Circular Re. Rules Governing Calculation of Annual Percentage Rate (APR)

[Saudi Central Bank]

Date: 17/04/1445
Ref: 45025707

Circular

Dear Sirs,

Greetings,

Subject: Issuance of Rules Governing Calculation of Annual Percentage Rate (APR).

Based on the authorities vested in the Saudi Central Bank under the Law for the Control of Finance Companies issued by Royal Decree No. (M/51) dated 13/8/1433H and its Implementing Regulations, and related systems and regulations. And referring to SAMA Circular No. (381000095091) dated 10/9/1438H, which includes a provision requiring compliance with the Annual Percentage Rate (APR) calculation method according to the APR Calculation Guide published on the SAMA website.

We hereby inform you of the issuance of the Rules Governing Calculation of Annual Percentage Rate (APR) according to the attached format, which replaces the aforementioned Guide.

For your information and action.

Yours faithfully,

Yazid bin Ahmed Al-Sheikh
Deputy Governor for Supervision

Distribution Scope

• Banks and financial institutions operating in the Kingdom.
• Finance companies operating in the Kingdom.

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Rules Governing Calculation of Annual Percentage Rate (APR) Rabi' II 1445H / November 2023

Important Note:
To follow up on updates and amendments regarding instructions issued by the Saudi Central Bank, SAMA emphasizes the necessity of relying on the versions published on its website: www.sama.gov.sa

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Table of Contents

Table of Contents	Page Number
Chapter I: General Provisions	3
Chapter II: APR Calculator	5
Chapter III: APR Calculation Requirements	5
Chapter IV: Concluding Provisions	8

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Chapter I: General Provisions

Article 1: Definitions
The following terms and phrases, where used in these Rules, shall have the corresponding meanings unless the context requires otherwise:
SAMA: The Saudi Central Bank.
Rules: Rules Governing the Calculation of the Annual Percentage Rate.
Finance Providers: Banks, and Finance Companies Licensed to engage in retail lending.
Borrower: A natural person receiving finance.
Financing Agreement: An agreement whereby finance is granted to the Borrower.
Amount of Finance: The ceiling or total amounts made available to the Borrower under a financing agreement.
Annual Percentage Rate (APR): The discount rate at which the present value of all installments and other payments due from the Borrower representing the total amount payable by the Borrower equals the present value of payments of the amount of finance available to the Borrower, on the date on which the amount of finance or the first payment thereof is available to the Borrower, in accordance with the provisions of these Rules. Total Amount Payable by the Borrower: The amount of finance plus the total cost of finance. Total Cost of Finance: What the Borrower is committed to pay in terms of costs other than the amount of finance according to the provisions of the financing agreement, including term cost, fees, commissions, administrative service costs, insurance, and any necessary expenses to obtain finance, excluding any expenses the Borrower can avoid such as costs or fees payable by the Borrower resulting from breach of any of his obligations contained in the financing agreement.

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Article 2: Scope of Application

1. The provisions of these Rules shall apply to all Finance Providers when engaging in financing activities directed at individuals.
2. The Rules must be read in conjunction with the considered systems, regulations, and instructions, including but not limited to the following:

• The Law for the Control of Finance Companies and its Implementing Regulation.
• Rules Regulating Consumer Microfinance Companies.
• Rules on Disclosure of Interest Rates on Financing and Saving Products.
• Consumer Financing Controls.
• SAMA Circular No. (381000095091) dated 10/9/1438H, regarding clarifying Article (10) and Article (21) and the method of calculating the Annual Percentage Rate (APR) contained in the updated Consumer Financing Controls.

Article 3: General Provisions

1. These Rules aim to standardize the method of calculating the Annual Percentage Rate for financing products granted to individuals, thereby contributing to raising the level of transparency of financing offers provided and enabling individual consumers to compare and make their credit decisions accurately.
2. The Annual Percentage Rate shall be calculated in accordance with these Rules and the accompanying Calculator in any of the following activities and documents:
   a. Advertising campaigns and marketing offers. b. Finance offering.
   c. Financing agreement.
   d. Periodic statements provided to Borrowers. e. Any disclosure involving reference to the Annual Percentage Rate.

