Lending interest among Saudi banks, “SIBOR”, fell by 63.2 percent at the end of last year, the highest pace in 12 years, as it ended the year with record declines, as the last time such record declines were seen was in 2008.
According to the monitoring of the reporting unit in Al-Eqtisadiah newspaper, the interest decreases in the four SIBOR terms recorded last year exceeded double what was recorded at the end of 2019.
According to the monitoring, the average rate of SIBOR interest decreases over the four terms of maturity amounted to 63.2 percent (equivalent to 140 basis points) by the end of 2020 compared to the average rate recorded at the end of 2019, which is 27.1 percent.
The pace of monthly declines in the interest “offered by Saudi banks” slowed in December, for the fifth consecutive month in the most dynamic housing loan market in the Middle East, and the declines came between one and two basis points in December.
The “three-month interest offered between Saudi banks”, on which most loans are priced, was at its lowest level in 64 months, according to the monthly closing of SIBOR at 0.81 percent at the end of last December, according to the Macrobond financial data platform. For three months, Al-Sayour is close to breaking the 0.80% barrier.
And all four references recorded SIBOR low levels, as they are all trading between 0.94% to 0.65%.
The decline in SIBOR terms since the beginning of 2020 was between 68.8 percent to 59.1 percent, equivalent to 144 basis points to 136 basis points. These data mean that the interest indicators used in the Saudi monetary markets and most “corporate and individual” banking contracts have declined at the fastest annual pace since 2015.
Since the beginning of 2020, Saudi borrowers and companies have been getting positive news by the end of each month, and they see their periodic payments, which are priced with variable interest, gradually decreasing compared to the levels they were in during 2019.
In the same context, the zero interest rate became 65 basis points away from “SIBOR one month”, as it closed at the end of last December at 0.65 per cent.
In contrast to the one-month interest for SIBOR, which was the first interest reviewer to break the 1 percent barrier at the end of May, this pricing reference is rarely used extensively in loans, and therefore its impact is limited on borrowers.
Therefore, breaking the 0.90 percent barrier of the three-month interest index, which most loans were priced on during August, is a positive turning point for the financing costs of individual and corporate borrowers.
The Saudi Central Bank “SAMA” pumped 50 billion riyals at the beginning of June 2020 to enhance liquidity in the banking sector and enable it to continue its role in providing credit facilities to all its private sector clients, including the role of banks in supporting and financing the private sector from Through modifying or restructuring their finances without any additional fees, and supporting plans to maintain levels of employment in the private sector, as well as exempting a number of electronic banking services fees, based on its role in activating monetary policy and enhancing financial stability.
And the liquidity injection that took place in June by SAMA increased the demand for new loans from some economic activities, with the simultaneous opening of the Saudi economy.
The measures of the Saudi Central Bank reflected positively on SIBOR through its continuous decline.
The SIBOR pricing reference for loans that are re-priced every three months, from the beginning of 2020 to the end of December, decreased by 63.6 percent, compared to the decline recorded at the end of the first quarter of 2020, at 47.5 percent.
The same was true for the six-month SIBOR, whose decline was 61.3 percent, compared to 47.1 percent at the end of March.
And the short-term lending interest in Saudi Arabia was reduced three times in 2019, in addition to two other cuts in 2020, meaning that the one who would have paid the financial institution a 12-month “SAIBOR interest” at 3.34 percent in early 2019 is now being paid with current levels around 0.94 per cent. Cent.
These declines in interest rates since 2019 until now reflect the new reality of low lending interest in Saudi Arabia, which contributed to boosting credit growth for the private sector and individuals during the last period.
The analysis of the economic reports unit on the movement of SIBOR was based on the data of the “C-Bonds” platform, whose platform is used by workers in fixed income markets to track the movement of global credit market indices, as well as to evaluate the performance of the bonds in which they invest.
As for the historical data of the SIBOR period, cooperation was made with the “Macro Bond” platform, which has a special software that has managed to create the largest economic database, supported by analytical tools that help researchers link these data together and form a comprehensive picture of the overall economy.
Private Sector Support Program
These changes in local interest rates coincide with the time in which most “eligible” companies have received periods of time in which the collection of future financing expenses due in accordance with the economic incentives announced by the Saudi Central Bank in light of the Covid-19 pandemic that swept global markets is postponed.
In mid-March, SAMA announced preparing a package worth 50 billion riyals (13 billion dollars) to help small and medium enterprises to cope with the economic effects of the outbreak of the Coronavirus.
The financing aims to allow small and medium companies to postpone the payment of bank and finance companies’ dues and obtain financing on easy terms with exemptions from the costs of the financing guarantees support program, as two of this package of measures are related to the cost of financing.
This was followed by the adoption of “SAMA” a package of new precautionary measures within the framework of supporting efforts to confront the effects of the spread of the Coronavirus pandemic in various economic sectors, and following up on its impact on financial markets and the economy, which included stressing banks on the importance of commitment to providing a set of support means to their customers at this time. Current and enable them to cope with the effects of the spread of the Coronavirus.
This is in addition to the importance of their support for the private sector to mitigate the effects of low cash flows, including reviewing the re-evaluation of interest rates and other fees on credit cards, whether for existing or new customers, in line with the current low interest rates as a result of the economic conditions.
A fifth cut in interest rates
The US Federal Reserve lowered interest rates for the second time in less than two weeks in March 2020, in a new exceptional step to support the US economy amid the accelerating coronavirus pandemic around the world.
The central bank said in a statement, “It decided to reduce the target range for interest rates to between zero and 0.25 percent.” The Fed had already cut interest rates by half a percentage point during an emergency meeting on March 3, the first cut outside the regular policy meeting schedule since the 2008 financial crisis.
The Saudi central bank responded to the second rate cut by the US Federal Reserve during the month of March when SAMA reduced the repurchase rate from 1.75 percent to 1 percent and the reverse repurchase rate from 1.25 percent to 0.50 percent. This is the fifth cut in Saudi interest rates in eight months.
Before cutting rates twice in 2020, SAMA in late October cut key interest rates, following the US Federal Reserve lowering interest rates for the third time in 2019.
It is known that most of the central banks around the world, which peg their currency to the dollar, have reduced local interest rates to join the monetary easing cycle led by the Federal Reserve, along with its Gulf counterparts.
3 references on credit pricing
The Saudi financial sector relies on three pricing references, the first and oldest of which is the interest offered between Saudi banks, “SIBOR”, and the second is “exchange contracts denominated in riyals”, which are used to price credit in the local market. The financial sector uses this indicator in pricing some of the corporate borrowing operations.
It is also rarely used as a “pricing reference” with the pricing of domestic sukuk for the private and government sectors, and the third reference is “government sukuk returns for all maturities,” and is the last reference for credit pricing, which has appeared recently.
What is a SIBOR?
Saudi banks use the SIBOR when trying to borrow from each other. The SIBOR is the interest rate offered between Saudi banks for three months.
SIBOR rates vary according to “short-term” borrowing terms, which may range from a month to a year. SIBOR rates are the backbone of individual and corporate loans, as well as some issues of sovereign bonds, which are priced with variable interest, in the local market. On this basis, the interest / profits that borrowers pay to banks are determined.
The calculation process takes place after 15 banks submit the interest rate, after which the highest and lowest two numbers are deleted, and then we finish with the interest rate. When the SIBOR rates rise, so does the profit margin of the banks that extend loans to customers with variable interest. Only clients who choose fixed interest are safe from interest rate fluctuations.
Economic Reports Unit