Situated in the Mediterranean, 60 miles south of Sicily and 200 miles
north of Africa, the three islands of Malta are only 316 sq km in size
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with a population of 400,420. Its financial sector, though, is
disproportionately large – accounting for 12% of GDP and employing 5000
– due partly to its tradition as a stepping stone between Europe and
North Africa, and also its Anglo-Saxon business culture. Many of the
senior people in Malta’s financial sector believe the EU will bring
benefits.
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The economy grew only 1% in 2002, and there was a decline of 0.8% in
2001 because of slow growth globally and the uncertainty surrounding EU
accession.
David Pullicino, deputy governor of the Central Bank of Malta, says now
that membership is assured, it will provide “an automatic stimulus to
growth” as businesses prepare for entry.
More precisely, Peter Sant, an economist at Bank of Valletta (BoV),
Malta’s second biggest bank, refers to a report by Professor Ali Bayar
“which concluded that as a result of EU membership Malta would benefit
from a one-off increase in its GDP of 6.45%”.
Tony Camilleri, BoV’s chief officer financial markets, adds: “The EU
has a number of trade agreements with non-EU countries in the
Mediterranean, which Malta will benefit from immediately.”
Downside to accession
There is a downside, as John Dalli, minister of finance and economic
affairs, and a long-standing EU protagonist, accepts. “Like all other
accession countries, we will have to synchronise ourselves with EU
monetary and fiscal policy,” he says. “There will be some loss of
control over our economy, but with the OECD [Organisation for Economic
Co-operation and Development] and the World Trade Organisation
breathing down our necks, we don’t have total control anyway.”
Malta’s membership entails eventual adoption of the euro in three to
four years’ time. The Maltese lira is pegged to a basket of currencies:
the euro with a 70% weighting, sterling 20% and the US dollar 10%.
A disadvantage of giving up the national currency is that certain
levers of economic policy, such as interest rates, will be controlled
by the European Central Bank. Mr Pullicino from the Central Bank of
Malta believes that this is a small price to pay and, besides, as
Malta’s currency is already linked to three other currencies, it has to
follow the interest rates of the currencies to which it is fixed.
Good preparations
Although some sectors of the economy – notably small and medium-sized
enterprises engaged in various manufacturing and services activities –
are likely to find it difficult to comply with the panoply of red tape
that emanates from Brussels, the financial sector is a different
matter. Since 1994, Malta’s financial services laws and regulatory
framework have been reformed along EU lines as part of the government’s
preparations for eventual membership.
This reforming process included not only the dismantling of the
country’s offshore industry, but also the creation of a single
regulator, the Malta Financial Services Authority (MFSA) last October.
Malta is also no longer a tax haven. Nine years ago it had a big
offshore sector, with some 3000 offshore registered companies, but now
only about 100 are left and even those will be gone by next year.
The MFSA is the country’s single regulator for all banking, investment
and insurance business. It also regulates the Malta Stock Exchange and
houses Malta’s Companies Registry. “The old model of regulation by
market sector had become increasingly bureaucratic, expensive and
complex,” says Professor Joe Bannister, the MFSA’s chairman. “Moving
towards a single regulatory authority is in line with global best
practice.”
Careful preparation went into transferring the regulatory and
supervisory powers of the Malta Financial Services Centre, the Central
Bank of Malta and the Malta Stock Exchange to the MFSA. “We looked at
other financial services authorities around the world to ensure we got
our structure right. We cherry-picked ideas,” says Prof Bannister.
“We have been screened by a number of international organisations – the
EU, the OECD, the FATF [Financial Action Task Force on Money
Laundering], the World Bank and, a few weeks ago, the International
Monetary Fund,” he says. “The IMF found nothing that caused us concern.
It concluded that our regulatory system is very robust.”
Commercial benefits
Mr Camilleri says there are commercial benefits of having a tougher
regime. “The fact that Malta is part of the EU will prove Malta and the
BoV have high regulatory standards, that they belong to the premier
league,” he says. “It will help Maltese banks to source cheaper funding
through syndicated loans.”
He admits to some drawbacks. A large chunk of his bank’s earnings come
from foreign exchange dealings with the euro, which will diminish when
Malta adopts the single currency. Interest margins will probably
reduce. Competition will intensify – local customers will be able to
borrow from other banks in Europe.
Mr Sant says: “The cost to the bank of converting to the euro will be
about 1%-2% of our operating costs for a two to three-year period.”
