The Liberalization of the Interest Rate and Related Matters Law No. 160(I) of 1999 which came into force in 2000 gave the right and absolute freedom to any banking institution to charge its customers with any increased percentage rate (also known as default interest rate) on overdue loan installments as a result of a breach of the terms of such facility.
Of course, the phenomenon of this liberalization was very welcomed and exercised by most banks in Cyprus. But it didn’t stop there. The banks also imposed higher interest rates than what was agreed initially in the contract with their clients. Indeed, the standard loan agreement form contained a particular clause which gave the banks the unilateral right to increase the basic interest, the margin or the default interest if at their discretion the market conditions and the value of money were altered. Such an alteration to the increase of the interest rate was considered by the courts legal hence the borrower was bound.
This absolute freedom resulted to a disparity on the default interest rate percentage among banking institutions in Cyprus and to the application of interest rates which were considerably above the initial loan interest rate.
The Cyprus Parliament responded to the voice of criticism and introduced certain changes to the Law which aim to regulate and protect the rights of the debtors by prohibiting the increase of the agreed interest rate and the increase of the default interest rate other than rate specified in the Law.
The new provisions of the law on the increase of interest rates and default interest rates are the following:
- For all credit facilities provided by a banking institution operating in Cyprus, which had not been terminated prior to 9 September 2014 or were concluded after the said date, any default interest rate above 2% is prohibited.
- For all credit facilities provided by a banking institution operating in Cyprus, which had been terminated on or prior to 7 May 2015, any default interest rate above 2% creates a rebuttable presumption that the interest does not represent the true loss of the banking institution and it is for the banking institution to prove that any such default interest represents its true loss. If the banking institution cannot prove such loss, then any person who has already paid for default interest rate (in excess of 2%) may claim damages for the amount paid and the banking institution has the obligation for restitution or pay compensation to the person who has suffered damage as a result of such charge.
- Any contractual term which gives to a banking institution the right of unilateral increase of the interest margin in a credit facility agreement which is valid on 9 September 2014, cannot be enforced after the said date.
- It is prohibited to a banking institution to include in its standard form agreements any term which confers to the banking institution the unilateral right to increase the interest margin in a credit facility agreement.
