Preserving the health of our financial sector
There are higher stakes for the country than the BAI case in itself. We have to restore our international credibility
As it is well known, Mauritius is quite significantly dependent on the performance of our financial sector.
Some 15,000 – mostly young — are employed by the sector. It contributes upwards of 11% of our GDP. Our financial sector dates back to centuries but it really gathered momentum in the past two and a half decades as we internationalized it. It is the high dynamism linked to the headwinds of global finance that has really only recently made this sector contribute significantly to the country’s advancement. Finance practitioners know that the sector has to be seen as being safe and sound to maintain pace and build up more substance.
Follow the path of successful financial centres
We are quite small as a financial centre compared with other places such as Bahrain, Dubai, Hong Kong and Singapore. But we have come up a long enough way for it to be employed as the launching pad for increasing the size of this sector. Singapore and others have shown that, carefully and skilfully managed, the financial sector of a small country can successfully vie against other centres that have long been in the business (e.g., London, New York). Inventive and innovative as ever, they carved out certain advantageous lines of financial business for which they became global references. We could travel along the same path.
One has to constantly integrate a fast evolving global financial marketplace in order to succeed. This is the true mission of Mauritius’ emergent financial services sector. It means it is necessary to keep expanding our presence on the international financial market. We have to keep coming up with new tailor-made financial products, supported by available local skills, to serve competitively our immediate environment and, why not, more distant places? Had we proceeded in this direction, we would not have been as badly upset as we’ve been each time new difficulties have surfaced up concerning our India-Mauritius DTA, for example.
How to minimize national reputational risk
Places like Singapore and Hong Kong have made themselves known for the brilliant breakthroughs they make in different specialized lines of business, based on local advantage. While being strict in approach, they have kept opening up new space for clever financial engineering. People from outside sense it that there is scope in these places to settle in and expand their business. This draws in the specialized firms of international finance to their shores. Ever more internationally accepted financial products and wider geographical reach are thus brought about to enrich and renew the range of the jurisdictions’ product offer. Naturally, their growth path is always upward.
Not that they do not come up with turbulence and disruptions from time to time. Like us, they meet with accidents but they manage clumsy situations masterfully. Singapore, for example, was the place in which a single trader accumulated so much decision-making power in himself that he was able in 1995 to single-handedly bankrupt the venerable old British ensign, Barings Bank. There was a big hue and cry when this happened.
As in the recent case of the BAI group over here, people started asking questions like: why did the regulators not foresee the disaster and pre-empt it? But in the case of Singapore, the problem was neatly rounded up and settled swiftly and not allowed to drag on. Besides, a place like Singapore has created for itself such strong international credentials as a financial centre that few would dare point the finger at it for long.
The financial centre hosts and keeps churning so much of international financial business that it would be highly risky for anyone to take a direct hit at it. Besides, ever newer and more performing financial products are being created the effect of which is to overwhelm adverse criticism. Its regulators and market operators command a high degree of international respect. The place has a store of solid experience and it retains its acquired skills instead of throwing them out or discrediting them for temporary convenience.
Struggle for survival is international, not internal
Unlike in our case, a creative place like Hong Kong or Singapore will keep looking out to the future instead of turning its sight inward in the quest for an original sin that would need to be punished. Financial centres which make progress have no time to waste by keeping the focus on their failings. They know they are in competition with other places and have their good name to protect. There are markets to chase up and that occupies most of the available time.
We have to realize that either we spend time focussing on our financial sector failings and not get out of the rut fast enough. Or, like the more successful places, we go for developing more business, creating more skilled employment, identifying new scope for business and acquiring a better understanding of the immediate needs of the marketplace we could serve.
If we focussed on generating more business, we would quickly set right any perceived weaknesses in our system. Consider the weak positions in which financial systems still find themselves in the West, so many years after the start of the 2007-08 financial crisis. Yet, instead of emphasizing this weakness, authorities in advanced economies are quietly fixing it up to avert another crisis and to get going as soon as possible.
Rules have been made to separate out the riskier investment banking business and trading activities of big systemic banks in a bid to protect the retail banking activities from any future catastrophe. Other than asking retail bank shareholders to bring in even more equity capital into the banks according to Basel 3 rules to better secure customers, they are requiring the banks to mobilize additional layers of near-equity such as bail-in bonds and convertible capital notes.
This layer will be bear the brunt if credit is mismanaged again instead of shifting the burden on taxpayers and customers, as it happened in the last financial crisis. Where financial situations threaten to break down, they are having recourse to bank resolution, not liquidation, whereby they can salvage the better and viable parts of the business without hurting on-going economic activities financed by the institutions. By so doing, they are also taking care not to inflict distress upon innocent customers.
There are higher stakes for the country than the BAI
Had we taken precautions like this, we would not have once again, as in the BAI case, landed in the situation of imposing that amount of distress on this group’s customers. Decision-makers should have known that this is the last kind of situation to throw innocent customers into. It was preferable to cure a situation gone out of hand from inside than to inflict such suffering on the public like a bolt from the blue.
All is not lost however. We have to quickly put behind the sad episode that played out recently in Mauritius. Preferably, painlessly to depositors/policy holders/investors. The best thing would have been to oil the wheels of the sound business fairly quickly, separating out the better elements from those that have been weakened by recent actions or were inherently weak because of previous bad management for later dealing.
It is important to do so because there are higher stakes for the country than the BAI case in itself. We have to restore our international credibility. We need to open up additional and more sophisticated space for doing financial business from Mauritius. We may have to place on the front ranks rule makers who command a higher degree of respect in order to wipe out quickly the memory of this sad episode.
Preserving the international good standing of Mauritius will be a far nobler objective to pursue than to carry on harping upon the BAI case. By quickly wiping out this past episode, we can concentrate on adding up to our employment levels in the financial sector as well as its contribution to GDP.
* Published in print edition on 29 May 2015