Dear Rama Sithanen,
Your two new appointments, following the recent elections when the Alliance du Changement won all the elected seats, put you in the privileged position, philosophically speaking, of having a central role in protecting the people from investments that pose risks to their savings and pensions as well as to the system that takes care of these.
You are in a position to ensure that democracy extends to the provision of safe and also good banking services for all the people. Your role is particularly important given that the State outlaws cash transactions over a certain sum for associations and unions, and over Rs 300,000 for any transaction, thus making it compulsory for working people, their associations and unions, the middle classes, small entrepreneurs and even pensioners, to resort to banking and other financial institutions in order to buy or sell essential items, including their house or vehicle – or face criminal charges and imprisonment.
So, we write to you, putting it in more technical and legalistic terms, as the new Governor and Chairman of the Board of the Bank of Mauritius, who is in charge of promoting the orderly and balanced economic development of Mauritius and ensuring the stability and soundness of its financial system, and also as the new Chairman of the Financial Services Commission, who has the role of mitigating risks in the non-banking financial institutions.
In this context, in LALIT, we believe that there is a dire need to separate the retail banking and investment banking activities within our financial system.
There are many justifications for this. However, at the core this is warranted for the very preservation of the financial system itself from a systemic crisis that could lead to its collapse with serious consequences for everyone. The 2007-8 global financial crisis provided crystal-clear evidence of the potential damage that can arise when substantial retail and commercial funds are used by investment banking institutions or divisions for high-risk, mostly speculative, activities that can undermine the whole system.
Furthermore, like in many other countries, the banking and financial systems in Mauritius are highly concentrated with a very small number of institutions dominating the sector. This situation carries huge systemic risk as highlighted even by the IMF over the years.
The other major reason behind the need to segregate retail and investment banking activities is to protect depositors’ money. Deposits at retail / commercial banks include savings of the working class and middle classes, pensioners and other low-income earners. It is the responsibility of regulators and the State to ensure that private banking and financial institutions protect those savings funds. In many jurisdictions, particularly since the 2007-8 financial crisis, regulators and the State also initiated various deposit guarantee schemes to protect depositors’ money. A segregation of retail and investment banking activities would go in the same direction.
In the same vein, regulations should be put in place to ensure that no employees’ funds (including pension funds) can be used to fund investment banking activities or other high-risk endeavours. The current potentially high-risk investment of circa MUR 1.5 billion in United Investments Limited (UIL) from the National Pension Fund and National Savings Fund highlights this particular risk.
Segregation of retail / commercial banking from investment banking would create the conditions for retail / commercial funds to be (re)deployed to funding activities that would strengthen the productive capacity and resilience of the country and address development needs. A typical example would be financing of projects towards food sovereignty which would at the same time create jobs, enhance exports capacity, generate foreign currency, strengthen our foreign currency reserves and contribute to improving our balance of payments as well as taming inflation.
Furthermore, as retail funds previously used for funding investment banking activities are made available for alternative use, we could in the near term expect retail banks to increase mortgage lending, resulting in a general fall in mortgage lending rates, thus providing a boost to housing (including social housing) projects and benefiting borrowers.
Lending for environmentally-friendly “green” projects should also benefit from redeployment of retail and commercial funding.
Controlling and managing credit risk on these fresh lending activities would be relatively easier in the well-regulated retail and commercial banking set-up in comparison to the complex high-risk investment banking world.
Another weakness needs to be addressed, namely the relative shortcomings in overall control over the non-bank financial sector. This situation exposes us to the possibility that non-bank financial institutions get involved in financially high-risk activities that may endanger contributors’ money, e.g. insurance policy holders’ contributions and returns. Mauritians experienced crashing Ponzi schemes like Whitedot and Sunkai, reminding us of these dangers.
Reinforcing overall control over the non-bank financial sector would go towards avoiding the risk that a substantial poorly regulated “shadow banking system” emerges (as it did in a number of large financial centres in the US, UK, EU and Japan in the years prior to the 2007-8 financial crisis) that could endanger the financial system as a whole.
In this respect due consideration should be given to the idea of moving towards a single regulatory authority that would regulate and control the financial sector as a whole, bank and non-bank. This would ease the way to a more robust control framework for the whole financial sector. It could even be argued that such a holistic approach could have helped to avoid upfront the various malpractices that contributed materially to and culminated in the BAI-Bramer financial crash a decade ago.
It is worth remembering that a major contributing factor to the 2007-8 financial crisis was the 1999 revocation of the so-called “Glass-Seagall Act” in the USA; this revocation paved the way for retail / commercial banks to once again, after 66 years, amalgamate. In 1933, the USA first introduced the Glass-Seagall Act precisely so as to enforce the separation of retail / commercial banking from investment banking by making amalgamation illegal. Most other countries followed suit, outlawing the combination. Why? Because this combination of retail banking with investment banking was the central “enabler” of the Wall Street crash of 1929. History is often a good teacher.
You may not be aware of the increasing contempt with which banks treat their ordinary banking clients, whose collective contribution to the banks’ wealth is, as you know, enormous. This lack of proper service is causing a massive swell of anger that will soon begin to take a collective form of expression if not addressed properly, ideally by the separation of the two sectors.
Because we, the undersigned, and some others amongst us in the LALIT leadership already know you personally via debates on both economic issues and on the electoral system, we know that you are keen on the broadest possible circulation of ideas and stimulation of debate on all the issues of the Republic, so we are taking the liberty of making this “call” to you available also to the public.
Yours sincerely,
Ragini Kistnasamy and Lindsey Collen
LALIT
8 th January 2025