The prospects of Cyprus as a fund industry hub are brighter than ever, albeit there is still way to go. The country has been moving towards the right direction in recent years and lately, within 2018, it has pushed further on certain crucial fronts introducing new fund-related tools and structures in the law, taking critical steps towards resolving long-standing issues at the banking system and combating financial crime harder.
The main issue at the banking system has been the high levels of non-performing exposures (NPEs), which have been of systemic nature and have hindered the performance of banks in recent years. According to data compiled by the Central Bank of Cyprus, the level of NPEs varied from €28bln on 31 December 2014 to €21bln on 31 December 2017. As a percentage of total gross facilities in the system, NPEs varied from 47.5% on 31 December 2014 to 42.5% on 31 December 2017. Bold actions have been taken by government authorities in the second quarter of 2018 which will reduce the NPEs in the system significantly, by approximately €7bln or 33%.
At the same time, laws that have been introduced pave the way for further decongestion of the system from the burden of NPEs. As a result, the biggest bank on the island sold recently a portfolio of loans worth €2.8bln, adding to the dramatic decrease in NPEs of the system. In other words, since the beginning of 2018, about half the NPEs have been removed from the system.
One has to acknowledge that, following recent steps, public debt to GDP will increase, but it is expected that this is a short term cost which will not reverse the downward trend of public debt to GDP of recent years. Consequently, the country may be coming closer to accomplishing an investment grade rating.
On a related note, combating financial crime has been a main objective of the authorities in recent years. This initiative is spearheaded by local regulators and the banking industry and aims at a healthier banking system and economy. It is not an easy task with thousands of bank accounts being forced to close in recent years, but it could be a necessary and unavoidable pain. The professional services industry is in a transformational stage, focusing increasingly on substance and physical presence of clients.
Last but not least, new tools and structures for the fund industry are being introduced by new laws. Already the new Registered Alternative Investment Fund (RAIF) regime has been introduced aiming at slashing time to set up a new Alternative Investment Fund (AIF) managed by an AIF Manager, alongside tax reforms such as the introduction of a new regime of personal taxation for certain fund or fund manager employees and the treatment of each investment compartment of a fund as a separate tax payer. The framework for AIFs of Limited Number of Persons has been enhanced based on experience of recent years while additional reforms are expected soon such as the introduction of the fund administration framework.
Having in mind the pieces of the puzzle above, it is time to embark on an even more convincing marketing campaign addressed to the global and European fund industry, stressing the merits of Cyprus as a fund hub while at the same time intensifying efforts to attract global custodian banks to Cyprus. A great effort is already under way to this end while the ingredients of success are now in place.
by Demetris Taxitaris, General Manager, MAP S.Platis