The banking system of cyprus past, present and future

THE BANKING SYSTEM OF CYPRUS Also by Kate Phylaktis FINANCIAL DATA OF BANKS AND OTHER FINANCIAL INSTITUTIONS INTERNATIONAL FINANCE AND THE LESS DEVELOPED COUNTRIES (editor with M Pradhan) The Banking System of Cyprus Past, Present and Future Kate Phylaktis Reader in International Finance Director of the Research Centre in Financial Development City University Business School London palgrave macmillan © Kate Phylaktis 1995 Softcover reprint of the hardcover 1st edition 1995 All rights reserved No reproduction, copy or transmission of this publication may be made without written permission No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London WIP 9HE Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources Logging, pulping and manufacturing processes are expected to conform to the environmental regulations ofthe country of origin First published 1995 by MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world ISBN 978-1-349-12868-6 (eBook) ISBN 978-1-349-12870-9 DOI 10.1007/978-1-349-12868-6 A catalogue record for this book is available from the British Library \0 04 03 02 01 00 99 98 97 96 I 95 To my family Contents xi Preface PART I THE PAST The Origins of Modern Banking in Cyprus The Establishment of the First Bank The Development of Local Banking Institutions A Comparison of Banking Strategies of Local and Foreign Banks The Stability of the Banking System In the Aftermath of the Banking Crisis The Decline of the Foreign Banks 5 10 15 16 18 The Financing of Agriculture 23 The Farmers and their Produce 23 24 The Financing Requirements of Farmers Financing Agriculture at the End of the Nineteenth Century and Early Twentieth century The Development of the Co-operative Movement The Establishment of the Agricultural Bank The Establishment of the Central Co-operative Bank Some Remarks on the Development of Co-operation 26 29 31 35 37 Banking without a Central Bank 42 The Monetary and Banking System Performance of Central Banking Functions Cyprus Banking, a Satellite of the English Banking System PART II 42 44 45 THE PRESENT The Central Bank of Cyprus 53 Reasons for Establishing the Central Bank of Cyprus 53 58 The Establishment of the Bank vii viii Contents The Relation Between the Central Bank and the Money Banks Monetary Policy in the Early Years Monetary Policy: 1974-80 Monetary Policy: 1981 to the Present Central Bank Performance 59 62 65 67 71 The Banking System during Independence 76 76 76 77 83 Introduction The Growth of the Commercial Banking Sector 2.1 Liabilities 2.2 Assets 2.3 Factors which contributed to the expansion of the commercial banking sector The Commercial Banks 3.1 The Bank of Cyprus 3.2 The Cyprus Popular Bank 3.3 The Hellenic Bank 3.4 Barclays Bank 3.5 The National Bank of Greece 3.6 The Arab Bank 3.7 Lombard Natwest Bank 3.8 Relative size and performance 3.9 Developments in banking structure Other Financial Institutions 4.1 The Cyprus Development Bank 4.2 The Mortgage Bank of Cyprus 4.3 Housing Finance Corporation 84 85 85 87 88 88 88 89 89 89 93 95 99 102 102 Co-operative Societies: Growth and Crisis 105 Introduction The Growth of the Co-operative Movement The Central Co-operative Bank 3.1 Developments: 1963 to 1979 3.2 The legal structure governing the co-operative movement 3.3 The crisis Final remarks 105 105 III III 112 114 117 Contents PART ill THE FUTURE Cyprus: An Emerging Offshore Banking and Financial Centre Characteristics of Cyprus as an Offshore Banking and 125 128 129 130 132 The Existing Regulatory Framework of the Banking System and Prospective Changes 134 accounts of banks and other financial institutions Commission's recommendation on monitoring and controlling large exposures of credit institutions 2.4 Directive on a solvency ratio for credit institutions 2.5 Directive on own funds 2.6 Directive concerning the reorganisation and the winding-up of credit institutions and deposit-guarantee schemes Comparison of EC Directives with the Proposed Cyprus Banking Bill 3.1 Limitations on credit facilities 3.2 Limitations on shareholding 3.3 Regulations on minimum capital 3.4 Regulations on capital adequacy 3.5 Liquidity requirements 3.6 Publications of accounts 3.7 Deposit guarantee schemes Further Comments on the Proposed Cyprus Banking Bill 2.3 125 Financial Centre A Comparison of the Experience of Cyprus and Bahrain as Offshore Banking Centres 2.1 Developments in offshore banking activities in Cyprus 2.2 Bahrain as an offshore banking centre Prospects for Offshore Banking Business in Cyprus Some Final Remarks Existing Prudential Regulations and Legal Framework The EC Banking Directives 2.1 The second Banking Co-ordinate Directive 2.2 Directive on the annual accounts and consolidated ix 128 134 137 137 138 139 139 140 141 141 141 142 142 142 142 142 143 143 Contents x Banking in Cyprus in the 1990s 145 Main Characteristics of the Current Banking Industry l.1 Private ownership 1.2 A substantial semi-informal sector 1.3 A highly concentrated commercial banking sector 