow and seek salvation in our own different ways. Regardless of one’s size or location, we can all aspire to the premier league. We have in our midst this evening my venerated tutors and mentors from my undergraduate days at Oxford and a bevy of dignitaries – indeed this is the kind of moment that you absolutely must share with family, friends, partners, colleagues from international institutions, and all those who walked part of the way with you in your life, personal, social, professional, or a mixture of all of them. I thank you all for your presence here to-night. As I landed at Heathrow the other day, my mind drifted off to my first days in England when I was a carefree student, from a remote island colony, a rural country boy from a village with no electricity, no telephone, and little running water, who had never spent more than a couple of nights away from home, and who could read and write Latin and Greek better than his peers. I was more interested in satisfying my deep curiosity for all the novelties that I was discovering. I wasn’t really thinking of my future. In fact, I was wondering what to do with my life. I was barely out of my teens, not yet twenty. I had a prized seat at Merton College, one of the oldest – if not the oldest – at Oxford University. I was going to read Greats…but I was going through an existential crisis. I had successfully resisted my parents’ calls to pressure me to become a lawyer or a medical doctor, the prestigious occupations that attracted the six “laureates” of which I was one. I was quite aware that a University education was not vocational or professional training. But I could not help asking myself, was there much mileage left in the classics? I had just been reading some Maupassant short stories. The punch line of one of them was fresh on my mind: le latin ne nourrit pas son homme! There used to be an outfit called Mauritius Students Unit, operating from a small office in Upper Montagu Street, off Baker Street, run by an energetic lady called Miss Rittner. She set up an interview for me at Merton. Peter Chellen, also with us tonight, used to work at the Unit. I found myself on the short train journey to Oxford – and soon wondering whether I had alighted at the wrong destination when the first sign I came across on leaving the station said in huge letters: “Welcome to Oxford, the Home of Pressed Steel.” Was this the ancient seat of learning I had been reading about? I was confronted by the formidable trio of PPE tutors: John Black for economics, John Lucas for philosophy and Dr Pelczynski for politics. I thank Dr Pelczynski and John Lucas, and also Vijay Joshi who took over from John Black later, for being with us tonight. I do not remember much about the interview except for some vague recollection of having stirred some interest when I qualified Greats, the pride of Oxford, as being: “backwardlooking.” Anyway, the upshot was that I was allowed to change over to Modern Greats, as the Honour School of Philosophy, Politics and Economics was known. But life is so full of surprises – your footsteps sometimes take you where you do not dream of going in the first place. To cut a long story short, I was swimming against the tide when I returned to newlyindependent Mauritius in 1968 after my studies. The flow was very much in the other direction, with people leaving in droves, searching for better prospects, as Mauritius was seen as a basket-case with no prospects whatever. My journey took me successively to the newly-established University of Mauritius, the equally recent Economic Planning Unit of the BIS central bankers’ speeches Prime Minister’s Office, the United Nations Industrial Development Organisation in Vienna, the Ministry of Economic Planning and Development, the Ministry of Finance, and the Bank of Mauritius. I am proud to have been associated with all these institutions and to have brought my modest contribution to the construction of the nation. Every position brought its own unique challenges. When I became Governor of the Bank of Mauritius in 2007, I was entering new territory. I was a macro-economist and a policy analyst, but not a banker or regulator either by temperament or profession. The environment in which banks operated had become very complex and highly volatile – quite a challenge for a newlyminted Governor. I could build on the work of my immediate predecessors who had, in their own way, contributed to strengthen the banking sector. I also thank the banking community – which is represented tonight by Ravin Dajee, Chairman of the Mauritius Bankers Association, and James Benoit, Vice Chairman of the Association, in their normal working life, CEO of Barclays Bank Mauritius and the CEO of Afrasia Bank, respectively. The relative success that Mauritius has achieved in economic and social development rests on the solid bedrock of regular public/private dialogue. At the core of this is the dialogue between the Bank and the CEO’s of all banks in Mauritius – which is unmatched in its regularity, its frequency and its intensity – which has helped us enormously to shield our small open and vulnerable economy from the crisis. The award is thus a tribute to the collective contribution of the Government, the Central Bank, the banking industry, and the Mauritian private sector. I would like to think of this distinction as a celebration of the progress of my country towards economic and social salvation. The crisis throws up new and unexpected problems around the world everyday: uncertainty persists in financial markets; spillovers on the real economy leave in their wake negative sentiment, poor growth and tenacious unemployment levels; fiscal and debt sustainability concerns cause serious apprehension; and reduced incomes depress consumption and investment levels. Amidst such global mayhem, our resource-constrained country surprisingly fared quite well. We have posted positive growth rates throughout the crisis, averaging 4 per cent per year or not far below trend levels. Unemployment is at 8 per cent, a far cry from the rising joblessness in some of our major markets. Inflation has come down. Reserves have gone up. Our banks are solid and well-capitalised. I can be forgiven for believing that smallness is no longer a liability. Quite the contrary: it can be a source of added adaptive advantage. It gives our policymakers a quick-response capacity and the flexibility to change gear quite rapidly to adapt to the constantly-changing environment that has become the new normal. And this is what has so far spared Mauritius from the worst effects of the crisis. My five years as Governor coincide almost perfectly with the run of the crisis. As can be expected, they have certainly not been de tout repos. I initiated the practice of issuing an annual Letter to Stakeholders, where I highlight the activities of the central bank during the past year. I titled my last letter, issued two weeks ago, “Pummeled, Hammered, Buffeted…But Still on Course!”. I was referring to the economy, but the title may also serve as a short-hand description of my own tenure as Governor. Pummeled, hammered, buffeted, I may have been but, through thick and thin, I have kept my eyes firmly focused on the best interest of the nation as I sought to live up to the trust placed in me to lead the Bank of Mauritius. Governors have a very tough job in a crisis-ridden world. They are constantly the subject of public scrutiny. They are the butt of jokes, the target of criticism, the object of much invective, with their fitness – occasionally their very sanity – being publicly questioned. They walk a tight rope most of the time. They need to take bold and timely decisions that make them unpopular. If they shirk such decisions, they court disaster. It is a case of “damned if they do, and damned if they don’t”. Yet, they have to remain resolute, determined to do whatever their BIS central bankers’ speeches job entails. If they are unlucky, they are terminated, with their gubernatorial life being – if I can borrow some words from Hobbes – “nasty, brutish and short.” I have a long list of “Thank you’s” tonight. I could have kept it short and said simply: I thank my parents for making it possible – and family, friends, and colleagues for making it necessary. But that won’t do, will it? So, please bear with me for a few more minutes. Let me call a few to take a bow. Zbigniew Pelczynski, Emeritus Fellow of Pembroke College, the Politics Tutor, I shared with Bill Clinton. John Lucas, Fellow of the British Academy, Emeritus Fellow of Merton College, my tutor in Philosophy. Vijay Joshi, Senior Research Fellow of St John’s College, Emeritus Fellow of Merton, and my tutor in Economics after John Black left Merton to take a chair in Exeter University. I thank them for the guidance and advice that they gave me, a young country bumpkin, and helped to make me the man I am today. I am extremely grateful to them. I would have wished to mention each and every teacher, family member, friend and collaborator by name for their contribution – I can assure you I am not lost for words when it comes to gratitude – but time constraints and your patience prevent me from doing that. I thank my mother, my wife of 40 years, my son and my daughter for the sacrifices they have silently endured, while I was away from home – which was most of the time, since even when I was there physically, I was not really there – I am your proverbial absentee parent – absorbed by my other concerns and responsibilities. I thank my wider family who share my patronym for stoically accepting their lot when they have had to take part of the flak as I have never ceased being publicly lambasted and pilloried, and called all manner of names – some of which you cannot mention in polite company – since I traded the comfort and anonymity of the civil service mandarinate for the hurly-burly of politics and the unrelenting public spotlight in an unforgiving environment where fair comment has long lost the battle against outrageous libel and quasi-criminal defamation. Some, closely-related, regret the shared patronym and have been known to disown the connection. I understand. Lately, others – quite unrelated – claim a close relation. Such is life. My professional career was much enriched by my interaction with colleagues from the World Bank, the IMF, the Commonwealth Secretariat, and elsewhere. I thank Michel Devaux and Paul Blay, both of the World Bank, and both here tonight, for the great support they gave in the dark days when Mauritius was a patient in intensive care, undergoing structural adjustment in the early 1980’s, and for their friendship ever since. I thank Bishnu Persaud for his support in equally-critical work on small island-states. I thank Percy Mistry for being a goading critic and a constant source of encouragement. I thank Mihaela Smith, and through her, the entire network of the Commonwealth Partnership for Technology Management, for always pushing me in new directions at that critical interface where academia and technology intersect the world of politics. I thank Ian Downing for being such a great Master of Ceremonies tonight. I thank Maurice Lam and the Board of Investment for sponsoring this event. I thank The Banker for having provided the reason to bring us all together. And thank you very much, all of you, ladies and gentlemen, dear friends, for gracing the occasion with your valued presence. Finally, beyond those I have mentioned and all of you present here tonight, I am also grateful to all those who, one way or another, extended some moral support to me in times of need. I am referring here, in the words of Luther King, to all those “people who make a successful journey possible – the known pilots and the unknown ground crew.” Thank you for your attention. BIS central bankers’ speeches | bank of mauritius | 2,012 | 3 |
Keynote address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Seminar on Foreign Account Tax Compliance Act, organized by Grant Thornton Mauritius, in collaboration with Grant Thornton UK, and the Mauritius Bankers Association, Ebène, 14 March 2012. | Rundheersing Bheenick: Responding to the US FATCA – complain but comply? Keynote address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Seminar on Foreign Account Tax Compliance Act, organized by Grant Thornton Mauritius, in collaboration with Grant Thornton UK, and the Mauritius Bankers Association, Ebène, 14 March 2012. * * * It is a great honour for me to be here this afternoon. I welcome the opportunity to address this forum on a subject that has led to so much heated debate and to such a huge outcry in the financial sector worldwide. The Foreign Account Tax Compliance Act (FATCA) has been badly-received, described in uncomplimentary terms, and attacked from many quarters. It has been hailed as: “A US-centric law”; “An attempt to convert foreigners into unpaid IRS agents”; “A kind of US backward imperialism”; “…a murder weapon and the US government the assailant”; “An atomic bomb used to kill a fly”; and “One of the worst pieces of legislations to be revealed in recent times”. As you can see, FATCA does not leave anybody indifferent! The attendance this afternoon well reflects the extent of our concern here in Mauritius. What is this FATCA? A quick recap FATCA was enacted on 18 March 2010 as part of the Hiring Incentives to Restore Employment Act. It seeks to identify US taxpayers who hold financial assets in non-US financial institutions and other offshore accounts, so that they cannot avoid their US tax obligations. FATCA focuses on high net-worth individuals (the so-called “FAT-CAts”). What does compliance with FATCA involve? FATCA requires foreign financial institutions (FFIs) to report directly to the US Internal Revenue Service (IRS) certain information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest. The FFIs would have to enter into a special agreement with the IRS. In case any FFIs do not agree to comply, they would be subject to a 30 per cent withholding tax. Should we be scared of this so-called murder weapon? Well, the aim of FATCA is to collect taxes. It is the right of the US government, as it is of any government, to levy taxes on its citizens. The US Senate estimates revenue losses from tax evasion by US-based firms and individuals at around 100 billion dollars a year. Add in other countries, and the sums run into many billions more. As all of us are aware, tax transparency and the fight against cross-border tax evasion have been key topics at successive G20 Summits in Washington, London, Pittsburgh, Toronto, Seoul and Cannes. BIS central bankers’ speeches Mauritius – a clean and transparent jurisdiction It is quite some time since Mauritius also embarked on a profound reform of its fiscal system to make it simpler, more effective and conducive to economic development. We offer certain fiscal advantages that encourage local and foreign companies to set up business in Mauritius. These include competitive corporate and income taxes of 15 per cent, no capital gains tax and no withholding tax on interest and dividends. At the same time, we have enlarged our tax base. In fact, the idea to enlarge our revenue collection base dates back to 1995 when, as some of you will recall, I was wearing the hat of Minister of Finance. The measures which I had then initiated paved the way for the introduction of the Value Added Tax. The sustained reforms to our tax system earned us commendable rankings in the Paying Taxes 2012 report, conducted jointly by the World Bank, the International Finance Corporation and PricewaterhouseCoopers (PwC) to compare tax systems in 183 economies around the world. In 2012, Mauritius improved its global position by two notches from 11th in 2011 to 9th. And in Africa, Mauritius is No 1. Mauritius is by no means a tax haven. All our policy decisions and actions promote the country as a clean and transparent jurisdiction. In 2000, when the Organisation for Economic Cooperation and Development (OECD), the chien de garde in the fight against tax avoidance and tax evasion, threatened to place Mauritius on the list of tax havens, we were one of the first countries to commit ourselves to eliminate any harmful tax practice from our tax regime, and to a programme of effective exchange of information in tax matters and transparency. We were in fact the first country to give such a commitment. We took significant steps to enhance our exchange of information and our legal and regulatory framework. We currently have 36 Double Taxation Avoidance Agreements (DTAA) in force, and there are three others awaiting ratification. The first DTAA we signed, with Germany, dates back to March 1978. In December 2010, Mauritius signed a Tax Information Exchange Agreement with Australia and there are others in the pipeline. Mauritius has never refused to sign an exchange of information agreement. In January 2011, the OECD commented favourably on our jurisdiction. We are now on the OECD “White List” as a jurisdiction with acceptable tax standards in compliance with OECD norms and best-practice principles. We fully cooperate with other competent authorities on effective exchange of information. And we are recognised by the World Bank, the IMF, and the Financial Action Task Force (FATF) as a clean and transparent jurisdiction with a sound legal, regulatory and supervisory framework. For the last ten years, the Central Bank has taken measures to enhance KYC procedures for institutions falling under its purview. We have issued Guidance Notes on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT). Under these guidance notes, which comply with the International Standards of the FATF on AML/CFT, tax evasion is a predicate offence for money laundering. So, it is my considered view that there is no need for us to be scared of FATCA. You would agree that we have gone a long way towards enhancing the effectiveness of our jurisdiction in our fight against tax avoidance and tax evasion. However, I do concede that compliance with FATCA would entail a number of changes at the level of our financial institutions. What does complying with FATCA entail for Mauritius? As matters stand, complying with FATCA would involve breaching a number of local laws on privacy, confidentiality and equal opportunities. There would also be heavy cost implications. BIS central bankers’ speeches But non-compliance would be equally costly in that there would be a withholding on passthru payments1. However, the choice that we are faced with today goes beyond purely financial considerations. We have to look at the bigger picture. We cannot act in isolation. We live in a global world and we are impacted by measures that are taken elsewhere. When the Bank for International Settlements came up with the Basel II framework, many countries found that the requirements of Basel II were too cumbersome and costly. Our banks did incur significant costs in beefing up their risk management structures to comply with the Basel II Framework. But today it is clear that such investments have paid off. We can boast of a sound and resilient banking system. We have not suffered from any bank failures as compared to more advanced countries. FATCA-Partnership Agreement Mauritius has never been one to shy away from hurdles. But does this mean that our financial institutions should be transformed as revenue collectors for the US? In my opinion, the best way to tame the beast would probably be for Mauritius to enter into FATCA Partnerships as other jurisdictions have done. You would be interested to know that in February last, five European countries – France, Germany, Spain, Italy and the UK – signed a deal with the US. They agreed that they would each enact legislation requiring their local FFIs to collect and report FATCA-style information to their local tax authorities. The European jurisdictions would then transfer the information to the US. Under such arrangements, the withholding on passthru payments would generally only apply to third-country non-participating FFIs. The obligations under the agreement are reciprocal. However, in order to enter into such a FATCA Partnership, Mauritius would need to amend its laws to address any conflict of laws issues that could arise. The advantage of entering into such a Partnership is that Mauritius would not only avoid any potential damage to its reputation, in case of non-compliance, but it may benefit from an enhanced “clean” image, since compliance with FATCA would require more detailed information-gathering and due diligence procedures. The downside of this is that Mauritius might well lose some of its US clients. However, if the tide is in favour of FATCA compliance, the US clients might well realize that they have no real alternative: opting for a non-FATCA-compliant jurisdiction might well be costlier as they would be hit with the 30 per cent withholding tax. At any rate, the attractiveness of the Mauritian financial sector lies in the fiscal and other advantages it has to offer, and not in any banking secrecy laws. Nonetheless, Mauritius cannot blindly rush into adopting a FATCA Partnership Agreement with the US. There is a host of questions that first need to be addressed. Are our financial institutions ready to respond to, and comply with, FATCA requirements? Does the Mauritius Revenue Authority (which would probably be the authority designated to conduct these operations) have the capacity – financial and otherwise – to cope with the requirements imposed by the proposed FATCA Partnership? In sum, are our institutions ready to rise to the challenge? This Seminar will help us in our search for answers to these and related questions. Let me commend Grant Thornton and the Mauritius Bankers Association (MBA) for this initiative. It will help to clear the air and point the way forward by helping our financial institutions, which As per FATCA, a passthru payment is any withholdable payment or other payment to the extent attributable to a withholdable payment BIS central bankers’ speeches would be impacted by FATCA, to gain an in-depth understanding of this piece of legislation. It is in this same perspective that the Bank of Mauritius and the MBA have recently set up a Joint Working Group to evaluate the impact of FATCA on banks in Mauritius. On a concluding note, may I draw your attention to the fact that so far, the US is the only country which taxes its citizens on the basis of nationality. Interestingly, outgoing President Nicolas Sarkozy has recently announced that should he win the presidential elections, France would also tax its citizens on the basis of nationality. So it might well be that FATCA which had been accused of being “a kind of US backward imperialism”, might become the new reality, the new norm. One final comment, whilst I understand the difficulties that our institutions might face in complying with FATCA, I have only one advice for them: Complain but Comply! Thank you. BIS central bankers’ speeches | bank of mauritius | 2,012 | 3 |
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the official launching of HSBC Global Custody Services, Port Louis, 12 April 2012. | Yandraduth Googoolye: Developing the custody market in Mauritius Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the official launching of HSBC Global Custody Services, Port Louis, 12 April 2012. * * * Good morning to you all. It gives me great pleasure to be present this morning at the launching of the HSBC Global Custody Services. This is yet another initiative of HSBC towards broadening the range of services that it offers to its customers. I have been given to understand that with this proposition, the bank, with the intrinsic support of its parent Group, aims at increasing the size of the custody market in the Mauritian jurisdiction. “HSBC Security Services” hopes to create a hub for tapping of both developed and emerging markets in over a network of 90 countries worldwide, including 25 African states. It is a known fact that the custodian industry has been dominated by a handful of largest banks worldwide, and HSBC has, in this regard, secured a privileged position among these big players. No doubt, your bank can view its track record in the global custodian industry with immense pride today. Having been ranked number one globally for its Global Custody Product in the Global Custodian 2011, your bank has been top rated in 8 out of 10 categories as published recently in the magazine. This outstanding performance clearly demonstrates your commitment to deliver a market leading product and maintain the position of number one service provider by the industry. While looking at the history of HSBC Group in Mauritius as far back as in the year 1859, it is remembered with pride and nostalgia of the assistance provided by the bank in the financing of railway construction in 1864. And today, it is acknowledged that HSBC Bank is moving on the fast track, bringing new life and strength to our banking sector. Role of a custodian bank The traditional responsibility of a custodian bank has been the holding and safe keeping of the various assets of either institutional or individual investors. These assets included stocks and bonds. While having its origins from the physical safekeeping of share certificates, custody has now been transformed into a technology-intensive information processing business. With the globalization of capital markets, more specialization is coming along with the constant growth of cross-border investment and collective investment schemes. Global custodians are therefore able to capture cross-border custody business without incurring substantial set-up costs and on-going fixed costs. There is no doubt that the global custodian model is most appealing to institutional investors and asset managers, and rightly so, HSBC is well-placed to serve this industry by capitalizing on its network of branches across the globe and by leveraging effectively on its worldwide resources with local expertise. HSBC Bank is creating a one-stop shop service by providing from its globally connected business, whether for fund accounting, valuation, global custody and transfer, foreign currency exchange, cash management, or securities lending. In addition, the proposition of HSBC Bank incorporates the creation of a central flow of data on the current status of assets which would enable the owner of the assets to easily obtain documentation that provides information about the holdings that he has entrusted to the bank. BIS central bankers’ speeches Supervisory issues relating to provision of custody services As is the case for any financial product, there are a number of risks associated in the delivery of custody services. These risks can be broadly, classified into operational, financial and legal risks. Focus is therefore being laid on financial risk management, capital adequacy, and operational risk mitigation. While it is viewed that there might not be any systemic implications which emanate directly from custody services, vigilance is nonetheless required on the part of financial institutions and supervisory authorities alike, since cross-border investment flows might have an impact on domestic financial system stability. In the aftermath of the global crisis which has been of unprecedented magnitude, banks have been called to become leaner and fitter. Alongside, the job of regulators has become even more complex given their mandate to maintain soundness and stability of the financial system. Presently, the Bank of Mauritius is engaged in constantly upgrading its prudential and supervisory norms to keep pace with international best practices in the regulation and supervision of financial institutions falling under its purview. The recent financial crisis bears witness to the fact that a mere slackening of vigilance can give rise to devastative snowball effects. As supervisor, we do maintain that prudential and supervisory norms have to be constantly revamped to chase up and keep pace with financial innovation. And in the wake of the rapid integration of financial markets, there is a dire need for refinement in early warning system tools that can further enhance the supervisory framework. Concurrently, the upholding of the basic principles of sound corporate governance remain crucial for withstanding speculative appetites and curbing excessive market volatility. And so much so, as banking per se requires the fundamental ingredient of instilling trust and confidence. Supervisors and authorities responsible for financial stability are presently contemplating the best options for strengthening of the risk sensitivity of the prudential framework, in the expectation of the emergence of a new financial architecture. One area remains that in the best interest of one and all, there should be increased trust-based cooperation between the financial service provider and the oversight authority. This basic ingredient is no doubt key to a continued successful development of an efficient and secure market infrastructure that meets the fast-changing needs of our financial sector. Mutual cooperation can but benefit our financial system. While HSBC Bank is engaged in marketing its custodian service provider role, our economy shall certainly gain in the process – our jurisdiction is projected in the global business arena as a credible International Financial Centre. Allow me to congratulate this initiative of HSBC Group and convey my best wishes to the Management and staff of HSBC Bank (Mauritius) Limited. I thank you for your attention. BIS central bankers’ speeches | bank of mauritius | 2,012 | 4 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the opening ceremony of the Bank of Baroda Branch, Rose Belle, 25 July 2012. | Rundheersing Bheenick: “We need to shine the torch of transparency on everything connected with banking” Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the opening ceremony of the Bank of Baroda Branch, Rose Belle, 25 July 2012. * * * I am delighted to be here with you this morning at the opening of this new branch of the Bank of Baroda in Rose Belle. This makes it the ninth Bank of Baroda branch in Mauritius and also the ninth bank branch in Rose Belle. As demonstrated here in Rose Belle, the branch network of our banking sector continues to expand, thus giving the lie to observers of the financial scene who have been predicting the end of the brick-and-mortar model of banks. The Minister will be pleased to know that this now allows Rose Belle (his constituency) to pull ahead of Triolet (the Prime Minister’s constituency)… but it is still one branch behind Flacq (the Vice Prime Minister’s constituency)… and trails behind Curepipe by two branches. Our banks in Mauritius value close proximity to their clients. Since I took over as Governor in 2007, I have seen the number of branches growing by 30 per cent, to 217. This translates into some interesting ratios regarding financial access: we have one branch for every 9.4 square kilometre of territory and for every 6,000 inhabitants – among the highest in the world. This banking model has served us well and I can safely say that it has contributed to bolster confidence in banking while adding to its resilience. The Bank of Baroda is, of course, no stranger to proximity. Soon after it set up shop in Mauritius, and drawing on its experience of more than a century of taking banking services to remote areas of India, the bank introduced Mobile Banking in Mauritius. These days when we speak of “mobile banking”, we refer to banking and financial services and payments enabled by cellular technology. In those days, Baroda’s mobile bank was empowered by an altogether different technology – the internal combustion engine. Bank of Baroda mobile banking was a bank on wheels. It would go – as it still does – from village to village, bringing banking to rural and unbanked areas. There are many who can still recollect the flurry of activity that would greet the van as it arrived in a village. At that time, banking was concentrated in urban areas. Transport facilities were not as developed and made it difficult to reach certain localities where population was sparse. The Bank of Baroda mobile thus contributed to financial access in rural areas. It helped many agricultural labourers, farmers and entrepreneurs to have access to basic banking services. This was a revolutionary step for the rural community at the time. Let me sincerely congratulate the management of Bank of Baroda for their involvement here and for their contribution to the economic and social development of our country for nearly half a century now. I understand you will soon be celebrating the golden jubilee of your presence in Mauritius. The Bank of Mauritius is five years your junior! We owe you some respect, don’t we? Bank of Baroda has a long-standing relationship with our country. It opened its first branch in Mauritius in 1962, when it became the fourth full-fledged commercial bank in the country after Mauritius Commercial Bank, Barclays Bank DCO, and Mercantile Bank of India, and broke a monopoly that had reigned through colonial times. Since then, Bank of Baroda has pioneered many developments. It was associated with the development of our offshore sector since the very outset. When offshore banking was launched in Mauritius in the late 1980’s, Bank of Baroda was among the first to establish an offshore banking unit. Today, this segment has grown into a profitable business. Over the years, our banking landscape has witnessed the emergence of new players. We now have 21 banks and Bank of Baroda is now solidly in the middle, ranking 10th, with an asset size of Rs 24 billion. BIS central bankers’ speeches I am sure this new branch will bring added value to the locality and the surrounding areas and instil more competition for the benefit of customers. Banking has to become more customer-centric. The financial crisis has changed the rules of the game. Only two weeks ago, at the Bank of Mauritius, we have taken very forceful steps to protect bank customers. We set up a Task Force on unfair terms and conditions in financial contracts, including fees, charges, commissions and other levies imposed by banks. By now, you should all know what prompted this initiative of the Bank. At the risk of repeating myself, I have spoken out about the many grievances spanning a wide range of issues from dissatisfied customers knocking at the door of the central bank. They complain about practices that are crying out for reform. Your central bank cannot remain indifferent to such calls from the public. The global economic downturn is impacting on our exports, on our employment and on our standard of living. This difficult and delicate situation requires that all stakeholders look beyond their narrow self-interest and share in the pain of adjusting to the new realities. It is a matter of continuing surprise to me that in the fifth year of an unprecedented financial and economic crisis of global proportions, some of our banks are still insolently reporting record profits. I am happy however to see that, at least on this score, I am no longer a lone voice in the desert. Others have recently joined me in denouncing this state of affairs. The Competition Commission has just completed an exercise on the bundling of insurance products where some banks were suspected of taking unfair advantage of their customers by selling them possibly overpriced insurance products from associated suppliers. It is currently investigating into credit card charges – another area where malpractices are rife, at least internationally. The government authorities have also stepped in. They set up a second Commission of Inquiry on the procedures and practices of sales by levy to which banks have recourse when they foreclose on properties secured as collateral. It started work earlier this month. You may rest assured that the Bank will take corrective actions to remedy the situation. It may be appropriate here to point out a growing trend to impose very hefty fines on global banks in other countries for all manners of misdemeanours and transgressions, ranging from conspiracy to rate-rigging. Bank CEO’s and Chairmen have been seen off the stage for their failures and violations, including money-laundering offences. These are not just corporate banking failures; corporates only act through individuals. These are therefore also individual failures. Criminal prosecution of the individuals responsible is something that we shall be hearing more about in the weeks and months ahead. To my mind, this places individual responsibility at the centre of things. The reforms that are now being envisaged to prevent future crises, will hopefully address this issue. We feel strongly that banks – and those working in them at whatever level − should be held accountable for their actions. Eight months ago, at the Bank’s Annual Dinner for economic operators, I had invited bank executives and directors to reconnect with reality – and not to do things that would resurrect the image of banksters. I understand some bankers had then toyed with the idea of a walk-out. Two weeks ago, the very respectable Economist magazine – in its UK edition for the week July 7th-13th – had “Banksters” emblazoned on its cover in large characters, complete with gangster-like cut-outs of bankers in dark-goggles by way of illustration. The only thing missing from the picture was some machine-guns or AK 47 rifles in their hands. But who needs these crude weapons when bankers can go around in total impunity toting the much more powerful “weapons of mass financial destruction” – as Warren Buffet put it. Two days ago, the respected Chairman of the British Financial Services Authority, Lord Turner, used the “bankster” word on Bloomberg. Bankers, the world over, cannot walk out. There is no place to hide! Instead of walk-outs, we need work-outs − to purge the system of crooked practices and crooked individuals. We need to shine the torch of transparency on everything connected with banking. Corporate governance is key. We, at the Bank, have examined the matter at length. We are issuing a revised Guideline on Corporate BIS central bankers’ speeches Governance. Very shortly, we will also issue a consultation document on Basel III. On a separate note, we are in the final stages of setting up the Deposit Insurance Scheme, which is a missing link in our financial infrastructure. Let me say a word on the Special Line of Credit in foreign currency that we have offered to banks for on-lending to exporters. With this measure, the Bank is using its own balance sheet in an attempt to resolve issues faced by enterprises at the micro-level. This has a cost to us. The Bank cannot keep this line of credit open indefinitely. Judging from some press reports, it would seem that some banks are able to meet the demand at comparable terms on their own. If that is so, well and good! Let them get on with it. Others claim there is no demand for such foreign currency loans in the first place as exporters are apparently quite happy with their foreign currency exposure – and that includes the very real depreciation risks of their export currencies. Let us bear in mind that micro-economic matters are not the normal business of the Bank and we have taken extra pain to explain the rationale behind our unusual move aimed at a very specific segment of our constituency. Rest assured that we have no difficulty in re-focusing our efforts back on the macroeconomic front, and on the broader needs of our complex multiple constituency. We will, therefore, soon start redeploying progressively some of the funds earmarked for this Special Line of Credit, if, for whatever reason, the demand is not there. Again, congratulations to the management of Bank of Baroda for adding this ninth branch to your network. I have no doubt that you will do your utmost to serve the best interest of the community. Thank you. BIS central bankers’ speeches | bank of mauritius | 2,012 | 8 |
