The financing of affordable housing in ksa

The financing of affordable housing in Kingdom of Saudi Arabia
Dr. Bhzad Sidawi assistant professor
King Faisal University, College of Architecture and Planning
Abstract
The demand for affordable housing has increased in the past decades in Saudi Arabia due to the increase
of population, inflation and variation in income levels. 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 finance to the prospected home buyers. Little evidence is found
on the volume of funding of the affordable housing at present that is provided by major financial
organizations such as banks. A survey have been undertaken to find out the contribution of banks and
REDF to the funding of affordable housing. 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 study should motivate banks, charities and other financing organizations, investors
and decision makers to consider and explore approaches that are capable to provide sufficient funding to
the low-income clients. The argument raised by this research would set conceptual foundations that could
be used by future research to analyse the misconception and misconduct in the method of affordable
housing’s financing.
1. Introduction
The demand for affordable housing around the world – in general- and particularly in the Kingdom of
Saudi Arabia has increased in the past decades due to a number of factors such as: the variation of income
levels, the increase of population who do not have financial resources to buy a property from the
traditional market (Payne 1984). The demand for next few years will increase in Kingdom of Saudi Arabia
and people ability to buy from traditional market is declining. The financing of affordable housing in the
KSA is provided by a number of government bodies, financial organizations including banks and private
sector companies. However, there is a concern that financial organizations can not meet the present and
future demand, did not develop yet a feasible strategy and did not create flexible lending mechanisms to
tackle the problem. The present provision of funding by banks to prospected affordable housing buyers
consider a number of instant or purchase-moment factors, meanwhile the future financial support is
absent.
Main providers of funding of low-income citizens who aim to purchase affordable homes were surveyed
in the KSA to find out the level of present and future financial support to prospected home buyers. The
next sections outline the survey findings and makes recommendations of how to tackle the problem of
financing of low-income home buyers in KSA.
2. Housing in the Kingdom of Saudi Arabia
Affordability can be defined as the ability of the household to purchase [own or rent] a home based on the
median monthly costs and housing can be considered as affordable if, a household pays not more than
30% of its gross income for basic housing costs. In the developed world, affordable housing is defined as
“housing that can be purchased by families earning 30% to 80% of the community’s median income”.
However, affordability must be determined by making comparisons at the local level between the cost of
housing and the incomes of households (Chatfield 2000). The term affordable housing is defined as “Low
cost market, and subsidized housing -irrespective of tenure, ownership-whether exclusive or shared-or
financial arrangements- that will be available to people who cannot afford to rent or buy houses generally
available on the open market” (Plymouth City Council 2008)

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In the Kingdom of Saudi Arabia, more Saudis will demand affordable housing in the future. The housing
affordability for Saudis and non Saudis would decline substantially from present to future because housing
prices rise rather faster than incomes. The increase in purchasing power for Saudis is approximately 25%,
against a 50% housing price rise (Struyk 2005). Less number of citizens would afford to buy houses in the
future and also to be able to get loans from banks as well.
It is figured that Saudi population will reach 33.44 million by 2020 and family size to fall to 5.3, and it
estimated that 2.32 million new housing units should be built in the Kingdom (NCB 2005). This gives a
long-term average demand for new housing units of around 145,000 annually from 2005 through 2020
(NCB 2005). Another report from Samba (Saudi American bank) predicates that by 2020 a total of 2.62
million housing units should be built, at an average rate of 163,750 units per annum (SAIF 2006). The
Director General of Dar Al Arkan Real Estate Development Company pointed out that Saudi Arabia is
currently suffering from the shortage of 2.7 million houses and it needs 4 million houses through the next
two decades to satisfy the growing domestic population growth (Al-shaikh et al 2000).
Struyk (2005) suggested that Saudis will experience a decline in housing affordability over the next two
decades. The increase in purchasing power is approximately 25%, against a 50% housing price rise.
He pointed out that more than 50,000 households will face housing affordability problems within the next
20 years in Riyadh area alone. Aldosary et al (2007) mentioned there is a mass demand for affordable
housing within the kingdom, particularly by middle-income Saudi families. He predicated that 906.876
affordable housing units are needed by 2025. This is based on forecasted estimation of the total population
as 39.581.511 million.
These figures depend on a number of factors such as the GDP, the population growth rate, purchasing
power etc. These factors interact in a complex way over time and would affect the housing quality and
size (Struyk 2005). This signals that many middle class Saudis will not be able to occupy housing of the
same size and standards as their parents. Low-income housing units tend to have less than 150 square
meters of floor space, which is less than half the average size of a housing unit in the Kingdom. The real
estate market is undersupplied in affordable low and middle-income housing and is expected to be the
same case in the future.
At present, the financing of affordable housing in the KSA is provided by the following government
bodies, financial organizations and private sector companies (NCB 2005); namely:
a. the Public Sector represented mainly by the Real Estate Development Fund REDF;
b. the private sector and Joint-stock companies; and
c. charities such as Prince Sultan and King Abed Allah for his parents charities
d. banks
A. The Public Sector represented by the real estate development fund REDF and Public Works,
other governmental bodies and SIDF
REDF was established in 1974 to enable individuals to build their houses and the private sector to invest
in, to enter into agreements with the municipalities to develop new residential areas, and to assist
government institutions in setting up housing projects for their employees (UNESCO 2008). From its
founding in 1974 through 2003, the government's Real Estate Development Fund (REDF) provided
funding to build more than 560,000 housing units1
. Through the year 1426-1427H (2005-2006G) , the
number of loans provided by Real Estate Development Fund was (25324) loans valued at more than
(7032) million Riyals (Iamsaudi 2008).

