SCHOOL OF BUSINESS AND MANAGEMENT & FINANCE

Economics for Managers Group Assignment

Market Structure for Retail Banking Services in Mauritius

SUPERVISOR: Dr Nowbutsing
14th November 2015

Table of Contents
1. Overview of the Banking Sector..................................................................................1
1.1 Mauritius Banking sector Performance..................................................................1

1.2 Financial Soundness Indicators..............................................................................2

1.2.1 Profitability......................................................................................................2
1.2.2 Regulatory Capital...........................................................................................3
1.2.3 Asset Quality....................................................................................................3
1.2.4 Banks Foreign Exchange Open Positions.......................................................4
1.2.5 Banks Liquidity Positions...............................................................................4
1.2.6 Concentration of Credit...................................................................................4
2. House Loan...................................................................................................................5
Banks........................................................................................................................5
2.1 Survey on Home Loan Takers................................................................................7
2.2 Banks and Insurance Company with Home loan Scheme......................................9
Mauritius Commercial Bank Ltd..............................................................................9
State Bank of Mauritius Ltd.....................................................................................9
References.......................................................................................................................11

1. Overview of the Banking Sector

The Mauritian banking industry comprises of 23 banks, of which 6 local banks, 10
foreign-owned subsidiaries, 1 is a joint venture, 4 are branches of foreign banks and 2
are licensed as private banks. All the banks are licensed by the Bank of Mauritius to
carry out banking business locally and internationally.
The banking industry is characterized by the wide range of services provided. Besides
traditional banking facilities, banks offer card-based payment services, such as credit
and debit cards internet banking and phone banking facilities. Specialized services such
as fund administration, custodial services, trusteeship, structured lending, structured

trade finance; international portfolio management, investment banking, private client

activities, treasury and specialized finance are also offered by banks. The international
banks offer a wide range of global banking and financial services to corporate,
institutional and private clients. Some of the biggest and most reputable international
banks are present in Mauritius and actively carry out international cross border
activities.
In spite of the various shocks facing the international banking landscape over the recent
years, the domestic banking sector has shown satisfactory performance.

1.1 Mauritius Banking sector Performance

Over the year ended March 2015, total assets of the banking sector grew at a rapid
pace, and with banks foreign assets increasing much faster than domestic assets. Total
assets of the banking sector rose by 21.8 per cent at end-March 2015 compared to a
moderate growth of 5.8 per cent a year earlier, reflecting further expansion of foreign
assets held by both domestic owned banks and subsidiaries of foreign-owned banks.
The upward trend in banks foreign assets is partly explained by the advances and
placements of local banks in frontier markets in Africa as well as in India. As at endMarch 2015, subsidiaries of foreign-owned banks held almost 55 per cent of total assets
compared to a lower market share of 40.8 per cent held by domestic-owned banks.

The balance sheet of branches of foreign-owned banks retrenched further by almost 18

per cent and represented 4.5 per cent of total banking sector assets. Banking sector
assets represented around 285 per cent of nominal GDP at market prices as at endMarch 2015.

Growth in banks claims on the private sector - comprising mainly households and
corporations - remained negative as at end-December 2014 but recent trends in 2015
indicate a recovery in bank credit extended to households and corporate. Net foreign
assets held mainly by subsidiaries of foreign-owned banks and domestic-owned
positions remained sizeable, while banks claims on the government and the central

bank have generally registered positive growth in recent years. Gross foreign asset
positions averaged US$25 billion during 2010-2014, with a net value of about US$10
billion. Banks claims on government refer mainly to holdings of government
securities, while banks claims on the central bank are holdings of BoM securities.

