Essay on Financial Sector In Mauritius

Essay on Financial Sector In Mauritius

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Mauritius is a multicultural developing island situated in the Indian Ocean. Over the last four decades, Mauritius has made a significant effort in its endeavor to become part of the global financial market. Indeed, the economy has witnessed incredible progress and is now considered as a middle-income, well diversified country. According to the IMF report 2008, Mauritius has a ‘relatively large and well-developed financial system’. The Mauritian economy grew by 4.1% in 2011 driven by a vigorous performance in the financial sector and a rise of the textile industry. A growth of grew 3.4% of GDP was noted in 2011 principally due to the tertiary sector (including financial services). Considerable development has been marked in the context of financial stability. The attractive fiscal policies, no exchange controls, modern infrastructure and availability of qualified workforce help in absorbing foreign investment in Mauritius. Mauritius has positioned as an imperative gateway linking Europe/USA/Asia to Africa and Europe/USA to Asia thereby increasing the range and essence of activities conducted in the financial services sector. According to World Bank’s 2012 Doing Business report [1] , Mauritius ranked first among African economies and 23rd globally in terms ease to carry out business and has been appraised by the Financial Action Task Force (FATF). Additionally, Mauritius is ranked 54th (3rd in Africa) in the global competitiveness Index and 8th(1st in Africa) in the Index of Economic Freedom 2012.

History of financial sector developments in Mauritius.

Since independence in 1968, Mauritius has experienced outstanding transformations. In early 1970s, Mauritius supported a monocrop economy, predominantly dependent on sugar and has gradually evolved to a multi-sector economy with impressive rise in per capita income (see Table 1). At independence, the country inherited a unique set of sound legal, a hybrid system based on both on the French Civil Code and English law. A strategic change took place in the 1970’s as Mauritius switched from agricultural sector to the industrial sector. Mauritius has successfully diversified into different economic sectors such as textiles, tourism and financial services. Despite the attempt of the government to reduce imports with the implementation of an import substitution strategy, no economic growth was noted. Nonetheless, the adoption of an outward looking strategy during 1980’s eventually led to a boom in the economy after the introduction of the EPZ and the start of exportation.

In the past, the Mauritian financial system comprised mainly of the banking sector with the first Commercial Bank being established in 1838. The banking sector alone has contributed over 6% on average to GDP in the last few years. A transformation took place in the financial structure in the early 1980s and a need for NBFI’s was felt. Having revisited the policies, the mid 1980’s marked the fastest growth rate with an outward looking strategy. In early 1990’s, Mauritius faced new challenges in terms of higher wages and increased inflation rate and the economy’s international competitiveness was seriously threatened. The economy nearly hit full employment and investment in new product lines was mandatory to regain the competitive edge. Ultimately, the country decided to set up an International Financial Centre which would be to the services sector what the EPZ’s were for the manufacturing sector, hence the emergence of the offshore banking and financial services. Ever since, the financial sector has flourished and today the sector comprise an increasing number of leading international banks insurance companies, offshore companies, and NBFIs. Investment vehicles ranging from investment holdings to major collective schemes have been set up and administered in the country.

3.2. A. Legal Framework

The Financial services industry is supervised and regulated under a legal framework by the Ministry of Finance. Numerous changes have been undertaken to modernize and improve the legislation. The Stock Exchange Act and Banking Act in year were passed in 1988. Further efforts by the Mauritian government to establish the appropriate legal framework in the financial sector resulted into the Trusts Act 2001, Financial Intelligence and the Anti-Money Laundering Act 2002, Banking Act (2004), Securities Act 2005, Guidelines for Islamic Banking 2007, Financial Services Act 2007, Amended Law Practitioners Act 2008 and until recently the Foundation Act 2012 among others. The financial sector development has added to the economy’s overall resilience by attracting more and better resources and upgrading the legislative and regulatory framework. This has had positive spillover effects on virtually all sectors of the economy.

With globalisation, Mauritius has demonstrated strong will and commitment to meeting international standards such as the Basel II principles adopted by the Bank of Mauritius in 2009, International Association of Insurance Supervisors (IAIS). The FSC ensure business-friendly laws and regulation which are in line with the standards of International Organisation of Securities Commission (IOSCO) and the Financial Action Task Force (FATF) recommendations. The FSC also focuses on Anti-Money Laundering and combating the Financing of Terrorism requirements, corporate governance principles and international norms and standards for investors’ protection such as strengthening Know Your Client (KYC) policies. Since April 2009, Mauritius is on the OECD’s list of the jurisdictions implementing the internationally agreed tax standards (the White List) to uphold assistance in tax matters.

