LONDON, 14 May 2007 — No one knows what the true size of the Saudi residential mortgage market is, but everyone agrees that the potential is huge, running into billions of riyals driven by the demand dynamics of a young population and the baby boomers of the 1970s.
Bank borrowing in the Kingdom is relatively low, and according to official statistics, mortgage housing finance in the country is a mere two percent of GDP (gross domestic product) as opposed to 17 percent in Malaysia, 50 percent in the US, and 72 percent in the UK.
As such, Al-Rajhi Bank’s new mortgage program for private and commercial properties, launched in early May 2007, in some respects is pre-empting important imminent market developments, which has kept potential mortgage providers (mainly the Kingdom’s banks and specialized mortgage finance companies) expectant with anticipation.
Similarly, Riyadh-based Dar Al-Arkan Real Estate Development Company, one of the largest real estate developers in the Kingdom, realizing the demand for housing units from a growing and young population and a fast-growing economy with GDP growth hovering round the 6 percent mark, set up a mortgage finance joint venture in April this year with Kingdom Installment Co. (KIC), Arab National Bank (ANB) and the International Finance Corporation (IFC), the private sector financing arm of the World Bank Group.
The SR2 billion capitalized company, according to Sheikh Abdullatif Al-Shelash, managing director of Dar Al-Arkan, is “to help Saudi youth purchase suitable houses by providing them with Shariah-compliant financial tools. People will be able to buy houses on an installment basis by paying amounts equal to monthly house rents. This will also encourage real estate developers to establish more such firms.” This joint venture is the first such housing finance company to be licensed by SAMA (the Saudi Arabian Monetary Agency).
Perhaps the likes of Al-Rajhi Bank, Dar Al-Arkan, KIC and Arab National Bank are going for the first mover advantage in anticipation of the adoption of the long-awaited mortgage law that is expected to be passed in Saudi Arabia during 2007. KIC, hitherto has financed the purchase of 3,000 housing units under Shariah-compliant basis, on an ad hoc basis.
According to Dr. Robert Eid, managing director and CEO of ANB, the joint venture “is an important part of ANB’s strategy to develop housing finance as a core growth sector for the bank and to develop and provide Shariah-compliant financial solutions to the bank’s clients in relation to home finance.”
Islamic home financing is now becoming an internationally-acceptable product. In the UK, for instance, the Islamic mortgage market is set to reach 1 billion sterling pound by 2009, and the Financial Services Authority now regulate Islamic mortgages under the Murabaha (cost-plus financing), Ijara (leasing) and Diminishing Musharaka (co-ownership) structures.
Earlier this year, Saudi Finance Minister Ibrahim Al-Assaf confirmed that a draft mortgage law is before the Shoura for consultation and debate. Saudi Arabia hopes to introduce the law before the end of 2007.
“Our Finance Minister Ibrahim Al-Assaf recently confirmed that a draft mortgage law is in place. We expect the law to be enacted sometime this year. The government has realized that its role in financing housing is limited and that the private sector should assume a greater role in this respect. Banks in Saudi Arabia are very keen to provide consumer housing financing. This law will pave the way for the mortgage industry in the Kingdom,” Al-Salash told Arab News during a recent visit to London.
The housing market in the Kingdom is set for a major upturn. Market dynamics show that demand is outstripping supply. In fact, according to Dar Al-Arkan, in the middle-income sector alone, a shortfall of 50,000 residential units is projected over the next few years.
The baby boom in the 1970s and increasing migration of people from the villages to cities in the Kingdom has resulted in many of these people now becoming first homebuyers.
The residential home development demographics in the Kingdom are also changing. In the past, some 98 percent of housing was built by individuals and only 2 percent by developers.
This trend is rapidly changing given the rising cost of development and building materials.
Dar Al-Arkan is currently involved in 26 land development projects with a total of 7.2 million square meters. It also has 15 residential projects in progress comprising some 13,000 units in some 5.5 million square meters of built-up area. The aim is build a total of 65,000 residential units over the next 5 years.
Al-Salash recently told Arab News that Dar Al-Arkan’s Al-Qasr project located in Al-Suwaidi suburb of Riyadh and the “privacy enhanced” residential development, Riyadh View, one of the largest such projects in the Kingdom, are well on track.
He confirmed that the company’s long-term strategy is to diversify into the residential development market in Jeddah, Madinah, and the tri-city area of Dammam, Dhahran and Alkhobar in the Eastern Province.
The IFC’s involvement in the joint venture is aimed at promoting housing finance in developing markets to tackle housing problems there.
Saudis, participating in the current ad hoc mortgage financing schemes, have proven to be punctual in paying their monthly premiums, according to Dar Al-Arkan and KIC
Both Al-Rajhi Bank’s and the joint venture’s mortgage financing will be up to a maximum 25 years tenor, subject to the various application conditions, such as a minimum income of SR2,000 per month. Neither institutions have revealed which underlying Islamic mortgage contracts they are offering.
Islamic home financing schemes will inevitably give rise to an Islamic home insurance (Takaful) business, which in Malaysia for instance is a given wrap-around for mortgage products, encouraged by Bank Negara, the regulator. The Kingdom is opening up its insurance market with the issuance of 13 new licenses including about five to Takaful companies including HSBC Amanah, Salama, FW Group and Tokyo Marine.
One operator which has the first mover advantage is Bank AlJazira’s Takaful Ta’awuni, whose general manager and head of Takaful Ta’awuni, Dawood Taylor, confirms that there is also a huge scope for mortgage Takaful.
HSBC Amanah, which currently offers the only mortgage Takaful in the UK, for instance, could be in a pole position to offer such products in Saudi Arabia.
The National Company for Cooperative Insurance (NCCI), the premier insurance company in the Kingdom, which introduced cooperative insurance a few years ago, recently appointed a Shariah Advisory Committee which will “review new regulations, products and services and see whether they comply with Shariah principles.”
