Hike in Interest Rate on Loans may Lead to Job Losses
Investors talk with each other as they monitor a screen displaying stock information at the Saudi Stock Exchange (Tadawul) in Riyadh, Saudi Arabia, in this June 29, 2016 photo. (REUTERS)
JEDDAH: Investors in the financing sector are warning against raising interest on bank loans, which, they say, will double the sector’s losses, which amounted to 30 percent during the first half of 2016.
Higher interest rates will also lead to the exit of 20 percent of companies from the sector and the laying off of at least 10 percent of employees.
Abdullah Al-Sultan of the Riyadh Chamber of Commerce and Industry said a 1.5 percent rise of bank interest rates increased operational costs for companies in the sector, especially as these companies operate based on borrowing and lending.
He said the sector wants to see the Saudi Arabian Monetary Agency (SAMA) come up with a bank lending mechanism that differs from the one currently in place, especially since the sector was already suffering before the current recession due to rising operation costs imposed by the new regulations, which required creating many new specialized positions. Such positions increase the costs of human capital at companies, in turn reflecting on overall costs.
Al-Sultan said the current economic conditions in the sector will also result in the laying off of at least 10 percent of employees in different sections, particularly those involved in collection, sale and administrative activities.
The sector will also see more mergers, despite the absence of clear regulations to assist such process, while 10-20 percent of companies lacking licenses will be forced to exit as they are unable to keep up with high costs.
Badr Al-Shammari of Al-Yusr Finance said the increase in interest rates on companies, to 3.5 percent, up from 2.5 percent, resulted into at least 5 percent higher costs for car-financing companies, which in turn translated into overall losses of 30 percent during the first half of the year.
An expert in the field, Mohammed Badress, said if these companies get loans from banks at higher interest rates, it will mean higher costs of cars for the consumers who would be forced to bear the extra bank fees and the profit margin of the company.