Two banks dominate retail and corporate banking: BoV with 43% of the
market and HSBC with 47%. Two others have most of the remaining 10% of
the local business: Lombard Bank and APS, a church-owned bank (the
Diocese of Malta).
There are also four or five Austrian banks, including Erste and
Volksbank. They used to operate offshore serving non-residents but,
with the winding up of the offshore financial sector, all have or will
soon have converted to onshore business, mostly in the wholesale
sector.
Bank of Valletta
BoV is owned by the public (60%), the Maltese government (25%) and
Italian bank Banco di Sicilia (15%). In 2002, total assets were Lm1.9bn
(E4.4bn), pre-tax profits Lm14.5m, number of branches 49 and number of
staff 1585.
In spite of its small size, it is the largest organisation quoted on
the local stock exchange and has been putting up a good fight against a
global goliath that wants to be a friendly local.
“When HSBC entered the Maltese banking scene in 1999 by buying Mid-Med,
some were concerned that its size and reputation would allow it to take
over much of our business,” recalls Mr Camilleri. “That hasn’t
happened. BoV’s share is much the same as it was four years ago.”
It has six representative offices overseas: two in Australia and one in
Canada where there are sizeable Maltese communities; one in Italy,
“which taps inward investment opportunities into Malta, and also
provides us with a stepping stone into other EU countries”; one in
Tunisia, which opened three years ago; and one in Libya, which opened
last year.
The latter two form part of a strategic aim to strengthen BoV’s
position as a conduit for commerce and investment between Europe and
North Africa, a strategy in which a representative office will be
opened in Egypt this year.
Volksbank Malta
Volksbank Malta is the Austrian bank with the biggest presence on the
island, with one branch and 25 staff. Thomas Havlik, managing director,
says it converted its offshore licence to an ordinary banking licence
last November and now operates in a similar way to the other commercial
banks in the country.
“There is one big difference – our balance sheet currency is the euro,
not the lira,” he says. “This means that for corporate and personal
loans, if the customer has an income in euros or dollars, we can lend
in those currencies and transfer the benefit of the low interest rates
that prevail.”
Volksbank also participates in some of its parent’s international
syndicated loans, and at a lower margin because operating costs are
lower. “Some deals would not make sense done in Austria,” says Mr
Havlik. “We do about 15-20 syndicated loans a year here, of around
E3m-E5m in size.”
The insurance sector
There are 19 insurance companies in Malta – five local and 14 foreign –
authorised to carry out insurance business, plus 32 agents and 24
brokers. The biggest life company in Malta is Middlesea Valletta Life,
with 60,000 policyholders accounting for 56% of the market. It is owned
by Middlesea Insurance (Malta’s biggest composite insurer), Bank of
Valletta and Munich Re.
Joseph Rizzo, general manager of Middlesea Insurance, says: “We are
striving to write business abroad, including in the EU. We don’t need
to wait until we are in the EU. We already have a company in Italy, a
branch office in Gibraltar, and are looking at opportunities in Greece
and the Gulf.”
Pensions should be a future opportunity, says Mr Rizzo. The Maltese
rely on state pensions but the government is working on a programme of
pensions reform to provide tax incentives for local people to take out
occupational or private pensions.
In parallel, a regime is being set up that will allow cross-border
pension funds to be set up in Malta, with tax benefits based on double
taxation treaties with other countries.
It would enable workers switching countries to take their pensions with
them and would be helpful to multinationals operating across the EU. If
it goes ahead, it will be one of the first regimes to be created under
the new pan-European Pensions Directive framework.
The finance and economic affairs minister, John Dalli, admits that
being in the EU will mean “losing control of the steering wheel and
accelerator a little bit”. But this should help inward investment,
financial services and the country’s economy in general. It will also
give the Maltese some influence, no matter how small, within a
community of 25 nations.
Licence to print money
De LA RUE, the British banknote company, has a print works in Malta
that is bigger than any of the company’s other print works in the
world, including the UK.
The factory – which was expanded last year – prints the currencies of
several countries, but Maltese lire for the Central Bank of Malta are
printed at one of De La Rue’s UK plants. Guy Potter, regional manager
at De La Rue, says the country is an ideal place in which to do
business. “It has a hard-working and educated labour force,” he says.
“Business costs in general – such as commercial property – are
reasonable, and there are good telecommunications and transport
services with Europe and North Africa.”