Research Paper on Banking Sector and Development of Corporate Governance in Mauritius

Introduction

For the longest time, the banking sector has experienced various challenges in the management as far as corporate governance is concerned. The challenges are majorly attributed to weak and ineffective systems of governance which in most circumstances put the companies at risk of collapsing and eventually pulling down the security markets. In the banking industry, corporate governance involves a set of relations between the management of the company, the shareholders, the board, and other stakeholders (Basel Committee on Banking Supervision 2015, p.1). This relationship creates and develops the structure and systems through which the company's objectives and goals are set. For the company to successfully achieve its goals, clear roles and responsibilities of the management personnel need to be defined. According to Kim et al. (2013, p.60), Corporate governance involves mechanisms used by shareholders to select the CEO of a corporation and deciding upon how and where to allocate its assets, which would eventually have effect on corporate and financial performance of an organization.

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Good corporate governance is a key aspect in the banking sector since when well implemented, the bank prevents financial fraud among other issues that could lead to financial distress and bankruptcy, which would eventually hinder the bank from achieving its objectives, goals and the nation's macroeconomics standards (Yeoh 2007, p.57). It is therefore essential for banks to implement good corporate governance within the company to prevent future occurrence of issues and enhance financial performances among other objectives.

The purpose of this research is, therefore, to establish how adequate the corporate governance and the financial performances of banks in Mauritius are, and how effective is the separation of roles of the chief executive officer from those of the chairman especially in the banking sector. This would be a solution to the banks where the managers expose the stakeholders to various financial risks as a result of satisfying shareholders base and causing unwanted social costs. The purpose of this research is achieved by giving background information on corporate governance in the banking sector in Mauritius, conducting a literature review on the current knowledge in financial banking management, a critical discussion of corporate governance and banking management and through various research techniques such as questionnaire administration, observations and analysis of data collected.

Background Information

Banking industry provides various services that include aggregating society's savings for investment, enhancement of movement of goods and services through payments, supervision of lenders, management of risk and uncertainty among others (Cocris &Ungureanu 2007, p.57). This makes the banking industry unique and different from other industries. According to De Andres and Vallelado (2008), for the reason of soundness in the bank and economic stability of the nation, good corporate governance becomes an essential tool in the banking industry and hence its worldwide attention and popularity as a research topic. The quality of the corporate governance in the bank affects its financial performance and the nation's macroeconomics and thus the need for sound management.

According to Putra and Simanungkalit (2014, p.101), good governance is the foundation for the creation of transparency and promotion of good relationship and engagement between the company and its stakeholders which results to positive performance of the banks. This research, therefore, seeks to establish an explanatory study of the corporate governance in the banking sector from previous research and the implementation of separation of roles and responsibilities of chairman and the chief executive officer of the banks within Mauritius' banking industry.

Corporate governance is an idea that separates the ownership from controlling the business. In the initial stage of corporate governance development, the main aim is to separate the power between the principle and its agent where in this case the agent is the chief executive officer and the principal is the shareholder. Various previous studies on corporate governance stated agency theory as their companion theory especially on the conflict between the agent and the principal. Corporate governance in most circumstances aims at solving agency conflict between the Chief Executive officer and the board since its main purpose is to monitor the performance in the bank in order to fulfil the interest of the shareholders.

Research conducted in the recent past shows that corporate governance in the banking industry greatly influences the banking activities such as day to day business of the bank, compliance with applicable laws, the setting of goals and objectives, and accountability to shareholders (Cocris &Ungureanu 2007, p. 60). According to Nordberg (2008, p. 36), other grand theories such as class hegemony, stewardship theory, law, resource dependence theory, and stakeholders' theory greatly influence corporate governance. Thus the main purpose of corporate governance is to protect shareholders interest through the establishment of performance monitoring mechanisms to the managers and other employees of the bank. It should be noted that corporate governance is practised differently throughout the world depending on the relative powers of the capital provider, owners, and managers.

