(MENAFN - Arab News) Just when we thought that the Shoura Council in Riyadh finally approved last Monday Saudi Arabia's long-overdue draft mortgage law, it now turns out that the draft law has only been approved with several caveats.
This means that there will be yet further delays in adopting the draft law, which now has to go back to the Shoura Council's Finance Committee to make the changes relating to unspecified aspects of the definition and disbursement of a mortgage loan. Only after these modifications are done, will the draft law be re-submitted to the full Shoura Council at a future session for adoption. Following this, it will then be sent to the Council of Ministers for consideration and ratification before it receiving royal assent.
This process could take another few months if not longer. Several Saudi bankers, while publicly lauding the progress of the long-awaited mortgage law, are privately exasperated by the seemingly endless process of bringing the law to the statute book. Surely, they point out, that the latest round of changes should have been identified and discussed at the earlier stages.
Under a parliamentary system, it is the minister together with his department lawyers and professionals and the civil service, that usually draft a law before being presented by the government to members of Parliament for scrutiny, debate, amendments and finally voting and adoption. Depending on the importance of the legislation, the tactics used by the various parties and the availability of parliamentary time, this process can be very quick, normal or drawn-out.
In the case of the Shoura Council, transparency is also an issue. The Shoura Council actually approved the original draft mortgage law in 2008, only for it to be returned for further deliberations after objections from the Council of Ministers because of serious differences relating to several articles of the draft law. Subsequently, the Shoura Council established a Special Finance Committee comprising six members to conduct a detailed study of the draft law, which has taken three years to materialize and to partially adopt.
Bankers in the Kingdom are bemused by the inefficient process and some analysts are keen that the articles in dispute like the law itself should have been open up to at least market if not public consultation.
As to the latest deliberations, a Shoura Council statement simply confirmed "The Agenda of the Majlis' 15th Ordinary Session Sunday (March 27) Fifth term - Third Year". The second article noted "the Finance Committee point of view regarding members' opinions toward the divergence of views between the Shoura Council and the Council of Ministers on the financing systems "mortgage system, control system for finance companies, a financial lease, a mortgage recorded, as well as amending some articles of the financial market in accordance with rule (17), of the Shoura Council. The council approved the draft mortgage law subject to modifications to some of its clauses."
Very little of the draft law is in the public domain. From the snippets of information that has emerged from the Shoura Council, the media and the banking community, it seems that:
Only companies authorized by the Saudi Arabian Monetary Agency (SAMA) - banks, mortgage companies, finance companies owned by real estate developers - will be allowed to extend housing finance.
The mortgage law is Shariah-compliant not only in terms of the mortgage finance contract, but also in terms of the rights of the mortgagee.
The draft mortgage law comprises a package of five laws - mortgage registration law; execution law; a financial leasing law; real estate finance law, and a finance company law.
What the draft mortgage law and the Shoura Council members apparently have not articulated are several potentially contentious issues relating to mortgage finance - whether Islamic or otherwise.
Housing is an important issue in almost all societies. Islam promotes the development and ownership of housing because it forms the core domicile of the family unit. As such this promotes family, community and social stability. For those who cannot afford to own a house, it is incumbent on the state to provide subsidized and affordable housing.
In market capitalism until the last few decades, home ownership was also essential for family stability. But the family was regarded as the most important consumer unit. The logic being that if the family is stable, then consumption will also be sustainable.
In a fast-changing globalized world with more nuclear families; one-parent families and the demise of the extended family concept, housing market and finance dynamics have inevitably changed. No country on earth can be immune to some of these changes because of employment, financial, family and even marital pressures.
Affordable housing - the lack of it - is the fundamental challenge for all societies whether they are in industrialized, newly industrialized, emerging and the least developed countries.
The lack of affordable housing in the rich economies of the West, in some Middle East and Asian countries is a political and moral scandal. Not surprisingly, the gap between rich and poor is widening. This is sharply manifested in the housing ownership gap.
Young people can no longer afford to get on to the property ownership ladder because of house price inflation, growing unemployment, low wages and the high cost of living in general. This in turn has led to alienation especially of the youth and to potentially various manifestations including radicalization in a very small number of cases.
Countries such as Saudi Arabia are now realizing that housing is a national priority. Custodian of the Two Holy Mosques King Abdullah last year even appointed the first minister for housing.
Pursuant to the anticipated adoption of a Saudi mortgage law, several groups have moved to established Islamic mortgage companies, which are seen as lucrative consumer finance providers for a socially progressive activity, affordable housing development and provision.
