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INSIGHTThe second edition of the “Cyprus Banking Insight”
I am pleased to present the second edition of the “Cyprus
Banking Insight”
published by the Association of Cyprus Banks (ACB).
The comments and feedback we received on the first Bulletin from
abroad as
well as locally, were most encouraging and it has given us the
incentive to establish
its publication biannually. The “Insight” provides a forum to
other service producing
sectors of the economy, which are complimentary to financial
services, to present their
activities or current developments in their industry.
This current issue of the “Insight”, beyond the articles that
the staff of the Association
contributed, hosts articles submitted by:
ñ The Cyprus Bankers Employers’ Association, a sister
organization,
ñ The Cyprus Shipping Chamber and
ñ Hellenic Bank Public Company Ltd, a member of our
Association.
The articles presented in this Bulletin provide and inform the
reader about current
issues, developments and practices taking place in the banking
community of Cyprus
as it is becoming more and more integrated with the European
Union.
I hope that the quality and depth of the articles in the second
edition of the
“Insight” will be helpful, thought provoking and of interest to
our readers.
I would like to thank our contributors from other organizations
as well as the Senior
Officers of ACB for their continuing efforts to support and
keep-up with various functions
and projects that ACB is currently involved in, including the
publication of this Bulletin.
Given this opportunity I would like to inform our readers that
the Board of Directors
has decided to proceed with changing the name of the Association
of Cyprus Commercial
Banks to “Association of Cyprus Banks”. This reflects changes
taking place in the global
banking sector and denotes the willingness of our Association to
welcome new members
from different banking backgrounds.
Your comments and suggestions are most welcome.
DDrr.. MMiicchhaaeell KKaammmmaassDDiirreeccttoorr
GGeenneerraall
AAssssoocciiaattiioonn ooff CCyypprruuss BBaannkkss
1
ASSOCIATION OFCYPRUS BANKS
BULLETINCONTENTS
Modernizing cheque processing:Moving to Electronic Clearing
2
Establishment ofa credit bureau in Cyprus 3
The Anti money launderingcompliance officer 4
The Implementationof MiFID in Cyprus 6
The international expansionof Cypriot banks 8
Public-Private Partnerships:Tackling Bank Robberies in Cyprus
9
Credit Scoring Models forConsumers and Small Businesses 11
Creation of a “Code of practice onSwitching Personal
Accounts”between Banks 13
The important roleof Cyprus Shipping 14
AAddddrreessss
1E Menandrou Str., 1st Floor,
P.O.Box 23363
1682 Nicosia, Cyprus
+357 22664293, +357 22665135
[email protected]
PPrriinnttiinngg
R.P.M LITHOGRAPHICA LTD
DDeessiiggnn
CHROMASYN - Alexia Nissiforou
[email protected]
ACCB Copyright 2008
The contents of the Articles represent
only the personal views of the authors
ISSUE No 2September 2008
Dr Michael KammasDirector General
Cyprus Banking
INSIGHT
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2
Massive numbers of cheques aretransferred every day from
variousfinancial institutions to the brancheswhere the customer
accounts aremaintained. This bulk of cheques makemanual sorting and
cheque clearing atime-consuming and tiresome process.In order to
counter this problem, manyfinancial institutions worldwide
haveproceeded to adopt a technology called‘electronic cheque
processing solutions’.These effective and
modernizedelectronic-based solutions have beenadopted in locations
as diverse as theUnited States, Spain, Belgium, Germany,Singapore,
Hong Kong, India, Nigeria,UAE and many more. Different
clearingsystems have evolved in these countries,varying from
image-based clearingsystems (i.e. Hong Kong) to exclusively
data-basedsolutions (i.e. Greece). Instead of exchanging
physicallyhuge numbers of cheques, in many cases having to
travelthousands of kilometers, cheques are nowadays clearedand
settled on the basis of the electronic presentationof images and/or
cheque information. The upshot ofthis is that the clearing cycle is
significantly speededup and in some countries cheques are cleared
the nextday or even the same day, thereby bringing efficiencyinto
the entire banking system.
The Association of Cyprus Banks (ACB) has evaluatedthe benefits
of such truncated systems and initiatedthe introduction of an
image-based cheque clearingsolution among its member banks and the
CooperativeSocieties in Cyprus. Following the ACB’s proposal,the
Bills of Exchange Act was amended in 2000 so asto facilitate the
electronic presentment of chequesthroughout the clearing process.
However, anadditional legislative amendment was necessary inorder
to reflect the modern environment. Thisconcerned Article 305A of
the Criminal Law which setsthe process that banks must follow for
the dishonored(unpaid) cheques. In order to obviate the need
forbanks to exchange physically the dishonored cheques,an amendment
was proposed in order to allow forthe electronic presentment and
exchange of the imagesof unpaid cheques. This amendment was voted
bythe House of Parliament in the Summer of 2008 andfinally gave
pace for the implementation of the newsystem.
After a tender process the ACB awarded the project toNCR
(Cyprus) Ltd. According to the agreement reached,JCC Payments
Systems Ltd, the primary processor of cardtransactions in Cyprus
will act as the DispatcherCompany. The solution was built on the
basis of thetechnical and functional requirements set by
theAssociation and the participating banks. The intentionis for the
system to go live during the first quarter of2009 after a pilot
period running for approximately 5-6 months. Although there will be
a period of parallelprocessing where manual cheque clearance and
thetruncated process will operate at the same time, it
isanticipated that eventually all local banking institutionswill
rid the cumbersome manual work and deploy themodern truncated
clearing operations for the benefitof both the financial system and
the customers.
