The liquidity ratio of the Maldives financial industry slightly increased in 2023 as compared to 2022. There has been a continued decline in lending from Sri Lankan banks due to the economic crisis in Sri Lanka. However, this has created room for other foreign banks such as those from Singapore and the People’s Republic of China, to fill the gaps in the lending market.
The Maldives government is currently active in providing financial assistance, mainly to small businesses, through various financial aid and lending schemes. However, there has been a noticeable decline in these activities year on year from 2021, 2022 to 2023.
Both the government and private parties continue to seek assistance from international and local financial institutions to refinance and restructure their existing debt, owing to the increase in inflation in 2022 and 2023, primarily due to the conflict between Russia and Ukraine.
The war in Ukraine has deeply impacted the Maldives, particularly due to its strong economic ties with Russia and Ukraine. Following the suspension of international flights by Russian airlines, the Maldives has experienced a marked decline in tourists from Russia, which had been the leading source of visitors prior to the conflict. This is particularly significant as Russian and Ukrainian tourists typically contribute more revenue to the Maldivian tourism sector than visitors from other countries.
However, the country’s economy has been able to maintain moderate growth primarily due to an upswing in tourist arrivals from other countries and capital spending. Whilst inflation rates rose in 2023 due to the impact of the war and the increase in general goods and services tax from 6% to 8%, and from 12% to 16% for the tourism sector, the Maldives Monetary Authority forecasts real GDP growth of 9.4% for the year. This projection is notably higher than the World Bank’s estimate of 6.6%.
The government has not implemented any new special measures in the form of financial aid or otherwise for those affected by the Russia-Ukraine conflict. However, the government continues to be active in supporting small businesses.
Interest rates of retail banking products targeting individuals are between 10% and 19%, which may be considered high-yield by international standards. Interest rates above 12% may be considered high-yield in other jurisdictions, but such interest rates are considered conventional in Maldives.
Interest rates of between 18% and 25% are considered high-yield in a Maldivian context. These loans usually relate to short-term and/or domestic/household borrowing needs. These facilities are not normally backed by security and have relatively low eligibility requirements. Therefore, there continues to be high demand for facilities with these interest rates, as there has been for some years now.
There are no emerging trends affecting the financing terms and structures of conventional loans as a result of the high-yield market, largely because the high-yield market targets a different borrowing group and relates to different borrowing needs. The high-yield market therefore has not in any meaningful way encroached on the conventional loan market share.
The Maldives has not seen significant growth in alternative credit providers.
There is a small unregulated private loan market, but the market share of these private lenders is too small for it to have any meaningful impact on the financing terms and structures of conventional loans.
Local banks and financial institutions have been slow to respond and adapt to new trends in the loan market, which has led to an increase in borrowing from foreign banks or financial institutions. For instance, local banks have struggled to compete with foreign lenders in attracting financing deals from the large-scale foreign direct investments made in Maldives in tourism, real estate or infrastructure. In this regard, the Maldives’ local banks are a long way from catching up with their foreign counterparts in the project finance market.
In terms of evolving techniques to reflect the needs of the domestic borrower base, there has recently been an increase in Islamic finance or Sharia-compliant banking products being introduced to cater to the needs of local borrowers. There are no other notable finance techniques evolving in Maldives to reflect the investor base and needs of borrowers.
The Maldives’ ESG Credit Impact Score is deeply negative, signalling the nation's heightened vulnerability to both natural hazards and social issues. For many years, the nascent legal framework in the realm of financial administration has impeded the government’s capacity for effective oversight and control of corruption, money laundering, and other financial crimes. Recent legislative enhancements have expanded the mechanisms for countering corruption, yet the challenges of addressing financial crimes and money laundering persist.
The Maldives is extremely vulnerable to natural hazards, with climate change and rising sea levels posing significant threats to both lives and livelihoods. The government is investing in large land reclamation projects such as the construction of the artificial Hulhumalé island to relocate people most threatened by rising sea levels.
The Maldives also has a number of social issues. Given the low and dispersed population, logistical challenges abound, notably evidenced by a scarcity of skilled labour and specialised expertise. This situation exacerbates youth unemployment and leads to diminished female workforce participation. To combat these issues, the government is making sustained investments in educational opportunities.
In light of these challenges, the Maldives continues to benefit from development and conservation aid, receiving grants and loans from several international bodies, including the Asian Development Bank, which funds environmental conservation, and the United Nations Development Programme, which funds awareness campaigns, among other initiatives.
The Banking Act (Law No 24/2010) is the primary law regulating banks, financial institutions and banking services in the Maldives. All activities of banks and financial institutions are overseen and regulated by the central bank – ie, the Maldives Monetary Authority (MMA).
