Banking and Market Fairness One cannot define a noun by its - TopicsExpress

Banking and Market Fairness One cannot define a noun by its adjective. Only the dictionary approach explains fairness as “the quality of being fair.” However, the layman would not understand the meaning of fairness if he could not grasp what is fair. The Report Banking Your Future of the Bank of Mauritius (BoM) treats fairness as a central theme but does not define it properly in the layman’s language. Put simply, to be fair is to be just. Now justice as fairness cannot be one - sided. This Report, which deals with unfair terms and conditions in banking contracts, speaks for the customers and sees more regulation as the solution of their problems. Banks naturally disagree and prefer less regulation, although they would seek political bail- out if they failed. The truth lies somewhere in the middle: regulation by the market is what our banking industry needs. The Report clearly espouses the philosophy of interventionism in the banking sector. Many of its 100 recommendations are commendable, but if all of them were to be put into law and applied compulsorily, Mauritius would be seen to backpedal on financial liberalisation. In particular, the proposal to “regulate interest rates” is nothing else than to subject the banking activity to price control. True, the fees, charges and commissions are high, and their level is all the more unacceptable that it is not commensurate with the quality of service provided by individual banks. The problem is that banks raise them too easily whenever their net interest income falls or their cost - income ratio rises. They have a captive non- interest income as it is difficult for a borrower to switch banks when his hands are tied by a credit facility. However, if the regulator meddles in the bank- customer relationship, there will be unintended consequences. Such relationship is not invariably perfect, but it is at least agreeable between the two parties. This is what market principle is all about. It is up to customers to exercise their free choice in an open market place, to decide what fees they are ready to accept or not. Both the customer and the banker weigh their options and arrive at the best compromise. What the BoM can do is to empower customers by increasing their financial literacy. They should be aware that banks need them to be solvent. It is the duty of bankers to heed their clients’ complaints and, as a result, to abandon unpopular charges. That is free market in action. The market is just because it is efficient Just as the market will reject some fees, it will tolerate other fees. Whatever the charges that the BoM would like to see abolished, banks will look for another way to boost revenue. Customers are not paying banks for the privilege of doing business with their money, but for the use of the bank’s computer, network and security systems which are costly to purchase, operate and maintain. Moreover, banks have to bear the increasing compliance costs and the license fees that are imposed by the Central Bank. While banks legitimately maximise profits, customers seek the best value for money. These interests combine in a free market as profitable banks reward prudent customers with quality services at an agreeable price. Market forces compel banking institutions to please their customers or risk losing them to more amenable competitors. Banks would like to get more customers paying smaller fees rather than to have fewer customers paying bigger charges. More regulation is likely to hamper the kind of competition that the BoM intends to promote. And it will tolerate, yes, bad customers. Increased regulation has the effect of relaxing the discipline that individuals afford to their behaviour. It breeds the problem of moral hazard whereby the customer reaps the benefits of a regulatory action without incurring the costs. The one- size - fits - all policies cannot handle the intricacies and dynamics of business of each and every bank. There is no industry more heavily regulated than banking. Additional regulatory powers would make the Central Bank popular but would not do justice to banks. By Eric Ng Ping Cheun The writer is the author of Alice in Dodoland: Looking to the Mauritian economy (2012), on sale at Bookcourt, Editions Le Printemps, Librairie Le Cygne, Le Bookstore and Jumbo Score.