Saudi central bank issues rules to protect retail customers

Saudi central bank cap on fees levied from retail customers may dampen profit at country's biggest lender Al Rajhi in short term but to boost industry in the longer run.

The new regulations also reduce costs for early repayment and force banks to give borrowers a month’s notice for any change in fees. Hassan Ammar / AFP

The Saudi central bank has issued new regulations, including capping the fees taken from retail customers for administrative services such as arranging loans, as part of its drive to protect consumers.

The regulator, the Saudi Arabian Monetary Authority (Sama) has also said that it can put limits on the amounts banks can lend to retail customers.

While the move to slash fees might reduce profitability at some banks with a big exposure to retail loans, such as Al Rajhi Bank, in the long run it will make the industry more competitive and fairer for consumers, analysts said.

Sama said in a circular titled Regulations for Consumer Financing that banks were no longer at liberty to set their own fee structures and that they must cap such charges at 1 per cent or 5,000 rials (Dh4,896), whichever was lower.

The new regulations, geared towards giving consumers more information, also reduce costs for early repayment and force banks to give borrowers a month’s notice for any change in fees. They also require banks to give clearer annual interest rate schedules instead of the deceptive flat rate that does not translate into the effective rate a borrower would be paying.

“This should have a limited impact on bank profitability in the short term because fees on consumer loans will be capped, while early repayments will become also more attractive for borrowers as well,” said Jaap Meijer, sector head for financial services at Dubai-based investment bank Arqaam Capital.

“Consumer banks like Al Rajhi might be impacted. However, they could re-price their loans so in the end I don’t think it will make much of a difference. For most banks, consumer loans are 10 per cent of their total loans. For Al Rajhi this represents about 60 per cent. Having said that, customers will be able to compare offers better, given better disclosure. Banks currently benefit from opaqueness and now they will have to become transparent.”

Shares of Al Rajhi, the largest lender by market value in Saudi Arabia, dropped 1.3 per cent to 76.75 riyals following the announcement, paring its year to date gain to 13.9 per cent.

Banks in Saudi Arabia, like in the UAE, have been beneficiaries of increased demand for loans from retail customers as economies around the Arabian Gulf rebounded from the financial crisis of 2008 amid increased government spending and improved consumer confidence.

Commercial lenders have also been focusing on consumer customers rather than corporate ones because the margins on the former are higher and many companies struggled to pay off existing debt in the aftermath of the financial crisis.

Real estate financing in Saudi Arabia increased 26 per cent last year, while loans for cars and equipment rose 17 per cent, according to Bloomberg data. The growth of business lending to industries such as electricity or transportation, slowed to 12 per cent from 17 per cent in 2012 by comparison.

That has made regulators keener to place more safeguards to prevent the excessive risk-taking of the past. In the UAE, that has come in the form of measures such as placing limits on the amount that could be borrowed to fund real estate purchases, as well as the introduction of a credit bureau that would give banks a better sense of the size of their clients’ overall debt.

“It’s aimed at making sure that consumers’ rights are protected,” Murad Ansari, a Riyadh-based analyst at EFG Hermes, an Egyptian investment bank, said of the new Saudi Arabian regulations.

“The argument that all central banks would take in this region, and this is valid, is that the corporate client is much more sophisticated versus the retail client and he is able to negotiate on all the fees that the banks are charging. But as a retail customer may not have the same level of awareness, the central bank has to step in and protect their rights to make sure that they get a service at a reasonable price.”

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