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The REDF provides zero interest, 25-year housing loans in amounts of SR 200,000–300,000 to eligible
Saudi households, financing up to 70 percent of the estimated construction cost. In recent years,. The
demand for REDF loans far surpasses availability. Based on REDF data in 2002, only one out of every 4.7
applications was approved and the applicant wait list stands now at about ten years (SAMA 2004). Around
8 percent of all housing units built in a year are REDF funded. (Zawya 2008)
Loans are repayable over a long period and a 20 % subsidy was also provided. Interest-free loans
repayable over ten years were also lent to businesses to build units of apartment buildings and villa
compounds (UNESCO 2008). These loans were disbursed for financing construction of owner-occupied
housing units. Loan repayments amounted to 1.8 SR billion during the same year, declining by 29.9
percent from the preceding year (SAMA 2007). Through its investment REDF loans, private Saudi
developers are encouraged to apply for investment loans with free interest loans up to $3 million. The
number of housing units constructed through REDF’s investment loans is 18,196 (Mubarak 2007).
Since the 1970’s the Saudi government through the ministry of public works2
and planning has made a
contribution for fulfilling housing demand (Hussain, 2001). The government through the Ministry of
Housing and Public Works has built over 25,000 housing units in the main cities. They were distributed to
low-income people by the REDF through the same arrangements as the loans it gives. However, the
number of housing units built by the Ministry of Housing and Public Works is relatively small compared
to units financed through REDF. This is because people want to design their own homes, select the sites
where they prefer to live, may be near relatives and friends. That is why the design and architecture of
homes vary considerably from one city district to another (UNESCO 2008). Also, compared to the private
real estate entities, there is little involvement from the Ministry of Public Works and Housing and various
other government departments and municipalities in real estate (Samba 2006).
On the other hand, the Saudi government initiated a large-scale low-income housing program and sought
partnerships with the private sector to help in the provision of this service. The program consists
essentially of two key projects. First, the Free Land Plots project provides dwellers with 400-900 square
meters of free serviced land to build their housing. The distribution happens through the municipalities. In
the Riyadh suburb of Oreijah, for example, 30,000 families received free plots, and in Riyadh alone, over
100,000 plots have been given away (UN: ESCWA 2001). The project facilitates the public-private
partnerships that are created between the Saudi central state authorities and the private sector, and the
involvement of local authorities (municipalities) and citizens in the provision of housing services. It also,
enables the authorities to play successful managerial role as mobilizes planning tools and alternative
resources in the process rather than building housing. The project initiates the distribution of a large
number of land plots and loans and the production of highly needed housing units for low-income
residents. The Saudi Industrial development Fund or SIDF provides loans for industrial projects only,
which include housing facilities for workers related to the project.
The number of housing units which has been constructed by government companies for its employees at
the end of the fifth development period had reached more than 221000 units3
(UN 2008). ARAMCO
Company has launched a Housing Loan Plan to assist its Saudi employees in securing funds to build or
purchase family housing in their local communities. Loans were repaid by regular monthly salary
deductions up to 20 percent (UNESCO: MOST 2008). Some universities have built housing units for their
students and staff. At a number of universities, students live in dormitories whereas in other universities
which have no dormitories they have to live in a rented property, with relatives or parents. The teaching
staff are leased detached houses for reasonable rent at some universities but at other universities they
should look elsewhere as there is no enough properties for all staff.

