Banking Industry and Telecommunications
By Murli Dhar
One would have wished that there had been less business concentration in several areas of activity in Mauritius. This would have released space for a broader swathe of entrepreneurship to emerge and give the country the necessary depth and wider base to be more nimble-footed in a competitive global environment. As things stand, however, even those areas such as the production of vegetables and fruits that had for long been left to the care of smaller producers eking out a living for the family out of such activities, have tended to be taken over by the hereditary bigger corporates of the country. This goes in the same direction as the upmarket tourism segment of Mauritius which packages for its own benefit the entire range of catering services from accommodation to restaurant and shopping needs of those of our visitors who happen to be its hotel clients. There are several other similar examples. The economic space is thus becoming even more foreclosed than before. Market power gets accordingly more concentrated in fewer hands that have far more resilience to survive than the high risk-taking smaller producers ever had.
Concentration in the banking industry
The provision of financial services is another case in point to illustrate the negative aspect of market concentration. In his speech on the occasion of the recent launching of the Cheque Truncation System of Mauritius, the Governor of the Bank of Mauritius referred to “the high degree of concentration in the banking sector of Mauritius”, at 624 points above the 1800 index entry point for high concentration. He goes on to state that the “top two banks, both local, have total domestic assets which exceed by more than 30% the combined assets of all the other 15 banks which have domestic operations”. The two top banks he is referring to are the Mauritius Commercial Bank and the State Commercial Bank.
It is the common practice of the banking sector to brush aside such remarks. They state that there is actually a lot of competition going on among the banks despite the dominance of the domestic banking market by the two largest banks. But if you were to avail yourself of a credit card loan, you would hardly be surprised that your bank is charging the same exorbitant rate of 23-24% pa, the same rate of interest as that which is being charged by almost every other bank in the country. Such a high interest rate applied on an overnight basis across the board should have had some basis. For example, it could have been justified on the high cost of raising funds by the concerned banks to settle amounts owed to the merchants where the credit cards have been used. This is far from true. Banks fund themselves by paying a paltry 3.5% or thereabouts to their savings deposit account holders. So, why this high rate in the 20% plus for credit card loans being applied by all banks? It is simply the standard practice among all card issuing financial institutions, which means that no matter how much you wriggle and shift about as a credit card user, you will end up paying almost the same exorbitant rate of interest if you happen to have unpaid credit card dues, whichever the bank you deal with.
This is the straightjacket sort of competition banks refer to when they inform you that they are actually competing among themselves to price the services on offer. Let us call it rather “competition within pre-established zones of comfort to the banks”. In a system, which is dominated by two banks which price their fees and commissions at almost the same level for the multiplicity of their “services” (ledger fees, direct debit fees, standing order fees, cheque collection fees, and several others), the word competition needs to be re-defined. In reality, no one has ever seen any downscaling of such fees no matter the supposed economies of scale or cheaper costs due to advances in technology adopted by the banks.
It should not be surprising that, given the overwhelming weight of the two biggest banks doing domestic business, not many of the smaller banks serving the local market would find it worth the while to dare clash against the bigger banks by applying any significant lower rates in terms of delivering the competition to big brothers. Let alone the near convergence of banks’ interest rates on loans compared with each other, the customer who has pledged his securities with one bank for a loan is literally not free to seek out a better rate by attempting to borrow instead from another. The encumbrance of moving from one bank to another, arranging to share the security among several “competing” banks, or simply taking away the full liability to another potential lender, is daunting enough for consumers of financial services to “shop around” for a competitive rate. In other words, the prevailing banking market structure makes sure that competition is blocked.
The result of this concentration of business is seen in the financial results of the sector. According to the Central Statistical Office, the domestic financial sector currently pays the highest average monthly income of about Rs 31,000 of all sectors of activity in Mauritius. The lowest paid sectors pay a monthly average of around Rs 4,000 to their workers. The disparity between the average monthly rate of pay in the financial sector and that of other sectors is no doubt the consequence of the “rent” that the financial sector is able to obtain by virtue of its almost collusive dominant concentration at the top. If the smaller banks tried to attract some of the business to themselves by trimming their relative fees and commissions, given their small market share, they would quickly be running themselves out of business; they have to follow the pace set by the two larger players if only to survive in this lopsided market structure with a sticky customer base. Despite charging the highest rate of average pay of all sectors to their expenses, banks like the MCB and SBM churn up annual profits of the order of Rs 5 billion and Rs 3 billion respectively whereas the smaller banks can consider themselves lucky to be having net earnings in the hundreds of millions per annum. The size of the top two banks gives them added advantages by way of access to the bulk of domestic and international business. Others cannot develop really cutting edges in international business over the dominant players except perhaps those units of international banks operating over here thanks to the finer access they have to overseas markets through their international networks. The system really keeps any “upstart” down forever.
