Saudi Arabia’s banks may have avoided the massive losses that hit other lenders in the region as a result of the financial crisis, but they have suffered their own crisis.

The stock market boom that came to an abrupt end in 2005 had become a major source of revenue for them. Since the collapse, lenders have struggled to match those heady days in terms of profitability. Five years later, they are only now starting to get close to being as profitable as they were back then.

This time though, profits are not being driven by an unsustainable boom in the stock market. Instead, it is the return of credit growth that is driving profitability. The danger facing banks in Saudi Arabia this time though is that with so much liquidity in desperate need of a home and so much pressure to start using it, that in a fierce competition to book new deals asset quality will deteriorate.

So far, most bankers say they are still too cautious after the harsh lessons learned from the default on billions of dollars of debt to two local conglomerates to let asset quality slip. But margins on lending have been falling fast.

By the third or fourth quarter of the year a glut of new deals is expected to come to the market seeking funding. One of two things is likely to happen.

Banks will either stay hungry for assets at any price, driving down prices and potentially storing up problems for themselves in the future. Or they will start to try and push up lending rates to more adequately reflect the risks they are taking on.

The question is who will be bold enough to stop offering ultra-cheap lending rates first.