Financial Markets Project

THE MORTGAGE MARKET IN SAUDI ARABIA 1

The Mortgage Market in Saudi Arabia

FINC 4302 - Financial Markets & Institutions

Spring 2014-2015

Bashaier Abdulsalam

( it was a team work )

May 6, 2015


Table of Contents

Section 1..........................................................................................................................................3

Introduction..................................................................................................................................3

Aims and Objectives....................................................................................................................4

Section 2..........................................................................................................................................6

Saudi Arabian Mortgage Market..................................................................................................6

Section 3........................................................................................................................................10

Recommendations and Conclusion............................................................................................10

Part B…………………………………………………………………………………………….11

Saudi Arabia to Open Stock Market to Foreign Investors: https://www.youtube.com/watch?v=xTL3ydtpjA4.........................................................................................................................11

References......................................................................................................................................13


The Mortgage Market in Saudi Arabia

Section 1

Introduction

A mortgage market is defined as the interaction between lenders and home loans

borrowers. The rationale of the mortgage market is to provide home owners with an opportunity

of owning a home without going through hassles associated with owning a home (Shoult, 2006).

Just like a normal loan, mortgage products are tailored to the needs of those who would wish to

own a home by paying smaller amounts which are inclusive of interests charged (Fund, 2012).

This implies that as customers take mortgage loans, they should be prepared to pay out a given

amount within the scheduled time agreed with the bank. For example, if the customer is required

to pay the mortgage on a monthly basis, this protocol should be followed without contravening

the rules. The payments required by lenders are expected to service the mortgage product that

has been acquired.

Aims and Objectives

The main objective of this paper will be to analyze the mortgage market and understand

how it works in the context of a financial system. In this regard, this research paper will focus on

the Saudi Arabian mortgage market by highlighting various issues related to the financial sector.

In addition, the role of the mortgage market in the development of the Saudi Arabian economy

will be reviewed with the objective of understanding the benefits that come along and also the

challenges. It would be important to look at both sides of the coin in relation to the mortgage

market in Saudi Arabia (Abdeen & Shook, 1984). Challenges resulting from the development of

the mortgage market will be analyzed in order to get the right perspectives of the mortgage

market in the Arab nation.


Regulatory issues will also feature in this research paper and will help understand the

manner in which Saudi Arabia has formulated polices aimed at streaming the mortgage market.

For example, the activities of Saudi Arabian Monetary Authority will be outlined with regards to

improving the mortgage sector in the country. Banking is another discussion point that will

feature in this discussion and will be used to help understand how the institutions influence this

sector. In addition, a comparative analysis of existing mortgage laws and the banking policies

adopted will be undertaken with the objective of understanding how the latter has affected the

former. The final part of the research paper will provide a number of recommendations needed

for addressing various issues in the Saudi Arabian mortgage market.

Before advancing a mortgage, lenders asses the financial muscle of the borrower by

reviewing factors such as income and the assets owned by the client. These considerations are

instrumental for supporting the bank in the event of a default. Security is a requirement of many

lenders and is used for providing a backup plan that would cater for the default of loan

repayments (Peagum, 1985). The question of foreclosure has been associated with mortgage

loans and results when the borrower fails to live within the repayment agreement made during

the signing of the loan product. The fact that the customer took a mortgage makes them obligated

to provide securities for the purpose of recovery. Taking into account the risks associated with

foreclosures, lending institutions create requirements which have to be met by those taking the

housing loans.

The mortgage market is considered as an important segment of financial markets that

bolsters economic growth. Market analysts contend that the mortgage market enhances the

financial markets by increasing credit facilities. The increase in loans and borrowing activity is

good for the economy and helps build on the infrastructural needs of a given region. The real


estate sector was triggered by the loan packages introduced by banks to attract more home

owners to live the dream of owning a house. The flexible and customized components of home

loan products go a long way in sparking demand in the market (Shoult, 2006). According to

surveys on home ownership, many consumers would love to own a home now or in the near

future. These results are a reflection of the potential held by the mortgage market. As the main

regulator of market activities and financial markets, the government endeavors to provide

guidelines that would protect the interests of various stakeholders in the industry (Lessambo,

2013). The lessons on mortgage loans in the concluded recession are a stark reminder of the risks

posed to the mortgage market. It should be known that the mortgage market helps in

consolidating the dimensions of the financial markets by enhancing the movement of credit. As

more customers acquire credit for home ownership, the economy improves by attracting

investors from outside to come and invest in the domestic market. Hard choices have to be made

when it comes to assessing the movement of the mortgage market to avoid the emergence of

risks which triggered the financial recession of 2009. The trend of taking banks taking risks with

home ownership loans should be avoided meaning that mortgage players should play by the rules

in the market.

