SAMA: Early repayment regulations and prevention of remaining term costs
The Saudi Central Bank (SAMA) has issued the executive regulations for the system of monitoring finance companies, in a move aimed at enhancing transparency and protecting the rights of beneficiaries in the financial sector.
The new regulations included essential provisions that govern the relationship between financing entities and beneficiaries, as they unequivocally affirmed that the beneficiary has the full right to expedite the repayment of the remaining financing amount at any time he wishes, without imposing arbitrary restrictions on him.
Details of early repayment regulations
The regulations clearly state that the finance company may not charge the beneficiary for the remaining term of the contract. This provision aims to prevent practices that previously forced borrowers to pay interest or profits for years they did not actually benefit from due to early repayment.
However, the regulation preserved the rights of finance companies in a balanced way, allowing them to receive specific compensation in two cases:
- Reinvestment cost: not exceeding the cost of the term for the three months following repayment, calculated on the basis of the decreasing balance.
- Third-party expenses: What the company pays to a third party because of the contract, provided that it is an unrefundable expense and only for the remaining term.
Mortgage financing exceptions
According to the regulations, a special exception was made for mortgage financing contracts due to their long-term nature. The contract may stipulate a period during which early repayment is prohibited, provided that this prohibition does not exceed two years from the contract's signing date. This provides relative stability to mortgage portfolios in their initial stages.
Context of financial development and consumer protection
These amendments are part of the Saudi Central Bank's ongoing efforts to develop the regulatory environment for the financial sector, in line with the objectives of Vision 2030 and the Financial Sector Development Program. These steps aim to enhance the efficiency of financial transactions and strengthen trust between lenders and beneficiaries.
Historically, early repayment has been one of the most contentious issues between customers and finance companies, with ambiguity in cost calculations leading to numerous complaints. This executive regulation is crucial in standardizing procedures, contributing to a fair and competitive environment based on clear rights and obligations, and supporting the stability of the Kingdom's financial market.
