Banks and Insurance Companies

1 – Overview:

Only banks and insurance companies licensed by the Saudi Central Bank may provide banking and insurance services in the Kingdom of Saudi Arabia. The banking control regulation and solidarity insurance control regulation mention the criteria and requirements needed to obtain such licences. The Saudi Central Bank has a wide range of powers in granting such licences. The banks are the legal entities that exercise the banking transactions. Under law, the banks receive the moneys of customers in deposit accounts, open the current accounts, issue the letters of credit and guarantee, collect cheques, promissory notes, and bills, perform foreign exchange transactions and other banking services. The banking control regulation contains provisions on the capital adequacy and the necessary financial restraints, and permits the foreign investor to own 60% of the bank capital and 49% of insurance company according to the protocol of accession of the Kingdom to the World Trade Organization. According to the systems of insurance companies of 100 million Saudi riyal capital and re-insurance companies of 200 million Saudi riyal capital, 20% of the net profits shall be added to the statutory reserve until it reaches 100% of the insurance company capital. The insurance companies, insurance advisors, agents and mediators, and re-insurance companies should get the necessary licences from the Saudi Central bank before commencement of business.

2 – Financing:

Whereas the Kingdom of Saudi Arabia is one the most prosperous states in the Middle East and the world, its regulations enable the investors and individuals to get an effective and easy financing where the investors and individuals have excellent opportunities to finance their projects through several forms of financing such debt financing and equity financing.

Financing opportunities available by the Saudi laws are not limited to the Saudi citizens only, but they are also available to non-Saudi business owners and companies having investments in the Kingdom.

The financing is available through the commercial banks to the projects and individuals. In addition to the banks, there are funds specialized for financing such as the Industrial Development Fund which provides financing for the industrial projects, and General Investment Fund which provides loans to the big industrial projects and Real Estate Development Fund which provides financing for the individuals and companies for the housing projects.

There are also the Saudi Agricultural Bank which provides loans and facilities to the planters, and the Islamic Development Bank which gives share capital and loans to the development projects.

There is another kind of financing which is share financing which is performed through the Saudi Stock Exchange known as “Tadawul” which is considered the biggest stock market at the level of the Arab world. The Saudi Central Bank and Capital Market Authority supervise the Saudi Stock Exchange.

It is notable that trading in the Saudi Stock Market (Tadawul) is available to the non-Saudi investors from the whole world through the joint investment funds.

The importance of guarantees is that they represent protection against non-fulfillment of financial and contractual obligations where the commercial transactions need confidence in the other party.

The financing institutions as banks provide several types of guarantees such as the bank guarantee where the bank issues an irrevocable pledge to pay an amount of money in case of non-execution of contract, performance bonds designed to guarantee the delivery of goods or services as per the contract terms and conditions at the time agreed upon, also pre-paid guarantees aiming to guarantee the use of the pre-paid amount as per the contract terms and conditions entered between the purchaser and seller and miscellaneous guarantees that help to mitigate the various risks arising out of contracts. For knowledge, the financing operations should be consistent with the Islamic Law. So, financing operations, lending and all the economic activities should be free from usury, deception and unfair speculation. This is taken into consideration on arranging any financial operation in the Kingdom.

3 – Guarantees:

Guarantees can be given against lands, collectible bonds, intellectual property, stocks and rights derived from contracts according to the special conditions of each case. But the most popular form of guarantees in the Kingdom of Saudi Arabia is the mortgage which is legalized by the Real Estate Mortgage Law. The mortgage should be approved and notarized by a notary public to be valid. For your knowledge, the notary public does not authenticate the real estate mortgage for the banks or investors if the mortgage involves an obligation to pay an interest.

This makes the real estate investment limited to the Islamic modes such as leasing (Ijara) and profit-loss-sharing (Murabaha). Under those two modes, the investor can take guarantees against property and execute the real estate mortgage under the court supervision.

  • Guarantees on collectable bonds:

The assignment of rights must be under consent by the assignor so that it could be valid and legally binding, but there is a doubt whether it shall entail any rights against the liquidators in regard to the amounts not actually collected.

As to the banking accounts, there is another condition to be met so that the assignment could be legally binding and valid, is that the assigned object should be sellable and negotiable.

According to the Islamic Sharia, it is not right to sell money. This raises doubts about the validity of assignment of deposits through guarantee in the Kingdom of Saudi Arabia.

There is another difficulty for assignment of deposits or creating a mortgage over unstable or uncertain deposit where the Islamic Sharia prevents the mortgage of future or unconfirmed assets.

  • Mortgage of shares:

Mortgage can be created over the shares of the joint stock companies through a mortgage to be created under the Saudi Commercial Mortgage Law where the mortgage can be registered with a Safe Deposit Box pursuant to the provisions of Commercial Mortgage Law and its Executive Regulations. The registration of mortgage gives priority to third parties from the registration date.

  • Priorities:

Except for the stocks of the joint stock companies and some intellectual property rights there are no registers in the Kingdom for registering and recording the priority of mortgages when agreed upon where the priority is from the registration date.

The execution of mortgage is made only by an application to be filed to the court and under its control. The Board of Grievances is the competent authority, except for the issues falling within the jurisdiction of the specialized judiciary committees such as bank disputes assumed by Banking Disputes Settlement Committee.

The execution procedures take a time and depend on the complexity of the action and the court decision on the matter.

4 – Islamic Financing:

In most cases, the transactions of commercial financing for companies and individuals in the Kingdom of Saudi Arabia are done through the modes of Islamic financing. It is known according to Islamic rules that any loan which results in a benefit is prohibited. The Islamic financing is based on the concept of sharing in profit and loss when the partners adopt the mode of sharing among them. Dealing in all kinds of usury, gambling, speculations (derivatives, options & future contracts), any deal or contract marred by deception and ignorance such as economic loss compensations and any compensations other than the actual damages, are prohibited. As other sharing, the profits and losses are distributed to shareholders on the basis of number of shares held by the shareholder in the capital. While the modes of conventional financing secure a fixed return to the financiers and they do not secure the same to the borrower, the Islamic financing secures the distribution of profits and losses among them.

  • Musharakah:

It is the best mode in pointing out the Islamic principles.

The Musharakah Agreement in financing permits the client to pump money intermittently.

This decreases the share of financier over time in the owned assets until all the assets become fully owned to the client, and this is known as the decreasing Musharakah.

  • Profit-loss-sharing (Murabaha):

It is a common form of Islamic sales for the assets where it is a selling or purchasing contract with the knowledge of the basic price in addition to the incremental amounts of profit where the financier buys the assets then sells them to client by agreement, and the profit ratio therein i.e. in the price of the object sold (incremental profit cost) is known.

Profit-loss-sharing varies in its many different types. For example, when the assets are sold to the client by the agent of financier, the financier shall get the profit in a fixed rate.

  • Leasing (Ijarah)

In leasing, the financier purchases the assets, and then lets them to others by an agreement against a rent for a limited period. The leasing includes a profit margin in different rates where the financier remains the real owner while the leasehold is transferred to the other party (client). It is agreed between the parties on the transfer of the leasehold from the owner to the client against a lump sum (rent) for a limited period which helps to reduce the total value of the final price where the rent is almost symbolic. Leasing is the most popular form as to the housing financing where it gives the financier a variable rate of return against a fixed murabaha (profit-loss-sharing).
Rabwa, Riyadh, Saudi Arabia

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AL NAMI LAW FIRM (NLF) is a law firm based in Riyadh, Saudi Arabia. It has been established by the brothers AL NAMI.

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