## IMF FSAP Technical Note — Maldives (1mdvea2024003)

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### Institutional mandate and setup
- MMA is responsible for maintaining financial stability; the Board has decision-making powers over three mandates (in order of priority): maintain price stability, maintain financial stability, provide assistance to the government in attaining economic development and stability.
- MMA regulates and supervises financial institutions, oversees payments and settlements, and houses a Credit Information Bureau (CIB); the securities market is regulated by the Capital Market Development Authority (CMDA).
- Key institutional gaps:
  - No macroprudential framework, no macroprudential committee, and no statutory macroprudential mandate with clear objectives.
  - Financial stability work would need a dedicated financial stability unit at MMA separate from the banks and OFI division.

### Key vulnerabilities and systemic risks
- Macroeconomic shock and recovery:
  - Real GDP contracted by 32.9 percent in 2020 and rebounded by 37.7 percent in 2021.
- External positions and FX:
  - MMA gross international reserves: USD 985 million in 2020; USD 806 million in 2021; USD 832 million in 2022.
  - Persistent parallel market premium of about 15 percent.
- Sovereign–bank nexus and public debt service:
  - Banks’ holdings of government debt amounted to 135 percent of regulatory capital at end-2022.
  - Public sector external debt service (debt service in percent of domestic GNFS exports): 7.5 percent in 2018; 12.9 percent in 2019; 37.4 percent in 2020 (declined thereafter).
  - External PPG debt: 40.3 percent in 2019; 74.9 percent in 2020 (subsequent reversal).
- Concentration and data gaps:
  - High loan concentration: one bank close to the supervisory single large exposure limit.
  - CIB data quality and coverage weak; exclusion of non-regulated ‘lease-and-hire’ purchase firms underestimates total household debt service.

### Current macroprudential stance and monitoring gaps
- Instruments in use:
  - Single macroprudential instrument: leverage ratio calibrated at 5 percent of a bank’s capital base.
  - FX exposure (NOP) limits: long position in a single currency: 25 percent of capital base; short position in a single currency: 15 percent of capital base; overall FX exposure: 40 percent of capital base.
- Monitoring limitations:
  - MMA monitors a few tourism-related series (tourist arrivals, number of bed-nights) but does not monitor credit cycle indicators, real estate indicators, corporate metrics, or comprehensive household indebtedness measures.
  - CIB access and data gaps hamper DSTI and household debt measurement.
- Banks’ currency and maturity vulnerabilities:
  - Overall Net Open Position (NOP) = 11.8% of CAR as of December 2022.
  - Maturity mismatch gaps (average as percent of total assets): 5.6% for maturities shorter than 5 years; 15.5% for maturities longer than 5 years.
  - Detailed maturity breakdown: -32.3 percent (<7 days), 2.1 percent (7–30 days), 4.8 percent (1–3 months), 8.2 percent (3–6 months), 7.5 percent (6–12 months), 3.4 percent (1–3 years), 7.7 percent (3–5 years), 15.5 percent (>5 years), and 6 percent (unclassified).
  - Loan-to-Deposit (LTD) ratios as of December 2022: LC = 65.8 percent; FX = 53.2 percent.

### Recommended institutional reforms (timing: I / ST / MT)
- Establish a Macroprudential Committee housed in MMA with clear mandate and decision-making powers; coordinate with MoF and CMDA. Timing: ST.
- Enshrine a statutory macroprudential mandate and legal definition of financial stability with explicit intermediate objectives (e.g., resilience, contain credit/leverage growth, contain structural interlinkage risks). Timing: ST.
- Create a dedicated financial stability unit at MMA to act as secretariat, produce systemic risk analysis, and prepare an annual Financial Stability Report (increase human resources). Timing: ST.
- Improve accountability and communication: publish an annual Financial Stability Report (backward- and forward-looking) and present to key stakeholders (MoF, Parliament). Timing: MT.
- Improve data infrastructure immediately:
  - Grant ready access to the CIB for relevant MMA divisions.
  - Address CIB gaps (include non-reporting of lease-and-hire schemes).
  - Expand CIB scope to include all recurrent household payment obligations.
  - Require banks to report clients’ disposable income to compute DSTI.
  - Build corporate financial database during on-site inspections.
  - Construct a property price index leveraging NBS, HDC, HDFC, web-scraping, and land registry data (preferably compiled by the national statistics bureau). Timing: I / MT.

