## 1mdvea2023004 ## Source details **Canonical URL:** [1mdvea2023004](https://www.imf.org/-/media/files/publications/cr/2023/english/1mdvea2023004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1mdvea2023004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1mdvea2023004.pdf.json) --- ### Executive summary — macrofinancial backdrop and fiscal vulnerabilities - Economy rebounded strongly from the pandemic, driven by tourist arrivals exceeding pre‑pandemic levels. - Banking sector recovery at end-2022: - NPL ratio: 5.9 percent - Return on assets: 5.0 percent - Growth of bank credit slowed to 4½ percent, with the tourism sector receiving 40 percent of private sector credit. - Fiscal vulnerabilities: - Public debt: 115 percent of GDP at end-2022 - Debt service: 11 percent of GDP at end-2022 - Debt in FX: 52 percent of public sector debt - Domestic debt: 66 percent of GDP and accounts for 70 percent of the increase since end-2019 - Sovereign debt assessment: 2022 IMF DSA found sovereign debt not sustainable in the baseline and Maldives at high risk of both external and overall debt distress. - SOE-related strains: - Rising debt service on external variable rate FX loans, notably HDC social housing projects. - HDC: 19 percent of debt financed by government and 80 percent guaranteed since the pandemic (rent-to-own programs). - Central government may need to prioritize debt repayment of certain SOEs to avoid cross-defaults. ### Financial system structure, sovereign‑bank nexus, and FX liquidity - Banks hold more than three-fourths of financial system assets; banking sector concentration: - Banks: 8 institutions; Assets 88,552 (millions of MVR); Share of total assets 77%; Share of GDP 93%. - Total financial institutions 17; Total assets 115,360 (millions of MVR); Share of GDP 121%. - Herfindahl-Hirschman Index near 3,000; largest bank holds 51 percent of system assets. - Sovereign exposures and linkages: - Banks heavily exposed to domestic sovereign debt: 28 percent of GDP (BSA matrix). - NBFIs exposed to domestic sovereign debt: 19 percent of GDP. - One-third of banks’ sovereign exposure is in FX. - Government loan guarantees to SOEs: 21 percent of GDP. - MRPS assets: 19,764 million MVR (17% of financial assets, 21% of GDP). - Domestic sovereign holdings characteristics: - Short-term: 78 percent share of T-bills - In local currency: 55 percent share - Banks hold domestic bonds in excess of capital (4 to 5 times) in some cases. - Banks hold nearly half of domestic debt stock (equaling 27 percent of bank assets). - FX market and reserves: - Official net international reserves fell to less than two months of imports. - Banks meet only 10-20 percent of importers’ FX needs; remainder sourced from a parallel market. - Parallel market premium: stable at 10-15 percent. - MMA advances to government increased and are main source of excess bank liquidity. - Recommendation: adopt regulation for money changing businesses and foreign exchange regulation. ### Vulnerabilities, prudential distortions, and data gaps - Key systemic vulnerabilities: - Growing sovereign‑bank nexus with banks financing central government and SOE debt. - High dollarization coupled with tight FX. - Shadow banking and unregulated leasing financing leading to underreported household payment obligations. - Prudential distortions: - Zero risk weight on domestic sovereign paper in FX comprises around one-third of banks’ holdings of domestic debt, incentivizing sovereign exposures. - Public debt trajectory risk: - Current public debt service trajectory combined with possible falling FX inflows could deplete official reserves and complicate exchange rate management. - Data gaps: - Need to properly measure debt service from lease and hire purchases and improve supervisory data granularity. ### Stress testing framework, scenarios, and results - Framework: - Institutions: All 8 domestic banks (100 percent of banking system assets). - Data baseline: Supervisory data as of December 2022. - Horizon: 3 years (end-2022 to end-2025). - Tests: solvency (top-down and bottom-up), credit concentration, sovereign sensitivity, liquidity, deposit concentration, market risk. - Scenarios (macro variables preserved verbatim): - Real GDP growth: - Baseline: 2022 12.3; 2023 7.2; 2024 5.7; 2025 6.5. - Moderate: 2022 12.3; 2023 -14.3; 2024 13.4; 2025 10.4. - Severe: 2022 12.3; 2023 -24.4; 2024 8.8; 2025 10.5. - Inflation rate (eop): - Baseline: 2022 3.3; 2023 5.1; 2024 2.5; 2025 2.1. - Moderate: 2022 3.3; 2023 5.8; 2024 4.2; 2025 2.4. - Severe: 2022 3.3; 2023 9.5; 2024 5; 2025 2.6. - Exchange rate (MVR per USD): - Baseline: 2022 15.4; 2023 15.4; 2024 15.4; 2025 15.4. - Severe: 2023 18.5; 2024 18.5; 2025 18.5. - Total Arrival (thousand): - Baseline: 2022 1675.26; 2023 1765.199; 2024 1899.109; 2025 2140.794. - Moderate: 2023 753.752; 2024 1214.506; 2025 1602.94. - Severe: 2023 676.116; 2024 893.058; 2025 1221.722. - Key stress test outcomes and metrics (preserved exactly where given): - NPL projections (percent of total loans), foreign currency model: - NPL ratio stress baseline: Dec. 22 9.0; Dec. 23 10.5; Dec. 24 11.8; Dec. 25 12.0. - Highest NPL ratio of any bank baseline: Dec. 22 34.4; Dec. 23 41.6; Dec. 24 46.1; Dec. 25 46.8. - NPL ratio stress severe: Dec. 22 9.0; Dec. 23 12.3; Dec. 24 14.8; Dec. 25 14.7. - Highest NPL ratio of any bank severe: Dec. 22 34.4; Dec. 23 47.0; Dec. 24 54.4; Dec. 25 54.0. - NPL projections, local currency model: - NPL ratio stress baseline: Dec. 22 3.4; Dec. 23 4.5; Dec. 24 5.1; Dec. 25 5.4. - Highest NPL ratio of any bank baseline: Dec. 22 27.5; Dec. 23 36.1; Dec. 24 40.4; Dec. 25 42.1. - NPL ratio stress severe: Dec. 22 3.4; Dec. 23 5.4; Dec. 24 6.3; Dec. 25 6.2. - Highest NPL ratio of any bank severe: Dec. 22 27.5; Dec. 23 41.0; Dec. 24 46.2; Dec. 25 46.2. - Capital adequacy (CAR, percent of RWA): - CAR baseline: Dec. 22 50.9; Dec. 23 52.3; Dec. 24 53.9; Dec. 25 55.0. - CAR moderate: Dec. 22 50.9; Dec. 23 53.1; Dec. 24 50.6; Dec. 25 50.2. - CAR severe: Dec. 22 50.9; Dec. 23 39.3; Dec. 24 44.0; Dec. 25 45.1. - Impact of domestic debt exchange (drop in CAR, ppt.): 14.8. - CAR baseline adjusted for 100% RW on domestic securities in FX: 41.1. - Failures and shortfalls: - Severe scenario: 3 banks (12 percent of assets) becoming undercapitalized. - Pct. of banking system <12% CAR (one estimate): 3.3. - Capital shortfall in % of GDP: 0.1 (under one estimation); 0.7 under credit concentration extreme scenario. - Credit concentration stress (loss of 5 largest borrowers): - CAR: Dec. 22 50.9; Dec. 23 20.6; Dec. 24 21.1; Dec. 25 21.6. - Number of banks failing: 5. - Pct. of banking system <12% CAR: 27.1. - Capital shortfall in % of GDP: 0.7. - Liquidity and deposit concentration: - Number of banks failing cashflow-based test in either currency: 2. - Banks failing cashflow test in either currency in % of system assets: 25.3. - Banks failing cashflow test in either currency in % of GDP: 23.3. - Basel III LCR, MVR: 253.8. - Basel III LCR, USD: 235.1. - Deposit concentration risk: number of banks failing test in either currency: 7; Assets of banks failing the test in % of banking system assets: 49.9; Assets of banks failing the test in % of GDP: 46.0. - FX risk: - Number of banks breaching NOP limits after 20% devaluation: 2. - Assets of banks failing the test in % of banking system assets: 23.3. - Assets of banks failing the test in % of GDP: 20.1. ### Liquidity stress testing and deposit concentration - Findings: - All but one bank meet LCR requirements in both MVR and FX. - One bank each (together comprising 25 percent of system assets) would fail a cashflow-based maturity mismatch test in local and foreign currency. - About half of the banking system (by assets) could not withstand withdrawal of the five largest deposits. - Interest rate risk test (symmetric +200 basis points) caused capitalization to drop by 1.3 percentage point. - Recommendations: - MMA should enhance stress testing capacity, develop solvency/liquidity/market stress methodologies, and engage banks in periodic dialogue on stress tests. - Strengthen reporting consistency and require alignment of bank-reported starting capital with official data. ### Climate risk analysis: methodology, results, and supervisory implications - Methodology: - Hazard: global climate data for sea level rise and storm surge under SSP2-4.5, SSP3-7.0, SSP5-8.5 assigned to administrative Atolls and Greater Male. - Exposure: economic activity disaggregated geographically using authorities’ proxies. - Damage functions: Huizinga et al. (2017) linked hazard intensity to industry damage; adjusted for elevation. - Banking exposure modelling: impact via sectoral damage rates on loans related to immovable assets (no geographic differentiation). - Results and caveats: - Direct damages to capital stock: - Mid-century: up to 3.4 percent - End-century: 20 percent - Mid-century banking impact (when directly impacting loans related to immovable assets and increasing provisions): 0.5 percentage point decline in banking system CAR; up to 0.9 percentage points for the most affected bank. - High uncertainty due to limited geographic exposure data and potential indirect/spillover effects on tourism. - Policy recommendation: - MMA should develop an institutional climate risk and opportunity strategy and operationalize supervisory expectations on business strategies, governance, risk management and reporting. ### Financial safety net, deposit insurance, and ELA - Deposit insurance enhancements (aligned to IADI principles): - Establish a separate unit for DIF management with operational independence. - Enhance MMA IT capacity to access online depositor accounts and reduce reimbursement period to 7 days (IADI CP 15). - Determine target fund size on clear criteria and timeframe (CP 9). - Expand DIF mandate to a paybox plus mandate and provide emergency funding arrangements (CP 9). - Legislation should not allow borrowings and contributions from MMA if DIF shortfall occurs. - ELA framework amendments and operational safeguards: - Amend MMA Act to include ELA provisions and safeguards; ELA discretionary to solvent/viable banks with temporary liquidity shortages. - Provide ELA against adequate collateral and at sufficiently high interest rate; use stress testing for viability assessments. - FX‑specific considerations: - Prioritize ELA in MVR; provide ELA in FX only if sufficient FX remains for other policy objectives. - MMA empowered to provide ELA in FX only under strict conditions and depending on FX reserves freely available. - Options: arrange swap arrangements, tighten prudential requirements (e.g., NOPs, FX reserve requirements). - ELA in FX to foreign bank subsidiaries/branches only under very specific circumstances and conditional on parent support assessments. ### Market infrastructure, payments, and securities market development - GSMD and CSD: - GSMD Project started 2017; CSD implementation partially implemented; Primary Dealership regime piloted; government securities issuance function transferred to MoF effective 12 August 2021. - Recommended market upgrades: - Replace depositary with DvP linked to RTGS (Partially Implemented). - Establish active primary dealers and electronic auction/trading platform (Priority: High; Horizon: Medium Term). - Guard against monopolistic outcomes when establishing primary dealer system. - Payment systems: - National Payment System Act published 18 May 2021; Payment Services Regulation published 13 March 2022. - IPS Phase 1 scheduled Q4 2022; Phase 2 planned Q2 2023; work in progress on RTGS upgrade and ACH phase-out. - Action plan to discontinue cheques with timelines and limits (some measures effective 1st April 2023). ### Nonbank finance, lease-and-hire purchase, and household indebtedness - Market scale and risks: - Rent‑to‑own schemes widespread; FSAP estimate of outstanding leases by four main finance/leasing companies and an active bank: about MVR 1 billion (anecdotal). - Bank loans to households excluding mortgages: MVR 4.5 billion at end-2022. - One finance company has ~30 percent share of leasing market; one licensee reports 30 percent delinquency ratio. - Data and regulatory gaps: - Only one of four companies reports to CIB; others unregulated/unreported. - Recommendation: include non-bank finance/leasing institutions in reporting to the CIB and augment reporting of recurrent household payment obligations. ### FX shortage: causes, parallel market dynamics, and policy implications - Causes: - HDC investment programs generate twin deficits and net FX outflows; HDC annual net FX outflow ~USD 160 million (~20 percent of MMA international reserves). - Not all resort FX inflows enter official market; many resorts have money changer licenses and supply the parallel market. - MMA earmarks FX for government and some SOEs; banks ration FX to clients. - Parallel market: - Premium around 10-15 percent since the pandemic; stability attributed to elastic supply from resorts and fishery companies. - Banks meet around 10-20 percent of importers’ FX demand; remainder via parallel market or bilateral resort arrangements. - Parallel market causes deadweight losses to traders and lowers government tax revenue. - Policy options: - MMA to consider ELA in FX only if critical and sufficient FX remains. - Tighten prudential requirements (NOPs, FX reserve requirements); pursue swap arrangements with other central banks; encourage bank-level FX swap facilities. ### MMA governance, supervision, and regulatory framework — main findings and recommended reforms - Governance and independence: - MMA Board: 7 members (Governor, Deputy Governor, one MMA employee, two government representatives, two private sector representatives). - Independence concerns: government and private sector representation risks; conflicts of interest definition excludes professional interests; Governor/Deputy removal process lacks strictly limited grounds and no mandate to disclose reasons. - Recommendation: strengthen MMA Board independence by changing composition and voting rights. - Resourcing and supervisory capacity: - Resource constraints: on-site inspections limited to minimum 2-year frequency; insufficient headcount for intrusive, forward‑looking supervision. - Recommendation: augment staffing, formal supervisory planning, and written methodologies. - Prudential framework deficiencies: - Capital and risk weighting: - Capital requirements based on Basel I with higher thresholds: 12 percent total capital ratio; 6 percent Tier I. - Risk weight on exposures to central government denominated in foreign currency: 0 percent; raising to 100 percent would reduce banking system CAR from 51 percent to 41 percent. - Recommendation: amend capital regulation to apply a 100 percent risk weight on bank holdings of Maldives government securities in foreign currency (phased in). - Liquidity framework: - Draft LCR/NSFR regulation prepared; liquidity requirements not yet imposed. - Recommendation: introduce liquidity requirements and require banks’ internal capital and liquidity planning. - Large exposures and concentration: - Single‑borrower limit: 15 percent; exceptions up to 30 percent; aggregate large exposures limit 500 percent. - High sector concentration: ~35 percent of loans to tourism. - Recommendation: improve large exposure reporting, incorporate concentration in stress tests, encourage syndication. - Supervisory enforcement: - Enforcement based largely on moral suasion; MMA has rarely used formal sanctions. - Recommendation: operationalize enforcement regime, clarify unsafe and unsound practices, and use enforcement