Modern architectural styles are increasingly popular in Male’.

Photo by Yassin Hameed. Courtesy Portrait Gallery, Maldives

Of all the legislative reform taking place in the Maldives, perhaps the most far-reaching is that of the financial sector. The office of the Attorney General has worked hard over the last year to draft a Banking Act, a Securities Act, a Public Finance Act and a Non-Banking Financial Institutions Act. Mohamed Munavvar, the Attorney General, believes that the work is of consummate importance in enabling sustainable development.

“In terms of developing the country’s legal framework, the primary focus is on the finance sector,” he says. “That is the area of primary importance to take the economy further and make our progress sustainable.”

He names access to long-term financing, and the corresponding influx of capital, as essential to economic progress. “The economy, the public sector and the private sector as well require access to finance and capital. The only way we can do it is to show the people that we have the necessary legal foundations and legal framework to come in here as long-term financing institutions.” Therefore the government is focusing on creating confidence and interest in such institutions, and acclimatizing Maldivians to their benefits.

The lack of availability of long-term finance at low interest rates has been the single most challenging hurdle for Maldivian businesses. Tourism, which accounts for the bulk of private sector investment, has traditionally depended on a combination of sources for financing, including; owners’ equity, local banks, direct and indirect foreign investment, tour operator advances and supplier credit. This combination has proved expensive and disadvantageous to investors. Other industries such as construction and fisheries have had even less access to development finance.

The government’s Sixth National Development Plan identifies inadequate financial institutions, a weak legal infrastructure, a lack of financial instruments and a lack of dynamism in the banking sector as major constraints for financial sector growth. “Access to finance, particularly long-term finance, has become a very important aspect of the country’s political debate,” says Mohamed Jaleel, Minister of State for Finance and Treasury and Vice-Governor of the Maldives Monetary Authority (the country's central bank). “The lending capacity of domestic commercial banks is not adequate to meet the financial needs of the private sector, especially resort development projects.”

A new financial culture
Until this year the Maldivian financial sector was composed of four relatively small commercial banks – Bank of Maldives, Bank of Ceylon, State Bank of India and Habib Bank, all state-owned banks in their respective countries. Recently the system also welcomed HSBC. The newcomer, says Bank of Maldives General Manager and CEO Keith Brown, will bring some modernization to the nation’s practices, in particular internet banking and transfer services to complement the Maldives’ existing network.

“I welcome them,” Brown says, “because they can assist and support me in introducing some of the basic banking disciplines to the country.”

Bank of Maldives (BML) is the institution with which most ordinary Maldivians (80,000 account holders) have the most contact. 75-percent government owned, it offers social and development banking services with 14 branches and five banking boats throughout the islands. The bank has introduced services like telephone banking, money transfer for resort expatriates, and will expand its branch network. It also plans to move into credit cards and eventually asset management.

Brown explains that BML is the only institution that handles development banking activities lending to most of the country’s economic sectors. The other four, he says, tend to focus on government and upper-tier tourism industry business. “We have more of a national responsibility,” he stresses. His bank has evolved from being purely a development bank, through expansion, into commercial and retail banking, while the others focus mainly on the latter. “I have been seeking to further expand our commercial banking because it essentially subsidizes our development banking activities,” Brown says, “which are very important – rather than going back to the government cap in hand.”

Khadeeja Hassan, Executive Director of the Maldives Monetary Authority (MMA), says that BML is changing people’s attitudes to banking: “Where branch offices have been opened, people are becoming more bank-friendly.” The bank is also venturing into microfinance, aided by developmental organizations such as the United Nations Development Program, and soon the Islamic Development bank, in order to provide credit to low-income families in atoll islands.

BML has been successful in its endeavors to educate people. Today it has more than 22,000 debit cardholders who draw cash from five ATM machines or make purchases at over 300 point-of-sale locations. “I am trying to take the cash out of the system through a combination of debit cards, encouraging more people to open accounts, and the development of flexible arrangements for customers to utilize our fully computerized on-line network,” Brown says.

People are undoubtedly using banks more than they used to, Hassan confirms, especially fishermen and workers on the remoter islands. “If you look at savings deposits in the banks you see they are growing. There is capital there.”

Bankings’ players
Bank of India, the country’s oldest bank, arrived in the Maldives in 1974. G.N. Dash, its CEO, says that its success has been due to its support of companies in the tourism sector. “They started their businesses with us with credit as low as $2,500,” he says, “and today are enjoying very large limits. As they grew, we grew with them, and as we grew, they grew with us. So it has been a mutually helpful relationship of growth.” Dash says that the bank has been consistently making profits and seeing growth for the last 28 years, particularly in advances. Maldivian businesses, he explains, rarely create bad debts.

Asked what he wants from the new regulatory framework, Dash replies that besides the setting up of a stock exchange and a leasing company, the greatest achievement legislation can make is to encourage competition. “It is good for the economy, because competition will improve the functioning of the banks, both in providing services and a larger numbers of products, and in cutting down costs.”

