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Experts Claim New Saudi Mortgage Market Should be Sukuk Based
The best Islamic Finance principle to base the much-awaited Saudi mortgage law should be sukuk-based with a Shariah- compliant set of guidelines, Giambattista Atzeni, vice president and MENA business manager for corporate trust and a member of the steering committee of the Gulf Bond and Sukuk Association at BNY Mellon Cor- porate Trust in Dubai told Arab News. “Sukuk would be the best way to mortgage homes in a Shariah-compliant fashion,” he said. He also believes that the exact scheme would be the issuance of an asset-backed sukuk and then a pool of loans would be sold to a Specific Purpose Vehicle (SPV). Proving the overall success of the sukuk market in Saudi Arabia and the region, Atzeni said that The Middle East Sukuk market was certainly the most active. “We expect that activity will increase in Q1 2011 when many projects will be refinanced due to the maturity of Sukuk bond transactions next year,” he said.
He also commented that with the Saudi mortgage market and a new law becom- ing active soon a further increase would be brought to the sukuk market due to Shariah- compliant home loans, but before this can happen the real estate market must do its part as land prices must drop, Atzeni stated. “Land prices must come down to a decent price. If land is expensive and project devel- opers want to build an apartment or housing project, those expenses will have to be incor- porated into the cost of the purchase price of the apartment or home.
Also we do not want to create a housing bub- ble. In the past many were just buying land and after a few months selling it at profit. The value has not increased in terms of real value, but only monetary value,” the vice president said. A shortage of housing and rising land costs, according to a report re- leased this month by CB Ellis states that the prices of housing are rising. “The sheer pres- sure of population growth and increase in construction costs and shortfall of develop- ment are likely to force housing prices high- er,” the report stated. The report also con- firmed in Jeddah alone there is a shortage of 300,000 dwellings. Atzeni believes that be-
cause of the desperate need for affordable housing in the Kingdom where most people can still not afford to purchase property or a home will change for the better following the adoption of the mortgage law.
He also said that it is very important howev- er that proper guidelines were followed con- struct affordable properties. “For example, King Abdullah Economic City is a wonderful infrastructure project but not everyone can afford to live luxuriously. We need afforda- ble housing elements to satisfy the demand of the mortgage market in order for it to be helpful in allowing those who can’t afford a big down payment to have either the bank or a government office guarantee,” he said.
He added that the Saudi government has been keen in offering this assistance if one proves to pay in a prompt manner for five years with privileges given to the home buyer. Other positive effects will be that the mortgage law is expected to put the King- dom’s economy into an even more positive cycle. Currently the debate on when the law will finally be introduced has been shelved until after the holy month of Ramadan.
In a previous interview with Arab News, Mu- hammed Al-Ghamdi, secretary-general of the Shoura Council has said that some of its members needed more time to discuss the proposed mortgage law concerning the country’s economy and this is why it has been delayed.
Ethiopian Financial Sector to Receive First Islamic Bank
Finally responding to a strong public de- mand, the National Bank of Ethiopia (NBE) is about to approve a directive that paves the way for the establishment of Islamic banks. The directive also opens doors for currently operational commercial banks to create an interest-free banking wing. “Existing banks may create interest-free banking windows and Ethiopian nationals may establish a bank exclusively engaged in interest-free banking,” the NBE draft directive reads. To accommodate muslims, who are by Sharia’h – Islamic law – prohibited from taking or giving interest (riba), commercial banks are
currently offering zero interest. However, ful- ly-fledged establishments of Islamic banks, which offers the owners of capital to share the profits made by the entrepreneur who comes up with investment projects, is an un- tapped concept for the local financial sector. The sector will, according to Prime Minister Meles Zenawi, remain closed from foreign banks involvement.
The 2008 Banking Business Proclamation has already crafted a room for non inter- est banking. However, particulars on the regulations of such services were left to be covered by National Bank directive which, two years late, has come now. According to sources, NBE’s two page draft directive en- titled Directives for Conducting Interest-Free Banking, has already received feedback from stakeholders and should be approved in a few weeks time.
The impending approval is expected to en- able some already under progress initiatives that envisages establishing Islamic banks. As per the NBE draft directive interest-free banking operations may include modes of advancing funds on a profit-and-loss shar- ing basis consistent with the Sharia’h law. Ibrahim Miftah, an economist, explains that what makes profit- sharing permissible in Is- lam, while interest is not, is that in the case of the former only the profit-sharing ratio and not the rate of return itself is predeter- mined.
“It has been argued that profit-sharing can help allocate resources efficiently, as the profit-sharing ratio can be influenced by mar- ket forces so that capital will flow into those sectors which offer the highest profit shar- ing ratio to the investor, other things being equal,” Ibrahim in his article, pending print- ing, explained. The NBE directive also stipu- lates that interest-free banking may include the modes of finance which are used for pur- chase or hire of goods, including assets, and services on a fixed return bases.
Among such recognized operations one is Murabahah which means a contract for the purchase and resale of goods with the re- sale price being determined on a cost plus basis. In such arrangements Intisar (or Isti- sna) and salam are also included. The latter
2010 October Global Islamic Finance 7
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