One of the ways in which the new mortgage laws will reshape the Saudi financial markets is through the emergence of a growing number of dedicated mortgage lenders. Such companies have an established presence in other Gulf markets like they are outside the region. While such new entrants will create new regulatory challenges, they also highlight the tremendous growth potential that mortgages hold in the Kingdom.

Currently standing at a mere 2 percent (or so) of GDP (gross domestic product), mortgages have the potential with time to converge with the developing country norm of 60-70 percent, something that would represent a profound transformation of the Saudi financial sector. While this may pose a challenge to the established lenders in the near terms, the hopefully growing pie will almost certainly offer opportunities for everyone.

Yesterday, Sidra Capital said it plans to set up a housing mortgage firm with SR 1 billion capital to tap growth expected after the approval of the mortgage law in the Kingdom. Similar announcements are expected from various companies in the near future.

Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said mortgage lending was potentially a massive growth area for financial services in the Kingdom.

"Recent years have seen a number of dedicated lenders tap the market and it is very likely that their numbers will grow now that the regulatory framework is in place," Kotilaine said.

He pointed out that similar entities play a key role in some of the other regional mortgage markets, the admittedly checkered history of Amlak and Tamweel in the UAE being the most salient examples. The end result of these new entrants will hopefully be a more contested and competitive marketplace that will ultimately benefit the consumers. But, as the examples of some of the Gulf economies show, the new market entrants will also necessitate regulatory vigilance to ensure sustainable operational models of operation and market growth.

"From the perspective of the development of the Saudi financial markets, these new entrants will mean diversification and more high-value job opportunities. Given their lack of a deposit base, many of them are likely to tap the bond and sukuk markets, either for new capital raising or as way of securitizing their portfolios," Kotilaine said.

However, Paul Gamble, chief economist and head of research at Jadwa Investment, said: "There will not be an immediate reaction to the passage of the mortgage law, but there are likely to be new mortgage financing and leasing companies in the Kingdom.

At present their wide branch network and large balance sheets give mortgage lenders aligned to commercial banks an advantage. It is not clear how the market will develop, but there should be room for more competition."

When asked if the approval of mortgage law will give scope for more mortgage firms in the Kingdom, Sajjad Chowdhry, vice president Capitas Group International Ltd., said: "Absolutely, given the shortfall in available homes the approval of the mortgage law will open the space for several entrants. The Saudi market is expected to be SR 1.2 trillion in size over the next 10 years. Only about 3.5 percent of all home purchases in the Kingdom are financed through mortgages. That compares with 17 percent in the UAE and 70 percent in the UK."

Last year, Saudi banks provided SR 29.3 billion in mortgages according to SAMA. That leaves a funding gap of over SR 90 billion a year for the next ten years. This gap creates a compelling opportunity for new entrants, he said.

Chowdhry said in a healthy mortgage market lending companies and banks complement each other. Certainly, banks have an advantage in their ability to access capital at a low cost given their ability to accept deposits. On the other hand, mortgage companies access capital through banks and the secondary markets. We have already seen the beginning of a secondary market in the Kingdom, wherein mortgage companies are selling their portfolios to banks in order to recycle their capital. “Over time mortgage companies will need to be able to secure funds at competitive costs through issuance of sukuk and other secondary market instruments and create an independent source of liquidity in order to remain competitive,” Chowdhry said.

He added from an operational perspective mortgage companies are typically more effective and efficient at serving the market because of their single product focus. Banks sell multiple products like credit cards, consumer finance, car loans, along with mortgages. “Although multiple products offerings create cross-selling opportunities for the banks, at times customer service quality is compromised. Therefore because of their singular focus on homebuyers, mortgage companies tend to provide a more customer focused experience to their clients,” Chowdhry said.