Financial Stability in the Maldives
Country Paper - SAARC Finance Governor’s Symposium on ‘Financial Stability’
Kumarakom, Kerala, 10th – 11th June 2011
Contents
1 – Overview of the Economy
2 – Overview of the Financial Sector
3 – Key Financial Stability Indicators for the banking sector
4 – Legal and regulatory framework
5 – Financial Sector Development Projects
1. Overview of the Economy
•
Maldives has an open, relies heavily on imports, and has a very narrow export base. The
main source of income to the country comes from tourism (31.8% of GDP) and fishing
(1.7% of GDP).
•
•
GDP growth was 4.8%
Inflation 6.5%
•
In April 2011 the earlier pegged exchange rate regime of USD to Rufiyaa was revised to
fluctuate within a band of 20 percent above or below the former peg rate of 12.85.
•
Due to increase in the fiscal deficit following the 2004 tsunami, the rise in food and oil
prices in 2008, a decline in foreign exchange earnings in 2009 owing to a decline in
tourist arrivals from the global recession aggravated the foreign exchange shortage and
made the peg unsustainable.
2. Overview of the Financial Sector
•
The financial sector in the Maldives is very narrow and dominated by the banking sector
which accounts for 96% of total assets of the sector. The banking sector consists of
seven banks – six traditional commercial banks and one new Islamic bank.
•
Non-bank financial institutions in the Maldives include a finance leasing company, a
specialized housing finance institution, one insurance company, several other insurance
brokers and agents, several money services businesses and securities market
intermediaries.
•
All banks and the non-bank financial institutions are licensed and regulated by the
Maldives Monetary Authority.
•
The Capital Market Development Authority (CMDA), license and regulate the securities
market in the Maldives which consists of four publicly-listed companies, each of which
is majority-owned by Government. The CMDA has statutory powers to license securities
market intermediaries including brokers, dealers, investment advisers, as well as stock
exchanges and central depositories.
Banking Sector
The Banking Sector in the Maldives includes seven banks: two locally incorporated banks,
four branches of foreign banks, and one subsidiary of a foreign bank.
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Two locally incorporated banks:
– Bank of Maldives Ltd, the national bank, majority-owned by the Government of
Maldives, established in 1982. It has 25 branches throughout the country.
– Maldives Islamic Bank, the first Islamic bank in the country opened in March 2011;
MIB is 85%-owned by the Islamic Corporation for Development and 15% by the
Government of Maldives.
Four branches of foreign banks:
– State Bank of India, Male’ branch – established in 1974
– Habib Bank Limited, Male’ branch – established in 1976
– Bank of Ceylon, Male’ branch – established in 1981
– HSBC, Male' branch – established in 2002
One subsidiary of foreign bank:
– Mauritius Commercial Bank, Maldives – established in 2008.
Non-Banking Financial Institutions
The Non-Bank Financial Sector consists of the following entities:
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Housing Development Finance Corporation – established in 2001
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Maldives Finance Leasing Company – established in 2002
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Insurance Companies:
– Allied Insurance Company of Maldives-established 1985 (local company)
– Several other insurance undertakings and market intermediaries through agents
and brokers from neighboring countries operate through their appointed local
agents.
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Money transfer business: five local companies operating as agents of international
money transfer companies such as Western Union.
3. Key Financial Stability Indicators for the banking sector
• The banking sector remained relatively strong from 2000 to 2008 when
the spillover effect of the global financial crisis brought pressures on the
system. As a result, banks are experiencing difficulties in raising USD
funds and non-performing loans have increased sharply. Nevertheless,
the banking system in Maldives remains adequately capitalized and able to
generate reasonable profits.
Capital Adequacy
•
Prior to May 2009, the minimum capital adequacy ratio was 8% of risk-weighted assets;
this was raised to 12% of total risk-weighted assets in May 2009 and a minimum equity
capital ratio (i.e. leverage ratio) of 5% was introduced.
•
The leverage, or equity capital, ratio of the banking sector has remained relatively low
and stable over time, ranging from a low of 12% in 2002-2006 to 18% in 2010.
•
The total risk-based and equity capital ratios of the banking sector appear very
adequate and above the minimum requirement; however, the low level of loan loss
reserves raises some concern about the true adequacy of banks' capital cushions.
Capital Adequacy
Asset quality
•
Non-performing loans to total loans trended downward from 10.8% in 2002 to a low of
1.6% in 2007 and then increased rapidly over the following years to 17% at end 2010.
This is directly related to the economic slowdown since 2008, which has adversely
affected the repayment capacity of borrowers especially in the tourism sector.
•
Credit management, administration and recovery management of banks has a large
effect on the Banks’ NPLs. The unavailability of adequate amounts USD in the market to
service USD denominated loan repayments and has been an issue too. Additionally, the
weaknesses in the legal system which make the processing of cases through the court
system very slow, affect the recovery of NPLs.