We referred in the beginning to the increasing encroachment of corporates in areas that had heretofore remained in smaller hands. The same is true in the financial market; banks are not content to take deposits and lend out money or carry out foreign exchange transactions; some of them have been increasingly going out for the multiple product market: securities trading, stockbroking, funds management, insurance, cross-border investments, international service providers, you-name-it. If they are not engaging in some of these activities directly, they are getting into it by means of other economic agents related to them, with whom they tie up the better to dominate the financial market.
As conglomerate interest takes over in the process through direct and indirect business links, the amount of profits churned grows and is increasingly concentrated among few market players. Market dominance is entrenched by this process in repeated cycles. Economic and financial stability will thus increasingly come to rest on the good health of a few key players. Not surprisingly, it is this market dominant elite that dictates prices. It can even go as far as to force government to make rules suited to its survival. One would not have bothered too much about it if at the end of the day competition did not stand a chance of being botched up altogether were this kind of concentration to go on consolidating. This unfortunately is and remains a major risk.
That is the reason why the Bank of Mauritius as a regulator of the financial sector and watchdog of financial system stability is getting worked up at the trend for increased business concentration. This situation may lead to what has been called the “Too Big to Fail” syndrome. As the risk accumulates in one or two financial conglomerates, it becomes ever more arduous for the system regulator to unwind a market-dominant situation that permeates all compartments of our economic life. It is the kind of risk Europeans are currently fretting about with key European banks steeped to the neck in shaky huge European government debts. It would be better to untie the knot before it becomes as tough as the Gordian knot that only Alexander was able to slash with his sharp sword.
Concentration in the telecommunications sector
Just like the two dominant banks, the telecoms sector is dominated by a single player. In 2001, Mauritius Telecom sold out 40% of its capital to France Telecom. There was hope that this would turn out into a strategic partnership so that MT would be enabled to venture out together with FT with higher value-added into third markets while at the same time liberating the full-fledged potential for development of the ICT sector of Mauritius. Down the years, this has proved to be a very difficult goal to achieve. MT has concentrated instead on a narrow trading strategy focussed on the local market with a view to maximizing its own profits. There has been no international outpost for MT to this day. Would we have remained stuck if we had chosen to associate MT with a different strategic partner at the time? It is a question that stakeholders have been asking persistently but without answer since we foreclosed alternative opportunities by tying our hands with FT and its narrower self-centred objectives.
The initiative taken by the government to develop the ICT sector has however shown results despite restrictive policies adopted by MT focussing on making profits. The ICT sector was able to grow and become an important contributor to GDP, notwithstanding the slow pace at which bandwidth has been allowed to progress and despite excessive connectivity costs the sector has faced. In other words, our potential to launch ourselves into offshoring has been handicapped. It goes to the credit of the ICT sector that it has nevertheless been able to account for 6.4% of GDP by now from naught only 8 years ago and that it has proved to be one of the main sources of Mauritius’ economic resilience from 2008 onwards, employing some 15,000 mainly young workers at present.
It appears that the current Minister for Information Technology has been having serious difficulties to persuade MT to change and look at the bigger picture where we could compare ourselves in terms of speed of connectivity and the cost thereof with the best centres competing with us. The struggle he is delivering shows clearly the undue pressure exerted by monopolistic or quasi-monopolistic situations to stifle economic progress. As in the case of the banking sector, we should not allow single economic operators in pursuit of private profits to frustrate a fairer sharing out of economic benefits among a larger number of people. It is time for the government to concentrate on our international competitiveness and productivity in the pursuit of longer-term goal to equip the country for the future.
* Published in print edition on 7 October 2011