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Chapter II: APR Calculator

Article 4: APR Calculator
Finance Providers shall be committed to using the APR Calculator prepared in spreadsheet software (Excel) accompanying these Rules for the purpose of implementing its provisions.

Article 5: Implementation and Update of the APR Calculator

1. Finance Providers shall update their policies and procedures related to ensuring compliance with the requirements contained in these Rules.
2. Finance Providers are responsible for applying appropriate internal controls and review mechanisms to ensure the integrity of the APR Calculator used. In case the APR Calculator is automated; the Finance Provider must verify the results obtained using the automated calculator by comparing these results with the figures reached using the spreadsheet (Excel) accompanying these Rules.
3. The Finance Provider shall verify the update of the APR Calculator available to customers through their electronic platforms to align with the requirements of these Rules and the accompanying Calculator.

Chapter III: APR Calculation Requirements

Article 6: Method of Calculating the Annual Percentage Rate The Annual Percentage Rate must be calculated based on the net present value method using the following equation:
$$\sum_{d=1}^{m} C_d (1 + X)^{-S_d} = \sum_{p=1}^{n} B_p (1 + X)^{-t_p}$$

Where the symbols represent the following:

• m is the sequence number of the last payment made available to the Borrower from the amount of finance.
• d is the sequence number of the payment made available to the Borrower from the amount of finance.
• Cd is the value of payment (d) made available to the Borrower from the amount of finance.
• Sd is the period between the date on which the amount of finance or the first payment thereof is available to the Borrower and the date of payment (d), calculated in years and parts of a year, such that this period for the first payment received by the Borrower from the amount of finance is zero (S1=0).
• n is the sequence number of the last payment due from the Borrower.
• p is the sequence number of the payment due from the Borrower.
• Bp is the value of payment (p) due from the Borrower.
• tp is the period between the date on which the amount of finance or the first payment thereof is available to the Borrower and the date on which payment (p) is due from the Borrower, calculated in years and parts of a year.
• X is the Annual Percentage Rate.

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Article 7: Cost of Finance

1. The Finance Provider shall determine the total amount payable by the Borrower when calculating the Annual Percentage Rate.
2. The Finance Provider shall include the following in the total cost of finance:
   a. All fees and costs due from the Borrower to obtain finance. b. All costs, whether due to the Finance Provider or a third party, or due from the Borrower directly or indirectly, or which provide access to financial or non-financial services.
   c. Term cost, credit agreement commissions, brokerage fees for finance due from the Borrower, administrative fees / or loan processing fees, costs related to insurance, valuation fees, cost of additional services, and taxes (including Value Added Tax), and others.
   d. Cost of additional or supplementary services for the financing agreement, when the additional services are mandatory to obtain finance or to obtain finance according to the terms and conditions announced by the Finance Provider.

Article 8: Costs Excluded from Calculating the Annual Percentage Rate The following are excluded from calculating the Annual Percentage Rate:
a. Any amount due for early repayment or settlement and changes in the terms and conditions of the financing agreement. b. Fees and costs that may be imposed as a result of breach of the terms and conditions of the financing agreement (such as: late payment penalties, collection fees, etc.).
c. Other unpaid costs related to the financing agreement (such as: vehicle registration fees).

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Article 9: General Requirements
The Finance Provider must consider the following when calculating the Annual Percentage Rate:

1. The periods between the date on which the amount of finance or the first payment thereof is available to the Borrower and the date of each payment made available to the Borrower or due from him shall be calculated on the basis of (365) days for the year.
2. It is assumed that the amount of finance is valid for the agreed period, and the parties adhere to their obligations according to the provisions contained in the financing agreement.
3. The Annual Percentage Rate shall be calculated in percentage points with a minimum of two basis points, and half a basis point or more shall be rounded up to a full point.
4. In case the financing agreement contains what permits making a change in the term cost and fees included in the Annual Percentage Rate (such as: variable term cost rate) in a manner that cannot be determined quantitatively at the time of granting finance, the Annual Percentage Rate must be calculated assuming that the term cost and other fees remain fixed at the initial term cost and remain valid until the end of the financing agreement.

