Banking plays a significant role in an economy; the main function of a bank is receiving deposits from the public and lending or investing the deposits. In conventional banking, deposits earn an interest and a borrower pays a loan advanced with an interest higher than the interest earned by deposits. The difference is profit for the bank from lending services (Schoon 9). A majority of Saudi Arabian are Muslims; the country has the largest number of Muslims in the world. Saudi Arabia has an Islamic banking system. Saudi Arabian Monetary Agency (SAMA) governs banking operations in the country (SAMA). This paper discusses the role of bank loans and deposits in the Saudi Arabian monetary system.
Bank loans and bank deposits
Customers make savings in cash, cheques or other variables that are taken for safe custody by their preferred bank. Variables are kept in high-security rooms and rent is charged on the custodial services. Banking savings, cash or cheque, are mobilized for the operation of the bank. Deposits are divided into two accounts, saving account and investment account. Saudi Arabian Monetary Agency (SAMA) rules and regulations are that the customer should be advised on the division made but cannot influence the decision. At the end of a certain period, saving accounts holders can be given a gift on their account called Hibrah. This is not a guarantee but it is at the discretion of the bank. Money kept in an investment account is invested in different sectors of the economy and the saving customer is entitled to a share of the profits earned from the investments (Eugene 12-45). When borrowers want money from a Saudi Arabian bank, the money is extended and paid in instalments at nominal value. The bank is entitled to a share of the profit made from the investment made. In case of a loss, the bank also suffers the loss the system is called Mudarabah. Lending like in conventional banking takes different forms, they include, asset financing, where the banks buy and assets, then sell the asset to the borrowing customer at a discount, the system is called Bai’al-inah. A joint Venture is called masharakah. Hire purchase, in the case of hire purchase, the bank acquires the asset and then gives the asset to the borrower at a discount, this is an agreement referred to as Ijarah thumma (Bourland 1-23)
What factors do you think affect bank deposits and bank loans? Give specific examples using real data
Bank deposits are dependent on the economic performance of an economy. Bank deposits take the form of savings and current accounts. In the case of savings, savings means the money that customers have in excess of their personal use. In companies, it may be seen as retained earnings. When a country has high economic activities (GDP), then deposits from current and savings will be increased accordingly. In 2006, Saudi Arabia had a GDP of SR799.9 billion and a nominal GDP of SR1.30trillion. This was a 12.4% increase in nominal GDP and a 4.2% increase in GDP (Saudi Arabia Economic Statistics and Indicators). SAMA was a major participant in the move as banks’ savings and loans were increased accordingly. The bank maintained a peg of the country’s currency with the United States Dollar and only changed the rate twice; it raised it by 25 basis points, from 4.75 by the end of 2005 to 5.0 at the start of the first quarter of 2006. By the second quarter, the repo rates were increased by 20 basis points to 5.20 (SAMA). In 2006, using the Consumer Price Index the inflation of the country had increased to 1.6% with a money supply increase of 14.9 percent over the same period. Over a period of four years, the changes in nominal GDP had increased to SR1.5Trillion, inflation had decreased to 2.2 and the SAMA base had decreased to 4.50 (SAMA).
The increase in GDP, the decrease in inflation and the SAMA base mean that the country has more disposable income that can be saved or deposited as current accounts. This increases the money available for lending. This lends to increased borrowers, the cycle continues again. After the world financial crisis of 2007, the banking sector of Saudi Arabia was seen to be stable although the trend of increase was reduced (SAMA). The increase was marginally small to less than one percent.
What has been the relationship between bank loans and deposits in the last 10-15 years?
The operation of Islamic banking is driven by the performance of the economy. SAMA determines the repo rates depending on the economic activities in a country. Since 2000, the economy of Saudi Arabia has been on the increase where deposits are growing as well (Munawar 13). To finance development projects, people are borrowing loans from banks. Between 2002 and 2004, there was reduced activity in banking where banks paid minimal repo. In 2005 -2009, there were increased deposits and loans advanced in the economy. This gave rise to an increase in the repo. In 2010, activities in the economy had decreased. Repo also decreased marginally to 4.50. The following graph shows the report for the last 10 years, which reflects the banking and loan trends in the economy:
From the graph above, it can be seen that when the Repo rate increase, then the rate of borrowing increases when the rate of savings are higher borrowing are also high (Mahlknecht 12-21)
How did these relationships differ before and after the global financial crisis?
