Malta’s Financial Services Industry – Too big to Fail?


At a seminar that I have recently attended one of the speakers referred to Malta’s financial services industry as having reached the point of becoming too big to fail. This should be viewed from the perspective that if the financial services industry in Malta had to suffer the ripple effects throughout the economy could be devastating.

Foreign vs Local Firms

To fully understand the importance of the financial services industry in Malta one has to look beyond the firms that cater to the local market and recognise that there are many firms registered and operating from Malta that cater mainly to foreign firms and customers. Taking a quick look at the quarterly statistics published by the MFSA one can easily appreciate how many operative entities in the financial services sector exist. For example, when considering the banking industry, although we all know of the big two and a handful of other smaller banks that service the local market, in actual fact as at 30th September 2015 there were 28 credit institutions and 39 financial institutions licensed in Malta.

In the insurance sector for example, as at the end of September 2015 there were 62 licensed entities in the Non-Life, Life, Composite and Reinsurance categories. In the third quarter of 2015 there were 147 licensed Investment services firms in Malta, of which 108 had a Category 2 license. As at the same date, in the funds industry we had 26 recognised fund administrators. To add some EUR figures now, as at September 2015 the Net Asset Value (NAV) of the locally-based Collective Investment Schemes (including Professional Investment Funds and Alternative Investment Funds) was €9.69 Billion with a B! This figure is made up of the NAVs of 524 funds (including sub-funds). To put this figure in perspective, Malta’s GDP as at 2013 at market prices was €7.51 billion.

So it is not that difficult to see that there is a very large proportion of the local financial services industry which is made up of foreign entities that have registered in Malta. This is of course a positive thing and a good result of the efforts made by various entities such as Finance Malta which for years have been working to attract foreign companies to Malta. It also highlights the fact that we must ensure that we remain attractive for the existing companies to remain in Malta and for new ones to continue to come to Malta. Before going on to list our strengths and what we can do to safeguard/improve them I would like to point out some indirect positives of the financial services industry.

The Indirect Positives

One must keep in mind that besides the direct effect that the financial services industry has on the Maltese economy there is also a significant indirect effect. Some of the indirect effects connected to this industry are:

  • The taxes paid by these companies locally

Here we are not only speaking about the corporate tax effect that the business pay but also the income tax effects of the people who work for these companies and are resident in Malta. Moreover these companies pay indirect taxes both on services they purchase in Malta and many times on the services they purchase in the EU.

  • The effect on the property market

Promoters and top management of these foreign companies who relocate or decide to open shop in Malta are normally among the top income earners who would afford the top rents and top purchase prices of some of the highest valued property on the island.

  • The spreading of knowledge

When locals work with these companies they are exposed to a much greater network of professional people within this sector and beyond. The knowledge base of such workers will grow and such knowledge can then be shared with other people and firms within the industry.

  • The effect on tourism

When foreigners come to live/work in Malta they would spread the word with their families and friends about the Island which in turn will result in increased tourism for the Island. Even if they do not move to Malta, by setting up their companies here they necessarily need to travel to the Island on a regular basis.

  • The effect on other local businesses

Such foreign companies will inevitably need to employ other local businesses in various sectors from lawyers, accountants, and other consultants. They will also contribute to the hospitality industry through hotel stays and business meetings over a meal for example.


An Analysis of our Strengths

Many website of companies that operate in the financial services industry have a “Why Malta” section which list the various pros available to companies who setup shop in Malta. In this section I would like to analyse these strengths to see how much of a strength they really are and what can be done to improve or safeguard them.


Our location is many a time listed as a strength of doing business in Malta. However, when one considers that a lot of foreign promoters that setup in Malta are from mainland Europe it would still be more convenient for them to setup in a place like Luxembourg. We do however have very good connections to mainland Europe so there is still a strength in being in our current geographical location. So short travel times would be a more appropriate strength.

Thus it is important to ensure that such good connections are maintained and improved. We know of the ailing national carrier which is supposedly going to be partially taken over by a larger counter party. The introduction of the low cost airlines which have helped in connecting Malta to other locations have also been a good help. The introduction of new carriers and new lines by existing carriers such as Ryanair’s inclusion of destination in Germany are all welcomed efforts as well.

Excellent ICT Connections

The website of Finance Malta for example states that “Satellite technology and high capacity fibre-optic submarine cables link Malta with Europe”. GO Plc boast about having “The only 4G network 100% fibre connected” while Vodafone Malta tells us “99% Network Coverage”. So yes coverage is very good in Malta, but what about the reliability of that coverage. Any customer of GO has experienced the lower than expected data speeds or being temporarily cut-off for a second or two which makes working through a remote location more difficult.

We also have to analyse the connectivity for foreigners when visiting Malta on a business trip. Are hotel wi-fi zones conveniently set-up or are they restricted just to public areas? Do they offer business facilities where one could operate a remote office? What about ICT maintenance, do we have enough qualified personnel to offer support services on the go and in the hotels?

