Mauritian Banking & Financial Services Sector: The next global hub?
“There is no miracle. It is due simply to hard work, discipline, and will.”- Sir Anerood Jugnauth - former President of Mauritius.
In spite of its small economic size, a low endowment of natural resources, and remoteness from world markets, Mauritius has transformed itself from a poor sugar economy into one of the most successful and vibrant economies in Africa.
With the Mauritian financial services sector in particular now a major pillar of the economy.
Which according to recent statistics now makes up 12% of annual GDP with a growth rate of 5.3% according to the newly formed Financial Services Promotion Agency (FSPA) with the potential to continue performing financial miracles at least for the small island nation. Mauritius’ financial sector is now sufficiently well developed, that the country has begun to position itself as a platform for investment linking East Africa with India and China.
With strong institutions, a politically stable and thriving business environment and the judicious use of trade preferences particularly between India and Europe all being instrumental in propelling growth and facilitating economic diversification in the financial sector.
Mr. Sridhar Ngarajan, The Chief Executive of MauBank, one of the leading domestic banking players, was emphatic, “Mauritius is moving into a position of strength and becoming the access point for trade to Africa. An international financial centre like ours could sustain up to fifty banks in the next three years and the sector will therefore only transform and grow. I believe that it is a foregone conclusion that many more banks will want to establish themselves here.”
Another major factor behind Mauritian success has been its business climate and the incentives for foreign financial service companies to locate. With no capital controls, a relatively stable currency, a low flat corporate tax rate of 15 percent, and a large number of double taxation avoidance agreements; taken together, these attributes often make Mauritius more attractive than larger financial centres.
“The banking sector in evolving into a more and more sophisticated one, offering many kinds of new banking services like regional treasury management, regional cash management, innovative payment solutions and is also supporting capital markets development. Increasingly the island is being recognised as a platform for investment into African countries, official statistics show that a significant amount of foreign direct investment into Africa has been structured through Mauritian investment vehicles.” The CEO of Barclays Bank Mauritius Mr. Ravin Dajee opined.
A sentiment that was also echoed by Mauritius Commercial Bank’s CEO Mr. Anthony Withers, “Mauritius is now an international financial centre of substance. The island has established itself as a very interesting and trustworthy jurisdiction, which is well regulated and can act as a gateway for trade and investment between the developed World.”
An example of this trend he cited being, “the total amount of money that has been invested in India, Africa and China, that is managed through our global business platform here in Mauritius is over $600 billion. That demonstrates that overseas fund managers are quite knowledgeable and that they understand the legal & accounting set-up here, there is no reason that this cannot be further developed.”
With international rankings consistently giving Mauritius high marks for business and investment climate. Mauritius has over the past 4 decades undertaken a fundamental overhaul of its financial services. Via the introduction of a new legislative framework and the creation of new regulatory institutions like the Mauritius Offshore Business Activities Authority MOBBA, The Financial Services Commission, The Stock Exchange of Mauritius and the newly minted, Ministry of Financial Services and Good Governance.
It was largely due to this sophistication of apparatus and enhanced regulatory oversight that enabled Mauritius’s burgeoning financial services sector to show such resilience in the face of recent global economic setbacks.
With the sector now poised to expand across a wide range of value-added services including, international banking, international fiscal management, international capital raising and regional treasury management.
“As a platform of choice for cross-border African investments, Mauritius endeavors to be a catalyst for investment and growth in the continent. The islands location is set to play a strategic role given its geographical proximity, while its political, social and economic stability, and regulatory framework offer a certainty to global investors to look to Africa as an investment destination: Says Mr. Harvesh Seegolam of the FSPA.
Yet, Mauritius, and it’s banking and financial services sector face several key challenges, with the industry arriving at a cross roads after many years of sustained success. There is a need to further promulgate a strategy that will encourage Indian and multinational firms to establish headquarters for Africa in Mauritius.
To reach out in a targeted manner to South African, Indian, African and European financial institutions, and finally, to leverage the Stock Exchange of Mauritius as a unique multi-currency platform to position the “SEM” as an attractive capital raising and dual-listing platform for Africa-focused ventures and international products.
Whilst from a short-term perspective, the industry will continue to grow depending on its ability to embrace and leverage the Base Erosion and Profit Sharing (BEPS) regulations - that are being adopted by the OECD members aimed at tax specialist jurisdictions and must serve as an area of focus to help the Mauritian financial services sector to make its mark globally.
Whilst Mauritian firms themselves must also tackle several further operational challenges facing the sector, such as the pressing need to diversify products to ensure continuous growth and to promote higher value-added services.
For the wider sector there is also a strong need to attract more international players to the jurisdiction, As Ravin Dajee, CEO of Barclays Mauritius stressed, “As it stands, there are two domestic banks that have 70% market share domestically, so from a financial stability standpoint this is not a good position to be in, hence having a few more sizeable banks would help."
