Saudi mortgage law awaits confirmation

The move is likely to lead to a multi-billion dollar industry. A mortgage market would vastly extend home ownership for both low and middle income Saudis.

There is a pressing need. Housing is a big issue in the Kingdom and the market is set for substantial with demand fuelled by a rising population and migration from rural to urban areas, far outstripping supply.

In February, the state-owned Public Investment Fund, General Organisation for Social Investment, the Public Pension Agency and the World Bank's International Finance Corporation signed a memorandum of understanding for a $400m housing finance facility.

The facility is designed to provide long-term funding to banks and housing finance firms to assist them in providing affordable financing to lower and middle-income households says Finance Minister Ibrahim Al-Assaf.

Up to now, one of the few avenues for Saudis wanting to obtain to finance to buy a house has been through interest-free, easy-term loans provided by the Saudi Real Estate Development Fund.

In spite of these initiatives, the government's role in financing home buyers is limited and it wants the private sector to assume a greater role. While Saudi banks are keen to oblige, a mortgage law is necessary to pave the way for a market to develop.

Legislation has been held up by the complexity of the difficult issues that need to be addressed, not least those governing property repossession, enforced eviction and assets liquidation in the case of default.

While there is no exact measure of the true size of the potential Saudi residential mortgage market it is believed to run into billions of dollars, given the rising demand of a young and growing middle-income population.

At just 2% of national gross domestic product, bank borrowing in the kingdom is still low compared to 50% in the US, 17% in Malaysia and more than 70% in the UK.

Availability of greater housing finance will add momentum to residential development, which is being driven by a surging economy, increasing personal income as well as the kingdom's population growth.

Nearly half the population now rent their homes, but rising expectations among middle income groups are stimulating increased home ownership. Some estimate more than two million new homes are needed over just the next three years to meet pent up demand.

National Commercial Bank predicts that spending on housing will be more than $17bn by 2010, as nearly 650,000 Saudis, who are expected to be a major determinant in the growth of the kingdom's housing market, enter the workplace.

Islamic financing methods seem likely to feature prominently in a future mortgage market with Shariah-compliant financial models such as Murabaha (cost-plus financing), Ijara (leasing) and Diminishing Musharaka (co-ownership) structures. A mortgage industry is also likely to stimulate an Islamic home insurance (Takaful) market in the kingdom, analysts say.