Monday, September 13, 2010

Privatize Bank of Maldives

Bank of Maldives - as it appears in their latest Annual Report, is the Nation's Bank. The only domestic commercial bank in the country, with over 27 years of banking service with 260,000 deposit account holders. The bank has achieved many over the years, and has 25 branches and 37 ATMs, provides electronic banking, and works on the financial inclusion aspect through its branches and 'dhoni' service in the atolls.

However, last two years have not been such favourable years for the bank, and this was made worse by the negative publicity in the media about the health of the bank. Recently, with the publication of its 2009 Annual Report, we have been hearing more about the bank, especially when it was revealed that the bank's earnings and profits fell during last year.

Briefly looking at the financial statements, we see that although deposits have increased, lending of the bank has fallen by almost 17 percent. Earnings per share has fallen to Rf9.3 in 2009 from Rf50.2 in 2008 (an 82% reduction). The bank has increased its investments on government securities despite its low appetite on commercial lending. All these factors remind me of only one thing, once again; that our bank should not be owned by the government.

As at now, the government directly holds 51 percent of the bank, while the public holds only 29.3 percent. Which means, there are 8 directors nominated by the government, and 3 elected by the public shares holders, in the board of directors. The fact that the government has the control of the bank, has led to the bank doing many mistakes in the past, like engaging in 'connected-lending', where lending has been done to politically connected people. Some of these connected people have less probability of repaying their loans on time, as a result, the bank's profits will be affected. Another drawback of the government ownership is its influence on the bank regarding investments on government securities. Since, the Ministry of Finance is the owner of the bank, and the ministry is also the seller of government treasury bills, the Ministry is in a position to instruct the bank to invest on these securities, when the government is in need to finance its budget shortfalls. In this case, the bank is not acting in the best interest of its share holders and its core business, further, the private sector will be deprived of its borrowings.

For this reason, it is always advised that commercial banks are freed from government ownership; instead, they be better regulated, monitored and supervised by the state. I don't seem to understand why the government has been so keen to privatize places like Ghiyasuddin, or the Islamiyya School, when these places are public education schools, with relatively good standards of education. If the government genuinely believes that the role of a government should not be conducting businesses, privatization of Bank of Maldives should be on the top of their privatization list. With limited government ownership, and strong regulation by the MMA and CMDA, the bank can be strengthened, and be able to serve its purpose better and effectively.

8 comments:

  1. the same militant milton friedmanesque world view

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  2. to anonymouse above:

    if not privatize, then let bml be run by corrupt politicians to their own whims???

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  3. have you seen the letter from a private share holder to BML ???
    in the letter they sound really unhappy about the way BML is run ... and hold the board members directly responsible for the bad debts of several millions ... :(

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  4. Anni did a degree in engineering, meaning he is a mechanic. so, this is how things will turn up. Board of directors appointed by Anni are all political fellows who are only interested to get more fam and more money into their pockets.

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  5. @Anonymous September 13, 2010 4:14 PM:
    There are reasons for state involvement in certain businesses/services, in order to maximize social welfare. Likewise, there was a reason why the government had to get involved in setting-up the bank 27 years ago. However, at this stage, what we've learnt is that social welfare is not protected when the board directors are nominated by politicians, and the daily business of the bank is influenced by politics.
    Please see my earlier article on this:
    http://maldiveseconomist.blogspot.com/2008/12/privatizing-bank-of-maldives.html

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  6. This comment has been removed by the author.

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  7. The way I understand it, the bank's performance is reflected by the poor performance of the economy itself.

    The economy has withstood injections of inexplicable currency in the money supply and demand has not been able to narrow the difference in equilibria of the value of our currency over the time that the country would have hoped so. For this reason, I believe it's a state stipulation that the reserve ratio be high in order to reduce borrowing (under the directive of the MMA), and since BML is an additional tool at the government's exclusive disposal,they have manipulated this resource unfairly to restrain further spending that could worsen the stability of the 'Rufiyaa'.
    However, they must be mindful of the circumstances of the ownership of BML; that civilian owners do exist.

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  8. I do admit however, that BML is deliberately under-analyzing credit thresholds of some of its clients who may be politically affiliated.

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