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B. The private sector and joint-stock companies
Some private companies are also involved in the construction of housing for their employees. Saudi-based
Dar Al-Arkan Real Estate Development Co. announced that it will form first housing finance company to
take advantage of upcoming mortgage regulations. The firm, to be launched in the second quarter of 2007
with a capital of SR1bn is an alliance with Arab National Bank, the International Finance Corporation, the
private sector arm of the World Bank, and Housing Development Finance Corp. of India. The company
will develop mortgage finance in Saudi Arabia, a sector that is expected to grow rapidly when a new
regulation governing mortgage foreclosure is approved by the government. (Zawya 2007)
The Saudi real estate company is a joint stock company established by the Government with a capital of
SR.600 million and with the government subscribing to the majority of shares. The company has built
housing complexes, some of which are apartment blocks for rent, and the other are villa type, which have
been sold to Saudi citizens.
The government will provide 57,000 REDF loans with a total value of SR 15.7 billion for constructing
70,000 housing units in the different provinces of the Kingdom. The private sector will finance the
construction of the remaining part of the estimated demand during the Seventh Plan, i.e. 730,000 housing
units at the rate of 146,000 units per year. The government will provide about 110 million square meters
of residential land in order to meet the demand for housing during the Seventh Plan. This also includes the
provision of necessary facilities and infrastructure prior to the construction stage. The eighth development
plan indicates that the private sector would undertake to build about 875,000 housing units to fulfill part of
the demand for housing, in different regions of the Kingdom (KSCC 2007). Out of these housing units,
about 225,000 would be built with the support and assistance of the government (KSCC 2007).
C. Charities and Welfare organizations
The Ministry of Social Affairs and some welfare organizations are also building about 35,000 Saudi
traditional houses in various regions of the Kingdom4
(Zawya 2007). Prince Sultan and King Abed Allah
for his parents’ charities build few hundreds of houses for low-income people at present but they are
ambitious to increase their contribution and provide more affordable housing (Prince Abdullah Foundation
2008, Sultan Foundation 2008).
D. Banks
Banks do not provide any information about their contribution to the financing of affordable housing in
KSA. There is an estimate that around 86% of all purchased homes are paid for in cash5
and the remaining
6 percent funded from 6 banks and financial companies (Zawya 2008). The contribution of the banking
sector to housing finance is expected to increase as soon as the real estate mortgage law is enacted. It is
worth mentioning that the size of real estate financing provided by commercial banks reached SR 13.4
billion at the end of the second quarter of 2006. Saudi Monetary Agency SAMA (2004) pointed out that has
permitted a number of banks to offer products for real estate financing. Banks are constantly working to
develop innovative products to meet the needs of the housing market. (Al-Sayari 2007).
The literature review showed a fragmented picture about the actual funding of the housing in KSA
whereas no specific information was found regarding the financing of the affordable housing. However,
the following general conclusions can be made:
 The persistent and hard efforts of the Saudi government to provide sufficient funding for housing
in general and for affordable housing in specific;
 Big contribution by REDF towards the funding of the purchase and development of affordable
housing;
 Little contribution of SIDF, private sector, charities and Ministry of Public Works;

