I am writing this little note after two events. One is by what the Hon Silvio Schembri said recently that, and I quote:
“We cannot remain tied to the COVID-19 situation. Life has to go on… economic activity needs to go on so that we can move forward.”
And rightly so. There is necessarily life after Covid, even if it remains with us. We need to think ahead and as much as possible sustain and even stimulate the economy in new ways. Resilience, the Digital Economy, enhancing entrepreneurship and education and innovation are the way forward.
Much like Malta rose from the ashes of World War II without much help from our rulers, but with the hard work of the Maltese, we must do the same.
The other is by several conversations I am having with fellow business people in many fields and their financial advisers. In my role as one of the more senior Council members of the Chamber of SME’s, I am consulted by quite a few people in many spheres of business. I will come to my point.
Many efforts have been made by all to ensure that businesses survive during this very marked economic downturn. We can only roughly predict where we will be, business-wise, even with all the aid being offered to businesses.
Rightly, the Government has pulled out many stops to help. In effect, it has already gambled roughly €350 million on the economy. That is its duty and it has done so. Besides this, through the Malta Development Bank and participating banks, it has been offering seemingly unprecedented guarantees and soft loans to tide people over this difficult period.
But “seemingly” is probably an understatement, and in a big way. My concern is that in the execution of this aid, we may be creating more problems than we are solving. As far as I am aware, most loans are guaranteed to banks by the Malta Development Bank (MDB), to the tune of a 90% guarantee.
Many people who have applied for these loans are being asked to sign a “LEG 01” document (BOV Terminology) or similar instruments, where individuals are standing surety for the whole amount being borrowed by their companies.
If one had to consult a commercial lawyer, one will immediately see that a document of this type is serious if, because of the present and future circumstances, the business fails or, because of the long-term effects of COVID-19, cannot pay back the loan in the timeframes agreed.
A banker friend I consulted told me that a document like this, and I will use the Maltese word for more effect, “ineżżek għarwien” because the bank can bypass the company that owes the money and attack the surety, his wife and his family for even their family home.
I had this confirmed by two lawyers who have told me that in the last three years, this instrument has been used to hurry up court procedures in loan defaults, to great effect. In effect, the loan guarantees given by the MDB, and the document that all borrowers are being asked to sign, means that the commercial banks are being doubly guaranteed that their money will be repaid. Do you not think that this is unfair?
Would it not be more prudent, in this situation, for these personal guarantees given by sureties to companies to be limited to the amount being “risked” by the commercial banks?
On the obverse sign of the coin, one may say that this may give rise to abuse. This may be the case in a few cases, but the majority of cases are business people of good standing, who feel responsible for their businesses and employees, and want to continue post this crisis, because they know of no other life.
If I were a financial adviser or accountant, I would be very wary of telling my client to go ahead and sign documents where I am standing surety for all the debts of my company, even when I know that there is a Government institution that is supposed to be helping we with these guarantees.
And unfortunately, this message is getting through. Many people are holding back because they are starting to realise the seriousness and the risk to their very livelihoods, because no matter how hard they work, this crisis has showed us that businesses are all connected, it’s all one thing..
We cannot segment the economy. Every business depends on other businesses. It is like a whole pattern of upright dominoes. If one falls, the others may follow suit, even if they have a different number on their face. Because what is this money being borrowed for?
It is to pay creditors, suppliers, rent, salaries, supplies, and to maintain and improve business premises. In short, it is directly injecting money in the economy, money that would usually come from trading and business. Without this money, many businesses would negatively affect other businesses and failures will be worse.
It is also not right to segment businesses so that only the very fittest survive. Undoubtedly, we will have failures despite the aid we give. Without a doubt, there will be a few cowboys in the mix, who may sign these anyway knowing that their business, failing before COVID-19, will never be able to repay these loans.
But the majority do not need to have the ugly fact thrust under their nose that they are actually guaranteeing everything with new plenipotentiary guarantees on assets that were not being used to guarantee their business before, when the MDB has stepped in to take that risk for them.
My conclusion is that the MDB is actually securing the lending bank’s risk, and the bank is not passing on that comfort to the client. And this, in my opinion, is a great failing. The spirit in which this aid has been given across the EU is not this. The spirit should be that businesses retain activity and employment, and entrepreneurs invent new ways and seek and find new niches to do business. The wheel must keep on turning.
For this to happen, business people, who risk everything for business, need peace of mind to be able to function and develop. They do not need to keep looking behind their backs. Their mental clarity and vision and the innate entrepreneurship that is ingrained in us Maltese needs sustaining.
This so called “Leg 01” business may make people give up prematurely or lead to worse mental problems amongst our small business owners. The banks tried this trick in the UK and elsewhere, and Governments immediately cracked down on it.
I believe that the Maltese Government isn’t happy with the way banks are going about this. The long winded procedures, the paperwork, the charges…. this will mean more profit for banks in the long run. There was a time when banks had to be supported but this is the time for our cash rich banks to support businesses.
This is what we should be talking about, not some balcony street party. Because business will sustain the economy, now and in the future.
Thank you for taking this time to read this. I sincerely hope that I am understood. I stress that this is my personal initiative and has nothing to do with my position at the Chamber of SME’s. But it has to do with the Malta I live in. The COVID-19 crisis has not gone away. It will continue to have a drastic effect on the economy. Now is not the time to be draconian.
Mario Debono is president of the pharmaceutical section of the Malta Chamber for SMEs
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