1.2 Financial Soundness Indicators

1.2.1 Profitability
Over the year ended March 2015, profitability of the banking sector recorded a
marginal decline mainly on the basis of downward trend of average ROA and ROE of
domestic-owned banks but was partly offset by improvements in the ROA and ROE of
subsidiaries of foreign-owned banks. Decreases in net interest income as well as
impairment loss contributed to the decline in profitability posted by banks over the year
ended March 2015. Movements in ROA were uneven across the banking sector but
remained unchanged at the aggregate level at 1.2 per cent as at end-March 2015.
The significant write-off of impaired investment and loan incurred by one bank
contributed to the decline in ROA of domestic-owned banks from 2.0 per cent to 1.6
per cent. During the period under review, banks average ROE followed almost a
similar pattern to ROA. Average ROE ratios of subsidiaries of foreign banks improved,
while those of domestic-owned banks and the branches of foreign bank recorded
significant declines over their previous levels.

1.2.2 Regulatory Capital

The banking sector maintained adequate capital levels during the period under review,
although differences remained between types of banks in terms of their individual
capital and asset holdings. The capital adequacy ratio (CAR) for the banking sector
stood at 16.6 per cent as at end- March 2015, lower than 17.0 per cent registered as at
end-September 2014. In line with regulatory requirements, banks are gradually
phasing-in the Basel III capital framework. The capital base of the banking sector
amounted to Rs120.7 billion at the end of March 2015, with the ratio of Common

Equity Tier 1(CET1) capital to total risk weighted assets being computed at 13.8 per
cent. From the ownership perspective, branches of foreign-owned banks maintained the
highest Tier 1 capital ratio with an average of 23.9 per cent, followed by the
subsidiaries of foreign banks by 16.7 per cent, while domestic-owned banks continued
to post lower Tier 1 capital ratio at 13.7 per cent.

1.2.3 Asset Quality

Over the year ended March 2015, non-performing loans cumulated in the banking
sector and reached almost Rs32 billion, indicating a marked deterioration in the asset
quality in some key sectors and pointing to rising credit and market risks. While
recovery of bank credit over the past two quarters was primarily attributed to crossborder advances, the rise in NPL, however, pertained to credit extended in the domestic
market. The ratio of NPL to total credit trended up over the year and reached 4.1 per
cent as at end-March 2015, reflecting a marked increase in impairment in the portfolio
of credit to the private sector from 5.8 per cent to 7.1 per cent. At the sectoral level,
conditions remained subdued for the tourism sector which recorded the highest rise in
NPL ratio from 7.0 per cent as at end-March 2014 to 13.8 per cent as at end March
2015. This impairment was mainly attributable proactive classification of loan facilities
granted to two major hotels during 2014Q4. Growth of impaired credit in the
construction sector continued to decelerate over the period under review, although the
corresponding NPL ratio remained at the highest level at 30.1 per cent as at end-March
2015.

1.2.4 Banks Foreign Exchange Open Positions

Since the publication of February 2015 FSR, the overall foreign exchange exposure of
the banking sector remained below the limit of 15 per cent of Tier 1 capital and single
currency exposure limit amounting to 10 per cent of Tier 1 capital. As attend-March
2015, the consolidated overall foreign exchange exposure of banks ranged from 0.1 per
cent to 8.9 per cent and averaged 3.7 per cent. Given that individual banks balance

sheet exhibit fairly low currency mismatches and net exposure to foreign exchange risk,
the risk of loss from adverse movements in foreign exchange rates are assessed to be
relatively insignificant.

1.2.5 Banks Liquidity Positions

By the end of March 2015, the ratio of liquid assets to total assets in the banking sector
stood at 26.0 per cent, while the ratio of liquid assets to short-term liabilities was 33.0
per cent. The main components of liquid assets comprise balances with the Bank of
Mauritius, holdings of Treasury bills and Government securities and short term
placements with banks abroad. Under the Basel IV framework, the Basel Committee on
Banking Supervision has made specific recommendations pertaining to liquidity of
banks.

