In the past few years, there has been an increasing demand from small and medium size investors in Saudi Arabia for mutual and investment funds investing in the domestic and the international markets. With encouragement from the Saudi Central bank, Saudi banks compete with regional and international financial institutions by developing and offering many open-ended and closed-ended funds to the investors.

In light of these developments H.E. The Minister of Finance in his decision No. 3/2052 dated 24 Rajab 1413H has approved the Regulations for Investment Funds and Collective Investment Schemes that are offered by Saudi banks. These Regulations address a number of issues related to the establishment, operation and marketing of open-ended and closed-ended mutual funds. The objectives of the Minister of Finance and SAMA in issuing these Regulations are as follows:

1.  To protect all investors.

2.  To ensure that only well managed and reputable institutions with adequate capital offer these services.

3.  To ensure that the quality of services and the efficiency of the market is enhanced and its credibility strengthened.

4.  To promote the development of supervisory standards in the GCC region.

These regulations are comprehensive and self-explanatory. However, they are to be read and applied in conjunction with the policies outlined in this memorandum.

1. Role of Saudi Banks :

The SAMA's policy is to permit only Saudi Banks to offer such products and services to the public in Saudi Arabia. SAMA requires Saudi Banks to play the role of a Fund Manager. The Banks may also act as custodians, administrators and marketeers or they may delegate some of these functions to other financial institutions. Nevertheless, they must take full responsibility for the management of their Investment Funds and remain accountable to the public and the authorities in the Kingdom at all times.

2. Considerations for Granting Permission :

A. Organisational Capability:

In granting a Saudi Bank permission to establish and market such funds the Saudi Central Bank makes an assessment of its organizational capability and the managerial expertise at its disposal. Banks planning to offer these product must have the organization structure, the operational and accounting systems, and the decision making and control procedures that are essential for providing an efficient, cost effective and profitable service. The Banks must also have appropriate managerial talent and expertise for this area.

B. Capital Adequacy

Saudi Banks wishing to offer these services must be well capitalized and meet all regulatory and legal capital requirements. While such services are of a fiduciary nature and do not require an allocation of capital for credit risk, in practice a strong capital base provides comfort to investors and the regulatory authorities for any losses that may arise from management negligence or fraud.

C. Management Capability

An important factor in granting permission to a Saudi Bank is the competence and integrity of its management which is assessed against the following criteria :

• Persons acting as managers should possess adequate qualifications to carryout their responsibilities including appropriate technical knowledge and skills.

• Managers must have appropriate professional experience.

• Such person must have probity and soundness of judgement commensurate with their positions.

• Such Persons are expected to fulfill their responsibilities with diligence and to protect investors.

Further-more it is expected that a person managing such funds :

1.  Has not committed an offence involving fraud or dishonesty.

2.  Has not contravened or broken any laws or provisions in any jurisdictions that were aimed at protecting investors and depositors.

3.  Has not engaged in any business practices that appears to SAMA as deceitful, oppressive or which reflect discredit on his methods of conducting business.

3. Funds to be domiciled in Foreign Jurisdictions :

From time to time for operational and other reasons, a Saudi Bank may wish to establish an investment fund outside of Saudi Arabia. In some instances this may be in the form of a separate legal entity. In such cases, the Saudi Bank is required to obtain SAMA’s approval prior to the establishment of such a fund. The bank should also ensure that it complies with the laws and regulations of Saudi Arabia and those of the relevant foreign jurisdiction.

4. Borrowings by the Fund :

In general the borrowings by a fund shall be limited to a percentage of its net assets value as agreed with SAMA at the time of establishment of the fund. These borrowings from the bank or from any other source shall be at the best available market rate. Funds derived from Repos activity shall be considered as borrowings. In determining the permissible borrowing level, Saudi Central Bank will consider the nature of the fund i.e open-ended or close-ended; the nature of underlying assets; and whether leveraging would be an important element of the investment vehicle. Loan for establishing the fund (the period of such loans shall not exceed twelve months from the date of the establishment) and short term borrowing to meet temporary shortages in liquidity shall be permitted.

5. Restriction on Investment Powers :

As indicated in Section 6 of the Regulations, SAMA shall issue guidelines to the Banks on the following restrictions on their investment powers. These shall be updated periodically to reflect the changes in the market conditions. Currently, these shall be as follows:

These regulations and restrictions are to apply immediately from the date of this circular. Any existing investment and mutual fund that may be in non-compliance of these rule should identify any violations and discuss these immediately with the appropriate staff in the Banking Control Department of SAMA.