One of the things I would not want to be in Saudi Arabia, apart from Graham Norton or someone looking for a pub, is a wizard.
Readers may not know this, but the rulers of that fair nation do not look kindly upon practitioners of sorcery. In fact, you can be executed for engaging in witchcraft and black magic. Even the Harry Potter films were banned for “promoting occultism and satanic propaganda”.
Given the conjuring skills many in the FX/CFD industry possess, where they can make money vanish with great rapidity, doing business in the wahabi kingdom may give a whole new meaning to the phrase ‘high risk products’.
And yet things are changing. Or they are supposed to be changing anyway. Much of the shift in attitude this author sees to Saudi Arabia could be described as “yea some weird things happen there but, you know, they have a lot of money and stuff so it’s probably fine.”
Is everything fine? Read on, as we try to give a snapshot of whether it’s worth it for CFD brokers to try and do things salafi style.
Why start a broker in Saudi Arabia?
Saudi is often discussed by brokers and other people in the industry as a good place to go but then no one really seems to do it. We’ll get to the reasons for the second factor later on but the reasons why they want to do business there are fairly obvious.
The primary factor is money and a relatively large population (36m). Despite what some people seem to think, not all Saudis are oil baron millionaires that spend their summers wandering around Harrods, but the average wage is high.
If you look at the headline GDP per capita figure of $23,185, this is on par with or greater than some parts of the European Union. However, it is also misleading as it appears to factor in the large number of foreign workers who get paid peanuts to do menial work there.
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And you can see this by looking at data on government workers. Readers who are familiar with the Gulf countries will know that it is normal for large swathes of the population to ‘work’ – we use the term loosely – for the government.
In Saudi Arabia close to 70% of the population is employed by the government and, although I have found it hard to dig up recent data, it seems like the average worker gets paid around $3,100 per month.
When you then consider that Saudi’s don’t pay any income tax, the average take home pay is equivalent to someone in the UK earning about £38,000 ($48,389) per year. You then have to think that energy, water, housing, and food are also all subsidised, so this means the average person has fewer costs to meet and thus more disposable income.
Despite these benefits, Saudis have some of the lowest savings rates in the world. One report published earlier this year claims that the country has a savings rate that is below 2% of annual income. Assuming its not based on the same data, this would fit with a KPMG report that was published in 2018.
To put this in simple terms, Saudis have a high level of take home pay that they then seem to enjoy blowing a large chunk of on discretionary goods.
Aside from having lots of disposable income that they enjoy spending, another factor that makes Saudi an appealing market for CFD providers is the ability to access clients.
Along with the UAE, Saudi had a 97% smartphone penetration rate in 2019, according to a report published that year by Deloitte. As you can see below, this was higher than the European average.
The final factor, which may be changing, is that there doesn’t seem like much fun stuff to do in Saudi. Cinemas were banned until 2018, there are still restrictions on mixing with the opposite sex, and there are no bars or pubs to go to. This author is all for kicking it with the fellas, getting some pizzas in, and playing Goldeneye multiplayer but after a while you do want to go out and do stuff. But if there is nothing for you to do, maybe you just stay at home taking captagon and trading forex all night.
So there is the set up, you have a large number of people with disposable income that they enjoy spending and the means to access them via the internet. To top that off, they live in a country where there isn’t, even if it is changing, a lot in the way of ‘fun’ – so there is incentive for them to do things like trading.
Saudi Arabia CFD regulation
On the face of it, Saudi Arabia actually has quite clear regulations on CFDs and other derivatives contracts.
The local regulator, the Capital Markets Authority, has a fairly short explanation of how securities businesses should operate. Notably, it includes CFDs under its definition of what constitutes a ‘security’.
Also positive is the fact that the Saudi authorities have been encouraging the establishment of exchange-traded derivatives on the country’s main stock exchange (Tadawul). One sentence here is of note (emphasis mine):
Al Hussan, Tadawul’s CEO, has emphasized, the exchange has not rushed to introduce new products, but has waited for the right time so that it could build awareness among its large retail investor base and invest time and resources into improving financial literacy to ensure the successful introduction of derivatives and other sophisticated products in the future.
This stuff sounds positive. But then Saudi firms dealing in securities must ensure they are shariah compliant. This is where things get more…complicated. For instance, the Saudi-based law firm Z&Co notes (bold text is me) that…
There has also been continuing uncertainty as to the enforceability of derivatives under Saudi law due to certain Sharia prohibitions, such as speculation and uncertainty (gharar). That uncertainty is mitigated, however, by the fact that disputes relating to derivative transactions are likely to be heard by the Committee for the Resolution for Securities Disputes, a judicial committee linked to the CMA, that is likely to uphold transactions with a clear commercial rationale (e.g. hedging) instead of basing its decisions on Sharia arguments alone.