1.4 A saturated banking sector 1.5 A profitable commercial banking sector 1.6 Substantial conduct regulation Effects of Domestic Deregulation Effects of Adopting the EC Banking Directives Abolition of Foreign Exchange Controls Final Remarks 145 145 146 146 147 147 147 148 151 153 153 Index 159 150 The Future one another The reason is simply that banks will want to split equally the interval between them This is in accordance with our observation of the current location of branches of the two biggest banks in Cyprus, the Bank of Cyprus and the Popular Bank On the whole their branches are located next to each other The introduction of price competition will give the two banks an incentive to move apart so as to weaken the effects of price competition If banks stay in the same neighbourhood, consumers, who decide on the basis of price and proximity, will easily be attracted by some price reductions, since banks are basically undifferentiated in terms of geographical proximity Price will be the main variable according to which consumers choose a bank As a result, price competition between geographically concentrated branches is likely to be intense In order to reduce this competition, banks will then have an incentive to move away from one another to By doing so, banks will be able to charge higher prices, since customers around their locations will trade off high price against the inconvenience of going to a bank much further away Isolated branches could thus obtain some local monopoly power The strategy of branch concentration will no longer be appropriate in the new competitive environment Furthermore, the reduction in the importance of the branch network in the presence of price competition might encourage entry in the banking industry.ll In anticipation of domestic deregulation and the introduction of price competition, we have already seen in Chapter that a foreign bank, Natwest Lombard, has acquired a complete banking licence to offer the entire range of banking services The widespread network of the two largest local banks did not seem to act as a deterrent Price competition will also encourage a reduction in crosssubsidisation of services and the setting up of a reliable analytical cost accounting system to estimate product-specific costs The latter is a difficult task for the following reasons First, there is no obvious way of allocating fixed costs, like those of branches, across banking products According to a study of the American banking industry, up to 80 per cent of total costs have to be shared by a range of productsY In general, less than 30 per cent of total costs are unique to specific products 13 Secondly, there are difficulties in estimating product-specific costs relating to the existence of economies of scope in banking services that is, whether the unit cost of a service can be reduced if another service is provided at the same time Banking in Cyprus in the 1990s 151 Turning to the demand for banking services, we will examine whether price competition will affect consumers' behaviour There are various factors which could reduce the importance of price in the choices of consumers, the most important of which is bank loyalty Consumers value the long-term aspect of their relationship with a bank Given that money matters are still regarded as a person's private business, a relationship of trust and confidence with a person's bankers will be highly valued In addition, consumers, if they are risk averse, will attach particular importance to the decision to repudiate the bank they deal with Thus, customers cannot be expected to switch banks immediately in response to a perceived price differentiaP4 At the same time, consumers in Cyprus are becoming increasingly sophisticated in their approach to financial matters They are well infonned and able to make effective comparisons between the prices of services offered Up to now we have examined the effects of introducing price competition on the commercial banking sector Price competition will also affect the informal sector - the co-operative societies Their growth, especially after independence, has been due particularly to the fact that they were able to offer higher interest rates to depositors, since they have not been subject to interest rate regulations, and therefore could charge lower interest rates to borrowers since they have not been subject to reserve requirements The introduction of price competition, even if the Government continues to treat them differently, will enable the commercial banks to challenge them The increase in the sophistication of consumers will also affect un favourably the growth of co-operative societies which offer banking services The ignorance and loyalty of the previous generation of peasant farmers has been gradually replaced by the greater knowledge and awareness of the better educated younger generation who demand the whole range of financial products EAffiCTSOFADOPnNGTHEECBAN~GDrnrnCTIVES The adoption of the EC Banking Directives, discussed in Chapter 8, will strengthen