What is Reserve Requirement Ratio?
The reserve requirement ratio is the minimum percentage of customer deposits that commercial banks must hold as reserves either in their vaults or as a deposit at the central bank. It is a monetary policy tool used to influence the supply of credit in the economy: raising the ratio tightens liquidity, lowering it loosens credit.
How It Works
- Central bank sets the required ratio against eligible deposit liabilities.
- Commercial banks segregate the required portion as non-lending reserves.
- Remaining deposits are available to fund loans (the money multiplier effect).
- Adjustments to the ratio change credit capacity across the banking system.
- Banks holding excess reserves above the requirement still meet regulation.
Saudi Context
The Saudi Central Bank (SAMA) sets reserve requirements for demand deposits, time deposits, and savings deposits separately. Historically, the demand deposit ratio in Saudi Arabia has been around 7%, while time and savings deposits have a lower 4% requirement. SAMA adjusts these levels in line with overall liquidity conditions and the SAR-USD peg.
Example
A Saudi bank holds SAR 10 billion of demand deposits. With a 7% reserve requirement, it must hold SAR 700 million at SAMA, leaving SAR 9.3 billion available to deploy in lending and investments.