In the Name of Allah, the Most Gracious, the Most Merculous

Saudi Arabian Monetary Authority

Head Office

General Administration for Finance Companies Supervision Ref No: 420191224 Date: 1442/03/24 Attachments: None

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Circular

Dear Sirs,

Peace, mercy, and blessings of God be upon you,

Subject: Regulations for Allowing Acceptance of Term Deposits

Pursuant to the powers granted to the Saudi Arabian Monetary Authority under the Finance Companies Control Law, issued by Royal Decree No. (M/51) dated 13/8/1433H, and its Implementing Regulation issued by the Governor's decision No. (2/SH T) dated 14/4/1434H, and based on the provisions of Paragraph (7) of Article Eleven of the Finance Companies Control Law, which stipulates that "A finance company is prohibited from the following:
7- Accepting term deposits, non-banking facilities, or opening accounts for its customers in any form, unless licensed by the Authority", and based on the provisions of Article Sixty-Five of the Implementing Regulation of the Finance Companies Control Law, which stipulates that "A finance company shall not accept term deposits, non-banking facilities, or similar items, or open accounts of any kind for its customers, except after obtaining a letter from the Authority stating no objection thereto".

Please find enclosed a copy of the Regulations for Allowing Finance Companies to Accept Term Deposits. The Authority emphasizes the necessity of complying with the provisions contained in the Regulations for companies seeking to obtain the Authority's no-objection in this regard, subject to fulfilling the following requirements:

1. The minimum capital must be one billion Saudi Riyals.
2. Total shareholders' equity must not be less than the minimum capital (no accumulated losses).
3. The company's requirements (over 90 days) must not exceed 5%.
4. The company must have achieved stable profits for more than three years.
5. Any other requirements deemed necessary by the Authority.

Yours sincerely,

Fahd bin Ibrahim Al-Shathri
Deputy Governor for Supervision

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Distribution Scope:

• Finance companies operating in the Kingdom

Al-Owais

P.O. Box 2992, Riyadh 11179, Tel: +966 1 4772020, Fax: +966 1 4772488

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Saudi Arabian Monetary Authority

Deposit Taking Finance Companies (DTFCs) Regulations 2020

November 2020

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Table of contents

1. PART I: APPROACH AND CORPORATE GOVERNANCE ................................................... 2
   Chapter 1: SAMA Approach to Deposit Taking Finance Companies (DTFC) Regulation ................... 2
   Chapter 2: SAMA Authorization of DTFCs ................................................................. 2
   Chapter 3: Corporate Governance and Risk Management ........................................... 4

2. PART II: PRUDENTIAL REGULATIONS ......................................................................... 6
   Chapter 4: Capital Requirements .............................................................................. 6
   Chapter 5: Liquidity Requirements .......................................................................... 8
   Chapter 6: Asset Quality ........................................................................................... 9
   Appendix A: Capital to Risk Weighted Assets Return .................................................. 11
   Appendix B – Liquidity Statement ........................................................................... 20
   Appendix C: Asset Quality ....................................................................................... 27

3. PART III: ACCOUNT OPENING AND OPERATING RULES AND REGULATIONS ................... 29
   Chapter 7: Definitions ............................................................................................. 29
   Chapter 8: General Requirements for Opening General Accounts ................................... 34
   Chapter 9: Specific Rules for opening General Accounts for Juristic persons: ................... 38
   Chapter 10: General Requirements for Opening Term Deposit Accounts: ....................... 44
   Chapter 11: Freezing and Updating of the Accounts ................................................... 45
   Chapter 12: Inactive and Dormant Accounts: ............................................................ 47
   Chapter 13: Know Your Customer (KYC) ................................................................... 48
   Chapter 14: Disclosing of account data and blocking balances: ................................... 51
   Chapter 15: Accounts Operating Rules ...................................................................... 52
   Chapter 16: Closing of the Account: ......................................................................... 56
   Chapter 17: Statement and Audit Confirmation ....................................................... 57
   Chapter 18: Final Provisions ................................................................................... 58

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1 Part I: Approach and Corporate Governance

Chapter 1: SAMA Approach to Deposit Taking Finance Companies (DTFC) Regulation

Introduction

1. These SAMA regulations are applicable to all Deposit Taking Finance Companies (DTFCs) operating in the Kingdom of Saudi Arabia (KSA).

2. Subject to the provisions of Finance Companies Control law, promulgated by Royal Decree No. M/51 dated 13/8/1433H and its Implementing Regulation, these Rules determine the requirements of exercising deposit-taking activity, and shall govern finance companies that are authorized to mobilize savings and time deposits from non-individual customers and to grant loans, credits and advances out of such deposits.

3. In addition to these DTFC-specific prudential requirements, DTFCs are also required to comply with the Finance Companies Control Law, SAMA regulations for Finance Companies (FCs), and other relevant laws and regulations as applicable to all Finance Companies (FCs).

