Sustaining the Development of Financial Services in Mauritius

Chapter1: Introduction
The financial sector represents the interface between the demand of individuals, households and enterprises for financial services, and the formal and informal institutions that meet these needs. It includes a whole host of actors, including clients themselves, local community-based groups that provide financial services, microfinance institutions, post offices, insurance providers, money transfer companies, and commercial banks. It also includes institutions that are involved in regulation and supervision. Access to sustainable and secure financial services contributes directly to increasing income and reducing vulnerability for the poor. Bringing more people, and therefore more money, into the formal financial system can lead to overall economic growth and development, and increased stability in developing country economies. Policymakers in developing countries have an important role to play in creating the conditions for improved access, and thereby unlocking the economic potential of their populations. The potential for economic growth and poverty alleviation through the development of a more inclusive financial services sector has been recognized by leaders in developing and developed countries and is emerging as a priority issue on political agendas. Developing country policymakers have recognized that the complex and multidimensional factors contributing to financial exclusion will require a variety of providers, products, and technologies that work within and are a reflection of the socio-economic, political, cultural, and geographic conditions in their countries. Policymakers and regulators broadly recognize two types of barriers to financial inclusion. Supply-side barriers such as transaction costs and poor regulatory frameworks hinder the quantity and quality of financial products and services. Demand-side barriers restrain the capacity of individuals to access available services and products. These include socio-economic and cultural elements, challenges posed by the lack of formal identification systems, ability to track an individuals financial history, and low levels of financial literacy, in addition to the absence of appropriate consumer protection mechanisms. To obtain sustainable development in

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the financial services, we should, therefore, seek comprehensive approaches to policy that strategically overcome supply- and demand-side barriers simultaneously for maximal results.

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Chapter 2: Economic Outlook of Mauritius

Despite the inherent constraints of a small island economy, Mauritius has achieved remarkable economic success over the years. Back in 1968, the economy was entirely dependent on sugar exports and showed little scope for sustained economic progress. While the manufacturing sector established a sound and solid base for sustainable economic development in Mauritius, in 1 970s-1 980s, the tourism sector simultaneously projected itself as a serious economic pillar by contributing increasingly to foreign exchange earnings of the country, and by being an important generator of employment. A range of investment incentives were provided to boost the development of the tourism sector in terms of fiscal incentives and financial support for hotel development and management services. The labour-intensive exportoriented growth strategy was therefore powered by three main economic sectors, namely sugar, textile products and tourism. Thus, by the late 1980s, the economy had significantly reduced its dependence on agriculture and its base became more diversified. The three major sectors of the economy namely sugar, textile and tourism as well as growth areas in financial and business services provided the main engines for growth. The diversification strategy focused on consolidating and modernizing traditional economic sectors while creating new areas of growth which would allow the economy to embark on higher levels of development. The services sector, more particular financial services, has been earmarked as the area for further economic development.

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Economic indicators and Statistical Highlights for Mauritius Country Profile

2010 Population (Million) GDP at basic prices (USD million)1 GDP per Capita at basic prices (USD) FDI (Total) (USD million)2
1

2011 1,3 9,560 7,432 244 32

1,3 8,504 6,729 447

FDI Financial and insurance activities (USD 149 million)2

Source: 1Statistics Mauritius- National Accounts - Dec 2011 issue(Revised data) Monthly Statistical Bulletin Bank of Mauritius - Nov 2011 issues(Revised data)-Data for 2011 covers period January-September
2

2010* Contribution to GDP (%) Financial 10.0 Intermediation Insurance Banking Other 2.9 5.7 1.4

2011* Growth Contribution Rate to GDP (%) (%) 4.3 4.5 3.9 5.6 10.0 3.0 5.7 1.3 Growth Rate (%) 5.5 4.5 5.9 6.0

Source: Statistics Mauritius National Accounts - Dec 2011 issue Note: * Revised

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World Bank Doing Business 2011 (out of 183 Countries) Overall Ranking on the Ease of Doing Business Ease of Starting a Business Protecting Investors Trading Across Borders Global Rankings Mo Ibrahim Index of African Governance 2010 (Out of 53 Countries) Environmental Performance Index 2010 (Out of 163 Countries) Global Competitiveness Index 2011-2012(Out of 142 Countries) The Wall Street Journal & The Heritage Foundation Index of Economic Freedom 2011

23rd (1stin Africa) 15th 13th 21th 20th 1st 6th 54th (3rd in Africa) 12th (1st in Africa)

The country is ranked high in terms of competitiveness, investment climate and governance. The World Economic Forums global competitiveness index ranked Mauritius at 55 out of 133 countries in 2010 - 2011, behind only South Africa in the Africa Region. It topped the 2008 Mo Ibrahim Index of African Governance, and is ranked 36 in the AT Kearney Global Services Location Index 2011. The remarkable performance of the economy is attributed to sound economic governance, accelerated reforms to sustain long-term growth and effective statebusiness relations. These factors together with timely and targeted responses helped Mauritius to weather the negative effects of the global crisis. According to the Wallstreet Journal and Heritage Foundation, Mauritius is now positioned 1st in the African region for the ranking of the Index of Economic Freedom and out of 179 countries, Mauritius is ranked 8th at the international level. (Le Dfi Quotidien- 13th January 2012)

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Real GDP growth

4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2009 2010 2011

GDP grew by 4.1% in 2010, up from 3.1% in 2009 but lower than 5.5% in 2008. Despite challenges at home and abroad, the Government has maintained a growth path. Projections for 2012 put economic growth at 4.1%.