The Bank of Ceylon’s Country Manager, Roy Jayasundara, says that banks welcome the new legal framework, principally because it ends lending restrictions. “After eliminating the credit ceiling we doubled our portfolio,” he says. “It gives us more opportunity to identify good customers.” He adds that the interest ceiling has also been lifted so that banks are free to decide rates.

Hassan of MMA says that this is why competition is sorely needed; it will lower interest rates and make new projects easier to start. “But,” she says, “our banking sector is small and there is not a lot of competition. There is a lot of demand for capital for loans, so the banks do not see a reason to bring down their rates of interest.” She says that MMA’s policy is to let competition bring rates down, and hopes that the coming of HSBC will facilitate it.

Jayasundara of the Bank of Ceylon stresses the importance of increasing the rate of deposits, so that banks have more to lend. Liquidity is good, he says, “but deposits are short-term so that it poses a difficulty for us to lend long-term.” Lending to develop tourism, wholesale trading businesses and construction companies needs to be facilitated, he says, for those sectors to grow.

Brown explains that things are changing. BML’s credit control system is undergoing a process of redesign through the use of computer software and development of collateral valuation techniques as aids for more effective management. Bank’s total lending was previously restricted by a Credit Ceiling – a tool Brown believes was intended to reduce money supply and thus control inflation.

Another reason for the former limit is the Maldives dual currency system (with the US dollar pegged to the ruffiyya at Rf.12.85/- to the dollar), it was felt that increasing the availability of ruffiyya in a country that is predominately import-driven might result in excess local currency chasing the dollar. Now the banks can lend as much as they want, and are self-monitoring. “As far as I am aware that has worked quite well: there has definitely been an increase in lending, and there certainly haven’t been any disastrous effects on the local economy.” says Brown.

Things are simplified (or restricted) by the lack of an interbank market in the Maldives. “The MMA is not the lender of last resort as you would have in a Central Bank structure,” Brown explains. In the absence of an FDIC insurance equivalent, banks have to maintain high reserves, so that 35 percent of each ruffiyaa or dollar deposited is placed with the MMA. “In a way, it is an effective controlling mechanism on how much you can actually use from your deposit base, and it ensures high cash reserves.”

Brown stresses that in such a young economy, guidance of consumers by banks is important if loan recipients are not to suffer from their own ignorance. “The banking sector can help: we have various skills to impart and we can be proactive in the education of customers in both business and financial management.”

Establishing Leasing
The Maldivian government has also established the country’s first leasing company, in June of this year, to facilitate the acquisition of equipment for the private sector: the Maldives Finance Leasing Company (MFLC). Shareholders include an international organization, a regional bank, and four local companies. Hassan says she hopes that the company will make a “major contribution to the financial sector.”

The MFLC forms part of the government’s plan to create medium-term financing institutions. “It was judged more suitable to a Muslim environment than a development funding institution,” says W. Don Barnabas, CEO and Director of MFLC, “because leasing is more acceptable and it provides for a different need.”

The new company necessitates yet more legislation: a regulatory framework has established the rights of lessee and lesser, and the MFLC has already funded a fisheries project. “We will be funding more as the sector opens to private entrepeneurship,” says Barnabas, adding that the company is widening the accessibility of the finance sector by providing another opportunity to borrow. “The private sector is the key developer of the economy,” he says, “and resources are scarce.”

Initiating Capital Markets
Private sector growth requires that the nation should raise capital. Instruments are limited in the Maldives for those who want to save, and the government hopes that the development of a capital market will help to promote savings and to diversify wealth. It may also help raise long-term capital for the private sector and for government projects.

So a Maldivian stock market is taking its first steps. A Presidential Decree established a Capital Markets Development Section (CMDS) of the MMA in 1999, charged with creating a fully functional stock exchange in the Maldives. Brown explains that there are only three public companies so far; the Maldives Transport and Contracting Company, the Bank of Maldives and the State Trading Organization – all state-owned companies.

The CMDS is training securities dealers, and readying the market to deal with corporate debentures and government securities as well as the IPO’s it has already seen. Fathimath Shafeega, Deputy Manager of CMDS says that the three companies traded are doing unexpectedly well. “People would never have anticipated such an amount of trading with only three companies. If you look at last month’s trading [August], it hit a record high.”

The central issue now is how to convince private companies, particularly those in the tourism sector, to go public. The government is providing incentives, such as the Tourism Act which provides that a wholly Maldivian company with at least 50 percent of its shares sold to the public may increase its lease period from 25 to 50 years.

According to Brown, in order to make a stock market part of Maldivians’ lives, education and awareness must be developed. “It is essential to develop a culture for this,” he says. “You have to go on a road show to ensure that the public is fully conversant with both the advantages and disadvantages of share ownership.”

Shafeega agrees that people have to get used to the idea of participating in the economic life of their country. “This a new thing, unless you see it working you won’t believe in it.” Maldivians are starting to notice that their economy is changing: with legislation in place, it is up to the government and the banks themselves to find ways to encourage sectorial growth.