Cyprus household borrowing rises as Middle East crisis weighs on businesses

Cyprus banks expect household borrowing to rise further during the third quarterCyprus banks reported stable lending standards and stronger household demand for credit during the second quarter of 2026, while uncertainty surrounding the Middle East crisis weighed on some business investment plans, according to the Central Bank of Cyprus (CBC). Credit standards for loans to enterprises and for household borrowing, including housing loans and consumer credit, remained unchanged in 2026Q2 compared with the previous quarter. The survey found that all factors affecting credit standards across the different loan categories had a neutral impact during the quarter. Banks had previously expected some tightening of lending standards, but those expectations were not realised. For businesses, lending standards remained unchanged for both small and medium-sized enterprises (SMEs) and large companies, continuing at the relatively tight levels seen since the second quarter of 2024. Credit standards for housing loans have likewise remained unchanged since the first quarter of 2024, following tightening in earlier years. Standards for consumer credit and other household lending have also been unchanged since the first quarter of 2024. Banks expect these lending standards to remain stable during the third quarter of 2026 for both businesses and households. The overall terms and conditions attached to new business loans also remained unchanged during the second quarter, following tightening in the previous quarter. Individual terms and conditions for new business lending were broadly stable, while the factors affecting those terms also had a neutral impact. For new housing loans, overall terms and conditions remained unchanged for a fifth consecutive quarter, although lending rates increased partly because of upward adjustments to European Central Bank policy rates. The remaining terms and conditions on housing loans were unchanged, with the factors affecting them also having a neutral impact. Terms and conditions on new consumer credit and other household lending were similarly broadly unchanged for a fifth consecutive quarter. The CBC said the continued stability in consumer lending conditions pointed to sustained momentum in private consumption, which remains supportive of economic activity. The share of rejected loan applications, including both formal and informal applications, also remained unchanged across all loan categories compared with the previous quarter. The stable rejection rate was consistent with the wider stability in credit standards. On the demand side, overall business demand for loans remained unchanged during the second quarter, despite lower financing needs related to fixed investment. The decline in demand for loans for fixed investment was mainly driven by large companies and was concentrated in the tourism and energy sectors. In tourism, the lower demand may partly reflect increased uncertainty linked to the continuing crisis in the Middle East. In the energy sector, weaker demand was associated with investment in renewable energy projects and factors affecting their expected returns. These factors included constraints on electricity grid capacity to absorb the energy generated, according to the survey. Demand for loans from SMEs, however, remained unchanged during the quarter. Household demand moved in the opposite direction, with demand for housing loans increasing further during the second quarter. The increase was stronger than banks had anticipated in their April 2026 survey, when they had expected household demand for housing loans to remain unchanged. The CBC said stronger demand was supported by the general level of interest rates and improved prospects in the housing market. The increase appears to have reflected demand both for owner-occupied homes and for residential properties being purchased for rental purposes. Demand for consumer credit and other household lending also increased, marking a third consecutive quarter of growth. This again exceeded banks’ expectations, which had pointed to unchanged demand in the previous survey. The increase was attributed to higher household spending on durable consumer goods and stronger consumer confidence. The continued rise in demand may also reflect favourable economic conditions for households, including the resilience of the labour market. Looking ahead, banks expect business demand for loans to remain unchanged in the third quarter of 2026. They expect household demand, however, to continue increasing for both housing loans and consumer credit and other lending. The survey suggests that Cyprus’s lending market therefore entered the second half of 2026 with little change in the availability or overall conditions of credit, but with a clearer divergence between businesses and households. While companies remained cautious about borrowing for investment amid geopolitical and infrastructure-related uncertainties, households continued to show stronger appetite for both property-related borrowing and consumer finance.