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

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.

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.”