Between 40% and 45% of the population of the GCC states are less than 21 years old, so there is ever-increasing housing demand and an ever-expanding property bubble. Finally, the sound of a ticking time bomb has woken policymakers and Islamic scholars to the serious economic and social consequences that could emerge if more affordable and accessible mortgage financing is not made available soon.
The GCC banks only started to roll out mortgage products just over a year ago, with Saudi Arabia’s Kingdom Instalment Company becoming the first lender in the region to offer 20-year fixed-rate mortgages at the end of 2006. It now has a loan portfolio of more than $500 million. In an effort to keep up with KIC, over the past couple of months, several banks, such as Emirates Bank, have rolled out their own versions of an Islamic mortgage. Is this a potentially huge new financial market at take-off point? In the UK the mortgage market is worth 72% of GDP, according to figures released by the Arab National Bank. This stands in stark contrast to Saudi Arabia’s 2%.
There remains at least one crucial impediment to market development. Islamic mortgages are inflexible and carry punitive terms for early redemption. Once a repayment figure has been decided between the bank and the borrower this is fixed and independent of whether the borrower holds the mortgage for the full 20-year term or pays it off after only three years. More flexible mortgages now hold the key to increasing participation in strictly Shariah-compliant countries.
If this hurdle can be overcome, there are clear signs that the growth in mortgage provision in the GCC might feed through quickly to the capital markets. In the past two months two securitization deals from the region have been announced. In May, KIC announced its plans to come to market with its second Shariah-compliant Saudi Arabian securitization transaction, the second part of its KSA MBS residential mortgage-backed programme. KIC’s announcement came a month after Tamweel, a Dubai mortgage lender, finalized plans to sell up to $1.1 billion-worth of sukuk, with a $300 million Shariah-compliant tranche backed by residential mortgages.
Several bankers confirmed this month, during interviews with Euromoney, that the securitization and mortgage markets will be the biggest areas of growth in the GCC over the next 12 months. Watch this space.