the process of domestic deregulation, and especially price competition The Second Banking Directive introduces a list of bank 152 The Future activities for which the principle of mutual recognition applies This principle states that if a banking service can be legally performed under some conditions in one country it cannot be forbidden under the same conditions in another country In addition, this Directive also establishes a single banking licence valid across the EC, which means that once a bank is authorised to undertake activities in its home country (according to the rules prevailing there), it may conduct the same activities in any member countries irrespective of whether or not these activities are permitted in the host country, and without the need to obtain local authorisation In fact, the implementation of this principle amounts to the mutual recognition of regulatory bodies for the list of activities covered by the Directive The implications of this principle are wide-ranging Foreign banks might be able to gain some competitive advantages by supplying domestic customers with products that domestic banks cannot offer Thus, the regulatory body of the domestic market will have an incentive to change its own regulations in order to put local banks on the same level as foreign banks The ensuing domestic deregulation and the strengthening of price competition will affect bank strategies and the financial structure in a similar fashion to that analysed in the previous section Bearing in mind the principles in the EC Banking Directives, the question arises whether many foreign banks will enter Cyprus Currently the market share of deposits of foreign banks in Cyprus is about 20 per cent (excluding co-operative credit societies) This is higher than that of other European countries, apart from Belgium 46 per cent), Luxembourg (91 per cent) and the UK (60 per cent}.15 It is unlikely that the number of foreign banks will increase, because of two factors First, the banking system in Cyprus is highly concentrated, and foreign firms prefer to penetrate rather unconcentrated markets, given that the potential retaliation from a very concentrated industry could be severe 16,17 Secondly, Cyprus is overbanked not only in terms of branches but in terms of the number of banks The National Bank of Greece seems to have problems in competing with the other banks and sooner or later is likely to be taken over On the other hand, Lombard Natwest has recently been added to the list of commercial banks NatWest, however, has been on the island offering various financial services since 1975, and has a knowledge of the local market It has also established a name for itself in other areas of the banking industry Banking in Cyprus in the 1990s 153 ABOLmON OF FOREIGN EXCHANGE CONTROLS Cyprus imposed foreign exchange controls in the late 1960s, and although in recent years it has relaxed some of the restrictions, it still maintains a vast array of such controls, especially those relating to movements of funds by Cypriot residents 18 This affects the international trade in banking services For example, if a Cypriot resident wants to open a foreign currency account with a bank abroad but is not permitted under the law, then that prevents the foreign country from exporting a service to Cyprus On the other hand, if a foreign resident wants to obtain an account with a bank in Cyprus, that will constitute an export of a banking service by Cyprus Complete Iiberalisation of foreign exchange controls will boost the foreign currency business of the banks in Cyprus That will affect the banking sector by strengthening the position of the foreign banks which are better placed to exploit the new opportunities through their links abroad, for example by creating a better network of correspondent banks FINAL REMARKS Cyprus currently has a highly concentrated commercial banking sector, where institutions compete fiercely in terms of quality of service Their private ownership status has allowed them to adopt strategies which have maintained their profitability At the same time, Cyprus has a substantial semi-informal sector, which up to now has been protected from competition from the commercial banking sector In general, the development of the banking sector in the post-independence era has been moulded by the establishment of the Central Bank and the explicit regulations governing the establishment and operations of banks; the conduct of monetary policy which relied on the minimum liquidity ratio and overall or sectoral credit limits; and the government finances which affected the banks asset management The development of banking sector in the future will be affected by domestic deregulation, the adoption of the EC Banking Directives and liberalisation of foreign exchange controls These factors will have an effect on the financial structure by changing the competitive environment through the introduction of price competition According 154 The Future to the analysis in the previous section the two main