18 September 2014

Banking: Co-operatives Would contribute to further diversification

 - Friday, 28 September 2012, 00:00

A co-operative bank in Malta would certainly contribute to the further diversification of the Maltese banking sector, and would be a positive development, Finance Minister Tonio Fenech yesterday told the co-operative banking seminar.

The theme was ‘An alternative model for banking in Malta: A case for setting up a co-operative bank in Maltese economic realities’.

From experience around us, Mr Fenech said, micro and smaller businesses could be primary beneficiaries of such a development. Studies carried out by European institutions show that European SMEs rely more on bank loans than their counterparts in some other economies.

He said the thinking behind the cooperative movement should appeal to the Maltese people’s sense of community and solidarity. Co-operative societies have existed in Malta since the latter years of the 19th century. As in many other countries, they had their beginnings in the agricultural sector, with farmers, who typically owned very small holdings, getting together to buy some bulky and expensive piece of machinery, like a threshing machine.

But the Maltese legal framework, as it has evolved so far, while providing for co-operatives and for commercial or joint stock banks, does not provide specifically for co-operative banks.

The local Co-operatives Board is exploring all possibilities where the authorities can help create the necessary legislative framework for a co-operative bank to be set up locally. It seems that no radical revision of the relevant legislation would in fact be necessary for such a bank – or a bank to serve the needs of co-operatives – to be established. In fact, I understand that only minor amendments to our Banking Act would be required to allow the market to take the initiative to establish a co-operative bank in Malta, Mr Fenech said.

Malta has not felt the effect of the credit crunch to the extent as elsewhere, but the government acknowledges the fact that the major challenge faced particularly by smaller and medium-sized businesses in putting into practice investment plans, talents and ideas is access to finance – and the increase in cautiousness on the banks’ part can certainly impact smaller businesses in no small way.

There are a number of positive reasons why Malta should look further into the possibility of establishing a co-operative bank. “But the matter needs to be studied carefully. For in amending the relevant legislation we will have to take care not only to accommodate the setting up of a co-operative bank (or banks), but also to ensure there will be a level-playing field for all operators involved in the business of banking. Considerations regarding taxation and supervision will have to be taken into account, as will all rules regarding the measurement of capital and of capital adequacy as set out by the Basel Committee.”

Some might argue that the market is already saturated and that local businesses, including large, medium and small, are sufficiently well served by the existing banks. After all, these share many characteristics with co-operative banks elsewhere. They are retail, not wholesale banks, and they are close to their customers.

The primary task of the government is to create a legal and regulatory environment that does not limit competition and thus makes it possible for different types of businesses and financial institutions, including cooperative banks, to start operating.

“I believe there is always room in the market for testing new ideas and for attempts to establish different types of enterprise. We do have one advantage though: While this debate may be relatively new to Malta, we have the benefit of witnessing the workings of co-operative banking around Europe.”

Fair Competition Minister Jason Azzopardi also addressed the seminar, saying that the United Nations declared the year 2012 to be the International Year of Co-operatives, with the theme: Co-operatives Build a Better World.

Co-operative banking has for some reason or other never taken root in Malta. It is, nevertheless, something which the amendments to the Co-operatives Act which he recently proposed for discussion, is intended to encourage, although this is only one of the innovations which the amendments would incorporate.

Co-operative banks have been described as the “submerged part” or even the “Cinderella” of the global banking system, but following the recent financial crisis, they seem to have weathered much better than the more well-known joint stock banks, and there is a renewed interest in them. “Indeed, as a result of the crisis, the co-operative model seems to be coming into its own, exemplifying as it does that social cohesion which, as many EU leaders (including Mario Monti, Prime Minister of Italy, and even Mario Draghi, the Governor of the European Central Bank), have pointed out, Europe risks losing as a result of the general lack of confidence and the economic recession,” Dr Azzopardi said.

Throughout the recent financial crisis, the most serious such crisis since the Great Depression, no co-operative bank anywhere in Europe has had to be nationalised or been declared bankrupt. “I think it is no coincidence, therefore, that criticism of the co-operative model of banking, so frequent in the good years of the ‘return to shareholders’ model, when it seemed there would be no end to the heady rise in profits and top officials in joint stock banks were earning handsome rewards for this seemingly wonderful performance, have dropped so sharply in these later years.”

The co-operative model is now considered worth studying precisely because it favours that social cohesion which Europe evidently needs so badly. After all it has its roots in that same soil from which the European Union has grown: Namely, the values of solidarity and subsidiarity. These are values that Malta too needs to cultivate. It may well be that the time has come to enable the co-operative model to be tried out in our banking system too – as it has in other sectors of our economy.

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