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Islamic RMBS is heading our way now…

The headlines that grabbed my attention was ‘Deutsche Bank and Saudi Investors launch Shariah mortgage Financing company targeting Saudi Arabia’. DB and retail home loans and that too of a Shariah compliant variety was a bit of a surprise. I told a colleague of mine ‘…the brand does not necessarily have top of the mind recall in the mortgage industry…’ Before I could finish he said ‘..but remember they have some fabulous expertise in packaging mortgages off as nifty products and selling them back to us in those halcyon days.’


What I found hilarious was that the moment this was said, my eyes hit upon the huge quote by the Managing Director and Global Head of Residential Mortgage Backed Securities Lending and Trading at DB. He said ‘We are pleased…..Islamic Home Finance is going to boom!..DB will be partnering with local big big biiig Saudi family…. etc’. ..ok I got it! So more than the CEO and COO of the Finance company, we had the MD of RMBS who was drolling all over the press release.


To make the press release more balanced DB had pulled out some moth eaten complex research saying ‘the total outstanding home finance provided by the private sector in Saudi Arabia aggregates to less than 1% of GDP compared with well over 50% in most developed countries, and approximately 6% in Kuwait and 7% in the UAE’. Ok, so now I get it, that’s why you guys started a home finance company in Saudi. Darn!


I mean it is so obviously evident that DB is only interested in the securitization part of this whole game and has no interest whatsoever in the loan business
 

Inherently by launching it in Saudi Arabia, a few things are taken care :
 

- Credit Risk: Surely would be low in these loans. Credit scorecard validation algos would be a fairly easy to set up and unless your name is George Bush, most of you who have the right name will get a loan. (and if you or me get this loan and default, you don’t want me to tell you the gory details of what can happen if you don’t pay your Shariah compliant loans off in Saudi Arabia…do you?)


- Pricing: Residential prices are pretty sensible in Saudi Arabia (the last time I asked an estate agent for a nice duplex in Riyadh, he told me I was searching for it in the wrong country, he said the whole middle east quota got completed in a 3 sq km stretch in Dubai)


- Early Redemption risk: The super rich taking to the novelty of the home loan concept for their new pad on the hand bag shaped building in Riyadh, may just forget about the loan linked to their bank account. I mean who will bother changing from a variable rate loan to a lower fixed rate loan in the future etc. so don’t fret on your prepayment risk and interest rate risk on your MBS
 

So overall we’re all set up nice and cozy on this whole Shariah complaint loan thingy being launched by BD.
 

So what are the plans for 2012: Shariah compliant securitization, Shariah compliant Residential mortgage backed securities, Shariah compliant collateralized mortgage obligation with a guarantee against home owner default risk with full faith and guarantee from one of the richest families in Saudi Arabia.
 

and if anything goes wrong, DB has only put in USD 44 Million of initial capital into this experiment
 

Small change for creating a new world order in the Kingdom and the world of Islamic Investment management



Disclosure: No Positions