Daily Management Review

Its Domestic Banks’ Cash Crunch being Addressed by Saudi Arabia


08/08/2016




Its Domestic Banks’ Cash Crunch being Addressed by Saudi Arabia
In its efforts to stave off the worst of a cash crunch among its banks, Saudi Arabia may be embarking on a new phase.
 
Sources conversant with the functioning of the kingdom’s banking system said that to help ease liquidity constraints, about 15 billion riyals ($4 billion) in short-term loans at a discounted rate were offered at the end of June by the kingdom’s central bank, known as SAMA. Banks were allowed to lend a greater percentage of deposits by SAMA six months ago.
 
Domestic banks, which hold 2.26 trillion riyals in assets, have been hobbling due to the collapse in crude prices and Saudi Arabia is taking unprecedented steps to shore up its finances in such a scenario. More than 70 percent of its revenue in Saudi Arabia comes from oil. Boosting of the financial industry and stimulating borrowing are the aims of SAMA. Since the government sold local-currency debt to banks and withdrew some of its deposits to fund the budget deficit, liquidity has tightened in the kingdom.
 
"Saudi banks are likely to continue to face liquidity tightness due to the large funding needs of the government and still solid private sector credit growth," said Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC.
 
"Immediate support to banks’ abilities to lend (is provided by the cash injection). We expect further steps, such as reducing the reserve requirement ratio and increasing the loan to deposit cap in the coming days,” Malik said.
 
Three bankers with knowledge of the matter said that most Saudi lenders took advantage of SAMA’s offer.
 
The lender received deposits from SAMA worth more than 1 billion riyals, Alinma Bank’s Chief Executive Officer Abdul Mohsen Al Fares told Al Arabiya TV last month. While Saudi Investment Bank’s CEO said his bank didn’t receive cash in the second quarter, Bank Albilad’s CEO in a separate interview with the TV channel also confirmed the bank got funds.
 
John Sfakianakias, the Riyadh-based director of economic research at the Gulf Research Center, said that the intervention is "an extremely important signal to the market that the central bank is prepared to do whatever is needed to improve liquidity." 
 
 “It’s a signal of pro-activeness that the tools available on the monetary side are going to be deployed and over time could have a pro-growth effect for the overall economy,” Sfakianakias added. He said that as oil prices retreated in the 1990s, the kingdom had previously pumped funds into its banking system.
 
According to central bank data, the highest level since November 2008 in the loans-to-deposit ratio, a key measure of liquidity, was reached by the Saudi banks in June as the banks’ combined loans-to-deposit ratio climbed to 90.2 percent. Up from 85 percent, the banks were allowed to lend the equivalent of 90 percent of their deposits by SAMA in February.
 
SAMA is probing banks’ currency products that allow speculators to bet against the kingdom’s currency peg and clamping down on banks that are low-balling interest-rate submissions, in addition to providing liquidity and easing rules on lending.
 
(Source:www.bloomberg.com) 






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