Saudi Arabia's largest bank is predicting a substantial increase in letter of credit (L/C) business next year as the bank gears up for what it sees as a new era of growth.

However, according to the National Commercial Bank (NCB), Saudi Arabia needs to inject more funds into its banking system to ensure sufficient liquidity and avert a lending problem in the next two years.

Credit demand

Saudi banks have sufficient lending capacity in 2009, but NCB reckons 2010 will pose real challenges as domestic demand and project financing start to strain the lending capacities of banks.

Corporate credit demand is expected to grow at a rate of 24 per cent a year in 2010, while deposits are expected to lag behind with an annual growth rate of 14.9 per cent, according to NCB.

It says the increase in corporate credit demand will stoke a far greater demand for L/Cs.

Intervention calls

Saudi Arabia's central bank, the Saudi Arabian Monetary Authority, should inject medium-term deposits to provide immediate liquidity relief and a stable source of funding to the banking system throughout 2009-2010, according to NCB.

The bank also recommends that the Saudi authorities should intervene by ordering the repayment of public debt to banks, increasing public investment in the banking sector and creating a credit rating system to expand the market for bonds issued by banks.

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