A significant share of Cypriot wealth continues to languish in low-interest bank deposits, despite alternative investment options, according to senior investment specialist at Athlos Capital Phanos Vladimirou.
He also attributed the persistently low interest rates on bank deposits in Cyprus to banks’ excess liquidity, low competition, and a lack of financial literacy among the population,
“Cypriot banks have some of the highest liquidity ratios in Europe,” Vladimirou explained in a recently published analysis piece.
“This means that the volume of deposits in the domestic banking system is quite large compared to the options available for banks to channel this liquidity,” he added.
“As a result”, he continued, “banks do not have a pressing need to attract new deposits, which is why they keep interest rates low, even if it risks losing some of their existing deposits”.
Vladimirou also noted the impact of a less competitive banking sector on deposit rates.
“The low level of competition in the Cypriot banking system plays a crucial role, he stated.
Moreover, he said that “with only a few banks holding a large share of the market, there is less pressure on them to offer higher interest rates to retain customers”.
He mentioned that “this allows them to keep deposit rates low without significant outflows to competitors”.
Another significant factor is the nature of deposits in Cyprus, many of which come from private individuals.
Vladimirou pointed out that these deposits tend to be “sticky,” meaning they are less likely to be moved from one bank to another.
“In Cyprus, the reluctance to move deposits is even more pronounced due to the low level of financial literacy,” he said.
“Many depositors are unaware of the alternatives available to them,” he added.
He explained that “even those who are aware often face barriers such as high fees or large minimum investment amounts imposed by financial institutions, which prevent them from pursuing other options”.
Despite the low interest rates, he continued, Cypriots continue to hold a substantial portion of their wealth in bank deposits.
However, Vladimirou stressed that there are alternative investment options available, especially in the current environment of high interest rates, noting that one such option is government bonds.
“Government bonds are one of the most common and safe alternatives to bank deposits,” he said.
“These are short-term securities, with durations of up to 12 months, issued by countries like Germany, France, and Cyprus,” he added.
These bonds, he said, are” widely regarded as one of the safest investment options”.
He stated that “currently, they offer attractive yields, often exceeding 3 per cent annually, and can be liquidated at any time before maturity”.
To highlight the potential of government bonds, Vladimirou drew attention to the situation in Greece.
“Greek and Cypriot bank deposit rates are similar,” he said, noting that “in the latest auction of three-month Greek government bonds, the yield was 2.84 per cent, while Cypriot bonds offered a yield of 3.4 per cent”.
He pointed out that despite Cyprus having a higher credit rating and better economic outlook, including a fiscal surplus and lower debt-to-GDP ratio, Cypriot bonds offer higher yields.
“The reason for this disparity is the massive demand from Greek private investors for Greek government bonds, which has driven down their yields,” Vladimirou said.
“This demand is primarily due to better awareness among Greek investors about their options and easier access to these financial products compared to their Cypriot counterparts,” he added.
Moreover, Vladimirou said that while there is a lack of awareness in Cyprus about these safer and more profitable alternatives to bank deposits, change is on the horizon.
“The positive aspect is that we are gradually seeing a change in attitude in Cyprus,” he concluded.
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