At the Mercy of Financial Institutions

By Murli Dhar

Our banks would have a lot of reason not to insist on making money simply by way of quick turnovers of synthetic money and products

It is the fag end of the speech of the Governor of the Bank of Mauritius at the annual dinner hosted in honour of economic operators Thursday last week that seems to have caught the attention of a part of the local media.

Mr Manou Bheenick was referring in the last lines of his speech to the recent not-very-flattering record of bankers on the world stage, so much so, he said, that it was being suggested that the word banker, for fear of being confused with a pejorative term, may be seeking an entry in two renowned dictionaries as ‘bankster’ to rhyme better with the word ‘gangster’. This quip has apparently not been well received by some of our bankers who do not find it of good taste… for an annual dinner or otherwise.

Yet, when you read the speech given out by Mr Bheenick, his plea in favour of financial stability as well as sound and responsible bank management against the background of all that has been and is still going wrong with the global financial system, looks eminently responsible.

Any self-respecting central banker would go in this direction to point out the disaster to which an unbridled banking system can take us all to. He has drawn attention to the serial mis-governance of financial institutions in critical global constituencies having money-making as the one-and-only pursuit.

To be fair, he has contrasted the excessive liberties taken by financial institutions elsewhere with the conservatism that banks in Mauritius in particular have been required to follow here to avert any disaster on the scale we can foresee for America and the Euro zone should things really get out of hand.

As Wall Street exercises tremendous influence and enjoys excessive lobby power, not many defaulting bankers from over there and other major centres having taken serious gambling risks to the detriment of the very economic system have been summoned in the courts.

London is not willing to introduce a tax on financial transactions (called the Tobin Tax), which would have had the effect of neutralising the City’s eminent position as a global international finance centre, not because the tax will deter the unwarranted multiplication of layer-upon-layer of artificial financial transactions, but rather because the huge incomes London draws from the same would thereby be seriously impaired.

The very people who have brought the world economy to its knees currently are thus unable to be dragged into courts to be tried for their misdemeanours. They have become part of the “untouchable” class. One can understand the anger that movements like ‘Occupy Wall Street’, to which Mr Bheenick has referred in his speech, are spewing all over the world at the amount of current subjugation of the political establishment by the financial powerhouse.

Another speech was given out on the same occasion to illustrate, as it were, the fact that it is not only bankers in developed countries that are bringing their own countries and those of their collateral victims, namely developing countries, to ruin. This speech came from the recently appointed Governor of the Central Bank of Nigeria; in the case of his country, bankers had resorted to outright theft and diversion of customer money.

Banks were being run like empty shells, devoid of their true substance, with the knowledge and complicity of top management. It required painful forensic auditing to trail out the places to which Nigerian funds had been moved into personal accounts of bank executives. Fortunately, the bankers over there were swiftly brought to justice, sacked and publicly censured for their totally inappropriate behaviour while in charge of public money.

In the case of Mauritius, Mr Bheenick has been repeatedly drawing attention to the need for responsible banking. A bank cannot be seen to be engaged solely in the business of making money by all means. Consumers of financial services, being much more numerous and far less concentrated than the banking houses, are easily exploited into making out all sorts of payments to banks for umpteen “services” being allegedly furnished by the banks to those customers. This is one part of the story.

The other part is devices used by banks to keep specific customers out of the banking mainstream; this is done by requiring those uninitiated customers to show “patte blanche” in order to qualify for banking services, at higher standards of rigour than big usual corporates which are the preferred customers of banks.

Why the heck invite this entire motley crowd into the hallowed circle of banking business, with all the hassle the white-collar man has to get into to show the way to this clumsy chapter? Besides, such as these are easily deterred from seeking bank facilities when a wall of tough security and interest rates higher in real terms than the most favoured borrowers are raised against them.

Banks don’t want to become adventurous when they can make comfortable profit on their classic business, squeezing money on interest and exchange rate intermediation acting as sheer brokers between the parties when they are not making money by depreciating the currency. They want their spreads to be as high as possible.

This is where the responsible central banker asks the question: if you stick to the minimum because you are making enough money by engaging in safe business, who then will take up new riskier business by the hand until it is groomed, up into a mature enough structure to be able to fend for itself?

Don’t we need this risky, but adventurous, SME so as to diversify? Should there not be an element of cross-subsidization by charging mature businesses a bit more if only to give the breath of life to newer smaller actors by charging the latter lower rates?

Yet, there have been times when hordes of upcoming businesses no larger in scale than SMEs have helped banks in Mauritius keep up their lending book to decent size when big corporates were losing their appetite to borrow. This has extended the scope of the Mauritian economy and kept up the level of employment over time. Our banks would have a lot of reason not to insist on making money simply by way of quick turnovers of synthetic money and products as it happened in the West recently bringing the international economic and financial system to great grief in its wake.

The experience has shown that, much as this kind of exponential financial growth based on speculation can inflate the books of banks, it can also bring them crashing down when disaster turns in. Our financial institutions have every good reason to go about their business soberly. However, they need also keep an eye on future growth of the economy as well.

Had policy makers abstracted from this dimension in the past, textile manufacturing would have been starved of funding at one time when a few companies started turning in losses, and the sector would have simply passed out. Fortunately, some banks showed commitment despite the losses they were being exposed to by insisting on lending to the sector which accounts for a big share of employment and foreign exchange earnings to this day.

It is this courage to take higher risks that appears to be absent to quite a degree in our current model of financial intermediation in Mauritius. We ought to be pushing more and newer enterprises to emerge and send up our export volumes. The less experienced they are, the more the financing risks but those risks can be mastered by financial institutions and entrepreneurs working hand in hand more closely.

It is a sad reflection that there is a tendency in Mauritius to focus attention on the individuals rather than on the better working of institutions and the systems. If the individual is brought down in the process, the institution will be no better off. That is why a dose of moderation, coupled with tough pragmatism, is far superior to the poor habit of targeting individuals.

This country is much more likely to grow if we sacrifice this vexatious and poor habit of losing our way in the forest each time there is something bigger at stake. Let us show to the world that we are capable of rising above petty quarrels of personalities. Let us give up the game which consists of classifying leaders as belonging to our camp or to another, in which case he is deemed fit to be found fault with no matter it makes sense what he says.

* Published in print edition on 9 December 2011