Last Updated: Mon Jul 02, 2012 18:48 pm (KSA) 15:48 pm (GMT)

Saudi Arabia approves long-awaited mortgage law

The Saudi Arabia mortgage law has been mooted for years but has been held up due to considerations around providing mortgage finance in an Islamic sharia-compliant manner. (File photo)
The Saudi Arabia mortgage law has been mooted for years but has been held up due to considerations around providing mortgage finance in an Islamic sharia-compliant manner. (File photo)

Saudi Arabia, which is spending about $500 billion to build infrastructure and industry, has approved a draft law that will allow mortgages to be sold in the kingdom, the state news agency said on Monday.

The law has been a long-awaited move to provide finance for real estate projects and is part of an overhaul of the kingdom’s home finance market.

“After reviewing a report by the minister of finance, the cabinet has approved the draft mortgage law and a royal decree has been prepared,” a statement to the Saudi Press Agency said.

The draft law lays down the regulations to establish mortgage companies and their activities.

The law has been mooted for years but has been held up due to considerations around providing mortgage finance in an Islamic sharia-compliant manner and how to deal with sensitive issues such as letting banks take away a borrower’s home if there is a default.

The move, which is expected to ease the concerns of lenders discouraged by previously unclear regulation, could therefore encourage banks to lend.

The mortgage market in Saudi Arabia, the biggest Arab economy, is the least developed among the six Gulf Cooperation Council states, the U.S.-based Commercial Real Estate Services Group Inc. (CBRE) said in March.

Only 2 percent of home purchases in the kingdom have been financed through mortgages, compared with 17 percent in the United Arab Emirates, according to CBRE.

The law has been long-delayed. In 2010, the kingdom said the law would be further delayed as it faces obstacles dealing with default and other issues that have impeded mortgage lending by banks in Saudi Arabia.

A key bank in the kingdom, the Saudi American Bank Group (SAMBA), had previously said the passage of the law would be an important breakthrough in opening up housing finance to a large section of the Saudi national population; the low- and middle-income earners in particular.

“By effectively providing collateral the mortgage law would give banks the comfort they need to expand lending,” SAMBA said in a statement.

“Once it is enforced, the mortgage law will not transform the housing finance landscape overnight. The law should help to transform potential demand into real demand, but it does not—directly at least—address supply constraints,” the bank added.

The Saudi Arabian General Investment Authority announced in 2010, it will spend $500 billion by 2020 on investments in energy, ports, logistics and education.

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