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Continued rise in liquidity presents challenges for Saudi banks

April SAMA data released earlier than usual on Monday show continued increase in liquidity (M3) for the second straight month, following two months (Jan and Feb) of small declines and a huge increase in December. M3 increased by a whopping SR14.5 billion from SR678 billion in March to a new record level of SR692 billion in April. This comes on the heels of a SR22 billion increase in March.

All components of M3 grew in April. Demand deposits show its seventh monthly rise in April, growing by SR8 billion after a SR6 billion increase in March. Time and savings deposits, except for a one-off decline in January 2007, grew for nine months since June 2006. In April 2007, it increased by SR1.7 billion,following March's SR8 billion increase. Quasi-money deposits also increased in April by SR4 billion, after a SR8 billion increase in March.

Trend data show that the pickup in liquidity growth in the first four months of this year is a continuation of the trend from November 2006 (see first chart where the vertical gaps between the yearly curves are widening since last November. The numbers corresponding to the vertical gaps, representing growth in any month from its year ago level are shown in the accompanying table).On the other side of the banking sector's balance sheet, loan growth picked up in March and April, but remains quite down compared to previous years (second chart and table).Bank loans and advances to the private sector grew 10.1% in April over the same month one year ago. The figure was 8.1% in March and 6.4% February, thus indicating a reversal of earlier declining trend. However, the numbers remain significantly lower than growth one year ago. In April 2006 (see second table), in the midst of the Saudi stock market correction, bank lending grew 32%, while just before the correction, it grew 42% in January 2006.

The marked slowdown in loan growth since January 2006 is visually evident in the second chart - in the narrowing of the vertical gap between the 2005, 2006 and 2007 curves. This drop in bank lending was primarily the result of the stock market correction as: (1) banks cut back their stock market exposure, (2) small investors pulled out of the stock market, and (3) SAMA introduced a number of new requirements on banks to reduce their exposure to personal loans.

The widening divergence in the "gaps" between the two charts says volumes about the challenge facing banks. The primary job (called "financial intermediation") of banks is to channel money from those who have it (i.e., savers) to those who do not (i.e., borrowers) through bank lending. The charts show that even as increased savers' money is coming to them, they are finding it difficult to channel that into new loans in the current environment.

By Khan Zahid, Ph.D., Chief Economist.

© Riyad Bank 2007