Central Bank Governor of the Year Middle East and North Africa 2012

Saudi Arabia’s new central bank governor has achieved an important reduction in inflation while at the same time preparing rules for the long-awaited legislation on mortgage loans in the kingdom

Fahad Al-Mubarak, the former chairman and managing director of Morgan Stanley Saudi Arabia, brought a wealth of private-sector experience to the country’s central bank when he joined as its governor last December.

Al-Mubarak, who has a doctorate from the University of Texas and was a professor at the Saudi King Fahd University of Petroleum and Minerals, played a role while at Morgan Stanley in the privatization of Saudi Telecom and was a member of the team which discussed the partial privatization of Saudi Arabia’s National Gas Industry with international oil companies.

His most significant intervention in the 10 months he has been in charge of the Saudi Arabian Monetary Agency (SAMA) has been to prepare rules for mortgage loans in the kingdom, a move aimed at helping the central bank monitor the activities of finance companies.

The legislation was approved at the beginning of July, and it revamps the market for home finance in a country faced with an acute shortage of affordable homes. The changes widen the customer base for mortgages and are comprised of five laws that make it easier to create mortgage providers, clarify the foreclosure process and set up rules for the oversight of lenders. It stipulates that the homes could be used as collateral for the loans instead of the borrowers’ salaries, which opens the market up to more people.

The mortgage legislation had been under discussion since the 1980s, but little progress was made because of opposition from religious scholars worried that the bills were not compliant with Islamic law, which forbids charging interest.

Central bank data show that mortgage lending surged 83% to 48 billion riyal ($12.8 billion) in the second quarter of the year from the same period in 2011, as lenders were encouraged by the progress of the legislation. Saudi Arabia needs to build more than 1.2 million new homes over the next two years to deal with the shortage of housing, as its population has increased rapidly over the last four decades. Capitas Group, a Saudi company specialized in home financing solutions, has estimated that close to half the population of Saudi Arabia live in rented accommodation, and over 60% of the population are below the age of 30.

Khalid Howladar, senior credit officer for financial institutions and sukuk finance at Moody’s, the credit ratings agency, says the passage of the mortgage law was “a success”. “SAMA is now responsible for the details,” he says. “This will be the hard part: to balance the social and cultural pressures regarding housing finance with the need for prudential lending and the prevention of a property bubble.

“Luckily [Al-Mubarak] inherits a very prudential and well-managed system – so it is more a case of stability versus change.”

Simon Williams, Middle East economist at HSBC, says Al-Mubarak brings a more market-oriented approach at a moment when Saudi Arabia’s banking system is faced with changes. “Saudi banks will in the next few years have to implement the new Basel III global banking standards, a tricky exercise that will require them to build liquidity buffers composed of a range of market instruments,” he says.

In terms of monetary policy, inflation cooled from a peak of 5.5% in February this year, and the IMF expects it to stabilize at around 5% as growth slows to 6% this year from 2011’s 7.1%. In August, inflation edged down to 3.8% from 4% in July, a 35-month low, with price rises cooling in the largest components of the inflation basket: food and housing.

National Commercial Bank says Al-Mubarak had adopted a “wait and see” approach on monetary policy.

Said Hirsh, Middle East economist at Capital Economics in London, says SAMA deserves credit for controlling inflation given the size of the government’s fiscal stimulus. “This increased the risk of inflationary pressures and rapid credit growth, and Fahad AlMubarak has played an important role in ensuring neither happened,” adds Hirsh.

He believes that August’s figures suggest that inflation is under control, although record government spending should keep some inflationary pressure as it maintains strong domestic demand. “However, the Saudi Arabian Monetary Agency has been mopping up excess liquidity in the financial system, ensuring that inflation does not get out of hand,” he says.

Hirsh, whose forecast for Saudi Arabia’s growth for this year was nearly half that of the IMF at 3.5%, upgraded it to 4.5% in September after an announcement by the kingdom that it plans to keep oil output at record levels, to prevent prices from rising too much and push the global economy into recession.

In the second quarter of this year, Saudi Arabia’s annual GDP growth rate slowed to 5.5% from 5.9% in the first quarter, with the oil and government sectors slowing sharply.