[DioraMoostebeers]

By Abeer Allam

Saudi Arabia’s cabinet approved the country’s first ever mortgage law on Monday, as the oil-rich kingdom accelerates efforts to address the economic concerns of its population amid regional turmoil.

The long-awaited law, prepared by the minister of finance and deliberated for years, sets the regulations for establishing mortgage companies and their activities, Abdulaziz Khoja, minister of culture and information, told the state-run Saudi Press Agency.

“This is a very positive and major shift in the economy of Saudi Arabia,” said Abdelaziz al-Qassem, a commercial lawyer in Riyadh. “It is also a significant legal development because it is a codification of the sharia law on mortgage issues.”

A mortgage law has been under discussion for three decade but has not been approved until now because of resistance from religious scholars concerned about whether mortgages were compliant with Islamic, or sharia, law.

In 1981, the Supreme Council of Judiciary ruled that a proposed mortgage law was un-Islamic, ending initial efforts to introduce mortgages to the kingdom. The clerics also resisted the codification of sharia law, saying the interpretation of the law should be left to individual judges. Nonetheless Saudi Arabia’s finance ministry issued laws regulating business and finance, including the capital market authority, which regulates the country's stock market.

In 2008, the Shura Council, an unelected consultative body, approved a new version of the mortgage law, but the final draft was still under review.
Although Saudi Arabia, a key US ally and the world’s biggest oil exporter, has avoided much of the unrest sweeping the Arab world, Saudi experts said that the region’s political upheavals, which were triggered by youth unemployment, lack of proper housing and economic pressure, have helped push the law back on to the government’s agenda.

In March 2011, after a failed attempt to organise protests on a so-called Day of Rage, Saudi King Abdullah announced sweeping increases in government spending, including the allocation of SR250bn for 500,000 new housing units and further assistance for existing government housing loans as part of a $130bn package to increase benefits and reduce unemployment.

The kingdom needs at least 1.5m units in the next few years to stem a shortage in affordable housing.

Saudi officials said they were reluctant to issue the mortgage law before ensuring that it complied with Islamic financial principles, which include a ban on interest. Others said that they wanted to ensure the kingdom avoided the mistakes and excesses of other countries, especially in the wake of the housing bust in Dubai.
Analysts in Riyadh treated the news with caution given the long and tortuous history of the law.

“It’s a very important step in a country where there is a fundamental shortage of accommodation and an issue of affordability in accommodation. However, I don’t think it will have much of a short-term impact,’’ said Paul Gamble, economist at Riyadh-based Jadwa Investment.
“The laws need to be tested. There has been uncertainty over the foreclosure process, it’s not until we get to that point that lenders will feel comfortable with the mortgage law.”

He added that people have turned to the government’s real estate development fund, which provides long-term loans at favourable terms, rather than commercial bank loans for property investment.
Additional reporting by Camilla Hall


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