Remarks by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Signature Ceremony of the Agreement between the Bank of Mauritius and the Mauritius Post and Cooperative Bank in respect of the First Disbursement under the Special Line of Credit in Foreign Currency, Port-Louis, 10 August 2012. | Rundheersing Bheenick: Special Line of Credit in Foreign Currency Remarks by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Signature Ceremony of the Agreement between the Bank of Mauritius and the Mauritius Post and Cooperative Bank in respect of the First Disbursement under the Special Line of Credit in Foreign Currency, Port-Louis, 10 August 2012. * * * A very good morning to all of you. I am pleased to welcome you this morning to our Headquarters for a special event: the signing of an Agreement between the Bank of Mauritius and the Mauritius Post and Cooperative Bank Ltd (MPCB) in respect of the First Disbursement under the Special Line of Credit in Foreign Currency. It is especially heart-warming to note that the management of MPCB, its board and its executive management are once again making a difference. They are the first one to get out of the starting stalls and come up to sign a framework agreement in the form of a Memorandum of Understanding which we will be entering into this morning. You will recall that MPCB was also the first bank to deal with us when we offered a special line of credit to the sugar sector when it was going through a tough time. While other banks were being reticent, MPCB was the first one to come forward, and we agreed to go ahead. Obviously other banks joined afterwards on the same terms and conditions. MPCB therefore deserves our congratulations for their readiness to join the central bank in its endeavours to reach out to sectors in need. A lot has been said about this foreign currency line of credit. Why are we offering it? Why were the terms what they were? And why have we taken two months? Yes, two whole months. It has, in fact, been two-month period of laborious gestation! We actually announced it on Saturday night of the 9th of June and you would have thought that people would have come queuing to the door of the Central Bank on the following Monday morning itself. But no! We had many carpic critics. Some were thinking that perhaps there were some ulterior motives behind it; others that perhaps the Bank was trying to deflect attention away from the real issue. Such reactions and misconceptions require that we give you some background and explain to you the rationale that lies behind the two measures, the Operation Reserves Reconstitution (ORR) and the Special Line of Credit in Foreign Currency. One school of thought believes that the real solution lies in depreciating the currency. Depreciating and devaluing massively to bail out key operators in the economy is fraught with difficulty and grossly unfair in terms of the quality of economic development requirements and social welfare losses. Our mandate at the Central Bank is to look at the interest of the entire nation and our responsibility, under the Bank of Mauritius Act, requires us to ensure that there is price stability and monetary stability. Robbing Peter to pay Paul was never a very good policy especially if Peter happens to be poorer than Paul who owns all the assets in the country! It was clear for us that the economic crisis was not going to be behind us so quickly – in fact, the latest data flow shows that prospects are getting gloomier, and dark clouds continue to hang over the global economic landscape. So we came forward with a proposal to refinance the stock of outstanding debt in rupees of our export operators, which was showing a glaring mismatch with their income streams. In the 45 years of history of the Bank, I don’t think the Bank has ever offered this kind of refinancing of the stock of outstanding debt. It was a path-breaking move for an innovative central bank. With the Special Line of Credit in Foreign Currency, our operators, who are now exposed, will probably be in a better position to sit out this crisis, without inflicting heavy costs on the rest of the economy if we take the easy solution of depreciating the currency – definitely not a sustainable solution. BIS central bankers’ speeches Another school of thought believed that the two solutions that we had offered on the 9th of June actually cancelled each other out. The argument was that, since the ORR was basically aiming at trying to build up our reserves, it would probably lead to a slide-depreciation of the currency. Operators would prefer to wait until the currency had slid enough, and would then come and convert at a very favourable rate through the foreign currency line. We never saw it that way. We started the process of reserves reconstitution, the ORR, in the light of studies made by the IMF. These studies, using different models, showed clearly that there was a growing misalignment of the rupee in relation to fundamentals, that needed to be corrected. At the start of the implementation of the ORR, the Gross Official Reserves of the country stood at 2.67 billion dollars representing 4.5 months of import cover. Currently, they increased to 2.86 billion dollars for 5 months of import cover. We accumulated around 191 million dollars. We are well on the way of reconstituting our reserves towards the targeted level of 6 months import cover. And we are doing it in a planned and orderly manner. The ORR has been a calculated move for the exchange rate to reach more competitive levels. We were never in the market to provoke an uncontrolled slide of the Mauritian rupee, for that would have been a very dangerous step. Instead we had a controlled approach to it. In May 2012, before the start of the ORR, MERI1 stood at 91.375. Our MERI1 increased to 94.984 in July 2012 resulting in an adjustment of around 4%, a level with which we are quite comfortable. We are now watching the exchange rate very carefully to make sure it does not have negative repercussions on our CPI. The figures that are coming out up to now show that there has been no direct inflationary impact in this controlled slide of 4%. The kind of currency adjustment that desperate exporters seem to be praying for, cannot be envisaged as the consequences would be unbearable for the rest of the population. We should bear in mind that while the Export-Oriented Enterprises employ around 55,000 people and the tourism sector, some 40,000, against a total employment of 536,700 in 2011, their weights in our GDP represent 6.3% and 7.9% respectively. The other sectors actually contribute more to GDP and would be penalized by currency depreciation. All this needs to be taken into consideration before we envisage any further currency adjustment. As I was saying earlier, it took two months before seeing the crystallization of our efforts to come to the help of economic operators in these two sectors. It is understandable that the banking community, not used to the kind of measures the Bank was proposing, required some time to reflect upon it to see whether it made sense for them as well. So we listened to them and understood their predicament to adequately cover the risks borne by them in extending such facilities to their clients. And we agreed to share our already very slim margin with them. We gave banks more flexibility to charge rates based on their risk assessment. The other reason advanced for not using this line of credit is that international banks can actually have access to foreign currency at more competitive rates. The Special Line of Credit in Foreign Currency was offered to give a sense of direction to the industry. So if branches and subsidiaries of foreign banks are prepared to share these competitive rates with the final borrowers, we can but encourage them to go in that direction, so long as the debt conversion does happen and other borrowers can benefit from the line of credit made available by these international banks from their own sources. We are happy to note that there are already a few proposals at advanced stages of finalization. A final point on the Special Line of Credit in Foreign Currency: had we had a deeper financial market in Mauritius, we would not have spent two months to get this going. Our capital market is very small and very illiquid. One of our targets as a central bank is to achieve a certain deepening of our financial market. Together with our colleagues in the capital market, we are working towards developing the bond market, alongside our own attempts to develop a secondary market of Government paper. This would hopefully result in the issuance of a corporate bond which would have been the ideal vehicle for us to refinance existing rupee BIS central bankers’ speeches debt, by underwriting corporate bonds in foreign currency. We hope to be able to make some progress on this front in the next six months. The other issue on which we have made some progress is the Task Force on Unfair Terms. The Task Force is well-engaged in the information-gathering stage and various initiatives have been taken to sensitize the general public on the importance to contribute to the exercise. We believe it is high time that we try to give the consumer a fairer deal than what he has been getting so far and for our banks to help the sectors that are hurting, a bit more than they have been doing. Another project in the pipeline is work on Basel III. As you know we are one of the few countries in Africa that have moved to Basel II, and Basel III is round the corner. Basel III is trying to remedy internationally the kinds of problems identified in the banking sector that have been responsible, amongst others, for the global economic crisis. Soon we will be issuing a consultation paper to the industry indicating our own approach to Basel III. So we will be introducing Basel III in a phased manner and by the end of 2018 approximately, we should be there. Our banks are already meeting by and large many requirements of Basel III e.g. capital buffers, Tier 1 capital, and capital adequacy ratios. However, there are other requirements which we still have to meet. Among those is the whole issue of domestic systemically important banks, the so-called DSIBs. We have at least two banks in our jurisdiction that would qualify as DSIBs. These DSIBs require a different regime. In other jurisdictions, systemically important institutions (SIFIs) are required to actually come forward with a living will. They are deemed to be too big to fail but they are also too big to bail. Why are they too big to bail? Because the cost of bailing them out is well beyond the resources either of the central bank as a regulator and lender of last resort, or well beyond the resources of the country that holds these institutions in terms of ratio to GDP of the banking sector assets. We fall in that category. Therefore we need to be very careful not to end up with a banking sector bust up like Ireland or like Iceland, which would have tremendous implications for the public sector budget. The Bank is currently working on a framework for the monitoring of such institutions which may be required to maintain additional capital. So, I am delighted to be proceeding this morning with the first disbursement under the Special Line of Credit in Foreign Currency to an economic operator in the tourism sector, Mr Shakeel Nundlall, who is here with us today and who, I am sure, will open the way for other economic operators to go and convert their stock of debt into foreign currency. I thank you for your attention. BIS central bankers’ speeches | bank of mauritius | 2,012 | 9 |
Address by Mr Mohammed Iqbal Belath, Second Deputy Governor of the Bank of Mauritius, at the opening ceremony of the seminar on the "Role of Islamic finance in the development of Africa", Balaclava, 6 September 2012. | Mohammed Iqbal Belath: Role of Islamic finance in the development of Africa Address by Mr Mohammed Iqbal Belath, Second Deputy Governor of the Bank of Mauritius, at the opening ceremony of the seminar on the “Role of Islamic finance in the development of Africa”, Balaclava, 6 September 2012. * * * Governor Bheenick, Excellencies from the Diplomatic corps, Chief Executives of Banks & Financial Institutions, Chief Executive of the MBA, Mr Jaseem Ahmed Secretary General of the IFSB, Distinguished Guests, Ladies & Gentlemen, A very good morning to you all. It gives me great pleasure to welcome you all at the Seminar on the Role of Islamic Finance in the Development of Africa. Some of you present today have travelled from far to attend this Seminar in this beautiful corner of the island. We hope that the arrangements put in place meet your expectations and wish you a most pleasant stay among us. This is the second time that the Bank of Mauritius is organizing an event of this scale to promote Islamic Finance in Mauritius. The first time was in May 2009, the Bank successfully co-organised the Seminar on Islamic Capital Markets in collaboration with the Financial Services Commission and IFSB. I hope that this seminar will provide you opportunities to discuss and raise issues in Islamic finance, common to Africa. Although many issues will probably still remain unresolved, you will leave with more fruitful ideas than before. This gathering of new ideas and schools of thought on Islamic finance will intensify awareness on the role of Islamic finance in the development of Africa. Sharing of each-others’ experience, enhancing networking and promoting awareness would probably be the main ingredients to make this seminar successful. In order to access a wider audience from all walks of life and across all communities in Mauritius, I mean those non-experts who are interested but not closely acquainted with Takaful, Mudarabha, Ijarah, to name a few of the jargon, the Bank is hosting a Public Forum on this Friday, to demystify Islamic Finance. I hope that the Public Forum will reach a larger mass and help to create more awareness around Islamic finance as an alternative way of doing banking in our society. Ladies and gentlemen, I am not an expert in the field of Islamic Finance, so I will not venture to make any comparison between Islamic finance and conventional banking, or to dwell over the merits of one system over the other. I would rather say that we can all learn from each other and explore different approaches for the benefit of all stakeholders. Two important aspects of Islamic Banking that I would like to safely highlight today are that Islamic finance encourages profit and risk sharing, thus involving greater participation of both banker and customer, a notion that could easily be adopted by conventional banking and of course the proscription of Usery or Riba in Islamic Finance. In fact usery has also been condemned in the Vedic texts as well as in religious texts from Budhism, Judaism, Christianity and Islam. At times many ancient nations, such as, China, Greece and Rome, have outlawed loans with interest. The pivotal change took place in 1545 in the English-speaking world through “An Act Against Userie” promulgated during the reign of King Henry the VIII. While others followed suit, the Muslims kept to their traditions alongside conventional banking. Allow me, Ladies and Gentlemen, to share with you our views on Islamic Banking in Mauritius. One participant Dr Manfred had a comment yesterday on how we are promoting Islamic Banking when Muslims are modestly represented here. First of all, we should be BIS central bankers’ speeches clear in our mind that IB is not reserved for Muslims only. There is no such tag on IB products either in Mauritius or in any other part of the world. The products are designed according to defined principles and are vetted by learned scholars. If you like the product, you adopt it. Mr Jaufeerally, our first speaker yesterday, referred to a very basic example, that of chicken briani. All of you may know that Briani is a very popular dish for local Muslims. I would go further by saying that as Muslims (again I am not a scholar here) there can never be any harm to share a halal product. The reverse may not be permissible. Our objective at the Central Bank is to offer an alternate mode of finance to local stakeholders and also to enlarge our offerings in the offshore financial domain. The tendency to focus on profits alone may not always be socially desirable. Of course, we do not dispute the fact that banks should be profitable, but in these crisis times where customers’ rights are being propelled in the forefront, banks should also consider to share the burden of customers. Islamic finance in Africa Modern Islamic finance was born in Egypt when a commercial bank opened its Cairo branch to process the financial transactions relating to the construction of the Suez Canal in 1890 and the notion of interest or riba was criticized by the then Islamic scholars. Consequently, the Muslim world witnessed the establishment of its first Islamic commercial bank. Islamic finance extended quickly to other parts of the world, most of which during the past thirty years or so. Other Maghreb countries, Morocco and Tunisia began the experience of Islamic finance by allowing conventional banks to offer certain Islamic products but these institutions are faced with strong competition from the region’s conventional banks. Remarkably, Sudan only established its first Sharia-compliant bank in 1977 and the country’s Islamic economic system has since then been continuously developing. Sudan is the only country in this part of the world to have a wholly Islamic financial sector. Within Sub-Saharan Africa, South Africa led the way, with one of the largest international Islamic banking conglomerates namely Al-Baraka Banking Group having been present there for the last 20 years alongside other institutions conducting Islamic finance in the country. More recently, other countries have joined the league namely Kenya, Tanzania, Botswana and Nigeria. Governments of Ghana, Uganda, Ivory Coast, Somalia, Malawi and Zambia are working towards introducing Islamic banking in their respective countries. Presently, the African continent hosts over 250 Islamic financial institutions that offer Islamic financial services including Islamic banks, Takaful companies, Islamic funds, Mudarabahs and Islamic microfinance. Noteworthy also is that over the last two years, the African continent has demonstrated interest in creating an Islamic capital market via initiatives for issuance of Sovereign Sukuks in a few countries including Nigeria, Kenya, South Africa and Senegal. As of date, two countries have successfully issued their Soveriegn Sukuks namely Sudan and Gambia. The rapid pace of the development of Islamic finance leaves no doubt among policy makers all over Africa including Mauritius that Islamic finance presents many prospects for development. Considering Africa’s population of nearly one billion people, half of which are of Muslim faith, and the numerous hurdles to financial access on the continent, Islamic finance could become a key factor in the promotion of financial inclusion by appealing to a large Muslim population in certain parts of Africa. The Mauritian experience Ladies and Gentlemen, over the past three years, The Mauritian Authorities took some initiatives towards the promotion of Islamic banking and finance in our jurisdiction. BIS central bankers’ speeches • The banking legislation has been amended to enable banks to conduct Islamic banking business exclusively or through a window; • Fiscal reforms were brought in to eliminate tax disadvantages that would otherwise have materialised in the Islamic mode of finance; • We joined the IFSB to facilitate the rapid development of Islamic finance in the country; • In 2010 the Bank of Mauritius became one of the founder members with 11 other countries, the International Islamic Liquidity Management Corporation, a supranational body engaged in the issue of high-rated Islamic liquidity instruments; • We have also initiated work on the development of an Islamic Interbank Money Market that will provide a platform for interbank dealings and facilitate liquidity management for Islamic banking institutions. • We are presently finalizing the framework to undertake Commodity Murabahah transactions with commercial banks in the domestic market, as part of our Open Market Operations and as an instrument for the management of liquidity in the domestic system. Our jurisdiction presently incorporates window operations by an international banking institution, and one entity that conducts Islamic banking business exclusively. We have also one large conglomerate that offers Ijarah and Takaful within its group entities. Concluding remarks As things stand now, I can confidently say that the Mauritian financial sector has crossed the initial stage of accommodating Islamic financial services, however much remains to be done. We are yet to issue our first Sovereign Sukuk which will take us one step nearer to our objective to project Mauritius as a reputable destination for the parking and transit of Islamic capital flows. Sustainable prosperity in Africa may be achieved with the inclusion of Islamic finance. Africa will however have to face the daunting task of increasing awareness and gradually building customer allegiance. It is acknowledged that the speed at which Islamic banking will grow will hinge – to a large extent – on how far depositors and investors are well informed about the philosophy underlying Islamic finance, its inherent risks and opportunities, as well as on whether it is perceived as a transparent and soundly regulated financial activity. Before concluding, I would like to thank Mr Jaseem Ahmed, the Secretary General of the Islamic Financial Services Board (IFSB) and his Team for their support in organising this event in Mauritius together with my colleagues from the Bank. I would like also to take this opportunity to thank Bramer Banking Corporation, Century Bank, HBL and HSBC for having kindly sponsored specific part of the seminar. You will appreciate that their contributions have indeed enabled us to offer you this world-class seminar at no extra costs. Ladies and gentlemen, thank you for your kind attention. I wish you all fruitful deliberations over these two days. BIS central bankers’ speeches | bank of mauritius | 2,012 | 9 |
Keynote address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the launch of the Foreign Account Tax Compliance Act Survey by KPMG, Ebène, 5 September 2012. | Yandraduth Googoolye: Foreign Account Tax Compliance Act – developments in Mauritius Keynote address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the launch of the Foreign Account Tax Compliance Act Survey by KPMG, Ebène, 5 September 2012. * * * Distinguished guests, a very good morning to you all. It is a great honour to be here today to address you on the launch of the KPMG Mauritius FATCA Survey. A few months ago, the Governor had addressed a similar audience on the Foreign Account Tax Compliance Act 1 (FATCA). Today, I would like to highlight some of the main developments about the FATCA for us to assess the depth and magnitude of this emerging regulatory issue. Although the FATCA was enacted in 2010, surprisingly, there are still a few countries which are blissfully unaware that such a law as the FATCA even exists and which are far from realizing the impact that this law will have on them. Seeing the number gathered here today, I am happy to note that Mauritius is not one of those countries and I commend KPMG for organizing such forums where we can all come together and take stock of where we are heading in this area. For a long time, there were those who were happy to brush aside the FATCA. Why would foreigners agree to act as Inland Revenue Service (IRS) agents? Surely, the US would soon realise that those who hailed the FACTA as “an atomic bomb to kill a fly” were right. They would wake up to reality, repeal this “breath-takingly arrogant law” (i.e. FATCA), and all would be well again. There were also those – the smaller countries – who were happy to sit back and think that the “big guys” would take care of the FATCA. Enough pressure would be exerted on the US and they would back-peddle on their US-centric law. Not many would have predicted the turn of events that followed. UK, France, Italy, Spain and Germany have seen in the FATCA a new opportunity. They have agreed to the FATCA-principle and are entering into agreements with the US to not only implement the FATCA but to improve offshore tax compliance. The communiqué issued jointly by the US and the 5 European countries – the “FATCA Partners” as they are called – is revealing and I quote: “For many years France, Germany, Italy, Spain, UK and US, have been partners in countering offshore tax evasion and improving international tax compliance so that all citizens pay their fair share of taxes due under the law.” On 26 July 2012, the US Treasury released a model intergovernmental agreement for implementing the FATCA. Two versions of the model agreement – a reciprocal version and a non-reciprocal version – were issued. Both versions establish a framework for reporting by financial institutions of certain financial account information to their respective tax authorities, followed by automatic exchange of such information under existing bilateral tax treaties or tax information exchange agreements. Both versions of the model agreement also address the legal issues that had been raised in connection with the FATCA, and simplify its implementation for financial institutions. The Foreign Account Tax Compliance Act (FATCA) was enacted, by the United States, on 18 March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act in an effort by the United States to combat tax evasion by U.S. persons holding investments in offshore accounts. FATCA will require foreign financial institutions (FFIs), among others, to enter into a special agreement with the IRS by 30 June 2013 and report directly to the US Government certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The FFIs would otherwise be subject to withholding on certain types of payments relating to U.S. investments. BIS central bankers’ speeches The reciprocal version of the model also provides for the U.S. to exchange information currently collected on accounts held in U.S. financial institutions by residents of partner countries, and includes a policy commitment to pursue regulations and support legislation that would provide for equivalent levels of exchange by the U.S. The OECD has welcomed the conclusion of negotiations between the U.S. and the 5 European countries. The Secretary General of the OECD has in fact expressed the intent of the OECD to work closely with interested countries and stakeholders to design global solutions to global problems for the benefit of governments and businesses around the world. Where does this leave Mauritius? I believe that we also ought to be seeking to enter into Intergovernmental Agreements of the model types proposed by the U.S. We are on the OECD “White List” as a jurisdiction with acceptable tax standards in compliance with OECD norms and best-practice principles and adhere to international standards on transparency and exchange of information set by the OECD. We are also recognised by the World Bank, the IMF and the FATF as a clean and transparent jurisdiction with a sound legal, regulatory and supervisory framework. Information exchange in tax matters, indeed, ranks high on our agenda. With 36 Double Taxation Avoidance Agreements (DTAA) in force, nine others awaiting ratification and 12 DTAAs under negotiation as well as half a dozen Tax Information Exchange Agreements (TIEA) in place and others in the pipeline, Mauritius has demonstrated that it is committed to the concepts of transparency and effective exchange of information. In fact, to further improve the effectiveness of our exchange of information mechanism and allow us to provide assistance to our partners in the collection of foreign taxes, Mauritius proposes to become a party to the Convention on Mutual Administrative Assistance in Tax Matters which has been jointly developed by the OECD and the Council of Europe. Mauritius is definitely a jurisdiction of substance and has in place the necessary mechanisms for effective exchange of information in tax matters. Importantly, as at present, however, we do not have in place any income tax treaty or Tax Information Exchange Agreement with the US, – a prerequisite to enter into Intergovernmental Agreements of the model types proposed by the US. Mauritius has never refused to sign an exchange of information agreement. We should, therefore, endeavour to pursue negotiations in this area with the US. However, even if an agreement were to be entered, when would it be reached? Would this leave us with sufficient time to meet the looming FATCA–deadline? Or would the OECD succeed in negotiating a third type of model agreement with the U.S. for those countries that do not have in place such treaties or agreements? Such questions touch upon issues well beyond the remit of the Bank. It is for this reason that at the level of the Bank, we have urged Government to consider setting up a collaborative platform comprising relevant stakeholders to reflect on the implications of the FATCA in Mauritius and take a concerted view regarding its implementation. I am very pleased that the collaborative platform has been constituted. A Joint Working Group comprising representatives of the Mauritius Bankers’ Association (MBA) and the Bank has also been set up to evaluate the impact of FATCA on banks in Mauritius and I am very appreciative of the contribution from the MBA in this endeavour. Rest assured that the authorities are taking this matter seriously. What is certain at this stage is that we will have to comply with the FATCA. In some way or another. Yes, there are costs. Yes, it is cumbersome. And yes, the challenges are numerous. Yet, we have no choice but to comply. FATCA is here to stay. It would be a bad idea to ignore it. And an even worse idea not to comply with it. Instead of looking at the FATCA as the insurmountable monster, we should be considering how to use it to our advantage – just as the FATCA Partners have done. With these Intergovernmental Agreements, these jurisdictions can hope to gather information on BIS central bankers’ speeches their own citizens and claim taxes back. They have been far sighted and have turned the FATCA threat into an opportunity. We should do the same. Let us seize this opportunity before it is too late. The first step would be to see how best to comply with the FATCA. The sooner this is achieved, the better it would be for us. We could then start selling our jurisdiction as a FATCA- compliant one. Our FATCA-compliant status should be used to attract investors to our jurisdiction. The so-called murder weapon (i.e. the FATCA) should be used to entice those who have clean money and are not running away from paying their fair share of taxes, to invest in Mauritius. Financial intermediation which has over the years consolidated its position as an emerging sector of the economy now contributes nearly 10 per cent to the GDP. We should capitalise on the fact that Mauritius offers the best doing business environment in Africa. While the World Bank’s 2012 Doing Business Report ranks Mauritius 23rd globally out of 183 economies, we rank 13th in terms of “protecting Investors” and 11th in terms of “Paying Taxes”. According to the Global Competitiveness Report 2012–13, Mauritius ranks 13th in terms of “strength of investor protection”. Opportunities to boost the financial intermediation sector’s potential, therefore, cannot be ignored. As I have said repeatedly, Mauritius is not a tax haven and the FATCA provides us with yet another opportunity to show this to the world. FATCA forces us to think differently – just as the threat of the Indian General Anti-Avoidance Rules (GAAR) does. The current economic climate has demonstrated more than ever that we need to be ready to meet the challenges that are thrown our way. We cannot keep doing things the way we used to. We need to change and adapt. We need to find new avenues, to innovate. While the financial intermediation sector grows on average by 5 per cent annually, we seem to have stagnated in terms of new products. The Global Competitiveness Report 2012–13 ranks Mauritius 47th in terms of “availability of financial services”. We lag well behind in terms of “capacity to innovate”, be it in our global rank or regional rank. Such metrics confirm that we need to broaden the spectrum of our financial services. I hope that this seminar will address many of the queries that we have on the FATCA and its compliance. I once again commend the organisers for providing the relevant stakeholders with a platform where views can be exchanged and I hope that more ideas emerge on how we can give a positive spin to the FATCA. One final advice, if I may: Turn Challenges into Opportunities! Think differently! Thank you for your kind attention. BIS central bankers’ speeches | bank of mauritius | 2,012 | 9 |
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the opening ceremony of the symposium on the theme "Mauritius - a regional financial services hub", organised by the Mauritian Management Association, Pointe aux Piment, 10 October 2012. | Yandraduth Googoolye: Mauritius – a regional financial services hub Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the opening ceremony of the symposium on the theme “Mauritius – a regional financial services hub”, organised by the Mauritian Management Association, Pointe aux Piment, 10 October 2012. * * * Honourable Anil Kumar Bachoo, GOSK, Vice-Prime Minister, Minister of Public Infrastructure, National Development Unit, Land Transport & Shipping & Acting Minister of Foreign Affairs, Regional Integration and International Trade Dr Rajun Jugurnuth, President, Mauritian Management Association Mr Marc Hein, Chairman, Financial Services Commission Ms Madhavi Ramdin, Head of ACCA Mauritius Chief Executives Distinguished Guests Ladies and Gentlemen Good Morning I am delighted to be in your midst for the opening of this Symposium. I extend my warm appreciation to the MMA for this laudable initiative which comes at a very opportune time when the country, having embarked on a rapid development path, is increasingly in need of professionals who are pragmatic in their approach but modern in their mind, to say but the least. The financial sector is at the core of the economic system, providing a range of services which are necessary for domestic and trade related industries to function efficiently and enabling consumers to effectively manage their inter-temporal consumption-savings requirements. While economic growth tends to induce accompanying financial sector growth, empirical research demonstrates a well-established causal link from financial sector development to economic growth. In short, having a financial sector that meets the financing and investment needs for consumers, businesses and governments as efficiently and competitively as possible, increases the nation’s capacity to grow. Efficiency and competitiveness are more likely to be evident in an economy that is open to international competition and world’s best practices. Countries that have highly efficient and competitive financial sectors are also likely to be exporting those services. Mauritius has a comparative advantage in many parts of its financial sector compared with most other countries in the region. While we remain a very open trading economy overall, our exports and imports of financial services as a percentage of GDP are, by international standards, relatively low. The opportunities for leveraging off our financial services skills and expertise, in the region and beyond, are potentially enormous. The financial sector in Mauritius is an important contributor to national output, employment, economic growth and development. The sector accounts directly for around 10.0 per cent of GDP, and employs directly around 12,000 people or 4.0 per cent of total employment. Indirectly, it employs a substantially larger number of people, by way of outsourced legal, accounting, technology, administration, processing and other services. In the aftermath of the global financial crisis, the world’s focus is increasingly on Africa for its untapped potential and Asia as a major source of investment, technology and funding. In this conjuncture, Mauritius has all the attributes to act as a bridge between Africa and Asia. According to the Global Competitiveness Report 2012–13, Mauritius ranks 13th in terms of BIS central bankers’ speeches “strength of investor protection”. Global investors interested in trading with Africa, for instance, should increasingly be encouraged to use Mauritius as a platform to set up their investment holding companies. Over the years, our country has established strong economic ties with both Asia and Africa. Mauritius is an active player in key African and regional organizations, including the African Union (AU), the Southern African Development Community (SADC), the Common Market for Eastern and Southern Africa (COMESA) and the Indian Ocean Commission Rim Association for Regional Cooperation (IOR-ARC). Mauritius has established a dozen Double Taxation Agreements (DTAs) with our African peers and ten, with our Asian counterparts. All these provide for opportunities which all stakeholders in the country need to tap if we are to service the region as a Financial Services Hub. The most important characteristic of a leading financial centre is that it must be stable and well regulated, and provide a wide range of financing and investment products as efficiently and competitively as possible. On the regulatory front, I can assure you, Ladies and Gentlemen, that the Bank of Mauritius has been and is continuously striving very hard to render the Mauritian Jurisdiction as credible and transparent as possible. Some ten years back, the financial world was lobbying for the relaxation of regulation or the implementation of “light touch regulation”. However, the Bank of Mauritius has always maintained a consistent and prudent approach in its regulatory oversight, and the recent global financial crisis has proved us right in our conviction that a properly regulated jurisdiction promotes financial stability and enhances the level of confidence in the financial system. The Bank of Mauritius is further working, in collaboration with the banking sector, on the ringfencing of banking activities with a view to facilitating the monitoring process and mitigating the risk of regulatory arbitrage. In order to promote the independence of our banks and enhance the resilience of our banking sector, the Bank of Mauritius encourages international banking Groups to conduct business in Mauritius through subsidiaries rather than branches. Emphasis is equally being laid on the oversight of domestic Systemically Important Financial Institutions (SIFIs) for greater financial stability and compliance with the recommendation of Basel III. In terms of regulatory tools, the Bank of Mauritius has issued some thirty Guidelines to institutions under its purview, which cover crucial and diverse areas such as capital adequacy, risk management, credit impairment, corporate governance, public disclosure of information and anti-money laundering, among others. These guidelines are constantly being updated to take on board evolving risks. New guidelines are also in the pipeline, including Basel III. In the field of anti-money laundering, in particular, the Bank of Mauritius has, besides issuing Guidance Notes on Anti-Money Laundering and Combating the Financing of Terrorism for Financial Institutions, set up a Committee comprising Compliance Officers of banks and officials of the Bank of Mauritius to discuss and follow up on all compliance issues. We have equally signed an MOU with the Financial Intelligence Unit, since 2009, for the exchange of information and greater cooperation in combating money laundering and the financing of terrorism. The concern for a macro-prudential oversight of the banking sector stands as a priority on the agenda of the Bank of Mauritius. In this connection, we have, at national level, entered into MOUs with the Mauritius Revenue Authority (MRA), Financial Services Commission (FSC), Competition Commission of Mauritius (CCM) and Statistics Mauritius. On the international level, the Bank of Mauritius has equally signed MOUs with some ten foreign regulators, of which five are from the region, for a better oversight on the activities of foreign banking institutions operating on our shores and on the regional operations of our BIS central bankers’ speeches local banks. We are also in the process of finalizing MOUs with a few other central banks in the region. Efforts are being deployed in view of the establishment of policies and measures to address the question of banking crisis resolution in the region. It may be highlighted that one of the greatest lessons learnt from the global financial crisis is that, in a world of interconnectedness, regulators must collaborate and exchange information to mitigate the effect of contagion risk and ensure that prompt actions are taken to prevent any future crises. We are gearing our efforts towards the establishment of supervisory colleges in the African Region to foster supervisory cooperation. I wish to return to the subject of corporate governance which I am sure will be of great relevance to the audience. We have in August issued a revised Guideline on Corporate Governance with a view to bringing improvements in the corporate governance framework of our financial institutions. The guideline has been aligned to the new recommendations of the Basel Committee on Banking Supervision and greater emphasis is now being laid on the independence of directors. We are requiring, amongst others, that the chairperson of a board in a local bank be an independent director. We have further requested the setting up of local advisory boards for the branches of foreign-owned banks. Additionally, greater transparency is being required regarding the role of the board of directors, particularly on ethical standards and corporate values. We believe that the soundness and resilience of the banking system, and by extension the financial system, involves, inter alia, the proper functioning of various mechanisms which inevitably entail accountability and transparency. Regarding transparency, the Bank of Mauritius has succeeded with the collaboration of banks, in disclosing the overall CAMEL rating of individual banks on its website and on a biannual basis. Mauritius is among the few countries and the first in the Sub-Saharan region to have gone public with those ratings. I believe that the publication of the CAMEL ratings has brought in higher market discipline in the banking system and is encouraging banks to improve their performance. Certain jurisdictions have even embarked on the dissemination of stress-testing results of their commercial banks. We have constantly been modernizing our Payments System. The Bank of Mauritius launched the Bulk Clearing and Cheque Truncation System in September 2011. This system allows for electronic clearing of cheques as well as low value payments. We are presently working on a National Switch project. As you may be aware, the Regional Payment and Settlement System (REPSS) of the COMESA has become operational effective 3 October 2012. The REPSS is an initiative of the COMESA Clearing House and is fully endorsed by all COMESA member states. The Bank of Mauritius is the settlement bank in the REPSS and the status of a settlement bank for such a huge market, spread over a total area of 12.8 million square kilometres and with a population of 413 million, is a coveted position and will benefit the country ultimately. The REPSS opens another opportunity for our country to enhance its role in the region. In fact, an efficient cross border payment system is a necessity for trade integration and the future of REPSS is very promising. Mauritius also inspires confidence among foreign investors on account of its robust legal framework. As of date, our jurisdiction has made considerable efforts to establish appropriate legislations whether in the field of banking, financial services, anti-money laundering or securities market. However a big challenge still awaits the country; we need to be compliant with The Foreign Account Tax Compliance Act (FATCA) by next year. The sooner this is achieved, the better it would be for us. We could then start selling our jurisdiction as a FATCA-compliant one. To conclude, we need a vision for our financial industry: that is, (a) maintaining a best practice, principles based regulatory framework, (b) maintaining world class education and BIS central bankers’ speeches training to ensure the continuous availability of a highly skilled and innovative workforce and (c) removing barriers to the competitiveness, efficiency and liquidity of domestic financial markets. Mauritius has many innate advantages. Our geographic proximity to Africa should provide a basis for diversification away from traditional markets. Our growing trade integration with the region provides increasing trade financing and other opportunities for our financial sector. Ladies and Gentlemen, we need the collaboration of each and every stakeholder to enable Mauritius to cement its role as a Regional Financial Services hub. I wish good luck to the MMA for its glorious initiative. Thank you for your attention. BIS central bankers’ speeches | bank of mauritius | 2,012 | 10 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Gala Dinner on the occasion of the Second Meeting of the Official Monetary and Financial Institutions