But, how will cheques be processed using theelectronic clearing
system?
Local banking practice today sets for the physicalcheques to be
exchanged daily between financialinstitutions through the Cyprus
Clearing House (CCH),which operates under the auspices of the
Central Bankof Cyprus. When a cheque is deposited at a branch
(ofthe collecting bank) it is forwarded to the bank’scentral
clearing centre. All cheques are bundled andprocessed and are
transferred the next day throughthe CCH to the bank on which they
were drawn forpayment. In the event where a cheque cannot
behonored, the payer bank returns the original cheque
Maria IoannouSenior OfficerConsumers Affairs
Modernizing cheque processing:Moving to Electronic Clearing
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3
The progressive development of Cyprus’s bankingsystem as well as
the latest developments at the EUlegislative level have underlined
the need to createa credit bureau in Cyprus.
In the European Union, there are a number of creditregister
systems in operation which differ accordingto their ownership
(public / private systems), the typeof information they provide
(positive / negative creditinformation) as well as type ofcustomers
covered (consumers /legal entities) and sophisticationof
information provided. Atpresent, out of all EU MemberStates only
Cyprus, Malta andLuxembourg do not have a creditbureau. The
experience in otherMember States indicates that theoperation of
reliable sources ofcredit related data that reflectsthe economic
behavior ofborrowers improves the ability ofbanks to estimate the
solvencyand financial credibility of loanapplicants. This in
turncontributes to the reduction ofcredit risk, the prevention of
fraud
in financial transactions and to the smootherfunctioning of the
banking system in general.
The European Parliament has recognized the abovebenefits and in
the revised Consumer Credit Directive(2008/48/EC) it stipulates
that lenders should assessthe individual creditworthiness of
applicants throughconsulting relevant databases. The Central Bank
ofCyprus has also pressed the need for the banking
industry to set up a system ofexchange on information
aboutcustomers’ credit standing.For the above reasons, themembers
of the Cyprus BankingAssociation are working towardsestablishing a
Credit Bureau inCyprus which will facilitate theexchange of
information oncustomer credit worthiness. Itsobjectives are as
follows:ñ To provide a better insight into
individuals’ and companies’indebtedness and theirhonoring of
contractualobligations
ñ To mitigate potential risksassociated with retail banking
document to the collecting bank within two or threedays. Cheques
are cleared and settled within a periodof five days or even
more.
Turning to electronic cheque processing, data and imagesof
cheques which are captured at the collecting bankare transmitted
electronically the same day to the payerbank through the Dispatcher
Company. The payerbank proceeds with the necessary proceedings and
if acheque cannot be honored, the image of the chequeis transmitted
electronically the next day to thecollecting bank with a written
notification stating thereasons for not being able to pay the
cheque. The image-return document acts as a substitute of the
dishonoredcheque. In this perspective the original papers are
nolonger exchanged between financial institutions andcustomers
benefit from the earlier notification ofreturned cheques. It is
anticipated that this process willreduce the overall clearing cycle
and money will becredited to the beneficiary account earlier than
wouldtake with the traditional method of manual processing.
Despite the proficient process described above, itshould be
noted that the future of cheques in Europe
seems to be unknown. Under the SEPA (Single EuroPayment Area)
project, an integrated Eurozone-wide payment arrangement, there is
a general viewthat cheques must be phased out and be replaced
byother electronic payment transactions. Consultationswithin the
European Payment Council call for thebanking industry to consider
the future of cheques.It is evident that the use of cheques
declines yearby year in many countries and card payments and
otherelectronic methods of payments such as internetbanking amd
mobile payments are becomingincreasingly favorable among European
citizens. Forinstance, in Germany and Austria, as well as
theNetherlands, cheques have almost completely vanishedin favour of
direct bank transfers and other electronicpayments, while in the
Nordic Countries cheques havebeen totally abandoned. Similarly, in
the UnitedKingdom and France cheques are diminishing andmany shops
and businesses refuse to accept cheques. If this decline continues,
cheque clearing will scaledown or eventually end and new electronic
means ofpayments will be used extensively in every day life allover
Europe. This signifies that cheques will ultimatelyvanish and
become a payment of the past.
Establishment of a credit bureau in Cyprus
Christina PieridesSenior Officer
Financial Markets
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4
As anti-money laundering regulation becomes morecomplex and
evolutionary so does the role of theAnti money laundering
compliance officer (the ‘MLCO’)The MLCO being the new age
‘musketeer’ in the fightagainst money laundering and terrorist
financinghas the challenging role to stay abreast of
rapidlychanging regulations and deal with the regulatorypressure on
financial institutions. His/Her role requiresconstant cooperation
with the regulators and asignificant investment of time and
resources on theinterpretation, implementation and monitoring
ofdifferent guidelines.The MCLO of a bank holds one of the few
positions theduties of which is specifically defined not only in
internalbank manuals but are stated in the Law and a CentralBank’s
Directive.Hence , the person appointed to the post of MLCOaccording
to the 2008 issue of the Directive of the CentralBank of Cyprus
Directive on the Prevention of MoneyLaundering and Terrorist
Financing (the ‘Directive’)should belong to the Management of the
bank so as tocommand the necessary authority. The Directive sets
out in an extensive list, the Dutiesand Responsibilities of the
MLCO. As a minimum, theduties of a MLCO include the following:
Risk management and Proceduresñ The preparation of the bank’s
risk management and
procedures manual for the prevention of moneylaundering and
terrorist financing.
