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RIYADH: Credit card loans in Saudi Arabia surged to SR27 billion ($7.2 billion) in 2023, marking a 17 percent annual increase, according to data from the Saudi Central Bank. 

Analyzing data from the financial institution, also known as SAMA, shows that this surge could be attributed to the ease of acquiring credit cards, the enticing reward programs they offer, and the Saudi preference for online transactions and cross-border payments.

Mastercard’s New Payments Index indicated a growing momentum for digital payment methods in Saudi Arabia, with technology shaping the future of transactions.

In the report, Country Manager for Saudi Arabia and Bahrain at Mastercard Maria Medvedeva emphasized the importance of cross-border payments for the Kingdom’s consumers and businesses, highlighting convenience and security as key factors. 

“Saudi Arabia is home to a sophisticated community of consumers and businesses that rely on cross-border payments to support their everyday needs,” said Medvedeva.

“Our latest findings show that these payments continue to play a vital role for many across the Kingdom, with our research underlining the importance of convenience and security to those we serve,” she added.

In contrast to consumer loans, where borrowers have fixed amounts and repayment schedules, credit card users enjoy flexibility in borrowing and repayment, with the option for both online and offline transactions.

When credit card balances are paid in full each month, users avoid interest charges. However, carrying balances from month to month can result in high-interest rates.

A study by Boston Consulting Group projects credit card loans to be the second-largest driver of retail loan volumes in Saudi Arabia, with an expected compounded annual growth rate of 10.2 percent due to low market penetration.

Additionally, credit cards offer an array of benefits beyond the convenience of cashless transactions. One notable advantage is the variety of rewards programs and incentives associated with credit card usage.

Many credit card issuers offer rewards such as cashback, airline miles, hotel points, or loyalty rewards for purchases made with the card. These reward programs allow users to earn valuable perks simply by using their credit cards for everyday spending.

In contrast, consumer loans saw a 2 percent decline during the same period, reaching a total of SR441.83 billion. However, within this category, which covers lending for diverse consumer needs, there was notable growth in education, tourism and travel, as well as vehicles and private transportation.

Education funding experienced the most growth, rising by 18 percent to SR7.46 billion, followed by tourism and travel, which saw a 13 percent increase totaling SR918 million.

Loans for vehicles and private transport saw a more modest increase of 3 percent, reaching SR11.3 billion. These calculations do not include figures for real estate financing, finance leasing, or margin lending, as indicated by SAMA.

The rise in these consumer loans, as highlighted in a Bank for International Settlements study, is attributed to several factors. Firstly, the country’s youthful and expanding population seeks financing for various purposes such as automobiles, education, vacations, housing, and share trading. 

Secondly, Saudi banks leverage an interbank payment system to secure consumer loans by obtaining an assignment of salary from borrowers, ensuring repayment through a tripartite agreement involving the employer, the employee, and the bank.

Additionally, establishing the Saudi Credit Bureau provides banks with up-to-date information on customers’ creditworthiness, facilitating informed lending decisions.

Therefore, when Saudis seek consumer loans to finance their education payments, it is because these loans typically offer higher borrowing limits, fixed repayment terms for consistent monthly planning, and lower interest rates, particularly if collateral is provided. Borrowers receive a lump sum upfront, enabling them to cover their education expenses comprehensively.

Overall, while credit cards offer flexibility and convenience, they also come with higher costs and the potential for overspending and debt accumulation if not used responsibly.

They typically have higher interest levels compared to consumer loans, and these rates are often variable, making it difficult to predict borrowing costs. 

Additionally, high credit card balances relative to the credit limit can negatively impact credit scores, affecting future borrowing opportunities. Consumer loans often allow for larger borrowing amounts, making them more suitable for major purchases.

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