Providing Banking Services in the Maldives
A licence issued by the MMA must be obtained prior to commencing any of the following activities:
In the case of domestic entities, licences are only granted to companies that are registered under the Companies Act (Law No 10/96); in the case of branches or representative offices of foreign banks, licences can be granted to companies that are registered under the respective companies acts of their jurisdiction of incorporation. Previously, all foreign investment applications were reviewed on a case-by-case basis. However, following the new Foreign Direct Investment Policy, which came into effect in 2020, express provision has been created for 100% foreign-held companies to be allowed to incorporate and provide banking and related services. There continues to be a requirement for at least two shareholders and at least one resident to sit on the board of directors.
Licences are granted in writing and can be valid for an indefinite period of time. Licences are not assignable or transferable. The licence or its attachments shall specify the conditions under which it is issued, and compliance with all conditions of licensing is a continuing requirement for all licensees, unless such conditions are later modified.
Licences are applied for in writing to the MMA. Said application has to be in the form prescribed by the MMA from time to time, and must contain all requested information. The MMA prescribes different application forms and different informational requirements for the various categories of licences available. Under the Banking Act (Law No 24/2010), the MMA has discretion to determine the procedures that it will use to evaluate applications for licences.
The information submitted with the application for a licence must include at least the following:
In the case of an application by a bank holding company or bank to organise a domestic bank, the MMA must obtain detailed financial and operational information regarding the prospective licensee, in addition to the information listed above. This information must also include details of the major shareholders and administrators of the applicant bank or bank holding company. The MMA may use this information to determine the following:
In the case of an application by a foreign bank to open a branch or representative office in the Maldives, the MMA may request any additional information that it believes to be pertinent to the proposal. It can also request the applicant to provide financial and biographical information regarding the persons to be designated as branch manager or representative office manager, as the case may be.
Applications for licences are to be accompanied by an application fee payable to the MMA in such amounts as the MMA may prescribe from time to time.
Applicants applying for a licence are required to act expeditiously in providing the required information, as well as any other information requested by the MMA for the purposes of processing the application. If an applicant fails to complete their application filing requirements within three months of applying for the licence, the MMA has the discretion to deem the application to have been abandoned and the application fee forfeited.
Providing Cross-Border Services
Cross-border lending is not regulated by the MMA, so foreign banks, financial institutions or non-banks do not require any permits or licences to provide financing to a company or party in the Maldives. Licences may be granted to foreign banks only if they are subject to consolidated supervision by a supervisory authority in the country in which the foreign bank maintains its head office, and which the MMA determines to be adequate.
There are no restrictions on foreign lenders granting loans to borrowers in the Maldives. There are no requirements to obtain registrations or licences, as cross-border lending is not regulated by the MMA.
Borrowers who may wish to remit proceeds from the Maldives to service their debts will need to consider the taxation implications they may face if they wish to borrow from a foreign lender that is a bank or non-bank financial institution not approved by the Commissioner General of MIRA. This is because payments made in relation to interest or to a payment that is economically equivalent to interest (excluding principal amount), including any commitment, guarantee or service fee, are liable for Non-Resident Withholding Tax (NWT) if they are paid to a bank or non-bank financial institution that is not approved by the Commissioner General. Therefore, NWT may act to disincentivise borrowers from taking loans from foreign lenders that are not approved by the Commissioner General, which may act as an indirect restriction on such unapproved lenders. As the NWT is relatively recent, whether this taxation will have an effect on foreign lending is yet to be determined.
There are no restrictions or impediments on the granting of security or guarantees to foreign lenders per se, but mortgages on tourist developments are subject to obtaining a written mortgage approval from the Ministry of Tourism, as required under the Grant of Rights Regulation (Regulation No 2010/R-14). Once the mortgage agreement has been executed, the mortgage must then be registered with the Ministry of Tourism and a mortgage registration fee of MVR10,000 shall be payable to MIRA.
Securities over residential land do not require prior approval, but there is a formality to register the mortgage with the relevant authorities – ie, the city or local council, depending on the location of the residential land over which the mortgage has been created.
There are no restrictions, controls or other concerns with respect to foreign currency exchange in Maldives. Parties wishing to engage in the business of foreign currency exchange can do so by obtaining a licence from the MMA, pursuant to the relevant regulations, including the Money Changers Regulation (1987).
There are no restrictions on the borrower’s use of proceeds from loans or debt securities, although general requirements under the Prevention of Money Laundering and Financing of Terrorism Act (Law No 10/2014) must be complied with.
Restrictions may also be imposed under the contract governing the underlying loan or debt securities, wherein the borrower’s use of proceeds should be in line with the conditions or purpose of financing set out in the loan agreement.
There are no statutes or regulations governing trusts or agency law in the Maldives.
The agency principle has been in practice for quite some time and is governed largely under the respective contractual arrangements between the parties.
Trusts have been recognised through precedent-setting Supreme Court judgments in two different cases, where the Supreme Court recognised the existence of implied trusts. Distinctions were not drawn between resulting and constructive trusts. Trust structures have therefore not been heavily utilised locally.