tools. - Supervisory practices and stress testing: - On-site: intrusive, loan‑by‑loan credit file reviews; coverage of large loans and NPLs. - Off-site monitoring: mainly quarterly CAMELS updates; lacks forward‑looking elements and regular engagement with boards. - Stress testing: standardized but missing market risk, concentration, and forward-looking programs; MMA should remodel stress testing and require bank internal stress tests and recovery plans. - Disclosure, external audit, and AML/CFT: - Banks not required to disclose risk management strategies or risk exposures; MMA lacks explicit power to rescind external auditor appointments. - AML/CFT: PMLFT Act framework and FIU activity; gaps remain in legal framework and training. - Recommended supervisory actions (selected and preserving phrasing where given): - Strengthen MMA independence; redefine off-site monitoring and augment MMA staffing. - Enhance enforcement and introduce liquidity requirements. - Require mandatory meetings with bank senior management as part of off-site monitoring review. - Improve granularity and coverage of climate data and initiate climate risk analysis. - Augment reporting of data on recurrent household payment obligations from leasing contracts to the CIB. - Establish a macroprudential framework, including a committee for macroprudential coordination, and publish a financial stability report. - Introduce borrower-based instruments (e.g., loan-to-value and debt-service-to-income limits) and instruments safeguarding bank liquidity and capital buffers. - Differentiate reserve requirements by currency to mitigate high financial dollarization risks. ### Financial sector development, inclusion, and green finance - MSME finance and credit infrastructure: - Develop the National Financial Inclusion Strategy with an MSME access to finance pillar. - Pass the Secured Transaction Act and Insolvency Law; review Civil Procedure Code for fast-track procedures. - Expand credit information collection and consider credit enhancement mechanisms (portfolio guarantee scheme). - Digital finance and inclusion: - Promote digital financial services, competition, interoperability, access to clearing infrastructure, cross-border connectivity, and digital channels for remote islands. - Green finance and climate resilience: - Maldives climate investment needs estimated at 15 percent of GDP annually. - Recommendations: draw on public international funding, develop national climate strategy, introduce a national green taxonomy, and develop a framework for tracking green finance. ### Selected key recommendations (timing and leads as presented in source) - Adopt regulation for money changing businesses and foreign exchange regulation. (ST, MMA) - Resume liquidity management operations and take measures towards an active secondary market. (ST, MMA) - Develop indicators for monitoring systemic risks. (ST, MMA) - Improve integrity and granularity of supervisory data, including data compiled by the Credit Information Bureau (CIB). (ST, MMA) - Develop methodologies for solvency, liquidity, and market risk stress tests and engage banks in dialogue about stress test procedures and results. (ST, MMA) - Improve granularity and coverage of climate data and initiate climate risk analysis. (ST/M T, MoED, MBS, MMA) - Augment reporting of data on recurrent household payment obligations from leasing contracts to the CIB. (I, MMA) - Establish a macroprudential framework, including a committee for macroprudential coordination, and publish a financial stability report. (ST, MMA) - Introduce key borrower-based and capital-related macroprudential policy instruments. (ST, MMA) - Amend capital regulation to apply a 100 percent risk weight on bank holdings of Maldives government securities in foreign currency and introduce liquidity requirements. (I, MMA) - Strengthen MMA’s Board of Directors independence by changing composition and voting rights. (ST, MMA, MoF) - Amend legislation to address shortcomings in early intervention, bank resolution, deposit insurance, and ELA provisions and establish ELA framework. (I/ST, MoF, MMA) - Develop the NFIS with MSME access pillar and enhance credit infrastructure. (ST, MMA, MoF, MoED, DJA) - Introduce a national green taxonomy and develop a framework for tracking green finance. (MT, MoF, MMA) *Source: Maldives — IMF Financial Sector Assessment Program: Executive Summary and excerpts (1mdvea2023004).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 7 ### EXECUTIVE SUMMARY ### Background - The economy has rebounded strongly from the pandemic, driven by a strong rebound in tourist arrivals exceeding pre-pandemic levels. - Banking sector recovery at end-2022: - NPL ratio: 5.9 percent - Return on assets: 5.0 percent - Growth of bank credit slowed to 4½ percent, with the tourism sector receiving 40 percent of private sector credit. - Fiscal vulnerabilities: - Public debt: 115 percent of GDP at end-2022 - Debt service: 11 percent of GDP at end-2022 - Debt in FX represents 52 percent of public sector debt - Domestic debt amounts to 66 percent of GDP and accounts for 70 percent of the increase since end-2019 - Sovereign debt assessment: 2022 IMF Debt Sustainability Analysis found sovereign debt not sustainable in the baseline and Maldives at high risk of both external and overall debt distress. - SOE support strains finances: - Rising debt service on external variable rate FX loans, particularly HDC social housing projects. - HDC: 19 percent of debt financed by government and 80 percent guaranteed since the pandemic (note: rent-to-own programs). - Central government may need to prioritize debt repayment of certain SOEs to avoid cross-defaults (e.g., HDC external debt contracts). ### Financial system structure and liquidity - Banks hold nearly half of domestic debt stock (equaling 27 percent of bank assets). - Domestic sovereign holdings are mostly: - Short-term: 78 percent share of T-bills - In local currency: 55 percent share - Some banks hold government bonds in excess of capital (4 to 5 times). - MMA advances to government have increased and are the main source of excess bank liquidity. - FX market dynamics: - Official net international reserves fell to less than two months of imports. - Banks meet only 10-20 percent of importers’ FX needs; remainder sourced from a parallel market. - Parallel market premiums: stable at 10-15 percent, pointing to elastic FX supply from resort owners with money changer licenses. - Pending regulation for money changing businesses and foreign exchange regulation is recommended. ### Vulnerabilities and risks - Systemic vulnerabilities highlighted: - Growing sovereign-bank nexus, with banks increasingly financing central government and SOE debt. - High dollarization coupled with tight FX. - Shadow banking and unregulated financing of consumer durables by leasing companies leading to underreported recurring household payment obligations. - Prudential distortions: - Zero risk weight on domestic sovereign paper in FX comprises around one-third of banks’ holdings of domestic debt, incentivizing bank sovereign exposures. - Public debt trajectory and risks: - Current trajectory of public debt service combined with possible falling FX inflows could deplete official reserves and complicate exchange rate management. - Data gaps: - Need to close data gaps (e.g., properly measuring debt service from lease and hire purchases). ### Stress tests and financial sector resilience - Stress test findings: - Banks are resilient to economic shocks due to ample interest margins. - An unraveling of the sovereign-bank nexus (e.g., value losses on sovereign paper) reduces capital ratios considerably. - Credit concentration risk is high. - Most banks maintain adequate liquidity despite missing liquidity regulation, yet some banks could not meet funding outflows or the exit of the largest depositors. - Maturity mismatch risk appears contained. - FX risk on banks’ balance sheets is high (wide net open positions). - Supervisory capacity: - MMA should enhance stress testing capacity to monitor these vulnerabilities. ### Climate risk analysis - Maldives is exceptionally vulnerable to climate change. - Climate risk analysis finds a mild effect on banks for mid-century conditions. - Shortcomings identified: - Supervisors and financial institutions lack analytic skills for complex climate risk analysis and specialized knowledge to manage climate-related financial risks. - Need for better coverage and granularity of climate data and enhanced climate risk analysis to clarify implications for the economy and financial sector. - Recommended institutional response: - MMA should develop an institutional climate risk and opportunity strategy to prioritize actions on climate risk supervision and coordinate implementation. ### Macroprudential policy and financial stability framework - Priority reforms: - Establish a financial stability committee to coordinate macroprudential policy. - Develop indicators for monitoring systemic risks. - Upgrade resources for financial stability analysis. - Publish a financial stability report. - Macroprudential instruments: - After closing data gaps, MMA should adopt borrower-based instruments (e.g., loan-to-value and debt-service-to-income limits) and instruments safeguarding bank liquidity and capital buffers. - Specific policy recommendation on reserve requirements: - Differentiate reserve requirements by currency to mitigate risks from high financial dollarization. ### Regulation, supervision, and governance - Key regulatory/supervisory reforms recommended: - Strengthen MMA independence. - Redefine off-site monitoring and augment MMA staffing (staffing remains insufficient). - Enhance enforcement and introduce liquidity requirements. - Increase the risk weight on domestic FX sovereign exposures (amend capital regulation to apply a 100 percent risk weight on bank holdings of Maldives government securities in foreign currency, perhaps phased in). - Issue regulatory standards to clarify the enforcement regime and ensure immediate enforcement action for non-compliant bank actions. - Require mandatory meetings with bank senior management as part of off-site monitoring review. ### Financial safety net and crisis management - Improvements needed: - Amend the Banking Act and deposit insurance regulation to address shortcomings in early intervention, bank resolution, and deposit insurance framework, and amend the MMA Act to include provisions for ELA. - Establish an emergency liquidity assistance (ELA) framework. - Make early intervention and resolution triggers forward-looking. - Introduce recovery and resolution planning, require systemically important banks to prepare recovery plans, prepare resolution plans, and undertake resolvability assessments. - Overhaul use of public funds in resolution and enhance the deposit insurance system. - Strengthen interagency arrangements and crisis preparedness to address challenges from high dollarization and FX shortages. ### Financial sector development and inclusion - Opportunities and recommended actions: - Develop the National Financial Inclusion Strategy (NFIS) with a specific MSME access to finance pillar. - Enhance credit infrastructure: - Pass the Secured Transaction Act and Insolvency Law. - Review the Civil Procedure Code for fast-track or simplified procedures for smaller claims. - Expand the collection of credit information. - Credit enhancement mechanisms (e.g., a portfolio guarantee scheme) to encourage bank lending to MSMEs. - Promote digital financial services, competition, and innovation. - Explore ways to stimulate markets for green finance and resilience, including introducing a national green taxonomy and developing a framework for tracking green finance. ### Selected key recommendations (timing and lead agencies as presented) - Adopt regulation for money changing businesses and foreign exchange regulation. (ST, MMA) - Resume liquidity management operations and take measures towards an active secondary market. (ST, MMA) - Develop indicators for monitoring of systemic risks. (ST, MMA) - Improve integrity and granularity of supervisory data, including data compiled by the Credit Information Bureau (CIB). (ST, MMA) - Develop methodologies for solvency, liquidity, and market risk stress tests and engage banks in dialogue about stress test procedures and results. (ST, MMA) - Improve granularity and coverage of climate data and initiate climate risk analysis. (ST/M T, MoED, MBS, MMA) - Augment reporting of data on recurrent household payment obligations from leasing contracts to the CIB. (I, MMA) - Establish a macroprudential framework, including a committee for macroprudential coordination, and publish a financial stability report. (ST, MMA) - Introduce key borrower-based and capital-related macroprudential policy instruments. (ST, MMA) - Amend capital regulation to apply a 100 percent risk weight on bank holdings of Maldives government securities in foreign currency and introduce liquidity requirements. (I, MMA) - Strengthen MMA’s Board of Directors independence by changing composition and voting rights. (ST, MMA, MoF) - Make amendments to legislation to address shortcomings in early intervention, bank resolution, deposit insurance, and ELA provisions and establish ELA framework. (I/ST, MoF, MMA) - Develop the NFIS with MSME access pillar and enhance credit infrastructure. (ST, MMA, MoF, MoED, DJA) - Introduce a national green taxonomy and develop a framework for tracking green finance. (MT, MoF, MMA) *Source: Maldives — IMF Financial Sector Assessment Program: Executive Summary (selected sections).