•
Adequate provisioning for non-performing loans is always of concern. Considering the
above stated reasons, MMA has been lenient in implementing the regulations with
tighter control issued in 2009 and a waiver was granted for those banks which are not in
compliance till end 2011 to meet adequate provisioning requirements.
Asset quality
100.0%
90.0%
89.3%
80.0%
70.0%
63.9%
60.0%
56.6%
50.0%
45.2%
41.1%
40.0%
32.1%
30.0%
25.0%
27.7%
27.6%
20.0%
10.0%
9.9%
10.0%
10.1%
6.2%
6.4%
0.0%
2001
2002
2003
2004
Gross non-performing loans ratio
2005
14.0%
8.9%
2.3%
2006
17.2%
12.7%
1.6%
2007
2008
2009
Provisions to non-performing loans ratio
2010
Earnings
60.0%
53.5%
50.0%
50.0%
43.7%
40.8%
40.0%
37.0%
30.6%
30.0%
30.4%
25.8%
20.0%
17.7%
16.9%
2.8%
2.8%
10.0%
5.6%
0.0%
2001
3.4%
2002
3.7%
2003
4.5%
2004
Return on equity
4.8%
2005
6.4%
2006
6.3%
2007
4.5%
2008
2009
2010
Return on assets
• Since 2006 the earnings was on a decreasing trend and dropped significantly in
2009 and 2010. The sharp drop in income results from higher loan loss provisions
and drop in interest income, mainly caused by higher NPLs. Profits likely will remain
depressed for near term until asset quality improves and/ or higher non-interest
income can be generated from fees and commissions.
Liquidity
Liquid assets ratio
60.0%
53.7%
50.0%
47.9%
50.3%
45.4%
40.0%
39.4%
34.8%
31.0%
30.0%
27.3%
25.4%
20.0%
22.6%
10.0%
0.0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
• Liquidity of the banking system decreased from 2003 to 2008, falling to only 23%;
however, it rebounded to 39% in 2010 due to the high minimum deposit reserve
requirement of 25 percent and a slowing of loan portfolio growth. Although the
liquidity ratios are strong in terms of domestic currency, US Dollar liquidity remains
tight.
Sensitivity
Net Foreign Currency to Capital
70.0%
60.0%
50.0%
58.6%
52.5%
48.3%
47.9%
40.0%
34.9%
31.0%
30.0%
20.0%
10.0%
0.0%
2005
2006
2007
2008
2009
2010
• Sensitivity to market risk (NOP risk) is above the 15% limit for USD; for some of the
banks and hence are not in compliance with the MMA regulation on foreign currency
exposures, a waiver was granted till end of 2011 to those banks unable to
immediately comply.
4. Legal and regulatory framework
Banking Act
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Banking Act of the Maldives was enacted in December 2010.
Prior to this enactment, licensing and supervision were carried out by MMA under the
Maldives Monetary Authority Act (1981).
The new Banking Law provides a comprehensive legal framework for banking and supervision
in the Maldives.
Banking Regulation
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Under the MMA Act regulations and circulars were issued to regulate the banking industry.
In May 2009, prudential regulations to address the main areas of risk in banking such as
capital adequacy, single borrower and insider loan limits, external audits, and asset
classification and provisioning were issued. And in Jan 2010, a regulation setting net open
position limits was issued.
The regulations are in alignment with international best practice standards and the
implementation process has been a challenge for the industry and the regulator alike.
The stricter limitations are a necessary and beneficial change for the future health of the
banking industry.
4. Legal and regulatory framework
Banking Supervision
• The MMA has a statutory mandate to license, regulate and supervise
banks to ensure that they are well-managed and risks are contained within
prudent limits. A guiding principle of MMA's supervisory process is to
identify and intervene promptly so as to prevent problems from becoming
unmanageable and/or very costly.
• The MMA monitors the compliance to regulatory requirements and the
soundness of banks through a combination of both on-site and off-site
activities. As necessary, the MMA meets with the managers and boards of
directors of individual banks and with their external auditors to review
matters of concern and develop mutually agreed plans for improvement.
• Prior to 2005, on-site examinations conducted by MMA were limited were
not conducted on a regular basis. Beginning in 2005, on-site examinations
are carried out more frequently. As per the Banking Act, an examination of
each bank has to be carried out in at least every 18 months.
5. Financial Sector Development Projects
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In February 2011, MMA inaugurated a Credit Information Bureau. The availability of
broader credit information should enable banks to make more informed and better
credit decisions.
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In May 2011, MMA launched an RTGS – Real Time Gross Settlement System. This
system processes large value and urgent interbank transactions on a real time gross
basis, thereby reducing settlement risk and adding stability in the financial system.
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Other Projects underway and expected to launch in the near future:
- Automated clearing house,
- National electronic funds transfer switch
- Mobile phone payment system
Thank You