21 Aug 2016 Are Cyprus SMEs being ripped off by banks?

Lending rates in Cyprus have been tumbling in recent years. In December 2007, a month before Cyprus adopted the euro, a small business would pay an average interest rate of 6.51% on loans of up to €1 million. Today, the same business would pay just 4.23% for a new loan.

The pattern is similar for mortgages. In December 2007, you would have paid 5.70% for a floating-rate or short-term, fixed-rate housing loan. Today, you pay on average 2.99%.

Notice, however, that interest rates on housing loans have come down by 271 basis points since late 2007, whereas small business loans have dropped by only 228 basis points.

Moreover, whereas the rate on housing loans has been declining all year, the rate for business loans under €1 million rose from a historic low of 4.14% in March to the above mentioned 4.23% in June.

Cypriot borrowing rates also compare badly with the rest of the eurozone. Here I am grateful to Emmanuel Schizas (@eschizas) for helping me find the dark corner of the European Central Bank (ECB) website in which the statistics were hiding.

According to the ECB, Cypriot borrowing rates for non-financial corporations (including loans over €1 million) were 4.19% in June, compared with 3.12% for Portugal, 2.73% for Ireland, 2.15% for Italy and just 1.90% for the eurozone as a whole. The only country with higher borrowing costs was Greece, with a rate of 5.01%. Cypriot banks also make more money from lending than a number of other eurozone banks. Banks’ lending margins for loans to non-financial corporations – a measure of lending profitability – rose to 2.34% for Cyprus in June, from 2.08% in March.

This was not the highest margin in the eurozone. Greece topped them all with a margin of 3.99%, while Portugal took 2.63% and Ireland 2.48%. The ECB does not give a eurozone average for this figure, but to give you an idea, the margins were just 1.35% in Germany and a tiny 0.54% in Italy.

Why are Cypriots paying more?
There are a number of reasons why Cypriot businesses are paying more for their loans than all other eurozone countries except Greece.

The first, of course, is risk. The non-performing loan (NPL) ratio for SMEs in Cyprus was 61.2% in May according to Central Bank data, compared with an overall average of 49%.

Another is lack of competition. Bank of Cyprus reported last week that it has 42% of the loan market. That makes it the price-setter in a small market. Another reason is lack of alternatives. With a tiny stock exchange and no other options avai-lable, companies in Cyprus have no other option but the bank.

Whatever the reasons, it is not good for an economy where SMEs bore the brunt of the recent downturn. According to the 2014 Census of Establishments, 96% of companies in Cyprus had fewer than 10 employees. In other words, pretty much everyone is paying more for loans than elsewhere.