Silvio Schembri
During the launch of a scheme intended to address the problem of access to finance faced by start-ups, the Prime Minister expressed his disappointment at the level of engagement shown by the banks and aired this view that banks should play an active role in generating economic growth and not limit themselves to being “glorified safety deposit boxes”. Banks won’t agree on this. They will say that, in compliance with stringent ECB regulations, that’s as far as they can go.
In the view of many, local banks are too stringent in providing access to finance and this was even noted by the European Commission, which listed the inadequate access to finance as one of Malta’s country-specific recommendations.
One aspect that seems to be underplayed is the attitude towards clients. There is often no effort to explain the context and reasons for the more stringent rules. Their approach has become too cautious, too conservative, relying too much on the government as the main motor of the economy.
Local SMEs rely heavily on debt financing. Last year, three out of four Maltese SMEs were depending on bank loans. However, more than one fourth of Maltese SMEs listed high interest rates as the most important limiting factor to obtaining external financing and this when interest rates charged by Central Banks are not only historically at the lowest point but also when the ECB is charging negative interest on certain deposits.
This administration has taken several steps to improve access to finance for SMEs. These steps were geared to easing the availability of equity and venture capital, which had been identified as a bottleneck in recent years. The government can create the right environment and address the issues of information asymmetries but cannot be the big player in the provision of finance to SMEs or to another private firm.
Banks should act as important strategic partners with the Maltese government and use EU funding mechanisms to promote the investment that is most suited to Malta, ideally evolving Malta as a cosmopolitan regional business hub of IT, super yachts, energy, medicine, education and aviation among others.
Banks should provide complete financing solutions
Given the government’s policy to promote public private partnerships, commercial banks can pool financial resources to participate in the funding of PPPs, thereby sharing the risk of a project. This could lead to a marginal decrease in the interest rates.
Recent surveys show that there is agreement that certain fees can be done without. These are an added cost to the local SMEs, simply discouraging their investment plans.
Local commercial banks should also realign the rate of interest they charge with the current euro-area reality. Flexibility is crucial if we want our SMEs to continue being a generator of wealth and employment. One such example is real estate.
Real estate should not be lumped as one sector but should be differentiated into different sections such as: home loans to residents where risk is practically zero; expansion for office space, where the underlying risk is not real estate but the sectors which are the ultimate users of such space and developments that are closely associated with tourism, among others.
Banks should provide complete financing solutions (not just a loan) to clients with good business prospects, rather than turn them away on account of gearing, in a manner which makes financial sense while allowing banks themselves to meet their capital-risk requirements.
While it is true that banks should act as commercial entities maximising long- term enterprise value, it is to be recognised that such value can only be maximised if they themselves invest in and contribute to the growth of the market to which they are principally selling, namely the Maltese economy.
This especially makes sense when it is considered that local banks have unique specialised knowledge on one of the fast growing economies in the EU, namely Malta. Such knowledge should not be allowed to be squandered in favour of automated processes for risk evaluation based on the economics of other countries.
Silvio Schembri is Labour MP and chairman of Economic and Financial Affairs Committee.
Claudio Grech
Access to finance and the increasingly restrictive lending practices of the major banks are not a new theme in the local business community. As the banking sector evolved and aligned itself closer to the ECB-mandated regulatory frameworks, the conventional cosy ‘relationship banking’ notion faded away and gave way to structured lending decision-making based on project feasibility and collateral requirements. Like in many other aspects in this country, we may have gone from an overly liberal extreme to another which is now severely restrictive and inspired more by risk avoidance rather than risk management.
We have been stressing the importance of the government taking a more active role in supporting SMEs to access finance beyond the one-off EU-funded projects and move more towards more structured, constantly open investment aid frameworks, providing long-term financing support to those enterprises that deserve it. We believe that SMEs need to be assisted in their growth path and the government (not the banks) has a key role to play in this.
Beyond that we believe that the crux of the problem lies in the lack of innovation and investment in new sectors that would enable banks to reduce their exposure to the real estate market. It is in this context that over the last months we have set out numerous proposals in our Economy for the People working document which we are now refining further as part of the extensive consultation process.
The government should enable better access to finance by well-thought and material incentives for businesses
It is evident that the Prime Minister’s comments were partly aimed towards the stewardship of Bank of Valletta. While one may empathise with such arguments, one cannot ignore the fact that banks have a primary obligation towards their depositors and cannot engage in speculative practices with other people’s money. Although I may not agree with some of his organisational decisions, I personally feel that John Cassar White and his team are acting prudently and within the parameters set by the prevailing banking regulations which we are all aware have become increasingly stringent and taxing on the lending banks.
This is where the government’s role becomes crucial: in enabling better access to finance by well-thought and material incentives for businesses, particularly SMEs and micro-businesses, to borrow from banks.
Parliament has also a fair share of responsibility to burden. In the legislative process, we cannot ignore the economic impact of the increasingly complex and taxing regulation being imposed on the banking sector. We cannot, on one hand, rush to legislate straitjackets for the major banks, while on the other hand take them to task for, in effect, adhering to the same regulations that we imposed on them.
If the government really wants to register progress, it should ditch sound bites and move towards a calm, open and consensus-driven debate which can lead to material solutions that fit the regulatory framework.
If this really matters (and we believe it does), we can use the long summer recess to convene as many sessions as necessary of the Economic and Financial Affairs Committee to discuss with the institutions concerned, the constituted bodies, civil society and the businesses themselves. We should do this with a clear objective to come up with a set of measures we are willing to support and adopt, moving forward, not as a talking shop but a productive process with a clear outcome.
As an Opposition which is committed to the growth of small businesses we shall proactively participate in this process by putting forward our ideas, proposals and the practical thinking of how we can improve the state of affairs.
This is the new way of doing politics: politicians as agents of change that focus on delivering a solution and not simply talking about it. Anything short of that would be simply paying lip service to an issue which is far more complex than the bank manager closing one eye (or both) and signing off on the dotted line of a sanction letter.
Claudio Grech is Shadow minister for the economy.
If you would like to put any questions to the two parties in Parliament send an e-mail marked clearly Question Time to editor@timesofmalta.com.