Article 10: Specific Requirements for Credit Card Products The Finance Provider, when calculating the Annual Percentage Rate for credit card products, shall assume the following:

1. That the amount of finance is for a period of one year starting from the date of the initial drawdown, or card allocation, and the approval date, and that the last payment made by the Borrower pays off the principal amount of finance and term cost and other costs, if any.
2. That the Borrower repays the amount of finance and term cost in (12) equal monthly installments starting one month after the date of the initial drawdown.
3. If no ceiling has been determined for the credit card, it is assumed that this ceiling is SAR 100,000 for the purpose of calculating the advertised Annual Percentage Rate.
4. At the offer stage, the amount of finance shall be equal to the full financing limit or the credit card limit requested by the customer or offered to him.
5. At the contract signing stage, the amount of finance shall be equal to the full financing limit or the credit card limit based on the agreement concluded with the Borrower.

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Chapter IV: Concluding Provisions

Article 11:
The Internal Audit Department shall review the procedures for calculating the Annual Percentage Rate at least annually, and the Finance Provider shall address the deficiencies indicated in the Internal Audit Report immediately and effectively.

Article 12:
These Rules shall be implemented after (90) days from the date of their publication on the Saudi Central Bank's electronic website.

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[Saudi Central Bank]
Rules Governing Calculation of Annual Percentage Rate (APR) Rabi' II 1445H / November 2023

Important note:
For the updated and amended Rules, SAMA advises referring to the version published on its website: www.sama.gov.sa

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Table of Content

Table of Content	Page Number
Chapter I: General Provisions	3
Chapter II: APR Calculator	5
Chapter III: APR Calculation Requirements	5
Chapter IV: Concluding Provisions	8

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Chapter I: General Provisions

Article 1: Definitions
The following terms and phrases, where used in these Rules, shall have the corresponding meanings unless the context requires otherwise:
SAMA: The Saudi Central Bank.
Rules: Rules Governing the Calculation of the Annual Percentage Rate (APR).
Finance Providers: Banks, and Finance Companies Licensed to engage in retail lending.
Borrower: a person receiving finance.
Financing Agreement: an agreement whereby financing is granted for the activities listed in the Laws and Regulations.
Amount of Finance: the ceiling or the total amounts made available to the borrower under a finance agreement.
Annual Percentage Rate (APR): The discount rate at which the present value of payments and installments that are due from the borrower representing the total amount payable by the borrower equals the present value of all payments of the amount of financing available to the borrower on the date on which the financing amount or the first payment thereof is available to the borrower. Total Amount Payable by the Borrower: the sum of principal loan amount and the total cost of finance. Total Cost of Finance: All the costs to be paid by the borrower under a financing agreement other than the amount of Finance, including term cost, fees, commissions, administrative services fees, insurance, and any charges required to obtain finance excluding any expenses the borrower can avoid such as costs or fees payable by the borrower due to his breach of any of his obligations contained in the financing agreement.

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Article 2: Scope of Implementation

1. These Rules shall be applicable on all finance providers engaging in retail lending.
2. The Rules shall be read in conjunction with the related Laws and Regulations, including but not limited to the following:

• Finance Companies Control Law and its Implementing Regulation.
• Rules Regulating Consumer Microfinance Companies.
• The Rules on disclosure of interest rates on financing and saving Products.
• The Regulations for Consumer Financing.
• SAMA's Circular No. 381000095091 issued on 10/9/1438H to clarify Article (10) and Article (21) and the APR Calculation Mechanism in the Regulation for Consumer Financing.

Article 3: General Provisions

1. The objective of these Rules is to standardize the Annual Percentage Rate (APR) calculation for different types of retail lending, ensuring transparency in the finance offers and comparability to enable retail consumers to make informed decisions.
2. The APR for financing transactions shall be determined in accordance with the instructions and APR Calculator implemented through these Rules for the following:
   a. Advertising and promotional materials. b. Finance offering stage.
   c. Financing contract.
   d. Periodic statements provided to customers. e. Any other disclosure of APR.

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Chapter II: APR Calculator

Article 4: SAMA APR Calculator
Finance providers shall utilize the Excel based calculator issued by SAMA for the purpose of implementing the Rules.

Article 5: Implementation and Update of the APR Calculator

1. Finance providers shall update the relevant policies and procedures to comply with the requirements included in the Rules.
2. Finance providers are responsible for implementing adequate internal controls and audit mechanisms to safeguard the integrity of the APR Calculator deployed. In case where the APR Calculator is automated, finance providers should verify the results obtained using the automated tool by comparing those results to the figures obtained by using Excel based APR Calculator provided by SAMA.
3. Finance providers shall also ensure that the APR Calculator made available to customers through their websites is updated to align with the Rules requirements and the enclosed Calculator.