local banks will be greatly affected They will have to reconsider their banking strategies especially those relating to their branch network They might have to reconsider relocating their branches In addition their extensive branch network and big overheads could be a handicap (at least initially) in competing on price with other banks Their position will be challenged especially by the Hellenic Bank and by the foreign banks Barclays with its long history on the island and its well-established status will certainly be in a good position to compete with the local banks Similarly Lombard Natwest although a newcomer in the Cyprus retail banking business has a good knowledge of the local market but is not encumbered by the consequences of bank strategies suitable to a different economic environment It therefore seems to have considerable prospects of challenging the position of the local banks The commercial banking sector in aggregate will also be in a better position to challenge the co-operative societies which offer banking services if domestic deregulation takes place The banks will be able to compete more successfully in terms of the interest rates offered to depositors The co-operative societies sector will most likely shrink in the future for yet another reason The agricultural sector has become smaller over the years In terms of its share of Gross Domestic Product it declined from 19 per cent in 1971 to about per cent in 1991 In addition the younger members of the co-operative societies are becoming more sophisticated and demanding The decline of the semi-informal sector is usually a natural evolution of the financial structure of a country Changes however will take time to take place Attitudes which have developed in an environment where long-standing controls on the structure of rates (opportunity costs) have tended to dispense with market criteria for credit allocation will change gradually For the banks existing arrangements have fostered the allocation of funds on the basis of security offered For the public bank loyalty rather than prices has ranked high in deciding from which bank to buy financial services Deregulation will also affect the size of the banks' assets and deposits through its effects on the conduct of monetary policy and public finances Existing arrangements make the task of the Central Bank to exercise effective monetary policy very difficult Currently the Central Bank decides on a credit target and makes the projections for the two Banking in Cyprus in the 1990s 155 out of the three sources of credit It predicts the level of bank credit extended to the public sector (which requires it to make assumptions about the level of foreign borrowing and borrowing from the domestic non-banking sector), and level of credit resulting from the external sector The third source of credit, from the banking sector to the private sector, is determined residually The Central Bank tries to achieve that by varying the minimum liquidity ratio and occasionally imposing credit limits Deregulation of domestic interest rates will enlarge the choice of how to conduct monetary policy For example, the Central Bank, having decided on the money supply target, could influence the market interest rates through the discount rate and ensure that the target level of money is demanded Alternatively it could work on the money supply by controlling the monetary base (notes and coins held by the public and by the banking system, plus banks' deposits with the Central Bank), which, given a money multiplier (which depends on the cash ratio of the banks and the public's ratio of cash to deposits), will be translated to the targeted money supply The merits of each of the above approaches will not be discussed here These changes will, however, reduce the role of minimum liquidity ratio and credit ceilings as policy instruments Such arrangements will only require a cash ratio These changes will have repercussions for the portfolios of banks and the total volumes of deposits On the whole, compulsory ratios on liabilities, to the extent that they are binding impose a tax on intermediation, which reduces the rate of return on the banks' asset portfolios This tax is equal to the difference between the rates paid on these compulsory holdings and the rates which these assets will be voluntarily held by the commercial banks in the volumes required by these compulsory ratios The reduction in return in bank portfolios will cause the interest rate offered on deposits and the volume of deposits to be lower than they will be in the absence of such constraints The possible beneficial effects on the volume of assets and liabilities will materialise if the solvency of the banks is not perceived to change as a result of the deregulation For example, the ceiling on deposits, which reduces competition for deposits, in principle contributes to the stability of the financial system and to greater confidence on the part of depositors on the viability of the financial institutions If, however, interest rates