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RIYADH, Feb 15, 2016:

Seeking to ease tightening liquidity in the banking system, Saudi Arabia’s central bank has raised the ratio of deposits which commercial banks can lend out to 90% from 85%, industry sources said yesterday.

Liquidity has tightened over the past year as low oil prices have reduced inflows of new state revenues and prompted the government to issue bonds to banks to cover a budget deficit that totalled nearly US$100 billion (RM415 billion) last year.

That threatens to slow economic growth; the three-month Saudi interbank offered rate has jumped to 1.73%, the highest level in seven years, from below 0.8% in mid-2015.

By making more money available for lending, the rise in the loan-to-deposit ratio could at least temporarily prevent corporate loan rates from rising further, benefiting Saudi companies.

The loan-to-deposit ratio is designed to limit risk in the banking system by preventing banks from lending too generously. However, raising it by five percentage points is unlikely to prove dangerous, analysts said.

“In fact, 85% is a conservative level compared to regional banks in the United Arab Emirates and Qatar, which allow the level to reach more than 100%,” said Said al- Shaikh, chief economist at National Commercial Bank.

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