the financing of affordable housing in the ksa executive report

The Financing of affordable housing in the Kingdom of Saudi Arabia B. Sidawi

The Financing of Affordable Housing in the Kingdom of Saudi Arabia

Executive report

Dr. Bhzad Sidawi (Bsc., Mphil, PhD.) Assistant Professor

College of Architecture and Planning

King Faisal University

@ All rights reserved of the author and the College of Architecture, King Faisal University, 31451 Al-Dammam, P O Box 2397


Acknowledgements

The researcher would like to thank all banks and Real Estate Development Fund (REDF) in the Kingdom of Saudi Arabia for their participation in the survey. Also, special thanks should go to the following businessmen and KFU staff:

The Dean of College of Architecture, Dr Ali Al Garney for his continuous support and for hosting the discussion forum session

The vice deans of College of Architecture, Dr Abed Al Salam Al Sudiari and Dr Sameer Zaher Al Layali

Mr Soarak Al Khateb, the head of the residential finance department, National Commercial bank

The Head of department of Architecture; Dr Ibrahim M. Al Naimi Mr Nidhal A. Mushaqri for the technical support Professor Jameel A. Akbar, the Chairman of the discussion forum Academic staff from Colleges of Architecture and Business Administration who

participated in the discussion forum session Businessmen who attended the discussion forum session



Table of Contents 1. ................................................................................................................................5 Forward2. ...............................................................................6 Research Objectives and Methodology3. ...............................................................................7 Mortgage loans types offered by banks

3.1. ............................................................................................................7 Survey findings3.2. .............................................................................................7 Statement of the problem3.3. ................................................................................................7 Towards good Practice

4. ..............................................................8 The length of period of loan mortgage repayment4.1. ............................................................................................................8 Survey findings4.2. .............................................................................................8 Statement of the problem4.3. ................................................................................................8 Towards good Practice

5. .......................................................................................9 Start date of the financing scheme5.1. ............................................................................................................9 Survey findings5.2. .............................................................................................9 Statement of the problem5.3. ................................................................................................9 Towards good Practice

6. 10 Number of mortgage loans granted last year and since the start of the financing scheme6.1. ..........................................................................................................10 Survey findings6.2. ...........................................................................................11 Statement of the problem6.3. ..............................................................................................11 Towards good Practice

7. ......................................................................................12 Total value of mortgages granted7.1. ..........................................................................................................12 Survey findings7.2. ...........................................................................................12 Statement of the problem7.3. ..............................................................................................12 Towards good Practice

8. ...........................................................13 Type of property financed at present and in future8.1. ..........................................................................................................13 Survey findings8.2. ...........................................................................................13 Statement of the problem8.3. ..............................................................................................13 Towards good Practice

9. ................................14 The bank policy regarding the owner's right regarding the property9.1. ..........................................................................................................14 Survey findings9.2. ...........................................................................................14 Statement of the problem9.3. ..............................................................................................14 Towards good Practice

10. .......15 The rights of the property’s owner during the repayment period of the mortgage10.1. ......................................................................................................15 Survey findings10.2. .......................................................................................15 Statement of the problem10.3. ..........................................................................................15 Towards good Practice

11. .....................................16 Type of financial support granted by banks to help the owner11.1. ......................................................................................................16 Survey findings11.2. .......................................................................................17 Statement of the problem11.3. ..........................................................................................17 Towards good Practice

12. .......................................................................................18

Possible plans of the bank to increase the amount of mortgage loans and attract potential affordable property’s clients

12.1. ......................................................................................................18 Survey findings



12.2. .......................................................................................18 Statement of the problem12.3. ..........................................................................................18 Towards good Practice

13. ..........................19 The weight of the user and property driven factors on property value13.1. ......................................................................................................19 Survey findings13.2. .......................................................................................19 Statement of the problem13.3. ..........................................................................................19 Towards good Practice

14. ........20 Internal and External hindrances to the lifelong financing of affordable housing15. .........................................................................................................21 Recommendations16. ...................................................................................................................22 Appendix A



1. Forward The demand for affordable housing has largely increased in the past decades in Saudi Arabia due to the increase of population, inflation and variation in income levels. Islamic banks which had emerged in Saudi Arabia as early as 1980’s, joint-stock companies, charities and government organizations such as Real Estate Development Fund REDF are providing funding to the prospected home buyers. However, little evidence regarding the volume and characteristics of funding of the affordable housing that is provided by major financial organizations such as banks is found at present.

