LONDON, 7 July 2003 — The housing market is a key sector in most, if not all major economies, where mortgage business is a key driver of bank lending and consumer borrowing. Mortgages have a link to inflation and the state of the construction sector. Not so at least till now in Saudi Arabia, where the Kingdom’s banks are “under-lent” in general, and where no mortgage law exists.
Not surprisingly, Saudi bankers predict the introduction of a mortgage finance market in the Kingdom could prove vital for the development of consumer banking and in the empowerment of ordinary Saudis. Demographic pressures and the fact that over 60 percent of a growing Saudi population totaling some 26 million currently is under the age of 20 years, means that housing will continue to be a major priority for the Saudi government for the next few decades.
Perhaps it is not coincidental that in the latest Cabinet reshuffle in April this year, the government created a new ministry, the Ministry of Public Works and Housing.
Free or heavily subsidized housing is becoming a thing of the past for Saudis. After all, the government has already started to ask Saudis to pay for health insurance. Riyad Bank, Al-Rajhi Banking and Investment Corporation, Arab National Bank, Saudi British Bank and SAMBA, have already introduced limited mortgage products including a 20-year Murabaha product. The problem is that the legal infrastructure is lacking. Laws on payment default and repossession are non-existent. Then there is also the question of interest-based mortgage finance or alternative Islamic mortgages based on Murabaha. In the UK, for instance, banks and building societies, are developing Islamic mortgages using contracts featuring leasing or partnership on a diminishing basis. The Kingdom has no current income tax on its citizens, which even the IMF has stressed is unsustainable in the medium term. Will Riyadh be prepared to introduce an indirect personal tax for homeowners? Saudi bankers stress that a mortgage law is in preparation but other laws have priority and will be enacted first.
International rating agency Moody’s in a recent report, stressed that the good financial performance of Saudi banks during 2002 was largely because of their focus on high-margin retail and consumer lending. This was because of high demand for such products, which according to Moody’s is a trend that will continue as the population continues to rise and because of the demography of the Saudi population.
A global low interest rate environment has squeezed margins on other financing areas. This coupled with the bear market in equities over the last few years, has forced banks to look for new money-making market segments. Property finance — commercial, development, and mortgage — has come to the rescue to a certain extent, but in countries such as the UK and US this has been characterized by stiff competition among lenders. The downside is that the higher the consumer lending, the needs for provisioning inevitably grow. Even though the risk weighting for mortgages (the money banks have to set aside to cover the mortgages) in the UK, US and the EU is 50 percent. In Malaysia, for instance, property finance accounts for over 40 percent of all bank financing. But, of this, mortgage financing accounts for a staggering 30 percent. In the Islamic banking sector, housing finance under the Murabaha (mark-up) and Al-Bai Bithaman Ajil (deferred payment) contracts, accounted for RM6,845.9 million or 24.3 per cent in 2001. However, asset quality of the Islamic banking sector deteriorated marginally in 2001. The bulk of non-performing financing (NPF), according to Bank Negara (the Malaysian central bank), in the Islamic financing sector was in the broad property sector (both residential and non-residential). Here NPF in 2001 increased by 57.4 percent or RM609.8 million — a staggering 56.7 percent of total NPF for the Islamic financing sector.
In the Saudi context, how will this translate especially in an economy which has an estimated 30 percent rate of adult unemployment, and assuming that banks will develop mortgage products away from salary-only criteria? It seems that the Housing Ministry, the Saudi banks, and the Shoura Council have their work cut out. While Saudi Arabia can learn from the experiences of other countries, demography, budget constraints, and the carrot of increased housing and therefore mortgage finance demand, will lead to a steep learning curve for all.
