Saudi Banks Embrace Diverse Funding for Lending Surge

Saudi banks are adapting to the surge in lending demand, particularly for mortgages, by exploring alternative funding avenues, as highlighted by S&P Global. The credit-rating agency's recent report indicates a significant shift in the funding landscape of financial institutions in Saudi Arabia, driven primarily by a government initiative to promote home ownership.

According to S&P Global, mortgage financing accounted for 23.5 percent of Saudi banks' total credit allocation by the end of 2023, a substantial increase from 12.8 percent in 2019. The report emphasizes that the continuous financing requirements of the Vision 2030 economic program, coupled with modest deposit growth, are prompting banks to look beyond traditional funding sources towards external financing options.

The analysis suggests that this pursuit of external funding could impact the credit quality of the Saudi banking sector, given that lending growth has outpaced deposits. The loan-to-deposit ratio exceeded 100 percent in 2022, up from 86 percent in 2019, indicating a growing reliance on external funding sources.

S&P Global anticipates that Saudi banks will increasingly rely on international capital markets to meet their funding needs, with foreign liabilities projected to rise significantly. Despite the potential risks associated with maturity mismatches, the stability of Saudi deposits is seen as a mitigating factor.

Looking ahead, the report forecasts robust credit growth of 8 to 9 percent for Saudi banks in 2024, driven by corporate lending supported by the Vision 2030 initiatives. The Saudi government's injection of deposits into the banking system is expected to further bolster credit expansion and financial stability in the Kingdom.

In conclusion, Saudi banks are proactively adjusting their funding strategies to accommodate the expanding lending landscape, with a focus on diversifying funding sources and leveraging international markets to sustain growth and meet evolving financial needs.