Last Updated on Thursday, 3 November, 2022 at 9:30 am by Andre Camilleri
Profs Josef Bonnici, Chairman of Malta Development Bank
Over the past three decades Malta’s banking sector has grown in a sustained manner with some two dozen licenced credit institutions servicing households, businesses and international customers through a variety of products and services. This growth has cemented Malta’s place as a reputable and strong European banking jurisdiction. Regular reviews carried out by international institutions, including the International Monetary Fund and established credit rating agencies, generally report a strong and stable banking sector, enjoying high liquidity levels, largely backed by resident deposits, and relatively low levels of non-performing loans. It is worth noting that during the financial crisis of ten years ago, Malta’s banking system proved resilient, avoiding the severe financial disruptions that a number of other EU member states had to pass though.
Despite the size and diversity of the banking sector, Malta’s rapid transformation into a service-based economy and its expanding financial services sector were not yet served by a national promotional bank. Particularly, during the height of the sovereign debt crisis, it became clear that Malta lacked an important institution to mitigate the adverse impacts of the prevailing economic cycle.
This lacuna was filled-in five years ago with the creation of the Malta Development Bank, the country’s first-ever national promotional bank.
A typical question that is often placed when discussing the role of promotional banks, relates to their special function in the context of a healthy, prudent and dynamic banking system. Indeed, despite the presence of a substantial number of banks for Malta’s size, access to finance often remains the biggest hurdle entrepreneurs face when seeking business loans to grow and innovate.
Despite perceptions to the contrary, the Maltese banking industry has been largely supportive of the commercial community, backing the expansion of a multitude of organisations and supporting the transformation of Malta’s economy throughout the past few decades. Yet not every project can be supported – hence several valid business ideas risk remaining on paper because of limitations to access to finance. This situation tends to be even more prevalent for activities related to strategic national and EU priorities, including the digital and green transition, and innovation and R&D. The positive externalities generated by these investments may not be internalised by private finance providers and hence, when compared to traditional businesses, they are perceived as riskier.
The main raison d’etre for promotional banks is precisely to support financing when traditional commercial banks are reluctant to do so.
This reluctance can be for various reasons. The risk may be deemed too high, the collateral may be lacking or inadequate, or the capital outlay is too significant for the bank to carry on its own. While popular perception might point towards an element of excessive prudence towards lending by Maltese banks, cross-continental surveys show that access to finance for small businesses, starts-ups, technology firms and other market innovators is a common challenge.
Larger infrastructural projects could see banks simply unwilling to take up the extent of the loan size required, particularly if it needs to be paid back over the long-term. With short-term customer deposits as the main source of funding, commercial banks are often not geared to provide very long-term financing. Also, such exposures may be too large for certain commercial banks to finance on their own, reducing the degree of diversification.
This is where promotional banks come into play. To set the record straight, the MDB does not compete with the traditional credit institutions but supports and complements them to help businesses and other underserved segments in securing financing.
As an example, the MDB, in collaboration with the Malta Council for Science and Technology (MCST), has recently launched the Go-To-Market scheme, through which the Bank is supporting innovative technological entrepreneurs to secure financing by providing additional guarantees on top of MCST’s grants – thus making their proposals viable to local banks.
Similarly, throughout the pandemic, the Bank helped preserve the continuity of economic activity by ensuring that impacted undertakings were provided with guarantee working capital loans granted by commercial banks. The total value of approved facilities under this scheme reached close to half a billion euro, covering around 600 companies.
The MDB, which is celebrating its fifth anniversary this month, has solidified its relationship with fellow EU promotional banks, ensuring exchange of best practices and transfer of knowledge.
In recognition of the role that the Bank enjoys within the community of European promotional banks, Malta was chosen to hold this year’s annual General Assembly of the European Long-Term Investors Association (ELTI). For the MDB, ELTI provides an excellent opportunity to exchange views with technical experts working with larger institutions and to benefit from other promotional banks’ experience as it seeks to fine-tune its product offering. ELTI also supports its member institutions by facilitating the preparation of common positions when communicating with the institutions of the European Union and the possibility of exchanging with other members and International Financial Institutions including the European Investment Bank and Council of Europe Development Bank.
As the MDB looks towards Malta’s post-pandemic regeneration, it will be shortly launching two new schemes aimed to support the local economy and its entrepreneurs to meet the obligations associated with the fight against climate change and the extensive investment gap in digitalisation.