Finance Companies Control Law in Saudi Arabia

The Finance Companies Control Law in the Kingdom of Saudi Arabia is a set of legal rules governing the operation of finance companies in the Kingdom, in accordance with Islamic law (Sharia). It covers the licensing, activities, and supervision of these companies, and defines violations and penalties. The law was issued in 2012.

The Finance Companies Control Law in the Kingdom stipulates that finance companies – licensed pursuant to this law- engage in finance activities in a manner not conflicting with principles of Sharia as defined by Sharia committees, whose members are selected by these companies, without prejudice to the integrity of the financial system and fairness of transactions.

The law prohibits finance companies from engaging in any of the specified financing activities without obtaining a license in accordance with the provisions of this law and other applicable laws.

The law also prohibits any unlicensed person from using, by any means, anything that indicates engagement in finance activities as specified under this law. It further prohibits the use of any other indicative terms or phrases in his documents, papers, or advertisements.

A natural or legal person may engage in financing the goods or services of their establishment for their customers, in a way that enables the Saudi Arabian Monetary Authority (currently the Saudi Central Bank) to exercise its monetary authority, protect the financial system, and ensure consumer protection.

The Finance Companies Control Law in the Kingdom establishes the conditions for issuing licenses to finance companies, which include the submission of the organizational structure of the company, operation systems, and an investment plan demonstrating its technical capability to engage in finance activities. Additionally, the capital of the company must not be less than the amount specified by SAMA, and not less than the amount specified under the Companies Law. The foreign share in the capital, if any, must not exceed the percentage specified by SAMA.

One of the conditions is that each founding member of the company must meet the Sharia and legal eligibility requirements. He must not have been in default of any obligation towards his creditors, or have been in breach of the provisions of the Capital Market Law and its regulations, the Banking Control Law, the Cooperative Insurance Companies Control Law, or finance laws. Additionally, the founding member must not have declared bankrupt or been convicted of any crime impinging on integrity, unless rehabilitated pursuant to laws or as specified under the regulations.

The law requires that individuals nominated to perform monitoring and executive duties in the company satisfy professional competence requirements. They must possess theoretical and practical know-how in finance. Additionally, they must not have been in breach of the provisions of the Capital Market Law and its regulations, or convicted of violating the Banking Control Law, the Cooperative Insurance Companies Control Law, or finance laws. They must also not have been convicted of a crime impinging on integrity, unless rehabilitated.

The Finance Companies Control Law in the Kingdom specifies a period of sixty days, upon completion of the application, for SAMA to issue its decision of approval or reasoned rejection. In making its decision, SAMA observes the competitiveness and integrity of the industry and the quality of services.

Upon approval, applications are referred to the Ministry of Commerce to complete company incorporation and registration in accordance with the provisions of the Companies Law. SAMA licenses the company upon completion of its incorporation and issuance of the commercial register. The license term is valid for five years. A portion of the finance company's share capital is offered to the public after at least two fiscal years provided that the specified profit percentage has been attained.

The Finance Companies Control Law in the Kingdom sets several conditions for membership in the board of directors of a finance company. These include: the individual must not be a board member of another finance company, must not combine the duty of monitoring finance companies or auditing their accounts with board membership in the same company, must not have been dismissed, as a disciplinary action, from a senior executive position in a finance institution and must not have been previously declared bankrupt nor have been convicted of a crime impinging on integrity, unless rehabilitated.

Upon concluding any finance contract falling within their powers, the chairman, board members, and employees of the finance company must disclose in writing any relation with respect to the contract, any relation to the contract of any relative up to the second degree, and any financial interest they have with any contract party. In case of non-disclosure, an aggrieved party may file a lawsuit before the competent court to invalidate the contract.

The Finance Companies Control Law in the Kingdom requires the finance company to commence its activities within a period not exceeding one year from the date of obtaining the license. After commencing its activities, it must not cease its activities for more than three successive months unless approved by SAMA.

According to the law, the license may be revoked if it is discovered that the finance company has provided false information, or failed to disclose material information that should have been provided for licensing purposes.

The shares of founding shareholders may not be disposed of except with the approval of SAMA. Recipients of such shares must satisfy the requirements and the license shall be deemed expired upon appointment of a liquidator for the finance company or issuance of a bankruptcy ruling.

The Finance Companies Control Law in the Kingdom outlines the types of financing activities that finance companies are permitted to engage in, either in one or more types. These include real estate finance, productive asset finance, small and medium enterprises finance, finance lease, credit card finance, consumer finance, microfinance, and any other finance activity approved by SAMA. Additionally, finance companies may own assets in order to finance third parties’ ownership of such assets. Entities seeking to engage in finance-supporting activities in a manner that achieves competition in providing their services may be licensed to do so.

The Finance Companies Control Law in the Kingdom prohibits extending finance without collateral, offering financing or granting facilities using their own shares as collateral, or financing or offering facilities collateralized by its shares finance or offering facilities to an establishment or a company (other than joint stock companies listed in the Saudi Capital Market) if a board member of the finance company or its external auditor is a partner or a director of the establishment or company receiving such finance.

The Finance Companies Control Law also prohibits finance companies from financing or offering facilities to persons or entities if a board member of the finance company or its external auditor is a guarantor for receiving such finance or facilities. It also prohibits financing or offering facilities to any board member, director, or spouse thereof, or a relative up to the second degree. Furthermore, the law prevents financing or offering facilities or guaranteeing any financial obligation of any of its employees in excess of his aggregate salaries or acquiring shares in another finance company without approval. Additionally, the law prohibits financing or offering facilities to a company or establishment in which the finance company owns, directly or indirectly, a percentage exceeding the specified percentage nor financing or offering facilities to a company or establishment that owns in the finance company, directly or indirectly, a percentage exceeding the specified percentage.

The Finance Companies Control Law imposes one or more penalties on any company that commits violations relating to any professional irregularities or transactions exposing its shareholders or creditors to risk, or if its debts exceed its assets, including:

Serve a warning, require the finance company to submit an appropriate corrective action plan, order the suspension of some of its operations, or prevent the distribution of dividends impose the fine set out, as the case may be. Order the suspension or dismissal of the violator, if not a board member, according to the gravity of the violation. Suspend the chairman or a board member. Appoint one or more consultants at the expense of the finance company to provide advice on its conduct of business. Suspend the board of directors and appoint a manager at the expense of the finance company to run the company until the causes for the suspension cease to exist or revoke the license, liquidate the company, or suspend the license.

A fine not exceeding SAR250,000 may be imposed for any violation. If the violation persists, an additional fine not exceeding SAR10,000 may be imposed for each day the violation continues.

The Finance Companies Control Law stipulates that a person who persists in defaulting the payment of his loan may be subject to a fine not exceeding double the interest agreed to for the defaulted payment. The fine may be repeated with each repeated default. The fine may be deposited into the account of the agency overseeing nongovernmental organizations, to be allocated for support of public benefit.

Any person violating any of the provisions of this law is subject, depending on the gravity of the violation, to a fine not exceeding SAR2 million or 10 percent and imprisonment for a term not exceeding two years, or either penalty. The fines collected are deposited into the state treasury. SAMA has the authority to impose precautionary asset freezes up to the maximum fine amount or percentage until the competent court reviews and rules on the violation. Furthermore, the ruling may include a provision requiring the violator to publish a summary of the penalty at their own expense in a local newspaper or another suitable medium.