Financial Crime World

Maturity Gap Threatens Maldives’ Financial Stability

The International Monetary Fund (IMF) has recently released a report highlighting a significant maturity mismatch in the Maldivian financial system, posing a threat to the country’s financial stability.

Banking System Relies Heavily on Foreign Currency Loans and Deposits

  • The Maldivian banking system is heavily reliant on foreign currency loans and deposits, which are subject to exchange rate fluctuations.
  • Callable deposits, which account for a high share of the country’s banks’ assets, can pose FX liquidity risk, particularly during tourism-related seasonal fluctuations.

Limited Progress in Crisis Management Framework Development

  • The legal framework governing bank resolution and crisis management is still developing, with limited progress made in recent years due to the dual shocks of COVID-19 and Russia’s war in Ukraine.
  • There is no comprehensive crisis management framework in place, nor has a bank resolution framework been operationalized.

Role of Maldivian Monetary Authority (MMA)

  • The MMA plays a key role in the country’s financial safety net, but its powers are limited, and it lacks a separate unit for bank resolution.
  • The IMF recommends establishing a dedicated Resolution Unit to undertake the work needed on bank resolution.

Emergency Liquidity Assistance Framework

  • There is no emergency liquidity assistance framework in place, although the MMA Act empowers the authority to lend to financial institutions for up to 90 days, which can be extended three times.

Ministry of Finance’s Role in Financial Safety Net

  • The Ministry of Finance’s role in the financial safety net is currently restricted to recapitalization using public funds.
  • The IMF recommends that the ministry’s involvement be expanded to include other areas, such as crisis management and bank resolution.

Conclusion

The report emphasizes the need for the Maldives to address its maturity gap and strengthen its financial stability framework to mitigate potential risks and ensure the country’s continued economic growth.