Contribution of GDP by sectors

4% 27%

69%

services sector

secondary sector

primary sector

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In Mauritius, the services sector contributes an average 68.5% of GDP compared to 27.4% for the secondary sector and 4.1% by the primary sector which consists mainly of agricultural activities.

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Chapter 3: Financial Services

3.1 Introduction Financial services are the economic services provided by the finance industry, which encompasses a broad range of organizations that manage money, including credit unions, banks, credit cards companies, insurance companies, consumer finance companies, stick brokerages, investment funds and some government sponsored enterprises. 3.2 History of Financial Services The term "financial services" became more prevalent in the United States partly as a result of the Gramm-Leach-Bliley Act of the late 1990s, which enabled different types of companies operating in the U.S. financial services industry at that time to merge. Companies usually have two distinct approaches to this new type of business. One approach would be a bank which simply buys an insurance company or an investment bank, keeps the original brands of the acquired firm, and adds the acquisition to its holding company simply to diversify its earnings. Outside the U.S. (e.g., in Japan), non-financial services companies are permitted within the holding company. In this scenario, each company still looks independent, and has its own customers, etc. In the other style, a bank would simply create its own brokerage division or insurance division and attempt to sell those products to its own existing customers, with incentives for combining all things with one company.

3.3 Types of Financial Services.

1. Banking Services The primary operations of banks include:

Keeping money safe while also allowing withdrawals when needed Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post

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Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or business)

Issuance of credit cards and processing of credit card transactions and billing Issuance of debit cards for use as a substitute for checks Allow financial transactions at branches or by using Automatic Teller Machines (ATMs) Provide wire transfers of funds and Electronic fund transfers between banks Facilitation of standing orders and direct debits, so payments for bills can be made automatically

Provide overdraft agreements for the temporary advancement of the Bank's own money to meet monthly spending commitments of a customer in their current account.

Provide internet banking system to facilitate the customers to view and operate their respective accounts through internet.

Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly.

Provide a check guaranteed by the Bank itself and prepaid by the customer, such as a cashier's check or certified check.

Notary service for financial and other documents Accepting the deposits from customer and provide the credit facilities to them.

Other types of Bank Services

Private banking - Private banks provide banking services exclusively to high net worth individuals. Many financial services firms require a person or family to have a certain minimum net worth to qualify for private banking services. Private banks often provide more personal services, such as wealth management and tax planning, than normal retail banks. Capital market bank - bank that underwrite debt and equity, assist company deals (advisory services, underwriting and advisory fees), and restructure debt into structured

finance products.

Bank cards - include both credit cards and debit cards. Bank Of America is the largest issuer of bank cards.
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Credit card machine services and networks - Companies which provide credit card machine and payment networks call themselves "merchant card providers".

2. Foreign Exchange Services Foreign exchange services are provided by many banks around the world. Foreign exchange services include: Currency exchange - where clients can purchase and sell foreign currency banknotes. Foreign Currency Banking - banking transactions are done in foreign currency. Wire transfer - where clients can send funds to international banks abroad.

3. Investment Services

Asset management - the term usually given to describe companies which run collective investment funds. Hedge fund management - Hedge funds often employ the services of "prime brokerage" divisions at major investment banks to execute their trades. Custody services - the safe-keeping and processing of the world's securities trades and servicing the associated portfolios.

4. Insurance

Insurance brokerage - Insurance brokers shop for insurance (generally corporate property and casualty insurance) on behalf of customers. Insurance underwriting - Personal lines insurance underwriters actually underwrite insurance for individuals, a service still offered primarily through agents, insurance brokers, and stock brokers. Underwriters may also offer similar commercial lines of

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coverage for businesses. Activities include insurance and annuities, life insurance, retirement insurance, health insurance, and property & casualty insurance. Reinsurance - Reinsurance is insurance sold to insurers themselves, to protect them from catastrophic losses

5. Other Financial Services

Intermediation or advisory services - These services involve stock brokers (private client services) and discount brokers. Stock brokers assist investors in buying or selling shares. Private equity - Private equity funds are typically closed-end funds, which usually take controlling equity stakes in businesses that are either private, or taken private once acquired.

Venture capital is a type of private equity capital typically provided by professional, outside investors to new, high-potential-growth companies in the interest of taking the company to an IPO or trade sale of the business.

Angel investment - An angel investor or angel (known as a business angel or informal investor in Europe), is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.

Conglomerates - A financial services conglomerate is a financial services firm that is active in more than one sector of the financial services market e.g. life insurance, general insurance, health insurance, asset management, retail banking, wholesale banking, investment banking, etc

Debt resolution -A consumer service that assists individuals that have too much debt to pay off as requested, but do not want to file bankruptcy and wish to payoff their debts owed. This debt can be accrued in various ways including but not limited to personal loans, credit cards or in some cases merchant accounts. There are many services/companies that can assist with this. These can include debt consolidation, debt settlement and refinancing.

