A Case Study of the Bank of Mauritius Finance Essay

The central bank (CB) of a country is one that has the right and duty to lend money to the government and commercial banks, set monetary policies, supervise and regulate the activities of financial institutions, mainly banks (Kock 1974, p. 14). Clear differences exist between central banks and commercial banks. [1] The central bank of Mauritius, responsible for these functions, is known as the Bank of Mauritius. This chapter will focus mostly on the role and the position that the Central bank holds in a country such as Mauritius. The way the CB is organised and managed will help in understanding how the bank proceeds in ensuring compliance by commercial banks. History of the bank The Bank of Mauritius (BoM) was founded in September 1967 under the Bank of Mauritius Act, and was modelled on the Bank of England. The bank is led by a Governor, who is also the Chairman of the Board of Directors. The Governor is appointed by the actual President, on the recommendation of the Prime Minister, and is the principal representative of the Bank who is also responsible for its general supervision. The Governor is answerable to the Board of Directors, who is appointed by the finance minister. The bank was established in order to cater for the needs of a more developed and complicated financial system and monetary dealings. The BoM was formed with the help of senior officers of the Bank of England, along the line of the well-known Radcliffe Report as ‘a separate organisation with a life of its own, capable of generating advice, views and proposals that are something more than a mere implementation of its superior’s instructions. [2] In other words, the bank should be independent legally and politically. However, as pointed out by Chandran Jankee, associate finance professor at the University of Mauritius, the independence of the BoM is subject to some debate, since it is doubtful whether the government in power controls the bank or whether the bank is free from politics (Arouff 2009). [3] After the creation of the BoM, our monetary system became more developed, such that the system moved from a ‘Sterling Exchange Standard’ to that of a ‘managed currency’, implying that the flexible role of the monetary authority becoming more important. [4] The country gained more control over its currency. The BoM is not the only financial regulator of the country. The Financial Services Commission (FSC) is responsible for supervising non- bank financial institutions. There is interaction between the two regulators. [5] As stated by Mr. Meetarbhan (2007), the Joint Coordination Committee was launched in order to avoid conflicts between the two regulators, so that the two bodies work together to regulate the financial industry. [6] This union between the two regulators will lead to more efficiency and thus, the country will be in a better position to compete with other countries. Role, duty and functions of the Bank of Mauritius All CBs, including the Bank of Mauritius, have some common tasks. The principle of any regulatory authority in any economic and financial system is to primarily attempt to save troubled financial institutions. [7] According to the Bank of Mauritius Act 2004, the functions of the central bank are to: conduct monetary policy and manage the exchange rate of the rupee, taking into account the orderly and balanced economic development of Mauritius; regulate and supervise financial institutions carrying on activities in, or from within, Mauritius; manage, in collaboration with other relevant supervisory and regulatory bodies, the clearing, payment and settlement systems of Mauritius; collect, compile, disseminate, on a timely basis, monetary and related financial statistics; and manage the foreign exchange reserves of Mauritius. [8] The goals of monetary policy include economic growth, low inflation and stability of the currency, high employment, interest rate and financial market stability amongst others (Presson and Tabellin 1995, p. 250). Without the involvement of the BoM in the setting of such objectives, the country’s financial situation and market would have been highly volatile, rendering the country not very attractive to invest in and uncompetitive. It is, furthermore, in charge of setting interest rates and controls the money supply. The bank will adjust its strategy depending on the economic situation of the country and the also the world economy. For instance, if the economy is in a period of economic prosperity, the bank will aim at a reduction in money supply in order to avoid inflation. It can do so by, for example, increasing the rate of interest. As a result, people will be more interested in saving money than spending, thus, reducing the money supply in circulation. Kock (1974, p. 34) declared that CBs fulfil the functions of agent, adviser of the Government and banker of both the latter and commercial banks. [9] The CB can also be considered to be the financial advisor of the government, as it helps in managing public debt and devise strategies and plans to reduce such debts. By so doing, the bank helps the government to sustain economic growth and tries to adjust any surplus or deficit in the Balance of Payment. This is one of the methods used by the central bank to control the value of the currency of the country. Another important function of the CB is