The treatment of beneficial ownership as being distinct and separate to legal ownership has not sufficiently matured in the Maldives. Notwithstanding the aforementioned Supreme Court judgment, the long-standing practice has been that only legal ownership is strictly recognised in the Maldives. Trust structures, if one were to arise at all, are likely to arise out of usually unwritten, implicit and likely unwitting understandings between parties and by operation of law as established in the recent Supreme Court judgment.
Offshore trusts are being utilised in transactions.
Despite the absence of a specific statute governing trusts in the Maldives, the Banking Act allows the provision of trust services as a banking service.
Lenders should approach trust instruments in the Maldives with caution as the principles and parameters of trust and agency law are not clearly defined and are not contained in a governing statute. It would be ideal for all rights and obligations with respect to trust and/or agency concepts to be expressly included in the deed/contract in order to guarantee protection.
There are neither statutory requirements nor any precedent-setting case law on loan transfer mechanisms.
Loan transfers can be done contractually through assignment, sale and novation of the loans. The lender may include an express provision in the underlying contract allowing such a transfer, and incorporate the requirements and protections into the contract.
Securities granted to the original lender may be released after the existing agreements are terminated and the borrower has entered into new agreements with the new lender (or a tripartite agreement with the original and new lender where the securities are transferred in favour of the new lender).
Debt buy-back is not regulated nor commonly practised in the Maldives. However, it is common for debt buy-back and the relevant procedure/mechanisms to be subject to the requirements contractually agreed between the parties.
There is no requirement under Maldivian law for the buyer to show that it has “certain funds” in order to acquire a target. Much like most M&A activities in Maldives, this is unregulated.
However, parties are free to agree on conditions precedent, and lenders may therefore include certain funds provisions as part of the conditions precedent required from a buyer. A seller’s existing lender may also impose such a requirement as part of the refinancing conditions precedent prior to completion. Ultimately, certain funds protection is one which the lenders ought to acquire from the seller/buyer of a transaction as appropriate. For any transaction, lenders must independently evaluate how much evidence and assurance they need regarding “certain funds”, and must obtain and review such documentation ahead of completion as there is no statutory protection to rely on.
In terms of documentation, local Maldivian banks provide debt financing on the basis of in-house standard documentation (consisting of general terms and conditions). This should be considered “short form”. International banks in the Maldivian loan market generally refer to the “long form” documentation, which is usually structured and drafted in line with the standards of the Loan Market Association. Upon execution, these documents do not normally need to be filed publicly, save for any securities such as mortgages over tourist developments or residential land, which need to be filed with the Ministry of Tourism and relevant city/island council, respectively.
There are no recent legal and/or commercial developments that have required changes to legal documentation in banking- and finance-related matters.
There are no usury laws limiting the amount of interest that can be charged.
Usury is a controversial topic in the Maldives. The Constitution of the Maldives requires that “tenets of Islam” shall be maintained in all dealings. Under this broad constitutional provision, inordinately high-yield loans could be challenged as usurious. However, this has not yet been regulated through statute and there has not been any precedent-setting case law on this point. This should reassure any lender, as loans charging compound interest of up to 25% per annum interest have not been challenged as usurious.
While there are no defined limits on how much a lender may charge as interest, it should be noted that the tax legislation of the Maldives allows a deduction of only 6% of interest as “deductible expenses” in computing taxable profit where the bank or financial institution is not approved by MIRA.
Furthermore, in applying the thin capitalisation rule, only 30% of the tax EBITDA may be deducted as interest in computing taxable profits.
Certain financial contracts may be requested by MIRA in the completion of an audit of the finance party. Save for this, there are no other regulatory requirements on disclosure of financial contracts.
However, it is worth noting that the Maldives has recently implemented new Civil Procedure Rules, containing expansive disclosure obligations that did not previously exist. This opens up the possibility that financial contracts may have to be disclosed during contentious proceedings before Maldivian courts.
From 1 January 2020, payments made in relation to interest or a payment that is economically equivalent to interest (excluding principal amount), including any commitment, guarantee or service fee, are liable for NWT if they are paid to a bank or non-bank financial institution that is not approved by the Commissioner General of MIRA. The term “interest” also includes any discounts, premiums, passive interest and profit in respect of any Islamic financial instrument.
Any bank or non-bank financial institution that is licensed by the central bank of its respective jurisdiction is considered an approved bank or non-bank financial institution; selected international financial institutions are also considered to be approved entities for this purpose. A full list of approved banks or non-bank financial institutions is available here.
From 1 January 2020, any interest payment made to a party other than those approved by the Commissioner General of MIRA is liable for NWT at the rate of 10% on the gross amount. Furthermore, NWT is payable on a monthly basis to MIRA and, in order to determine the period in which the NWT is to be settled, the earlier of the paid or payable date (determined as per the relevant accounting standard) is to be considered.
