Saudi Arabian home finance market holds huge potential

According to Michael Essex, director of the Middle East and North Africa (MENA) region, at the International Finance Corporation (IFC), the private sector financing arm of the World Bank Group supporting emerging market economies, at 2.9 per cent the Kingdom has one of the highest population growth rates in MENA region, surpassed only by Yemen at 3 per cent.

Moreover, 88 per cent of the Kingdom's population is based in urban areas, and 55.8 per cent of this population is under the age of 25 years old.

Also, Saudi Arabia has a high population to housing density with an average 6.4 persons to each household. This is higher than India with 5.5 per cent; South Africa with 5.3 per cent; Malaysia with 5 per cent and even Egypt with 4.3 per cent, respectively.

He said that the case for establishing Saudi Homes Loans Company (SHL) was compelling.

Essex said that the IFC is set to increase its involvement in the 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 per cent equity stake in SHL worth SR100 million. The other shareholders include Arab National Bank and Kingdom Installment Company (KIC) — each with 40 per cent of the equity worth SR800 million each; and Riyadh-based Dar Al Arkan Real Estate Development Company (DAAR) with the remaining15 per cent of the equity worth SR300 million. SHL is due to start full operations soon.

Essex said that SHL's mandate 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.

According to him, SHL will provide a strong driver for developing Saudi Arabia and the region's nascent housing finance market. The establishment of SHL "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, " he added.

Essex said that IFC promotes open and competitive markets in developing countries, and supports sustainable private sector companies and other partners in generating jobs and delivering basic services.

He said that IFC has been involved in the Kingdom's housing sector in several other ways. It has subscribed to a 10 per cent IFC credit enhancement of an $18 million KIC sukuk (Islamic bond), with additional credit enhancement provided by DAAR. It also participated in the first true-sale securitisation (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 the Saudi Arabian Monetary Agency (SAMA).

He explained that at present there were limited housing finance resources in the Kingdom. Commercial banks extend 45 per cent of current housing finance usually in the form of personal loans, followed by developers and installment companies with 27 per cent, Islamic banks with 18 per cent and government lending institutions with 10 per cent.

SHL is acquiring KIC's existing real estate housing finance portfolio. It is also utilising the ANB branch network for loan originations. SHL has also enlisted the Housing Development Finance Corporation (HDFC) of India as its technical partner.