The Saudi Central Bank (SAMA) has issued a directive to all financial institutions in the Kingdom, including banks and finance companies, to discontinue the practice of requiring promissory notes from individuals applying for or holding credit cards. This move, announced earlier this month, aims to bolster customer protection and address a growing trend of lenders utilizing these financial instruments as a condition for credit card financing. The cancellation of existing notes must be completed by January 2, 2025.
The regulatory action, detailed in a recent circular, mandates the immediate cessation of requesting commercial papers for new credit card applications. SAMA has given institutions 30 days to submit a corrective action plan and six months to fully implement the changes. This impacts all banks and financial lenders operating within Saudi Arabia and their interactions with individual customers seeking credit card services.
SAMA Cracks Down on Promissory Note Requirement for Credit Cards
The central bank’s decision stems from increased observations of financial institutions requiring promissory notes – essentially a written promise to pay a specific sum – as collateral for credit card issuance. While not illegal, SAMA views this practice as potentially exploitative and creating undue financial burden on consumers. This is particularly concerning given the often complex nature of these instruments and the potential for misunderstanding among cardholders.
Why the Change?
According to SAMA, the increasing use of promissory notes raised concerns about transparency and fairness in the lending process. The practice can effectively increase the cost of credit for consumers, as they may be required to pay fees associated with the issuance and maintenance of the notes. Additionally, it introduces a layer of complexity that could lead to disputes or legal issues.
The move aligns with broader efforts by SAMA to enhance financial consumer protection within the Kingdom. In recent years, the central bank has introduced regulations aimed at improving transparency in banking fees, strengthening debt collection practices, and promoting financial literacy. This latest directive is a continuation of that trend, focusing specifically on the potential risks associated with the use of commercial papers in credit card agreements.
Impact on Financial Institutions
Banks and finance companies are now required to update their internal policies and procedures to reflect the new regulations. This includes revising application forms, training staff, and ensuring that existing customers are informed about the cancellation of their promissory notes. The 30-day deadline for submitting a corrective action plan necessitates a swift response from these institutions.
The corrective action plan must detail how each institution will address existing promissory notes. Options include outright cancellation, returning the notes to customers, or providing a clear path for customers to redeem them without penalty. Full implementation of these measures is expected within six months of the circular’s issuance date, which was February 11, 2024.
The change may also prompt a reassessment of risk management strategies employed by lenders. Previously, promissory notes offered an additional layer of security in case of default. Now, institutions will need to rely more heavily on traditional credit scoring methods and other risk mitigation techniques. This could potentially lead to more stringent approval criteria for credit cards, particularly for applicants with limited credit history.
Consumer Benefits and Related Lending Practices
The primary beneficiary of this regulation is the consumer. Eliminating the requirement for promissory notes simplifies the credit card application process and reduces the potential for hidden costs. It also empowers consumers by removing a financial instrument they may not fully understand.
This directive doesn’t address all aspects of consumer lending in Saudi Arabia. Other forms of security, such as salary assignment or guarantees, may still be permissible under certain circumstances. However, SAMA’s focus on protecting consumers from potentially unfair practices suggests a continued scrutiny of lending products and services. The move also comes amid broader discussions about personal finance and debt management in the Kingdom.
Furthermore, the regulation doesn’t directly impact other types of loans, such as personal loans or mortgages. However, the underlying principle of protecting consumers from unnecessary financial burdens could potentially influence future regulations in these areas as well. The central bank is likely monitoring the impact of this change on the overall lending landscape.
The Saudi Arabian banking sector has seen significant growth in recent years, with a corresponding increase in the availability of credit card products. This growth has been accompanied by a greater emphasis on responsible lending and consumer protection. The latest directive from SAMA is a clear indication of the regulator’s commitment to these principles.
Looking ahead, the effectiveness of this regulation will depend on the thoroughness of the corrective action plans submitted by financial institutions and their commitment to full implementation. SAMA will likely continue to monitor the market for any attempts to circumvent the new rules and will be prepared to take further action if necessary. The next key date is July 11, 2024, when full implementation of the corrective measures is expected. It remains to be seen whether this change will lead to a broader shift in lending practices within Saudi Arabia.