All businesses are currently taxed under the Income Tax Act, including banks. The Maldives currently has a worldwide tax system, where the tax base is calculated based on the tax residency of the entity. Where a lender is a tax resident in the Maldives in a given tax year, its tax base is its worldwide income after the deduction of allowable expenses. If the lender is a non-tax resident in the Maldives in a given tax year, the tax base of the lender is only income sourced in the Maldives. Under the Income Tax Act, banks are charged a flat rate of 25% on their taxable income.
Lenders who have obtained a licence from the MMA are not required to register or charge Goods and Service Tax (GST) as the service falls within the definition of “financial services”, which is exempted for the purpose of the Goods and Services Tax Act (Law No 10/2011).
There are no specific tax concerns if funds are borrowed for a business purpose that generates a taxable income in the Maldives, provided that the lender is not an associated party (as defined in the Income Tax Act) of the borrower.
However, if funds are borrowed from an associated party, the borrower needs to first establish that the amount borrowed is a bona fide debt (ie, follow the debt to equity test determined in the OECD Transfer Price Guidelines) and that the transaction is on an arm’s length basis.
Further, where the funds are borrowed from a foreign entity, the interest payments would attract Non-Resident Withholding Taxes at a fixed rate of 10% on the gross amount of interest. In addition, this would have thin capitalisation implications as interest paid or payable to local financing institutions are fully deductible while foreign borrowings are deductible up to the thin capitalisation ceiling of 6% per annum.
The assets commonly made available as collateral to lenders include:
Mortgages over Tourist Resorts and Residential Land
Mortgages created over the leasehold rights of tourism developments would require prior approval from the Ministry of Tourism and subsequent registration with the Ministry after payment of a mortgage registration fee of MVR10,000. The approval and registration process generally takes five to seven working days per step.
Mortgages over residential land do not require prior approval, but there is a formal requirement to register the mortgage with the relevant authorities – ie, the city or local council, depending on the location of the residential land.
With respect to pledges over shares of a borrower or its subsidiaries, there is no legal requirement for a share pledge to be registered in favour of the lender with any authorities in the Maldives. However, it is the general market practice for the same to be communicated to the Registrar of Companies, which maintains a record of the charges. This usually takes three to four working days, and no costs are involved.
Assignment of Bank Accounts and Insurance Policies
The general practice is for notice of assignment to be given to the respective banks in which the accounts are held and to the insurers from which the respective policies have been procured, and to obtain their signed acknowledgment as a condition subsequent to the completion of the transaction. The period in which this must be satisfied will be governed contractually. However, in recent financing transactions, local banks have been much more hesitant to allow the creation of a charge over bank accounts.
The Public Finance Act (Law No 3/2006) regulates the provision of guarantees backed by the state or state-owned companies, or the mortgage of assets, rights or other interests held by the state, or the giving of undertakings and covenants affecting state assets or funds. This is with respect to loans or debt finance obtained by the state or by state-owned companies using the government as an intermediary, or with respect to transactions entered into on behalf of the state.
The Public Finance Act provides that such activities shall be carried out only after a proposal to do so is made by a Minister and approved by the President. Parliamentary consent by a simple majority of Members present and voting must be obtained.
Floating charges are commonly used in the Maldives, especially as project finance securities.
The crystallisation moment of such a charge generally occurs when the borrowing company defaults on its financial covenants or enters into insolvency.
Entities in the Maldives are allowed to give downstream, upstream and cross-stream guarantees without restriction or limitation. There are therefore no issues relating to the adequacy of credit support in relation to these guarantees.
A target is restricted from granting guarantees, securities or financial assistance for the acquisition of its own shares. There are no limitations on the seller involved in an asset sale providing such guarantees, securities or financial assistance.
There is a requirement to obtain prior approval from the Ministry of Tourism where the leasehold rights to a tourism development are being mortgaged. No costs are incurred in obtaining this approval.
Securities may be released upon the borrower fulfilling its obligations and/or the parties agreeing for the security to be released.
In the case of securities that are registered with the governmental authorities, the bank or the lender will execute a deed of discharge and communicate the same to the relevant authorities, which will then release the security from their records and communicate the discharge/de-registration in writing.
There are no specific statutes (such as insolvency laws) governing the priority of competing security interests in the Maldives. There is, however, an established practice whereby reference is generally made to Section 91 of the Companies Act to assume that the same order of settling debts (where the company enters a winding-up process) shall apply when a borrower goes into insolvency. In this regard, after paying the expenses incurred for winding up and remunerating the person(s) appointed to wind up the company, the assets of the company are to be used in the following order:
However, this means that, in a liquidation scenario, competing security interests may not have priority despite being perfected and registered with the authorities. It is ultimately a matter for a court to decide. Courts may take an approach that the security interest shall be ranked according to the time of creation or perfection.
In this regard, courts have followed the following ranking where such priority can be established through the contractual agreements of the debtor and creditors. Courts have also referred to the laws of developed jurisdiction to assist their assessment of the appropriate order to rank debts. The commonly utilised ranking is as follows:
Other than creditors’ liens exercised over ships in Maldivian ports, liens do not arise by operation of law and need to be expressly created over assets. There are restrictions on the creation of liens over certain classes of assets. The only priming interest that may arise over securitised assets are ring fences over a company’s assets in a liquidation process for debts owed to the government/tax authorities and a certain minimum amount (two months’ pay) for employees being made redundant as a result of the liquidation.