Forum (OMFIF) in Africa, hosted by the Bank of Mauritius, Port-Louis, 5 November 2012 | Rundheersing Bheenick: A central bank in search of “anti-fragility” Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Gala Dinner on the occasion of the Second Meeting of the Official Monetary and Financial Institutions Forum (OMFIF) in Africa, hosted by the Bank of Mauritius, Port-Louis, 5 November 2012 * * * Of all the memorable events that the Bank of Mauritius has staged in this Dining Room – and there have been quite a few – tonight’s event is surely one of a kind. This is the very first time that we are welcoming at the Bank His Excellency Rajkeswur Purryag, G.O.S.K., G.C.S.K., since he acceded to the exalted position of President of the Republic of Mauritius four months ago. Mr President, we are deeply honoured by your presence amongst us tonight. This is also the first time that we are hosting a meeting of the Official Monetary and Financial Institutions Forum. We are conscious of the honour OMFIF is doing us, a small Central Bank of a small island-state, by giving us the privilege of hosting this event. Let me extend a very warm welcome to our many distinguished visitors from abroad. And express our thanks to our distinguished guests from home for joining us tonight. This is only the second time that OMFIF is holding a meeting in Africa. Now bankers and central bankers are supposed to have a head for numbers – cynics have their doubts. We are struck by a strange coincidence. When the South African Reserve Bank hosted the first meeting in Africa, it happened to be celebrating its 90th Anniversary. As we host this second meeting, we are celebrating the 45th Anniversary of our Bank. I am sure numerologists and others of their ilk may discern some hidden esoteric meaning in those numbers. And this is what we intend to discover during the next two days. Let me say a few words on OMFIF for our guests who may not be very familiar with its work. Founded in 2010, OMFIF regroups diverse players from the public and private sector, central banks, sovereign wealth funds, and academia who get together to exchange views and share experience with the objective of improving performance and achieving prosperity. This second meeting provides a remarkable networking opportunity. It brings together a total of 19 institutions, of nearly 100 delegates from 21 countries, 25 delegates from central banks, 64 delegates from the private sector, 4 delegates from multinational organizations and others from governmental and academic institutions. We can therefore reasonably expect very enriching debates and exchanges at the various sessions. The inaugural meeting in South Africa last year already set the tone. Participants highlighted the signs of Africa’s stunning potential: 5% average GDP growth in the recent past, fast-rising incomes, and abundant resources. The meeting articulated the crucial requirements for the future of the African continent. Foremost among them were the following: first, strengthening trade integration with other faster growing areas; second, fighting corruption; and third, harnessing domestic and foreign savings for investment and development. The theme of this year’s symposium “Trade flows and global growth” rightly follows up on the conclusions of the meeting in South Africa. Tonight I will share with you our own experience at the Bank of Mauritius and touch upon our role in the regional integration agenda. I also comment en passant on some issues that have a bearing on the prosperity of the African continent. We are all aware that we are meeting against the backdrop of a continuing global financial and economic crisis. At different levels and in different fora, we have talked enough about it. As Christine Lagarde, the Managing Director of the IMF, put it in Tokyo, it is now time to A-C-T, spelling the word for added emphasis. Lagarde didn’t say it but she would surely agree that Africa must be part of the solution to the global crisis. BIS central bankers’ speeches While mature markets, in particular the UK and the euro area, continue to face sharp risks of prolonged sub-par growth, Asia and Africa, have emerged as the two fastest-growing continents in the world. Asia, resilient in the face of prolonged softening in external demand, is being hailed as the new axis of development. What a refreshing change from the bugbear of the Yellow Peril and the Clash of Civilizations that Western strategists used to fantasize about not so long ago! Typical of this school of thought was a book penned by Alain Pereyfitte, confidant of Charles de Gaulle, which he entitled: “Quand la Chine s’éveillera…le monde tremblera” − literally translated, “When China awakes…… there’ll be a global earthquake.” As Lord Desai has pointed out, the African awakening is a totally different story. There is no fear of an earthquake, with Africa as its epicenter. But there is no denying that African policymakers have been rapidly getting their act together, bringing greater political and macroeconomic stability and microeconomic reforms. Africa has been very successful at attracting investors by the abundance of its resources endowment. India and China have increased trade and capital flows to Africa; and China has become an important partner for Africa in infrastructure development. Integration within Africa has however been fairly disappointing. The International Trade Statistics 2012 of the World Trade Organisation confirms the relatively low level of intra-Africa trade: at only 10%, intra-Africa trade trails far behind the 30% level of ASEAN, the 40% level of North America, and the 60% of Europe. Red tape, poor infrastructure and trade barriers are costing Africa billions of dollars and depriving the region of new sources of economic growth. It is clear that we must step up our efforts to stimulate intra-regional trade and develop further financing links within the continent. Trade integration could unlock the growth and employment potential in the region and help to mitigate the impact of external shocks on our economies. Five years ago, the Bank of Mauritius threw its hat in the ring and joined the fight to promote intra-regional trade by lobbying successfully to become the settlement bank for COMESA’s regional payments system initiative, REPSS, the Regional Payment and Settlement System. REPSS went live last month. The system allows for an easy transfer of funds among member countries – importers are able to pay for goods and services in their local currencies, and exporters can invoice their products in their domestic currencies. There is no reason why this platform cannot also serve the needs of other countries beyond COMESA member-states, and thus give a much-needed fillip to cross-border regional trade. Macroeconomic convergence and financial integration figure high on our regional integration agenda. The Bank has been playing an increasingly active role in other African integration initiatives such as COMESA, SADC and AACB, i.e. the Association of African Central Banks. Countries in the region recognize that stability is a necessary condition for prosperity. Along with several of our peers, the Bank of Mauritius joined the Sub-Saharan Africa Regional Consultative Group of the Financial Stability Board. This will help to identify the region’s challenges and, hopefully, adjust global policy-making to make it more relevant for peripheral countries. Such a forum ensures that the African continent has a voice in the process of policy reforms. There is another remarkable phenomenon happening in our part of the world which I would like to flag for your attention. While major banks in developed countries are mired in scandal, scrambling for capital, shrinking their operations, and losing their CEO’s, many of our banks are posting healthy profits and extending their footprint to other parts of the continent. This underlines the need for African regulators to collaborate more and exchange information to mitigate risks of contagion. The two African giants, Nigeria and South Africa, which account for half of sub-Saharan Africa’s GDP, must be more sensitive to the spillover effects of their actions on the rest of the continent. We must be ready to take prompt policy actions in the event of a home-grown crisis. It is not surprising, therefore, that we are joining hands to establish supervisory colleges to foster closer supervisory cooperation and address the issue of banking crisis resolution in the African region. BIS central bankers’ speeches Africa has an abundance of resources and is seen as the world’s most promising place for new production. However, this wealth, when tapped, does not trickle down to Africans. By contrast, a small island economy like Mauritius, with its 1,860 square kilometres of land, a coastline of 177 kilometres, its limited resources and its independent economic history of less than five decades, has prospered and continues to score high marks on a number of counts. We have a sound and dynamic financial sector, an evolving monetary policy framework, a modern financial market infrastructure, and a banking sector that has showed remarkable resilience during the turbulent years. This financial and monetary stability has undoubtedly been a major contributor to the robust growth that Mauritius has experienced throughout the crisis. In 2011, the Mauritian economy was one-third bigger than it was in 2007, GDP having risen from Rs244 billion to Rs323 billion over the period. One might be tempted to say: “if this is a crisis, let’s have more of it!” But we must not tempt the devil… Mauritius is, of course, far from being what Nassim Taleb calls a “black-swan-robust” economy, that is, an economy that can resist difficult-to-predict events. But we have most certainly taken steps to “robustify” our economy, and we have made it less vulnerable and less fragile. In his Stamp Memorial Lecture at the London School of Economics in October this year, Sir Mervyn King, Governor of the Bank of England, put it thus: “[Taleb] argues that the opposite of fragility is not resilience or robustness, but “anti-fragility”, that is a state in which people or institutions thrive on volatility, shocks to the system, and risk. We go to the gym to stress our muscles in order to strengthen them; occasional seismic activity may prevent a more damaging earthquake…[Anti-fragility] offers a warning of the dangers of believing that the role of monetary policy is to offset all shocks. Rather than pretend that we can forecast the future, a more intelligent response is to reinforce the resilience of those parts of the financial system that we cannot permit to fail and encourage entry and exit in a free market in other parts.” Since I joined the Bank – about the time when the sub-prime crisis broke – I introduced an annual Letter to Stakeholders as part of my new communication strategy in an attempt to de-mystify central banking. In my Letter of 2011, I may unwittingly have put my finger on one of the mechanisms to build “anti-fragility”. I wrote there that I have come to consider the smallness of our economy as “an asset rather than a liability because small size gives us an added adaptive advantage: a quick response capacity and the flexibility to continually adjust to the volatile external environment”. That prompt response and flexibility have very much become our mantra at the Bank of Mauritius during the crisis. Which means that, unknown to ourselves, we have actually been promoting “anti-fragility”. We are as amazed as Molière’s eponymous Bourgeois Gentilhomme was when he discovered that he had been speaking prose all his life! How, then, did we “robustify” the banking and finance sector? How did we respond to the increasing volatility, the external shocks, and the heightened risk? It will take us too long to go through all the things we did, both government and Central Bank, to cope with the succession of shocks that hit us in the financial and real sectors over the last five years, some of them anticipated and quite unrelated to the crisis. Let me just highlight some of the actions of the Central Bank. Inevitably, these sparked some misgivings about the evolving role of the Central Bank. Central banks in systemic countries have moved center-stage. The US Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan have moved well beyond the traditional ‘lender of last resort’ function and financial orthodoxy. They have had to step in swiftly to stabilize economic activity and restore trust in the financial system. These central banks are in uncharted territory. Some fear that, like some of the mammoth universal banks at the heart of the crisis these central banks may also have become too big to fail. Others raise the spectre of a “currency war” and revive memories of a former US Treasury BIS central bankers’ speeches Secretary, John Connally, who told a group of European finance ministers worried about the export of American inflation that the dollar is “ our currency, but your problem.” Small central banks, like ours, do suffer from this quantitative easing and consequent currency weakening in our reserves portfolio even while we recognize that we benefit from the favourable impact on the demand for our exports. We have been constantly re-jigging our reserves composition, more for prudential reasons than in a search for yield. We have struggled to maintain a high level of monetary and financial stability in spite of our exposure arising from the openness of the economy. We made full use of all the elbow room we could build around us by taking a less restrictive approach to the Bank of Mauritius Act; we revisited little-known provisions of the Act and viewed the Bank’s mandate in a broader perspective – at the cost, I must say, of much friction with other interested parties and to the evident delight of the local press. We did not limit ourselves to the conduct of monetary policy via interest rate decisions only. The Bank fully assumed its socio-developmental role in the economy. We have been particularly attentive to a better integration of banking and financial sector policies with national economic policies. To facilitate this, we stepped up our coordination with the Treasury while safeguarding the central bank’s independence against fiscal dominance and other encroachments on its domain, in, for example, the area of exchange and reserve management. Let me mention briefly some of the main policy measures that can be credited with instilling “anti-fragility” in the system: First, trade finance. For a country which depends so critically on trade exchanges with the rest of the World – external trade constitutes 69% of GDP – it was perhaps inevitable that the financing of trade flows would be the area where financial stress would first surface when international money-centre banks did not roll over long-established trade credit lines to domestic banks. The Bank responded promptly by extending a Special Foreign Currency Line of Credit of US$125 million, i.e. nearly 7% of Bank reserves to ensure the continued financing of the country’s trade. This measure, taken in December 2008, extended the Bank’s toolkit and it was vital to keep the economy functioning smoothly in the unusual conditions prevailing at the time. The Special Foreign Currency Line of Credit remained available for three years and we only withdrew it last year when it was no longer required. Those who follow developments in this area will recall that it was only in October 2011 that the BIS brought two changes in the treatment of trade finance under the Basel Capital framework to improve access to, and lower the cost of, trade finance instruments for low-income countries. Second, Swaps Transactions. The lack of liquidity in the spot foreign exchange market towards the end of 2009 started to impact on the orderly functioning of this market. Consequently, the Bank offered to undertake swap transactions with a view to injecting liquidity in the market and thus, prevent the build-up of uncertainties that would have been having financial stability implications. Spot-to-one month forward swap transactions in USD, EUR and GBP were carried out for an amount equivalent to USD94 million. Third, Excess Liquidity. As the global economy nosedived, it dragged down private sector credit demand. By an unfortunate coincidence, this happened simultaneously with the Government drawdown of prudential credit types negotiated with international financial institutions to ward off the possible negative repercussions of any sudden stop in foreign direct investment inflows. These flows diminished somewhat, but no sudden stop materialized. The net redemption of public debt that followed fuelled an explosion of domestic excess liquidity. As its peak, this stood at Rs8.3 billion, or nearly three times higher than the Bank’s comfort level of Rs3 billion. As yields on reduced issues of Government debt were aggressively pushed further and further below savings deposit rates, it became increasingly obvious that this excess liquidity situation would hamper the monetary transmission mechanism and impede normal financial intermediation. BIS central bankers’ speeches The Bank was in a fix. Its own resources were severely stretched as interest rates on its reserve holdings, its main source of income, neared the zero level. Although profitability was not a major motivation, it could not easily envisage incurring a loss. It could not persuade the Treasury to issue more paper, with a senior finance official bluntly saying: “Excess liquidity is your problem!” to the Bank officer mandated to explore this issue with the Treasury. Unlike some central banks, we did not have the option of automatically issuing treasury paper for monetary policy purposes for the Government’s account. Tentatively, we started issuing 28-day Bank of Mauritius paper. We had already abandoned the overnight placement facility with the Central Bank as it didn’t serve any useful purpose given the high costs incurred. Persistent excess liquidity led to frequent rollovers of our 28-day paper. The Bank lengthened the maturity of its own paper and, before long, found itself issuing bills of 91-day, 182-day and 364-day maturities as well as notes of 2-year, 3-year and 4-year duration. At peak time, the Bank had a total of Rs11.5 billion outstanding, compared to Rs31.5 billion of Treasury bills at the time. Let me fast forward to the present when we are facing sporadic liquidity shortages in the domestic banking system. Since early December, we have gone into reverse mode. We have been offering to buy back our own paper but no bank has taken us up on our offer yet. Fourth, the Bank’s accounting framework. This required the Bank to liquidate periodically, part of its portfolio to distribute unrealized gains, and did not allow dynamic provisioning. I shall spare you the details of how we managed to effect changes in the Bank’s accounting framework in the face of concerted opposition from the Bank’s external auditors, the Treasury, the State Law Office, and some of our own accounting staff – or how we got the IMF to defend our corner. In November 2011, we also doubled the Bank’s capital from Rs1 billion to Rs2 billion to quell any fears about the Bank’s capital adequacy. Both are fascinating stories, but we shall have them for another time. Fifth, credit to small cane-growers. When the sugar sector was hit by continued decline in export prices and small planters were abandoning cane cultivation, the Bank made available a cheap line of credit in rupees amounting to Rs1.5 billion in each of the two years 2010 and 2011 and of Rs1.3 billion 2012 to the Mauritius Sugar Syndicate to finance the crop at preferential rates. We negotiated paper-thin margins with the commercial banks to make sure that it provided maximum benefit to the targeted beneficiaries. Sixth, we worked closely with the Treasury to develop new bank lending facilities for the Small and Medium Enterprises sector. This was announced in the November 2011 Budget. The Bank supported the initiative by providing the framework through which finance could be extended on favourable terms and conditions through commercial banks. The Bank has been closely monitoring the scheme since it was launched. Seventh, public debt management. The Bank was entrusted with the management of central Government’s debt since December 2008. Since then, the Bank has innovated with a host of measures to render the Government securities market deep and liquid. Single maturity auctions that determine the Government’s debt profile are conducted since 2010 and this has enabled the issuer to decide on its debt profile rather than leave it to the market to mark its preference. We scored some success in lengthening the domestic debt profile of central Government. A new instrument – 273-day Treasury Bills – was introduced to widen the maturity spectrum of available instrument and we succeeded to garner a smooth upward-sloping yield curve, which among other things, is expected to benefit the development of a corporate bond market by enabling market participants to price their financial products. We have noted that banks, in general, have a tendency to lean on a buy-and-hold strategy when they purchase Government Treasury Bills. The marked preference of banks for official paper, even at the cost of driving down yields in the preferred part of the spectrum, and a growing risk aversion, have impeded the growth of credit and have prompted us to introduce a new tool in the form of a cap on banks’ holdings of Treasury Bills in their banking books in BIS central bankers’ speeches April 2011. This cap was initially set at 20 per cent of daily average rupee deposits and tightened further to 18 per cent as from July 2011. There is no limit on banks’ holdings of Treasury Bills in their trading book. You will note that while most central banks impose a minimum holding of liquid assets, we were bold enough to prescribe a maximum imposable limit on the premise to encourage banks to direct loanable funds towards extending more credit and also, to promote the long-awaited development of the secondary market. My eighth point relates to our action on the foreign exchange market. For an import-dependent economy which does not grow its own food and which imports its fuel, the exchange-rate pass-through plays a critical role in domestic inflation with imports accounting for nearly 53% of the Consumer Price basket. Armed with our mandate to target price stability and the power to formulate appropriate intervention policies on the foreign exchange market, we moved decisively to reduce volatility on the foreign exchange market arising from suspected currency manipulation in an oligopolistic market with information asymmetries where the State Trading Corporation (STC) played the role of the fat goose to be avidly plucked by the well-informed and well-supplied currency trading desks. Our statutory powers allowed the Bank to provide directly the currency requirements of the STC, the agency responsible for our fuel and part of our food imports. This measure not only reduced volatility but it also enabled the STC to have less frequent price adjustments, thereby contributing to the price stability objective of the Bank. The ninth measure we introduced relates to an action we took in June this year to shore up the export sector. Ever since the crisis hit, we have been closely monitoring the indebtedness of the corporate sector. We have a high level of interconnectedness and related party transactions in our banking system, which makes it very vulnerable to contagion. Our exporters had long been used to a slow and steady depreciation of the domestic currency. Over the years, they built up large rupee debts which they serviced from unhedged foreign currency earnings, mostly in euros. The prolonged weakness of the euro prompted calls to peg the rupee to the euro and, more generally, to depreciate the rupee. Instead of yielding to these pressures, which would have imposed a heavy burden on the rest of the population and risked social instability, the Bank introduced a Special Facility in Foreign Currency for an amount of Euros 600 million, or 27% of gross reserves, to refinance the outstanding stock of rupee debt of the export sectors which were hit by the declining external demand in key markets and the weakness of the export currencies. The Bank was charting new territory as we had never undertaken such a refinancing operation. Economic operators with highly-leveraged balance sheets – and severely affected by the mismatch between their earnings in foreign currency and their debt in rupees – posed grave risks to the balance sheets of banks and to overall financial stability in the country. The tenth measure was introduced in parallel with the previous one. It concerns the same issue of currency valuation but approaches it from the perspective of foreign exchange reserves. There is no doubt that the rupee has strengthened since the crisis – the rupee exchange rate index moved from 100 in 2007 to 91.6 in December 2011, standing at 94.2 in September 2012. Over the same period, year-on-year inflation has fallen from 11.9% in 2006 to 3.9% in September 2012 after having dipped to a record low of 0.1% in October 2009. Given the openness of the economy and the exchange rate pass-through which I have referred to earlier, we could not have achieved the inflation outcome without the currency strategy which underpinned it. There has been increasing concern about the “overvaluation” of the rupee from exporters’ lobbies. The matter has been addressed by the IMF in the last two annual Article IV consultations, and also in a recent special report: “Mauritius: External Balances from a Long-Term Perspective.” Please bear with me as I quote selective excerpts from these documents to drive home the point that we may possibly be misreading the IMF’s analysis when we argue for an accelerated depreciation: BIS central bankers’ speeches Excerpt 1: “The flexible exchange rate continues to play a useful role as a potential shock absorber; exchange rate interventions should be used primarily to limit excess volatility. Net international reserves appear fully adequate, but not excessive.” (Staff report for the 2012 Article IV Consultation, February 2012) Excerpt 2: “Using cross-country panel methodologies as well as single country time series techniques, we estimate that the Mauritian Rupee is mildly overvalued with respect to fundamentals. Nevertheless, there is significant uncertainty about the size of the overvaluation. Mauritian competitiveness in general (beyond real exchange rate issues) appears to have declined with respect to exports, labor productivity, growth in unit labor costs, and other structural competitiveness indicators” (IMF: Mauritius External Balances from a Long-Term Perspective – May 2012) Excerpt 3: “The balance of evidence suggests the need for measures to address external imbalances and declining competitiveness…….the real exchange rate in 2012 might be considered overvalued……although the evidence is not fully conclusive….the exchange rate is one of the tools to address analyzed imbalances; likely partially effective in the short run, but also probably the most ineffective tool for the long run.” (IMF: Mauritius External Balances from a Long-Term Perspective – May 2012) Excerpt 4: “The recent strengthening of the Rupee owes to the depreciation of the Euro and the deteriorating conditions in the Euro area.” (IMF: Mauritius External Balances from a Long-Term Perspective – May 2012) Excerpt 5: “Empirical results indicate that the BOM’s FX intervention has generally been effective in affecting the volatility of the rupee exchange rates.” (IMF: Mauritius External Balances from a Long-Term Perspective – May 2012) Well, that should put paid to the argument that the Central Bank has been misguided in its forex intervention policies as much as to the contention that the salvation of the export sector depends on a currency fix that the Bank should provide. Earlier, we had been advised by the Fund that the mild overvaluation did not warrant active foreign exchange intervention. In the light of evidence suggesting growing misalignment and our reserve cover being qualified as “adequate, but not excessive”, we launched an initiative to increase our reserve cover to six months’ of imports. Since its launch in June 2012, Operation Reserves Reconstitution has added reserves of nearly one month of import cover and we are well on the way to achieve our target. We managed to contain rupee appreciation and corrected the growing misalignment without creating disorderly conditions on the domestic foreign exchange market. Whether this will suffice to combat further appreciation depends very much on what happens to our trading partner currencies. BIS central bankers’ speeches I hope I have not bored you with all these details. These measures, and many other smaller ones relating amongst others to macro-prudential provisions, that I have no time to mention tonight, contributed to build “anti-fragility” not just in the Mauritian economy but, more broadly, in Mauritian society as well. We did not chart new territory; we were really raking over old ground but we did it with a fresh insight and renewed determination. Lady luck was also on our side as we seem to have got the sequencing right. Which reminds me of a remark of US President Herbert Hoover: “Wisdom consists not so much in knowing what to do in the ultimate as knowing what to do next” It is possible that we have also been helped by the nature of our banking and finance system. Let me explain. Two years ago (June 2010), I was privileged to be among the Governors who were being hosted to a dinner at All Souls College in Oxford by John Vickers, who was then chairing the International Banking Commission. He had arranged for a rather unusual after-dinner speaker, unusual for bankers’ meetings. This was the Oxford Professor of …….Zoology, Lord May, who treated us to a talk on “The Ecology of Finance”. The gist of his argument was that simple ecosystems, not complex ones, were better at resisting stressful environments. He cautioned against extrapolating from ecosystems to financial systems but suggested that there were lessons to be learnt. Avoid complexity, and keep it simple. The Mauritian banking structure is a fairly simple one, with banks mobilizing deposits in traditional ways and the lender knowing the borrower. The simple structure and traditional banking values, allied with normally non-intrusive regulation, have also contributed to the resilience of our banking system. Let me come to my final point – the Gold Bar project that H.E. The President, will be launching later tonight. We have witnessed the domestic savings rate halving from 29% in 1992 to 14% currently. This is partly in response to continued negative real interest rates on saving deposits. The outlook for normalising rates in the near future is not encouraging. In the absence of attractive financial saving instruments, it is the domestic property market that draws speculative investment with the risk of a real estate bubble. More generally, there is demand for a “safe haven”, away from paper currencies as we are living under the threat of the depreciation of paper money and, particularly of reserve currencies, from quantitative easing. This is the rationale for the Bank to introduce physical gold as a new asset class. The Bank, which already sells industrial gold to jewelers and gold coins to the general public, has partnered with Rand Refinery of South Africa for this Gold Bar project. There are two features to this new savings instrument that enhance its attractiveness. We are offering a buy-back option to make the investment as liquid as possible; and we are proposing custodial services in our vault to mitigate the risk of loss through theft. We are initially proposing gold bars in three denominations, 10g, 50g and 100g, and they will be put on sale at competitive prices, set as close as possible to those prevailing on the international bullion market. We now wait with bated breath to see how the market reacts to it! Before concluding, let me recognize – De La Rue with whom we have partnered to organize this event. As some of you may be aware, the relationship between Mauritius and De La Rue goes as far back as 1860! Indeed it was 152 years ago that Thomas De La Rue, as the nascent company was then known, bagged its very first banknote printing contract, to supply Mauritius with three denominations of banknotes. The first note to be printed was the 5-pound note, which also gave its fixed exchange equivalent value of 25 dollars. Now, would it not be just great if we could issue our rupee notes giving their exchange value in Euros? Alas, the world of fixed parity has long been gone. Let me also add a word of thanks to Standard Chartered Bank which chipped in as a silver sponsor. Our thanks also go to the Mauritius Post Office which kindly agreed to issue a Special Commemorative Cover to mark this OMFIF meeting in Mauritius. BIS central bankers’ speeches May I invite you to rise and propose a combined toast to the President of the Republic, to all our guests, this evening, and to the success of this OMFIF meeting. BIS central bankers’ speeches | bank of mauritius | 2,012 | 11 |
Welcome address by Mr Mohammed Iqbal Belath, Second Deputy Governor of the Bank of Mauritius, at the Second Meeting of the Official Monetary and Financial Institutions Forum (OMFIF) in Africa, hosted by the Bank of Mauritius, Port Louis, 5 November 2012. | Mohammed Iqbal Belath: Africa and the Indo-Pacific – the new economic mainspring Welcome address by Mr Mohammed Iqbal Belath, Second Deputy Governor of the Bank of Mauritius, at the Second Meeting of the Official Monetary and Financial Institutions Forum (OMFIF) in Africa, hosted by the Bank of Mauritius, Port Louis, 5 November 2012. * * * Governors Deputy Governors Members of the Management Board of OMFIF Members of the Advisory Board of OMFIF Distinguished Guests Ladies and Gentlemen A very good morning and warm welcome to you all! I feel privileged to deliver this Welcome Address on the occasion of the 2nd Meeting of OMFIF in Africa, which demonstrates the growing importance of the Dark Continent on the global map. The continent has come a long way from its ruthless, poverty-stricken and unstable political environment. Today, Africa is looked upon as the continent full of opportunities, the place where we may say the “next big things to unfold”. The hosting of this Meeting in Mauritius is a premiere for the Bank and I will like to salute the vision of Governor Bheenick to put our Bank on the radar of Official Monetary and Financial Institutions Forum. The 1st Meeting in Africa, the inaugural one, was held a year ago in Pretoria at the South African Reserve Bank, when the SARB was celebrating its 90th Anniversary. The 2nd Meeting is being held at the Bank of Mauritius, which is celebrating its 45th Anniversary this year. Perfect Symmetry? Sheer Coincidence? I’d rather not venture to know the venue for the 3rd Meeting in Africa!!! Leaving aside the perfect symmetry of these anniversaries, I believe that it is the ideal time to be in Africa and to deliberate of the topic of the Meeting: Africa and the Indo-Pacific: The New Economic Mainspring. The US Secretary of State, Hillary Clinton, first coined the term “Indo-Pacific” officially in October 2010, in Honolulu, in a geopolitical sense, to elucidate developments in the Asia Pacific region. Her husband, former President Bill Clinton, on one of his innumerable trips to Africa, declared and I quote “We are living in the most interdependent time in history. The evidence is all around us. Wealth and talent now cross borders that are more like nets than walls but so do less positive forces. The financial crisis that started in the United States and swept the globe proved just how deeply our social and economic fates are intertwined — we can’t escape each other anymore. The good news is that we have more power than ever to build a world of shared values and shared opportunities – and nowhere is this clearer than in Africa.” The Indo-Pacific region covers a huge geo-strategic and geo-economic territory, covering the western Pacific Ocean to the western Indian Ocean along the eastern coast of Africa. As global economic power shifts from West to East, this region is rapidly gaining importance as the centre of trade, investment and cooperation. The Indo-Pacific contains close to half the world’s population and draws Australia together with the rising powers of China and India, the dynamic sub-regions of Northeast Asia and Southeast Asia and the resource rich and sometimes volatile Middle East and Africa. Moreover the region provides several of the world’s most important choke-points for global commerce. So, there could not have been a better theme for seminar. This Meeting will dwell on a number of issues and I don’t intend to elaborate thereon. But allow me to throw some thrusts on some of the topical issues. When we look at Asia, the BIS central bankers’ speeches growth of its intra-regional trade in the last decade has been quite inspirational and has helped in building new channels of growth. These have indeed helped Asia to sustain its growth momentum in these challenging times and contain the spillover effects of lacklustre economic performance in traditional markets. Africa, too, is gearing up its regional market, which has an immense potential. But Africa has a big infrastructural disadvantage – countries throughout the continent are not well-connected. Steady advances in regional integration and services will surely enable the move from overseas trade to trade between countries and across regions. Increasingly, Africa is making use of available technology to make progress on inclusive growth. The use of mobile-banking, this single most innovative instrument, has created ripples by increasing outreach to many of the unbanked that were excluded due to high operation costs in establishing branch network around the continent. This broad example will set the path for inclusive growth but it raises concerns for policymakers for financial stability issues arising therefrom. Africa has, in the past, been victim of what is referred to as the “natural resource curse”. But today we are witnessing a new phenomenon with the surge in commodity prices. Commodity-exporting countries have experienced appreciation of their currencies owing to increasing capital flowing in those countries to take advantage of the rising commodity prices. Also, they have been following the trend in setting up Sovereign Wealth Funds. Unfortunately, these capital flows had made those countries vulnerable to the occurrence of Dutch disease, excessive capital and exchange rate volatility. Today we are meeting for the 5th Meeting of the World E-Money Council. E-money is gradually becoming an important element of the infrastructure of a modern economy. There exists different synonyms and definitions of e-money, but anything where value is exchanged electronically and by contrast, not using physical form of money, is generally accepted as E-money. All of us do very much appreciate the convenience of the ability to pay by plastic. Card payments as well as E-money transactions have systematically grown to account for a big slice of spending in the retail economy. The ability to make and receive payments with confidence is the centre stage of any commercial activity. The smooth functioning of the market infrastructure for enabling payment and settlement systems is essential for market and financial stability as well as for economic efficiency. The public policy objectives common to all stakeholders are to enhance public confidence, safety, integrity, access to finance and efficiency of payments systems. Consequently, to facilitate cross-border trade and investment flows, the appropriate payment instruments, clearing mechanisms and settlements systems must be in place. Allow me here to talk of our own involvement in regional initiatives. The Bank of Mauritius is the settlement bank in the REPSS set-up, which enables for the cross-border payment settlement needs of COMESA countries. The Bank is actively pursuing discussions to extend this platform beyond COMESA. Another initiative of the Bank, which came into effect last September related to the Cheque Truncation System (CTS), which refers to the clearing of cheques based on digital images of cheques. This initiative ultimately attempts to eliminate potential fraud and forgery risks while ensuring faster clearing of cheques. However, the advent of E-Money raises a number of challenges for central banks: Will e-money always be variants of the national currency of a country? Can central banks account for e-money in circulation? Will they still have the monopoly of money issuance and therefore dictate monetary policies? And what about the impact on regulation and anti-money laundering? Ladies and Gentlemen, allow me to quote Elbert Hubbard, the philosopher (1856–1915), who said that “The world is moving so fast these days that the man who says it can’t be done is generally interrupted by someone doing it.” I will no further stand before the beginning of your BIS central bankers’ speeches sessions and, without much ado, I wish you all successful deliberations and a fruitful Meeting. Thank you for your kind attention. BIS central bankers’ speeches | bank of mauritius | 2,012 | 11 |
