Saudi Mortgage Law on the Way?

So says the Gulf News quoting Bloomberg quoting HE Muhammad Al Jasser, Governor of SAMA.

It might come as a surprise to many out there but there is substantial unmet demand for housing in the Kingdom.

This law will facilitate the mobilization of real estate finance, particularly for residential housing.  It will also provide alternative investment opportunities for local financial institutions.  

In 2006 Unicorn Investment Bank in Bahrain teamed up Standard Bank and the IFC to launch the first ever securitization of housing receivables in the Kingdom.  Here's the IFC's write-up on the transaction. It was a modest sized deal of some US$18.5 million.  But followed by further deals by UIB in 2007 (US$600 million and US$1,000) for Dar Al Arkan.  Here is the portal page to UIB's press releases on these transactions, if you're interested.

SAMA Governor Denies Saudi Bank "Settlement Deal" with Saad

In an interview with the Saudi Newspaper, Al Iqtisad, HE Dr. Mohammad Bin Sulayman Al Jassir, Governor of the Saudi Arabian Monetary Agency denied that there had been any settlement among the Saad Group and Saudi banks.

Continuing he noted that since AlGosaibi and Saad were commercial enterprises SAMA had not right of supervision - either directly or indirectly.  Thus, it had to rely on the banks for information.  They told SAMA that they had offset the collateral they held against their loans.  The article does not  contain any comment on how much of the exposure was collateralized/offset.   Governor Al Jassir noted that this was something that foreign banks had been doing as well.  His point being that offsetting collateral is a normal banking practice.

He also said that the uncovered portion of both local and foreign banks' exposure remained a problem and that as far as SAMA knew there had been no settlement between Saad and its creditors.

Some observations:

1. Banks get to choose on what basis to lend their clients:  secured or unsecured.
2. Lenders with security (and properly drafted legal documents) have the right to take possession of and realize the security upon the occurrence of certain defined events.
3. It may be that Saudi banks were relatively more collateralized then foreign lenders.  As a side note, one of the interesting patterns in lending is that often foreign lenders impose fewer conditions on borrowers than local lenders.  Generally, those foreign lenders, often Western, justify this by their greater sophistication in underwriting and their more developed risk management skills.  Of course, competition plays a role.  Pricing and requirements are the two ways to compete for a borrower's business.
   

SAMA: Saudi Banks Exposure to Dubai Very Limited

Saudi Arabian Monetary Agency Governor Dr. Muhammad Bin Sulayman Al Jasser said that Saudi banks have very limited exposure to Dubai less than 0.2 percent.

Again this is not a big surprise.  Saudi is a large market and its banks are not forced to go outside the Kingdom to find business.

British Bankers Ask UK Govt for Help on Saad and AlGosaibi

You've probably seen today's Financial Times.  

Thomas Harris, Chairman of the British Bankers Association Trade Policy Committee, reportedly wrote to the UK Minister for Trade, Lord Davies, urging him to push the Saudi authorities to help foreign banks (read "British banks".  This is the BBA after all)  resolve their problems with both Saad and AHAB.

Frank Kane has more details on the letter in Abu Dhabi's The National.  And he is a bit less gentle.  The FT has more to protect that The National.

Clearly, the leak of this letter is designed to put pressure on the Saudi Government.

First reaction.

It's fairly typical for bankers who have gotten themselves into trouble to seek  to identify those responsible for their predicament.  For some strange reason, they rarely look close to home.  Rather they blame regulators, accountants, the weatherman, and the chap standing on the corner for their misfortune.   Equally, it's typical for them to look for governments, central banks, and regulators to extricate them  - usually justified as needed to protect the good name of the country and future business. We're seeing a bit of the latter in this letter:  a  not so subtle threat that if the authorities fail to "assume responsibility", then future business will suffer.   Not a highly credible threat  as bankers  are known as a group to be congenitally pre-disposed to ADD.

But added to that normal pattern of behavior are a few other complicating factors:

1. The side deal cut to favor local banks.  A Saudi preferential tradition so it seems if the stories about Redec are correct.
2. Lenders' knowledge that the Saudi legal system presents formidable obstacles to redress through the courts, particularly for foreign lenders.  It's remarkable how laser-like the focus is on legal matters after the problem has occurred.  It's not just punters in the equity market who are  often irrationally exuberant.  Many times it's those presumedly sober pin-striped bankers.
   
3. As well, their knowledge that securing full and frank information will be difficult.
4. Both borrowers' apparent attempts to use the above and their financial difficulties to settle their obligations for pennies on the dollar.  
   

Certainly, a difficult situation, particularly when the sums involved are large.  And clearly they are.  The BBA is not writing letters to Lord Davies because the sums are modest.

One wonders (or at least AA does) how many times a person or a banker has to get hit in the head before he or she catches on.

Commercial banking is a fairly simple business.  A key element is understanding the market one is doing business or proposes to do business in - well before one looks at the credit of an individual obligor.  If there are  fundamental problems with the law itself, the enforcement mechanism, business practices, transparency etc,   there is a problem with the market.  If that is the case, one adjusts one's lending strategy - amounts, terms, collateral (offshore of course) - or simply does not lend.