An interview with Prof. Josef Bonnici, chairman of the Malta Development Bank
In April, the MDB launched its COVID-19 Guarantee Scheme. What was it all about?
Let us recall that when COVID reached our shores, most of our population had to live for several weeks in partial lockdown, and significant portions of our economy were negatively impacted especially considering our dependence on tourism. It was a bit like applying an emergency brake on a massive truck and seeing momentum dissipate as the vehicle slows to a crawl. In that environment, the MDB launched the CGS to provide economic support – enhanced access to otherwise-unavailable bank loans, reduced collateral requirements, highly-subsidised interest rates on loans and a moratorium on repayment of both capital and interest.
What was the objective at that time? What were you trying to achieve?
It was obvious to us, even back in March, that when the pandemic would start to recede, the economic recovery would be a slow incremental process. In fact, while the airport has been reopened, tourism is picking up only slowly. Our economy needed to rely on a support infrastructure in order to regain momentum. At MDB, we want to provide credit risk mitigation and capital relief that supports commercial banks in unlocking credit to businesses at favourable terms.
An ambitious objective. Did you have enough resources to kick-start the economy?
Government allocated a guarantee fund of €350m for MDB to develop, administer and implement the scheme through the intermediation of nine local commercial banks. The underlying guarantee of 90% on each transaction provides capital relief to the banks, which enables them to leverage these funds and mobilise up to €777m of new working capital loans to businesses at very favourable conditions.
It’s clearly still work-in-progress but do you have any early indications of take-up?
As you have just said, this scheme is still in its early stages and is available to receive new applications through banks until the end of the year. We still see a need to provide economic support and our commitment is to continue to provide credit risk mitigation and capital relief as long as there is justification arising from the ongoing process of economic recovery.
Nevertheless, we are extremely encouraged by the initial results which show that the scheme responds well to the needs of businesses. So far, the MDB scheme has supported over 250 businesses, which is a very strong response to the facility. The early indications are that around 94% of beneficiaries are SMEs. In total, this scheme has enabled the retention of more than 15,000 jobs which means that we have protected the livelihood of 15,000 individuals and their families.
The greatest share of the beneficiaries were enterprises operating in the tourism accommodation and food service industry (more than 25% of the total) while enterprises operating in wholesale and retail businesses were a close second (22%). Other sectors that made up important shares of the pool of beneficiaries were Construction and the Transport and storage sectors (each at 12%), while a further 6% of the guaranteed loans were supporting enterprises in the manufacturing sector.
Financing large or small projects?
The scheme is available for businesses of all sizes and operating in all sectors. I believe that the survival of a business through such incredibly challenging times is a big project to each business, irrespective of its size. In total, the value of approved facilities reached €200m by the end of June, of which €161m were sanctioned. Our information is that we have successfully supported businesses of all sizes: we supported loans greater than €5m to some businesses, but I am equally delighted that we supported 160 businesses with loans of up to €250,000.
What is the significance of giving small loans to SMEs?
I think there are two important aspects to this question. Firstly, one of our objectives for this scheme was to make credit accessible to businesses that may not have been able to tap bank credit due to the disruption in their operations brought about by the pandemic. The guarantee enabled the commercial banks to create new regulatory space for a significant volume of new loans which may otherwise have been very challenging. In addition, the scheme enabled the loans to be subject to reduced collateral requirements, making them accessible to businesses that would normally have been unable to put the required collateral. All these loans are also benefitting from an initial moratorium of six to 12 months, as well as the interest rate subsidy sponsored by government to complement the guarantee scheme. This means that cashflow is more accessible and more affordable for businesses in a time when they need it the most.
Secondly, I believe that Malta’s future lies in achieving higher economic value added through higher levels of innovation. Indeed, SMEs are often principal drivers of innovation and the protection of our SME sector is a strategic priority for the longer-term economic growth.
Is the scheme still available to businesses that may not yet have applied for support?
Yes, the CGS will remain available until the end of the year. Through nine accredited banks, the MDB scheme is still offering credit to support the working capital requirements of all companies and self-employed people in Malta, with different limits as to the maximum loan amounts that can be applied for, and even these limits can be extended on a case-by-case basis subject to appropriate justification. The scheme still has the ability to mobilise an additional volume of over €600m in new loans. Businesses wishing to apply for facilities covered by the CGS should contact any of the nine accredited banks listed on our website, essentially most of the commercial banks, and proceed accordingly.