No structure has been proven effective to go around the ring fences as courts are strict in implementing the ring fences in a liquidation process.
A secured lender may enforce its collateral where there is an event of default under the underlying loan or security agreements.
The secured lender would have to file a claim at the Civil Court of Maldives to obtain a judgment debt against the borrower in default, through which they can request permission to sell the mortgaged asset.
Concerns to be taken into account are delays attributable to the court and any subsequent appeal processes, which may cause further delays in enforcing the collateral. Recent developments through case law indicate that the enforcement of an order (eg, for sale of a mortgage) shall not be stayed unless the appellate court issues a stay order on enforcement proceedings.
Section 18(d) of the Contracts Act (Law No 4/1991) allows parties to decide on the governing law of the contract, whether it is foreign law or Maldivian law. It is common practice in the Maldives for loan and financing agreements to be governed under foreign law, especially in cross-border lending transactions.
The choice of foreign law as the governing law of a contract and a waiver of immunity will be upheld by the courts in the Maldives.
Judgments delivered by a foreign court may now be directly recognised and enforced pursuant to the Maldives’ Civil Procedure Code (CPC), which came into effect on 16 June 2022.
As per the CPC, courts are not allowed to decide on the merits of a foreign judgment applied for enforcement in the Maldives, but courts may look into the merits of the case to ensure the case is enforceable in the Maldives. A judgment delivered against a party by a foreign court shall only be recognised and enforced through Maldivian courts if the same judgment has legal effect and is enforceable in the country of origin of the judgment. The party opposing enforcement can raise an objection if the foreign judgment has been appealed in the country of origin or if the appeal period has not yet expired. A foreign judgment is only enforceable if it complies with the laws of the Maldives and the fundamentals of Islam and satisfies one or more conditions in Section 391 of the CPC. The respondent to an enforcement application can contest the enforcement under Section 392 of the CPC. However, no request for enforcement of a foreign judgment has been filed in Maldivian courts to date.
Arbitral awards issued pursuant to a foreign-seated arbitration shall be recognised and enforced in the Maldives, without a retrial of the merits of the case, pursuant to section 72 of the Arbitration Act (Law No 10/2013) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), unless the award has been set aside in the courts of the seat or in the Maldives, or recognition of the arbitral award is refused by the High Court of the Maldives upon such an application being made.
Save for any restrictions in the underlying loan or security agreement, there are no particular legal or regulatory provisions that may specifically impact a foreign lender’s ability to enforce its respective rights.
There are no insolvency laws in the Maldives.
However, assuming a similar procedure to the winding up of a company applies, where insolvency proceedings commence, the onus is on the lender to make a claim for the debt and prove the existence of such.
If the debt is secured and the securities can cover the value of the debt, there should not be any impediments on the lenders’ rights to enforce their loans or security or guarantee, subject to the order of priority with respect to creditors.
Insolvency laws do not exist in the Maldives and, with reference to Section 91 of the Companies Act, after paying the expenses incurred for winding up and remunerating the person(s) appointed to wind up the company, the assets of the company are used in the order set in 5.7 Rules Governing the Priority of Competing Security Interests.
One could argue that, according to this order, no priority is given to secured creditors over unsecured creditors and that they stand on an equal footing.
This is largely an untested area in Maldivian courts, which generally take a prudent approach in such instances and make reference to the laws of developed jurisdictions. In this regard, with reference to the insolvency laws applicable in other competent jurisdictions, the courts would most likely give priority to secured creditors over unsecured creditors. In terms of priority over securities, it is reasonable to assume that mortgages would rank first, followed by fixed charges and floating charges, in that order. The proceeds of a sale of a company’s assets would only be paid to unsecured creditors (such as judgment debtors and trade creditors) after the debts to secured creditors are cleared.
There is no specific insolvency law in the Maldives. Insolvency is dealt with through the limited proceedings under the Companies Act.
Under the Companies Act, a company can be dissolved in the following ways:
However, in a recent Supreme Court decision, the court took the view that a voluntary liquidation cannot be completed if there are creditors and it seemed to suggest that, where creditors are present, a court-administered liquidation route should be followed. The reasoning behind this view was however not clarified and it remains to be seen how this decision will be interpreted in similar cases moving forward.
Typically, the time for the completion of dissolution will be the same as any other case as there are no special provisions to govern such proceedings. In the event it is administered through court, it could take two to four years to go through all the courts.
Creditors such as banks can submit a joinder to be part of the process to ensure that, where assets are sold, creditors will be paid.
In practice, companies are free to set internal procedures in relation to company rescues or reorganisations.