* ### 6. Banks dominate the financial sector (Table 2). They hold more than three-fourths of ### 6. Banks dominate the financial sector (Table 2) ### Financial system structure and concentration - Banks hold more than three-fourths of financial system assets: total financial institutions 17, banks 8, OFC 9 (Table 3). - Table 3 end-2022 highlights: - Banks: 8 institutions; Assets (millions of MVR) 88,552; Share of total assets 77%; Share of GDP 93%. - Other Financial Corporations (OFC): 9 institutions; Assets (millions of MVR) 26,808; Share of total assets 23%; Share of GDP 28%. - Finance Companies, regulated: 3; Assets 4,192; Share 4%; Share of GDP 4%. - Insurance Companies: 5; Assets 2,852; Share 2%; Share of GDP 3%. - Pension Fund (MRPS): 1; Assets 19,764; Share 17%; Share of GDP 21%. - Total: 17 institutions; Assets 115,360; Share of GDP 121%. - Banking sector concentration: - Herfindahl-Hirschman Index near 3,000 (well above peers; Figure 4). - Largest bank holds 51 percent of system assets. - Consequently, three-fourths of banking system assets are under government control (two private domestic banks, five foreign-controlled banks and one domestic state-owned bank, with two of the foreign banks also state-owned). ### Sovereign exposures and government linkages - Government also provides loan guarantees to SOEs amounting to 21 percent of GDP (footnote). - During 2020-22, banks’ sovereign debt holdings and loans roughly doubled to MVR 26.4 billion and 3.4 billion, respectively. - Balance Sheet Approach (BSA) matrix findings: - Banks heavily exposed to domestic sovereign debt: 28 percent of GDP. - NBFIs exposed to domestic sovereign debt: 19 percent of GDP. - One-third of banks’ sovereign exposure is in FX. - MRPS (public pension scheme) holdings augment sovereign nexus: MRPS assets 19,764 million MVR (17% of financial assets, 21% of GDP). ### Financial soundness indicators and supervisory context - Capital and profitability: - Banking system CAR around 50 percent (well above regulatory minimum of 12 percent). - Pandemic-related relief rollbacks: - Minimum reserve requirement reversed to pre-pandemic level (from 5 to 10 percent). - Moratorium of six months on loan repayments and flexibility in provisioning on rescheduled loans rolled back in 2021. - Regulatory treatment that incentivizes sovereign holdings: - Zero risk weights on government paper in local and foreign currency. - Exemptions from provisioning for sovereign paper. - Government securities across all maturities treated as HQLA (instead of a 30-day cutoff aligned with Basel III LCR). - Sovereign debt holdings and government-guaranteed loans exempt from single exposures limits. - MMA operations and balance sheet: - Advances to government repeatedly converted into non-tradeable long-term securities at preferential rates. - MMA plans to further gradually decrease the overdraft limit. - MMA’s international reserves increasingly earmarked for imports and public sector debt service. ### Key vulnerabilities and transmission channels - Macrofinancial vulnerability: high central government and SOE debt, with potential stressors including tighter financial conditions and SOE distress. - Rising SOE exposures in bank portfolios: - SOE exposures represent about 10 percent of corporate loans (over 25 percent at some banks). - SOE exposures have risen by 150 percent since the start of the pandemic. - HDC accounts for one-sixth of outstanding bank loans to SOEs. - Sectoral and borrower concentration: - Loan portfolios highly concentrated in tourism and construction (half of credit, mostly in FX). - Large exposures to a few corporates; some banks close to the single exposure limit of 15 percent of regulatory capital. - Dollarization and FX risks: - Deposit dollarization 53 percent; loan dollarization 44 percent. - Dollarization of loans to private nonfinancial corporates 75 percent. - Significant maturity mismatch: longer-term loans vs. ample daily callable FX deposits with seasonality. - Banks generally positive net open FX positions, but FX liquidity risk remains. - NBFI and shadow banking risks: - Only three non-bank credit institutions: includes SDFC (high NPLs) and majority government-owned HDFC. - Finance companies offering lease/hire options; one institution has a delinquency ratio of 30 percent. - Sector size and household recurrent payment obligations unclear due to absent regulation and reporting and limited registration with the CIB. - Market and external risks: - Commodity price volatility, higher bank funding costs from global monetary tightening or systemic turmoil, and security incidents affecting tourism. - Climate vulnerability: - Key statistics highlighting vulnerability: - 80 percent of Maldives’ islands are less than one meter above sea level. - 90 percent of the islands report flooding annually. - 97 percent of the islands report shoreline erosion. - 64 percent of the islands report severe erosion. - 50 percent of the housing structure are within 100 meters of the coastline. ### Monetary and liquidity management shortcomings and recommendations - Current liquidity management: - Minimum reserve requirement (MRR) is main monetary instrument; absent active open market operations or standing facilities. - FX swap line only with the Reserve Bank of India; FX swap facility with commercial banks unused. - Recommended measures (as noted in text): - Differentiate reserve requirements by currency (higher rate on FX deposits) and within FX reserves by maturity (lower RR on longer-term deposits). - Resume liquidity management operations. - Bolster secondary market activity: establish active primary dealers and an electronic platform for government debt securities auctions and trading. - When establishing a primary dealer system, guard against a monopolistic setting elevating the cost of government financing. ### Stress testing framework and scenarios - Stress tests performed: - Solvency stress tests (top-down and bottom-up), credit concentration test. - Sovereign risk sensitivity analysis based on hypothetical domestic debt exchange. - Liquidity stress tests and deposit concentration risk test. - Market risk stress tests. - Interconnectedness and duration-based mark-to-market tests not performed (no functioning interbank market; very short tenor of sovereign paper). - NBFI sector excluded due to small size and unregulated institutions not reporting data. - Data limitations: - Loan exposures by sector available only from 2015; designation by specific recipient types unavailable. - Longer quarterly series since 2010 used for credit risk modeling. - Three solvency scenarios (Table 3; percent where applicable): - Baseline: reflects IMF projections (forecast cutoff date end-2022). - Moderate stress: reflects IMF adverse projections. - Severe (bespoke crisis): assumes a devaluation by 20 percent and a domestic debt exchange of T-bills for bonds with 25 percent face value reduction; deep short-lived recession from external distress combined with mounting domestic imbalances. - Macro variables (selected rows from Table 3, preserving exact values): - Real GDP growth: - Baseline: 2022 12.3; 2023 7.2; 2024 5.7; 2025 6.5. - Moderate: 2022 12.3; 2023 -14.3; 2024 13.4; 2025 10.4. - Severe: 2022 12.3; 2023 -24.4; 2024 8.8; 2025 10.5. - Inflation rate (eop): - Baseline: 2022 3.3; 2023 5.1; 2024 2.5; 2025 2.1. - Moderate: 2022 3.3; 2023 5.8; 2024 4.2; 2025 2.4. - Severe: 2022 3.3; 2023 9.5; 2024 5; 2025 2.6. - Exchange rate (MVR per USD): - Baseline: 2022 15.4; 2023 15.4; 2024 15.4; 2025 15.4. - Severe: 2023 18.5; 2024 18.5; 2025 18.5. - Total Arrival (thousand): - Baseline: 2022 1675.26; 2023 1765.199; 2024 1899.109; 2025 2140.794. - Moderate: 2023 753.752; 2024 1214.506; 2025 1602.94. - Severe: 2023 676.116; 2024 893.058; 2025 1221.722. ### Stress test results—high-level outcomes and key metrics (Table 4 and concluding tables) - Credit risk (NPL projections, percent of total loans): - NPL ratio stress baseline scenario (foreign currency model): Dec. 22 9.0; Dec. 23 10.5; Dec. 24 11.8; Dec. 25 12.0. - Highest NPL ratio of any bank (foreign currency model) baseline: Dec. 22 34.4; Dec. 23 41.6; Dec. 24 46.1; Dec. 25 46.8. - NPL ratio stress severe scenario (foreign currency model): Dec. 22 9.0; Dec. 23 12.3; Dec. 24 14.8; Dec. 25 14.7. - Highest NPL ratio of any bank (foreign currency model) severe: Dec. 22 34.4; Dec. 23 47.0; Dec. 24 54.4; Dec. 25 54.0. - NPL ratio stress baseline scenario (local currency model): Dec. 22 3.4; Dec. 23 4.5; Dec. 24 5.1; Dec. 25 5.4. - Highest NPL ratio of any bank (local currency model) baseline: Dec. 22 27.5; Dec. 23 36.1; Dec. 24 40.4; Dec. 25 42.1. - NPL ratio stress severe scenario (local currency model): Dec. 22 3.4; Dec. 23 5.4; Dec. 24 6.3; Dec. 25 6.2. - Highest NPL ratio of any bank (local currency model) severe: Dec. 22 27.5; Dec. 23 41.0; Dec. 24 46.2; Dec. 25 46.2. - Capital adequacy (CAR, percent of RWA): - CAR baseline scenario: Dec. 22 50.9; Dec. 23 52.3; Dec. 24 53.9; Dec. 25 55.0. - CAR moderate scenario: Dec. 22 50.9; Dec. 23 53.1; Dec. 24 50.6; Dec. 25 50.2. - CAR severe scenario: Dec. 22 50.9; Dec. 23 39.3; Dec. 24 44.0; Dec. 25 45.1. - Impact of domestic debt exchange (drop in CAR, ppt.): 14.8 (in percent of RWA). - CAR baseline scenario adjusted for 100% RW on domestic securities in FX: 41.1. - Failures and capital shortfalls: - Severe scenario outcome: 3 banks (12 percent of assets) becoming undercapitalized (text). - Table 4 summary lines: - Number of banks failing (as reported): 1 (in one row) and other tests show higher counts depending on scenario and test. - Pct. of banking system <12% CAR: 3.3 (under one estimation). - Capital shortfall in % of GDP: 0.1 (under one estimation); 0.7 under credit concentration extreme scenario. - Credit concentration risk: - CAR downgrade to loss of 5 largest borrowers: Dec. 22 50.9; Dec. 23 20.6; Dec. 24 21.1; Dec. 25 21.6. - Number of banks failing in this stress: 5. - Pct. of banking system <12% CAR in this stress: 27.1. - Capital shortfall in % of GDP: 0.7. - Liquidity and deposit concentration: - Number of banks failing cashflow-based test in either currency: 2. - Banks failing the cashflow test in either currency in % of system assets: 25.3. - Banks failing the cashflow test in either currency in % of GDP: 23.3. - Basel III Liquidity Coverage Ratio, MVR: 253.8. - Basel III Liquidity Coverage Ratio, USD: 235.1. - Deposit concentration risk: - Number of banks failing test in either currency: 7. - Assets of banks failing the test in % of banking system assets: 49.9. - Assets of banks failing the test in % of GDP: 46.0. - Foreign currency risk: - Number of banks breaching NOP limits after 20% devaluation: 2. - Assets of banks failing the test in % of banking system assets: 23.3. - Assets of banks failing the test in % of GDP: 20.1. ### Policy implications and recommended priorities (drawn from analysis and supervisory observations) - Reduce sovereign-bank nexus risks: - Reassess zero risk weighting and provisioning exemptions on domestic sovereign paper, including FX securities. - Consider applying a 30-day cutoff for HQLA treatment to align with Basel III LCR. - Reconsider exemptions from single exposure limits for sovereign debt holdings and government-guaranteed loans. - Strengthen liquidity management and market infrastructure: - Differentiate reserve requirements by currency and maturity as suggested. - Resume liquidity management operations and develop secondary market infrastructure (active primary dealers, electronic auction and trading platform). - Activate and make usable FX swap facilities for banks. - Improve data, supervision, and concentration controls: - Improve granularity and frequency of supervisory data (sectoral loan breakdowns, recipient designation). - Encourage syndication of large commercial loans to reduce single-borrower concentration. - Strengthen oversight and reporting of non-bank credit institutions and finance companies; register entities with the CIB. - Address macro-fiscal vulnerabilities: - Manage rising public sector borrowing and FX needs to limit pressures on MMA reserves and the sovereign-bank feedback loop. *Source: MMA Monthly Statistics, Maldives Pension Administration Office (MPAO); IMF Staff calculations.* ### 25. The liquidity stress tests indicate significant risk at individual institutions and a high ### 25. The liquidity stress tests indicate significant risk at individual institutions and a high susceptibility to withdrawals of large deposits ### Liquidity stress test findings - All but one bank would meet the LCR requirements in both MVR and FX, but one bank each (together comprising 25 percent of system assets) would fail a cashflow-based maturity mismatch test in local and foreign currency. - About half of the banking system (measured by assets) could not withstand the withdrawal of the five largest deposits, indicating inordinate deposit concentration. - Interest rate risk test: assuming a symmetric increase of 200 basis points on interest-bearing assets and liabilities with residual maturities of up to one year caused capitalization to drop by only 1.3 percentage point, owing to relatively short maturities of loans and securities, with two-thirds maturing within one year (8 percent for liabilities). - FX risk: changes in NOPs reflecting FX risk in balance sheets are moderate upon an assumed devaluation by 20 percent; however, two banks breach the relatively loose upper NOP limit and a large bank’s NOP becomes even more negative and approaches the single currency limit. - Bottom-up bank tests (based on FSAP macroeconomic scenarios): all reporting banks (six out of eight) would remain adequately capitalized under stress, although several expect a pronounced drop in CAR in the severe scenario; projections for the NPL ratio align broadly with the FSAP team’s estimates; banks project continued high profitability under the baseline and a deteriorating bottom line under stress. - Data/reporting issues: cross-bank inconsistencies existed despite instructions (some banks did not provide requested metrics or reported starting-point capital different from official data). - Average maturity of T-bills is about 290 days; banks space bond purchases so equal parts come due each month. ### Policy recommendations (liquidity, stress testing, supervision) - MMA should improve stress testing capacity and initiate a dialogue with banks on periodic stress tests. - Build stress testing capacity and develop a suite of stress test methodologies for solvency risk, liquidity, and market risks. - Provide banks with more detailed scenarios and engage them in discussions on results for early detection of systemic risks. - Strengthen reporting consistency and require banks to provide requested metrics aligned with official data to improve bottom-up testing reliability. --- ### Climate risk analysis: methodology and scope - Hazard component: used global climate data on sea level rise and storm surge height for actual conditions and future climate scenarios SSP2-4.5, SSP3-7.0, and SSP5-8.5; data assigned to each administrative Atoll and Greater Male area. - Exposure: economic activity disaggregated to these locations using authorities' geographical information as proxies. - Damage functions: Huizinga et al. (2017) damage functions link hazard intensity to percentage of damage by industry, adjusted for elevation. - Banking-sector exposure modelling: due to unavailability of standardized geographical exposure data, impact considered via by-sector damage rates on banks' loans related to immovable assets (not geographically differentiated). - Indirect impacts: potential effects on households' and corporates' incomes; insurance impacts include higher reinsurance premiums or inability to obtain reinsurance for climate-related events, specifically coastal flooding. ### Climate risk analysis: results and caveats - Physical risk results: - Direct damages to the capital stock for mid-century scenario may reach up to 3.4 percent, and 20 percent for the end-century scenario. - When directly impacting loans related to physical immovable assets and increasing loan loss provisions, the mid-century impact was mild: a 0.5 percentage point decline in the banking system’s CAR, and up to 0.9 percentage points for the most affected bank. - Interpretation caveats: - High uncertainty in climate data, limited geographical exposure data, and possible indirect damages and spillover effects in Maldives’ tourism-dependent economy warrant cautious interpretation. - Policy recommendation (climate and supervision): - Authorities should operationalize an institutional strategy on climate and supervisory expectations for the financial sector regarding business strategies, governance, risk management and reporting, in line with international standards. _Source: IMF staff._ ### 47. The deposit insurance system should be enhanced and aligned with International ### 1mdvea2023004 - 47. The deposit insurance system should be enhanced and aligned with International ### Deposit insurance: recommended enhancements (paragraph 47) - Align the deposit insurance system with International Association of Deposit Insurers (IADI) Core Principles for Effective Deposit Insurance Systems. - Specific measures recommended: - Establish a separate unit for the management of the DIF, ensuring operational independence and governance arrangements. - Enhance MMA’s information technology capacity to access to online depositor accounts and adopt a plan to reduce the reimbursement period for insured deposits to 7 days (IADI CP 