Bank of Maldives is the country’s largest financial institution with more than 300,000 customers and assets valued over MVR40 billion. In 2021, with the country still reeling from the shock of the pandemic, BML saw a profit after tax (PAT) of MVR 1.9 billion. Last year, the bank’s profit stood at a respectable MVR 1.48 billion, buttressed by income from interest which amounted to over MVR 2 billion. What is wrong with this picture?
The Problem
“BML operates from a very safe space while charging extremely high interest,” says a businessman involved in a resort construction firm wishing to remain anonymous. “If you want a loan of one million, they’d get you to collateralise something of equal or greater value, and then charge you commercial interest rates of over 10 percent. BML is incredibly risk averse, but they still want to make a lot of money from their lending.”
What this means for entrepreneurs and businesses is that they face severe financial obstacles to their growth. The cost of borrowing is extremely high. Meanwhile, banks abroad are lending at less than half BML’s rate to their customers. Multiple local businessmen we have spoken with say the high cost of credit in the Maldives is a large deterrent to companies wishing to engage in capital intensive ventures in tourism and other commercial pursuits.
But this is not the only issue with the bank.
Interest and self-interested individuals
BML offers Lui Loans and Lui Express Loans without any collateral to individuals who meet their criteria, which include having a source of regular income. Currently, Lui Loans carry an interest rate of 15% per annum, which is charged to the borrower’s loan account daily – this information is in the fine print of the loan agreement. Meaning if you borrow MVR 25,000 from the bank and spread the loan amount over a five-year period, you would end up paying close to MVR 45,000.
The bank also offers “lifestyle loans” which come in two flavours – the first lets you borrow without security at 15% if you receive rental income, which must be routed through your BML account for the past year.
The second is more lenient at 12% with less stringent measures – 3 months’ rent routed through any bank account. However, it asks for a security worth 150% of the loan amount. BML plays it safe while its customers walk the tightrope.
Tough on students
Back in the 2010s, BML was charging commercial interest rates on student loans, at over 10%. Those who wished to study abroad were saddled with great debt that kept on accumulating. An elected official we talked to revealed that he borrowed MVR 540,000 from the bank in 2016 to study. “My father had to collateralise our home, which is valued at 14 million for the bank to finally release this loan,” he said. “Up till today, I have paid almost MVR 700,000 and I still have not paid it [the loan] off. What’s more, our home is still collateralised so we can’t get any more loans. How is this remotely acceptable from a bank that’s owned by the state?”
The bank has since revised interest rates on student loans to 5% but still asks for collateral valued at 150% of the loan amount.
SOS to the Central Bank
The Maldives Monetary Authority, our central bank, publishes a Treasury Bill rate – considered the risk-free rate (risk-free since these bills are backed by the government). The T-Bill rate or risk-free rate sets the limit on the lowest interest rate on loans. Banks then add on their premium to this percentage, based on their assessment of the risk of lending and other factors. Through manipulating the risk-free rate issued on government bills and bonds, MMA can indirectly influence the interest rates of commercial banks.
Ultimately, though, it is up to the banks to decide on the terms of their lending.
MMA’s current one-year T-Bill rate is 4.6%. Meanwhile, BML’s guesthouse loan scheme advertises an interest rate of 12%.
A veteran business-owner believes that the risk of default is unusually high in the Maldives so banks are cautious. “And unlike some other banks here, BML needs to borrow dollars from abroad and this further drives up the cost of lending,” he says. “So, it’s not surprising their interest rates reflect this.”
The BML’s PR team also revealed to us that changes to the rates of the Federal Reserve in the US affect the rates here as BML’s rates are directly linked to the Fed’s rates. “Any changes to Fed’s rate are absorbed by the Bank and not passed on to our customers – our interest rates are fixed.”
Yet a longtime financial employee says these do not justify the high cost of credit here.
“Also, bad debts aren’t unusually high in the banking sector so there’s no high default rate,” they add and note that the banks, especially BML, are unwilling to take on any risk.
What’s to be done?
It is not just BML that lends at exorbitant rates – on the matter of interest, all eight banks in the country are on the same page. In a typical free-market scenario, more banks would mean more competition and better rates for customers. Why has it not happened here?
An expert on the Maldives economy revealed that there is an excess demand for credit in the Maldives, so the banks are, in economic terms, price makers. This means banks here have some level of freedom in setting the price of lending as there are more than enough people who are willing to borrow from them.
“There are also other factors because the financial sphere of the country is still very young,” he adds. “For example, there is no credit rating agency here. This is important for assessing risk and calculating risk premiums for individuals. The better your rating, the lower your risk, so banks can lend to you at a lower rate.”
BML is 62% government owned, but that does not mean the bank works in the interests of the majority of those who form its userbase. Its fourth quarter report from last year reveals that BML spent over MVR 30 million on marketing and CSR activities. The two components are mentioned together and it is indicative of how BML views CSR. The bank however did lower the interest rates on student loans to 5%. But it is yet to lift its COVID-19 US dollar limit on debit and credit cards, which has a huge impact on customers.
“BML projects a very pro-people image,” says a banking expert, on the condition of anonymity. “In real life, it’s anything but. This is a corporation driven by profit, and they’re making billions. Why change anything?”
If there is no pressure by influential agents, there will be no change to the running of the bank – interest rates will remain high. The economy expert believes there is a major role that the government can play as the majority shareholder to persuade the bank to lowering their cost of credit to a more socially beneficial level.
And if BML, the country’s largest bank, lowers their rate, other banks will have to follow suit. But there needs to be real pressure, first. Not just on Twitter. (X)
(this article first appeared in Ocean Weekly)