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 Joint stock companies are just starting to operate in KSA, thus, their contribution towards the
financing of affordable housing is insignificant at present; and
 The amount of contribution by banks towards the financing of affordable housing is unknown.
This research suggests that REDF and banks should be the steering power behind the provision of funding
for affordable housing. Therefore, it is important to know the amount of their contribution at present, their
plans to increase their contribution in the future and the framework for collaboration with other
organizations to make the financing of affordable housing more effective.
4. Research objectives and methodology
The research has a number of objectives; these are:
 To find out the volume of contribution of banks and REDF towards the financing of affordable
housing at present and whether it is capable to meet the present and future demand
 To evaluate the banks and REDF’s role and plans regarding the present and future demand
 To set recommendation on how to activate the banks and REDF role in order to meet the future
demand.
To achieve the research objectives, it is argued that a combination of quantitative and qualitative research
methods is needed. The use of mixed methods is because the findings that relate to each method will be
used to complement one another and at the end of the study to enhance theoretical or substantive
completeness (Morse 1991). To assess the banks’ views about the issue, it was suggested to use a survey
questionnaire and discussion group would be used as tools to examine the level of contribution of banks
towards the affordable housing. 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 of finance of affordable housing that offered by banks
 Bank’s plans to improve their financial services and contribute more to financing of affordable
housing
The questionnaire was sent to banks in March 2008. Three banks including REDF responded back.
Afterwards, three remainders were sent but without any response. The researcher contacted local branches
of banks in the Eastern region asking for an interview. After around two weeks, the researcher was able to
interview all real estate managers/ branch managers using the same questionnaire. Simple statistic
methods such as T-test, percentage and mean were used to analyze the data as the sample number was too
small. There was number of ambiguous points in the data extracted from the questionnaire, so bank
managers were invited to the College of Architecture 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 that exist in the questionnaire results
 to find out banks’ future plans regarding the financing of low-income home buyers
An invitation was sent to all banks in KSA by fax and email. Afterwards, couple reminders were sent as
well. Eventually, three banks managers turned up. The seminar was chaired by an expertise in Islamic
built laws from the College of architecture.

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5. The survey results
5.1. General results
Banks which did not start their mortgage scheme (i.e. 1 out of 126
banks) should catch up and start it
immediately otherwise it would be too late for them (see table 3, appendix A). Some banks (i.e. 5 out of
12 banks) offer one type of mortgage loans only and they are not happy to introduce more types of
mortgage loans. These banks need to introduce more types of the mortgage loans in the near future to
serve the various needs of the clients. Banks which offer mortgage loans with a maximum repayment
period of 11-20 years need to review the length of the period to see whether it is beneficial to increase the
maximum period of mortgage loan repayment. This would be helpful for clients who can not cope with
the high monthly payments (table 1& 2, appendix A).
The study found that majority of the banks (i.e. 10 banks) have limited financing activity last year as they
granted 3000 mortgage loans and less and only five banks granted more than 500 million Riyals worth of
mortgage loans last year. However, some banks said that number of mortgage loans and volume of
mortgage loans that were granted last year (i.e. 2007) was bigger than the year before (i.e. 2006) (see table
4, appendix A).
Since the start of financing scheme, four banks have granted more than 3000 mortgage loans and only
three banks have granted mortgage loans of a value of more than 2000 million Riyals (see table 4& 5).
The Kingdom of Saudi Arabia needs around 906.875 new affordable properties to be built by 2025. This
means around 60000 properties should be built and financed annually. Table 4 in the appendix A shows
that 2 banks only offer 3000 mortgage loans or more last year. One of them declared that it provided
around 4000 mortgage loans. The other bank - which is REDF-, provides an average of 27000 mortgage
loans annually. By incorporating these figures with table 4 figures (left hand side figures) in appendix A,
we would have the total maximum number of mortgage loans as:
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
Thus, there will be a shortage of around 21800 mortgage loans annually. This does not however, take into
account the delay in processing requests for loans by REDF or how long the properties would take until
they are actually built and occupied. Banks are happy to finance various types of properties now and in the
future and this includes plots of land, villas, flat/ apartment or duplexes (see table 6, appendix A).
However, one bank only expressed its willingness to fund other types of properties as well.
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 (see table 7 appendix A). Banks were asked about their future plans to increase the
amount of mortgage loans and attract potential customers. 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 loan repayment
period, to offer a flexible mortgage loan scheme7
and to introduce smooth property registration and title
transfer. Banks were divided upon giving lifelong advantages to the borrowers as seven of them said that
they are happy to do so whereas five of them were unhappy to give any lifelong advantages.

