What Influences Bank Lending in Saudi Arabia?

Abstract

Purpose – Determinants of credit growth in Saudi Arabia are investigated.

Design/methodology/approach – A panel approach is applied to macroeconomic and bank-level data spanning 2000 -15.

Findings – Bank lending is supported by strong bank balance sheet conditions (high capital ratio, and growth of NPL provisioning and deposits), and higher growth of both oil prices and non-oil private sector GDP. Lower bank concentration also helps, likely through greater competition, so does stronger institution. Consistent with the literature, lending by Islamic banks may be more responsive to economic activity. Lending remained robust in 2015 despite oil prices having declined, helped by strong bank balance sheets and as banks reduced their holdings of “excess liquidity”. To support bank lending in the period ahead, bank balance sheets need to remain strong. Fiscal adjustment and a reduced reliance on banks to finance the budget deficit would support credit provision to the private sector.

Originality/value – The paper is first to analyze in detail determinants of bank lending in Saudi Arabia applying a panel approach to bank level data, and draws critical policy implications.

Keywords: Bank credit; Macro-financial linkages; Fixed-effects panel model

JEL Classification: C33; E44; G21