15). - Determine the target fund size on the basis of clear, consistent and transparent criteria and a reasonable timeframe to reach the target size (CP 9). - Expand the DIF mandate to a paybox plus mandate (CP 9). - Provide for emergency funding arrangements for the deposit insurance system (CP 9). - Ensure that the legislation does not allow for any borrowings and contributions from the MMA in case of a shortfall in funding from the DIF. ### Emergency liquidity assistance (ELA) framework (paragraphs 48–49) - Amend the MMA Act to include ELA provisions and safeguards, clarifying that ELA can be provided by the MMA on a discretionary basis to solvent and viable banks with temporary liquidity shortages. - Operational safeguards and conditions: - Provide ELA against adequate collateral and at a sufficiently high interest rate. - Use stress testing for viability assessment purposes. - Enhance liquidity management framework given limited market mechanisms and tools, including renewal/strengthening of open market operations and standing facilities. - FX-specific considerations and contingent measures: - High dollarization and FX shortages complicate provision of ELA in FX; assess required level of international reserves considering potential needs for ELA in FX. - Prioritize provision of ELA in MVR; use the RR in FX to provide a liquidity backstop for banks; provide ELA in FX only if absolutely necessary and provided sufficient FX remains to meet other policy objectives. - MMA should be empowered to provide ELA in FX, but ability depends on level of FX reserves freely available; official FX reserves typically sufficient only for idiosyncratic cases rather than systemic events. - Options to bolster FX capacity include arranging swap arrangements with other central banks or tightening prudential requirements (e.g., tightening NOPs or increasing reserve requirements in FX). - Provide ELA in FX to subsidiaries or branches of foreign banks only as part of a comprehensive set of measures and under very specific circumstances and conditions. - Prefer local entity obtaining liquidity from parent, supported by home authorities; MMA should provide ELA in FX only if the entity is deemed systemic, the ELA is likely to deliver a viable going concern entity, and enhanced supervisory monitoring and pre-approval of flows from the local entity to its parent are established. - Ensure ELA in FX is not a substitute for liquidity support from the parent bank or other parts of the group. ### Crisis preparedness and coordination (paragraph 50) - Task the Financial Stability Committee (FSC) recommended for macroprudential policymaking with crisis preparedness and management. - FSC role: - Function as a forum with a coordination role where authorities collaborate for crisis preparedness and management. - Each institution safeguards its own responsibility and autonomy for exercising its relevant powers within its mandate. ### Financial sector development: access, inclusion, and resilience (paragraphs 52–54) - Access to finance for smaller enterprises: - Banking sector currently serves government and larger enterprises; access to finance for MSMEs remains a significant challenge. - Implement a concerted effort under the National Financial Inclusion Strategy despite scant data. - Restructure SDFC away from subsidized lending towards second-tier intermediation. - Introduce credit enhancement mechanisms (e.g., a portfolio guarantee scheme) to encourage bank lending to MSMEs. - Reform credit-enabling infrastructure (e.g., movable collateral registry under the pending Secured Transaction Act, a modern insolvency framework). - Financial inclusion and consumer protection: - Advances made in financial inclusion, but gaps remain in usage of financial products and geographic access due to dispersion of the country. - Limited adoption of credit and insurance, restricted access in remote areas, and low financial literacy. - MMA has financial consumer protection powers through the amended MMA Act, but an enabling regulatory and supervisory framework still needs to be adopted. - Further reforms to foster inclusion should focus on digital financial services, competition, and innovation (e.g., interoperability, access to clearing infrastructure, and cross-border connectivity). - Efforts to address inclusion in remote islands should be directed towards digital channels. - Green finance and climate resilience: - Maldives climate investment needs are estimated at 15 percent of GDP annually and cannot be met solely by the domestic market. - Draw on available public international sources of funding. - Support green finance by developing a national climate strategy, introducing a green taxonomy, and leveraging existing state-owned financial institutions. - Explore options to strengthen disaster risk finance and develop insurance to improve financial resilience to climate-related disasters. ### Authorities’ views (paragraphs 55–56) - Authorities’ reactions: - The Maldives' authorities expressed appreciation for the report and its analysis of macrofinancial vulnerabilities. - MMA emphasized the importance of publishing the report as part of the FSAP process to spur next steps, including introducing new regulations. - MMA agreed to consider forming a financial stability committee with various stakeholders. - Sovereign-bank nexus: - Authorities showed strong interest in further examining the sovereign-bank nexus, identified as a major vulnerability. - MMA requested further recommendations on feasible measures such as reducing banks’ exposure to government securities, enhancing oversight of banks, and strengthening the fiscal framework and debt management. - Ministry of Finance requested additional information on possible policy measures to address the sovereign-bank nexus, including peer country experiences. *Source: MALDIVES INTERNATIONAL MONETARY FUND (excerpt from 1mdvea2023004).* ### introduction of banks as ### introduction of banks as ### Market makers, Government Securities Market Development (GSMD), and CSD - MMA initiated Government Securities Market Development (GSMD) Project in 2017 and started Central Securities Depository (CSD) system implementation. - Project scope included introduction of a Primary Dealership regime: all institutions licensed by the Authority under the Banking Act [2010] are eligible to be appointed as Market Dealers to perform market maker roles to stimulate the Secondary Market process. - The functions of market makers were tested through the CSD system and they work accordingly. - Effective from 12 August 2021, MoF decided to terminate agency agreement between MoF & MMA. - Consequently, the GSMD Project and the CSD System implementation process was transferred to MoF. - Status: Partially Implemented. ### Recommended market infrastructure upgrades and implementation status - Replace the depositary with a more robust system, including a Delivery versus Payment (DvP) settlement process linked to the Real Time Gross Settlement (RTGS) system (MMA). - Status: Partially Implemented. - Replace MSE’s trading system with a well-established international system that is fit for purpose (MSE). - Priority: High; Horizon: Medium Term. - During the Inception Phase of the CSD implementation project it was decided to integrate the Maldives Real Time Gross Settlement System (MRTGS) system with the CSD system to facilitate simultaneousness of securities trade operations and settlement with the DvP process. - Status: Partially Implemented. ### Government securities issuance and market development - Any issuance related to Government Securities will be conducted by the Ministry of Finance as Government Securities Issuance function has been transferred to the Ministry In 2021. - Status: Not Implemented (as recommendation to coordinate market makers pilot). - Coordinate, through the Project Group, a market makers pilot including short-dated T-bonds and the STO corporate bond (MoFT, MMA, CMDA). - Priority: High; Horizon: Medium Term. - Once the government bond market has begun to function seek to support the MSE in obtaining appropriate well-established trading systems (MoFT). - Priority: Medium; Horizon: Long Term. - Status: Not Implemented. ### Payment and settlement systems: reforms, timelines, and status - National Payment System Act published on 18 May 2021. - Regulation on Payment Services published on 13 March 2022. - Planned regulations to be issued in the year of the report: - Regulation on Access to Payment Accounts (to facilitate Open Banking in the Maldives). - Regulation on Electronic Customer Due Diligence (to enable E-KYC in the Maldives). - Status: Work in Progress. - Action Plan to discontinue usage of cheques: - Plan launched during April 2022 and became effective from July 2022. - Imposition of value ceiling of MVR 50,000 and USD 3,000 on cheque transactions effective, 1st April 2023. - Migrate all Direct Credit transfers processed through ACH to IPS by June 2023. - Reduce the frequency of cheque clearing to twice a week (by 1st April 2023), and once a week (by 1st January 2024). - Introduction of fees on cheque transactions effective, October 2023. - Status: Partially implemented. - Instant Payment System (IPS) under Maldives Payment System Development project: - Phase 1 scheduled to go-live during the last quarter of 2022: implement IPS for account-based domestic retail payments; connectivity via open APIs; use of aliases (e-mails, National ID numbers, phone numbers). - Phase 2 Payment Platform with white-labelled mobile application planned to go-live during the second quarter of 2023. - MMA planning to upgrade existing RTGS System within the next two years and phase out ACH completely. - Status: Work in Progress. - Establish Payment Systems and Oversight Division: - Division established in 2019 to implement oversight function; MMA developing oversight framework, manuals and documentation. - Status: Work in Progress. ### Credit reporting systems - Data Quality Analysis (DQA) shared with relevant data providers; guidance provided on corrections. - Credit Information System Regulation: access limited to authorized staff of data provider and Credit Information Bureau staff. - Status: Partially Implemented. - Draft Credit Information System Act is in the Attorney General’s Office. - Status: Work in Progress. - New Credit Information System Regulation allows alternative data providers (financial/non-financial) to participate; came into effect on July 2022. - Under section 10, credit data should only be accessed for a permissible purpose. - Dispute Module enables data correction of errors on credit facilities reported by consumers and data providers. - Status: Partially Implemented. ### Insolvency, secured transactions, and creditor rights - Pass a Secured Transactions Law and establish a Collateral Registry providing clear priorities of creditors’ rights; implement out-of-court enforcement over real property or establish independent arbitration panel; full digitalization of land registry; permit second charge mortgages; strengthen judicial training and case management systems. - Draft Secure Transaction Bill at the Attorney General’s Office; draft covers security interests in movable property. Pending Mortgage Bill covers security interest in immoveable property. - Status: Progress / Work in Progress. - Develop out-of-court guidelines to facilitate informal restructurings for multi-bank or syndicated loans; draft Secure Transaction Bill to cover out-of-court settlement components. - Status: Work in Progress. - Pass an Insolvency Law addressing reorganization, liquidation and cross-border insolvency of corporates, and formal bankruptcy for partnership, sole proprietorships and individuals. - Bankruptcy Bill pending in Parliament; sent to relevant parliament committee in late 2020 and covers insolvency matters related to natural persons and sole proprietorships only. - Status: Work in Progress. ### Insurance sector recommendations and status - Engage an international supervisor or consultant to prepare manuals for effective onsite review and offsite analysis of insurance companies and arrange staff training (MMA). - Manuals prepared with help of Consultant and SARTTAC technical assistance; training on-going. - Priority: High; Horizon: Short Term. - Status: Work in Progress. - Review existing regulations and guidelines; enact law(s) on insurance contracts, insurance supervision and insolvency; address gaps (GoM). - Draft Insurance Act submitted to AG office by MMA in March 2018; Act going through final stages in the Parliament. - Priority: High; Horizon: Medium Term. - Status: Work in Progress. - Increase competition by privatizing Allied Insurance and allowing all insurers to compete for every business line. - More players have entered since the study; Allied Insurance not yet privatized. - Status: Partially Implemented. - Investigate arrangements with other countries for purchase of catastrophe insurance. - Catastrophe insurance gap analysis is being conducted (baseline study with UNDP). - Status: Work in Progress. ### Pensions - Resolve double pensions by limiting unfunded benefits to the period between retirement and age 65 (GoM). - Under the ‘New Retirement Benefit Guideline’ by the National Pay Commission, all institutions following the pay structure to follow a harmonized pension benefit system. - Status: Partially Implemented. - Permit MRPS to purchase conservative international instruments and supply the international currency to do so (MMA). - Ongoing discussions with MoF & CMDA; no further developments. - Status: Not Implemented. - Explore securitization of home loans and authorize MRPS to purchase securities issued by securitization program (GoM). - Currently, MRPS invests in debt instruments issued by HDFC; direct exposure to real estate restricted under the Pension Act. - Status: Not Implemented. ### Financial inclusion - Enhance data collection and reporting on financial inclusion by conducting MSME and household finance surveys, gather indicators from financial institutions (MMA, MED, MIRA). - MMA collects financial inclusion data for Financial Access Survey. - MMA completed first demand side survey to formulate NFI strategy. - FI disaggregated data collection project ongoing by FCPS section. - Status: Work in Progress. - Leverage postal offices and airports to establish a network of financial service agents; prohibit exclusivity of cash agents; enforce opening of BML’s financial infrastructure for a cost recovery fee to BML (MMA). - MMA pursuing National Payment System project; objective to be achieved through this and not pursuing agent network banking. - Status: Work in Progress. - Establish a special purpose vehicle (apex SPV) to consolidate government credit lines and house partial credit guarantee scheme, professionally managed under MMA supervision (MED, MMA). - Credit Guarantee Scheme and Affordable Housing Scheme were operated by MMA until 2021; schemes no longer in operation and no SPV established. - Status: Not Implemented. - Adopt comprehensive legal and regulatory framework for financial consumer protection covering all financial services and establish alternative dispute resolution such as a Financial Ombudsman (MMA, CMDA). - Consumer Protection Regulation (under amended MMA Act) ongoing; alternative dispute resolution mechanism yet to be established, subject to enactment of the regulation. - Status: Work in Progress. ### Financial integrity (AML/CFT) - Address gaps in legal framework for implementation of UN Security Council Resolutions 1267 and 1373 (MMA, Parliament). - Regulation