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Two third of the banks said that they plan to extend the mortgage loan 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 loan repayment period because it is already more than 25 years, or to
offer support to the future needs of the client. One of the banks said that they are planning to introduce
lower mortgage loan percent and provide short term offers with less profit rate. Some banks were not
happy to address the following issues in their future plans: to give the borrower more lifelong advantages
and support (i.e. 7 banks out of 12), to extend the mortgage loan repayment period (i.e. 8 banks out of 12),
and to support the future needs of the client as such future alterations of the property (i.e. 8 banks out of
12).
Possible plans of the bank to increase the amount of mortgage loans
and attract potential customers
Likely Unlikely
To target potential borrowers 12 0
To make lending process easier 12 0
To introduce smooth property registration and title transfer 10 2
To give more instant advantages to the borrower 11 1
To give the borrower more lifelong advantages and support 7 5
To provide a quality service throughout the mortgage loan repayment
period
11 0
To extend the mortgage loan repayment period 8 4
To support the future needs of the client as such future alterations of the
property
8 4
To offer a flexible mortgage loan package 10 2
To offer a competitive mortgage loan package 12 0
To extend the geographic coverage 12 0
Table 1: The possible plans of banks to increase the amount of mortgage loans and attract potential
affordable property’s customers
5.2. The seminar results
The seminar target is to clarify the ambiguous points that found in the research and to find out whether the
issues raised in the questionnaire would be considered by banks as potential factors that affect the flow of
finance of affordable housing.
The present financial legislations
A bank representative said that opportunities to provide financing in KSA are low and there is a high
financial risk. He proceeds by saying: “it is better if the bank work with one co-operate client with low risk
and gets less profit than working with 5000 customers and having problems in regards to the payments’
collection. He regretted that rights of banks are not protected by present legislations”. Banks are willing
to offer financing but they can not do it without protection. The Rahin Aqary (i.e. mortgage) system if
applied- would provide protection to banks and regulates the relation between the borrower and the lender.
It would give banks the right to overtake the property if the borrower did not make payments for a certain
period. However, the system may contradict with the Islamic Shariah clauses which protects the
homeowner unless the system has the power to overcome this issue. This would give banks bigger
willingness to lend prospected buyers because the system is capable to reserve the banks’ rights. Banks
have another problem as there are two judicial systems in KSA; the Grievance Board or Diwan al-
Mazalim and the conventional judicial system and each of them may give different verdict for the same
case.

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Funding constraints
The property financing essentially depends on the salary, credit history and the value of property. A
banker pointed out that the segmentation of prospected clients that based on the above mentioned
criterions has produced small size segment, thus the number of mortgage loan applications that can be
accepted is low and there is not much funding provided to borrowers at present. A segment of clients –for
instance- whose salary is 2000-3000 riyals can not apply for a loan. Tough criteria by banks are applied
because of the absence of financial legislations that protects their rights. Another banker said that banks
have to offer initially one type of loan mortgages which Ijara (or let to buy) through which the bank would
reserve the property ownership. Furthermore, the criteria for accepting mortgage loan applications are
different from bank to another. This highlights the fact that many mortgage loans applications are refused
or turned down by banks.
Cultural issues
A bank manager suggests that people in KSA still have concerns regarding the property financing issues.
Borrowing in the Saudi Society is something which is generally unacceptable and difficult to comprehend.
The Saudi individual prefers to ask help from the family, parents, and other relatives before borrowing
from banks. Also, the client’s feels that the bank - which grants the loan-, is in a superior position and it
restrains him/her and there is no equality in the relation between the two parties. On the other hand, banks
apply flat rate interest at the start of the lending period. People do not know the difference between
lending rates and ask whether the loan decreases or not, and in case that it does not decrease, they consider
it as a rape off.
Another representative mentioned other cultural characteristics that affect the lending process to the
public. He said:” when the government had announced about the property financing, people imagined that
it is free”. The Saudi Society expects that everything is or should be free. Thus, when banks provide
mortgage loans, people have vague perception of the mortgage loan terms and conditions, whether it is
free, halal (i.e. not prohibited by Islamic Shariah) or not. This is why –as another banker said- banks
initially went into Ijara scheme as this would keep the property ownership with the bank.
The banker suggests that the consumer should be financially educated. He said:” There should be an
official establishment such as CNA which is responsible about the education of the client, property
appraisal methods, housing, and how somebody could raise the value of his/her property and other
issues”. The customer should be educated about mortgage loan products and process. He/she should
understand he/she is entering into a business transaction relation. The mortgage loan that the customer
gets, will not be subsidized by the government, it is a loan based on affordability and commitment to pay
back.
The mortgage loan product and lending process risks
One of bank representatives said that one of the issues that will stop the mortgage loan product from being
marketed is to be of a high risk. Banks are concern about risk/ reward issue so since banks own the
property, it wants to be certain that it’s value will not decline while it is under their custody until it is sold/
handed-over to the customer. At present, Saudi Credit Bureau8
have credit history database for KSA
citizens and this can be accessed by banks which incorporate it in pricing and assessing potential risks of
new mortgage loan products.
A bank manager anticipated that Banks do not give loans for fifty years because it does not know the age
of the property. There were problems which some banks have when they gave a loan for a house and after
one year the house was not suitable for living. This is one of the factors that prevent banks of financing
some properties. Consequently, it seems that some banks do not conduct a proper survey on the property.

