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Jeddah - Yasmine El Tohamy - RIYADH: Saudi banks’ money supply rose 8 percent in March, as compared to the same month last year, to reach SR2.82 trillion ($753 billion), official data showed.

According to the data released by the Saudi Central Bank, also known as SAMA, the increase was mainly fueled by a roughly 21 percent surge in banks’ term and savings accounts, reaching SR843.25 billion. These deposits represented the second-largest portion, comprising 30 percent of the total money supply, following demand deposits, which constituted 50 percent at SR1.41 trillion.

On the other hand, quasi-money holdings made up 21 percent of the total, experiencing a 1 percent decrease during this period. Meanwhile, currency outside banks accounted for an 8 percent share, showing a 10 percent growth.

Multiple factors influenced the upsurge in term deposits. Firstly, the elevated interest rate environment within the Kingdom, shaped by the US Federal Reserve’s anti-inflationary monetary policy, has spurred individuals and entities to seek higher returns through these accounts.

Moreover, the increase in accounts held by government-related entities played a significant role. As per Fitch Ratings, these entities opted to channel their surplus liquidity into term deposits with commercial banks, thereby boosting the growth trajectory of such accounts.

It is noteworthy that during 2022, SAMA raised key policy rates seven times, followed by an additional four increases in 2023. The central bank’s repo rate was last raised by 25 basis points to 6 percent in its July 2023 meeting, marking its highest level since 2001. Since then, rates have remained unchanged. 

Meanwhile, US inflation surged to a six-month high in March, prompting investors to delay their expectations for Federal Reserve rate cuts.

Deposits represent a costly funding source for banks, with heightened competition in the financial market significantly driving up their average cost.

Despite this, the surge in interest rates also strengthened Saudi banks’ profits on the asset side. Higher borrowing rates led to increased income, offsetting the challenges posed by the expensive funding environment.

On the asset side, Saudi bank loans grew by 11 percent during this period to reach SR2.67 trillion; therefore, lending growth among Saudi banks outpaced deposits.

In their April report, S&P Global suggested that Saudi financial institutions would explore alternative funding strategies to manage the rapid increase in lending, driven by rising demand for new mortgages.

The credit-rating agency noted that the funding profiles of financial institutions in the Kingdom will undergo changes, mainly due to a government-supported initiative aimed at boosting homeownership.

According to their analysis, mortgage financing accounted for 23.5 percent of Saudi banks’ total credit allocation by the end of 2023, compared to 12.8 percent in 2019.

They highlighted that the ongoing financing needs of the Vision 2030 economic initiative, coupled with relatively sluggish deposit growth, are likely to prompt banks to seek alternative budget sources, including external funding.

S&P Global anticipated this trend to persist, especially as corporate lending assumes a more significant role in growth in the coming years.

The report indicated that Saudi banks are expected to adopt alternative funding strategies to support this expansion. It also noted that the stability of Saudi deposits mitigates the risk posed by maturity mismatch.

Furthermore, the agency projected an increase in Saudi banks’ foreign liabilities, rising from approximately $19.2 billion by the end of 2023, to meet the funding demands of robust lending growth, particularly amidst slower deposit expansion.

The report emphasized that Saudi banks have already tapped into international capital markets, and S&P Global anticipates this trend to continue over the next three to five years.