"Islamic mortgage finance is set to grow at varying levels in the GCC markets as compared to previous years," explains R. Lakshmanan, chief executive officer of Bahrain-based Sakana Holistic Housing Solutions, one of the pioneers of Islamic mortgage finance in the GCC, in an interview with Arab News.
"Saudi Arabia and Qatar are likely to witness higher growth compared to other markets due to ongoing increased economic activity in those markets. The Islamic finance industry is also expected to grow in Oman with the recent licensing of three Islamic banks in the sultanate," he adds.
Over the last few years Islamic mortgage finance has developed faster than conventional mortgages with providers such as Sakana Holistic Housing Solutions; Saudi Home Loans Company; and Deutsche Housing Finance taking the lead. Sakana, which is 50:50 owned by Capinnova Investment Bank and Ithmaar Bank and which started operations in December 2006 as a dedicated Islamic mortgage finance provider in Bahrain, adopts a holistic approach to mortgage finance with a comprehensive range of Shariah-compliant products. In addition the company, which is capitalized at BD20 million, claims that its strategy is paving the way for significant change in the Kingdom's mortgage market by making Islamic finance easier to understand and acceptable, as well as making it available to an ever-wider group of customers.
"Since the GCC countries are Islamic," explains Lakshmanan, "there is natural demand for Islamic finance products from nationals. Having said this, in my view Islamic customers fall into three categories. On the one hand, you have customers who only go for Islamic finance based on religious conviction, and on the other hand some you have those who have religious beliefs but consider Islamic finance products a mere wrap around of conventional products and hence do not believe in Islamic finance. There is a significant group of customers who fall in the 3rd category and they would choose Islamic finance provided the value proposition is attractive in comparison to conventional banking products and services."
Since many GCC countries rely mostly on expatriate population that comprise of Muslims and non-Muslims their preference toward Islamic finance is varied for several reasons. Indeed, one of the major drivers until 2008, in the pre-crisis period, was Islamic financial institutions preferred to focus on real estate as an asset class and this led to increased number of players that were offering a variety of Islamic mortgage products. These institutions were also willing to take a higher risk of financing on properties that were under construction (referred to as off-plan developments) which was largely prevalent then.
In addition some of the developers such as Dar Al-Arkan Real Estate Development Company (DAAR) in Saudi Arabia, had established their own mortgage companies or entered into preferred arrangements with certain mortgage providers which had exclusivity arrangements. However, Lakshmanan stressed that it is interesting to note that over the last five years Islamic mortgage providers have also been able to attract customers of all religions based on better value proposition.
Another major driver of the mortgage market in the GCC, according to him, is the advent of the concept of freehold property in some of the markets. The freehold property was a new concept introduced in early 2000's by some of the GCC countries such as UAE lead by Dubai, Bahrain, Qatar and Oman.
Prior to this, property ownership was restricted to nationals of the respective country and in certain cases GCC nationals were also allowed to invest. Accordingly, mortgage finance was provided to nationals primarily through state run housing banks or specific housing schemes run by the respective government.
After the freehold property announcements in the above GCC countries, several dedicated mortgage providers came into existence and retail banks also started entering this space. Many of the retail banks up to then, says Lakshmanan, were providing personal finance say for 5 to 7 years for meeting customer's housing finance requirements. "Hence in my view, many of the retail banks portfolio of "personal loans/finance" even now has a portion of funds given for the purpose of housing though classified as personal," he adds.
Many GCC mortgage providers rue the delay in the passing of the Saudi mortgage law which some stress has psychologically affected the growth and development of the Islamic mortgage market in the Kingdom and the region. "Unfortunately, I am not in a position to quantify this. But the delay in the issuance of the Saudi mortgage law has had an impact on the growth and development of Islamic mortgages in Saudi Arabia. Since the legal position is not clear, investors will generally tend to be risk averse in the establishment of mortgage finance companies. Of course, this problem has been precipitated by the recent global financial crisis and more so by some reluctance to invest in real estate asset class," maintains Lakshmanan.
Considering the huge potential Saudi market has for housing, a purely captive consumption of Saudi nationals, mortgage providers such as Sakana are keen to see the mortgage law being passed sooner than later. This will create huge opportunity not only for mortgage providers including banks but for developers and service providers in the real estate chain. This stresses, Lakshmanan, will enable the Kingdom to address the housing problem in the country. Needless to say, customers should benefit from increased mortgage products and services with better value proposition.
The GCC mortgage market is estimated to be approximately $75 billion, of which the Islamic mortgage market is estimated to be around 35 percent to 40 percent of the total market size. The market with the biggest potential, according to Lakshmanan, is Saudi Arabia and the main challenge is the legal framework relating to mortgages. By he contends that Saudi Arabia will make considerable progress over the next few years. The oldest market is the UAE mortgage market which has evolved over a period of time and this is also due to evolving regulations on the real estate side, with Dubai taking the lead in this respect.
Sakana estimates demand for social housing in Bahrain at approximately 50,000 on the waiting list. Further, every year approximately 4,000 units are added to the list. Demand in Saudi Arabia is forecast to be approximately 1.5 million units over the next 5 years or so. Only the UAE currently has an oversupply of housing stock. However, across all markets there is an immediate need for "affordable housing". This would not only include demand from nationals but also from expatriates.
Lakshmanan believes that to meet the above demand for housing stock, the market needs to adopt several approaches. "PPP is certainly an approach to be considered for the development of affordable housing. Bahrain has already made considerable progress in this respect. In addition, governments should ensure suitable laws and regulations are available for regulating real estate development such as developers, valuers, selling and leasing agents, strata law, off plan sales, repossession and development of capital markets to ensure availability of long term funding etc. In my view, these would encourage more private players to invest in housing and mortgage industry and thereby effectively reducing Government's burden to provide housing," he says.