Michael C Bonello: The banking environment in Malta Speech by Mr Michael C Bonello, Governor of the Central Bank of Malta, at the Raiffeisen Economic Forum, St Julians, 21 May 2004. *  *  *  The history of banking in Malta goes back at least to the earliest decades of the nineteenth century, when the island’s strategic importance as a centre for entrepot trade encouraged the establishment of banking institutions. Among the better known foreign names before World War II was that of Barclays Bank DCO. This was a time when Malta was a British colony and part of the sterling area. Barclays remained in Malta after independence and the subsequent break with sterling in 1972, and contributed to the development of a cadre of bankers trained in the British banking tradition. It left only when the larger banks were nationalised during the 1970s. This coincided with the adoption of a policy of economic autarchy. The major banks were publicly owned and lending rates were set by the Minister of Finance, while the Central Bank controlled deposit rates. Nominal interest rates were kept artificially low, often resulting in negative real rates. Strict exchange controls were imposed to sustain the value of the Maltese lira. In the absence of money and capital markets, the banking sector dominated the financial system. In the circumstances, however, the sector did not operate efficiently.
By the end of 2003 for example, the domestic banks’ assets amounted to over 277% of GDP, compared with a euro area average of 273%, while the ratio of domestic bank credit to GDP stood at 155%, as against 143% in the euro area. More significantly, spreads between short-term lending and deposit rates in Malta, at 2.41 percentage points in 2003, were even narrower than the euro area average of 3.48 points. This suggests that the local banks compare favourably in terms of efficiency with banks elsewhere in the European Union. Furthermore, despite the global economic slowdown and the recent weak performance of the Maltese economy, the profitability of banks in Malta, as evidenced by the return on assets, has been fairly stable at around 0.8%. This compares with an average return of 0.6% recorded by European banks in 2001. At the same time, bank liquidity remains very high, with the domestic banks’ holdings of liquid assets as a share of short-term liabilities, just under 50% at the end of 2003, consistently exceeding the 30% prudential requirement. Maltese banks are also strongly capitalized. Their aggregate capital adequacy ratio, defined as the ratio of own funds to risk-weighted assets, stood at 16.7%. On the other hand, the banks’ loan portfolio still tends to be concentrated on a few sectors, reflecting the structure and small size of the Maltese economy. Furthermore, they still rely too heavily on property as collateral.