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.

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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

info@acb.com.cy

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R.P.M LITHOGRAPHICA LTD

DDeessiiggnn

CHROMASYN - Alexia Nissiforou

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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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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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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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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.

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.

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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

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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.

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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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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

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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- 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

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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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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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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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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E-mail: info@acb.com.cywww.accb.com.cy