SAMA Publishes Draft Rules for Supply Chain Finance

The Saudi Central Bank (“SAMA”) has published draft Rules for Engaging in Supply Chain Finance (“Rules”) for a 30-day public consultation. The Rules would introduce the Kingdom of Saudi Arabia’s (“KSA”) first dedicated framework for supply chain finance (“SCF”), covering licensing, the activities of supply chain finance companies, brokerage companies, platform governance, financial-crime controls and reporting.

The proposed Rules are of relevance to including but not limited, supply chain finance companies, banks, SCF brokerage companies, digital platforms, and technology providers.

Scope and Extra-Territorial Application

The Rules define supply chain finance activities as the use of supply chain finance methods for the purpose of improving working capital management, liquidity and mitigating risks in supply chain operations and transactions. Such products include factoring, reverse factoring, and any other products approved by SAMA.

The Rules apply to SCF and related brokerage activities carried out in KSA, including financing provided with or without recourse to the supplier. They apply to buyer-led SCF and related brokerage activities where the buyer is headquartered in KSA or directly carries out the relevant activity in KSA, even where the suppliers benefiting from the financing are headquartered outside KSA. However, in case of supplier-led SCF, the activity is not treated as conducted in KSA merely because the debtor or party obligated to pay is located in KSA, where the finance provider or brokerage company and all suppliers benefiting from the financing are headquartered outside KSA.

Licensing and Exclusivity

Only licensed entities may conduct supply chain financing activities in KSA. An SCF licence is granted pursuant to Article 10 of the Finance Companies Control Law. Further, an SCF finance company must obtain SAMA’s prior written non-objection before providing or operating a platform and must comply with the applicable licensing requirements, including a minimum paid-up capital of SAR 30 million. SCF brokerage is treated as a finance support activity. Therefore, brokers must comply with the applicable licensing requirements, including a minimum paid-up capital of SAR 2 million.

Further, pursuant to the Rules, any brokerage activity must be undertaken by a single entity only, whether an SCF brokerage company or a bank acting in connection with its own SCF activity.

Platform Requirements

The requirements to operate a platform shall apply to banks, finance companies and SCF brokerage companies, which must also ensure compliance by their technology providers. Key points include:

• Security and resilience: Maintain systems that protect confidentiality, integrity and security, test controls regularly and respond to cybersecurity incidents in line with SAMA requirements.
• Verification and accuracy: Verify counterparties and their contact details, including mobile and address information, and check financing offers before they are displayed.
• Retention: Keep counterparty records and transaction data securely for at least 10 years from the end of the relationship with the counterparty or completion of the transaction.
• Anti-Fraud and Risk Management: SCF participants must maintain risk-based anti-fraud policies and controls to detect repeated financing, inflated or fictitious invoices, and to set value limits for eligible assets. Providers must conduct due diligence on transactions and counterparties, confirm that financed assets are free of third-party rights and maintain written creditworthiness methodologies reviewed at least every two years.

The Rules, once they come into force, would represent KSA’s first dedicated regulatory framework for supply chain finance, signalling SAMA’s intention to formalise and grow the SCF sector.

Our team is closely monitoring developments and is available to assist with gap analyses, consultation submissions, licensing applications, and compliance planning. Please do not hesitate to reach out to discuss how the proposed Rules may affect your supply chain financing activities.