The following chapter featured in the 2025 Islamic Finance Global Practice Guide and is awaiting update from the firm.

In the Kingdom of Saudi Arabia (KSA), Islamic finance operates under the general legal framework for financial services with additional Sharia compliance requirements. The Saudi Central Bank (SAMA) regulates banks and finance companies, while the Capital Market Authority (CMA) oversees securities and sukuk. Both regulators mandate Sharia governance frameworks including boards, audits and compliance structures.

Key Laws and Regulations

• Banking Control Law: Covers commercial banks, defines banking business, limits it to licensed entities, and sets governance and licensing standards.
• Finance Companies Control Law: Applies to non-bank financial institutions, mandates compliance with Sharia via internal committees, and sets licensing and conduct rules.
• Civil Transactions Law: Functions like a civil code, outlines contract formation and validity, and codifies profit-sharing and partnership contracts.
• Capital Market Law: Establishes the CMA and provides the legal basis for securities regulation.
• Securities Business Regulations: Define securities business and requires CMA licensing.
• Rules on the Offer of Securities and Continuing Obligations: Regulate securities offerings and ongoing disclosure obligations.
• Sharia Governance Regulations: Require Sharia boards and audits for banks, finance companies and capital market institutions.

Licensing Framework

There is no separate Islamic finance licence in KSA. Entities offering Islamic financial products must be licensed either as a bank or finance company by SAMA, or as a capital market institution by the CMA. Banks engaging in deposit-taking and lending require a SAMA banking licence under the Banking Control Law, while finance companies (including those offering Murabaha/Tawarruq or Ijara) are licensed under the Finance Companies Control Law. Sukuk arrangers or issuers must be authorised by the CMA.

Sharia Oversight Requirements

While no religious body issues licences, SAMA requires licensed banks and finance companies to maintain their own Sharia boards or external Sharia advisers, supported by internal compliance mechanisms. Each institution sets its own guidelines, allowing for discretion and variation in Sharia interpretation. SAMA does not issue fatwas but approves Sharia board appointments and monitors institutional compliance.

Capital Markets Regulation

In the capital markets sector, the CMA mandates that Sharia-compliant funds and sukuk issuers secure appropriate Sharia certification. For example, Sharia-compliant mutual funds must appoint a dedicated Sharia committee and comply with additional requirements under the Investment Funds Regulations.

Decentralised Sharia Certification

There is no centralised Sharia authority in KSA. Instead, each financial institution’s own Sharia committee is responsible for approving and certifying the Sharia compliance of its products.

Market Overview

The Islamic finance market in KSA is one of the largest globally, forming a major component of the domestic financial system. All major banks offer Sharia-compliant products, with institutions like Al Rajhi Bank and Alinma Bank operating fully on an Islamic basis. Even conventional banks and financing companies typically favour Sharia-compliant structures across their offerings.

Role in Vision 2030

Islamic finance plays a central role in advancing KSA’s Vision 2030. Major government funds across sectors such as housing, tourism and culture have widely adopted Islamic financing, using tools such as structured deposits, Murabaha/Tawarruq, Istisna’a and forward lease arrangements, in collaboration with leading banks. These funds also rely on Islamic liquidity tools such as Murabaha/Tawarruq-based deposits and Wakala structures to support the banking sector.

Retail Market Trends

Retail consumers have broad access to Islamic products, including Sharia-compliant mortgages, car finance and personal loans. Mortgage contracts are exclusively based on Islamic structures, typically Murabaha/Tawarruq for ready units and Istisna’a/Ijara Mawsoofah Bil Thimmah for construction finance. However, Murabaha/Tawarruq is increasingly preferred due to operational ease and alignment with SAMA’s collateral requirements.

Banking in KSA is now predominantly Islamic, and KSA continues to rank among the leading jurisdictions for Islamic finance worldwide.

Organic Growth, Not Incentives

Islamic finance in KSA has developed organically, driven by consumer demand and a Sharia-based legal framework. As a result, there are no special regulatory or legal incentives exclusive to Islamic finance; conventional and Islamic institutions operate under the same conditions.

Strategic Support Under Vision 2030

While no targeted incentives exist, Vision 2030 and the Financial Sector Development Program identify Islamic finance as a strategic growth area. These plans aim to strengthen the sector by enhancing regulation and encouraging innovation, signalling a high-level policy commitment rather than specific advantages.

