Financial Stability in the Maldives

Transcription

1 Financial Stability in the Maldives Country Paper SAARC Finance Governor s Symposium on the Financial Stability to be held in Kumarakom, Kerala during June

2 Contents 1 Overview of the Economy Overview of the Financial Sector Banking Sector Non Banking Financial Institutions Key Financial Stability Indicators for the banking sector Capital Adequacy Asset quality Earnings Liquidity Sensitivity Legal and regulatory framework Banking Act Banking Regulation Banking Supervision Financial Sector Development Projects

3 1 Overview of the Economy The economy of the Maldives is open, relies heavily on imports, and has a very narrow export base. The main source of income to the country comes from tourism (31.8% of GDP) and fishing (1.7% of GDP). According to the latest estimates 1, GDP growth was 4.8 percent and the rate of inflation 2 is 5.5 percent. Prior to April 2011, Maldives maintained a pegged exchange rate tied to the US dollar. However, the increase in the fiscal deficit following the 2004 tsunami plus the rise in food and oil prices in 2008, a decline in foreign exchange earnings in 2009 and a decline in tourist arrivals due to the global recession aggravated the foreign exchange shortage made the peg unsustainable. Thus, in April 2011 Maldives allowed the exchange rate to fluctuate within a band of 20 percent above/below the former pegged rate of With this change in the exchange rate regime, MMA is further tightening monetary policy to absorb excess domestic liquidity in the system and is also introducing other instruments and measures to better manage liquidity and monetary policy. 2 Overview of the Financial Sector The financial sector in the Maldives is very narrow and dominated by the banking sector which accounts for 96% of total assets of the sector. The banking sector consists of seven banks six traditional commercial banks and one new Islamic bank. Non bank financial institutions in the Maldives include a finance leasing company, a specialized housing finance institution, oneinsurance company, several insurance brokers and agents, several money services businesses and securities market intermediaries. All 1 Latest GDP estimate is as of November Source: MMA 2 As measured by annual percentage change in 12 month moving average of consumer price index. 3

4 banks and also the non bank financial institutions (except for the securities market intermediaries)are licensed and regulated by the Maldives Monetary Authority (MMA). The Capital Market Development Authority (CMDA), a separate entity,license and regulates the securities market in the Maldives which consists of four publicly listed companies, each of which is majority owned by Government. The CMDA has statutory powers to license securities market intermediaries including brokers, dealers, investment advisers, as well as stock exchanges and central depositories. 2.1 Banking Sector The Banking Sector in the Maldives includes sevenbanks: two are locally incorporated banks, four are branches of foreign banks,and oneis a subsidiary of a foreign bank. - Two locally incorporated banks: o Bank of Maldives Ltd, the national bank, majority owned by the Government of Maldives, established in It has 25 branches throughout the country. o Maldives Islamic Bank, the first Islamic bank in the country opened in March 2011; MIB is85% owned by the Islamic Corporation for Development and 15% by the Government of Maldives. - Four branches of foreign banks: o State Bank of India, Male branch established in 1974 o Habib Bank Limited, Male branch established in 1976 o Bank of Ceylon, Male branch established in 1981 o HSBC, Male' branch established in One subsidiary of a foreign bank: o Mauritius Commercial Bank, Maldives established in Non Banking Financial Institutions The Non Bank Financial Sector consists of the following entities: Housing Development Finance Corporation established in Maldives Finance Leasing Company established in

5 - Insurance Companies: o Allied Insurance Company of Maldives established 1985(local company) o Several other insurance undertakings and market intermediariesthrough agents and brokersfrom neighboring countries operate through their appointed local agents. - Money transfer business: five local companies operating as agents of international money transfer companies such as Western Union. The services provided by these companies are mostly obtained by the expatriates in the country who utilize these services for outward remittances from Maldives. 5

6 3 Key Financial Stability Indicators for the banking sector The banking sector of the Maldives remained relatively strong from 2000 to 2008 when the spillover effect of the global financial crisis brought pressures on the system. As a result, banks are experiencing difficulties in raising USD funds and non performing loans have increased sharply. Nevertheless, the banking system in Maldives remains adequately capitalized and able to generatereasonable profits. 3.1 Capital Adequacy Prior to May 2009, the minimum capital adequacy ratio was 8% of risk weighted assets; this was raised to 12% of total risk weighted assets in May 2009 and a minimum equity capital ratio (i.e. leverage ratio) of 5% was also introduced. The graph below shows the level and trend of banks' equity capital ratios since The leverage, or equitycapital, ratio of the banking sector has remained relatively low and stable over time, ranging from a low of 12% in to 18% in On a simple equity basis, the capital strength of the banking sector is more realistically shown. The total risk based and equity capital ratios of the banking sector appearvery adequate and above the minimum requirement; however, the low level of loan loss reserves raises 6