on Management of Confiscated Funds and Properties related to Money Laundering and Financing of Terrorism issued by MMA Legal in 2020. - Status: Partially Implemented. - Enhance supervisory capacity to effectively regulate offshore banks and consider risks associated with offshore sector (MMA). - Regulation for Offshore Banks Operating in the Special Economic Zone issued by MMA in 2015. - Authorities indicated no offshore financial institutions licensed in the Maldives. - Status: Not Implemented. - Focus on effective implementation of AML/CFT measures in the new law and regulations, including DNFBPs. - Supervisory activities conducted in relation to certain reporting entities; efforts to improve AML/CFT regulatory framework are ongoing. - Status: Work in Progress. ### Risk Assessment Matrix: selected risks, likelihood, impact, and policy responses - Systemic regional instability causes financial market dislocations, widening of parallel market exchange rate spread, and increased sovereign debt stress. - Likelihood: Medium. - Impact: High. Banks’ capital could erode rapidly considering that RWs on banks’ sovereign debt exposure are zero and sovereign debt represents roughly 30 percent of banks’ total assets. - Policy response: Reduce domestic financing needs and adjust the RW on banking sector sovereign debt exposure; reduce excess liquidity and implement measures to reduce the level of dollarization in the economy. - Intensification of military conflicts, commodity price shock, and supply chain disruptions. - Likelihood: Medium. - Impact: High. Slower growth and damage to business confidence; global financial tightening threatens FX stability and external debt sustainability. - Policy response: Extend support measures including (i) asset purchase program to support liquidity in bond markets and compress risk premia and (ii) provide liquidity support to banks; implement fiscal consolidation and adjust banks’ RWs on sovereign debt exposures. - Abrupt global slowdown or domestic economic shock affecting tourism. - Likelihood: Medium. - Impact: High: disruption to tourist arrivals from key source countries, pressure on FX reserves and the budget deficit. - Policy response: Provide targeted and temporary fiscal support to the most vulnerable and hardest-hit workers and businesses; if necessary, keep financial conditions accommodative to support banks. - Extreme climate events causing infrastructure damage and loss of livelihoods. - Likelihood: Medium. - Impact: High: disruption in tourism, property damage from coastal flooding, higher food and energy inflation weakening debtor capacity. - Policy response: Establish contingent financing plans with development partners; provide targeted and temporary assistance with clear criteria; prioritize public investment in disaster-resistant infrastructure; identify financial sector exposures to physical risks from climate change. *Source: introduction of banks as (excerpt).* ### Appendix V. Stress Testing Matrix (STeM) ### Appendix V. Stress Testing Matrix (STeM) ### BANKING SECTOR: SOLVENCY RISK - Institutional perimeter - Institutions included: All 8 domestic banks - Market share: 100 percent of banking system assets - Data and baseline date: Supervisory data as of December 2022 - Channels of risk propagation and methodology - Methodology: IMF stress testing framework - Satellite models for macro-financial linkages: - Model-based forecast of main macroeconomic and financial variables. - Satellite panel data models for bank-level NPL ratios. - Bottom-up stress test: Banks were asked to use their own models or to apply expert judgment and estimate impact of FSAP stress test scenarios on NPL ratio, income and CAR. - Stress test horizon: 3 years (end-2022 to end-2025). - Tail shocks / scenario analysis - Macro scenarios: baseline, moderate, severe (variables include tourist arrivals, bed-nights, real GDP growth, exports, imports, lending rate, consumer inflation). - Baseline scenario: Latest baseline scenario of the APD country team. - Moderate scenario: Latest adverse scenario of the APD country team built on an economic downturn in advanced countries important to economic activity in Maldives. - Severe scenario: Bespoke adverse scenario involving a significant economic deterioration, depreciation of the MVR against the U.S. dollar (i.e., abandoning the peg), leading to a twin-coupled with a period of extreme sovereign stress and debt restructuring. - Sensitivity analysis and specific risk channels - Credit Risk: - Derived from projection of NPL ratio based on satellite models that include as regressors inflation and import growth, and assumptions about credit growth. - An increase in NPLs in the following areas: Local currency loan portfolio (mostly household and SME loans); Default of largest 5 borrowers. - FX-induced Credit Risk: - Severe scenario (currency devaluation): calibrate to historical volatility and analyze effect of loans to unhedged borrowers in FX (data on indirect currency risk permitting). - Sovereign Risk: - Severe scenario (domestic debt exchange): assumes restructuring of domestic debt where T-bills and any other outstanding domestic government bonds (excl. MMA) are converted into a new bond on financial terms comparable to that given to the MMA in the most recent securitization of MMA claims (20-year maturity at an interest rate of 2.5 percent, equating to a 24.9 percent value loss applied as a haircut to the face value). - Risks and buffers assessed - Risks/factors: Total credit losses, pre-provision profit, repricing gap, shocks to the credit quality of sectoral and large exposures, domestic debt exchange (DDE) losses, losses from maturity and currency mismatches. - Behavioral adjustments: Assumptions for pre-provision income growth and credit growth in scenarios as well as for income taxes paid, dividend payouts, maturity mismatch related repricing gap, NOP upon devaluation. - Regulatory and market-based parameters - Calibration: Projections of bank-by-bank NPL ratios based on satellite panel data regressions combined with projections for credit growth, pre-provision income, income taxes, dividends, and regulatory information to project banks’ solvency positions in each scenario. - Regulatory/Accounting and Market-Based Standards: Minimum CAR hurdle rate: 12 percent. ### BANKING SECTOR: LIQUIDITY RISK - Institutional perimeter - Institutions included: All 8 domestic banks - Market share: 100 percent of total banking sector assets and liabilities - Data and baseline date: Supervisory data as of December 2022 - Channels of risk propagation and methodology - Methodology: Cash-flow-based using maturity buckets; Withdrawals of five largest deposits of each bank. - Risks and buffers - Risks: Funding liquidity shock - Buffers: Counterbalancing capacity - Tail shocks / calibration - Size of the shock: Assumptions for run-off rates on funding sources and roll-off rates on assets to estimate the funding gap based on historical volatility. - Regulatory and market-based standards - Regulatory standards: Hurdle metrics: funding gap used for pass/fail result. - Reporting format for results - Output presentation: Funding gap by bank, aggregated; Number of banks that are found to be illiquid and their aggregate share in system assets. ### BANKING SECTOR: MARKET RISK - Tail shocks / sensitivity analysis - Interest Rate Risk — Income Effect: - Parallel shifts in interest rates of interest-bearing assets and liabilities, using the maturity buckets supplied for the liquidity stress test. - Currency Risk: - Severe scenario (currency devaluation): calibrate to historical volatility and analyze effect on Net Open Position (direct currency risk effect). --- ### Appendix VI. FX Shortage: Causes and Implications - Main causes - Government’s ambitious investment programs executed mainly by HDC generate twin deficits and net FX outflows. Reportedly, HDC’s has an annual net FX annual outflow of about USD 160 million which is equivalent to 20 percent of international reserves at MMA. - MMA earmarks FX allocation to government and certain SOEs for external debt service; remainder goes to banks which ration FX to clients. - Not all FX inflows from resorts enter the official market; some are kept in offshore accounts or directed to importers. Most resorts have money exchange licenses facilitating supply to the parallel FX market. - Some foreign banks have increased repatriation due to Maldives’ low and falling sovereign rating; others do not repatriate due to possible dividend payment loss in FX. - Parallel market and market behavior - The parallel market has operated at a premium of around 10 to 15 percent since the pandemic. - Stability of the premium attributed to elastic FX supply meeting seasonal peaks and large supply-side players (resorts and fishery companies) stabilizing the parallel market rate. - Market segmentation and implications - Banks can meet around 10-20 percent of importers’ FX demand; the rest is procured through the parallel market. - Some private sector importers source FX through bilateral relationships with resorts or by providing logistics support to resorts. - The parallel market causes deadweight losses to traders and lowers government tax revenue since importers can claim FX sourcing costs in tax returns. - Financial stability implications and policy options - Persistent FX shortage and low official reserves could lead to a higher parallel market premium, possibly precipitating an exchange rate devaluation. A devaluation or a sudden stop of FX inflows may further exacerbate the FX shortage. - While some foreign-owned banks have FX liquidity contingency lines from head offices, domestic banks lack this backstop. MMA’s low reserves suffice only for FX provision in an idiosyncratic case, not in a systemic event. - Policy recommendations: - MMA should consider ELA in FX only if critical to preserving financial stability and sufficient FX remains for other policy objectives. - Consider tightening prudential requirements (e.g., net open position, FX reserve requirements). - Bolster international reserves through additional swap arrangements with central banks (noting challenges during a crisis). - Encourage banks to have their own FX swap facilities rather than relying on MMA resources. - If a stressed parent is deemed unable to provide liquidity support, MMA should provide ELA in FX only to viable banks meeting ELA eligibility criteria, while ring-fencing the local entity. --- ### Appendix VII. Lease-and-Hire Purchase Programs and Household Indebtedness - Market structure and scale - Lease-and-hire (“rent-to-own”) schemes widespread for vehicles, vessels, consumer durables (mobile phones) due to affordability and alignment with Islamic financing principles. - FSAP team estimates outstanding leases provided by four main finance/leasing companies and the bank most active in this segment amount to about MVR 1 billion (based on anecdotal information). - Bank loans to households excluding mortgage loans: MVR 4.5 billion at end-2022. - One of the four finance/leasing companies has about a 30 percent share in the leasing market and is licensed and regulated by MMA and reports to the CIB. - Product and risk features - Under most plans, leasing company retains ownership until full payment; exposures are “debt-like” with obligors typically held accountable for full payment even if they abandon the lease. - One company transfers ownership and has experienced a relatively high delinquency rate. - Repossession shortfalls often lead firms to consider suing lessees, weighed against lengthy and costly court proceedings with uncertain outcomes. - Regulatory and data gaps; recommendations - Only one of four companies reports to CIB; others not regulated because they finance products offered by the same group. - Leasing companies welcomed proposal for reporting of such exposures to the CIB. - Recommendation: Include non-bank finance/leasing institutions in reporting to the CIB to build comprehensive records of recurring payment obligations beyond loan service, improving information on client leverage and helping lower delinquency rates. - Once information gaps are closed, MMA should calibrate the envisaged limit to the DSTI ratio based on comprehensive systemwide payment obligations and not just on bank debt service. --- ### Appendix VIII. Report on the Observance of Standards and Codes (ROSC): Basel Core Principles — Summary and Methodology - Context and scope - Assessment of implementation of the BCPs by MMA as part of the FSAP undertaken by the IMF and the World Bank in 2023; reflects framework in place as of completion of the assessment. - Basel Core Principles (BCP) assessment mission: February 12 to March 2, 2023. - Assessment based on the 2012 version of BCPs issued by the BCBS. - First detailed assessment of the BCPs for Maldives. - Methodology and approach - Maldives opted to be assessed and graded only against the essential criteria (EC). The methodology uses essential and additional criteria; essential criteria set minimum baseline requirements; additional criteria are recommended best practices. - Assessment uses a five-part qualitative rating system; compliance judged on effective application of relevant laws and regulations. - Assessment focused on banking supervision and regulation in Maldives, not on other financial institutions. - Evidence base: framework of laws, regulations, procedures, guidelines, supervisory documents, files, staff interviews, meetings with select banks and external audit firms. - Observations on cooperation and proportionality - Assessors appreciated very high quality of cooperation from MMA, including BCP self-assessment and access to documents and staff. - Assessment applies a proportionate approach recognizing supervisory expectations commensurate with complexity, interconnectedness, size, risk profile, and cross-border operations. - Emphasis on commentary accompanying each principle’s grade rather than the grade alone. - Preconditions for effective banking supervision (as identified) - Sound and Sustainable Macroeconomic Policies: See Section on Macrofinancial Developments in this report. - A well-established framework for financial stability policy formulation: see section on Financial Oversight in this report. - A well-developed public infrastructure: payment and settlement infrastructure managed by MMA includes wholesale and retail payment systems but deficiencies remain (no switch for payment cards, limited interoperability, no central securities depository for government securities). Access to finance is a major constraint to micro, small and medium sized enterprises. The insolvency and creditors’ rights framework warrants further improvement. Despite high account ownership, there are gaps in financial inclusion given the widely dispersed population. MMA operates a credit registry used for banks’ lending decisions but not for supervisory purposes. - A clear framework for crisis Management, recovery and resolution: see section of Financial Safety Net and Crisis Management Arrangements in this report. - Effective Market Discipline: Transparent information provided by banks and MMA to the public, but disclosure varies in comprehensiveness and formats which might hinder effective market discipline. Capital markets are not developed, with issuance focused on Treasury bills. - Main findings (excerpt) - Responsibilities, Objectives, Powers, Independence (CP1–2): - MMA is the responsible authority for banking supervision in Maldives and also regulates and supervises other financing institutions. - The Maldives Banking Act (MBA) provides broad delegation to MMA to develop regulations, instructions and other legal acts for implementation. - MMA has issued regulations covering capital adequacy, asset classification and coverage, limits to large exposures and related parties, audit and disclosures, and more recently, corporate governance, as well as Guidelines on Risk Management and binding instructions and circulars. *Source: Appendix V–VIII, 1mdvea2023004 - Appendix V. Stress Testing Matrix (STeM).