Standard and Poor's publishes credit FAQ on Saudi Arabia's new mortgage law

This legislation will transform home financing in Saudi Arabia to property-secured lending from the current practice of extending loans based on salary assignment, or banks' automatic deductions from borrowers' salaries to repay home loans. Standard & Poor's Ratings Services addresses questions about Saudi home financing and banks in its Credit FAQ "How Will Saudi Arabia's New Mortgage Law Affect Domestic Banks?," published Feb. 18, 2013.

"Once the new mortgage law becomes effective, we believe that Saudi banks will expand their mortgage lending activity significantly over time, strengthening their competitive advantage versus nonfinancial companies and foreign banks operating in Saudi Arabia," said Standard & Poor's credit analyst Paul-Henri Pruvost.

We understand that the Saudi Arabian Monetary Agency (SAMA), the central bank, is currently in informal talks with market participants to fine-tune drafts of three of the five laws, those on real estate financing, financial leases, and the supervision of finance companies. We will monitor any changes SAMA makes to the draft legislation and how they could affect our view of the economic and competitive conditions for the domestic banking system. We believe the traditionally cautious and conservative SAMA will take the necessary time to come up with the proper framework to identify and segregate risks, as it has demonstrated in the past, for instance, when Saudi commercial banks spun off their investment banking lines into separate legal entities in 2007.

The FAQ addresses the following questions about Saudi home financing and the impact of the new mortgage law on domestic banks.
• Do you anticipate rating actions on Saudi banks in the wake of the new mortgage law?
• Why is the new mortgage law important for Saudi Arabia?
• Are Saudi banks the main providers of home financing to retail customers?
• Why have Saudi banks been reluctant to extend home financing until recently?
• Have conditions for home financing changed recently?
• Why did home financing accelerate in 2012?
• Do you think SAMA will lower the risk weight it applies to calculate banks' capital adequacy from 100% to the 35% that Basel II prescribes, given that Saudi Arabia's current home loans will become property-secured mortgages?
• How would a decision by SAMA to lower its risk weight affect Standard & Poor's ratios of risk-adjusted capital for rated banks?
• What economic risks could the rollout of the new mortgage law entail?
• Would competitive dynamics in the banking system change significantly? Specifically, do you think nonbank finance companies or foreign players could become a competitive threat?
• Could the increased activity of nonbank financial companies represent a risk for the banking system?
• What short-term benefits do you see for the banks?
• If a boom in residential construction occurs following the implementation of the new mortgage law, how would it affect the Saudi insurance sector?