ñ The monitoring and assessing whether the policy,procedures and
controls that have been introducedfor the prevention of money
laundering and terroristfinancing are correctly and effectively
applied.
Customer Acceptance Policyñ The preparation of the Customer
Acceptance Policy
which is submitted through the Senior Managementof the bank to
the Board of Directors for considerationand approval.
Internal and External Reporting ñ Receiving information from the
bank's employees
which is considered by the latter to be knowledge orsuspicion of
money laundering or terrorist financingactivities or might be
related with such activities.
ñ The validation and consideration of this information.ñ If
following the evaluation described above, the MLCO
decides to notify the Unit for Combating MoneyLaundering
(“MOKAS”), then he/she should completea written report and submit
it to MOKAS the soonestpossible.
ñ After the submission of the MLCO’s report to MOKAS,
The Anti money laundering compliance officer: Role and
Responsibilities under the Cyprus Anti money laundering
framework
Elena FrixouSenior OfficerLegal Affairs
ñ To enable banks to make better and faster creditdecisions
ñ To promote greater financial health
The Bureau will be a separate legal entity, owned andfinanced by
the 10 Member Banks of the Associationof Cyprus Banks. As it is
planned to be an interbankingsystem, access to the Bureau’s credit
information willbe limited to the members of the Cyprus
BankingAssociation. At the initial stage of implementation,
theCredit Bureau’s electronic database will only cover“negative”
data which concerns information onbankruptcies, court orders, or
any type of loan defaultby an individual or legal entity in Cyprus.
Informationwill be collected from member banks as well as fromother
sources such as the Central Bank of Cyprus(Central Information
Register - bounced checks), theCyprus Banking Association
(Bankruptcy Register) etc.
Each time a consumer or company applies for creditfrom one of
the Member Banks, the bank will accessthe applicant’s credit report
to find out about theperformance under previous credit agreements
withthe other Member Banks. This can help the bank assessthe
applicant’s credit worthiness and ability torepay a loan. It is
expected to reduce non-performing
loans and it will also provide the bank with thecapability of
carrying out risk-based pricing by varyinginterest rates depending
on the different expectedrisk of different borrowers.
By virtue of its activities, the Credit Bureau will
inevitablyneed to comply with the European Data ProtectionDirective
and Cyprus data protection law based on theDirective. Consequently,
the credit bureau will followclosely the instructions of the
Commissioner for PersonalData Protection and will make every effort
to safeguardcitizens’ rights.
Furthermore, in line with international practice, it
isenvisioned that the data in the credit bureau will onlybe used
for the purpose of credit risk managementand not for
commercial/marketing purposes.
The Cyprus Banking Association has identified thetechnical
supplier and business consultants for the setup of the Credit
Bureau. The aim of the Association isfor the Credit Bureau to
commence operations within2009. Following the successful
implementation ofthe initial phase of the project, the Credit
Bureau’sservices will be expanded to include provision of“positive
data” and credit scoring.
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the transactions of the customer(s) involved aremonitored by the
MLCO.
ñ The MLCO maintains a registry with statisticalinformation in
relation to the Internal MoneyLaundering Suspicious Reports and the
MLCO’s reportsto MOKAS.
ñ The MLCO responds to requests from MOKAS andprovides all the
supplementary information requestedand fully co-operates with
MOKAS.
Compliance of branches and subsidiariesñ The MLCO ensures that
all branches and subsidiaries
of the bank in non-EU countries have taken allnecessary measures
for achieving full compliancewith the provisions of this Directive
in relation tocustomer identification, due diligence and
recordkeeping procedures.
Annual Reportñ The MLCO has also the additional duty of
preparing
an Annual Report which is a significant tool forassessing a
bank's level of compliance with itsobligations laid down in the Law
and the CentralBank of Cyprus' Directives for the prevention
ofmoney laundering and terrorist financing.
Annual Evaluation of Risks and Periodic Reportsñ The MLCO is
responsible for the evaluation, on an
annual basis, of all risks arising from existingand new
customers, new products and services andupdating and amending
systems and proceduresapplied by the bank for the effective
managementof the aforesaid risks.
ñ The MLCO informs, through regular periodic reports,the Senior
Management of the bank regarding themanagement of risks associated
with moneylaundering and terrorist financing.
Cash Depositsñ The MLCO is responsible for examining and
deciding
on the applications for accepting cash deposits inforeign
currency notes submitted in writing by theresponsible officials of
the branches/units of the bankwhere the related customers’ accounts
aremaintained.
Cooperation with the CentralBankñ The MLCO responds to
allrequests and queries fromthe Central Bank ofCyprus and provides
allrequested informationand co-operates fullywith the Central
Bankof Cyprus.
Guidance and Training of Employeesñ The MLCO provides advice and
guidance to other
employees of the bank on the correct implementationof procedures
and controls against money launderingand terrorist financing.
ñ The MLCO determines which of the bank'sunits/branches staff
and employees need furthertraining and education for the purpose of
moneylaundering and terrorist financing prevention andorganises
appropriate training sessions/seminars.In this regard, the MLCO
prepares and applies, inco-operation with other departments of the
bank,an annual staff training program.
