BML has to re-examine lending rates

The Bank of Maldives Plc (BML) with over MVR31 billion in total assets, dominates the market in the Maldives' banking industry. With over 293,000 customers, and 35 branches in the atolls, the BML has an outstanding MVR14.5 billion in loans to individuals and businesses. It also administers government loan schemes valued at over MVR2 billion.

As per the published schedule of BML’s charges, the corporate lending rate is 13 percent per annum for both Rufiyaa and US dollar loans. Retailer loans for SMEs carries an interest rate of 13 percent per annum, while for guesthouses, it is 12 percent. Secured green loans for SMEs carry a rate of 10 percent per annum, while personal, education, and vehicle loans carry a staggering interest rate of 15 percent.

Economists at the World Bank and International Monetary Fund recently conducted studies that established a causal relationship between finance and growth. Theory suggests that financial instruments, markets and institutions lead to reducing information, and transaction, costs. These national savings and investments along with technological innovation increases long term growth.  In fact, Robert G. King and Ross Levine states that financial systems that ease the risk diversification in economies can accelerate the technological change and economic growth in a country.

Raghuram G. Rajan and Luigi Zingales have also shown that, in countries with well-developed financial systems, industries that are naturally heavy users of external finance, grow relatively faster than other industries. All in all, there are piles of literature which emphasises the causal role of intermediaries in spurring growth.

In the case of the Maldives, one of the constraints faced by the economy and private sector businesses is the availability and cost of obtaining finance. The Maldives has an under-developed financial and banking sector, with eight commercial banks, one finance leasing company, one housing development finance company and one government owned Small and Medium Enterprise (SME) finance corporation. Out of the eight banks, five are branches of foreign banks and the capital market of the country is still in its infancy.  

BML, in 2019, made an after tax net profit of MVR1.039 billion, or USD67.4 million. As with other institutions, BML was badly hit during the COVID-19 pandemic severely reducing the bank’s net profit to just MVR325 million in 2020. As per the audited financials published by BML, the total interest income amounted to MVR1.76 billion in 2019, and MVR1.88 billion in 2020. Income from fees and commissions was at MVR893 million in 2019, while in 2020 it was at MVR719 million. With a net foreign exchange income of MVR53.2 million, the bank made a total operating income of MVR2.2 billion in 2020, which is almost the same in 2019. Interestingly, BML’s net profit has been over MVR1 billion and the bank paid over MVR300 million in tax on average to the government in the past 4 years.

With over 45 percent market share held by BML in terms of total assets, the government directly holds 51 percent ownership of the bank, while 33 percent is held by the public. The Bank's board has seven directors nominated by the government, and three elected from the public shareholders. With clear directions from the government as the majority shareholder, the bank can revolutionarise the Maldives' financial market, by paving the way to reduce the cost of borrowing in the market. With reduced cost of borrowing, the private sector will be in a better position to catalyse the expansion of the tax base of the economy. 

With increased private sector investments, leading to economic expansion, the increased tax revenue from the resultant economic activity would more than compensate for the reduced tax revenue from the bank’s profits, and the dividends paid to the Government that it is at risk of losing — to drive market growth the government need only make a calculated decision, backed by the expertise it is not lacking within its ranks, in order to mature lending in the country, with reduced rates, while still reaping the same profits for the company and the government.