INTERNATIONAL. The financial industry in the GCC has been growing due to the rise in demand from the real estate sector and therefore appears to be lacking pace and focus, according to a study.

Moreover, the GCC property and financial markets face key challenges, including lack of information and transparency as well as the perception of leniency towards consumers in default scenarios and limited protection for creditors, said an analysis by Capitas Group, a New York-based firm with a track record of establishing Shariah-compliant specialty finance business.

Highlighting that the majority of the mortgage issuers in the GCC were banks financed by consumer deposits, it said while these deposits were increasing, they were “trailing” property market appreciation and demand for mortgages.

“Additionally, the demand for longer term mortgages (10 to 30 years) will inevitably create a mismatch between bank liabilities and assets,” the report warned.

Asserting that banks, private institutional investors and secondary markets needed to be assured that primary market credit risks are well managed, it said more effective underwriting and greater transparency at the origination level was necessary to encourage secondary market development and growth.

However, it said, like most emerging markets, the property and financial markets within the GCC pose key challenges which include lack of market data such as vacancy, rental rates, construction completions, as well as data on property, sales transactions and capitalisation rates.

For the developing markets of the GCC, a measure for commercial properties was especially relevant as the availability of developable land and vast government projects could cause “significant” changes in the demand/supply dynamic, affecting property rental rates and valuations, it said.

On the issue of transparency, Capitas said the GCC countries do not require individual customers to file income taxes and therefore there was limited transparency as far as verifiable income and balance sheet information.

Widely-accepted accounting principles involving revenue realisation, disclosure of accounting information, accounting bases, valuation, revenues and expense matching were not fully enforced, it said.

Consumer credit reporting has only recently started in the UAE, Kuwait, Bahrain and Saudi Arabia and does not provide adequate history.

It said the lack of market data also contributed to the inability of financial institutions to accurately assess default risk, whose problem was exacerbated as most Islamic financial institutions within the GCC region, especially in Saudi Arabia, were discouraged from using late payment penalties.

According to Shariah scholars, late payment fees received (after deducting actual costs incurred as a result of the late payment) should be donated to a charity on behalf of the consumer.

On the legal framework, Capitas found that mortgage laws in most GCC countries have only recently been drafted and questions remain on the enforcement of vital laws such as foreclosure rights or transfer of title.

“Overall, there is the perception of leniency towards consumers in default scenarios and limited protection for creditors and ultimately investors,” it said. In view of these risks, Capitas suggested that mortgage insurance was especially important in the GCC until foreclosure laws were more clearly established.
It said insurance products were vital in establishing confidence within the secondary market but risk coverage tend to be “prohibitively” expensive due to the lack of competition and doubts are being raised over the Shariah compliance of certain products.

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