Section 2

Saudi Arabian Mortgage Market

The first mortgage law that Saudi Arabia needs to oblige by in order, to enhance the real

estate market is developing a licensing system that resonates with the regulations established by

the Central Bank. There have been differing opinions from mortgage analysts on the importance

of formalizing the licensing process. The importance of this process is reflected in the long term

where a sense of order and professionalism is exhibited in the market system (Lessambo, 2013).


For example, the conditions that led to loss in the value of homes in the recession can be

attributed to the lax attitude of mortgage companies in terms of consolidating the licensing

process. Therefore, enhancing the real estate market in Saudi Arabia requires concerted efforts in

terms of introducing licensing mechanisms that help create order in the market. The failure by

lending institutions to improve their lending controls led to irresponsibility and risk taking that

compromised the position of lenders and borrowers in the market.

Financial accessibility and effective provision of services is another law that Saudi

Arabia ought to adopt with regards to improving the situation of the mortgage sector in the

country. Accessing financial services is the first step that would help borrowers make efforts

towards owing their homes. Financial services matter in the course of developing the mortgage

market meaning that Saudi Arabia is obliged in terms of streamlining the financial sector by

fostering service delivery at all levels. A combination of service provision and convenience-

when accessing loan products from lenders- are the best options that Saudi Arabia needs to

oblige in order to develop a vibrant mortgage market sector (Shoult, 2006).

The first regulation by Saudi Arabian Monetary Authority published with regards to

mortgage financing laws is the Real Estate Finance Policy that gave power to SAMA in relation

to regulating the real estate industry. For example, the law allows SAMA to play an oversight

role in all activities related to the real estate sector. A good example of these roles is the

requirement for mortgage companies to provide information on the contract arrangements made

with borrowers and a detailed credit report. As the regulatory authority charged with playing an

oversight role in the real estate industry, SAMA ensures that all companies and stakeholders play

by the rules. Integrity issues are another factor considered in the development of this law. The


agency was tasked with the role of ensuring that integrity was observed at all levels while at the

same time protecting the interests of all stakeholders such as borrowers and banks.

Finance Lease Law is the second regulation published by SAMA to cater for the lease

agreements involving assets. Movable and immovable assets are also part of this category with

both the needs of those leasing and lessors taken into consideration (Lessambo, 2013). Given the

numerous conflicts resulting from the interaction between banks and consumers of home

products, the crafting of this legislation offered a new hope and direction in the way these two

parties would build a positive relationship devoid of issues such as mistrust and paying high fees

on acquisition of mortgage loan products. The registrar is also included in this provision and acts

as the appointed authority that issue operating licenses to players in the real estate industry.

Supervision of Companies law is the other regulation whose publishing focused on

financing laws in the mortgage market. In collaboration with SAMA, the implementation of the

regulation would entail regulating the activities of companies in the finance sector. The main

distinction between this law and the previous regulations is overseeing the inclusion of

companies dealing with finance apart from those in the mortgage industry. Governance issues

have been outlined in this law with attention being placed on the need for companies to develop

the right approaches for doing business in the industry.

The first benefit of mortgage financing to the citizens of Saudi and the overall economy

is access to credit facilities. Financing is key towards promoting a borrowing culture in the

country. There are concerns that most people in Saudi Arabia shy off from acquiring home loans

as a result of high charges (Abdeen & Shook, 1984). This shows the importance of easing the

access to financial support towards potential and existing home owners. Access to credit comes

first in relation to developing capital mobility in the economy. The mortgage industry has been


criticized in the past as lacking the right framework needed for meeting the needs of consumers.

The sensitive issue here is ability of consumers to acquire mortgage loans without having to

incur burdens as high interest rates and rigid requirements. An economy that provides credit

access to consumers grows faster and stronger as compared to a situation where access to credit

is low. In Saudi Arabia, the regulatory authorities have put in place laws meant to increase the

convenience of accessing credit facilities while at the same time relaxing the tough conditions

that ordinary folks are required to comply with. On the other hand, the benefits of developing an

effective lending system benefit the economy through, stabilization of the financial system and

improving growth. Indicators used to map growth in Saudi Arabia are inclusive of the mortgage

market that is thought to have a reasonable value.

Higher living standards and attraction of foreign investors is the other benefit of

mortgage financing to the people and economy of Saudi Arabia. When citizens are able to

acquire credit and build their own homes, chances are that they can reduce the cost of meeting

daily needs by getting a payment reprieve from mortgage companies. Under normal

circumstances, home owners who take loans are expected to pay the total amount in phases

which gives them an advantage as compared to buying the property in cash (Lessambo, 2013).