Consequently, the broad inspection of the present financing system for buying properties suggests the system is inflexible enough as it does not consider the user’s lifelong preferences and requirements regarding the property such as: the future physical alterations or improvements, partial or full transfer of the ownership and the management of the property. It does not offer the necessary support to the user to manage the lifelong changes that would affect the property. These possible changes would have an impact on the property value and leave the user/ owner unable to do improvements or alterations or to properly maintain the property. The owner has the right of getting flexible lifelong financial support and management of the property. The study argues that initial bank’s support (i.e. the mortgage loan) to the buyer to purchase of the property would not be sustainable unless it considers the lifelong owner rights.

A survey have been undertaken to find out the lifelong contribution of banks and REDF to the funding of affordable housing in 2008. The study found that the present financing system seems not capable to meet the present and future demand of low-income home buyers. It investigates what banks are doing to improve their lending services and whether they have efficient plans to tackle the shortage of future funding. The report illustrates the findings of survey and suggests an approach to lifelong sustainable financing scheme that would support the owner to cope with possible impacts on the property. The study should motivate banks, charities and other financing organizations, investors and decision makers to consider and explore approaches that are capable to provide sufficient and lifelong funding to the low-income clients.



2. Research Objectives and Methodology

The research has a set of objectives; these are:

to explore characteristics of the existing financing system and how far it supports the lifelong owner’s needs and impacts on the property or -in other words- whether it is sustainable;

to find out which of the user lifestyle and environmental issues have significant impact on the property value;

to find out how banks would address possible environmental and; user lifestyle changes and impacts in the mortgage loan scheme; and

to make recommendations to banks and other financial organizations on how to respond to low-income clients needs and aspirations and provide lifelong support

To achieve the research objectives, a combination of quantitative and qualitative research methods are used. A questionnaire survey was used to target eleven Saudi banks and REDF and it aims to inspect the bank’s views regarding the following issues:

the volume and characteristics of the financial support that is offered by banks to low-income clients (i.e. affordable home buyer) at present;

bank’s plans to improve their financial services and contribute more to the financing of affordable housing in KSA

the level of lifelong support that would be provided by banks to the owner; and

the significance of ownership/use/management rights and responsibilities of the owner to the property value

There were a number of ambiguous points in the data extracted from the questionnaire, so bank managers were invited to the College of Architecture, KFU-Dammam to discuss the results. The targets of the discussion forum were:

to discuss the results of the survey questionnaire

to clarify and explain the unclear areas of the questionnaire results

to find out banks’ future plans regarding the owner’s support Three banks’ managers, a number of academic figures and businessmen attended the discussion forum session. The following sections demonstrate the results of the questionnaire survey and the discussion forum.



3. Mortgage loans’ types offered by banks

3.1. Survey findings

Banks were asked what types of mortgages that they offer to customers at present. Ijarah mortgage type is offered by five banks, Murabaha mortgage type is offered by eight banks whereas other types of mortgages such as Istisnaa - through this scheme, the bank builds the property, completes building it up or do the finishing only on behalf of the client- or Musharaka is offered by 3 banks only. Banks were asked whether they intend to introduce other types of mortgages in the near future, four banks replied that they will not do it unless the government changes its financial regulations and give more freedom to banks whereas the rest of banks (i.e. eight) replied that they will do according to the market needs. (2 banks have Ijarah only, three banks has Murabaha only, one bank has other types of mortgages).

Chart 1: Types of mortgages that are offered by banksthe number for each catergory represents number of banks

2

5

8

3

None

Ijarah

Murabahah

Other types of mortgages

Banks were asked whether they happy to Introduce other types of affordable property mortgages in the near future. Eight banks said that they are happy and four banks said that they are not happy to do so.

3.2. Statement of the problem

Banks which did not start their mortgage scheme should catch up and start it immediately otherwise it would be too late for them.