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Chapter 4: Financial Services Sector of Mauritius

4.1 Overview and Evolution By diversifying its four-pillar economy- sugar, textiles, tourism and financial services, Mauritius has strived to make it more resilient to shock, enhance productivity and competitiveness and support growth and job creation. However, there was a need to provide an outward orientation to the financial services sector which has predominantly been focused on banking and insurance. New laws had to be enacted to provide a new thrust to the development of financial services in Mauritius. Therefore, over the past few years a number of legislations were passed to ensure that the legislative framework meets all the international standards and also aimed at improving efficiency and competitiveness of our financial services sector. To start off, the Banking Act was amended in 1988 to enable offshore banking to be carried out. Then, followed the establishment of a stock exchange in 1989, through the enactment of the Stock Exchange Act 1988 which provided for the set of a supervisory body and a private operating and management company. Measures for liberalizing the domestic financial sector were initiated in 1991 and culminated in 1994 with the abolition of the exchange control. Such measures aimed to reorient macroeconomic policy towards sustainable growth while creating a financially sound and efficient domestic financial system. Comprehensive legislation relating to non-banking offshore business activities were enacted in 1992 through the Mauritius Offshore Business Activities (MOBA) Act and the offshore Trust Act. Besides the legislative framework in place, various fiscal incentives were introduced to attract international investors to set up offshore vehicles in Mauritius. The establishment of a Freeport in 1992 followed the economic development strategy of Mauritius in positioning the Island as a financial, business and trading hub in the Indian Ocean region. The enactment of the Freeport Act provided a comprehensive framework for the development of trade-related activities that would boost the traditional trading base of Mauritius.
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In the wake of the global financial crisis, there have been several initiatives at national and international levels to review the financial regulatory infrastructure. In Mauritius the Government set up in 2009 a Financial Stability Committee, a tripartite arrangement between the Treasure, the Bank of Mauritius and the Financial services Commission. The purpose is to regularly review and ensure the soundness of the financial system. The financial activities are now experiencing a gradual shift away from the dominance of banks and insurance companies. A number a non-bank financial institutions are now emerging to play a vital role. Thus, the number of well established firms from South Africa, Europe and Asia setting up operational offices with the objective of centralizing their offshore operations in Mauritius, have significantly increased over the past few years. This shows Mauritius provides an ideal environment for bank, insurance companies, trading companies, fund managers and other professionals to conduct their international business. To emphasize more on the promotion of Mauritius as a Financial hub, the Financial Services Development Act 2001 also provides for the setting up of a Financial Services promotion Agency as a separate body to promote the further development if the financial services sector in Mauritius. This Agency is also responsible to prepare and implement a plan for human resource development and training in the field of financial services. The reputation of Mauritius as an International Financial Centre rests on the quality of its services and its pool of highly qualified professionals. The Financial Services Act (FSA) adopted in 2007, simplifies the regulatory regime and consolidates the legislative framework of the global business sector. The Financial Services Act 2007(FSA) repeals the Financial Services and Development Act 2001(FSDA) and the Financial Services Development(Amendment)Act 2005. It specifically provides for the independence of the Financial Services Commission as a regulatory body. The FSA enhances the substance of the Mauritius jurisdiction and promotes value- addition by allowing a larger scope of work to be conducted in Mauritius by a Category 1 Global Business Licence (GBL 1). GBLs conducting financial services must also be licensed under the financial services regime. The financial sector in Mauritius, which is dominated by banks and insurance companies account for more than 70% of the sectors total assets and remained stable and sound throughout 2009
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and in the first six months of 2010. Financial corporations nevertheless, faced a slowdown in their activities as a result of the challenging economic conditions, but there were no instances of institutions in the sector facing hardships. (Financial Stability Report- August 2010)

4.2 Capital markets The Capital Markets in Mauritius is one of the most dynamic sectors of the economy. The governing legislation, the Securities Act, based on international norms and standards, aims to:

foster fair, efficient, transparent and informed markets for securities in Mauritius; monitor and regulate the operations of securities exchanges and the activities of persons providing clearing and settlement services and trading systems for securities;

suppress and prevent financial crimes and illegal practices; regulate the disclosure of information by persons issuing securities and by reporting issuers to securities holders and to the public;

cooperate and collaborate with domestic and international organisations, law enforcement, supervisory and regulatory bodies; and

reinforce the protection of investors in Mauritius from unfair, improper and fraudulent practices.

There are two licensed Securities Exchanges in Mauritius - the Stock Exchange of Mauritius Ltd (SEM) and the Global Board of Trade Ltd (GBOT). Stock Exchange of Mauritius Ltd SEM, one of the leading exchanges in Africa operates a fully automated stock market infrastructure from trading to settlement which is in line with international standards. This system has revolutionized trading practices in Mauritius and empowered investors to benefit from real time trading. SEM has gained international recognition by achieving membership status to the World Federation of Exchanges since 2005 and has gone live on the Bloomberg index since 2009.
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SEM operates two markets in the equity segment: the Official Market - meant for larger companies, consisting of some 40 listed companies and the Development and Enterprise Market (DEM) catering for medium and small enterprises which comprises some 50 companies. The listed companies are from various sectors of the economy such as banks, insurance and other finance, commerce, sugar, industry, investments and transport. With the lifting of the Exchange Control in 1994, foreign investors can also trade on the SEM. Global Board of Trade Ltd GBOT was launched in October 2010 and is promoted by the Financial Technologies Group of India. It was licensed as a multi class asset exchange and currently operates two derivatives segments - the Currency and the Commodity Derivatives Segments. GBOT is the first exchange to offer derivative products in Mauritius. It has a state-of-the-art trading platform with clearing and settlement systems, providing access to several of the world's fastest growing economies. The licensing of the GBOT by the FSC is a major milestone in the development of the capital markets industry in Mauritius. GBOT promotes Mauritius as a financial hub as it helps the investment community to hedge price risk movements in international markets and provides an opportunity for investors to capitalize on arbitrage opportunities.

