In a bid to ease growing pressure on liquidity, Saudi Arabia’s banking regulator has raised the loans-to-deposit ratio in the kingdom, allowing the commercial banks to lend as much as 90 per cent of their deposits as credit and advances.

Central bank Saudi Arabian Monetary Agency (Sama) had previously allowed lenders to lend only 85 per cent of their deposits, news agency Reuters reported, citing industry sources.

The loans-to-deposit ratio (LDR) is a regulatory tool, which is an indication of the health of a financial institution. Saudi Arabia’s cap of 90 per cent is still lower than the UAE, where banks can lend more than 100 per cent of their deposits. 

The rise in the LDR allows more money to be lent to the corporate sector, temporarily keeping a check on corporate loan rates from climbing further. The three-month Saudi interbank offered rate has jumped to 1.73 per cent, the highest level in seven years, from below 0.80 per cent in the middle of last year.

The banking system in Saudi Arabia has felt the squeeze in teh past year after the government resorted to selling bonds to local banks and financial institutions in order to plug the budget deficit, which totalled almost $100bn in 2015.

Saudi Arabia, which is leading an oil price war against the US shale producers to protect its share of the global oil trade, relies heavily on the sale of hydrocarbons for revenues. Oil prices have slumped close to 70 per cent since mid-2014, denting the kingdom’s financial muscle.

The lack of fresh deposits from oil proceeds has also added to liquidity stress, threatening to deepen the slowdown in the biggest GCC economy, as lenders have had to prioritise whether to subscribe to government bonds or lend to corporate sector.