Global Ambitions

“There is no miracle. It is due simply to hard work, discipline, and will.” — Sir Anerood Jugnauth, former Prime Minister of Mauritius

In spite of its small economic size, a low endowment of natural resources, and remoteness from world markets, Mauritius has transformed itself from a struggling agricultural economy into one of the most successful and vibrant economies in Africa.

The Mauritian financial services sector in particular is now a major pillar of the economy which, according to recent statistics, makes up 12% of annual GDP with a growth rate of 5.3% according to the newly formed Financial Services Promotion Agency (FSPA).

The potential further economic miracles remains strong. Mauritius’ domestic financial sector has developed to the point that the country has begun to position itself as a platform for investment linking East Africa with India and China.

Strong institutions, a politically stable and thriving business environment and the judicious use of trade preferences — particularly between India and Europe — are all instrumental in propelling growth and facilitating economic diversification in the financial sector.

Sridhar Nagarajan, CEO of MauBank, one of the domestic banking players, was emphatic, “Mauritius is moving into a position of strength and becoming the access point for trade to Africa. An international financial centre like ours could sustain up to fifty banks in the next three years and the sector will therefore only transform and grow. I believe that it is a foregone conclusion that many more banks will want to establish themselves here.”

Another major factor behind the Mauritian success has been its business climate and the incentives for foreign financial service companies to relocate. With no capital controls, a relatively stable currency, a low flat corporate tax rate of 15%, and a large number of double taxation agreements, these attributes often make Mauritius more attractive than larger financial centres.

“The banking sector is evolving into a more and more sophisticated one, offering many kinds of new banking services like regional treasury management, regional cash management, and innovative payment solutions, and also supports capital markets development. Increasingly the island is being recognised as a platform for investment into African countries. Official statistics show that a significant amount of foreign direct investment into Africa has been structured through Mauritian investment vehicles,” the Managing Director of Barclays Bank Mauritius Ravin Dajee opined.

The sentiment that was echoed by Mauritius Commercial Bank’s Acting Chief Executive, Alain Law Min: “With technology and communication improving, I think a third submarine cable will be added which will improve internet capacity here in Mauritius. Fund raising for African companies can be done in Mauritius. MCB has done quite a bit in the private equity sphere, but there is no reason why Dollar bonds or listed equity raising can’t be done here.”

An example of this trend he cited is “the total amount of money that has been invested in India, Africa and China, managed through our global business platform here in Mauritius which is over $600 billion. That demonstrates that overseas fund managers are quite knowledgeable and that they understand the legal & accounting set-up here, there is no reason that this cannot be further developed.”

With international rankings consistently giving Mauritius high marks for business and investment climate, Mauritius has over the past four decades undertaken a fundamental overhaul of its financial services.

This was done via the introduction of a new legislative framework and the creation of new regulatory institutions like the Financial Services Commission, the Stock Exchange of Mauritius and the newly minted Ministry of Financial Services and Good Governance.

It was largely due to this sophistication of apparatus and enhanced regulatory oversight that enabled Mauritius’s burgeoning financial services sector to show such resilience in the face of recent global economic setbacks.

The sector is now poised to expand across a wide range of value-added services including, international banking, international fiscal management, and international capital raising and regional treasury management.

“As a platform of choice for cross-border African investments, Mauritius endeavors to be a catalyst for investment and growth in the continent,” says Harvesh Seegolam of the FSPA. “The island’s location is set to play a strategic role, given its geographical proximity, while its political, social and economic stability, and regulatory framework offer a certainty to global investors to look to Africa as an investment destination.”

Yet, Mauritius, and its banking and financial services sector face several key challenges, with the industry arriving at a crossroads after many years of sustained success.

There is a need to further promulgate a strategy that will encourage Indian and multinational firms to establish headquarters for Africa in Mauritius and to reach out in a targeted manner to Indian, African and European financial institutions, and finally, to leverage the Stock Exchange of Mauritius as a unique multi-currency platform in order to position the “SEM” as an attractive capital raising and dual-listing platform for Africa-focused ventures and international products.

While from a short-term perspective, the industry will continue to grow depending on its ability to embrace and leverage the Base Erosion and Profit Sharing (BEPS) regulations. These regulations are being adopted by the OECD members aimed at tax specialist jurisdictions and must serve as an area of focus to help the Mauritian financial services sector to make its mark globally.

Likewise, Mauritian firms themselves must tackle several further operational challenges facing the sector, such as the pressing need to diversify products to ensure continuous growth and to promote higher value-added services.

For the wider sector there is also a strong need to attract more international players to the jurisdiction as Dajee stressed. “As it stands, there are two domestic banks that have 70% market share domestically, so from a financial stability standpoint this is not a good position to be in, hence having a few more sizeable banks would help.”

However, the sector’s complexity, size and linkages between financial institutions could potentially contribute to contagion risk. With changes to Mauritius’ Double Taxation Avoidance Agreement (DTAA) with India, due to come into effect in April 2017, they may well weaken an industry that contributes to approximately 15% in net foreign inflows annually.

