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Banks complementary to the Exchange

Marcel Cassar, chairman of the Malta Bankers’ Association, says his association has been sounding the warning bells for some time on how certain companies need to restructure their finances.

The Malta Stock Exchange and the local banking system are highly complementary, in terms of providing opportunities, avenues and channels of financial intermediation, according to Marcel Cassar, who chairs the Malta Bankers’ Association.

“In a sense, the Exchange is another source of funding and an important one at that,” he said. “It should be a companion, a partner on the financing journey.”

Bankers meet clients constantly who have excellent projects, or have excellent ideas, but lack adequate funding. “Very often they will be asset rich but will not have the liquidity and, typically in Malta, as companies grow in size, they do not strengthen their governance and financial management, leaving a lot to be desired, particularly the way their financing is organised,” Mr Cassar said.

He observed that a lot of education is needed with certain business owners and, more than that, a generational change was needed for there to be a different mentality. “You see companies that are growing to a certain size, going into projects where more risk capital and equity should be employed, but they are not going for equity because they don’t want to dilute control, so they keep referring to the banks.”

Mr Cassar is under no illusion that this is going to happen any time soon. With particular reference to Prospects, when companies approach the Exchange for a bond issue, and they draw up a prospectus and bring in independent directors in line with statutory requirements, this is not being done in earnest.

“Very often the attitude for good governance still does not improve and you see the same names and faces appearing on multiple boards – almost like renting a director – or inexperienced individuals taking up board positions,” he said.

He is adamant that bank financing and funding through the stock exchange are not in competition. “Clients will require leverage, bank finance, and other types of financing over their business cycles. It’s not competition – different risk profiles and phases of the business journey require different types of financing.

“Sometimes it’s equity or venture capital that you need. Your typical banks are not there to provide risk capital because they are ultimately passing on depositors’ savings. Banks are regulated more than ever before, and everything is measured according to their risk appetite.”

In response to the sometimes vociferous criticism that banks are on occasion reluctant to make available funding despite the high liquidity in the country, Mr Cassar said: “Banks are in business so whoever comes up with a good project or idea is likely to find a bank to finance it. Banks have largely financed Malta’s economic growth over the decades and continue to do so. But if a proposal is considered as too high risk, requires equity and not bank financing, or is outside a bank’s risk appetite – and the reasons can be many – it may find banks reluctant to support it.”

For this reason, the Malta Bankers’ Association feels it has a responsibility to sound a word of caution about certain names that approach the Prospects MTF for a listing. “Unfortunately, the Maltese investor tends to run after the higher coupon return while ignoring the potential risk of that investment,” he said.

“We see firms approaching Prospects with a viable business model while others do so to raise money which should be generated from their operations but is instead locked up in property or other assets. If some businesses need to restructure their financing, then Prospects should treat them with caution, and we have been sounding the warning bells for quite some time now.”