Cyprus has been holding talks with the Troika – the European Union, the European Central Bank and the International Monetary Fund - to get financial aid after its banks were battered by its exposure to debt-crippled Greece.
The amount of the banks' recapitalisation will be determined by an interim report expected to be submitted by investment company PIMCO in early December, central bank spokeswoman Aliki Stylianou told Reuters.
The central bank said that the initial agreement will help restore the Cypriot banking sector's credibility.
"The recapitalisation of the monetary sector and the ensuing increase in liquidity will lead, on the one hand, to interest rate reduction and on the other, fulfil the economy's monetary needs, developments that will positively affect growth," the central bank said in a statement.
Signalling some progress in the talks, government and central bank officials told Reuters on Saturday that the troika had also agreed on a key capital ratio for banks and a system for the sector's supervision.
Both commercial banks and cooperatives would be overseen by the Central Bank, finance ministry and central bank officials said. Cooperatives were previously overseen by a separate authority.
They also set a core Tier 1 ratio - a measure of financial strength - of 9% by the end of 2013 for banks, which could then rise to 10% in 2014.
The two sides remain at odds over the lenders' demands for privatising assets and cutting wages and pensions.
The size of the potential bailout - speculated to be anything between €11 billion and €16 billion and the bulk of it for banks - will be huge in proportion to the €17.9 billion economy, the third smallest in the eurozone.