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The problem of finding and creating Islamic financing mechanism
A banker said that if the bank feels that it needs to produce a new product (i.e. mortgage loan), it will do
it. The bank may have a product which another bank does not have and does not want to have. It is related
to the market demand and what is offered. Banks has the ability and creativity to create and produce new
and excellent products.
This was rejected by another banker who said that creation of new products in respect of the Islamic
Shariah would be a problem as banks have to develop new Islamic financing mechanisms. When a new
Islamic mechanism is created, the bank compares the effect of the new Islamic mechanism with the
conventional one in order to assess the potential risk. As an example, the bank has created an Islamic
mechanism for selling up a property on paper before construction. The banker said: “we do it through Ijra
Mawsofa Be-Zema which means that the bank let the property to the client through a letting contract. The
bank and client signs Istisnaa contract in which the client instructs the bank to construct the building for
him/her. The bank instructs a building developer to construct the building according to the client’s
specifications”. Ijara Mawsofa Be-Zema has its’ risk and the Istisnaa contract as well and these can not be
put together back to back as one contract because each one has its legal liabilities. The client and the
building developer will have no responsibility if any problem regarding the building quality arises, and the
bank will be the only one in trouble. Such financial arrangement would constitute a high level of risk for
the bank. Therefore, when the bank is engaged in a relationship with a building developer, the problem is
to find the right Islamic mechanism that control such relationship and provide the right product to the
client. Another banker highlighted the difficulty of the creation of some mortgage products as the
government would consider that it would conflict with the public rights and interest.
The weight of free land provision by government on property value
The discussion forum’s chairman pointed out the importance of providing free land plots to the low-
income people. He stated that land plots should not be given to influential individuals; instead the
government should give it to highly qualified giant companies and instruct them to set the infrastructure
within an assigned period. In case that they did not accomplish the work within the designated period, the
land would be given another company. The land price which includes the infrastructure costs, thus, would
be cheaper.
6. Discussion and conclusion
The questionnaire showed a number of potential factors that would affect the flow of financing of
affordable housing and support to the owner. These can be concluded as the following:
 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 not happy to offer a flexible mortgage loan packages
 Some banks are not happy to provide lifelong support to the owner regarding the changes and
impacts on the property
The interviews and discussion forum found some possible external factors which would affect the
financing of affordable housing in KSA. These would include the followings:
 the slowness of REDF procedures, insecure financial environment due to the absence of
legislations which hinder banks to operate and flourish as they feel unprotected;

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 very few links between banks themselves, between them and Joint-stock, other financial
organizations including big investors;
 the society culture and the level of the client’s education and knowledge regarding financial
issues; and
 the absence of ready-to-use Islamic financing mechanisms that can be implemented by banks
 the non-existence of building code that would control the building quality in KSA;
It can be concluded that the funding provided to low-income people to purchase a property is inefficient
and insufficient at present and in the future despite the government, private sector and banks current
efforts. Banks should also take the low-income clients circumstances into account and easiness the
mortgage loan conditions. There is a need to develop flexible mortgage packages that respond to low-
income clients needs. To do so, the research suggests the consideration of the lifelong owner/ user rights
and responsibilities regarding the property as defined by Shariah law could be used as a start point. Akbar
(1992) pointed out to three broad types of right/ responsibility of an individual (i.e. the user or the owner),
these are:
a. control and management
b. ownership; and
c. use: this includes right of use and right of benefit
The above rights can be categorized into one of the following eight categories (see table 2). The owner of
the property may have three rights: ownership, control and use. He/ she can assign one of these rights to a
third party such as the use or the control. The user may have a control right or control and use rights
together. A third party such as facilities’ management company would have control right only.
Individual or party
The rights
The
owner
The user, occupant
or a third party
The controller/
facilities
manager
1. Ownership, control and
use
X
2. Ownership and control X
3. Ownership and use X
4. Control and use X
5. Ownership only X
6. Control only X
7. Use only X
8. Right of benefit only X
Table 2: The rights of an individual or a party in a property
The property ownership and/ or control rights can be transferred partially or wholly from the original
owner to other owners and/or controllers (i.e. property managers). This possible dynamic and flexible
transfer of the property rights through its life can be incorporated in the mortgage packages. Mixing
portions of these characteristics would enable banks to produce varied and flexible mortgage packages -
such as the Istisnaa- in co-ordination with expertises in Islamic financing law. Through these packages,
the bank would share some of the lifelong ownership, management rights and responsibilities with the
owner.
The government should set clear and well defined financial legislations that provide secure environment to
banks. Banks and the government have the duty to provide basic financial education to the public. Banks