The loan packages in the mortgage market in Saudi Arabia have been fashioned with the needs

of consumers in mind. For example, the flexibility introduced by lenders in relation to repaying

the loan is considerable and provides ordinary folks with the stamina to own a home and manage

other needs. There is a direct relationship between economic growth and increase in the lending

nature of mortgage companies. The situation has been evidenced in Saudi Arabia where the

revenues coming from this sector have significantly improved the economy. It can be said that

investments that come from abroad into the Saudi Arabian economy have increased as a result of


a stable housing market that provides returns. The number of local and foreign investors in the

Saudi economy has increased thanks to the regulations introduced to maintain standards and

fulfil the needs of all stakeholders.

External price factor is one of the challenges facing the implementation of mortgage

financing in Saudi Arabia. International prices of mortgage have always determined the policy

adopted by the Saudi market. For example, there are times when reducing mortgage rates

becomes unfavorable despite of a decline in the international housing market prices. Adoption of

a new financial system is the other challenge facing the mortgage market in Saudi Arabia

(Peagum, 1985). For example, given that Saudi Arabia had no stable financial system in the past,

the introduction of this concept I the market has posed numerous challenges to all stakeholders.

Regulators for example, grapple with the emerging risks and the position of consumers in the

midst of a changing market system.

The banking industry in Saudi Arabia will be affected by formulation of new mortgage

laws such as Real Estate which have been mandated with making decisions related to the

operations of the industry. For example, undisclosed activities of financial institutions such as

risky bets will be prohibited and also protect the interests of consumers.

Section 3

Recommendations and Conclusion

Effective policy formulation is a requirement with regards to making meaningful changes

to the system of borrowing and financing in the mortgage market. As long as the right policies

are put into place, the mortgage industry of Saudi Arabia is set to grow in a robust fashion that

would build the much needed confidence (Abdeen & Shook, 1984).


Addressing market volatility is another recommendation that would work for the case of

Saudi Arabia in term of building its mortgage industry. Consumers would not only be protected

but would also get value from their loan contributions. The experience from the recession was

that the mortgage market is highly volatile and needs the right controls that would leverage the

needs of consumers in the long haul.

Mortgage financing in the Saudi Arabian market has gained momentum with the recent

diversification of the financial system used in the country. Regardless of challenges that face the

real estate market in Saudi Arabia, the benefits of this financing approach are evident in the

economic growth attained in the country. In addition, the introduction of healthy regulatory

policies has had a major impact on the economy with outfits such as SAMA playing an oversight

role of all mortgage related activities in the economy. Thanks to a thriving mortgage sector in

Saudi Arabia, the future looks bright for citizens and the economy in general.

Part B

Saudi Arabia to Open Stock Market to Foreign Investors: https://www.youtube.com/watch?

v=xTL3ydtpjA4

The above video talks about the decision by Saudi Arabia to allow foreign investors to

buy stocks in the country and the diversification strategy currently used in detaching the

economy from dependence on oil revenues (Fox business, 2015). By allowing investors to buy

stocks, the country is focused on forming an inclusive and diverse economy that is aligned with

global perspectives.

The approach discussed in the above video about Saudi Arabia opening up its market

system to outside investors is happening in the country as evidenced by the current

diversification of other economic sectors. For example, the financial system and the stock market

https://www.youtube.com/watch?v=xTL3ydtpjA4



have been improved to match international standards. By attracting foreign investors, the country

would not only make strides forward but also become an important player in the region. The

expansion of the mortgage market in Saudi Arabia is another aspect showing the current

economic diversification taking place in the Arab nation and supports the assertions made in the

above video.

The video adds to this research on the mortgage diversification approach used by Saudi

Arabia in diversifying the economy by investing in other sectors such as the financial markets.

The mortgage market developed in Saudi Arabia shows a transition by the country to a

knowledge economy that is in line with the emerging global trends. Given that oil is the main

natural resource in the country, looking into other sectors of the economy such as mortgage

financing has signaled the dawn of new economic reforms in Saudi Arabia. In summary, the

expertise analysis provided by the panelists in the video is an illustration of the gains made by

the Saudi Arabian economy and the future outlook.


References

Abdeen, A., & Shook, D. N. (1984). The Saudi financial system, in the context of Western and

Islamic finance. Chichester [West Sussex: Wiley.

Fund, I. M. (2012). Saudi Arabia. International Monetary Fund.

Fox Business. (2015). Saudi Arabia to Open Stock Market to Foreign Investors. Accessed on 28th

April, 2015. https://www.youtube.com/watch?v=xTL3ydtpjA4

Lessambo, F. I. (2013). The international banking system: Capital adequacy, core businesses

and risk management. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan.

Peagam, N. (1985). The industrialization of Saudi Arabia. London: Euro money Publications.

Shoult, A. (2006). Doing business with Saudi Arabia. London: Global Market Briefings.


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