European Commission green-lights Malta Development Bank

The European Commission approved the Malta Development Bank as it found it be in line with EU state aid rules.

Deputy Prime Minister Louis Grech explained that the European Commission’s decision laid down the agreed parameters for the bank’s operations, including its compliance with various rules relating to state aid and general block exemption regulation. It is also said to specify the financing envelopes approved for the bank for the first three years of operation. After this period, Grech said, these will be reviewed in the light of developments.

“The Bank will be considered as a non-profit making institution, but according to its statute, it will follow prudent banking practice and only finance projects that are commercially viable. It will initially operate through guarantee schemes provided to the private commercial banks, who will continue to inter-relate directly with their clients and carry out due diligence and project sustainability studies,” Grech said.

Grech added that the bank will be an unregulated financial institution, but its operations will be monitored by a strong supervirsory board. The bank will reportedly not take retail deposits, but its capital can be augmented by loans from other financial institutions. There is also the possibility, according to Grech’s statement, that the bank may later be authorised to issue bonds to the public.

Grech described the European Commission’s decision as a “fundamental step in extending Malta’s financial structure.”

“The country will now have a financial institution that specialises in development and which will not be guided solely by the profits of the shareholders,” Grech said, explaining that the principal aim of the bank will be to promote socio-economic development through non-commercial activities to finance different sectors without unduly distorting competition. The main sectors will be Small and Medium Enterprises and Infrastructural Projects, he said.

“The scope of the bank is to finance commercial enterprises, particularly small and medium sized ones, which have sound plans for new businesses or wish to expand existing ones, on one hand, and to finance medium and large infrastructure projects on the other.”

“The bank will have an authorised capital of €200 million, allowing it to leverage this to around €1 billion of loans in due course. However, the initial paid-up capital is expected to be around €30 million, with further capital pay-ups depending on the growth of the Bank’s business,” Grech said, adding that the bank will be completely owned by the government. “It will have a guarantee from the Maltese government on both the assets and liabilities side, the extent of which will be negotiated between the bank and the ministry of finance.”

“The government is expecting the bank to have a prominent role in stimulating investment and growth, making access to finance easier and, wherever possible, on easier terms. It will fill a long-felt void,” he added.

In his statement, Grech said that the Malta Development Bank will act mainly as a second-tier financial institution crowding-in established credit institutions. “This means that it will primarily operate when the private commercial banks fail to make appropriate financing available or, if it is available, it is not offered at normal market terms.”

The European Commission’s Directorate-General Competition approved the bank after months of negotiations between it and the Office of the Deputy Prime Minister, with the assitance of a working group under the chairmanship of Rene Saliba.

According to Grech, the negotiations were complemented by various technical studies commissioned by the government in order to establish the magnitide of market failure as well as to draw up a business plan for the bank.  Furthermore, a series of consultations were reportedly held with various stakeholders together with representatives from the Nationalist Party.

The bank will not be considered as part of the government’s finances, and therefore it will be excluded from the deficit calculations, as reportedly already advised by the Eurostat office.