Corporate governance can at times be viewed as cultures, structures, and processes employed in a company to direct and manage the business and social interest with the main purpose of improving the business welfare and accountability of the company. The ultimate goals would be to create values to the shareholders in the long run and observe the interest of stakeholders at the same time. A summary of all the above description and information background about corporate governance support the original goal which is to monitor the company's performance to ensure the interest of the principal is achieved. This then makes the development of corporate governance significant and critical for the banking sector.

Development of Corporate Governance in Mauritius

The history of corporate governance development in Mauritius dates back to September 2001, when a committee with a mandate to promote good corporate governance amongst private and public sector organizations were formed (National Committee on Corporate Governance [NCCG] n.d.). The Committee was mandated to ensure fair treatment, management disciplines, accountability, responsibility, transparency and fight against corruption was achieved in various organizations across the nation. In 2002, the World Bank published a Report on the Observance of Standards and Codes (ROSC) for corporate governance and among the recommendations within the report was that development of a Code of Corporate Governance for Mauritius should be done (NCCG n.d.)

As a result of the recommendation in the ROSC about the development of the Code of Corporate Governance for Mauritius, Mr. Mervyn King from South Africa and an expert on corporate governance was appointed to help the committee in developing a Code of Corporate Governance in 2003. Intense national consultation by the stakeholders was held before its publication. In October 2003, the code was published and was held in high regard by the national and international business communities. In December 2004, the financial reporting act of 2004 was gazetted and came into operation in early 2005. The main purpose of the act was to aid the establishment of a strong body that would oversee corporate financial reporting, auditing standards and practices, accounting and general corporate governance in Mauritius. Section 63 of the Act established the national committee and corporate governance as the national body mandated to oversee all matters pertaining to corporate governance. The NCCG took over in January 2005.

A survey conducted by the National Committee on Corporate Governance of Mauritius in 2014 identified that the business community of Mauritius needed the 2003 code to be revised (NCCG n.d.). Some of the reasons for its revision were to recognize, learn and apply the lessons learned from collapsing of the BAI and Bramer banks in 2015 and the preceding financial crisis in 2008 (Khushiram 2015, p.1). The code also needed to be aligned with the new laws and guidelines of the bank of Mauritius. The code also needed to identify and apply the best international practices. The committee revised the code with assistance from Dr. Chris Pierce and other stakeholders between 2015 and 2016 before officially launching the code in February 2017 at the BMPL conference. The Code of Corporate Governance 2016 applies to public sector organizations, public interest entities, and other companies (NCCG n.d.).

Case of Mauritius

According to the World Bank (n.d.), Mauritius' economy has made great stride since its independence in 1968, and currently, it is an upper middle-income economy. In 2017, the real GDP of Mauritius grew with 4% with the main drivers of growth being the service sector including trade and accommodation services and financial services. The tourism sector created a robust impact since the tourist arrival increased by 5.2% in 2017 to reach 1.34 million tourists (the World Bank n.d.).

The inflation rate raised by 6.9% in early 2018, compared to 1.3% the previous year. However, the core inflation measure of the central bank remained under control in January 2018. The economy experienced a stable fiscal policy with an overall budget balance of -3.2 of GDP planned for the current fiscal year. Public sector debt is substantial and is at approximately 56% of the GDP as per domestic statutory definition (the World Bank n.d.).

The abundant financial and capital inflow including the net inflows to the large offshore corporate sector greatly supported Mauritius' external balances. Thus the overall balance of payment by the third quarter of 2017 remained surplus and gross international reserves rose in January 2018 by approximately $6.1 billion.

The political context of Mauritius is of great influence to its economy since it has a stable multiparty and parliamentary democracy. The prime minister has full executive powers and heads the government while the president is the head of state. The democratic political system that is supported by a strong legal system has widely contributed to its economic growth. The economy has diversified from agriculture to other sectors such as tourism,...