Building Household Financial Resilience in Cyprus: The National Strategy for the Promotion of Financial Literacy
Central Bank of Cyprus Premises
18 September 2024
Honourable Member of Parliament, distinguished guests, esteemed colleagues, ladies and gentlemen,
It is with great pleasure that I welcome you to the Central Bank of Cyprus for today’s international event. We are delighted to host the Research, Policy and Practice session of the Centre for Economic Policy Research European Conference on Household Finance of 2024, organized these days in Cyprus. The theme of our session, “Empowering Households in their Financial Behaviour”, is both timely and globally relevant. Empowering households in their financial behaviour constitutes a multifaceted and long-term set of challenges for both researchers and policy makers. These challenges include maintaining a balanced, effective and efficient regulatory framework to protect consumers, ensuring broad access of the wider public to financial services and promoting financial literacy and education. Successfully addressing these issues, is necessary for navigating the complexities of the modern financial landscape. Our distinguished panellists will discuss these topics from an international perspective.
In my introductory address, I will focus primarily on one key challenge we face in Cyprus: building household financial resilience by advancing financial literacy and education particularly through the implementation of our National Strategy. In addition, I will share some preliminary conclusions from recent work conducted at the Central Bank of Cyprus, underscoring the critical importance of both financial literacy and regulation, not only to households but also to financial stability of the country.
At the Central Bank of Cyprus, we are striving to be a centre of excellence that supports the well-being of our citizens and our society. Financial literacy is a fundamental prerequisite for financial well-being and household resilience. It encompasses the ability to understand and effectively apply a range of financial skills, including personal financial management, budgeting, and investing. In today’s increasingly complex world, where financial products and services are more diverse and digitalised, the need for financial literacy has never been greater.
Cyprus has faced significant financial challenges, from the stock market crash in 1999-2000 to the 2013 banking crisis, underscoring the critical importance of financial literacy. A financial literacy survey conducted in Cyprus in 2023 in collaboration with the OECD confirmed significant gaps in financial literacy across various demographic groups, consistent with findings from a 2018 Central Bank of Cyprus survey. These results emphasise the urgent need for targeted financial literacy initiatives to enhance the financial well-being and resilience of the Cypriot population.
The 2023 survey results revealed that the average financial literacy score among the population aged 15-79 was 56 out of 100, with only 17% of respondents achieving the basic financial competence benchmark level of 70 points. This indicates a widespread deficiency in essential financial skills, which can have serious implications for household resilience.
Disparities in financial knowledge are particularly concerning, with individuals lacking a high school education scoring an average of 49 out of 100, compared to 61 among those with tertiary education. This gap exacerbates economic inequalities and increases vulnerability to financial shocks, particularly among lower-income and less-educated individuals.
Moreover, the results of the survey align with other studies, confirming that financial resilience in Cyprus, that is the ability of the households to cope with unexpected expenses or income disruptions, is notably low. Only 22% of the population reported they could handle a major expense equivalent to their monthly income without borrowing or seeking help from family and friends. Additionally, 38% of respondents indicated that their income did not cover their living expenses at some point in the previous 12 months.
These results, suggest that many Cypriots are ill-prepared to manage their financial affairs effectively. This lack of preparedness can lead to poor financial decisions, increased debt, and reduced financial resilience, especially during adverse economic downturns or personal financial crises. Addressing these challenges is crucial, but it is equally important to ensure that consumers are shielded from unfair practices and empowered by clear, balanced and effective regulations.
Effective consumer protection frameworks must complement the efforts to advance financial literacy in Cyprus, ensuring that individuals are not only well-informed but also safeguarded against risks, such as fraud or unfair practices, that threaten their economic interests. Also, market imperfections, such as information asymmetry, can leave consumers vulnerable, particularly in complex financial transactions like loan agreements. Loan origination, the process by which lenders assess the creditworthiness of potential borrowers before approving loans, plays a critical role in this context. Borrowers may not fully understand the terms, conditions or long-term implications of their financial commitments, leading to decisions that could undermine both household well-being as well as broader economic stability.
