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The Tawreeq Process

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Points of Essence:

  • The newly approved mortgage law in Saudi Arabia has spurred the interest for the real estate finance business. The size of the business is expected to double due to the long term finance requirements of real estate acquisitions.
  • The growth of real estate finance will pump up activities on asset securitizations (Tawreeq) where non-liquid assets will be transformed into marketable securities through securitizing or converting them into negotiable bonds to be sold to investors. Thus, providing a new source of fund.
  • The Tawreeq will contribute to reduce the financial instutions’ receivables so that they can meet the standard of capital adequacy as per the Basel II Accord, the author, nevertheless, cautioned on the risks entailed in this industry in the absence of adequate governing laws, standards and qualified financial institutions.
  • The author has expressed hope that the Saudi Capital Market Authority would have a contingency action plan for Tawreeq process in the event of a mortgage crisis. This would include legal, technical or regulatory address. Rules and regulations governing the Tawreeq process should be drawn with the Shariah experts being consulted to ensure compliance with the requirements of Islamic law.

09/09/2008

By Lahem al Nasser

Riyadh, Asharq Al-Awsat- As the Shura Council approved the mortgage law that is expected to be applied soon in the Kingdom of Saudi Arabia, many businessmen and banks have looked towards setting up companies that specialize in real estate finance, seeking to take advantage of the leap that is expected to take place after the mortgage system has been adopted. The size of real estate finance is expected to double in Saudi Arabia in view of the fact that its nature is of long-term finance where the funding period ranges from 15 to 25 years.

This financial activity is expected to generate Tawreeq [asset securitization]. Many of these companies will seek to establish subsidiary companies that will undertake the task of transforming these non-liquid assets into marketable securities through securitizing or converting them into negotiable bonds to be sold to investors, whether they are wealthy individuals or financial institutions such as investment companies, insurance companies, government and investment funds, with the goal of generating new money. In this manner they could continue to the funding process. Additionally, Tawreeq contributes to reducing their receivables so that they can meet the standard of capital adequacy, which is a requirement of the Basel II Accord. This article will focus on the risks entailed in this industry that could affect our economy in light of the absence of governing laws, standards and qualified financial institutions.

The danger lies in the reality of the crisis that is being experienced by the world today, which has hit the most modern and advanced financial markets that enjoy a solid legislative and legal environment and long experience in this field. Yet they have been unable to avoid the dilemma of mortgages, to which many old financial institutions have fallen victim, and which have dealt a blow to numerous developed economies and destroyed many of the well-established social structures.

Many analysts believe that what has happened so far is merely the tip of the iceberg; the world economy should expect that the worst is yet to come. Therefore, the trial and error logic that is used by most of our monitoring agencies (or the belief that all matters are progressing out of sheer luck) cannot continue where legislations and regulations are set in place only after a disaster has struck, particularly in the financial system because not only do errors have a devastating effect on the state economy but also the industry.

Based on this, I think that the Saudi Capital Market Authority [CMA], before giving permission to any Tawreeq process, should draft a plan of action according to which the realities that caused the mortgage crisis that the world is experiencing today could be considered, whether legal, technical or regulatory. Therefore, rules and regulations governing the Tawreeq process can be laid down according to this study to avoid making the same mistakes as others, so that the existing real estate finance companies, or those to be established, will offer their services in accordance with the provisions of Islamic law. Consequently, the Tawreeq process will be conducted in accordance with the provisions of Islamic law.

I think that the CMA and the other regulatory bodies responsible for monitoring this activity should resort to Shariah expertise at formulating these rules and regulations so as to avoid any deviation or error in these rules and regulations that could make them non-Shariah compliant thus losing their legal value.

In addition, the transactions that are subjected to Islamic law differ in their structures, contracts, procedures and risks from other conventional tools that are only realized by those who have legal backgrounds and valid practical experiences; it is crucial to have such people on board.

I am very optimistic that this vision will be put into practice because I am aware of the way of thinking within the CMA, which has consolidated the principle of seeking the opinions of others with respect to regulations and rulings before issuing them.

* Lahem al Nasser is an Islamic banking adviser.

Source: aawsat.com

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Written by Suapi Shaffaii

September 10, 2008 at 11:46 am

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