Statement by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, Port Louis, 8 October 2012. | Rundheersing Bheenick: Review of the year gone by and reflections on the present and future outlook Statement by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, Port Louis, 8 October 2012. * * * This year, the Bank celebrates its 45th year in the service of the country, which itself prepares to celebrate the 45th anniversary of its accession to independence in March 2013. Looking back over these eventful 45 years, I can see a country that has radically transformed itself and its economy, with the Bank of Mauritius (BoM) having continuously reinvented itself to be part of this change process. At the Bank’s foundation in 1967, there was one major industry, sugar. Today, the economy is well-diversified, with many pillars of growth. We have lived through times when the import cover was less than a week, unemployment hovered around 20 per cent, and our countrymen were emigrating in large numbers in search of jobs, and inflation reached 42 per cent. Today, our reserves represent 5 months of import cover; we have an unemployment rate of around 8 per cent, with 23,000 migrant workers in our country; inflation has declined to less than 5 per cent today. At the time of independence, the rupee was tied to the British pound at a fixed parity under the “Sterling Exchange Standard”. It was then pegged, first to the IMF’s Special Drawing Rights, and subsequently to a basket of currencies reflecting the trade pattern of the country, before moving to a floating regime. Prior to the late 1980’s, monetary policy was implemented through reserve requirements, ceilings on commercial bank credit and administered interest rates. Today, after a free float for nearly two years, we have a managed float, with BoM interventions limited to smoothing excess volatility of the rupee and, since June 2012, also combating unwarranted currency appreciation. The Monetary Policy Committee (MPC), set up in 2007, formulates and determines our hybrid inflation-targeting monetary policy. Our financial sector was underdeveloped at the time of independence when we had only five banks. Today, our banking sector has 21 banks and 216 bank branches, eight non-bank deposit taking institutions, ten money-changers and six foreign exchange dealers. We now have a radically different financial landscape, with parallel changes in the supervisory, regulatory and oversight functions of the Bank of Mauritius. Let me come back to the present day and to the year under review. This is the fifth year of my governorship. I cannot help wonder by what twist of fate I found myself entrusted with the exalted responsibility of steering the Central Bank at such a defining moment in its history. My five years as Governor have coincided with the global financial and economic crisis. They have been five challenging years which have tested my mettle relentlessly. Alas, no dénouement to this crisis is in sight. The crisis will last a while and will continue to pose considerable challenges for the Bank for quite some time. The unending saga of the euro debt crisis, and the spreading distress beyond the Eurozone periphery, heightens the risk of a second European recession in three years. The succession of temporary and temporizing solutions which we have seen, fail to come to grips with the underlying problems. Markets are unimpressed. I am convinced that, in the absence of an agreed long-term vision for the area with a full fiscal union, the Eurozone will hurtle from crisis to crisis. Economic activity lost momentum in many advanced and emerging market economies and their growth forecasts have been consistently revised downwards. The effects were also felt in the foreign exchange markets, leading the US dollar, with its safe-haven status, to appreciate against the euro. The weak outlook for global economic activity quelled inflationary pressures. Unemployment was at exceptionally high levels in the US and worsened in Europe. Against this background, most major central banks continued to implement expansionary monetary policies and breached the limits of monetary policy. BIS central bankers’ speeches The unpredictable conditions prevailing in the global environment led the Bank to experiment with innovative policies within our mandates of price stability and financial stability. Of particular concern to us was the fact that some of our key markets were facing recessionary conditions. We felt it important to step up coordination with the Treasury and we held regular consultations with various stakeholders to ascertain the appropriateness of our responses. This modus operandi gave us added flexibility and enabled us to react faster and to act pre-emptively and thus contributed to maintain a fair degree of stability and confidence in the economy. Our economy grew at a rate of 3.9 per cent in 2011, a commendable performance when viewed in the context of the sharp global economic downturn. Most of the key sectors of the economy recorded positive growth rates. At a time, when most countries have been seeing their ratings downgraded, Moody’s Investors Service upgraded Mauritius’s foreignand local-currency government bond ratings to Baa1 from Baa2, with a stable rating outlook in June 2012. Inflation was on a declining trend and the rate of unemployment remained virtually unchanged. Our public sector debt to GDP ratio has hovered below 60 per cent over recent years. This is no mean feat for a small open island economy like ours. The banking sector continued to expand and recorded solid profits in spite of the difficult global conditions. In the financial year ended 30 June 2012, profits after tax increased to Rs12.6 billion from Rs11.9 billion in the previous financial year. Banks held high levels of capital — the capital adequacy ratio of the banking sector stood at 15.9 per cent at end-June 2012. The ratio of non-performing loans to total loans (NPL) for domestic assets increased from 4.3 per cent at end-June 2011 to 5.1 per cent at end-June 2012. The NPL for overseas assets of the banking sector moved from 0.6 per cent to 1.5 per cent. The overall NPL ratio stood at 3.1 per cent at end-June 2012, up from 2.3 per cent at end-June 2011. In the following paragraphs, I will review the main policy actions taken over the period. • After four years of operating experience, we reviewed the functioning of the MPC. We enhanced transparency with the publication of the minutes of the MPC meetings and the pattern of individual votes beginning with the MPC meeting of December 2011. Legislative amendments severed the formal links of the MPC with the Bank’s Board of Directors. The MPC was reconstituted in March 2012, with four members from the Bank and five external to the Bank, including two foreigners. The focus of monetary policy continued to be the maintenance of price stability while ensuring a balanced and orderly economic development. I maintained a regular dialogue with stakeholders, as much to gain deeper understanding of the domestic economic outlook as to foster better understanding of the Bank’s policy stance. Our monetary policy framework has gained in credibility and we have been successful in anchoring inflation expectations. During the year under review, the year-on-year and headline inflation measures showed signs of moderation, at 3.9 per cent and 5.1 per cent, respectively, as at June 2012. The monetary policy stance was eased as from the second semester of 2011 on concerns over the intensification of the euro debt crisis and its implications for the domestic economy. • The Bank introduced two bold measures in June 2012, in close coordination with the Treasury, to minimize the fallout from the euro debt crisis and the global economic downturn on the domestic economy. The measures targeted the sectors particularly vulnerable to the declining external demand in key markets. We embarked on a programme to build up our foreign exchange reserves, the Operation Reserves Reconstitution. This also helped us to reduce the growing misalignment of the rupee in relation to fundamentals, as confirmed by the studies conducted by the IMF. It resulted in an increase of our gross official reserves from Rs81.5 billion at the end of June 2011 to Rs86.7 billion at the end of June 2012, thereby raising our import cover from 4.6 months to 4.9 months. As this report goes to the press, an adjustment of around 4 to BIS central bankers’ speeches 5 per cent would have been noted in the exchange rate of the rupee as measured by MERI . And we are well on the way to achieve the target of 6 months of import cover that we have set ourselves. The second measure was the Special Line of Credit in Foreign Currency. It was a path-breaking move for a small, but innovative, central bank, prepared to use its own balance sheet in a pre-emptive bid to bail out exposed sectors ahead of troubled times. Through this measure, the Bank went to the rescue of economic operators which were directly affected by the mismatch between the currencies in which their earnings were denominated, mostly euros, and their outstanding debt in rupees. We were giving to highly-leveraged operators a unique tool to restructure their debt so that they would end up with healthier balance sheets. We were particularly concerned by the impact of euro-generated debt-servicing difficulties of operators on the balance sheets of banks. Since the project was launched, the terms and conditions of the line of credit have been reviewed to enhance their flexibility. We have lengthened the maturity and increased the margin to make it more attractive for the intermediary banks. However, there has been a slow take-up; out of the amount of EUR600 million earmarked for this project, only an amount of EUR8.9 million has been utilized so far. • We launched the Cheque Truncation System, which provides for the Bulk Clearing System for low-value electronic transactions, in September 2011. The next step in the modernization of the payments system will be the implementation of a National Switch on which work is proceeding. • In April 2012, we introduced the depository system for Government securities that provides for a strict deliver-versus-payment mechanism for the issue of such securities. This mechanism is aimed at eliminating settlement risks and is in accordance with the recommendations of the Bank for International Settlements for securities settlement. • We broadened the coverage of the Mauritius Credit Information Bureau to include insurance companies, non-bank deposit taking institutions, and utility providers, as well as the Central Bank itself. Thus, a comprehensive picture of the aggregate indebtedness of the prospective borrowers is now available, and this should, under normal circumstances, curb the level of non-performing loans in the system. • We increased the efficiency of the financial markets through the conduct of singlematurity auctions of Treasury Bills and by holding frequent auctions during the week. We eliminated paper bids at auctions and moved to a platform where participants can submit their bids online. We enlarged the spectrum of instruments by introducing a 273-Day Treasury Bill as from October 2011. We introduced single-maturity auctions as from November 2011 to enable the Government to determine its debt profile. New benchmark securities — 3-Year Treasury Notes and 5-Year Bonds — were issued to enhance liquidity in the secondary market. We finalized preparations for trading these benchmark securities on the Stock Exchange to create a proper bond market for Mauritius. Concurrently, the issue of 2-Year and 4-Year Treasury Notes was discontinued in 2012. • The Bank continued its efforts to issue new guidelines and improve existing ones, incorporating the latest developments in international best practices as recommended by international standard-setting bodies such as the Basel Committee on Banking Supervision. The latest guideline to have been issued (August 2012) is the Guideline on Corporate Governance after prolonged consultation with the industry. BIS central bankers’ speeches • The Bank actively participated in both regional and continental fora such as the COMESA Committee of Central Bank Governors, the Committee of Central Bank Governors of SADC, and the Association of African Central Banks (AACB). Since February 2012, the Bank is a member of the Sub-Saharan Regional Consultative Group of the Financial Stability Board, which operates under the aegis of the Bank for International Settlements. In 2011, I had the honour to co-chair on behalf of fellow-Governors the two separate inaugural Joint Meetings between Central Bank Governors and Ministers of Finance for both COMESA and SADC. I also co-chaired the first meeting of the SADC Peer Review Panel held in October 2011 in Mauritius. The Bank hosted the 34th Committee of Central Bank Governors of SADC in April 2012 and the 19ème Conférence des Gouverneurs des Banques Centrales des Pays Francophones in May 2012. In August 2012, I acceded to the Vice-Chairmanship of the AACB and the Bank will be hosting the 37th Assembly of Governors in August 2013. • The Bank of Mauritius is the settlement bank for the Regional Payment and Settlement System (REPSS) of the COMESA. REPSS went live on 3 October 2012. I am delighted that this project in which the Bank has been closely involved since 2007 has finally come to fruition. REPSS is expected to stimulate intra-regional trade. I sincerely hope that it will live up to expectations, and stakeholders and commercial banks will make full use of this system. • Our financial system continues to grow steadily, with total banking assets (Segment A) representing 107.7 per cent of GDP at end-June 2012. On 6 September 2012, we granted our 21st banking licence. This new addition to our financial landscape demonstrates the continuing interest of new operators in our banking sector. • In June 2012, we set up a Task Force on Unfair Terms to look into the terms and conditions of financial contracts. We hope to come up with a Public Consultation Document by the end of the year. We are working simultaneously on the simplification of loan agreements. These initiatives of the Bank aim at improving the efficiency of financial services. • I have on various occasions expressed my concern over the declining saving rate in the country. In an attempt to address the issue, the Bank proposes to provide the public with a new asset class in which to invest. The Gold Bar Project, as the initiative has been named, aims at broadening the range of savings products available to the public while promoting a savings culture. As from November 2012, the Bank will be offering for sale a range of Minted Gold Bars of 10g, 50g and 100g, with or without storage in the Bank’s vault. The selling price of these Gold Bars will be set as close as possible to the price of gold on the international market. Investing in these gold bars would be an excellent hedge against inflation. • In recent years, financial stability has moved to the top of the agenda of central banks. We have fully endorsed this new focus. After an upgrading of our banking supervisory framework which allowed us to implement Basel II as from March 2008, the Bank is now envisaging to implement Basel III. A consultative paper outlining the proposals of the Bank will be issued for consultation by the end of October 2012. Our banks have remained strong during the global financial crisis. The higher capital requirements of the Basel III framework will further enhance their ability to function under conditions of stress and help protect depositors. • The Deposit Insurance Scheme is currently in its final stages after a lengthy process which involved intensive consultation with the banking industry and study visits by our officers to other jurisdictions. This additional safety-net will reinforce the stability of our financial system. BIS central bankers’ speeches • Another issue that requires our attention is that of domestic systemically important banks, the so-called D-SIBs. I had drawn attention on several occasions to the fact that at least two of our banks have developed into big complex institutions, with the potential of posing a threat to the financial system in case of failure. We are currently working on a framework for the monitoring of such institutions which will be required to simplify their structures and maintain additional capital, and possibly write living wills. I am very pleased to note that already two banks, as well as one financial conglomerate, have taken the cue and are restructuring their operations so that they end up with leaner structures. • I am pleased to announce that the net profits of the Bank rose from Rs258.4 million for the financial year ended 30 June 2011 to Rs395.3 million for the current financial year. The sustained improvement in the performance of the Bank was attributable mainly to a combination of operational efficiency and a prudent diversification strategy with respect to reserve management. In 2011, there was a noteworthy change in the Bank of Mauritius Act 2004 with significant impact on the accounts of the Bank. This provision allows the Bank to credit to the Special Reserve Fund all unrealized gains, arising from the valuation of investments held by the Bank, instead of treating them as distributable income, which forced the Bank to liquidate portfolio assets, which it would have been more prudent to keep, to distribute as profits. Words of appreciation I am deeply indebted to all those who have supported me during my two tenures of office. I thank Dr The Honourable Navinchandra Ramgoolam, GCSK, FRCP, our Prime Minister, for entrusting me with the responsibility of leading the Central Bank at this fraught period of its history, and for giving me his support all through. I have had very cordial relations with Honourable Charles Gaëtan Xavier-Luc Duval, GCSK, Vice-Prime Minister and Minister of Finance and Economic Development, and we have been able to join our efforts to keep the economy on an even keel. My appreciation goes to the Honourable Minister and his team. I thank the Chairmen and the Chief Executive of the Mauritius Bankers Association, the Chief Executives of banks, and all the stakeholders for their active involvement and participation in meetings which helped us develop a fruitful collaboration and mutual understanding on the direction that our financial sector and economy need to take. I thank my close collaborators, particularly my two Deputy Governors, the Head of the Governor’s Office, and the staff of my Policy Unit, for their support all the year through. Last but not least, I thank the Staff of the Bank for their support and dedication, particularly those who have been behind the scene. Without their unflinching support and commitment, I would not have been able to function. To all of them, I dedicate the Award of Central Banker of the Year 2012 – Africa, bestowed upon me by The Banker Magazine, of the British Financial Times newspaper group, at the beginning of the year. Looking ahead Looking ahead, we need to be vigilant against inflation – which is our overriding objective. But the challenging environment compels the Bank to continuously change the way in which it functions. Monetary policy has played its role and will continue to do so. But it has its limitations, and expectations are sometimes beyond what it can possibly achieve. We will pursue on our path of innovative policies. We view our mandate in a wider perspective in which other considerations such as protection of consumer interests, governance, transparency, competition and communication are assuming greater importance. This broader macroprudential focus will enable us to stabilize the economy. BIS central bankers’ speeches My final message to my compatriots: The time has come for us to change our mindset. As I have said before, a crisis is too good to waste. Our country should dare measure up to more advanced economies. I am pleased to note that the views expressed lately by the Bank on the need for structural reforms has gained consensus. All stakeholders — public, private sector, civil society — should collaborate to move the country forward to new levels of development through more equitable and inclusive growth. BIS central bankers’ speeches | bank of mauritius | 2,012 | 11 |
Speech by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual Dinner in honour of Economic Operators, Pailles, 6 December 2012. | Rundheersing Bheenick: Past Imperfect, Present Tense and Future Conditional Speech by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual Dinner in honour of Economic Operators, Pailles, 6 December 2012. * * * Taking stock I have been here nearly six years and I thought it opportune tonight to look back, take stock before the past is truly past, and then try to peer into our hazy economic future as we continue to battle through what certainly looks like an extended period of economic uncertainty. The past six years The most obvious change at the Bank in these past six years has been the new and, some might say, sumptuous building. I inherited that, and since moving in, I have been conscious of the necessity for the Bank to deliver even better value for money than in the past. For as Lord Kelvin has said: Large increases in cost with questionable increases in performance can be tolerated only in race horses and fancy women. We had to pay greater attention to our performance. The Bank plays a supportive role in the economy. But the global financial crisis – which happened to coincide with my assuming the role of Governor; I trust not a case of post hoc ergo propter hoc – encouraged me to look a little beyond our traditional role to embrace that of promoting socio-development by giving new life to some of the little-used statutory powers of the Bank. So I set out to improve governance by putting in place the Monetary Policy Committee (MPC). I called upon external talents and developed clear lines of communication with economic agents. The MPC has been worth its salt and I pressed for statutory changes to make it more transparent and accountable by publishing the minutes of its meetings and the individual voting pattern of MPC members. I also embraced an open-door policy responding to the concerns of the various economic stakeholders going well beyond the banking industry, to include real sector operators, academia, opinion leaders, and consumer associations. We have regular public consultations through press conferences and public addresses. I initiated, amongst others, MERI − the Mauritius Exchange Rate Index −, PLIBOR – the Port Louis Interbank Offered Rate − and the Inflation Expectations Survey to focus more sharply on expectations to help us track changing market sentiment. We initiated two new regular reports, one on Financial Stability and the other on Inflation. In addition, we have brought in some internal reorganisation endowing the institution with a flatter structure enabling more delegation, faster response, and greater flexibility in decisionmaking. New operating units were created to address new issues, such as financial stability and Islamic finance, or to give sharper focus to specific work areas such as financial markets and compliance. Banking supervision and regulation were strengthened; the payments system was modernised allowing for cheque truncation and bulk clearing; financial market infrastructure was spruced up with single-maturity auctions of Treasuries; financial literacy programmes were initiated. All these required strong emphasis on capacity-building and training, and continuous interaction with regional and global networks to keep up to the mark. Above all, I have been steering affairs, guided by Rabindranath Tagore’s great prayer, BIS central bankers’ speeches Give me the strength never to disown the poor, nor bend my knees before insolent might. We continue to prize our independence and we defend it in the best interests of the country. Often we remind the most powerful in the land that our concerns extend not least to pensioners and those constrained to live off their savings; for our task at the Central Bank extends to promoting a stable and growing economy for all. It is vital for the Bank to respond to the interests of all sectors, not just the most powerful, the best-connected, or the most vociferous. Now if Paul Getty’s formula for success was …rise early, work late and strike oil I have had to adapt that to the circumstances of Mauritius where there is no black gold. Not finding oil here, the Bank has taken to buying gold; we bought two metric tonnes of it from the IMF in November 2009 for 2 billion rupees: that gold is now worth nearly 3½ billion rupees. The profit from this should pay for a few tower blocks or even a few new botanical gardens. And to ensure all Mauritians have easy access to a similar deal, we now offer for sale to the public solid gold bars; so do come by and make a mint while the stocks last. This offer comes during the course of our 45th anniversary year as the central bank in Mauritius and we have had a series of international events in celebration. As a more lasting commemoration, we shall be issuing a souvenir book on central banking, the economy and Mauritian society. Riding the storm Now, many theorists have speculated on the causes of the continuing international financial crisis − perhaps as many as those whose speculation promoted it! Some here have contributed to this mountain of analysis. On these occasions, I usually offer a new Law to illuminate the issue of concern. We’ve had Maradona’s law of interest rates; Einstein’s law of success; Newton’s laws on physical response; and now I offer you Poul Andersen’s law. This is the obverse of the law of Occam’s razor for simplicity of explanatory hypotheses. So I offer you tonight Andersen’s law of the shaving brush, in which he declared: I have yet to see any problem, however complicated, which, when looked at in the right way, did not become still more complicated. This law underpins much of the writing about the recent crisis. But for my own part I prefer to go straight to the point, as Liaquat Ahmed has done in his brilliant analysis of the Great Depression, when he wrote: More than anything else…the Great Depression (1929–31) was caused by the failure of intellectual will and a lack of understanding about how the economy operated. Similarly, I put down the lingering crisis to the dual impact of market failure in the capital market and supervisory and policy failure at the level of financial boards and the regulators. Incredibly, other banking Boards did not see the demise of Barings as prime evidence of a fatal flaw that could engulf the banking world and much beyond, as it did. To correct this flaw required just a little imagination and courage. Unfortunately, this turned out to be beyond the grasp of every western bank board, every regulator and supervising agency, every Minister of Finance and every Government. Thus the poor tax payer has had to pick up the tab for the gross failure of top financial management, leaving the banksters’ bonuses and golden parachutes largely intact. Those in charge just lacked the courage to ensure that if banks went bust so must the bankers. BIS central bankers’ speeches Which rather reminds me of Lord Salisbury’s observation on the political scene: You will find as you grow older that courage is the rarest of qualities to be found in public life. So, where are we now in Mauritius in the lingering crisis? We’ve done rather well in fact. In the last six years the total assets of banks have expanded by 70 per cent; our 21 banks have almost 35,000 shareholders and employ over 7,000 staff. I have granted five new banking licences, the public now has access to 216 branches with 2.5 million accounts – or 2 accounts per head of population. More than half of the bankable population are internet-banking users. The footprints of our banks stretch from the Indian Ocean islands, to Malawi, Mozambique and Zimbabwe on the continent, and across to Maldives and India. The list of the Top 80 Banks in Africa in terms of assets includes three of our banks. We have consistently logged positive economic growth, and enjoyed social peace with low inflation and moderate unemployment. Despite the lingering global economic crisis, our banking and financial system has remained robust, resilient and well-managed. Strong supervision and prudent management have earned us a coveted place on the short list of countries that actually had a rating upgrade this year when the likes of the United States, France and, more recently, the European Stability Mechanism, have been stripped of their coveted triple-A ratings. Banks in Mauritius have continued to make extraordinary profits, beyond those of even our top six companies in the real economy! Let’s hope our top bankers will share this wealth judiciously with all stakeholders to the benefit of all the people of this land. A fair deal for bank customers is very much at the top of our agenda. It is not exactly a secret although it may not be very widely known in financial circles but we do have very fishy banks in Mauritius – and large ones too. It is also an area where there are many sharks. Worse, these fishy banks are all under water. Now, before you look suspiciously at the banker sitting at your table, let me give you the names of these fishy banks. Do I feel a chill running through our bankers? Out with the names then! They are Sudan bank, Nazareth bank, and Saya de Malha bank. These banks, which do not require a bank licence, are within our territorial waters of 2 million km2 and are very fishy indeed. They provide us with our white fish for the dinner table and occasionally, like now, with a fishy tale for dinner table chat as well. We have here a clear case of fishy banks without fishy bankers. If any of our scoop-hungry press is ruminating over a catchy headline: “Very Fishy Banks in Mauritius, Governor says”. let me gently remind them of the benchmark for this kind of mis-reporting set by a cub-reporter covering the visit of the Archbishop of Canterbury to the US, landing in New York. The Archbishop had been advised to be cautious with the scandal-mongering press. “Be discreet: be very discreet; but with a smile”. On arrival he was hijacked by a bevy of press men clamouring for a story. One reporter asked “What do you think of the night clubs in New York?” Remembering to be discreet, with a smile, the Archbishop ironically responded “Are there any night clubs in New York?” Headlines next day: Archbishop’s first question on landing in New York “Are there any night clubs here?” Some people have continued to express dismay that we are not continuing to achieve the 5% growth that they had come to feel was our birth-right. May I say, this is just unrealistic. It arises from a failure to understand the dynamics of economic growth. These dynamics change as you emerge from the developing to the developed stage. To move into the higher income bracket, escaping the middle-income trap is a long haul. It requires quite different capacities and is not done at the sprint of 5% but more at the pace of a long-distance runner. It is good to remind ourselves − especially if we are inclined to agonise over the estimated 3.4% GDP growth rate this year − that 1% on our national income now is far greater than 5% BIS central bankers’ speeches was twenty years ago. Why? Simply because the national cake is much bigger! Just the annual incremental output in 2012 – at an estimated nominal Rs21 billion – is greater than the entire GDP of the country was as recently as 1987. “Growth at any cost” has never been our credo. Equitable growth, inclusive growth, sustainable growth is what we have been pursuing with, as even the most carping critic must concede, impressive results in terms of rising national income, a stable multi-ethnic society, and a democratic polity. Our track record may not be perfect; our present may be tense; and our future may look conditional – that may in fact well serve as an apt diagnosis of our predicament at any point in our recent history. What we should avoid is the risk of blowing it all by pursuing an unrealistic agenda of higher growth by monetary fixes. Instead of growing at a brisk sprint, galoping inflation is the more likely outcome if we rush down this route. We must adapt to the “new normal” of reduced growth in the western economies on whose coattails our export-driven economy has been riding. What we need to power future growth is not cheap labour but increasing productivity, greater competitiveness, more innovation and a more agile, cerebral management in both the public and the private sectors. But if we have indeed weathered the storm, some of our sails are looking rather shabby, and badly in need of a refit. But what sort of refit do we need? And what sort of strategy must we devise to continue to face up to the turbulent world? Lessons we have learned We should be wise to acknowledge another of oilman Paul Getty’s maxims, this time on banking: If you owe the bank $100, that is your problem. If you owe the bank $100 million, that’s the bank’s problem. Which reminds me of the story of the very distinguished banker, if there are any left standing. Our banker was attending a grand international conference of bankers. The sessions that day had been long, with detailed workshops and breakout sessions. After a formal dinner he paused for a night-cap in a quiet bar in the hotel. As he was relaxing over a screwdriver, his favourite cocktail, a fashionably-dressed lady, slid into the seat beside him, flashed a smile and engaged him in conversation. He could not remember her in the conference sessions, so he explained he was a banker at the conference of international bankers taking place at the hotel. She took up his offer of a drink and settled down with a screwdriver, too. “Much obliged”, she said, sipping appreciatively, and giving him her best come-hither look. As our banker just looked into his glass, wondering who he was dealing with, she added, “I also oblige – for a fee of course.” “I oblige my clients anytime”, she went on. Our banker was trying to puzzle this out. She vaguely reminded him of a Churchillian wartime speech as she continued: “I oblige them in the train; I oblige in the car; I oblige in the office, I oblige in the lift, I oblige on the golf course…” “Oh, blow me!” interrupted our banker, as the penny finally dropped, “why − you are a banker, like the rest of us! Tell me, which bank are you with?” Now, I have sanitised the story considerably for sensitive ears, but you get the gist of it! So, be on your guard when you come across an obliging banker! If there is one thing we must learn, it is how to bring banking and accountancy back in from the righteous wind of public anger, for a refit with refreshed ethics, a new sense of corporate probity and a bolder BIS central bankers’ speeches capacity for corporate governance. That is exactly what we seek to achieve by the new Guidelines on Corporate Governance that we introduced in August this year. Not to be outdone, the Banker’s Association has announced that it is coming up with a new Code of Ethics and Banking Practice. Not a minute too soon, one might be tempted to say! So I must say that I am very pleased to hear that after the Diamond era of super bonuses and the alleged massaging of the figures in rampant rate-rigging, one of the largest banks concerned is to refocus on the retail trade. Good news indeed! For here we are initiating the separation of domestic banking from international banking business, as a sound precaution against any further global infection. Let’s just hope that bankers everywhere remember whose money they are speculating on − not their own money but yours! So what can we learn from the past few years? To be sure, we should be more vigilant in identifying the first tell-tale signs of bubbles. We should be wary of unsustainable credit levels and fat profit margins. Banks must again pursue the function of promoting the optimum allocation of capital, and not just sit on it. We must also remember that real estate is just houses, buildings and land that have fundamental economic, social and environmental functions, only some of whose value appears in the accountants’ books. We need to account for all these functions more clearly. We may also draw lessons for the future as we approach key decisions on advancing the regional integration agenda with Common Market for Eastern and Southern Africa, Southern Africa Development Community, Association of African Central Banks and the rest. For we need forms of management in business and political governance that rise above the self-interest of the nation-state. When 90% of the people of the south western Indian Ocean are living in poverty − I speak principally of Madagascar and the Comoros − we might ask ourselves, not how we can continue to be in the lead at the top of the Mo Ibrahim Index for Africa, but what have we done with that leadership to secure development in our region to relieve poverty, and to promote growth. What we lack now is a clear vision for our future, a long-term picture of where we want to be in 2030 based on greater intra-regional cooperation and reinvigorated trade, amongst others. To turn round the famous Clinton adage on political priorities, it seems to me that on the regional integration issue: It’s all about trade, stupid! A future prospectus We have been promoting greater financial integration and facilitating regional banking initiatives. The IOC is promoting new regional ventures in air and sea transport and in communications; many businesses are extending their regional links. But we would do well to think ahead about combining regional fiscal and monetary management and the development of regional governance through some sharing of sovereignty. But if intra-regional trade is where the EU, and indeed the USA, began, we have yet to reach the starting blocks. We need free movement of capital and labour; we need social union with common frameworks for labour law, portable pensions and social security; we must foster greater international competitiveness and probity; we need fewer cartels and more competition. We need to nurture greater savings and investment with a regional fund for development and less reliance on external aid programmes. Banking union is a very distant prospect; and dare I even mention that far-off dream of a common currency? For our dreams need to keep in touch with reality and not turn into debilitating daydreams. If our dreams are to be, then as Tagore has declared: We have no time to lose, and having no time we must BIS central bankers’ speeches Scramble for our chances. We are too poor to be late… Or as Ovid remarked, for those who still have some Latin: Tempus edax rerum. And for those who don’t have the Latin, I might broadly translate that as Time [is] the devourer of all things. That is why I have put so much effort in recent years into the tasks of getting banking ready for regional lift-off. For I am doing nothing less than banking on the future of Mauritius as a regional leader in this field. We must avoid the pitfalls that are testing the EU, seeing the task not to enrich ourselves but to enrich all the peoples of these beautiful African lands. As I close, let me say that last year some of you were kind enough to say they liked my speech. Others suffered a mild bout of indigestion and were less kind. A few are still smarting from the mere recollection. But words, whether meant in earnest, or spoken half in jest, are just precursors of greater things. I trust that, over my six years as Governor, I have adequately demonstrated that I go well beyond word-smithing. In these matters, I am a disciple of the Athenian Statesman, still celebrated for his rhetorical prowess, Demosthenes, who declared (and here I will save you from the original Attic Greek): First in oratory is action; second is action; and again third is action! BIS central bankers’ speeches | bank of mauritius | 2,012 | 12 |
