21 Mar Interview with Karol Gabarretta, Secretary-General, Malta Bankers’ Association
Can you give us a description of Malta Bankers’ Association (MBA)’s current role and responsibilities?
The association is a young banking association set up in 1964. With changes and new legislation put in place to prepare for Malta’s entry into the European Union (EU) in 1994, our memberships increased. The association is active in coming up with common positions voiced by the banking sector. We approach authorities such as the European Commission and the European Central Bank and provide them with views of the local banking sector, often in consonance with the European Banking Federation. Although we have internal structures that discuss technical issues, due Malta’s characteristics, the MBA secretariat is unsurprisingly very small and consists of only three people. Almost all the technical work is done by our bank’s representatives who meet, share views and come up with common positions. Similar associations in Europe and beyond are a very heterogeneous mix. Some associations are almost self-regulatory organisations, others appear to be almost quasi-regulatory bodies and others engage very publicly and trigger processes for all their members. In our case, we are rather on the opposite side of the spectrum.
We have also been doing our part to enhance financial literacy and financial education. Even in sophisticated jurisdictions, these issues are still pressing matters. There are groups of banks’ clients who need to be made more aware of the current issues today through requisite financial education programmes to prevent those with bad intentions from accessing personal funds. We have been active in this area through the assistance and in collaboration with our members and the government and will remain active. We believe that while banks are not social organisations, they should have a social conscience.
How would you categorise the different types of members in MBA?
While our number of members has changed over the years, today we represent quite a heterogeneous mix of 20 banks. We classify our banks using the same model used by the Central Bank of Malta and the Malta Financial Services Authority. Our core domestic banks are Bank of Valletta, HSBC, APS Bank, Lombard Bank, BNF Bank and MeDirect Bank. These banks are almost exclusively focused on doing business internally within Malta and the country’s economic sectors. Malta’s three largest local banks are directly supervised by the European Central Bank with assistance and in collaboration with the local supervisory group Malta Financial Services Authority.
The next category is Malta’s non-core domestic banks, which comprise six banks. These are typically smaller with possibly limited business in Malta. These entities are generally specialised and provide mortgages, corporate lending, trade finance or depository services. There are also a couple of banks focused on servicing the group companies of the shareholders of the banks in question, which are focused on the manufacturing industry. These banks serve as the bank of the group but are still subject to all applicable regulatory and supervisory requirements.
The third category is that of small international banks specialised in certain areas. We have banks whose business is almost exclusively dedicated to acquisitions in payments while others are focused on providing short-term loans. We have two branches of Turkish banks and a branch of an EU bank. There exists another branch of a European bank in the market, but they are not yet a member of MBA possibly because its activities are in depository services with asset management firms.
How does Malta’s banking sector differentiate from other similar sectors in Europe?
Bank lending forms the absolute majority of financing for local corporations in Malta. This is in line with the general trend in Europe where companies rely on financing from banks much more than equity or debt instruments. The issue of local debt instruments has increased significantly over the last five to ten years, even among small corporations, and there now exists a special market for them in Malta. While we are but a small rock in the Mediterranean, Malta’s banking sector is quite diversified and covers a broad range of sectors. Our banking segment goes well beyond catering to the needs of our population of 500,000 or thereabouts, which is the size of a large town in Europe. It is interesting to note that most Maltese banks are almost entirely funded by customers’ retail deposits, which means it is impossible to find a local interbank market. However, there remains significant trust in the banking sector. Malta’s liquidity ratios have increased substantially, particularly over the last five years.
How would you assess the current level digitisation of Malta’s banks?
Local banks are striving to digitise many of their services and products. Due to the COVID-19 pandemic, there has been a significant uptick in the use of digital services. The pandemic was a game changer for clients who may not have shifted towards digital solutions beforehand. That said, the use of physical cash and cheques in Malta remains quite high. A large factor is that Malta — like most of mainland Europe — has an ageing population. Most of our elderly were nurtured in an environment in which going to the bank was part of their daily life. Many banks retain a significant branch network considering the size of the island. In the pre-pandemic era, almost every town in Malta had its branch and sometimes more than one. However, in the post-pandemic era, it has become evident that digitising services provides added value and reduces costs. Some larger banks have reduced their branch networks while other smaller banks have increased their branch networks. With all new requirements necessary due to constant changes in the regulatory landscape and new cyber security challenges, banks require a very extensive, robust and secure network to ensure protection of internal proprietary funds and those of its customers.
Inevitably, all our member banks are moving towards the utilisation of the latest technologies. While some smaller banks may not be as advanced as the larger ones in this respect, they are more agile in their response. For example, some smaller banks are exploring the use of artificial intelligence for certain activities. In the area of anti-money laundering and countering the financing of terrorism, our members have realised the benefits of having systems for transaction monitoring, which is impossible without proper and up-to-date monitoring systems. One cannot rely on this being done physically without additional resources.