* ### 9. The Maldives Monetary Act regulates the governance and operations of MMA. MMA is ### 9–H: Maldives Monetary Authority (MMA) governance, supervision, and regulatory framework ### Governance and institutional independence - MMA is governed by a Board of Directors of 7 members: the Governor and the Deputy Governor, one employee of MMA, two government representatives, and two representatives of the private sector. - Board responsibilities: approving regulations, the annual budget, the accounts and the report. - The Governor is responsible for approval of actions related to supervised institutions; the Governor can delegate these tasks to MMA’s senior managers. - Independence concerns and specific findings: - The presence of government and private sector representatives on the Board exposes MMA to significant risks to its independence, amplified by the key role of the state in the financial sector. - Current rules on defining and managing conflicts of interest limit conflicts to personal interests and exclude professional interests that may affect some Board members. - Appointment and removal of the Governor and Deputy Governor is done by the President with consultation with the Parliament, but: - The reasons for dismissal are not strictly limited by law to lack of fitness and propriety. - There is no mandate to require disclosure of the reasons for dismissal. ### Resources and supervisory capacity - Evidence of resource constraints affecting MMA’s capacity to perform supervisory activities. - Operational effects: - MMA has not been able to perform on-site inspections beyond the minimum 2-year frequency imposed by the MBA. - MMA has not been able to conduct on-site examinations simultaneously. - Supervisory challenges as MMA moves toward a more judgment-based, forward-looking supervisory framework and potentially revamps off-site monitoring. - Despite an increase in supervisory division resources during the last year, current headcount may not be sufficient to effectively perform banking supervision activities. ### Licensing, change in control, and acquisitions (CP 4–7) - MBA licensing framework: - MBA reserves exercise of banking, including deposit-taking, and the use of the word “bank” to institutions licensed as banks by MMA. - The list of banks, including branches and subsidiaries of foreign entities, is available on MMA’s website. - Licensing includes establishment by a bank in Maldives of a foreign branch or representative office in a different country. - Law lists permitted banking activities and enumerates activities prohibited to banks. - Two additional licensing regimes exist: one for Islamic banking activities and one for offshore banking services in the Special Economic Zone (the latter has not been used hitherto). - MMA Guidelines for Licensing: - Detail the authorization process, required information, and assessment criteria. - Elaborate assessment of fitness and propriety of major shareholders and administrators, business plan and financial projections. - Include an informal scoring system to facilitate application assessment. - Recommendation: complement the Guidelines by introducing assessment of collective suitability of the Board of Directors and oversight mechanism for outsourced functions. - Acquisition and investment authorizations: - MBA defines a major shareholder as any person with an ownership above 10 percent of the bank’s capital. - Increases in ownership above certain thresholds are subject to MMA authorization. - Merger or agglomeration transactions, acquisition of ownership interests above 5 percent of the investee’s capital, and the set-up of a foreign branch or representative office are subject to MMA’s ex ante authorization. - Banks are prevented from acquiring ownership interests in non-financial companies beyond 5 percent of the capital of the investee. - These processes have not been activated in practice and, given ownership structure, authorization provisions have been rarely used. ### Supervisory cooperation and consolidated supervision (CP 3,12,13) - Coordination with national authorities: - MMA signed an MoU with the Capital Market Development Authority (CMDA) covering coordination, cooperation, and information exchange. - Coordination has been mainly on demand; no regular meetings are scheduled between the two authorities. - No specific formal coordination between MMA and the Ministry of Finance (MoF) in banking supervision or financial stability, despite MoF’s potential role in banks under receivership. - Cross-border coordination and cooperation: - Maldives is a “small host”: 5 out of 8 banks are branches or subsidiaries of foreign banks. - MMA has entered into 3 MoUs and is negotiating two additional MoUs. - Cross-border coordination practices include sharing information with home supervisors before on-site examinations and sharing examination reports. - MMA participates in two supervisory colleges. - Both law and MoUs contain confidentiality provisions. - No joint inspections have been conducted; no common communication strategy is agreed with home countries. - Consolidated supervision: - No bank in Maldives currently owns any subsidiary; no banking group is headquartered in the country. - MBA mandates consolidated supervision, but these provisions have not been implemented because there are currently no banking groups in Maldives. - MMA’s power to authorize ex-ante investments above 5 percent in banks and financial institutions could give flexibility to implement consolidated supervision when needed. ### Supervisory approach, techniques and reporting (CP 8–10) - On-site examination practices: - MMA required to examine banks on-site at least every two years; this has been the default frequency. - Examinations can be targeted or full scope. - Initial focus was on credit risk (credit classification and coverage, concentration and related party limits). - After the PMLFT Act, on-site scope expanded to AML/CFT compliance and operational risk. - On-site AML/CFT inspections (except market entry aspects) are conducted by both the FIU (housed in MMA) and MMA. - Current on-site focus: assessment of corporate governance and risk management practices. - Impact of on-site inspections: - Examinations have been highly intrusive; examiners commonly review individually credit files amounting to more than half of banks’ loan portfolios. - Examination reports are shared as draft and final with banks’ boards. - Full update of supervisory CAMELS rating is done only once on-site inspections have finished. - Off-site monitoring shortcomings: - Supervisors prepare quarterly monitoring reports mainly using banks’ monthly and weekly submissions. - Main outcome of reports: CAMELS rating updated quarterly. - Off-site monitoring is not effective in aligning banks’ risk profiles with MMA risk tolerance. - Recommendations: - Allocate sufficient resources to improve off-site monitoring. - Schedule regular meetings with boards, independent board members, key senior managers and external auditors (rather than on-demand). - Revamp methodological approach to be consistent with regulatory framework and include forward-looking elements (e.g., business model analysis) and qualitative supervisory judgement (e.g., corporate governance, risk control frameworks). - Share off-site outcomes with banks’ boards and senior management and use them as basis for recommendations and supervisory enforcement actions where applicable. - Manuals and procedures: - MMA should prepare or update written methodologies and procedures covering on-site examination, off-site monitoring and planning; MMA is currently preparing them. - Reporting framework and gaps: - Banks report weekly and monthly supervisory returns covering financial statements, capital adequacy, asset classification and coverage, large exposures and related parties, limits on interbank borrowings, foreign currency exposures, interest rate risk in the banking book, and funding and liquidity. - MMA requires specific reports such as quarterly stress tests, fraud or cyber-security events. - Gaps persist in capital adequacy data, operational loss data, liquidity and interest rate risk data, and exemptions on large exposures. ### Corrective and sanctioning powers (CP 11) - MBA provides a comprehensive framework for dealing with banking problems: breaches of legal/regulatory provisions, instructions by MMA, or unsafe and unsound practices. - MMA’s available measures: - Mild measures: written warnings, voluntary agreements. - Formal orders and compelling banks to take measures. - Governance measures: removing board members, appointment of an advisor, replacing the board of directors. - Administrative sanctions on banks and administrators. - More drastic measures: conservatorship (resolution) or receivership (liquidation). - Enforcement practice and concerns: - MMA’s enforcement approach largely based on moral suasion rather than formal enforcement. - MMA traditionally issues recommendations after on-site examinations; in egregious cases it has warned banks using sanctions and other enforcement actions, but it has never sanctioned a bank. - The only relevant enforcement experience dates back more than a decade and was based on consensual measures. - Absence of enforcement background may create an expectation that MMA may not take enforcement action or may warn banks before doing so, potentially resulting in moral hazard. - Enforcement regime not operationalized: - Lack of clarity over definition of unsafe and unsound practices may preclude MMA from taking enforcement measures if legal challenge risk is high. - MMA has not issued guidance on how it intends to use the powers conferred by law. - Lack of recovery and resolution planning and other contingency arrangements results in little preparedness to tackle a stressed situation. ### Corporate governance and internal audit (CP 14, 26) - Corporate governance framework: - MMA issued comprehensive regulation on corporate governance in 2020. - Regulation addresses most Corporate Governance principles except those related to compensation. - No requirement that compensation frameworks include appropriate incentives aligned with prudent risk taking and consistent with long-term objectives and financial soundness of the bank. - Recommendation: amend corporate governance regulation to align with BCBS compensation recommendations. - Implementation and supervision: - Supervision of corporate governance historically focused on compliance with the MBA. - Since 2020, MMA began assessing compliance with the Corporate Governance regulation. - Finalizing and extending this assessment across the financial system is important to ensure adequate implementation and to make supervision more comprehensive and principle-based. - Internal audit and controls: - MMA has not implemented a structured process to assess internal control and internal audit effectiveness. - MMA does not interact routinely with internal audit and mainly assesses governance and reporting aspects. - No assessment of effectiveness of internal audit, no routine engagement with back office, and no assessment of back office functions or balance in skills/resources compared to business origination units. ### Capital framework (CP 16) - Capital requirements and risk-weighting: - MMA has prescribed capital requirements based on Basel I with higher capital adequacy thresholds: - 12 percent total capital ratio. - 6 percent Tier I capital ratio. - Capital definition closely follows Basel I; loans/investments of capital nature to banks and financial institutions are deducted from total capital. - Risk-weighted assets (RWAs) consider only credit risk; risk weights applied to exposures to central government denominated in foreign currency is 0 percent instead of 100 percent. - Adjusting that risk weight to 100 percent would reduce the capital adequacy ratio of the banking system from 51 percent to 41 percent. - Impact varies by bank, from no impact to a 65 percentage point reduction of one bank’s capital adequacy ratio. - Note: recommendation to increase RW to 100% aligns with Basel I and Basel III guidance; Maldives is currently rated B- by Fitch. - The increase in RW on domestic sovereign exposures denominated in foreign currency to 100% could be gradually phased in to reduce impact on specific banks. - Leverage ratio: - MMA implemented a leverage ratio of 5 percent applicable to all banks. - Leverage ratio defined as Tier 1 capital divided by net assets. - “Net assets” do not include off-balance sheet items (which are currently not significant). - Even without off-balance sheet items, the leverage ratio is considered more binding than capital ratios. - Supervisory discretion: - MMA has the power to order individual banks to maintain higher capital ratios based on operations, financial conditions, or systemic importance, but MMA has never used this power. - MMA asserts additional capital requirements would not be binding because banks have large excess capital buffers; however, this may not hold if RWs for central government foreign currency exposures were raised to 100 percent. ### Risk management and stress testing (CP 15, 17–25) - Risk management framework: - MMA issued risk management guidelines in 2022 which are important for compliance with BCP provisions on risk management and specific risks (market, liquidity, operational). - Guidelines are recent and have not yet impacted supervisory practices; therefore, supervision of risk management is expected to improve but the extent is unclear. - Supervisory approach should evolve toward being more principle-based and intrusive (as is the case for credit risk) and less compliance-based. - Internal capital and liquidity planning: - MMA assesses capital and liquidity compliance with regulatory and internal limits. - There is no requirement or expectation that banks perform internal capital and liquidity planning processes (initial steps toward ICAAP/ILAAP). - Stress testing framework deficiencies: - Banks perform standardized stress tests based on NPLs and withdrawals scenarios. - Current stress tests do not include market risk exposures or concentration risk, nor assess vulnerability to losses from adverse interest rate movements. - MMA does not require forward-looking stress testing programs proportional to banks’ risk profile and systemic importance, nor does it regularly assess banks’ internal stress test programs. - MMA does not assess whether stress test results are integrated into banks’ decision-making and risk management or whether they impact capital and liquidity. - Recommendation: remodel the stress testing framework and align it, in a proportionate way, with the related BCBS document. *Source: 1mdvea2023004 — Excerpt on MMA governance, supervision, and regulatory framework.