The Office for Competition within the Malta Competition and Consumer Affairs Authority has concluded that bank lending policies were detrimental to SMEs – but stopped short of declaring that there was any infringement of the Competition Act.
It made eight recommendations, ranging from the creation of online lists of all the charges relating to business loans and information in Maltese, to free-of-charge quotations. It also notes that EU-funded support for SME financing should apply to facilities provided by more than one bank – saying that competitors were irked by Bank of Valletta’s Jeremie project.
The authority noted that the weighted average interest rates on loans were among the highest in the EU, which partly reflects a relatively low pass-through of the European Central Bank policy rate. Only 60 per cent of rate cuts by the ECB since 2008 were reflected in local lending rates.
“Although there are several factors that may explain this divergence, such as the higher cost of funding (due to Maltese banks’ heavy reliance on deposit funding) and credit risk (due to the relatively large share of SMEs in the banks’ loan portfolio), it may also reflect difference in the profit margin,” it said, adding that profitability indicators for the core domestic banks in Malta were “persistently higher than the EU average”.
There was a two percentage point reduction in the banks’ lending rates between 2008 and 2013 but the report said there may have been room for further reductions, and suggested that “banks could have lowered them earlier than they actually did” as it was clear that the reduction only came about because of pressure from institutions. In the last quarter of 2014, there was still a difference of 1.2 percentage point between Maltese and eurozone banks.
The report stressed that banks provide little information to help SMEs take informed decisions – but also laid some of the blame at the SMEs’ door, saying that they fail to “shop around” because they felt it was pointless to do so, conceding that there was also an underlying element of customer loyalty.
However, it conceded that there were also lock-in effects and costs which could hinder consumer mobility, such as early repayment costs and the pressure to have an account at the lending bank.
The authority has the power to take decisions with executive power and to impose fines. However, in the report, it said: “The office considers it preferable to address the above identified concerns by proposing behavioural remedies”, adding that the recommendations could be put into practice without any adverse effects on financial stability. However, in the report, no feedback from the banks was demanded and no deadline was imposed.
The 91-page report, concluded in July, was only presented in Parliament along with the Budget 10 days ago, along with another one by the Malta Financial Services Authority about various aspects of retail banking.
The investigation into lending policies to SMEs was instigated following calls from both local and international institutions, including the Finance Ministry, Central Bank of Malta and the European Commission, expressing concern over “high interest rates” which could increase SME costs and “erode the country’s competitiveness”.
The authority looked at the period between 2007/2008 and 2014, consulting a wide variety of stakeholders, seeking to establish whether there was a well-functioning market with relatively low barriers to entry for new banks, competition between lenders, and the ability of SMEs to make informed decisions.
The authority looked at Bank of Valletta, HSBC, APS, Lombard and Banif but found that the first two dominated the market, corroborating its belief that the barriers to entry were difficult.
A survey on access to finance showed that 69 per cent of SMEs in Malta prefer bank loans.