DUBAI: Deposits at Saudi Arabian banks have shrunk as the government withdraws emergency funds injected when oil prices slumped, although weak loan demand makes a liquidity crunch unlikely.

Eight of the top 12 Saudi banks reported lower deposits in their second-quarter earnings, released over the past couple of weeks.

Deposits at Alawaal Bank tumbled 19 percent from a year ago to 66.2 billion riyals ($18 billion), the bank said on Monday. Deposits at Bank Aljazira fell 3 percent to 47.8 billion riyals.

Bucking the trend was the country's biggest lender, National Commercial Bank, with a 1 percent rise in deposits to 317.7 billion riyals, while major Islamic bank Alinma saw a 4 percent increase.

In 2016, the government placed deposits in the banking system to counter a shortage of funds due to low oil prices, which was pushing funding costs up sharply. Oil prices have now partially recovered, however, and the central bank wants to avoid capital outflows by having Saudi interest rates rise in line with U.S. rates.

As a result, monetary authorities said early this year they would let the emergency deposits expire, pulling some money out of the system to prevent the money market from being too loose.

Deposits by government entities in all commercial banks shrank 11.7 percent from a year earlier to 313.6 billion riyals in June, central bank data released on Sunday showed, with time and savings deposits accounting for all of the drop.

Deposits by the private sector rose sharply, however, so that total deposits in commercial banks fell only 1.2 percent to 1.61 trillion riyals.

Normally, shrinking deposits would pose the risk of another funding shortage in the banking sector, but Saudi Arabia's sluggish economic growth is keeping down demand for money. Bank lending to the private sector edged up just 0.6 percent from a year earlier in June.

Commercial banks' loan-to-deposit ratio fell to 78.1 percent in June, the central bank data showed. This was far below the regulatory maximum of 90 percent, suggesting banks have plenty of room to expand lending if demand for loans revives.

The central bank changed the formula for calculating the loan-to-deposit ratio in April by giving long-term deposits higher weights in order to encourage banks to introduce savings products.

(Writing by Andrew Torchia; Editing by Susan Fenton) ((; +9715 6681 7277; Reuters Messaging: