Thursday, December 25, 2008

Saving Bank of Maldives

The ownership structure of Bank of Maldives (BML) is as follows: the government of Maldives directly owns 51%, STO 4.2%, MTCC 4.1%, Government Employees Provident Fund 7.3%, Rayyithun Account 4.1%, and general public 29.3%.
Although the government directly controls 51%, since both STO and MTCC are partly government owned companies, it can be said that through the shares owned by these companies the government has an indirect control over the bank. In that case, almost 60% is controlled by the government, while the general public owns only a mere 29.3% of shares.

How is social welfare affected or minimized due to the government ownership and control of a significant share of BML? How much social welfare can be increased by privatizing the existing government shares?
As Bank of Maldives is the only local commercial bank in Maldives, can privatization of BML help in efficient allocation of capital to business enterprises, and further development of the financial sector of the country?
In order to answer these questions, we need to analyze the costs and benefits of the current ownership structure.

The board of directors is entrusted to formulate strategic issues of the bank, and the management is held accountable to the board. The government nominates the chairman, and seven directors to the board out of the 11 directors. Three are elected from the general public. The Managing Director/CEO is also recruited by the government. There is no doubt about the level of influence the government can have on the lending decisions and day-to-day activities of the bank.
The public interest view put forward by many economists states that government control is necessary if the private sector is unable to provide a necessary service (or a public good) to the society, and as a result of government provision, the public interest is maximized.

When Bank of Maldives first started its operations in the country, government involvement was necessary as the private sector did not have the necessary capability to establish a commercial bank, and hence government initiative provided public interest, and maximized social welfare. A similar story goes to government involvement in other major public corporations like MIFCO, Dhiraagu, and MNSL.

However, as Bank of Maldives has become an established commercial bank, reducing government influence may reduce possibilities of corruption, chances of abuse of power, and possibility of using bank’s resources for political advantages. It can also help in better allocation of scarce capital resources, and effective development of the financial sector. A very simple example could be the case of ‘connected lending’, where bank managers lend money to well connected people with poor credit history. When huge loans are made to politically well-connected people, and when these highly concentrated loans become non-performing, could affect the profits of the bank. When this happens, the rights and interests of the remaining share holders from the public are not well protected. Past lending decisions of BML and records on some non-performing loans support this claim. In the past, some directors to the board have been assigned by the government without considering their capabilities or professional capacity. These decisions were mostly politically motivated. This will also affect decision making process of the board of directors on important strategic issues of the bank.

What are the benefits of keeping the existing government shares in the bank? Considering the fiscal revenue to the government, BML paid about Rf119 million as tax from its profit to the government in 2007, in addition to the revenue as dividends of Rf9.3 million that was paid in the same year. Even if all the government held shares are sold to the public, the government would still receive the tax revenue, but would have to sacrifice the dividend revenue. However, with the possibility of improvement in the bank’s performance as a result of less government influence, the gross profit of the bank may increase, leading to higher tax revenue that may compensate the loss in dividend revenue. In that case, reducing government influence may be fiscally much beneficial to the government. If not completely privatizing the bank, reducing the government direct control to at least 36% instead of 51% may also lead to a much efficient outcome, as this will increase the shares held by the general public to at least 44%, and hence improve accountability of the bank managers to the public.
Empirical evidence from most countries in the world also suggests government influence, and connected lending as harmful for efficient capital allocation and development of the financial sector. With effective corporate governance principles and regulation by authorities like MMA and Ministry of Finance, the bank can be held responsible to its shareholders without the government having to have political control over the bank’s operations through direct ownership of shares.


  1. Naseer once again you are spot on with your analysis of BML’s ownership structure and its negative consequences. I think quite rightly you have pointed out the damages and the unfairness posed by “connected-lending”. This is a serious deficiency in our system of administration. By system of administration I happen to mean the way the Board Members gets elected and how they function as a team.

    If governments own majority of their shares, obviously they would require a proportion of the board members no less than the percentage of their ownership. On this case, the 12 members that comprise the board, 9 of them come from the direct nomination from the government (meaning 75%)! As you had pointed out in the article, almost 60% includes a vested interest by the government (directly and indirectly). Let me point out a couple of thoughts that goes along the same lines as yous.

    First and foremost, we can still argue that the government’s MUST have a significant share of BML as currently our financial system is very new to be left alone to administer. By new I mean, we are just a basic system of which the only products we could offer are the traditional loans and savings accounts (ofcourse you can add these days some of the credit card accounts). A system being new doesn’t justify the government to have majority control over the ownership and hence a dominant position in the board. I think part of the reluctance (be it knowingly or unconcisouly) could be the fact that given the shares to be controlled by the public, at any time one dominant businessman (such as the likes of Burumaas, Universals or Others) could start the unfair practice of slowly takingover the business and having the majority control. If this happens, what consequences will BMLsuffer? What about the Government? And not only the government, but the entire economy could face the hardships that goes with it. So the point is, how can we establish a system whereby individuals cannot control a majority of stake or ownership? I guess this indeed is a topic that might be of interest for another article!

    This being the case, I think it would be wise for the government in the short term to reduce their interests from the stated 60% to a mere 51% (ofcourse in the name of FAIRNESS to its citizens). This 51% is purely precautioney just so that at any one point, no individual gets a dominant position or control of the board. I think trimming the ownership down to 51% can also improve the efficiency of BML by a mere 9% (given that the government will be giving away 9% of its control to the public at large) provided this must be the representative proportions of the BML Board. That 9% is not necessarily a direct improvement of efficiency, but quite honestly the face value of this change.

    Given this, I think there must be precise and clear cut criterias on who could become board members. Certain types of experiences, qualifications and exposures are vital to guide a company such as BML into the future. Just simply nominating someone who had long served the government, or have been a child of a big business doesn’t justify anything! If the board could have the right people (by right I mean the collection of qualifications, experiences and exposures), it could also make a difference. I don’t really know what should be some other qualities of these board members, but I think whatever it is, it must be transparent!

    In addition to this, the board’s functioning could also be an important element. How do these people analyse their cases, how do they make their decisions, how do they form opinions, and also on top of this list, how can we question them as to their decisions?? Making people responsible for their actions is vital. As the great saying … with great powers, comes great responsibilities.

    Further to this, I think BML and other Banks needs to be closely monitored in terms of its liquitidy levels and of its lending practices. We know that these very banks are sometimes forced into very bad practices such as the practice of valuing certain properties or assets without having any deeper knowledge of how to even value a certain item. Independent valuers or perhaps professional valuers could play a bigger role in actually assisting these very banks in properly understanding their very collateral that they hold.

    Naseer you have just highlighted some issues that flourishes on the horizons of BML. I support your views simply because i am a firm believer that it is the structure that could provide the much needed efficiencies. Without a good structure, even the worlds best strategy will collapse. BML needs that structure … and it starts with the BOARD!

  2. Maldive National,
    You are absulutely right, we have the danger of powerful businessmen trying to control through ownership of huge shares. A similar thing happened in the case of MTDC. However, as our country is moving towards a better democracy, things like accoutability and corporate governance has to develop. With the establishment of an independent auditor general, capital market development authority, and many other similar institutions, such actions can be brought to notice and avoided.
    What you've said about monitoring of banks is definitely true. What we need is better regulation and supervision of banks and other financial institutions.
    Once again, thanks a lot for your contributions.

  3. Naseer, this is a very good article. I really enjoy reading your articles. Good Luck.

    Btw, have a look at this link. This person seems well aware of Maldivian economy.