Banks that offer one type of mortgage loans only and they are not happy to introduce more types of mortgage loans, should review their policies, be competitive and introduce more types of the mortgage loans in the near future to serve various needs of clients.

3.3. Towards good Practice

Banks that offer more one type of mortgages and they are happy to introduce more types in the near future.



4. The length of period of the loan mortgage’s repayment


The maximum period for the mortgage repayment looks different from bank to another. Few banks (i.e. 2 banks) said that repayment period is from 11 to 20 years, one third of the banks (i.e. 4 banks) said it is from 21 to 25 years whereas the rest (i.e. four banks) said it more than 25 years.

2 2

4 4

0123456789

101112

Has not beendecided yet

11-20 years 21-25 years More than 25years

Chart 2: Maximum period of mortgage loan repayment

Number of banks


The length of period of the repayment of the mortgage loan offered by some banks is still short. This would be a real obstacle for low-income clients to apply for a loan as they can not afford to pay large mortgage monthly instalments.

Some banks has not make their minds regarding the length of period of the mortgage loan repayment


The increase of the mortgage loan repayment period would attract more clients and would make life easier for existing clients

Banks which did not decide yet regarding the mortgage loan repayment period, should make their minds and set their policy as soon as possible.



5. Start date of the financing scheme


Less than third of the banks (i.e. two banks and REDF) has started the real estate finance more than four years ago. Three banks have started the scheme from 2-4 years ago and four banks started the scheme less than two years ago. Two banks have not started the scheme but one of them said that it is already set the housing finance policy but it has not been implemented yet.

2

43 3

0123456789

101112

Has not beenstarted yet

Less than twoyears ago

Two-four yearsago

More than fouryears ago

Number of banks

Chart 3: Start date of financing scheme of the affordable property


Some banks did not start up their financing scheme Some banks started late Few banks started earlier than four years


Banks which started their financing activity early, seem to have good financing experience and better position in the financial market

Banks which started late need to learn from other banks that have long financing experience in the financial market.



6. Number of mortgage loans granted last year and since the start of the financing scheme


Banks were asked about the number of mortgages that have been granted during the last year. Only two banks including REDF have granted more than 3000 mortgage loans, four banks have granted 500-3000 mortgages and four banks have granted 1-50 mortgages only.

Chart 4: The number of mortgages loans granted to customers last year

2

4

01 1

2

0 0

0

0123456789

101112

None 1-50 51-100

101-200

201-500

501-1000

1001-2000

2001-3000

Morethan3000

Number ofbanks

Banks were asked about the number of mortgage loans that have been granted since the start of the financing scheme. Six banks said that each of them granted more than 2000 mortgages. Four banks that each of them has granted less than one thousand mortgages.

Chart 5: Number of mortgages that have been granted since start of the financing scheme

2 21

01

0

2

4

0123456789

101112

None Lessthan100

101-200

201-500

501-1000

1001-2000

2001-3000

Morethan3000

Number ofbanks




The annual number of mortgage loans offered by most banks is low in comparison with the annual demand1. The annual shortage in mortgages is as the following:

Maximum number of mortgage loans granted by banks in 2007

4*50+ 2*1000+ 2000 + 3000 + 4000+ 27000= 200+ 2000+2000+ 3000+4000+27000= 38200

Number of mortgage loans that should be granted annually until 2025

60000*- 38200= 21800

The average of the amount of single loan 300.000 to 400.000 The average of loan amount needed annually until 2025

6.540.000.000- 8.720.000.000

* This figure is extracted from the number of affordable housing 906.875 that is needed to be built until 2025. (source: Aldosary et al 2007, KFUPM) The overall number of mortgages that are offered since the start of the financing scheme is low. The figures show that some banks have low financing activity since they started their financing scheme.


Some banks offer relatively reasonable number of mortgage loans to low-income clients Some banks are active regarding the financing of properties

1 205420 property sales were made in the year 1427 (i.e. 2006) as estimated by Ministry of Justice. The percentage of the affordable housing sales percentage can be estimated as around 26% (source: Aldosary et al 2007, KFUPM). So, number of affordable housing sales would be estimated as 53400.



