Malta risks losing between €2.3 billion and €3.1 billion in potential capital over the course of five years due to the surfeit of projects that are considered to be market failures, according to Professor Josef Bonnici, Chairman of the newly-established Malta Development Bank (MDB).
“According to a study by a private consultancy firm, market failures in Malta have been estimated to range between €2.3 billion and €3.1 billion over five years, equivalent to between 29 and 39 per cent of Malta’s 2014 GDP,” Prof. Bonnici said, stating that there are a number of situations that can be defined as market failures. “There may be a shortage of suitable collateral that can be provided by borrowers (especially in the case of SMEs), a higher element of risk – as in the case of start-ups – or that the size of the loan is too large, for example in infrastructural projects, or the duration is too long because the gestation period of the project extends over a longer timeframe than banks are normally comfortable with.”
Professor Josef Bonnici, Chairman of the Malta Development Bank (MDB)
The establishment of the MDB, which marked the start of its operations in December 2017, aims to supplement the lending activities of commercial banks. It’s the first of its kind in Malta – a fully Government-owned bank with a specific remit that is aimed at supplementing the lending activities of commercial banks.
In this first interview since the bank’s launch, Prof. Bonnici said that while the banking system in Malta has been servicing the borrowing needs of investors and industry very effectively over the years, there are cases where investors come up with viable investment projects and yet, commercial banks might be unwilling or unable to provide them with loan facilities.
“This problem has long been in existence, but it has become even more acute in the wake of the international financial crisis which led to a significant reduction in the risk appetite of banks worldwide and a marked tightening of the banking prudential regulatory framework to ensure that the commercial banks’ capital position can withstand shocks and is not exposed to undue risks,” said Prof. Bonnici. “The MDB’s overriding objective is to address such market failures by offering financing facilities to support productive and viable operations where the market is unable or unwilling to accommodate such activities on its own, in whole or part.”
He added that the MDB’s vision is to make a significant contribution towards sustainable economic development by encouraging inclusive and environmentally-sustainable economic growth and infrastructure development. “It will do this by linking entrepreneurship, investment and economic growth to improved living conditions, a higher quality of life, and better social inclusion.”
The MDB will be opening up numerous opportunities, he states, primarily by filling an institutional gap, putting Malta at par with the other EU member states, virtually all of which have one or more promotional bank. “The MDB will be helping to stimulate new investment, job creation and social welfare, through collaborative arrangements that will be negotiated with strategic partners, both locally and abroad.” He said that the MDB can also facilitate the blending of EFSI (European Fund for Strategic Investments) with ESIF (European Structural and Investment Funds) at project level, and will be able to borrow from international institutions or local sources for on-lending to smaller projects under an umbrella fund. “The list is endless and the opportunities are many.”
Asked to elaborate on the criteria for businesses or entities to apply for funding, Prof. Bonnici explained that MDB lending may be on state-aided terms or on market terms. “Aided financing must be in accordance with the EU State Aid regulations, in particular the General Block Exemption Regulation, the de Minimis Regulation and other EU financial instruments and aid schemes approved by the Commission. MDB financing on market terms is also subject to certain conditions. For instance, in the case of infrastructure projects, participation by private investors must be at least 50 per cent of the projects costs on a pari passu basis with the bank.”
Once the MDB launches new schemes to enhance access to finance for SMEs, such firms will need to go to the participating financial intermediaries to present their request. “Furthermore, all requests for MDB financing must be bankable projects, that is, viable projects that have satisfactory revenue-generating potential. In fact, the MDB Act specifies that loan applications have to be assessed according to sound banking principles.”
With Government being the only shareholder of the bank, it has been questioned what or who exactly the bank is accountable to. Prof. Bonnici said that the MDB Act obliges the MDB to present its Annual Report and Financial Statements to Parliament by not later than four months after the end of its financial year, and is subject to the prudential oversight, regulation and supervision of a Supervisory Board appointed in terms of the MDB Act. “The Supervisory Board is composed of very senior officials from the Malta Financial Services Authority, the Central Bank of Malta, the Ministry for Finance, as well as two independent professionals with banking or regulatory experience. The MDB may also be subject to inquiry by the Auditor General.”
As the first of its kind in Malta, the MDB brings with it many milestones, not least for Prof. Bonnici himself who will be the first Chairman of the bank. He said that he’s long been a firm believer in the need to establish a national development bank, and is convinced that the institution will have a lot to offer for the furthering of Malta’s socio-economic development. “During my term as Central Bank Governor, I had made a number of public statements in favour of such an institution and had also presented a proposal to the Cabinet for the setting up of such a bank. I am very glad that this vision is now becoming a reality.”
The full interview appeared in the latest issue of The Business Observer