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Financial results show Islamic lenders are unaffected after shifting mortgages under floating rates to a fixed one

By Mohammed KHNIFER | December 02, 2018

The landscape of pricing housing loans for retails has changed forever after the recent entrance of the Saudi Real Estate Refinance Company (SRC). These rules were almost impossible to abandon by local lenders if it were not for the full government support across all spectrums (goal is to increase homeownership to 60 percent by 2020 and 70 percent by 2030).


Throughout May to June, more than eight Saudi banks embarked on a rare low-profile initiative, from global scale, to convert mortgages that are priced with floating rate to fixed one. Such initiative is only limited to the retail portfolio for mortgage lending. Early this year, mortgage holders, who lacks financial knowledge, found themselves exposed to Saudi interest rise (SAIBOR).  After nine years of stable interest rate, Saudi mortgage holders found themselves suddenly tangled with the mechanics of high interest rates that started to eat up their income through the monthly mortgage installments (being repriced more than once per year). Having a murabaha contract means the rate will be fixed.

What happened after?

-Second half results of 2018 show that majority of Islamic banks are not affected after shifting mortgages under floating rates to a fixed one (due to the use of Islamic profit-rate swaps).

-SRC has launched an initiative to allow retailers to apply for cheaper mortgages at fixed rates (with at least seven local financial institutions are taking part to provide new mortgages for home buyers). SRC is basically buying these housing portfolios and will be issuing sukuk against them (be it floating or fixed rate).

-While the number of local lenders who embrace this initiative reached nine so far, it seems understandable that Saudi British Bank (SABB) and Alawwal Bank are yet to announce anything on this regard (This is likely due to the expected merger between them which will create Saudi Arabia's third-biggest lender in 2019).

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