المملكة: Adopting the regulation of direct financing funds…a minimum of 50 million riyals and borrowing up to 50%
I approved Financial stability.
The new regulation obliges all funds to fully comply with the provisions of the instructions and investment fund regulations, whether with regard to offering units, managing operations or investment policies, while granting the Authority the power to exempt some entities from applying some provisions, in whole or in part, based on a reasoned request, thus allowing regulatory flexibility without disturbing the integrity of the market.
The regulatory framework specified the investment areas of direct financing funds, limiting them to financing activities and market transactions. Cash with regulated entities The Central Bank or similar regulatory bodies, in addition to bank deposits, and investment in money market fund units inside and outside the Kingdom, provided that they are subject to similar regulatory supervision.
Strict establishment requirements
The instructions stressed the necessity of fulfilling a set of basic conditions, most notably that the fund be originally closed, with the possibility of it being open in specific cases provided that there are clear policies for managing liquidity and subscription and redemption requests.
The instructions required that the direct financing fund take the form of a special-purpose facility, specifying a minimum total size of the fund upon establishment of no less than 50 million Saudi riyals, in addition to submitting a detailed feasibility study to the Authority that includes the targeted sectors and investment plans.
It also required that the terms and conditions of the fund include clear mechanisms for making investment decisions, and disclose any potential cases of conflict of interest, while noting that investing in these funds may involve risks amounting to a complete loss of value. Assets.
Restrictions on direct financing operations
The instructions imposed strict restrictions on direct financing activity, as the provision of financing was restricted to legal persons and investment funds and not individuals, reflecting a trend towards targeting corporate entities.
The duration of financing was set so that it did not exceed the remaining life of the fund, including rescheduling or extension operations, in addition to setting total limits for the financing provided so that it did not exceed the total size of the fund, while preventing excessive exposure to risks.
The instructions obligated fund managers to include in financing contracts within the Kingdom the full right of recourse for the buyer, allowing him to demand payment according to specific conditions, while prohibiting the sale of external financing contracts to licensed local financial institutions.
Regulating indirect financing
The instructions allowed financial funds to engage in indirect financing activity by purchasing financing portfolios from entities subject to the supervision of the Central Bank, or by entering into partnerships with licensed financing companies to provide joint financing, or investing with them while retaining those companies. With the decision to grant credit, which enhances integration between the financial and investment sectors.
The instructions imposed a set of additional obligations on direct financing fund managers, including the necessity of keeping documents and records of beneficiaries for a period of not less than ten years, and establishing clear mechanisms to receive complaints and address them immediately, in addition to maintaining the confidentiality of data and not disclosing it except in accordance with the regulations.
It obligated managers to disclose any conflict of interest to the fund’s board of directors and unit owners, and to obtain the necessary approvals, in addition to including contracts. Financing has clear mechanisms for resolving disputes, such as resorting to arbitration.
Strict credit governance
In addition to managing credit risks, the instructions stressed the necessity of examining the beneficiary’s credit record after his approval, and verifying his financial solvency and credit behavior, with documenting this in the financing file.
It obligated fund managers to record credit information with licensed entities and update it continuously, while prohibiting granting financing if these requirements are not met, in addition to adopting clear standards. They are written to evaluate credit worthiness and are approved by the Fund’s Board of Directors.
The instructions made it possible to assign some work related to financing activity to licensed finance companies, in a way that enhances operational efficiency and ensures compliance with regulatory standards.
Regulating borrowing limits
With regard to public financing funds, the instructions made it clear that they fall within the category of specialized public funds, and are subject to the provisions of the Investment Funds Regulations, with specific exceptions to some regulatory articles.
It imposed restrictions on borrowing levels, as the total borrowing of a public finance fund may not exceed 15% of the net value of its assets, in a step aimed at reducing financial risks and maintaining the stability of these funds.
The instructions set a clear ceiling for borrowing from public finance funds, such that it does not exceed 15% of the net asset value of the fund, while it permitted raising this limit to 50% of the total size of the fund if it is traded in the parallel market, to reflect Regulatory flexibility takes into account the different nature of funds and their investment structure, without prejudice to the requirements of financial stability.
The instructions obligated fund managers not to exceed the percentage of exposure to a single beneficiary or a related group of 25% of the total size of the fund, which enhances the diversification of financing portfolios and reduces the impact of any party’s default on the overall performance of the fund.
Disclosure of collection mechanisms
At the level of governance and disclosure, the instructions imposed detailed requirements. On managers of public financing funds, it is necessary to include in the terms and conditions of the fund accurate information about financing directions, especially if it is concentrated in a specific sector or industry, while specifying the lower and upper limits of the financing ratios directed to each sector, allowing investors a clear vision of the fund’s strategy.
It stressed the importance of disclosing collection mechanisms and procedures for granting credit in public direct financing funds, while obliging boards of directors to review these mechanisms and ensure their accuracy and completeness, in a step aimed at raising the efficiency of financing operations management and reducing default rates.
The instructions required the disclosure of details of the evaluation of the targeted financing portfolios, the mechanisms of partnership with financing companies, in addition to the methodology for making investment decisions, in a way that enhances the clarity of the investment vision and reduces the risks associated with indirect financing decisions.
The controls included obliging fund managers to disclose the policies and standards for the acquisition of financing portfolios, including the average default periods, the economic sectors related to the beneficiaries, and the time periods since funding was granted, provided that they are not less than six months, which enhances the accuracy of the evaluation before making decisions. Acquisitions.
The quality of the financing portfolio
In addition to continuous disclosure, the instructions obligated fund managers to include additional information in the annual reports, including lending ratios to total assets, unit price, and beneficiary default rates according to specific time periods, in addition to the percentage of financing backed by assets, which provides accurate indicators about the quality of the financing portfolio.
It also required that the quarterly data include extensive details about the performance of financing contracts, such as the number of days of late payment, Default rates and changes in sectoral exposure, in addition to displaying financing returns, the payment schedule, and the most prominent new contracts, as well as a list of the ten largest financings and their percentages of the fund’s size.
Disclosure requirements also included any substantial deals exceeding 10% of the fund’s net assets, with evaluation prices and mechanisms clarified, in addition to borrowing ratios, ensuring a high level of transparency that enables investors to evaluate performance and make informed decisions.
If investment is made available In guaranteed financing, the instructions stressed the necessity of disclosing the details of the guarantees, their percentages, and the fund’s priority in them, in a way that enhances the clarity of the risks associated with this type of investment.
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