Evaluation of Third Persons and non-EU banksñThe MLCO assesses
the systems and procedures appliedby a third person on whom the
bank relies for customeridentification and due diligence purposes
or whoapplies for the opening of “client accounts”.
ñ The MLCO assesses the adequacy of the policymeasures and
procedures against money launderingand terrorist financing applied
by non-EU bankswhich apply for the opening of
correspondentaccounts.
Categorisation of Customersñ The MLCO ensures that the bank
prepares and
maintains lists of customers classified as low andhigh risk
which should contain the names ofcustomers, their account
number(s), the branch/unitmaintaining the account(s) and the date
of thecommencement of the business relationship.
The responsibility of the MLCO takes up a higherdifficulty level
taking into consideration that all of theabove duties must be
accomplished while not appearingto be ‘anti- business’.Additionally
even though the MLCO is oftensurrounded by a team of fellow bank
employees toassist in implementing the different procedures,
theultimate measure of success or failure often fallson the MLCO of
the Bank.
It is therefore important for the MLCO to applythe necessary
steps in order to
successfully and effectively achievehis given role. Generally
these steps
may involve : (i) securing thesupport of top management;
(ii)
buy-in from middlemanagement ;(iii)
applying a strongsystem of internalcontrols throughout
the organization andspecifically in the
compliance department; (iv) the abilityto manage compliance
risks while allowing businessdevelopment and (v) recognition and
credibility withregulators and peers.
5
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Nearly one year since MiFID went live, implementationin Cyprus
has been successful and investment servicesproviders are already
enjoying the benefits, being theSingle European Passport combined
with the taxadvantages in Cyprus.
Investment Services Providers MiFID was transposed into national
legislation with Law144(I) of 2007 (Provision of Investment
Services, theExercise of Investment Activities, the Operation
ofRegulated Markets Law). Under this Law, investmentservices may be
offered in Cyprus by: 1. CyprusInvestment Firms (CIF) (licensed
under the Law);2. Investment Firms from other Member States (MS)
ofthe European Union (EU) that may provide their servicesfreely in
Cyprus with their Single Passport;3. Investment Firms from third
countries that obtaineda license in Cyprus; and 4. Credit
Institutions (Banksand Cooperative Societies).
Supervision These providers need to follow the same
requirementsof the Law regarding the protection of investors,
albeittheir supervision is performed by different
SupervisoryAuthorities. So, unlike the situation in other
EUcountries, (i.e. the UK where there is a single Supervisorfor all
financial institutions (the FSA)), in Cyprusthere is a different
Supervisor for each type of financialfirm. Hence, ñ The Cyprus
Securities and Exchange Commission
(CySEC) is the Supervisor for CIFs and Investment Firmsfrom
third countries.
ñ The Central Bank of Cyprus supervises Banks.
ñ Cooperative Societies are supervised by the Authorityfor the
Supervision and Development of CooperativeSocieties (ASDCS).
ñ Investment Firms of other MS of the EU that offer
theirservices in Cyprus via their Single Passport, are supervisedby
their home Supervisor, while CySEC has some powersover them.Despite
the existence of different national Supervisors,the directives
issued by each Supervisor have exactlythe same requirements and
text, aiming to ensure a levelplaying field amongst market players.
This is also thecase regarding Capital Adequacy Requirements and
Anti-Money Laundering directives.
Licensing CySEC may grant an authorization to an
undertaking,whether existing or under formation, for the
provisionof the investment and ancillary services and activities,if
the following requirements are met:
1. The applicant’s Memorandum and Articles ofAssociation allow
the provision of such services;
2. The applicant has the appropriate capital
requirements(depending on which services they will provide);
3. The applicant has the appropriate organizational andinternal
procedures in place to comply with the Law(with transparency
requirements, suitability andappropriateness tests), so as to
protect investors andto avoid and deal with conflict of interest
situations;
4. The persons who effectively direct the business shouldbe of
sufficiently good repute and sufficientlyexperienced as to ensure
the sound and prudentmanagement of the investment firm;
5. The management must be undertaken by at least twopersons
meeting the requirements laid above [four-eye principle];
6. Where close links exist between the investmentfirm and other
natural or legal persons, CySEC grantsauthorisation only if those
links do not prevent theeffective exercise of the supervisory
functions of thecompetent authority;
The Implementation of MiFID in Cyprus
Dr. Demetra ValiantiSenior OfficerLegal Affairs
6
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7. Shareholders and members with qualifying holdings(who hold
10% and over of voting rights) must besuitable;
8. The persons employed by a CIF must be ofsufficiently good
repute and have the necessaryskills, knowledge and expertise for
performing theirassigned responsibilities;
9. The applicant must participate at the investors’compensation
scheme;
10. The head offices are situated in Cyprus.
Once a complete application is submitted, CySEC mustreply within
six months. In practice, CySEC mayreply in three months.Of course,
this dependson the quality of thework of the consultantthat has
undertaken topromote theapplication for theinvestment
firmregistration.
Investment Servicesand Activities Cypriot Investment Firms
provide nearly the full rangeof investment services and activities,
namely:
1. Reception and transmission of orders in relation toone or
more financial instruments;
2. Execution of orders on behalf of clients;
3. Dealing on own account;
4. Portfolio management;
5. Investment Advice;
6. Underwriting of financial instruments and/or placingof
financial instruments on a firm commitment basis;
7. Placing of financial instruments without a firmcommitment
basis.
