Domestic banks’ credit to the Saudi economy goes by means of numerous private businesses, listed companies, and individual consumers along with credit cards loan takers. Not only that, government and quasi government entities also borrow from the domestic banking system and spend money to spur economic activities. In fact, bank credit is an extremely important instrument for economic growth. The rapid pace of credit growth to the Saudi economy has significantly contributed to the creation of wealth in the economy which accelerated private consumption and assets buying activities.
Pattern of Growth
The overall banks’ credit to the Saudi economy had been growing 18.2 percent annual rate between 1999 and 2005, much faster than the 11.4 percent yearly average growth recorded for the nominal GDP in the same period. The credit growth has been particularly phenomenal at 36.2 percent to SR452.5 billion for the whole of 2005. In the first three months to March 2006, banks’ total credit further grew by 3.2 percent to SR467.1 billion over its level at the end of 2005. The credit growth has slowed down in the first quarter of this year largely on Saudi Arabian Monetary Agency’s (SAMA’s) new regulations that limit the rapid expansion of consumer loans.
With the active functioning of Saudi Capital Market Authority (CMA), Saudi corporations have started utilizing other channels for seeking funds including the issuance of shares and bonds. However, banks’ lending to the Saudi economy continued to expand successively both in absolute terms and in relation to the size of domestic economy in the last six years to 2005. Banks’ credit to the Saudi economy has expanded from 27.6 percent of nominal GDP in 1999 to 39.2 percent in 2005, and is expected to have touched nearly 40 percent in the first half of 2006. Rapid growth in the consumer credit has been the main driver of the rising share of banks’ credit to nominal GDP.
Credit by Broader Sectors
In 2005, the private corporate sector received by far the largest 52.2 percent of the banks’ total loans and advances to the Saudi economy followed by 40.8 percent for the individual sector. The improved fiscal position of the government has curtailed the reliance on bank borrowing, falling down to 7 percent in 2005, from 8.6 percent of the banks’ total credit in 1999.
Banks’ credit is one of the principal sources for investment spending by the Kingdom’s private sector, which has been growing around 5 percent annually in the last six years to 2005.
Private corporate sector and businesses were still the major recipients of banks’ credit totaling SR236 billion in 2005, up around 28 percent over 2004’s level. Banks’ credit growth averaged around 9.4 percent annually between 1999 and 2005. On a sequential basis, banks’ credit to the private corporate sector is estimated to have slowly grown by 5.5 percent to SR249.1 billion up to March 2006.
The share of the private sector in banks’ total lending has gradually been descending from 82.6 percent of the total in 1999 to 52.2 percent in 2005, but picked up marginally to 53.3 percent in the first quarter of 2006.
The consumer credit is the second largest component of banks’ lending to the Saudi economy, which has been growing nearly 52.6 percent annually between 1999 and 2005. However, the share of consumer credit and loans on credit cards significantly expanded from 8.8 percent of the banks’ total loans portfolio in 1999 to 40.8 percent in 2005 and is estimated to have reached around 39.6 percent in the first quarter of 2006. In absolute value, the banks’ portfolio of consumer loans and advances grew by 55.8 percent to SR184.78 billion at the end of 2005.
The Kingdom’s average per capita size of consumer and credit card loans stood at SR7,954 in 2005, which represents nearly 16.03 percent of average per capita nominal GDP of SR49,632 in the same year.
Maturity Terms
In terms of maturity, short-term credit continues to dominate with 55.3 percent (SR258.5 billion) share of the total in the first quarter of 2006, while long-term credit amounted to nearly 32.3 percent (SR151.1 billion), and the medium-term credit stood at 12.3 percent (SR57.6 billion). There is, however, a marked shift in the maturity structure of the banks’ credit, with long-term credit growing rapidly while its share in total credit picked up from 15.3 percent in 2000, suggesting that local banks are now committing more funds, especially to consumers, for terms over three years period.
Economic Activities
SAMA tracks bank credit and classifies into eleven main economic activities, including credit to government and quasi-government entities.
The miscellaneous category, being the largest, which accounted for nearly 36.4 percent of the total and amounted to SR170.2 billion in March 2006, has been growing by 26.6 percent annually between 1999 and 2005.
The other category of personal loans, including margin lending, expanded by nearly 76 percent to SR138 billion in 2005, compared with SR78.6 billion in the year before.
Bank lending to the second largest economic activity of commerce and trade rose by 32.2 percent to SR83.1 billion in 2005 and further grew by 6.6 percent to SR88.5 billion in the first three months of this year. The loans’ portfolio of commerce generally includes private sector imports financed through domestic commercial banks, which rose nearly 21 percent to SR116.2 billion and facilitated Saudi imports worth of SR205 billion in 2005. The upward trend in banks’ imports financing business is still intact so far this year.
After finance category in the third place, bank lending to manufacturing and processing industries comes fourth, expanding nearly 30 percent to SR34.5 billion in 2005 and remaining almost flat in the first three months of this year. It represents nearly 7.4 percent of the total lending in the first quarter of 2006.
The banks’ credit to the building and construction sector, which represents nearly 7.3 percent of the total, expanded by 37.6 percent in 2005 and further climbed nearly 54 percent in the 12-month to March 2006.
(Dr. Said A. Al-Shaikh is chief economist at the National Commercial Bank, Jeddah.)
