The right instrument at the right time

14th April 2020 • News

In normal times, the role of development banks is to address investment gaps, sometimes called market failures, by offering financing facilities and guarantees to support new investment in productive and viable operations where the commercial banks are unable or unwilling to accommodate on their own the demand for credit from business enterprises.

 

In times of crisis, development banks are brought into the spotlight. The setting up of Malta’s development bank was indeed timely.

 

The preparatory work for the establishment of the Malta Development Bank (MDB) started way back in 2013 with a lengthy negotiation process that culminated with parliament’s unanimous approval in May 2017 of the MDB Act which came into force in November 2017.

 

With the outbreak of COVID-19, the MDB is stepping in to help shield the Maltese economy, fulfilling its invaluable role as a counter-cyclical state instrument.

 

The aftermath of the global financial crisis of 2008-2010 spurred a new wave of promotional banks being set-up across the EU with their main focus being to tackle the impact of the international crisis in their respective economies, with both long-term infrastructural investment and SME financing being key areas addressed.

 

As promotional banks were generally shifting back to the new normal, the COVID-19 outbreak has quickly shifted the path back into crisis mode and promotional banks are now again focused on their counter-cyclical role. There is agreement that we are dealing with an abnormally concentrated business collapse and the scale of response needs to be proportional to the severity of the economic fallout. Extraordinary times call for an extraordinary policy response.

 

The MDB offers unique response options by virtue of its position between the state and the credit market.

 

Operating under the prudential discipline of a bank, the MDB achieves capital leverage by providing risk sharing mechanisms to support commercial banks in deploying their liquidity more actively and ensuring that credit keeps flowing to where it is needed most.

 

This financial intermediation function becomes even more critical in the prevailing times of abnormal economic uncertainty with businesses in various key sectors of the economy abruptly facing an almost complete halt in their economic operations, sales and revenue inflow and are struggling to survive.

 

In such a grave scenario, having flexible bank credit on favourable terms to fall back on is crucial for the survival of businesses. The recently launched COVID-19 Guarantee Scheme by the MDB provides credit risk mitigation that supports commercial banks in unlocking credit to help businesses in Malta weather this unprecedented storm.

 

The COVID-19 Guarantee Scheme is part of the wider package of government’s COVID-19 Response Support Programme. A Guarantee Fund of €350 million has been allocated by the government to the MDB to develop, administer and implement the guarantee scheme through the intermediation of the local commercial banks.

 

With the COVID-19 Guarantee Scheme, the MDB is offering an exceptionally high degree of risk mitigation, taking on 90 per cent of the risk of each facility extended by the commercial banks under the scheme.

 

This government guarantee will provide the necessary reassurance and capital relief to the commercial banks which will enable them to mobilise over €777 million of new working capital loans to businesses at favourable terms.

 

The COVID-19 Guarantee Scheme will be guaranteeing loans granted by commercial banks to meet the working capital requirements of businesses facing cashflow disruptions due to the effects of COVID-19.

 

This includes financing to cover the wages of employees, rent, energy and water bills, purchase of raw materials and supplies for continuation of business, unpaid invoices due to a decrease in activity, maintenance costs and other recurring expenses.

 

The MDB will ensure that the benefits banks will obtain from the government guarantee will be passed on to the businesses in various forms.

 

First and foremost, the COVID-19 Guarantee Scheme will enable businesses to gain access to vital bank liquidity which would not have been possible in the absence of the MDB guarantee. This will ensure their continuity and survival.

 

Secondly, businesses will benefit from a moratorium of six months on both the interest payments and capital repayments. The moratorium period can be extended up to one year on a case-by-case basis, providing the much-needed breathing space during this difficult time.

 

Thirdly, in spite of the higher overall risks and uncertainty brought by the COVID-19 outbreak – which would in normal circumstances be reflected in higher pricing of loans – businesses benefit from a significant interest rate reduction compared to the average rates charged before the introduction of the guarantee scheme.

 

This reduction is particularly meaningful for smaller businesses that are normally charged higher rates due to the perceived risk. Moreover, because of the guarantee, businesses will be requested to provide much less collateral than is normally requested by commercial banks.

 

Going forward, the MDB will continue to play an important role in supporting SMEs and in catalysing long-term finance for infrastructural investment, particularly projects with a strong social dimension and which contribute to a greener economy.

 

In 2019, the MDB stepped up its activities launching its first guarantee schemes in the SME segment and in education-related loans.

 

The MDB’s activities in its first two years were pivotal in building the necessary capacity to respond to the crisis quickly and decisively.

 

The experience gained from the implementation of financial instruments over the course of 2019 meant that the MDB is now well-equipped with the necessary expertise and operational capacity to implement the COVID-19 Guarantee Scheme.

 

It stands ready to protect the interests of the business community and will strive to help the economy to be in a position to bounce back and resume the pace of economic activity at the earliest opportunity.

 

Source:  TimesofMalta.com 

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