Islamic Finance in Public Sector Practice

Major government funds implementing Vision 2030 objectives predominantly use Sharia-compliant structures. Given the scale of public funding, this has made Islamic finance a dominant market practice across project and infrastructure financing.

SAMA’s Role in Market Structuring

SAMA has played a key role in guiding banks to develop Sharia-compliant solutions, especially to address IBOR transition challenges, using Murabaha/Tawarruq and Ijara. It also helped develop a standardised Sharia-compliant repo agreement (Master Double Wa’ad Repo Agreement), reflecting GMRA provisions.

Regulatory Modernisation

Saudi regulators have improved efficiency and access in Islamic finance through measures such as streamlined sukuk issuance and support for fintech initiatives, further promoting Islamic financial market development.

KSA is advancing Islamic finance under Vision 2030 through the Financial Sector Development Program and the FinTech Strategy Implementation Plan, positioning itself as a leader in sustainable and digital Islamic finance.

Green Finance

In 2024, the Ministry of Finance launched the Saudi Green Financing Framework aligned with ICMA Green Bond Principles. In 2025, the CMA issued voluntary guidelines for green, social and sustainability-linked sukuk and bonds, encouraging clear disclosures and use of proceeds reporting. These efforts aim to build a robust sustainable finance market aligned with Vision 2030 and global standards such as the EU Green Bond Standard.

Islamic Fintech and Digital Innovation

By 2023, over 210 fintechs were operating in KSA, offering Sharia-compliant products including crowdfunding Murabaha/Tawarruq and sukuk. Platforms like Lendo and Tarmeez have supported over SAR2.5 billion in financing and digitised sukuk issuance. STC Bank and D360 Bank lead in Islamic digital banking. Regulatory sandboxes from SAMA and CMA have enabled innovations such as blockchain-based sukuk and peer-to-peer lending.

Infrastructure and Project Finance

Mega-projects such as NEOM and Red Sea Global are often financed through Islamic structures. In early 2025, PIF raised USD7 billion via Murabaha/Tawarruq financing through a syndicate of 20 institutions.

SME Finance

The Small and Medium Enterprises Loan Guarantee Program (Kafalah), established in 2004, is a state financial guarantee programme available to SMEs to support access to financing and business growth. In Q1 2025, it issued 1,900 guarantees worth over SAR4.8 billion. Kafalah covers Sharia-compliant credit facilities, including Tawarruq, granted by financiers to eligible SMEs.

Overview of Regulatory Approach

There are no specific legal or regulatory constraints in Saudi Arabia when structuring Islamic finance transactions. Rather, SAMA has actively encouraged banks to develop Sharia-compliant solutions, particularly in response to the global IBOR transition.

Structuring Responses to IBOR Transition – Murabaha

This shift to Risk-Free Rates (RFRs) presents complexities for structures such as Murabaha because Sharia principles prohibit changing the purchase price after sale and because RFRs are backward-looking rather than forward-looking like LIBOR. SAMA has guided banks to adopt new Sharia-compliant structures to mitigate these challenges. Key models include the following:

Successive Murabahas

• The facility is structured as a series of Murabaha contracts, each covering a profit period (eg three months).
• The first Murabaha is entered into at a deferred price comprising the principal and a spread; no RFR-based profit is included.
• At the end of each profit period, a successive Murabaha is entered into for the applicable principal amount, with profit based on the actual RFR observed over the prior period plus spread.
• The customer undertakes in advance to enter into each successive Murabaha up to final maturity and, on the last maturity date, to execute a final spot Murabaha covering the last period’s RFR.
• If the customer fails to enter a new Murabaha, it must compensate the bank for actual damages, capped at the value of the applicable RFR for the missed period.

High ceiling (capped) profit rate with undertakings/rebate structure

• The facility is documented as a single long-dated Murabaha for the full principal amount, with a deferred sale price that includes a high fixed profit rate encompassing a credit spread and a buffer above anticipated RFR levels.
• On each instalment date, the bank calculates the profit amount that would have applied based on the actual RFR for the relevant period.
• The customer undertakes to pay this actual RFR-based amount, which is typically lower than the high fixed rate agreed in the initial Murabaha.
• The bank separately undertakes to waive or rebate the excess between the high fixed rate and the actual RFR-based amount, either by contractual waiver or through a spot Murabaha in favour of the customer.
• If the actual RFR exceeds the high fixed rate, the customer provides an undertaking to pay the difference, which some banks document through an additional spot Murabaha at that time.