11
have to develop better awareness of the activities of other financial organizations and this would enable it
to operate effectively in the financial sector. The research recommends that financial organizations which
are involved in the funding and provision of affordable 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 housing problem. Future research would investigate the present financial 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.
Acknowledgements
The researcher would like to thank all banks and REDF in KSA for their participation in the survey. Also,
special thanks should go to the dean and; staff of College of Architecture, KFU for supporting and hosting
the discussion forum venue.
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Appendix A
Type of mortgage loan that is offered to
customers at present
Number of
banks
Ijarah 5
Murabahah 8
Other types of mortgage loans (Istisnaa or
Musharaka)
3
Table 1: Type of mortgage loans that are offered by banks
The maximum period of the mortgage
loan repayment Number of banks
Has not been decided yet 2
11-20 years 2
21-25 years 4
More than 25 years 4
Table 2: Maximum period of the mortgage loan repayment
Start date of financing scheme of the
affordable property
Number of banks
Has not been started yet 2
Less than two years ago 4
Two-four years ago 3
More than four years ago 3*
Table 3: The start date of the affordable property financing scheme
Note: * these are two banks and REDF
Number of mortgage loans that
were granted to customers last
year
Number
of banks
Number of mortgage
loans that have been
granted since start of
the financing scheme
Number of
banks
None 2 None 2
1-50 4 Less than 100 2
51-100 Nil 101-200 1
101-200 Nil 201-500 Nil
201-500 Nil 501-1000 1

14
501-1000 2 1001-2000 Nil
1001-2000 1 2001-3000 2
2001-3000 1 More than 3000 4
More than 3000 2
Table 4: The number of affordable property mortgage loans you granted to customers last year and since of
the start of the financing scheme
Total value of affordable
property purchases that were
financed during the last year
Number of
banks
Total value of affordable property
purchases that were granted since
the start of the financing scheme
Number of
banks
None 2 None 2
Less than 20 million Riyals 2 Less than 100 million Riyals 3
21-50 million Riyals 2 101-500 million Riyals 2
51-100 million Riyals 1 501-1000 million Riyal 1
101-500 million riyals 0 1001-2000 million Riyals 1
More than 500 million Riyals 5 More than 2000 million Riyals 3
Table 5: The number of affordable property purchases that have been financed last year and since the bank
has started the affordable property scheme
Type of property No. of banks that
grant finance at
present
No. of banks that will
grant finance in the
near future
Land 9 10
Villa 10 11
Flat/ Apartment 10 12
Duplex 9 12
Other types of
properties
1 1
Table 6: Type of properties that is financed
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

15
Table 7: The percentage of contribution by other organizations to the total financing of affordable housing
during the last year in KSA
Appendix B
Definition of terms
Al-Silm: An agreement whereby money is paid in advance and the goods are received later. It is
considered an important agreement for funding the agricultural and industrial sectors. The bank in this
contract buys " the yet to be produced product", in return of full immediate payment. The bank resells the
same quality and quantity of the product bought via a parallel Al-silm contract.
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.
Diwan al-mazalim: A special tribunal that often resolves disputes between citizens and government
officials
1
This means around 19.310 housing units annually.
2
There is no Ministry of Public works at present and it’s tasks are undertaken by municipalities and other ministries
3
This can be calculated as 44200 housing units annually
4
This number has not been found in high profile publication so it is under question.
5
Around 50% of the population still lives in rented homes thus this would indicate that few percentage of the
population have enough cash to fund the purchase of a property
6
The bank has already set the mortgage rules but it did not put it in practice yet.
7
Two banks were unhappy to offer flexible mortgage loan as they believe that they had given enough rights to the
owner so there is no need to give more
8
The web site of the Saudi Credit bureau is http://www.simah.com

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