Features of the Financial System Finance Essay

Mauritius, which is a small island in the Indian Ocean and which forms part of the South African Development Community (SADC), is becoming more and more famous because of its financial and economic stability. The country is also very stable politically and has a good education system which has lead to a high literacy rate among its inhabitants. These factors have thus contributed to the fact that Mauritius now has a relatively big and quite well developed domestic financial system and its offshore sector, which allows it to open its financial services to the rest of the World, is quite promising. Its payment system, securities trading system and its settlement system which form part of the basic financial sector infrastructure, is quite modern and efficient. Financial Services in the country is also very accessible and it is quite easy for firms to gain access to services provided by the Financial Industry and to borrow funds.

The main features of the Mauritian Financial System are its banks, its capital market, the Insurance sector, its Money Market and its Offshore Sector.

2.0 FEATURES OF THE FINANCIAL SYSTEM

2.1 BANKING SECTOR

The Banking Industry plays a very important role in the economy of Mauritius as it is the main constituent of the Financial System of the country. The Banking Industry of Mauritius is considered to constitute 2/3 of the domestic financial system. It has kept expanding and has grown at a mean rate of 13% from 2002 to 2007 (Padachi, Rojid & Seetanah,2008). After this progress was somewhat hindered as the world was hit by the global financial crisis. However, it has to be noted that banks in Mauritius have stood remarkably well in this period of financial turmoil and they are still performing well. This has been possible mainly due to the fact that the country is both politically and socially very stable. The Banking Sector is also quite important for the Mauritian Economy as it provides employment to many people but also by allowing the inflow of foreign currency in the country.

The Banking Industry of Mauritius comprises of 19 banks among which 6 are local banks, 8 are foreign owned subsidiaries, 4 are branches of foreign banks and 1 is a joint venture. The Central Bank give licenses to all the banks in order for them to operate and provide banking services both locally and internationally.

The Mauritius Commercial Bank and The State Bank of Mauritius are the 2 main local banks in the country and dominate the Banking Industry of Mauritius by controlling about 66% of the market (SADC Report,2011). They are both listed on the Stock Exchange of Mauritius. The two largest foreign banks operating in the country are the Hong Kong and Shanghai Bank (HSBC) and Barclays International which combined together have a 25% share in the market.

Banks in Mauritius provide a large range of services to their customers. These include:

Deposits

Many deposits products are offered by the banks namely current accounts, term deposits, savings accounts and this in most currencies.

Advances

Banks provide financing for both private and corporate requirements along woth traditional overdraft facilities. They offer loans with different times to maturity in different currencies depending on the needs of their customers.

Trade Finance

Trade Finance products are very common in all Mauritian banks. They provide services such as letter of credit, import loans and other facilities to support the trading busisness.

Banks also offer card based payment services such as debit cards and credit cards

Other services offered by banks in Mauritius include: Electronic Funds Transfers, Foreign Exchange, Cash Management, Internet Banking, Private Banking, Wealth Management and Investment Banking.

It can be said that the Banking Sector in Mauritius is very promising despite the recent crisis and with the increased number of investors now coming to the island, banks have kept on improving and innovating their products and services to better serve the changing needs of their customers.

2.2 INSURANCE SECTOR

The Insurance sector in Mauritius is relatively well developed. In fact, the existence of insurance companies in Mauritius dates back to as far as 1835. The sector has taken quite a lot of time to develop but is today quite strong. This sector contributes about 2.8% to the Gross Domestic Product of the country. The Insurance Sector in Mauritius extensively uses reinsurance facilities.

Life Insurance, which represents the major part of the total premiums, has been favored by the growth of pension funds. Life insurance constitutes about 61% of the total premiums. The second largest contributor to premiums is motor insurance which generates about 17% of the premiums.

There are about 20 insurance companies in Mauritius. Some of them are local companies while others are branches or subsidiaries of foreign owned companies. The insurance products which are offered by those companies are adapted to meet the demands and needs of their customers. They usually provide services such as life insurance, travel insurance, personal pension plans, medical insurance, commercial insurance. Some of them also provide loans for specific purposes such as education, housing or for commercial purposes.

2.3 OFFSHORE SECTOR

The Offshore sector or as it is more commonly called nowadays the Global Business sector is quite booming in Mauritius although it has been hit by the recent Global Financial Crisis which has hindered its progression. Over the past few years Mauritius has emerged as an efficiently regulated financial centre for conducting business and providing financial services. Many companies are registered in Mauritius to conduct Global Business and there are about 550 investment funds in the country. They usually conduct activities such as asset management, management of trusts, investment holding, consultancy services and management of partnerships and societies. The Offshore sector in Mauritius is however dominated by offshore banking

2.3.1 OFFSHORE BANKING IN MAURITUS

Offshore business activities became a significant sector in Mauritius as from 1992, when the Mauritian Offshore Business Activities Act (MOBA Act 1992) came into force, bringing into being the Mauritius Offshore Business Activities Authority (MOBAA), which was active and effective in structuring offshore regimes in various sectors. Alongside this initiative, Mauritius began to offer a range of very attractive investment incentives.

