Bank loan

Snapshot: Regulation of bank lending facilities in Malta

Regulation

Equity and liquidity requirements

Describe how capital and liquidity requirements affect the structure of bank loan facilities, including the availability of related facilities.

Maltese banks are very conservative in their lending practices and in developing more sophisticated loan proposals. This conservatism has been a defining characteristic of Maltese banking since its inception, primarily due to the size of the market and the gradual development of the more sophisticated capital market seen today. The 2008 financial crisis had little, if any, impact on Maltese banks due to their limited exposure to international commercial paper. Therefore, the liquidity requirements imposed by Basel III have not had a noticeable impact on the general approach of Maltese banks to lending.

Disclosure requirements

For public enterprise debtors, are there any disclosure requirements applicable to bank loan facilities?

Yes. Public companies are required to disclose the nature and extent of their bank credit facilities. Details of these borrowings should also be included in the audited financial statements.

Use of loan proceeds

How is the debtor’s use of bank loan proceeds regulated? What liability could investors be exposed to if the debtor uses the product contrary to the regulations? Can investors mitigate their liability?

The use of the proceeds of a bank loan is subject to several specific conditions imposed by the bank. These very often prescribe the specific borrower-draw mechanism for which the bank would only pay the borrower’s third-party creditors under the agreed facility to retain a legally privileged position over the asset being paid, where the lien is available under Maltese law. Anti-corruption rules, anti-money laundering regulations and anti-terrorist sanctions are all included in the general terms and conditions of Maltese banks.

If a borrower applies loan proceeds contrary to the bank’s terms, this generally constitutes an event of default, requiring the bank to step up and demand the loan. Mitigating this risk is the practice of requiring the bank to advance funds only to the borrower’s nominated suppliers, which allows the bank to retain a high degree of control over the use of funds in the originally intended goal.

Article 15 of the banking law also prohibits a bank from granting credit facilities against the guarantee of its own shares or against any other security issued by the institution itself. It must also ensure that the credit facilities or other banking services granted or granted to one of its directors or their spouses; to any entity in which one or more of its directors is interested as a director, partner, manager, agent or member; or to any other person or entity guaranteed by one or more directors of the bank, are granted on terms that are not more favorable than those that the credit institution would otherwise have applied.

Cross-border loans

Are there regulations that limit an investor’s ability to extend credit to debtors organized or operating in particular jurisdictions? What liability do investors incur if they lend to these debtors? Can investors mitigate their liability?

Yes. The Prevention of Money Laundering and Terrorist Financing Regulations (SL 373.01) places significant limits on banks with respect to any banking activity undertaken with organized debtors in jurisdictions deemed high risk or subject to international sanctions . Any breach of these regulations exposes the bank to administrative fines of up to €5 million or up to 10% of the bank’s total annual turnover.

Debtor leverage profile

Are there limits to an investor’s ability to extend credit to a debtor based on the debtor’s debt profile?

No. Maltese law does not contain any specific rules restricting an investor’s ability to extend credit to a debtor, based on the debtor’s debt profile. This does not affect general legal principles on fiduciary duties, under which the directors of the investor would be expected to consider investment opportunities based on a correct and objective assessment of the debtor’s general creditworthiness and uses to which the credit will be applied.

Interest rate

Do regulations limit the interest rate that can be charged on bank loans?

Section 1852 of the Civil Code (Chapter 16 of the Laws of Malta) establishes the general rule that the maximum rate of interest permitted by law (and under public order) is 8% per annum, subject to subject to certain exceptions which will be considered below. If a higher interest rate is charged, it should be reduced to that rate.

It is also an established principle of law that capitalization of interest is generally enforceable only if the obligation to pay interest is for a term greater than one year and the rate of interest is capitalized annually, satisfying the requirements of article 1850 of the Civil Code. .

Banks and certain cross-border financing transactions are exempted from this general rule under the Interest Rates (Exemption) Regulations (SL 16.06), allowing commercial rates to be charged in excess of this limit for various forms of facilities and borrowings in circumstances where no party to the financial transaction is a natural person.

Bank interest rates are usually expressed as a percentage above the bank’s base rate, and they can vary slightly between consumer lending rate, home lending rate, and business lending rate. Interest rates on loans to small and medium enterprises tend to be higher than the euro area average. The two main factors driving the pricing of interest rates are the bank’s cost of funding and the element of risk, with local banks making limited use of cheap European Central Bank funding due to a high local deposit base.

Currency restrictions

What are the limits on investors funding bank loans in a currency other than the local currency?

Between 1972 and 1994, Malta applied a strict exchange control regime limiting the flow of capital out of Malta. In 1994, current account transactions were freed from exchange controls. Between 2002 and 2004 capital controls were phased out meaning that all remaining exchange control restrictions were removed until 1 May 2004 when Malta became a full member of the Union European.

In 2003, the Exchange Control Act (Chapter 233 of the Laws of Malta) was revised and renamed the Foreign Transactions Act as part of Malta’s legal and economic preparations for full membership of the European Union.

Since Malta joined the European Union, there have been no exchange control regulations. Furthermore, no distinction is made between companies owned or controlled by EU citizens and those owned or controlled by non-EU citizens for exchange control purposes, although the Minister of Finance has the power to take regulations to impose restrictions on capital transactions in exceptional and exceptional circumstances to preserve the stability of the Maltese financial system.

In light of the removal of exchange control regulations, investors funding bank loans are free to make these investments in any currency.

Other regulations

Describe any other regulatory requirements that impact the structuring or availability of bank lending facilities.

The main regulatory consideration that may affect the structuring or availability of bank credit facilities is that relating to large exposures, particularly given the comparatively smaller size of Maltese banks’ balance sheets.