Banking your future… on what? (III)

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The Task Force report, to be fair, has indicated a number of proposals which could improve banking in general. Even if some of these are already generally in existence, their assimilation by all banks should go some way to move services and perceptions further in the right direction.

Thus, no bank in its right mind can refuse to promote competition and therefore want to maintain, for example, some of the present barriers to customers changing banks. The search for greater transparency sounds great; treating customers and bankers “fairly” is a self-evident path to improvements; banks not penalizing customers twice for the same omission sounds,  on the face of it, logical; making available, on request, a copy of legal documentation to examine at leisure before signing is ok; improving access to Mauritians even more, in “GO” accounts looks like a fine idea, though the devil may be in the detail, for example the KYC detail imposed by the Central Bank; making contracts simpler and fairer looks legitimate until the lawyers get their teeth into it and point to the existing legislation, a fact that the Task Force’s chairperson, as head of the legal services at the Governor’s office, should perhaps be well aware of? This is just a sample.

But by basing its recommendations on the written complaints received by Bank of Mauritius (BoM) and on the negatively charged “concerns and grievances” invited of the general public, the task force ends up with several unrealistic proposals and conclusions which are plain wrong. A sample of those follows:-

(a) the proposed principle that banks “should not impose fees and charges for services which form part of the core features of the product” smacks of delusion. The focus is on cash handling. One of the functions of banks is to protect and secure its customers’ money, otherwise the customer would have to keep his money at home, at risk. So banks built strong buildings and vaults and invested in security and subscribed to insurances and actually became the focus of robbers from Bonnie and Clyde to Steve Monvoisin. Isn’t this a service that costs, offered to the free choice of the public? If a bank wants to offer this for free, so as to present a more competitive offer, then it should freely be allowed to do so. Some banks offer free access to accounts through ATMs and Internet Banking. But the principle proposed is wrong. Lending or wiring money or selling currency are also “core” to banking in more ways than one. Could they be next?

(b) the proposal that banks do not charge for quarterly paper statements of account sent by mail is retrograde. The number of free statements sent by post is today already two, not one as indicated (paragraph 127). Banks investing in ATMs and Internet Banking have provided individual customers FREE access to their statements of account and have been moving with the times (this is acknowledged by paragraph 59 of the report). Increasing the number of free printed statements by mail may be of interest to the Post Office, but incentivizes away from modernity. The customer quoted says he “chooses” to keep hard copy monthly statements. He can actually get those for free by subscribing to Internet Banking and printing his own.

(c) a customer quoted in the report states: “…there is inter-bank collusion to keep the fees (and one, here, often adds interest rates) at the same level so that it matters not which bank you go to for your mortgage, you are going to be hit with the same fees (interest rate).” This is an accusation of a cartel at work. It is simply not true as the BoM well knows and recognises. However, a housing loan is not a product that can be easily differentiated, like say, a car or even toothpaste and therefore prices “iterate” towards neutral points. For example, if a bank eliminates fees and reduces its interest rates to 2% below its competitors, it will, of course, attract all customers in until either others stop the “bleeding” by reducing their own rates or, more likely until that bank reverts back, having solved its temporary excess liquidity issue, or facing insufficient willingness on the part of its depositors to feed its “spread” at that lower rate! This is not collusion, it is a market finding its neutral equilibrium point quite naturally. Anyway, let us also at least recognize that the larger the markets, the more likely the spreads will narrow.

(d) paragraphs 158 to 161 are simply frightening to the future of the sector. The Task Force blandly recommends that BoM should regulate fees and charges and interest rate spreads. One might cheekily remark that it would require far fewer bureaucrats to just decree and regulate a “ceiling ROI” for banks, then watch the effect on the rating of Mauritius as an investment destination or on the stock exchange! By the way, it may be of interest to some to read the page at: data.worldbank.org listing interest rate spreads for 119 countries in 2012. Strangely, neither the USA nor the EU figures are in there, I don’t know why, as I did not compile the figures. But out of 119 countries listed, only 19 have an interest rate spread that is smaller than tiny Mauritius’s spread of 2.4% ! Of the countries where spreads are higher than locally, one finds the comparable island economies: Trinidad (6.2%), Tonga (6.8%), Sri Lanka (4.6%), Singapore (!)(5.2%), Seychelles (8.9%), Qatar (!) (3.7%), Philippines (2.5%), Maldives (6.8%), Madagascar (49.5%), Jamaica (14.1%), Fiji (4.5%), Costa Rica (13.5%), Comoros (8.8%), Barbados (6.1%), but also Australia (3.3%), Brazil (28.7%), Canada (2.5%), China (3.0%), Indonesia (5.8%), Israel(3.3%), Kenya (8.2%), Nigeria (8.4%), Russia (3.6%), South Africa (3.3%),… Switzerland (2.7%) amongst others. Which certainly puts the report’s opening quote of SSR, in section 1, dating back to 1966, under new light.

The first Prime Minister of the island apparently said this: “…I would like to say that I am sure the interest charges will be less than those we pay now; for instance, it is the usual rule for commercial banks to pay 6 ½ % (on savings ?) and later on to lend this at about 7 ½ % to local industries or to local people, hardly making much out of the transaction. We are hoping that with proper administration and better methods and procedures of banking, the interest charges will certainly be lower than those we are accustomed to pay now…

Maybe the time has come ? To go back to 1966 ! For all those unfulfilled dreams… MCCB… DBM…

*Bold words within quotes are mine.

See also: Banking your future on... what? I & II

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