* ### 36. MMA performs an intrusive supervisory process on credit risk. During on-site supervisions, ### 36. MMA performs an intrusive supervisory process on credit risk. During on-site supervisions, ### Credit risk supervision - On-site supervisions perform a thorough assessment of credit files on a loan-by-loan basis. - Coverage includes a significant part of the loan book, including most large loans, loans on watchlist, NPLs as well as some rescheduled and special mention loans. - MMA verifies loans’ classification and provisioning and requires adjustments frequently. ### Asset classification and provisioning - MMA issued the Regulation on Asset Classification, Provisioning and Suspension of Interest. - Classification grades mandated: pass or acceptable, special mention, substandard, doubtful and loss. - Regulation does not cover off-balance sheet items, which should be included. - Classification is based on days in arrears (objective factors) and on financial condition and repayment history of a borrower (subjective factors). - Provisioning: each grade is assigned a percentage of provisioning requirements, which varies depending on whether loans are secured or not for doubtful and loss categories. - Described provisioning rules characterized as relatively simple. ### Large exposures and sector concentration - Large exposure limit: 15 percent applies to both single-borrowers and group of connected counterparties. - Aggregate amount of large exposure limited to 500 percent. - Some exceptions to the single borrower limit apply, mostly raising it to 30 percent. - Institutions required to develop their own limit structure while remaining within exposure limits set by MMA; internal limits recommended for products, activities, industries, sectors and/or geographic regions. - Around 35 percent of loans are granted directly to the tourism sector. - Since 2009, direct concentration to the tourism sector has declined from 53 to 34 percent. - No regulatory limits imposed on tourism concentration; concentration is monitored by banks and MMA. ### Country and transfer risk - Country and transfer risk is not defined under national standards and is not encompassed by regulatory and supervisory approach. - MMA receives no country breakdown on geographic exposures; at most receives information on time balances, debt securities, loans and other exposures abroad with no country breakdown. - For the whole banking system, total assets abroad amount to 3 percent (or 12 percent of the capital base). - Current assessment: country and transfer risk considered not material in Maldives; may change in future but not expected soon. - Recommendation: MMA should define country and transfer risk in its regulation so it can request information on banks’ exposures to country risk. ### Market risk and foreign exchange exposures - Market risk mainly related to foreign exchange risk and interest rate. - Banks’ investment portfolios concentrated in plain vanilla instruments. - Derivatives, shares and other equity investments represent 0.2, 0.4 and 0.2 percent, respectively, of total banks’ assets. - Assets in foreign currency are mostly held in US dollars, representing around 44 percent of total assets. - No segregation of banking and trading book; most interest rate risk exposures lie in the banking book. - MMA has implemented limits on foreign currency exposures: - overall (short and long positions for all currencies) of 40 percent of the capital base; - single currency long position of 25 percent of the capital base; - single currency short position of 15 percent of the capital base. - Supervision closely monitors compliance during on-site and off-site and analyses trends of foreign currency ratios. - Observation: supervisory processes do not comply with what is expected in the BCPs; market risk supervisory processes should assess provisions in the risk management guidelines. ### Interest Rate Risk in the Banking Book (IRRBB) - IRRBB included in risk management guidelines within market risk, but provisions are scarce and do not cover BCBS principles. - On- and off-site supervision do not assess IRRBB. - Recommendation: pursue proportional application of BCBS principles, e.g., standardized approach, and use information received in the interest rate sensitivity spreadsheet in banks’ returns. ### Liquidity risk supervision - MMA has drafted but not yet issued regulation for the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR); regulation expected to be issued still in 2023. - MMA has not imposed requirements on liquidity risk and supervisory process is not intrusive nor comprehensive. - Examples of supervisory shortfalls: MMA does not assess or challenge capacity to sell high quality liquid assets nor assess feasibility of contingency funding plans. ### Operational risk and ICT/AML focus - Since 2019, MMA performed different on-site inspections on ICT and AML; collects information on cyber security and fraud events. - Other operational risk areas assessed include fixed asset register and cash handling and management. - Material aspects not covered by MMA: - whether operational risk policies have been implemented effectively and integrated into bank’s overall risk management; - whether banks have policies and processes to assess, manage and monitor outsourced activities; - quality and comprehensiveness of disaster recovery and business continuity plans and feasibility challenges. - MMA does not collect information on operational errors or losses. - Legal risk is not covered under operational risk definition in regulation and therefore has not been assessed. ### Disclosures and transparency (CP 27–28) - Regulation does not explicitly grant MMA power to rescind the appointment of an external auditor. - MBA gives powers to MMA to approve external auditors; Regulation on External Audit requires banks to notify MMA of any change in external auditor. - No provision grants power to rescind appointment of an external auditor deemed to have inadequate expertise or independence or not adhering to professional standards. - Banks are not required to disclose information on risk management strategies and practices or risk exposures; regulation only requires disclosure of financial statements prepared according to International Financial Reporting Standards (IFRS). - In practice banks disclose information on risk, but no supervisor or government agency effectively reviews and enforces compliance with disclosure standards. ### Abuse of financial services / AML/CFT (CP 29) - Regulatory framework for prevention of money laundering and financing of terrorism included mainly in the PMLFT Act and related regulations. - Financial Intelligence Unit (FIU), with the MMA, is responsible for preventing money laundering and financing of terrorism; MMA has powers to undertake supervisory measures for certain financial institutions to ensure AML/CFT compliance. - Legal and regulatory framework imposes broad AML/CFT obligations on banks: know your customer, customer due diligence, reinforced due diligence for high-risk clients (including politically exposed persons), and reporting of suspicious transactions. - Gaps noted: gaps in overall AML/CFT legal framework remain; gaps in bank-wide training programs for staff and policies and procedures for prevention of money laundering. - Framework does not explicitly request a risk-based client approval policy and does not require banks to include relevant provisions in outsourcing contracts. - Since 2015, review of banks’ AML/CFT mechanisms has been a priority for MMA; MMA and FIU conducted multiple on-site examinations with emphasis on customer identification, customer due diligence and reporting of suspicious transactions. - MMA’s focus contributed to improvement of risk management standards in this area. ### Appendix VIII — Selected summary compliance observations (Basel Core Principles) - Responsibilities, objectives and powers: MMA Act and MBA provide necessary powers to authorize banks, conduct supervision and undertake corrective actions; MBA contains broad delegations to MMA to develop regulations and an enforcement regime. - Independence, accountability and resourcing: MMA board has 7 members (Governor, Deputy Governor, one MMA employee, 2 ministry representatives, 2 private sector representatives); government and private sector representation may undermine independence; conflicts of interest definition excludes professional interests; lack of granularity in decision-making delegation for supervision; staff working in banking supervision increased by 50% in recent years but resources unlikely sufficient; lack of formal resource planning. - Cooperation and collaboration: MMA is sole authority for banking supervision; CMDA oversees securities with a 2014 MoU but no regular meetings; no MoU between MMA and MoF and no evidence of coordination. - Supervisory approach and tools: Supervisory approach assesses bank exposures but does not sufficiently consider systemic relevance and risk profile when adjusting supervisory intensity; supervisory approach includes few forward-looking elements; stress tests quarterly but linear, single factor, point-in-time; no forward-looking capital, funding or recovery plans; off-site monitoring and on-site monitoring combined but with insufficient formal communication; MMA does not engage in resolution planning or operationalize crisis management framework. - Supervisory techniques and reporting shortcomings: Off-site monitoring prepares quarterly reports and updates bank ratings, uses multiple information sources including stress tests, but shortcomings include lack of orientation to address weaknesses, no communication of results to senior management/board, limited linkage of supervisory actions to outcomes, limited qualitative assessment, inconsistent follow-up on on-site findings, insufficient meetings with senior management/board, on-site frequency not risk-sensitive, inadequate procedures and methodologies, incomplete assessment of risk management and corporate governance, absence of written supervisory planning procedures, no systematic evaluation of internal audit, and stress tests rarely result in supervisory action. - Supervisory reporting improvements suggested: align capital adequacy information with Regulation on Capital Adequacy; force standardized reporting of exemptions of large exposures and related parties; devise new reports on operational risk (including operational risk losses beyond fraud and cyber-security incidents), interest rate risk in the banking book and liquidity risk; standardize reporting on strategic plans and budget to support business model viability assessments. - Corrective and sanctioning powers: MBA includes comprehensive enforcement regime but effectiveness is doubtful; MMA has not operationalized the regime (e.g., definition of unsafe and unsound practices); limited use of enforcement (only relevant measure—voluntary agreement—over a decade ago); MMA reluctant to take enforcement measures, preferring moral suasion; capacity gaps for conservatorship and crisis preparedness; insufficient communication with bank boards and senior management; no administrative sanctions applicable to senior managers who are not considered executive officers. *Source: Excerpt from IMF country report content unit 1mdvea2023004.* ### 12. Consolidated ### 12. Consolidated ### Consolidated supervision - MBA mandates MMA to supervise banks on consolidated basis, and mandates banks to prepare consolidated financial statements. - No bank licensed in Maldives own any subsidiary and therefore no banking group is headquartered in Maldives. - MMA supervises subsidiaries and branches of foreign banks applying the same prudential standards than to domestic banks. ### Home–host relationships - MMA is exclusively a host supervisor, as no banking group is currently headquartered in Maldives and 5 out of 8 banks operating in Maldives are either branches or subsidiaries of foreign banks. - MMA has exhibited a significant willingness to cooperate and coordinate with home authorities. - MoUs are not in place with two home supervisors. - There is no common planning of supervisory activities with home authorities. - MMA has not conducted any examination with a home supervisor, nor has it agreed any common communication strategy with them, despite MMA communication efforts. ### Corporate governance - The MBA and the Regulation on corporate governance are very comprehensive and detailed. - MMA issued the Corporate Governance regulation in 2020. - Regulation lacks requirement that the compensation framework: - has appropriate incentives aligned with prudent risk taking; and - ensures compensation system and related performance standards are consistent with long-term objectives and financial soundness of the bank and is rectified if there are deficiencies. - Supervision process shortcomings: - MMA has not fully assessed nor enforced compliance to regulation on Corporate Governance. - MMA does not meet the board regularly and does not meet the CRO outside on-site inspections. - Lack of consistency and details on banks’ compliance reports. - Recommended actions (selected): - Amend the corporate governance regulation with respect to the compensation framework to align with the BCBS Compensation Principles and Standards Assessment Methodology (2010). - Perform in-depth thematic corporate governance inspections to assess and enforce implementation. - Meet the board and the CRO regularly, at least annually. - Issue instructions on how to elaborate compliance reports. ### Risk management process - Risk management Guidelines for banks, finance companies and insurance companies were issued on March 10, 2022, to provide guidance on minimum standards of risk management. - Guidelines are recent and have not yet been assessed, enforced nor reflected in supervisory practices. - MMA has significant room for improvement to make the risk management examination process more comprehensive and principle-based. - Specific deficiencies: - No requirement or expectation that banks perform internal capital and liquidity planning processes. - No requirement or assessment of banks' internal models used for internal purposes. - MMA does not require forward-looking stress testing programs commensurate with risk profile and systemic importance; currently only standardized sensitivity analysis is required and assessed. - MMA does not assess integration of stress test results into decision-making, risk management processes, contingency arrangements, or assessment of capital and liquidity levels. - MMA does not assess whether the macroeconomic environment is considered in risk management. - Although all banks are required to elaborate the Risk Appetite Statement, MMA has not been able to verify them. - No requirement that CRO removal be done with prior Board approval, discussed with MMA, or disclosed publicly. - MMA engagement with banks is insufficient: does not meet the board regularly and does not meet the CRO outside on-site inspections. - MMA does not assess contingency plans and there are no requirements regarding recovery plans. - Recommended actions (selected): - Perform in-depth thematic risk management inspections to assess and enforce the implementation of the risk management guidelines. - Assess risk appetite framework and contingency plans in detail. - Require and enforce that macroeconomic environment is taken into account in risk management. - Remodel the stress testing framework, pursuing a proportional application of the "Stress testing principles” (2018). - Require banks to perform internal capital and liquidity planning processes and establish regulatory process to challenge the plans. - Amend regulation to: 1. include requirements related to CRO dismissal and verification; 2. require recovery plans for large and complex banks; 3. set high-level requirements for internal models and validation, back