Saudi Arabia lays path to creating viable Islamic securitisation and covered bond markets

Saudi Arabia ( rated A1 positive by Moody’s) is the largest Islamic finance market globally and Moody’s expects the Saudi Real Estate Refinance Company (SRC), despite being a relatively new joiner, to further strengthen the country’s position as it expands its balance sheet and becomes a more significant issuer in the sukuk market.

 The SRC will fund some of that future growth via securitisations and covered bonds, having relied largely on Shariah-compliant wholesale funding and government backing to date.

Since a 2012 real estate finance law laid the foundation for Saudi Arabia’s mortgage market, a number of other key measures have helped grow the country’s mortgage market both in volume and sophistication.

“Going forward, the diversification of mortgage funding that securitisation provides would increase home ownership, a key pillar of the Saudi Vision 2030 plan (unveiled in 2016) that will have tangible social benefits as well. Home ownership benefits societies in a number of ways because it is a foundational asset that is capable of shaping and influencing vibrancy of families, communities, and the broader society,” says Moody’s.

Key initiatives driving mortgage market growth since 2012 include the Ministry of Housing’s and real estate development fund’s (REDF) launch of the Sakani program in 2017 and the establishment of the SRC in 2017.

Saudi’s SRC has complemented government plans to increase homeownership among Saudis and deepen the capital markets through the creation of a secondary mortgage market.

The company aims to standardise mortgage offerings, lower rates on long-term fixed-rate mortgages and encourage banks to move to facilitate mortgage origination. SRC’s setup provides banks with the option to free up capital and generate liquidity as and when needed.

The banking system in Saudi Arabia is currently experiencing a high credit growth cycle, supported by the government’s  diversification and reform agenda, and more banks will likely start utilising the SRC’s mortgage purchase facility to free up their balance sheets.

As a result of these developments, mortgages have been the key driver of asset growth for banks of late. Since 2018, banks’ residential mortgage lending has had a compound annual growth rate (CAGR) of 41%, far outpacing commercial real estate lending’s CAGR of 9%.

As of year-end 2022, mortgages made up about 30% of total lending to the private sector, up from 17% in 2018, which has lowered borrower concentration risk in the system.

While growth has slowed in the past 12 months, “we still expect the country’s growing youth population to support the market in the future.”