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11 December 2023

New Saudi legislation permits foreclosure on properties

Saudi housing demand is expected to rise after the law is passed. (AFP)


Saudi Arabia's long-awaited mortgage law will give lenders more rights, including the ability to foreclose on properties in default, according to a draft seen by Reuters, appeasing lenders nervous about jumping into the kingdom's real estate market.

The arrival of the mortgage law is expected to drive Saudi housing demand and prices as more people access the market.

The Shariah-compliant legislation, which has not been finalised yet, allows lenders to enforce their mortgages by reporting debtors to a central authority and forcing them to either repay their debt or vacate a property.

"This is a huge development and the draft is a step in the right direction," said Michael McMillen, partner and head of Islamic finance at law firm Fulbright & Jaworski. "The overall structure of this law is very familiar to a collateral security structure and it's obvious they've taken a long time to work through both what financiers want and how Shariah works."

The draft law also addresses concerns over subprime mortgages, implementing a "safety ratio" which will prevent lenders from giving financing beyond the means of the consumer. Specifics regarding the ratio have yet to be established. The mortgage law, which has been in planning stages for almost a decade, was supposed to have been implemented last year. Saudi officials now expect it to be passed in a few months with few, if any, changes to the current draft, sources said.

The Saudi Arabian Monetary Agency (Sama), the country's central bank and one of the authorities overseeing the draft, was not immediately available for comment. Under current Saudi mortgage lending practices, a notary public records a title deed that the property is subject to a mortgage. But notary publics are known to refuse to record those rahns, or pledges of property to secure a debt, if they have any concerns over the lender.

The new law creates a central authority to register the documents, reducing the role of the notary publics and making it easier to validate mortgages.

The registration clause, which extends beyond home financing to commercial real estate, could draw more commercial finance business to Saudi Arabia.

If the law is finally put into place, it could usher in a new boon period for mortgage financing in Saudi Arabia – an area traditionally avoided by financial institutions due to a lack of proper regulation.

"The opportunity is enormous," said Jarmo Kotilaine, chief economist at NCB Capital in Riyadh. "If we look at this from the perspective of the financial sector, mortgage lending has been one of those missing elements."


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