Bahraini retail bank lending to businesses eased slightly in the first quarter, posting its worst performance in more than five years as caution prevails in a Gulf Arab banking system hit by the global financial crisis.

Outstanding consumer loans by banks in the smallest Gulf economy also declined in the first quarter while annual money supply growth fell to 14.2 per cent in March, its slowest rate of growth in two years, the central bank said in a monthly report.

Loans and advances to businesses stood at BD3.87 billion ($10.27 billion) on March 31, down 0.03 per cent from the end of December, the data showed. The last time there was a quarter-on-quarter drop was in the third quarter of 2003.

'The disappearance and drying up of international credit markets has meant that banks are more reliant on deposit funding,' said Giyas Gokkent, chief economist at National Bank of Abu Dhabi.

'If the macro environment deteriorates you are not going to have a lot of loan demand. Banks are much more prudent and much more selective. This is unlikely to reverse until the second half of this year.'

Year-on-year growth in business loans also dropped to 38 per cent in March from 58 per cent in December, the data showed.

Banks across the world's biggest oil-exporting region have been taking provisions to guard against an expected rise in bad loans after the global financial crisis and tight credit markets brought to an end a regional economic boom late last year.

Bahrain's biggest lender, Ahli United Bank, posted an 8.9 per cent decline in first-quarter profit and a loss in the fourth quarter as it took more provisions for bad loans.

Total Bahrain retail bank loans to consumers fell 4.7 per cent in March from the end of 2008, including an almost 13 per cent decline in loans secured by property mortgages, the central bank said.

Claims on the private sector stood at BD6.12 billion on March 31, up 1.4 per cent from the month earlier but down 1.4 per cent from December. Claims on the private sector peaked at BD6.27 billion in November.

Growth in Bahraini money supply, one indicator of future inflation, fell to 14.2 per cent in March from 17 percent in February, with the level of money supply also easing from the month earlier to BD8.06 billion.

The central bank's net foreign assets fell for a second month to BD1.42 billion, down 24.5 percent from a year earlier-Reuters