Deposit Taking Activities / Products and Services

4. DTFCs are authorized to mobilize savings and time deposits from non-individual customers and to grant loans, credits and advances out of such deposits while observing liquidity ratios with regard to its liquid assets vis-à-vis total deposit liabilities and other prudential regulations as prescribed for DTFCs.

5. DTFCs shall maintain one or more records of specified particulars in the case of every depositor such as name, address of depositor, types of deposit, date of receipt/date or renewal, date of maturity and profit rate payable. The registers are required to be kept at the place of business and preserved in good order for five calendar years following the financial year in which the latest entry was made of the repayment or the renewal of the deposit.

Chapter 2: SAMA Authorization of DTFCs

6. No Finance Company (FC) shall carry out deposit taking business without prior SAMA written approval to designate it as Deposit Taking Finance Company (DTFC).

7. An application for a SAMA approval to carry out deposit taking business shall be accompanied by the Feasibility study and three-year business plan of the proposed deposit-taking business, detailing the mission, vision, scope and nature of business operations, profitability analysis and internal controls and monitoring procedures, including but not limited to:

   i. the proposed organizational structure;
   ii. the market to be served by the FC;
   iii. a schedule of all the preliminary expenses including the FC costs, all expenses relating to the establishment or transformation of the FC;

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iv. projected balance sheets, income and expenditure statements and cash flow for three years supported by:
a. projected deposit mobilization and profit payable, stating separately anticipated sources of deposits; b. forecasted lending and advances to be made and profit receivable, stating major areas of lending including the intended sectoral lending composition;
c. forecasted cash and other liquid assets to be maintained;
d. the required provision for bad and doubtful debts and loan write-offs, including the policy and procedures manual; e. projected operating expenses including rents, salaries, employee benefits, and director’s remuneration, etc.; f. proposed levels of fixed assets, including business premises and equipment; g. other income, including commissions, fees and discounts etc. h. profit rate sensitivity analysis on the projections submitted or other similar analysis, providing necessary levels of scenario planning should economic conditions change or when business expectations fall short; assumptions underpinning the pro-forma financial statements, the sensitivity analysis and scenario planning must be fully elaborated;
i. statistical data and other market information, which may have been collected and analyzed covering economic activities and the planned areas of operation, where revenue and expenses will be incurred, including detailed competitive analysis; and
j. the planned scope of operations including services and products to be offered, the capability to provide these services, the projected demand for the services, and different groups of customers or market segments the FC wants to serve; k. the FC’s risk-management policies and internal control systems including, among others, board and senior management oversight, internal controls, physical infrastructure, use of information technology, including but not limited to the following: —
l. deposit mobilization strategies or plans and marketing methodologies;
m. lending and credit administration policy manual; n. human resource development manual; o. assets manual; p. liquidity and funds management policies and procedures; q. management information system and Information Security; r. capital, planning and budgeting; s. accounting procedures manual; and t. internal audit and control manuals (including compliance and AML/CTF controls);
v. evidence of sources and availability of capital including copies of bank statements, Treasury Bills, or other forms in which the capital is held.

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Chapter 3: Corporate Governance and Risk Management

Introduction

8. These regulatory requirements are relevant to all DTFCs. It sets out SAMA’s requirements for the internal governance and risk management of the DTFCs and how they should comply with these regulations. These regulations cover the following areas:
   i. General requirements;
   ii. Senior Management Function & Responsibilities;
   iii. Segregation of Functions;

General Requirements

9. SAMA requires that the governance and risk management arrangements, processes and mechanisms implemented by a DTFC should be proportionate to the nature, scale and complexity of the risks inherent in its business and its activities.

Expectations in relation to the Senior Management and their responsibilities

10. SAMA requires a DTFC to have robust governance and risk management arrangements, which includes a clear organisational structure with well-defined, transparent and consistent lines of responsibility. All DTFCs are required to put in place a Job description (JD) for each member of the senior management. More specifically, JDs must:
    i. Clearly set out the areas of the DTFC’s activities for which the senior manager is responsible;
    ii. Be included in every application to SAMA for pre-approval as a senior manager as per SAMA’s fit and proper regulations; and
    iii. Be updated and resubmitted if there is a significant change to the senior manager’s responsibilities as per SAMA’s fit and proper regulations.

11. A DTFC is also required to produce and maintain a Management Responsibilities Description Document (MRDD), which is a single, up-to-date document setting out the DTFC’s management, governance and risk management arrangements. The MRDD should be proportionate and include information about the business relationship with the head office and the group.

Board and Senior Management Responsibilities

12. SAMA looks to the Board of the DTFC to oversee the activities of the DTFC, including matters of a corporate governance nature that relate to the DTFC. As such, SAMA requires that the Board will be accountable for the DTFC’s operations.