Services offered by offshore banks are in Mauritius: Accounts in major currencies, Currency Advisory Services, International Money Payments, Outward Payments, Multi-Currency Cheque book, Credit balances, Foreign Exchange and Derivatives Transaction, Structured Investments, Custody Services, Credit Facilities, International Trade Instruments, Structured Trade and Commodity Finance.

The international banks present in Mauritius in the late 1980âA¢”šA¬A¢”žA¢s and early 1990âA¢”šA¬A¢”žA¢s were the pioneers in this field, backed by their enhanced knowledge of the global market and their clientsâA¢”šA¬A¢”žA¢ needs and demands. Services provided included offshore lending and trade financing as well as services to private equity investors and Foreign Institutional Investors (FII) in terms of opening and maintaining their accounts, cash clearing and settlement compliance monitoring and reporting, advising on tax matters and acting as global custodians.

The authorities were also eager to create the appropriate environment for the offshore business sector to take off and this was done in the form of the revival of the Indo-Mauritian Double Taxation Avoidance (DTA) Treaty signed with India as far back as 1983 and ratified by both countries in 1985. The latter remained mostly inactive until 1993 when renewed interest in the Treaty was expressed when India opened its economy by allowing FIIs to invest in the Indian Stock Market. Today, some 33 other DTAs have been signed and are in force, the most active ones being those with India, China and South Africa, clearly establishing the positioning of Mauritius as a regional financial centre and the preferred route for investment flows between Africa and Asia.

The international banks now present in Mauritius sought their banking license once the offshore sector had started to gain the necessary momentum and enhanced opportunities of doing business from Mauritius were well established. These are amongst others: Investec Bank in 1997, Bank International Indonesia in 1998, Deutsche bank in 1999 and Standard Chartered Bank in 2002. (Mauritius Bankers Association, 2012)

2.4 MONEY MARKET

The Money Market, in Mauritius has two main constituents namely the Inter-bank money market and a market for treasury bills and other securities issued by the government. In an attempt to encourage the emergence of Islamic finance in the country it is also now possible to trade some of those instruments in the market. Banks, since 2004, can also enter into repurchase transactions amongst themselves by making use of government securities as collateral. As from 2003, The Central Bank, i.e, the Bank of Mauritius began issuing Bank of Mauritius Bills along with the normal Treasury Bills. Treasury Bills are normally issued when the Government has borrowing needs only while Bank of Mauritius securities are issued for monetary purposes. A secondary market for these types of securities is also operational.

In February 2002, a Primary Dealer System was implemented and till date there are 12 banks which have been appointed as primary dealers. The Bank of Mauritius usually intervenes in the Money Market as and when it is necessary by conducting repurchase activities and reverse repurchase activities and by issuing Bank of Mauritius Bills and Notes. Its intervention will depend on the liquidity conditions of the market.

The main instruments used in the money market are Treasury bills and other short term government securities.

2.5 CAPITAL MARKET

The Stock Exchange of Mauritius (SEM), which was set up on the 30 March 1989, is the only organized market for the trading of company shares and debentures in Mauritius. Forty companies were listed on the Official Market of the Stock Exchange of Mauritius at the end of June 2011. Among them, only one was a foreign company while the others were local ones. In addition, five foreign firms were listed. The SEM is mainly involved in the trading of company shares and debentures. The Stock Exchange of Mauritius is nowadays undergoing a strategic reorientation of its activities and is little by little moving away from its equity based domestic exchange to a multi product internationally oriented exchange. An Over the Counter Market is also present and forms part of the Capital Market.

In the pursuit of innovation, the Development and Enterprise Market (DEM) has now been implemented and it has been especially designed for small and medium sized enterprises and companies which are new entrants to the equity market (Nowbuthsingh & Oodit, 2009). The DEM is mostly aimed at companies which want to take the advantages and facilities provided by a regulated and organized market. These companies might have as objective to raise capital for their future growth, make their shares more liquid, improve their corporate image or get an unbiased market value of their shares. The DEM also goes hand in hand with the policy of the Government to cater the needs for the development of a dynamic business environment in Mauritius. The Development and Enterprise Market also helps to diversify the Financial Services sector and thus it helps investors to have access to a wider range of opportunities for investment.

Here, it is worth mentioning the recent implementation of the Global Board of Trade in October 2010. It is licensed as a multi class asset exchange and performs its operations on two derivatives segments namely the Currency and the Commodity Derivatives segments. It is the first exchange to offer possibilities of derivatives instruments trading in the island. It provides clearing and settlement systems and access to most of the growing economies of the world. The Global Board of Trade by its implementation has helped to promote Mauritius as a financial hub as it provides investors with opportunities such as making use of arbitrage situations and to hedge price risks movements in the international markets.