In 2007, the world was faced with the global financial crisis, which is believed to have started in the United of America. Saudi Arabia’s main economic activity is in the oil industry where it has the world’s largest oil deposits (Saudi Arabia Economic Statistics and Indicators). Despite the financial crisis of 2007, banking deposits in Saudi Arabia have been increasing though marginally. In the first quarter of 2008, the bank deposits increased by 6.1 percent to SR761.613824 billion, this was a 24.35% increase from what was recorded in the same period of 2007. The money supply rate at the end of 2008 first quarter was 91.3a this is up from 90.3% in the same period in 2007.
In 2008, (SAMA) contributed some of SR26bn to local banks to facilitate banking business in the year. Banking transitions increased to 45.6 million, which was an increase of 2.4 million. At the end of 2008, loans disbursed were SR379.4bn up from SR353.2bn at the end of 2007 (SAMA).
According to a SAMA report in May 2010, bank deposits increased by 1.1% to SR921.71 Billion. The deposits that were rerecorded at the same period in 2009 were 911.8billion.
The loan to deposits ratio in May 2010, increased to 78.6% up put from 77% recorded in the same period of the year in 2009.
Repo rate in 2007 and 2008 remained unchanged at the end of the year at 5.50 but in 2009, it decreased to 5.25 and in 2010, it decreased to 4.50 (SAMA). From the statistical above, it is clear that the banking sector was marginally affected by the world financial crisis. The lending rate has not increased at a higher rate as it had previously increased. This can be attributed to reduced business in international trade. Oil, which is the country’s major exporter, is used in different countries of the world as energy for production. With the reduced world economic performance, it means that the businesses were affected and demand for fuel reduced (Sait 12-34).
What would you recommend as a whole if you were working for one of the big banks as an advisor?
The banking sector can implement some measures to have better trading and be able to face threats given by world economies performances. These strategic moves include:
Implement cost management programs; these are programs that will reduce the costs of a bank. Instead of the traditional banks where a customer would come to a counter and make a deposit, borrow a loan, repay his loan, make an inquiry or withdraw, the banks should implement technology to perform these functions. For example, using the automated machine, one should be able to make a deposit, withdrawal and make inquiries. The space and running costs of these technologies are much lower than that of having employees (Yahia 45-49)
Online banking and M-banking should also be other mechanisms to be implemented for various services. A customer should be able to log in to his account and get data about his operation over his phone or using the internet. Other than reducing costs in the industry, these technologies will increase customer satisfaction and boost their loyalty.
Having agency banking is another way that banks can use to increase bank deposits, withdrawals and marketing strategies. Banking agents should be established in locations where a certain bank does not have a branch, or the available branch is at a distance or congested. In this banking system, a bank establishes an operating business in some locality and gives it the privileges of collecting deposits and issuing withdraws. The bank will have assisted the customer since the customer will not have to travel for the services. The bank will be able to boost its deposits and withdraw from these points (Suliman 12-34).
On the other hand, looking for high return investments will increase a bank’s profit. This includes micro-banking systems.
Saudi Arabia has an Islamic banking system; it is regulated by the Saudi Arabian Monetary Agency (SAMA). Banks are allowed to collect deposits from the public and have them divided into saving accounts and investment accounts. Saving accounts do not guarantee any benefit to the customer, but the bank can decide to give a gift called Hibrah. Money saved in an investment account is invested in different sectors of the economy by the bank, the depositor is entitled to a share of profits or losses from the investments. According to SAMA May 2010 banking statistics report, loan to deposit ratio was 78.6 up put from 77% recorded at the same time in 2009.
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