Banking Control Law in Saudi Arabia - Essay Example

Questions on Banking Control Law inside Saudi Arabia Answer the following questions: Read the attached Banking Control Law and answer the following questions: 1. Determine what is the LRR (Statutory) and Liquidity reserve ratio as stated by the Banking Laws & Regulations in Saudi Arabia? The Statutory deposit is a term used in order to describe the amount that a bank needs to have deposited in the Agency and which is used for backing the bank’s deposits; the statutory reserve ratio cannot be less from 15% of a bank’s deposits liabilities (article 7); the Liquidity reserve is also used for backing the deposits liabilities of a bank; the difference between the Liquidity reserve and the Statutory reserve – as described above – is that the latter ‘can be converted into cash the maximum within 30 days’ (article 7). 2. What are the items that are allowed to be held for liquidity reserves by the commercial banks according to the Saudi Banking Control Law? In accordance with the article 7 of the Saudi Banking Control Law the items that are allowed to be held for liquidity reserves by the commercial banks are the following ones: ‘cash, gold or assets’ (article 7). 3. What is the legal maximum loan size that is allowed to be given by commercial banks operating inside Saudi Arabia relative to (total bank reserves & capital) size? The legal maximum loan size that commercial banks in Saudi Arabia can give is mentioned in the article 8 of the Saudi Banking Control Law. In accordance with this article a commercial bank in Saudi Arabia is not allowed to give a loan which exceeds the ‘25% of the bank’s reserves and paid-up or invested capital’ (article 8). 4. List three activities that commercial banks operating inside Saudi Arabia are not allowed to undertake unless they get a written permission from the Central Bank? In accordance with the article 10 there is a series of activities prohibited to banks across Saudi Arabia; we could indicatively refer to the following ones: a) to get involved in wholesale or retail trade activities, b) to purchase the shares of a bank operating in Saudi Arabia, c) to acquire or lease real estate – unless this is necessary for the development of the firm’s activities or because of debts to the bank (article 10). The above activities are permitted to banks operating in Saudi Arabia only after the written authorization of the Agency. 5. List 4 activities that SAMA (Central Bank of Saudi Arabia) would implement if it discovers that a commercial bank is not abiding with banking laws especially when those un-allowed activities adversely affect the bank’s ability to repay back its loans and/or affect his liquidity position? In case that a bank operating in Saudi Arabia fails to follow the rules set in the country’s Banking legal framework, then it can be controlled by SAMA; the above authority can take the measures required in order to ensure the protection of the public from the particular organization; in this context, the following activities can be developed – enforced by SAMA: a) appoint one or more appropriately skilled advisers, b) order the suspension of any officer – or even the director – who is considered as responsible for the organizational failures, c) set limits to the credit offered to the specific organization; limits should be also set in regard to the level of deposits that the specific organization can be accepted, d) orders the bank to take additional measures – as appropriate – taking into consideration the internal and external organizational conditions (article 22). 6. What is the accepted rule about a bank acquiring or leasing real estate inside the country? At a first level, the acquisition of real estate by banks in Saudi Arabia is prohibited; however, Saudi Arabia banks can acquire real estate for the following two reasons: either in the context of business activities – for instance when the real estate is required for the housing of employees or if it real estate acquired because of debts to the particular bank (article 10). The above terms need to be proved – the written approval of Agency is required in order for a bank to Saudi Arabia to acquire real estate in general – apart from the cases mentioned above. 7. What are the needed basic requirements to charter a bank in Saudi Arabia? At a first level, an application needs to be submitted to the Agency; the latter will forward the application to the Minister of Finance. The following requirements need to be met for establishing a bank in Saudi Arabia: ‘a) the firm needs to have the format of a Joint Stock company, b) the minimum capital is Rls. 2.5 million, c) the founders and the members of the board need to have good reputation, d) the memorandum and articles of association need to be approved by the Minister of Finance’ (article 3). 8. What are the major characteristics of a “National Bank” according to the Banking Control Law of Saudi Arabia? In accordance with the article 1 par. c., a financial institution in Saudi Arabia is characterized as National Bank if both its head offices and its branches are situated in the specific country (article 1). 9. Are commercial banks inside Saudi Arabia free in their decisions to cease to carry on the banking business, that is to stop their banking operations and shut down their doors, any time? If Yes or No, explain how is the process of cessation of any banking institution is carried out inside the Kingdom? In accordance with the article 11 par. d of the Saudi Arabia Banking Control Law, a bank is not permitted to cease its operations unless the Agency agrees. In such cases, the bank needs to take all necessary measures so that the rights of the depositors are not set under risk. 10. What’s the required limit of Deposits level to Banks reserves and paid-up or invested capital? What if the bank exceeds this limit, what’s the bank requested to do to abide with this law? In accordance with the article 6, the deposit liabilities of a Saudi Arabia bank cannot ‘exceed fifteen times its reserves’ (article 6); if the above level is exceeded, then the bank needs to ‘either increase its capital and reserves to the prescribed limit or deposit fifty percent of the excess with the Agency’ (article 6). 11. According to the Banking Control Law inside Saudi Arabia, what is meant by “Banking Business”? What specific activities does “Banking Business” include? The context of the term ‘banking business’ is described in article 1 par.b; in accordance with the above provision banking business includes: ‘the business of receiving money on current or fixed deposit account, opening of current accounts, opening of letters of credit, issuance of letters of guarantee, payment and collection of cheques, payment orders, promissory notes and similar other papers of value, discounting of bills, bills of exchange and other commercial papers, foreign exchange transactions and other banking business’ (article 1) 12. What are the limitations and restrictions that must be taken into consideration when electing any person as the director or manager of a Bank? The terms for the election of a person as a director of a bank in Saudi Arabia are described in article 12 which notes that a person cannot be hired as a director in a Saudi Arabia bank if: a) the specific person is director of another bank, b) if he worked on a similar position in firm that was ‘wound up’ (article 12); in the last case, the approval of the Agency is required, c) if he has been involved in bankrupt, d) if he has been convicted for criminal offence (article 12). 13. What are the types of Deposits that a commercial bank holds at the Monetary Agency, what are its required ratios? There are two types of deposits that a bank holds at the Monetary Agency: the Statutory deposits (which need to be at least 15% of the bank’s deposits liabilities) and the Liquidity deposits (also at least 15% of the bank’s deposit liabilities) (article 7). Reference Banking Control Law – Saudi Arabia Read More