Developing an Effective Mortgage Market in the KSA - Essay Example

Implementation of the Saudi Mortgage Law - Developing an Effective Mortgage Market in the KSA of Affiliation Mortgage industry in Saudi Arabia is entirely different from that in other countries because of the influence of the Sharia law. Saudi government has started to liberalize the mortgage laws recently in order to silence the criticism against the Sharia laws as well as mortgage laws. This report analyses the overall picture of the mortgage industry in Saudi Arabia in general and the responsibility played by the two primary GSEs in the USA mortgage market over the last two decades in particular. Table of Contents Abstract 2 Implementation of the Saudi Mortgage Law 4 The mortgage market in Saudi Arabia 4 The existence of a secondary mortgage market 6 Review of the responsibility played by the two primary GSEs in the USA mortgage market over the last two decades 6 An outline of the benefits of creating of a liquid secondary mortgage market in an economy 8 Conclusions 9 References 10 Implementation of the Saudi Mortgage Law- Developing an Effective Mortgage Market in the KSA The mortgage industry in the Kingdom of Saudi Arabia is not developing as rapidly as that in other countries, because of Sharia law. The Sharia law does not allow the lending against any kind of properties. However, there were some changes happened in Saudi mortgage industry in recent times because of the 2013 mortgage law. The introduction of this law took place during the latter half of 2013. Since then, Central Bank and Saudi Arabian Monetary Authority (SAMA) have actively engaged in encouraging banking and nonbanking organizations in offering home loans. This is intended for unleashing and implementing the mortgage law (Lippman, 2012). The mortgage market in Saudi Arabia Saudi Arabian government and all stakeholders in Saudi mortgage market and industry have endeavored in creating a real estate refinancing company, which can offer home-financing services. Saudi government wants this company to function in accordance with the functioning of the Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) in the U.S. home mortgage industry. Fannie Mae and Freddie Mac are private companies functioning under the sponsorship of US government. The government moved to create and amend regulations that can govern the industry in the region. It is imperative to note that the mortgage industry has been inactive for a longer period because of the influence of the sharia law that does not permit lending against property (Lippman, 2012). Saudi Arabia, the world’s top oil exporter faces a major housing challenge now. The majority of the lower and middle earners do not have access to housing facilities even though the country as a whole is developing rapidly. In fact homelessness is a big problem in Saudi Arabia, compared to that in some other countries in the Middle East. Saudi government has recognized problems in the mortgage industry as the core reason for the increased rate of homelessness in the Kingdom. As a result of that, the government went out of its normal operational guideline and passed a law on mortgage advertisement and easy lending. The law makes it official for banks, non-banks and other financial institutions to lend money for home financing. It is interesting to note that the market will blossom at a high rate because of the strong economic foundation of Saudi Arabia (Ramady, 2010). There is a correlation between the nations’ economy and the growth of the mortgage industry. Saudi Arabia enjoys a highly rated economic stability. Currently, Saudi Arabia registers an unemployment rate of only 12.2%. In other words, majority of the adults in the Kingdom have some kind of professions. Therefore, it is possible for them to take housing loans and repay it later without any problems. Moreover, the stable economic growth in the Kingdom over last few years made it possible for the banks and other financial institutions to lend money for the housing loan seekers without a second thought. The law that guides the mortgage market requires both banks and non-bank sector to undergo a licensing process. Banks do little in this process compared to non-banking organizations. Banks need to confirm that they have the necessary ability to finance home loans. Non-banking organizations on the other hand should align with the regulatory system of the central bank to ensure that they are put on a matching footing with banks. The 2013 law on Saudi mortgages aims at reaching the effect of creating competition and more alternatives in the market (Lippman, 2012). This law has the potential to bring a vibrant and innovative mortgage market in Saudi Arabia. Factors such as geographical accessibility and finance accessibility have often been cited as the essential ingredients for a consumer-friendly mortgage market. The Saudi Arabia mortgage market has the potential to become a promising market in future because of the liberalized mortgage laws. Saudi government wants the present mortgage system to function like US-based mortgage firms such as the Fannie Mae and Freddy Mac (Oxford Business Group, 2007). The existence of a secondary mortgage market Saudis usually give more importance to traditional secondary mortgage market system that functions in accordance with the Sharia laws. However, this market does not have the capacity to interpret market trends in relation to the economic