The Central Bank of Cyprus recognises its role in this area. Following the 2013 financial crisis, we implemented a series of banking regulations and reforms designed to stabilise the financial system and prevent future crises. These measures were part of the broader Economic Adjustment Programme agreed upon with the Troika, including a comprehensive framework for resolving non-performing loans, mandating rigorous loan origination processes, and establishing specialised units to manage distressed assets. Additionally, we have strengthened oversight to curb unfair practices and minimise the risk of consumers being misled or exploited.
To underscore the importance of combining financial literacy initiatives with effective regulatory frameworks, a recent Central Bank of Cyprus study explored the link between financial literacy and financial stability, in two different regulatory regimes, a relaxed one prior to 2013 and a robust one, after the 2013 and the creation of the Single Regulatory Mechanism in 2014. Drawing on data from the Household Finance and Consumption Survey (HFCS), the study empirically revealed that higher financial literacy reduces loan defaults, emphasising the role of financial education in mitigating credit risk and enhancing financial resilience. Furthermore, the study showed that post-2013 regulatory reforms, particularly those related to loan origination, appeared effective in reduced loan arrears, demonstrating the importance of integrating prudent regulation with financial literacy efforts. The enduring impact of these regulatory measures was also evident during the COVID-19 pandemic and the challenging environment of high inflation and geopolitical turmoil. Despite these economic disruptions, Non-Performing Loans in Cyprus continued decreasing, underscoring the resilience of the financial system. This evident resilience highlights the critical role of robust regulation resulting in best banking practices and the further strengthening of financial education.
Against this background, the Central Bank of Cyprus, in collaboration with key stakeholders, that is, the Ministry of Finance, the Ministry of Education, Sports and Youth, the Exchange and Securities Commission and distinguished academics, developed a comprehensive National Strategy for the Promotion of Financial Literacy, that was endorsed by the Council of Ministers in June 2022. As of June 17, 2024, the Cyprus Financial Literacy and Education Committee (CyFLEC) has commenced its activities and is fully operational, undertaking the implementation of the National Strategy’s goals and objectives.
The Governing Board of CyFLEC has already approved the formation of four Thematic Project Teams, each dedicated to a key area of financial literacy: first, the ongoing evaluation and revision of the National Strategy, second, the integration of financial literacy into school curricula across public and private institutions, third, the promotion of lifelong learning with an emphasis on vulnerable groups, and fourth, the enhancement of digital financial literacy. On the occasion, I would like to commend the Ministry of Education, Sports and Youth for taking a crucial first step in the context of the second initiative above by introducing financial education interventions for third graders in high schools this academic year.
Dear friends,
The success of this strategy relies on the active participation and support of all stakeholders—government agencies, educational institutions, the private sector, and, most importantly, the citizens of Cyprus. As the Greek Nobel Price Winner in Literature Odysseas Elytis wrote “για να γυρίσει ο ήλιος θέλει δουλειά πολλή”. Literally, it means "for the sun to turn, it takes a lot of work." Metaphorically, the sun turning symbolizes significant change or progress, whether on a personal, or societal level. Indeed, the journey to creating a financially educated society is long and filled with challenges. It demands time, dedication, and consistent effort. Each step we take today lays the foundation for a stronger and more resilient future for all.
In closing, I would like to express my deep appreciation to everyone involved in the development and implementation of this National Strategy. The work we are doing through CyFLEC is not just about improving financial literacy—it’s about fundamentally strengthening the financial resilience of households across Cyprus. This is directly aligned with the broader objectives of the Centre for Economic Policy Research Household Finance initiative, which seeks to understand and improve the financial outcomes for households.
Let us continue working together to build a society where every citizen is financially literate and resilient, capable of effectively managing debt, investing wisely and weathering economic shocks, thereby securing a more stable and prosperous future for all.
Thank you.