Real estate leads corporate lending as bank loans top $811bn

13/04/2025 06:25 AST

Saudi Arabia's banking sector experienced a surge in lending in February, with total loans reaching SR3.04 trillion ($811.46 billion) - the highest annual growth rate in more than two years at 14.89 percent.

According to new data from the Saudi Central Bank, also known as SAMA, the increase was largely fueled by corporate borrowing, which made up 54.57 percent of the total loan portfolio, reaching SR1.66 trillion.

This segment grew by 19.29 percent year on year, driven by sectors aligned with the Kingdom's Vision 2030 diversification strategy.

Among corporate segments, real estate activities dominated lending, comprising 20.62 percent of total business loans.

This sector also registered a 30.82 percent increase compared with the same month last year, hitting SR342.34 billion. Wholesale and retail trade followed, accounting for 12.42 percent or SR206.14 billion, while manufacturing made up 11.15 percent, or SR185.1 billion.

Electricity, gas, and water supply accounted for 10.69 percent reaching SR177.5 billion.

Although the financial and insurance sector held a smaller share at about 10 percent, it posted the highest growth rate of 43.52 percent during this period, reaching SR165.39 billion.

Meanwhile, lending for education, although just 0.62 percent of corporate loans, registered the second-highest annual growth at 38.47 percent to SR8.75 billion.

This lending momentum reflects the Kingdom's accelerating efforts to meet its Vision 2030 economic transformation goals. As Saudi Arabia pushes forward with mega projects, urban development, and infrastructure upgrades, sectors such as real estate and manufacturing have emerged as critical engines of growth - and top priorities for bank financing.

Real estate lending has soared on the back of housing demand, government-backed mortgage programs, and major residential developments, particularly in Riyadh and other growing urban centers.

Similarly, manufacturing is experiencing strong momentum as the Kingdom works to localize production and become a regional industrial hub.

According to the General Authority for Statistics, Saudi Arabia's industrial production index rose 1.3 percent year on year in January, fueled by a 4 percent increase in manufacturing activity.

Chemicals, refined petroleum products, and non-metallic minerals led the gains - all strategic subsectors under the National Industrial Development and Logistics Program, which aims to diversify the economy and reduce dependence on oil.

With manufacturing output expanding and large-scale housing and commercial projects underway, banks are channeling more capital into these high-priority sectors. This is enabling developers and manufacturers to scale operations, enhance productivity, and support the broader objectives of Vision 2030.

Risk controls amid soaring real estate exposure
With real estate loans, both retail and corporate, now making up approximately 30 percent of total bank credit in Saudi Arabia, regulators and lenders are tightening risk controls to safeguard financial stability amid booming demand.

According to the International Monetary Fund's 2024 Financial System Stability Assessment, several factors help mitigate risk in the Kingdom's expanding mortgage portfolio.

Most home loans in Saudi Arabia are issued with fixed interest rates and full recourse clauses - meaning borrowers are personally liable even in case of default - significantly lowering the likelihood of strategic defaults.

Additionally, nearly 80 percent of retail mortgage borrowers are government employees, whose income is expected to remain stable even in economic downturns. Many loans are also salary assigned, allowing banks to deduct payments directly from borrowers' paychecks.

The IMF noted that Saudi authorities have taken commendable steps to contain risks, including responsible lending rules that cap borrowers' debt-service-to-income ratios and new foreclosure laws that allow lenders to reclaim properties when borrowers default.

A growing credit bureau and expanded housing data collection platforms are also strengthening transparency.

Still, the IMF cautioned that the scale and complexity of Saudi Arabia's real estate and infrastructure mega-projects could lead to resource competition, project delays, or stress on developers and contractors - underscoring the need for continuous monitoring of system-wide risks.

The National Financial Stability Committee, as well as SAMA and other agencies, are urged to ensure timely data sharing and fill gaps identified under the G20's Data Gaps Initiative, particularly in areas such as sectoral lending exposures and interbank linkages.

Stress tests conducted on 11 major Saudi banks revealed that the system remains resilient, even under adverse conditions such as a global recession or sharp oil price declines.

Although the IMF observed some volatility in historical default data and limited availability of micro-level information, capital buffers across the sector remain solid.

Only one non-systemic bank fell slightly below the regulatory threshold under a high-rate shock scenario.

As lending continues to surge - particularly in real estate - Saudi Arabia's financial sector appears well positioned for the moment, according to the IMF.

But as Vision 2030 accelerates, experts emphasize that maintaining strong safeguards, diversifying exposures, and closing data gaps will be key to ensuring long-term resilience.

Boosting mortgage liquidity
To sustainably support the sector's growth, banks are increasingly embracing securitization.

In January, the Saudi Real Estate Refinance Co. - a subsidiary of the Public Investment Fund - signed a memorandum of understanding with Hassana Investment Co. to launch the region's first residential mortgage-backed securities.

Mortgage securitization is a financial process through which banks and lenders pool together a collection of home loans and convert them into tradable securities known as mortgage-backed securities.

These securities are then sold to investors, who receive periodic payments derived from the underlying mortgage repayments made by homeowners. This approach allows banks to offload mortgage risk from their balance sheets, free up capital, and extend more loans to new borrowers.

It also diversifies funding sources and deepens capital markets. SRC CEO Majeed Al-Abduljabbar described the agreement as a major step in developing the Kingdom's housing finance ecosystem, while Hassana CEO Saad Al-Fadhli said the partnership exemplifies a shift toward scalable and long-term financial solutions.

As the real estate market continues to expand and mortgage demand rises, the SRC-Hassana partnership is expected to boost liquidity in the secondary mortgage market, draw new investment, and reinforce the financial sector's role as an enabler of Vision 2030.

Arab News