However, it should be noted that although, the Lawmakes
provision for the Operation of MultilateralTrading Facilities
(MTF), no firm has yet activated sucha service.
Ancillary Services include any of the following: ñ Safekeeping
and administration in relation to one
or more financial instruments; ñ Safe custody services; ñ
Granting of credits or loans to clients to enable them
to carry out transactions in one or more financialinstruments,
where the firm granting the credit orloan is involved in the
transaction;
ñ Advice to undertakings on capital structure,industrial
strategy and related matters and adviceand services relating to
mergers and acquisitions;
ñ Services connected to underwriting; ñ Investment advice
concerning one or more financial
instruments; ñ Foreign-exchange services where these are
connected
with the provision of investment services.
Single Passport The Single Passport was further enhanced by
MiFID.The idea of a Single Passport is very simple. AnInvestment
Firm granted authorisation and operatingin a European Union country
may establish a branchor provide, without establishment, services
inanother MS, without prior authorisation by the othercountry’s
supervisor. The procedure involvesnotification via the home
Supervisor to the hostSupervisor. This possibility opens the doors
for Cyprusestablished investment firms to all major Europeanmarkets
and hence enables the provision to cross-border investments.
Tax Advantages Many service providers choose Cyprus for trading
ininternational markets due to Cyprus’ tax advantages.The corporate
tax rate of 10% is possibly the lowestin Europe, while gains from
trading in stocks and sharesare exempt from taxation. In addition
Cyprus is a partyto a number of double taxation treaties. Finally,
Cyprus’saccession in the EU has brought compliance with allEU
Directives. This combined with microeconomicstability provides a
safe environment for investmentservice providers.
7
The procedure involves notification
via the home Supervisor to the host Supervisor.
This possibility opens the doors for Cyprus established
investment firms to all major European markets and hence
enables the provision to cross-border investments.
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8
The European Union enlargement has boosted themodernisation and
reforms in many Balkan and EasternEuropean economies. Improved
economic conditions,macro economic stabilization, policy reforms
and the pathto European Union accession, have opened
upopportunities for investments in the banking sector.
Creditinstitutions have been privatized and restructured and asa
result banking activity in the region has increasedconsiderably.
These developments, together with the sheersize of the markets,
provide opportunities for investments.Foreign investment is
beneficial for both the investor andthe recipient credit
institutions. It allows the investor toexpand its business activity
and gain market share, whilethe recipient benefits from the
transfer of capital,knowledge and technology. The most common mode
ofentry that foreign credit institutions use to enter a newmarket
is either to set up a subsidiary, which requires alengthy process
for the acquisition of a banking license,or to acquire a local
bank, which enables a quick increasein market share
Traditionally, Cypriot banks concentrated on exploitingtheir
comparative advantages over domesticcounterparts in the local
market. Today, their mainstrategic target is to expand their
operations into newmarkets and take advantage of the
attractiveopportunities and growth prospects offered overseas.
Historically, the first wave of the internationalexpansion of
Cypriot banks begun in the 1960s in theU.K. where Cypriots and
Greeks emigrated. The mainreason for this expansion was to serve
the banking
needs of Cypriot and Greek expatriates and the modeof entry was
through the establishment of subsidiariesor branches. The second
wave of international expansionof Cypriot banks was in the 1990s to
Greece, Australia,countries with significant presence of Cypriot
and Greekexpatriates, and to the Channel Islands so as tointroduce
offshore banking services. The mode of entrywas again the
establishment of subsidiaries or branches.During this period
Cypriot banks strengthened theiroperations particularly in Greece,
opening a significantnumber of branches and offering the full range
ofbanking services to retail and corporate customers.
Cypriot banks are now riding the third and most significantwave
of their international expansion into new markets.Increasing
competitive conditions in the local marketand the reduction of
opportunities for significant growth,combined with the need to
increase earnings, diversifyrisks and realise efficiency gains,
forces Cypriot banks toseek new and profitable investment
strategies overseas.This is particularly evident from the presence
of Cypriotbanks in countries where their international
customershold their activities and operations (Russia,
Ukraine,Serbia and Romania). The Balkan and Eastern Europeanmarkets
offer considerable opportunities for expandingbanking services. The
strengthening of political stability,the relaxation of restrictions
on foreign ownership andthe application of free market economic
policies havecontributed to the growth of cross-border banking in
theregion, and Cypriot banks have taken advantage of
theopportunities that have arisen.
The international expansion of Cypriot banks
Michael KronidesSenior OfficerBanking Supervision
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The Cyprus Bankers Employers’ Association hosted on May 30,
2008, the 19th Meeting of thePhysical Security Working Group (PSWG)
of the European Banking Federation in Limassol,Cyprus. The PSWG
meetings take place twice a year and usually at the May/June
meeting themajor topic of discussion is the Report on Bank
Robberies and Other Bank Raids. Representativesof each country give
an overview of the status of bank robberies and raids in their own
countries.These discussions are confidential and therefore will not
be disclosed in this article.However, one of the important
conclusions of the group and an important deterring factoragainst
bank robberies are Public-Private Partnerships. Here below is the
case of Cyprus onhow this measure is implemented:
Public-Private Partnerships (PPP) refers to any type of
co-operation between private companies(in this case banks), the
Cyprus Police, and the Judicial Authorities of a country to
fightcrime. The Cyprus Bankers Employers’ Association formed a PPP
in Cyprus in 1998 togetherwith the Cyprus Police in order to
specifically fight bank robberies. As part of this co-operationa
bipartite committee between banks and the police was formed to
tackle the issue of thephysical security of bank branches. The
committee meets on a regular basis when neededand discusses issues
that may affect the physical security of bank branches, future
crimetrends (especially bank robberies) and any other threat that
may evolve as a risk factoragainst the security of banks. Some of
the more important measures agreed upon as partof the work of this
bipartite committee are:
- The decrease in the amount of cash money available at bank
branches.
