Depth and sophistication of the mortgage industry in Saudi Arabia

Naif Abdulmohsin Al-Baz, CEO of Deutsche Gulf Finance talks about the sophistication of the mortgage market in Saudi Arabia.

Traditionally the banks would provide financing but in the developed markets it is the specialised financial institutions such as yourself that provide the mortgages. How sophisticated is the Saudi Arabian market and what do you think will happen in the future? How is this industry going to be structured?

With the new regulations from SAMA we have seen four major mortgage residential housing financial companies entering in the market beside the 12 banks. As the mortgage industry becomes mature, the specialised mortgage financial companies will dominate under the originate to sell strategy model where they are going to originate in the market and sell these assets to banks and investors in the future.

We need time for the mortgage industry to mature and become more efficient. At DGF this is what we have started. The company has an originate to sell strategy and we have been able to sell assets to banks and investors. For instance, DGF has sold around 40% of what it has originated. With the introduction of the real estate refinance company by the PIF Private Investment Fund, the market will be heathier and more liquidity will come to the system.

Thus, the real estate refinance companies will be the ultimate buyers of assets in the future beside the commercial banks as the primary vehicles for liquidity.

How would you describe your performance in this market? Are you happy with your performance and the amount of mortgages that you are able to originate?

Today we are originating but we have limited capacity with respect to originating given the circumstances in the market and the liquidity of course. We are not like the banks, we don’t have deposits from clients so we depend on our capital and we depend on the standby warehouse facility from banks and the sale of assets to investors. We are also exploring the issuance of SUKOK (corporate bonds).

The shareholders so far have been satisfied with our performance however, there are some issues that need to be cleared up in the industry with respect to the Zakat treatment. This is a pressing issue in the industry and SAMA is now getting in and trying to resolve it.
However the outlook is bright for the future and as we increase our originations and we build a portfolio, the return on the equity should be satisfactory to the shareholders and we anticipate going IPO in the near future.