3.0 THE LEGAL AND REGUALTORY FRAMEWORK

There are two main bodies which regulate the Financial System in Mauritius. They are namely The Bank of Mauritius which is the central bank and the Financial Services Commission (FSC) which is the equivalent of the FSA in the United Kingdom. The Bank of Mauritius mainly concentrates on the banking sector of the country while the FSC concentrates on the non-banking part of the Finance Industry. Let us now take a look at the roles they have.

3.1 THE BANK OF MAURITIUS

The Central Bank which is known as the Bank of Mauritius was set up in 1967 and has as function to maintain price stability and to conduct monetary policy which aims at achieving an ordered and well balanced economy. It also has the duty of regulating credit an currency to ensure economic growth and to make sure that the Financial System of the country is sound and stable.

The Bank of Mauritius has as main role to regulate and supervise not only banks in Mauritius but also non-banking institutions which are deposit taking ones. It undertakes this function by following the Banking Act 2004 and the Bank of Mauritius Act 2004.

The Bank of Mauritius has several functions. For instance one of its main functions is to issue regulations deemed as prudential ones and see to it that they are followed by those institutions falling under their supervision. The Bank of Mauritius is also responsible for granting banking licenses. It also sees to it that banks follow the 25 Core Principles of Effective Banking Supervision set up by the Basel Committee, which enables banks to conform to international standards.

3.2 THE FINANCIAL SERVICES COMISSION

The Financial Services Commission is the organization which has the responsibility of issuing licenses, regulating , supervising and monitoring financial institutions which do not perform banking activities in Mauritius. These institutions are mainly insurance companies, the Stock Exchange of Mauritius, Capital Markets and the non-banking part of the offshore sector. the FSC was established in 2001 and performs within a legal framework which comprises of the Financial Services act, the Securities Act and the Insurance Act. The FSC also has as objectives to fight against fraud and corruption and prevent money laundering. The FSC also promotes the development of the Financial Sector in Mauritius.

4.0 REFORMS AND RECOMMENDATIONS

The Financial System in Mauritius has certainly been affected by the recent Global financial crisis as have been the financial system in other parts of the world. Therefore the Government along with the Bank of Mauritius and the Financial Services Commission need to make some changes to the system in order to prevent it from facing more difficulties in the future.

One of the changes that can be made is that the government could take measures to attract more foreign investors in the country. By doing this, it will surely help the banks and other financial institutions as there will automatically be an increase in investment in the financial sector of the country. The government has therefore an important role to play as it is the only authority which can implement measures in order to promote the country and its financial services sector and encourage investors from abroad to come to Mauritius.

Another reform which can be made concerns the regulatory framework in place. It certainly need not be completely overhauled but it can certainly be improved and fine tuned. This will benefit not only banks but all the stakeholders of the financial services industry. They will in a sense be protected from financial crises and other turmoil which might crop up in the future.

Another issue might be internal risk management of the financial institutions. Financial supervisors should give more importance to the management of risks as this might prove to be an efficient way of guarding themselves against period of crises. They might develop their own methods of risk management by hiring suitably qualified and efficient staff.

Another change which might be included in the reform of the Financial System in Mauritius might be the fact of internationally diversifying the investments of Mauritian investors. The latter tend to practice only horizontal types of diversification which do not include investing in foreign firms. Thus, international diversification can be encouraged. This might prove to be beneficial for investors in times when the Mauritian economy is not performing at its best. One of the ways to do so might be to list foreign firms on the Stock Exchange of Mauritius.

The fact that banks are mostly the main sources of funds for companies might also be another aspect which needs to be reviewed. This situation makes it that the risk is highly concentrated on banks and it is certainly not a good thing for them. So, businesses have to be encouraged to diversify their sources of funds and have recourse to other financial institutions than banks.

The financial sector should also be more innovative and not delay in introducing new financial products in the country. This will attract more investors to Mauritius and help in developing the financial sector of the country. For instance, the derivatives market has just started to make its way in the portfolios of investors and as derivatives are becoming increasingly popular they have to be integrated in the market.

5.0 CONCLUSION

The economy and financial sector of Mauritius is performing quite well despite the recent turmoil which have affected economies and financial systems all over the world. Many have found it surprising how a small country like Mauritius has resisted so well to the crisis. The government along with the financial regulators and also the stakeholders are regularly taking measures to either improve or find measures to prevent the economy from going down. This has certainly helped in the improvement of the financial sector. Nevertheless there are still some areas which need some more attention and which need either to be reformed or restructured. It is certain that all the stakeholders of the financial industry in Mauritius are always finding ways to innovate and improve and it can only be hoped that this will continue.

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