### Systemic risk monitoring — dashboard and indicators
- Develop a comprehensive dashboard/heatmap covering broad-based, corporate, and household indicators. Core indicators recommended:
  - Broad-based: Credit-to-GDP gap (ST); d-SRI (MT); property & rental prices (Greater Male vs. Atolls) (ST); loan transition matrix (MT); matrix of cross-sectoral exposures (MT).
  - Corporate: sectoral credit growth (ST); average sectoral lending rates (MT); debt-to-EBITDA, current ratio, interest coverage ratio (all MT).
  - Households: mortgage loan growth and average mortgage lending rates (Greater Male vs. Atolls) (MT); growth of specific consumer loans including NBFIs (MT).
- Credit-to-GDP gap guidance:
  - BIS HP-filter smoothing parameter recommended at 1,600 for quarterly data; GDP interpolated from annual NBS data.
- Housing market specifics:
  - Build property price index; monitor price-to-rent and property-price-to-disposable-income ratios; geographic splits (Greater Malé vs. other atolls) recommended.

### Macroprudential instrument recommendations and calibration
- Household-sector tools:
  - Introduce Debt-Service-to-Income (DSTI) limits and Loan-to-Value (LTV) limits; priority for empirical calibration once CIB and income data are available. Timing: MT.
  - Proposed DSTI calibration under consideration:
    - Cap at 50 percent for monthly disposable income below MVR 50,000;
    - Cap at 60 percent for income between MVR 50,000 and 100,000;
    - Cap at 70 percent for income above MVR 100,000;
    - For joint loan applications (two or more borrowers other than husband and wife), cap set at 50 percent.
  - Proposed LTV calibration for residential properties:
    - 90 percent for loans under MVR 5.0 million;
    - 80 percent for loans above MVR 5.0 million;
    - Joint application exception: maximum LTV 70 percent for two or more borrowers (not husband and wife).
  - Exempt HDC ‘rent-to-own’ lease programs from DSTI inclusion; require leasing companies to report lease-and-hire recurrent payments to CIB.
- Bank liquidity and funding:
  - Implement Liquidity Coverage Ratio (LCR) in local and major foreign currencies (usual minimum 100 percent). Timing: MT.
  - Implement Net Stable Funding Ratio (NSFR). Timing: MT.
  - Implement Loan-to-Deposit (LTD) ratio in both LC and FX; recommended maximum LTD in FX < 80 percent and LC at 80 percent. Timing: MT.
  - Consider caps on new FX lending to borrowers earning revenue in local currency.
- Capital and systemic buffers:
  - Introduce Basel III capital buffers, Countercyclical Capital Buffer (CCyB) (adopt a positive rate, e.g., at least 0.5 percent as a first step), Systemic Risk Buffer (SyRB), and Basel Pillar 1/2 capital surcharges. Timing: MT.
  - Additional capital requirement to mitigate sovereign–bank nexus: calibrate nonlinearly based on bank exposure relative to RWA; could be implemented via Pillar 2 or Pillar 1 with macroprudential rule.
- Systemic bank framework:
  - Implement D‑SIB identification using BCBS methodology and apply a D‑SIB buffer given high sector concentration and a major state-owned bank.

### Calibration, sequencing, and implementation notes
- Priority sequencing:
  - Immediate: establish legal mandate, financial stability unit, access to CIB, start data improvements (I / ST).
  - Medium term: develop dashboard, calibrate and implement LTV, DSTI, LCR, NSFR, LTD, CCyB/SyRB, D‑SIB buffer (MT).
- Empirical calibration emphasized:
  - Use borrower-level data, loan transition matrices, and plotting NPL share vs. DSTI to identify nonlinear thresholds for DSTI/LTV.
  - Monitor leakages (non‑regulated leasing firms) and enforce reporting to CIB to enable accurate DSTI calibration.
- Complementary microprudential measures:
  - Supervisory guidance, internal bank limits for household loans, improved stress testing, and on-site collection of corporate financials.

### Key specific quantitative figures highlighted
- GDP shock and rebound: -32.9 percent (2020); +37.7 percent (2021).
- MMA gross international reserves: USD 985 million (2020); USD 806 million (2021); USD 832 million (2022).
- Parallel market premium: about 15 percent.
- Banks’ holdings of government debt: 135 percent of regulatory capital (end-2022).
- Public sector external debt service (percent of domestic GNFS exports): 7.5 percent (2018); 12.9 percent (2019); 37.4 percent (2020).
- External PPG debt: 40.3 percent (2019); 74.9 percent (2020).
- Leverage ratio (MMA): 5 percent of capital base (above Basel III 3 percent).
- NOP = 11.8% of CAR (December 2022).
- Maturity mismatch gaps and breakdown (percent of total assets): see detailed figures above (-32.3; 2.1; 4.8; 8.2; 7.5; 3.4; 7.7; 15.5; 6).
- LTD (December 2022): LC = 65.8 percent; FX = 53.2 percent.
- FSAP estimate of outstanding leases from main leasing firms and active bank: about MVR 1 billion (anecdotal).

