Promissory Note in the Saudi Financial Market: Definition and Legal Framework

A promissory note is a written commercial instrument that includes an unconditional commitment from a person (the debtor or issuer) to pay a certain amount of money to another person (the creditor or beneficiary) on demand or at a specified date. In the Saudi commercial system, the promissory note is defined as an explicit debt document, issued by the debtor themselves, containing all essential data such as the names of the parties, the amount to be paid, the date of issuance, and the due date if applicable. The promissory note is not classified as a financial instrument listed on the stock or official bond markets, but rather serves as a contractual document between two parties, often in the context of business or temporary financing. Typically, the promissory note does not include any return or interest, complying with the provisions of Islamic law in Saudi Arabia that prohibit usurious interest, making it a suitable debt instrument for the local business environment.

Despite the relative similarity between promissory notes, bills of exchange, and checks, there are substantial differences in form, usage, and legal regulation. A promissory note is a promise to pay issued by the debtor to the creditor, while a bill of exchange is a payment order involving three parties (the drawer, the drawee, and the beneficiary). A check, on the other hand, is an immediate payment order from the bank account holder to the beneficiary through the bank. Trading in promissory notes is less common than checks, and a promissory note is transferable unless stated otherwise. Bills of exchange are a more complex trading instrument, while checks are directly linked to the banking system and can only be issued through a bank account. In Saudi Arabia, promissory notes are often used between companies or in temporary financing transactions, while checks are preferred in daily banking dealings.

To issue a valid promissory note in Saudi Arabia, specific formal and regulatory conditions must be observed. Among the most important are: it must be written (on paper or electronically approved), include the names of the debtor and creditor or beneficiary, the amount of debt in both numbers and words, the date of issuance, and the due date if applicable. The text of the promissory note must clearly and explicitly state the debtor's obligation to pay, without conditioning payment on an unrealized condition or event. It is important for the debtor to sign the note in their own handwriting. There is no requirement for an official entity to issue the note; self-documentation between the parties is sufficient, with the possibility of electronic validation through the Ministry of Justice systems. If any of these conditions are violated, the validity of the note can be challenged in court.

The promissory note plays a pivotal role in financing short-term commercial operations, especially in the contracting, trade, and industrial sectors. Small and medium-sized enterprises often use it to facilitate payments to suppliers or to ensure the settlement of contractors' dues. The promissory note allows for deferred payment with legal documentation of the debt, enhancing trust in commercial transactions. Although it is not traded in financial markets officially, it is considered an effective means of managing liquidity and enhancing financial flexibility for companies. Nevertheless, the use of the promissory note remains confined to direct business relationships and is not used as a general investment tool or a means of raising capital from the public.

The promissory note in Saudi Arabia is subject to Islamic law requirements, where the inclusion of any interest or usurious return in the note is prohibited. Its format is limited to the principal amount of the debt, and any increase is considered impermissible under Sharia. Therefore, if the parties wish to include profits or fees, they must resort to alternative Islamic financing contracts such as Murabaha or Ijara and then document the debt in a promissory note that reflects only the principal amount. Adhering to these regulations enhances the legitimacy of the promissory note and its suitability for the Saudi legal and economic environment, making it an acceptable tool for safeguarding financial rights without violating Sharia provisions.

When the due date of the promissory note arrives and the debtor refuses to pay, the beneficiary has the right to approach the Execution Court through the Ministry of Justice. The promissory note is a legally recognized enforceable document, which can be submitted electronically or in paper form directly to the execution platform. The execution judge issues a preliminary order for payment, and the debtor's assets may be seized or their government services suspended if they continue to refuse. Enforcement does not require re-establishing the original debt; it is sufficient to attach the promissory note that meets the formal conditions. The Saudi Ministry of Justice provides electronic services for submitting requests and tracking execution procedures, which accelerates the recovery of financial rights and protects the interests of creditors.

