Financial innovation in the mauritian system (1)


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A ppt about financial innovations in the Mauritian system. First some examples of financial innovations in the international market is explained and categorized under product, process and institutional innovations and then this is compared with financial innovations in the Mauritian system. When comparing innovations in the international market and Mauritian financial market, fields where Mauritius is lagging behind are pointed out.

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Financial innovation in the mauritian system (1)

  1. 1.  Critical and persistent part of economic landscape over the past few decades. Active role of intermediaries resulting in endless stream of new products/services Delivering benefits that are widely felt in the Mauritian industry and across the broader economy Impact of recent global financial slow down ?Financial innovation not without risk – can create or intensify risk.
  2. 2. • Innovation in the financial system has increasingly levelled up through the past decades resulting in growth and development of the country.• Amongst the first financial institutions were the Mauritius Commercial Bank in 1938, Hongkong and Shanghai Banking Corporation Limited in 1916, Barclays Bank in 1919, Bank of Mauritius in 1966 and State Bank of Mauritius in 1973.• The economy , the economy grew by an average rate of 7.3 per cent in mid 1980’s and came along a broad-based liberalization of the economy.
  3. 3. Financial Sector Financial Bank of Service Mauritius CommissionDomestic Offshore Capital Global Insurance Pension banks banks Market business
  4. 4. 1. The Bank of Mauritius - issue currency. - regulates the operations of other banks.2. Domestics Banks (MCB,SBM,HSBC,…) -continuously innovating through online banking, credit cards, specific loans or ATM.3. Offshore Banks -growing sustainably new financial services like Investment Holding, Trading, Property Investment, Financing, Patent amongst others.
  5. 5. 1. The Stock Exchange of Mauritius - 41 companies listed on the Official Market - SEMDEX is an index of prices of all listed shares - SEM Total Return Index (SEMTRI), it is an index to provide market’s evolution over time - SEM-7 is an index which measures movements in the 7 largest eligible shares on the Official List in terms of capitalization, liquidity and investability.2. The Development and Enterprise Market - 53 companies - designed for Small and Medium-sized Enterprises and newly set- up companies which possess a sound business plan and demonstrate a good growth potential.
  6. 6. - The DEM since it had launched in August 2006, fell and remained low until November 2006. This may be due to the fact that the market was not well stabilized. - However in December 2006, net purchases experienced a considerable increase from Rs 2,341,433 to Rs 50,026,057, thus the DEM is slowly marking its territory in the financial sector of Mauritius.3. Leasing Companies - licensed by the Financial Services Commission. - Leasing companies provide leases for equipment, machinery, plant, motor vehicles, tools and other assets to industrial, agricultural, commercial, service sectors and individuals.
  7. 7.  Mauritian Offshore Business Activities Act in 1992 GBL 1 ;− incorporated as a branch of a foreign Company− E.g. aircraft financing, asset management, financial services, GBL 2 ;Tax Exempted in Mauritius − cannot be used for banking, insurance, or fund-related activities − cannot transact business with Mauritian residents − cannot be public companies
  8. 8.  plays a key role in the financial sector of Mauritius  From the table below, it can be seen thati. The distribution of deposits and other securities and government securities have risen while the others have fallen.ii. Despite this, the total assets figure has been very high and experienced a change of 87% from 2002 to 2006, thus showing how profitable this section of the financial sector is in Mauritius.
  9. 9.  E.g. In Mauritius: Basic Retirement Pension, the National Pension Fund, the National Savings Fund and the Civil Service Pension Scheme To know benefits of this part of the financial sector, the government made predictions
  10. 10.  Table shows Pension expected to rise tremendously by 2040 Expenditure as a percentage of GDP will rise from 3.4% to 4.3% Pension schemes amounted to almost 11bn as December 2006.
