Corporate Failure: A Case study in Mauritius Banking Sector

1. Overview of Mauritius Banking Sector

With the origin of The Mauritius Commercial Bank Ltd ever since 1838, Mauritius,
the emerging tiger of the Indian Ocean has shown its proven stability to the World.
Other banks have followed its path and they are as follows:

Bank of Baroda, Banque des Mascareignes Ltée, Barclays PLC, Deutsche Bank
(Mauritius) Limited, First City Bank Ltd which just changed name into Bank One,
Habib Bank Limited, Indian Ocean International Bank limited, Investec Bank
(Mauritius) Limited, the Mauritius Commercial Bank Limited, Mauritius Post &
Cooperative Bank Ltd, P.T Bank International Indonesnia, SBM Nedbank
International Limited, SBI International (Mauritius) Ltd, South East Asian Bank Ltd
which has just changed to Bramer Banking Corporation Limited, Standard Bank
(Mauritius) Limited, Standard Chartered Bank (Mauritius) Ltd, State Bank of
Mauritius Ltd, the Hong Kong & Shanghai Banking Corporation Ltd.

Mauritius has been remarkably successful in achieving rapid growth, in diversifying

its economy, and in developing a broad-based financial system. “Mauritius has a
deep financial sector, dominated by a large domestic banking sector, with assets
equivalent to 100 percent of GDP and with a significant expansion in the region” as
per the IMF report 2003-Mauritius: Financial System Stability Assessment.

The domestic banking system, while sound, is vulnerable to external economic

shocks and to a downturn in economic activity. The vulnerability to these shocks is
increased by a highly concentrated structure of banking system and the
concentration of credit in the hands of few conglomerate borrowers and a few
sectors. As a result, a prolonged downturn in economic activity in the key sectors
(sugar, textile and tourism) where bank risk exposure is significant, will adversely
affect the quality of bank portfolio and potentially threaten the stability of the
system, as confirmed by stress tests. Mauritius ‘banking system consists of two
subsystems: an onshore and an offshore banking sector. As of end-2002, the
onshore sector comprises 11 banks having a Category 1 license, which permits
them to operate a normal range of banking activities, in domestic as well as foreign
currency.

2. Definition of Corporate Failure

Billions of dollars of market erased. Thousands of jobs lost. Savings wiped out. A
demise as spectacular as Enron’s has failure written all over it. And in some
quarters, that failure is at least partially attributed to the complex derivatives
transactions that Enron entered into – transactions that some believe may have
been used to conceal or obscure the company’s true financial conditions, to hide
losses, and to bolster earnings. On the 18 September 2008, the FINANCIAL TIMES
made its headline “Global banks in crisis- Credit panic hits historic levels”. The
immediate cause or trigger of the crisis was the bursting of the United States
housing bubble which peaked in approximately 2005–2006. Already-rising default
rates on "subprime" and adjustable rate mortgages (ARM) began to increase quickly
thereafter. An increase in loan packaging, marketing and incentives such as easy
initial terms, and a long-term trend of rising housing prices had encouraged
borrowers to take on difficult mortgages in the belief they would be able to quickly
refinance at more favorable terms. However, once interest rates began to rise and
housing prices started to drop moderately in 2006–2007 in many parts of the U.S.,
refinancing became more difficult. Defaults and foreclosure activity increased
dramatically as easy initial terms expired, home prices failed to go up as
anticipated, and ARM interest rates reset higher

The devastating year

The collapse of the American Financial sector which has given rise to the Sub-prime
market crisis. As per the IMF 2009- Mauritius: Assessment letter for the World Bank
and African Development- “Mauritius has a long and sustained track record of
implementing strong policies, and the authorities have responded appropriately to
the global financial crisis by easing macroeconomic policies. While the crisis
response has halted the decline in public debt, the public finances are
fundamentally sound and external debt is sustainable. In the light of the flexible
exchange rate, the country’s current reserve position is comfortable, and banks
remained liquid and profitable. With these strong economic fundamentals and an
effective institutional policy framework, Mauritius is well placed to weather the
current challenges”.

The Mauritian economy is suffering from second-round effects of the global financial
crisis, with economic growth slowing but expected to remain positive. As a result,
banks had little direct exposure to subprime and other affected assets, and have
remained liquid, profitable, and well capitalized, thus far. The stock market has
moved in tandem with global trends.