LONDON, 12 November 2007 — The International Finance Corporation (IFC), the private sector financing arm of the World Bank Group supporting emerging market economies, is set to increase its involvement in the Middle East and North Africa (MENA) housing finance market in its effort to promote affordable home ownership to the region’s middle- and lower-income population.
Earlier this year, the IFC, which is heavily involved in the sector in Saudi Arabia, took a 5 percent equity stake in Saudi Homes Loans Company (SHL) worth SR100 million — the largest specialized Islamic housing finance company within the MENA region. The other shareholders include Arab National Bank and Kingdom Installment Company (KIC) — each with 40 percent of the equity worth SR800 million each; and Riyadh-based Dar Al-Arkan Real Estate Development Company (DAAR) with the remaining15 percent of the equity worth SR300 million. SHL is due to start full operations soon.
Michael Essex, director of the Middle East & North Africa at the IFC, stressed at the IREF 2007 conference held in London last Tuesday that the corporation “takes a programmatic approach to support the housing value chain” in the countries in which it is involved in the sector. The IFC, under its mandate, promotes open and competitive markets in developing countries, and supports sustainable private sector companies and other partners in generating jobs and delivering basic services “so that people have opportunities to escape poverty and improve their lives.”
According to Michael Essex, the IFC has been involved in the Kingdom’s housing sector in several other ways. It has subscribed to a 10 percent IFC credit enhancement of an $18 million KIC sukuk, with additional credit enhancement provided by DAAR. It also participated in the first true-sale securitization (Shariah-compliant) in the GCC backed by $23 million of Ijara and Istisna contracts. The IFC also has a $50 million equity stake in SABB, and is in the process of completing a Housing Finance Gap Analysis Report for SAMA (Saudi Arabian Monetary Agency).
The case for establishing SHL is compelling, Essex added. The Kingdom has one of the highest population growth rates at 2.9 percent, only surpasses by Yemen at 3 percent in the MENA region. Similarly, 88 percent of the Kingdom’s population is based in urban areas, and 55.8 percent of this population is under the age of 25 years old.
Perhaps more amazingly, Saudi Arabia has the highest population to housing density with an average 6.4 persons to each household. This is higher than India with 5.5 percent; South Africa with 5.3 percent; Malaysia with 5 percent and even Egypt with 4.3 percent, respectively.
Essex stressed that there were currently limited housing finance resources in the Kingdom, which is in the process of adopting a mortgage finance law. Commercial banks extend 45 percent of current housing finance usually in the form of personal loans, followed by developers and installment companies with 27 percent’ Islamic banks with 18 percent and government lending institutions with 10 percent. The adoption of the mortgage law may enhance and institutionalize the mortgage finance in the Kingdom.
SHL’s impact will be important. It is effectively acquiring KIC’s existing real estate housing finance portfolio, thus “providing SHL with scale from day one”. SHL is also utilizing the ANB branch network for loan originations, “a distribution channel from day one”. There is also non-competition among SHL shareholders. As such, KIC and ANB, for instance, won’t engage in any activity that is competitive with any aspect of SHL business.
SHL has also enlisted the Housing Development Finance Corporation (HDFC) of India as its technical partner. HDFC is one of the first projects in which the IFC got involve in this sector. As such, HDFC has built considerable technical experience over the last two decades in this field.
SHL’s mandate, Essex said, is to provide Shariah-compliant housing finance in Saudi Arabia for the purchase of apartments, villas and land. It will provide fixed profit rate mortgages with maturities of up to 20 years.
SHL will also originate, underwrite and service real estate loans, which will not necessarily be limited to properties constructed by DAAR; and will use mortgage backed securities and other financing structures to optimize cost structure and funding process.
The IFC believes that SHL will provide a strong driver for developing Saudi Arabia and the region’s nascent housing finance market. The establishment of SHL, according to the IFC, “will have a strong demonstration effect and will encourage replication by other private sector players in the country. We expect this kind of institution to stimulate competition, which will improve market conditions, choices, and delivery of quality financial services.”
No one knows the true size of the Saudi home financing market, but everyone agrees that the potential is huge, given the demographics. Bank borrowing in Saudi Arabia is relatively low. According to official statistics, mortgage housing finance in the Kingdom is a mere 2 percent of GDP as opposed to 17 percent in Malaysia, 50 percent in the US, and 72 percent in the UK.