13. While the Board may not conduct all responsibilities or activities directly, SAMA requires the Board to retain its overall accountability for the operations of the DTFC. Regardless of who conducts the various functions, SAMA requires the Board to:
    i. Ensure that business objectives, strategies, and plans set for the DTFC are prudent in the context of the DTFC.
    ii. Be satisfied that appropriate policies and procedures (i.e. control systems) are in place to manage the risks regardless of where the controls may reside;
    iii. Receive sufficiently comprehensive and frequent reports to understand and monitor the business of the DTFC; and

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iv. Undertake or obtain, periodically, an independent assessment of the adequacy and effectiveness of the controls. Independent assessment may be obtained from individuals or groups designated with that role, such as internal audit or risk management (either at the DTFC or head office), or qualified third parties.

14. The Board is required to ensure that there are robust policies and procedures to manage the assets and liabilities recorded on the DTFC’s books and records and related accounts (e.g. deposit, loan, investment, etc.).

15. The Board should ensure the DTFC is in compliance with all applicable legislation and regulations, and is conducting its business and affairs in a manner that is consistent with applicable SAMA requirements.

16. While the Board may delegate responsibility for day-to-day management to management, SAMA requires the Board to be in a position to oversee the DTFC’s regulatory returns. Therefore, SAMA would expect the Board to have, or to ensure the individuals undertaking activities with respect to the DTFC have, a good understanding of applicable legislation, regulations and guidelines, as well as the activities and related records of the DTFC, including its assets, liabilities, revenues and expenses. SAMA would also expect the Board to be satisfied with any work performed by others (e.g., head office or another entity within the group) and should ensure any deficiencies are corrected.

Segregation of Functions

17. A DTFC should ensure that the performance of multiple functions by its relevant persons does not and is not likely to prevent those persons from discharging any particular functions soundly, honestly and professionally. The senior personnel within the DTFC should define arrangements concerning the segregation of duties within the DTFC and the prevention of conflicts.

18. A DTFC should ensure that no single individual has unrestricted authority to do all of the following:
    i. Initiate a transaction;
    ii. Bind the DTFC;
    iii. Make payments; and
    iv. Account for it.

19. Where a DTFC is unable to ensure the complete segregation of duties because the DTFC has a limited number of staff, it should ensure that there is adequate compensating controls in place such as frequent review of an area by relevant DTFC senior managers.

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2 Part II: Prudential Regulations

Chapter 4: Capital Requirements

Minimum Capital Requirements

20. Every DTFC shall, at all times-
    i. maintain records including balance sheets and periodic statements of income and expenditure to enable proper computation of the institution’s capital adequacy of 20%; and
    ii. maintain the prescribed minimum capital requirements.

21. SAMA shall determine whether an institution is in compliance with the capital adequacy requirements in accordance with these Regulations.

Criteria for Higher Minimum Capital Ratios

22. SAMA may require higher minimum capital ratios for an individual DTFC based on, but not limited to the following criteria, if:
    i. a DTFC has losses resulting in a capital deficiency;
    ii. a DTFC has significant exposure to risk;
    iii. a DTFC has a high, or particularly severe, volume of poor asset quality;
    iv. a DTFC is growing rapidly without adequate capitalization and risk management system among other resource needs as may be determined by SAMA; or
    v. there is a likelihood a DTFC may be adversely affected by the activities or conditions of its holding company (where DTFC is wholly owned by another institution).

On-Balance Sheet Items

23. Every DTFC shall assess and provide for risks in the evaluation of their respective capital adequacy measurement.

24. Every DTFC shall classify and assign risk weight to credit exposures into four categories according to their relative risk exposures, in the following manner –
    i. zero weight should be assigned to the on-balance sheet items including cash, balances with SAMA, claims on the government of KSA by way of investments in government of KSA securities, loans fully secured by cash and loans duly guaranteed by government;
    ii. 20% weight, where deposits and balances due from commercial banks, financial institutions, DTFCs and claims (loans and advances) guaranteed by a multilateral development bank (MDB), a Regional Development Bank, or a development agencies;
    iii. 50% weight where loans are fully secured by a residential property located within cities and municipalities in KSA that are either occupied by the borrower or rented and;
    iv. 100% weight shall apply to all other claims on the public and private sector, which are not covered under the other categories and include- deposits in banks, financial institutions, mortgage finance companies and deposit-taking finance companies that are under statutory management; premises and other fixed assets, loans and advances, bills discounted and all other assets of these institutions.

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Off-Balance Sheet Items

25. Every DTFC shall ensure that:
    i. off-balance sheet items fully secured by cash or cash equivalent and those that are guaranteed by government of KSA shall be assigned 0% risk weight; and
    ii. off balance sheet items with the maturity exceeding a year are assigned a risk weight of 50%, including performance bonds and bid bonds.

