Whenever you read or listen to the narrative on the BAI saga by some hardcore labourites , they seem to get stuck to one side of the story-the verso side and, «kouma dire fin met œillères » , they refuse to flip over to the recto side .
VERSO : The verso side pertains to the closing down of the BAI which they portray solely as a vengeful act of destruction . It’s without doubt that that closure of the BAI group and revocation of Bramer Bank’s licence following persistent liquidity and regulatory capital shortages was mismanaged. Instead of bursting the BAI/Bramer Bank bubble, a clear rescue plan could have been devised and implemented by the Ministry of Finance, in coordination with the Financial Services Commission, the Registrar of Companies, the Financial Reporting Council and the Bank of Mauritius.
A key objective would have been to establish proper supervisory oversight and enforce corrective action for effective and prudent risk management. Under firm pressure from the supervisory institutions and Government, in December 2014 itself, (not four months later), BAI Co Ltd could have been led into a salvage operation involving new strategic investments and sound professional management. The BAI Group’s well-performing Kenyan businesses which held substantial assets could have provided a financial underpinning to strengthen BAI Co Ltd. A major source of financial haemorrhage within the BAI Group could have been urgently addressed, namely the Apollo Bramwell Hospital while some degree of public financial support could have been provided to bring health and soundness to BAI Co Ltd.
At the end of the day, when the harm has been done, one is perfectly entitled to put the following questions: Was it all due to a vengeful act per se? Was the government’s actions guided more by the need to avert a systemic crisis or on banking a master stroke on the recoupable assets of BAI rather than on the mere urgency to settle scores?
Before we tackle the recto side of the story, we have to concede that the whole approach was blatantly amateurish – and directed by people who , besides their incompetence and financial fudging, behaved like bulls in a china shop.
That’s it for these laborites; there is no need to delve deeper, to get rid of the smokescreen that may have been blurring and distorting the facts in trying to show that the BAI closure was solely a vengeful act of destruction and that the BAI was a well-run concern facing some short-term liquidity issues without any whatsoever involvement in any so-called Ponzi schemes
RECTO : For the recto version , we will leave it to the readers to find out whether there were certainly more that what meets the eye about the BAI saga. Whether BAI was a disaster waiting to happen!
We will marshall the facts and the arguments that need not be supported by a fawning claque . Facts and nothing but facts. Everyone is entitled to his opinion but not to his own facts. Please bear with me if the facts are sometimes peppered with some wayward comments.
Fact 1: Let us rewind to 2004-5. The government of the day was putting some order in the insurance business and their investigations (by a South African actuarial firm) had indicated that BAI activities were in contravention of the regulatory regime and were putting at risk the entire financial sector. “The FSC also conducted an onsite inspection of this insurance company in December 2004. The inspection found several breaches of current regulations. These included asset valuation issues and asset concentration in related companies as well as corporate governance and internal control deficiencies. The company was asked to take steps to rectify the shortcomings. The company disputed some of the findings, in particular the finding that there is a significant deficit in the life fund.”
Fact 2: A highly qualified Singaporean expert employed at the FSC who was completing a report along the same lines of the SA Actuarial report on the BAI, left the country hastily within hours . ( reminds us of Cunningham and of a certain mafia).
Fact 3: Following the 2005 general elections, the Chairman and Chief Executive of the FSC, and the Chief Executive of the FRC, were summarily replaced. Political interference deprived these nascent regulatory institutions of invaluable skills, causing a major setback to the establishment of an effective and independent regulatory regime. An IMF Report noted that “At the Financial Services Commission (FSC), senior management and most of the Board were replaced following the last general election. Such a wholesale turnover in senior management and the Board could raise concerns about the independence of the regulator, and was undoubtedly disruptive to the ongoing operations of an important but young institution. In addition, two of the three director positions remain vacant. Both regulatory independence and the perception of independence are important for effective supervision. The authorities should consider granting greater statutory independence to the FSC...”
