Prudential Capital Requirements - M2 & Dealing Firms

Prudential Capital requirements for Financial Institutions in KSA - "How much cash do I have to keep in the Kingdom?" ??

At ValueExperts, this is a question we hear from almost every new entrant to the Saudi capital market sector: if I put SAR 20 million into a Managing Investments and Operating Funds licence, or SAR 50 million into a Dealing and Custody licence, how much of it must I keep sitting in the bank?

The answer surprises most people. It is not about the cash. It is about the ratio.

Under the CMA's prudential capital requirements, the regulator does not ask where your money is. It asks whether your capital is large enough for the risks you are running. 

Here is how we explain it to our clients, step by step.

1?? Your capital is not a locked deposit

It is the firm's own money. It can pay salaries, rent and systems, and it can be invested. Nothing requires it to sit idle.

2?? The CMA measures your capital base

Paid-up capital, plus profits, less losses (Tier 1), plus any qualifying subordinated loan (Tier 2). Think net worth, not bank balance.

3?? Everything you do with that money carries a risk weight

A deposit with a local bank carries a very low weight. Equities, related-party lending or one large exposure carry a heavy one. Your cost base counts too: the more expensive the firm is to run, the higher the operational risk charge.

4?? Add it all up

Credit risk + market risk + operational risk + concentration risk = total risk-weighted assets.

5?? Then comes the test

? Tier 1 capital must be at least 6% of that total

? Total capital base must be at least 8%

Every single month.

6?? Two things damage the ratio

? Losses shrink your capital base (the top number)

? Riskier investments and higher costs increase the risk total (the bottom number)

A first-year firm usually faces both at once.

? A simple illustration: a firm starts with SAR 20 million and loses SAR 4 million in Year 1. Its capital base is now SAR 16 million. If its risk-weighted total is SAR 40 million, the ratio is 40%, far above the 8% minimum, even though a good part of the cash has been spent.

So the real question is not "how much cash must I keep?"

It is "how do I deploy my capital and control my costs so that my ratio stays comfortably above the minimum?"

? Our advice for Year 1: keep the capital in low-risk, liquid instruments, avoid large single exposures and budget your costs realistically. Protect the ratio first. Everything else follows.

? If you would like a confidential discussion on how capital adequacy is calculated, how your first-year plan holds up under stress test scenarios, or how the simpler expenditure-based requirement works for Arranging and Advising licences, feel free to reach out to us.

? info@valueexperts.sa

? www.valueexperts.sa

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