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the workshop on "Corporate governance", organised by the Mauritius Institute of Directors, Port Louis, 11 January 2013. | Yandraduth Googoolye: Corporate governance Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the workshop on “Corporate governance”, organised by the Mauritius Institute of Directors, Port-Louis, 11 January 2013. * * * Ladies and Gentlemen A very good morning to you. I would like to thank the Mauritius Institute of Directors – the MIOD – for organizing this Workshop on Corporate Governance and inviting me to speak before such a distinguished audience. I understand that this is the second Workshop in this series – the first one was held in November last year at this very same venue and due to the vast interest expressed by its members, the MIOD had to organize this second workshop. Corporate Governance is turning out to be a very topical issue indeed! Not only in Mauritius, but worldwide. International standard setters like the Bank for International Settlements and the OECD, among others, have recommended that bolder initiatives be taken to promote higher corporate governance standards in organisations. These initiatives, as you all know, were driven mainly by the corporate governance failures and lapses noted during the global financial crisis. The crisis has shown that there is not only the need for banks to improve their corporate governance practices, but that supervisors also must ensure that sound corporate governance principles are thoroughly and consistently implemented. But why should banks be subject to more stringent rules than other companies? One would be tempted to ask. Well, simply because banks play a critical role in the economy. They are highly leveraged institutions and most of their funds come from depositors – regulators cannot condone that a customer loses his money on account of lax corporate governance standards being maintained in institutions they regulate. Regulators have the ultimate responsibility of ensuring the safety and soundness of the financial system while at the same time safeguarding the interests of the depositors and the public at large. Hence, it is vital that this special position of trust that banks have in the economy is maintained through principles of good corporate governance. And it is within the remit of the regulators to make sure that these principles are effectively adhered to by banks. Predictably, the best option available to the Bank of Mauritius to ensure that these best practices are being adhered to in the banking sector is to prescribe them in the form of Guidelines. In fact, as far back as 2001, the Bank of Mauritius issued the first Guideline on Corporate Governance, which shows that corporate governance has always ranked high on our agenda. The first Guideline, however, provided only a broad framework of corporate governance whereby banks were advised to put in place a set of parameters without being prescriptive enough. The growth and increasing complexity of banks domestically coupled with the sad experiences which unfolded during the financial crisis, however, heightened the need for the Bank of Mauritius to revisit the codes and principles of corporate governance governing banks. As you all know, the history of banking contains many examples of banking crises. You may recall the high profile failures such as Enron and Parmalat and nearer to us, the failure of BIS central bankers’ speeches banks in the global financial crisis largely attributed to failures in corporate governance and risk management practices and the underpinning poor corporate culture and ethics. In response, many standard setting bodies and banking supervisors around the world have revamped their corporate governance standards requirements and reassessed their adequacy. Whilst these changes may have increased the burden of regulated financial institutions, they provide a safeguard for the financial system as a whole. The Bank of Mauritius has also kept pace with the evolving best practices set by international standard setters and issued a new Guideline on Corporate Governance in August 2012. This Guideline, I must say, was released to the industry after rather lengthy consultations with the banking community and the public at large. The Guideline was issued for public consultation in November 2010 and it was finalized after nearly two years. The Bank of Mauritius adopted a collaborative approach on this front and discussion groups were set up with banks. We even received comments from the MIOD for which we are very thankful and we thank everyone who participated in this initiative. I must emphasize here that the new Guideline has been finalized taking into account the specificities of the local context. Let me now run you through the broad principles underpinning the Guideline. The financial crisis has shown that in certain instances, the Board – which plays a significant role in safeguarding the corporate governance principles and is ultimately responsible for overseeing the organization and management of the company’s affairs as well as the individual board directors were simply unaware of and did not understand the risks taken by the businesses which they were supposed to oversee. Other factors in corporate governance breakdown were attributed to conflicts of interest, lack of board director independence, weak internal and external audit practices and deficient internal control systems. Moreover, the complexity of the organisational structure of some financial firms impeded transparency and disclosure so that the firms’ true conditions were not visible to external parties such as regulators and market participants. The new Guideline on Corporate Governance has thus, attempted to circumvent these shortcomings and uphold the three principles underpinning good corporate governance, namely integrity, transparency and accountability. The Guideline emphasizes the responsibility of boards, their accountability as well as that of the Chairperson who leads the Board. The quality of the people sitting on boards and comprising senior management of financial companies has a direct bearing on the way these institutions are managed. The Guideline, therefore, whilst ensuring that directors meet the fit and proper person criteria, further prescribes for the leadership skills enhancement of board directors. Poor leadership has undermined public confidence in financial institutions during the crisis and has provided many painful but precious leadership lessons to one and all. The Orientation Program for Directors outlined in the Guideline addresses the issue of leadership by ensuring that directors are fully conversant with the principles of leadership, and the leadership training programme has to be approved by the Bank of Mauritius. I am pleased to announce that this Workshop has been duly approved by the Bank. The crisis also brought to light the importance of inculcating a corporate culture which promotes ethical principles. Culture has been described as “the way human beings behave together – what they value and what they celebrate.” The banking crisis revealed a breakdown of the values that promote trust and led to a crisis of confidence in banks. Regulation can propel a change in culture when it is otherwise not feasible, as rightly expressed by the Chief Executive of the UK, Financial Services Authority who stated that the regulator can influence culture by “influencing the composition of management, influencing incentives for good behaviour, influencing training and competence regime and deterring poor behaviour.” BIS central bankers’ speeches The Guideline on Corporate Governance, thus imposes the responsibility on directors and senior management to lead by example in an environment that emphasizes trust, integrity, honesty, judgment, respect, responsibility and accountability. Culture can only be effective when combined with strong leadership. For corporate governance principles to be really effective, the tone must be set from the very top of the organization in order that these principles trickle down to the lowest level of the organization to ensure compliance. The board should actively sustain an ethical corporate culture in the organization. Further, strategic plans and procedures have to promote ethical balance, fair dealing practices must be applied, and a code of ethics must be laid down and communicated to all the members of the organisation. The Guideline on Corporate Governance not only draws from lessons learnt from the crisis, but also aims at addressing corporate governance weaknesses identified in financial institutions during on-site examinations conducted by the Bank of Mauritius and which have not been remedied in line with the recommendations of the Bank of Mauritius. While the 2001 Guideline recommended for a rotation of directors, it was noted that this recommendation has not been implemented to the satisfaction of the Bank of Mauritius. It was found that some boards remained “Pale, Male and Stale” as Governor Bheenick remarked during the first Workshop. To remedy that, we had no other alternative than to limit the term of office of non-executive directors of local banks to 6 years with a cooling-off period of two years before a possible re-appointment. This would allow for more fresh blood in the Boardroom with new ideas, new mindset and, why not, bolder initiatives. Renewal of board members allows new thinking on the board. Nevertheless, we are alive of the need to maintain continuity at the Board level and banks have been granted a transitional period to comply with that provision. In addition, on the issue of directorship, it needs to be highlighted that while the Bank of Mauritius is mandated under the Banking Act 2004 to allow a director to sit on the Board of more than one financial institution, we have taken the view that there is a potential risk of conflict of interest, if we were to allow this. We also believe that all directors should allocate sufficient time to perform their board responsibilities effectively. The Chairperson of the Board must be an independent director under the Guideline. This requirement is based on the principle that effective board debate and discussion require independent board leadership. A strong presence of independent directors implies independent judgment, free of any external influence. The board is further encouraged to appoint a lead independent director. The lead independent director has a potentially major role to play within the board, if there is a potential or actual tension between the Chairman and CEO or, alternatively, where the closeness of the Chairman and the CEO might inhibit the ability of nonexecutive/independent directors to challenge and to contribute effectively to the works of the board. As regards the various sub-committees of the boards, the Guideline makes it mandatory for financial institutions to have an Audit Committee, a Conduct Review Committee for related party transactions and a Risk Management Committee. Board sub-committees represent the arm of the board for those issues that require special competencies. The sub-committees should report regularly and formally to the board which should stand ready to challenge any key issues as the board bears the ultimate responsibility. Corporate governance principles also require the bottom-up flow of information to the board through independent control functions such as the internal audit, compliance and risk management functions. However, the onus remains on the board to ensure receipt of management information as appropriate for the exercise of its oversight responsibilities. We may recall that the global financial crisis revealed weaknesses in corporate governance practices of failed banks where information on the real risks being taken by the institution did not reach the board or even senior levels of management. Even if risk management systems are functioning, the absence of transmission of information to the board and senior BIS central bankers’ speeches management would constitute a breakdown of corporate governance principles. Approving strategy is not sufficient, suitable metrics must be set to monitor the implementation of strategy and the responsibility for such monitoring falls on the board. Internal Audit and Compliance are two independent assurance functions which constitute the eyes of the board in matters of internal control as well as legislative and regulatory compliance. Whilst the Banking Act 2004 already elevated the Internal Audit function in the organization by giving it a direct reporting line to the Audit Committee, the Guideline on Corporate Governance has now enhanced the value and importance of the Compliance function by prescribing that it has a direct reporting line to the board or a board committee. This function has the responsibility of ensuring compliance with legislative and regulatory requirements as well as policies and procedures. Moreover, a compliance certificate has to be delivered by the board to the central bank on an annual basis as we want to ensure that the board is assuming its compliance oversight responsibilities over the activities of the institution. It would be remiss of me, if, in a talk on corporate governance, I did not mention the role of external auditors. The latter provide an independent opinion on whether the financial statements of the bank are complete, fair and properly drawn up with a true and fair view of its affairs. They will also draw attention on any significant matters identified during the course of their audit work. We view auditors as partners in our quest to have safe and sound institutions and expect the highest standards from them. Excessive risk taking by employees and compensation based on short term profitability have often been a serious hit to the banks. Weaknesses in these areas contributed to the failures of financial institutions during the crisis where remuneration systems were not related to the strategy and risk appetite of companies and served more the self-interest of bankers rather than the long term interest of the financial companies. To address this issue, the guideline recommends that incentives be designed to discourage such practices and remuneration for executives, directors and key personnel be fair and reasonable. The Bank of Mauritius will ensure that the provisions of this Guideline are being complied with. In fact, compliance thereto will be factored in the computation of the CAMEL Ratings of banks which are published on the Bank’s website since 2011. The CAMEL Ratings comprise an assessment of the following components: Capital, Asset quality, Management, Earnings and Liquidity. Four of the five components, namely the Capital, Asset Quality, Earnings and Liquidity, are based on objective criteria, i.e. data submitted by banks in their returns to the Bank of Mauritius, whereas the Management component is based on subjective criteria many of which are contained in the Guideline on Corporate Governance. The Bank therefore, expects financial institutions to comply with the provisions of the Guidelines, as noncompliance thereto will have a bearing on the Management component in the CAMEL rating of banks. On this note, may I conclude by commending the initiative of the MIOD to organize this workshop and assist stakeholders to better understand the Bank’s Guideline on Corporate Governance. I am confident that participants will benefit from it. May I also congratulate the Institute for its relentless efforts to improve professionalism and ethics in our corporate entities. I thank you very much for your kind attention. BIS central bankers’ speeches | bank of mauritius | 2,013 | 1 |
Keynote address Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at a function to mark the successful issue of the second tranche of Notes under the Omnicane Multicurrency Medium Term Note Programme, with Standard Bank (Mauritius) as the Lead Arranger, Ebène, 21 January 2013. | Rundheersing Bheenick: Ticking the right boxes – financial market development in Mauritius Keynote address Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at a function to mark the successful issue of the second tranche of Notes under the Omnicane Multicurrency Medium Term Note Programme, with Standard Bank (Mauritius) as the Lead Arranger, Ebène, 21 January 2013. * * * What a pleasure it is to be here this evening to mark the continued success of both the issuer, Omnicane, and the Lead Arranger, Standard Bank (Mauritius), with their Multicurrency Medium Term Note Programme. And just in case anyone thought that this is not reason enough to celebrate, we are also marking the entry of OMNICANE as a 25% equity partner in a US$200 million sugar complex in Kenya, after closure of a US$120 million loan, again arranged by Standard Bank but, this time, jointly with the PTA Bank. What a wonderful way to start the New Year – on a such strong note of confidence, especially after the pessimistic mood that had been dogging us in the second half of last year! Well done, Omnicane. Well done, Standard Bank. I hope that as the year progresses, we shall be celebrating more similar successes. This financing and investment package ticks so many of the right boxes that it’s difficult not to get excited about it. • It scores very high marks on banking and financial market development. • It confirms the return to health and renewed vigor of the domestic sugar sector in its latest avatar as a cane industry. • It attests to the growing regional interest in Mauritian savoir faire. • And it illustrates the dynamism of our offshore banks operating in our international financial centre. Let me say a few words on each of these points in turn. First, banking and financial market development Bank-of-Mauritius-watchers – at least those who go beyond the widespread fixation with our monetary policy – know that financial market deepening has been a major focus of central bank action in recent years. Progress has been frustratingly slow and all of us, not just the Bank, need to step up our efforts considerably, if we are to have a financial market which is more aligned with our financing needs as a middle-income country. Some of the building blocks are already in place. We now issue single-maturity instruments at our regular auctions of Government paper. We have introduced benchmark bonds of 3-year and 5-year maturities. We have been working closely with the Stock Exchange authorities to start trading of Government securities on the stock market. This can be expected to result in a reference yield curve, a key element in the development of a corporate bond market. Our financial sector is dominated by bank lending. A recent IMF study on bond markets in Africa1 1 finds that these markets are at a nascent stage, with corporate bond market capitalization accounting for just 1.12% of GDP in the last decade. For us Mauritians who are used to see our country in the top rung of African league Yibin Mu, Peter Phelps & Janet G. Stotsky, “Bond Markets in Africa”, IMF Working Paper No. WP/13/12 (Washington: International Monetary Fund). BIS central bankers’ speeches tables, it may come as a jolt to learn that this is one area where we do not have bragging rights. Quite the opposite, in fact. Out of 28 Sub-Saharan countries analysed, we trail in as Number 13 just behind the Central African Republic, at one-fifth of one percent of GDP. We must do better, much better. The Medium Term Note Programme, whose second issue within one year we are celebrating, does take us in the right direction. This Rs2 billion Multicurrency Medium Term Note (MTN) Programme is a serious contender for the record book. It is the very first such instrument issued by a listed entity in Mauritius. Also, the amount raised under a single issue is a record for the Mauritian market. Although not a bond, the MTN is an alternative source of financing to bank lending. The participation of banks in the MTN illustrates that alternative debt instruments and bank financing are clearly complementary. Our well-capitalised banking system, our creditable inflation record, and our exchange rate stability augur well for faster growth of the corporate bond market. This will in turn have a favourable impact on financial and economic stability. So, this is one box that I tick enthusiastically, with a well-deserved pat on the back to both the issuer and the lead-arranger, while also renewing my call for greater diligence to the other partners with a crucial role in domestic bond market and secondary market development to catch up on the 12 Sub-Saharan countries that have trounced us in this field. Second, the transformation of the erstwhile Sugar industry into a cane industry. Government embarked last year on an Economic Transformation Programme. It can draw some inspiration from the example of the sugar industry which has undergone a total transformation on the back of some Schumpeterian “creative destruction”. As is well-known, the local sugar sector found itself with its back to the wall when faced with a drastic 36 per cent cut in sugar export prices following the reform of the EU Sugar Protocol to make it WTO-compatible. There were dire predictions that the industry was going the way of the dodo. It had to shed excess fat and had literally reinvent itself to survive. With public/private collaboration of a kind rarely seen before, an industry that was widely seen as being on its last legs successfully transformed itself into a modern cane cluster. This cane cluster has emerged from an industry that until recently, owed its survival to the continued generosity of the EU taxpayer and was content to export raw sugar in bulk for refining in Europe. It now produces several types of sugar such as raw sugar, special sugars, industrial sugar and white sugar; it also supplies firm power to the national grid from bagasse/coal co-generation using state-of-the-art technology; and it will soon produce ethanol using molasses. Today, Mauritius is a successful and reliable exporter of refined sugar to Europe. With its flexi-factory, Omnicane is the very emblem of this transformation. There are useful lessons in this transformation for others operating in other sectors of the economy: Adapt or Perish. I had the pleasure of visiting Omnicane last year. I was quite impressed by what I saw there, particularly by the spirit of innovation and efficiency that permeates the whole organization. I am trying not to sound like a publicist for Omnicane – but it is quite an operation, believe me. I congratulate all those who played a role in transforming an industry, doomed to a slow death in the view of many, into an avant-garde cane industry with impeccable green credentials. Sugar may not be King anymore, but it certainly does not show any sign of becoming plain common Citizen cane anytime soon. There’s life in the old dog yet. After its important contribution to the integration of the sugar sector in Mauritius, I am delighted to note that the company has consolidated its position on export markets by acquiring a 20% equity stake in a large UK-based non-refining distributor of sugar in Europe. Omnicane clearly has the wind in its sails. It is hardly surprising that investors and lenders are rewarding it by subscribing to this second issue of Notes of Rs920 million, bringing the total BIS central bankers’ speeches issue to-date to Rs2 billion – and doing so with a fixed rate coupon which is 145 basis points lower than the first issue. This brings me neatly to my next point. Third, growing regional interest Part of the proceeds of this second Notes issue will finance OMNICANE’s domestic investment in the next stage of the flexi-factory. The remainder will support their ventures overseas, especially in the region. And this is where the US$120-million loan package comes in. Omnicane has a 25% equity stake in Kwale International Sugar Company Limited near Mombasa in Kenya, with an option to increase its participation to 50%. Omnicane will operate and manage the complex which will produce ethanol, electricity and cane sugar, on the lines of what it does in Mauritius. This is the latest chapter in successful Mauritian involvement in the sugar industry in Africa, which has a long and respectable history. In a previous capacity, I was involved in a Lenders’ meeting to mount a financing package for the first major investment from Mauritius into Mozambique – the MARROMEU Sugar Project. This followed in the wake of the SUCRIVORE Project in the Ivory Coast, to be followed later by the TPC project in Tanzania. Let me salute the boldness of the different sugar groups concerned which did not hesitate to invest in Africa at a time of negative perception about the Continent and its prospects. Besides the co-arrangers, Standard Bank and the East and Southern African Trade and Development Bank, known as the PTA Bank, five other banks have participated in this loan, including two Kenyan banks, Kenya Commercial Bank and Cooperative Bank of Kenya. I note that three Mauritian banks are also participating in the financing, namely State Bank of Mauritius, Mauritius Commercial Bank and AfrAsia Bank. Which gives me an extra reason for satisfaction. Our banks are increasingly playing an important role by extending their footprints in the region and accompanying our investors in their overseas ventures. The latest ranking of the African Banker shows that seven Mauritian banks now figure among the top 100 African banks. Our banks are robust and have undoubtedly contributed to the resilience of our economy during the global financial crisis. Far be it for me to trumpet this, but let us never forget that this happy state of affairs is the result of the strong regulatory and supervisory framework put in place by the Bank of Mauritius. Let me say a word about our relations with Kenya. Last year, I was in Nairobi to sign a Memorandum of Understanding with Governor Ndung’u of the Central Bank of Kenya to enhance mutual co-operation in the supervision of our financial institutions. It is a little-known fact that our relations with Kenya in the financial sphere go back to preindependence days. The Kenya-based Jubilee Insurance invested then in an operation in Mauritius, which is still present today. More recently, I & M Bank of Kenya joined forces with a Mauritian conglomerate, with diversified interests in agriculture, hotels, tourism and manufacturing to take over a local bank. In the other direction, another large Mauritian multinational conglomerate, involved in diverse activities ranging from insurance and leasing to banking and distribution, invested as a minority partner in one of the rapidly-growing Kenyan banks, Equity Bank. The same conglomerate ended the year with another joint venture in Kenya, this time in the furniture retail business. So Kenya and Mauritius are living examples of increased South-South cooperation and South-South investment, which mean more FDI flows among the Southern countries. It seems that the wish I had expressed at the signing ceremony with my Kenyan counterpart that the relations between Mauritius and Kenya tighten further, is fast being fulfilled. Conclusion Let me now conclude. This financing and investment package that we are celebrating this evening has allowed us to tick so many boxes on the long to-do list on our financial sector BIS central bankers’ speeches development agenda. We are slowly but surely moving forward. The road ahead is long, bumpy, and certainly not risk-free. But I have no doubt that the Notes issue by Omnicane will prove to be a milestone in this long journey. It would be remiss of me to conclude without giving some good marks to Standard Bank for taking the lead in this initiative. Since the bank set up shop here in 2001, its business has expanded significantly. During the last five years, the bank’s total assets have increased three-fold. It now ranks 6th in terms of total assets of the banking sector. The bank’s previous CEO, Chris Clarkson, was constantly fighting for financial deepening and the development of the domestic debt market. It became something of a hobby horse of his – one that I was quite happy to share with him. His successor, Lakshman Bheenick, has continued the struggle. The bank is now reaping its just reward. We invite the bank to continue to include Mauritius in their growth plans for the region and to make greater use of the Mauritian jurisdiction for their regional operations. We can give a terrific boost by overcoming the resistance we see in some quarters to the introduction of new financing instruments such as sukuks and inflation-protected paper of different maturities. These would work wonders for the financial market, attract new business, and ease intermediation between savers and investors. So, I say to Standard Bank: Keep pushing. Let me reiterate my congratulations to the promoters of Omnicane who had the foresight to take the right decisions at the right time, contributing to convert a sector that was heading for the rocks, into a model of how an industry can reinvent itself in the face of daunting challenges. Thank you and the very best of luck in your future endeavours. BIS central bankers’ speeches | bank of mauritius | 2,013 | 1 |
Letter by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, to stakeholders, Bank of Mauritius, Port Louis, 4 February 2013. | Rundheersing Bheenick: “Steaming on … in uncharted waters in storm-tossed seas” – five years of steering a central bank in a small, open island state and keeping the economy on an even keel Letter by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, to stakeholders, Bank of Mauritius, Port Louis, 4 February 2013. * * * On 28 December 2007, from my vantage point as newly-installed Governor, I issued my first Letter to Stakeholders to plug what I felt was a gap in our communication. I saw it as a vehicle to review developments in the economic and financial landscape and to give interested stakeholders a flavour of the Bank’s actions during the past year. It was the year of the Bank’s 40th Anniversary celebrations. Less auspiciously, it was also the year when the first tremors of an impending global financial crisis began to be felt in specialized corners of the financial market dealing with esoteric sub-prime mortgages originating in the US. 2. Five years on, the Letter to Stakeholders is well-embedded in the calendar of publications of the Bank, with its release much-awaited, not least by the local financial press. Five additional years in the life of the institution, five years at its helm as Governor, and five years of unending crisis, to boot ― surely all this requires us to pause awhile, look back over those tumultuous, challenging yet ultimately rewarding, years and take stock of the progress achieved. But, first, a brief assessment of 2012 and the perspective for 2013 may provide some context. 3. The Global Economy 2012 has proved far more turbulent, uncertain and painful than most economists had predicted. The European Union, hailed until recently as the nec plus ultra of regional cooperation, came on the brink of implosion, with the rest of the world holding its breath in anticipation of the expected global crash likely to follow in the wake of the widely-predicted “Grexit” which would bring the eurozone to an ignominious end. Across the Atlantic, the US economy was hardly in better shape, barely managing in the nick of time to surmount its “fiscal cliff” before the predicted financial catastrophe. Fortunately, emerging market economies, though wounded, managed to pull the world economy round. In such exceptional circumstances, central banking in advanced economies had to be reshaped to accommodate unconventional policy measures, which would have been clearly beyond the pale for central bankers a decade earlier. 4. So here we are, at the start of 2013, facing the same questions as in preceding years: when shall we finally see an end to the global economic crisis and a sustained rebound in growth and job creation? As we start the New Year, there are tentative signs that the global economy is finally picking up, with growth momentum building modestly and financial conditions becoming more supportive. But the transition is likely to be slow and fragile. Even as we see some global growth, the legacy of subpar performance over the recent years is expected to play a major role in influencing investment and macroeconomic performance in general in 2013 and beyond. Doubts persist over the sustainability of the timid recovery once the flood of central bank money, propping up economic activity in the advanced countries, begins to be withdrawn ― as it clearly must if we are not to see an unprecedented debasement of major reserve currencies, hand in hand with runaway inflation. 5. The Mauritian Economy For Mauritius, the odds of surviving intact in the face of the global turmoil over the past five years were very thin at best. We have a small open economy, heavily dependent on exports to the European Union, and we have been unable to rely significantly on regional or domestic demand to pick up the slack from depressed conditions in our traditional markets. Nevertheless, we avoided recession and have come out rather well. Key factors here were the support from the fiscal stimulus at the beginning of the crisis and an appropriately accommodative, but much-maligned, monetary and exchange rate policy that have together allowed the domestic economy to continue recording positive BIS central bankers’ speeches growth rates even as some major trading partner economies were contracting. The added adaptive advantage arising from our smallness proved to be a real asset in these troubled times. In addition, our closely-regulated banking system was not drawn into the seemingly very lucrative, but high-risk, operations that proved fatal to banks in many advanced economies and we have had no banking failures or bailouts. 6. It is evident, however, that our economy is still operating below its potential. The crisis has shown up the shortcomings of the inertia in much of our trade for both goods and services, where we have seemed locked into previously successful, but fragile, strategies that have left us at the mercy of external market and policy failure. While the lesson has been learnt, many sectors have been caught wrong-footed and are now scrambling to diversify products and markets. 7. My own personal experience at the Bank The uncertainty and instability prevailing in the global economic and financial environment have kept me on my toes. It was a path full of challenges that confronted me, a path strewn with obstacles where I sometimes stumbled and where I found myself, like many fellow-governors elsewhere, regularly attacked, sometimes ridiculed, and even scorned. But I always emerged, often bruised, but more determined than ever, motivated by the unchanging desire to rise to the constantly-changing challenge, raise the profile of the Bank, and transform it into a modern and innovative institution that fulfils its mission confidently and efficiently for the sustainable development of the Mauritian economy. We had our share of achievements, small victories and successes obtained with great satisfaction. 8. The decisions and actions that I took at the Bank over the last five years have been directed towards maintaining financial and macroeconomic stability – this, as the global financial crisis revealed, is the most important function of a central bank. This overriding consideration has guided all my decisions and actions. However, given the highly uncertain and unstable global environment, flexibility and promptness in action turned out to be key elements in our decision-making. I saw the need to bring some key reforms to the organisational structure of the Bank. For operational efficiency, the Bank was restructured into a more flexible institution. New divisions were created to monitor areas that I had foreseen would be critical in the years to come, among which the Financial Stability Unit to monitor and assess the risks to financial stability and associated macro-prudential policy. Our strategies have borne fruit and the Bank’s contribution to financial and macroeconomic stability has been recognised locally and internationally. 9. Let me sketch the broad outlines of the Bank’s policies and actions during the past five years, which flow from this overriding consideration. 10. Monetary Policy At the very start of my tenure as Governor, I set out to remedy what was, to my mind, a major flaw in our approach to monetary policy decision-making. Although it had been three years since the new Bank of Mauritius Act had been enacted, with explicit provision for the creation of a Monetary Policy Committee (MPC), the interest-rate decision process had remained unchanged. One of my first moves as Governor was to establish this Committee, which was officially launched in April 2007. Soon after the first meeting, I proposed that amendments be brought to the law to enhance the independence of the MPC. 11. It was also a decisive stride towards improving governance at the Bank. I wanted more transparency and accountability at the level of the MPC and instigated a major review after it had been in operation for four years. The review resulted in two major changes, firstly in the composition of the MPC and, secondly, in the publication of the minutes of the meeting, including the voting patterns of individual members. 12. The establishment of the MPC with its enhanced transparency and accountability made monetary policy gain increasing credibility in the eyes of the public. We complemented our action by developing clear lines of communication with economic agents and adopted an open-door policy to respond to the concerns of the various economic stakeholders including real sector operators, academia, opinion leaders, and consumer associations. I held regular BIS central bankers’ speeches public consultations through press conferences and public addresses. Today, inflation expectations are well-anchored and it has become much easier to interpret and understand monetary policy decisions. The Bank has been successful in disinflating the economy and has brought down the inflation rate to less than 4 per cent in 2012 from 10.9 per cent in April 2007. 13. Exchange Rate Policy Many of you will recall that the value of the rupee was in free fall in the years preceding my nomination as Governor of the Bank of Mauritius in 2007, paving the way for a one-way bet against the currency and fuelling unsustainable over-borrowing in rupees. It was clear to me that this would plague the economy with speculative transactions and constrain our move to the next stage of development. Exchange rate stability was the necessary condition that we had to satisfy if we were to stand any chance to succeed in realising the vision of our political leadership to build Mauritius into a vibrant international financial centre of repute. 14. My stance was to favour a stable currency, given our euro-biased exports and dollar-biased imports and the high exchange-rate volatility witnessed in the international forex market during the global financial crisis. A stable currency would remove foreign exchange risk, thus providing some element of certainty in doing business for both importers and exporters. To pursue this stable exchange rate policy, the Bank continued with its methods of adjustment and fine-tuning but never shied away from doing what we assessed was right under the varying circumstances faced by the economy. More recently, the Bank has attuned its policy to mitigate further appreciation pressures on the exchange rate value of the rupee to avert the adverse potential impact of the worsening euro debt crisis on key sectors of the economy. I firmly believe that the real test of our management of exchange rate policy has emerged in the medium-term perspective over the five years for a short-run view can be very misleading, even if it makes good headlines in the media. 15. Modernisation of the Financial Market infrastructure When I took over as Governor in 2007, I discovered that the growing financial sector, in particular the offshore segment, and increasing cross-border transactions posed new and complex challenges to the existing payment system infrastructure. I realised that the financial market infrastructure needed a major overhaul to meet these demands. So the first decision that I took in this area was to replace the existing real-time gross settlement system – the Mauritius Automated Clearing and Settlement System (MACSS) – with another application that was built on a more resilient architecture and supported multi-currency transactions. The extended capability of the system has no doubt been a major contributing factor behind the appointment by COMESA member-states of the Bank of Mauritius as the settlement bank for its Regional Payment and Settlement System, whose operations we now host. We pursued our modernisation process with the implementation of the Cheque Truncation System, which provides for the bulk clearing of low-value electronic transactions. I set out, during my tenure, to extend the coverage of the Mauritius Credit Information Bureau (MCIB) to all types of credit institutions operating in the economy. The MCIB has over the years emerged as an essential risk management tool for banks in their lending activities. 16. Over the past years, the card-based payment method has assumed growing importance in the economy and it is expected to make further inroads on cash and cheque-based settlement. The systemic importance of card transactions may pose a threat to the stability of the financial system if left unattended. In line with our mandate to ensure the stability and soundness of the financial system, I saw the need to revisit our erstwhile hands-off approach to this sector and move to regulate it properly. The Bank will thus set up and operate a National Payment Switch (NPS) by the end of the year. The NPS is a national, multifaceted switching platform for various payment channels and it will settle the net positions of banks on the MACSS while reducing the cost of transactions and routing costs via the reduction of interconnection charges and merchant fees, in particular on domestic transactions. The NPS will therefore address the inefficiencies of the current setup and provide a level playing field to all banks and operators. BIS central bankers’ speeches 17. I also devoted a lot of attention to deepening financial markets, the other leg of the modernisation of the financial market infrastructure. Small size and lack of depth have always hampered the development of the domestic money and foreign-exchange markets. I have introduced a number of measures to bring down the surplus of liquidity and enhance both the price-discovery process and the transmission mechanism in the money market. I am particularly pleased to note the progress achieved on this front by end-2012. It is even more encouraging to note that private initiatives have been coming forward to build on the current momentum. The current context in which Mauritius is viewed positively by international credit rating agencies, the low interest rate and inflation environment, and the prudent fiscal path and public debt levels provide increased traction to speed up the country’s transformation into the long-awaited sophisticated international financial centre that would generate income and jobs for generations to come. 18. Reserves Management Reserves are strategic for a country to survive trade shocks and economic crises as they act as the first line of defence. It was clear to me that a more efficient management of these reserves would provide rich dividends to the country. Over the five years since 2008 I have found managing foreign exchange reserves an increasingly challenging task. Monetary policy worldwide turned significantly accommodative and a number of major central banks implemented quantitative easing, resulting in progressively lower yields on our reserves. I instigated a review of the Bank’s investment strategy given the low profitability of operations. In an attempt to increase returns while containing risks, we reduced our exposure with foreign commercial banks (which were being de-rated), reviewed the investment horizon, invested in cash and near-cash instruments, and increased our holdings in high-yielding currencies even as we moved to include new currencies in our portfolio. In November 2009, the Bank purchased two metric tons of gold from the IMF, to diversify our portfolio further and mitigate the impact of currency volatility. Subsequently, I also increased our share of investment in fixed-income instruments. I am happy to report that the diversification strategy, coupled with enhanced operational efficiency, translated into higher net profits for the Bank: Rs395 million in FY 2011/12, from Rs258 million in FY 2010/2011, and just Rs72.4 million in FY 2009/2010. And we managed to do this at a time when many central banks and fund managers were actually making losses. In June 2012, we launched the Operation Reserves Reconstitution to maintain a more comfortable import cover and to combat unwarranted appreciation of the rupee. The Bank’s gross external reserves at end-December 2012 amounted to USD3.0 billion (Rs93.0 billion), having risen from USD1.3 billion (Rs44.7 billion) at end-December 2006. 19. Regulation and Supervision At the time of my appointment as Governor, the Prime Minister, as the nominating authority, shared with me his vision of a sophisticated financial system that would contribute to make Mauritius a recognised international financial centre. This vision included a banking sector that could aspire to become a regional leader in the field. I proceeded to flesh out this vision. I imagined a vibrant, competitive, transparent, robust and profitable banking sector further extending its footprints in the region and beyond, but always well-regulated and enhancing the reputation of its home jurisdiction. 20. My assessment of the regulatory and supervisory framework in place at the time revealed that the framework was adequate although there were some areas that required strengthening to enhance the performance of the banking sector and the financial system. Some of these areas were highlighted in the report of the IMF/World Bank Financial Sector Assessment Programme team that was concluding its field visit to the country just as I was stepping into the shoes of Governor. New rules had in the meantime also been released by international standard-setting bodies e.g. those of the Basel Committee on Banking Supervision and the International Accounting Standards Board. Armed with these, we took measures to build confidence in the integrity of the banking system and encourage banks to improve their performance. We instilled more competition in the sector by opening up to new players as part of our efforts to reduce intermediation margins and provide a fairer deal to bank customers. And we continued to strengthen our regulatory and supervisory framework BIS central bankers’ speeches to align it with emerging international best practice resulting from the global regulatory reforms triggered by the crisis. 