Jaya Patten is an expatriate living and working in the United Kingdom but who has always shown a deep interest in the development of the financial and banking sectors of Mauritius. He shares his views on certain issues amongst which the relevance of a capital market and the preconditions to have one set here.

The Africa Financial Markets Index, a joint initiative of both Absa and Omfit (Official Monetary and Financial Institutions Forum) was launched in Mauritius last week. It provides a toolkit for countries seeking to strengthen their financial market infrastructure and track performance on financial market development annually across a range of countries. To what extent will Mauritius benefit from this index?

Mauritius can use such an Index to its advantage to demonstrate its achievements in terms of financial market development, maturity and trust. The fact that the Index is compiled by a third party reinforces the independence and objectivity of the assessment. The local financial sector at large and the authorities in particular should however be mindful and willing to accept constructive criticism and use it to improve. I gather Mauritius is currently ranked number 4. It is legitimate to expect that we should be proactively looking at what the three countries ahead of us are doing better, learn and aim for a medal for next year.

More generally, how do you compare the financial markets in Mauritius with those within the African continent?

Generally, financial markets in Mauritius in terms of regulatory framework and market enforceability compare favourably with the continent. I, personally, do not necessarily see this as the benchmark. On the other hand, in terms of governance, risk and compliance culture and practices, we are letting ourselves down and yet this is an area where we should be head and shoulders above.

Are we mature enough to now focus our attention on the relevance of a capital market?

This is an interesting issue and one which is dear to me. It reminds me of the typical grilling that, as a London based investment banker, I would be subjected to whenever I visited Singapore in the late 1980s and early 90s. Given my background in capital markets, this is a subject on which I have tried to engage with policy makers and professionals from the financial sector in Mauritius. To a large extent, the success of the financial sector as a tax destination based on the Indian Double Taxation Treaty has prevented the country from focusing on the capital market opportunities. Following the change of DTT legislation, Mauritius should focus on becoming a regional Capital Markets Hub.

“To a large extent, the success of the financial sector as a tax destination based on the Indian Double Taxation Treaty has prevented the country from focusing on the capital market opportunities. Following the change of DTT legislation, Mauritius should focus on becoming a regional Capital Markets Hub.”

What would then be the pre-conditions to build up a capital market in Mauritius?

Three pre-conditions are required. Firstly, the foundations: three pillars for creating a fecund ecosystem to promote the development of a capital market. These are in the first instance, a regulatory framework that guarantees the free and transparent trading of financial instruments, then Financial expertise and more broadly, the human capital requirements and finally, market reputation and trust.

The second pre-condition deals with capital market activities and can be summarised along three business lines: raising capital (this is essentially about raising finance ranging from debt to equity and hybrids), secondly trading capital which is meant to offer market participants the ability to trade and to manage their risk and lastly, managing capital which is about an asset management industry.

The third pre-condition to build up a capital market in Mauritius is about the scope, breadth and depth. It has to be regional.

The World Bank estimates that currently there is a 50 % shortfall on the spending Africa needs to fully bridge the infrastructure gap. The consensus view is that this shortfall is fundable. It’s about creating bankable opportunities, efficient partnerships between stakeholders to source funding and clever risk mitigation and transfer. It still baffles me as to why Mauritius has been unable /unwilling so far to play such a role.

Mauritius boasts itself as a leading international financial centre and a gateway to Africa, with a clear vision to join the sphere of high-income countries. How far are our ambitions tailored on our real capacity and capability to move from where we are to reach the level of those high-income countries?

I believe this is aspirational. It sounds good. People who say so might be genuine in their desire to achieve such a status. In my experience, I don’t see the implementation roadmap. I don’t think we have created the preconditions to facilitate such a trajectory. The human capital deficiencies are blatant. The SBM debacle has dealt a serious blow to the financial sector’s image and revealed the pithy state of the governance practices and culture.

What saddens me the most is the collective sense of apathy and complacency. In the wake of the SBM misdemeanours, I have been engaging with an institution – within the purview of the Ministry of Good Governance and Financial Services to organise/participate in a Governance Risk and Compliance (GRC) event. Three months have passed by. Given the context, how hard is it to organise such an event?

During the annual dinner last Friday, the governor of the Bank of Mauritius stated that a survey among banks as to why they were keeping rupee excess balances showed that a sizeable part was being held by them voluntarily as a precaution”. How does excess liquidity occur?

The fact that banks’ balance sheets are showing excess liquidity could stem from either demand (reduced demand for credit because of uncertainty or possible slowdown) or supply (banks have tightened lending conditions in the wake of the SBM case). Another explanation could be that banks have increased the risk premium and increased lending rates for certain types of borrowers – considered more risky. This is a common observation when credit markets are disrupted – the clients that banks wish to lend to are not interested in borrowing while the ones that are keen to borrow are shunned by banks.