are market determined and destabilising competition sets 156 The Future in, then depositors might lose their confidence in the financial system and choose not to entrust their funds to the banks In order to maintain the climate of confidence, the Central Bank will have to strengthen its supervision of the banking sector We have seen in the book how the banking system in Cyprus developed for the first 100 years (1864-1963) without a Central Bank The decline of the foreign banks on the island and the fractional reserve banking system made the establishment of the Central Bank essential in post-independent Cyprus In the 199Os, the prospect of deregulation will not reduce the importance of the Central Bank On the contrary, it will enhance its role as a supervisory body of the financial community Notes I 10 II 12 13 This figure refers to 1990 infonnation the most recent date for which we have data on the Central Co-operative Bank It is calculated as follows: deposits of co-operative societies over total deposits of deposit money banks minus deposits of Central Co-operative Bank plus deposits of cooperative credit and savings banks See Price Waterhouse (1988) See OECD (1987) See OECD (1987) Domestic financial deregulation is a prerequisite to the Iiberalisation of the external sector For details see Phylaktis (1989) It should be noted that in Cyprus there are no restrictions on the number of branches a bank may open in contrast to some other European countries, such as Italy and Spain Similarly, the existence of deposit insurance schemes discourages bank efficiency, for while protecting the depositors, it protects the banks too This conclusions is drawn from the analysis of Dixit (1979) Dixit builds a model in which finns sell differentiated products and have two strategic variables, namely price and quality He allows finns either to compete or to collude over either or both variables and compares the outcome of these various competitive scenarios See Eaton and Lipsey (1975) See d' Aspremont et al (1979) In general, it will take fewer branches to deter entry effectively when there is price competition than when there is no price competition See Corstjens et al (1988) See Neven (1993) See Bryan and Allen (1988) Banking in Cyprus in the 1990s 14 15 16 17 18 157 According to a study by the American Banking Institute, it takes an interest rate differential of 1-3 per cent for private customers to switch banks See Steinherr and Gilibert (1988) See Schmalensee (1978) The correlation ratio between foreign penetration and market concentration for European countries is -0.58 (see Neven, 1993) For a summary of exchange controls regulations, see Arsalides (1991) Bibliography Arsalides, P., 'Exchange Control Regulations in Cyprus', Central Bank of Cyprus, June 1991 d' Aspremont, C., I Gabsezwicz and I-F, 'On Hotelling Stability in Competition', Econometrica, vol 47,1979, pp 1145-50 Bryan, L and P Allen, 'The Changing World of Banking: Geographic Strategies for the 199Os', McKinsey Quarterly, 1988, pp 52-71 Corstjens, M., C Matutes and D Neven, 'Brand Proliferation and Entry Deterrence', INSEAD, mimeo, 1988 Dixit, A., 'Quality and Quantity Competition', Review of Economics Studies, vol 46, 1979, pp 587-99 Eaton, B and R Lipsey, 'The Principle of Minimum Differentiation Reconsidered: Some New Developments in the Theory of Spacial Markets', Review of Economic Studies, vol 42, 1975, pp 27-50 Neven, D., 'Structural Adjustment in European Retail Banking', in J Dermine (ed.), European Banking in the 1990s, Oxford: Blackwell, 1993 OECD, Rentabilite des Banques, Paris: OECD, 1987 Phylaktis, K., 'Foreign Exchange Controls: Theory and Evidence', in R Aliber (ed.), Handbook in International Financial Management, Illinois: Dow Jones-Irwin, 1989 Price Waterhouse, The Cost of Non-Europe in Financial Services In Research of the Cost of Non-Europe, vol 9, Brussels: Commission of the European Communities, 1988 Schmalensee, R., 'Entry Deterrence in the Ready to Eat Breakfast Cereals Industry', Bell Journal of Economics, 89,1978, pp 1228-38 Steinherr, A and P Gilibert, The Impact of Freeing Trade in Financial Services and Capital Movements on the European Banking Industry, European Investment Bank, 1988 Index Accountant General's study S4-5, 56 accounts fee Be Banking Directives Agricultural Bank 10,37 and co-operative societies 33, 34, 35 establishment of 31-5,44; attempts 27-8 loans from 31, 34 and Ottoman Bank 38 Agricultural Bank Law (1925) 10 agriculture 19th-century production 5, 23-4 and Co-operative Central Bank 111 cultivation methods 24-5 debt 14,39n exports 24; and banks, liquidity 64-5 financing 10, 19, 23-41; 19th and early 20th century 26-8 marketing by co-operatives 105, 106, 109 seasonality and credit requirements 37-8, 68 taxation 24 25 see also farmers; taxation amalgamation see takeovers Anglo-Egyptian Bank Anglo-Egyptian Land Allotment Company 28 Arab Bank 85, 89 96 Arestis, P 74 Asbestos Company, Cyprus 13 Athens see Bank of Athens ATMs 94 95.149 Australia 86,87.95 automated teller