Members of the Malta Chamber would un-doubtedly welcome lower rates of interest on their borrowings. However, they would not agree to lower interest rates if these were to bring about any threat to the stability of the local banking sector or likely to result in a lower appetite for commercial lending by local banks. Chamber members are well aware of the fact that the strength of our banking sector largely contributed to Malta surviving the effects of the worst financial crisis in the last 100 years.

We note with regret that the recent public debate on the subject has, so far, been characterised by an element of misinformation and reliance on simplistic arguments leading to incorrect and dangerous conclusions. It is, for example, incorrect to conclude that interest rates are artificially high in Malta because of insufficient competition among banks or that high interest rates are the cause for the prevailing low demand for commercial credit.

Here are some basic facts that will help shed light on this complex matter.

Firstly, the local banking model is different to that in other countries because Maltese banks fund their lending from retail deposits rather than borrow from the wholesale interbank market or the European Central Bank. This provides higher stability but means that the underlying cost of raising money in Malta is higher than in other EU states.

In fact, the level of interest rates which local banks currently offer on term deposits are higher than those available in most other countries.

Secondly, banks need to be compensated for the level of risk, which they assume upon sanctioning credit. The Chamber is reliably informed that businesses which present a lower level of risk to the bank are able to negotiate lower lending rates than other businesses.

The risk-to-reward rationale or principle is basic in any economic sector and fundamental in a free economy. Admittedly, in controlled economies, the ‘central authority’ is in a position to determine what rates are applicable to specific sectors.

However, the socio-economic cost and sustainability of such controlled economies is known to be disastrous.

Thirdly, the decline in demand for commercial credit does not relate to interest rates. Banks in Malta have in the past experienced a higher demand for commercial credit when interest rates were at the same level or indeed higher. The chamber is informed that while local banks are experiencing a strong demand for credit from SMEs the demand for credit from larger businesses, particularly from manufacturing concerns, has declined. This subdued demand for credit from the larger businesses is mainly attributable to the uncertainty that exists in certain sectors such as in manufacturing and not due to high interest rates.

The increased demand for banking facilities by SMEs is evidenced by the fact that the funds made available under the BOV Jeremie financing package and the HSBC Malta Trade for Growth Fund specifically aimed at SMEs and micro-enterprises have been largely taken up and the chamber is informed that at least one of these two initiatives will be renewed.

Should local banks lose certain flexibility, then the negative impact on the economy and on the business community is likely to be severe

What is, however, becoming a serious cause for concern is the manner in which new bank lending regulations are likely to affect our local banks. Due to the new regulatory requirements (partly due to Country Specific Recommendations of the European Commission with respect to Malta), going forward, local banks are likely to be reluctant to review/adjust loan repayment terms, even when these are sensible and justified.

It seems that by agreeing to change loan repayment terms, banks will be penalised both by way of reporting/supervisory issues as well as through the imposition of new limits to their dividend payment capability.

The Malta Chamber believes that should local banks lose certain flexibility, then the negative impact on the economy and on the business community is likely to be severe and the private sector’s potential to generate the profits and employment necessary for growth stands to be considerably limited. Furthermore, the ECB will be striving to implement certain standards for non-performing loans across eurozone lenders and will seek to homogenise the way banks value assets and when to categorise a loan as being ‘non-performing’.

Admittedly measures imposed by regulators are taken to ensure prudence and to avoid crisis such as those that happened in some European jurisdictions. The stark reality is that local banks will be subject to European wide one-size–fits-all regulations, notwithstanding that our banking sector as well as the Maltese commercial sector survived well the international crisis.

Malta has a proven track record in prudent, safe bank lending, maintaining very high liquidity and also solid capital basis. Maltese banks never had a reputation for having liberal lending practices.

The Malta Chamber has recently been called to discuss the complex matter of banks’ lending rates with various authorities. In the meantime the Office for Competition stated publicly that it is carrying out a sector inquiry into loan interest rates offered by banks to SMEs, merchant service charges and interchange fees in terms of the Competition Act.

The Malta Chamber expects that any decision which is to be made on interest rates is evidence-based, taking into account the unique characteristics, culture and practices of the Maltese commercial sector. In the process, a transparent and thorough consultation process with the banks must also take place.

Chamber members fear that undue interference with the local banks’ business models coupled with the myriad one-size-fits-all EU regulations which our leading local banks will be subjected to might cause banks to reduce their appetite for commercial lending, limiting access to finance for the business community. This would result in the unavailability of much needed financing for businesses. No-one stands to gain from such a scenario including the investor, the bank and society at large, particularly as the country would lose out to potentially viable and profitable projects. It would also lead to a further loss of investment which would, in turn, affect future employment and growth prospects in the country.

Banks could become less tolerant with customers falling behind in repayments and could take drastic measures to secure repayment, if necessary by forcing the sale of assets within a timeframe that does not achieve realistic value for their customers. Indeed, such pressure by the banks to foreclose on borrowing customers would bring about an undesired sense of instability and uncertainty, which may be both alarmist and infectious and could unnecessarily develop into an unwarranted crisis. This uncertainty in turn may lead to a lack of trust and confidence. Trust and confidence are critical to the effective functioning of business, including trade, investment, spending and of course borrowing

In summary, the position being taken by the Malta Chamber in this matter is a responsible one and one that is based on the need to ensure an uninterrupted flow of finance for businesses and SMEs to fuel much needed economic growth in the country.

Consequently, the Chamber urges utmost caution in the handling of these very complex matters.

David Curmi is the president of the Malta Chamber of Commerce, Enterprise and Industry.