Dual tranche structure (fixed deferred rate Murabaha + spot profit Murabaha)

• The facility is divided into two components: a long-dated Murabaha (first tranche) and a series of spot Murabahas (second tranche).
• The first tranche is executed upfront as a fixed-rate Murabaha covering the principal amount and a pre-agreed credit spread, with the option to include a pricing buffer to accommodate future rate fluctuations.
• This first Murabaha is on a deferred payment basis and establishes the principal and the pre-agreed spread repayment obligation over the life of the facility.
• The second tranche consists of separate spot Murabahas entered into at the end of each profit period, each reflecting the actual RFR accrued over that period.
• The customer undertakes to enter into each spot Murabaha on the agreed dates, and failure to do so obliges the customer to compensate the bank for actual damages, capped at the RFR amount.
• If the actual RFR exceeds the fixed buffer used in the first Murabaha, the customer agrees to execute a spot Murabaha for the difference; conversely, if the buffer is higher than the actual RFR, the bank undertakes to waive or rebate the excess, ensuring Sharia compliance and commercial fairness.

In determining which of the above structures to follow, each bank will take into account key considerations, including its own Sharia board preference and operational feasibility.

Structuring Responses to IBOR Transition – Ijara

Ijara structures present unique documentation and operational challenges. There is no unified template for Ijara financings, and documentation must reflect the requirements of individual Sharia boards. Key structuring features include:

Structure 1. Master Ijara agreement with purchase/sale undertakings

• A master lease covers the full term for principal and profit.
• Daily rent is based on published RFRs and payable at the end of each rental period.
• The customer is given access to the rate calculation portal and may raise objections in the agreed manner.
• Early termination (mandatory/voluntary) is governed by a purchase/sale undertaking, with the exercise price incorporating outstanding principal and profit based on accrued rent.
• The sale agreement is structured to facilitate transfer of ownership from the financier to the customer.

Structure 2. Multiple rental periods

• The lease runs to final maturity but is divided into shorter sub-rental periods.
• At the start of each period, an estimated rate is used; at the end, the actual RFR is known.
• The differential is calculated to ensure profit reflects actual RFR.
• Any final adjustment is added to the asset purchase price (exercise price components) under the relevant undertaking exercised at early termination or maturity.

Structure 3. Two sub-rental periods

• Each rental period is divided into two sub-periods.
• The first sub-period uses an estimated profit rate for accrual.
• The second sub-period runs from expiry of the first sub-period until the end of the rental period and applies the actual RFR.
• The rental amount payable at period-end includes:
1. accrued rent based on the estimated rate for the first sub-period;
2. rent based on actual RFR for the second sub-period; plus
3. an adjustment to reflect any difference from the estimated rate.

Structuring Issues in Residential Financing

In retail home financing, many banks had used Istisna’a and Ijara Mawsoofah Bil Thimmah to fund property construction. However, these expose banks to delivery risk, as they act as lessors and can be liable if the developer fails to deliver – even where the bank is not at fault. As a result, banks have increasingly adopted Tawarruq structures, where the customer’s repayment obligation is not contingent on project completion. Tawarruq avoids direct contracting with the developer, limiting liability and aligning with SAMA’s risk management expectations. Banks secure repayment via suitable guarantees and collateral.

Structural Complexity not Driven by Regulation

These structuring innovations are not driven by regulation but by the nature of Islamic finance itself. SAMA has encouraged banks to resolve these challenges through market-led solutions. Sharia compliance is implemented institutionally via Sharia boards rather than by prescriptive law.

Legal Recognition of Islamic Finance

Saudi Arabia’s legal framework increasingly accommodates Islamic finance. The 2025 Close-out Netting and Related Collateral Arrangements Regulation issued by SAMA expressly recognises Islamic contracts such as Murabaha, Musawama and Wa’ad as Qualified Financial Contracts if they achieve an economically equivalent effect to conventional instruments listed in the annex. Similarly, the 2023 Civil Transactions Law includes detailed provisions on Islamic finance concepts such as Mudarabah, Musharakah and Kafalah, and sets out enforceability rules for unilateral promises (Wa’ad). These developments further strengthen the integration of Islamic finance into KSA’s legal infrastructure.

The primary source of law in KSA is Sharia, derived mainly from the Holy Qur’an and the Sunnah (the witnessed sayings and actions of the Prophet Muhammad). The Hanbali school of Islamic jurisprudence is predominantly followed, though principles from other schools may be applied by Sharia committees where deemed more aligned with the Qur’an and Sunnah. Sharia also forms the foundation of the Saudi constitution, known as the Basic Law of Governance.