machines 94.95, 149 Bagehot Walter 42 53 Bahrain as offshore banking centre 128-30 132, 133 bailUlCC of payments deficit 65 Bank of Athens 10 13, 88-9 1878-1959 market share II 12 and banking crisis 15 Bank of Cyprus 85 93, 94 95 amalgamations 86 branches 96; location of 150 cnSlS 15,56 development of 85-7 market share 146; 1878-1959 11-12 origin 10 overseas expansion 86 performance 90,92.104 in post-war prosperity 17 profitability 104 reserve fund 16 success of 12-13 Bank of England rates 13, 14 Banking Bill, proposed 123, 137 capital adequacy 142 Central Bank enforcement powers 143 on co-operative societies 143 compared with EC Banking Directives 141-3 Deposit Guarantee Schemes 143 limitations on credit facilities 141 limitations on shareholding 142 liquidity requirements 142 publication of accounts 142-3 Banking Business (Temporary Restrictions) Law (CAPI24) (1939) 134, 135~ bankslbanking branches per person 95 capital adequacy guidelines 136 140 142, 144n central bank functions 44-5 characteristics of system 145-8 competition 149-51 deregulation effects 148-55 during independence 76-104 failures 144n future development 153-4 limited liability 10.43 origins 5-22 overbanking 152 private ownership 14~ productive and allocative efficiency 148-9 regulatory framework 134-7; lack of 42; weaknesses 137 reserve requirements 61 a.~ satellite of English system 45 159 160 banks eOn/ saturation 147 stability of 15 supervision 58,61-2, 135, 143; future 156 without central bank 42-7 see also Bank of Cyprus; Central Bank; commercial banks; EC Banking Directi ves; financial institutions; foreign banks; local banks Barclays Bank (DCO) 10, 14,85,88,93, 95 1878-1959 market share II and banking crisis 15 branches 96 central bank functions 44 and Co-operative Central Bank 36, 37, 38,45 and co-operative movement 18,41 and future competition 154 as lender-of-Iast-resort 44-5, 57 OBUs 128 Beogradaska Banka 128 Bevan, William 29 branches 156n density 149, 152 future strategies 154 number by bank 96 perperson 95,96,147 capital adequacy 148 Banking Bill 142 guidelines 136, 140, 142, l44n capital flight 70, 148 central bank see Central Bank of Cyprus; Co-operative Central Bank Central Bank of Cyprus 51,53-75.153 administration 59 and banking crisis 57-8 and Co-operative Bank crisis 116 17 and currency 54.59,60 and deregulation 154-5, 156 discount rates 61 62 enforcement powers: and Banking Bill 143; lack of 137; proposed 143-4 establishment of 58-9; reasons for 53-8 evaluation of performance 71-3 and foreign exchange market 71-2 legislation 58, 63 as lender-of-Iast-resort 56 7.84 Index liquidity ratio 65-6.68, 142, 153, 155 monetary policy: 1974-80 65-7; 1981 to present 67-71; and deregulation 154-5; early 62-5; procedure.~ for 67-8 and monetary stability 72-3 and money supply 71,72 and national prestige 56 andOBUs 126 policy instruments 62.63,65,68, 142 powers 58-60, 61 and price stability 67, 84 relations with money banks 59-62 Central Bank of Cyprus Law ( 1963) 134 Central Co-operative Bank see Cooperative Central Bank Central Co-operative Industries Ltd 109-10 Chartered Bank 57, 86 Chilean banks 145-6 CISCO 86 Clay, Christopher 19 clearing house 94 Co-operative Central Bank 14,33,77, 111-17 and agricultural projects III crisis 51, 114-1 7; reasons for 115-17 deposits and loans III, 112 effect of invasion 112, 114 establishment of 35-7 functions 35, 37 and government 36,37, 114-15, 117 growth rate 111-12 lack of supervision of 116, 117, 118 liquidity 114 115 loans to societies 36, 37 and refugees 109, 119 sale of agricultural products 37 sources of funds 36 working capital 36 Co-operative Confederation, International 110 Co-operative Law (1914) 29 co-operative societies agricultural produce marketing 105, 106, 109 amalgamation of I~, 108 banking lOS, 106, 108 benefits of 38 and Central Bank performance 72, 73 Index and co-operati ve spirit II competition and deregulation 151 153 in consumer and commercial sectors 105 credit control 118 143 146 decline of 154 displaced by invasion 108-9 export organisations 109 growth of 29-31.39.51.146; and crisis 105-19 housing loans 103 industrial projects 109 legislation 29.109 Ill 112-14 117 119 143 limited and unlimited liability 106 loans 31 32; arrears 11 0-11 ; categories of 29-30; and deposits 106 107 108 membership 32 106 107 108 number of 106 107 and profit-making llO Registrar 32-3; powers of 113 savings societies 33 supervision of 33 113 118 supply societies 105-6 119 thrift and credit 32 types of 106 108 Co-operative Societies Law 143 colonial government/period 19 monetary and banking system 42-3 official bankers COMARINE 109 commercial banks competition 85.95; future 154; and takeovers 94 concentration 153 157 and credit control 118 developments in structure 93-5 and farmers' credit 38-9 growth of 76-85; contributory factors 84-5 market shares 146; 1878-1959 II and offshore companies 95 profi lability 147 relative size and performance 89 90-3 services offered 94; public awareness of 84-5 supervision 116 see also deposit money banks