Helping the Financial Sector Grow despite Disruptions

We need not fall into the convoluted type of thinking by assuming that Fintech is only for the “grown-ups” in the global market

Countries which make progress economically and socially do not get entangled in irrelevant matters. At least, not for too long. Once they chart a substantive course for themselves, undistracted by trivial concerns of the moment, they forge ahead overcoming difficulties lying on the way.

When it became clear that economic diversification was the way forward in our quest for higher standards of living, we embarked on newer lines of business. We manufactured textiles for sale to external markets. We enhanced our tourism capacity. We decided to go for ICT/BPO services to international markets. We also embarked on the provision of international financial services despite reticence felt in the beginning about this adventure. It is the way forward.

Given recent political upsets in different countries, Germany being the latest on the list, some amount of uncertainty has surfaced up about sustaining our customary external markets access. For example, data for the past three years to 2016 show that nearly half our total exports of goods has gone to Europe (mainly UK, France, Italy and Spain), about 20% to Africa (Madagascar and South Africa) and 12% to the US. If Europe, for example, ends up with a weak or disruptive leadership, we may end up with an important chunk of our export market being put at risk.

There are things which are in our hands and others that are not. We are free to take new business initiatives which may work out eventually. Despite the apprehensions in the beginning, our financial services sector has grown up over the years, contributing about 12% of GDP today, of which half is generated from the provision of international financial services. The recent OECD and G20 initiatives (Base Erosion and Profit Shifting) to exercise greater global tax scrutiny on other countries notwithstanding, our job is to grow this market with due respect for international norms of good governance.

Fintech

The question is often asked: how does a small economy with a relatively small finance sector, compared with the giant centres operating in other parts of the world, maintain the pace of growth of its financial sector despite such new disruptive and activity-restraining rules and regulations imposed by the richer countries of the world? The answer is simple: by enhancing and increasing its scope.

Consider the accelerated use of financial technology, commonly called Fintech, coming into place after the backlash experienced the world over since the financial and economic crisis of 2007-08. What is it about?

The failure of conventional financial institutions in this context led, especially from 2013 onwards, towards substituting usual finance providers by new players on the market. The upcoming financial market disruptors – the Fintechs — were not like the banks, for instance, which essentially channel funds collected from numerous depositors to diverse other business borrowers. With the support of vast amounts of data floating on the internet, these Fintech operators leaned extensively on technology to bring about a system for putting together the two sides directly in relation with each other without intermediating in the manner of banks and similar financial institutions. The skilful use of information and technology mainly by startups springing up like mushrooms has been key to this development.

In the process, relatively small technology-supported Fintech firms have invaded nearly all common financial sector activities with growing success. They’ve gone into a wide diversity of activities: supporting direct business-to-business lending without intermediaries, making fund transfers, raising new equity for businesses by a democratic process known as “crowdfunding”, doing disruptive insurance business, making foreign exchange and international financial remittances, wealth management, advising on securities trading by churning data, providing software for risk management and regulatory compliance, etc.

Briefly, Fintech firms have disaggregated business customarily done by big financial conglomerates at great cost advantage to users. Since they don’t do intermediating financial business, they are not regulated like conventional financial institutions. That makes them more nimble-footed, causing even the big financial institutions to follow them in their footsteps wherever they can. Disruptive? Yes, but a growing business activity in different financial centres of the world.

Thus, London Fintech employed 61,000 in 2015, according to an E&Y report of 2016; California: 74,000; New York: 57,000; Germany: 13,000; Australia: 10,000; Hong Kong: 8,000; Singapore: 7,000. Given its technology edge, China is now rearing up to massively join this mainstream. Total annual Fintech revenues are currently estimated at $5 trillion.

Mauritius

We need not fall into the convoluted type of thinking which, in the beginning, would have denied the setting up of offshore financial activity in Mauritius, by assuming that Fintech is only for the “grown-ups” in the global market. Nothing prevents us from joining the club if we successfully create the right environment for Fintech.

We can attract entrepreneurs engaged in this activity to ourselves by encouraging high-speed computing and innovations in machine-learning, facilitating the availability of capital to Fintech firms willing to set up here,  creating a trained pool of talents and skills with which to locally support this essentially information-technology driven business, opening up the digital market place for the Fintechs across the full range from retail to wholesale, identifying regional friendly markets and connecting them with the same through appropriate international political networking. The bad thing would be to tie them down by making tough regulations, something other financial centres have abstained from while still keeping them under soft watch.

If we do our part with skill and foresight enough, we’ll end up adding to the scope of our financial sector. Improving the product and adapting it to prevailing exigencies is the path we can follow whenever we hit roadblocks in our access to external markets in all fields of activity. Being challenged by political and other uncertainties elsewhere should not deter us from looking for alternative solutions for our market development.

 

* Published in print edition on 1 December 2017

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