Housing is one of the basic needs of an individual and Islam encourages home ownership because it is deemed to give stability to the family and thus society as a whole. House purchases are the single most expensive outlay of the ordinary family. And this is usually financed through a housing loan from a bank or mortgage provider. Its importance in any developed economy cannot be underestimated. Mortgage provision of course differs from market to market. The UK, for instance, has probably got the highest home ownership per capita in the world, whereas in Germany and France, the culture is more toward renting than outright ownership.
Yet, while the Islamic banking movement has rapidly expanded over the last three decades, the provision of affordable housing remains a dream in many Muslim countries and Islamic housing finance or mortgages remains elusive in many markets.
The notable exception in terms of mortgage market scale and competitiveness is Malaysia, because the market and the laws are tried and tested. The Malaysian Islamic mortgage market did have a fright earlier this year when a lower court judge ruled that Bank Islam Malaysia’s ‘Baiti Home Financing- i’ and ‘Baiti Cakna Home Financing- i’ products based on the Al-Bai Bithaman Ajil (BBA) contract were not Shariah-compliant. But the Malaysian Appeal Court later overturned the ruling confirming that the Islamic mortgage offered by Malaysian Islamic banks based on the BBA deferred payment contract is a valid contract under Shariah.
Islamic mortgage providers in Malaysia, where the BBA has been a popular home financing transaction for more than two decades and where it accounts for about 60-80 percent of the financing of Malaysian Islamic banks, breathed a sigh of relief. Other Islamic mortgage products are based on Ijara (leasing) and Diminishing Musharaka (declining shared-ownership).
Elsewhere, especially in the Middle East, the introduction of Islamic mortgages has been relatively recent, with specialized mortgage providers such as Amlak and Tamweel setting the pace in addition to the limited number of Islamic banks such as Dubai Islamic Bank and western windows such as HSBC Amanah and Standard Chartered Saadiq also providing Islamic mortgages. The credit crunch and the collapse of the real estate market in Dubai strongly affected both Amlak and Tanweel (the two dedicated Islamic mortgage providers) and there was talk of a merger between the two, which is still being negotiated.
The UAE mortgage market prior to the credit crunch was estimated at 20 billion dirhams with a rather ambitious forward forecast of 65 billion dirhams by 2012. But as soon as liquidity started to dry up the market was very badly hit. According to Dubai-based mortgage advisor John Charcoal Middle East, mortgage transactions slumped to 340 million dirhams in May 2009, but the market has seen a modest rally with 940 million dirhams of mortgages transactions reported for July 2009. Bankers, however, stress that a full recovery is likely to be seen only in 2011.
A major problem in the GCC mortgage market is the lack of legal uncertainty pertaining to property ownership; the passing of titles or deeds from one person to another; inheritance laws and the status of foreigners owning or renting property. The result has been that mortgage providers were operating in an uncertain legal and regulatory environment; developers were offering home financing and taking the risk on their books; and many of the young preferred to stay in extended family situations rather than venturing into the housing market, which is already underdeveloped.
Dubai started reforms two years ago with the introduction of free zones in which foreigners could own freehold properties. Dubai also introduced the Interim Registration Law for off-plan properties and the Dubai Property Court.
However, the Saudi mortgage market has been the great disappointment with the long-awaited mortgage law still to be adopted and ratified. The Kingdom is by far the largest potential mortgage market and with a population of some 30 million and rising at an annual growth rate of 2.6 percent, demand for housing stock will increase over the next few decades.
According to research published by Credit Suisse in July 2009, the Saudi real estate market offers a strong growth opportunity and is better positioned than other GCC markets. The growth and demand drivers of the Saudi real estate market, especially housing, according to Credit Suisse are:
* The Saudi government is committed to development expenditure in the 2009 budget — an increase of 36 percent on 2008.
* The country has a young population some 55 percent under the age of 25 years. Therefore, the Saudi demographics are favorable and have a strong demand outlook. Credit Suisse estimates that demand for housing in the Kingdom will reach at least 1 million units over the next five years.
• The new mortgage law, which is currently in the final stages of approval could increase the number of first time homebuyers as less than half the population own their homes. Consumer finance in Saudi Arabia was less than 0.9 percent of GDP at end 2008.
• The Kingdom is perhaps the most attractive real estate market both in a regional and global context with average residential selling prices at a 58 percent discount to the MENA average. In addition, Saudi residential and office markets offer above-average rental yields.
• Saudi Arabia, despite having 65 percent of the total GCC population, only accounts for 45 percent of total GCC retail gross leaseable area (GLA). Thus the opportunity for retail growth is huge.
