Risks of dealing with unlicensed financial institutions

المؤسسات المالية غير المرخصة

The Saudi Central Bank (SAMA) has taken many measures to protect citizens and residents from the risks of dealing with and investing in unlicensed financial institutions in the Kingdom. These institutions seek to infiltrate the local market by masquerading as legitimate financial institutions under various names, such as financing entities, financial intermediaries and brokers or others. They engage in suspicious activities and promote their services through illegal and unauthorized advertisements, posters, websites, sales staff, or individuals in exchange for rewarding commissions. Their ultimate aim is to fraudulently and dishonestly raise and collect funds from citizens and residents in the Kingdom.

Most common types of unauthorized financial companies

  1. Finance or Debt Repayment Companies
    Some fraudulent companies take advantage of finance needs of individuals. These companies provide illegal financing products, which may trap individuals in a debt spiral. It is difficult to get out of such debt due to the high financing cost, apart from legal accountability resulting from dealing with an unlicensed and unregulated institution.
  2. Pay-by-Instalments Companies
    Certain financial entities offer payment-by-instalments services without a license from the Ministry of Commerce and Industry. These companies exploit the need of individuals for such products and sell these products requiring payments by instalments after adding large profit margins, which in many cases doubles the amount owed to the company. This may land the individual behind bars for their inability to pay the instalments in full. Neither do these companies take into account the financial situation of customers and their ability to pay the instalments, nor do they factor in their credit history. These entities also fail to abide by the regulations and laws set by the concerned authorities that ensure the financial protection of the client.
  3. Financial Brokers and Advisory Companies
    Companies that falsely claim to be investment advisory firms or financial brokers promote their activities by enticing individuals to generate additional income or profits through trading or investing in currency (forex) or securities (stocks) trading. Their aim is to defraud individuals by exploiting their lack of knowledge and understanding of such investment products as well as their quest for quick profits. Investors must be aware that such companies are not registered with the Capital Market Authority (CMA).

How to avoid the risks of dealing with unlicensed financial institutions

The Saudi Central Bank (SAMA) and the concerned authorities are constantly working to monitor and follow up on the activities of such unlicensed institutions within the local market in the Kingdom. The regulator can take legal action against such unlicensed companies and close down their offices. SAMA also carries out awareness campaigns highlighting the risks involved in dealing with such institutions.

However, individuals also have a key role to play in limiting the role of these institutions by immediately reporting any institution promoting and offering suspicious investment products and making a conscious decision to avoid dealing with them under any circumstances.

Tips for dealing with financial institutions

  1. Check the licenses, registration and authorization of financial institutions before dealing with them.
  2. Do not apply for any financing products if you are aware of your inability to pay back the full amount.
  3. Do not invest in financial instruments or products if you do not understand them.
  4. Do not write checks with deferred payment dates as security for purchases by instalments.
  5. Read the terms and conditions of the financing, purchase or investment agreement carefully before signing.
  6. Do not fall prey to attractive advertisements that promise get-rich-quick investments without making sure they are authentic.

The Saudi Central Bank (SAMA) and other stakeholders strive to protect and educate citizens and residents alike from unregulated and unlicensed financial institutions. The primary objective of regulatory authorities is to protect individual’s savings and wealth, as well as to protect the national economy as a whole from the greed of unregulated entities.

It is also the responsibility of individuals to protect themselves by distinguishing between licenced and fictitious financial services providers. When in doubt, you should remember to seek information and verification from the relevant authorities.

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