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Mortgage law to spur Islamic finance: Study

Last updated: Thursday, July 12, 2012 1:19 PM



JEDDAH – Saudi Arabia’s approval of a landmark mortgage law this week after a delay of more than three years will give rise to Islamic funding and tackle some of the challenges in the real estate sector in the Kingdom, National Commercial Bank (NCB) said.

Although all income segments will be positively impacted from the enactment of a mortgage law, those within the affluent segment will have greater freedom to either finance the construction of their own houses or to invest in the housing sector, NCB noted.

In their present lending system, banks use various forms of financing but prefer the ijara scheme due to the lack of a mortgage law, it said in a study.

"The mortgage law would allow for greater use of Islamic financing schemes within mortgage lending such as murabaha, which would allow the buyer to retain ownership of an asset," said the study.

"The passing of the mortgage law is expected to help convince individuals and entities to enter the housing market in the country…however, the law clearly addresses solutions to the pent-up demand for housing by the middle to high income segment, but does not address the inherent supply shortage of affordable housing. Additionally, until precedence has been set, the enforcement and full applicability of the law will be unknown."

Additionally, mortgage securitization will allow originators of the loans to diversify their risk by enabling them to secure immediate liquidity for assets, it said.

"An increase in loan tenors, with the expectations of higher returns, would make the assets more attractive to the secondary market, especially for institutional investors such as GOSI and investment banks," NCB said.The report expected the Saudi housing sector, the largest in the Gulf, to start witnessing what it described as a measured development of an active secondary market, whereby mortgage lenders will be able to sell the assets on their balance sheets and utilize their capital more efficiently.

NCB noted that the lack of a mortgage law in the Kingdom in the previous years has hindered the potential growth in the housing sector leading many financial institutions and developers to maintain low risk portfolios. "While we expect the momentum to gradually shift towards the implementation of higher risky offerings by banks and developers, the immediate short-term behavior is to maintain cautious optimism by taking a wait and see approach," the study added.

"The mortgage law is one solution out of a few that will help address the housing market challenge. Recent developments including the housing related royal decrees and the partnerships between banks and the Real Estate Development Fund will provide much needed support," the study added. – SG

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