Lending by commercial banks in Malta

Abstract

Commercial banks are the major financial institutions in any economy, Malta being no exception. Banks are continuously faced by the trade-off that exists between the borrowers' and lenders' requirements. Lenders desire liquidity, minimum risks and maximum return, while borrowers require funds to be available at a specific date, for a specific period and at the lowest cost possible. The main objective of this dissertation is to analyse the Maltese commercial banking sector vis-à-vis lending. This study will compare the lending practices and procedures of some local banks in order to highlight any differences in the way the granting of loans is carried out. The lending process may depend on many factors, such as the level of competition in the financial industry, the perception of credit risk, the level of risk aversion, availability of close substitutes for loans, and many more. The level of risk undertaken by the bank may be influenced by credit rationing and the uncertainty about the creditworthiness of the potential borrowers. Commercial banks need to protect depositors and shareholders' interests as well as seek to fashion lending policies that encourage the growth of business. Areas such as the demand for loans by businesses and households, the different types of loans and other forms of credit, depending on the need of the individual or company, will be dealt with. Furthermore, this dissertation will seek to identify the process involved in the lending activity, the documentation that is normally requested at inception and its use as a tool to evaluate and assess the risks involved. The process of how the banks mitigate the credit risks and the question of how they deal with defaulters are also analysed. ii It was noted that some banks promote one type of credit more than another depending on their appetite for particular sectors. Other aspects which will be taken into consideration are the matching of the banks' inflows and outflows, the term of the loans and the amount of capital adequacy and liquidity required by the banks. Five commercial bank representatives were interviewed in order to examine and understand their respective banks’ strategies implemented in the lending procedure. Additional information was also attained from the Maltese regulator, the Malta Financial Services Authority, annual reports available online, as well as the respective websites of each of the commercial banks in question. Findings revealed that Maltese banks emphasize a lot of importance on the credit analysis as the Banks deem the purpose of the potential borrower and the approach towards managing their credit impinge on the re-payment of the loan. At the end of this research the author proposed a number of recommendations on how the banks could continue advancing their credit aptitude and enhance their customer base in the process.