  11. 11.  Demand driven force Protect against changing circumstances Advances in technology New ways to make profit Minimize the impact of taxes or regulations The ever-changing face of global patterns Competitive pressure
  12. 12. Financial innovations in the international marketDespite the recent crisis and challenges, financial innovation willcontinue to play an important role in promoting global growth,especially in emerging markets and developing countries
  13. 13. What is Financial innovation?Financial innovation refers to the creation of new financialassets or new ways to use financial assets. There are 3 typesof financial innovation. There are 3 types of financialinnovation :• Institutional innovations• Process innovations• Product innovations
  14. 14. In the global Financial Services industry,there are many innovative companies.Institutional Innovation Product Innovation ProcessInnovation
  15. 15. Year Innovation Description9000 BC Medium of exchange Bartering of produce and cattleonwards2500 BC Insurance Babylonian goods transport insurance1700 - 1100 Annuities (first recorded) First purchased by Egyptian princeBC1000 BC Metal money and coins Early Chinese “tool money” and primitive coins321 - 185 BC, Bills of exchange Early bills of exchange, promissory notes2nd - 3rd Annuities (widespread) Annuities common in Romancentury AD Empire14th century Bonds War as the “father of the bond market” in1602 Publicly listed stock East India Company on Amsterdam1609 Standardized currency Issued by Amsterdam Exchange (Wisselbank)18th century Options First call options on some Dutch stocks1710 Futures Japanese rice futures market1742 Monopoly on issuing Bank of England banknotes1744 Insurance fund Modern insurance industry with
  16. 16. 1773 Check clearing house London bankers introduce clearing house1774 Mutual funds Early closed-end mutual fund set up by Dutch merchant1829 Deposit insurance New York first state to establish bank-obligation insurance programme1874 Standardized futures Chicago introduces standardized exchange futures contract and clearing house1880s Workers’ insurance and Otto von Bismarck supports the welfare state insurance and pensions for German workers1913 Federal Reserve System Woodrow Wilson signs US Federal Reserve Act1933 First national deposit US creates Federal Deposit insurance scheme Insurance Corporation in response to bank failures
  17. 17. 1946 Venture capital Private equity firms established in United States1949 Hedge funds Absolute return or “hedged fund” created by Alfred Winslow Jones1950 Early credit card Diners Club International launches first multi-purpose charge card1958 Modern credit card Bank of America launches credit card with revolving credit line1960 Automated teller US patent filed for early cash machines (ATMs) dispenser1961 Reverse mortgage Former Maine bank CEO’s idea helps senior citizens access housing equity1968 Securitization (originate Ginnie Mae guarantees first to distribute) mortgage pass-through securityLate 1960s ATMs operational Cash dispensers deployed in London and elsewhere1971 Floating exchange rates United States abandons fixed exchange rate
  18. 18. 1971 Money market mutual Bruce R. Bent and Henry B. R. funds Brown set up first money market fund in United States1972 Debit cards City National Bank of Cleveland issues ATM account debit card1970 - 1972 Foreign currency futures Development of FX futures in New York and Chicago1973 Black-Scholes model Nobel prize winning option- pricing model helps launch modern derivatives industry1973 Point of sale terminals IBM launches POS terminals linked to mainframe store computer1974 Automated clearing Electronic payments process houses (ACH) replaces paper cheques for routine payments1976 Modern micro-finance Muhammad Yunus begins research leading to first micro-finance bank in 1983
  19. 19. 1981 CHIPS (same day A settlement wire transfer system settlement) Clearing House for the banking Interbank Payments System industry1982 Consumer online stock First full-service consumer trading trading system connects traders around the world1982 Stock index futures Kansas City Board of Trade introduces stock index futures1988 International capital Basel Accord (Basel I) requirements for banks1989 Exchange traded funds First ETF launched in Canada1992 Insurance-linked Life insurers transfer risk while securities releasing its value to the open market through asset- backed note1992 Public–private UK government launches partnerships programme of public–private investment partnerships1994 Credit default swap JP Morgan structures one of the first credit default swaps1999 Online payment service PayPal launches online payments2004 Usage-based insurance Pay-As-You-Drive car insurance2004 Longevity bonds and First longevity bond announced swaps
  20. 20. Product innovations in the internationalmarket The mainstream of product innovations in the past decades was centered on risk: risk as a threat, as the possibility of a loss, but also as an opportunity for profit. The introduction of interest rate futures, hedging tools, mortgage-backed securities and swaps might be seen as financial innovations that allow investors to reach their desired exposure to particular risks.
