KIC NewCo Investment

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	25384
Company name	Saudi Home Loans Company
Country	Saudi Arabia
Sector	Finance & Insurance
Environmental category	C
Department	Global Financial Markets Group
Status	Active

Date SPI disclosed	November 30, 2006
Projected board date	January 2, 2007
Date revised SPI disclosed	November 30, 2006
Previous Events	Invested: October 2, 2007 Signed: April 4, 2007 Approved: February 15, 2007

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The proposed transaction consists of a green field investment in a new specialized mortgage finance institution (the NewCo) that is proposed to be established in the Kingdom of Saudi Arabia (KSA). IFC is planning to invest a total of c.a. $27 million of minority equity investment in the NewCo. The NewCo is planned to offer various housing finance products, targeting middle-income customer segment in Saudi Arabia, and grow to the nation’s largest specialized mortgage finance institution over years.

Project sponsor and major shareholders of project company

The NewCo would have a founding consortium of four institutions (including IFC) as shown below. KIC and ANB signed an Memorandum of Understanding (MOU) in July 2006 to create the NewCo.

- Kingdom Installment Company (KIC) –

Established in Riyadh in 2001, KIC is well-established as the largest private housing finance company in KSA and as a pioneer of Islamic housing finance in the Kingdom, having financed more than 3,000 home purchases since its inception. KIC's current loan portfolio is in excess of $430 million. KIC was the first lender in the region to offer 20 year fixed rate mortgage financing.

- Dar Al-Arkan Real Estate Development Company (DAAR) –

Established in 1993, DAAR is the largest private residential real estate development company in terms of market share in KSA and is a sister company of KIC. DAAR designs and develops real estate projects according to international standards, and is the first residential real estate company in KSA to obtain the ISO 9001 certification. Since its inception, DAAR has developed a sizeable number of residential large-scale projects that have enjoyed strong popularity, which has firmly established DAAR’s name and reputation.

- Arab National Bank (ANB) –

ANB was established in 1979 and is 40% owned by Jordan’s Arab Bank (one of the strongest franchises in the Middle East); 10% owned indirectly by the Saudi government and the remaining 50% is owned by Saudi nationals. Total assets as of year-end 2005 were SAR67.5 billion ($18.0 billion), making it the 6th largest bank in the Kingdom. ANB, a publicly traded company, has a strong consumer banking franchise in KSA and is positioning housing finance as one of core growth segments under its long term corporate strategy. ANB has Standard & Poor’s long-term credit rating of A (outlook stable) and short-term credit rating of A-1.

Total project cost and amount and nature of IFC's investment

The total capitalization of the NewCo is estimated at SAR2 billion (c.a. $ 533million). The proposed IFC Investment is an equity investment of up to SAR100 million ($27 million).

Location of project and description of site

The NewCo will be headquartered in Riyadh, and will establish several branches across Kingdom of Saudi Arabia. Investments can be made throughout the country.

Anticipated development impact of the project

The project is expected to have a high impact contribution on residential infrastructure development and financial sector development in KSA:

Increased Access to Housing Finance:

The NewCo will provide increased affordability of housing finance for middle-income Saudi households, currently underserved by developers, who tend to focus on the wealthiest segments of the population. Access to housing is a major problem in KSA, with demand consistently outstripping supply and the housing deficit increasing each year. By 2020, there will be an estimated demand for 7 million houses, an increase of 3.9 million units from current levels. The major constraint on the development of the real estate sector is the lack of sufficient availability in housing finance.

Establishment of Replicable Business Model in the Region:

The business model of the NewCo will send a powerful signal on the best practice of the corporate governance and the operations to current and potential market participants. KIC/NewCo is completely on board with these views, as shown by its negotiations with HDFC for capacity-building technical assistance.

Capital Markets Development:

The IFC Loan would provide the NewCo with access to long-term funds to acquire and lease a steady stream of properties initially financed by the IFC Loan. The revolving nature of the IFC Loan provides support for the NewCo’s potential securitization activity, and further accelerates the development of mortgage finance/MBS securitization market in the country.

Introduction of Sustainability Standards in Housing Construction:

The acceptance and implementation of sustainability standards by DAAR and other developers whose residential products will be the source of origination for the NewCo will send an important and industry wide signal to the real estate sector in Saudi Arabia. If this initiative is successful, it could lead to broader acceptance both voluntarily by other competing builders and by regulatory authorities through inclusion of such standards in building codes. The experience gained in this connection could be used to introduce similar initiatives in other emerging markets.

IFC's expected development contribution

The planned introduction of a number of international standards of financial measurements, accounting policy, corporate governance, performance benchmarks, organizational structure, operational processing, and credit risk management is expected to make the NewCo a strong player with sound business practice. The establishment of such practice will be an excellent role model to the other players in KSA, regardless of industry. Moreover, the compliance with the IFC sustainability standards in the construction of the residences that the NewCo deals with will strongly promote the establishment and the enhancement of sustainability standards within the residential construction sector in KSA. IFC has been in dialogue with the Saudi Arabian authorities to discuss the establishment of a new specialized mortgage financing company who is providing support to promote the project and strongly welcome IFC’s participation.

Environmental and social issues - Category C

This project is engaged in the business of mortgage finance and has been classified as a Category C project according to IFC’s Environmental and Social Review Procedure. The project is required to inform IFC in the event of any change in nature or scope of its contemplated business or operations.

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