Commissioner of Co-opemtive Development 114 116 117 161 Company Law ( 1922) 10 43 competition and consumer behaviour 151 effects of 150 location theory 149-50 price 153; and service 149 150 computerisation 94.95.149 credit ceilings 68-9 73n 148 155 and Centml Bank 59.61 legislation 135 136 policy 71; Centml Bank 68-9; foreign and local banks 13-14 proposed Banking Bill 141 to fanners 7-8.24-5.26-7.30.37-8 to private sector 66 67 68 credit cards 94 credit control 43 118 and Centml Bank 54-5.56.59.61 63-5 co-opemtive societies 143 146 and money supply 63-5 credit societies 33-4 see also co-operative societies crisis banking 15.43.44-5 aftermath 16-17 emergency expansion measures 57-8 and lender-of-Iast-resort facilities 56-7 currency board system 42-3 46 55-{) and price stability 43 currency/system 42-3 46 103n backing by foreign assets 60 and centml bank 54 55 59 andECU 71 and exchange controls abolition 153 inflexibility of 51 and sterling 54 current account deficit 65 67 Cyprus Bank of see Bank of Cyprus Cyprus Development Bank Ltd 98 99-102 acti vities 99 100 10 I education services 101 expansion 101-2 profi tability 102 services 100 sources offunds 99 Cyprus Savings Bank 86 debt and 1930s depression 32 162 debt eont Commission into 30 farmers 14, 2fr.7, 30, 31; total 39n refugees 57, 66, 108-9 Debtors Relief Law (1979) 66 deficit current account 65, 67 and inflation 70 Demetriades, P 74 deposit guarantee schemes 143 deposit money banks 7fr.7,95 assets 78,79.80.81,83-4 cash balances with Central Bank 78 79.80.81.83-4 discounted bills 83 liabilities 77-83 see also commercial banks deregulation effects 123 148-51 153 and assets and deposits 154-5 competition 149-51, 153-4 and EC Banking Directives 151-2 on monetary policy 154-5 productive and a1locative efficiency 148-9 Development Bank see Cyprus Dixit A 156n Double Tax Treaties 127 EC Banking Directives 123, 134 137-41 145.153 Annual Accounts and Consolidated Accounts 138-9 compared with Banking Bill 141-3 Directive on Solvency Ratio for Credit Institutions 139-40 effects of 151-2 monitoring and controlling large exposures of credit institutions 139 on own funds 140 141 reorganisation and winding up of credit Institutions 141 Second Banking Co-ordination Directive 137-8 152 economic growth see growth economic economic indicators 64 Economides John 29 economy in 19th century Egypt 131 trade with emergency expansion measures 57-8.65 European Community see EC Index Exchange Control Law (1952) 134 exchange controls/rate 42.95,134 abolition of 153 exports 19th-century co-operative organisations 109 Famagusta Bank 10 16 86 farmers credit to 7-8 2fr.7 30: requirements 24 37-8 debt 2fr.7 30 31; reasons for 24-5 income variations 24 see also agriculture; taxation: tithes financial institutions 95- 103 assets and liabilities 97, 98 decline of 97 features of 97 private ownership of 145-6 see also banksJbanking foreign assets 60 legislation 83 restrictions on 63 foreign banks 10 1888-1959 deposits 12 and banking crisis 15 and competition 154 customers of 13 decline of 17, 18, 156 and EC Directive.~ 152 inflexibility of 13 18 as lender-of-Ia.~t-resort 44,45 56 market shares 16 146, 152; 1878-1959 II role of 56 strategies 10-14 takeovers by local banks 93-4 foreign exchange market and Central Bank 71-2,74 see also exchange controls/rate Funds for Financing Priority Project~ 66,67 GDP 64,66, 154 Goodhart, C.A.E 44 45, 53, 57 government see Central Bank; colonial government; Ottoman Bank Government Savings Bank Greaves, I 45 Greece expansion into 87.95 Greece National Bank of 85, 88-9, 96 152 Index Grindlays Bank 57, 103n takeover 88, 93 growth, economic 16-17,55-6 and commercial banks 84 Gulf War 68 and Bahrain 130 effects of 131 Hellenic Bank 57,85,93,95 branches 96 future 154 history 88 performance 89,91,92 profitability 104 shareholders 73n, 88 Hellenic Mining Group 73n, 88 Hong Kong 55, 56 Hong Kong Bank 87 Housing Finance Corporation 98, 99 purpose 102-3 IBRD see International Bank for Reconstruction and Development IMF see International Monetary Fund Imperial Ottoman Bank see Ottoman Bank income tax 25-6 independence 17 and co-operative movement 37 inflation 65 and Central Bank performance 72, 73 and interest rates 69-70 insurance companies 86, 87 Interest Law (1882) 27,40-1 Interest Rate Law (1944) 69 interest rates 74, l44n ceilings 66, 69-70, 148 and capital flight 70 and Central Bank 61,62,69, 155 and customer behaviour 156 on debts 40-1 foreign and local banks 13-14 and inflation 69-70 legislation 27,40-1,69,135 International Bank for Reconstruction and Development 99 International Institute of Management 101 International Monetary Fund 67, 101 invasion (1974) and Bank of Cyprus 86 163 and Co-operative Central Bank 112, 114 and commercial banks 93 economic disruption 65 effects 145; on co-operatives 106, 108-9 investment, local government 83-4 Ionian Bank 10, 13, 18, 46, 86 1878-1959 market share II, 12 attempts to obtain government accounts 14,44 and banking crisis IS in post-war prosperity 17 Iran, Bank of Persia 18 