An entrepreneur needs €1 million for a project. He has already put in €200,000 of his own money but still requires another €800,000. To fill this gap, he approaches the Malta Development Bank (MDB) for assistance.

The entrepreneur also confirms he is eligible for a €100,000 EU grant for the same project. Instead of taking the grant directly and being left with a €700,000 shortfall, the MDB offers him a 10-year loan of €800,000 at a low 0.5% interest rate. The €100,000 grant is used to cover a large portion of the interest, making the loan much more affordable. This way, the grant helps secure a larger loan with better conditions.

This is an example of how the MDB blends different financial resources to support projects.

The loan can be issued under one of MDB’s schemes by a commercial bank which has signed up for the scheme.  If none of the commercial banks are interested in the project, the MDB would consider providing the loan directly, though this is generally avoided.

Each project is unique, and the MDB tailors its approach accordingly. However, we aim to create schemes that are broadly applicable across various businesses. Details of our current schemes and services are available on our website, mdb.org.mt.

Available resources

Development banks across the European continent are playing a pivotal role by skilfully blending grant-based support with other forms of financial assistance, such as loans.  This strategic shift is not only enhancing the reach and impact of resources but also instilling a sense of responsibility and self-incentive among beneficiaries.

The Malta Development Bank (MDB) has demonstrated exceptional expertise in setting up and implementing these sophisticated financial instruments. The MDB creates financial instruments by blending guarantees and funds from various sources, such as the EU, international banks, and national funds.  These instruments are most often intermediated via our partner banks.

The success of various schemes, including those introduced during the COVID-19 pandemic and Ukraine response measures, showcase these instruments’ proficiency and timeliness.  These schemes blended subsidies on interest payable with guaranteed loans, effectively supporting businesses and individuals in highly challenging times.

An MDB research paper calculates that the Covid-19 Guarantee Scheme, using a government guarantee, supported €1.7 billion of Gross Value Added, or 13 % of Malta’s 2019 Gross Value Added. GVA is the value of goods and services produced in a country less the costs of all inputs.

Another notable example of innovative financial support, this time outside of emergencies, is the Further Studies Made Affordable (FSMA) scheme, implemented by the MDB. This scheme used EU funds to provide guarantees to partner banks which in turn provided loans to students furthering their studies which reduces the latter’s risks as well as the credit risk premium on loans.

Additionally, an interest subsidy grant component further softened the terms of student loans, showcasing the effectiveness of blending operations in transitioning from pure grant-based support to more sophisticated financial instruments.

Loan can be issued under one of MDB’s schemes

By end July 2024, close to 600 students benefited from a total of €23 million in soft loans under the scheme.

Advantages

Financial instruments offer several advantages over traditional grants, including leverage, unlocking private investment, increased reach and impact, risk-sharing, sustainability, and fostering responsibility among beneficiaries.

One compelling advantage is leverage. By combining grants with loans and guarantees, promotional banks magnify the impact of limited resources, reaching more beneficiaries than traditional grant-only support.  This blending approach introduces self-incentive and responsibility, motivating project promoters to ensure their ventures succeed.

Financial instruments also have a revolving nature, allowing repayments from existing portfolios to be reinvested into new projects with different beneficiaries in succession.  This continuous funding cycle contrasts with one-time grant expenditures, ensuring prolonged impact, and making a difference for multiple beneficiaries and the wider economy.

Moreover, financial instruments effectively crowd in private investors through risk-sharing.  Guarantees reduce the risk for private investors as well as commercial banks, encouraging more innovative and higher-risk projects, thereby unlocking more private sector resources and magnifying the investment size.  In turn, this leads to more efficient and effective use of funds.

MDB expertise and collaboration

The Malta Development Bank possesses deep expertise in blending funds and state aid frameworks, frequently offering advisory services to optimize the use of national and European resources. We encourage Maltese grant-providing entities to collaborate with us, leveraging our financial instruments to enhance the effectiveness of their grants while aligning with EU policy to promote sustainable investment and development.

It is essential to continue these joint efforts to ensure that the available resources for Maltese businesses are effectively channelled to the real economy.

Our track record shows that the MDB is adept at mobilising resources efficiently, achieving much more with less.

This article was first published in The Corporate Times