the supervision and regulation of commercial banks, both domestic and offshore, under the Banking Act 2004. Nineteen banks fall under the regulation of the BoM. Additionally, it also supervise foreign exchange dealers and money changers, licensed under the Foreign Exchange Dealers Act as well as non-bank financial institutions authorised to take deposits under the Banking Act. [10] Freixas and Rochet (1998, p.257) claim that bank regulation is justified by market failures that can come from the presence of market power, the importance of externalities, or asymmetric information between buyers and sellers. [11] Without the supervision of the BoM, commercial banks may, for instance, launch a service which might be disadvantageous to their customers. They may even adopt dishonest practices to get rid of weak competitors. Commercial banks in Mauritius are regulated and supervised by the Bank of Mauritius under the Banking Act 2004 which replaced the 1988 Act, with a view to reinforce and modernise the regulatory and supervisory system as well as to provide for the legal framework for the establishment and operations of offshore banks domiciled in Mauritius. [12] The BoM and compliance officers of commercial banks normally work hand in hand. In order to be more efficient, the Banking Committee chaired by the Governor of the Bank and comprising Chief Executive Officers of banks formerly holding a Category 1 Banking Licence decided to set up a Committee between the Regulator and the Compliance Officers (Committee) of those banks to serve as a platform for interaction on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) issues. [13] The bank should ensure that financial institutions adopt policies and procedures designed to control and manage risks effectively. As the regulator, it should monitor system-wide factors that might have or potentially have a negative impact on the financial condition of financial institutions. [14] The BoM holds a major part in the compliance practices of other financial institutions. [15] Powers of the BoM [16] The powers of the CB of Mauritius are mainly set out in the section 6 of the Bank of Mauritius Act 2004. Contrary to what many people may believe, CBs are not all-powerful. They have limited powers to put their policies into effect because of many constraints, both economic and political. One of the powers of the BoM is to provide financial services and facilities (deposits, lending money etc..) to the Government, institutions and funds controlled by the Government, to financial institutions, any statutory or corporate bodies as the Board may approve, and to the receiver and manager or the liquidator of any financial institution in liquidation. In general, the bank has the power to deal with anything regarding the foreign exchange reserve and market. It can adopt relevant policies to deal with the development and any fluctuation in the money market. The bank has also some discretionary powers for the sale and re-purchase of bonds, treasury bills and any type of securities; in other words, it has the capacity of raising funds for the government. Besides of raising fund from the public, it can also borrow money from international institutions like the World Bank and the International Monetary Fund for any project which the board may approve. The CB of Mauritius has also the authority of controlling many issues concerning other financial bodies, such as, appointing any other financial institutions to act as its agents in Mauritius, and any other financial institutions abroad to act as its agents or correspondents abroad. It is able to regulate the fees and charges in respect of services provided by financial institutions and with the consent of the Minister, subscribe to, hold and sell shares of any corporation or company set up for the purpose of facilitating economic development. [17] As it can be seen above, the BoM has several powers which it must employ with precaution, and within the legal and moral framework of the country. It must also be noted that, if ever the BoM, namely the Governor, makes abuse of his powers, he can be removed and replaced by the Prime Minister. Effectiveness of the Bank The CB will be effective in achieving its goals and objectives if it co-ordinates its various policies and fiscal policies made by the government, so that they can go side by side without hindering each other. If ever there is a clash between the policies, then the desired results will not be obtained. BoM regulation of commercial banks is essential, since without it, the dealings and affairs of these banks will become arbitrary. Since its establishment, the bank has been quite successful in achieving its objects. Except in some cases, where commercial banks have gone off track, like the case of MCB/NPF [18] . However, one cannot expect the central bank of a country to be perfect. As the ex Governor of the BoM, Ramesh Basant Roi, rightly said, “The Board of Directors provides for the checks and balances in the event that abuses of authority are detected. Governors are not faultless Buddha.” An example of the effectiveness of the BoM is present in this case, whereby the Bank adopted an approach that best served the welfare of the country’s financial sector and the economy. The BoM made sure that the measures taken by the MCB to fully restore its internal controls and procedures are carried