Kermia Ltd 86 Kuwait 128-9, 130 Labancor Ltd 87 Laiki Investment 87 land legislation 39n Ottoman Code 25, 39n-40 tax 25 Land Development Corporation 103 Lanitis, N.C 24 Larnaca Bank 10, 16, 86 Law of Inheritance (1895) 25 Lebanon 128, 132 legislation 43 advantages for OBUs 126 and Agricultural Bank 10, 31 32, 34 Banking Business (Temporary Restrictions) Law (1939) 134 Central Bank 58, 63, 134, 135-6 Co-operative Law (1914) 29 co-operative societies 29, 109, III, 112-14, 117, 119, 143 Company Law (1922) 10,43 confidentiality of banking 126 Debtors Relief Law (1979) 66 Exchange Control Law (1952) 134 foreign assets 83 Interest Law (1882) 27,40-1 Interest Rate Law (1944) 69 land 39n Law of Inheritance (1895) 25 Usury (Farmers) Law (1919) 30,41 see also Banking Bill lender-of-Iast-resort 44-5, 56, 57 central bank functions 53, 84 foreign banks as 15, 45 164 Index licences, banking 135, 152 limited liability 10, 43 liquidity legislation 135, 136 ratio 65-6,68,72,73,142,153,155 local banks 8-10 1888-1959 deposits 12 advantages of 18 market shares 146 strategies 1~14 success of 12-13, 18 vulnerability of 15 Locust tax 26, 28 Lombard Natwest Bank 85,89,98, 152, 154 McKinnon, R.I 70 Makarios, Archibishop 58 Melissa Bank 10, 16, 86 Mining Corporation, Cyprus 13 monetary policy 1974 80 65-7 1981 to present 67-71 and deregulation 154-5 early 62-5 effectiveness 7~1 money supply 64 and Central Bank 71, 72 and credit contrul 63 and currency board system 54, 55-6 moneylenders 26-7,30,40 Mortgage Bank of Cyprus 86, 98, 99 role 102 Moslem Savings Bank of Nicosia National Bank of Greece 85,88-9,96 Nicosia Savings Bank 9, 29 and co-operative societies 38 growth of 9-10 Norway 146 Novasys Infonnation Services 100 offshore banking units/financial companies 123, 126 activities of 125-6 advantages of Cyprus 126, 132; geographical 126-7; infrastructure 127 Arab and Eastern European banks Bahrain and Cyprus compared 128-30, 133 and commercial banks 95 131 and demands of Arab countries 131, 132 developments in Cyprus 128-9 and European banks 130 future prospects 13~2, 133 legislation 134 numberof 123,128 Policy Statement and Guideline.~ 125 tax advantages 127, 133n Yugoslav 128, 131 Omonia Savings Bank OPEC funds and OBUs 129,130,131 origins of banking 5-22 other financial institutions see financial institutions Ottoman Bank 13,42, 103n 1878-1959 market share II, 12 and Agricultural Bank 34, 38 and banking crisis 15 central bank functions 44 and credit to farmers 7-8, 26 functions 44-5 as government bankers 5, 6, 8, 14, 18, 44 a.~ lender-of-Ia.~t-resort 44-5, 57 Ottoman Land Code 25, 39n-40 overbanking 95 see also bankslbanking Pancyprian Co-operative Confederation 109 pea.~ts see farmers Plumptre, A.F.W 53 Popular Bank of Cyprus 85, 93, 94 branches 96 expansion 87-8; oversea.~ 87,95 location of branches 150 marketshare 146 origin 87 perfonnance 90, 92 profitability 104 Popular Bank of Limassol 9,10 1878-1959 marketshare II in post-war prosperity 17 see also Popular Bank of Cyprus Popular Bank of Paphos 10 private ownership of financial institutions 145-6 proposed Banking Bill fee Banking Bill prosperity, post-war 16-17 Index refugees debts 57, 66, 108-9 regulation 153 conduct 148 framewortc of banking system structural 147, 148 134-7 increase in 72 post-crisis 16-17 requirements 61 retail price index 64 rural see agriculture; fanners Saudi Arabia 131 savings banks 8-10, IS savings societies 33 Sayers, Richard 53 Scotland, banking system 45 service quality 149 shareholding, proposed Banking Bill 142 Shaw, E.S 70 Singapore 55 Smith, Vera 53 solvency ratio, EC Directives 141 SPEA 106 SPEL 105 SPOLP 105 Standard Chartered Bank 93 sterling see currency supervision see bank.'llbanking; regulation supply societies for co-operatives 105-6,119 swwr system 94 Syria 131 165 takeovers 88, 93, 94 post-crisis 16-17 Tawney, R.H 923 taxation 68 advantages for OBUs and OFCs 127 agriCUlture 24, 25 and co-operatives 119 and deficit 65 Double Tax Treaties 127 133n income 25-6 Locust 26, 28 Thorp Report 99 tithes 25,26 abolition of 3I see also agriculture; fanners; taxation Turkish banks 19,21 United Kingdom, bank expansion into 95 United Nations study 54, 56 Usury (Fanners) Law (1919) 30.41 see also moneylenders Walters, A 55 warofindependence 17 wholesale price index 64 Willcocks, William 28 winding-up, EC Directives 141 women and local banks Yialousa Savings Bank 96 98 99 Yugoslav Arab company 128 Yugoslav OBUs 128 131 ... The Stability of the Banking System In the Aftermath of the Banking Crisis The Decline of the Foreign Banks 5 10 15 16 18 The Financing of Agriculture 23 The Farmers and their Produce 23 24 The. .. the banks in Cyprus in the early 19808, I became aware of the lack of a comprehensive study of the banking system on the island despite the many Cypriot academics and scholars in Cyprus and the. .. Functions Cyprus Banking, a Satellite of the English Banking System PART II 42 44 45 THE PRESENT The Central Bank of Cyprus 53 Reasons for Establishing the Central Bank of Cyprus 53 58 The Establishment