*Technical Note prepared by Etienne Vaccaro-Grange (MCM); analysis benefited from discussions with MMA staff and IMF reviewers.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Overview and mandate
- The Maldives Monetary Authority (MMA) is the entity responsible for maintaining financial stability. The Board of the monetary authority has decision-making powers over MMA’s three mandates (in order of priority): maintain price stability, maintain financial stability, provide assistance to the government in attaining economic development and stability.
- MMA regulates and supervises financial institutions, oversees the payments and settlements system, and houses a Credit Information Bureau (CIB). The securities market is regulated by the Capital Market Development Authority (CMDA).
- MMA does not have a macroprudential framework, no macroprudential committee, and no macroprudential mandate with clear objectives. The bulk of macroprudential work would need to be done by a financial stability unit at MMA, separate from the “banks and OFI division”.

### Key vulnerabilities and systemic risks identified
- Tourism-dependent economy: real GDP contracted by 32.9 percent in 2020 and rebounded by 37.7 percent in 2021.
- External reserves and FX shortages:
  - MMA gross international reserves: USD 985 million in 2020; USD 806 million in 2021; USD 832 million in 2022.
  - Persistent parallel market premium of about 15 percent.
- Sovereign–bank nexus:
  - Banks’ holdings of government debt amounted to 135 percent of regulatory capital at end-2022 (aided by zero risk weights and no regulatory limits).
- Public sector external debt service (debt service in percent of domestic GNFS exports): grew from 7.5 percent in 2018, to 12.9 percent in 2019, and 37.4 percent in 2020, before declining thereafter.
- External PPG debt grew from 40.3 percent in 2019 to 74.9 percent in 2020, before reversing the trend in the following years.
- Concentration and data gaps:
  - High loan concentration: one bank close to the supervisory single large exposure limit.
  - CIB data quality and coverage are weak; exclusion of non-regulated ‘lease-and-hire‘ purchase firms underestimates total household debt (service).

### Current macroprudential stance and tools
- Systemic risk monitoring is very limited: MMA monitors only a few macroeconomic series key to tourism (tourist arrivals, number of bed-nights); indicators of credit cycle, real estate, corporate performance, and household indebtedness are not monitored.
- Macroprudential instruments: MMA uses a single macroprudential instrument (leverage ratio). MMA is contemplating introducing household-related measures (LTV, DSTI limits) and liquidity instruments.

### FSAP recommendations (overview)
- Establish a comprehensive macroprudential framework comprising:
  - A Macroprudential Committee housed in MMA with a clear mandate and decision-making powers; coordination with MoF and CMDA and other stakeholders (Timing: ST).
  - A statutory macroprudential mandate and legal definition of financial stability with clear intermediate objectives (Timing: ST).
  - A financial stability unit at MMA to act as secretariat, with clear objectives, resources, and regular production of financial stability analysis (Timing: ST).
  - Publication of an annual Financial Stability Report and presentation to key stakeholders (Timing: MT).
  - Improve data infrastructure: grant access to CIB to relevant MMA divisions, address CIB data gaps, build corporate financial database through on-site inspections, construct a property price index leveraging existing information (e.g., at HDFC) (Timing: I).
- Develop a dashboard of systemic risk indicators covering credit, real estate development, corporate performance, and household indebtedness (Timing: MT).
- Expand the macroprudential toolkit and calibrate contemplated instruments:
  - Introduce regulatory limits to LTV, LTI, LCR, NSFR, LTD ratios (Timing: MT).
  - Follow Basel Committee on Banking Supervision (BCBS) recommendations: introduce Basel III capital buffers, Systemic Risk Buffer (SyRB), Basel Pillar 1/2 capital surcharge (Timing: MT).

---

### INTRODUCTION

### Context of the FSAP assessment
- The macroprudential policy assessment was conducted during the first mission of the FSAP in February-March 2023. This Technical Note provides a roadmap for establishing a macroprudential framework and developing systemic risk indicators and tools.

### Macroeconomic shock and recovery
- COVID-19 shock: real GDP contracted by 32.9 percent in 2020; rebounded by 37.7 percent in 2021.
- Despite recent near-record tourist arrivals, the pandemic exacerbated vulnerabilities: persistently high fiscal deficit, widening current account deficit, rising government debt, and depletion of international reserves.

### Main macro-financial sources of systemic risk
- Persistent FX shortages linked to large current account deficits and rising SOE and central government external debt service.
- Strong sovereign–bank nexus due to large bank holdings of government debt and weak regulatory limits and risk weights.
- High loan concentration toward a few large firms raising single-exposure risks.
- Insufficient data coverage (notably CIB gaps and exclusion of lease-and-hire firms) leading to underestimation of household indebtedness.

---

### INSTITUTIONAL FRAMEWORK

### Current institutional arrangements and legal powers
- MMA is the designated authority for financial stability; MMA Act (2020 amendment section 4) assigns responsibility for “maintaining financial stability without prejudice to maintaining price stability conducive to the sustainable growth of the economy.”
- MMA lacks a legal definition of financial stability; only an operational definition appears on its website.
- Decision-making: the Board of MMA makes financial stability decisions and also controls monetary policy; no separate macroprudential committee exists (Model 1 governance).
- MMA has legal “hard powers” across four categories: rulemaking, information collection, supervision, and enforcement. However, organizational limitations and weak enforcement of information sharing constrain the ability to act.