7. Total value of mortgages granted


Seven banks said that the total value of the mortgages that granted last year was 100 million and less whereas five banks said that the total value was more than 500 million. Seven banks said that total value of mortgages that each of them granted since the start of the financing scheme was 2000 million and less whereas only three banks (including the REDF) said that the total value is more than 2000 million.

2 2 21

0

5

0

2

4

6

8

10

12

None Less than20

millionRiyals

21-50millionRiyals

51-100millionRiyals

101-500millionriyals

Morethan 500millionRiyals

Chart 7: Total value of affordable property purchases that were financed during the last year

Number ofbanks

None Less than100 million

Riyals

101-500millionRiyals

501-1000millionRiyal

1001-2000millionRiyals

More than2000

millionRiyals

2 32

1 13

0123456789

101112

Number ofbanks

Chart 8: Total value of affordable property purchases that were granted since the start of the financing scheme


Low financing activity by some banks since last year and also since the start of their financing scheme


The good contribution of some banks towards the funding of affordable housing



8. Type of properties financed at present and in the near future


Most of the Banks are happy to finance the purchase of all property types at present and in the near future as well. Two banks -which did not start their mortgage scheme- do not finance the purchase of any type of property and one bank does not finance the purchase of land and duplex properties.

9

10 1011

10

12

9

12

1 1

0

2

4

6

8

10

12

Land Villa Flat/Apartment

Duplex Other typesof properties

No. of banks that finance this type ofproperty at present

No. of banks that finance this type ofproperty in the near future

Chart 9: Type of properties that is financed


Very few banks are happy to finance other types of properties at present and in the near future


To finance different types of properties at present and in the near future



9. The banks’ awareness of financing activities of other financial organizations


The awareness of banks regarding the financial activities of other organizations is under question as banks provide different estimation of the contribution of other financial organizations to the financing of affordable housing. Half of them estimated that REDF (Real Estate Development Fund) contribute less than 20%, whereas two respondents estimated the contribution as more than 60%. More than half of banks said that Ministry of Housing does not contribute to the finance of affordable housing whereas three banks said that they do not know. Three banks estimated the proportion of contribution of private sector as nil, three banks estimated it as 20% and less whereas five banks said that they do not know. Seven banks estimated the contribution of joint-stock companies (i.e. Bait AL Tamweel, Taqseet) as 20% and less where as five banks said that they do not know. Nearly half of the banks said that SIDF does not contribute to the finance of affordable housing whereas the other half said that they do not know. Half of the banks said that the contribution of other banks is between 11-40% and three banks said that it is more than forty percent. Half of the banks said that the contribution of other organizations (e.g. Sabec, Aramco, Royal Jubial, Arkan) is less than 20%. As a conclusion, Banks said that Ministry of housing and SIDF do not contribute to the finance of the affordable housing.

Nil Less than 6%

6-10%

11-20%

21-40%

41-60%

More than 60%

Do not

know

The Real Estate Development Fund (REDF) 0 2 0 4 0 1 2 3

The Ministry of Housing and Public Works 7 0 0 2 0 0 0 3

The private sector 3 2 0 1 0 0 1 5 Joint-stock companies 0 3 0 4 0 0 0 5 The Saudi Industrial Development Fund (SIDF) 5 0 0 1 0 0 0 6

Other banks 0 2 0 3 3 1 2 1 Other organizations 3 2 1 3 0 0 0 3

Table 1: The percentage of contribution by other organizations to the total financing of affordable housing during the last year in KSA as estimated by banks


Most banks are not aware of the actual contribution of other banks to the financing of affordable housing


To be aware of financial activities of other financial organizations regarding the financing of affordable housing. This would help banks to develop their own financing policies and long term strategies.


