The Chairman of the Malta Development Bank (MDB), Prof Josef Bonnici, outlines the benefits of the entity’s COVID-19 Guarantee Scheme (CGS) to local businesses, and how the programme aims to provide enhanced access to capital in an affordable format, by providing credit risk mitigation and capital relief through Malta’s commercial banks, enabling them to provide liquidity to local businesses.
What is the aim of the COVID-19 Guarantee Scheme (CGS) and how was it put into place?
Malta is a small and open economy. This openness means that we are highly dependent on the economic well-being of our trading partners. The lion’s share of our tourism originates from Western European countries, while most of our trade is with our EU partners and a large portion of the expatriate community, resident in Malta, originates from our European neighbours.
Moreover, many items critical to our quality of life - food, furnishings, clothing, educational materials, medicines and medical supplies – also originate from Europe. This means that, when COVID-19 hit Europe, we were very exposed to the risk of the pandemic spreading to Malta, and likewise, to the spreading economic shocks.
For the past weeks, most of our population has lived in partial lockdown, and huge portions of our economy have been suspended.
Thankfully, we are now increasingly talking about removing some restrictions in view of the apparent receding threat of the pandemic, but the economic shock in Europe will not recede at the touch of a button, and our economy needs to rely on an infrastructure of support in order to re-emerge.
Financial inter mediation is a critical element of this support infrastructure. With so much economic activity disrupted by the pandemic, a flexible supply of credit is crucial for our recovery.
This is the economic logic underlying the COVID-19 Guarantee Scheme.
At MDB, we want to provide credit risk mitigation and capital relief in order to support commercial banks in unlocking credit to Malta’s businesses at favourable terms. The CGS is part of the wider package of Government’s COVID19 Response Support Programme.
A Guarantee Fund of €350 million has been allocated by Government to the MDB in order to develop, administer and implement the guarantee scheme through the intermediation of the local commercial banks.
The Government guarantee provided under the scheme will provide the necessary reassurance and capital relief to the commercial banks which will enable them to mobilise over €777 million of new working capital loans to businesses at favourable terms.
In your view, which aspects of the scheme are the most helpful to local businesses?
The CGS is a comprehensive package of support, and in my view, it cannot be dissected to identify those components, which are more, or less, favourable. In its totality, the CGS comprises enhanced access to otherwise-unavailable credit; a moratorium on repayments of both capital and interest; a very significant reduction in interest rates; and a significant reduction in collateral requirements.
This scheme is meant to aid local businesses on two levels: first, the enhanced access to bank liquidity, together with the lower collateral requirements, make it easier for business to access financing.
Secondly, the moratorium on repayments and the lower interest rate make the repayments much more affordable for businesses. It is the synergy of access to financing and the affordability of financing that make the CGS such a powerful and helpful instrument for local businesses.
How does the MDB plan on liaising with the accredited bank/s in order to ease the process?
From the very start, the MDB was in consultation with Malta’s commercial banks when deciding the features and operation of the CGS. We are now going ahead with the accreditation process for commercial banks so that they can participate in the CGS. The list of accredited commercial banks can be viewed on the MDB website.
Are there any companies which would not be eligible for this scheme?
The rules of the CGS effectively make all companies and self-employed people in Malta eligible for the scheme, with different limits on the maximum loan amounts that can be applied for.
Small and medium-sized enterprises (SMEs) can apply for a loan up to a limit of €4 million, while larger enterprises can apply for loans up to €8 million, and even these limits can be extended on a case by case basis subject to appropriate justification.
Are there plans to increase the number of accredited banks?
The scheme is open to all banks operating in Malta. The MDB’s objective is to magnify the outreach of its promotional role by collaborating with all commercial banks so that they can diversify the financing options to SMEs.
The MDB is proceeding with the accreditation of more commercial banks and we encourage all banks to meet MDB’s criteria in order to support Malta’s economy in this difficult time.
What is the process through which an entity can become a financial intermediary of the CGS, and how long does the process take? Any licensed bank can apply to become a financial intermediary of the CGS, and the MDB is not setting any limits on the number of accredited banks.
The accreditation mainly involves a due diligence process and the signing of a risk sharing agreement as well as a service level agreement that both govern the relationship between the MDB and the commercial bank, including responsibilities of both parties and operational modalities on the implementation.
How is the MDB going to guarantee the favourable terms, as discussed with commercial banks, are being implemented?
The MDB is relying on accredited commercial banks to commit to the conditions and regulations of the scheme and to implement the mechanism in accordance with these regulations.
We believe that, using the norms of moral suasion, the accredited commercial banks will implement the scheme in good faith and consistently with the MDB’s guidelines.
Through the risk sharing agreement mentioned earlier, we, furthermore, ensure that the commercial bank’s benefits pass to its business customers, thereby charging lower interest rates than it did before the pandemic and the CGS.
Does the MDB plan on any other schemes in the future to aid companies in the wake of COVID-19?
On 21 April, we announced that the MDB has been appointed by Government as the entity responsible for the implementation of the recently announced Interest Rate Subsidy. This scheme is an additional measure to be implemented by MDB that will further soften the terms of working capital loans extended by banks under the CGS.
The MDB will endeavour to intervene to mitigate the effects of economic shocks and market failures in order to support the Maltese economy. In such times of crises, the role of the MDB is further amplified as it acts as a counter-cyclical state instrument.
This interview appeared in the April edition of The Malta Business Observer