LONDON, 3 December 2007 — Islamic housing finance is set to make dramatic inroads in the GCC and Middle East markets in 2008 as more mortgage corporations come on stream and several countries adopt the legal and regulatory infrastructure to facilitate what in many developed countries is a basic consumer finance necessity.
Saudi Arabia especially is a compelling target market. The Kingdom has one of the highest population growth rates at 2.9 percent, only surpassed 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.
According to Michael Essex, director of the Middle East & North Africa at the International Finance Corporation (IFC), the private sector financing arm of the World Bank Group, there were currently limited housing finance resources in the Kingdom. The IFC, under its mandate, promotes open and competitive markets in developing countries especially in the provision of affordable home ownership to the middle- and lower-income population groups, 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.”
The prime driver will be the adoption of the long-awaited mortgage law in Saudi Arabia in the first quarter of 2008. Similarly, The Saudi Home Loans Company (SHLC), capitalized at SR100 million and the largest specialized Islamic housing finance company within the MENA region, will also start operations early in the year. SHLC is a joint venture between the IFC, Arab National Bank, Kingdom Installment Company (KIC) and Riyadh-based Dar Al-Arkan Real Estate Development Company (DAAR).
Just two weeks ago Aayan Arabia Holding, a subsidiary of Kuwaiti Islamic finance company, Aayan, signed an agreement with the Canada Mortgage and Housing Corporation (CMHC) to establish Aayan Housing Finance Company to provide Shariah-compliant affordable housing finance in the Kingdom.
Similarly, last week, Amlak Finance, a pioneer of Islamic housing finance and a subsidiary of Emaar Properties in the UAE, launched a subsidiary in Egypt to provide housing finance. According to Amlak Finance CEO, Arif Alharmi there are plans to set up similar ventures in Saudi Aeabia, Jordan, Bahrain and Qatar during 2008.
Even in non-Muslim markets such as the UK, Islamic home finance providers are capitalizing on the crisis in the conventional mortgage market which has affected providers such as Northern Rock and others. Northern Rock fell victim to a global credit squeeze precipitated by dodgy investments in the US subprime mortgage market. It had to be bailed out by the Bank of England with an emergency 29 billion pounds facility to cover its deposits. The move is proving politically controversial for the government of Prime Minister Gordon Brown.
Normally Northern Rock would have no difficulty borrowing from the interbank money markets, but in present circumstances, commercial banks are nervous about lending. As a result, Northern Rock has struggled to raise money to finance its lending.
In the last few days, Alburaq, the leading provider of Islamic home finance in the UK, which is a subsidiary of ABC International Bank, part of the Bahrain-based ABC Group, announced that it was offering a discount equating to an effect rental rate of 5.99 percent for its wide-range of Shariah-compliant home finance products.
“Recent increases in the cost of mortgages in the UK impacts Islamic finance as well as conventional mortgages, placing an increasing strain on household budgets. Our new discount is designed to keep payments lower till September 2008 and includes a free valuation. Our discounted products have proved extremely popular and this is the biggest discount we have provided yet,” said Waqar Ahmed, sales and marketing officer at Alburaq.
The offer says Keith Leach, Head of Alburaq, lasts till Sepetmber 2008, with the discount tied to 6 months Libor. However, there is a review in March 2008 for the rental portion of the Diminishing Musharaka mortgage contract which could go up or down. Leach is confident that even after the end of the discount period, the Alburaq mortgage margin would be “quite low compared with those of competitors such as HSBC Amanah”.
The key features of the Alburaq mortgage include availability for purchases and refinance; finance of up to 95 percent (subject to income); mortgage up to 4.5 times the sole income plus second income or 4 times joint income of applicants; a minimum finance 15,001 pounds or 25,001 pounds for refinancing; and free valuation.
The maximum amount of finance ranges from 95 percent for between 15,000 to 300,000 pounds; 90 percent for between 300,001to 500,000 pounds; 85 percent for between 500,001 to 750,000 pounds; 80 percent for between 750,001 to 850,000 pounds; 75 percent for between 850,001 to 1 million pounds; 70 percent for between 1,000,001 to 2 million pounds; and 60 percent for over 2 million pounds, respectively.