RIYADH — The Saudi Real Estate Refinance Company (SRC), a subsidiary of Saudi Arabia’s Public Investment Fund (PIF), recently organized an Islamic Finance panel on Murabaha or cost-plus financing that discussed challenges and potential solutions for the current situation around the Murabaha financing structure.

The virtual panel included well renowned Shariah scholars from around the Kingdom, with issues around securitization, refinancing and current regulatory framework for Murabaha mortgages discussed in detail.

“The role of improving homeownership remains one of the most important part of the Vision 2030 that aims to increase homeownership rates to 70% by 2030,” Majid Al Hogail, minister of housing, said during his opening speech at the panel.

“This panel on Murabaha financing reiterates SRC’s role in supporting the residential real estate financing market in the Kingdom and provide liquidity to financial institutions, reducing the cost of mortgages for citizens with products that are in line with the Shariah principles,” he added.

Fabrice Susini, CEO of SRC, said: “At SRC we believe in continuous improvement to our processes, regulations and products in every aspect of our business with a goal of achieving our broader objective of making the mortgage market accessible to all and boosting homeownership rates in the Kingdom.

“Murabaha, or cost-plus financing is one of the most important tools in Islamic Finance that allows a beneficiary to transfer the title deed of the asset in their name — making it the preferred financing structure, especially in case of home mortgages.”

According to SAMA, around 40% of new mortgages in Saudi Arabia in 2019 were Murabaha. SRC expects the number to be higher when considering the total number of mortgages.

“We have some very technical and regulatory challenges around Murabaha financing structure in terms of refinancing and securitization.

“These include inability to pay premiums when acquiring portfolios from originators, rendering them unattractive to them, and restrictions on trading sukuks issued by SRC, which translates to tying investors to the bonds until the end of the maturity period.

“These factors result in higher cost for borrowers or Saudi citizens and making affordable housing a challenge,” Susini added.

During the conference, SRC presented their findings and solutions to these challenges, which were drafted with assistance from local Shariah consulting firms, in an effort to develop an a first-of-its kind, Shariah-compliant structure for securing Murabaha mortgages, which promotes the secondary market through Shariah-compliant instruments.

Shariah scholars from around Saudi Arabia expressed their opinions on the findings presented.

“A dialogue to discuss Shariah regulations and compliance to work for the betterment of the citizens of Saudi Arabia is exactly what we need,” Dr. Khalid Bin Mohammed Al Sayyari, head of the research team that drafted the potential solutions in partnership with SRC, said.

“Murabaha loans are an extremely crucial aspect of Islamic financing and to improve regulations and bringing scholars to a consensus that helps improve the purchase of Murabaha mortgages and securitization is an excellent venture by SRC. We hope that can continue to dialogue and improve our understanding of Islamic financing frameworks in the future,” he added. — SG