Saudi central bank lowers early repayment fees

• Applies to retail loans only
• Capped at three months’ interest
• Could affect banks’ profits

Saudi Arabia’s central bank has amended early repayment terms on retail loans in an apparent effort to ease pressure on borrowers and stimulate lending at cheaper rates.

This is likely to have a small effect on profitability at the kingdom’s consumer-focused banks, analysts say.

The reforms are part of a new law governing finance companies that came into force this month.

Under the new rules, lenders may not charge the full outstanding interest – or profit in the case of sharia-compliant loans – that would have been due if the loan had run its full term.

Early repayment compensation for these reinvestment costs is now capped at no more than the equivalent of three months’ worth of interest payments, calculated on the outstanding balance at the time of full repayment, Sama, the central bank, announced. Banks cannot impose additional fees or penalties.

Previously, banks could charge a fee equivalent to around 1 percent of the outstanding balance on early retail loan repayments. For example, a person borrowing $20,000 who still owed $10,000 at the time of early repayment would be charged $100.

The rule change limits what lenders can recover in so-called “reinvestment costs” – the potential loss incurred when money from a loan repaid early is re-lent at lower interest rates in a falling rate environment.

“Banks will probably try to offset the reduced early repayment fees by increasing loan processing fees and upping the interest rate slightly on new loans,” said Chiro Ghosh, vice president for financial institutions at Bahrain’s Sico Bank.

“Banks don’t provide data on the number of early loan repayments, but we believe only a small percentage of loans are repaid early,” Ghosh said.

That proportion may rise. Saudi Arabia’s central bank has cut interest rates six times since September 2024, tracking the US benchmark rate because of the riyal’s dollar peg, and markets forecast two further rate cuts in 2026.

Lower penalties could encourage borrowers to repay loans early and re-borrow at cheaper rates.

Retail loan rates are fixed for the duration of the loan, unlike most corporate lending, which is on variable and benchmark linked. As such, retail loan growth tends to slow during periods of high interest rates, said Sara Boutros, head of real estate and financials research at Cairo’s CI Capital.

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Al Rajhi Bank and Saudi National Bank have the largest retail loan books, with Riyad Bank a somewhat distant third, she said.

This month’s rule changes are the latest in a series of initiatives by the central bank.

“The regulator wants to lower the burden on retail borrowers especially,” added Boutros, pointing to earlier reforms in late 2025 that limit fees on consumer borrowing.

“Sama is [also] becoming stricter when it comes to banks’ capitalisation and liquidity.”