RIYADH: Saudi Arabia’s financial market is approaching a regulatory step that could open a broader path for mortgage securitization, after Saudi Exchange, or Tadawul, proposed draft amendments to market rules allowing special purpose entities to issue and list debt instruments.
The significance of this step lies in the size of mortgage loans in Saudi banks, which amounted to around SR968 billion ($258 billion) in the first quarter of this year, approaching the SR1 trillion threshold, according to data from the Saudi Central Bank, known as SAMA.
This does not imply that all of the loans will be securitized. Instead, it indicates the existence of a large credit pool that can be selectively converted into securities over time, subject to regulatory, credit, and accounting approvals.
The draft amendments to market rules appear consistent with the general direction of the Capital Market Authority’s 2024-2026 strategic plan, particularly the goal of developing the sukuk and debt instruments market, supporting more than one strategic axis at the same time.
They strengthen the role of the debt market in financing, help enable investors through more diversified products, and open a wider field for institutional investors, including foreigners, to enter instruments based on cash flows and specific assets.
Draft aims to regulate securitization
The draft proposes expanding the definition of debt instruments to include instruments issued by special purpose entities.
The importance of this lies in the fact that securitization is not usually carried out directly by the bank that owns the loan, but rather by an independent entity to which assets or cash-flow rights are transferred, which then issues debt instruments to investors.
According to the draft, the amendments aim to enhance and develop the sukuk and debt market in the Kingdom by improving the regulatory framework for securitization operations. However, the draft is still in the consultation phase, meaning it is not yet a binding or final rule.
Khalid Al-Falih, former minister of investment, said during a panel session at the Financial Markets Forum 2025 that Saudi Arabia aims to convert some of the debts on banks’ balance sheets, such as mortgage and corporate debt, into tradable securities that can be recycled over the coming years.
Mortgage loans approaching SR1tn
Mortgage loans are among the clearest banking assets in the context of securitization, due to their large size, long-term nature, regular installment structure, and link to a real estate asset that can serve as collateral, although this does not eliminate risks.
Mortgage financing portfolios allow the creation of debt instruments backed by specific cash flows. Instead of remaining on bank balance sheets for many years, loans can be transferred to special purpose entities that issue debt instruments to investors, with borrower installments used to pay returns on those instruments and the principal amount.
However, securitization suitability does not depend on size alone, as suitable portfolios require accurate data on default rates, loan-to-value ratios, and repayment maturities, as well as early repayment rates, enforcement mechanisms on collateral, and any supporting credit enhancements.
Why special-purpose entities are the key link
Special-purpose entities represent the critical regulatory link in securitization, as they are the entities to which assets or cash-flow rights are transferred, and which then issue debt instruments backed by them.
This structure separates the bank that originated the loan from the instrument purchased by the investor, allowing the identification of the assets subject to securitization, the source of repayment, and the limits of responsibility of the sponsor or originator.
Without this separation, it is difficult to convert mortgage loans from long-term banking assets into tradable securities listed on regulated markets. Therefore, adding special-purpose entities to market rules appears to be more than a technical amendment; it establishes the legal framework required for securitization to operate within an organized market.
Role of the Saudi Real Estate Refinance Co.
The Saudi Real Estate Refinance Co, or SRC, emerges as a key player in building a secondary mortgage market in the Kingdom.
SRC does not operate as a traditional mortgage lender in the usual sense, but as a specialized entity that refinances and purchases mortgage portfolios from banks and finance companies, acting as a link between loan originators on one side and capital market investors on the other.
In 2024, SRC, one of the Public Investment Fund companies, signed a memorandum of understanding with BlackRock aimed at accelerating the development of mortgage refinancing programs, expanding through domestic and international capital markets channels, and diversifying funding sources through fixed-income markets.
According to its 2025 annual report, the company refinanced mortgage portfolios worth around SR16 billion from local banks and mortgage finance companies.
It also carried out the first securitization transaction through residential mortgage-backed securities, or RMBS, compliant with Islamic principles in Saudi Arabia, introducing a new asset class to the Saudi financial markets.
Unlocking bank balance sheets
Securitization may give banks an additional tool to manage their balance sheets, especially since mortgage loans are long-term by nature, while banks rely in part on shorter-term deposits. Therefore, securitization may help reduce the maturity gap between assets and liabilities by converting part of long-term loans into tradable instruments in the debt market.
The impact is not limited to liquidity provision. If assets or risks are truly transferred to investors and recognized by regulatory and accounting bodies, banks may be able to reduce the capital burden associated with these loans, enabling them to reuse part of their credit capacity or manage concentration more flexibly.
Therefore, the true value of securitization is not measured only by the volume of loans converted into securities, but by the extent to which risks are transferred, and whether this allows banks to reduce their capital burdens and redirect resources toward new financing.
Diversifying investor portfolios
Securitized debt instruments may provide diversification within investment portfolios because they carry different sources of risk compared to corporate and government bonds. Therefore, some institutional investors view them as a complementary component of fixed-income portfolios, not a full substitute for traditional instruments.
They may also help investors distribute risk across many mortgage borrowers, instead of relying on a single borrower or issuer.
Research by PIMCO and Capital Group indicates that securitized credit can enhance fixed-income portfolio diversification because it provides different sources of return and risk compared to government and corporate bonds.
A study by the Federal Reserve Bank of New York shows that mortgage-backed securities have specific characteristics, most notably prepayment risk, pricing, and liquidity. Therefore, disclosure quality and credit ratings remain key elements.
Mortgage drives securitization in the US
This step in Saudi Arabia is not isolated from international experience, as securitization is one of the main tools used in developed markets to convert long-term loans into tradable instruments.
In the US, mortgage lending remains the largest driver of the securitization market, as issuance of mortgage-backed securities reached $727.4 billion through April, compared to $176.4 billion of other asset-backed securities during the same period, according to SIFMA data.
In Europe, securitized product issuance reached €252.3 billion in 2025, of which €156.3 billion was offered to investors.
AFME data shows that corporate loans led issuance in 2025, followed by UK residential mortgages and German auto finance instruments.
The implication for the Kingdom is that building a securitization market does not depend only on the size of loans, but on the existence of independent legal structures, deep credit data, and institutional investors capable of analyzing portfolios rather than relying only on the sponsoring entity.
The Saudi Tadawul draft lays an important regulatory foundation for the securitization market by enabling special-purpose entities to issue and list debt instruments.
With mortgage loans in banks approaching SR1 trillion, the importance of this amendment is increasing, as it opens a pathway to convert part of these loans into tradable financial instruments.
SRC strengthens this direction through its role in refinancing portfolios and its experience in the first issuance of RMBS in Saudi Arabia.
However, the success of the market will not depend solely on the regulatory framework, but also on asset quality, disclosure transparency, clarity of risk transfer, and investors’ ability to price these instruments.
