JEDDAH, 26 December 2002 — Saudi Arabia has banned two dozen investment companies that had been operating without license in the country and offering highly exaggerated interest rates, bankers have said.

On advice from a special ministerial committee and SAMA, the Ministry of Interior ordered the companies to cease operations immediately.

SAMA, the Kingdom’s central bank, also ordered local commercial banks to freeze the accounts of the companies and barred any withdrawal or transfer of money from them.

According to banking sources, these companies had investments to the tune of SR4.6 billion ($1.2 billion). The sources said the operations, which began several years ago, gained momentum thanks to the religious cover under which these companies operated. Added to this is the trust that many put in these firms that lured investors by offering high returns. Many investors withdrew their money from commercial banks to invest in these companies.

Some sources estimated that the companies had managed to collect more than SR7 billion from around 50,000 clients, mostly in the Eastern Province, over the past 15 months.

The companies had been active in high-risk speculation in real estate and other forms of investments and had paid interest rates ranging from 15 to 70 percent, depending on duration and amount.

Following the government crackdown, the clients of these companies flocked to their offices in the Eastern Province seeking information about their investments. In one instance, the investors blocked traffic in Dammam city in front of the offices of one company to demand their money back. Police had to be called in to calm the situation. The situation was defused after a standoff of several hours.

Exorbitant interest rates offered by the firms and the high risk involved in such investments prompted SAMA to caution people several weeks ago about the dangers of dealing with such firms. But as SAMA warnings went unheeded, the Ministry of Interior on Tuesday ordered the crackdown on the companies, all of which are owned by Saudis. The repatriation of several billion dollars from the United States following the Sept. 11, 2001 attacks and a high level of domestic liquidity spurred the growth of such firms.

Authorities have ordered the companies to pay back the investors later.

Twenty-five bank accounts have been affected by the move. The Ministry of Interior has instructed SAMA to bar these companies from opening new ones. Sources said officials of the companies have signed an undertaking at the Eastern Province Governorate, promising not to receive money from the public for investment.

Economists welcomed the move, saying it would yield good results in the long run and will help regulate the investment market in the country as the companies affected by the decision have been functioning without proper authorization. They cited the situation created several years ago by similar companies in Egypt where thousands of clients lost their savings. Some of the owners of those Egyptian companies have since fled the country.