- Further deployment and continuous upgrade of Closed Circuit
Television (CCTV) systems.
Public-Private Partnerships: Tackling Bank Robberies in
Cyprus
9
Yiannos RossidesSenior IndustrialRelations Officer
Cyprus BankersEmployers’Association
The choice to expand in these markets is notaccidental. First,
there is close proximity toCyprus, which facilitates the monitoring
andefficient operation from the Head Office. Second,Cyprus has
become a major trading partner ofEastern European countries and a
significantinvestor in the region due to the existence offavourable
double tax treaties and its statusas a financial centre. Third,
local banks havebuilt strong relationships with individuals
andcorporations which are extensively active in theregion
(“follow-the-client” strategy). Fourth,the banks’ management
developed considerableknowledge of the regional market
conditions,business growth prospects, investmentopportunities and
corporate culture.
The three largest Cypriot banks are currentlygoing through the
most important phase oftheir efforts to strengthen their
internationalpresence and become key regional players inthe markets
of Eastern Europe and the Balkans.In the last couple of years they
have beenparticularly active and have completed a
number of deals concerning the acquisitionof local banks or the
establishment of subsidiarycompanies. Bank of Cyprus is currently
in theprocess of completing the acquisition of localbanks in
Ukraine and Russia and openingadditional branches in Greece. With
theseadditions the bank will be operating a welldiversified network
of 520 branches in Cyprus,Greece, Romania, Ukraine, the United
Kingdom,Channel Islands and Australia. Marfin Laiki Bankhas further
enhanced its activities in southernand eastern Europe, acquiring
banks in Ukraine,Malta and Russia. Through these acquisitionsthe
bank has expanded its network to 451branches in Cyprus, Greece, the
UnitedKingdom, Australia, Romania, Serbia, Estonia,Guernsey,
Ukraine, Malta and Russia. HellenicBank is in the final stages of
acquiring a bankinglicense in Russia, where it will open its
firstbranch in Moscow, and is further expanding itspresence in
Greece with the opening ofadditional branches. The bank is
alsoconsidering several options for the acquisitionof a local bank
in Eastern Europe.
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10
- Further deployment and continuous upgrade of attack alarm
systems directly connected to police controlcentres.
- Continuous staff training on how to cope with bank
robberies.
To give you a better understanding of the facts see below the
relevant table:
The above measures were agreed and have been adopted since. As
part of the Public-Private Partnership betweenbanks and the police,
an additional measure has been in effect since 2001. Special police
patrols were set-up topatrol bank branches during normal working
hours in the two major cities of Cyprus. The use of police
patrolsprovides a sense of increased security among staff and works
as a deterring factor against potential robbers. Also,since they
are en route during normal working hours, in case of an emergency
the time needed to respond toattack alarms is substantially
decreased.
The situation after the implementation of the protective
measures mentioned above and of police patrolling ofbank branches
is shown in the following table:
It is clear that since 2001, the number of robberies is
decreasing with the exception of 2004, even thoughthe total number
of robberies in Cyprus was showing an upward trend till recently.
The obvious conclusionis that the security measures implemented in
bank branches along with the close co-operation with the
policethrough regular meetings to discuss measures that increase
the physical security of bank branches and theeffective use of
police patrolling have been successful. However, the fight against
crime is an on-going struggleand the Cyprus Bankers Employers’
Association aims at minimising bank robberies, through a closer
cooperationwith the police and any other public-private partnership
deemed necessary to achieve this goal.
YearNumber of Robberies in
Bank Branches
Number of Robberies inCo-operative and
Savings bank branches
Total number ofRobberies in Bank,Co-operative and
Savings Bank branches
Total number ofRobberies in Cyprus
2002 3 2 5 38
2003 1 2 3 69
2004 6 7 13 104
2005 2 4 6 84
2006 0 2 2 80
2007 1 2 3 74
YearNumber of Robberies
in Bank Branches
Number of Robberiesin Co-operative and
Savings bankbranches
Total number of Robberiesin Bank, Co-operative and
Savings Bank branches
Total number ofRobberies in Cyprus
1999 5 2 7 32
2000 7 - 7 43
2001 6 5 11 42
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Banks are in the business of taking risk. Credit risk,which is
the risk that borrowers will fail to fulfiltheir credit obligations
completely, is a major concernfor Cypriot banks. The retail and
small businesssegments are of particular importance to the
Cyprioteconomy. Based on research published by theStatistical
Service of Cyprus (Cystat) in 2007, 92%of the companies in Cyprus
are classified as small andare employing less than 10 people. In
addition,according to the Central Bank of Cyprus, the rate ofgrowth
for personal and professional loans has reached54.6% in 2007, up
from 50.6% in 2006 and the growthis expected to continue.
