Maldives Financial Sector Assessment Program: Risk Assessment
Introduction
A recent study conducted as part of the Maldives Financial Sector Assessment Program (FSAP) has identified potential vulnerabilities in the country’s financial institutions. The analysis, which was based on quarterly data from eight banks operating in the Maldives as of December 2022, revealed areas of concern that could impact the stability and resilience of the financial sector.
Risk Assessment
The report highlights three significant risks facing Maldivian financial institutions:
Credit Risk
- Non-performing loans: Can put pressure on pre-provision income
- Materialized through: Failure to recover loan amounts
Liquidity Risk
- Deposit outflows: Can lead to a shortage of funds
- Materialized through: Withdrawal of deposits by customers
Market Risk
- Changes in interest and exchange rates: Can impact the value of assets and liabilities
Consequences of Inaction
The report notes that these risks are plausible and could be triggered by extreme but hypothetical scenarios informed by the Risk Assessment Matrix. The study’s findings highlight the need for financial institutions in Maldives to adopt robust risk management strategies to mitigate these vulnerabilities.
Recommendations
Experts recommend that:
Regulatory Frameworks
- Improvement: Enhance regulatory frameworks to address potential vulnerabilities
- Increased transparency: Improve transparency and disclosure requirements
Risk Management Strategies
- Capacity building: Focus on building capacity to manage risk, particularly credit risk, liquidity risk, and market risk
- Robust strategies: Adopt robust risk management strategies to mitigate vulnerabilities
Conclusion
The study’s recommendations come at a time when the Maldives is experiencing rapid economic growth, driven by tourism and infrastructure development. As the country continues to grow and develop, it is essential to address potential vulnerabilities in its financial sector to ensure long-term stability and resilience.