Paying up: Islamic lenders are developing more extensive home financing packages

As only Islamic lenders are permitted to offer home financing packages, Kuwait’s mortgage market differs significantly from others in the region. Unsurprisingly, this is a state of affairs that conventional banks would like to see changed. “Mortgage loans are a big problem here in Kuwait,” Aly Mahmoud Shalaby, the head of consumer banking at Gulf Bank, Kuwait’s second-largest lender by market value, told the local press in 2012. “Conventional banks are upset and not happy, and we [put] pressure on the government.” In effect, then, only five lenders in the Kuwaiti banking sector are in a position to provide finance to homebuyers: Kuwait Finance House, the nation’s oldest Islamic bank; Ahli United Bank; Kuwait International Bank; Boubyan Bank; and Warba Bank.

WEIGHING THE OPTIONS: As the most recent market entrant, however, Warba has yet to develop its home finance products, while Boubyan has to date restricted itself to providing what it calls Boubyan Bank Construction Materials Finance, aimed at the sizeable number of Kuwaitis who wish to construct their own homes. The remaining three Islamic lenders offer home financing packages on broadly similar grounds. Credit is usually offered to Kuwaitis and GCC nationals working in the government, public and private sectors, with minimum salary requirements ranging from KD200-400 ($714-1428), although some lenders extend their packages to expatriates with valid residence and visa documents.

Land or property financing is generally offered under the murabaha or ijara models, while construction or renovation loans are extended according to the istisnaa principle. The length of financing is limited to 15 years, relatively short compared to more developed markets, and until 2013 the maximum financing amount was limited by law to KD70,000 ($250,012). Payment models differ across lenders, with some requiring up-front instalments and others offering a six-month grace period before the first instalment, and monthly payments thereafter. Some lenders also stipulate a minimum loan amount, usually of KD10,000 ($35,716). While the process of securing home financing is relatively straightforward – a matter of opening an account with the lender, filling in an application form and submitting a standard set of documentation such as building permits, civil identification, salary certificate, architectural designs, title deeds and price quotations – all of the lenders in the housing finance market insist on salary transfers directly to them.

CALLING FOR REFORM: These limitations, as well as the legislative block on conventional lenders entering the market, have led to an increasing number of calls for reform of the mortgage framework.

Industry participants also point out that even those who are eligible for mortgages are limited by the upper limit of KD70,000 ($250,012), which is low given that a mid-sized villa in Kuwait City can attract offers in the region of KD250,000 ($892,900). Some mortgagees mitigate the problem by applying for the KD70,000 ($250,012) available according to the government lending scheme as well as a further KD70,000 ($250,012) in the form of a 15-year personal loan, but even then further funding is usually required, often in the form of parental loans.

However, while the argument for mortgage market reform is a strong one, the government is wary of making legislative changes that will result in more personal debt. Instead, the government made a modest intervention in the mortgage market by increasing the housing home loan limit from KD70,000 ($250,012) to KD100,000 ($357,160), according to local press. It also announced that it would provide housing finance to single Kuwaiti women under certain criteria, up to a value of KD70,000 ($250,012).

How effective the government’s measured approach will be in addressing the question of home financing remains unclear, but for now, at least, it seems that Kuwait’s conventional banks will have to wait a while longer to enter the national property market.