The Saudi stock market regulator has approved setting up a market for debt securities, it said on Saturday, responding to a long-standing demand by some firms to diversify sources of financing amid tight credit conditions.

The Capital Market Authority's (CMA) decision is part of its 'continunous and gradual effort to develop the Saudi capital market', it said in a statement posted on the bourse's website.

The Saudi stock exchange - Tadawul - has already developed the market, which will trade bonds and sukuk Isamic bonds through licensed intermediaries, CMA said.

The date of the market's launch will be announced later, it added. CMA's head, Abdul-Rahman al-Tuwaijri, has already said the authority planned to launch a market for debt securities.

Central bank governor Mohammad al-Jasser said in February that commercial banks and firms seeking financing should tap more the debt market with the issue of bonds.

A surge in lending over the past five years that was fuelled by record oil prices has brought several Saudi banks to limits on their credit capacity with loan-to-deposit ratio exceeding at the end of last year the limit imposed by the central bank.

Bank loans in 2008 equalled their total during the previous two years, Jasser said in February.

Concern over fallout of the global financial crisis has further slowed down credit growth as lenders became increasingly cautious.

Tadawul currently trades Islamic bond issues by only two listed firms - Saudi Basic Industries Corporation and Saudi Electricity. The government is a major shareholder in both firms.-Reuters