“With real estate consumer finance accounting for less than 0.9 percent of GDP (2008), we believe the new mortgage law could potentially lead to an increase in the number of first-time homebuyers as less than half of the population own their own homes,” stressed Credit Suisse.
Another driver for the mortgage market could be household sizes to fall in the Kingdom from the current 5.6 to 5.4 over the next year or so. But the advice is that given the shortage of financing and growing demand for housing from a growing population, developers need to come up with smaller and affordable homes.
The importance of the Saudi housing challenge is further underlined by the involvement of the International Finance Corporation (IFC), the private sector financing arm of the World Bank Group supporting emerging market economies, through the establishment of the Saudi Homes Loans Company (SHL) which is the largest specialized Islamic housing finance company within the MENA Region. The IFC has an equity stake in SHL with Arab National Bank, Kingdom Installment Company (KIC) and Riyadh-based Dar Al-Arkan Real Estate Development Company (DAAR).
According to Michael Essex, director of the Middle East and North Africa at the IFC, 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 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.
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.
IN Bahrain, there were further signs that the Islamic housing finance market is painstakingly recovering from the financial crisis. Bahrain-based Sakana Holistic Housing Solutions, the Islamic housing finance provider, which is a 50:50 joint venture between BBK and Shamil Bank of Bahrain, saw its interim profits for 2009 down although its mortgage assets did increase.
Abdul Hakim Khalil Al-Mutawa, Sakana’s chairman, reiterated that “the prevailing market conditions challenged mortgage underwriting for Sakana in this period, which remained significantly low, as did profit margins which were affected by the increased cost of funding. We have been able to weather the storm so far and continue to manage costs effectively to remain profitable. We remain optimistic about growing our mortgage business.”
Sakana in fact increased its capital to put the company “in a much stronger position to face the challenges of the ongoing financial crisis. We expect 2009 to be a challenging year and expect to see tightening liquidity, reduction in real estate prices, delayed and cancelled projects. However, our focus remains on growing our mortgage book. The pressures of increased cost of funding, reduced take-up of mortgages and possible reductions in asset values will impact on our business and in line with these factors we have prudently adjusted our financing criteria.”
In Kuwait, the real estate market, one of the more badly affected by the impact of the credit crunch and the financial crisis, seems to bottoming out, according to a latest report by the National Bank of Kuwait (NBK). Real estate transactions rose for the second successive month in July 2009 totaling 415 deals — an increase of 2 percent on June and 42 percent on January. While these figures suggest a bottoming out of the realty market, NBK warns that in general overall activity in the real estate market remains subdued, with sales remaining at about two-thirds of the pre-crisis level.
Outside the Muslim world, the UK is the most developed Islamic mortgage market, albeit very small in scale compared to conventional mortgages. Thanks to the UK government’s proactive support, especially in introducing enabling legislation and tax neutrality measures such as the abolishing of double stamp duty for Islamic mortgage contracts, the Islamic home finance market is one of the largest components of the UK Islamic financial services sector. However, this market only accounts for about 0.5 percent of the overall UK mortgage market. In the retail sector, the Islamic mortgage market is now worth an estimated £2 billion a year.
“Our Amanah Home Finance product is based on the Diminishing Musharaka (declining shared ownership) contract and is our flagship product. We have managed to build a viable and sustainable business here in the UK and we have seen steady growth year on year. Since July 2003, we have processed home financing applications totaling in excess of £700 million and I believe we are the market leader,” explains Amjid Ali, senior manager and UK head of HSBC Amanah.
While the conventional mortgage sector in the UK has seen record house repossessions especially in the aftermath of the credit crunch and the financial crisis, the Islamic mortgage sector has fared much better. HSBC Amanah, for instance, has had a single repossession in the last five years, which was done on a mutually-agreed basis. However, such figures have to be seen in context and scale because the size of the conventional mortgage book is much bigger than the Shariah-compliant one.
In Malaysia, Badlisyah Abdul Ghani, CEO of CIMB Islamic Bank, confirms that his bank has had “some repossessions but in general we at CIMB Islamic try our best to restructure the mortgage facility to pre-empt foreclosure. In this very difficult time when some people have lost their jobs, we have agreed a moratorium on repayments for one year. At the end of the day, banks are responsible to shareholders and depositors. This responsibility overrides all other responsibility. Having said that, there is always a balance. If a bank goes after a customer at all costs as soon as the customer is down on his luck or the business is not doing well, then that might not be in the long-term interest of the bank. Balancing the ethos of shareholder and deposit value with the ethical principles of Islamic banking can be easier done in markets that are well-regulated.”