<p>The banking industry in the Kingdom of Saudi Arabia (&ldquo;KSA&rdquo;) embodies one of  the main commercial industries that still has a number of issues requiring  clarity for the sector and the following will identify and provide a general  overview of some important areas. <br /><br />The Saudi Arabia Monetary Agency  (&ldquo;SAMA&rdquo;) performs the central bank role in KSA, overseeing the local and foreign  banking businesses in KSA .&nbsp; Historically, the Commercial Court Law promulgated  by Royal Decree dated 15/1/1350 H (corresponding to 2/6/1931 G) can be  considered as the first set of regulations that tried to regulate the banking  and exchange businesses in KSA, albeit, the cornerstone of laws regulating the  banking business have been issued after the establishing of SAMA in 25/7/1371 H  (corresponding to 20/4/1952 G).&nbsp; The first was the Law of SAMA issued by Royal  Decree No. 23 dated 23/5/1377 H (corresponding to 16/12/1957 G) ("SAMA's Law")  and the second is the Banking Control Law issued by Royal Decree No. M/5 dated  22/6/1386 H (corresponding to 8/10/1966 G) ("BCL").<br /><br />SAMA&rsquo;s Law outlines  its role and regulates its relationship with local and foreign banks conducting  banking businesses in KSA and sets forth the governing and supervisory role of  SAMA over banking activity in KSA.&nbsp; The BCL regulates banking businesses in  terms of the statutory requirements to conduct banking business in KSA and  provides various provisions that govern the activities that a bank is allowed to  carry out and those which are prohibited. <br /><br />However, within the current  legislation there are insufficient provisions that define the meaning of banking  businesses and also how a banking business is to function.&nbsp; In light of this,  SAMA has issued many rules and instructions in the form of circulars to all  local and foreign licensed banks in KSA during the past few decades.&nbsp;  Unfortunately, such circulars are not usually publicly available.  <br /><br />Further, it can be said theoretically, that all banking transactions  have to be Shari&rsquo;ah compliant.&nbsp; However, practically speaking, it is widely  observed that various banking transactions conducted in the KSA are not  consistent with Islamic Shari&rsquo;ah as construed and applied in KSA.&nbsp; Some  commentators are of the view that the creation of a quasi-judicial committee  called the Banking Disputes Settlement Committee (&ldquo;BDSC&rdquo;) was to address  contemporary banking matters and the BDSC is a specialized forum adjudicating  banking disputes in a more experienced and flexible manner than when banking  disputes were brought before the regular courts. <br /><br />One of the ideas about  the BDSC is that it is more pragmatic than any of the other courts in KSA to the  extent that it recognizes and accepts interest.&nbsp; However, this view is not  entirely accurate.&nbsp; A thorough examination of judgments and principles of the  BDSC will fail to locate any judgment requesting the payment of interest. What  can be seen however is that the BDSC would accept what has already been paid as  commissions and may not include such payments when calculating the principal  amount owed.<br />The BSDC is administratively under the auspices of SAMA and  therefore the BDSC is sometimes referred to as the SAMA Committee.&nbsp; The current  composition of the BDSC is three members, a professor in law who in the same  time has lengthy experience working in the private and public sector as a legal  advisor; a professor of accountancy and a former Shari&rsquo;ah judge who worked in  the General Courts.<br /><br /><strong>Cross Border Financing</strong><br /><br />The  true legality of cross border financing is deemed to be one of those issues that  have not been clearly resolved, as the BCL states that it is prohibited to  conduct any banking businesses without a proper license from SAMA.&nbsp; In addition,  the rules for applying the BCL, issued by a ministerial resolution of the  Minister of Finance No M2149/3 dated 14/10/1406 H (corresponding to 22/6/1986  G), requires that locally registered banks must notify SAMA prior to being  involved in any facility arrangement provided by a non-resident entity in KSA.  <br /><br />However, in practice, there has been a long history of foreign financial  institutions providing funding to local entities in KSA without issuing SAMA any  notification; and the regulators are fully aware of this situation.&nbsp; To our  knowledge no regulatory action has ever been taken against these banks.&nbsp; More  importantly, some disputes have actually been brought before the BDSC and been  judicially determined in favour of the foreign lenders in such  situations.<br /><br />Furthermore, in 2005, major trading nations approved KSA&rsquo;s  accession to the World Trade Organisation (&ldquo;WTO Accession&rdquo;).&nbsp; As part of the WTO  Accession process, KSA made a series of commitments and concessions on the  conditions to be imposed on services and wholesale and retail trade.&nbsp; A schedule  including these commitments is annexed to the Protocol of Accession, included in  which, is cross border financing arrangements.<br /><br />Based on the above, it is  difficult to definitively confirm the legality of cross border financing.&nbsp;  However, there is an understanding among a number of experts in KSA that SAMA  would be more tolerant with cross border financing arrangements if a Saudi  financial institution was involved as a party, for example, a syndicated loan  that involves Saudi bank(s). <br /><br /><strong>Shari'ah Compliant  Transactions</strong><br /><br />Unlike other GCC and Arab states, there is no  distinction between Islamic financial institutions and conventional ones, in the  sense that there is no local bank&nbsp; called or identified as an Islamic bank, as  we see with Islamic banks in Bahrain and the UAE for example.&nbsp; This could be  since all banking transactions, theoretically, have to be Shari'ah compliant and  by identifying a specific bank as an Islamic bank may indicate that there are  other banks that are non-Islamic, which perhaps SAMA is trying to  avoid.<br /><br />Generally, Shari'ah compliant products are provided from Islamic  banks in a manner so that all of their transactions have to be approved by a  Shari'ah committee that has a supervisory role over banking businesses or though  Islamic channels within the conventional bank.<br /><br />One of the consequences of  not recognizing Islamic banking, as opposed to conventional banking, is that we  do not see an official or semi-official body that can provide a unified set of  rules or guidelines to what actually constitutes a Shari'ah compliant  transaction as we can see in Bahrain.&nbsp; In the current situation, what can be  considered Shari'ah compliant from one Shari'ah committee&rsquo;s perspective is not  necessarily acceptable to another Shari'ah committee. <br /><br />Also, if such a  body did exist, it could assume the role of overseeing the correct application  of Islamic banking to ensure that the Shari'ah compliant products are conducted  properly in accordance with proposed mechanisms specified and not merely being  furthered through formalities and documents. <br /><br /><strong>Conclusion </strong><br /><br />Broadly speaking, SAMA is known by its conservative policies  and is seen as an efficient governmental body that has a very successful track  record during the last few decades; more recently the successful steering of  monetary policy resulting in the KSA economy suffering to a lesser degree than  many other nations during the global recession. <br />Considering the current  complex nature of banking transactions, new sets of regulations may be seen in  the coming years to cover those areas and types of transactions that were  developed during the last 40 years.&nbsp; Another issue that could create further  stability in the banking industry is to resolve the issue of interest and the  extent of its illegality or legality. <br /><br /><strong>Footnotes</strong></p>
<ol>
<li>Generally, a branch of a foreign bank is the legal vehicle of the foreign  bank in KSA.</li>
</ol>