Credit cavalcade: Fuelled by public and private sector demand, loans are on the rise

Bank lending has increased substantially in recent years. According to data from the Saudi Arabian Monetary Agency (SAMA), the Kingdom’s central bank, bank claims on the private sector had reached SR965.3bn ($257.25bn), up 12.5% from SR858.4bn ($228.76bn) at the end of 2011 and nearly double the 2007 figure of SR577.9bn ($154bn).

This recent wave of credit follows a few years of stagnation in the wake of the 2008-09 global economic crisis, when banks focused on building up their strategic reserves in order to protect against future shocks. In mid-2011 flush with short-term demand deposits, banks slowed their provisioning efforts and began to lend again. Since then, the sector’s credit portfolio has increased substantially, driven by retail, corporate and government demand.


The current period of lending growth is closely related to the credit crunch that stopped up markets around the world after the financial crisis. When the downturn hit, mortgage-backed and other securitised assets accounted for just 3% of total assets held by the Kingdom’s banking sector, according to IMF data. Despite this low exposure rate, the lack of liquidity in the global economy did have an impact on Saudi banks. Indeed, in October 2008 the spread between the reverse repo rate and the Saudi interbank offer rate jumped to over 200 basis points as a result of low liquidity levels in the local interbank market. Many Saudi banks were also impacted by the defaulting of the Saad Group and Ahmad Hamad Algosaibi & Brothers in 2009, which served to highlight the banking sector’s overreliance on credit lines established by family-owned conglomerates up until that point. Incidentally, the Saudi banking sector’s exposure to the UAE-based firm Dubai World, which defaulted in late 2009, was estimated at around 0.2% of total assets. As a result the event had very little impact on the Kingdom’s banks.

Quick Reflexes

SAMA reacted quickly to the downturn. The central bank injected SR11.26bn ($3bn) into the banking sector in late 2008, in addition to around SR15bn ($4bn) in swaps, with the goal of shoring up liquidity in the Kingdom. At the same time, the central bank cut reserve requirements on demand deposits by 600 basis points in October and November 2008 in order to reduce pressure on local banks in the short-term. Additionally, SAMA cut the repo rate and the reverse repo rate a number of times in the months following the crisis, in an effort to restore liquidity to the interbank market. Between October 2008 and January 2009, for example, the repo rate was slashed by a total of 350 basis points until it reached 2%. Similarly, the reverse repo rate was cut by 175 basis points between December 2008 and June 2009, according to the IMF, which brought it down to 0.25%. Perhaps most importantly, immediately after the crisis SAMA announced that it would ensure the safety of bank deposits and local banks. Paired with the subsequent liquidity package, this announcement calmed depositors and the banks themselves, and likely helped to ensure and speed up the ensuing recovery.

Economic Performance

By the time SAMA felt confident enough to withdraw the SR11.26bn ($3bn) emergency liquidity boost in mid-2009, the market had levelled out substantially. The Kingdom’s economy performed relatively well during the downturn, especially compared to hard-hit countries in the West. The Kingdom posted GDP growth of 4.5% in 2008, for example, up from 3.3% in 2007, according to data from the Bank for International Settlements (BIS), a Swiss international financial organisation that advises central banks around the world. Perhaps more importantly, the Kingdom’s non-oil private sector grew by 4.7% in 2008, and inflationary pressures declined from early 2008 through late 2009.

The banking sector, which was well capitalised going into the crisis as a result of SAMA’s conservative regulatory requirements, performed especially well during the crisis. According to IMF data, the industry’s return on equity was 20.4% in 2008, 13.7% in 2009 and 13.6% in 2010. Similarly, the banking sector’s capital adequacy ratio was 16% in 2008, 16.5% in 2009 and 17.1% in 2010.

Tightened Lending

In an effort to build up reserves in the wake of the crisis, most Saudi banks tightened up their lending criteria and bumped up rates, in line with international trends. In an effort to make up for declining credit in the banking system, the government injected SR40bn ($10.63bn) in late 2008 into a handful of public specialised credit institutions, including the Real Estate Development Fund and the Saudi Credit and Savings Bank.