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Chapter 5: Classification of the Financial Services Sector of Mauritius

5.1 Banking Sector The legal framework for banking business is embodied in the Banking Act 1988 and the Bank of Mauritius Act 1988. Both the Banking Act 1988 and Bank of Mauritius Act 1988 were repealed by a new Banking Act which will soon be proclaimed in 2004. Banking legislation provides for prudential regulations with respect to bank's concentration of risk, weighted capital adequacy ratio, income recognition and clarification of loans and advances for provisioning purposes, maintenance of accounting and other records and internal control systems.

5.2 Insurance Sector The Insurance Act 1987 sets out the legal framework for the conduct of insurance business in Mauritius, and provides for the prudential supervision of the insurance industry by ensuring control over and transparency in the conduct of insurance business, and for the protection of policyholders and members of the general public. Pension schemes operated by insurance companies also fall under the Insurance Act. Under the Financial Services Development Act 2001, the Financial Services Commission has taken over the Regulatory and Supervisory role of the Controller of Insurance. 5.3 Security Sector The Stock Exchange Act 1988 established a formal stock exchange in Mauritius, operated and managed by the Stock Exchange of Mauritius Limited. With the enactment of the Financial Services Development Act 2001, supervision and regulation is carried out by the Financial Services Commission (FSC). The FSC also administers the Securities (Central Depository, Clearing and Settlement) Act 1996. The Stock Exchange currently consists of two markets: the Official Market on which securities of listed companies are traded, and the Over-The-Counter Market. Trading in
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securities is no longer floor-based but conducted through dedicated trading workstations located at stock-broking firms and linked by communication lines to the automated trading system of the Stock Exchange of Mauritius Ltd (SEMATS). SEMATS can accommodate different types of financial instruments: Ordinary shares, Preference shares, Corporate and Government debt instruments.

5.4 Global Business Banking Sector With a view to sustaining economic growth and further diversification of the economy, the Government initiated offshore business sector, now termed Global Business Sector in 1992. The activities that can be conducted in the Global Business Sector are: offshore insurance, offshore funds management, international financial services, operational headquarters, international consultancy services, shipping and ship management, aircraft financing and leasing, international licensing and franchising, offshore pension funds, international trading and assets management and international employment services. Developments in the Global Business Sector are oriented towards the establishment of activities generating substance and value added. The number of well established firms from South Africa, Europe and Asia setting up operational offices with the objective of centralising their offshore operations in Mauritius is have significantly increased over the past few years. The following types of offshore activities can be conducted in Mauritius:

Offshore Banking Offshore Insurance Offshore Funds Management International Financial Services Operational Headquarters International Consultancy Services Shipping and Ship Management Aircraft Financing and Leasing International Licensing and Franchising

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International Data Processing and Information Technology Services Offshore Pension Funds International Trading International Assets Management International Assets Management International Employment Services

5.5 Trusts The legal framework for Trusts is contained in the Trust Act 2001. Various types of Trusts may be set up by residents and non-residents in Mauritius such as charitable, discretionary, purpose and trading trusts. Flexibility is provided under the Trust Act in determining the applicable governing law.

Key features Possibility to accumulate income for any period within the duration of the Trust. A Trust may carry on a Qualified Global Business once a Category 1 Global Business License has been obtained. A Trust may not apply for a Category 2 Global Business Licence. A foreign Trust may be registered in Mauritius provided the terms of the Trust are in compliance with Mauritian law. The forced heirship rules do not apply to Trusts set up by non-Mauritian nationals.

5.6 Activities carried out by other Non-Banking Financial Institutions:

Assets Management Credit Finance Custodian Services (non-CIS) Distribution of Financial Products

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Factoring Leasing Occupational Pension Scheme Pension Fund Administrators Pension Scheme Management Retirement Benefits Scheme Superannuation Funds Registrar and Transfer Agent Treasury Management Credit Rating Agencies/Rating Agencies Representative Office (for financial services provided by a person established in a foreign jurisdiction

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Chapter 6: Regulation of the Financial Services Sector

With the rapid growth of the financial sector, there may be market abuse and financial frauds. Therefore strong regulation is needed to combat fraud and money laundering.

6.1 The Financial Services Commission (FSC)

One of the missions of the FSC is to suppress crime and malpractices so as to provide protection to members of the public investing in non-banking financial products. By enforcing regulatory and compliance requirements, the FSC thus ensures the sound conduct of business in the financial services sector and global business sector.

The FSC is a member of the International Organization of Securities Commission (IOSCO). The FSC was awarded the "Most Innovative Capital Markets Regulator of the Year Award" by Africa Investor in September 2010 at a summit organized, in collaboration with New York Stock Exchange (NYSE) Euronext. The Award recognizes the measures taken by the FSC to promote the development of financial services in Mauritius and the adoption of a business-friendly approach to regulation. In monitoring the conduct of business activities of its licensees, the FSC focuses inter alia on market conduct, Anti-Money Laundering and Combating the Financing of Terrorism requirements, corporate governance principles and international norms and standards.

6.2. The Financial Intelligence and Anti-money Laundering Act 2002 The FIAML Act make provision for the establishment and management of a Financial Intelligence Unit(FIU) as the central agency responsible for receiving, requesting, analyzing and disseminating to the investory and supervisory authorities, disclosures of financial information: -Concerning suspected proceeds of crime and alleged money laundering offences. Banks, financial institutions, cash dealers and the relevant professionals are required to report suspicious

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transactions in relation to money laundering activities to the FIU; required by or under any enactment in order to counter money laundering ; or -Concerning the financing of any activities or transactions related to terrorism, as specified in Part III of the Prevention of Terrorism Act 2002. This Act also makes provision for mutual assistance with overseas bodies in respect of investigation and prosecution of money laundering cases.

6.3 The Bank of Mauritius As a bank regulator, the primary concern of the Bank of Mauritius is to ensure that banks have in place adequate systems to measure, identify and control the various types of risk to which they are exposed. This issue has been the subject of a separate guideline to be issued to banks. Bank auditors are also under a duty to report to the Bank of Mauritius on the status, inter alia, of controls put in place by banks for creating a safe and secure environment free of operational risk. The aim is to continuously ascertain the adequacy of the controls in the light of evolving technology. Given the rapid pace of innovation in technology, the Bank has an interest in anticipating the likely policy implications of these developments. The Bank has specific objectives to protect consumers and other users of the payment system against financial or other types of risks with a view to enhancing confidence of consumers of electronic money services. In this connexion, the Bank is in the process of issuing a specific guideline to banks on the appropriate framework for establishing their electronic banking and electronic money business. According to David Hotte, expert in anti-money Laundering at the Mauritius Institute of Directors, Mauritius faces the same financial crimes as the developed countries. However, he states that Mauritian laws against financial crimes are effective and the local institutions who have direct or indirect link with these offences, are functioning properly.

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During a conference on financial crimes, he said: Vous aurez des gens, par exemple, qui essaieront dutiliser le system financier pour placer de largent illgalement. Cela peut tre dans des investissements immobiliers. Mais lle Maurice est bien quipe pour contrer les crimes financier financiers, ce qui nest pas le cas de tous les pays qui lentourent. (Le Dfi Quotidien- Friday 27 January 2012)

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Chapter 7: Importance of Financial Services

The financial services needed in poor households vary, according to a familys level of poverty, its skills, life cycle needs, and local market opportunities. Savings are needed by poor families to prepare for major events such as marriage, to finance basic health care, housing, childrens education, or to set aside emergency funds. Access to insurance services helps households better cope with risks to life and assets. Millions of poor families in the developing world use small loans to make their living from a huge variety of microenterprises or to help them cope with an emergency or short-term economic down turn. Overall, these services can help poor families benefit from economic opportunities to build up incomes and assets to lift them out of poverty. In other circumstances, financial services provide protection from sliding further into poverty. All over the world, microfinance institutions not only provide key services, but also play an important role in building up community-based groups, local networks, and leadership skills, especially for poor women Many poor households would prefer wage employment in a formal business to self-employment in informal enterprise. Small and medium enterprises (SMEs) have the potential to create many new jobs, but SMEs are often severely constrained by lack of access to capital. They are excluded by both the formal and informal financial sector - the former deeming them too risky and the latter lacking the resources and systems to extend services to the sector. A functional financial sector reduces poverty indirectly, sometimes dramatically, by promoting broad-based economic growth. Recent studies point to a strong correlation between financial development and economic growth. An efficient financial sector promotes Savings mobilization by supplying flexible financial instruments with attractive yields and different maturities; Efficient allocation of resources by providing investment choices and screening alternative proposals; Stronger investment by matching risks and rewards and by pooling, pricing and sharing risk; A stable and acceptable medium of exchange and a reduction of the inefficiencies of barter economies.
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Chapter 8: Recommendations on how to Promote Sustainable Development of Financial Services

8.1 Changing role of Policymakers

The widespread realization that financial inclusion is critical for poverty alleviation, balanced economic growth and economic stability has resulted in growing leadership and ownership of the issue by policymakers. The policy environment will critically determine the scope and speed at which the financial access gap across countries and regions will be closed. Beyond promising a more demanding role for policymakers in future, the process of financial inclusion policy creation in developing countries is itself undergoing profound changes. Developing countries are increasingly setting their own agendas and helping their peers do the same. Instead of adopting wholesale solutions, they are themselves increasingly innovating powerful policy solutions that boost scale of access to finance. Hence, in the field of technology-enabled financial services, policy makers of Mauritius should have access to information about effective policies that can improve access to financial services. Policy makers of Mauritius can also refer and try to adopt the following policies:

(1) Leadership is manifesting itself in different ways around the world. The Bank of Thailand has emphasized the importance of financial inclusion in its recent second Financial Sector Master Plan and is entering discussions with the commercial banks on business models that can help to reach the rural poor. (2) At the heart of Kenyas strategy to grow into middle-income country within the next decade is the plan to bring millions of people into the formal financial system. This national objective stewarded by the Kenyan central bank helps to guide and prioritize a range of activities from public, private, and non-profit sector players. (3) The Superintendence of Peru has adopted financial inclusion as a cross-cutting priority for the whole institution, creating specific working groups in each department to enhance their performance from the perspective of financial inclusion.