testing, outputs and board involvement and focus supervisory processes on the few models relevant for banks’ risk management. ### Capital adequacy - Maldives has prescribed capital requirements based on the so-called Basel I Capital framework, both in terms of capital definition and in RWA calculation. - Compared to Basel I capital ratios MMA requires higher thresholds. - Material deviation: exposures to central government denominated in foreign currency are risk-weighted at 0%. - MMA has power to order individual banks to hold higher capital ratios and to require higher capital if a bank is systemically important; MMA has never used these powers to impose additional capital requirements. - Leverage ratio definition does not include off-balance sheet items. - MMA has no provision to request a forward-looking approach to capital management. - Recommended actions (selected): - Amend capital regulation to apply 100% risk-weight to exposures to central government denominated in foreign currency (the increase in risk-weight could be gradually phased-in to reduce the impact on specific banks). ### Credit risk - MMA has a comprehensive approach combining offsite scrutiny with onsite investigation. - No requirement that major/risky credit exposures are to be decided by the bank’s Board or senior management. - Room for improvement on stress testing, frequency of reporting on write-downs, extensions/rollovers or restructured loans, and access to credit bureau. ### Problem assets, provisions, and reserves - MMA performs an intrusive supervisory process on provisioning and has implemented a simple (except for undue complexity related to 3 different “types” of classification) provisioning standard. - The provisioning standard does not cover off-balance sheet items, which should be included. - No assessment is made on the concentration in the risk mitigation strategies. ### Concentration risk and large exposure limits - Regulation on single borrower: 15%, with exceptions up to 30%; large exposures limits: 500%. - Reporting template does not properly allow identification, calculation and assessment of the exceptions mentioned in the regulation. - Around 35% of loans are granted directly to the tourism sector. - Because the whole economy is dependent on tourism, loans to other sectors are likely to be indirectly impacted in stress. - Concentration to the tourism sector is monitored by banks and MMA, but no specific limits have been imposed. ### Transactions with related parties - MMA issued regulation on transactions with related persons and regulation on limits on loans to related persons. - Regulations provide a clear and comprehensive definition of a “related party” aligned with the footnote of the Principle. - Aggregate amount of all loans to all related parties is limited to 50% of capital. - Transactions other than loans are not included in the limits. ### Country and transfer risks - No regulation or supervision related to country and transfer risk; risks are not considered material and this is not expected to change in the near future. ### Market risk - Risk management Guidelines issued in 2022 establish requirements on market risk management policies and processes, but MMA has not yet assessed nor enforced compliance. - Market risk arises mainly from holdings in foreign currencies, loans (local and foreign currency) and T-bills and t-bonds (local and foreign currency). - Supervisory process mainly assesses compliance to FX limits: overall: 40% and single currency: 25% long position/15% short position. - Market risk exposures are not included in stress tests. ### Interest rate risk in the banking book (IRRBB) - Risk management guidelines require banks to establish suitable measures for all market risks assumed, but do not provide detailed, proportionate IRRBB application. - IRRBB is not assessed in on- and off-site supervision. - MMA does not require banks to include appropriate scenarios in stress testing programs to measure vulnerability to adverse interest rate movements. ### Liquidity risk - Currently, there are no prescribed requirements for liquidity. - A draft regulation establishing liquidity requirements, such as the LCR and the NSFR, has been formulated and it is expected to be issued in 2023. - Stress testing requirements are not bank specific and supervision does not assess its use in liquidity risk management. - No assessment or challenge of capacity to sell high quality liquid assets or feasibility of contingency funding plan. - Risk management guidelines set detailed requirements on liquidity risk management strategies, policies and processes, but MMA has not assessed nor enforced compliance. ### Operational risk - Supervisory focus has recently included AML and operational risk, in particular ICT. - MMA has not covered material aspects of operational risk, including: - whether operational risk policies have been effectively implemented and integrated; - whether banks have policies and processes to assess, manage and monitor outsourced activities; - the quality and comprehensiveness of disaster recovery and business continuity plans, nor their feasibility. - MMA does not collect information on operational errors or losses. - Legal risk is not covered under the operational risk definition in regulation and has not been assessed. ### Internal control and audit - MMA has not implemented a structured process to assess control and internal audit. - MMA does not interact routinely with internal audit and mainly assesses it in terms of governance and reporting aspects; there is no assessment of internal audit effectiveness. - MMA does not engage with back-office and does not assess back-office functions or the balance in skills and resources compared to business origination units. ### Financial reporting and external audit - Regulation does not explicitly grant MMA the power to rescind the appointment of an external auditor. - MMA does not meet routinely with external audit; engagement is considered insufficient. - Financial statements are prepared according to International Financial Reporting Standards (IFRS). ### Disclosure and transparency - Regulation only requires disclosure of financial statements by banks. - Banks are not required to disclose information on risk management strategies and practices or risk exposures. - Banks have been disclosing information on risk in practice, but no supervisor or government agency effectively reviews and enforces compliance with disclosure standards. ### Abuse of financial services (AML/CFT) - Since 2015, review of banks’ mechanisms, policies and procedures for prevention of money laundering has been a priority for MMA. - Legal and regulatory framework for prevention of money laundering and financing of terrorism is included in the AML Act and the AML Regulation. - Framework does not explicitly request a risk-based client approval policy (although it prohibits banks from engaging with certain clients) and does not request that banks include relevant provisions in their outsourcing contracts. - Compliance reporting is not standardized sufficiently, and there is no requirement for banks to report suspicious transactions to the banking supervision department in addition to FIU. ### Recommended actions (selected, by theme) - Governance, independence and resourcing: - Strengthen the independence of MMA’s board of directors by removing Government and private sector representatives from it. - Amend MMA’s Act definition of conflicts of interest to cover professional conflicts. - Increase staffing in the banking supervision department commensurate with responsibilities and implement formal supervisory planning. - Home–host cooperation: - Intensify efforts towards signing MoUs with the two remaining home supervisory authorities. - Schedule regular meetings with CMDA to discuss financial stability topics. - Licensing and authorisation: - Amend Licensing Guidelines to reflect assessing board collective suitability and oversight of outsourced functions. - Define policy to monitor compliance with licensing conditions of new entrants and provide guidance on Islamic banking authorization. - Supervisory methodology and resourcing: - Consider systemic relevance and risk profile in allocation of supervisory resources. - Standardize reporting templates for budget and strategic plans for business model assessment. - Request banks’ capital and funding plans covering at least 3 years and require recovery plans for largest institutions. - Review off-site monitoring process and CAMELS methodology; ensure corporate governance and risk management are sufficiently assessed off-site. - Draft written procedures reflecting MMA supervisory practices, including on-site examinations, off-site monitoring and supervisory planning. - Reporting and valuation: - Review reporting packages in areas of capital adequacy, credit risk (forborne loans), large exposures and related parties, interest rate risk, liquidity and operational risk. - Review adequacy and relevance to introduce standards on prudent valuation for fair-valued elements. - Implement supervisory review process of supervisory reporting adequacy with predetermined frequency. - Enforcement, crisis preparedness and resolution: - Amend MBA to extend administrative sanctions to banks’ senior managers not currently considered executive officers. - Issue regulations and guidelines to operationalize crisis management including definitions of unsound practices, enforcement actions, and resolution tools (bridge bank, purchase and assumption and recapitalization) in conservatorship. - Build capacity on bank recovery and resolution; request recovery plans for largest banks and draft resolution plans. - Undertake a crisis simulation exercise with participation of MoF and CMDA involving a systemic bank crisis. - Ensure noncompliance by banks is met with enforcement action by the authority. *Source: 12. Consolidated (1mdvea2023004)* ### 2. align capital definition with (a simplified version of) Basel III. ### 2. align capital definition with (a simplified version of) Basel III. ### Capital definition and leverage - Align capital definition with a simplified version of Basel III. - Adjust leverage ratio definition to include off-balance sheet items based on credit conversion factors. - Require additional capital both based on the risks identified and on the systemic importance. - Introduce a forward-looking approach to capital management, for instance, by improving stress testing framework. - Authorities’ note: The MMA acknowledged deviations such as the risk weighting for foreign currency government securities being zero percent instead of 100 percent, but disagreed with the FSAP’s assessment on capital adequacy since capital ratios will still be well above the minimum requirements as a result of this adjustment, at 21 percent even for the bank with the lowest ratio. ### Supervisory access, governance, and reporting (Principle 17) - Allow supervisors to access the credit bureau. - Amend regulation to require that major credit exposures above a certain limit or exposures that are especially risky or otherwise not in line with the mainstream of the bank’s activities are to be decided by the bank’s Board or senior management. - Introduce frequent reporting on write-downs, extensions/rollovers and restructured loans. - Improve stress testing framework. ### Asset classification and provisioning (Principle 18) - Amend the Asset Classification and Provisioning Regulation to: - 1. adjust the regulation to require provisions on off-balance sheet items. - 2. Simplify the provisioning categories and improve communication. - Adjust the report on provisioning. - Introduce frequent reporting on write-downs, extensions/rollovers and restructured loans (or adjust credit bureau information) to allow for matching rescheduled loans to the original ones. - Assess concentration in the risk mitigation strategies. ### Concentration, limits, and large exposures (Principle 19 and 20) - Principle 19: - Assess adequacy of banks’ internal limits. - Amend regulation to introduce requirement that material concentration should be regularly reviewed and reported to the board. - Amend the large exposures reporting to allow for proper exception reporting. - Incorporate concentration scenarios into standardized stress tests. - Principle 20: - Amend regulation to: - 1. set at 15% limit to aggregate amount of all loans to all related parties to be in line with the limits to the single counterparties. - 2. include transactions in related parties’ limits. ### Country, market, and interest-rate risk (Principles 21–23) - Principle 21: - Define country and transfer risk in the regulation, introduce reporting and continuously monitor its materiality. - Principle 22: - Assess and enforce the implementation of the risk management guidelines. - Perform thematic inspections on market risk. - Include market risk exposures in the stress tests. - Principle 23: - Amend regulation aligning it with the BCBS document “Interest rate risk in the banking book”. - Improve on-site and off-site supervision to incorporate IRRBB. - Perform thematic inspections on IRRBB. - Remodel the stress testing framework, a proportional application of the "Stress testing principles” (2018) that considers the simplicity of the Maldives’ financial system could be pursued. ### Liquidity, operational, and outsourcing risk (Principles 24–26) - Principle 24: - Issue regulation on liquidity risk requirements (LCR and NSFR). - Improve stress testing framework: require banks’ specific scenarios and use in liquidity risk management. - Assess banks’ capacity to sell high quality liquid assets. - Assess feasibility of contingency funding plan. - Assess and enforce the implementation of the risk management guidelines. - Principle 25: - Amend regulation to include legal risk in the operational risk definition. - Require report on operational errors and losses. - Assess and enforce the implementation of the risk management guidelines. - Assess if banks have policies and processes to assess, manage and monitor outsourced activities. - Assess the quality and comprehensiveness of the bank’s disaster recovery and business continuity plans and challenge their feasibility. - Perform inspections that consider operational risk beyond ICT and AML. - Principle 26: - Assess back-office functions and balance in the skills and resources. - Assess if compliance is suitably trained or have relevant experience. - Establish structured process to assess control and internal audit. - Meet routinely with the internal audit. - Assess the effectiveness of the internal audit. ### External audit, disclosure, and AML/CFT (Principles 27–29) - Principle 27: - Meet routinely with the external audit. - Amend regulation for MMA to have the power to rescind the appointment of external auditor. - Principle 28: - Amend regulation to introduce disclosure requirements related to risk management strategies and practices and risk exposures. - Review and enforce compliance with disclosure standards. - Principle 29: - Amend the AML/CFT legal, regulatory, and supervisory framework to align with international FATF standards. - Integrate the results of ML/TF risk assessments into the prudential risk-based supervisory framework, in an appropriate manner. *Source: Appendix VIII. Table 2. Maldives: Recommended Actions to Improve Compliance with the Basel Core Principles and the Effectiveness of Regulatory and Supervisory Frameworks (Concluded); Authorities’ Response to the Assessment.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1mdvea2023004.pdf_