Saudi banks ease curbs as credit rebounds

Saudi Arabia's banks appear to be slowly reopening their lending taps as credit to the private sector rebounded in February and the banks are cutting their deposits with the central bank, a key Saudi investment firm said yesterday.

Lending to the private sector by the kingdom's 12 commercial banks grew by nearly 0.9 per cent in February, the second largest monthly increase since the end of 2008, Riyadh-based Jadwa Investments said.

Although bank credit to the local private sector, the largest in the Middle East, has increased in eight of the past nine months, the total is only 1.6 per cent higher than it was one year earlier, it said in a study sent to Emirates Business.

We view bank lending as a key indicator of the health of the private sector. Lack of availability of suitably priced credit has been a major impediment to the ability of the private sector to benefit fully from the stimulatory government policy. In this context, the growth in lending is encouraging, though it is well below the average monthly growth of 1.8 per cent over 2007 and 2008."

Like those in other Gulf oil producers, Saudi banks have been hit by the global financial crisis and regional debt default problems, which forced them to sharply cut their lending activity. The slowdown was aggravated by slackening domestic demand as many regional companies have shelved major projects or expansion plans because of economic and fiscal uncertainty in the region.

Slow credit growth in Saudi Arabia, the world's oil superpower, has been cited among key factors for the poor economic recovery in the kingdom over the past year. But a survey conducted by a Saudi bank recently showed there was a surge in business mood in the country due to better prospects of bank lending.

"Business executives in Saudi Arabia have shed many of their reservations regarding the outlook for the economy and business climate, with respondents to BSF's second-quarter business confidence survey indicating they expect lending activity to return to normal in the next two quarters as their companies' improve sales and resume hiring," said the survey, conducted for the second quarter of 2010 by Banque Saudi Fransi.

"A considerable shift from the first quarter index, almost 60 per cent of the 781 company managers surveyed said the lending attitude of banks had returned to normal or improved, compared with 41 per cent who gave the same response last quarter. Languishing bank credit growth has been a thorn in the side of the economic recovery, compelling the government to take on the primary role in financing numerous expansion projects."

According to Jadwa, the increase in lending by the kingdom's banks to the private sector may have been financed by their drawing down some of their excess deposits at the Saudi Arabian Monetary Agency (Sama).

"The value of funds deposited by banks at Sama in excess of the statutory requirement dropped by SR11.6 billion (Dh11.3bn) in February, the largest fall in six months. Bank foreign assets and lending to the public sector rose substantially during as banks search for higher returns on their funds; the interest rate on funds deposited at Sama is currently just 0.25 per cent," Jadwa said.

"As a result of the decline in deposits at Sama, the ratio of bank reserves to total deposits fell to its lowest level since the end of September, though it remains high on an historical basis, a reflection of the cautious attitude of banks."

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