Cyprus’ banking sector faces concerns over high lending rates

Cyprus’ banking sector is undergoing significant changes, with recent mergers reshaping the financial landscape.

At the same time, Cypriots are paying the highest mortgage rates in the eurozone while receiving some of the lowest interest rates on their deposits.

“The banking system operates close to an oligopoly, limiting competitive pressure,” said Central Bank of Cyprus (CBC) governor Christodoulos Patsalides, highlighting the limited competition within the sector.

These concerns arise as the sector consolidates further, with the announced merger between Hellenic Bank and Eurobank and Alpha Bank’s acquisition of AstroBank.

Patsalides confirmed that the high liquidity of Cypriot banks, combined with reduced competition, enables them to maintain low deposit rates while benefiting from placing funds with the European Central Bank (ECB).

“About half of bank profitability comes from depositing Cypriot savings in European banks at higher rates,” he acknowledged.

Despite calls for intervention, the Central Bank of Cyprus does not have the authority to regulate interest rates or bank charges, he pointed out.

“We do not have the right to touch interest rates,” Patsalides explained, adding that these are determined by the ECB and transmitted through market mechanisms.

He also noted that Cyprus’ small and less competitive economy leads to slower interest rate adjustments compared to other eurozone countries.

Moreover, the issue of high lending rates remains a pressing concern. “Cyprus is well above the eurozone average in real annual percentage rates on mortgage loans,” Patsalides admitted.

While the country’s liquidity levels are among the highest in the eurozone—standing at 300 per cent compared to the 150 per cent EU average—this excess liquidity reduces the need for banks to attract deposits by offering higher interest rates.

In response, lawmakers have voiced concerns about the impact of these banking practices on consumers and economic development.

Efforts are underway to address abusive contract clauses in banking agreements, with a draft law currently under review by the legal service.

However, financial authorities continue to stress that consumer protection initiatives should primarily fall under the jurisdiction of the Consumer Protection Service at the Ministry of Commerce.

“It is in the banks’ interest to maintain low lending rates, but so far, this has not materialised,” Patsalides said.

Meanwhile, concerns have also been raised over the potential rise in non-performing loans (NPLs) as borrowing costs remain high.

Financial analyst Marios Ieropoulos warned that the increase in the Euribor rate and the ECB’s base rate could lead to more defaults if banks do not adjust their lending policies.

“Without a reduction in interest margins, borrowers may struggle to meet their obligations,” he cautioned.

Additionally, the draft legislation on unfair contract terms aims to provide some relief to borrowers facing excessive charges.

However, critics argue that enforcement remains weak, with only 30 per cent of financial ombudsman decisions being upheld by banks.

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