One key point this highlights is the fact that many derivatives trades are effectively banned in Saudi because they are only permitted if they are being used to hedge risk, not engage in speculative trading. I have also seen some prohibitions on contracts where neither party owns the underlying asset – something that would obviously include CFDs.
Leaving aside that problem, there is the frequent use of the phrase ‘likely’ in that text. You are ‘likely’ to be dealt with by the CMA, as opposed to the shariah court. ‘Likely’ is, of course, not the same as ‘will’ and the result is distinctly unnerving. I don’t know about you but I reckon a visit from the Saudi shariah authorities might be quite different to receiving a warning from CySEC.
Even if firms could figure out the logistics of launching shariah-compliant products in Saudi, another thing you would have to do is set up a shariah committee. The committee has to hold meetings regularly and members must be familiar with the tenets of shariah. This author will pay money to be present in such a meeting if a CFD provider ever makes it to Riyadh.
The final problem brokers would face in setting up shop in Saudi is the range of restrictions on foreign ownership of local companies. As with the UAE, this includes things like a local having to own a certain proportion of the firm, a certain proportion of revenue that has to be derived from the local economy, and rules around what proportion of the workforce should be from Saudi citizens.
These rules could change moving forward. As noted, Saudi seems to be becoming more friendly to derivatives. The country also launched four special economic zones earlier this year and, although they don’t currently cater to financial companies, these seem like they could ultimately be similar to their equivalents in the UAE.
But in the meantime, it is logistically difficult to set up in Saudi, unclear if you could actually offer CFDs and, if you were caught doing something wrong, it seems like you would be wise to make like Lawrence of Arabia and get to Amman as quickly as possible.
Marketing
Although it may be difficult to actually go there and set up an entity, that does not mean brokers aren’t taking clients from Saudi Arabia – unsolicited of course. I noticed that one large broker, who will remain nameless to prevent them from having to meet the shariah council, saw a sudden spike in traffic from the country recently. It is now their largest source of site visitors, if Similarweb data is accurate.
App download data for iOS and Android suggests the most popular broker in the country might be….ExpertOption, a company that seems to get huge numbers of downloads in many parts of the world but is completely faceless and based in St Vincent & the Grenadines.
Other brokers that appear to be getting some traction in Saudi are Capital.com, Exness, and IQ Option, the last of which is also huge in emerging markets but which seems to barely ever be in the news or really do anything to publicise its activities. Olymptrade is another faceless broker that also seems to be doing well there and other emerging markets.
However, it’s also interesting to note a few other trends. One is that there are local brokers in Saudi that cater heavily to retail clients, but they only really do cash equities and some kind of shariah-compliant margin trading on stocks. One example is here. Incidentally, the retail investor base in Saudi is big – about 6m people – so there is demand for these products.
Another trend is that you see other stock brokers and crypto firms from the region making some headway there. Baraka Invest, for example, is a UAE-based stockbroker and its app is being downloaded a lot in Saudi on both Android and iOS.
If you look at the company’s website, they are hiring for a derivatives product manager, which looks to be for options trading. Given the Saudi government seems to like exchange-traded products and people there have a track record of punting on stocks with margin, it might be that equity options are a better fit with local traders, compared to CFDs.
The other point of interest is just how many paid apps are related to either investing or trading. These mainly seem to be price monitoring and news sources, but you also have some random MT4 bots and things like that too.
Payments
Payments do not appear to be as annoying as they are in some parts of the world in Saudi but there can be problems.
One point I have heard working against brokers is the fact that payments from banks to crypto firms are banned and have been since 2018. As a result, banks won’t permit transfers to some brokers, even if they don’t actually let users access physical crypto.
However, this rule doesn’t seem to be particularly well-enforced. Close to 20% of Saudis trade crypto and Binance is one of the most downloaded financial apps in the country across iOS and Android.
Moreover, the payment mechanism appears to affect bank transfers more than anything else, rather than card payments. The downside here is that it can limit deposits and make withdrawals more difficult.
But overall this doesn’t seem like the most ‘annoying’ part of doing business in Saudi. Getting clients and the probable impossibility of having a local entity seem like much bigger hurdles.
If you will it…
Overall Saudi is likely to remain a frustrating market for brokers. It has all the trends they want – people with high incomes that like to spend, who are tech savvy and have an interest in trading.
Unfortunately, the reality is current regulations mean it is very difficult, maybe even impossible, to set up shop and do business there. This could change moving forward but even then there are no clear signs how that could happen at the moment, beyond a vague sense that the country has become a bit more business friendly and open to derivatives trading.
In the meantime, this author would far rather be in Achrafieh than Riyadh. We can all have our dreams.