Can a loan agreement charge interest in Saudi Arabia?

Article 385 of the Civil Transactions Law provides that any condition requiring the payment of interest which the lender stipulates on the conclusion of a loan contract, or on the deferral of payment, is invalid. Licensed lending is documented differently: Article 3 of the Finance Companies Control Law requires finance activities to be conducted in a manner not conflicting with Sharia principles as defined by each company's Sharia committee, and Article 78 of the Implementing Regulation prices the transaction as a term cost with an annual percentage rate.

Does lending money in Saudi Arabia require a licence?

Article 4(1) of the Finance Companies Control Law prohibits engaging in the finance activities specified in that Law without a licence obtained under it, and Article 4(2) bars an unlicensed person from indicating explicitly or implicitly, in documents, papers or advertisements, that it engages in such activities. A loan between private parties outside those activities is governed by Articles 382 to 390 of the Civil Transactions Law.

Can a loan agreement include default interest or a late payment charge?

Article 178 of the Civil Transactions Law allows compensation to be fixed in advance except where the subject of the obligation is a cash amount, which is the position with a money debt. Article 179 adds that agreed compensation is not payable where the debtor proves the creditor sustained no harm, that the court may reduce an excessive amount, and that any agreement in violation of that Article is null and void.

Loan Agreement in Saudi Arabia

Interest is not a drafting choice in Saudi Arabia. Article 385 of the Civil Transactions Law invalidates any condition requiring the payment of interest, whether stipulated when the loan is made or on deferral of payment, and Article 178 bars pre-agreed compensation where the subject of the obligation is a cash amount. Regulated lending is documented instead as a finance agreement, which requires a licence and prescribed content.

Download the Saudi Arabia drafting checklist (.docx)Where to read Saudi Arabia law

Governing law

Loans between private parties are governed by Articles 382 to 390 of the Civil Transactions Law, Royal Decree No. M/191 of 18 June 2023. Finance provided by licensed companies is governed by the Finance Companies Control Law and its Implementing Regulation, supervised by the Saudi Central Bank.

Civil Transactions Law, Royal Decree No. M/191 of 18 June 2023, Arts. 382 to 390 (Bureau of Experts official translation, Ministry of Investment)

What a loan agreement has to contain in Saudi Arabia

Article 382 defines a loan as transferring ownership of a fungible thing against the return of a thing of the same kind, and Article 383 provides that the contract is not concluded until the borrower receives the borrowed thing.
Civil Transactions Law, Royal Decree No. M/191 of 18 June 2023, Arts. 382 and 383 (Bureau of Experts official translation, Ministry of Investment)
Article 385 provides that any condition requiring the payment of interest which the lender stipulates on the conclusion of a loan contract, or on the deferral of payment, is invalid.
Civil Transactions Law, Royal Decree No. M/191 of 18 June 2023, Art. 385 (Bureau of Experts official translation, Ministry of Investment)
Articles 387 to 390 set the defaults: no repayment before a fixed maturity or purpose; repayment on demand where none is fixed unless that prejudices the borrower; return of similar property or its value as at conclusion; repayment at the place of conclusion; and costs on the borrower, each unless agreed otherwise.
Civil Transactions Law, Royal Decree No. M/191 of 18 June 2023, Arts. 387 to 390 (Bureau of Experts official translation, Ministry of Investment)
Article 4 of the Finance Companies Control Law prohibits engaging in the finance activities it specifies without a licence and bars an unlicensed person from implying that it does. Article 3 requires licensed finance companies to operate in a manner not conflicting with Sharia principles as defined by Sharia committees they select.
Finance Companies Control Law, Arts. 3 and 4 (official English translation, Ministry of Investment law library)
Article 78 of the Implementing Regulation requires a finance agreement to carry at least the parties with their identity, residence permit or commercial registration numbers, the type, term and amount of finance, the term cost with its index and change procedure, the annual percentage rate, the total amount payable, instalments, fees, late payment consequences, guarantees and insurance, and the withdrawal, early repayment and termination procedures.
Implementing Regulation of the Finance Companies Control Law, Part Eighteen (Consumer Protection in Finance Services), Art. 78 (Saudi Central Bank Rulebook)
Article 178 of the Civil Transactions Law allows compensation to be fixed in advance, in the contract or later, unless the subject of the obligation is a cash amount.
Civil Transactions Law, Royal Decree No. M/191 of 18 June 2023, Art. 178 (Bureau of Experts official translation, Ministry of Investment)

Form, notarisation and registration

Article 78 of the Implementing Regulation requires the finance agreement to be drawn up on paper or electronically between the finance company and the borrower, with each contracting party receiving a copy.
Implementing Regulation of the Finance Companies Control Law, Art. 78 (Saudi Central Bank Rulebook)

What catches drafters out

Article 179 makes agreed compensation unpayable where the debtor proves no harm, lets the court reduce an excessive figure or one where the obligation was partly performed, lets it increase for fraud or gross negligence, and voids any contrary agreement.
Civil Transactions Law, Royal Decree No. M/191 of 18 June 2023, Art. 179 (Bureau of Experts official translation, Ministry of Investment)
Article 384 requires the lender to be fully competent and bars a guardian or trustee from lending or borrowing the property of a person under his custody except in accordance with legal provisions.
Civil Transactions Law, Royal Decree No. M/191 of 18 June 2023, Art. 384 (Bureau of Experts official translation, Ministry of Investment)
Article 295 bars a claim after 10 years, Article 299 runs the period from when the right becomes due, and Article 300 interrupts it where grounds prevent the claim, including bona fide negotiations.
Civil Transactions Law, Royal Decree No. M/191 of 18 June 2023, Arts. 295, 299 and 300 (Bureau of Experts official translation, Ministry of Investment)