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(4) Malaysias Financial Sector Master Plan includes meeting socioeconomic objectives such as improving access to financing for priority sectors (such as SMEs and Agriculture), providing advisory services to small borrowers, and providing banking services to nonurban areas.

8.2 Microfinance as the Entry Point

Despite expanded availability of an interest in technology-driven solutions and new delivery channels, a developing country policymakers first exposure to financial inclusion is often still typically related to the notion of microfinance. As the microfinance sector has grown and matured, it has necessitated the development of policies to support financial intermediation, and cope with non-bank financial actors that have started to take deposits or otherwise intermediate funds. Many countries, including Mauritius, have a national microfinance strategy in place, but may not yet have identified an overall financial inclusion strategy or approach. Mauritius can use a variety of policy options to promote the transformation and commercialization of microfinance institutions (MFIs), institutionally strengthen MFIs, allow charity or non-profit MFIs to operate easily, supervise the conduct of microlenders and offer financing facilities for MFIs. Some regulators can encourage commercial banks to downscale their operations to participate in microfinance activities, either by establishing specialized departments, subsidiaries, or wholesale lending to MFIs.

8.3 Cost Reduction and New Technology on the Horizon

The use of information and communication technology has great potential to reduce transaction costs and allow for the expansion and diversification of financial services. It also opens up new options for non-bank players, such as mobile network operators or banking agents, to get involved with the provision of these services via mobile telephones or other devices. However, regulators have the difficult task of trying to find the appropriate balance between supporting growth-enhancing innovation while at the same time implementing prudent regulation and effective risk-based supervision. This partly explains why new electronic or technology-based

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financial services have so-far gained momentum only in a handful of countries, and in some of these with regulation thus far kept to a minimum.

Another way of promoting financial services is low cost of operation. If Mauritius reduces unnecessary paperwork as well as redtapism regarding loans, insurance and other financial services, this will reduce cost of operation. The existing financial firms will hence improve their way of operating, becoming more efficient. This might also induce them to introduce new services as well as improving existing ones. New services might include internet banking, mobile banking, new credit cards, and better customer services inter alia.

8.4 Role of Banks: E-banking and Mobile Banking

Banks have a critical part to play in the sustainable development of financial services. Regulators are seeing that financial inclusion is in part a distribution issue and often stipulate loosening licensing requirements for opening new bank branches as a step towards facilitating the outreach of banks to otherwise expensive to reach areas. In Pakistan the revision and liberalization of the branch licensing policy of the State Bank of Pakistan will facilitate outreach by allowing banks to make their branch housing decisions within broad policy parameters. Kenya in addition to the successful regulatory openings for mobile payments is also exploring the revision of branching requirements towards making use of banking agents. Banks of Mauritius are already extending their outreach through the use of technology such as mobile phones and correspondents. We are living in a world where everything is metamorphosing with new technology, then why be late in implementing such measures in the financial sector, particularly in the banking sector of Mauritius? As such, by replacing the traditional way of accessing to the bank to incur financial transactions, E-Banking or Internet Banking could be promulgated instead which would certainly lure the youth of the country. The use of information and communication technology has great potential to reduce transaction costs and allow for the expansion and diversification of financial services. It also opens up new
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options for non-bank players, such as mobile network operators or banking agents, to get involved with the provision of these services via mobile telephones or other devices. Electronic-money (e-money) refers to monetary value measured in currency units stored in electronic form on an electronic device in the consumers possession. Although e-money is still in its infancy in Mauritius, two big corporates, via the Mauritius Telecoms and Shell Mauritius Limited are issuing single-purpose prepaid cards which are used to pay for telephone calls and fuel. Over the past years, two types of electronic banking services have emerged in the banking sector; they are phone banking and Internet banking. Three banks have already launched their websites in Mauritius and others are likely to follow suit soon. Services through the Internet allow customers to effect banking transactions round the clock from anywhere around the world. Internet banking systems are well secured to prevent unauthorized access and safeguard the integrity of the data. The services which are actually being provided through Internet banking include overview of and inquiring of accounts, making inter-account transfers, effecting payments to third party accounts, ordering cheque books and opening of accounts. In addition to these facilities, application for loans can be made through the Internet.

8.5 Financial Services Policy going beyond Supply

Traditionally the role of policymakers in the area of financial services has been on the supplyside, either through public provision of financial services or enabling regulation. There is a distinct shift in this approach demonstrated by the attention given by financial sector policymakers to fair consumer protection and financial capability. Mauritius should emphasis on empowering financial service consumers, who are vulnerable to abuse, so they can make a better use of existing products. Financial education, consumer protection, and financial transparency are some of the issues that should receive more attention from regulators. For example, Peruvian regulators require prior approval of consumer contracts used by financial institutions, disclosure
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of interest rates, commissions and fees and prohibit unilateral contract modifications by financial institutions. Malaysias central bank conducts outreach activities on rights and responsibilities of customers, targeting women, students, rural communities and pensioners who may be most vulnerable. Under the Indonesian Banking Architecture, banks annual business plan must include banking education activities that cover the benefits, risks, and fees of banking products as well as the rights and obligations of both the bank and customer. The FSC promotes the development, fairness, efficiency and transparency of financial institutions and capital markets in Mauritius.The Companies Act 2001 provides a modern and efficient framework for companies to carry out their business activities at the onset of the new millennium and, aims to facilitate enterprise, promote transparency and enhance

competitiveness. The new company legislation is designed to be clear, flexible and in line with international standards and concerns. The Companies Act 2001 is user-friendly and helps to minimize bureaucracy, reduce compliance and other costs and facilitates the administration of company business. Insurance Entities, Management Companies & Investment Businesses

