In Saudi Arabia most banks finance loans from their own deposits. As aggregate deposits have fallen by 2% over the December 2009 to August 2010 period this has squeezed financing. At the same time the authorities have been encouraging the banks to participate in the funding of major infrastructure projects, which implies a shift away from consumer credit. Although there are no third quarter figures as yet, the latest report for the half year to June for Al Rajhi Bank shows that it is in a much stronger position. Instead of falling, customers’ deposits increased from SAR120 billion (US$32 billion) to almost SAR135 billion (US$36 billion). Consequently financing increased from SAR113 billion (US$30 billion) to over SAR118 billion (US$32 billion). It therefore appears that Islamic banks are accounting for an increased share of both deposits and financing activity in Saudi Arabia, and although Al Rajhi and the other Islamic banks are willing to get involved in infrastructure funding, this will not be at the expense of personal finance to their loyal retail customers.
PROFESSOR RODNEY WILSON
The expected reduction in financing activities in the Saudi Arabian banking system is strongly associated with their desire to reduce the amount of deposits taken at high rates. In order to preserve margins, the banks are generally exploring other avenues of funding which are more in line with their risk appetite. This development appears to occur across the sector and is hence expected to apply to Islamic and conventional banks in the Saudi banking sector to the same extent. DR NATALIE SCHOON Head of product research, Bank of London and The Middle East |