The Financing of affordable housing in the Kingdom of Saudi Arabia B. Sidawi 10. The rights of the property’s owner during the repayment of the mortgage period


Most banks (i.e. ten banks) said that it is not the owner’s right to donate a part of whole of the property. One bank said that the owner can do so providing he paid his outstanding mortgage. Seven banks said that the right of benefit can not be transferred to somebody else whereas four banks said it can. Seven banks were unhappy that the property or part of it to be let by the owner whereas third of the banks said that they do not mind. Most of the banks (i.e. ten) said that the owner has the right to hire somebody to manage the property. Six banks said that the owner has the right to sell the property providing the owner have the necessary approval from bank and has paid the outstanding mortgage whereas five banks said it is not his right if he did not pay the outstanding mortgage. Therefore all banks agreed that the owner has the right to sell the property providing that he/she will pay the outstanding mortgage but some of them were more restricting as they said that owner should get the bank’s agreement on sale. Banks were divided on the issue of the use of the property for other purposes than residential e.g. commercial. Half of the banks (i.e. six banks) said that they are unhappy that the property would be used for other purposes whereas five banks said they do not mind. Banks were asked whether they would adjust their financing policy to provide more ownership and management rights to the owner. One of the banks said it is not possible to do any adjustment, whereas majority (i.e. eleven) of banks said that their future policy would consider providing more rights to the owner.

1 1 1 1 1 1 1

10 10

7

4

1

56

1 1

4

7

10

65

0

2

4

6

8

10

12

Owner rightto donate

part orwhole ofproperty

Owner rightto give itaway ascharity

To grant theright of

benefit tosomebody

else

To let theproperty or

part of it

To hire athird partyto manage

the property

To sell theproperty

To use theproperty for

purposesother thanresidential

No policy

It is not the owner's right

It is the owner's right

Chart 10: The rights of the affordable property owner during the mortgage repayment period


Few banks have no policy regarding the owner’s rights Some banks apply restrictions regarding some of the following owner’s rights: letting the property, selling the property and using the property for uses other than residential


To give more rights to the low-income owner. This would help him/her to cope with the changing life and property requirements and demands.

To consider adjustments to the future policy and provide more rights to the owner


The Financing of affordable housing in the Kingdom of Saudi Arabia B. Sidawi 11. Type of financial support granted by banks to help the owner


Banks were asked whether they are happy to offer any financial support to the owner to cope with possible physical, management and ownership changes to the property. Two third of banks said that transfer of right to benefit is an irrelevant issue or it is not considered. Also, eight to nine banks said that the donorship or giving it away is irrelevant issue or it is not considered.

Eight banks said the transfer of the property to the heirs can be supported through a number of ways such as to incorporate it in the initial mortgage, to be considered through the re-mortgage or through other arrangements which include property’s insurance scheme. Some banks said that the financial situation of the heirs will be evaluated to see if they can afford the mortgage repayment, and if not, the property will be granted to them. Other banks said the ownership of the property will be transferred the heirs automatically who do not have to pay the outstanding mortgage. One of banks said that the insurance will cover the outstanding mortgage and the heirs do not have to pay it.

Financial support to help the owner

Type of change

Irre

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nt

It is

not

con

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red

Can

be

cons

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Wou

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th

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age

Oth

er a

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ents

w

ould

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Tot

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in

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Transfer of right to benefit to a third party by owner 6 3 1 0 2 0 3 Donorship of the property by the owner 9 2 0 0 1 0 1 Give it away as Sadaqa by the owner 8 2 0 0 2 0 2 Transfer of the property to heirs i.e. family and relatives 1 3 1 2 1 4 8

Commercial investment in the property by the owner 5 3 2 0 2 0 4 Internal alteration 0 6 2 3 1 0 6 External alteration 0 6 2 3 1 0 6 Management of the property by third party 0 7 2 1 2 0 5 Possible negative impacts of the environment on the property 0 5 3 1 1 2 7

Possible natural disaster 0 4 2 0 0 6 8 Table 2: Type of financial support that would be granted to help the owner to cope with physical, management and ownership changes to the affordable property Eight banks said that support to the commercial investment2 of the property by the owner is irrelevant or it is not considered, whereas four banks said that it can be considered. Half of the banks said that financial support for internal or external alteration of the property can be supported whereas the other half said it not considered. Seven banks said that it is happy to support the management of the property by third party whereas five banks said it can be considered.

Five banks said that it can not support the owner to deal with the negative impacts of the environment whereas seven banks said that they are happy to do so. However, some banks said that they would finance the maintenance of basic structure not the sewage or water pipes.