Despite the simplicity and procedural ease of the promissory note, there are risks that must be considered. The most prominent include the possibility of the debtor defaulting or being unable to pay, especially if they lack sufficient assets. Additionally, the promissory note is not guaranteed by any official or banking entity, thus the creditor bears the risk of default. Basic precautions include ensuring the accuracy of the note's data, proper documentation, avoiding the inclusion of any conditions that violate the law or Sharia, and attaching additional guarantees when necessary (such as a guarantor or insurance). It is advisable to review agreements carefully and consult a legal specialist before accepting or issuing a promissory note in large transactions.

With the evolution of government services, the Saudi Ministry of Justice launched the electronic "Nafath" system, which allows for the electronic registration of promissory notes and bills of exchange, facilitating their documentation and execution without the need for paper. This step has enhanced transparency and expedited execution procedures, while reducing instances of forgery or disputes over document validity. The platform allows beneficiaries to track the status of requests electronically and provides banks and companies with a reliable tool for managing debts. Nevertheless, electronic promissory notes remain subject to the same regulatory and Sharia conditions applicable to paper documents, and it is always advisable to verify the accuracy of data and signatures through official channels.

The promissory note differs from official debt instruments such as bonds and sukuk in several respects. First, the promissory note is an unlisted instrument in the trading market and is not subject to disclosures or public offerings. Second, the promissory note does not include periodic returns or profit distributions; instead, the principal amount is repaid at maturity. In contrast, government and corporate bonds and sukuk are subject to regulations from the Capital Market Authority and are used to raise large amounts of capital with disclosure and governance obligations. Islamic bank loans are a more formally regulated alternative and provide a legitimate profit margin. Meanwhile, bills of exchange and checks play a complementary role but differ in legal form and scope of use.

The promissory note is primarily used in Saudi Arabia in business transactions between companies (B2B), such as in the contracting sector where the main contractor issues a promissory note to a subcontractor in exchange for completing a specific job, or in trade to defer payment for goods. Banks sometimes require a promissory note as additional collateral when granting small or medium-sized loans. In microfinance, a promissory note is used between entrepreneurs and suppliers. It is important to understand that the promissory note is a personal commitment to pay and does not grant its holder ownership rights or investment profits. Therefore, it is resorted to for documenting temporary debts and not as an investment or long-term financing tool.

During 2024 and 2025, there were no significant changes in the regulatory framework of the Saudi financial market regarding promissory notes. Regulatory authorities continued to encourage companies to use more organized official debt instruments such as sukuk and bonds when large financing is needed. Among the notable technical developments was the launch of electronic platforms for documenting and executing promissory notes, enhancing security and transparency. The private sector has increasingly moved towards refinancing short-term debts through official bonds rather than relying excessively on promissory notes. However, the promissory note remains an important tool for small and medium-sized enterprises that need flexible and quick financing solutions.

Promissory notes play a pivotal role in financing small and medium enterprises in Saudi Arabia, enabling them to defer payments to suppliers or clients while having a legal document that guarantees rights. The promissory note is an effective means of managing cash flow and alleviating financial pressure on startups and contractors. It also facilitates installment sales and enhances trust in commercial transactions. However, excessive reliance on this tool may lead to the accumulation of short-term debts and the risks associated with non-payment. For this reason, regulatory authorities encourage diversifying funding sources and resorting to formal and Sharia-compliant solutions whenever possible.

Despite the strong legal recognition of promissory notes in Saudi Arabia, they remain an unsecured debt instrument not officially guaranteed by government or banking entities. The primary risks include debtor default, difficulty in collection in cases of bankruptcy or liquidation, disputes over the validity of the document or its signature, and the possibility of losing the right if the note is not presented for enforcement in a timely manner. Financially, the promissory note does not provide an investment return and is not traded in secondary markets, making it less liquid than registered debt instruments. It is recommended to assess the creditworthiness of the counterparty and document all details and update them electronically when possible, while consulting a legal specialist when dealing with large amounts or complex contracts.