Structural Transformation of the Financial System

The Bank of Mauritius (BoM) hosted on Friday last a lecture by Governor Njuguna Ndungu of the Central Bank of Kenya on this theme with reference to Kenya. The Kenyan governor demonstrated by reference to facts and figures how the Central Bank of Kenya had pursued deliberate policies during the past decade to increase substance in the country’s financial system and to bring it in closer proximity to the people.

The lecture provided an opportunity for us to learn from each other nearer home, as distinct from looking afar for roadmaps from systems that are less adapted to our particular environment. The question arose as to whether central banks have a developmental role or whether they should stick to their straightjacket role of stabilising inflation. As it was stated in the course of the lecture, central banks have a much wider developmental responsibility to assume by virtue of the fact that they are additionally called upon to give the country a dependable payment system as well as a stable financial system not prone to volatilities. All of these are social roles which contribute to the well-being of the population as a whole.

The strides made by Kenya in recent years towards enhancing the people’s interaction with its financial system are significant and they owe a lot to the central bank not feeling intimidated by the espousal of technology in the provision of banking services. Sustained higher growth rates no doubt have also played a role. The Kenyan central bank governor was not only happy with the extensive reach out of his country’s financial system in terms of its wider embrace of account holders on both the deposits and lending sides. He was equally pleased with the speed of execution of transactions, partly due to technology use embedded in the vastly popular mobile phone banking devices, which impact directly and dynamically on economic decision-taking by consumers of financial services.

The speed and efficiency of execution of financial transactions are not reckoned as an additional factor of production in economic theory, in addition to land, labour and capital. In the modern economy based on dynamic exchanges, it is clear however that an economy would not perform itself up to its potential without the contribution of an efficient financial system operating in tandem with the real economy. So long we do not cross the boundaries resulting in overall breakdown of the financial system as happened in some parts of the world in 2007-08.

The lecture given by the Kenyan central bank governor should be an occasion for us to reflect on the distance travelled by our own financial system over the past five decades to become an effective contributor to our economic growth and to a fairer distribution of the fruits of such growth. All this way, the BoM has played a pivotal role in the financial transformation of Mauritius.

While the financial systems of both Kenya and Mauritius were born in the British system, the BoM did not mind overstepping, at a rather early stage, its laid-down role in the British tradition to concern itself solely with the “control of the money supply”. In the early 1970s, the BoM realized that banking services were mostly concentrated in the Plaines Wilhems-Port Louis belt. Thus, the majority of the population remained outside the banking fold, mostly rural-based areas in which there were few or no banking branches at all. It must be said that commercial banks were concentrated in the urban regions because this is where steady income earners, from both the public and private sectors, resided in the 1960s and even the 1970s and it made economic sense for them to compete for business in these relatively better endowed areas of the country rather than in other parts of the country.

Even where some rural people managed to secure a steady job in the public service in those days, they would sooner or later migrate to the towns in quest of better schools, better hospitals, roads, electricity, etc. This pattern of migration reinforced banks’ argument to be based in towns. That would have left the rural regions unattended. The BoM therefore took deliberate initiatives, notably by its branch licensing policy, to flow out banking services to hitherto unbanked parts of the country. It is this development that brought the entrepreneurial spirit to those parts of the country as purchasing power increased through making of deposits and raising loans for funding small projects, including one’s own house.

The BoM did not stop at this. Starting from the 1970s, it evolved its own scheme to provide rediscount of export bills to encourage commercial banks’ support of our export manufacturing sector. It was a clear signal that the growth and expansion of manufacturing was a priority. Had this kind of encouragement not been given, with the added support of access to export markets through the government-negotiated Lomé Convention of 1974, manufacturing activity would not have expanded and spilled over to some of our most remote rural locations, as it is the case till today.

Poverty was much more deeply entrenched across the entire population in Mauritius in those days than it is the case today. All this development made a significant difference to how people started contemplating the future with greater optimism and beyond day-to-day living. People who would have otherwise stayed indoors as dependent housekeepers were thus given an opportunity to earn a living by making garments for outsiders that they could not themselves afford with their meagre incomes. It is by these means that the economic embrace was extended to take on board those who at first appeared condemned to a life of low incomes and defiant poverty.

At a time stringent tight credit controls were in place, the BoM made sure that credit flows to vital export enterprises and import-substitution industries were not jeopardised. It even contributed to the capital of the Development Bank of Mauritius (DBM) which, at the time, was the capital provider to smaller producers who could not have had access to bank credit for their variegated activities, a lot of it in rural areas (small farmers, pig breeders, fishermen, artisans, et al). It stretched itself out for some time to even support the DBM’s Export Credit Guarantee and Insurance Schemes.

By taking on the regular public floating and issuance of Government stocks, the BoM raised a steady stream of money, beyond budget collections, for the government to incur expenditures on transformative infrastructure projects for the country. It spearheaded, in the words of the Kenyan central bank governor, a confident positive economic outlook by taking so many initiatives, be it by modernising the banking laws for a higher standard of financial sector governance or for helping to diversify the banking product into the provision of international financial services.

It is easy to realize how far behind we would have remained but for having taken numerous initiatives beyond the classic role of regulating the money supply and fixing interest rates.

* Published in print edition on 8 August 2014