2 Such as to convert some parts of the property into an office or shop


The Financing of affordable housing in the Kingdom of Saudi Arabia B. Sidawi Four banks said that the support for a possible natural disaster that would affect the property is not considered whereas half of them said that this can be considered through other arrangement i.e. the insurance of the property against possible natural disasters. However, the repair work will be carried out by a company which is appointed by the insurance company. One of the banks said that the cost of repair will be paid by the government of Saudi Arabia. Two banks were happy to include this issue through the initial mortgage scheme.

Some banks that were unhappy to provide financial support commented that as the amount of mortgage that the borrower would get is 35-45 times of his/her annual salary so there will be no room to give him/ her more finance as he/ she would not probably afford to repay it back.


Few banks are happy to help with the transfer of right to benefit to a third party by the owner Few banks are happy to help the owner to invest in the property Half of the banks only are happy to offer help regarding the expenses of internal and external alterations and the management of the property


Banks may consider helping the owner regarding the following issues: the transfer of right to benefit to a third party the commercial investment in the property expenses of internal and external alterations and the management of the property



12. Possible plans of the bank to increase the amount of mortgage loans and attract potential clients


All banks said that they are happy to target potential borrowers, to make lending process easier, to extend the geographic coverage, to give more instant advantages to the borrower, to provide a quality service throughout the mortgage repayment period, to offer a flexible mortgage scheme3 and to introduce smooth property registration and title transfer. Banks were divided upon giving lifelong advantages to the borrowers as seven of them that they are happy to do so whereas five of them were unhappy to give any lifelong advantages. Two third of the banks said that they plan to extend the mortgage repayment period or to support the future needs of the client such as future alterations to the property. One third of the banks said that they are not happy to extend the mortgage repayment period (because it is already more than 25 years) or to offer support to the future needs of the client.

Chart 11: The possible plans of banks to increase the amountof mortgages and attract potential customers

12

0

12

0

10

2

11

1

7

5

8

4

8

4

10

2

12

0 0

12

0

2

4

6

8

10

12

Likely Unlikely

To target potential borrowers

To make lending process easier

To introduce smooth property registration andtitle transfer

To give more instant advantages to the borrower

To give the borrower more lifelong advantages andsupport

To provide a quality service throughout themortgage repayment period

To extend the mortgage repayment period

To support the future needs of the client as suchfuture alterations of the property

To offer a flexible mortgage package

To offer a competitive mortgage package

To extend the geographic coverage


Nearly half of banks are not happy to give the borrower more lifelong advantages and support Some banks not happy to support the future needs of the client as such future alterations of the property


To effectively target potential borrowers To create and offer an easy to get, flexible and competitive mortgage loan packages To introduce smooth property registration and title transfer To offer lifelong support to the owner which means to introduce lifelong partnership with the borrower

To provide a quality service throughout the mortgage loan repayment period To extend the mortgage loan repayment period

3 one of the banks said it is not the right of the owner to do anything whereas the other bank has given some rights to the owner so he believes that he give a flexible mortgage and no need to give more


The Financing of affordable housing in the Kingdom of Saudi Arabia B. Sidawi 13. The weight of the user& property-driven factors on the property’s value


Banks were asked about the significance rank of a number of management and ownership factors to the affordable property value during the repayment period of the mortgage loan. Banks considered a number of factors would have a weight above average (i.e. 5) and these are: building adaptability, the owner occupant daily lifestyle activities, energy efficiency of the property, Internal and external alterations carried out by the owner to suit his/her lifestyle, maintenance and management practice style of the property by the owner, building quality and other criterion i.e. location, age and area (see table 3).

Property characterises and owner’s rights Weighting out of 10 1. Partial transfer of the ownership 0.17 2. The transfer of right to benefit to third party 2.83 3. Commercial investment in the property by owner 3.00 4. Management of the property by third party 4.00 5. Building adaptability 5.27 6. The owner occupant daily lifestyle activities 5.33 7. Energy efficiency of the property 5.50 8. Internal alteration carried out by the owner to suit his lifestyle 5.83 9. Maintenance and management practice style of the property by the owner 5.83 10. External alteration carried out by the owner to suit his lifestyle (i.e. external extension) 6.36 11. Building quality 7.33 12. Other criterion (i.e. building location, age and area) 8.40

Table 3: The weight of each of property characteristics and owner rights on the property value during the repayment period of the mortgage loan


Banks may wish to re-think about the weight of the following factors on the property value: Building adaptability Energy efficiency of the property The owner occupant daily lifestyle activities Internal and external alteration carried out by the owner

Banks may wish to investigate how the significant factors are interacting over time and affect the property value.