According to the Banking Act, the MMA shall appoint a conservator for a bank when it determines that:
Additionally, the MMA may appoint a conservator for a bank when it determines that:
The above provisions shall apply to the domestic branch offices and domestic representative offices in the Maldives of a foreign bank as if all these offices together were to form a single legal entity. All assets, liabilities, acts and omissions of the foreign bank resulting from or otherwise relating to the business of any such office shall be attributed to that single entity in applying the provisions. The conservator of a foreign bank shall be authorised to take all actions with respect to such foreign bank as could be taken by the authorised manager or by shareholders at the general meeting of shareholders of a domestic bank.
Parties are generally also free to enter into voluntary creditor arrangements to come to an agreement outside of insolvency proceedings. There have been instances where the government has also intervened to rescue or reorganise companies in which it is a stakeholder.
In the Maldives, laws on mortgages are limited, and the ranking of mortgages is clearly defined only for certain types of assets, such as freehold land, tourist assets, and vessels. In cases where there is no registration mechanism, the courts’ approach remains uncertain.
Further, under the new Civil Procedure Code, with respect to the enforcement of mortgages both the lender and borrower must agree on the value of the mortgaged property in a foreclosure; failing this, both parties are required to agree on a third-party valuer. If this is not achieved, the judicial valuation committee must determine the value, which will form the minimum price for the process.
This requirement has complicated matters for lenders seeking to exercise their enforcement rights as it is rarely possible for the parties to agree on a value upfront and ultimately requires lenders to seek “approval” from the borrower in a foreclosure situation. If the case proceeds to the judicial valuation committee, it not only incurs additional delays, but the methodology employed by the committee to arrive at the valuation remains opaque, further complicating the enforcement process.
Project finance has been used in the Maldives for the past few decades, mostly for the financing of tourism development projects and government infrastructure projects. In 2023, there has been a rise in financing for solar projects undertaken by the government, power utility companies and private companies.
Since 2008, the government has made efforts to promote developmental projects, through public-private partnerships, especially infrastructure development projects. As such, an international airport project (the Malé International Airport) was tendered out on a public-private partnership basis and became the subject of political and social debate, which led to the public-private partnership being terminated by the following government; in turn, this resulted in a prolonged arbitration against the government, which the government ultimately lost.
Since then, the appetite for major public-private partnership projects has been low.
Section 18(d) of the Contracts Act (Law No 4/1991) allows parties to decide on the governing law of the contract, whether it is foreign law or Maldivian law. It is common practice in the Maldives for project documents to be governed under foreign law and for international arbitration to be used as the dispute resolution mechanism. Therefore, there is no restriction in the application of English or New York law or any other law for that matter to govern the project documents or the arbitration clause.
Foreign entities cannot hold freehold rights over real property in the Maldives. This is a constitutional restriction. The workaround has been for the government to grant long-term leasehold interests which are, in all material respects (except for the lease term), akin to a freehold interest. All tourism assets are held as long-term leaseholds. Similarly, the government owns all real subsurface property rights, which are subject to the same long-term leasehold interests where it forms part of an asset in which the foreign entity invests.
There are no specific laws or restrictions that are relevant to project companies, although the primary consideration that needs to be made in structuring a deal may be tax-related.
In terms of foreign investment, the Foreign Direct Investment Policy reiterates the activities that are open for foreign investment, with the maximum foreign shareholding percentage and maximum period of investment that would be allowed for the activity, and the minimum investment requirement.
Typical financing sources include term loans from commercial banks or financial institutions. Project bonds have also gained momentum in the Maldives, with the government seeking additional financing to meet their working capital requirements.
There are no oil and gas, power or mining sectors in the Maldives, so any acquisition or export in relation to these sectors is not regulated.
The acquisition and export of natural resources are governed under the respective environmental laws in the Maldives, with the Environmental Protection Agency regulating its compliance under the mandate issued to the Agency by the Ministry of Environment, Climate Change and Technology.
The Environment Protection and Preservation Act (Law No 4/93) sets out the basic framework for environmental protection. The relevant ministry (now the Ministry of Environment, Climate Change and Technology) is mandated under this Act to further develop regulations and policies to ensure environment protection.
The Environment Protection Agency is a regulatory entity, affiliated with the Ministry, that is responsible for regulatory activities relating to the protection, conservation and management of the environment and biodiversity, as well as waste management and pollution prevention under the above-mentioned Act.
There are no laws on health and safety requirements that are applicable to projects. However, the Employment Act (Law No 2/2008) contains provisions on workplace safety and employee health, which shall apply to persons employed under the project. There are no mechanisms or procedures to oversee this, but employees may file a complaint with the Labour Relations Authority or Employment Tribunal for any breach of the general health and safety standards imposed under the Employment Act.
The Maldivian Economy Shows Resilience
Despite grappling with the twin challenges of the COVID-19 pandemic and the Russia-Ukraine conflict, the Maldivian economy has shown resilience. Even with the cessation of flights from Russia, tourism has not only rebounded but now exceeds pre-pandemic levels. This revival is largely attributed to alternative markets like India and the Middle East compensating for the decline. Additionally, an influx of Chinese tourists, following the lifting of a more than two-year travel ban, has further bolstered the sector.
