The Central Bank of Cyprus was established in 1963 as an autonomous institution in accordance with the Central Bank of Cyprus Law 1963. Since July 2002, the Central Bank has been governed by the Central Bank of Cyprus Law 2002. This law ensures the independence of the Bank and compatibility with the relevant provisions both of the Treaty establishing the European Community and of the Statute of the European System of Central Banks and of the European Central Bank. The pertinent constitutional provisions have been amended so as to ensure central bank independence as prescribed by the European Union acquis communautaire.
The most important changes effected by the 2002 Law concern the necessary adjustments with the acquis regarding the Banks independence and primary objective as well as the financing of the public sector. Furthermore, the Monetary Policy Committee (MPC) has been upgraded to a decision-making body in the areas of its competence (e.g. monetary policy) whereas under the previous legislation the MPCs role was only advisory. More specifically, the Law establishes the institutional and financial independence of the Bank and the independence of the members of its decision-making bodies when carrying out the tasks conferred upon them. In addition, the Law specifies that the primary objective of the Bank is to ensure price stability, as stipulated in the Treaty establishing the European Community and in the Statute of the European System of Central Banks and of the European Central Bank. The Law explicitly prohibits the financing of the government, local authorities, public corporations or public undertakings by the Central Bank.
Under the Central Bank of Cyprus Law, the main tasks of the Bank are the:
(a) definition and implementation of monetary policy (including credit policy)
(b) conduct of exchange rate policy, within the framework of the exchange rate policy formulated by the Council of Ministers after the opinion expressed by the Bank
(c) holding, keeping and management of official international reserves
(d) supervision of bank
(e) promotion, regulation and oversight of the smooth operation of payment and settlement systems
(f) provision of services or performance of the tasks of banker and financial agent of the government, and
(g) participation as a member in international monetary and economic organizations.
The Banking System - Cyprus has a well-developed banking system which offers a wide range of services catering for the needs of businesses and individuals. Cyprus banking system comprises the Central Bank of Cyprus, domestic banks and international banking units. It also encompasses the co-operative credit institutions, which are supervised by the Co-operative Societies Supervision and Development Authority.
The Central Bank of Cyprus is the licensing authority for the conduct of banking business and for the supervision of banks. In the exercise of its supervisory role, the Central Bank is guided by the recommendations of the Basel Committee on Banking Supervision and the regulatory framework of the European Union. In July 2003, the Banking (Amendment) Law 2003 was enacted by the House of Representatives for purposes of full compliance and harmonization with the acquis communautaire.
There are currently 14 domestic banks operating in Cyprus, 11 commercial banks and 3 specialized financial institutions. All banks are incorporated in Cyprus with the exception of Arab Bank plc and National Bank of Greece S.A., which operate as branches of foreign banks. The commercial banks incorporated in Cyprus are: Bank of Cyprus Ltd, Cyprus Popular Bank Ltd, Hellenic Bank Ltd, Co-operative Central Bank Ltd, Universal Bank Ltd, Alpha Bank Ltd, National Bank of Greece (Cyprus) Ltd, Emporiki Bank - Cyprus Ltd and Société Générale Cyprus Ltd. The latter four are subsidiaries of foreign banks.
The specialized financial institutions are the Cyprus Development Bank Ltd, the Housing Finance Corporation and the Mortgage Bank of Cyprus Ltd. The Cyprus Development Bank Ltd specializes in the provision of medium and long-term finance for development purposes, carries out investment banking operations and provides consulting services to companies. The Housing Finance Corporation provides long-term housing loans mainly to low and middle-income families while the Mortgage Bank of Cyprus Ltd specializes in granting medium and long-term loans for the development of the tourism and manufacturing sectors.
In recent years banks have expanded their activities beyond traditional banking and their services include insurance, leasing, hire purchase finance, factoring, mutual fund management, investment and consulting as well as custody and asset management services. Developments in technology and the opening of markets have contributed to a more competitive environment. Banks have responded by upgrading their technological infrastructure and launching new products and services through electronic means or electronic access, using alternative distribution channels such as the Internet, call centers, etc.
In addition to the domestic banks, there are currently 29 international banking units which have been authorized by the Central Bank to operate from within Cyprus. They are required, however, to confine their activities primarily to the provision of services to non-residents and in currencies other than the Cyprus pound. Since January 2001, these institutions have been permitted to grant medium and long-term loans in foreign currencies to residents.
