Article 8 of the Banking Control Law limits the exposure of a Saudi Bank to any natural or juristic counterparty to 25% of its paid up Capital and Reserves. This limit can be raised to 50% by SAMA in the public interest. A 1987 Circular (No. 2662/M/A/24 dated 15 September 1987) issued by the Agency provided further guidance to the Saudi Banks by defining such terms as credit exposure, related counterparties etc. These limits, however, did not apply to credit exposures with domestic and foreign banks and with the Government of Saudi Arabia. Also Article 9 of the Banking Control Law specifies the legal requirements for credit exposures to connected parties and a Circular dated 15 September 1987 (No. 2647/M/A/23) provided detailed guidance.

The purpose of this Circular is to update and revise the 1987 rules in light of recent developments in international supervisory practices and to reflect the decisions made by the GCC Governors in 1993 to harmonize the GCC rules in this area. Further more, these rules now also encompass limits on exposure to foreign banks and financial institutions. Guidance on the definitions and interpretations of some key terms included in the rules are attached as Appendix 1 to this Circular.

The Agency requires Saudi Banks to establish a written policy for large credit exposures to customers, banks, countries, and economic sectors to be approved by its Board of Directors. Significant changes to the established policies should be drawn to the attention of the Agency and discussed prior to their implementation.

The Agency expects Saudi Banks to follow prudent lending policies. Notwithstanding the legal lending limit of 25% of capital and reserves the Agency believes that a single credit exposure should not exceed 15%. The Agency expects banks to carefully monitor all large credit exposures and has introduced a monthly prudential return to report all credit exposures in excess of 10% of their capital and reserves.

2.Limits on Credit Exposures to Non-bank Counterparties :

2.1 In accordance with Article 8 of the Banking Control Law, the Agency shall continue to apply a limit of 25% of Capital and Reserves of a bank for credit exposure to a non-bank counterparty or to a group of related counter-parties. The Agency can in the public interest, increase this limit to 50%. The definition of a Credit Exposure and a Group of Related Counterparties is given under item 1 and 2 of Appendix 1.

2.2 Credit exposures to Saudi Government and quasi government institutions are not subject to these limits.

2.3 Credit exposures to the GCC and OECD central banks and central governments are not subject to these limits.

2.4 A bank is prohibited under Article 9 (1) of the Banking Control Law to extend any credit on security of its own shares.

3.Limits on Lending to Connected Non-bank Counterparties :

The definition of connected counter-parties is included under item 5 in Appendix 1.

3.1 A single exposure to a connected non-bank counter-party shall not exceed 10% of Capital and Reserves. A cumulative limit on all such exposures shall be 50%.

3.2 The requirements specified by Article 9 Section 2 of the Banking Control Law that all exposures to connected parties must be fully secured shall continue to apply.

3.3 As stipulated by Article 9 section 3 unsecured loans and credit facilities to officers and employees shall not exceed their four months salary except for housing loans which are secured by the property being financed by the Bank.

4. Clustering And Over-Concentration Applicable to Non-bank Counterparties :

Clustering and over concentration of exposures is a common phenomenon found in troubled banks. It arises where a bank may have a high proportion of large credit exposures to a limited number of customers. Consequently an overall limit of 8 times Capital and Reserves of a bank shall apply to all credit exposures to non-bank counterparties that exceed 10% of a bank's Capital and Reserves. For the purpose of this limit exposures to banks and to the GCC and OECD countries' central banks and central governments are not to be included.

5. Limits on Credit Exposure to Banks and Financial Institutions :

These prudential limits on credit exposures apply to all banks although Saudi Banks are expected to have their own internal limits which may be lower.

5.1 A limit of 50% of Capital and Reserves on credit exposures to any bank or financial institution that is "Adequately Capitalized", as defined under item 4 in Appendix 1.

5.2 A limit of 25% of Capital and Reserves on credit exposures to banks and financial institutions that are not "adequately capitalized". Such credit exposures should also not exceed 25% of the counter-party bank's last published capital and reserves.

5.3 A limit of 25% of Capital and Reserves also applies to all specialized banks and other financial institutions including multilateral banks, insurance companies, mutual funds, investment companies etc. Also, such credit exposures should not exceed 25% of the last published capital and reserves of the counterparty.

6. Consolidation :

All credit exposures are to be measured, monitored and reported on a fully consolidated basis including exposures of all foreign branches and subsidiaries. Subsidiaries include companies in which a bank owns or controls 50% or more of its voting stock.

7. Collateral :

Credit exposures are to be measured, monitored and reported at gross values as no reduction is permitted for any collateral supporting the loan or credit facility, except that cash margins for letters of credits, documentary credits and guarantees received by the Bank shall be permitted for reducing the related credit exposure. Further-more cash margins for foreign exchange and other derivative transactions are also permitted for reducing the related credit exposure. However, such cash margins must be maintained in the same currency as the credit exposure and in the same jurisdiction where the credit exposure is booked.

8. Reporting to the Agency :

8.1 A bank shall report to the Agency, on a monthly basis, all exposures to non-banking counterparties (including foreign Central Banks and central governments and any other levels of governments), that exceed 10% of its Capital and Reserves on the reporting date. It should also report the ratio of the total of such exposures to its Capital and Reserves. However, in calculating the ratio, exposures to GCC and OECD central banks and central governments should be excluded.

8.2 A bank shall report to the Agency, on a monthly basis, all exposures to connected parties that exceed 5% of its Capital and Reserves on the reporting date.

8.3 A bank shall report to the Agency on a monthly basis, all exposures to banks and financial institutions that exceeded their limits during the month and were not resolved within 15 working days thereafter.

9. Implementation Date :

The effective date of this circular is 1 june 1995. Saudi Banks are expected to ensure that their credit exposures conform with these rules by the effective date. The information required by the Agency under items 8.1, 8.2 and 8.3 should be provided by the Banks for the month ending 30 June 1995, and each month thereafter in the prescribed forms attached to this circular.