PKF study probes banks’ ‘oligopolistic position’

Last year PKF ventured to conduct research on the banking sector where only a few realise how banks operate in a highly concentrated market, yet one can conclude that such concentration negatively influences the degree of price transparency.

One may argue that such an oligopolistic situation could arise whereby banks would follow each other’s behaviour on the market by offering very similar products and gradually inculcate a culture of profit taking even in retail products sold over the counter. Economists may tell us that only intensive research will reveal if such perceived implicit and or explicit concentration truly exits among local banks with special reference when conducting negotiations over new loans to SMEs.

As part of its support towards clients, PKF planned to conduct market research to assess the level of transparency in the local market particularly where SME’s are concerned, but as can be stated later on, this project failed as it found no empathy from neither regulators, the banks or other sources such as data held at the Central Bank.

In Malta, one seldom remarks that credit providers of bank loans to SMEs are a handful – actually being fairly concentrated in two main financial institutions.

The SME loan market is a market where movement among players  is limited if not static, with some exceptions. 

PKF found out that switching between banks, which ought to happen in a non concentrated market, does not occur so often and few SMEs  bother to shop around for best conditions of borrowing due to a perceived lack of transparency of prices on offer.

For this purpose, PKF last year commenced on a long, hard journey to collect empirical data on the way risk is recognised by banks when SMEs knock on their doors to seek finance.

The first steps in the methodology was to assess if the interest rate is competitive and if it exceeds the indicative rates regularly announced by European Central Bank. Despite many requests, no breakthrough was registered so PKF had reluctantly to drop the assignment after it held talks with the two main banks to discuss this issue and as can be expected very little – if anything – was divulged.

Both the respective CEOs claimed that the only information they could impart was about press releases and standard information released to the Registry of Companies.

Again, only due to the passing of the Small Business Act in July 2011, by the previous administration, a drive started to build an official classification showing separately the amounts (usually around the €1 million cluster) lent to SMEs.

The general perception is that SMEs are considered a higher risk and therefore must carry a heavier burden as reflected in various sanctions letters issued with corresponding high loan charges and tougher repayment conditions.

Really and truly such a duopoly may finally draw the attention of the Competition authority (MCCAA) to recommend remedies to safeguard SME interests.

It seems that the GRTU, the organisation representing the majority of SMEs in various sectors, will be closely checking their letterbox this year for any redeeming circular issued by the banking or competition regulator on the subject matter.

Obviously this is a complex issue and warrants a proper assessment away from any emotional attachment and a remedy has to be based on proper econometric studies.

A number of articles were written on the subject and talks were held jointly with MCCAA, GRTU, Ministry of Finance and MFSA to examine the issues and last year it was agreed that in the near future an ad hoc study would be commenced.

The dilemma about barriers to finance needs to be solved as it is an impediment  to  competitiveness yet bankers in Malta tend to point to higher costs resulting from rigid Anti Money laundering regulation when accepting clients and ECB tighter regulation with a penchant of nipping the bud of any non-performing loans.

With retrospect, one may reminisce that global banks have had their share of criticism when the recession hit in 2007/8 and governments had to bail them out of their misery – mostly out of taxpayer monies (although no banks were bailed in Malta).

A lot has been written about the causes leading to the demise of powerful banking institutions – bank bashers were quick to attribute this to lax regulation and political patronage. Now the penny has dropped and in Europe the ECB formally took responsibility for bank supervision under the Single Supervisory Mechanism (SSM)  – so it conducted a comprehensive assessment of local banks.

Some bank executives may be silently complaining about the additional cost of such heavy regulation, including one-time costs for the ECB’s stress tests and the ongoing additional fees for the regular supervision. One hopes that such costs are not passed on to customers by way of hidden charges and heavier interest rates.

Work by the MFSA is already underway to examine bank charges and fees but much more needs to be done. As banks get to grips with their business strategy, risk appetite, risk culture and management, they will need information on the risk profile of SMEs which happen to be an important component of Malta’s business community.

There is no need for a prolonged scientific study to unravel the truth behind the lingering perception that lending to SMEs is charged at premium rates while as a general rule lending to big firms is shrinking.

But not everything is doom and gloom for SMEs as the Director General of the Office for Competition has recently consented to open a sector inquiry in terms of Article 11A (1) of the Competition Act to examine the prevailing competition conditions on the market, with particular emphasis on interest rates on loans to SMEs.

This report could not come a moment too soon as it was issued to the public one week after the budget speech and as reported in the financial press it revealed the worst fears that lending to SMEs is at a premium.

It is noted that more than 85% of enterprises can be classified as SMEs, with the majority of these being micro enterprises that employ fewer than 10 workers. Quoting from the MCCAA study it confirmed the view that the two main banks form a quasi duopoly since at the end of 2013, they accounted for 75-100% of the market for bank loans to SMEs, highlighting the assertion that with such high levels of concentration SMEs are typically faced with low levels of competition when accessing finance.

In conclusion, the MCCAA study  says... The interest rates charged by Malta’s core domestic banks on loans to non-financial corporations are amongst the highest in the EU, only lower than those of Greece and Cyprus, whose economic performance suffered significantly in the aftermath of the 2007/8 international financial crisis.

The die has been cast and now there is no hiding behind the thick veil of banking probity or discreet ECB regulation as the Genie is out of the bottle that in Malta banks are earning superlative returns on equity (one reaches close to 21%). Perhaps, shortly, the Minister of Finance may have to reach out to sharpen the blades of a rusty pruning scissors.