07 May 2008
Saudi Arabia's banks continued to make full use of a business upswing and lavish funds for the insatiable private sector despite measures by the Gulf country's top monetary body to curb lending and mop up liquidity.

Official figures showed the curbs introduced by the Saudi Arabian Monetary Authority (Sama) late last year and this year have had no impact on the banks' lending activity, with their credits to the private sector soaring by around SAR30 billion (Dh29bn) in the last quarter of 2007 and picking up by nearly SAR48bn in the first quarter of this year.

The surge prompted Sama (Central Bank) to introduce more curbs this week but bankers doubt the measures would produce any results on the grounds deposits with the Kingdom's banks are also recording massive increases.

Sama's action was intended to deprive local banks from some cash to discourage them from lending in a desperate bid to stem domestic liquidity, which it apparently believes is associated with soaring inflation rates.

In its latest move, Sama told banks this week it had decided to raise their reserve requirement to 13 per cent from 12 per cent. It was the fourth such a move since last November when the rate was only seven per cent.

Sama also decided for the first time in years to double the reserve requirements banks have to make for time and savings deposits to four per cent. Bankers said the curbs, which Sama hopes would offset a series of interest rate cuts, would have little impact on the grounds deposits with Saudi banks have sharply risen over the past few months and the surge strengthened banks' ability to lend to the private sector.

They noted the reserve requirement is related to demand deposits, which make up almost half the total deposits with the local banks. According to the National Commercial Bank (NCB), Saudi banks keep large additional reserves that enable them to keep up lending.

"Sama believes that higher reserves will offset the expansionary impact of lower interest rates. But since banks already keep additional reserves in excess of statutory requirements, the increase in reserves has not been effective in constraining private-sector credit growth," said NCB yesterday.

"Instead of cutting back on lending, banks opted to reduce other deposits with Sama by about SAR7bn in December and a further SAR2.4bn in January. With the latest Sama action, an additional SAR9.2bn is expected to be withdrawn from the banking system."

Sama's figures showed demand deposits with Saudi banks jumped from SAR243bn (Dh240bn) at the end of 2006 to SAR311bn (Dh307bn) at the end of 2007 and continued their rapid growth to peak at SAR339.3bn (Dh332bn) at the end of March this year, according to Sama.

Time deposits and savings also leaped from SAR226bn (Dh222bn) at the end of 2006 to SAR283bn (Dh275bn) at the end of 2007 and a record SAR294.1bn (Dh283bn) at the end of March.

Sama's hectic measures against bank illustrates its desperate bid to tackle inflation, which hit an annual record of 4.1 per cent last year and is projected by local bankers and economists to more than double this year.

Officials and experts have cited many factors for the problem, including the rial's peg to the weakening dollar, high food prices and other reasons. But most of them agreed soaring rents was the biggest cause.

According to Sama's March bulletin, rents jumped by around 8.1 per cent in 2007 and picked up by 9.7 per cent in the first quarter compared with the end of 2007. But year on year basis, quarterly rents leaped by nearly 14.5 per cent.

The figures showed the overall price consumer index rose by 6.5 per cent in the first quarter compared with the end of 2007 and by 8.5 per cent year on year.

The numbers
SAR30: In billions is Saudi banks' credits to the private sector in the last quarter of 2007. The credits further picked up by nearly SAR48bn in the first quarter of this year

13%: Sama told banks it has decided to raise their reserve requirement to 13 per cent from 12 per cent.

By Nadim Kawach

© Emirates Business 24/7 2008