How Cyprus banks harm society and the environment

Lending model strongly favours richer property owners and developers and large corporationsMuch has been written by this author on how the policies of the Cyprus government have contributed to the widening income and very high wealth inequalities of households and on related social problems in the Republic. But, with less having been published on how Cyprus banks with their policies and activities are contributing to wealth and income discrepancies, that in turn are causing harm to society, the following text mainly addresses this issue. In addition, as living conditions of households are not only determined by incomes and wealth, but importantly by the quality of the natural environment in which they live, the impact of the policies of Cyprus banks on the natural environment are discussed as well. Social harm The traditional collateral-based lending of Cyprus banks strongly favours richer property owners and developers and large corporations, that have much greater access to affordable loans resulting in a widening of wealth and income inequalities. In addition, a not insignificant proportion of the lending of banks involves the charging of unaffordable interest and hidden fees on household loans, that lock borrowers into permanent debt and often losing mortgaged homes. In effect with unaffordable loans, wealth is drained away from lower-income earners, further deepening wealth inequalities. And wealth and income inequalities in turn directly erode social cohesion by fracturing public trust in institutions and fellow citizens and reducing social mobility. Undeniably, great wealth concentration, particularly in property in Cyprus, where the richer 10 per cent of households own 67 per cent of the country’s wealth, is making basic needs like decent affordable housing increasingly unattainable for large segments of the population, resulting in a fragmenting of society. Furthermore, the less wealthy are subject to lower social mobility in that they have unequal access to quality education, healthcare and decent jobs, entrenching them in disadvantaged groups and reinforcing social divides. And more generally, there is the prospect that the prevalence of high income and wealth inequalities in Cyprus could lead to higher rates of crime and violence that would impact across society. Environmental harm Cyprus banks contribute to degrading the natural environment primarily through their indirect financing of projects and activities in the construction/property development and tourism sectors of the economy. Government permits are readily given for the bank-financed construction of residential and commercial buildings and hotels in open fields and coastal areas that replace natural areas with concrete structures and polluting vehicles. Property developers and waste disposal plants frequently add further damage to the environment by blatantly violating building and environmental protection regulations with the government doing little to penalise such infringements. Most notably, Cyprus banks play a key role in generating “consumer-driven pollution” in that these banks have extended loans and provided financial services to a rising local population. When increased access to credit is channeled into non-green consumer goods, such as motor vehicles and certain industrial products, like cement, it can boost fossil fuel energy demand and cause ecological degradation. In addition, although major banks subscribe to a ‘Green Wealth’ financing framework, their rigid lending policies based on high collateral requirements have restricted the financing of investments in producing and storing renewable energy, a factor that has kept the country heavily reliant on the import of polluting fossil fuels. While limited bank financing programmes have strictly covered the cost of solar panel installation, the financing of integrated battery storage systems has mainly been excluded. Furthermore, banks have viewed independent renewable energy developers as high-risk borrowers, owing among other things, to the absence of guarantees that additional energy production can be loaded onto and absorbed by the isolated and antiquated electricity grid of Cyprus. Policy recommendations Against this backdrop of a widening of stark wealth and income inequalities and related social problems as well as a deteriorating natural environment, a compelling need exists for fundamental changes and reforms in the policies of the government and banks. These policies should start with profound changes in the taxation of and bank lending policies toward the property sector. Tax rates should be raised in order to deter the construction of and the demand for “up-market” residential and commercial buildings including hotels. Such taxation measures should be complemented by a marked shift in the policies of banks toward lending on the basis of the repayment capability of the borrower as against the traditional practice of extending loans secured by property collateral. Furthermore, the government needs to be more sensitive in not issuing permits for the construction of properties in areas viewed as likely to be damaged environmentally. And given their holding of ESG (Environmental, Social and Governance) certification, major banks in Cyprus should do more in financing on very favourable terms the construction and purchase of social housing and local community projects. In addition, and/or alternatively, an extraordinary tax could be levied on the abnormally high profits of banks with the proceeds used for social purposes. Moreover, as outlined in previous opinion pieces, authorities need to address the main causes of the ongoing affordability crisis, namely the high prices of basic needs, particularly energy, essential food and housing, on the one side, and the relatively low incomes of many households on the other side. On the supply side, to deal with high electricity prices, Cyprus needs to modernise its aging electricity grid, expand its battery storage capacity, create a competitive electricity market, and pursue physical interconnection with other countries via economically viable projects. Implementation of these important reforms for the electricity market should induce banks to be more forthcoming in financing investments in renewable energy production and storage, enabling the increased supply of more affordable electricity to households and businesses. In the short run the purchasing power of lower income households can be elevated by various measures including providing greater income support for pensioners and other deserving social beneficiaries, raising and enforcing payment of minimum wages to employees, reducing taxes and duties on consumer products, and subsidising the costs of energy products, such as heating oil for low-income households. However, to sustain increases in the incomes of households over the longer term would require a persistent upward trend in the economy’s productivity. This in turn would necessitate the adoption of more efficient production techniques in the low productivity/wage sectors, such as construction, retail trade, and tourism/hospitality, and also a profound shift in the allocation of resources to high productivity activities like Fintech. But, with employers motivated to utilise greater automation and digital technology in their work processes and a reallocation of resources to activities requiring mostly highly-skilled staff, the structure of the labour market could be fundamentally changed with the demand for low-skilled workers reduced, and the more qualified and capable personnel being the main beneficiaries in securing employment and elevated incomes. Thus, there would be an additional challenge for the government in needing to compensate and retrain persons, who have lost out in being employed, with decent incomes following the possible restructuring of the labour market. Most importantly, in light of the problems of society resulting from government and bank policies and activities, it can’t be overstated that the Cyprus government, and banks with their ESG certifications, have obligations to protect citizens against harm, whether from socio/economic problems and/or environmental pollution.