However, the Russia-Ukraine war has led to rising global energy and commodity prices, putting upward pressure on domestic inflation and negatively impacting the government’s fiscal situation. Higher fiscal deficits are expected due to ambitious infrastructure investments by the government, coupled with blanket subsidies for energy and food, extensive capital outlays, and election-related expenditures.
To mitigate these challenges, the Maldivian authorities are in the process of establishing a legal framework for a Sovereign Development Fund. This framework aims to lay a robust legislative foundation for government-funded development projects while introducing strict governance, accountability, and reporting structures.
In light of these fiscal pressures, the World Bank has stressed the necessity for improved public investment planning and management to ensure macroeconomic stability. It has also underscored the need for economic diversification, advising the Maldives to reduce its reliance on tourism as the primary economic driver to mitigate the impact of external shocks. Moreover, the World Bank suggests that the significant presence of state-owned enterprises in the non-tourism sector hampers private sector development, indicating an area for potential reform.
In addition to the rise of inflation due to global constraints, in 2023 the Maldives government increased the rate of goods and services taxes from 6% to 8% for the general sector and from 12% to 16% for the tourism sector, with the aim of reducing the fiscal deficit. While the high public debt levels continue to be a concern, projections for the nation’s economic growth are optimistic. According to the Maldives Monetary Authority and the Ministry of Finance, real GDP growth is expected to reach 9.4% in 2023. In contrast, the World Bank offers a more conservative estimate, projecting a real GDP growth of 6.6% for the same period. It remains to be seen which of these projections will materialise by year’s end.
Continued Support for Small and Medium Businesses
At present, stakeholders continue to provide financial assistance to the local community, with a primary focus on aiding small and medium businesses (SMEs). The Small and Medium Enterprise Development Finance Corporation (SDFC), which falls under the purview of the Ministry of Economic Development, has reportedly disbursed loans totalling MVR1.7 billion (around USD110.2 million) in 2023 for SMEs. Their financial support primarily focuses on eight key sectors, which include local tourism, agriculture and fisheries.
Within the framework of the COVID-19 Business Assistance stimulus package, the corporation has sanctioned an additional MVR373 million in loans (around USD24.2 million), which have been allocated to 2,146 recipients. It was reported that the most substantial loans granted thus far range from MVR500,000 to MVR1 million (around USD32,400 to USD64,800).
Furthermore, the Maldivian government, recognising the vital importance of nurturing SMEs, has demonstrated its commitment to their growth and competitiveness. In June 2023, the government secured USD67.8 million from the World Bank. These funds are earmarked for various initiatives aimed at enhancing Maldives’ digital financial ecosystem in order to make it more accessible for SMEs to obtain loans and streamline their financial operations effectively based on non-conventional performance metrics to assess creditworthiness, particularly for startups and SMEs.
In parallel, the Bank of Maldives has embarked on its mission to support SMEs by securing a USD41 million facility from the Asian Development Bank. This facility is dedicated to the same objective, namely, facilitating financing opportunities for small and medium enterprises. These co-ordinated efforts from both public and financial institutions underscore the government’s recognition of the importance of nurturing SMEs and their commitment to the growth and competitiveness of startups and SMEs.
Developments in the Financial Sector
As the Maldivian economy gradually rebounds to pre-pandemic levels, the Bank of Maldives has taken steps in 2023 to ease certain restrictions that were put in place during the challenging period of the pandemic. One significant change is the removal of the previous USD cash withdrawal limit, which allowed customers to withdraw a maximum of USD2,000 per month. After nearly two years of this restriction being in effect, the bank has now increased the daily cash withdrawal limit to USD1,600. This adjustment reflects the bank’s confidence in the improving economic conditions and the increasing need for flexibility in accessing funds.
However, while the withdrawal limits have been relaxed, the bank continues to maintain restrictions on foreign transactions. For international transfers and purchases made with credit cards linked to a Maldivian Rufiyaa account, the monthly limit remains at USD750. For debit card transactions under similar circumstances, the monthly limit stands at USD250. These measures are aimed at maintaining financial stability and ensuring responsible financial practices, particularly in cross-border transactions.
To modernise the financial landscape, the Maldives Monetary Authority, has introduced an innovative Instant Payment System called “Favara” in the Maldives. This system is designed to revolutionise the speed and convenience of money transfers for both individuals and businesses. Designed to be accessible through the respective banks’ e-wallets, internet banking, and mobile banking applications, Favara allows users to swiftly transfer up to a maximum of MVR50,000 (around USD3,200) in a single transaction. Furthermore, Favara requests enable customers to conveniently request payments of up to MVR5,000 (around USD320) from other users, facilitating seamless financial interactions. As of the date of this publication, Bank of Maldives, Maldives Islamic Bank and the State Bank of India offer Favara payment services.
