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Mon 27 Jun 2011 10:49 AM

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Saudi Arabia's banks must back the country's youth

Youth will gain from economic growth if their ideas and businesses are lent support

Saudi Arabia's banks must back the country's youth

It’s not often we devote an entire issue to one country, but Saudi Arabia certainly deserves that privilege. This week, as well as counting down the kingdom’s 30 richest, we also look at the various sectors of the economy and how they are faring.

Two things stand out: one, there are lots of very rich people in Saudi Arabia. Even the lowest ranked entry on our Rich List has $2.7bn. But you already knew that.

More interesting is the challenges the economy now faces, and whether the country is equipped to meet them. The latest briefing from National Bank of Kuwait forecasts that Saudi Arabia’s real GDP growth this year from 4.2 percent to 6.9 percent. If so, this is a huge achievement, and one which would leave Saudi Arabia as the region’s second fastest growing economy behind Qatar.

Around half of this revision comes from the hydrocarbon sector, which is now forecast to grow by ten percent compared to the five percent expected before. Despite this, what is really impressive about Saudi Arabia is its diversification from hydrocarbons, particularly into education and infrastructure. There, a staggering $155bn of spending has been set aside for this year alone, while over the next five years $15 trillion will be invested in the non-oil sector.

And here is where the greatest challenges also lie. As the kingdom’s economy grows, so does its youthful population (of which 70 percent, yes 70 percent, are under 30). The more prosperous they become, the more security they demand. In short, they want to own their own homes.

There is no exactly a shortage in supply — about fifteen percent of the country’s housing units are empty. The problem has always been financing. Yes, a new mortgage law is being put in place, but right now the options are either a personal loan, or access to the state-backed Real Estate Development Fund (REDF). However, for low-income Saudis, bank loans have been hard to obtain during a cut in private-sector credit lending, and have generally been limited to payback periods of about fifteen years. The REDF has played its part, but had upper limits of $80,000 in place until this year, when HRH King Abdullah ordered this threshold to be raised to $130,000. In addition, lengthy waiting lists have made the fund almost redundant for younger Saudis.

In other words, the mortgage law could not come sooner. But the question is will it make a difference? A lot of experts would have you believe that once in place, the KSA will see an incredible housing boom. The fact is the housing market is already booming, which is already pricing many Saudis out of it. And recent history tells us that mortgage laws don’t solve all problems. There has been one in place in Egypt for a decade, but it has had limited impact. In any new market, the banks tend to be over cautious, and lending terms remain unattractive for many people and for many years.

All being well, the new Saudi mortgage law should be in place before the year is out, and we will find out whether the banks are willing to help or hinder the market.

Which brings me back to our Rich List, intended as a celebration of the financial success of the country’s 30 richest individuals and families. From HRH Prince Alwaleed downwards, each one has had an outstanding career and has earned their place in the country’s history. But what also strikes me is that there are no “new kids on the block” in the list. The old guard, largely as a result of inherited family wealth, have maintained the status quo.

For the younger generation, it is one thing to watch the economy grow at 6.9 percent, but quite another to benefit from it.  The banks — starting with the mortgage law — must back the youth, their ideas and their businesses. Otherwise, it is unlikely our Rich List will see any new entries for many years to come.

(Anil Bhoyrul is the Editorial Director of Arabian Business. The opinions expressed are his own.)

Click here to view the Saudi Rich List 2011

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