JEDDAH – Improvements in technology utilization will drive the economy toward a cashless society, thus, enhancing the velocity of money, the National Commercial Bank (NCB) said in its latest Saudi Economic Review released Tuesday. “In the last couple of years, technology had ostensibly changed the banking landscape, and in turn, the overall macroeconomic environment. By changing the way banks do business and undertake their operational activities, technology had increased the speed of business and consumer transactions, which was an element in improving the absorptive capacity of the Saudi economy,” the report noted. The five parameters for the domestic utilization of technology include the Saudi Arabian Riyal Interbank Express System (SRIE), SADAD bill payment system, the banks' clearing system, Automated Teller Machines (ATMs) and Points of Sale (POS) terminals. In terms of value, SRIE system, which commenced on May 14,1997, is the largest of these channels, with transactions amounting to SR65.4 trillion by the end of 2012, a substantial increase from a mere SR7.2 trillion in 2003. Volume-wise, the number of transactions conducted via SRIE had quadrupled during 2003-2012, reaching 54.9 million transactions. The relatively new SADAD system that became operational on Oct. 4, 2004 had exhibited similar growth trends, with the payments' value increasing by 14 times, from SR8.9 billion in 2007 to around SR132 billion in 2012. The volume of bills paid through SADAD also rose to 137.3 million last year from 18.9 million in 2007. It is important to note that SADAD was instrumental in reducing the front-office burden on banks and the manual labor associated with these paper-based transactions, given the fact that around 70 percent of the bills pre-SADAD were paid in cash. An additional channel is banks' clearance of commercial, personal and interbank checks, which even though have lagged behind in the last two years given the fact that it is the oldest channel of settlement, yet during 2003-2012 time span it grew value-wise by 84.3 percent to SR837.6 billion, with the average value of checks rising at a similar pace. The last two channels that encompass ATMs and POS are largely used as proxies for measuring retail activity as well as technology penetration in the economy. Cash withdrawals from ATMs had remarkably increased from SR171.6 billion in 2003 to around SR625.8 billion in 2012, an indication that people are relatively at ease with the use of technology and less dependent on branch visits to meet their liquidity needs. Meanwhile, Points of Sale transactions that are an integral part of a cashless economy are quickly gaining ground especially since 2007, with the value of sales through POS rising to SR122.2 billion in 2012 from a meager SR19.7 billion in 2003. Most recently, POS transactions grew by 24.2 percent Y/Y by the end of 1Q 2013, thus, maintaining its 14th consecutive double-digit growth since 4Q 2009. However, NCB emphasized that “a pickup in velocity of money must be matched by an increase in the productive capacity, or else inflationary pressures will materialize rapidly.” Bottomline, technology has its pros and cons, and at this juncture of well-anchored headline inflation of around 4 percent, the Kingdom is reaping the benefits with no price level challenges, the report said. Meanwhile, total deposits in the Saudi financial system reached SR1.3 trillion by the end of May, adding SR70.5 billion YTD, the report further said. Growth in the depositary base continues to provide opportunities to expand the financing capabilities of the banking system. The largest portion of deposits are in the form of demand deposits, of which only 8.5 percent are contributed by government entities. Given businesses and individuals' varying need for the most liquid type of deposits, their demand, time and savings, and foreign currency deposits are distributed at 74.1 percent, 17.5 percent, and 8.3 percent, respectively during May. Nonetheless, the government's long-term priority is apparent as time and savings deposits represent 47.7 percent of their total deposits while demand and foreign currency deposits hold 23.8 percent and 28.5 percent, respectively. Collectively, demand deposits increased by 20.0 percent annually, outpacing time and savings deposits which rose by 7.3 percent Y/Y as interest rates remain low. On the assets side, total claims of the banking system, excluding T-bills and government bonds, accelerated to record an annual growth of 16.0 percent in May, but decelerated marginally in comparison to April. Total deposits outpaced credit which resulted in a slight decrease of the loans-to-deposits ratio to 80.3 by the end of May. By maturity, short-term credit posted the slowest annual increase in over a year at 5.2 percent, albeit holding the largest share at 53.2 percent. Ostensibly, local banks have been attempting to expand the maturity curve towards longer-term credit. The notion is derived from medium term and long term credit growth rates, which have been substantially higher than short-term credit over the past six months. During May, long-term credit rose by 37.3 percent, while medium term credit climbed by 22.2 percent annually. Local banks are expected to maintain the current level of credit growth as portfolio diversification offers new opportunities to add to their books. As for the private sector, banks extended credit lines to businesses in the amount of SR12.8 billion during the month of May. On an annual basis, credit to the private sector grew by 16.5 percent, as total fresh lending reached SR61.8 billion during the first five months of 2013. Yet, credit to the public sector increased at an annual rate of 16.0 percent. Bank credit to public enterprises significantly decelerated to 6.1 percent Y/Y while government bonds recorded their eleventh consecutive annual decline by 21.9 percent during May. The bulk of bank claims on the public sector are in the form of treasury bills. The issuance of treasury bills has been used as a liquidity management tool to mop up excess liquidity following bond settlements. As the economy's liquidity levels have increased lately, treasury bill issuances increased by 34.6 percent annually to reach SR174.3 billion, a 24-month high. As for the interbank rate, SAIBOR, the subdued interest environment will aid banks in avoiding any liquidity shortages by allowing them to access funds cheaply. However, given the rise in credit, which translated into larger liquidity movements, the spread between SAIBOR and LIBOR has widened to over 70bps. The pace is far from worrying as SAMA is closely monitoring risk indicators for the Saudi financial system. Accordingly, SAIBOR is expected to hover around 100bps. Consumer prices have marginally eased during May as the benchmark index recorded a 3.8 percent annual increase, 0.2 percent lower than the previous month. The category of food and beverages rose by 3.8 percent Y/Y. – SG
