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.