Government Entities

3.3. A. The Board of Investment

The Board of Investment (BOI) is the national Investment Promotion Agency of Mauritius. To transform Mauritius as a competitive business platform, BOI offers a range of innovative financial products and services to foreign investors in a business friendly environment with a competitive tax rate and no exchange control. Additionally, the BOI's provides extensive network of Double Taxation Treaties to further develop trade and the investment climate. Mauritius currently has access to Double Taxation Avoidance Agreements with 37 countries which provide investors with fiscal advantages. The DTAA’s and Investment Protection & Promotion Agreements (IPPAs) have proved to be influential in motivating foreign investors to choose Mauritius as an efficient business platform. Mauritius has attracted a number of international businesses investing across the globe and has since enhanced inward and outward investment.

ACC 202 Management Accounting

Mauritius has a stable democracy with one of the highest per capita incomes in Africa. Table 1 below shows the trends of real gross domestic product per head in Mauritius for the past six years.

Table 1: Real GDP per capita (current international $)

Year

GDP ($)

2006

10816.93

2007

11712.43

2008

12550.59

2009

13034.10

2010

13606.56

2011

14419.50

Source: World Bank report 2012

According to the statistics provided above, an overall consistent rising trend in the Real GDP per capita is noted. This can be attributed to a well-managed economic regime in the country. Real GDP per capita peaked highest in 2007 owing to the development in the ICT business being an essential trait. Mauritius witnessed a slight rise of 5.97% in 2011 in comparison to 2010. Data are in current international dollars converted at purchasing power parity rates.

The responsibility to regulate bank and non-bank activities falls on different regulators. Incidentally, the regulatory approach has been product based. Presently, the financial structure of Mauritius is regulated and supervised by two different bodies namely: Bank of Mauritius (BOM) and Financial Services Commission (FSC).ACC 300 Auditing and Assurance

3.3. B. Banking Industry

The banking industry is primordial in the financial system to enhance economic expansion. Mauritius has a relatively sophisticated banking sector which consists of the Bank of Mauritius, offshore banks and domestic banks. The sector comprises of 20 banks licensed by the Bank of Mauritius as at December 2012. Of these, 8 are local banks, 7 are subsidiaries of foreign-owned banks and 5 are branches of international banks. Most renowned international banks are present in Mauritius and actively carry out cross border transactions and internationalisation. A strong domestic regulatory framework prevails in the Mauritian banking industry. Banks operate in accordance with the Bank of Mauritius Act (2004), the Banking Act (2004) ND conform to strict confidentiality issues concerning personal data of clients. The Bank closely monitors the risk indicators.

SMEs play an important role in the economic development of a country through employment creation, exports, and poverty alleviation. With the fast expanding Mauritian banking industry, nowadays SMEs face no major constraints concerning availability of credit facilities unlike other developing States. Financial services are easily reachable to the public because more than one bank account per head has been noted. The industry present potential opportunities for investment in banking in and through Mauritius in fields like Global Business Banking, Private Banking and Investment Banking.

Mauritius has well-developed and secure payment systems. There are widespread banking branches and electronic banking for the convenience of customer service. Information technology in banking has transformed the system. The Automated Clearing and Settlement System (MACSS) have speed up automatic processing of cheques. In November 2011, the average number of cheques cleared daily stood at 22,089 cheques, for an average amount of Rs 1,233 million. The numbers of ATMs have been increasing considerably over the years from 195 in 1995 to 426 in 2011. Consequently, the number of transactions has risen from 1524578 in 1995 to 4,525,691 in 2011 amounting to Rs 9 billion with a total number of 1,324,610 of cards in circulation. With the rapid infusion of prepaid cards and mobile banking in the modern banking system, the banking industry laying its focus on easing its electronic delivery channels for the betterment of the public.

Being an International Finance Centre Mauritius supports banking assets from many African and Asian countries. The total asset value of banks in Mauritius was Rs 924.2 billion as at November 2011 with a total amount of credit of Rs 248.8 billion to the private sector.

Bank of Mauritius

The Bank of Mauritius (BoM), founded in September 1967, is the Central Bank of the country. It supervises and regulates the activities of banking sector. The BoM is responsible for maintaining price stability in the economy, controlling the foreign exchange reserves, formulating and executing monetary policy, ensuring information confidentiality and keeping adequate liquidity amongst others. At present (2012) there are 8 non-bank deposit-taking financial institutions, 6 foreign exchange dealers and 10 money changers. The minimum Cash Reserve Ratio (CRR) requirement on a bank’s deposits in 2011 was 6% which endorse stability in credit creation of the banks.