  21. 21. • Securitization One example of a risk management financial innovation is securitization. It is probably, one of the most important financial innovations that occurred in the last part of the previous century. It allows banks and also non-financial firms to obtain liquidity from assets that, otherwise, cannot be sold in liquid markets. For instance, banks can sell the bad loans and remove them from their balance sheet and thus getting rid of the credit risk. Securitization was one of the factors which contributed to the financial crisis of 2007.
  22. 22. • Credit default swap
  23. 23. Process innovation in the internationalmarket• Self-serve kiosks Washington Trust Company reduced their number of tellers by 50% by introducing self-serve kiosks in the waiting area. In addition to this solution, Washington Trust also added a kiosk that accepts bulk cash deposits, check deposits and completes other online banking functionality
  24. 24. • Cheque21Credit process innovations such as new payment services etchave also been more prevalent in recent years. For exampleAquabanc provides the new Cheque21 service which allowscheques to be scanned by customers and sent electronically tobanks Provides benefits for both the customer and the client because Cheque21 has been customers get ease of passed into law and payment and the client allows physical cheques gets a file that is easy to be scanned and to store. submitted online
  25. 25. • Gay niche marketCredit Suisse develops a profitable niche segment inLondon by targeting gay and lesbians with their privatebanking arm Credit Suisse has a very personalized approach to private banking in the UK. In London, 1 out of every 9 people is gay. Credit Suisse’s now provides gay financial advisors to clients who are themselves openly gay. The services provided by the private bankers includes not just traditional banking offerings but also information tailored to services such as adoption and civil partnership
  26. 26. Institutional innovation in the internationalmarket • The Grameen BankGrameen Bank has enabled 4.9 million borrowers to emergefrom extreme poverty by offering microcredit loans to poorpeople.
  27. 27. • Zopa Zopa (US) matches lenders with borrowers online. They guarantee lenders a ~3.75% return on their money and charge borrowers ~8.5%. Zopa was the first online social lending company, starting operations in the United Kingdom (UK) in 2005. They have since grown to Japan, Italy and the United States (US). Before the deposit is accepted the lender must find a borrower for their money on Zopa’s website. This ensures that the money will be lent.
  28. 28. • Mutual fundMutual fund is another example of institutional innovation. Thisrefers to fund raised by a financial service company by poolingthe savings of the public.
  29. 29. • Financial innovation as a tool to solveenvironmental problemThe financial technology applied to environmental problems is known ascarbon markets. One of the interesting things about carbon finance is that itis a proposal for letting the invisible hand solves some of the environmentalproblems that might otherwise be regulated by the government which maynot always be the best optionCredit Suisses has adopted the carbon principle to becomethe first bank to go completely carbon neutral in 2009Credit Suisse is providingopportunities for its clients toparticipate in environmentalinitiatives.
  30. 30.  1. Institutional Innovation The COMESA Clearing House (CCH) has introduced the Region Payment and Settlement System (REPSS) which encourages trade by transferring funds more easily within COMESA. Modernization of Mauritius Automated Clearing and Settlement System (MACCS) - With the emerging of the financial sector, there is a need for a more dynamic payment system and the Central bank has decided to replace the existing MACSS with new application based on best international practice. Offshore Banking
  31. 31.  Online banking gives customers facilities like checking the accounts, paying bills and transferring of funds to another accounts. Central Database System (CDS) launched in July 2007 as there is a need for an online application for data collection and dissemination. In 2006, the MCB has launched the mobile point of sale in association with Emtel and VeriFone.
  32. 32.  In 2012, the MPCB launchers the Electronic-Correspondence which allows customers to receive their bank statement or other documents via e-mail, in PDF format which are secured by a password. The Bank of Mauritius has introduced a new system for clearing and settlement of cheques known as the truncation which enhances the payment system by reducing the clearing days.
