The Islamic Finance and Markets Review: Saudi Arabia

Legislative and regulatory framework

i Legislative and regulatory regime

There are no laws in the Kingdom of Saudi Arabia that apply specifically to Islamic finance as opposed to other types of finance. The paramount body of law in Saudi Arabia is the shariah. The shariah comprises a collection of fundamental principles derived from a number of different sources, which include the Holy Quran and the Sunnah (the witnessed sayings and actions of the Prophet Mohammed). In addition to the shariah, Saudi Arabian law is also derived from enacted legislation. Legislation is enacted in various forms, the most common of which are:

  1. royal orders;
  2. high orders;
  3. royal decrees;
  4. resolutions of the Council of Ministers;
  5. resolutions of the Council of Economic and Development Affairs; and
  6. resolutions and circulars of ministries and other governmental bodies.

All such laws are ultimately subject to, and may not conflict with, the shariah, and each Saudi Arabian court or other adjudicatory authority is required to interpret secular legislation accordingly. There are, therefore, numerous enacted pieces of legislation covering banking, capital markets, insurance and funds, all of which are subject to shariah as applied in Saudi Arabia.

References to Saudi Arabian law in this chapter include the shariah as construed and applied in Saudi Arabia, and all published enacted legislation referred to above and having the force of law in Saudi Arabia.


Banking business is a regulated activity in Saudi Arabia. Article 2 of the Banking Control Law states that no legal or natural person who is not licensed in accordance with the provisions of this Law may conduct any banking business in the Kingdom as its core business. The law defines banking business as:

  1. receiving funds on deposit (fixed or current);
  2. opening current accounts and letters of credit;
  3. issuing letters of guarantee;
  4. paying and collecting under cheques, drafts and other papers of value, discounting notes and bills of exchange and other commercial papers;
  5. conducting foreign exchange activities; and
  6. other banking business.

The reference to other banking business in the definition, based on the fact that lending is generally regarded (as a matter of Saudi Arabian and international market practice) as constituting banking business, captures the provision of loans or other banking products (whether structured so as to be shariah-compliant or conventional) as part of a business in Saudi Arabia that requires a licence under the Banking Control Law.


Financing activities, which include real estate finance, production asset finance, finance leasing, credit card finance, consumer finance and microfinance, are regulated activities in Saudi Arabia. The Finance Companies Control Law requires that a person be licensed in accordance with the provisions of such Law (and any other applicable laws) prior to engaging in any such financing activities. Licensed entities are required to engage in finance activities in a manner that does not conflict with the principles of shariah as stipulated by their shariah committees, whose members are selected by such entities, without prejudice to the integrity of the financial system and equity of transactions.


The provision of insurance and reinsurance services (whether or not structured so as to be shariah-compliant) is also a regulated activity in Saudi Arabia. The Cooperative Insurance Companies Control Law (and its implementing regulations) specify, among other things, the licensing requirements in respect of the types of insurance activities, capital requirements, governance, asset valuation and solvency margin.

Capital markets

The primary legislation regulating the offering of securities in Saudi Arabia is the Capital Market Law and various implementing regulations issued pursuant to the Capital Market Law. The Rules on the Offer of Securities and Continuing Obligations (among other implementing regulations) provide a legal framework governing the offering of securities in

Saudi Arabia. Securities are defined to include:

  2. debt instruments;
  3. warrants;
  4. certificates;
  5. units;
  6. options;
  7. futures;
  8. contracts for differences;
  9. long-term insurance contracts; and
  10. any right to or interest in any of the foregoing.

A sakk (singular of sukuk) would constitute a security for the purpose of these regulations.

In addition to the offering of securities, the following activities are regulated, and a person must not carry on such activities in Saudi Arabia unless such person is a person authorised by the Capital Market Authority (CMA) or is an exempt person as specified in the Securities Business Regulations:

  1. dealing: a person deals in a security as principal or as agent, and dealing includes selling, buying, managing subscriptions and underwriting securities;
  2. arranging: a person introduces parties in relation to securities business, advises on corporate finance business or otherwise acts to bring about a deal in a security;
  3. managing: a person manages a security belonging to another person in circumstances involving the exercise of discretion;
  4. advising: a person advises a person on the merits of that person dealing in a security or exercising any right to deal conferred by a security; and
  5. custody: a person safeguards assets belonging to another person that include a security, or arranges for another person to do so, and custody includes taking the necessary administrative measures.


