It is well known that the good standing of a country’s financial sector depends on the amount of confidence it enjoys. This is because, unlike non-financial sectors of the economy, almost the whole business of the financial sector relies on the amount of money brought to it by the public rather than on the funds injected in it by shareholders. It is therefore a fundamental requirement that this element of public confidence is preserved by all means.
Our financial sector has come across some odds in the past. Recently, we saw the Development Bank of Mauritius (DBM) deciding to write off a slate full of doubtful and irrecoverable debts that have been accumulating during the terms of several past governments. Since the State is the main shareholder in this case, this write-off involves the loss of taxpayers’ money. The DBM cannot however escape scrutiny which will inevitably establish that most of the amount being written off was based on unsound lending. While one can understand that it did not make sense to carry this burden uselessly into the future, this state of affairs does not reflect brightly on the institution.
Commercial banks themselves have oftentimes fallen prey to shrewd individual borrowers who manage to siphon off singly even larger amounts of loans than the collective amount of debts being written off by the DBM, after having borrowed from the banks against securities of no value. The entire money is lost in the event. The management of such banks may not have had enough discernment in such cases as to the real value of security against which they had been busy dishing out depositors’ money to the borrowers. Or, they might have been unconcerned about this aspect altogether for reasons best known to themselves. It is to be considered whether bankers who accumulate losses of the sort should not have to pass once again the ‘Fit and Proper’ test as a deterrent for them not to wilfully engage in such doomed transactions.
Another outstanding example of bank failure concerns the systematic violation of internal controls in the case of the MCB scandal of 2003. In this case, funds lying on the deposit accounts of the NPF had been lifted out over a length of time to extend loans of a dubious character. The NPF was paid up its lost funds from out of shareholders’ money. This matter remains to be resolved fully but fortunately it did not put at risk the stability of Mauritius’ financial system.
Ill-advised lending based on thin air or assets locally or in foreign countries that it may prove mighty difficult to chase when the going is bad for the banks will impair the capital base of concerned banks. If the exposure is too large in relation to the concerned banks’ capital base, there is the risk that inroads will be made on the deposits entrusted to the banks by depositors to salvage the banks. If, as in the case of the two big banks of Cyprus, the banks’ capital is wiped out by the excessive lending based on impaired judgement, the depositors will have to pay the price by losing their hard earned money, as it happened there following the so-called ‘bail-in’ of the banks. Situations like this will erode the critical element of public confidence in affected banks and, at times, by fear of contagion, spread out even to banks not directly involved in bad decisions of the sort.
There appears to be no such problem facing our banks at this level. So long they set aside adequate provisions against bad debts, everything will be transparent and the public will be able to judge which bank to trust their money with. Since the public is not always able to clearly read the risks being taken by individual banks, the regulators make the banks comply with explicit rules so that all undue risks are contained before they tilt over to breaking point.
We believe that, in the absence of active shareholders pointing out unnecessary and excessive risks being taken by commercial banks in their lending and other activities, our financial regulator is causing our banks to comply with rules of prudence and hence keeping them safe enough for the public to maintain trust in their good governance. Mauritius has, in the past, succeeded to deal with weak banks before they could do damage to the overall image of the country’s financial sector. It is imperative to maintain this track record of sound financial management for us to remain out of the eye of the storm like the one which is threatening even today the very survival of several big European banks having embarked upon unsustainable lending to states which are not immediately in a position to honour their obligations to those banks.
We have been told lately that certain of our banks would not have done their duty to report suspicious transactions in relation to the operation of certain Ponzi schemes which recently came to light. They are bound to do so both according to law and according to guidance notes issued by the regulators. While they may be amenable to fines for this serious omission, if proved, it would be advisable, given the false perception many are creating abroad about our being a tax haven, that slips of the sort should not be allowed to happen. Banks should regain their credentials for rigour and regulatory compliance.
There is a shared responsibility in this domain involving the public (whistle blowers), financial institutions, auditors, internal controllers and compliance officers, regulators and public bodies entrusted with keeping a watch over money laundering and acts of corruption, to keep intact our good standing as a financial centre. We cannot assume fully this responsibility by trying to pass the buck for non-compliance to one or other of our public bodies. If that were to happen, we would only be offering ourselves in spectacle to the world on the lookout to pin down countries which do not have the sinews of the West to defend forcefully their bona fides. The good image of Mauritius should be a concern for all the stakeholders who have a duty to act on information received instead of sleeping on it, especially when the good standing of the entire jurisdiction is at stake. Action, more than words, are necessary on the way forward.
* Published in print edition on 14 June 2013