The Economist Intelligence Unit (EIU) has said in a new report that defaults by Saudi Arabia's Algosaibi and Saad groups could signal an end of name lending, a practice that banks in the region follow whereby loans are extended to influential business families in the Gulf on the basis of their name.
"The defaults in June by the two large Saudi family-owned conglomerates have generated some concern among banks about lending to Gulf family-owned firms, and may herald the end of the unofficial practice of 'name-lending' – lending to influential business families largely on the basis of their name," the EIU said in its latest global forecast.
Credit environment in the Gulf – Saudi Arabia in particular – is expected to remain tight for some time as lending sentiment is depressed. "The known bank loans extended to the two groups stand at around $7.4 billion (Dh27bn), but this figure excludes bilateral loans and letters of credit, and the full amount is likely to be significantly higher," the EIU said.
However, the agency expects the direct fallout for local banks to be limited as it believes the Saudi Arabian Monetary Agency will help local banks to cover losses relating to the defaults. International banks, the EIU said, are unlikely to be protected in this way, and there are concerns that the defaults will further constrain the availability of credit to Gulf Arab corporates at a time when many international banks are risk-averse.
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