21. It may appropriate here to comment en passant on the largest fraud to have ever been unearthed in the domestic banking sector, the MCB/NPF case, a financial scandal of the bank-within-a-bank type that came to light in 2003. It has been an eye-opener for the Bank, prodding us to step up the surveillance and supervision of financial institutions under our purview. This case still awaits resolution ten years later and the perpetrators are yet to be held accountable as the various associated cases laboriously wend their way through the legal process in domestic and British courts. This stands out in sharp contrast to the rapidity with which prosecutors and regulators in major money centres have reached settlement with several universal banks for a range of crisis-related misdemeanors and malpractices, with record fines. The glaring absence of an efficient banking resolution mechanism may be a brake on our attempt to transform our jurisdiction into an international money centre. 22. Another source of concern is the dominating presence of a couple of large complex financial institutions in our banking sector and their systemic importance – the so-called Domestic Systemically Important Banks. To mitigate the systemic risks that such institutions could pose to the system, I have urged those banks to reduce the complexity of their structures by separating their banking from non-banking activities. This will enable us to clarify the regulatory perimeter and assist in efficient resolution, should the need arise, without having recourse to taxpayers’ money. In the same vein, we have encouraged branches of foreign banks operating in Mauritius to convert into locally-incorporated subsidiaries that would give us more effective control and greater ability to act independently in conditions of stress. We have met with some success on this front, and the process of conversion of the branch of a major foreign bank into a local subsidiary is at an advanced stage. 23. We raised some hackles when we moved to adopt what many considered an overly intrusive approach regarding governance at the level of bank boards. A major lesson learnt from the global financial crisis was the failure of board oversight. What happens in bank boardrooms is of vital importance for the smooth functioning of, not just of the bank concerned, but also the economy as a whole. We have brought major changes to our Guideline on Corporate Governance to prescribe rotation at board level and limit the tenure of board members to six years. Domestic realities and capacity constraints dictated a flexible approach to smooth the transition to the new regime. 24. Today, our banking sector is very vibrant, well-regulated, robust, profitable and increasingly transparent. There are new financial product offerings including Islamic banking and forex futures. It attracts growing interest from investors – three new banks have set up shop in six years. Some of our banks have set up subsidiaries in the region, with more now figuring in the Top 100 African banks. Mauritius is one of the rare countries in Africa to be Basel-II-compliant and we are now ready to move towards Basel III. There are however a few signs that are less comforting and that need to be addressed. The sustained increase in credit growth in some specific sectors could be an early indicator of incipient asset bubbles. Also, the rise in non-performing loans noted during the year does not augur well. 25. Developmental role of the Bank In the aftermath of the global financial downturn, central banks assumed, in truth, a more central role as they stepped in swiftly to shore up their economies and restore confidence in the financial system. The Bank of Mauritius did not shirk its responsibility and jumped into the fray with a number of unconventional measures to support the economic and social development of the island as the effects of the crisis began to reach our shores. These included (i) the provision in December 2008 of a Special Foreign Currency Line of Credit of USD125 million for trade financing (ii) the extension of a preferential line of credit to small sugar-cane planters faced with a sharp reduction in their revenue, and (iii) our full support to the Small and Medium Enterprises Financing Scheme – a limited form of directed lending which was initiated by the Ministry of Finance to ensure that BIS central bankers’ speeches SME’s had adequate access to bank credit. More importantly, the Bank introduced a Special Facility in Foreign Currency for an amount of €600 million to help highly-indebted economic operators, in the export-manufacturing and tourism sectors, suffering from the compression of margins in depressed market conditions, the weakness of export currencies, and the mismatch between their earnings in foreign currency and their debt in rupees. The Bank made a pre-emptive move to forestall any knock-on effects on the balance sheets of lending banks, which could have posed very serious risks to financial stability in view of some inherent characteristics of the local credit landscape relating to the interconnected nature of much lending ― across borrowers, sectors, and banks ― which presented clear contagion risks. 26. Financial inclusion Good supervision cannot be dissociated from the need to ensure that the best interests of consumers of financial services are protected. As far back as 2007, two flagrant areas where the consumer was not getting a fair deal came to my attention: the high interest rates on loans and opaque fees and commissions. One of my first actions was to request all banks to publish their principal interest rates, fees, charges and commissions, using a standard template to enable customers to better compare the cost of services provided. This took effect in November 2008. In the same spirit, the indicative exchange rates of individual banks are now published daily on the Bank’s website for public information since September 2009. In 2012, I initiated work to impose a cap on fees and charges for services provided by financial institutions and actually imposed the maximum allowable margin for same-day trading of forex. I also established a Complaints Desk at the Bank and made it mandatory for each domestic bank to set up its own complaints desk. Furthermore, I instituted a Task Force on Unfair Terms and Conditions in Banking and Related Financial Contracts ― this work is ongoing. 27. A new communication culture When I joined the Bank in 2007, I was struck by the very conservative manner in which the Bank communicated, mostly to a very limited and specialized audience. No wonder that few of our countrymen could grasp the essential functions that a central bank performs in an economy. This lack of understanding made the work of the Bank less effective because the public could not relate to it or understand that it was in fact their own interests that the Bank was meant to promote. So I decided to embark the Bank on a new communication drive ― not without some misgiving from some quarters which saw this central bank activism as a transgression. In the past five years, I have made 80 local addresses, held more than 35 press conferences, and given innumerable press interviews and statements in both the local and international press. 28. The process of increasing our dialogue with a wider range of stakeholders of the economy brought many critical issues to light which enabled us to take several initiatives to respond to the identified needs. In the course of this transformation, the Bank was able to take more-informed decisions, and its visibility increased ― as did the public’s understanding of our various actions. Our web site has been upgraded and all information pertaining to the activities of the Bank are posted in real-time. In parallel, we launched financial literacy programmes to increase the awareness of our citizens to enable them to make better use of available financial products and of redress mechanisms available to them. 29. Let me here highlight the significant improvement in the quality, frequency, and timeliness of central bank statistics which since February 2012 have met the stringent requirements of the IMF’s Special Data Dissemination Standards (SDDS). We are now engaged in the process to move to the even higher SDDS+ standard. 30. Regional cooperation and International visibility I have long held the view that tiny Mauritius cannot unlock its full development potential without accelerating its integration in the sub-Saharan Africa region. I have pursued this line during my mandate at the Bank which saw our increasing participation in various fora under the auspices of SADC, COMESA and the AACB to advance the regional and continental integration agenda. In 2011, I had the honour to co-chair, on behalf of fellow-Governors, the two separate inaugural Joint Meetings BIS central bankers’ speeches between Central Bank Governors and Ministers of Finance for both COMESA and SADC. I also co-chaired the first meeting of the SADC Peer Review Panel in Mauritius in October 2011. In August 2012, I acceded to the Vice-Chairmanship of the AACB and the Bank will be hosting the 37th Assembly of Governors in August 2013. In February 2012, the Bank was invited to become a member of the newly-established Sub-Saharan Africa Regional Consultative Group of the Financial Stability Board. In October 2012, we successfully launched the Regional Payment and Settlement System of COMESA, which is hosted at the Bank. 31. Way Forward Over the past years, I have been constantly griping at the slow and long-drawn-out pace at which we are embracing change in much of the economy and in many of our institutions on which we depend to accelerate growth and development. It is widely recognised that we need to be quicker on our feet, more open to the process of innovation, more agile in exploiting alternative markets and new products and services, and much more willing to change our policies and procedures. Global economic poles are irremediably shifting to new centres in the East and to the South. Nearer to us, Africa is on the move. We must be quick to engage in the competition for the opportunities offered by the resource-rich, growing and more stable African continent. A higher growth path requires us to pay greater attention to international competitiveness. We must become more productive, shedding unnecessary layers of bureaucracy and ensuring greater probity in procurement, in both the public and private sector. Economic history, as embodied in the relatively recent Asian success stories, leaves no doubt about the importance of more efficient production and ease of doing business. 32. Our monetary policy strategy will continue to be guided by our primary objective of price stability and the promotion of orderly and balanced economic development. Central bankers worldwide continue to accumulate evidence that low and stable inflation allows all economic agents to make better decisions on savings and investment ― the key conditions for sustained growth. 33. Going forward, we shall continue to ensure that monetary and exchange rate policy is formulated taking into consideration the interests of all stakeholders of the economy. While the fundamentals of the economy seem fairly strong for now, I am particularly concerned about the persistently high current account deficit, which mirrors a worryingly low savings rate. As our main export markets in Europe grapple with fairly bleak economic prospects in the foreseeable future, it is vitally important that we do not reduce our structural reform efforts to raise the productive potential of the economy and prepare for the heightened competition which we are likely to encounter on foreign markets as the recovery takes hold. 34. The Bank remains ever vigilant to potential risks to financial stability that could hamper our progress to another plane of development. On the regulatory front, we are moving forward with the implementation of Basel III. We shall introduce more stringent conditions, including higher capital requirements, as we step up our endeavours to address the risks posed by Domestic-Systemically Important Banks, whose failure might entail widespread consequences for the economy. Increasing access to financial services is a key priority for the regulator and I will take all necessary measures to ensure that consumers get a fair deal. The Bank is determined to keep a tight rein on bank charges and commissions, in the light of the report of the Task Force on Unfair Terms and Conditions in Banking and Related Financial Contracts, which I mentioned earlier. We concluded a lengthy process of consultation with both domestic banks and international regulatory bodies before finalising draft legislation on the Deposit Insurance Scheme which we submitted to the Ministry of Finance at the end of last year. We will pursue our efforts to deepen our financial markets. 35. Concluding Remarks As I look back upon my years helming the Bank, I am acutely aware of the weight of responsibility that comes with being called on to ensure financial and macroeconomic stability amid the extraordinary events of the past five years. I wish to thank the Prime Minister, Dr the Honourable Navinchandra Ramgoolam, GCSK, FRCP, for having BIS central bankers’ speeches given me this opportunity to serve the nation in this capacity. My thanks also go to the various Ministers of Finance with whom I always maintained cordial personal ― although occasionally tense professional ― relations, my Deputy Governors, the Head of Governor’s Office, and other key staff-members on whom I relied to deliver on my mandate. 36. The past five years have been tumultuous, but as I mentioned in my acceptance speech when I received the “Central Banker of the Year 2012, Africa” award, I have always maintained an unwavering focus on the statutory mandate of the Bank. My aim has also been to rejuvenate the Bank by bringing in vital improvements in line with international best practice. After 45 years, I believe the Central Bank has reached a level of maturity where it can confidently play a key role, not only in maintaining confidence in the economy, but also in accompanying the country’s progress to ever-higher levels of growth, development and welfare. BIS central bankers’ speeches | bank of mauritius | 2,013 | 2 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on the occasion of the grant of a new banking licence to Barclays Bank Mauritius Limited, Port Louis, 23 May 2013. | Rundheersing Bheenick: Ensuring the financial stability of the banking system in Mauritius Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, on the occasion of the grant of a new banking licence to Barclays Bank Mauritius Limited, Port Louis, 23 May 2013. * * * I am delighted to welcome you all at the Bank this afternoon. A special word of welcome to His Excellency Mr Nicholas Howard Leake, the British High Commissioner. We are very pleased to have you all with us on this occasion. Today is an important day in the history of Barclays in our country. After almost a century of operation in Mauritius, Barclays Bank PLC, Mauritius Branch is converting into a whollyowned subsidiary to be henceforth known as Barclays Bank Mauritius Limited. Early this week, the President of the Republic, acting on the advice of our Prime Minister, Dr The Hon Navinchandra Ramgoolam, FRCP GCSK, appointed me to a new term as Governor of the central bank. I am reminded that in August 2008, I revoked the banking licence of the nowdefunct First City Bank and the equally-defunct South East Asian Bank to issue a new licence to their successors who are still thriving here which makes this a concatenation of four 3’s. It is thus on the 3rd day of my 3rd three-year term as Governor that I am proceeding to announce the revocation1 of the 3rd banking licence, and I believe the Barclays people are actually rejoicing at this revocation! So are we at the Bank of Mauritius. A century ago, the central bank did not even exist – we are younger than Barclays Mauritius by almost two generations. Today, as regulator and regulatee, we have a strong bond of partnership. We are placing this partnership on even firmer foundations by extending the legal arsenal available to the Bank of Mauritius and deploying it to such good effect in the Barclays case. Let me explain. Nearly six years have passed since the global financial crisis unfolded. Central bankers, commercial bankers, financial commentators, academics and other finance professionals have been on the case ever since, busily drawing lessons from this prolonged crisis. Countless international fora have examined the appropriate policy frameworks to deal with issues identified as having exacerbated the crisis such as structures that were too complex and banks that were too-big-to-fail or too-connected-to-fail. An international agreement on a cross-border resolution mechanism for internationally-active banks is not likely to be reached in the near future. We are waiting with bated breath for more rapid progress with the banking union at the level of the European Union. We cannot wait for all the lessons to be learned and new institutions to be forged, before we, as regulator, reflect on how these lessons can be applied to our own banking system. Our problem is somewhat smaller, and certainly less intractable – provided we have an open mind about it. Someone has said: “More powerful than the will to win is the courage to begin.” In the case of Barclays, we have amply demonstrated the courage to begin the process of restructuring. Our banking sector is made up of 21 banks, of which five operate as branches of foreign banks. Of these, we consider a few to be Domestic Systemically Important Banks (DSIBs), in view of their size and complex structures. The global crisis highlighted two sources of vulnerability that the Bank needs to address to ensure the stability of the domestic financial system. The first is the need to protect affiliates of cross-border banks operating in Technically, it is a surrender of licence under Section 11 (7) of the Banking Act 2004. BIS central bankers’ speeches our jurisdiction from any potential problem affecting their parents in their home country. The second vulnerability stems from the fact that the failure of a DSIB could not only impair the provision of key financial services but also have knock-on effects on other parts of the domestic economy. These issues have been exercising my mind for quite some time. This is why I have been encouraging branches of foreign banks operating in Mauritius to convert into locally-incorporated subsidiaries, and urging our DSIBs to reduce the complexity of their structures by resorting to what is now labelled as “ring-fencing.” We have been setting the stage for some time. That is where Barclays enters the scene, in pursuit of its “One Africa Strategy”. It is seeking to align the legal structure of its Mauritius branch business with the rest of Barclays Africa entities. Barclays sought our approval to become a wholly-owned subsidiary of Barclays Bank PLC. Barclays was the first of the targeted banks to do so. Just as it had also been the first to set up a Local Advisory Board for its branch operation in February 2012, well before we enshrined this in the revised Guideline on Corporate Governance in August 2012. Rarely have two simultaneous objectives, coming from opposite sides of the decision chain, from the regulator on the one hand and from the regulatee on the other, meshed so well to trigger an important change in the banking landscape. The effects of the change will translate into more muscle for both the Bank of Mauritius and Barclays. Barclays will undoubtedly emerge stronger from this restructuring, and the Bank will have more room for manoeuver to exercise an effective oversight of the system and reduce its financial stability concerns. But in spite of the clear and expressed support of the regulator, the road leading to Barclays restructuring its operations into a subsidiary was like an obstacle course. From the moment Barclays started the legal procedures to restructure itself, after obtaining the blessing of the central bank, it became evident that our laws and processes were not designed to meet today’s needs. Banking legislation did not provide the regulator with the powers to enable a “seamless transfer”. And Barclays had to have recourse to a Scheme of Arrangement, to be approved by the Supreme Court, in line with the general provisions of the Companies Act. To our mounting frustration, the project led to prolonged litigation and became mired in procedural entanglements. We realized that, had we found ourselves in a crisis situation, the legal procedures would not have allowed us, as regulator to act rapidly to resolve matters and ensure financial stability. In times of crisis, no regulator can afford to wait for months on end for a bank to reorganize itself. The problem was exacerbated by a number of objections – some of which came from within the banking sector itself. As we went from court hearing to court hearing, the whole restructuring process gradually became lengthier and more cumbersome, with the outcome increasingly unclear and uncertain. Of course, the Bank had a Plan B up its sleeve to fall back on. This had in fact been raised in the early days when we first discussed the restructuring plan but we thought it was a very remote possibility that we would ever have to resort to it. Well, how wrong we were! Plan B involved an amendment to the Banking Act to provide for an expedient process for banks to restructure their respective businesses − always subject of course, to the approval of the central bank. Interestingly, this piece of legislation was welcomed by both sides of the House when it was debated at the National Assembly with a Certificate of Urgency. Our legislators fully understood that the Bank needed more specific provisions in the banking legislation itself given the systemic importance of banks, and the legislative amendments were approved illico presto. The new provisions are quite wide-ranging. They allow a financial institution to restructure its business with the approval of the central bank. They also empower the central bank to direct a bank to restructure its operations. These provisions make the restructuring process clear, leaving little room for controversy or for differing interpretations. When Barclays petitioned the court under the Companies Act, there had been different interpretations of the proper procedure to be followed. Objections were raised by some parties. I thank those parties who BIS central bankers’ speeches objected to Barclays’ initiatives, as they have indirectly contributed to a rapid resolution of an issue that would otherwise have dragged on and on. With the new law and the clarity it now provides, such a situation should not arise again. However, I am told lawyers are reserving their rights to object – this is fair enough. Lawyers will be lawyers. As a breed, lawyers do not like clarity. If laws were always crystal clear, just imagine what a negative impact this would have on the demand for highly-paid legal services! The legislative amendment has positive repercussions on the ease of doing business in the country. It highlights the capacity of Mauritian authorities to expedite changes in the legal framework. It projects Mauritius as a jurisdiction capable of coming up with avant-gardiste legislation, which allows it to take appropriate, timely and specific actions. Our banks continue to perform well and have proved to be very resilient. The Global Competitiveness Report 2012–2013 of the World Economic Forum ranks our banking sector 15th out of 144 in terms of the soundness of banks. In 2012, seven of our banks ranked among the top 100 banks in Africa according to the magazine African Banker, a major achievement for a small country like ours with a GDP of only 0.02% of the GDP of the African continent as a whole. Banks everywhere remain fragile institutions on account of their high leverage and the constant concern over the trade-off between profitability and liquidity. We, as regulator, want our domestic banks to go beyond narrow profitability concerns and to become internationally competitive. To do this, they need to become more efficient and come closer to international benchmarks. Therefore, the regulator needs to be constantly on the alert against vulnerabilities and possible weaknesses and malpractices within the sector. We cannot wait for problems to occur to act – we need to be proactive. Our rules and regulations need to be constantly revisited. Between 2007 and now, 11 guidelines have been revised and 13 new ones have been issued by the Bank. There are other areas that the Bank is now addressing in consultation with the Mauritius Bankers Association. First, the issue of DSIBs: a framework is currently being designed to identify DSIBs. We did not wait for it to be formalized before initiating a dialogue with two of the largest banking groups, and some of the others as well, to simplify their structures. We started it two years ago. The new provisions of the law allow us to require big banks to separate their banking and non-banking activities in an expedient manner. Our objective is to reduce the complexity of large banking groups, make them easier to manage, make them more transparent to outside stakeholders, and easier to resolve in case they run into difficulties. These in turn contain moral hazard and strengthen market discipline. The good news with regards to our DSIBs is that we are already in presence of proposals to reduce the complexity of their structures and I hope to see this happening in the near future. Second, these newly-acquired powers will facilitate the implementation of living wills for a rapid resolution of financial institutions in distress, without systemic disruption, and specifically without putting public finances or bank depositors at risk. Third, we are working towards establishing supervisory colleges in Mauritius for banks of which we are the home regulator. This year we intend to set up our first such supervisory college. This will result in effective information exchange and coordination among regulators and supervisors to minimize financial stability risks. With the setting up of a resolution regime and the establishment of supervisory colleges, we will be looking at a banking sector relatively insulated from financial stability risks. Today, one of the five branches of the foreign banks present in our jurisdiction is converting into a wholly-owned subsidiary. Others will surely follow suit. Our big banks are simplifying their structures. Many other countries have already adopted such structural bank regulation measures in response to the global financial crisis. These structural measures mark a paradigm shift in the banking and financial landscape and aim at shielding the real economy from certain types of financial activities. BIS central bankers’ speeches Ensuring the financial stability of the system is part of the mandate of the Bank. However, there seems to be a disconnect between our mandate and the scope of our regulatory purview. We do not supervise all the players in the financial system. Non-bank financial institutions fall under the purview of another regulator while still other regulatory agencies are responsible for other parts of the financial system such as cooperative societies and credit unions. The Ponzi Schemes that have been dismantled recently have turned the spotlight on the regulatory loopholes in supervision and regulation beyond the banking sector which have allowed the scammers to perpetrate their financial crimes. This calls for a system-wide review of the regulatory and supervisory framework to minimize the risks of any such recurrence in future. Before I conclude, let me share with you a few thoughts on the banking sector in the nearfuture. In the next couple of years, I expect a more competitive banking sector with room for more players, domestic and foreign – diversity has proved to be a source of resilience. I look forward to our banks becoming more efficient for the benefit of customers. Their profitability would rest on that competitive edge that they would develop, and not so much on the wide net interest margins on which they rely today. The whole economy will gain from a more competitive banking sector as this will result in lower cost of capital for the real sector, and help stimulate private investment and growth. We expect our banking sector to have more responsible practices, including a commitment to achieve socio-economic goals. These are the prerequisites for the Bank of Mauritius to achieve its primary mandate of balanced and orderly economic development while ensuring the stability and soundness of the financial system. By the end of my third three-year term at the helm of the central bank, I hope to leave as legacy a more innovative, more competitive, more resilient and a more stable banking sector. I will now announce the revocation of the licence of Barclays Bank PLC Mauritius Branch – trust me engineering the revocation of a banking licence is a regulator’s equivalent of the nuclear option – but in the present case, this revocation is effected with much pleasure and leads to the still greater pleasure of granting a new banking licence to Barclays Bank Mauritius Limited. Congratulations and the very best of success at this new juncture of your banking history in Mauritius. Thank you. BIS central bankers’ speeches | bank of mauritius | 2,013 | 5 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual Dinner of the Mauritius Bankers Association, Port Louis, 6 June 2013. | Rundheersing Bheenick: Strong regulatory measures… the prerequisites for banks to do business, stay in business, thrive in business Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual Dinner of the Mauritius Bankers Association, Port Louis, 6 June 2013. * * * I am delighted to be in your midst this evening. Thank you for your kind invitation to say a few words on the occasion of the Annual Dinner of the Mauritius Bankers Association (MBA). It is indeed a great honour for me. Those of you who were present, the week before, at the function during which I granted Barclays Bank Mauritius Limited its banking licence, would remember that I had highlighted that there was a gap of two generations between the Bank of Mauritius (Bank) and Barclays. Tonight we are on an equal footing – the MBA and the Bank are both 46 years old – and the occasion is very auspicious for a man-to-man chat. Tonight’s function demands that I touch upon the relationship between the central bank and commercial banks. Almost two decades ago, a Fed Governor 1 observed that the relation between commercial banks and the central bank is an important and far-reaching one, with potentially significant implications for a country's economic performance. I quote from his address: “…a nation's commercial banks and central bank are reflections of each other. They are likely to succeed or fail together. A healthy, efficient banking system goes hand-in-hand with a dependable, independent central bank. The activities of both are inextricably intertwined, and the institutions undeniably share a commonality of interests.” How relevant such a statement is in our current environment! Tonight we are here to celebrate the strong bond of partnership that exists between the MBA and the Bank and for which we have every reason to rejoice. In 2007, a month after I had joined the Bank, I chaired my first Banking Committee Meeting. At the time, there were the CEO’s of 17 banks sitting around the table and of course, our Chief Executive of the MBA. Since then, four banks have joined in, AfrAsia Bank, ABC Bank, Century Bank and Banyan Tree Bank. So far we have held nearly 25 meetings of the Banking Committee, and since 2008, in between the quarterly meetings of the Banking Committee, we have had in all nine meetings of the Bureau of the MBA. A strong regulator and regulatee bond has thus been nurtured. However strong our bond is, our relationship is not an easy one to manage. Our perspective does not necessarily converge at all times. Tension arises between us from time and time. There are times when the regulator takes measures that banks may believe to be wrong or misconceived. We understand your fears that the proposed regulations may be too complex, inappropriate in geographical scope, or not conducive to level playing fields. We, as regulator, may not only see strong regulatory measures as the prerequisites for banks to do business, stay in business and thrive in business, but essential for the stability of the financial system as a whole. Sometimes, banks may decide not to challenge or criticise existing or new regulatory requirements in order not to upset the regulator – of this also we are aware. But it is important that you understand that criticisms of regulations which you believe are going to impact the sector, are wholly welcome as part of the constructive dialogue to get regulation right. Nonetheless, together we have been able to take forward the banking sector. The banking industry in Mauritius has traversed a long way to assume its present stature. Governor Gary Stern of the Federal Reserve Bank of Minneapolis at the International Conference on Russian Banking, 1994. BIS central bankers’ speeches Following the biggest financial tremor in the history of banking in Mauritius in 2003, many efforts have been made by banks to step up their internal control systems. Despite all care and diligence, banks are not totally shielded from fraud risks or financial crimes. Recently the banking sector has been shaken again out of its comfort zone. It was not a moment of glory for bankers and the central bank to realize that they have been outwitted by scammers using the loop holes in the regulatory framework. As of date, the total amount reported at our help desk has crossed Rs769 million, with 2,031 victims and if you take into account those who did not come forward, the total amount of the scam may be estimated as being quite close to the billion. It was certainly not flattering to any of you to learn that a number of your bankers may have fallen prey to the Ponzi Schemes – we cannot put this on their financial illiteracy, can we? It is rather a worrisome fact. It is my duty as regulator to remind you of the importance of stepping up your compliance functions to protect your institutions from being used as conduit for illicit activities. It is a matter of focusing on the “Know Your Customer” principles and applying them to your internal customers as well. It should not be just a ‘tick-box’ approach but rather a ‘judgmentbased’ approach. Most of the time, it is at the level of the front-liners that the application of this ‘judgment-based’ approach starts. The front-liners need to be well-versed in compliance legislation, manuals and procedures and be able to detect suspicious transactions at an early stage, thus minimising the risks of fraud. It is important that ongoing reviews of bank personnel are conducted at all levels as bank officers may be involved in promoting such schemes. Our investigation has revealed that some banks have not been abiding scrupulously by anti-money laundering laws and guidelines. Five of them would be imposed hefty fines with the concurrence of the Director of Public Prosecutions. Recently four of our banks made a very bad deal with Indian corporates. Rs2.7 billion out of total facilities of Rs3.5 billion turned out to be impaired. They represent 0.9% of the total assets of the four banks and if we take into account provisioning already made, this ratio comes down to 0.3% only. This is only a drop in the bucket and there is no need for the public to be alarmed. Depositors’ money is not at risk. This bad deal sends a warning signal to the banking sector about the level of non-performing loans (NPL). Historically the NPL of the Segment B business has been low, dragging down the overall NPL of the banking sector. Banks need to be extra careful when extending crossborder credit. They need to have a proper understanding of the legal infrastructure, the banking and regulatory landscape and the debt recovery processes of the country with which they intend to do business. In India, the cumbersome process of crystallizing collateral led some banks to resort to naming and shaming their non-performing corporate customers. In the midst of growing protest, the Central Information Commission of India “is convinced that the benefits accruing to the economic and moral fabric of the country far outweigh any damage to the fiduciary relationship of bankers and their customers if the details of the top defaulters are disclosed”. The naming and shaming of bad borrowers apply to wilful defaulters of public sector banks, who, according to the Reserve Bank of India Guidelines, are those who do not repay deliberately despite having sufficient funds and a solid net worth. The public sector banks have even started publishing photographs of the borrowers in newspapers. Maybe it is high time that we start considering to bring amendments to our own law to disclose the name of the top defaulters. Or even consider the coordinated efforts of the four banks, with or without the blessing of the central bank so as to ensure a favourable and rapid outcome. The bad experience of our bankers sheds light on the fact that however meticulous they may have been, banking remains a risky business. The Bank has lately been considering a system of information-sharing on cross-border loans although we do recognize the difficulty of accessing information on foreign clients. A good reputation requires conscientious regulatory compliance. The rapidly evolving financial landscape is keeping the regulator on its toes to ensure that we are up to the mark BIS central bankers’ speeches when it comes to international best practice. We champion a proactive and thorough approach to fraud risk management which includes among other things, putting in place a whistleblowing procedure and where it already exists to review it, and educating staff about fraud. We need to be alert to the growing impact of the prevalence of gambling in our country for it is l’appât du gain which motivated the public to invest in placements that offered unrealistically high returns. Over the years, the Bank of Mauritius and the Mauritius Bankers Association have developed a strong partnership. More than ever, we need to consolidate this partnership and live up to the four Rs of a sound banking sector – Regulation, Reputation, Results and Resilience. Together we can continue facing the daunting challenges that await the financial sector when it comes to the next-generation regulation. Thank you. BIS central bankers’ speeches | bank of mauritius | 2,013 | 6 |
