By Edward Attwood
David Dew warns that fixed interest rates over long tenures are a concern for local banks
As the wait for Saudi Arabia’s
much-anticipated mortgage law continues, one of the kingdom’s most senior
banking officials has claimed that the new legislation will not automatically
lead to a flurry of lending from the local banking sector.
“I think the mortgage law - when it
is eventually passed, and clearly it has been under discussion for a long time
- will help,” David Dew, managing director of Saudi British Bank (SABB), told
“But I do not see it as a panacea
that will automatically resolve the housing issues in Saudi Arabia and, in
particular, the pressure on affordable housing.”
Last year, the Shoura Council
-Saudi Arabia’s highest consultative body - pushed through their approval of the
mortgage-financing law, which now needs only to be approved by King Abdullah.
However, the draft legislation is
still yet to be signed off.
Dew, whose firm was the first Saudi
lender to provide a specific home loan product seven years ago, suggested that
some banks might be put off offering mortgages due to long tenures and fixed
“The biggest concern we have in that
business is actually funding and an interest-rate mismatch,” he said. “By that
I mean we are lending at essentially fixed rates for long periods of time
- 15 to 25 years - without the ability to match fund.”
“So we and the other banks providing
this financing are taking interest-rate risk. And that, for us, is a bigger
concern, and a bigger risk factor, than the fact that there is, or is not, a
In 2011, King Abdullah announced
that 500,000 extra homes would be built in the kingdom, where the local real
estate sector has been hit back a lack of supply, limited home financing
opportunities, and a rise in prices in the more desirable areas of major
Overall, around 1.65m homes
- or 275,000 units annually - are expected to be built over the next five years.
To ease the pressure on poorer
Saudis, the king also announced that the upper limits of loans available from
the state-run home financing body, the Real Estate Development Fund, would be
raised from US$80,000 to US$130,000.
There are also signs that banks are
more willing to lend after a lengthy period of provisioning and risk aversion.
January data from the Saudi Arabian Monetary Agency (SAMA), the kingdom’s
central bank, showed that lending to the private sector rose by 11.7 percent
year-on-year in January- its highest gain for two years.
“The mortgage law will help regulate
the whole industry; for example, it will help to regulate lending entities that
at the moment are not regulated by SAMA,” said Dew. “But I do not think the
mortgage law by itself will make any significant difference to SABB’s home loan
policies or products.”
Mortgage law will be good for the Saudi Arabia. The problem which are being raised can surely be addressed. One of the problem which is of interest rate risk and un-matched finance i.e. matching financing the long term investment with short term lending can be easily addressed by launching the real-estate Sukuk.
Saudi mortgage law had been put aside due to the fact that there are no clear laws to solve the problem in case someone defaulted to the instalments and could not pay. There are no such laws which can kick the people out of the property actualy purhased through the mortgae.