The Maldives' financial sector

As with other economies, the Maldives' economy requires an efficient financial system that moves funds from those people who save, to those who have productive investments opportunities. In order to provide an economic analysis of how the nation's financial sector promotes the required economic efficiencies, one has to first highlight how the financial sector is structured and designed. 

All over the world, the financial system is complex in structure and functions. The sector has different types of institutions: banks, non-bank financial corporations, insurance companies, stock & bond markets, pension funds, and other investment funds. All these are regulated by state bodies, and in the case of the Maldives, mainly by the Maldives Monetary Authority (MMA), the Capital Market Development Authority (CMDA) and the Maldives Stock Exchange (MSE). 

The financial system channels billions of Rufiyaa per year from savers to the people with investment opportunities. 

Bank loans

Maldivian companies and the government financed their activities mainly through loans and advances. The loans category is mainly made up of bank loans, as banks are the most important source of funds used to finance businesses. 

With 17 percent of loans from non-bank financial corporations, Maldives has one leasing company, one housing finance company, and one SME finance corporation. Together with banks, these non-bank finance companies are also regulated by the MMA. 

Stocks or shares

The stock market accounts for only three percent of total financing in the country, as we have only nine listed companies in the MSE. Six out of these companies are partly owned by the government. The Maldives capital market has been relatively under-developed since its inception in 2006, with minimal trading activity. The stock exchange was prematurely privatised in 2007, and lacks proper infrastructure and incentives for further development. The regulatory body, CMDA has also been highly neglected by all governments, and lacks proper resources. 

Issuing debt

The bonds and sukuk market, although represents 17 percent of total financing, also includes more than MVR6 billion government bonds held by MMA. If it is excluded, the total share of bonds and sukuk in the Maldives financial sector will be 10 percent. In addition to the treasury bonds, the banks and non-banks also hold short term treasury bills, outstanding at over MVR24 billion at the end of 2020, and constituting 30 percent of total financing. If government treasury bills and treasury bonds are excluded, the private sector obtains 80 percent of financing through bank loans, 15 percent by bonds/sukuk, and five percent through equity shares. 

The regulatory environment

The financial sector is among the most heavily regulated sectors in the economy. Under the Maldives Banking Act, and the prudential regulations issued by the MMA, all banks and financial institutions are subject to strict financial soundness obligations. While proper regulatory requirements, as per internationally acceptable standards are important, the Maldives' financial sector has often been criticised, by multilateral donor agencies and the private sector, over difficulties in access to finance and the high cost of obtaining finance from the banks.

As the regulatory body, MMA, has also been targeted with criticism from the private sector, and the public, for their ‘disconnect’ with the realities of the real sectors of the economy. Regulatory oversight leading to hindrance of development of the financial sector, rather than being the facilitator  — at times even differing to certain state entities  the agency is in charge of regulating.

The way forward

Organic growth and evolution within the financial sector not only has been slow coming; it has been stalled and stagnant since efforts were initially put in place with a view to invigorate and ignite activity through establishing capital markets and a stock exchange.

What should stand as an undisputed fact is that, in addition to properly regulating the still nascent financial sector, an agency also needs to step up, spur and champion innovation. This agency, based on form, function, experience and institutional maturity, should in most likelihood be the MMA. Where potential conflicts may occur the MMA, along with relevant state bodies, can come up with procedures and timelines in a manner where conflicts can be avoided and independence, in time, guaranteed — there have been some precedences that have been explored in the past that give this notion significant weight.

In conclusion a word of caution also needs highlighting; that there is perhaps no need to establish additional agencies and leave then to their devices in a system where people, resources and institutional will are already lacking.