Nevertheless, for the credit expansion of Cypriot banksin the
retail and small business segments of theeconomy to be healthy,
robust credit risk measurementand management tools should be
employed, in orderto accurately assess and monitor the credit risk
in theirbooks. This article attempts to provide a briefdescription
of the statistical tools available forassessing the credit risk of
consumers and smallbusinesses, namely credit scoring models.
Traditional methods for deciding whether to grantcredit to
customers use human judgement for theassessment of credit risk.
This is purely based on theexperience of previous decisions as well
as on the
valuable information collected from servicing aparticular
customer over time. However, economicpressure resulting from
increased demand for creditalong with the greater commercial
competition andthe emergence of computer technology have led tothe
development of sophisticated statistical modelsto aid the credit
granting decision. Currently, not onlyare these tools the most
efficient way of handling alarge number of transactions, yet, they
also seem toproduce more accurate assessments of credit risk
thansubjective evaluations by human experts.
The statistical models used for the assessment of creditrisk
associated with consumers and small businessesare called credit
scoring models (or scorecards). Thedevelopment of these models is
carried out with theuse of a sample of customers whose
repaymentbehaviour on a particular product is known. Eachcustomer
has its own attributes and an associatedrepayment history over a
given time horizon. Statisticaltechniques are then employed in
order to identifybehavioural patterns in the sample of these
customers.The procedure resembles a credit officer’s
empiricalknowledge, gained by assessing the creditworthinessof
customers over time. The difference, however, isthat the
identification of attributes that define thecreditworthiness of
clients (called risk drivers) for a
Credit Scoring Models for Consumers and Small Businesses
11
Dimitris KoniotisOfficer
Hellenic BankPublic Company Ltd
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12
given time horizon, is carried out in a statisticalframework
which has proved to be more consistent andthus more accurate in the
assessment of credit risk thanempirical expert judgement.
The attributes used for the assessment of thecreditworthiness of
clients via scoring models varybetween different segments of the
economy. For the retailsegment which includes products like credit
cards, personalloans, overdrafts, mortgages,etc., the attributes
used aremainly the demographiccharacteristics of the consumerand
the type/value of thecollateral offered. Examples ofthese
attributes include thecustomers’ occupation, maritalstatus, age,
education,monthly net income, etc. The personal characteristics
ofcustomers provide an indication about their ability torepay their
obligations to the bank, whereas theinformation about the
collateral offered usually providesan indication about their
willingness to repay. To illustratethe latter, the Loan-to-Value
ratio is reported by manypractitioners to be an important variable
in scoring modelsfor mortgage applications.
On the other hand, for the small business segment,the attributes
used in scoring models include thedemographic characteristics of
the owner, qualitativeinformation of the business, such as the age
of thecompany, its industry, etc. and information about
thecollateral offered. A number of studies have confirmedthat the
demographic characteristics of the owner ofa small business are
more suitable than the oftenunreliable financial data of the
business itself, in theassessment of its creditworthiness. The
principle hereis that individuals that repay their debts are likely
torun small businesses that also repay their debts.
Customers’ attributes are input into the appropriatescoring
model, depending on the product requested .The scoring model then
evaluates the creditworthinessof the customer, and assigns him a
score, In general,the higher the score obtained, the higher is
thecustomers’ presumed ability to serve their obligations.A crucial
decision banks then have to take is to definethe minimum score a
customer has to achieve in orderfor his application to be
approved.
An important characteristic of scoring models isthat they are
susceptible to population drift. Thisphenomenon is the tendency of
the attributes ofthe population to evolve over time, such as growth
inthe income level of consumers, which, as a result,reduces the
accuracy of the models. Hence, scoringmodels need to be constantly
redeveloped – aroundevery 18 months to 2 years, to overcome this
driftin the population and maintain the accuracy in theassessment
of credit risk.
Credit scoring models for retail and small businessesnot only
provide an effective way of processing alarge number of
transactions, but also, if developedproperly, an accurate
assessment of credit risk. However,reliance on the credit
assessments of scoring modelsover time should only be placed when
their accuracyis closely monitored. The general principle is that
themore confidence banks place on their scoring models,the more
time and effort they should spend monitoringtheir performance.
A crucial decision banks then have to take is to define the
minimum score a customer has to achieve in order for his
application to be approved.
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13
Creation of a “Code of practice on Switching Personal
Accounts”between Banks
The switching of personal accounts between Bankshas been
considered as a time-consuming andbureaucratic procedure that
“prevents” customers fromeasily switching their accounts from one
Bank toanother. The reasons for which customers may wishto switch
their accounts are: better prices (rates)offered by another Bank,
dissatisfaction with thequality of service of the current Bank,
better branchlocation, broader product-range and higher
possibilityto obtain credit from a new Bank.
Having the above in mind and after considering theEuropean
Commission’s position that: “obstacles toaccount mobility can
function as competition barriers”,the Association of Cyprus Banks
(ACB) took theinitiative to create a Code of practice on
SwitchingPersonal Accounts. The drafting of the Code waseffected by
an Ad Hoc Committee which comprisedof representatives from the
Association and it’s 10member Banks. The final version of the Code
wasapproved by ACB’s Executive Board and will beimplemented in the
second half of 2008.
The Association and it’s members developed this step-by-step
guide for both Banks and their customers, inorder to help make the
process of switching personalaccounts, quick, easy and as
hassle-free as possible.Among others, the Code clearly explains
each of thesteps involved, who is responsible for them, as wellas
the time limits of each procedure.
