JEDDAH, 7 January 2007 — A recent study has rejected the assumption that the stock market crash in the Kingdom in February 2006 was spurred by the panic-driven liquidation of the family credit portfolios by the banks that operated the portfolios. A research study conducted by a leading economic consultant, Fadi Al-Ojaji, on the link between the bank credits to the family sector and the general stock market index in the Kingdom showed that the increase in the number of credits to the family sector was the direct result of the rise in the Saudi stock market index, which, in turn, pushed up the demand for the credits, Al-Eqtisadiah daily reported yesterday.
The study proved that the steep rise in the index tempted the people to seek credits. At any rate the credit did not grow in a dramatic manner upsetting or contributing to any economic trends in the Kingdom.
The researcher found the value of the credit to the family sector never exceeded SR30.2 billion at any point of time.
“A value of SR30.2 billion early in the year could by no means make the value of the stock market to grow to SR2.9 trillion by the end of February 2006”, the researcher pointed out.
The report noted that the economic analysts were exaggerating by connecting the rapid growth in the family banking credits that are mainly spent for consumer purposes to market crash. The study also found that the demand for bank credits increased because of the decrease in the availability of credits from financing and installment companies. The economic analysts also exaggerated the impact of the family credits on the stock market while the Granger Casualty Test applied on the studies revealed that the rise in these credits was only a result and not a cause of the sharp rise in the index.
The rapid developments in the banking sector in the Kingdom have resulted particularly in the speedy customer payments. The speedy transfer of salaries to the workers through banks, particularly of the government employees, led to minimize the risk element in credits to such people. The interest rate on the three-months loans also fell to record level in 2004 and 2005. These are factors that led to the increase in the consumer and credit card borrowing to the rate of 83.9 percent in 2000. This was only a natural development under the existing situation. Then the growth level of the family sector credits fell to 36.2 percent in 2003 and rose to 56.3 percent in 2004 and 55.8 percent in 2005. This increase could also be linked to the rise in oil price and the corresponding rise in the general index in the stock market which in turn encouraged the family credit sector to turn to the share market in an unprecedented manner, the study said. Another important factor was that the growth in the family credits did not exceed 2.8 percent even in the period before the crash in the first half of 2006.
It should also be pointed out that the rise in the growth levels of the bank credits to the family sector did not necessarily mean a rise in the indebtedness of the sector, as there was a notable decrease in the indebtedness of the family sector from other sources such as financing institutions and installment companies. People preferred bank loans because the terms and conditions of other financial institutions were tougher than the banks. The bank loans were more flexible as well.
It has also been noted that the credits extended to family sector by the specialized credit establishments such as the Saudi Credit Bank, Real Estate Development Fund and the Saudi Arabian Agricultural Bank have been enjoying relatively better stability in the period between 1998 to the middle of 2006.
Since the data on the details and volume of credits to the family sector were not readily available, the researcher undertook a field study of this type of credit. The study was the only way to know the volume of the indebtedness of the family sector, its relation to their income including the impact of the volume of this indebtedness to the level of savings by the sector. The study also aimed at finding the relation between the level of savings and the sector’s income and the ratio of the bank loans to the family sector.
The studies were made at Riyadh in the first half of 2005 with 119 sample families and in the first half of 2006 with 327 samples. The findings of the studies strongly suggested that the bank loans to the family sector could not have been a major factor in making an upheaval in the stock market let alone the February 2006 crash. The Granger Casualty Test applied on the family loans and the general price index of stocks in the period from the first quarter of the 2000 to the second quarter of the 2006 showed that it was the rise in the stock market indices that made the family sector look for more bank credits.
It is naïve to believe that a marginal factor in the market is the major cause of the stock crash in the Kingdom. SR30.2 billion was the highest level to which the bank credits to the family sector ever rose while the stock market value had rose to SR2.9 billion by the end of February 2006. It means the family sector credits could only account for 0.1 percent of the nominal value of the issued stocks. If the market value of the state-owned stocks is excluded from this, the family credits do not exceed 1.8 percentage of the total market value of the stocks in the market. It also proves that the liquidation of all the family credits could not have any material or moral impact on the stock market, the study said.