7 some concern about the true adequacy of banks' capital cushions. comments at paragraph 3.2 below.] [See additional 3.2 Asset quality The ratio of non performing loans to total loanstrended downward from 10.8% in 2002 to a low of 1.6% in 2007 and then increased over the years that followed with NPL at 17% at end This recent rapid increase is directly related to the impact of the economic slowdown since 2008, which has adversely affected the repayment capacity of large loans especially in the tourism sector. Credit management, administration and recovery management of banks has a large effect on the Banks NPLs. The unavailability of adequate amounts USD in the market to service USD denominated loan repayments has been an issue too. General issues of concern are the excessive level of credit concentrations and the inadequate management of credit underwriting and administration. Additionally, the weaknesses in the legal system which 7

8 make the processing of cases through the court system very slow, affect the recovery of NPLs. The level of provisioning for non performing loans is a matter of concern. Some banks are not yet in compliance with MMA's provisioning requirements, but forbearance was granted until end of 2011 when all banks are expected to fully comply. 3.3Earnings Since 2006 the earnings was on a decreasing trend and dropped significantly in 2009 and The sharp drop in income results from higher loan loss provisions and drop in interest income, mainly caused by higher NPLs. Profits likely will remain depressed for near term until asset quality improves and/ or higher non interest income can be generated from fees and commissions. 8

9 3.5Liquidity Liquidity of the banking system decreasedfrom 2003 to 2008, falling to 23%; however, it rebounded to 39% in The liquidity position of the banking system is strong mainly due to the high minimum reserve requirement which is currently at 25 percent due to the high minimum deposit reserve requirement of 25. Although the liquidity ratios are strong in terms of domestic currency, US Dollar liquidity remains tight. 3.6Sensitivity 9

10 Sensitivity to market risk (NOP risk) is above 15% limit for USD; for some of the banks and hence are not in compliance with the MMA regulation on foreign currency exposures limits which requires banks to maintain single exposures at 15% of capital and overall exposure at 40%. However, forbearancewas granted until end of 2011 when all banks are expected to fully comply. 10

11 4 Legal and regulatory framework 4.1 Banking Act One of the most important steps and a milestone in strengthening the financial sector was enactment of the first Banking Act of the Maldives in December Prior to the Act, licensing and supervision weredone under powers in the Maldives Monetary Authority Act. The new Banking Law provides a comprehensive legal framework for banking and supervision in the Maldives. 4.2 Banking Regulation Prior the enactment of the banking act, under the MMA Act, regulations and circulars were issued to regulate and supervise the banking industry.inmay 2009, the MMA issued several prudential regulations to address the main areas of risk in banking such as capital adequacy, single borrower and insider loan limits, external audits, and asset classification and provisioning. In early 2010, a regulation setting net open position limits was issued. The introduction of international best practice standards has been a challenge for the industry and the regulator alike, but it has been a necessary and beneficial change for the future health of the banking industry. 4.3 Banking Supervision The MMA has a statutory mandate to license, regulateand supervise banks to ensure that they are well managed and risks are contained within prudent limits. If banks are determined to have too much risk or are engaging in unsound or unsafe practices, the MMA applies corrective measures or enforcement actions to resolve problems. These may include informal warnings or formal orders depending on the seriousness of the problems. A guiding principle of MMA's supervisory process is to identify and intervene promptly so as to prevent problems from becoming unmanageable and/or very costly. The MMA monitors the compliance to regulatory requirements and the soundness of banks through a combination of both on site and off site activities.the MMA also holds regular 11

12 meetings with bank managers to brief them on economic matters and to discuss other issues that impact the financial sector of Maldives. As necessary, the MMA meets with the managers and boards of directors of individual banksand with their external auditors to review matters of concern and develop mutually agreed plans for improvement. Prior to 2005, on site inspections conducted by MMA were limited mainly to loan reviews and were not conducted on a regular basis. Beginning in 2005, comprehensive on site inspections were made of all banks. Examinations are risk focused and incorporate the uniform bank rating system, more commonly known as the CAMELS rating system. It is expected that on site examinations will be done at regular intervals not exceeding 18 months or more frequently for problem banks or banks that require more attention; however, the on site process is still a "work in progress" that will improve with further development of the examination staff. 12

13 5 Financial Sector Development Projects MMA is introducing technological advancements and other improvements to the financial sector. In February of this year, MMA inaugurated a Credit Information Bureaupowered by Dunn and Bradstreet, one of the world s leading business information service firms. The availability of broader credit information should enable banks to make more informed and better credit decisions. The payment system is anothermajor part of the financial infrastructure.in May of this year, MMA launched an RTGS Real Time Gross Settlement System. This system processes large value and urgent interbank transactions on a real time gross basis, thereby reducing settlement risk and adding stability in the financial system. An automated clearing house will be inaugurated in the near future as well as a national electronic funds transfer switch and a mobile phone payment system. 13