The Code’s main provisions are as follows:
Scope: The Code covers Current accounts, Noticeaccounts, Savings
accounts and (expiring) FixedDeposits belonging to physical
persons. It does notcover accounts bearing Overdraft facilities,
guaranteesor any form of commitments.
Time limits: The whole account switching processmust be
completed within 15 working days.Furthermore the “Former” Bank must
provide to the“New” Bank all details relating to customer’s
DirectDebits and Standing Orders within 3 working days(from the day
the customer signs the New Bank’sAccount Transfer Form). In order
to facilitate the wholeprocedure, the Code also includes specimens
of thetwo documents that must be completed by the 3involving
parties, i.e. the Former Bank, the New Bankand the customer. The
said documents are: “The
Account Transfer Form” (completed and signed by theNew Bank and
the customer) and a “List of customer’sDirect Debits and Standing
Orders” (completed by theFormer Bank in order to be submitted to
the New Bank).
Charges: The whole procedure will be effected by Banksfor the
benefit of their customers, without imposingany charges.
Participation: Apart from the 10 member Banks of theAssociation
and their customers, it is possible for otherFinancial Institutions
to participate in the Code,provided that they have presence and
operations inCyprus and are offering the above-mentioned
accounts.
The creation of the Code is expected to have a positiveimpact on
both Banks and their customers, for thefollowing reasons:
- It will facilitate the account switching process andwill
enable customers to save time and avoidmistakes or
misunderstandings with their Banks.
- It will boost competition between Banks, whichin the long term
may lead to the offering ofmore choices to customers, the reduction
of pricesand the provision of higher quality products
andservices.
- It will enhance the relationship between Banksand their
customers, as it promotes transparencyand mutual understanding
between the two parties.
Marios NicolaouSenior Officer
Payment Systems
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14
After its independence in 1960, Cyprus recognisedthe political,
economic and social importance ofShipping. Since then, Cyprus
managed to attractshipping entrepreneurs and to develop the island
intoa fully-fledged international shipping centre combiningboth a
sovereign flag and a resident shipping industry,which is renowned
for its high quality services andstandards of safety. The Cyprus
Flag today is classifiedas the 10th largest merchant fleet globally
and the3rd largest fleet in the European Union.
Cyprus is considered to be the largest third partyshipmanagement
centre in the European Union, andone of the largest in the world.
More than 130shipowning, shipmanagement and shipping
relatedcompanies maintain fully-fledged offices and conducttheir
international activities from Cyprus. The vastmajority of these
companies are located in Limassoland are Members of the Cyprus
Shipping Chamber, thetrade association of the Shipping Industry in
Cyprus.
The contribution of Shipping to the economy of Cyprusis
estimated at 4% of the Gross Domestic Product (GDP)and latest
national statistics indicate that receiptsfrom the Maritime
Transport Sector in 2007 reachedapproximately 1 billion Euro.
Another importantcontribution of the Cyprus Shipping Industry is
thatit has created many employment opportunities forCypriots. The
total number of gainfully employedpersons by Cyprus shipping ashore
is approximately4,000 and more than 25,000 seafarers of
differentnationalities are employed onboard Cyprus flagships at any
one time.
Cyprus Shipping, especially now with the recentaccession of
Cyprus to the European Union, has a verypromising future with more
high quality ships expectedto register under the Cyprus Flag and
more shipowning,
shipmanaging and shipping related companies fromboth the EU, as
well as outside the EU, expected toestablish their business
operations on the island.
Further, since the accession of Cyprus into the EU,as well as
more recently the beginning of Turkey’sEU accession negotiations,
the long standing “TurkishEmbargo” affecting Cyprus related
Shipping has gaineda new dimension, whereby Turkey is expected to
liftits Embargo on Cyprus Shipping within 2009 and applythe Customs
Protocol.
In a very fast-pace industry such as Shipping wherecompetition
is fierce and the business environmentis changing rapidly, Cyprus
must make sure that thefollowing significant requirements are met
on acontinuously basis:
ñ A competitive Taxation System for Shippingcompanies, and
ñ A fast and efficient Government Service.
Cyprus, to a large extent, managed to meet the aboverequirements
but still there are few important pendingissues that Cyprus needs
to resolve in order to maintainits position in the league of
important maritime centres.
With respect to taxation of shipping companies, alltaxation
systems of EU countries will come underrevision the next few
months. The Cyprus Government,with the close cooperation of the
Cyprus ShippingChamber, already produced the necessary
legal,financial and policy arguments in order to convincethe EU to
continue approving the tax system appliedin Cyprus today for
shipowning and shipmanagementcompanies. Also some additional
financial incentivesto act as a “counter-balance” measure against
theTurkish Ban on Cyprus ships were included..
As regards the service offered by theGovernment, Cyprus made
aconsiderable improvement over thelast few years. However, in this
fastgrowing and changing environmentthe Cyprus Government needs to
createa Permanent Directorate on Shippingat the Ministry of
Communications andWorks, in order to create the necessarymechanism
of even faster decision-making in effectively tackling thevarious
issues affecting our Industry.
Cyprus Shipping can therefore belabelled, as the “blood-life” of
theCyprus Economy.
The important role of Cyprus Shipping
Thomas KazakosDirector GeneralCyprus ShippingChamber
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