Circular Re. Responsible Lending Principles for Individual Customers

In the Name of Allah, the Most Gracious, the Most Merciful Saudi Central Bank Headquarters

Governor's Office
No: 1
Attachments:

Circular

To:
Gentlemen /
Peace, mercy, and blessings of Allah be upon you.

Subject: Responsible Lending Principles for Individuals

Based on the authorities granted to the Saudi Central Bank under the relevant systems, regulations, and instructions, and to achieve the Bank's objectives of preserving the integrity of the financing sector, ensuring fair dealings, and protecting customers.

You will find attached a copy of the Responsible Lending Principles for Individuals, issued on 2/9/1439H. The Bank emphasizes that banks and licensed financing companies must immediately take the necessary steps to ensure full compliance with these instructions by 1/7/1439H (corresponding to 12/8/2018). Please note that the provisions of paragraphs (15-16-17) of these Principles shall apply from that date.

For information and action,
And accept my regards and appreciation,
Ahmed bin Abdul Kareem Al-Khalifa
Governor

Distribution List:

• Banks and general commercial banks in the Kingdom
• Financing companies operating in the Kingdom
• Supervisory Agency Departments
• General Administration of Legal Affairs

P.O. Box: Riyadh 2992 : Email: 11169 : Telephone: governor@sama.gov.sa : Fax: 3000 463 : 3703 463

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In the Name of Allah, the Most Gracious, the Most Merciful Saudi Central Bank Headquarters

Governor's Office
Date:
Corresponding:

Saudi Central Bank

Responsible Lending Principles for Individuals

P.O. Box: Riyadh 2992 : Email: 11169 : Telephone: governor@sama.gov.sa : Fax: 3000 463 : 3703 463

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In the Name of Allah, the Most Gracious, the Most Merciful Saudi Central Bank Headquarters

Governor's Office
Date: Ramadan 1439H -- May 2018
Corresponding:

Preamble

The Saudi Central Bank issued these Principles based on the authorities granted to it under the relevant systems, regulations, and instructions.

The reading of these Principles should be accompanied by the following:
a. The Banking Control System issued by Royal Decree No. 5/M dated 22/2/1386H b. The Financing Companies Control System issued by Royal Decree No. 51/M dated 13/8/1433H and its Executive Regulations issued by Governor's Decision No. 2/M/Sh dated 14/4/1434H
c. The Real Estate Financing System issued by Royal Decree No. 50/M dated 13/8/1433H and its Executive Regulations issued by Minister of Finance Decision No. 1229 dated 10/4/1434H
d. The Leasing System issued by Royal Decree No. 48/M dated 13/8/1433H and its Executive Regulations issued by Governor's Decision No. 1/M/Sh dated 14/4/1434H e. Updated Consumer Financing Controls issued under Circular No. 351000116619 dated 10/9/1435H f. Controls for Issuing and Operating Credit Cards and Direct Debit Cards issued under Circular No. 361000090389 dated 26/6/1436H g. Controls and Procedures for Collecting from Individual Customers issued by Saudi Central Bank Circular No. 391000083340 dated 26/7/1439H corresponding to 12/04/2018H h. Principles for Protecting Bank Customers issued under Circular No. 341000095960 dated 3/8/1434H
i. Principles for Protecting Financing Company Customers issued under Circular No. 361000110320 dated 14/8/1436H

P.O. Box: Riyadh 2992 : Email: 11169 : Telephone: governor@sama.gov.sa : Fax: 3000 463 : 3703 463

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In the Name of Allah, the Most Gracious, the Most Merciful Saudi Central Bank Headquarters

Governor's Office
Date:
Corresponding:

Chapter One
Definitions

1. The following words and expressions - wherever they appear in these Principles - have the meanings indicated opposite each of them, unless the context requires otherwise:

• The Institution: The Saudi Central Bank.
• The Governor: The Governor of the Saudi Central Bank.
• The Financier: Banks and financing companies subject to the supervision of the Institution and licensed to conduct one or more financing activities.
• The Principles: Responsible Lending Principles for Individuals.
• The Customer: A natural person who obtains financing or applies to the Financier for financing, or to whom financing is directed.
• Financing Amount: The maximum or total amounts available to the Customer under the financing contract.
• Tenor Cost: The value of the tenor charged to the Customer under the financing contract, which can be expressed as a fixed or variable annual percentage of the financing amount provided to the Customer.
• Variable Tenor Cost: The tenor cost determined based on a clearly defined and fixed index or reference rate in the financing contract, which changes with the change in the index.
• Total Amount Payable by the Customer: The financing amount plus all that the Customer is obligated to pay in costs according to the provisions of the financing contract, including tenor cost, fees, commissions, administrative service costs, insurance, and any necessary expenses to obtain financing, excluding any expenses that the Customer can earn, such as costs or fees due to the Customer resulting from breach of any of its obligations under the financing contract.

