How big is the credit problem in Malta and is it restricted to certain areas or, perhaps?

Although credit problems do not exist only in Malta, late payment and dishonouring of credit terms in commercial transactions are considered as the main concerns of the Maltese business community.

Some companies, across all sectors of the Maltese economy, are facing liquidity problems, which are evidently seen and remarked in their audited accounts. We also see a great deal of bartering going on with building developers exchanging property as payment to sub-contractors. Another issue is the large number of dishonoured cheques, and it appears clearly that this negotiable instrument has lost a lot of its value as a payment tool. The lack of adequate action taken against defaulters in this area either by banks or the authorities reinforces the defaulters’ actions.

Some other companies also complain that as a result of late payment, they are unable to restructure appropriately in order to face the new challenges and opportunities of today’s market demands. Credit problems exist in all sectors of the economy. The wide variety of commercial sectors that our Members come from, give a clear indication of this.

What led to the credit or liquidity problem?

The principal reasons that are contributing to liquidity problem in the local market are:

 1. Under-capitalisation of businesses which consequently rely on their banks’ and trade creditors’ capital to pull them through. A lot of shell companies with Lm500 authorised share capital and Lm100 paid capital try to hide behind the limited liability shell that such a company offers.

 2. Poorly managed businesses, which in some cases inefficiency and / or fraud may be the primary causes of distress. This is often a result of a gross lack of basic management, accounting or business training. The owner also sometimes does not manage to separate his personal interests from those of the business.

 3. Overtrading, occurring when the business’s turnover increases faster than its cash profits, so that eventually it becomes unable to obtain the extra capital required to finance the expansion, thus having huge cash flow problems.

 4. Intense competition, leading to unsustainable price wars through a gross misunderstanding of the company’s cost base which effect the profits of any business in the long term.

 5. Government is mopping up liquidity from the economy through its attempts to maximise efficiency in timely collection of taxes and other charges. It is quite obvious that these measures are hampering companies’ liquidity and adversely affecting consumer expenditure.

The businessman’s biggest enemy when it comes to credit management and what should be his biggest ally?

Avid sales targets, inadequate research on the client assets and performance, lack of noting trends of late payments, dishonoured cheques, and post-dated cheques drawn by their clients / debtors are the trade creditor’s enemies, when it comes to credit management. Often it is caused by management zealously pursuing sales objectives rather than profit objectives. A sale is a sale only when the money has been collected.

An effective credit management should be proactive by having a reliable and up-to-date information system providing the necessary data about the prospective credit applicants. MACM educates how this should be done and assists by providing elements of the credit information required to take business decisions. Secondly, credit reviews should be made on a regular basis, taking immediate action against any defaulting debtor as necessary at an early stage such as on site visits, repayment agreements and ultimately legal action if co-operation is not forthcoming from the debtor.

‘How can a businessman give credit or review an existing credit facility to a client without knowing the real worth of the client, his credit history with other creditors, and his commitment to abide with the credit terms and conditions set?’

MACM is therefore active in educating how credit should be managed in a more professional way, so that credit would be seen as an important tool to enhance the trading relationship between the client and his supplier, and not as being a selling technique.