Alternative funding in Saudi Arabia persists as credit demand remains strong: Moody’s

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Moody’s Investors Service said that the strong activity in Saudi Arabia’s non-oil economy continues to drive credit demand, which is outpacing the growth of local deposits.

Saudi banks seek to maintain their market share and capitalize on local market opportunities by turning to alternative funding sources, including international markets, the agency said.

It added that reliance on alternative funding sources is likely to persist though it will gradually diminish as credit growth moderates and aligns more closely with deposits.

In addition to local customer deposits, funding sources include capital market issuances, syndicated loans, and US dollar–denominated instruments. The use of additional Tier 1 (AT1) instruments remains common, but diversification into Tier 2 and other types of debt is increasing. Saudi banks’ total issuances reached SAR 56 billion across all instruments in 2024 — more than double the previous year — and a similar volume is likely in 2025, although a gradual slowdown is expected as banks aim to balance loan and deposit growth.

Banks can also access liquidity through the Saudi Real Estate Refinance Co. (SRC), Moody's said, expecting banks’ role in the mortgage market to gradually shift toward an “originate-to-sell” model, with ultimate mortgage risk transferring to the SRC.

Banks are expected to focus more on originating loans for sale to reduce funding requirements as the market matures, while securitization and regulatory frameworks are likely to see further development.

Moody’s added that market funding — particularly foreign funding — provides flexibility and access to a wider pool of investors, but the rapid increase in its use could expose banks to greater refinancing risks, currency mismatches, and sensitivity to global interest rate changes.

The agency believes that well-managed and diversified funding strategies, such as longer maturities and geographically diversified sources, will enhance funding stability.

It highlighted that the Saudi Central Bank (SAMA) remains committed to preserving financial stability by strengthening supervisory standards and introducing macroprudential measures as the banking sector continues to experience rapid growth and changes in funding mix. SAMA is closely monitoring banks’ foreign-currency liquidity coverage ratios and net stable funding sources to ensure robust risk management, even though no specific currency-related regulatory restrictions have been imposed so far.