### Willingness to act
- A clear statutory mandate and definition of financial stability are needed to counter biases for inaction and to underpin legitimacy of macroprudential measures.
- Risks of integration under one roof: dominance of monetary policy and absence of a dedicated secretariat can curtail macroprudential effectiveness and potentially affect central bank credibility.

### Ability to act and coordination
- MMA’s organizational setup, limited resources, insufficient data access (notably to CIB), and lack of a financial stability unit weaken its surveillance capacity and policy implementation readiness.
- Coordination with CMDA and other stakeholders appears limited; enhanced cooperation mechanisms are recommended.

### Accountability and communication
- MMA does not publish a Financial Stability Report and public communication on financial stability is sparse.
- Recommendation: publish an annual Financial Stability Report and hold regular meetings/presentations to key stakeholders including MoF and Parliament.

---

### SYSTEMIC RISK MONITORING

### Current monitoring gaps
- MMA monitors a few tourism-related macroeconomic series (tourist arrivals, number of bed-nights) but does not monitor credit cycle indicators, real estate indicators, corporate performance metrics, or comprehensive household indebtedness measures.
- CIB data quality and access constraints limit accurate measurement of household debt and loan service burdens.

### Recommended early-warning indicators
- Develop a comprehensive dashboard of broad-based and sectoral indicators to measure and monitor systemic risk (proposed indicators include credit-to-GDP gap, property price indices, DSTI/LTI/LTV distributions, corporate leverage and profitability metrics, bank liquidity ratios, FX mismatches).
- Construct a property price index leveraging existing sources (e.g., HDFC) to monitor real estate developments.

---

### MACROPRUDENTIAL INSTRUMENTS

### Existing instruments and shortfalls
- At present MMA employs a single macroprudential instrument: a leverage ratio.
- Contemplated instruments include LTV and DSTI limits for households and liquidity-related measures.

### Recommended instrument set
- Household-sector tools:
  - Implement limits to Loan-to-Value (LTV) and Debt-Service-to-Income (DSTI) ratios (MMA is already contemplating LTV and DSTI).
- Bank liquidity and funding:
  - Introduce Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), and Loan-to-Deposit (LTD) ratio in both local currency and foreign currency to safeguard bank liquidity and reduce currency mismatch.
- Capital and systemic buffers:
  - Introduce Basel III capital buffers, Systemic Risk Buffer (SyRB), and Basel Pillar 1/2 capital surcharges as recommended by BCBS.
- Calibration and sequencing:
  - Calibrate contemplated instruments (LTV, LTI, LCR, NSFR, LTD) in the medium term with priority given to household-related measures and liquidity safeguards.
  - Develop complementary microprudential or supervisory measures (internal bank limits for household loans, improved stress testing, supervisory guidance).

---

### TABLED RECOMMENDATIONS (HIGHLIGHTS FROM TABLE 1)

- Institutional Framework
  - Create a Macroprudential Committee housed in MMA with macroprudential mandate and decision-making powers; coordinate with MoF and CMDA and other stakeholders as needed. Timing: ST.
  - Establish a Macroprudential Mandate: define financial stability in the law with clear macroprudential objectives. Timing: ST.
  - Create a financial stability unit at MMA to act as secretariat; give clear objectives including systemic risk analysis and preparation of Financial Stability Report; increase human resources. Timing: ST.
  - Publish a Financial Stability Report: backward- and forward-looking assessment; published in between annual reports; present to key stakeholders (MoF, Parliament). Timing: MT.
  - Improve data infrastructure: grant access to CIB to relevant MMA divisions; address CIB data gaps; build corporate financial database via on-site inspections; construct property price index leveraging existing information (HDFC). Timing: I.

- Systemic Risk Monitoring
  - Develop systemic risk indicators and a comprehensive dashboard covering credit, real estate, corporate metrics, and household indebtedness. Timing: MT.

- Macroprudential Instruments
  - Calibrate and introduce regulatory limits: LTV, LTI, LCR, NSFR, LTD ratios. Timing: MT.
  - Develop other instruments recommended by BCBS: introduce Basel III capital buffers. Timing: MT.

(I: Immediately; ST: Short term (less than 1 year); MT: Medium Term (1-5 years))

*Technical Note prepared by Etienne Vaccaro-Grange (MCM); analysis benefited from discussions with MMA staff and IMF reviewers.*

### 14.      The banks and OFI division of MMA has limited ability to prepare macroprudential

### 1mdvea2024003 - 14.      The banks and OFI division of MMA has limited ability to prepare macroprudential

### Capacity, mandate, and data gaps
- The banks and OFI division of MMA lacks clear macroprudential objectives and appears understaffed (currently, two staff in charge of financial stability).
- The division is also mandated with non-financial stability-related activities (e.g., licensing of banks).
- Despite the existence of the CIB within MMA, the banks and OFI division does not have and has never requested access to its database.
- There is no database for corporate sector data; only the nine publicly listed companies are required to publish financial statements.
- There is currently no compilation of house price data at the project stage, which inhibits monitoring of the sector.