P.O. Box: Riyadh 2992 : Email: 11169 : Telephone: governor@sama.gov.sa : Fax: 3000 463 : 3703 463

In the Name of Allah, the Most Gracious, the Most Merciful Saudi Central Bank Executive Office Governor's Office

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Monthly Credit Obligations: The total amounts payable by the Customer according to the credit report issued by licensed credit reporting agencies and the Customer's personal disclosure, calculated on a monthly basis.

Gross Salary: The basic monthly salary (after deducting pension or insurance dues) plus all fixed allowances given to the employee by their employer on a monthly basis.

Gross Monthly Income: The monthly average of financial amounts received by the Customer from any periodic income source, whether monthly, annually, or other periodic periods, including gross salary or any other income, including any allowances or bonuses paid periodically, or rental yields from assets or yields from other investments, or otherwise, which can be reasonably verified, calculated according to the provisions of paragraph (17) of these Principles.

Available Monthly Net Income: The amount remaining from the Customer's gross monthly income for spending, investing, or saving after deducting current or expected future basic expenses, and monthly credit obligations, calculated on a monthly basis.

Debt Burden Ratio: The ratio of the Customer's monthly credit obligations to the Customer's gross monthly income, calculated according to the provisions and conditions set forth in Chapter Four regarding the Quantitative Principles of Responsible Lending.

Deduction: The body of the Customer's gross salary or their monthly pensions.

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In the Name of Allah, the Most Gracious, the Most Merciful Saudi Central Bank Executive Office Governor's Office

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Chapter Two
General Provisions

2. These Principles aim to encourage responsible financing that meets the actual needs of customers, particularly those related to obtaining housing and assets rather than consumption purposes. These Principles also aim to enhance financial inclusion by providing appropriate financing for all segments of society, and considering the debt burden ratio within a range the Customer can bear. These Principles also aim to ensure fairness and competition among Financiers, thereby maintaining the effectiveness of the procedures and mechanisms adopted by them and ensuring their efficiency.

3. These Principles apply to all Financiers and include their financing activities directed towards customers, which include all credit products and programs directed towards individuals, including but not limited to personal financing, vehicle financing, credit cards, and real estate financing.

4. The Financier must establish appropriate internal controls and procedures to ensure monitoring of compliance with these Principles and other related systems, regulations, and instructions, and pay special attention to documenting the information and documents provided by the Customer to give them an acceptable degree of reliability.

5. If the Financier delegates some related work to one or more other parties, it must ensure that those parties comply with these Principles and do not violate the provisions of these Principles and other related systems, regulations, and instructions.

6. The Financier must take necessary steps to ensure its employees' full compliance with these Principles and their commitment to applying them, sharing them with customers, and making them aware of them. When preparing employee incentive programs, the Financier must consider these Principles and not establish programs that lead to irresponsible financing, nor rely solely on the number or value of financing granted.

7. The Financier must keep sufficient records to prove its compliance with these Principles and other related systems, regulations, and instructions.

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In the Name of Allah, the Most Gracious, the Most Merciful Saudi Central Bank Executive Office Governor's Office

Date:
Corresponding:
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Chapter Three
Qualitative Principles of Responsible Lending

8. The Financier must follow a scientific approach and clear, transparent, and written standards and procedures to evaluate the Customer's creditworthiness and repayment capacity, in accordance with best practices in this field and without conflicting with these Principles. The Board of Directors of the Financier must approve these standards and procedures, review them annually, and update them as needed. The Financier must apply these procedures before granting financing and document this in the financing file.

9. The Financier must examine the Customer's credit record, with their consent, to verify their financial solvency, ability to bear monthly credit obligations, and credit behavior, and document this in the financing file. The Financier must request the Customer to disclose in writing any other credit obligations they have, such as loans from their employer, friends, relatives, or other obligations, whether current or expected, and document this in the financing file. The Financier must, in accordance with the provisions of relevant systems, regulations, and instructions, after granting financing, register the credit information related to the financing granted to the Customer, with their consent, with the relevant credit reporting agencies, and update that information throughout the duration of dealing with the Customer. The Financier must reject the financing request if it does not obtain the Customer's consent to all that is mentioned in this paragraph.

10. The Financier must subject all its operations to an assessment of the ability to bear monthly credit obligations, especially in circumstances where the Customer's debt burden ratio approaches the upper limits set forth in these Principles. The assessment of the ability to bear monthly credit obligations is based primarily on evaluating the Customer's available monthly net income that can be used to meet their monthly credit obligations, taking into account the variation in basic expenses based on multiple factors such as income levels, number of dependents, place of residence, and whether the Customer owns or rents their home, or otherwise. The Financier is expected to establish appropriate rules according to best practices to apply comprehensive factors for different customer categories. Financing is considered affordable if the Customer's total monthly credit obligations after granting financing are less than the available monthly net income.