This is an area where the Central bank should investigate further and publish its findings. In the aftermath of the SBM case, I would expect banks’ lending to slow down as banks review their lending criteria and processes. This should be a temporary phenomenon.

Are we experimenting a paradigm shift whereby borrowers on the capital market no longer rely on savings guaranteed by banks to finance their development projects due to the fact that banks no longer stand as the sole, primary and inescapable source of financing?

In the case of Mauritius, we can’t speak of capital market alternatives. Corporate bond issuance or other market sources of funding (such as securitisation) are limited if not nonexistent, to my knowledge. In any case, such sources of funding would be available only to a handful of creditworthy borrowers. It certainly would not apply to SMEs.

In the absence of bank funding, who are the other potential funders? Is there a vibrant shadow banking sector in Mauritius? Insurance companies and private lenders can fill in some of the gaps but I don’t see them replacing banks.

It’s all about intermediation towards which banks seem to be gradually moving. Will this trend gather momemtum on the local market?

Intermediation is more relevant to the developed markets. Banks are less willing to commit their own balance sheet and instead are keener to act as intermediaries to help borrowers tap the capital markets. However even this trend seems to be reversing as a number of investment banks – traditionally not in the direct lending business – have decided to apply for a banking licence to engage in the lending business. In Europe as banks have retrenched, we have also seen the proliferation of Debt Funds.

Will the principle of transparency be restored if government decides to forgo its direct interest and commitment in the banking sector?

I, personally, do not believe the government should either forego its interest or commitment to the banking sector. However, I do believe they need to think harder about the choice of the political appointee and ensure he has sector competence. I believe the Board’s composition should be reviewed to minimise undue political meddling and interference. This should apply to all government board nominations. If the government were to divest its shares completely, by definition, they will no longer have a say in board nominations and will no longer be able to interfere with the bank.

 “I, personally, do not believe the government should either forego its interest or commitment to the banking sector. However, I do believe they need to think harder about the choice of the political appointee and ensure he has sector competence.”

As for transparency, who knows? The government, including other state entities, is the majority shareholder in SBM. This is nothing new. Although the 1980’s economic orthodoxy shuns government ownership in key sectors of the economy, the success of state owned and state controlled entities in economies like Singapore, the Gulf and to a certain extent in China certainly opens the debate.

SBM has accomplished a lot in terms of financial inclusion and more generally broadening access to finance a large swathe of the population. This should neither be forgotten nor minimised. It’s a long cry since the days when MCB, Barclays and Mercantile ruled the roost. I don’t believe the issue is necessarily about government ownership.

Moreover, irrespective of their political colour, successive governments have found it hard to resist the temptation of meddling in the bank’s affairs. The difference, in my mind, is the calibre of the bank’s CEO and Chair. They are political appointees – that’s a given, as they represent the majority shareholder. They must be competent bankers, financiers… professionals too. At the end of the day, it’s the family silver.

With the advent of new technology input such a blockchain or artificial intelligence entering and causing comprehensive disruption in the field of capital market and banking sphere, what would the real face or definition of a ‘well-regulated and supervised banking industry’ look like?

Since the global financial crisis, the banking sector has been facing the twin headwinds of mounting regulation and technology disruption. This is the new normal. Banks who think this is either a fad or a temporary disruption will disappear. Technology is double-edged.

On the one hand, it helps banks resolve some of the complex regulatory challenges in areas such as market surveillance, data governance, pricing and trade transparency. On the other, it facilitates cannibalisation. Areas such as payments or foreign exchange transactions which used to be the banks’ private turf – a healthy margin business for that matter – are being completely overhauled with new Fin- Tech entrants. The face or definition of a wellregulated and supervised banking industry will not necessarily change drastically. The requirements are always the same: Trust, Transparency, Treating customers fairly, minimising Risk – at the participant and systemic level and Governance. Technology will be both an enabler and a disruptor in achieving these objectives.

“The difference, in my mind, is the calibre of the bank’s CEO and Chair. They are political appointees – that’s a given, as they represent the majority shareholder. They must be competent bankers, financiers… professionals too.

There are three points which are noteworthy for the Regulator: firstly, risk is by definition inherent to financial transactions. Risk cannot be eliminated. There is a need for education and training where Technology can be used more effectively. Secondly, there is always information asymmetry in markets. Thirdly, regulators ask increasingly for large amounts of data. I am not convinced they are using the data intelligently and effectively. The SBM case, is a good illustration. Should the Regulator have queried the massive increase in Segment B exposure?