### Inter-agency coordination and cooperation
- No inter-agency coordination committee on financial stability exists.
- An intra-agency committee exists to discuss macroeconomic developments (composed of the Ministry of Finance, Ministry of Tourism, National Bureau of Statistics, Maldives Inland Revenue Authority as well as MMA) and meets at least twice a year, with more frequent meetings as needed.
- No forum exists for discussion of financial stability issues among agencies and with banks; MMA holds bankers’ meetings to discuss the macroeconomic outlook.
- There is no official communication channel with insurance companies, non-bank financial institutions (NBFIs—HDFC, SDFC, MFLC), and other institutions (notably, HDC, the public pension fund—regulated by CMDA—and three leasing companies).
- Cooperation between MMA and CMDA appears limited despite a Memorandum of Understanding (MoU) for mutual assistance and exchange of information; communication appears unidirectional as MMA sits on the board of CMDA, but not vice versa.
- MMA has signed MoUs with three out of the five foreign regulators (Bank of Mauritius, Reserve Bank of India (RBI), and Central Bank of Sri Lanka) for information sharing and cooperation; MoUs with The State Bank of Pakistan and the UK’s FCA are envisaged.
- MMA participates in RBI’s and Bank of Mauritius's supervisory colleges.
- There are four foreign bank branches and one subsidiary of a foreign bank in the Maldives.

### Accountability and public communication
- Absent an adequate framework, there is no accountability of macroprudential policy; accountability should rest on the legal and institutional framework and ensure public understanding, governmental/legislative oversight, and legal recourse where authorities exceed legal authority (IMF, 2013).
- MMA does not publish any financial stability report, only a brief financial stability section within its annual report that does not discuss systemic risks as informed by early warning indicators.
- MMA does not communicate about financial stability in its regular press conferences or on social media.

### FSAP team recommendations (institutional and legal)
- Create a macroprudential committee housed in MMA following Model 2 for macroprudential decision making bodies, with a clear macroprudential mandate, well-defined objectives, and decision-making powers (¶20).
  - The macroprudential mandate should be explicitly added to the functions of the authority specified in the MMA Act (¶21), e.g., include “the development and implementation of macroprudential policy”.
  - Housing the committee in the central bank has a dual benefit: preserves strong central bank role in systemic risk mitigation, access to prudential data, and control over prudential tools; and allows better accountability with limited reputational risks for MMA’s board.
  - Distribution of voting rights should balance monetary authority independence and other official entities’ involvement; example: MMA could have the same number of votes as other stakeholders (e.g., CMDA and MoF) combined and retain the tiebreaker vote.
- Enshrine a definition of financial stability and well-defined macroprudential objectives in law (¶21).
  - Possible legal text: definition used by MMA or a general definition such as “to promote the safety and soundness of banks and the financial system”.
  - MMA Act should contain explicit intermediate objectives in support of the macroprudential mandate (examples from IMF Staff Guidance Note (2014a)): (i) maintain the overall resilience of the system; (ii) contain risks from unsustainable increases in credit and leverage; and (iii) contain structural risks from interlinkages within the financial system.
- Create a dedicated financial stability unit within MMA, separate from the banks and OFI division (¶22).
  - Remit: (i) analysis of systemic risks; (ii) assessment of need to apply or adjust macroprudential instruments; and (iii) preparation of a financial stability report.
  - The unit should act as secretariat to the macroprudential committee and require a significant increase in head count and analytical expertise.
- Improve communication and transparency through publication of a financial stability report (¶23).
  - Published ideally between annual reports; include backward and forward-looking assessment of systemic risks and the impact of macroprudential instruments.
  - Report should be based on core indicators and granular data (e.g., direct access to the CIB).
  - To enhance accountability, the report could be routinely submitted to main stakeholders (e.g., MoF, Parliament) and the governor could address Parliament on fulfillment of the macroprudential mandate.
- Substantially invest in data infrastructure and leverage the CIB (¶24).
  - Grant ready access to the database to relevant MMA divisions (banks and OFI division, future financial stability unit).
  - Address data gaps in the registry (e.g., non-reporting of payment obligations under ’lease-and-hire’ purchase schemes for consumer durables, particularly by non-regulated institutions).
  - Expand the scope of the CIB to include all recurrent payment obligations of households, and enforce systematic reporting of all debtors’ information.
  - Require banks to report clients’ disposable income (net of taxes) to compute and monitor a debt-service-to-income ratio (this could be done by issuing a circular to banks).
  - MMA could build a corporate sector database during on-site inspections by collecting firms’ financial statements to facilitate future early warning indicators of corporate performance.
  - Strong recommendation that a property price index be developed by, preferably, the statistics office (see ¶29).

