Saudi Arabia's financial market is approaching a regulatory milestone that could significantly expand mortgage securitization. The Saudi Exchange, known as Tadawul, has proposed draft amendments to market rules that would allow special purpose entities to issue and list debt instruments.
Massive Mortgage Pool Nears SR1 Trillion
The importance of this step is underscored by the size of mortgage loans in Saudi banks, which reached approximately SR968 billion ($258 billion) in the first quarter of 2026, approaching the SR1 trillion threshold, according to data from the Saudi Central Bank (SAMA). While not all loans will be securitized, this indicates a large credit pool that can be selectively converted into securities over time, subject to regulatory, credit, and accounting approvals.
Alignment with CMA Strategic Plan
The draft amendments align with the Capital Market Authority's 2024-2026 strategic plan, particularly the goal of developing the sukuk and debt instruments market. They strengthen the role of the debt market in financing, enable investors through more diversified products, and open wider fields 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 those issued by special purpose entities. Securitization is typically not carried out directly by the bank that owns the loan but by an independent entity to which assets or cash-flow rights are transferred, which then issues debt instruments to investors. The amendments aim to enhance the regulatory framework for securitization operations, though the draft is still in the consultation phase and not yet binding.
Khalid Al-Falih, former minister of investment, stated during a panel session at the Financial Markets Forum 2025 that Saudi Arabia aims to convert some debts on banks' balance sheets, such as mortgage and corporate debt, into tradable securities that can be recycled over the coming years.
Mortgage Loans: A Clear Candidate for Securitization
Mortgage loans are among the clearest banking assets for securitization due to their large size, long-term nature, regular installment structure, and link to a real estate asset that can serve as collateral. Mortgage financing portfolios allow the creation of debt instruments backed by specific cash flows. Instead of remaining on bank balance sheets for years, loans can be transferred to special purpose entities that issue debt instruments to investors, with borrower installments used to pay returns.
However, securitization suitability depends not only on size but also on accurate data regarding default rates, loan-to-value ratios, repayment maturities, early repayment rates, enforcement mechanisms on collateral, and any supporting credit enhancements.
Special Purpose Entities: The Critical Link
Special purpose entities represent the critical regulatory link in securitization. They are the entities to which assets or cash-flow rights are transferred and which issue debt instruments backed by them. This structure separates the bank that originated the loan from the instrument purchased by the investor, allowing identification of the assets subject to securitization, the source of repayment, and the limits of responsibility of the sponsor or originator. Without this separation, converting mortgage loans from long-term banking assets into tradable securities listed on regulated markets is difficult.
Role of the Saudi Real Estate Refinance Co.
The Saudi Real Estate Refinance Co. (SRC) emerges as a key player in building a secondary mortgage market in the Kingdom. SRC operates as a specialized entity that refinances and purchases mortgage portfolios from banks and finance companies, acting as a link between loan originators and capital market investors.
In 2024, SRC, a Public Investment Fund company, signed a memorandum of understanding with BlackRock to accelerate the development of mortgage refinancing programs and diversify funding sources through fixed-income markets. According to its 2025 annual report, SRC refinanced mortgage portfolios worth approximately SR16 billion from local banks and mortgage finance companies. It also executed the first securitization transaction through residential mortgage-backed securities (RMBS) compliant with Islamic principles in Saudi Arabia, introducing a new asset class to the financial markets.
Unlocking Bank Balance Sheets
Securitization may provide banks with an additional tool to manage their balance sheets, especially since mortgage loans are long-term while banks rely partly on shorter-term deposits. This can help reduce the maturity gap between assets and liabilities by converting part of long-term loans into tradable instruments.
If assets or risks are truly transferred to investors and recognized by regulatory and accounting bodies, banks may reduce the capital burden associated with these loans, enabling them to reuse credit capacity or manage concentration more flexibly. The true value of securitization is measured not only by the volume of loans converted but by the extent of risk transfer and whether it allows banks to reduce 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. Some institutional investors view them as a complementary component of fixed-income portfolios. They can 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. A study by the Federal Reserve Bank of New York shows that mortgage-backed securities have specific characteristics, including prepayment risk, pricing, and liquidity. Therefore, disclosure quality and credit ratings remain key elements.
International Context: Mortgage Drives US Securitization
This step in Saudi Arabia is not isolated from international experience. In the US, mortgage lending remains the largest driver of the securitization market, with issuance of mortgage-backed securities reaching $727.4 billion through April 2026, compared to $176.4 billion of other asset-backed securities, according to SIFMA data. In Europe, securitized product issuance reached €252.3 billion in 2025, with €156.3 billion 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 depends not 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 solely on the sponsoring entity.
Conclusion
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 RMBS issuance in Saudi Arabia. However, the success of the market will depend not solely on the regulatory framework but also on asset quality, disclosure transparency, clarity of risk transfer, and investors' ability to price these instruments.
