New guidance provides greater specificity and transparency about the application process

After a period of relatively little change, the banking sector in the Kingdom of Saudi Arabia (the "Kingdom") is the latest to reflect change as the country seeks to diversify its economy in accordance with the Vision 2030 program announced by the Saudi Arabian Government in April 2016.

Following closely upon a number of significant developments in the sector in 2018 (including the announcement in May of the merger between The Saudi British Bank and Bank Alawwal and the opening in October of the first branch of a Japanese bank (MUFG Bank) in the Kingdom), the Saudi Arabian Monetary Authority ("SAMA") published on 13 January 2019 an update of its rules on applying for a banking license in the Kingdom (the "Update"). SAMA serves both as the central bank and as regulator of the banking sector in the Kingdom.

Under the Banking Control Law of 22/01/1386 H corresponding to 11 June 1966 (the "BCL"), anyone conducting "banking business" in the Kingdom (as defined in the BCL) is required to obtain and maintain a banking license. Subject to very limited exceptions, conducting banking business in the Kingdom without a banking license under the BCL is strictly prohibited, with sanctions including monetary penalties and imprisonment for persons found guilty of violating this requirement.

Banking licenses may be issued to:

1. an entity that is incorporated in the Kingdom as a joint-stock company ("JSC") for the purpose of doing banking business in the Kingdom (a "Saudi Bank"); and
2. the branch of a foreign bank that wishes to do banking business in the Kingdom (a "Foreign Bank Branch").

For Saudi Banks, the shareholders should apply for the banking license either before or in tandem with incorporation of the JSC in the Kingdom, such that the JSC is able to commence its banking operations upon completion of the incorporation process. For Foreign Bank Branches, the parent entity (i.e., the foreign bank itself) must apply for the license before establishing the branch in the Kingdom.

Prior to 2018, the number of entities licensed to do banking business in the Kingdom had remained largely static for quite a period of time, with about a dozen Saudi Banks and a dozen Foreign Bank Branches in the sector. This led in turn to the common perception that a banking license in the Kingdom was difficult to obtain and infrequently granted. The issuance of this updated guidance on how to apply to SAMA for a banking license is welcomed, as the Kingdom seeks ways to diversify its banking sector in order to provide more sources of funding to accomplish the ambitious goals of Vision 2030.

The Update asks potential applicants to engage with SAMA as early in the process as possible. Indeed, the Update expressly encourages potential applicants to make first contact with SAMA on an informal basis before submitting a formal application. While this may be viewed by some observers as an attempt to 'demystify' the application process, it is consistent with SAMA's longstanding practice of encouraging direct engagement with applicants.

Some salient points from the Update are:

1. Minimum requirements: The Update makes explicitly clear that all applicants will be held to minimum standards of integrity, prudence and competence on a continuing basis, as well as being expected to know and to comply with the BCL.
2. Capital adequacy: Although the BCL specifies that Saudi Banks must have a paid-up capital of not less than two-and-a-half million Saudi Arabian riyals (SAR 2,500,000), the Update mentions that SAMA will assess capital adequacy on a case-by-case basis, depending on the nature of the planned operations of the Saudi Bank. In practice, the minimum capital requirements for a Saudi Bank are many times higher than what is stipulated in the BCL, which sets out a minimum figure originally dating back to 1966. Foreign Bank Branches are not automatically required to maintain capital in the Kingdom, but SAMA may require them to do so on a case-by-case basis, depending on the nature of their planned operations.
3. Ownership: Applicants must demonstrate that both their shareholders and the members of their board of directors are "fit and proper" For Foreign Bank Branches, this requirement applies at the level of both the foreign bank itself and the "significant shareholders" in the foreign bank (although the precise meaning of this term is not specified in the Update).
4. Corporate Governance: Applicants must demonstrate that they satisfy the Principles of Corporate Governance for Banks Operating in Saudi Arabia, as published by SAMA, regarding composition and functioning of their board of directors (the "Banking Corporate Governance Principles").
   
5. Operational Policies and Procedures: Applicants must demonstrate that they have in place adequate policies and procedures in specified banking-related subjects, including credit-monitoring and management, liquidity and anti-money-laundering and combating terrorist financing (AML / CTF), as well as more 'everyday' matters such as information technology (IT), accounting and audit systems, and outsourcing.
6. Supervision in home jurisdiction (for Foreign Bank Branches only): Applicants seeking to open a Foreign Bank Branch must include in their application a written consent from the banking regulator in their home jurisdiction to commence banking operations in the Kingdom. This particular category of applicants must be licensed as a bank and listed on the stock exchange in their home jurisdiction (i.e., entirely privately-owned foreign banks are not eligible to apply).

The Update does not give any commitment on how long SAMA will take to evaluate an application. It does state, however, that applicants should receive an acknowledgement within fifteen (15) business days of submitting a formal application and that all applications will be processed "within a reasonable time" Traditionally, the market expectation has been that an application for a banking license in the Kingdom takes between 12-18 months from beginning to end: it remains therefore to be seen whether these latest clarifications to the application process will shorten this process.

In summary, the Update will be helpful to anyone considering applying for a banking license in the Kingdom, because it:

1. provides insight on how SAMA interprets various elements of the application process, including the importance to applicants of demonstrating compliance with the BCL and the Banking Corporate Governance Principles;
2. provides additional information for applicants on what SAMA deems most important in evaluating applications, above and beyond what is set out in the application form itself; and
3. underlines the importance to applicants of early communication with SAMA, even before submission of a formal application.

We will continue to monitor developments regarding the Update and encourage you to reach out to your Baker Botts relationship lawyer(s) or to any of the lawyers of The Law Office of Mohanned bin Saud Al Rasheed in association with Baker Botts L.L.P., Riyadh, regarding any questions or additional inquiries that you may have on this important topic.

DISCLAIMER: This article does not, and is not intended to, constitute legal advice.  Baker Botts L.L.P. operates in the Kingdom of Saudi Arabia in association with The Law Office of Mohanned bin Saud Al Rasheed.

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