### Systemic risk monitoring: existing indicators and recommendations
- Macroprudential policy must rely on continuous assessment of evolving risks and key indicators derived from appropriate data and qualitative information (¶25).
- Existing data sources MMA could leverage:
  - Banks’ balance sheet data collected for supervision.
  - National Bureau of Statistics (NBS) macroeconomic statistics, including a CPI rent price index, sectoral credit growth data (and corresponding average lending rates), banks’ NOP, and banks’ LTD ratios (¶26).
- Existing indicators (Figure 1): CPI Rent; Sectoral Credit; Banks Loan-to-Deposit; Banks Net Open Position.

### Recommended additional indicators and dashboard (Table 3 summary)
- Build a comprehensive dashboard/heatmap to indicate macrofinancial risk and inform macroprudential instrument settings (¶27).
- Core indicators to monitor:
  - Broad-based:
    - Credit-to-GDP gap — Data need: No additional data need — Timing: ST
    - d-SRI — Data need: Credit-to-GDP ratio, real total credit, debt service ratio, residential real estate price-to-income ratio, real equity prices, and current account-to-GDP ratio — Timing: MT
    - Real estate indicators: Property & rental prices (Greater Male vs. Atolls) — Timing: ST
    - Loan transition matrix — Data need: Borrower-level loan data (amount and classification) — Timing: MT
    - Matrix of cross-sectoral exposures — Data need: Balance sheet data of the government, MMA, banks, insurances, and NBFIs — Timing: MT
  - Corporate:
    - Sectoral credit growth — Data need: No additional data need — Timing: ST
    - Average sectoral lending rates — Data need: Loan data — Timing: MT
    - Debt-to-EBITDA ratio — Data need: Firms’ financial statements — Timing: MT
    - Current ratio — Data need: Firms’ financial statements — Timing: MT
    - Interest coverage ratio — Data need: Firms’ financial statements — Timing: MT
  - Households:
    - Mortgage loan growth — Data need: Specific mortgage loan data (Greater Male vs. Atolls) — Timing: MT
    - Average mortgage lending rates — Data need: Specific mortgage loan data (Greater Male vs. Atolls) — Timing: MT
    - Growth of specific consumer loans — Data need: Specific consumer loan data, including NBFIs — Timing: MT
- Timing legend: ST: Short term (up to 1 year); MT: Medium Term (within 1–5 years).

### Credit-to-GDP gap and housing market specifics
- The credit-to-GDP gap (deviation from trend) can signal overheating or cooling of credit and be a predictor of crises; useful input to Countercyclical Capital Buffer (CCyB) calibration but subject to large revisions and trend estimation caveats (¶28).
  - BIS HP-filter recommendation: smoothing parameter set to 1,600 for quarterly data; GDP was interpolated to obtain quarterly estimates from annual NBS data.
- Housing market indicators are particularly relevant for the Maldives due to limited land supply and government-sponsored ‘rent-to-own’ leasing by HDC driving construction and likely property prices (¶29).
  - Recommendation: MMA cooperate with NBS to build a property price index (e.g., typical homes such as two bedrooms, two baths), using web-scraping online house sales advertising, registered sales prices from the land registry, and data from HDC, HDFC split geographically (Greater Malé vs. other atolls).
  - Monitor rent prices and calculate price-to-rent ratio; compute property-price-to-disposable-income ratio to detect impaired affordability.
  - The national statistics bureau should calculate and publish the property price index; MMA could provide operational assistance.

### Lease-and-hire purchase schemes and household indebtedness (Box 1)
- Lease-and-hire purchase schemes (’lease-and-hire‘ purchase for consumer durables) are widespread; financed products include vehicles, vessels, mobile phones.
- FSAP team estimate: 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 were MVR 4.5 million at end-2022.
- One of the four finance/leasing companies (about a 30 percent share in the leasing market as per outstanding leases) is licensed and regulated by MMA and reports to the CIB; the other three are not regulated by MMA.
- Inclusion of leasing companies in reporting to CIB would provide comprehensive record of recurring payment obligations beyond loan service and allow calibration of DSTI limits based on systemwide payment obligations rather than bank debt alone.

### Early warning: loan transition matrix
- Construct a loan transition matrix to measure emerging credit risk and illustrate movement of loans across classification categories over time (e.g., monthly).
- Uses: signal increased transitions from normal to special mention preceding NPL recognition; estimate probability of default (PD) and expected credit loss (¶30).

*Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1mdvea2024003.pdf*

### 31.      The interconnectedness of the different actors of the financial system can be

### 1mdvea2024003 - 31.      The interconnectedness of the different actors of the financial system can be

### Interconnectedness monitoring
- Use an inter-sectoral (cross-sectional exposures) matrix showing assets and liabilities in percentage of GDP between sectors (corporate, government, central bank, banking, non-bank financial sector, key SOEs, household sector) to identify large net claims and macrofinancial disequilibria (e.g., sovereign-bank nexus, government exposure to large SOEs like HDC).
- The IMF’s Statistics Department tool: Balance Sheet Approach (BSA) Matrix can be used to build the matrix of cross-sectional exposures.

### Corporate sector monitoring
- FSAP recommends at least three core corporate indicators:
  - (i) the debt-to-EBITDA ratio (stock measure of leverage);
  - (ii) the interest coverage ratio (EBIT/interest expenses; debt service measure);
  - (iii) the current ratio (current assets/current liabilities; liquidity measure).
- Data availability constraint: unlisted companies are not required to publish financial statements; MMA should obtain such data through on-site inspections of banks.

### Household indebtedness monitoring
- Core household indicators to monitor:
  - Mortgage loans growth (with possible geographic split: Greater Malé vs. other atolls);
  - Credit card loan growth;
  - Personal loan growth (vehicles, vessels, etc.);
  - Corresponding average lending rates.
- Include recurrent, non-discretionary payment obligations from ‘lease-and-hire’ purchase schemes for vessels and consumer goods in a wider measure of household debt service.
- Required data should be made available primarily through the CIB.

### Existing macroprudential instruments (MMA)
- MMA currently has a single macroprudential instrument:
  - Leverage ratio calibrated at 5 percent of a bank’s capital base (above Basel III requirement of 3 percent; broadly in line with peer implementation).
- Foreign exchange exposure limits (NOP limits):
  - Long position in a single currency: 25 percent of a bank’s capital base;
  - Short position in a single currency: 15 percent of a bank’s capital base;
  - Overall FX exposure (short and long): 40 percent of a bank’s capital base.
- Note on leverage definition: MMA’s leverage ratio = Tier 1 capital / net assets (net assets exclude off-balance sheet items). For most banks off-balance-sheet items < one percent of total assets; comparable example cited: 17% (Basel III) vs. 18% (MMA’s definition) at end-2022.

### Envisaged macroprudential instruments (household-focused)
- DSTI and LTV limits are being contemplated to mitigate systemic risks from household borrowing; calibration, leakages, and enforcement require robust data (priority: build CIB database and grant MMA access).
- Rationale for DSTI:
  - Caps on DSTI limit admissible debt-related monthly disbursements and ensure mortgage affordability;
  - DSTI also restricts use of unsecured loans to cover down payments (unlike LTV);
  - Maldives evidence: ratio of residential and commercial real estate loans to total gross loans roughly 5½ percent since 2019; share of household loans to commercial bank loans rose from 18 percent in 2011 to 38 percent in 2021.
- Treatment of ‘lease-and-hire’ payments:
  - Recommended inclusion of recurrent payments under ‘lease-and-hire’ purchase schemes in the DSTI numerator (reporting by leasing companies to CIB should be mandatory).
  - Exemptions: HDC’s ‘rent-to-own’ lease programs should be exempted from inclusion to avoid unequal treatment of beneficiary households (HDC ‘rent-to-own’ clients can walk away without lender full recourse).
  - Exclusions: utilities and other recurrent payments not tied to purchase of goods (e.g., phone and internet subscriptions) should remain outside DSTI.
- Proposed DSTI calibration under consideration:
  - Cap at 50 percent for monthly disposable income below MVR 50,000;
  - Cap at 60 percent for income between MVR 50,000 and 100,000;
  - Cap at 70 percent for income above MVR 100,000;
  - For joint loan applications (two or more borrowers other than husband and wife), cap set at 50 percent.
- Recommendation: empirically calibrate DSTI thresholds (methodology example: plot NPL share vs. DSTI to identify non-linear threshold effects as in Romania).

### Envisaged LTV measures (mortgage lending)
- Proposed maximum LTV ratio for residential properties:
  - 90 percent for loans under MVR 5.0 million;
  - 80 percent for loans above MVR 5.0 million.
- Joint application exception: maximum LTV is 70 percent for joint applications of two or more borrowers (not husband and wife).
- These proposed LTVs are currently neutral-to-loose and at the upper end compared with peers; may be tightened/relaxed along the financial cycle.
- Complementary tools if needed: cap on loan maturity or lower LTV on second mortgages.