In response to those threats, the authorities have intensified efforts to strengthen the country’s crisis management framework and to reduce the costs of resolving troubled banks for the government.

However, their mandate for preserving macro stability is becoming increasingly challenging, with a primarily offshore financial sector that is large and interlinked and could, therefore, constitute a source of vulnerability to financial stability. Albeit a systemic banking crisis is unlikely, given factors such as the systems’ sound capital and liquidity buffers which are firmly in place.

Moreover, establishing the Mauritius International Financial Centre as a key intermediation centre for Africa will be vital, both to increase their relevance, profile and to effectively take advantage of the many opportunities in Africa.

Dajee elucidated further, “Mauritius has grown over the last few decades into an attractive, secure, and competitive platform for cross-border investments, our geographical position and political stability allows us to take a strategic role in capturing and channeling investments across Africa.”

So what are some of the strengths and weaknesses of the financial sector in Mauritius? In the first instance, Mauritius has a well-established and fairly well developed banking sector, with a few prominent and professionally managed domestic banks.

Mauritius also has an enviable democratic history, well enshrined commercial law codes administered by an independent judiciary. With the ultimate backstop, and reassurance, being the British Queen’s Privy Council, a strong banking regulator, with an automated clearing and settlement system linked to an efficient and reliable international payment system infrastructure via SWIFT.

On the weaknesses side, the operation of too many small financial players may become a source of systemic risk, whereas the dominant position of only a handful of major players inhibits competition and innovation and there is a barely significant secondary market for trading in stocks and shares.

Mauritius is also hampered by an inadequate supply of skilled human capital, despite having giving rise to some 15,000 high skills jobs; this shortfall is felt particularly acutely in new areas such as asset securitisation and financial engineering. “If the Government is serious about wanting Mauritius to become a major international finance hub that can compete with the likes of Singapore, Dubai and Hong Kong, one needs to be able to attract the best human capital. We cannot expect to be competitive when we do not have enough people with the requisite skills,” comments Craig McKenzie, CEO of Investec Bank Mauritius. He also highlighted their need to, “continue to develop its digital infrastructure.”

The pace of economic development of neighboring countries is comparatively slow and are therefore not attracting sufficient foreign investment which is, in turn, inhibiting Mauritius ability to play the role of a regional financial centre channeling funds into these nearby countries.

There is also the issue of their capital markets being prone to malfunctioning, with often, poor disclosure practices that hinder the proper evaluation of business and credit risk. This can lead to inherent weaknesses in the pricing of financial assets.

In addition, with the exception of the banking sector, there is a lack of risk management culture across the financial services industry in general. The end result of this might include misallocation of capital that could, in the long run, weaken the financial position of some financial institutions operating in Mauritius and hence the entire system.

A revamping of the stock market as well as the development of an active and vibrant debt market is also urgently needed.

However, Mauritius shows every promise of becoming a financial centre meeting the specific needs of companies worldwide, while some of the domestic players could potentially evolve into important regional players after some consolidation among themselves.

“Mauritius has established itself as a very interesting and trustworthy jurisdiction which is well regulated and can act as a gateway for trade and investment between the developed world, Asia and Africa,” says Law Min. “The country is on the whitelist of the OECD; investment graded, with a rating of BAA1; it’s an open economy and there are no foreign exchange controls; it has a reliable infrastructure; and it’s got a bilingual, educated labour force. I think Mauritius has the opportunity to act as a regional financial centre for Africa and fulfil the need for a well-located, politically stable, well-regulated, with a good legal system, platform for regional treasury and regional management of investments in African countries.”

Fund management is now one of the fastest growth segments of the financial services industry worldwide, with capital flowing to areas and countries that provide superior alpha returns on capital for given risk levels, and at the same time fund and asset managers want to manage funds invested in or near that market or country.

This trend may well accelerate in those countries surrounding Mauritius and create additional opportunities for their domestic financial services sector to capitalise on, should Mauritius inspire the necessary investor confidence and has the appropriate products to offer by continually enhancing and broadening its financial sector.

According to PK Kuriachen, Acting Chief Executive of the FSC, “We already have a flow of global investors coming now to set up their funds in Mauritius.” The main threat to all of this is the inability of the Mauritian industry to adapt and embrace the globalisation trend, with the danger that the existing dominant players in each segment become complacent, and consolidate their local market positions, satisfied with an inward looking status quo.

Inevitably, the consequence of this would be the gradual transfer of domestic savings out of Mauritius into global markets.

As Seegolam of the FSPA emphasized: “Mauritius has proven itself as an ideal hub of repute and choice for cross-border investment for more than two decades, we are now determined to build upon this proven track-record to position our jurisdiction and enhance the value addition and offering to the international investment community.”

Mauritius is indeed a small island economy that has witnessed a relentless struggle to achieve an “outward looking strategy.”