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25 April 2024

Saudi banks cut lending to SR5bn in fourth quarter

Sama imposed curbs on lending to mop up excess liquidity and tackle soaring inflation. (AFP)

By Nadim Kawach

Saudi Arabia's banks slashed their lending activity in the last quarter of 2008 despite high growth in their deposits and pledges by the country's central bank to pump funds into the sector, official figures showed yesterday.

After a surge of nearly 10 per cent in the second quarter and 5.2 per cent in the third quarter, the combined credits extended by the kingdom's 12 banks edged up by only 0.6 per cent at the end of the last quarter, showed the figures by the Saudi Arabian Monetary Agency (Sama), the central bank.

This means the banks provided only about SR5 billion in the fourth quarter compared to nearly SR35bn in the third quarter and as high as SR64bn in the second quarter. In contrast, deposits with the banks continued their rapid growth through the year mainly because of higher interest offers by most of the banks.

From about SR804bn at the end of September, the combined deposits gained around SR45bn at the end of December, said Sama.

Experts said the low growth in credits was a result of recent curbs imposed by Sama on lending activity by banks during 2008 to mop up excess liquidity and tackle soaring inflation before the collapse of oil prices in the last quarter.

Another reason is that banks have become more cautious and selective in providing credit while they are also deprived from a major source of funding through foreign banks because of the global credit tightness.

In a recent study, a key Saudi bank expected the kingdom's banks to tighten their lending activity in 2009 unless Sama eases its curbs, including tough reserve requirements and loan-to-deposit ratio of 85 per cent.

By the end of 2008, the banks had exceeded that ratio to reach about 87 per cent and bankers said this was a result of a lax policy by Sama to spur lending activity and stimulate the economy following the oil price crash.

According to the Saudi American Bank (Samba), lending activity in the world's oil superpower has already suffered from a downturn in the economy.

It said the decline had been mainly felt in the corporate sector, where credit for all types of projects remains extremely tight, leading to an increase in spreads over the Saudi Inter-Bank Offered Rate (Sibor).

"The persistence of wide spreads on corporate lending is explained by a number of factors, including the fact that the retrenchment of international banks has left local banks struggling to meet corporate demand and that Saudi banks have become more cautious about corporate growth prospects, particularly those projects that are dependent on export demand," Samba said.

"The banks are also constrained by the mandated loan-deposit ratio limit. Many banks are at or near this limit. In 2009, banks are likely to maintain a cautious approach, waiting for global economic prospects to improve and for international banks to renew their interest in Saudi corporate debt before increasing lending significantly. This should begin to happen towards the end of this year, though prospects for the global economy remain fraught with uncertainty."

Sama's figures showed Saudi banks have started to cut their foreign assets apparently to redirect them into the local market because of risks abroad and a funding gap caused by slackening lending by foreign banks. From about SR161.6bn at the end of November, their foreign assets dropped to SR153.9bn at the end of 2008. The decline was mainly in due from banks abroad, which dived from SR36.8bn to SR27.2bn and in investments abroad, which fell from nearly SR71.1bn to SR64.8bn in the same period, according to Sama.

On the other hand, their foreign liabilities also declined from SR121.8bn to SR112.4bn. The biggest decline was due to foreign banks, which slumped from SR53.8bn to SR45.3bn.

The drop widened the banks' net foreign assets from SR39.7bn at the end of November to SR41.5bn at the end of 2008.