through and that such controls are properly implemented and procedures are strictly followed. [19] Independence of the BoM An independent central bank is not affected by political pressures and is free to set its policies without worrying about the consequences that such policies will have on the image of the government in power. [20] Such independence is very essential if a central bank wants to achieve its objectives. [21] A paper written by Carlstrom and Fuerst (2006, P. 2) pointed out that, if central banks are pressed on to adopt measures which seem beneficial, like inflating the currency in the short run to deliver a more favourable exchange rate, a higher output rate, or a lower level of inflation-adjusted debt. Such short-run inducement may contravene the aim of long-run price stability. One good example of the advantages of having an independent central bank is the case of New Zealand, whose average annual inflation dropped from 7.6% to 2.7% after giving more independence to the Reserve Bank of New Zealand. New Zealand Bank is ranked among the most independent ones. Even though the fall in inflation rate cannot be wholly attributed to the greater independence given to the bank, it has played a key role in achieving this target. [22] Whenever the government interferes in the matters of the central bank, it is not always for the bank’s own good. Most of the time, not always though, ministers will be biased by their political situation, in giving suggestions and recommendations. To better illustrate this, let us consider a situation whereby the country is in a period of general election. The government in power will try to induce the population to vote for them, and thus, it may issue guidelines to the central bank to adopt measures which will look favourable now, but not that beneficial in the long run, just to look good in the eyes of the public. Because the bank does not have to worry about influencing an electorate to vote for it, it is more likely to act in the best long-run interests of the economy. For the case of the BoM, according to the law, the bank is an independent bank, because the Governor is accountable to the Board and not the parliament. This has been set out in the Bank of Mauritius Act 2004 for good reasons. The Bank has to be protected against the influence of politicians. It is the Governor who is responsible of formulating guidelines and policies. However, some have raised the question whether the bank is really independent politically, and not just in theory. When some argue that the BoM is run by the Governor, others claim that it is run both by the minister of finance and the Governor. As a consequence, there might be conflicts when drafting policies. While the Governor might be motivated by some factors, the minister might be motivated by others, more political ones. The fact that both the Governor and the Board are appointed by members of the Parliament implies that the government is bound to step into the matters of the bank. [23] The Prime Minister will not appoint someone who is against his opinions and way of doing things. If he feels that the Governor is not acting in accordance of his will, then he may devise a mean to make him step down and appoint someone else. However, given that it is the Board who has the power to direct and instruct the Governor to proceed in accordance with the majority’s decision at the Board level, may imply that if the government has no control over the Board, then it will not have any control over the running of the bank. It must be noted again that the Board also is appointed by the Minister of Finance. As a result, some members of the Board might be more committed to the Minister instead of the Governor. The case of the Ex Governor, Mr. Ramesh Basant Roi, may put some doubt on the autonomy of the Bank. Since he was removed from office as he was not in agreement with the then Minister of Finance. Most members of the Board were also against him. He was clear about the fact that the central bank should be completely free from political pressure. He said in an interview accorded to L’Express newspaper on the 12th April 2008, “Under normal circumstances the fact remains that a central bank can and should ignore government’s policy priority if it suspects attempts of misuse of certain levels of power to meet political ends at the expense of price stability or even growth. I reiterate that central banks have long term policy goals. But governments have short-term policy goals and interests.” [24] According to him, the government should avoid interfering in the matters of the Central Bank, in order to have a sound financial industry and ensure that financial institutions do indeed comply with laws and regulations established.

Â

Did you like this example?

Having doubts about how to write your paper correctly?

Our editors will help you fix any mistakes and get an A+!

Get started
Leave your email and we will send a sample to you.
Thank you!

We will send an essay sample to you in 2 Hours. If you need help faster you can always use our custom writing service.

Get help with my paper
Sorry, but copying text is forbidden on this website. You can leave an email and we will send it to you.
Didn't find the paper that you were looking for?
We can create an original paper just for you!
What is your topic?
Number of pages
Deadline 0 days left
Get Your Price