Chapter III: APR Calculation Requirements

Article 6: APR Calculation Method
The APR should be calculated based on the net present value method using the following formula:
$$\sum_{d=1}^{m} C_d (1 + X)^{-S_d} = \sum_{p=1}^{n} B_p (1 + X)^{-t_p}$$

Where:

• m is the last payment of the amount of finance to be received by the borrower.
• d is the payment to be received by the borrower from the amount of finance.
• Cd is the payment value of (d) to be received by the borrower from the amount of finance.
• Sd is the period between the date on which the amount of finance or the first payment is available to the borrower and the date of payment (d), calculated in years and parts of the year, and so that this period of first payment received by the borrower from the amount of finance is zero (s1=0)
• n is the last payment payable by the borrower.
• p is the payment payable by the borrower.
• Bp is the payment value (p) payable by the borrower
• Tp the period between the date on which the amount of finance or the first payment is available to the borrower and the date of the payment (p) received from the borrower, calculated in years and parts of the year.
• X is the Annual Percentage Rate.

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Article 7: Cost of Finance

1. For calculating the APR, finance providers shall specify the total amount payable by the borrower.
2. Finance providers shall include the cost elements in the total cost of finance as specified below:
   a. All types of costs that the borrower has to pay in order to access the credit. b. All costs shall be accounted for regardless of whether they are payable to the finance provider or a third party or payable directly or indirectly by the borrower or whether they give access to financial or non-financial services.
   c. Term cost, commissions arising from the credit agreement, credit brokerage fees payable by the borrower, administrative fees / or loan processing fee, insurance related costs, valuation costs, cost of ancillary services, and taxes including VAT, etc.
   d. Cost of ancillary services or supplementary services to the financing agreement, shall be included in the total cost of finance where the ancillary service is mandatory to obtain the finance or to obtain the finance on the terms and conditions marketed by the finance provider.

Article 8: Costs Excluded from APR Calculations The total cost of finance shall not include:
a. Any amount charged in lieu of early repayment or settlement and changes in the terms and conditions of the financing agreement.

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Article 9: General Requirements
Finance providers must consider the following while calculating the APR:

1. The periods between the date on which the amount of finance or the first payment is available to the borrower and the date of each payment received or payable by the borrower shall be calculated on the basis of 365 days a year.
2. The APR shall be calculated on the assumption that the amount of finance is valid for the term agreed upon and the parties' adherence to their obligations according to the conditions stipulated in the financing agreement.
3. The APR must be calculated and expressed in percentage points with a minimum of two basis points, rounding half basis points to the nearest full basis points.
4. In case the finance agreement contains a clause allowing variations in term cost and fees contained in the APR (e.g. floating) which is not quantifiable at the time of financing, the APR must be calculated on the assumption that the term cost and other charges remain fixed in relation to the initial term cost applied and will remain applicable until the end of the financing agreement.

Article 10: Specific Requirements for Credit Cards Products Finance providers while calculating the APR for credit cards shall assume the following:

1. The amount of finance is provided for a period of 1 year starting from the date of the initial drawdown or card allotment/approval date, and that the final payment made by the borrower clears the principal payment, term cost and other charges, if any.

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2. The principal payments and term cost are repaid by the borrower in 12 equal monthly payments, commencing 1 month after the date of the initial drawdown.
3. If the ceiling of the credit card has not been determined, that ceiling shall assumed to be SAR 10,000 when calculating the advertised APR.
4. At the pre-contractual stage, the amount of finance shall be equal to the financing limit or credit card limit requested by the customer or offered to the customer.
5. At the contractual stage, the amount of finance shall be equal to the financing limit or credit card limit based on the agreement concluded with the borrower.

Chapter IV: Concluding Provisions

Article 11:
The internal audit function shall review the APR calculation process at least annually. Any control deficiencies highlighted by the internal auditor shall be addressed by management in a timely and effective manner.

Article 12:
These Rules shall enter into force (90) days after the date of their publication on SAMA's official Website.