All financial institutions should have a system of internal controls to manage their AML/CFT (Anti-Money Laundering and Combating the Financing of Terrorism requirements) risks and to provide a systematic and disciplined approach to assuring compliance with AML/CFT laws, codes and standards of good practice. AML/CFT risk management is most effective when an Insurance Entitys culture emphasizes high standards of ethical behavior at all levels of the entity. The board of directors and senior management should promote an organizational culture which establishes through both actions and words the expectation of compliance by all employees with AML/CFT laws, codes, standards of good practice and internal policies and procedures when conducting the business. The board of the institution should approve its AML/CFT policy and must establish procedures and allocate responsibilities to ensure that the AML/CFT policy and procedures are managed effectively and are in line with applicable laws, codes and standards of good practice.

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8.5.1 Promoting Financial Literacy to Promote Financial Services The promotion of a sustainable development of financial services can be done by endorsing the public awareness of the financial systems of Mauritius, thereby encouraging more people to utilize the plethora of services provided by various financial institutions of the country. In this way, the citizens will become knowledgeable of the modus operandi of finance sphere and this will allow them to motion optimal decisions on how to allocate their finance. This would, without any doubt create a headway to the utilization of the services provided on this field, thus improving the long-term financial well being of the country and sustaining the development of financial services. Example: SAVINGS- Both General and Retirement Savings Indeed savings is vital in this insecure world, but it is a fact that potentially many people do not actually keep aside some funds for future days. As such, to address this issue, it is essential to sensitize the people to do so. By educating the individuals about the importance of savings, we are indirectly stepping towards the use of financial services such as the banking services, insurance, investment in shares to obtain further revenue in the foreseeable future, inter alia. As a result, the retired people would not only rely on the National Pension Funds amount of Rs 3 146 which might be insufficient to meet all the basic needs of the person aged above 60 but below 90. They are better positioned to reach retirement with the funds they need for the standard of living to which they desire. Moreover, employment in the financial and business services sector is highly remunerative and this sector represents a major absorption capacity for employment in the future. Employment opportunities will increase in this sector. Therefore, we must focus on the human resource development in an attempt to create the skilled labour force needed by this sector.

8.6 Prioritizing Evidence-Based Policy

Increasing emphasis on financial inclusion data collection is being made by regulators to inform the decision-making process. For many countries, data is simply unavailable or very limited. For
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others, existing data provides an over-simplistic view of financial inclusion. All countries remark how important it is to have reliable data capable of illustrating the many aspects of the multidimensional access problem to help well inform decision-making processes, to set priorities for action and to monitor progress. The trend here is towards linking policies to current realities and projecting how these will affect markets for the future. These initiatives demonstrate a new commitment by policymakers to the impact of the regulations and policies they adopt. Countries are at different stages of measuring financial inclusion often starting with gathering the right supply-side data that is more readily available to regulators and supervisors before moving on to demand side surveys. Mauritius should therefore not only take the lead in driving financial inclusion through better and systematic policies but are also at the forefront of innovating financial inclusion policies.

8.7 Encouraging more International Financial Institutions to install their Branches in Mauritius: Fiscal Policies. Indisputable is the fact that due to the favorable business environment in Mauritius, many financial companies have stepped onto the Mauritian lands to conduct their highly lucrative business. In a bid to support investment in the financial services landscape, authorities have recently introduced a Pioneer Financial Services Scheme, in which tax will be paid at the concessionary rate of 15%. Services and products qualifying for this scheme include foreign currency and portfolio management, options and other future instruments and factoring and other actuarial services. Given that the financial intermediation pertains to 10% to the GDP level of Mauritius, it would be therein plausible to assert that by amending the fiscal policies of the government in the guise of tapering of the tax rate of 15% would , therefore encourage foreign investment in the financial sector of Mauritius. By reducing taxation on financial services (taxation subsidy), it might lure more foreign investors to invest or open branches in Mauritius. Examples of international banks include Bank of Baroda, Standard Chartered Bank, Deutsche Bank, and Barclays Bank inter alia. By providing subsidies or reducing taxation, it might be hoped that international banks or even insurance companies will be willing to open a branch here.
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Cash ratio is the minimum cash in relation to deposit which commercial banks must keep. The central bank has the power of changing this ratio from time to time. The central bank might lower the cash ratio so that commercial banks keep less cash and give more loans. This might encourage the financial sectors to operate more efficiently, hence improving their services. Moreover, the international financial firms will be more motivated to open branches here rather than other developing countries. Sometimes the central bank has the power to require commercial banks to keep special deposits. If these special deposits will no longer be compulsory, this might induce foreign financial investment.

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Chapter 9: Barriers to the Sustainable Development of Financial Services

While many developing countries are showing high commitment to including the whole spectrum of their populations in the formal financial system, they have come up against barriers that make it difficult to tackle financial exclusion to the degree to which they would aspire. The following barriers do not occur in isolation on the contrary, they tend to be inter-connected and mutually reinforcing.