1.2.6 Concentration of Credit

The level of concentration of banking credit portfolio remained high, as the ratio of
aggregate large exposures to total credit rose by 50 basis points to 31.5 per cent as at
end-March 2015. However, credit concentration, as measured by the ratio of large
exposures to capital base, narrowed from 210.1 per cent at end-September 2014 to
205.6 per cent as at end- March 2015, mainly due to banks raising their capital holdings
in line with Basel III capital requirements. Concurrently, the proportion of bank credit
extended to the ten largest borrowers rose in absolute amount by around Rs1.4 billion
to Rs84.0 billion, equivalent to around 67 per cent of banks capital base as at endMarch 2015. On an overall basis, credit concentration ratio remained below the
aggregate prudential limit of 600 per cent of the capital base of individual banks that is
imposed by the Bank.

2. House Loan
Housing is the basic human need that shelters a family. Nowadays the priority after
getting a job is to look for a substantial source of income for the construction of a house

or an apartment. However this major overhead cannot be funded out of a family basic
monthly income. This is known as the most expensive asset that most family can
possess and will usually require external funding in the form of a loan. The loan in
question will need to be borrowed from financial institutions such as bank or insurance
companies and the borrower will undergo a list of checklist such as his/her monthly
income their capability to repay the home loan. The government through its housing
scheme provides exemption through tax concessions to young individuals who had
their first home loan taken from any Mauritian registered lender.
Mauritius being a developing country will continue to grow in population and with it
the number of people who will need to construct a new house. According to the
statistical bureau of Mauritius,
From the year 2010 to 2011, there have been about 10900 residential houses which
have been built and being inhabited. With the rise of construction prices every month,
the need to take a home loan shall help to fulfil the ultimate dream of every middle
class family.
The market structure for Home loan services by banks or insurance companies is
present in an oligopolistic market condition. This industry is not a really competitive
one
In Mauritius we have 23 operating banks registered with the Bank of Mauritius and are
listed below:
Note that we have two banks which conduct private banking exclusively and one which
conduct Islamic banking.
Banks
1. ABC Banking Corporation Ltd
2. AfrAsia Bank Limited
3. Bank One Limited
4. Bank of Baroda
5. Banque des Mascareignes Lte

6. Banque Prive de Fleury Limited (Conducts private banking business exclusively)

7. BanyanTree Bank Limited
8. Barclays Bank Mauritius Limited
9. Century Banking Corporation Ltd (Conducts Islamic banking business exclusively)
10. Deutsche Bank (Mauritius) Limited
11. Habib Bank Limited
12. HSBC Bank (Mauritius) Limited
13. Investec Bank (Mauritius) Limited
14. Mauritius Post and Cooperative Bank Ltd
15. National Commercial Bank Ltd
16. P.T Bank Internasional Indonesia
17. SBI (Mauritius) Ltd
18. Standard Bank (Mauritius) Limited
19. Standard Chartered Bank (Mauritius) Limited
20. SBM Bank (Mauritius) Ltd
21. The Hongkong and Shanghai Banking Corporation Limited
22. The Mauritius Commercial Bank Limited
23. Warwyck Private Bank Ltd (Conducts private banking business exclusively)

Non-Bank Deposit Taking Institutions

Mauritius Housing Company Ltd
SICOM Financial Services Ltd

2.1 Survey on Home Loan Takers

For the purpose of this study, we shall first take a survey on a group of 30 person and
see how many of them are ready or have already taken a home loan and how many will
not take a home loan. To note that due to religious belief, some are not allow to take
any kind of loan with any institutions.
Purpose of taking the home Loan