Returns to SAMA

26. Every DTFC shall prepare and submit to SAMA at the end of every month to be received by the 15th business day of the following month, returns on Capital to Risk Weighted Assets in the form set out in Appendix A to these Regulations.

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Chapter 5: Liquidity Requirements

Liquidity Risk Management Plan

27. Every DTFC shall plan and fund its liquidity requirement over specific time periods as set by the DTFC.

28. Every DTFC is required to put in place a Board (or its delegated authority) approved liquidity risk management plan. A liquidity risk management plan shall, as a minimum, address the following:
    i. management structures and information systems;
    ii. measuring and monitoring net funding requirements;
    iii. contingency funding planning; and
    iv. internal controls for liquidity management.

Statutory minimum

29. Every DTFC shall maintain a minimum holding of liquid assets of twenty per cent (20%) of all its deposit liabilities, matured and short-term liabilities.

30. Every DTFC shall also maintain with SAMA at all times a statutory deposits of a sum not less than 4% of deposit liabilities. SAMA may, if it deems it to be in the public interest, vary the aforesaid percentage.

31. The deposit liabilities of a DTFC shall not exceed 15 times its total capital. If the deposits liabilities exceeds this limit, the DTFC must within one month of the date of submission of its liquidity information as per Appendix B, either increase its total capital to the prescribed limit or deposit 50% of the excess deposits with SAMA.

Returns

32. Every DTFC shall prepare and submit to SAMA at the end of every month to be received by the 15th business day of the following month, liquidity information to SAMA as set out in Appendix B to these Regulations.

33. Where the date of submission falls on a weekend or a holiday, the deadline shall be the Thursday or the day before the holiday.

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Chapter 6: Asset Quality

Loan review function of DTFCs.

34. Every DTFC’s loan review function shall ensure that:
    i. the loan portfolio and lending function conforms to a sound written lending policy, which has been approved and adopted by the board or its delegated authority;
    ii. management and the board are adequately informed regarding credit risk, among other risks and risk management control effectiveness;
    iii. problem accounts are identified properly and on a timely basis and internally classified in accordance with the classification criteria in these regulations; and
    iv. appropriate and adequate level of provisions for potential loss are made and maintained at all times.

Review and classification of Loans.

35. Every DTFC shall review, classify and appropriately make provisions for its loan portfolio at least once every three months.

36. Every DTFC shall classify loans and advances in the manner set out in Appendix C to these Regulations.

37. Where a DTFC has granted multiple loans to a single borrower, and any one of such loans is non-performing, the DTFC shall evaluate every other loan to that borrower and place such loans on non-performing status accordingly.

Classification of Renegotiated or Restructured Loans

38. Every DTFC shall classify a renegotiated or restructured loan in the Substandard category unless-
    i. all past due principal and profit is repaid in full at the time of renegotiation, in which case it may revert to ‘Normal’ classification.
    ii. All past due profit is repaid in full at the time of renegotiation in which case it may revert to ‘Watch’ classification.

39. A renegotiated or restructured loan classified as doubtful or loss shall continue to be classified as doubtful or loss unless –
    i. all past due principal and profit is repaid in full at the time of renegotiation, in which case it may revert to ‘Watch’ classification or;
    ii. all past due profit is repaid in full at the time of renegotiation in which case it may revert to ‘Substandard’ classification; and
    iii. all past due principal and profit is repaid in full at the time of renegotiation and there has been consistent repayment of three instalments in which case it may revert to ‘Normal’ classification.

40. No DTFC shall restructure or renegotiate any loan or credit facility more than twice over the life of the original loan or credit facility.

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41. Any loan or credit facility restructured for the second time shall be classified as substandard if all past due principal and profit is repaid in full at the time of renegotiation: Provided that if all past due profit is repaid in full at the time of renegotiation, the loan or credit facility shall be classified as doubtful.

42. Where a loan is classified as non- performing every DTFC shall suspend any profit on such loans and advances and - (a) the profit in suspense shall not be treated as income; and (b) all profit in suspense shall be taken into account in the computation of provisions for non-performing accounts; and (c) reverse any profit on non-performing loans or credit facilities accrued into income but uncollected and credit into the profit in suspense account until paid in cash by the borrower.

43. Every DTFC shall ensure that a non-performing loan or credit facility is returned to accrual basis only when all outstanding dues and unpaid obligations have been paid up to date.

44. Every DTFC shall ensure that all profit on nonperforming loan or credit facilities previously accrued into income but uncollected is reversed and credited into the profit in suspense account until paid in cash by the borrower.

45. In determining the amount of potential loss in specific loans or in the aggregate loan portfolio, every DTFC shall be guided by the following minimum provisioning percentages:
    i. For loans classified “Normal”, 1%;
    ii. For loans classified “Watch”, 5%;
    iii. For loans classified “Substandard”, 25%;

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