  33. 33.  Many banks have been able to expand the range of products offered by entering in the leasing business and this has become a new revenue streams. MCB offers green loan to projects which are environment friendly and the person entitled is granted 12% cash amount of the loan approved for financing such projects. SBM offers Eco loan to individuals and SME and give them the opportunity to equip their homes or offices with solar system installations.
  34. 34.  During the crisis, the banking and the insurance sector was affected differently because they have: Different business models Different roles Different risk profiles Taken for granted that insurers would never become an issue of systemic relevance but this could be questioned by the current financial crisis. Financial Innovation, perhaps also in insurance, is in the dock.
  35. 35.  Different strategies adopted to survive the crisis : Innovation of British American Insurance – Mauritius (BAI): BA lady “BAI Takaful” which complies with Islamic Sha’riah regulations. New version of A+ Education plan Mauritian Eagle Insurance (MEI) : Innovative products / Services Home Premier – All in one policy
  36. 36.  Other financial innovations used by other insurance companies : Pay - as - you - go insurance e.g. auto insurance Business interruption policies for non-physical damage Micro – insurance ( Access to insurance for the poor)
  37. 37. Stock Exchange The Bond Market • Globalisation • Merge with other stock exchange • Trade derivatives • Small despite• Not fully implemented development in mauritius • Bank lending• Can increase dominated developmentMicro Finance Credit Scoring • Innovation not implemented in Mauritius • Bank can knoe credit worthiness of borrowers • Insurance take better decison
  38. 38.  Introduction of new products Enlarge the market Microfinance Improves market efficiency Deliver essential functions
  39. 39.  One of the root cause of the financial crisis Exploitation of consumers Increases complexity May lead to abuses e.g market power
  40. 40.  Islamic finance is one of the fastest growing segments in the international financial arena and is fast gaining momentum in Mauritius. It is an alternative financial system reflecting financial transactions and activities which are in accordance with the practices and principles of Islamic law, known as Shariah, which is a set of rules, practices and principles governing all aspects of life of those who have submitted themselves to Islam. The general objective of the Islamic financial system is to promote human wellbeing, adopt measures for establishing justice, equity, fairness and prohibiting harm and unproductive activities.
  41. 41.  The general objective of the Islamic financial system is to promote human wellbeing, adopt measures for establishing justice, equity, fairness and prohibiting harm and unproductive activities. HSBC Bank was the first to incorporate Islamic banking on the island.
  42. 42.  The downturn fuelled by the crisis has clearly proved that a banking system based on interest does not have positive outcomes. With a population of 15% Muslims, Mauritius is already well incorporated with the Islamic culture. In fact, Mauritius has had a Waqf Act since 1941. Further legislation has been introduced to allow more innovative product within the financial Services landscape. Appropriate Banking legislation has been amended to allow for the development of Alternative Financial Services such as Islamic Financial Services which is a fast growing activity with big export potential.
  43. 43.  Islamic banking and finance provides an example of innovation. It attempts to achieve the economic effects of conventional financial products by employing Islamic legal contracts and methods in product development. Also, with the increase in the size and sophistication of Islamic banks and financial institutions and a greater awareness of risk, Islamic banks have gradually moved away from the riskier clients.
  44. 44.  Increased competitive pressure on Islamic banks and financial institutions leads to more product innovation. Islamic financial innovation can be defined as the process of utilising Islamic legal contracts in new ways to develop financial products that are in compliance with sharia and at the same time have the ability to replicate the economic effects of conventional financial products. Therefore, the objective of Islamic financial innovation is to develop financial structures (products and institutions) that are not only sharia compliance but also offer a distinct social value.
  45. 45.  Though the dark sides of financial innovations have an impact of on the economy, innovations cannot be bypassed. As we have seen financial markets are now characterised by rapid innovations and only effective innovations will provide for more efficient allocation of resources, higher capital productivity and therefore growth of the economy.