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Islamic finance meets the mortgage challenge

Housing provision for a burgeoning youthful population puts the development of a mortgage market centre stage in the GCC countries.

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.

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