Abdul Haleem Abdul Latheef
1950s is an interesting period in Maldives economic history. This was the era when liberalisation of trade took place in the Maldives, following several important historical events; the resolution of dispute between Vohra merchants (who settled in Maldives during 1857); tax reforms; formation of trade development bodies (Fisheries Advisory Board, Coir and Cowry Advisory Board); and establishment of shipping line. These historic developments paved way for the emergence of private enterprise in the Maldives and the necessity for availability of capital to fund private enterprise.
However, money lending, a practice which was well established by the 17th century in Europe, has not come to Maldivian shores until 21st century. In Maldives, the earliest reference to financial intermediaries appeared in an article titled “Dhiri Ulhun Kuri Eruvumah Ehee Foaru Vaidhey Dhirey Fundu”, published on the 3rd January 1959 in Viyafaari Miadhu, the earliest known newspaper in Maldives. There appeared another article, in the same newspaper, published on the 25th of February 1959, on the same theme under the title “Dhiri Ulhun Kuriyah Gendhiumah Takaa Mogeyju- Idhaaraa Eh”.
Modern Banking was introduced in the Maldives during February 1974 with establishment of a branch of State Bank of India (SBI), to facilitate international trade. Central Banking was introduced in the Maldives under Maldives Monetary Authority Act (1981). In 1981, Maldives Monetary Authority was given privileged control over the production and distribution of money and credit to the nation along with powers to regulate the banks and other financial intermediaries. The Act was subsequently revised three times; in 2007, 2015, 2020.
Surprisingly, more than six decades after the development of the thought, the issues the author saw during his time, remain as the biggest truth about the development of private enterprise in Maldives; the capital constraint. Although money supply (broad money) has increased over the past 35 years in absolute terms, the capital constraint has kept choking off private enterprise in the Maldives.
"Surprisingly, more than six decades after the development of the thought, the issues the author saw during his time, remain as the biggest truth about the development of private enterprise in Maldives; the capital constraint. Although money supply (broad money) has increased over the past 35 years in absolute terms, the capital constraint has kept choking off private enterprise in the Maldives."
During the last 20 years (pre-covid) our real GDP growth averaged close to 7%, which is far above that of OECD and Upper Middle-Income Counties, amidst the chronic capital constraint. I cannot stop wondering the potential GPD for the Maldives, had there been a vibrant financial system. It seems time has stood still in this realm for over more than 6 decades.
Saving rates offered by banks have decreased over the years. Lending practices have been overly restrictive. Banks generally require the Debt Service Coverage Ratio (DSCR) to be above 1.5 times Except in case of Government projects, the banks require perfection of collateral in the form of an immovable asset. Other properties like vessels and vehicles are not considered as primary collateral although ownership of these assets contribute to the credit approval process. The acceptable assets are restricted to property in Male City. The security cover ranges from 133%-150% of the loan taken, unless there is a government guarantee.
The equity requirements of typically 30% of the proposed funding is another risk control measure imposed by banks in Maldives. Apart from the high thresholds for bank financing, bank lending is subjected to the following;
• Personal guarantees from the shareholders
• All proceeds on the project to be deposited to the bank
• Progress payments and veri¬cation of work done
• Restrictions on further borrowing
• Restrictions on dividend distributions
• Restrictions on sale of assets
• Restrictions on related-party transactions
• Disclosure of information that may impact the future earning of the business
• Single party exposure limits in addition to regulatory requirements
• Additional rights for the bank if there is a default in any other bank or any other facility held by the borrower, or any party related to the borrower.
• Rights over all bank accounts of the borrower and other related parties.
Growth of Money Supply
Money supply, which stood at MVR 0.3 billon in 1986 reached over MVR 52.22 billion as of 2021, registering a growth rate of 15.93% on compound basis. Despite of the money supply growth, relative to GDP the money has remained low. According to data from World Bank, Maldives Broad money to GDP ratio averaged 37.70% (1986-2019), whereas counties like Singapore and Malaysia, along with OECD, the ratio stood well above 100% during the same period. Maldives lags far behind compared to Upper Middle-Income counties. This might perhaps explain the issue of chronic capital constraint for businesses in the Maldives.
