Mortgage Finance Warrants Surveillance: Regulatory Frameworks Must Be Strengthened
A recent report has shed light on the need for regulators to closely monitor mortgage finance in Mauritius, particularly with regards to loan-to-value ratios and credit demand.
Mortgage Finance Risks
- Lower income housing borrowing may benefit from subsidized mortgage financing schemes and targeted marketing of mortgage financing.
- Caps on loan-to-value ratios may have a stronger impact on credit growth in high-end housing segments than in other market segments.
- Demand for large commercial property lending may be sheltered by long-term customer relationships between borrowers and lenders, accompanied by collateral.
Banking Sector Risks
The report warns that banks’ net foreign asset positions pose risks to financial stability. Specifically:
- About 30% of banks’ gross external assets represent lending abroad, with potential credit risk and foreign exchange rate risk if borrowers are unable to pay their loans.
- The need for stronger regulatory frameworks is highlighted to monitor banks’ external positions, particularly in frontier markets such as Africa.
Non-Bank Financial Intermediaries Risks
The report also notes that insurance companies hold significant deposits and equity with domestic banks, posing potential risks to financial stability. While insurance deposits have historically not been volatile, regulators must remain vigilant to monitor these trends.
Concentration Risks in Banking Sector
The report warns that concentration of bank credit poses risks to financial stability, particularly if a relatively large borrower or group of connected borrowers experiences difficulty in servicing their debt. Contagion risk could be even higher if the counterparty is another bank.
Payment Systems Infrastructure
The report notes that financial system risks stemming from payment systems are contained and unchanged from earlier assessments. However:
- Regulators must continue to monitor these trends and implement cost-effective clearing systems for small value transactions.
Conclusion
Overall, the report highlights the need for regulators to closely monitor mortgage finance and banking sector risks to ensure financial stability in Mauritius. Strengthening regulatory frameworks and monitoring concentration risks will be key to mitigating potential threats to the financial system.