Fact 4: In Budget 2006-7, Govt reformed personal income taxation by removing all the allowances and deductions including insurance premiums . This discouraged savings and delinked the savers to their traditional insurance companies which in a sense democratise the whole insurance business. The predator, BAI, with its huge sales and marketing force, targeting these potential savers on the basis of the promise of higher returns, rushed in to fill the void offered on a plate by the authorities. A nice return for the Labour Party’s financier !
Fact 5: The FSC adopted light-touch regulation, while the FRC went into hibernation. The politically-connected insurance conglomerate was thus relieved from strong oversight to pursue the expansion of its risky business without complying with prudential requirements, and in financial accounting opacity. The Bank of Mauritius became even more subservient, and approved the grant of a banking licence to the Group in 2006, despite having knowledge of the reservations held about its insurance activities. – The IMF noted that “Rather disconcertingly, despite its adoption of unsound investment principles, this financial group was granted "approval in principle" in late 2006 to obtain a license under the Banking Act by the Bank of Mauritius, without any consultation between the BOM and the FSC. The "approval in principle" concerned an entity that would be an affiliate of an institution whose activities have been the subject of the closest examination from the FSC.”
Fact 6: Sometime before 2010, BAI was in difficulty, they were looking for a strategic partner . They promised Ned Bank that they would be able to secure them control of the Sate Bank in return for…..The deal did not go through.
Fact 7: The Group’s true financial situation was concealed by a myriad structure of interlinked companies, displaying high and recurring fair value gains to systematically inflate investments. Consolidated financial statements at the domestic level were no longer available as from 2010, while a healthcare subsidiary was running sizeable deficits. The consolidated accounts at the level of the ultimate holding company in the Bahamas revealed huge annual losses, of over USD 100 million, in 2011 and 2012.
Fact 8: And in 2012, the IMF reminded us that the issue of the insurance company with a substantial proportion of its assets invested in related companies has not been resolved. Moreover, they also warned us that these issues are potentially serious for the policyholders, depositors and investors and the weaknesses that allowed the problem to remain unresolved for so long, could result in more serious failure of a systemic nature.
Fact 9: Under Clairette Ah Hen-a committed and talented CEO-a policy of forbearance- i.e., of restraint to allow the insurance company time to comply with the investment concentration limits- was undertaken. But the political factors ultimately prevailed. Amendments to banking legislation were tailor-made to facilitate its business. The Banking Act was amended to relax the limitation on investments and non-banking operations, and allow financial institutions to buy, sell, hold or manage pools of assets. A credit book of hire-purchase clients could thus be securitized and sold to a bank as an investment product, to ease the bank’s lending without infringing on related party limits. (which I denounced in an article titled “ Cronysm impairs growth" in L’express of August 2014 ). There were also attempts to merge FSC with BOM to dilute the former’s effectiveness (which was rejected by the IMF). The process of regulatory capture reached its peak with the appointment of a Deputy Governor at the Bank of Mauritius at the discretion of the financial conglomerate.
Fact 10: The N’Tan Report concluded that there were growing evidence of massive corporate mismanagement and fraud at the BAI Group, with some features of a Ponzi scheme also present. In the infamous Madoff case, not a single investment had been made on behalf of clients in 13 years. Like Madoff however, the BAI Group managed to hide losses for years, and hoodwinked the regulators by adopting equivocal accounting practices.
From these facts , our recto version of the BAI Saga seems to point out that the activities of the BAI as a financial conglomerate, engaged in both banking and insurance activities, was a long-standing source of concern. The insurance company offered investment rather than insurance products, made excessive related party investments, and presented solvency issues. The return to policy holders was unrelated to the performance of the insurance company’s assets. BAI’s banking and insurance operations sustained an excessive concentration of investments in the Group’s related activities, which were mostly non- performing.
But it could have been worse ; paradoxically, we still have to be grateful to the leader of the one-sided (Verso)labourites for not giving in to the demands, among others, of the conglomerate for a takeover of SICOM(and State Bank ?) and for a paying health sector which would have turned Apollo hospital into a gold-mine.
A concluding comment from a talented observer -that despite all the lessons drawn from the BAI saga , the cycle of regulatory capture resumes anew with a new regime and a new upcoming group/conglomerate . How True ! “The gambling mogul is to MSM, what BAI was to the LP !”