The recent major innovations in the BoM are the introduction of CAMEL ratings, to generate reliable and comparable ratings in bank disclosure; the implementation of the Bulk Clearing system, the Cheque Truncation system and the COMESA Clearing and Settlement System. The Bank’s main data centre in Port Louis during has been upgraded using blade server and virtual machine technology. The Bank has set up a Wireless Network to interconnect banking institutions participating in cheque clearing in Mauritius.

The Central Bank has been working closely with SEM and Commercial Banks to set up a platform to trade government securities on the Exchange. Commercial Banks which have been licensed as Primary Dealers by the Central Bank will act as Market Makers on the SEM platform to ensure liquidity.

Domestic banks

Presently, there are 20 domestic banks in Mauritius. Domestic banks render several services such as deposits taking, granting loan, card-based payment services, internet banking, fund management services, stock broking, private investment banking, custodial management and others. The Mauritius Commercial Bank Ltd and the State Bank of Mauritius Ltd account for approximately 75% of the banking market share.

Offshore banks

Mauritius has a notable offshore banking sector among other developing nations in the Indian Ocean. After the enactment of the Mauritian Offshore Business Activities Act in 1992, Mauritius became an ideal jurisdiction for offshore business activities. Its network of double tax treaties accompanied with well developed telecommunication systems and infrastructural services, offer lucrative opportunities in ‘global business banking’ mostly with significant regional economies such as Asia and Africa. The offshore banks in Mauritius offer a wide range of services including foreign exchange dealing, , offshore trust and securities and fund management. Currently there are 19 offshore banks in Mauritius and this sector is experiencing a sustained growth.

Islamic Banking

The financial sector witnessed a new entrant in March 2011 with the commencement of the first full-fledged Islamic banking operations. Mauritius now offers at introducing a competitive platform of Shariah compliant banking services and financial products. HSBC Bank (Mauritius) Limited and Century Banking Corporation Ltd are currently undertaking Islamic banking business. The Islamic financial services sector in Mauritius is set for further expansion in the coming years.

3.3. C. Financial Services Commission

The Financial Services Commission (FSC), established in 2001, is an integrated regulator for global business, insurance and pensions, capital markets and other NBFI’s. The FSC licenses, regulates, monitors and supervises the conduct of business activities while promoting fairness and transparency of the financial institutions. The FSC is committed to the sustained development of the economy as a sound, stable and competitive International Financial Centre of repute.

Financial intermediation expanded by 5.5% in 2011 as compared to 4.3% in 2010, representing 10.1% of the GDP, FSC Annual Report 2011. This is explained by a growth of 4.5% in the insurance sector, 6.0% in the banking sector and 6.0% in ‘Other financial intermediation activities’.

In 2011, the FSC licensed 16 NBFI’s under the Financial Services Act 2007 [2] , 19 under the Securities Act 2005 and 694 under the Insurance Act 2005, totaling to 729 number of NBFI’s, thus representing an increase of 7% as compared to 2010.

Global business

Since its inception in 1992 under the Mauritian Offshore Business Activities Act (MOBAA), the global business (formerly known as offshore business activities) has experienced sustained growth. The global business sector contributed on average 5% of GDP over the last few years. The Financial Services Act 2007 defined the global business company (GBC) as a resident corporation that proposes to conduct business outside Mauritius. There are two types of GBCs based on the category of licence - GBC1 and GBC2. The top three target markets for GBCs are Africa, India and Asia.

According to table 2, the global business industry experienced a rise of almost 13 % in the number of GBC 2’s in 2011 as compared to 2010 indicating that the jurisdiction ensures certainty and attractiveness to carry out business, according to the FSC Report 2011.

Table 2: Total number of Global Business licensed between 2007-2011

2007

2008

2009

2010

2011

GBC 1’s

1 562

1 937

907

1203

1 101

GBC 2’s

2 367

1 909

1 198

1 145

1 231

Source: FSC Annual Statistical Bulletin - 2011

The number of GBCs followed an upward trend indicating growingly financial investments. In 2011, GBCs were being serviced by 154 Management companies. Management companies are service providers which act as intermediaries between their clients and the FSC. As at October 2010, there were around 140 licensed Management Companies. Despite a constant rise in the turnover for management companies in Mauritius for the last four consecutive years, an approximate fall of 40% was registered from the year 2010 to 2011. The profit before tax dropped by almost 54% in 2011 when compared to year 2010, as depicted below.

