Cash Management in the Nordic and Baltic Regions 2015

Iceland update

Published: Aug 2015

Beyond its natural beauty, Iceland can be a challenging place to thrive but the population has proved resilient through boom and bust. Although the country’s impressive 230% growth from 2001 was halted following the collapse of its banking sector in 2008, it has seen rapid growth since 2011.


Key facts

Official country name:
Republic of Iceland
krona (ISK)
Official language:
Capital city and financial centre:
Other major cities:
Kopavogur, Keflavik, Hafnarfjordur, Akureyri
Time zone:
317,351 (July 2014 est)
Population growth rate:
0.65% (2014 est)
GDP per capita (USD equivalent):
$42,600 (2014 est)
GDP real growth rate:
2.9% (2014 est)
Government type:
constitutional republic
Head of state:
President Ólafur Ragnar Grímsson
Political leader:
Prime Minister Sigmundur Davíð Gunnlaugsson
Top export partners:
Netherlands, Germany, UK, Norway, US, France
Top import partners:
Norway, US, Germany, China, Brazil, Denmark, Netherlands, UK, Sweden


Economic overview

With dramatic landscapes, a coastline spanning almost 5,000 km, geysers, glaciers and thermal springs, the fishing and tourism industries have historically driven Iceland’s economic growth. EEA membership in 1994 meant Iceland’s free market economy expanded, with growth in the software production, tourism and financial sectors. Subsequent economic reforms, deregulation and low inflation helped the country to become renowned worldwide for its prosperity, low unemployment rates and remarkably even distribution of income.

In 2006, however, after Iceland’s major banks had totalled loans and assets over ten times the country’s GDP, the crisis hit. The booming Icelandic economy was destroyed over a summer – Iceland’s three largest banks, Landsbankinn, Kaupthing and Glitnir collapsed in late 2008 and were subsequently nationalised. The country’s GDP fell by 6.8% in 2009, by a further 3.5% in 2010 and unemployment peaked at 9.4% in February 2009.

But, since 2011, the country’s GDP has been on the rise once again (2.1% in 2011, 1.1% in 2012, 3.5% in 2013). Unemployment has halved and exports are up; salaries are rising and the national debt is shrinking. However, to close the gap in the budget, almost 100 new taxes were created in the household debt relief scheme announced at the end of 2013 and the country continues to face difficult decisions to regain its credibility among international investors.

For many years, Iceland rejected the idea of joining the European Union (EU). When looking to regain economic stability – and that all elusive credibility – Iceland applied for EU membership in July 2009. Negotiations were formally started at an intergovernmental conference in Brussels on 27th July 2011. But, following a stalemate in negotiations in April 2013 Iceland’s foreign minister, Gunnar Bragi Sveinsson, announced plans to withdraw the country’s EU application, in June 2013. “We are part of Europe and want to strengthen our relationship in other ways,” he insisted. Currently, Iceland is a member of the European Economic Area, the European Free Trade Association and part of the Schengen area.

The banking sector

There are four commercial banks operating in Iceland today and eight savings banks. No foreign banks operate branches in Iceland.

Major banks Total assets (USD millions) 31st December 2013
Landsbankinn 10,008
Arion Banki 8,160
Íslandsbanki 7,527
MP Banki 526
Straumur Fjárfestingarbanki 148


After seizing control of the country’s largest three banks (then-named Kaupthing Bank, Landsbankinn Íslands and Glitnir) in 2008, the government forced the sale of each bank’s international operations to finance debt obligations and attempt to restore international confidence. Assets were transferred to the state-owned now-named Arion Bank, Islandsbanki and Landsbankinn. The outlook for their economic risk trend was revised from stable to positive in October 2014 by Standard & Poors.

To date, the banks’ main achievement has been the restricting and strengthening of the domestic loan portfolios acquired from the collapsed banks. Legacy assets were dealt with efficiently because they were bought from the old banks at heavy discounts allowing the restructuring, and subsequent revaluing, of the banks’ corporate and household corporate loan books.

The reconstruction of Icelandic banking industry post-crisis has benefitted Icelandic economy in many ways: non-performing loans (NPLs) have been sharply reduced from six years ago and capital levels are among the highest in the world. At the end of 2013, according to Iceland’s regulator, The Financial Supervisory Authority (FME), the banks’ combined capital adequacy ratio was 26.2% up from 24.8% at the end of 2012. More than 90% of this is accounted for by tier one capital.

Seðlabanki Íslands is the independent Central Bank of Iceland. One of its main tasks is promoting a safe, stable, and effective financial system.

Payments and clearing

System Clearing type Transaction type Value dates Times
RTGS system RTGS Payment amounts of at least ISK 10m Same day immediate finality 09:00 GMT to 16:15 GMT (Mon – Fri)
Netting system Multilateral netting Transaction below ISK 10m Final net settlement takes place via the RTGS system (outside of its conventional operating hours) at 16:30 and 08:30 GMT 24 hours Mon – Fri
  • Cash is still a popular payment method, but popularity is stagnating. Whilst usage of cash increased significantly when the banking crisis began (34% increase in circulation of notes and coins from 2009-2010), the cash in circulation outside deposit institutions and the central bank only increased by 1.8%, during 2013 – the smallest increase since 2000.
  • Payment cards usage has rapidly increased in recent years. In 2013, card payments accounted for 99% of the volume of all cashless payments and 96% of the value. Furthermore, at the end of February 2014, there were approximately 424,054 debit cards and 319,971 credit cards in circulation in Iceland.
  • Credit transfers are widely used in the country and they are all completed electronically. Iceland is part of the SEPA initiative for EUR-denominated payments.
  • Cheques were once the predominant cashless payment instrument in the country, but between 2012 and 2013, the number of transactions completed using cheques declined by 22.2%. This is due to the increasing preference for electronic payments – all cheques are condensed into electronic items being processed by the netting system.
  • Direct debits have also increased in usage, mainly for low-value recurring payments. This is partly due to electronic, internet and mobile banking now being commonplace in Iceland.

Investment options

  • Interest can be earned on current accounts.
  • Time deposits typically have maturities of up to one year and are available in ISK or major foreign currencies.
  • Certificates of deposit are available for short-term investment purposes and are offered by banks, including the Central Bank.
  • Treasury bills are issued by the Central Bank via auction, with three, six and 12 month maturities.
  • Both euro commercial paper and US commercial paper can be issued in Iceland.
  • There is an active repo market in the country.
  • Corporation tax is levied at 20% (2015) and partnerships registered as taxable entities are subject to a rate of 36%.
  • Temporary restrictions have now been lifted on the flow of money out of Iceland. These rules used to restrict certain types of cross-border capital movements or foreign exchange transactions.
  • Dividends paid to a resident company are subject to 20% withholding tax. Dividends paid to a non-resident company are subject to 18% withholding tax.

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