A mindset change: Malta’s capital financing scene

This article was published in the Sunday Times of Malta on the 30th of April 2023: https://timesofmalta.com/articles/view/mindset-change-malta-s-capital-financing-scene-a2.1028210

Malta’s financial services industry history saw its infancy in the late 1980s when the government established a legislative and regulatory framework for this economic vertical, followed by the introduction of the Malta Stock Exchange Act in 1990.

Complementing these two milestones was the introduction in 1994 of the Investment Services Act, Banking Act, and Income Tax Management Act, which made the islands an attractive jurisdiction in this industry.

Closing the loop was the setting up of the financial regulator in 2002, The Malta Financial Services Authority (MFSA), taking over some of the responsibilities of the Central Bank of Malta, the Malta Stock Exchange, and the Malta Financial Services Centre. EU membership in 2004 and the introduction of the Euro in 2008 further consolidated our overall offering and were instrumental in creating offshoot industries such as gaming and aviation.

The island’s mindset from day one was, rightly so, projected towards “servicing and supporting” the industry through licensing, back-office, advisory, expertise, and general company secretarial support.

The impact of a clear, defined strategy was witnessed with the creation of thousands of high-value-added jobs, which led to a higher standard of living of many. Today, this industry, excluding offshoots, contributes approximately 12% to Malta’s GDP and employs around ten thousand people. As they say, the rest is history.

Over the years, we tried creating more offshoot industries, such as licensing of virtual assets, which taught us several lessons, including the fact that implementing a strategy requires a robust follow-through to ensure that all the key players within the eco-system are on board and well prepared to gain a first mover advantage.

So, what’s next?

An area that requires particular attention within Malta’s financial services industry is a solid ecosystem for Private Equity (PE) and Venture Capital (VC) funds to operate from the Islands. For clarity’s sake, a PE & a VC invests in a project (that can be a business) and, apart from capital, handholds the management team through expertise and strategic support. A PE would usually prefer to invest funds and energy in mature and established companies, while a VC prefers a start-up with the potential for very high returns. The two terms are often used interchangeably.

Malta’s start-up numbers, deal volumes, and size are minimal due to our market and the country’s size. However, Malta can capitalise on the foundations built, its strategic location, its European membership, language, cultural diversity, and a stable social, economic, and political scene to attract regional PE and VC funds to operate from here.

Malta can quickly evolve into a Luxembourg of the Mediterranean, where capital flows between the North and South and from the West to the East. In the process, we can develop an eco-system that supports our economic development by promoting alternative financing to the traditional leveraged models with which our economy is entrenched. Research shows that there is a potential investment gap of up to USD$ 900 billion in the region; hence the opportunity is there for Malta to take up the challenge as it has strong links with Europe and North Africa, thus exploiting our position in the region in addition to being part of the Commonwealth.

How could we do this?

We can start by streamlining and simplifying the regulatory framework by consolidating regulations and removing unnecessary requirements. We could also improve the licensing process by digitalising it and bringing the process down to, at best, three months through an online platform that provides greater clarity and guidance on the licensing requirements.

Strengthening the investment industry ecosystem is also important if we continue to foster and promote a culture of innovation. This vision and the implementing strategy need the support of the relevant Government entities and regulators, the banking system (the island needs another big player operating from here), and easier access to talented professionals and supporting service providers.

Malta also needs to develop strategic partnerships with other countries and organisations to increase its visibility in this sphere. This would also create opportunities for cross-border investments and collaborations. This would go hand in hand with a renewal of efforts at a sovereign level by promoting Malta as a centre of excellence in the financial services industry whilst supporting emerging niches such as fintech and insurtech.

As other countries have experienced, a fund of funds could also be established with a remit to invest capital in privately managed PE and VC funds to sustain specific sectors and companies that require a capital injection. Additional funds may be raised through the European Investment Fund (EIF) or sovereign wealth funds.

Malta would do well to also attract Private Equity and Venture Capital firms or funds to operate from the island. This would require a coordinated effort from the government, private sector, and other stakeholders. Finally, a consensus at a national level is crucial for our sector to thrive, in addition to safeguarding Malta’s reputation, especially as we come out from grey listing.

I believe that by taking the above steps, Malta can position itself as an attractive destination for these firms or funds and drive economic growth and development.