The Balance Between Risk and Credit Banking
The nature of banking and financial businesses is based on recycling money to achieve direct profit. This is done by developing economic activities in the country indirectly, through financing projects and financing the consumer to benefit from them. Essentially, the bank provides credit to those who do not have it.
But how do banks balance risk and credit in the Kingdom of Saudi Arabia? If you’re looking for banking credit to start or further your own business, the business law attorney at Khalaf Bandar | International Advisors PLLC can help.
What is Risk & Credit Banking?
Risk banking and credit banking in Saudi Arabia focus on managing financial risks from lending. They also work to keep the banking sector stable. Here are some key points:
- Risk Profiles: Saudi banks generally have strong risk profiles, reflected in their asset quality metrics. The sector’s cost of risk has been relatively low compared to other GCC lenders.
- Credit Expansion: Commercial banks in Saudi Arabia are lending more money quickly. This could lead to more loans that borrowers do not pay back. This expansion needs careful management to prevent potential financial instability.
- Risk Management: With the growing number of banks, the risks they face are also increasing. Effective risk management is crucial for banks to remain profitable and stable.
- Loan-to-Deposit Ratio: The average loan-to-deposit ratio in Saudi banks is over 100%. This means loans are growing faster than deposits. This situation requires careful management to ensure liquidity and financial health.
- Credit Risk Management: Saudi banks check credit risk by analyzing financial ratios. This helps them manage and reduce possible losses from lending.
Risk and credit management in Saudi Arabia’s banking sector means balancing growth and stability. Ensuring that lending practices do not harm the banks’ financial health is important.
How Does the Banking Sector Operate in Saudi Arabia?
In the financial sector of the Kingdom, especially banking, banks in Saudi Arabia offer high credit. They do this in exchange for many guarantees. As a result, businessmen, investors, and large depositors can get high credit. This credit often comes in the form of bank facilities or cash financing.
They are able to provide adequate guarantees such as mortgages, securities, and even a high credit rating. In other words, they can create credit on their own.
This is especially true in Saudi Arabia. There, capital is large and abundant. It has even become a key part of the regional economy in the Middle East.
This explains the fact that the banking sector in Saudi Arabia has stabilized despite many global crises, perhaps the most recent of which is the COVID-19 crisis.
The Difference Between Risk & Credit Banking For Businesses vs. Individuals
On the other hand, a simple person does not get much credit. This is because they must mortgage their income. They do this with a guarantee that their salary will not be transferred.
One common example is when a group of businessmen buys land. They then mortgage it to pay for the project built on that land. If a project fails, it loses its paid share of the land’s value. The bank then pays for it.
In the event of a profit, the capital, which remains stable, doubles. In contrast, the average person takes out a mortgage for 20 to 30 years. They do this to own a property through rent-to-own or by mortgaging it. This often leads to default after a short time.
He reduced his credit history and went over the monthly deduction rate. This happened because of high interest rates. These rates cover the risks of the client not paying back.
The Risk Of Excessive Profitability
This excessive profitability would drag the economy towards inflation without depression. As long as money follows its owners, we will not be able to find an open market or even a fair distribution of wealth. What we see is a flaw in assessing the client’s risks.
The investor is seen as a high-risk client. This is due to his default, which led to bankruptcy. He is now competing with creditors. The process will not result in full financing or profit.
As for the simple person, his default will not be reflected in his monthly income, and merely rescheduling Simple may resolve the conflict.
How Can You Traverse Risk & Credit When Banking?
There is no doubt that the credit industry is fraught with risks and affects the national economy, and what we mentioned is just the tip of the realistic challenges for this sector. The wise leadership’s direction to reorganize this sector and support it with strategic plans prompted me to anticipate events, and God is the Grantor of success.
For legal help, contact the business law attorneys at Khalaf Bandar | International Advisors PLLC for help.
