Saudi mortgage law passed

JEDDAH - The Saudi Shoura Council has passed the long-awaited mortgage law following completion of debate on its four components, according to the Saudi Press Agency (SPA).



By (By our correspondent)

Published: Sun 6 Jul 2008, 11:39 PM

Last updated: Sun 5 Apr 2015, 12:48 PM

Ahmed Al Yahya, assistant secretary-general of the 150-member Shoura explained that the four components of the law are real estate financing system, system to monitor financing companies, lease financing system and real estate mortgage system.

The draft law, which has to be approved by the Council of Ministers, will allow more Saudis to own property and banks to diversify income sources by providing loans to build real estate projects.

Emphasising the importance of the law for the Kingdom’s economy and citizens, Al Yahya said that the law is designed to allow much wider access to property ownership in a country where only one out of five Saudis owns a home.

He said the Shoura had taken three months to study the new systems and hoped that there would be no obstacles in implementing the law. “We hope it will solve many problems that obstruct the growth of real estate market in the Kingdom,” he added.

He believed that the new law would contribute to reducing real estate prices, providing more homes to Saudis and cutting inflation rates that hit 10.4 per cent last month. “It will also lead to the establishment of new real estate firms and funds and open new channels of financing,” he said.

The potential of the Saudi residential mortgage market is estimated to be 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 per cent of GDP (gross domestic product) as opposed to 17 per cent in Malaysia, 50 per cent in the US, and 72 per cent in the UK.

Al Rajhi Bank launched a new mortgage programme for private and commercial properties in May 2007.

Riyadh-based Dar Al Arkan Real Estate Development Company, one of the largest real estate developers in the Kingdom set up a mortgage finance joint venture in April of that 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 capitalised company’s aim 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. The joint venture was the first such housing finance company to be licensed the Saudi Arabian Monetary Agency (SAMA).

Islamic home financing is now becoming an internationally-acceptable product. In the United Kingdom, for instance, the Islamic mortgage market is set to reach 1 billion pounds sterling 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.

In Saudi Arabia, the housing market is set for a major upturn. Market dynamics show that demand is outstripping supply. 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 home buyers.

The residential home development demographics in the Kingdom are also changing. In the past, some 98 per cent of housing was built by individuals and only 2 per cent by developers.


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