Text of the OMFIF (The Official Monetary and Financial Institutions Forum) Lecture by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, London, 30 May 2013. | Rundheersing Bheenick: Mauritius – the financial crossroads of the world Text of the OMFIF (The Official Monetary and Financial Institutions Forum) Lecture by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, London, 30 May 2013. * * * Thank you OMFIF for the invitation to address such an impressive audience as the one I see this morning at the equally-impressive Armourers’ Hall. This elegant and sophisticated hall is steeped in history. I understand that it has served as the home of the Armourers’ Company for over six and half centuries since 1346. This company has played a special role in the defence of the City and supported many charities focusing, amongst others on education. One could hardly have wished for a better venue than this magnificent hall. OMFIF suggested as the theme for my address this morning “Mauritius: The Financial Crossroads of the World”. At first, I thought that the theme was proposed perhaps half in jest. The qualifier would certainly be more appropriate for the City of London where we are meeting – but Mauritius as a financial crossroad, and that too of the world, who would have thought such a thing? Close examination of the OMFIF cheek did not reveal any sign of tongue. They were quite serious about it, and there was no alternative but to go ahead and get organised to talk to you on this subject. As I was trying to gather my thoughts about what exactly I should be talking about this morning, I could not help reflecting what a difference the last fifty years have made in the life of this small island-state, tucked far away in a remote corner of the Indian Ocean. Fifty years ago, few people in the banking and business community had even heard about Mauritius, much less thought of it as a Financial Crossroad. Those who knew the place thought of it as a basket case, without any prospects. I have it on good authority that the first-ever World Bank mission to Mauritius in 1962, just a few years before the country became independent, had delivered a devastating verdict: “This country exudes an air of hopelessness” This was the view of Jean Baneth, World Bank Mission Chief, who was then working on India and had been sent to do a quick diagnosis of the Mauritian case. He was not alone in his negative judgment of the country. V.S. Naipaul, acclaimed novelist and commentator, had also delivered an equally scathing verdict after a short visit to Mauritius in 1967. This was well encapsulated in the title of the piece he wrote, and which he obviously liked as he retained it as the title of his subsequent book, which included the Mauritius piece along with several other longer articles of his. What was the title? “The Overcrowded Barracoon” Mauritius was not just reducing visiting World Bank experts and noted political and social commentators to despair. The contagion engulfed such famous academics as Richard Titmus, the noted sociologist, and the future Nobel economics prize-winner Sir James Meade. For them, and for many others who followed, Mauritius was sinking under the weight of runaway population growth which its sugar economy could not conceivably bear. The country’s economic future looked dim and its citizens were leaving its shores in droves looking for better prospects elsewhere – Australia, Canada, South Africa and the United Kingdom. Another bugbear exercising the minds of knowledgeable observers was that the country was heading for a monumental blow-up. Surely, half a million people of diverse origin, − African, Asian, European, − practising many religions and speaking a Babel of languages, could not survive on this crowded, impoverished island. They were bound to be at each other’s throat as soon as the colonial overlord left. BIS central bankers’ speeches Mauritius had indeed come down in the world. To understand the full impact of this déchéance, it would be good to remind ourselves that, much earlier, during the height of the colonial struggle after Vasco da Gama had rounded the Cape of Good Hope in search of the riches of the Indies, Mauritius was at the centre of the colonial scramble for position in this part of the Indian Ocean. A favourable location in the Indian Ocean, added to the prevailing trade winds, turned Mauritius into a staging post of choice for sailing ships on their way to India and the Dutch East Indies. We proudly sport a relic of those glorious days, in our national Coat of Arms: Stella Clavisque Maris Indici. The Star and the Key of the Indian Ocean − no less! By the time of James Meade and the others, sugar, which was the mainstay of the economy had earned the country the reputation of Sugar Bowl Island. And sugar was rapidly running out of steam. The economic problem had been reduced to a race between population and productivity. The Star had definitely lost its shine and the Key was not unlocking any door, certainly not one to a brighter future. It certainly looked as if Mauritius was going the way of the dodo, the eponymous bird that had forgotten how to fly on the isolated island of no predators and fell victim to the appetite of struggling Dutch settlers. It is not my intention to tell you the full story of either of these two transformations, from Star and Key to basketcase, and then from basket-case to a rising star on the African continent. I evoke it just to drive home the sheer enormity of the task accomplished in this second transformation, achieved in slightly over one generation, so that it now seems perfectly natural to discuss whether this erstwhile basket-case is now a financial crossroad of the world. In what follows, I interpret “financial crossroads” to refer to International Financial Centres, or IFC’s. Let me state categorically that I do not view tax havens as IFC’s and I do not believe that traditional, secretive, opaque tax-havens have much of a business case these days. These “sunny places with shady finances”, as they have been called, will have to change rapidly if they are to survive in some form or other. We in Mauritius have always rejected the “tax-haven” label as we are a jurisdiction of substance, which comes with a real, diversified, and thriving economy attached. I could begin by debunking the notion that Mauritius is, or will soon become, the financial crossroad of the world. Had I come from our investment promotion agency, I would probably be arguing that Mauritius is not only the financial crossroad of the world, but perhaps also the centre of the universe. I shall take a more measured view. In my substantive remarks, I shall discuss briefly the case for offshore jurisdictions, and offshore banking and tax planning facilities. I shall consider the recent Cyprus episode and seek to draw some lessons for IFC’s. I shall spend a little more time on the Mauritian offshore experience and argue that Mauritius is an IFC with a difference. Offshore is not the only game in town as Mauritius comes with a real economy attached. There will be continuing demand for packaging a rising volume of investment flows and for other professional services on the African continent and elsewhere which could drive Mauritius to a more prominent position in the offshore space. I. The case for small offshore jurisdictions, offshore banking and tax planning facilities. Small jurisdictions seem to have a comparative advantage as IFC’s. Historically, partly at least because of their size which limited other economic activities, small states have been more open to the world. This has allowed them to exploit emerging niches and embrace global trends more rapidly than bigger countries. They have proved to be more flexible than bigger economies and have adapted more easily to changing circumstances. Both their populations and their GDP are but a tiny fraction of world population and world GDP. Faced with limited options for development, many sought to become Offshore Financial Centres (OFC’s). OFC’s are generally defined as small, low-tax jurisdictions specializing in providing BIS central bankers’ speeches corporate and commercial services to non-resident offshore companies and for the investment of offshore funds. However, abuse in some jurisdictions has too easily and mistakenly fed the perception that OFC’s are tax havens. Unsurprisingly, OFC’s are the object of constant attack, especially from the OECD and the G20. They seem to have spawned a cottage-industry of specialists regularly taking potshots at OFC’s. We cannot ignore the fact that small country IFC’s play an important role as conduits of cross-border capital flows and investments. It is estimated that as much as half the world's capital flows go through offshore centres. An estimated £13–20 trillion is hoarded away in offshore accounts. Small country IFC’s, with a little over 1% of world population, hold 26% of the world's wealth, and 31% of the net profits of United States multinationals transit through them. II. Let me turn to the question whether the Cyprus episode spells the knell for IFC’s as we know them. There is no denying that the reputation of small country IFC’s has taken a severe blow in the wake of the Cyprus crisis. Cyprus incurred direct losses of the order of EUR4 billion or 23% of its GDP. The mind boggles at the thought of our economies taking such a big hit because of malfeasance in our offshore banking activity. The austerity cure, imposed by the Troika, and the population’s reaction to it has added new jargon to the language of economic discourse. The thought of being “cypressed” strikes fear in the mind of policy-makers in all small countries, not just IFC’s. For most IFC’s, such a possibility is extremely remote. Some attributed the crisis to the fact that the Cypriot banking sector was disproportionate to the size of the economy. This led to the policy prescription of a quantitative limit on banking assets of 3.5 times of GDP, arbitrarily proposed at the EU level. With the benefit of hindsight, we can assert that such a limit would not have prevented the kind of problems encountered by Cyprus. The truth lies in the fact that Cyprus was excessively exposed to Greece on the assets side and to Russia on the liabilities side. The lesson that I draw from this is not that IFC’s as a class are bound to disappear or, at best, condemned to a slow death. I would rather argue that small country IFC’s need to exercise care in the conduct of their business, appropriately assess potential sources of risk and better manage their asset and liability mix. Both of these points are clearly illustrated in the next two slides, which compare Cyprus banking ratios and financial soundness indicators, with three other offshore jurisdictions including Luxemburg and Mauritius. Malta and Luxemburg have 8 times and 17 times of their GDP, respectively, by way of banking assets. But their FSI’s in the next slide, show that they had a more robust banking sector, as reflected for example by their non-performing loans – less than 0.5% for Luxemburg while it was nearly 16% for Cyprus. The case of Luxemburg provides ample evidence of the solidity of the banking sector of a country even when its banking assets represent 17 times its GDP. The short story is that the Cyprus episode does have lessons for other jurisdictions but it has no immediate relevance for most of them because they do not run their banking and finance the way Cyprus did. It certainly does not mark the end of the road for solid, transparent, wellregulated IFC’s. III. Which brings me rather neatly to Mauritius and its home-grown model of an IFC. The previous two slides provide an indication of the size of the Mauritius offshore banking sector and its financial soundness. Our banking sector assets are less than three times our GDP, the lowest in the sample, and evenly divided between domestic and offshore assets. The FSI’s show a sound banking sector, well-capitalised and nearer Luxemburg on most measures with, for example, non-performing loans at less than 4%, half the level of Malta, and regulatory capital to risk-weighted assets at 17%, very close to Luxemburg’s 19%. We started on our offshore journey in 1988. An earlier attempt, a decade earlier when the BIS central bankers’ speeches economy was about to go into intensive care, proposed by a Caribbean consulting company unashamedly calling itself Tax Haven International, was shot down by the IMF which had been called in to advise on the matter. By the late 1980’s, we had emerged from the tutelage of the Bretton Woods institutions and a bevy of stabilisation and structural adjustment programs. The economy was fitter and on the lookout for new engines to power the next stage of growth, to add to sugar, export manufacturing and tourism which were all doing well. It may not be deemed prudent these days to admit to any Cyprus connection but we did draw on the Cyprus experience when we were finalising plans for our own offshore business sector. It may be still less prudent to admit that it was BCCI staff on the ground that facilitated our contacts with the Cypriot authorities and its offshore banking sector. We drew on this and other models as we set about developing, in a phased manner, our home-grown model. This has proved to be more resilient than some of the models that inspired us – not least because our financial sector benefited from an increasingly-diversified and growing real sector and from a multilingual pool of professionals in accounting, law, management, and finance. Financial Intermediation today provides more than 2% of the total employment in the country and the trend is on the rise. We developed an extensive network of Double Taxation Avoidance Agreements (DTAA) and Investment Promotion and Protection Agreements (IPPA) with several countries, both developed and emerging. Our strategic location in the Indian Ocean proved to be an added advantage which enabled us to carve a niche in the region. When India started major economic reforms in the wake of the 1991 balance of payments crisis, Mauritius which had signed a DTAA with India years earlier, seized the opportunity to emerge as the largest conduit of foreign inflows to India averaging 43% of total inflows into the Asian giant over the past decade. The most important provision in the DTAA between India and Mauritius has been that the capital gains earned by a company resident in Mauritius on disposal of shares of an Indian company are tax-exempt in India. As a consequence, Mauritius has enjoyed a prominent place in tax treaty planning of private equity players, multinationals, and global fund houses investing into India. We adopted high standards of rigorously-enforced regulation proposed by the Financial Action Task Force, the Organisation for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF). We go beyond merely applying those international norms; we are also committed and cooperative partners in compliance legislation. Our efforts paid dividends – OECD placed us on its white list which means that our jurisdiction has substantially implemented the internationally-agreed tax standards. More recently, we have initiated consultations with the US Revenue Authority to become FATCA-compliant. Mauritius has also adopted tax information exchange protocols to allow foreign countries to investigate suspected tax evasion. As a small, isolated, island, we lost no opportunity to join regional economic groupings. When some of our needs were not met by existing bodies, we set about creating others, and two of these are actually headquartered in Mauritius. Mauritius joined the Common Market for Eastern and Southern Africa (COMESA), having been a founder-member of its precursor, the Preferential Trade Area. We joined the Southern African Development Community (SADC), at the same time that SADC opened its doors to post-apartheid South Africa. We initiated the short process that culminated rapidly in the establishment of the Indian Ocean Commission in 1982 and the bigger Indian Ocean Rim Association for Regional Cooperation in 1995. We are committed to be an active player in regional cooperation. The Bank of Mauritius serves as the Settlement Bank of the Regional Payments and Settlement System of COMESA. Mauritius hosts AFRITAC (South) – the 4th regional technical assistance centre of the IMF in Africa. The COMESA Fund and the Africa Training Institute of the IMF will soon start operations in Mauritius. The day is not far when Mauritius will obtain observer status in the Eastern African Community and ASEAN. Our vision to become a bridge between rising Asia and Africa is something that we have been patiently working on for several decades. A BIS central bankers’ speeches visible outcome is the fact that nearly half of our GBCs have been used as vehicles for investment in Kenya, Mozambique, Zimbabwe and South Africa. Our banking sector Little did we know how radically we were going to transform the financial landscape when we adopted in 1988 banking legislation to enable offshore banking. That was just 25 years ago. We then had 13 banks, all involved in domestic banking. By 1998, the numbers had changed to 10 domestic banks and 9 offshore banks. The sector was quite dynamic. By 2002, after some consolidation, there were 10 domestic banks and 12 offshore banks when there were also 221 offshore funds and around 19,350 Global Business Licence (GBL) Companies. The offshore banks employed around 170 persons and their assets amounted to 94% of our GDP. In 2005, we distinguished ourselves from other OFC’s by introducing a single banking licence. We adopted Segmental Reporting requiring the disclosure of financial information on two distinct segments of banking activity– Segment B for banking business giving rise to “foreign source income”, and Segment A for all other banking business. Today, we have 21 banks operating in our jurisdiction, all involved to varying degrees in cross-border banking activities. Some have extended their footprint beyond our shores, setting up operations in the region. Our banking sector assets represent around 3 times our GDP. There were nearly 25,000 GBL companies and their deposit base at the end of 2012 represented around 39% of total banking deposits. There is a long way to go before we reach the size of other small IFC’s. Our banks perform well and have proved to be very resilient. They have contributed in no small measure to the resilience of the Mauritian economy. The robustness of our banking sector is itself the result of prudential measures adopted in a timely manner over the years. The Global Competitiveness Report 2012–2013 provides a good indication of the health of the sector. It ranks the Mauritian banking sector 15th out of 144 countries in terms of the soundness of banks, and 35th in terms of financial market development. In the ranking of the African Banker magazine, seven Mauritian banks figured among the top 100 banks in Africa in 2012. This is no mean achievement if we consider that the Mauritian GDP adds up to a grand total of one-fifth of one percent of African GDP. I have been focusing more on the central bank and its regulatees but the change was broad-based. The other financial and market regulators, namely the Stock Exchange of Mauritius and the Financial Services Commission, have also garnered international accolades. I am certainly not saying that there have not been some major tremors in our financial sector, because there have been. But these had nothing to do with the ongoing global financial and economic crisis. We had a major financial scandal in 2003, very much home-grown too. This was the infamous MCB/NPF saga which takes its name from the protagonists involved, which happened to be the largest bank and the largest pension fund in the country. Recently we have suffered from a rash of “Ponzi Schemes”. Such “accidents” have triggered corrective measures to ensure that there is no recurrence. We have learnt some lessons from the unfortunate experience of others in the wake of the 2008 global financial crisis and we are applying them to our banking system. We have taken several policy initiatives to deal with complex banking structures of domestic systemically important banks which are too-bigto-fail and too-connected-to-fail in our close-knit economy. As many Mauritian banks have grown regional, we are also addressing cross-border banking issues. Just to give you an idea of the challenge facing the central bank, let me point out five pertinent facts. First, the Bank is 45 years old, and has been an independent institution only for a little over eight years since 2004. Second, the largest domestic bank has been in continuous existence for the better part of two centuries, which makes it one of the oldest surviving commercial banks in the southern hemisphere, and not just on the African continent. Third, the two largest banks in the country, both domestic, account for two thirds of domestic banking assets. Fourth, there is tremendous concentration of asset ownership in the country in the hands of a handful of conglomerates. And fifth, when the central bank tries BIS central bankers’ speeches to address the underlying problems, its Governor is regularly accused of suffering from Marxist hang-ups and acute personality disorders and his imminent departure has been a constant refrain of the hyper-active rumour mill for over six years now. I just walked you through some of the initiatives, measures and policies adopted by Mauritius in its quest to become an IFC of international repute. Notwithstanding our best efforts sustained over decades to keep our jurisdiction clean, the Mauritian offshore sector has been constantly under attack, both from official quarters and from unofficial self-appointed vigilantes. India has undoubtedly benefited from increased FDI through the so-called “Mauritius Route”. This has not prevented the DTAA between the two countries from regular attacks in the Indian press, which often look suspiciously like part of a “dirty-tricks” campaign by a competing jurisdiction when, that is, they are not being fuelled by holier-than-thou Indian politicians on the campaign trail who scapegoat Mauritius as an expiatory target in their “bring black money back from overseas campaign”. Teflon-like, Mauritius stoically shrugs off these attacks as it does not practice a culture of opacity. Mauritius has always been more than willing to share information with the banking and tax authorities of partner-countries. That is why attempts from various quarters to qualify Mauritius as a tax haven have not succeeded, anymore than veiled threats from OECD to put Mauritius on its grey list. Many cling to the view that all IFC’s are tarred with the same brush and perpetuate the myth of Mauritius, the tax haven in the Indian Ocean. Mauritius is a global facilitator with unparalleled transparency, and serious credentials, and not the answer to round-tripper’s dream. IV. Mauritius – an IFC with a difference The challenge confronting Mauritius now is perhaps its toughest since it embarked on the offshore business a quarter century ago. It is one thing to be a competitive back-office hub and an efficient conduit for capital flows to India and Africa, but it is quite another to become a significant value-added platform, effectively enhancing South-South trade and investment. The name of the game now is greater substance and more value addition. Depressed conditions in the crisis-hit West, coupled with slowdown in India, have forced Mauritius to target other markets to grow its export of goods and services. Fortunately, the next growth frontier that is Sub-Saharan Africa is just next door. Africa has definitely turned the corner. The African Union, marking its 50th anniversary last week, had a lot to celebrate. Its predecessor, the OAU – or the Organisation of African Unity – had attracted the charge that it was trading under false pretences: there was neither organisation nor unity in Africa! Global powers, old and new, are now making a bee-line for the continent, attracted by policy reforms, institutional strengthening and resource discoveries. Some thirteen years ago, in May 2000, back when investment gurus were still fascinated by the BRICs and the good things that would come out of the European Union, The Economist magazine carried a devastating front page cover “Africa, the Hopeless Continent.” The article which followed talked about how Africa would struggle to resolve famine, HIV AIDS, high debt, bad governance and its many wars. To be fair, some of the criticism levelled at the continent remains true even today, but Africa has now got its act together and is playing catch-up. This is perhaps why The Economist recanted two years ago, and blazoned an altogether different message on its front cover in December 2011, this time titled ‘Africa Rising’. The titles have become even more positive ever since, with its March 2013 issue talking about ‘Aspiring Africa’. Let me quote the introductory paragraph from the latter just to give you the flavour and a sense of the changing times. “CELEBRATIONS are in order on the poorest continent… Life expectancy rose by a tenth in the past decade and foreign direct investment has tripled. Consumer spending will almost double in the next ten years; the number of countries with average incomes above $1,000 per person a year will grow from less than half of Africa’s 55 states to three-quarters.” BIS central bankers’ speeches How times have changed! How very sporting of The Economist to recognise and celebrate this changing sentiment towards Africa. Which rather reminds me that The Economist had meted out a similarly harsh treatment to Mauritius, but without any subsequent recantation. It was in the late 1980’s, if memory serves me right. We had stabilised the economy, consolidated public finances with austerity and wage restraint, strengthened the sugar sector, tourism and export manufacturing, and changed governments through free and fair elections – as has always been the practice since independence, and started offshore activities. We were doing quite well, one would have thought. The World Bank certainly thought so: its country report on Mauritius had the tell-tale title “Managing Success.” The Economist, however, took a more jaundiced view, buying the myth that Mauritius was rolling out the red carpet for money launderers. It carried a short article, with the admonishing title “A Naughty way to Salvation.” It was well-hidden in an inside page – no cover page on The Economist for small-island states unless they have been particularly naughty like Cyprus, or Iceland before it. Maybe it’s high time for The Economist to make some amende honorable... The African narrative has got a rush of superlatives going. “Lions on the Move”, trumpeted a McKinsey study on the continent. As their largest trading partner, the EU is mired in recession this year, Mauritians can count their blessings as their country happens to be in one of the fastest growing regions of the planet: East Africa will grow by around 6%. This is impressive enough. Its southern African neighbours, Mozambique and Zambia, are likely to clock more than 7% growth. What is driving all this growth you may ask? Not only has the region discovered oil and natural gas but it is also blessed with a young population and a rising middle class. Falling trade barriers, stable interest rates, and greater currency stability are encouraging interregional trade. Large Kenyan banks like Equity Bank which used to have 100% of its revenues from within Kenya in 2007, now gets 12.5% of its revenues from the rest of the region as expansion plans bear fruit. With banking penetration rates in Africa at close to 20%, large African banks are raising deposits cheaply from the villages, in increasingly innovative ways, and lending it at huge spreads to the corporate sector and upper middle class. Yes, these are good times for the banking industry in Africa. With 40% of the African workforce between the ages of 15–24, and with the continent becoming increasingly urban, Africa’s challenge is to use its demographic dividend wisely. With strong growth comes increased global investor attention. Just to give you a few examples, last year two of the best performing stock markets in the world were African – Nigeria and Kenya. Last September, Zambia’s debut USD750 million Eurobond auction was oversubscribed by a staggering 15 times, pushing its yield down to 5.6%! Africa will issue a record USD7 Billion in Eurobonds this year, more than the cumulative sum of the last five years. With Western nations curtailing donor aid, fast-growing African nations, with manageable debt to GDP ratios, are not finding problems in attracting money in a world where the search for yield is increasingly becoming important. Money has increasingly been flowing into the domestic bond market in the likes of Nigeria, where a well-functioning secondary bond market exists, with the inclusion in the JP Morgan Emerging Markets Bond Index helping to push down yields at the long end of the curve. Unlike in the West where interest rates hover at, or near, the zero-bound, with interest rates in Kenya and Nigeria for example between 8% to 14%, there is much scope for compression in Africa as monetary policy gains traction and inflation falls, which will in turn help unlock still more growth. The Africa growth story is just only beginning. Mauritius, as the friendly, neighbourhood, well-connected IFC, can expect much business to come its way. BIS central bankers’ speeches What does the future hold for Mauritius? Before Mauritius can move up the value chain, it needs to recognize its limitations. It is a small country, with limited resources and it needs to do things differently. Mauritius cannot afford to be a common, garden-variety, IFC, undistinguishable from a dozen others. It must seek, at all times, to be increasingly an IFC with a difference. For this to happen, it needs both scope and scale. To add value, it needs foreign investors not only to invest through Mauritius but increasingly with Mauritian investors. And for this to happen, we need to show substance by bringing both knowledge and seed capital on the table. Mauritius can become the private equity vehicle of choice for small- and medium-scale projects in the Eastern and Southern parts of Africa within sectors where it has a comparative advantage. The country does not have the knowhow or financial clout to finance oil exploration, power plants, aluminium smelters or mining projects. But, it has already demonstrated that it can be the ideal vehicle for such investments as medium-sized clinic in Uganda, a bank in Kenya, a sugar mill project in Tanzania, a stone-crushing plant in Sri Lanka, or textiles in Bangladesh. You do not need huge sums of capital to set up a chicken farm in Madagascar or Mozambique or to offer Mauritian savoir-faire to the booming hotel industry of the region. Investors in the big-ticket projects of the continent, who tap the myriad of large US, European and Middle Eastern private equity funds, can still find it convenient to use the Mauritian IFC platform to package, administer and route their investments. But for investors looking for diversification from the same old investment themes, and seeking to capture Africa from the bottom-up, Mauritius can be the ideal platform. Mauritian banks are increasingly interested in forming partnerships with small- and medium-sized banks in the East African Community but their relatively small size and current Capital Adequacy Ratios mean that they need more funding. Historically, Mauritian private sector captains have preferred the go-it-alone approach. A local bank, which had recently acquired a minority stake in one of the smaller banks in Zimbabwe, has paid a high price to learn the lesson that investing in Africa can be quite risky. There is a strong case to pool together available know-how and seed capital to build the critical mass required for larger projects, diversify risks, and leverage external funding. Mauritius has been toying with the idea of setting up a sovereign wealth fund which could become a source of equity funding for a more aggressive move into Africa. There is scope for increased public-private partnerships, which are still a rare phenomenon on the continent. The African Development Bank has floated the idea of an African Infrastructure Fund, financed partly from central bank reserves. It will be setting up an office in Mauritius this year. There is truly a ferment of investment and finance activity in, and around, Mauritius. All this leads me to conclude that there are bright days ahead for the Mauritian IFC because it is an IFC with a difference. Its thriving real economy means that offshore activities are only a small chunk of the panoply of activities going on in the country. Mauritius has made major strides during the two last decades to become a bigger regional financial centre. Compared to other small IFC’s, we still have a long road to travel to become what Singapore is to Asia or Luxemburg to Europe. We have always strived to live up to the “fit and proper” image of a reputable jurisdiction. We have tried hard to be a jurisdiction of substance. We can confidently lay claim to be the best in our class, a target that has constantly been in our sights since the very beginning. We collaborate fully with all global stakeholders of the financial world – OECD, FATF, IMF and the like. Cyprus holds no lessons for a clean jurisdiction like Mauritius. Current attacks on offshore jurisdictions coming from the G20 do not pose a particular problem as long as there is level playing field across jurisdictions and transparency is upheld through wellcoordinated exchange of information. There is no dearth of growth opportunities for the Mauritian IFC from Aspiring Africa next door, and the prodigious developments expected in Asia. There is increasing demand for reliable and trusted products and services for efficient BIS central bankers’ speeches tax planning as there is for better packaging and distribution of investments with greater real sector involvement. Mauritius is positioning itself to make the most of these opportunities. Mauritius: the Financial Crossroads of the world? Probably not. But quite possibly a financial crossroad, along with several others, meeting a real need of investors, savers and corporates from all over the world. Not a bad prospect for a country that was exuding such an air of hopelessness only half a century ago, wouldn’t you agree? BIS central bankers’ speeches | bank of mauritius | 2,013 | 6 |
Welcome address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius and Vice-Chairman of the Association of African Central Banks (AACB), at the Opening Ceremony of the 2013 Symposium of Governors preceding the 37th Assembly of Governors of the AACB, Balaclava, Mauritius, 22 August 2013. | Rundheersing Bheenick: Becalmed – but still on course Welcome address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius and Vice-Chairman of the Association of African Central Banks (AACB), at the Opening Ceremony of the 2013 Symposium of Governors preceding the 37th Assembly of Governors of the AACB, Balaclava, Mauritius, 22 August 2013. * * * It is an immense privilege for me to welcome you all today on the occasion of this symposium on financial inclusion on the eve of the 37th Assembly of the AACB – the Association of African Central Banks. This is an historic occasion both for Mauritius and for the Bank of Mauritius. We are hosting the Assembly Meeting and the Symposium of the Association for the first time in the history of our small island-state. There are indeed many firsts: this is the very first time the AACB is meeting off-shore – away from the African mainland. It is the first time that AACB annual meetings are witnessing such a record attendance; and also the first time that we are having in our midst the General Manager of the Bank for International Settlements, the President of the African Development Bank, and the Secretary-General of the Islamic Financial Services Board. We have all of Africa here, and when we include the flagship institution of the G-20, we have almost all the world represented under one roof, bearing testimony to the growing interest in the happenings on this great Continent. And from Africa itself – just to give you an indication of the representation − from North Africa we have our Chairman, Governor Laksaci of Algeria; from the West we have Governor Sanusi of Nigeria; from Central Africa, we have Governor Nchama of Banque des Etats de l’Afrique Centrale; from the East we have Governor Mutebile of Uganda, and from the South we have Governor Marcus of South Africa – a grand total of 32 Governors and heads of Central Bank delegations representing 44 countries. I welcome you all here today. I wish the meeting great success and hope your stay here will be fruitful and worthwhile for you all. We are here to discuss what is emerging from the G20 Financial Inclusion Action Plan to improve the livelihoods of the poor, and to support Micro Small and Medium Enterprises, the engines of economic growth and job creation – in much of the world, and not just in Africa. At the time Governors decided upon the theme of the Symposium last year, we could not have foreseen that the subject would assume such importance as to attract this splendid attendance. Governors will recall that we did discuss financial inclusion as far back as 2007. In truth, our choice of this AACB Agenda converges with its development through the G-20 process. Many countries worldwide are actively engaged in reforms and programmes for the provision of affordable banking services, which makes the topic of our Symposium particularly pertinent. The slow recovery from the global crisis forces us to revisit our growth strategies and take a closer look at their impact on the whole of the societies we are expected to serve, not just the prosperous, but also the poor and the excluded – who are showing increasing signs of impatience as they wait for the elusive magic of trickle-down to improve their lot. Africa is changing fast. From the gloom and the conflict of the last decades we now have new hope and opportunity spreading across the whole continent. In some parts, it is not just a wind of change but a veritable tempest. Indeed, in certain places, such is the pace of change that some fear that we are moving straight from the African Spring into a wintry period of discontent. We are here, therefore, to address the issue of what can the world of banking do to push back this spectre. With 77% of our population still having no access to formal finance, we have our work cut out for us. BIS central bankers’ speeches Today, as we open our discussions on inclusive finance and banking, we must frankly admit that in an environment where only a small minority of people ever set foot in a bank, and where banking itself is hardly part of the greater political debate, we face a daunting prospect to find a pathway for promoting the best use of the capital resources available to the continent, to ensure balanced and sustainable growth with social stability, hand-in-hand with price stability, financial stability, and monetary stability. Stable currencies and control of inflation figure high among pro-poor policies. To maintain our focus as central banks and to remind ourselves of the distance we still have to travel, it is sobering to note that we are reaching the time when we should embark on Stage IV of the African Monetary Cooperation Program, which reduces the annual inflation target from the current 5% to 3% − a bar which is too high for many of us at this juncture. The wider agenda, when the present troubles have been overcome, is of course the movement towards regional economic, monetary and fiscal union. The steps to be taken on that pathway are many and difficult. Our model from Europe is itself under great scrutiny; and we must adapt our strategy and our timetable as we absorb the lessons we have been learning from that troubled experiment. An important issue here is how far we can together achieve even the early stage of economic convergence, when only 4 out of 46 countries successfully met the targets in 2011, the last year for which we have comparable data. Even Mauritius is having difficulty here. Meeting these soft targets is a sine qua non if we are to have any real hope of achieving the overarching ambition of an African Economic Community. But as necessity is the mother of invention, if I may quote from my good friend Plato, I see with pleasure how many of our colleagues have been vigorously inventive. Across the African region we are seeing innovation with branchless and mobile banking, which is cutting down the barrier of distance, reducing the cost of financial services, and delivering low-cost accounts for poorer people and small businesses. Indeed, technology is transforming the contours of the banking and financial landscape – and nowhere more so than here in Africa. We have also been more than busy, counteracting fraud and money laundering, and locking up the real “banksters” in the profession, who for too long have been giving our business a bad name. Our friend and distinguished colleague from Nigeria, Governor Sanusi, has been one of the pioneers in this sharp-shooting side of the business. Such reforms in banking discipline, security and probity are essential prerequisites for extending banking services to the unbanked, but deserving, majority, in Africa. Driven by such innovation, banking in Africa today is emerging as a poster boy of empowerment and growing inclusiveness. Kenya, as Governor Ndungu can attest, is widely recognized as leading the field in a new generation of banking in Africa. We must, however, beware of hubris: for if we are at last getting on the right track, we must not just sit there contented, only to be run over by the next train that comes along! Innovation, built on sound R & D, must be our way of life. For we have a major job in hand to keep pace with innovation in trade and investment in the region, and to provide the support that will ensure they thrive. As financial inclusion becomes another accepted test of quality in banking policy, it will, I am sure, provide a more solid foundation for promoting sustainable, equitable, and inclusive growth in the region. Now let me take this opportunity to warmly welcome experts from the African Development Bank, the Bank for International Settlements, the IMF and Standard Bank. Your contribution to our proceedings is eagerly awaited. You have done so much over the years, as our major advisers and development partners, to help us steer our countries from the darker days of the past, into the fresh light of a future rich with promise. For Africa is now emerging as the up-and-coming global centre of attention, a continent on the cusp of a major breakthrough. I have no doubt you can enrich our discussions on the general aspects of financial inclusion, as well as on the more technical issues of monetary policy and financial stability and their relevance to inclusiveness. BIS central bankers’ speeches The General Manager of the Bank for International Settlements, Jaime Caruana, will give a special address on the Basle process and the global aspects of Financial Inclusion. He is very committed to the Financial Inclusion Agenda of the G-20 which has been germinating since 2008, in the wake of the global crisis. We thank him for his interest in the work of the AACB. We take this opportunity to also thank him for hosting at his headquarters in Basel an annual Round Table for the benefit of African Governors, with selected peers from elsewhere. This new development agenda pulls together the policy objectives of financial stability, financial inclusion and consumer protection, to overcome the clear shortcomings of the traditional framework of financial liberalisation. Jaime Caruana will no doubt brief us on the work of the two subcommittees of the G-20 on SMEs and on consumer access through innovation. Commissioner Maruping will share with us the African Union’s perspective on our work. Tomorrow at the Assembly of Governors, we will have the President of the African Development Bank, Donald Kaberuka, who will talk to us about the Africa 50 Fund and how it can help to bridge the infrastructure gap now hampering faster growth and better quality of life on the continent. And the Secretary General of the Islamic Financial Services Board, Jaseem Ahmed, will bring his inputs later into our discussions by sharing with us his views on Islamic Finance and financial inclusion. I must express my thanks to those organisations who have partnered with us to organise this event, and given us such fulsome support. First, the three banks: State Bank of Mauritius, Standard Bank and Barclays Bank. They are all leading the way in working towards closer financial links between Mauritius and the wider region. Next, our two banknote suppliers: Oberthur Fiduciaire, a leading banknote printer, won their very first supply contract in Mauritius with the notes which we shall be launching today. De La Rue, our traditional supplier, has a much longer association with Mauritius, going all the way back to 1860 when they supplied us with the first ever banknotes that the company produced. De la Rue is the supplier of the Rs 500 polymer note that we launch today. Third, two technology partners: SICPA, which manufactures the special security inks for our bank notes; and the IT company CMA Business Systems, who have been working with us on the COMESA Regional Payments System, the Real Time Gross Settlement System, and the Cheque Truncation System. We thank them most sincerely for their generous support. Our symposium will be successful only if we uncover new knowledge, form new partnerships for collaboration, if we establish new networks for continual communication across this vast continent and its island-states, and above all if we secure new professional friendships, to be nurtured over the years to come. Colleagues and friends, just a word about financial inclusion and financial access in Mauritius. Mauritius is making slow, but steady progress in economic and social development, despite the global economic and financial crisis. The Bank of Mauritius has been working closely with Government in promoting SMEs through a Bank of Mauritiusmanaged scheme, now in its second year, extending credit for new start-ups. We have a Task Force hard at work on Unfair Terms in Financial Contracts, that have been subject of complaints by consumers, for their excessive cost, inhibiting development and trade. A major innovation in banknote technology is the use of polymer to replace the traditional paper substrate. We are following in the steps of some of our African peers in the introduction of polymer bank notes. We trust that these notes, like our population here, will enjoy increasing length of life and security. Today’s Symposium could not have been a more perfect timing for launching our polymer bank notes. Our Prime Minister has accepted to address us this morning when he will proceed with the official launching of these polymer notes. By this happy coincidence, AACB will forever be associated with polymer notes here in Mauritius. BIS central bankers’ speeches Let me reiterate that I am delighted to have you with us here in our small island. I have no doubt that our meeting will be very stimulating and generate lots of ideas on how finance could promote inclusive growth. Organising this meeting in this small island-state has been quite a challenge for us. I must therefore express my personal thanks to the AACB, the organising team at the Bank, the Office of the PM and the various agencies involved in the logistic arrangements for your reception. And I must add my personal thanks to the head of my office at the Bank for coordinating the whole thing. I wish you a pleasant stay in Mauritius. I hope that our meeting will help to promote greater innovation and make a contribution to stimulate economic growth and prosperity in this great continent. In this way, we can validate the perennial and evergreen character and continued pertinence of the famous remark of the Roman historian, Pliny the Elder, who observed “There is always something new out of Africa!” BIS central bankers’ speeches | bank of mauritius | 2,013 | 8 |
