In recent years Saudi Arabia’s banking sector has shown itself to be particularly adept at building retail loan books. Consumer lending in the Kingdom has followed a healthy upward trend since 2009, with research by local investment firm Aljazira Finance showing that the contribution of retail loans to aggregate sector lending rose from 22% in that year to more than 30% in 2012.
Moreover, the outlook for more growth in the coming years is a positive one, underpinned by factors such as the increased borrowing capacity of Saudi citizens as a result of higher salaries and the room for consumer credit expansion suggested by a retail loan penetration rate (as a percentage of GDP) of just 12% in comparison to regional peers such as the UAE (19%) and more developed markets such as Europe (55%).
GROWTH AREAS: Against this backdrop, there is much anticipation as to which segments will drive growth going forward. Indeed, as per data from the central bank, personal loans have traditionally dominated the consumer credit arena, accounting for 20.3% of the total in 2012, while motor loans, which generated 19.7% of the total, also represent an area of future consumer credit expansion. One segment in particular, however, has emerged as the most talked about within the industry. Real estate lending has been steadily increasing its contribution to the consumer credit total for some years, more than doubling in size between 2008, when aggregate home loans stood at SR14.9bn ($3.97bn), and 2013, when SR38.4bn ($10.24bn) worth of credit was directed towards the housing sector.
The IMF, in its 2013 Article IV Consultation with Saudi Arabia, points out that real estate finance from banks to individuals has risen by more than 25% per year since 2011, but also notes that as it still accounts for less than 5% of total bank credit there is plenty of room for further growth. While the trend clearly visible in lending data would be enough in itself to account for the optimism surrounding the prospect of future credit extension to homebuyers, another important development also underpins the buoyant long-term outlook.
LEGAL FRAMEWORK: The Kingdom has been debating the pros and cons of introducing a real estate mortgage law for several years. The issue of establishing a formal legislative framework on which to build a viable mortgage finance industry is a complex one in the Saudi context. Indeed, proponents of the legislation argued that the lack of a mortgage law has reduced the ability of financial institutions to extend credit to potential house-buyers, an assertion supported by Bloomberg data, which shows that less than 4% of all home purchases are financed via mortgages, compared to 17% in the UAE and 70% in the UK.
On the one hand, some claim that the nation’s young population needs more straightforward access to credit if its housing needs are to be met. On the other hand, according to those who have adopted a more cautious stance, the real estate crashes that shook regional and global economies following the 2008 financial crisis demonstrated the potentially damaging results of ready access to credit. Added to this uncertainty was the question of sharia compliance and mortgage lending – a central issue in the design of financial instruments and drafting of new regulations in the Kingdom.
Nevertheless, by the summer of 2012 implementation of Saudi Arabia’s new mortgage legislation began. The law is actually a set of five separate pieces of legislation, collectively known as the Real Estate Mortgage and Financing Laws, which aims to overhaul the process by which credit is extended to homebuyers. Between them they cover a broad sweep of activity and concepts, including: creation and registration of a mortgage; the rights and obligations of mortgagors and mortgagees; regulatory oversight (which falls under the auspices of the Saudi Arabian Monetary Agency); finance lease contracts (and, importantly, the rules and processes of recovering an asset when a borrower defaults); the establishment and operation of finance companies; and matters related to enforcement.
CONSEQUENCES: The changes brought by the new legislation are many, but as far as Saudi Arabia’s banks are concerned they can be broadly divided into issues of procedure and the wider issue of sector structure. In the procedural arena, the biggest potential change is related to how banks have traditionally dealt with title deeds. Banks extending home loans generally request to hold the title of the real estate in question for the term of the loan, while on full payment of the debt the title is returned to the borrower. While this system has served the banks well in the absence of a mortgage law, the new legislation – depending on the final implementing regulations – potentially removes the necessity for banks to hold the title deeds of properties.
Under the recently introduced regime, for mortgages to be enforceable against third parties properties must be recorded under a new real estate register, after which the bank is in a position to legally access the capital tied up in the building in the case of a default. From the banks’ perspective, the efficacy of the new law will rest in their ability to issue mortgages without incurring additional risk as a result of not retaining title deeds. Much attention, therefore, will be paid to the question of foreclosure in the coming months, both in terms of the regulation governing it and the findings of the courts as cases come before them.
COOPERATION: However, just as significant as the procedural changes brought about by the law are the implications for the structure of the sector. The third law in the five-part series established a framework for finance firms to extend credit to the housing segment. While these firms remain few in number, the mortgage law has the potential to usher in a new era in which specialised mortgage lenders assume the chief role in the home-loan market. “New SAMA regulations are expected to usher in a wave of mergers among Saudi and GCC leasing companies as the majority of companies in Saudi will struggle to meet the capital requirement of at least SR500m ($133.3m),” Omar Hindi, managing director at Taajeer, a local financial group, told OBG. Deutsche Gulf Finance (DGF), for example, is one of around three finance firms undergoing the licensing process as of early 2014, and is a joint venture between Deutsche Bank and Al Rajhi. Naif Abdulmohsin Al Baz, CEO of DGF, told OBG that he foresees a transformation of home-loan activity over the coming years. “What we are seeing is the normal maturing of the market. In the future it will be the real estate finance companies, not the banks, which will be dominating the sector, as has happened elsewhere. The banks will act as providers of liquidity and bookers of assets,” he said.
Thus, banks do not have to lose out as mortgage finance groups step up their operations. Indeed, firms like DGF can originate transactions, park them temporarily on their balance sheets and then sell them on to investors. The originate-to-sell model, new to Saudi Arabia, but already gaining momentum, is a key addition to the home-loan market as far as banks are concerned. Notwithstanding, consumers can also benefit from the global practices that mortgage groups are bringing to the market, such as taking out a home-loan without assigning a salary to the lender and the possibility of paying down a loan early without penalty.
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