% who will purchase

% who will not purchase

with a home loan

with a loan

Land Purchase
76.67 (23)
23.33 (7)
House Purchase
66.67 (20)
33.33 (10)
House Construction
93.33 (28)
6.67 (2)
House renovation & Extension 56.67 (17)
43.33 (13)
Table 1: Survey on home loan takers
From table 1 above we can read that about 73.33% of the people who took the survey
will take a home loan and that only 26.67% will not take a home loan. Hence the
purpose of the home and its market is a practical mean of revenue for the banking and
financial sector.
The home loan scheme market has mostly existed since centuries where the financial
institution will lend to the people in need with a repayment interest rate. In the past
houses were built by their owners themselves or with the help of their families with raw
materials readily available such as wood, soil and bale of straw. But in a tropical
country like Mauritius where mostly each year there is heavy rainfall and cyclonic
weather conditions, a concrete house is a must have for all Mauritian Families.
The following checklist and estimated cost have been prepared for people who need to
construct a house of about 120m2 on a 160m2 plot of land:
a) Purchase of a land (minimum of about Rs800,000 outside rural areas)
b) House Plan and Building permit (minimum of about Rs30000)
c) House Construction and completion (Minimum of about Rs1,500,000)

Hence a minimum total of about Rs2.33 million will be needed for an individual to
build a house on a plot of land. According to Statistic Mauritius the average monthly
earning of an individual in Mauritius is Rs 24537 and without taking into consideration
the increase of the value of money over time, it will take a minimum of more than 7
years for an average income individual to have sufficient funds in his bank account to
be able to build a house.
Below Chart 1 shows the evolution of the construction price index from October 2014
to September 2015. We can analyse from the chart that since December 2014 there has
been a rise in the construction price index. Hence this will results in the need to have a
greater monthly income for an individual from a middle class family in order to build a
house.

Index
114.5
114
113.5
113
112.5
112
111.5
111
41913 41944 41974 42005 42036 42064 42095 42125 42156 42186 42217 42248

Figure 1 : Construction Price Index Oct 14 to Sep 15

And with construction prices increasing every month as per figure 1 above, the market
for home loan is big in a developing country like Mauritius.
Under this study we shall consider only two main Commercial banks, That is:
1) Mauritius Commercial Bank Ltd

2) State Bank of Mauritius Ltd

The private sector, governmental institutions and Commercial banks have been playing
an important role in the home loan industry and with the increase in demand for
housing loans, all commercial banks, insurance companies and governmental
companies are emerging as lenders in the segment. To note that all lenders in Mauritius
will need to provide information about the credit facilities granted to both individual
and firms such as loans, overdraft, credit cards, leasing facilities, to the Mauritius
Credit Information Bureau (MCIB). The objective of MCIB is to ensure the
development of an overall sound credit environment by preventing over-indebtedness.
Most Lenders will need to ensure that they lend money to persons who have sufficient
repayment capacity and good credit culture.

2.2 Banks and Insurance Company with Home loan Scheme

Mauritius Commercial Bank Ltd
The MCB Ltd housing finance offers loan for purchase, construction and renovation of
houses at an interest rate ranging from 6.40% to 7.15% with a Repo Rate of +2.5%. The
repo rate is the rate at which the Bank of Mauritius lends money to commercial banks
in the event of any shortfall of funds. Hence if Repo rate is decreased, loans may
become cheaper. All banks require a building insurance (fire, cyclone, and other perils).
Interest Rate

Loan
Amount
Rupees

6.40% fixed 6.75% fixed as 6.90% to 7.15% variable

as
from from year 3
depending on Repo Rate
year 3
of +2.5 and conditions
applies
in As from
4million

Loan Repayment term

Minimum
of 3 years

Greater
2million
less
4million

than 2.5million or less

and
than

Minimum of 3 Minimum of 2 months up

years
to 300 months

State Bank of Mauritius Ltd

The SBM Ltd offers four different scheme of home loan with a prime lending rate of
7.0% which will increase or decrease the PLR according to the amount of home loan
being taken by the borrower. The Repo Rate is +2.5%. The below table summarise the

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provided scheme. All banks require a building insurance (fire, cyclone, and other
perils).