The consideration of the significance of the following issues to the property value: Building quality External alteration



14. Internal and External hindrances to the lifelong financing of affordable housing

Internal Hindrances would include the following factors: The hesitation of some banks to start their financing scheme as some of them did not start yet; The introduction of one type of mortgage loans only by some banks. Furthermore, the fact

that these banks are not happy to introduce more types of mortgage loans in the future; Limited period of repayment of the mortgage loan (i.e. 11-20 years); The limited financial activity during the last year of the majority of the banks (i.e. 10) and

some of them since the start of their financing scheme; Little awareness of banks regarding the extent of financial activities of other organizations; Some banks are reluctant to offer a flexible mortgage loan packages; Some banks are reluctant to provide lifelong support to the owner regarding the changes and

impacts on the property; and The difficulty of creating new mortgage loan mechanisms that comply with Islamic Sharria

The potential External Hindrances would be:

Insecure financial environment including legislations that hinder banks to operate and flourish as they feel unprotected;

The non-existence of building code that would control the building quality in KSA;

The level of the client’s education and knowledge regarding financial issues;

The level of client’s commitment;

The difficulty of finding and creating new Islamic financing mechanisms; and

Few and weak links with other financial and government organizations and bodies



15. Recommendations

• The government should set clear and well defined financial legislations that provide secure environment to banks. These financial legislations needs to be updated regularly.

• Banks, the government and other financial organizations have the duty to provide basic financial education to the public

• The Ministry of finance in KSA should motivate banks to develop new and flexible Islamic mortgage loan products such as the Istisnaa in co-ordination with expertises in Islamic financing law

• In regards to the lifelong support to the owner

On the environmental side, lifelong financial support to low-income home owners should address environmental impacts on the property and how to meet it

On the owner/user’s lifestyle side, the lifelong financial support may include property development (i.e. design and/ or construction), use/ownership, management attributes or portions of each according to the client request

Mixing portions of the above mentioned attributes such as management and ownership or building development and management would enable banks to produce multiple and flexible mortgage packages. Through these packages, the bank would share some of the lifelong ownership and management responsibilities with the owner

• Financial organizations that are involved in the funding low-income housing such as government bodies, REDF, banks, investors etc should set up a framework for collaboration and a long term strategy that is capable to tackle the funding of the affordable housing’s problem

• Future research should investigate the present lifelong relationship between the bank and the owner and test whether it is the right relationship that is capable to reserve the rights of both sides while highlighting their responsibilities without contradicting Islamic Financial laws

• There should be also research on new methods that would provide flexible lifelong financial support to the owner rather than the existing and conventional financing ways which may exhaust the low-income owners



16. Appendix A

Definition of terms Al-Murabahah: Purchase and resale. Instead of lending out money, the capital provider purchases the desired commodity (for which the loan would have been taken out) from a third party and resells it at a predetermined higher price to the capital user. By paying this higher price over installments, the capital user has effectively obtained credit without paying interest. Musharakah: Profit and loss sharing. It is a partnership where profits are shared according to an agreed ratio whereas the losses are shared in proportion to the capital/investment of each partner. Al-Ijara: The bank owns high cost assets and assets that deal with rapidly changing technology. After purchasing these assets, the bank then rents them to the customer, giving him an option to either purchase them during the rent period, or after its completion. It is the most efficient and flexible way to utilize high cost assets and technology related products. Al-Istinaa: An agreement suited for construction projects, whereby the bank signs an agreement with the client for the construction of a site, or a building, and then signs another agreement with the construction company responsible for the development plan.


the financing of affordable housing in the ksa executive report

Economy & Finance

architecture dr ibrahim

colleges of architecture

dr abed al salam al

dr ali al garney

al naimi mr nidhal

dean of college

financing scheme5

sidawi acknowledgements