Since 1974, political stability in Cyprus has been tarnished by continued struggles between Turkish and Greek interests. In turn, its progression as a financial centre has been halted by the perception of it as a tax haven for money of questionable origin. But in the past few years, Cyprus has had good reason to celebrate a marked departure from these images, particularly with its accession to the EU due in May.
"For our accession to the EU, we had to amend our legislation in many areas and abide to stricter regulations," says Haris Hambakis, manager of private banking at Laiki Bank. "Despite the September 11 shock and the changes that came with it, which affected the financial world, we managed to sustain our growth through a rigorous promotion of our services."
Louis Pochanis, private-banking manager at Bank of Cyprus, says that Cyprus cannot be considered an offshore centre now because it has to comply with EU directives.
"Previously the tax rate for offshore companies was 4.25%, while now with the new tax legislation, it is 10% for all companies, so there is no tax discrimination any more," Pochanis says.
Respondents to Euromoney's survey of private banks published last month ranked Bank of Cyprus as the island's top private bank, followed by Alpha Finance and Cyprus Popular Bank.
Regulations tightened
During the 1990s, its relaxed regulatory systems and attractive tax rates drew in many Russian investors. Its offshore sector was often accused of being a financial centre for shady Russian companies involved in transfer pricing, buying Russian production cheaply and reselling at world market prices for a hefty profit.
Cyprus had to undergo a rigorous change in order to be viewed as a respectable and reputable business and financial centre. Attracting more sophisticated clients meant that the island had to establish a comprehensive and legitimate private-banking system.
Cyprus International Trusts is a new vehicle often used by high-net-worth individuals to take advantage of the new tax system. Hambakis believes this has been a major force behind the continued growth of this sector. "Clients are beginning to shop around more and see the benefits of our system," he says.
Private-banking divisions of domestic banks have grown substantially because of partial lifting of exchange controls, allowing clients to start investing abroad. According to figures from the Central Bank of Cyprus, at the end of 2001 the total assets for international banking groups operating in Cyprus amounted to e11.5 billion, compared with e25.5 billion for the domestic banking system. Furthermore the contribution of the financial sector is estimated at 7.5% of the economy for 2000, compared with 4.9% in 1995, with the banking sector dominating.
Inflow of foreign currency
Banks' foreign currency business has also expanded rapidly in recent years, with an annual growth rate of 20%. According to research from the Central Bank of Cyprus, this is mainly attributed to the rapid growth of foreign currency deposits from both customers and foreign banks. At the end of 2001, foreign currency deposits amounted to the equivalent of e7.1 billion, representing 36% of total deposits.
Alliances with big players have enabled private banks in Cyprus to embrace open architecture. "We formed a number of strategic alliances in the areas of mutual funds, structured products and hedge funds," says Hambakis. "Notable examples are Man Group, Invesco, HSBC and this strategy has paid significant dividends since it has made it easier to attract clients from the heavyweights of the industry."
Cyprus's location near the Gulf has encouraged private banks to expand their client base in that area. Increasingly, wealthy Middle East individuals are parking funds in Cyprus.
Longstanding experience and knowledge of the Russian market has proved an advantage for private banks in Cyprus competing against growing foreign interest in Russia. "However, our growth rates in this area, which are still extremely high, do not compare with our rate of expansion with other European clients," says Hambakis.
Although the Investec/Bishops deal is believed to be the first of its kind, relationships between financial institutions and South African private schools are not uncommon. Retail banks often sponsor golf days and speech days. An increasing number of financial institutions, however, are becoming involved in state-run schools. Investec's social responsibility programme is starting a rural school project with farm owners and the government. "We will be working together to set up schools in the farmlands outside main cities for the children of labourers," says Barr. "At the moment, such children attend farm schools, which tend to be sub-standard. Here the relationship with Bishops will further bear fruit, as pupils and teachers at Bishops intend to assist at the new schools."