growth and real estate business potentials. Only professionals, who deal with market and financial analysis in the mortgage industry, will be in a position to understand what is going on between investors and consumers in Saudi Arabia. In order to overcome these problems, Saudi government has declared the formation of a mortgage company recently. The proposed company will be responsible for the refinancing of the mortgages. As per the reports coming out, Saudi government will have 19% share in the proposed company and 51% of the share will be collected through public investment funds. The remaining 30% of the share goes to the private sector (Lippman, 2012). The process of creating a secure mortgage, which is the foremost commodity of trade in the secondary market, is simple. It adopts an approach in which the client and the financing company engage in a discussion before the agreement being made. Thereafter, Saudi version of the Fannie Mae will be agreed to buy the financial rights at a discount. The Saudi Fannie Mae’s intention in this transaction is to acquire the rights and sell to the investors in the market. Review of the responsibility played by the two primary GSEs in the USA mortgage market over the last two decades The primary U.S mortgage sponsored (GSEs) committed to housing include the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Corporation (Freddie Mac). The two institutions have played a fundamental role in offering financial services intended for home ownership. There has been rapid development in US home markets in past 20 years because of the operations of the Fannie Mae and the Freddie Mac (Hassan & Mahlknecht, 2011). The culture of home ownership has been well cultivated among the Americans by these two institutions. These two institutions guide the Americans in how to getting hassle free home loans. Since their inception and consequent chartering in 1938, the institutions have helped thousands of Americans in owning homes. The housing GSEs have grown as a niche market in US mortgage market since their inception. In fact these institutions have transformed the traditional US mortgage industry into a modern mortgage industry that functions in accordance with the economic trends in the market (Lessambo, 2013). However, it should not be forgtten that these two institutions contributed heavily to the recent financial crisis in America. Because of the easness in getting housing loans, many people have taken loans from American banks. The banks on the other hand, issued loans to all without bothering too much in enquiring about the repayment capabilities of the loan seekers. The rest is history. Many of the American banks and finanical institutions were collapsed because of the recent financial crisis. At the same time, amidst all the unfavourable financial conditions mentioned above, these two institutions have made big profits over the last two decades. With the government sponsorship, these institutions were able to expand their asset base, which reflects a considerable percentage of the American economy. Both institutions indicated a positive signal at the time of the 2008 takeover. The cost of their assets was more than liabilities during this period (O’Kane, 2013). Consider the following graph that indicates the impact of the mortgage industry on the US economy. (Lippmann, 2012) An outline of the benefits of creating of a liquid secondary mortgage market in an economy A secondary mortgage market refers to a market where the mortgage loans and attributed servicing rights are purchased and sold amid mortgage aggregators and investors. The following are the benefits that are attributed to the secondary mortgage market The market is liquid and extremely large Helps in equating the credit that is available to all the mortgagors across the topographical locations. The investors are not exposed to the credit risks The market is attractive to the group of investors. The market provides a comprehensive accessibility of 30-year fixed rate mortgage, which can be paid without fines The market is critical in offering lower mortgage rates The market recycles the funds back into the local lenders to facilitate more rounds of mortgage lending. Conclusions This report concludes that the 2013 Saudi law on mortgage has revolutionized the mortgage industry in the Kingdom. Since 2013, the Central Bank and the Saudi Arabian Monetary Authority (SAMA) have actively engaged in offering home-finance licenses to banks and other financial institutions. In addition, the implementation of this law would increase the business potential in Saudi mortgage market. The government’s intention is to build a stable mortgage system that is capable of functioning like the US-based mortgage systems. References Hassan, K., & Mahlknecht, M. (2011). Islamic capital markets: Products and strategies. Chichester, West Sussex, U.K: Wiley. Lessambo, F. I. (2013). The international banking system: Capital adequacy, core businesses and risk management. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan. Lippman, T. W. (2012). Saudi Arabia on the edge: The uncertain future of an American ally. Publisher: Potomac Books Inc. (January 2012) Ramady, M. A. (2010). The Saudi Arabian economy. New York: Springer. Oxford Business Group. (2007). The Report: Emerging Saudi Arabia 2007. London: Oxford Business Group. OKane, M. (2010). Doing business in Saudi Arabia. Publisher: Al-Andalus Publishing (December 1, 2010) Read More