In line with these progressive initiatives, the Maldives Monetary Authority initiated a request for proposal for the drafting of an electronic Know Your Customer (e-KYC) regulation and related guidelines. The drafting of the regulation is believed to be underway, and the eventual implementation of this regulation will undoubtedly bring substantial benefits to the banking sector. It will streamline client onboarding processes, reduce the reliance on manual paperwork, and enhance convenience and security for clients. Biometric authentication methods, such as facial recognition, would be welcome to mitigate fraud risks and ensure banks’ compliance with regulatory requirements.
New Opportunities in the Market
In 2023, the liquidity status of the banking sector has remained adequate. Concerning the banks’ lending activities, by the end of Q4 2022, the gross loans extended by these institutions had reached MVR33.1 billion (around USD2.1 billion). This marks a modest 2% quarterly increase and a more substantial 6% year-on-year increase. This growth in lending signalled that banks were actively involved in providing financial support to individuals and businesses, potentially contributing to economic expansion and entrepreneurship. In contrast, financing companies continued to excel in their performance during the same period. By the end of Q4 2022, these entities collectively managed total assets worth MVR4.2 billion (around USD272.3 million). This indicates a 5% quarterly and a 12% year-on-year growth rate.
However, despite these profitability gains, the rate of loan growth by local lenders still falls short of meeting the burgeoning demand in the Maldivian borrower market. This shortfall has led borrowers to increasingly turn to foreign lenders. The major foreign lenders for the tourism industry include Singaporean banks. Notably, a syndicate including DBS Bank and United Overseas Bank recently granted its first green loan in the Maldives for the development of several tourist resorts. The syndicate also included HSBC Singapore, which committed to their first green loan in the Maldives’ hotel sector, having previously granted loans in other sectors. These developments signify a growing focus on sustainability among current investors in the Maldivian tourism sector. Key initiatives are being undertaken in areas such as sustainable architecture and renewable energy sources, and there could be more ESG loans on the horizon.
Although Sri Lankan banks previously used to play a key role in lending to private parties in the tourism sector, they have been absent in the market for quite some time now due to the ongoing recovery of their hard-hit economy. Stricter financial measures, such as an increase in the standard income tax rate from 24% to 30%, have been implemented in Sri Lanka, making it unlikely that these banks will re-enter the Maldivian lending market in the near future. However, some Sri Lankan banks are cautiously re-entering the market by negotiating debt restructuring options with borrowers.
Amid the ongoing presidential elections in the Maldives, the current government has taken a noteworthy step to address the severe housing crisis in the Greater Malé Region. A total of 6,200 plots of land were allocated to individuals just 62 days before the first round of elections, held on 9 September 2023. It is anticipated that the majority of these recipients will seek financing options for the construction and development of these housing plots. Consequently, new local schemes are expected to be rolled out, offering concessional loans to individuals to commence construction.
In a concerted effort to address climate change through renewable energy projects, the Maldivian government has ramped up solar projects in 2023. These initiatives are now seeing unprecedented interest from international investors. International bodies such as the Asian Development Bank and World Bank have already pledged financial support to help the government attain its ambitious goal of achieving net-zero carbon emissions by 2030.
To broaden opportunities for foreign investors in the tourism sector, the Maldivian government has introduced several projects this year that qualify for cross-subsidies under the Cross Subsidy Regulation. The eligible projects include the development of several domestic and international airports in various atolls and the development of a residential city in Kaafu Atoll following dredging and reclamation of a lagoon. Applicants can apply for a 50-year lease on an island or lagoon to develop tourism establishments. This year, the government has already granted leases on several islands and lagoons, creating additional lending opportunities for foreign lenders. Amid this surge in tourism projects, construction activities, and solar energy initiatives, foreign lenders are likely to capitalise on the regulatory vacuum formed by the absence of cross-border lending regulations in the Maldives.
The Maldivian economy, while showing resilience, continues to be extremely vulnerable to unexpected external shocks. The Russia-Ukraine war and global economic volatility will likely continue to drive up commodity prices, putting additional pressure on the country’s reserves and potentially increasing its already substantial external debt.
The significant upswing in housing and infrastructure projects in 2023, coupled with the acquisition of new tourism-related assets and the rapid expansion of solar initiatives by both government and private parties, has widened the spectrum of opportunities for foreign lenders. The granting of the first green loan for tourism development by a foreign lender this year will likely attract more foreign lenders interested in financing energy and sustainability projects.
While tourism has rebounded to pre-pandemic levels, global uncertainties loom large and demand vigilance from the Maldivian government. Due tothe impending change of government and the upcoming second round of presidential elections on 30 September 2023, the political climate is volatile, creating uncertainty for the banking and finance sector in the Maldives, and for the broader economy. The Maldives stands at a critical juncture. It is crucial to balance economic resilience with proactive risk management and robust fiscal reforms, not just to maintain the Maldives’ economic standing, but also to shield against future vulnerabilities and risks.