Saudi Arabia’s decision to force its banks to boost their reserves has failed to curb soaring domestic liquidity, a key factor to rein in inflation, a bank said yesterday.
The National Commercial Bank (NCB), the largest bank in Saudi Arabia, said credits to the private sector had not been affected by the Saudi Arabian Monetary Authority’s (Sama) decision to raise the banks’ reserve requirement from seven per cent to nine per cent in November and to 10 per cent in January.
“So far the growth in private-sector credit has not been affected by the recent increases in the bank reserve requirement,” NCB said in its weekly bulletin, sent to Emirates Business yesterday.
“In theory, banks would have to set aside a larger proportion of their money as reserves, which would reduce the total amount available to lend, and hence slow down the growth in domestic credit. However, this policy has not been as effective, given the large level of liquidity.
“Recent data shows that growth in private-sector credit has increased to 21.4 per cent year-on-year in December from 20.6 per cent year-on-year in November.”
Instead of cutting back on lending, banks opted to reduce other deposits with Sama by about SR7 billion (Dh6.9bn) in December.
“As a result, the ratio of excess reserves held by banks in Sama to total bank deposits in Sama dropped to 63.3 per cent in December from 70.6 per cent in November last year.
“It is also important to highlight that aside from the direct increase in the cost of funding to banks, a higher reserve ratio is associated with an opportunity cost… the amount of income foregone if these reserves were invested in higher-yield assets,” the weekly bulletin said.
Like other Gulf countries, Saudi Arabia is reeling under high inflation rate because of high oil prices, an economic upsurge, high rents and other factors. The kingdom reported inflation hit a record 4.1 per cent in 2007.
Follow Emirates 24|7 on Google News.