However, the sector's complexity, size and linkages between financial institutions could potentially contribute to contagion risk. With changes to Mauritius's Double Taxation Avoidance Agreement (DTAA) with India, due to come into effect in April 2017, may well weaken an industry that contributes to approximately 15% in net foreign inflows annually.
In response to those threats, the authorities have intensified efforts to strengthen the country's crisis management framework and to reduce the costs of resolving troubled banks for the government.
However, their mandate for preserving macro stability is becoming increasingly challenging. With a primarily off shore financial sector that is large and interlinked and could, therefore, constitute a source of vulnerability to financial stability. Albeit a systemic banking crisis is unlikely, given factors such as the systems’ sound capital and liquidity buffers which are firmly in place.
Moreover establishing Mauritius International Financial Centre as a key intermediation centre for Africa will be vital, both to increase their relevance, profile and to effectively take advantage of the many opportunities in Africa.
Barclays Mauritius CEO Ravin Dajee elucidated further, “Mauritius has grown over the last few decades into an attractive, secure, and competitive platform for cross-border investments, our geographical position and political stability allows us to take a strategic role in capturing and channeling investments across Africa.”
So what are some of the strengths and weaknesses of the financial sector in Mauritius? In the first instance, Mauritius has a well-established and fairly well developed banking sector, with a few prominent and professionally managed domestic banks.
An enviable democratic history, well enshrined commercial law codes administered by an independent judiciary. With the ultimate back-stop, and reassurance, being the British Queen’s Privy council, a strong banking regulator, with an automated clearing and settlement system linked to an efficient and reliable international payment system infrastructure via SWIFT.
On the weaknesses side the operation of too many small financial players may become a source of systemic risk, whereas the dominant position of only a handful of major players inhibits competition and innovation and there is a barely significant secondary market for trading in stocks & shares.
Mauritius is also hampered by an inadequate supply of skilled human capital, despite having giving rise to some 15,000 high skills jobs; this shortfall is felt particularly acutely in new areas such as asset securitisation and financial engineering. “If the Government is serious about wanting Mauritius to become a major international finance hub that can compete with the likes of Singapore, Dubai and Hong Kong, one needs to be able to attract the best human capital, we cannot expect to be competitive when we do not have enough people with the requisite skills,” Complained Craig McKenzie CEO of SA firm Investec Mauritius. Whilst also highlighting their need to, “continue to develop its digital infrastructure.”
Whilst the pace of economic development of neighboring countries is comparatively slow and are therefore not attracting sufficient foreign investment which is, in turn, inhibiting Mauritius ability to play the role of a regional financial centre channeling funds into these nearby countries.
There is also the issue of their capital markets being prone to malfunctioning, with often, poor disclosure practices that hinder the proper evaluation of business and credit risk. Which can lead to inherent weaknesses in the pricing of financial assets.
In addition, with the exception of the banking sector, there is a lack of risk management culture across the financial services industry more generally. The end result of which might include misallocation of capital that could in the long run weaken the financial position of some financial institutions operating in Mauritius and hence the entire system.
Whilst a revamping of the stock market. As well as the development of an active and vibrant debt market is urgently needed. However Mauritius shows every promise of becoming a financial center meeting the specific needs of companies worldwide, whilst some of the domestic players could potentially evolve into important regional players after some consolidation amongst themselves.
“I think, Mauritius now has the opportunity that Singapore had in South East Asia 20 years ago, to fulfill the need for a well located, politically stable, well regulated, with a good legal system, platform for regional treasury, and regional management of investments in African countries.” says Anthony Withers CEO of Mauritius Commercial Bank (MCB).
Whilst fund management is now one of the fastest growth segments of the financial services industry worldwide, with capital flowing to areas and countries that provide superior alpha returns on capital for given risk levels, and at the same time fund and asset managers want to manage funds invested in or near that market or country.
This trend may well accelerate in those countries surrounding Mauritius and create additional opportunities for their the domestic financial services sector to capitalise on if Mauritius inspires the necessary investor confidence and has the appropriate products to offer by continually enhancing and broadening its financial sector.
According to PK Kuriachen, CEO of the Financial services Commission, “We already have a flow of global investors coming now to set up their funds in Mauritius.” The main threat to all of this is the inability of the Mauritian industry to adapt and embrace the globalization trend, with a danger that the existing dominant players in each segment becoming complacent, and consolidating their local market positions, satisfied with an inward looking status quo.
Inevitably the consequence of this would be the gradual transfer of domestic savings out of Mauritius into global markets. As Mr. Harvesh Seegolam of the FSPA emphasised, “Mauritius has proven itself as an ideal hub of repute and choice for cross-border investment for more than two decades, we are now determined to build upon this proven track-record to position our jurisdiction and enhance the value addition and offering to the international investment community.”
Mauritius is a indeed a small island economy that has witnessed a relentless struggle to achieve an “outward looking strategy.”