Having been left largely unaffected by the international credit crisis that proved so damaging for financial systems in the West, Saudi Arabian banks have maintained their stability and will now profit from the trickle-down effect of the large government-driven infrastructural development projects.
The downturn has certainly had an impact on the economy though - the government predicts growth will be less than 1% in 2009 - but overall the Kingdom has fared better than other economies in the region. The banks in particular have shown resilience.
Some relief will come through the government's planned expenditure programme. The 2009 budget projects a 16% increase in expenditure, reaching a record $126bn. Several projects, such as in power generation, desalinisation and transport infrastructure, are strategic, with the Kingdom aiming to further diversify its hydrocarbons-based economy.
A recent report by Fitch Ratings, quoted in the local media, stated that Saudi banks will be heavily dependent on government-backed projects. The same report also mentioned that overall the banking system in the Kingdom had remained strong due to its adequate liquidity base and asset quality.
Notwithstanding the strengths, a slowdown in lending in the first quarter of 2009 was an evident effect of international events, and a clear sign of a stricter lending climate in the local banking industry. According to figures from the Saudi Arabian Monetary Agency (SAMA), the Kingdom's commercial banks have reduced lending in the first quarter of 2009 by 3.6% year-on-year to SR35.5bn ($9.48bn).
Although both the private and public sector have been affected by these tighter lending conditions, the market is still hoping that none of the mega projects planned will be delayed or cancelled due to lack of funding. Local banks have sufficient liquidity but are now looking more carefully at the quality of their loan portfolio.
Consumer credit is also considered an area with large potential for growth in the Kingdom. However, despite being a potentially lucrative segment, loan seekers will also have to adapt to a considerably more selective stance by lender institutions.
Demographically driven sectors, such as housing, are expected to keep growing. Mortgage schemes have long been heralded as one of the most promising areas of business for banks in the Kingdom. Government estimates put the demand for new housing at 130,000 units per year. Final approval for the long-awaited mortgage law is expected to come by the end of this year.
The banking sector is emerging relatively strong from the credit crunch and should now be able to benefit significantly from the government's expansionary budget. In order to take advantage of their privileged position, banks will likely be more selective in regards to their loan portfolios, while continuing to expand branch networks in order to attract deposits and expand lending capability. (Oxford Business Group)
Global Arab Network