EU Member State

This is definitely one of our strengths when compared to places like islands in the Caribbean, Mauritius and other known off-shore localities. When being licensed in Malta the companies can use the EU passport to use their license in other jurisdictions. How this is done will depend on the level of activities that they wish to perform in the foreign jurisdiction. But to simply promote their products (without operating an actual office abroad) all the license holder needs to do is to apply the simpler version of this passporting facility which involves our regulator informing the foreign regulator.

I would say that as a threat here we could list the fact that we cannot afford to passport licenses of entities that are not that reputable and honest. We cannot afford to make a bad name for our jurisdiction since in the end the foreign regulators can always refuse to accept Maltese licensed entities that are trying to passport their license. This would definitely create problems for the local industry. From first-hand experience I can say that our regulator is quite stringent in its authorisation process and local banks are also very strict on who they offer their banking facilities to. Although this can be a negative thing at times, it does in fact help us in the long term to maintain a reputable jurisdiction.

Small and Nimble

This advantage is also prominently argued when convincing entities to come to Malta. Since we are a small country where networks with people in influential places are easier to make and maintain it should theoretically be easier to do business in Malta. Of course there is the other side of this argument that since Malta is so small it cannot afford any major scandals. Hence the process to get a license and to open a bank account for foreigners is still not the quickest of processes by any measure.

So one has to be careful not to make it appear that since Malta is a small place that it easy to get any business setup. Also, we must ensure that we promote a reputable jurisdiction and change some people’s attitude that any business is good business. Financial practitioners have to realise that it does not pay to take on any business and that they have to be selective in their choices of whom they chose to endorse.

Knowledgeable Workforce

Another reason why companies come to Malta is the fact that all employees have a decent level of English and in most cases will also know another language. Our courses at University level when it comes to financial services are of quite a high level, especially in the honours courses. So overall we produce a workforce with a good knowledge level that foreign companies wishing to setup in Malta can employ. But is the amount of employees enough and is the level as good as it could be?

When you consider that all our graduates have been studying English from the age of 3 when they entered primary school – is our overall level of English as good as it should be? Here I am referring to people who graduate with a university degree who have spent 20 something years studying the language and/or studying other subjects using English. Should we introduce English proficiency tests across the board for all courses? Keep in mind that to enrol for the bachelor of commerce at the University of Malta your only requirement is an intermediate level pass in Mathematics. Another problem I see with our workforce, is the attitude problem that develops when the students know that they will definitely find a basic level job since there is so much demand for employees with their qualifications. If you take the accounting graduates and the banking and finance graduates – thanks to the progress made in the financial services industry these students know that they have a good chance of finding a job easily. So is this creating the situation where the student does not need to do his utmost? If so, could this not lower the over level and backfire on us?

What about availability? Are we in fact producing enough graduates in the financial services sector? In order to get the full picture here we need to think beyond the directly related jobs such as accountants and consider other such as software developers. If anyone has ever tried to hire a Java developer for example you would quickly find out that the demand for such jobs is far beyond the supply. Like with any asset, since the demand is above the supply the price for such an asset will be high. This is why a developer with little experience can command a high wage compared to other employees in a different department. This of course is good news for developers but in the overall perspective it is reducing our competitiveness.

Our Tax System

I purposely left this last point till the end. Undoubtedly one of the major reason that companies setup shop in Malta is the beneficial tax system we employ. Our system allows companies to legally avoid taxes in higher taxed jurisdictions by moving their business to our Islands. As many know, we have the 5/6ths rule whereby non-residents can claim back 5/6ths of the tax they would have paid on dividends at source. In Malta the corporate tax rate is 35% which means that dividends are paid out after 35% would have been deducted at source. Since non-residents can claim back 5/6ths of this they would effectively be paying 5%.

The problem of focusing too much on this factor is twofold in my eyes. One is the negative image we could portray whereby we could be attracting the wrong type of investors looking to avoid tax at all costs. The other is the fact that there have been a lot of talks at EU level to introduce measures of fiscal integration across the Union. This would effectively mean that the government would lose its ability to determine its own tax rates and a more harmonised approach would be introduced. This would practically eliminate our tax advantage. Both government and opposition are in agreement that they will fight this at all costs, however only time will tell how this will all fold out.

My input here would be not to focus too much on the tax issue. All the above points I mentioned in this section of strengths are all independent of the tax issue. So we have much more to offer foreign investors than the tax incentive. This is the message I believe that Malta has to portray in attracting more business to the financial services sector. When I say that Malta has to do this I do not mean just the government and the entities setup to attract foreign investors, but also the financial practitioners who ultimately end up working with these investors. So the consultants, lawyers, accountants, directors – they all must work together to present a better picture of Malta. The tax issue is a very nice perk of doing business here, but it not the only one. We have far more to offer and this is how I believe our approach should be.

The Bottom Line

We are all aware of the importance of the financial services sector to our economy. I hope this post has highlighted some of the aspects that were not so apparent. I also hope it gets people thinking on the points I raise and how we can all contribute to a better sector altogether.