On the development of home mortgage financing in Saudi Arabia
To what extent do you expect future growth in the housing market to be supported by mortgage finance?
MAZIN AL GHUNAIM: Until 10 years ago consumers contributed 70% of the value of a property through their own cash sources and finance was used for the remaining 30%. This has since reversed, with 70% provided by financing and 30% from cash reserves. The impact of current economic conditions on what ordinary citizens can afford has increased reliance on instruments such as mortgage finance. The downturn in oil prices has meant that the government cannot rely on surpluses to continue subsidising housing in the Kingdom, and authorities have further emphasised the importance of mortgage finance by launching initiatives in support of alternative financing solutions.
How can public-private partnerships (PPPs) be utilised in the Saudi housing market, and what role can non-bank financial institutions (NBFIs) play?
AL GHUNAIM: PPPs will be important; they contribute to the adoption of economies of scale in residential developments, which will keep unit prices within an affordable range. Their involvement will also lead to faster project delivery from experienced developers, shortening the average wait time of about 18 years to receive units. The National Transformation Programme aims to reduce the average waiting period for housing finance from 15 years to five years by 2020. However, achieving this may be a challenge given that establishing a regulatory regime will take time and any PPP model will need to be sharia-compliant.
We have already seen successful examples of PPP projects, such as East Gate in Riyadh, which act as a benchmark for what can be achieved. PPPs will certainly help deliver consistent, quality units and improved public services in the medium term, in addition to supporting the government by freeing up fiscal resources. To successfully engage the private sector, the government will need to reassure private companies that there will be proper regulation, transparency and a systematic approach to implementing projects. In this context, NBFIs are expected to play a significant role, as – unlike banks that offer multiple products – they are the only institutions with specialised knowledge in mortgage finance.
What impact has the increase from 70% to 85% in the loan-to-value (LTV) ratio had on mortgage finance?
AL GHUNAIM: The increase in the LTV ratio has definitely had a beneficial impact. The Saudi Arabian Monetary Authority reduced the LTV ratio to 70% at the end of 2014. At this time the total retail book for commercial banks totalled SR94.2bn ($25.1bn), with growth of only 9% in 2015 compared to 35% in 2014. As for NBFIs, the total retail book was SR8.6bn ($2.3bn) at the end of 2014, with growth of 6.1% in 2015 versus 11% in 2014.
Several incentives have already been implemented to stimulate sector growth. The government has reorganised the Real Estate Development Fund (REDF) so that it falls under the umbrella of the Ministry of Housing (MoH). The REDF has developed three new products to stimulate growth for Saudi citizens by working with banks and non-bank financial institutions that provide housing finance as a product. The MoH has already floated 14 projects with reduced unit prices to offer affordable alternatives to citizens, and there is also subsidised finance where the profit portion is subsidised for citizens when they take out a loan.
How are digital innovations driving the penetration of home-financing instruments?
AL GHUNAIM: Digital innovations are disrupting several industries, and financial institutions – including home mortgage providers – are also looking to transform the delivery of services. One of the ways in which digitisation is shaping the industry is through the wide reach that financial instruments can now enjoy. Knowledge of different home-financing products and their intricate details are no longer subject to long lead times and unending queues at a customer service counter. As we have demonstrated through our company’s digital touchpoint, knowledge of financing instruments is now available at the customer’s fingertips. Digital innovation is helping home finance appeal to the Kingdom’s young, tech-savvy consumers, and giving them the opportunity to explore this avenue to own a home, consolidate their assets and contribute towards nation-building.
Digitisation will be a central mechanism to expand the reach of mortgage finance across the country. It is not a sustainable approach to have only a brick-and-mortar presence, and we see this shift in the global landscape of banks reducing the number of physical branches and increasing their online operations. Customers can now access finance products, including those offered by the REDF and the MoH, at their convenience and through their preferred communication channel to understand the options and opportunities available.