Trust in local currency
The Maldives financial system has not evolved beyond tradition banking despite of technological process, investor sophistication and demands from enterprise. The reasons maybe many fold. Limited investment choices and finance facilities available within the Maldives finance system may have forced capital to flight to more conducive environments. The trust in local currency has significantly deteriorated as indicated by the huge increase in foreign currency denominated quasi money.
"The Maldives financial system has not evolved beyond tradition banking despite of technological process, investor sophistication and demands from enterprise. The reasons maybe many fold."
Although reserve assets have increased exponentially over the past 25 years [from USD 76.16 million (1996) to USD 805.81million (2021)] the reserve asset ratio relative to external debt has deteriorated significantly. This is also true relative to GPD as well. In addition, these deteriorating indicators the reserve volatility remain high with a monthly standard deviation of close to 9%.
Face with these structural challenges, it is imperative that strong polices are in place, urgently, to retain capital locally, for us to remain prosperous and pass on the many developmental gains to the next generation, especially in the context of limited economic diversification opportunities, aging assets especially the tourism industry assets and public infrastructure; rapid increase in personal debt [personal debt reached over MVR 3 billion (2021) from MVR 610.89 million (2015)], the expected fiscal pressure to fund health and pension expenses of a rapidly aging society.
The new frontier of development
The dual trouble of too conservative banking sector and dormancy at market development and regulatory agencies have exacerbated the capital constraint. Despite the banking sector’s dominance in our financial system, in terms of legal development, it is interesting to note that Securities Law predates the Banking Law. The Maldives Securities Act came into effect in 2006 while the Maldives Banking Act came into existence in December 2010.
The Maldives Securities Act was an important foundation for the development of alternative conduits other than banks for transfer of capital from savers to the borrowers. The Maldives Securities Act is an important enabler for development of the financial system. Under the Act, licenses are issued to establish stock exchanges, brokers/dealers, investment advisors, underwrites as well as depository service providers, credit rating agencies and custodians, which are integral component of a vibrant financial system.
Crucial developments under the Act were the issuance of Regulation on Issuance of Securities and Regulations on Registration and Management of Investment Funds on the 7th August 2016. The Regulations on Registration and Management of Investment Funds have provided a strong foundation for the conduct of professional money management business in the Maldives. Thus, under the new set of regulations issued by the Capital Market Development Authority (CMDA), investment vehicles such as mutual funds, trusts, family offers, and endowments can now be legally incorporated.
With the new basic framework in place, an important policy initiative should be to create a conducive environment for professional money management firms to thrive. This will certainly, lead to formation of a strong asset and wealth management industry in Maldives.
"The asset and wealth management firms can contribute to the financial system both at micro and macro level as they bring new set of skills, expertise, and technology. While specialising in their respective domains, the asset and wealth management firms can work in close collaboration with banks and other asset owners such as pension fund, insurance companies, high net worth individuals and even central bank to address the capital constraint issue."
The asset and wealth management firms can contribute to the financial system both at micro and macro level as they bring new set of skills, expertise, and technology. While specialising in their respective domains, the asset and wealth management firms can work in close collaboration with banks and other asset owners such as pension fund, insurance companies, high net worth individuals and even central bank to address the capital constraint issue. At macro level, both established and the emergent firms can work together, contributing to design and development of a new financial system architecture that is attuned to the realities of today’s technology and investor’s demand. In addition, the industry can collectively contribute to address structural challenges in our financial system; monetary policy effectiveness, reserve management and public sector debt.
Abdul Haleem Abdul Latheef is the Co-founder and Chief Investment Officer at First National Finance Corporation.
Haleem started his career as an academic and held the position of Head of the Department of Accounting and Finance of the now Business School of Maldives National University.
He served as the CFO at Pension Office for eight years, leading the investment management, investment operations, and financial management functions. Haleem worked in the banking, insurance and consulting practice before setting up First National.
He is also the current President of Maldives Red Crescent and a Board Member of the Pension Fund.