Banking and Market Fairness

Published on 15th July 2014

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. 


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