Alongside Sharia, Saudi law includes enacted legislation in various forms, such as royal decrees, ministerial resolutions and circulars. All legislation is subordinate to Sharia: in cases of conflict, Sharia prevails; where legislation is silent, Sharia principles apply.

Financial disputes are typically adjudicated by the SAMA Banking Disputes Committee or the CMA Committee for Resolution of Securities Disputes, depending on the nature of the business. These bodies generally uphold contractual terms in line with international market standards, subject to compliance with applicable Saudi law and Sharia principles.

KSA’s financial regulatory architecture is composed of the following authorities tasked with oversight and enforcement, each with defined powers:

Saudi Central Bank (SAMA)

The Saudi Central Bank (still referred to as “SAMA” in reference to its former title, the Saudi Arabian Monetary Agency) is the regulator for banks and finance companies. Under the Banking Control Law and Finance Companies Control Law, SAMA supervises those institutions’ compliance with licensing requirements, prudential standards and market conduct. SAMA has robust enforcement powers: it can conduct examinations, issue binding rules and impose penalties. These penalties range from monetary fines and suspension of certain activities up to revocation of licences for serious breaches.

Capital Market Authority (CMA)

The CMA is the regulator for the capital markets, overseeing securities offerings, the Saudi stock exchange (Tadawul) and the compliance of brokerage and asset management firms and listed companies with their continuing obligations under the listing rules. Any offer of securities (such as equities or sukuk) falls under the CMA’s purview via the Capital Market Law and implementing regulations. The CMA similarly wields strong enforcement authority: it can investigate and sanction insider trading, market manipulation or breaches of disclosure rules, among other violations.

It may issue fines, suspend trading of a security, bar individuals from practice or revoke the licences of market intermediaries.

For issuances of financial instruments, the CMA reviews prospectuses to ensure compliance with CMA rules relating to documentation and disclosure requirements. While the CMA does not opine on Sharia, it does ensure the offering has a Sharia board’s approval if marketed as sukuk.

There are no dedicated Sharia courts for financial disputes in Saudi Arabia, but all courts may apply Sharia where relevant. Disputes are generally heard by specialised regulatory tribunals rather than ordinary civil courts. These bodies operate with procedural formality and issue binding decisions. Sharia is typically only applied where statutes are silent or ambiguous.

SAMA Banking Disputes Committee

This committee hears cases involving banks and finance companies regulated by SAMA. It functions similarly to a court, with claims, hearings and binding rulings. Appeals go to a designated appellate body. The committee enforces contracts according to their terms and international market practice.

CMA Committee for the Resolution of Securities Disputes (CRSD)

The CRSD handles disputes involving capital market institutions. It mirrors the process of the SAMA committee, and its decisions are appealable to a separate appellate committee for securities.

Other Forums

In some cases jurisdiction may shift; for example, if a government entity seeks to enforce a promissory note, the Administrative Enforcement Court will have jurisdiction (whereas the regular Enforcement Court will hear the matter where the application is made by a private entity).

In KSA, Islamic working capital financing is primarily offered through asset- and trade-based structures that comply with Sharia principles prohibiting interest (riba) and excessive uncertainty (gharar). The most widely used structures include the following:

Murabaha/Tawarruq (Cost-Plus Sale)

Murabaha/Tawarruq is the dominant structure for working capital. The financier purchases commodities and sells them to the client at a markup, with deferred payment terms. The client immediately resells the commodities to generate cash. Tawarruq denotes a sequence of sales to facilitate cash-based financing. These structures are widely accepted by Saudi banks and finance companies.

Ijara (Leasing)

Used for asset-based financing, Ijara involves the financier purchasing equipment and leasing it to the client. Rental payments serve as the financier’s return. Ownership may transfer to the customer at lease-end through a gift (hebah) or nominal sale, depending on the agreed terms.

Musharakah (Joint Venture Partnership)

Musharakah involves two or more parties contributing capital to a business or asset. Profits are shared per a pre-agreed ratio; losses are proportionate to each party’s capital contribution. A common form is “diminishing Musharakah”, often used in real estate, where the financier’s share is gradually bought out by the customer.

Mudarabah (Trust-Based Partnership)

In this structure, the financier (rab al-maal) provides capital, while the entrepreneur (mudarib) manages the venture. Profits are shared by agreement; losses are borne by the financier unless due to the misconduct of the mudarib. Mudarabah is often used in sukuk, including hybrid Murabaha/Mudarabah structures and sole Mudarabah arrangements for Tier 1 capital sukuk (AT1), where banks act as mudarib on behalf of investors.

