BANK deposits rose 21,12% in the first 5 months of the year to US$4 billion from US$3,3 billion recorded over the same period last year as tobacco sales helped boost a local money market reeling from liquidity challenges.

Kingdom Financial Holdings (KFHL) said while the banking sector continued to witness significant growth in deposits, loans and advances declined by 3,45% with US$2,8 billion loaned out by mid May from US$2,9 billion as at December 2011.

"Loan-to-deposit ratio declined to 70% from 87,4% in December 2011 which is in line with the 30% prudential liquidity ratio prescribed by the central bank," said KFHL.

The Reserve Bank on February 16 this year increased the prudential liquidity ratio from 25% to 27,5% by end of March and 30% by May 31.

"The gradual increase to 30% by end of May 2012 implies that the central bank wants banks to reduce their loan to deposit ratios to at most 70% so as to better manage their liquidity," KFHL said.

However an analysis of financial statements for banks as at December 31, 2011 show that locally-owned banks had high loan-to-deposit ratios of around 85% when compared to the conservative lending approach by international banks which had significantly lower ratios of around 40%.

"Various banks are still facing liquidity problems due to the mismanagement of the liquidity gap and have created huge asset and liability mismatch which ultimately create a liquidity crunch," said KFHL.

Banks mobilise deposits of varying tenor periods and should also lend the money in a way that ensures that it can meet its contingent liabilities.

The short nature of deposits and the continual rolling over of outstanding loans has also precipitated the liquidity crisis across the banking sector.

Meanwhile 111 million kgs of tobacco worth US$415.9 million has been sold since the beginning of the marketing season in February, representing a 49% change from last season when a total of 104 million kgs worth US$279,6 million was auctioned during the same period.