Saudi Banking Regulation, the Banking Control Law 1966, and the Saudi Central Bank: A Case of Legal Irritation Following Transplantation

Abstract

In 1952, the Kingdom of Saudi Arabia (KSA) adopted a Western banking and finance model. This transplantation is the central focus of this thesis. Saudi regulators have repeatedly attempted to address and reduce the conflict and contradictions between Western banking/finance and Sharia law. However, Sharia prohibitions on interest payments (riba), gambling (maysir) and uncertainty (gharar) continue, leading to ongoing incompatibilities between Sharia and Western socio-legal systems. Teubner’s approach to legal transplantation analysis can explain much of what has occurred in Saudi regulation of banking and finance due to the tight coupling between Sharia and legal discourse. Avoiding a normative position that legal transplantations are good, bad or indifferent, while not offering a total explanation, Teubner provides insights and reveals opportunities for appropriate change. He argues that ‘irritations’ within the destination legal system may arise from a legal transplantation. Adjustments to deal with such legal irritations within the Saudi regulatory system include the establishment of a Banking Disputes Committee; a new charter for the Saudi Central Bank; a Sharia Governance Framework for local banks operating in the KSA; a risk management framework for Sharia-compliant banking, and a recently proposed draft Saudi banking law. A trajectory of continuous adjustment and readjustment is perceptible. This thesis applies Teubner’s ideas to legal conflicts in KSA banking and finance while accommodating the pressures of globalisation. It concludes that the Saudi Vision 2030 proposal to establish a Central Sharia Supervisory Board in the Saudi Central Bank should be supported. It would be an effective step by Saudi regulators to increase customers’ trust in the compliance of Islamic financial products with Sharia law. This solution to a legal irritation resulting from the transplantation of Western banking and finance into KSA banking and finance is a further step in the evolutionary dynamic of the Saudi legal system.