financial innovation

F i n a n c i a l

I n n o v a t i o n

i n

M a u r i t i u s

AKR

Overview• MAURITIAN FINANCIAL SYSTEM • WHAT IS FINANCIAL INNOVATION • TYPES OF FINANCIAL INNOVATION • CLASSIFICATION OF FINANCIAL

INNOVATIONS • EXAMPLES OF FINANCIAL

INNOVATION • CAUSES OF FINANCIAL

INNOVATION • BENEFITS OF FINANCIAL

INNOVATION • CRITICISMS OF FINANCIAL

INNOVATION

• MAURITIUS WITHOUT FINANCIAL INNOVATION

• INNOVATION AND CRISIS • INNOVATION IN ISLAMIC BANKING • INNOVATION IN MAURITIUS AND IN OTHER

COUNTRIES • INNOVATION IN MAURITIUS VS INNOVATION

IN U.S • FINANCIAL INNOVATION IN MAURITIUS VS

INNOVATION IN MALAYSIA

• INNOVATION IN MAURITIUS VS INNOVATION IN TOGO

• POTENTIAL BARRIERS TO INNOVATION

• CURRENT AND FUTURE TRENDS

Mauritian Financial System• Once a poor sugar production-based country.

• Today, the island is at the dawn of a new era:

• The financial services sector is one of the most important economic pillars.

• The future of this sector is very promising.

• With evolving markets & international financial competition and ever-changing demand of consumers, our financial market becomes an obsolete one without proper and timely modification.

• This is where financial innovation comes into play.

What is Financial Innovation?

• Basically, financial innovation refers to the creation of new financial

assets or new ways to use existing financial assets.

• A broad term and a much wider phenomenon than just new physical

products or a new technology. E.g. Model T Ford, launched in 1908.

• different from what has gone before

• extremely desirable in the long run

• A dominant feature of the modern financial system.

Types of financial innovations

Three types of financial innovations:

1. Product innovation - Introduction of a good or

service or improvements made to existing products.

2. Process innovation - execution of a new or

considerably improved production or delivery

method.

Types of financial innovations

3. Institutional innovation - Creation or

changes in organizational structures, the setting

up of new types of financial intermediaries, or to

changes in the legal and supervisory framework.

Classification of Financial Innovation

Market broadening instruments

Risk management instruments

Arbitraging instruments and processes


Market broadening instruments - increase the size and depth of markets.

• Increase liquidity of the market.

• Attract new investors and offer new opportunities for borrowers.


Risk management instruments - are instruments which reallocate financial risks to those who are less averse to them, or who have offsetting exposure and thus are presumably better able to shoulder them.


Arbitraging instruments and processes - are instruments which enable investors and borrowers to take advantage of differences in costs and returns between markets, and which reflect differences in the perception of risks as well as in information, taxation and regulations.

Examples of financial innovation in Mauritius

• The Mauritius Commercial Bank

–Internet Banking–ATM (1987)–Juice–Mobile Banking–MCB Select


• The Hong Kong & Shanghai Banking Corporation (HSBC) Ltd –AssetVantage –Islamic banking services


• SBI International Ltd –Teacher Plus

–Health Plus

• CHEQUE TRUNCATION

• POLYMER BANKNOTES

CAUSES OF FINANCIAL INNOVATION

• Tax and Regulations

• Imperfections-asymmetric information

• Variations in inflation, interest rate

• Increase in Government deficits

• Advancement in technology

• Increase in competition

BENEFITS OF FINANCIAL INNOVATION• Reduction in transaction costs• Moving funds across time and space-

complete markets• Managing risks and the pooling of funds• Boosting economic growth and development• Facilitating the sale and purchase of goods and

services through a payment system• Addressing moral hazard and asymmetric

information problems

CRITICISM OF FINANCIAL INNOVATION

• Speculation

• Recession- Financial crisis

• Exploitation of consumers

• Financial instability

MAURITIAN FINANCIAL SYSTEM WITHOUT FINANCIAL INNOVATION

• Without Financial Innovation, Financial Sector would not be able to perform its core function: Intermediation

• Concentration on the primary and secondary sectors of production.

• Difficulty in coping with the trading ways of other countries.

• FDI would be low → to low investments, BOP deficit, increasing unemployment.

MAURITIAN FINANCIAL SYSTEM WITHOUT FINANCIAL INNOVATION

• Example: ATMHad it not been introduced, what would have

been the effects?• Consumption pattern → low leading to a

reduction in production, thus reducing economic efficiency.

• Standard of living would have been very poor.

FINANCIAL INNOVATION AND CRISIS• The economic crisis that started in 2007 has negatively

affected business innovation and research and development

in all countries.

• Firms resorted to securitisation, one example of a risk

management financial innovation.

• It contributed to the financial crisis of 2007.

FINANCIAL INNOVATION IN ISLAMIC BANKING

Islamic financial innovation can be defined as

the process of utilizing Islamic legal contracts in

new ways to develop financial products that are

in compliance with Shariah and at the same

time produce economic effects which other

financial products have on the economy.

FINANCIAL INNOVATION IN ISLAMIC BANKING

• Islamic Private Equity Funds

It is similar to the Islamic mutual fund, but here the

investments are made in unlisted companies. Venture Capital

and Private Equity are ideal Islamic compliant investment

structures and are based on the conventional Private Equity

Fund.

Comparability between innovation in Mauritius and

innovation in other countries

FINANCIAL INNOVATIONMauritius V/s United States

• U.S is considered to be the best in all Economic reports compared to Mauritius.

• Money and capital markets → largest and most highly developed in the world.

• Mauritius - relatively well-developed financial system than other African developing countries.

• The securities markets are shallow.


• U.S provoked the 2007/08 financial crisis, caused by financial innovation, not Mauritius.

How and why not Mauritius?• Supervisory bodies: the Board of Investment, the

Central Bank, the Competition Commission.• International bodies: International Monetary

Fund, the World Bank.• Amendments and creation in the Mauritian legal

system: the Finance Act 2011, Banking Act 2004.


• Unlike Mauritius, U.S found itself trapped for about three years.

• Excessive lending.• Collapse of Lehman Brothers and the

American Investment Group. • Risk management failures in many financial

firms and deficiencies in the regulatory oversight.

Financial InnovationMauritius V/s Malaysia

• Malaysia has trained Mauritius on Islamic banking.

• Innovation in Mauritius has virtually been in line with innovation in Malaysia.

Financial Innovation Mauritius VS Togo

• Togo has a poor human development index compared to Mauritius

• Togo has not been able to face the recent economic downturn compared to Mauritius

• Financial Innovation is more boldly present in Mauritius than in Togo

• Better regulations in Mauritius than in Togo

POTENTIAL BARRIERS TO FINANCIAL INNOVATION

• Lack of opportunities given to employees by managers and unskilled

managers

• Lack of time and capital

• Ineffective commercialization and execution of products (unfit

management of advertising)

• Standards

• Cost and complication of patents and Intellectual Property Rights

protection• Potential barriers to Financial Innovation

Trends of Financial Innovation

• Wide range of financial services are being provided due to financial innovation

• Insurance sector and banking sector are being more dynamic

• Corporate finance, risk management and financial data processing are being provided.

CONCLUSION

Financial innovation has indeed helped Mauritius to develop its economy to a great extent.As a small island economy, we cannot believe that we cannot innovate – otherwise we will die.

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