JEDDAH, 26 November 2005 — Saudi banks will drastically cut personal loans given to clients from today in response to instructions from Saudi Arabian Monetary Agency (SAMA), banking sources said.
The maturity period of the loans will be reduced from 120 months to 60 months while the volume of loans will be brought down from 27 times to 15 to 17 times of the monthly salary, they said.
The SAMA instructions came after personal loans reached dangerous levels. The total volume of personal loans given by banks is expected to reach SR200 billion by the year-end.
The move also aims at changing the consumption behavior of employees, especially those having limited income, as the loans increase their debts. SAMA has also instructed banks that installment amount to be deducted must not exceed 33 percent of the salary.
According to Al-Eqtisadiah business daily, a sister publication of Arab News, Saudi banks are also likely to increase their commission on loans in light of rising interest rates.
Financial analyst Abdelmenem Jamil Addas downplayed the effect of the new SAMA decision on businesses. “This reduction will have only very small impact,” said Addas, professor of finance at the College of Business Administration in Jeddah.
Addas said the volume of personal loans provided by banks had reached dangerous levels, adding that it could geopardize the enonomy. He said SAMA should have taken this wise decision a long time ago.
Addas said the decision would affect only a small segment of society. “About 70 percent of employees, who draw a monthly salary of between SR3,000 and SR15,000, can still borrow,” he pointed out.
Banks give consumer loans to both government and private sector employees. Most people take maximum loans whether they need it or not. They invest the excess amount in stocks and in various investment funds.