Demand for credit declined substantially during this period, as companies cut back on spending as consumer demand for many products dropped off, causing a slight slowdown in the regional manufacturing and consumer products sectors, for example. Similarly, falling materials costs throughout the Gulf after the downturn caused many construction companies to refinance ongoing projects, which resulted in reduced demand for credit in some markets.


Despite falling demand and tightening supply, the Kingdom’s banks continued lending throughout the crisis, with total credit issuance growing by 20% in 2007 to reach SR594.8bn ($158.5bn) for the year and 25% in 2008 to reach SR744.8bn ($198.48bn) for the year, according to SAMA data. In 2009 credit issuance dropped slightly – by around 1% – to reach SR736.9bn ($196.38bn) for the year. In 2010 lending picked up again, rising 5.2% to reach SR775.3bn ($206.6bn) for the year.

By mid-2011 economic activity in the Kingdom had begun to pick up again, buoyed by rising oil prices and growth in the non-oil sector. At the same time, the banking sector was coming out of a period of asset building and provisioning, which put banks in a good position to take advantage of the recovering economy. In 2011 bank credit jumped by 10.5%, reaching SR856.6bn ($228.28bn) by the end of the year. This expansion has continued through 2012 so far. As of the end of the third quarter of 2012 credit issuance had reached SR973.2bn ($259.36bn), up 13.6% from the beginning of the year.

Growth Drivers

Demand for credit has come from a variety of sources. On the corporate side, the government’s numerous large-scale infrastructure and housing projects have been major contributors to project financing demand, in particular.

Between 2010 and 2014 the state plans to spend SR1.4trn ($373.1bn) on infrastructure and social housing projects, according to the Kingdom’s ninth development plan document. Indeed, in 2011 alone the government awarded some SR267.2bn ($71.2bn) worth of new construction contracts, according to reports in local media. Similarly, according to a recent report released by Bank of America Merrill Lynch, contract awards in Saudi Arabia’s construction and infrastructure sectors grew by 177% in the first five months of 2012 compared to the same period in 2011. The Kingdom is widely expected to be the largest construction market in the region until at least 2020, which bodes well for the local financial sector (see Construction chapter).

Retail lending has also increased substantially since mid-2011, driven by a series of public sector pay increases and bonuses since the downturn. In February 2011, for example, the Kingdom introduced a SR138.8bn ($37bn) financial package aimed at offsetting inflation, shoring up unemployment benefits and funding the construction of affordable housing. Less than a month later, in March 2011 King Abdullah bin Abdulaziz Al Saud announced an additional financial package, valued at around SR349bn ($93bn), which included two-month bonuses for public sector employees, a minimum wage of SR3000 ($800) for Saudis in the private sector, an increase in welfare benefits and increased spending on affordable housing. Additionally, the government announced plans to create more than 50,000 additional public sector jobs in the coming years.

Spurred on by these financial packages and an increase in economic activity in 2011, many Saudis increased their spending in the last half of 2011 and 2012. According to a July 2012 report released by Banque Audi, retail lending is “being used to finance real estate, cars and other goods acquisitions on behalf of individuals” in the Kingdom.

Indeed, consumer and credit card loans have jumped substantially in recent years. According to SAMA, by the end of the second quarter of 2012 total consumer and credit card loans were at SR277.5bn ($73.95bn), up from SR242.2bn ($64.55bn) at the end of 2011 and SR198.8bn ($52.98bn) at the end of 2010. Real estate finance in particular has jumped over this period, from SR23.1bn ($6.16bn) in 2010 to SR29.3bn ($7.8bn) in 2011 and SR47.9bn ($12.77bn) by the second quarter of 2012. The Kingdom’s new mortgage law, which was approved in July 2012, is expected to result in increasing demand for real estate financing for many years to come.

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The Report: Saudi Arabia 2013

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