P.O. Box: Riyadh 2992 : Email: 11169 : Telephone: governor@sama.gov.sa : Fax: 3000 463 : 3703 463

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available to the Customer and without conflicting with the debt burden ratios set forth in Chapter Four regarding the Quantitative Principles of Responsible Lending, paragraphs (15, 16, 17) of these Principles.

11. The Financier must use financial models and tools to measure the ability to bear monthly credit obligations and the suitability of financing for the Customer's needs and circumstances, based on a credit study and evaluation of the Customer's available monthly net income. This type of model is based on fundamentals, the most prominent of which are the inventory and classification of usual basic expenses for different customer categories. Basic expenses include at least the following:

(a) Food expenses, which are affected by the number of dependents.

(b) Housing (rent) and service expenses, which depend on whether the Customer owns their home, rents it, or otherwise.

(c) Domestic labor wages.

(d) Education expenses, which are affected by the number of dependents.

(e) Healthcare expenses, which are affected by the number of dependents.

(f) Transportation and communication expenses.

(g) Insurance expenses for the individual and their dependents, as applicable.

(h) Any expected future costs or expenses.

In addition to the above, existing monthly credit obligations that can be verified through licensed credit reporting agencies and financing deducted by the employer, friends, relatives, or other financing that is repaid in monthly or semi-annual installments or otherwise.

12. The Financier must ensure a balance between efficiency and effectiveness in the financial models and tools used to measure affordability, utilizing the information and data available to the Financier as well as general statistical sources available in a legal manner. The methodology of these models and tools must include at least the following:

(a) Mechanism for calculating and analyzing gross monthly income.

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(b) Mechanism for calculating and analyzing monthly credit obligations.

(c) Mechanism for calculating and analyzing basic expenses, including the following:

- A list of basic expense indicators compared with verified data.
- The ability to change basic expenses according to income levels.
- The ability to change basic expenses according to the number of dependents.

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## Chapter Four
Quantitative Principles of Responsible Lending

13. The conditions for calculating the Customer's monthly credit obligations must be adhered to as follows:

(a) The monthly credit obligation for a credit card is equal to the minimum payment from the credit limit for each credit card issued to the Customer.

(b) Monthly credit obligations include all credit obligations to Financiers and specialized government lending institutions, and any other credit obligations such as loans from employers, friends, relatives, or other financing.

(c) The Financier must consider, before granting financing with variable tenor cost, adding a default margin to the tenor cost when granting financing when calculating the monthly credit obligations for this financing. The monthly credit obligations for this financing must be documented based on the tenor cost at the time of granting financing plus the default margin in the Customer's credit report at the credit reporting agency, to face the risks of changes in tenor cost.

(d) After granting financing, the Financier is responsible if the Customer's debt burden ratio exceeds the permitted limit under these Principles if that excess is due to a change in tenor cost. If this occurs, the Financier must reschedule the repayment periods for the financing, and the Financier may not then calculate a tenor cost that leads to exceeding these limits.

(e) Monthly credit obligations for financing where not all installments are equal are calculated assuming the monthly installment remains at the level of the average monthly installment of all installments, regardless of whether the financing is repayable through equal installments or requires a final payment.

14. The conditions for calculating the Customer's gross monthly income must be adhered to as follows:

(a) From the gross salary, what is documented by any means from the employer is calculated.

In the Name of Allah, the Most Gracious, the Most Merciful Saudi Central Bank Executive Office Governor's Office No:
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(b) From other income, half of the monthly average of the total financial amounts received by the person from any periodic income source, whether monthly, annually, or of another periodic period, is calculated, including allowances or bonuses paid periodically, or rental yields from assets or investment yields, or corporate dividends or otherwise, which can be verified based on the Customer's account statement for at least two years or by official documents proving their continuity.

(c) The Customer's receipt of government subsidies such as the "Hisaab" program or social security is not allowed to be included in the Customer's gross monthly income.

15. The debt burden ratios for customers whose gross monthly income is (15,000) SAR or less are subject to the following restrictions:
    (a) Monthly credit obligations arising from financing related only to the monthly deduction from the Customer's gross salary must not exceed (33.33%) of the gross salary, and for retired customers (25%) of the gross salary. (b) Monthly credit obligations other than those arising from real estate financing must not exceed (45%) of the Customer's gross monthly income. (c) Monthly credit obligations arising from financing must not exceed (55%) of the Customer's gross monthly income.

16. The debt burden ratios for customers whose gross monthly income exceeds (15,000) and is less than (25,000) SAR are subject to the following restrictions:
    (a) Monthly credit obligations arising from financing related only to the monthly deduction from the Customer's gross salary must not exceed (33.33%) of the gross salary, and for retired customers (25%) of the gross salary. (b) Monthly credit obligations other than those arising from real estate financing must not exceed (45%) of the Customer's gross monthly income. (c) Monthly credit obligations arising from financing must not exceed (65%) of the Customer's gross monthly income.

P.O. Box: Riyadh 2997 : Email: 11169 : Telephone: governor@sama.gov.sa : Fax: 3000 463 : 3703 463 ---