Saudi Arabian Law Overview

Banking

The Saudi Arabian Monetary Authority

The central bank of Saudi Arabia, which is known as the Saudi Arabian Monetary Authority (SAMA), was established pursuant to the SAMA Charter, Royal Decree No M/23 of 23 Jumada Awal 1377 Hejra (corresponding to 15 December 1957). The objects of SAMA are (i) the issue, support and consolidation of the Saudi Riyal; (ii) to be the central bank for the government; and (iii) to control the banks and money changers. The SAMA Charter sets out the functions of SAMA with regard to the supervision of banks and money changers, as well as specifying certain prohibited activities for SAMA. Corporate governance provisions in the SAMA Charter provide for the SAMA’s management, and specific penalties are provided for in the event banks and money changers do not submit monthly reports of their financial position to SAMA or maintain the required minimum deposits with SAMA. In line with Islamic tenets, the SAMA Charter provides that SAMA “shall not pay or receive interest” and SAMA shall not “carry on any act which violates the principles of Islamic rites: it may not pay or receive interest on business.”

The Currency Regulation, Royal Decree No M/6 of 1 Rajab 1379 Hejra (corresponding to 31 December 1959) established the Saudi Riyal as the official currency of Saudi Arabia.

Banking in Saudi Arabia is regulated by the Banking Control Regulation, Royal Decree No M/5 of 22 Safar 1386 Hejra (corresponding to 11 June 1966). Any entity carrying on banking activities is required to be licensed pursuant to the Banking Control Regulation. Banking activities include, but are not limited to, the business of receiving money in a current or fixed deposit account, the opening of current accounts, the opening of letters of credit, the issuance of letters of guarantee and the payment and collection of cheques.

The Banking Licence Application Process

There are currently 13 locally licensed banks and 17 foreign licensed banks in Saudi Arabia.

The Banking Control Regulation lays down basic requirements for obtaining a banking licence. In December 2018, SAMA issued the SAMA Banking Licensing Guidelines and Minimum Criteria which distilled these requirements into a guide for applicants interested in obtaining a banking licence.

SAMA is the banking regulator, and is responsible for reviewing an application for a banking licence, but such licences are granted by the Minister of Finance after approval by the Council of Ministers. The parent entity of a foreign bank may apply to establish branches within the Kingdom.

The application process for the acquisition of a banking licence involves an assessment by SAMA that the bank’s structure and operations are satisfactory and in compliance with applicable laws and regulations. This assessment is comprehensive and involves the evaluation of many criteria including:

1. the bank’s level of capital;
2. the fitness of the owners of the bank for their position;
3. the composition and functioning of the bank’s board;
4. the adequacy of the bank’s risk management and control procedures;
5. the appropriateness of the IT, accounting, auditing, outsourcing, and risk management and control arrangements; and
6. the adequacy of measures in place for ensuring compliance and combating money laundering and the financing of terrorism.

There are additional requirements for foreign bank branch applicants, which include the home supervisor’s consent for the establishment of a bank in Saudi Arabia, and an evaluation by SAMA that the foreign applicant is subject to an adequate level of supervision in their country of origin.

SAMA assesses the adequacy of bank capital on a case-by-case basis. Local banks must maintain a minimum capital ratio set by SAMA. Foreign banks do not need to maintain capital in the Kingdom however assessment of the adequacy of their capital is also conducted on a case-by-case basis. The Banking Control Regulation lays down the regulatory requirement of a deposit reserve ratio being maintained together with an obligation for banks to increase their capital and reserves in the event deposits exceed the prescribed amount. As required by most central banks, the Banking Control Regulation obligates each bank to maintain a deposit with SAMA, and provides SAMA with the flexibility of increasing or decreasing such deposits within a narrow band. Furthermore, banks are prohibited from extending to any one entity a loan or credit facility exceeding in total 25% of the total reserves and paid-up or invested capital of the bank. Activities such as merging with another bank are prohibited unless written permission is obtained from SAMA and subject to fulfilment of the terms and conditions laid down by SAMA.

All banks are required to appoint two auditors duly registered in Saudi Arabia, and to post certain statutory reserves. Banks are also required to send monthly reports to SAMA. The Banking Control Regulation allows SAMA to lay down general principles to regulate certain specific matters. SAMA also has the authority to require any information from any bank and to conduct audits. There is also a specific confidentiality obligation in the Banking Control Regulation.

Banks are obliged to divest themselves of their investment activities and must set up new financial institutions for investment activities. Such financial institutions fall under the jurisdiction of the Capital Market Authority and not under the jurisdiction of SAMA.

Penalties

The Banking Control Regulation provides for penalties for banks in violation of the provisions of such laws, including cancellation of their licence for persistent violations. Other penalties that can be imposed or ordered by SAMA include:

1. suspension or removal of any director or officer of the bank;
2. limiting or suspending the granting of credits or the acceptance of deposits; and
3. fines and imprisonment. For example, any person which contravenes the requirement for licensing shall be liable to imprisonment for a term not exceeding two years and to a fine not exceeding SAR 5000 for each day the offence continues or to either of these penalties.

Other Banking and Financial Regulations

Detailed regulations for the banking and financial sectors are contained in secondary legislation, with these rules and regulations increasingly being uploaded to SAMA’s website.

Money Changing Licences

The Rules Regulating Money Changing Business were issued by the Decision of the Minister of Finance No 4686 of 21 Dhul Qada 1441 Hejra (corresponding to 12 July 2020). Under Article 4 (a) (1) of the Rules, SAMA prohibits money changing without a valid licence. SAMA has granted money changing licences to foreign businesses. Licensed hotel, hotel suites and tourism offices are restricted to exchanging money with their clients. These currencies must afterwards be sold to licensed Saudi money exchange centers and banks.

Financial Technology Activities

In recent years, SAMA has constructed a regulatory framework to support financial technology activities. It is currently working with the United Arab Emirates Central Bank (UAECB) to develop a common digital currency, “Aber”, to be used in financial settlements between the two countries.

The Payment Services Provider Regulations (PSPR), released in January 2020, regulate payment service providers in Saudi Arabia. These regulations permit the licensing of non-banking financial institutions, such as payment companies, and govern the provision of these services within the Kingdom. Certain aspects of the European Union’s Payment Services Directive (PSD2) have been implemented by the PSPR, which should serve to streamline the licence application process for foreign companies who wish to launch operations in Saudi Arabia.

On 24 September 2020, SAMA released the Additional Licensing Guidelines and Criteria for Digital-Only Banks in Saudi Arabia, which set out the licensing criteria for banks which conduct business primarily through digital-only channels such as website and mobile applications.