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the annual conference of the African Union for Housing Finance, Flic en Flac, 11 September 2013. | Yandraduth Googoolye: The role of central banks in encouraging investment in housing Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the annual conference of the African Union for Housing Finance, Flic en Flac, 11 September 2013. * * * Ladies and Gentlemen A very good morning to you all. It gives me great pleasure to participate this morning in this Annual Conference of the African Union for Housing Finance (AUHF), being organised in collaboration with the Mauritius Housing Company Ltd (MHC). Home ownership is one of the major aspirations of an individual. Today, owning a house not only means having a shelter for the family. The house is a real asset that probably represents the largest investment undertaken by an individual during his lifetime. Such a large sum of money may not initially be readily available for the average individual. It is primarily in this context that housing finance has been linked to the grant of credit facilities by banks and other mortgage institutions. Investment in housing can be seen from different viewpoints. For a Government interested in fulfilling its social mandate of facilitating access to decent housing for low- to middle- income families, the problem is finding the necessary resources to carry out public housing programs. Let me set an aside here to dwell for a minute on the experience of Mauritius where the Government set up as early as 1963 an organism geared towards the provision of social housing. This organism evolved into the Mauritius Housing Corporation (MHC), which is today the only finance institution – both in Mauritius and Rodrigues – that caters exclusively for the promotion of home ownership and the provision of housing finance. Since July 2001, the MHC has been authorised to conduct deposit-taking business to finance its activities and is accordingly under the regulatory purview of the Bank of Mauritius. Over the years, the MHC has been innovative. In addition to credit granted for housing projects, the company also provides architectural, technical, legal, insurance services, and accept deposits primarily for the purpose engaging the general public in savings for homeownership. More of this will be provided by the Managing Director of MHC. Coming back to my main point, investment in housing, from the perspective of the household, is very often linked to the possibility of obtaining a loan at affordable terms. For the bank manager considering whether to grant a loan, the problem is how to expand the scope of financial services while managing risks appropriately. Finally, from the viewpoint of central banks, the problem is to prevent financial instability and to maintain confidence in the financial system. Today, I should like to take this opportunity to share with you the viewpoint of the central bank and some thoughts on our role in encouraging investment in housing while taking into account the risks that such investment may pose to financial stability. Hopefully, I will be able to contribute towards a deeper awareness and understanding of these risks and other issues linked to housing financing. At least two factors make this a highly topical subject. First, the 2008 global financial crisis has shed the spotlight directly on the housing market, prompting many questions to be raised about practices in housing finance. These questions have challenged traditional assumptions that lending for housing purposes is generally a safe and low-risk activity, and highlighted potential dangers that central banks and banks need to be concerned about. Secondly, the current accommodative stance of monetary policy coupled with the increased competition in BIS central bankers’ speeches the housing market calls for greater vigilance by banks in monitoring risks linked with housing loans. In Mauritius, credit for housing purposes has always constituted a large share of total credit to households. Currently, advances granted by banks for housing purposes account for around 62 per cent of total household credit. As a percentage of GDP, housing loans have increased from 7.1 per cent at end-March 2008 to 12.1 per cent in the first quarter of 2013. Latest data show that investment in residential building posted a robust growth rate of 26.9 per cent in the first quarter of 2013, and it is expected that growth in this segment will hover around 10 per cent in 2013. At the end of the first quarter, the volume of residential building permits increased to 1,724 compared to 1,367 a year earlier. Comparatively, according to the Housing Survey conducted by Statistics Mauritius in 2011, the housing stock grew by 19.9% from 297,700 to 356,900 housing units over the past decade, with the number of private households increasing by 14.5% from 297,900 in 2000 to 341,000 in 2011. While growth in the housing market is expected to be sustained, there is increasing evidence that the rise of investment property has also been important. Housing loans remain relatively sound. However, while house financing is a profitable business for most banks, competition has intensified considerably. Today banks compete aggressively for borrowers by offering highly competitive home loan packages to meet different needs of borrowers. Banks need to be aware of the risks posed by a rapidly expanding housing credit portfolio. The financial crisis of 2008 and its consequences for the world economy serve as a useful reminder of this need. Part of the central bank mandate is to ascertain that, notwithstanding competition and the need to make profits, banks maintain a prudent approach in granting housing loans. At the same time, the regulatory framework set up by the Bank of Mauritius is such that it encourages investment in housing, particularly with regard to first-time buyers. In line with international standards prescribed by the Basel Committee for Banking Supervision, credit extended for residential purposes is classified in the preferential bucket of 35 per cent of risk-weighted assets in the computation of capital adequacy ratio requirement. Accordingly, banks are implicitly encouraged to increase the quantum of their portfolio for housing credit given that they maintain lower regulatory capital for holding these assets in their books. In 2004, a Commission of Inquiry was set up by the Government on the Sale by Levy system in the light of several cases of foreclosures and rising number of lawsuits being filed in court against borrowers whose loans had become non-performing. Subsequently, the promulgation of the Borrowers Protection Act in 2007 came to the rescue and clearly set out the obligations of lenders in providing clear information on the terms and conditions governing the grant of any credit facility, including financing of the acquisition of immovable property. Several measures were taken by the Bank of Mauritius: banks were requested to abide by the provisions of the said Act for all loans, specifically with respect to facilities below the amount of Rs2 million; in view of a closer monitoring of cases being lodged in courts against borrowers, banks were requested to provide information on all cases of Sale by Levy on a periodical basis to the Bank of Mauritius. Presently, the Bank of Mauritius is working on several initiatives that aim at promoting investment by first-home buyers. Macroprudential measures shall shortly become applicable to credit extended by the banking sector for residential purposes, and these policy measures shall include guidelines towards demarcating credit granted for housing purposes and property investment based on speculation and commercial purposes. There is no doubt that making a clear distinction in the terms and conditions applicable for first-house buyers would facilitate the granting of loans. It is also perceived that buying a first house represents a low-risk investment as the collateral for mortgage financing is usually secured by fixed charge on both land and building. However, the Bank of Mauritius has adopted the stance that banks have to maintain sound BIS central bankers’ speeches lending standards in granting credit facilities to the housing sector. While having due regard to the level of household indebtedness at the macro level, the Bank of Mauritius has underlined the need for all financial institutions to undertake proper assessment of borrowers’ repayment capacity. This would prevent households from becoming overleveraged. The Bank of Mauritius further ensures that accurate information is conveyed through advertisements issued by financial institutions to attract borrowers. In this regard, while “teaser rates” for home loans can be conspicuously displayed, the Bank of Mauritius requires that other information, including the Annual Percentage Rate (APR), be displayed as well so that the potential borrower is clearly made aware of the implied interest rate applicable on an annual basis. Conclusion Housing finance contributes significantly in raising living standards of people, be it either in Africa or any part of the world. Viewed at the macro level, housing finance generates economic growth via job creation, entrepreneurship, and economic linkages to other sectors. However, one cannot ignore the fact that the recent financial crisis that rocked the global economy is closely related to a crash in subprime mortgage lending in the United States, the so-called CDS or credit default swap. While taking lessons from the global financial turmoil, the Bank of Mauritius remains committed to its goal of maintaining the soundness and stability of the financial system in Mauritius. Stakeholders should therefore aim at ways to improve access to housing finance in a sustainable way. Ladies and gentlemen, you will concur that affordability remains a major challenge in housing markets in Africa. Several constraining factors such as poverty, lack of long-term financing, reform in land management system, and the rising cost of building materials are issues that remain to be tackled by all delegates present at this conference. However, it is reassuring to note that lenders are becoming more proactive and experimenting with new products, and that housing microfinance is complementing conventional financing methods. Work being undertaken by the African Union for Housing Finance is laudable while aiming to promote housing credit as part of financial inclusion in Africa. I am sure all delegates present here from Africa mainland will benefit from the fruitful deliberations over the next three days and will reach concrete resolutions that shall foster sharing of knowledge and cooperation among members of the African Union for Housing Finance in mobilising funds for shelter and housing on the African continent. I thank you for your attention. BIS central bankers’ speeches | bank of mauritius | 2,013 | 9 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the opening ceremony of the new Bramer Bank Headquarters, Port Louis, 15 November 2013. | Rundheersing Bheenick: “On the High Street of High Finance…” Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the opening ceremony of the new Bramer Bank Headquarters, Port Louis, 15 November 2013. * * * It is a pleasure to be here this evening for the inauguration of these impressive new premises of Bramer Bank. A prime location and imposing buildings have long been at the heart of the business proposition of banks. The serious inroads of technology in the banking space have not altered the equation for traditional banks. It is hardly necessary for bank decision-makers to embrace tenets of economic geography and spatial theory to identify the capital-city as a place to set up shop in Mauritius. Port Louis boasts more branches than any other location in the country. As a central banker, I welcome this clustering, and the competition that it brings. It is also a boon for customers, keen on shopping around for better services. These new premises in a tastefully-restored centennial building, on the high street of high finance in Mauritius, in an exclusive area once reserved for the colonial elite, brings a certain added prestige to this bank. Within a radius of fifty metres, we have the grandes dames of banking in the country, such as MCB, State Bank of Mauritius, Barclays Bank, and HSBC. Within a stone’s throw, we have SBI, Century Bank and Bank of Baroda. Jostling for space on this very street, in look-alike buildings, are ABC Bank and Banque des Mascareignes. Just across the street, we can see Afrasia Bank. Which means that 10 of the 21 banks in the country are next door to you. Bramer Bank could not have chosen a better location. A bold move, indeed! For if there is already a marchand briani1 operating in the street, a new one would not set up his stall on the next corner unless he planned to offer the best roti chaud2 in town. In the case of Bramer Bank, the move to Place D’Armes sends a strong signal to all the big players on the market. With this ultra-modern branch, it takes competition to the next level. Competition is something that we at the Bank of Mauritius have been encouraging with, if I may say so, some measure of success. Mauritius is the eponymous leader in extinct species – and no laggard in threatened species, either! We have hardly learned the lesson of the Dodo. But when we look at the biogeography of the banking species over the last few years (that is since I arrived in the banking habitat), you will see that the pasture has proved rich enough to support many new varieties of the species. What is more, the young biches are not only flourishing, but successfully challenging the main stags of the herd in their erstwhile chasses gardées. The habitat of banking in Mauritius has changed; and Bramer Bank is changing it further. Five years ago, the dominant stags in the banking pasture, the four largest banks, held over 87 % of total domestic private sector credit. In just five years, that share has fallen by nearly 10 points under pressure from the new breed of banks, of which Bramer Bank is a vigorous example, taking a larger share of a growing market. Our banking sector has indeed flourished and met the needs of our growing economy. Today, 13 of our banks are among the Top 200 banks in Africa, so says the Africa Report Ratings, 2013. Bramer Bank will surely carry forward this momentum. The British American Investment Group has done a worthy job of transforming Bramer Bank into a strong alternative to the mainstream brands. This started with the acquisition of South A marchand briani is a food-hawker, selling spicy rice favoured by the locals. A roti chaud is a flat pancake made from dough, a Mauritian fast-food equivalent. BIS central bankers’ speeches East Asian Bank, which it levered up by the merger with Mauritius Leasing. Starting with just six branches in 2008, Bramer Bank now has the fourth largest branch network in the country. Moving ever closer to its customers, Bramer Bank’s business has grown three-fold in the last five years with 21 branches. It tries to live up to its tagline: “the bank that is built around you”. I note that Bramer Bank has been very mindful of our national history. It has charmingly transformed an historic colonial legacy, into a modern and warm place to offer a tailor-made space for its private banking and trade finance customers. Private banking provides tremendous scope for growth. The latest World Wealth Report indicates that the wealth of high net worth individuals grew by 10% in 2012 to reach a record level of USD46.2 trillion. We should set our sights on attracting a bigger share of global private banking business to our shores. I am sure that our banks will take up this challenge. Bramer’s private bankers and their private banking customers could hardly ask for a better environment than this classic setting to conduct their business. Today, it is customers’ evolving needs and technology that are driving the business models of banks. An ever-increasing share of bank revenues is now derived from digital channels. Banks must embrace new technology as much to offer a better and more efficient service as to resist competition from non-bank sources, such as telecommunications operators in mobile payments. We can harness technology to promote greater financial inclusion in the country. We score quite high in the African continent in the matter of inclusion. It will be recalled that, according to the World Bank Study, Banking the Poor, published in 2009, Mauritius then had the highest density of accounts in Africa, i.e. 2,010 accounts per thousand adults, and came just behind Singapore. However, access to banking services is lower than suggested by this figure. More recent data do not give us much cause for complacency. Indeed, the latest Global Financial Development Report, published by the World Bank in November 2013, indicates that 80% of the population above 15 years of age have accounts at a formal financial institution. The comparable figure for Singapore is 98%. Some 20% of the adult population is still unbanked. A basic no-frills account should be part of the basic human rights of any citizen in a modern monetised economy. We, bankers, have our work cut out for us to make finance accessible to every citizen in this country. The inauguration of the new branch-cum-registered office of Bramer Bank today comes at a time when regulators across the world are struggling to erect more safeguards against future global finance and banking crises. The perimeter of regulation and supervision is being extended. Supervisory failures are being remedied. An increase in supervisory intensity is on the cards. The regulator’s toolkit now includes macro-prudential measures. This is a new label for a range of policies and measures, themselves certainly not new, to address systemic issues, going beyond individual regulated institutions. They seek to ensure that banks do their core job of safeguarding the savings of their customers while optimising the allocation of capital. The, global, madness of casino banking is being closed down, but it is not forgotten, nor indeed forgiven. For globally we have yet to see just how many of those banksters, our rash colleagues abroad, will end in jail, as the multi-billion dollar fines they are paying are not nearly the end of this story. Happily, here in Mauritius, with judicious regulation, prudent local bankers, and a good bit of luck, we escaped the worst of that phase of irrational trading, and set our compass on a more ethical course. Yet, rapid credit growth and asset price bubbles have made regulators worldwide question their domestic micro- and macro-prudential policies to cope, amongst others, with the unintended consequences of the lingering low-interest-rate environment. The loan-to-value ratio, that we recently introduced, aims to contain speculative pressure in our property market, which has been pushing prices beyond their real value. First-time buyers will not be adversely affected by these measures for we recognise that first-time buyers are an important segment of housing demand. Moreover, the risk of default is minimal as they are more committed to honour their obligations. Wider home-ownership is also a source of BIS central bankers’ speeches social stability. This is the rationale for extending the loan-to-value ratio for first-time buyers from 80% to 90%, which the 2014 budget has improved to 95% for eligible borrowers, subject to a partial state guarantee. We also introduced a debt-to-income ratio, for two reasons: first, to prevent households from getting trapped in excessive debt; and second, to force borrowers to make informed decisions when buying a property. These will save them from the sale-by-levy trap of foreclosures against defaulting borrowers. These macro-prudential measures, together with the adoption of Basel III early next year, will do much to improve the resilience of our financial system. Over the years, we have been building our financial infrastructure to transform the country into a respectable international financial centre. It is a slow and patient undertaking which forces us to keep abreast with international best practice. Occasionally, those who are comfortable in what they have been doing so far may feel that we are moving too fast. They fail to recognise that we are now operating in a very dynamic environment. We just cannot afford to have a domestic financial sector where core elements are resistant to change. We are overhauling corporate governance practices in banks, with particular emphasis on the responsibility of the Board of Directors, on the choice of Board members, and on their tenure of office. I have no doubt that the management and Board of Bramer Bank share our belief that a sound corporate governance framework is the bedrock on which to build a successful bank. We expect to initiate a National Payment Switch soon. This will connect all transactions by card and mobile phone to a central point, and lead to significant cost savings for all stakeholders. It will level the playing field for all banks by removing the barriers to entry which the costly initial investments represent for small banks, acting singly. We also recognize the importance of protecting depositors and we sincerely hope we shall overcome remaining pockets of resistance and set up a national deposit insurance scheme, which is a critical missing link in our domestic financial architecture. The bien-être of consumers of banking services is a key concern. Customers are in a weak bargaining position vis-à-vis banks. The Task Force on Unfair Terms, that we have set up, is hard at work and will soon come up with its recommendations on how customers can get a fairer deal. So, these are some of the priority areas for us in our quest to ensure that consumers are treated fairly and get the protection that they deserve. As regulator, I would not earn my keep if I did not use the occasion to offer some words of advice to my regulatees. I am inclined to caution banks against undue risks. I greatly appreciate the efforts of our banks in technological innovation but this must not be at the expense of any relaxation in controls and risk management processes. By all means, venture into new areas but, first, do put in place safeguards to mitigate the potential risks! Banking is becoming increasingly transnational and it only takes a click of the mouse for funds to switch jurisdictions. We must remind ourselves that the risks of money laundering are ever-present. Banks should always be on the alert to combat money laundering and to prevent our financial system from being used as a conduit for such crimes. I welcome the recent measures in the budget to combat financial crime. My final comment is prompted by a recent press remark attributed to a local banker. The banking industry differs in crucial respects from other business sectors and I would expect a banker to be aware of it. Locally, the shareholding of non-bank corporates in some domestic banks is very significant – which is not permitted in many jurisdictions. The return on equity (ROE) in the banking sector is well above those of the real sector – at 30 June 2013, the highest ROE was 28.6%. I am not aware of any real sector operator posting nearly 30 % returns in 2013, do you? Banks earn returns not just on their own initial equity, but also on the deposits which they mobilise from the public, which are far in excess of their own equity. Some banks have deposits-to-equity ratios of up to 2,200%, that is, in plain language, deposits are 22 times the initial equity capital of the owners, excluding reserves and BIS central bankers’ speeches accumulated surplus. The yields on their assets go to their bank equity holders. Few businesses can leverage their capital that much. It is normal that in return, they are subject to tight supervision and occasional recourse to special levies to finance government expenditure. If some are complaining about banking being overtaxed, they can always move out of the banking space to other sectors of the economy. I can assure you there is no dearth of demand from outsiders to gain entry to the domestic banking scene. Let me conclude! I sincerely congratulate the Board, management and staff of Bramer Bank on the inauguration of these premises. I wish you success in your endeavours to fulfil your priorities for innovation and quality of service, to your customers and to the country. BIS central bankers’ speeches | bank of mauritius | 2,013 | 11 |
Statement by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, Port Louis, 14 November 2013. | Rundheersing Bheenick: Review of the year gone by and reflections on the present and future outlook Statement by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, Port Louis, 14 November 2013. * * * The financial year 2012–13 has been challenging for the Bank as I had anticipated in my last Statement, and we have continued to be tested by international and domestic pressures. The long-running financial crisis has now entered its sixth consecutive year. The global economy has remained under stress – the US witnessed timid growth, the euro area temporarily slipped into recession, the UK avoided “triple-dip” recession, and growth in emerging economies moderated. Occasional bouts of volatility in financial markets complicated the lingering global uncertainty. With monetary policy loose and fiscal space limited, particularly in the advanced economies, capital flows worldwide have been relatively more volatile as investors responded to uncertainty in major advanced economies. This impacted adversely on some emerging economies with rising inflation, capital outflows, and sudden depreciation of their currencies. Policymakers around the world introduced several non-conventional measures to calm financial markets and provide confidence to investors. The Mauritian economy grew at a relatively healthy rate of 3.4 per cent in 2012 despite the negative sentiment that prevailed during much of that year. Headline inflation came down from 4.9 per cent in July 2012 to 3.6 per cent in June 2013 while year-on-year inflation stabilized, decreasing marginally from 3.7 per cent to 3.6 per cent. The increasingly diversified nature of our economy in terms of markets and products, and prudent and appropriate fiscal and monetary policies implemented during the year, maintained macroeconomic and financial stability in the country. We benefited from a steady flow of foreign direct investment, not far from previous highs, during the period. Unemployment hovered around 8.1 per cent in 2012, a level that I do not consider alarming in the current context, especially if account is taken of chronic over-reporting, continued skills mismatch, and labour market inflexibility which induces employers to have recourse to foreign labour. During the year, the Bank was called upon to respond rapidly to the changing dynamics at the international level as well as on the domestic front. Operation Reserves Reconstitution In June 2012, the Bank launched the Operation Reserves Reconstitution (ORR) – an unconventional measure for the Bank of Mauritius which had pursued a free-floating foreign exchange regime until as recently as November 2011. The currency appreciation was getting quite alarming at the time and required urgent policy responses on our part. The ORR allowed us to address not only the growing appreciation of the rupee but to build up our reserves which crossed the Rs100-billion threshold in May 2013. We are today well on our way to achieve the target of six months’ import cover. The ORR resulted, however, in excess rupee liquidity in the domestic money market and the Bank had to conduct open market operations to mop up the surplus. We had to complement the issue of Government securities with our own paper which reached a record level of almost Rs19 billion. This came with a cost and weighed heavily on the Bank’s balance sheet. The continuation of open market operations at the same level as in recent months will rapidly become unsustainable for us. A few years ago, I had flagged this issue. Today, I am renewing my call to the authorities to share the burden as it is certainly not in the interest of the nation to have a central bank with weak finances. BIS central bankers’ speeches Ponzi Schemes At the beginning of 2013, we were hit by a spate of financial scams. Scammers, using the loopholes in the regulatory framework, lured the public into investing in schemes that promised extravagant returns ‒ which in fact turned out to be Ponzi Schemes. This was a wake-up call for regulatory and other authorities to review their operations as they relate to detecting and combating financial crime. When the Ponzi Schemes were uncovered, the Bank stepped in to manage the crisis and reassure victims by setting up a help desk to attend to the grievances of the public. The number of known victims of the six companies involved in the financial scams, who lodged complaints at the Bank reached 2,290 and the total defrauded amount stood at Rs835 million by 28 June 2013. The figure is rapidly nearing the Rs1 billion mark. We undertook a series of actions to deal with the problem; most notably we sought the assistance of the Reserve Bank of India (RBI), which has first-hand knowledge of the matter. The RBI team’s recommendations range from the reinforcement of Know Your Customer procedures and due diligence in banks, the setting up of dedicated cells to gather market intelligence, to enhanced coordination among regulators. These recommendations are in line with the restructuring and redefining of our mandate. They reinforced our commitment towards financial literacy, consumer education, and fair treatment of consumers, on all of which we had initiated work in early 2012. The Task Force on Unfair Terms and Conditions in Banking and related Financial Contracts was set up in July 2012 to investigate into the terms and conditions of contracts, including fees, commission and charges. The public was invited to make representations. We hope to be able to share the work of the Task Force with the public in the course of the coming year and, hopefully, pave the way for a better deal for users of banking and financial services. Modernisation of the banking sector We pursued our efforts to modernise the banking sector and enhance the soundness of our banks. We granted our 21st bank licence to a new bank which started operations in February 2013. We were concerned with the need to protect the cross-border branches of foreign banks operating in our jurisdiction from potential problems of their parents in their home country. We encouraged foreign bank branches to convert into subsidiaries. The proposal of Barclays Bank PLC Mauritius Branch, to convert itself into a wholly-owned subsidiary provided us with the opportunity to expand our legal arsenal with new provisions to aid such restructuring. Our concern for ensuring financial stability further motivated us to consider the case of large and complex local banking institutions – an ever-present danger in a country where 65 per cent of bank assets are controlled by two banks. We are in the process of putting up a framework for Domestic Systemically Important Banks, wherein stricter requirements including the imposition of capital surcharge will be applicable. We issued a consultation paper outlining our proposal to the industry for comments. We also brought important changes in the board room of banks, requiring diversity of board members, competence and periodic term renewal. I once reflected that a crisis is too good to be wasted – the global regulatory reforms were mirrored in our own efforts to strengthen the resilience of our banking sector. In May 2013, we issued a draft guideline on Basel III after we had circulated a consultation paper to the industry in October 2012. We continued our work on the setting up of Supervisory Colleges in Mauritius for our banks with cross-border operations. We expect to hold the first Supervisory Colleges later in the year. Our banking sector assets grew at the rate of 10.2 per cent. The month of May 2013 also saw banking assets exceeding the Rs1.0 trillion mark for the first time. Profit after tax maintained its upward trend and the capital adequacy ratio of banks remained well above the regulatory requirement of 10 per cent. Nonetheless, the growing non-performing loans and the concentration of risks in our banking sector continued to raise financial stability concerns. BIS central bankers’ speeches We started work during the year on the introduction of a wide range of macroprudential measures to contain banking sector risks. At the heart of a modern economy is a robust and efficient payments system. The Cheque Truncation System, introduced the year before, saw the end of physical exchange of cheques on the Bank’s premises on 31 January 2013. International regional role We continued to participate actively in regional fora organized by SADC, COMESA and AACB and brought our contribution to discussions relating to regional issues. The COMESA REPSS went live in October 2012. We were privileged to host in November 2012 the second meeting in Africa of OMFIF, which regroups diverse players from the public and private sector, central banks of developed and developing economies, sovereign wealth funds, and academia. Nearly 100 delegates from Europe, Africa, Asia and Latin America participated in the meeting. On 30 August 2012, at the conclusion of the 36th Assembly of Governors of the AACB in Algeria, I assumed the Vice-Chair of the AACB, with Governor Mohammed Laksaci of the Bank of Algeria in the Chair. In August 2013, the Bank hosted the 37th Assembly of Governors of the AACB – the first time in its 45-year history that the AACB has held its meeting away from Continental Africa – and I took over the Chair for a one-year term. Almost simultaneously, I was appointed by the FSB RCG for Sub-Saharan Africa as its non-FSB member co-chair for a two-year term starting 1 July 2013. Over and above the Governors who participated in OMFIF and AACB meetings in Mauritius during the year, I welcomed Ms Christine Lagarde, Managing Director of the IMF, Dr Duvvuri Subbarao, Governor of the Reserve Bank of India, and Mr Martin Redrado, former Governor of the Central Bank of Argentina. Monetary Policy Committee Since its inception in April 2007, the Monetary Policy Committee (MPC) witnessed several changes. 30 meetings have been held of which 29 were interest-rate-setting meetings. The MPC was reconstituted, for the second time, in December 2012 and the total number of members was reduced from nine to eight, comprising namely, the Governor, the two Deputy Governors, two members appointed by the Prime Minister, and three members appointed by the Minister of Finance and Economic Development. It was also explicitly laid down in the Bank of Mauritius Act that the MPC has to take into consideration the views of the Bank, the Ministry, and any other appropriate institution. Furthermore, the MPC adopted a Code of Conduct for its members. During 2012–13, the MPC met on four occasions. At the first three meetings, the Key Repo Rate (KRR) was left unchanged at 4.9 per cent. In June 2013, the MPC, at its second meeting in its third reincarnation, took the decision to cut the KRR by 25 basis points to 4.65 per cent by majority vote ‒ outvoting my two Deputy Governors and myself who preferred to adopt a more prudent stance in the face of growing vulnerabilities in the financial system. Monetary-policy-making is a forward-looking exercise, requiring objectivity and independence of mind, and should, in my view, be ideally operationally-independent of Government. The mandates of fiscal and monetary authorities are not necessarily incompatible – the overriding objective remaining the well-being of the nation. Indeed, fiscal and monetary coordination is a two-way traffic requiring mutual adjustment. At the June 2013 MPC meeting, the representation of the Ministry weighed on the final assessment of MPC members and resulted in an interest rate decision that the Bank did not consider fitting in then economic circumstances. BIS central bankers’ speeches Transforming the Bank of Mauritius into a modern central bank We carried on the process of modernising our statistical operations. We pursued our efforts to meet the highest standards applicable to balance of payments and monetary and financial statistics in terms of quality and frequency – SDDS+. We launched our first polymer bank notes, a major innovation in bank note technology, in August 2013. We seriously considered this alternative as far back as 2008 but our earlier attempts to introduce polymer notes ran into legal hurdles and we first had to change the applicable law before we could proceed – thus missing our chance to be the first in Africa. As I write this Statement, polymer bank notes in three denominations of Rs25, Rs50 and Rs500 are circulating in parallel with paper bank notes. In the wake of the global financial crisis, banking has become a 24-hr operation. Banks are evolving in an extremely dynamic and competitive environment. Financial institutions are more and more stretching regulations to outwit regulators; and we regulators, need to continuously strive to keep ahead of them. The demands on the Bank are becoming more and more exacting by the day. The restructuring of the Bank, which I initiated in 2007, is ongoing. Our headcounts are among the highest, on a per capita basis, amidst our peers and a more flexible approach is needed to attract new talents. Fresh skills have been recruited to complement our pool of talents in new areas of business, for example, reserve management. A review of the salary and conditions of service at the Bank was conducted to align them with market trends, attract new talents as well as retain existing ones. The salary review includes a Performance Management System which will be introduced this year, paving the way for a mechanism that relates work performance and remuneration. These developments should translate into efficiency gains and allow the Bank to keep up to the mark when it comes to expected outcomes even if they exert pressure on our overhead expenses. Words of Appreciation In May 2013, our Prime Minister, Dr The Honourable Navinchandra Ramgoolam, GCSK, FRCP, appointed me for a third term of office. I am deeply touched by this mark of continued confidence in my abilities to lead the Central Bank. I will endeavor to uphold the trust placed in me and I am sincerely indebted to him for the unflinching support he extended to me since the beginning of my tenure of office. I have worked closely with the Honourable Charles Gaëtan Xavier-Luc Duval, GCSK, VicePrime Minister and Minister of Finance and Economic Development, and his team during the year. We have often had diverging views on our assessment of the economic situation. Indeed it is common for Treasuries and Central Banks to have occasional differences when it comes to economic, financial and monetary policies ‒ which our lively local media, and some interested lobbies, magnified. Here, we have different mandates but we both have the economic welfare of the Mauritian population at heart. I thank the Honourable Minister and his team for the cordial working relations between ourselves and between our respective staff, in particular at the level of different regular joint working committees. I have a special word of appreciation for the strong bond of partnership that now exists between the Central Bank and the banking community. Our regular dialogue and frequent consultations have strengthened our collaboration. I therefore thank all stakeholders, in particular, Chief Executives of banks and the Chairman and the Chief Executive of the Mauritius Bankers Association, for joining our efforts for the advancement of the banking sector. Finally, I need to express my sincerest appreciation to my two Deputy Governors, the Head of my Governor’s Office, my Heads of Division, and the Staff of the Bank for their support and commitment throughout the past year. BIS central bankers’ speeches Looking ahead There are increasing signs that we are nearing the end of the crisis with visible signs of what looks like a sustainable recovery. I never tire of saying that the best contribution that the Central Bank can make to the nation is to maintain price and financial stability – this is our raison d’être. Our heightened profile at the international level puts us in a position where we can make a significant contribution to issues of relevance to central banks well beyond our own frontier. Over the years, we have transformed our economy to make it more diversified and resilient. Had we not engaged in, at times, painful reforms, we would have been hit harder by the crisis. We need to pursue these reforms and develop new drivers of growth that can take our economy out of the middle-income trap to a higher-income-level economy. Development, like life itself, is a journey and not a destination. The reforms must continue if we are to maintain our preeminent position in Sub-Saharan Africa. BIS central bankers’ speeches | bank of mauritius | 2,013 | 11 |
Subsets and Splits
No community queries yet
The top public SQL queries from the community will appear here once available.