While our banks are not necessarily at the cutting edge of technology, within the context of the local economy and size of our banks, they are moving along the right path and have advanced significantly. All banks are forward looking. These days at least five out of the six core domestic banks are quite advanced in the digital sphere, and one can perform around 95% of banking transactions online and through mobile phones. The next frontier is tweaking systems and exploring alternatives in things such as cloud services. One challenge is having the right talent with the right skills in information technology. As a small country, this is one of our greater challenges as those with qualifications in these areas are in high demand.
There are also 54 entities operating in Malta known within the terms of law as financial institutions. They provide payment accounts and payment services both in wallet form and through electronic money. They are not members of MBA. These small institutions are very open and more cutting edge in their approaches to digitalisation. The growth of these entities shows how technology can make institutions more efficient and is creating a more competitive market. However, each of these institutions has entered into some sort of agreement with larger banks to explore synergies and to see whether there could be scope for mutual interest and benefits accrued through collaboration. Such types of partnerships will be explored by our members in the coming months and years. There are significant changes ahead. We are on the verge of having instant payments and a third payment services regulation, known as the Payment Service Directive.
What new challenges and opportunities has the EU’s Green Deal and focus on lowering carbon emissions created for banks in Malta?
Sustainability is on the radar screen for Malta. In my opinion, there are several aspects of this that are challenging for our local banks. First, there has been a significant increase in reporting requirements. While it is excellent that stakeholders of banks know with whom banks are doing business, to what extent these industrial sectors are contributing to greenhouse gases and whether these industries are striving to reduce their carbon footprints, it is a challenge to obtain data from customers to meet the granular requirements disclosures now dictate. There is push back from certain customers in that banks are asking more questions and requiring more information. While other customers may have more recognition and are more sympathetic, this challenge remains at the local scale.
In Malta, most loans from core domestic banks are to the retail sector in the form of personal and mortgage lending. The local banking sector is not exposed to oil and gas, coal mining or large polluting chemical industries. Everything is on a smaller scale. While we still have emissions from our industries both directly and indirectly through import content, a main source is our buildings and real estate. Many people in Malta are homeowners, with homeownership rates one of the highest in Europe. There are opportunities for at least our core domestic banks to lend house owners funds to make habitations more sustainable. To an extent this is already being done at low and attractive rates for solar panels or double glazing. However, this should be coupled with incentives from the government for those taking out loans to change their domicile to become less energy-consuming and have a lower carbon footprint. This represents both a possible future source of business for banks and a positive movement for the country as a whole.
On the corporate side, the principle of providing loans to shift enterprises to become greener is another possible source of future lending for many of our banks. There exist challenges because some corporations are very attuned to what they must do from an environmental, social and corporate governance (ESG) perspective while others may be less sympathetic. It will be challenging for operators — particularly in those sectors that service the building industry — to strive as much as possible to become greener in their outlook and business model.
The ESG agenda is being monitored and driven by regulatory authorities. They know the challenges, and they are cognisant that banks will do their utmost to be compliant. Banks have been vested with the role of gatekeepers in ESG arena similar to the way banks were conferred many years ago with the role of gatekeepers in anti-money laundering and countering the financing of terror. While much has been done in the area, locally it remains rather fluid. We need the passage of time to see the impact of sustainable banking practices on the market. While commitment from our banks is there, from a social and governance perspective perhaps more improvement may be necessary overall. While it may never be possible for Malta to be one of the top emitters in the world, we could be emitting less per capita. However, this cannot happen overnight.
In terms of green finance, one of our six core domestic banks issued a term deposit in the form of a green deposit, the first type of this product we have seen in the market. The bank’s assets funded by these deposits are purely sustainable projects. Additionally, we recently had an issuance of green bonds by one of our utilities that proved to be a success. This activity is expected to increase with other utilities and entities joining in. Green bonds are an area designated in our strategy for financial services that the government endorsed earlier in 2023.
What future goals does MBA have in terms of representing its members?
As an association, we would like to continue to voice our member’s views and provide a more positive picture of the banking sector. One of our future goals is to increase the banking sector’s voice overall whether it is on issues of national importance or issues related purely to regulatory and supervisory issues. We have been quite successful. There exists a high percentage of relevant authorities in Malta, and we have achieved good relations with many. We will continue to increase our footprint. In the last couple of years, we have also shifted our focus on engaging more with stakeholders as banks are very often criticised for not being sensitive enough to the needs of certain clients. We now meet with representatives of consumer associations, practitioners’ associations, associations for small and medium-sized enterprises and non-profit organisations. We listen to specific issues and discuss why certain things are done in certain ways. However, we do not speak on behalf of our members. If there are internal issues, it is best for parties to engage directly with those involved.
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