Interest Rate

7.90%

6.99%

6.15%

Loan Amount As
from As
from As
in Rupees
200,000
to 1million
to 2milion
999,999
2milion
3milion
Loan
repayment
term

5.99%
from As
from
to 3million
to
4million

Minimum
1 Minimum
1 Minimum
1 Minimum
1
month
and month
and month
and month
and
maximum 300 maximum 300 maximum 300 maximum 300
months
months
months
months

The above two banks provides a relatively same interest rates. This is because Home
Loan banking in Mauritius is more like an oligopolistic type of market where the Bank
of Mauritius affect all other banks interest rates for home loan by varying its Repo rate.
With a high degree of interdependence where if one banks offers a lower interest rate
on savings or fixed term deposit, this will results in a large amount of bank accounts
closure where the stability of the other banks will be at risk.
Home loan also consist of a large portion of monthly expenditure and remains the
primary assets in homeowners portfolios. In Mauritius each year homeownership
keeps on increasing and with home loan we can expect to have a favourable tax
treatment by the MRA at the end of each semester.

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3.0 Conclusion
Growth of household indebtedness, as measured by the growth of bank credit to
households, decelerated rapidly during the second half of 2014. Bank credit to
households, particularly consumption credit grew at relatively high double digit growth
rates during 2013, before registering a marked slowdown in recent months. Growth
rates of consumption credit are about those registered in mid-2012, while those of
housing credit are even lower than the growth rates registered during the heights of the
global financial crisis (2007/09). Housing credit represents around 60 per cent of total
bank credit to households. Consumption loans represent the remaining 40 per cent of
total bank credit to households.

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Figure 1: Growth of Housing and consumption credit

Household indebtedness has remained broadly constant as a share of household

disposable income over the 12-month period to end September 2014, although it
gradually increased between 2009 and 2012.

Figure 2: Household debt to disposable income

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The recent stability of the household indebtedness ratio is consistent with an average
growth rate of disposable income of about 7 per cent during the period, and the
reported slowdown in the growth of consumption and housing loans to households.
Broadening the definition of households debt to include borrowing from banks and
non-bank financial institutions (i.e., insurance companies) does not change the
perceived trends in the household debt ratio.

Figure 3: Alternative estimates of household indebtedness ratio

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The broader definition of household debt to disposable income increased marginally

from 56.8 per cent as at end-September 2013 to 58.0 per cent as at endSeptember 2014,
while that of the narrow definition of household indebtedness (only bank credit)
increased from 53.0 per cent to 54.5 per cent over the same period. Insurance
companies generally extend mortgage loans to households.
The ratio of household debt to disposable income in Mauritius is relatively low by
international standards. In Mauritius, the referred ratio is significantly lower than in
New Zealand, South Africa and Namibia, for instance.

Figure 4: Household indebtedness in selected countries

However, international comparisons are not straightforward, as some countries may
capture more comprehensive funding information of household indebtedness than in
the case of Mauritius.
Debt Service Ratio Households debt service ratio, as measured by the households
financial burden as a share of disposable income, has been gradually increasing during
the last five years, but remains low by international standards.

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Figure 5: Household debt service cost and interest rates

Figure 6: Household debt service cost in selected countries

16

The financial burden increased from an equivalent of about 4 per cent of disposable
income in early 2009 to about 4.5 per cent by end-September 2014. The increase in the
debt service ratio has taken place against the background of generally declining interest
rates. On a cross-country basis, households debt service costs in Mauritius are
significantly lower than in comparator countries.
Household indebtedness and household debt service (both as a share
of disposable income) are relatively low by international standards

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References
Figures, graphs and charts were drawn on Microsoft Word 2013 from scratch by the
author of this report.
http://www.mcb.mu/en/individual/loans/housing-loan/Housing-loan-promo
https://www.sbmgroup.mu/interest_rates.php?lang=en
https://www.sbmgroup.mu/loan_calculator.php?lang=en
https://www.hsbc.co.mu/1/2/personal/loans/home-loan?
WT.ac=HBAP_MU_Home_Loan_FOM#features
http://www.tradingeconomics.com/mauritius/interest-rate
http://www.bom.mu/Default.asp?id=RepoRate
http://statsmauritius.govmu.org/English/Pages/default.aspx

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