These include Saudi Home Loans Company, set up a few years ago by the International Finance Corporation (IFC), the private sector funding arm of the World Bank Group, in a joint venture with Saudi partners including Dar Al-Arkan Real Estate Development Company (DAAR) and Arab National Bank; Deutsche Gulf Finance (DGF), a joint venture Shariah-compliant home financing company set up in 2010 and owned 40 percent by the Deutsche Bank's Riyadh branch and 60 percent by a group of prominent Saudi-based investors led by Fahad Abdullah Abdulaziz Al-Rajhi through the Al-Nakhla Company for Commerce and Real Estate Investment, a wholly-owned subsidiary of Far Venture Holdings; and the mortgage finance company which is in the process of being established by the Jeddah-based Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the Islamic Development Bank (IDB) Group, the Saudi Public Investment Fund and Us mortgage advisory company, Capitas.
The business case for the Saudi mortgage finance market alone should be an important marker for the Shoura Council and the Saudi government to get its act right and in greater urgency. ICD's real estate development and investment entity, Anfaal Capital, which is regulated by the Capital markets Authority (CMA) estimates the current demand for almost 1 million housing units in Saudi Arabia alone. This is projected to increase on a yearly basis by 150,000 units.
According to Deutsche Bank Research, the total outstanding home finance provided by the private sector in Saudi Arabia aggregates to less than 1 percent of GDP compared with well over 50 percent in most developed countries, and approximately 6 percent in Kuwait and 7 percent in the UAE.
Deutsche Bank Research projects Saudi Arabia will need 1.2 million additional housing units by 2015. In addition, based on market assumptions, it estimates that when the new Saudi mortgage law is enacted it will contribute to incremental demand of approximately 55,000 additional units per year.
Saudi Mortgage penetration is only 2 percent, albeit the Saudi government target is for 80 percent home ownership by Saudi citizens by the year 2024.
In August 2010, the Saudi Arabian government approved the country's 9th Five-Year Development Plan (2010 - 2014) totaling SR1.44 trillion inter alia to develop human resource and education, housing and transportation infrastructure. In addition, the Saudi Arabia General Investment Authority (SAGIA) is developing six economic cities, which its estimates would have a population of 45 million by 2020, which would generate huge additional demand for housing and other services.
Some of the challenges for the Saudi mortgage market and for the proposed mortgage law are specific. Although one of the laws in the package talks about financial leasing (Ijara), does this mean that only Ijara-based mortgages will be available in Saudi market- The other choices are Murabaha (fixed-rate mark-up); Al-Bai Bithaman Ajil (deferred payment), and Diminishing Musharaka (equity participation with a rental element). If the draft mortgage law only adopts the Ijara contract, then Saudi consumers would be restricted in the choice of the Islamic mortgage finance contract. This would be a serious constraint on the market. Some Shariah scholars prefer the Diminishing Musharaka contract for mortgages, although BBA is the preferred in Malaysia, and the Murabaha in countries such as Turkey.
No mortgage finance provider would finance a house without the requisite insurance. Does the draft law allow for this- Are there any mortgage Takaful wrapper products available in the market- The Takaful market alone is potentially bigger than banking, but insurance penetration of the Saudi market is miniscule because of cultural reasons.
Does the draft law deal with the potentially contentious issues of defaults in repayments of monthly installments or in any delayed payments- If there are defaults, how will the mortgage finance companies react- Can they resort to repossession of the property and does the draft law allow this- As the global financial crisis and the real estate bubble in Dubai showed over the last year or so, mortgages can be risky business for banks and mortgage finance companies, which after all are in the business to generate profit and to add social value to the economy at the same time.
If there are delayed payments, since under Islamic mortgage contracts a bank cannot charge interest, will the mortgage finance provider be allowed to charge a penalty in lieu of the delayed payment-
Banks will stress that they cannot subsidize mortgage finance because their primary loyalty lies with their shareholders. It may be that the Saudi government may have to set up a Saudi Mortgage Finance Corporation say as in Malaysia and elsewhere. But once again no mortgage finance model is sustainable on a continual subsidy basis. It simply will be too costly.
Similarly, the hope must be that the draft mortgage law also deals with legal issues such as the ability to pass a title or deeds to a house from one owner to another on sale, death or inheritance.
The truth is that even if the mortgage law was to be adopted tomorrow, it would take a substantial amount of time for the law and the mortgage market to settle down. At the same time, the market will have to be prepared to deal with several potential hiccups relating to some of the above points mentioned above and some of the idiosyncracies of the Saudi market which may be further fueled by a lack of market education and awareness about mortgages especially amongst certain sections of society. This is not peculiar to the Kingdom and happens even in the most advanced of mortgage markets.
Inevitably, some of the cases will end up in the courts, but this would not be a weakness but a sign that the new law when adopted is being tried and tested and gives Saudis and mortgage providers recourse to law, which is a fundamental prerequisite on the road to an advanced and mature mortgage market.
By Mushtak Parker