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11 December 2023

Saudi mortgage law to boost bank lending

National Commercial Bank expects a surge in property funding after the mortgage law is enforced. (AFP)

By Nadim Kawach

Saudi banks are expected to reverse several months of tight credit policy and open up their massive lending coffers when the long-awaited mortgage law is issued this year, the Gulf kingdom's largest bank said yesterday.

National Commercial Bank (NCB), the largest Saudi bank by assets, said the mortgage law offers huge investment potential to the 12 commercial banks in the world's largest oil exporter and this could allow them to end their strict credit approach and entice them to invest more at home.

"The mortgage law will soon be passed in the kingdom, offering a new opportunity for banks to expand and diversify their balance sheets," NCB said in its weekly economic bulletin, sent to Emirates Business.

It cited recent statements by the governor of the Saudi Arabian Monetary Agency (Sama), Muhammad Al Jasser, that the Shariah-compliant mortgage law has already been drafted and will be issued in the next few months.

According to NCB, the proposed law could provide banks with legal recourse to foreclosure, thereby encouraging them to capture the large existing demand for mortgage finance in the Arab world's largest economy.

Quoting Sama's figures, the report estimated total Saudi bank assets at $370bn (Dh1.35 trillion) at the end of November 2009. But it noted that with consumer credit accounting for just around 14 per cent of the country's gross domestic product (GDP), the new law offers considerable room for growth.

"In our opinion, the timing couldn't have been any better for Saudi banks, given the currently low interest rates, a relatively higher degree of liquidity in local financial markets, improving consumer confidence, rising per capita income levels in line with our forecast of gradual economic recovery in 2010 and a rapidly growing youthful population," the report said.

"It is also worth mentioning that nearly 44 per cent of housing units in the kingdom are being occupied on a rental basis by around 38 per cent of the total population in Saudi Arabia-based on latest official census data… hence, greater access to and availability of mortgage financing will likely give a boost to the real estate market as well as other related sectors, namely insurance."

In a detailed study about mortgage in Saudi Arabia issued earlier, NCB expected a surge in property funding after the mortgage law is enforced. It said due to the rapid growth in its population, the kingdom needs to construct nearly 158,000 houses every year between 2010 and 2020, a total 1.58 million new housing units. It estimated the investments required for these projects at nearly SR79bn (Dh77.3bn) annually.

"For establishing long-term supply-demand equilibrium in the housing market, Saudi Arabia is required to build about 158,000 new housing units with an estimated investment need of SR79bn each year between 2010 and 2020.

The conventional funding sources are the Real Estate Development Fund (REDF), commercial banks' consumer loans and individual's own savings."

NCB's figures showed that over the past three years, REDF's disbursements of new housing loans averaged SR4.2 billion annually, while those from the commercial bank averaged about SR600m a year.


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