Recent legal and regulatory reforms in Saudi Arabia are paving the way for a domestic structured finance market, according to a new report from Moody’s Ratings.
The credit agency said the country’s first-ever securitisation transaction marks a significant step in developing financial markets supported by more transparent legal foundations.
The transaction, a residential mortgage-backed security (RMBS) backed by Shariah-compliant loans, highlights progress driven by recent legislative changes.
Moody’s noted that the Civil Transactions Law (CTL) of 2023 has strengthened the enforceability of asset transfers, while new Capital Market Authority (CMA) regulations for special purpose entities (SPEs) have enhanced bankruptcy remoteness protections.
The report said that while these reforms create a more predictable environment for securitisation, many legal principles “remain untested in Saudi courts”. It also pointed out that Saudi law, based on uncodified Shariah, takes precedence over statutory regulation in cases of conflict, which can lead to differing interpretations among judges.
Legal updates boost Saudi finance market
Under Saudi legislation, lenders are permitted to assign contractual claims, with the CTL allowing creditors to transfer their rights to third parties unless restricted by specific laws or loan terms. To qualify as a “true sale” and be enforceable against the originator’s creditors, borrowers must either consent to or be notified of the transfer, as required by Article 240.
Moody’s said that individual borrower notification is likely to be required, which may pose practical challenges for originators that prefer not to inform borrowers during asset transfers.
The report added that sector-specific laws, such as the Real Estate Finance Law and Regulations (REFLR) governed by the Saudi Central Bank (SAMA), can take precedence over the CTL. While REFLR permits mortgage loan assignments, it remains unclear whether Saudi courts would interpret this as overriding the CTL’s notification requirement.
Moody’s also highlighted Saudi Arabia’s Bankruptcy Law, which allows creditors to challenge certain pre-bankruptcy transactions within 12 to 24 months. Although the meaning of “unfair” transactions is not precisely defined, the associated legal risks are comparable to those in more developed securitisation markets.
The CMA’s framework for SPEs adds a procedural safeguard by requiring regulatory approval before bankruptcy proceedings can be initiated against a licensed entity. According to Moody’s, this measure reduces the likelihood of insolvency. The report said non-petition and limited recourse clauses, which limit creditor claims and protect issuers, are also likely to be enforceable in Saudi courts.
“Although recent legislative reforms in Saudi Arabia and the judiciary’s general respect for contractual arrangements provide a supportive backdrop for securitisation, material legal uncertainty persists,” Moody’s said. “Given the absence of a fully codified body of Shariah jurisprudence, interpretations can vary significantly across judges and cases.”
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