Monetary Policy Framework - The primary objective of the Central Bank of Cyprus is to ensure price stability. Without prejudice to this primary objective, the Central Bank supports the general economic policy of the government. In order to achieve its monetary policy objectives, the Central Bank has at its disposal a set of monetary policy instruments through which it regulates the supply of money and credit.
During 1995, the Central Bank completed the preparatory work for the initiation of a new framework of monetary policy implementation. The new framework was put into effect on 1 January 1996. Furthermore, in January 1996 the auction process was introduced as regards the primary sales of government stock. On 1 January 2001, the law liberalizing interest rates was put into effect. The Interest Rate Law repealed the legal interest rate ceiling of 9%, which existed since the 1940s.
In addition, it provides for the obligation for transparency on behalf of credit institutions in relation to the interest rates charged and other applicable charges and relevant details. Since 1 January 2001, the Central Bank has set the base lending rate for all banks equal to the interest rate on its marginal lending facility. This formal linkage will continue for a transitional period until experience of the new system is acquired. A margin over the base rate is applied by the commercial banks according to the risk and the creditworthiness of the client.
Currency - According to the Central Bank of Cyprus Law the Cyprus Pound is the monetary unit of the Republic of Cyprus and is divided into such fractions as may be determined by the Council of Ministers. Since 1983 the Cyprus Pound Is divided into 100 cents. The Central Bank of Cyprus has the exclusive right to issue notes and coins in Cyprus. Banknotes currently in circulation are in the denominations of twenty pounds, ten pounds, five pounds and one pound. The coins currently in circulation consist of fifty cents, twenty cents, ten cents, five cents, two cents and one cent. The Cyprus pound is pegged to the euro at a central rate of 1euro=CY pound 0, 5853.
International Banking - In accordance with the relevant provisions of the Cyprus Banking Law, applications for establishing an international banking unit (IBU) are submitted to the Central Bank of Cyprus. In this connection, it should be noted that the term IBU is not a legal term but simply a descriptive term used to denote a foreign owned bank operating in and from within Cyprus and which deals exclusively in currencies other than the Cyprus pound. In July 2002, Cyprus proceeded with a major amendment to its tax laws by virtue of which a uniform tax rate (i.e. 10%) was imposed on all enterprises in Cyprus, including IBUs, irrespective of the permanent residence of their owners. On 1 January 2003, the so called “ring fencing” of business enterprises, including IBUs, owned by non-residents was abolished and all international business companies assumed the same tax obligations as domestic enterprises. According to one of the provisions of the new tax law, those IBUs operating in Cyprus prior to 1 January 2002 and which continued to deal primarily with non-residents, were given the option of maintaining their previous tax status (i.e. 4,25%) until the end of 2005. When the transitional period expires, IBUs may start offering foreign currency services to residents and be subject to the standard tax rate of 10%. As a result of these changes, new applications from foreign banks for the establishment of a presence in Cyprus will essentially cover the provision of both domestic and international banking services.
Since 1 May 2004, when Cyprus became a member of the European Union, all banks licensed by the competent authorities of European Union countries have been allowed to establish branches in Cyprus or provide banking services on a cross border basis without requiring a license from the host supervisory authority i.e. the Central Bank of Cyprus ('single passport' principle).
Applicant banks originating from third / non-European Union countries are expected to be institutions enjoying a good reputation internationally with an established track record of growth and profitability. Banking business licenses will be granted only to banks licensed in jurisdictions where in the opinion of the Central Bank of Cyprus, proper licensing and banking supervision are exercised and whose banking supervisory authorities subscribe to all the recommendations / principles embodied in the various papers issued by the Basel Committee on Banking Supervision. Applicant banks should also originate from jurisdictions which enjoy a stable economic and political environment. In addition, applicant banks should, inter alia, have a widespread and transparent ownership and, preferably, be listed on a recognized stock exchange, enjoy high ratings by a recognized credit assessment institution, have a strong capitalization and have no significant concentration in lending and deposits or related party business.
In this respect, it should be noted, that the Central Bank of Cyprus gives preference to applications from existing foreign banks for the establishment of branches as opposed to the local incorporation of new banking subsidiaries or associated companies.
Establishing a Business in Cyprus - The Central Bank is currently responsible for authorizing the acquisition by non-residents of equity in legal entities registered in Cyprus. Non-residents wishing to participate in Cypriot legal entities that are not quoted on the Cyprus Stock Exchange should apply through an appropriate professional (lawyer or accountant) practicing in Cyprus. Applications are classified into one of the three main categories: Direct Investment, International Business Companies , Ship Ownership and Related Activities.
Source: Press And Information Office, Republic Of Cyprus, 2005