Panayiotis Rougalas
While lending increasingly grows in a demanding environment with geopolitical developments affecting the region and by extension Cyprus, the boundaries between traditional and shadow banking are becoming more and more blurred. Total loans in May 2026 recorded a net increase of 260.3 million euros, compared to a net increase of 40.5 million euros in April 2026, while the annual rate of change of total loans reached 12.6%, compared to 12% in April 2026. The balance of total loans in May 2026 reached 28.1 billion euros.
At the same time, a significant increase in the funding of other financial schemes by traditional banks is recorded in Cyprus. The latest figures show that these fundings, also under the pressure of an admittedly saturated market, in May 2026 reached 10% of total loans, compared to 7.6% in the same month last year. These do not only include, if we may use the expression, shadow banking, but are a significant indication of the picture. 40.4% of these credits were made within Cyprus, with another 48.6% having been granted to legal residents of the rest of the eurozone. The amount, combined with supervision, is not enough to cause a banking problem, but it is enough to affect credit expansion and reduce banking intermediation during an episode.
The Central Bank demonstrates that loans to Cyprus residents showed an increase of 173.7 million euros. More analytically, loans to households and non-financial corporations increased by 52.7 million euros and 63.0 million euros respectively. Loans of the remaining domestic sectors showed a total increase of 58 million euros. The general swelling of shadow banking worsens the structural contradictions in the global economy. Assets are valued high in a period of compressed growth, trade turmoil, energy discomfort and, worst of all, rising public debt which shows that it is reaching a point of correction.
Many means of absorption
As a small, open economy Cyprus has many open channels for pressures to spread, such as tourism, services, shipping, and Foreign Direct Investments, but also has many ways to absorb them. Clearly more resilient, more ready, with better supervision and healthier banks compared to the 2008 to 2012 period, Cyprus can manage a shake-up in international markets.
A significant insurance premium is fiscal discipline. The reduction of public debt and the maintenance of surpluses have created fiscal space so that the state can support the economy without its access to markets being questioned. This margin cannot, however, be conquered by inelastic expenditures, which increase faster than revenues and which trap the executive power in a pro-cyclical policy.
wThe rapid development of explicit policy and strategic goals regarding Foreign Direct Investments will also be of critical importance for the adoption of measures to prevent a halt in FDI, or worse, a reversal under such conditions. Especially if one considers the interconnection of our FDI financing from shadow banking in sectors such as fintech and forex, the immediate steps that must be taken concern precisely their organic dependence on the domestic economy, with the aim of increasing the cost of their exit from Cyprus.
Private high
As domestic supervisors record in the June economic bulletin, during 2025, the non-financial private sector debt-to-GDP ratio continued its downward trend, reflecting ongoing deleveraging combined with the resilience of economic activity. The total debt ratio decreased to 162% in 2025, from 173% in 2024, mainly due to the increase in nominal GDP and write-offs of Non-Performing Loans. The de-escalation was more intense in the debt of Non-Financial Corporations (NFCs), which stood at 107% of GDP, while household debt decreased to 54%, slightly below the EU indicative threshold.
As they point out in the Bulletin, adjusted for the effect of special purpose entities (SPEs), NFC debt stood at 66% of GDP, significantly lower than the relevant threshold, while the total ratio excluding SPEs decreased to 120%, from 129% in 2024. Despite the significant de-escalation from the peak levels of 2015, the relevant ratios continue to be affected by accounting factors linked to the recording of loans held by credit acquisition companies at their nominal value. This practice leads to an overestimation of recoverable debt and restrains the further reduction of the ratio, despite the improvement of the underlying figures, they explain.