### Banks’ current internal prudential limits (summary)
- Several banks have implemented internal DSTI and LTV limits (examples of internal DSTI limits range from 40% to 60% depending on income bands; internal LTV limits cited from 50% to 80% across banks). (Source: MMA/banks)

### Recommended additional macroprudential instruments (currency and maturity mismatches)
- Rationale: high dependence on tourism, high dollarization, limited hedging opportunities have led to substantial bank FX exposures and maturity mismatches.
- Key metrics and vulnerabilities:
  - Overall Net Open Position (NOP) = 11.8% of CAR as of December 2022.
  - Maturity mismatch gaps (average maturity mismatch as percent of total assets, all currencies):
    - Gap reaches 5.6% of banks’ total assets for maturities shorter than 5 years;
    - Gap reaches 15.5% for maturities longer than 5 years.
  - Detailed breakdown cited for maturities: -32.3 percent (<7 days), 2.1 percent (7–30 days), 4.8 percent (1–3 months), 8.2 percent (3–6 months), 7.5 percent (6–12 months), 3.4 percent (1–3 years), 7.7 percent (3–5 years), 15.5 percent (>5 years), and 6 percent (unclassified).
- Recommended instruments to reduce currency and maturity mismatches:
  - Implement Liquidity Coverage Ratio (LCR) in local and major foreign currencies (usual minimum 100 percent);
  - Implement Net Stable Funding Ratio (NSFR);
  - Implement loan-to-deposit (LTD) ratio in both local currency (LC) and foreign currency (FX).
- LTD guidance and current levels:
  - Recommendation: maximum LTD ratio of less than 80 percent in FX to ensure resilience to sudden stop in FX inflows.
  - Recommendation: set maximum LTD ratio in LC at 80 percent.
  - Current observed levels as of December 2022: LTD in LC = 65.8 percent; LTD in FX = 53.2 percent.
  - Consider caps on new FX lending to borrowers earning revenue in local currency to limit currency mismatches (e.g., traders importing in FX but selling in local currency).
- LCR description: banks must hold HQLA in each currency sufficient to cover projected net cash outflows in that currency over a 30-day stress period.
- NSFR description: available amount of stable funding divided by required amount of stable funding.

### Systemic bank framework
- Recommendation: implement a D-SIB framework using BCBS methodology to identify domestically systemically important banks and apply a specific buffer to reduce systemic failure risk, given high banking sector concentration and presence of a major state-owned bank dominating the sector.

*Source: IMF — Maldives FSAP Technical Note (excerpts).*

### 44.      The FSAP team also recommends the implementation of the Basel III countercyclical

### Implementation of the Basel III Countercyclical Capital Buffer and Recommended Macroprudential Instruments

### Basel III Countercyclical Capital Buffer (CCyB): overview and evidence
- The CCyB requires banks to hold a percentage of their Risk-Weighted Assets (RWA, usually between 0 percent and 2.5 percent) as additional capital during times of strong credit growth relative to economic growth that can be released during an economic downturn.
- The buffer is designed to be a flexible tool that can be adjusted by regulators to respond to changing financial and economic conditions.
- Purpose: a countercyclical measure intended to help prevent banks from exacerbating the effects of economic cycles.
- Empirical evidence: Miettinen and Nier (2023) show that countries that entered the pandemic with a positive CCyB were able to smooth the impact of the shock though a release of the buffer, while other countries had an insufficient buffer entering the crisis.

### FSAP recommendations for Maldives Monetary Authority (MMA)
- Adopt a CCyB with a positive rate (e.g., at least 0.5 percent) as a first step, with potential to raise it later after thorough calibration.
- As an alternative, consider introducing a Systemic Risk Buffer (SyRB).
- Data and calibration note: Additional data would be needed if indicators beyond the Credit-to-GDP gap are to be used for CCyB setting.

### Additional capital requirement to mitigate the sovereign–bank nexus
- Rationale: An additional capital requirement would help mitigate the sovereign-bank nexus by discouraging banks from being excessively exposed to the sovereign.
- Design guidance:
  - The calibration should be nonlinear, with the requirement increasing gradually beyond a minimum concentration threshold based on the level of a bank’s exposure relative to its risk-weighted assets.
  - The additional capital requirement should be based on Basel Pillar 2 or, alternatively, on Pillar 1 with an accompanying macroprudential rule (WAEMU FSSA, 2022).

### Recommended macroprudential instruments (summary of envisaged measures and data needs)
- Scope: Banks
  - (FX) Liquidity Coverage ratio (LCR) — No additional data need — Timing: MT
  - (FX) Loan-to-Deposit ratio (LTD) — No additional data need — Timing: MT
  - Domestic Systemically Important Bank (D-SIB) Buffer — Data for Identification of D-SIBs — Timing: MT
  - Countercyclical Capital Buffer (CCyB) — Additional data needed if indicators beyond Credit-to-GDP gap to be used — Timing: MT
  - Systemic Risk Buffer (SyRB) — No additional data need — Timing: MT
  - Basel Pillar 1/2 capital surcharge — Banks’ sovereign exposure — Timing: MT
- Scope: Corporate & Households
  - Debt-Service-to-Income Ratio (DSTI) — Debtors’ disposable income; Data for calculation of debt service — Timing: MT
  - Loan-to-Value (LTV) — Property values — Timing: MT
- Timing legend: MT: Medium Term (within 1–5 years).

*Source: IMF Staff.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1mdvea2024003.pdf_