Disclaimer

Table 3: Summary of financial results of Management Companies

(inclusive of Corporate Trustees) (2007 – 2011)

2007

2008

2009

2010

2011

Turnover (thousand USD)

93 285

129 379

146 524

151 303

86 938

Profit before tax (thousand USD)

39 189

79 519

59 210

53 884

24 803

Source: FSC Annual Report 2011

Insurance market and pension

The Insurance is an integral part of the financial sector as it contributes to economic growth by promoting financial stability, mobilizing savings, fostering trade as well as mitigating risks. The FSC licenses the insurance/reinsurance companies as well as insurance service providers under the Insurance Act 2005, in alignment with the principles of IAIS.

As illustrated below, the insurance industry grew by 8% in 2011 with assets amounting to Rs 95.9 billion for 21 insurance companies. Similarly, the total gross premium expanded by 9% from Rs 17.5 billion in 2010 to Rs 19.2 billion in 2011 during the year under review. Another performance indicator of the insurance industry is the increase in number of licenses issued. The FSC licensed 18 insurance agents, one insurance broker and 675 insurance salespersons in 2011.

Table 4: Figures for the insurance sector in 2010 and 2011

Dec-11

Dec-10

Growth (%)

Long term Insurance

Gross Premiums

12,953,342,000

11,962,757,000

8%

Assets

84,244,200,000

75,380,174,000

12%

Gross Claims

10,583,575,000

7,786,807,000

36%

No. Policies

497,228

437,108

14%

General Insurance

Gross Premiums

6,246,871,000

5,574,601,000

12%

Assets

11,659,437,000

13,158,375,000

-11%

Gross Claims

3,250,208,000

2,561,172,000

27%

No. Policies

419,516

446,270

-6%

Total Gross Premiums

19,200,213,000

17,537,358,000

9%

Total Assets

95,903,639,000

88,538,550,000

8%

Total Gross Claims

13,833,783,000

10,347,979,000

34%

Total No. Policies

916,744

883,378

4%

Source: FSC Annual Report 2011

Capital Markets

The capital market is one of the most dynamic sectors in the economy. It promotes growth by converting savings to investments and assists companies in raising funds.  The Securities Act 2005 governs the operations of securities exchanges in Mauritius.

The FSC has two duly licensed Securities Exchanges:

Stock Exchange of Mauritius Ltd (SEM)

Global Board of Trade Ltd (GBOT).

Stock Exchange of Mauritius

Following the enactment of the Stock Exchange Act in 1988, the Stock Exchange of Mauritius Ltd (SEM), a private limited company, was incorporated in 1989 to control and supervise the securities market operations. The local stock market which was opened to foreign investors after the abolishment of the Exchange Control in 1994, has witnessed net inflows of Rs 6.82 billion from foreign investors from August 1994 to 11 April 2012. In 2008, the SEM became a public company and is today one of the leading exchanges in Africa. By attaining membership to the World Federation of Exchanges since 2005, SEM is being acknowledged internationally.

Over the last decade, Mauritius Bourse generated encouraging investment inflows on many listed companies foreign investor. Being ranked first in the “Most Innovative African Stock Exchange” category in 2012, SEM now aims at consolidating its position to further contribute to economic development of the country. Until recently, SEM brought flexible changes in its Listing Rules to cater for Global Business companies and remain in line with international standards.

The SEM operates two markets:

Official Market

The Official Market took off in 1989 and presently has 62 listed companies with a market capitalisation around US$ 5.5 billion as at 30 November 2012 and 3 listed Global Business companies in 2013. According to the FSC’s Annual Report 2011, the official market capitalisation was Rs 172 billion which amounted 53% of GDP.

Development & Enterprise Market (DEM).

The DEM started in 2006 and currently has 52 listed companies in 2012 compared to 50 listed companies in 2011. The DEM market capitalisation rose to Rs 59 billion implying a growth of 9% in 2011 as compared to 2010, FSC’s Annual Report 2011.

Global Board of Trade Ltd

The GBOT, launched in October 2010, is a major step in development of the Mauritian economy. GBOT is promoted by an Indian Group, the Financial Technologies Group, which is licensed and regulated by the FSC. It is an international multi-asset class exchange which offers a basket of currency derivative products and the commodity derivatives for trading. During 2011, the total turnover for the 294,441 contracts traded on the GBOT hit USD 8.155 billion.

Conclusion:

The structure of the financial services sector is undergoing dynamic changes worldwide. With activities becoming more integrated, a unified financial and regulatory framework was proposed by Dr Manraj [3] for the Mauritian financial system. . In a nutshell, Mauritius is currently in a transitionary model for reforms are being initiated to provide reliance in the sector. Given the increasing number of issuers, players and investors in our local market over time, a meaningful contribution is brought towards the integration of the Mauritius financial services. The financial sector remained resilient and profitable during the year 2010-11 despite the uncertain economic conditions that persisted on the international front.

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