Many of us follow the stock screen, buying and selling, and are concerned about company profits, but sometimes we come across economic news that seems complicated or filled with difficult terminology. At "Yamama Insights", we have taken on a clear mission: "To simplify the language of finance and business so that it is accessible to every investor".

Today, we will discuss a news item published recently, which may seem at first glance to concern economists only, but in reality, it directly affects your investment portfolio!

The Story of 658 Billion Riyals!

Last February, the Saudi Central Bank (SAMA) released data indicating that Saudi banks' investments in something called "government bonds" reached 658.2 billion Saudi riyals.

Let's simplify the numbers further:

  • This figure means that banks have increased their investments in these bonds by 5.2 billion riyals (a 10% increase) compared to the same time last year.
  • These huge amounts represent 72% of the total funds that banks have provided to the government and quasi-government sectors (which totaled 910 billion riyals).
  • These investments include long-term debts issued by the Ministry of Finance and international sukuk, and do not include very short-term loans.

The most important question here: What are these "government bonds" anyway?

Imagine you have a large sum of money and want to invest it in a 100% guaranteed place that never loses. In the world of nations, the government undertakes massive projects (roads, hospitals, infrastructure), and sometimes prefers to borrow part of the costs of these projects from within.

Here, the government issues a paper called a "bond" and tells banks: "Give me your surplus funds to invest in state projects, and I will return them to you after years with guaranteed annual profits." This is, in short, what a "government bond" is.

Why do banks love to lend their money to the government?

As an investor, you might ask: Why don't banks lend all these billions to people or companies to earn more?

The answer lies in a golden rule in trade: "Don't put all your eggs in one basket".

Banks love these bonds for three main reasons:

  1. Peace of mind (complete guarantee): Loans given to companies or individuals may default or be delayed in repayment, but the state never delays its debt repayments. This means that the bank's money (which is originally depositors' money) is completely safe.
  2. Guaranteed financial return: Bonds guarantee the bank continuous periodic profits, allowing it to cover its expenses and distribute dividends to its shareholders without worry.
  3. Providing "cash" in times of need: If the bank needs sudden liquidity, it can easily sell these bonds to other banks in the market and recover its money immediately.

As an investor in the stock market.. what is your relation to all this?

If you own shares in any Saudi bank listed on "TASI", this news should reassure you. Why?

  • Because the bank you are investing in is protecting its funds and your funds by placing a large portion of them in a very safe place.
  • The higher the safety level in the bank's investments, the lower the likelihood of sudden losses, which maintains the stability of the bank's stock price on the screen.
  • The financial stability of the bank means it continues to generate profits, and thus continues to distribute cash dividends to your investment account.

In conclusion..

The flow of money between banks and our government is like the "blood circulation" of the economy. Your knowledge of such movements, even if you are a beginner investor, puts you on solid ground and helps you understand how the financial game is played. And this is exactly what we strive to provide you with always through your platform, Yamama Insights.