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Opinion • March 28 2004

From NBM to HSBC – Getting Even

Karmenu Farrugia looks back and queries why the Mintoff government went for a Maltese bank; the National Bank

In a banking mode. That’s how someone described my ‘mood’ lately, culminating last week in my rhetorical question “who really is steering the economy?”
Before the final curtain drops on the National Bank (NBM) saga. I feel urged to write about how it was perceived through the eyes of an apolitical economic observer during the tumultuous early seventies – the banks’ nationalisation era.
To the Maltese people NBM was not just a bank: it was more like an ‘institution’ which had served the nation well for over a century. When the country embarked on its industrialisation drive in 1959, NBM was always in the forefront of endeavours. Even today, I still harbour grave doubts as to whether the nation could have achieved the industrial and touristic growth rate it then experienced if NBM had followed the ultra conservative lending policies as advocated and practised by Barclays Bank, undoubtedly the leader in the whole banking sector, much more so than HSBC is today.
To Barclays, the core business was mopping up Maltese savings for investment overseas, naturally at a lucrative margin. The proportion advanced to the economy’s industrial engine was low by any standard. Not to importers and traders, though. Why take risks with the people’s money on new investment projects when one could only lend in Malta at a maximum 8 percent pa even with base rates higher than they have been for several years now.
Foreign industrialists, with whom I used to discuss Barclay’s lending philosophy during my five year stint with the Malta Development Corporation (then very much like Malta Enterprise today with the addition of touristic projects), often described it as no better than a glorified savings bank. Subsidiaries of huge multinationals (eg Plessey, GKN) borrowed from Barclays mainly because its capped lending rates happened to be lower than their own banks.’ These latter guaranteed the loans/overdrafts and the sky was the limit. Riskless profits for Barclays.
Not so NMB. In its majority, Malta’s industrial community banked with it, seeking financial accommodation on terms often refused, or only grudgingly accepted, by Barclays. This included middle-sized foreign entrepreneurs, chiefly from Germany, attracted to invest here by a dynamic truly-independent MDC left alone to work without undue interference from its political masters.
Until 1971, that is, NBM’s critical moment had arrived: a departure from its erstwhile financial service to the economy became imperative. No longer was it a norm to assess a potential new project’s feasibility independently from both camps, NBM and MDC, compare notes and separately make proper recommendations to our respective boards for approval or rejection. Besides the usual overdraft facilities for working capital, an approved project’s capital requirements were often financially structured as to a third promoters’ equity, a third MDC grant - from specific funds made available through the Financial Protocol agreed with Britain on our Independence - and a third by way of an NBM loan -only occasionally or partially secured on property or a foreign banker’s warranty.
In 1970 the Banking Act had come into force, with its many strict provisions required to be complied with by latest the following year, 1971. Drastic measures had to be taken by NBM to liquidate transactions previously entered into which would otherwise have contravened the new conditions, eg maintaining a reserve fund from undistributed profits until it equalled at least the paid-up share capital; eliminating intangible assets from the balance sheet before the bank could pay any dividend; imposing a minimum holding of ‘specified assets’ - all liquid - as a information to the Central Bank, whose inspectors periodically reported on performance, and obliging the bank’s auditors to state any provisions made for known and doubtful debts - now called ‘impairment losses.’
During the previous decade, the Maltese savers had somehow demonstrated their appreciation of NBM’s role and contribution to their economic well-being and increasingly deposited therewith more and more of their surplus liquid funds, enabling it to grow fast and, apparently, robust.
Sadly, not strong enough to withstand the infamous ‘run’ which followed in the wake of the BICAL fiasco. Not that there was any comparison that could remotely be drawn between the two banks in size, lending policies, creditworthiness assessment or economic contribution. Far from it.
But politics eventually triumphs over economics in tiny nations. No different here. Understandably, the Labour government which was returned to office mid-1971 was annoyed at the way vital and strategic functions and services were controlled by the foreigner - wireless telegraphy, broadcasting, civil aviation, banking. It made no bones about it.
However, to my surprise, why go for a Maltese-owned bank? And one which had helped the economy grow in preference to exporting its financial savings to help others. This is what I dislike about politics: a hidden agenda.
‘Runs’ on NBM had not been unheard of before Big Bang. At least three times over the previous three years did NBM face such a situation, but each time the depositors’ confidence had been restored and the funds flowed back.
What then was so special the last time? Why Big Bang? If it was the big fish (Barclays) that really needed to be nationalised - and this could have made sense in the economic thinking of that decade, why not just say so and appoint an independent board to value the shares taken over for a fair compensation? Why render them valueless merely by threatening withdrawal of operating licence? Can any activity have any market value whatsoever if deprived of such a licence?
It was simply a bravura of buying on the cheap. Very cheap. Good business for the powerful; bad economics for the country. ‘Action and reaction are equal and opposite’ had oft repeated my physics teacher at the Lyceum. How right he was! Even in politics! Wasn’t it a mere four years ago that the government sold - not bought this time - MidMed Bank shares on the cheap?





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