Wakala (Agency-Based Investment)

Less common in financing, Wakala is used for investment management. the financier (principal) appoints an agent (wakeel) to invest on its behalf under agreed parameters. The agent may receive a fixed fee or performance-based incentive. Wakala is commonly used by state entities, through licensed institutions, to support Vision 2030 objectives.

Banks’ preferences for these structures depend on Sharia board guidance, operational capacity (eg, commodity brokerage in Tawarruq), asset availability and commercial strategy.

Securitisation remains relatively uncommon in KSA, but recent legal reforms have addressed many of the historic challenges.

Receivables can now be sold outright under the Civil Transactions Law. Article 238 allows for the assignment of creditor rights unless legally or contractually restricted. Article 240 requires the debtor to be notified for the assignment to be enforceable. Written consent is typically obtained in practice.

Additionally, under the 2020 Movable Property Security Law, receivables can be assigned as security in Islamic finance transactions such as Murabaha/Tawarruq. In these structures, the borrower pledges receivables from buyers to the financier. The Murabaha cost price reflects the discounted value of the receivables, while the deferred sale price corresponds to their face value.

The CMA has introduced rules for special purpose entities (SPEs), enabling the issuance of debt instruments, including sukuk. These SPEs can isolate asset risk from the originator’s balance sheet, supporting true securitisation structures.

Additionally, the Bankruptcy Law allows for the formal ranking of creditors, which facilitates the structuring of sukuk into tranches with different risk profiles.

Islamic securitisation can take the form of asset-backed sukuk, whereby:

• Sharia-compliant receivables are transferred to an SPE.
• The SPE issues asset-backed sukuk to investors entitled to cash flows from the asset pool.
• Risk is transferred from the originator to the sukukholders.

Digital Platforms and Marketplace Financing

Islamic fintech in KSA is rapidly expanding, offering Sharia-compliant working capital solutions via digital platforms. Licensed providers such as Lendo and Sulfah offer peer-to-peer SME financing through Murabaha, Tawarruq and Wakala structures, using automated KYC and credit scoring. These operate under SAMA’s rules for debt crowdfunding and microfinance. Open banking, enabled by SAMA’s Open Banking Framework, allows fintechs to access real-time banking data and offer tailored Islamic financial products based on company receivables or inventory.

Blockchain and Tokenised Assets

Blockchain is cautiously being explored for Islamic finance use cases, excluding cryptocurrencies. SABB has piloted blockchain-based Islamic trade finance. SAMA also partnered in Project Aber with the Central Bank of the UAE, testing a cross-border payment system using a jointly issued digital currency. Sandbox fintechs are trialling blockchain for asset tracking and tokenised sukuk.

Regulatory Oversight and Sharia Alignment

SAMA and the CMA regulate Islamic fintech through sandbox regimes and Sharia governance rules. Licensed fintechs must establish internal Sharia boards to ensure compliance. These frameworks, along with digital tools, are increasing access to Sharia-compliant finance for SMEs and supporting KSA’s leadership in Islamic digital finance.

While Saudi banks have successfully navigated Islamic finance challenges, working capital financing under Sharia remains complex. Unlike conventional finance, Islamic finance prohibits interest (riba) and requires asset-backed or risk-sharing structures. Financing must be structured through alternatives like Murabaha/Tawarruq (cost-plus sale), Tawarruq (commodity-based financing) or Ijara (leasing), each demanding a valid underlying trade and identifiable asset. For example, Ijara or Musharaka/Ijara structures require obligors to provide suitable assets for leasing, while high-value Tawarruq deals often face operational and cost inefficiencies due to commodity trade execution.

Operational Complexities and Limited Adoption of Risk-Sharing Models

Ensuring Sharia compliance involves avoiding disguised cash loans and conducting genuine asset trades. This can create timing and documentation risks in commodity execution. While models like Mudarabah and Musharakah promote profit-and-loss sharing, they are less commonly adopted due to financiers’ preference for fixed returns, leading to reliance on Murabaha/Tawarruq.

Overcoming Challenges Through Governance

To address these challenges, banks collaborate with law firms and Sharia committees to validate structures. Execution risks are mitigated by powers of attorney enabling banks to act on behalf of clients. Sharia audit frameworks further enhance compliance and practical viability.