The Maldives, Asia’s smallest country, comprises more than 1,000 coral islands that stretch along 871 kilometres in the Indian Ocean. While it has made significant gains from incoming tourism, the country needs to diversify its economy to ensure a positive future. We take a look at how fintech could play a role in facilitating this.
Known for its beautiful islands, the South Asian nation of the Maldives has built a strong industry around tourism – contributing to almost a third of its gross domestic product (GDP) and around 60 per cent of its foreign currency reserves.
The Muslim nation has a population of over half a million people, with Male being its capital and largest city. In 2019, the Maldives’ GDP per capita exceeded $11,500. However, during the Covid pandemic, the country’s tourism industry (and therefore its economy) experienced a significant hit – leading to its GDP per capita falling to a little over $7,000.
However, in a post-Covid world, the country has been recovering, and, by the end of this year, expects to welcome around two million tourists.
While this paints a positive picture for the future of the country, it is also facing a pressing climate crisis – which could lead to much of the country being completely submerged (75 per cent of the country is only 1 metre above sea level). Because this would impact the number of tourists that it could welcome, it is important that the Maldives reduces its reliance on tourism and favours a more diverse economic setup.
The Maldives’ banking sector is highly concentrated and dominated by state-owned banks. The country hosts eight banks, with the domestic state-owned bank, the Bank of Maldives (BML), accounting for 51 per cent of total assets.
Financial inclusion, digital and fintech
While the World Bank says that at least 80 per cent of adults in the Maldives have a bank account with a traditional financial institution, the nation’s central bank, the Maldives Monetary Authority (MMA), says that cash remains the most popular payment method.
The region also lacks financial services infrastructure in many areas. In fact, in 2016, only one-third of the population had access to a bank branch and less than half of the entire population had access to an ATM outside of Male. When including Male, these figures jump to 63 per cent and 67 per cent respectively.
Borrowing and access to credit is also expensive in the Maldives, while financial literacy is low there, particularly in rural areas.
The MMA explains that many citizens in the country receive social welfare payouts via a bank account, but they immediately take the equivalent amount out in cash to spend it.
To note, 86 per cent of individuals report to use the internet. In terms of mobile subscriptions, the country has an 136 per cent rate. Also, two-thirds of the population in 2017 made or received a digital payment in the past year.
Governmental initiatives for improvement
Last year, the MMA unveiled its new instant payment system, ‘Favara’, which allows users to swiftly transfer up to MVR 50,000 ($3,257). This development promises to reshape the way transactions are conducted in the country. A key feature of the Favara system is the concept of the Favara ID, enabling users to create personalised and easily memorable credentials for fund transfers.
This year, there has been speculation that PayPal would be introduced to the country. As the country has significant numbers of foreign tourists, coupled with Maldivians who work and study overseas, PayPal could prove helpful for cross-border transfers and payments. The Maldivian government announced a proposal to PayPal to bring the payment system to Maldives, and, whilst there is no set timeline for its introduction, should it become reality, PayPal could provide a significant boost within the country.
In October, Maldives President Mohamed Muizzu took “necessary steps” to introduce India’s Unified Payments Interface (UPI). Developed by the National Payments Corporation of India, UPI is an instant real-time payment system for facilitating inter-bank transactions through mobile phones that has improved financial inclusion in India. The president set up a consortium to introduce UPI to Maldives and appointed TradeNet Maldives Corporation Limited as its leading agency.
While more work needs to be done, there is potential for Maldives to use both fintech and digital to boost and diversify its economy and further achieve economic development.