A person who intends to offer units in an investment fund in Saudi Arabia, or to establish an investment fund in Saudi Arabia, must comply with the Investment Fund Regulations under the remit of the CMA. Certain additional obligations must be adhered to in respect of any investment fund that is a shariah-compliant investment fund. The Real Estate Investment Funds Regulations (under the remit of the CMA) regulate investment funds in Saudi Arabia in respect of real estate.

ii Regulatory and supervisory authorities

The Saudi Arabian Monetary Authority (SAMA) is the principal regulator in respect of banking activities, financing activities and insurance and reinsurance services in Saudi Arabia. Under the applicable laws and regulations governing such activities and services, SAMA has powers to, among other things, issue circulars to licensed persons providing recommendations and additional requirements to be adhered to in addition to supervising and sanctioning persons carrying out any regulated activities, including providing warnings, issuing fines and revoking any licences it has issued. Certain breaches of the laws and regulations may also result in the imprisonment of the persons involved.

The CMA is the principal regulator in respect of securities business and investment funds in Saudi Arabia. Under the applicable laws and regulations governing such business and instruments the CMA has powers to, among other things, supervise and sanction persons carrying out any regulated activities, including through providing warnings, issuing fines, revoking any licences it has issued or voiding contracts. Certain breaches of the laws and regulations may also result in the imprisonment of the persons involved.

Common structures

All of the banks licensed by SAMA in Saudi Arabia offer a range of Islamic finance products, whether to their corporate or retail clients. A number of those banks also provide conventional financing products or solutions, while others are purely focused on Islamic banking solutions. A few of those latter banks may also take a more conservative or strict interpretation of certain shariah principles. In syndicated or multi-bank financings, such differing shariah requirements may dictate that different financing structures are implemented in respect of a project or transaction, or side letters are entered into by such banks carving out certain provisions that may otherwise be applicable to the finance parties (such as the imposition of late payment penalties, notwithstanding that these would otherwise be limited to actual costs or payable to charity when charged).

Although there is a wide range of Islamic finance structures employed within Saudi Arabia (whether by the local SAMA licensed banks or foreign branches of international banks), the most common financing structures are based on a murabahah, ijarah or istisnah. In respect of sukuk (under the remit of the CMA) the structures vary, but they typically apply a wakalah, musharakah or mudarabah structure, with a number of issuances based on ijarah and murabahah structures.

As mentioned above, entities licensed by SAMA as finance companies are required to provide financing solutions that do not conflict with the principles of shariah.


There is no separate or specific taxation regime for Islamic financial products and structures in Saudi Arabia. However, there is an exemption under the VAT Implementing Regulations that provides that Islamic finance products that are shariah-compliant, and that simulate the intention of and achieve the same result as a conventional finance product, will have the same VAT treatment as a conventional finance product. The General Authority of Zakat and Tax has published the Islamic Finance Guideline, which provides some clarity on the VAT treatment of certain Islamic finance products, and the considerations to be taken into account in order that they may fall within the exemption under the Regulations.

Pursuant to the Income Tax Law, payments of or in the nature of interest made by a person in Saudi Arabia to a person that is not incorporated in Saudi Arabia are subject to a five per cent withholding tax in Saudi Arabia.

Zakat, income tax and other taxes may also be applicable in respect of Islamic finance products and structures, albeit these are not necessarily specific to products being Islamic or shariah-compliant.


There is no separate or specific insolvency regime for Islamic financial products and structures in Saudi Arabia.

The Bankruptcy Law does not distinguish whether a debtor's debts are in respect of an Islamic financial product or a conventional financial product. In summary, the Bankruptcy Law applies to:

  1. natural persons who conduct in Saudi Arabia financial or professional activities, or activities that aim to make a profit;
  2. commercial companies, professional companies, regulated entities and other companies, and entities that aim to make a profit and are registered in Saudi Arabia; and
  3. non-Saudi investors, whether natural or corporate persons, holding assets or practising a commercial activity or a professional activity, or any activity with an aim to generate profits through a licensed entity in Saudi Arabia (and in such circumstances the Bankruptcy Law would apply to the assets of the investor that are located in Saudi Arabia).

The Bankruptcy Law provides for protective settlements and restructuring schemes. Each includes a streamlined procedure for 'small debtors'. The Bankruptcy Law also provides for the winding up of insolvent debtors, including a small debtor variant. A further insolvent winding-up procedure is available for debtors whose assets are insufficient to cover the expenses of the procedure.

The Bankruptcy Law focuses closely on rehabilitation and provides a cram down process for settlements and restructuring schemes. The Bankruptcy Law also introduced the concepts of statutory netting and the clawback of suspect transactions, as well as providing a hierarchy for the priority of claims, which were previously not specifically recognised or provided for within Saudi Arabian law.

Judicial framework

i Courts

There are no separate or specific courts that have jurisdiction to decide disputes involving shariah-compliant products and structures in Saudi Arabia.

Under Saudi Arabian law, only a court or judicial committee in its application of the law will finally determine the appropriate adjudicating forum for a dispute, notwithstanding the contractual election of the parties to the agreement. Jurisdictional clauses that purport only to give certain of the parties the option to choose a forum for adjudication are unlikely to be upheld, on grounds of unfairness.

However, the Banking Disputes Committee has been set up to take jurisdiction over disputes between banks and their customers, and the Committee for the Resolution of Securities Disputes has been set up to take jurisdiction over disputes relating to securities. The Board of Grievances, an independent administrative judicial committee responsible directly to the King of Saudi Arabia, has jurisdiction over claims against the government and government-related entities.

ii Cases

We are not aware of any significant Saudi Arabian cases that have been decided that affect or interpret Islamic financial products and structures. However, it is well established that agreements for the payment of interest or amounts that are considered by a Saudi Arabian court or judicial committee to be in the nature of interest (howsoever described, and whether or not involving a penal element), as well as indemnities with respect thereto, are unenforceable under the laws and regulations of Saudi Arabia. The unenforceability of any such obligation would not, however, cause other obligations not constituting or in the nature of interest to become likewise unenforceable. In legal proceedings to enforce payments under any agreement, a court or judicial committee in Saudi Arabia may order a deduction from the amounts claimed in an amount equal to all amounts previously paid to a claimant that the Saudi Arabian court or judicial committee considers to be in the nature of interest.

Generally, previous decisions of Saudi Arabian adjudicatory bodies are not considered to establish a binding precedent for the decision of later cases, and the principle of stare decisis is thus not accepted in Saudi Arabia.


The role of financial technology (fintech) in Islamic finance is a key focus in the industry and is also one of the key initiatives for Saudi Arabia as it works towards its aspiration to become a pioneering hub for the fintech sector. The digitisation of financial services and advance digital transformation in the sector to meet the demands and goals of the financial sector development programme is one of the programmes of Saudi Vision 2030. Fintech Saudi was launched by the Saudi Arabian Monetary Authority in partnership with the Capital Market Authority in April 2018 to act as a catalyst for the development of the fintech industry in Saudi Arabia. Their stated ambition is to transform Saudi Arabia into an innovative fintech hub with a thriving and responsible fintech ecosystem. This is set to be achieved by Fintech Saudi 'supporting the development of the infrastructure required for the growth of the fintech industry, building capabilities and talent required by fintech companies and supporting fintech entrepreneurs at every stage of their development'.2

The Financial Sector Development Program Charter (Delivery Plan 2020) has, as one of its strategic considerations, the further enhancement of Islamic finance offerings in Saudi Arabia. The Charter states that such would be implemented by introducing initiatives that focus on enhancing the current product offering (such as debt capital markets and savings products) to define the right mechanisms to provide the necessary shariah-compliant offerings, with a view to enable the correct specialisation within each domain and avoiding overlap with (or cannibalisation of) conventional products.


1 Karim Wali is a partner and Zeyad Khoshaim is the managing partner at Khoshaim & Associates.

Get unlimited access to all The Law Reviews content