9.1 Market Response

For financial services to be expanded through enabling regulation, market uptake is critical, and surveys indicated that this has been a challenge in some places. Passing regulation to improve access to and use of financial services does not guarantee increased access. And, increasingly new players such as mobile network operators are entering financial markets and become actual suppliers of financial services.

Regulators may face challenges in predicting or understanding market uptake because of a lack of clarity surrounding business models and the resulting incentive structures needed to motivate financial service providers to pursue harder to reach markets. Thus, financial institutions often do not have the right motivation, or business case, to abandon their comfort zone and explore new areas of activity.

9.2 Coordination amongst Policymakers

Financial inclusion policymaking involves multiple stakeholders from different public institutions. The absence of platforms to bring relevant agents together may hamper the correct design and implementation of financial inclusion reforms and policies. Lack of coordination also increases the risk of bad timing and sequencing of regulatory changes.

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9.3 Absence of Reliable Financial Data on Access and Usage The absence of reliable data (even for baseline issues such as how many people have no access to or make little use of financial services? or who are they and where do they live?) is still a reality in many developing countries. This poses a major obstacle to policymakers ability to make well-informed decisions as well as to monitor the progress of financial inclusion initiatives. Without data, financial inclusion enters a vicious cycle no data means it is difficult to have a complete picture of the situation in the country, which in turn results in lack of political awareness and few subsequent actions being taken. Regulators indicated that policymakers addressing financial inclusion are often unable to collect data and therefore develop informed policy because they lack the budget or mandate for these activities as this policy area lacks a clearly assigned overseeing authority.

9.4

Understanding, Trust, and Protection

Many policymakers expressed consumer protection as a central pillar of their overall financial inclusion strategy. Though originating in developed countries, the recent financial crisis, has put the spotlight on consumer protection and the fact that unfettered access to financial services is not politically palatable. Past financial crises may have long-lasting effects. One of them is the erosion of trust in the financial system, reducing peoples willingness to use it.. Lack of trust is reflected in low levels of use of financial products, mainly savings accounts; in the importance of hard currencies in daily transactions; or in the abundance of offshore bank accounts in countries considered to be safer for those who can afford it.

9.5 Challenges of the Political Process

Despite impressive progress in the last years, the level of political awareness on financial inclusion is still insufficient. In some cases financial inclusion is still being perceived by some policymakers as a non-urgent issue, which relegates it to a second level of priority in the political agenda

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Financial inclusion requires a dynamic and flexible approach to regulation that is often missing. This is a problem for regulators, who often see how their technical proposals are changed and transformed beyond recognition as they are subject to the political process in Parliaments.. Constant innovations and changes in this sector push regulators to react with dynamism to new challenges and opportunities in the market. When it does not happen, regulatory frameworks quickly become obsolete and therefore unable to satisfy the needs of both customers and financial institutions.

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Chapter 10: Conclusion

Significant strides have been made in response to financial exclusion. The recent economic and financial crisis with its roots in the financial sectors of the developed world has temporarily shifted the focus of financial policymakers towards regulatory changes and efforts that restore financial stability. However, the fundamental re-thinking of the role of governments and central banks in finance triggered by the crisis has built opportunities to unlock the potential of the already existing reform drive to advance financial inclusion policies that foster economic resilience.

Post-crisis opportunities to promote financial inclusion hinge on the careful analysis of the risks posed by financial innovations that boost transactions of the poor. A small number of countries leading regulatory innovations to promote greater financial inclusion have demonstrated that an appropriate balance between financial openness and regulations that limit potential risks of financial instability can be established. A better and broader understanding of risks of financial innovation in this area is a key prerequisite for scaling-up and particularly relevant in the field of technology-enabled financial services. Therefore systematic global and regional efforts are needed to refine and spread these insights widely, enabling those countries not yet equipped with the appropriate solutions but actively looking for sustainable options to create a conducive environment for financial inclusion to adapt and scale-up successful innovations, and finally reach their financial inclusion breakthrough point. Mechanisms that help leverage existing insights on better understanding of risks need to be strengthened.

A global policy response based on leadership and ownership from developing countries, closer international cooperation, and strong and coordinated partnerships between relevant public and private sector stakeholders at national and international level can be useful to most effectively support the various groups of countries.

Mauritius embarked on a multi-sector reform agenda in 2006 with the objective of improving the competitiveness of the economy. These reforms had considerable success in accelerating the rate

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of growth, reducing unemployment and speeding up the pace of diversification of the economy through the development of new sectors. The economic strategy of Mauritius has paved the way for sustainable development in various economic sectors while establishing a sound and coherent economic environment for the development of the services sector, especially financial services. The development of financial services has lead to the creation of new opportunities for achieving economic sustainability and job creation. With the setting up of the global business sector and services like the Freeport and Stock Exchange, Mauritius ensures that an integrated operating framework for the services sector be allowed to develop in order to exploit fully the business opportunities availing in the Indian Ocean region. The emphasis of the current Government on IT and E-Business developments will no doubt consolidate this framework. Good communication skills, non military labour, stability of value, political as well as economic stability will be definitely helpful in promoting financial services in Mauritius. All these ideas might be able to make Mauritius a financial sector hub. By promoting the sustainable development of the financial services, we are going to achieve the Governments objective which is to transform Mauritius into an international financial and business hub built on strong foundations.

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