SRC: Pioneer of Saudi Arabia’s Secondary Mortgage Market
The Saudi Real Estate Refinance Company (SRC), established by PIF in 2017 and licensed by SAMA, serves as the institutional foundation of Saudi Arabia’s secondary mortgage market. SRC’s mission — developing and deepening the Kingdom’s housing finance ecosystem — addresses a structural requirement for sustained mortgage market growth: enabling banks to recycle capital through mortgage portfolio sales rather than holding loans until maturity. Without SRC, Saudi Arabia’s banking system would face a growing balance sheet constraint as the mortgage market expands toward the SAR 1.3 trillion target by 2030, eventually throttling the supply of new mortgage credit precisely when the housing programme needs it most.
SRC occupies a unique position in the housing finance ecosystem — it does not originate mortgages, does not interact directly with homebuyers, and does not build or sell housing. Instead, it operates entirely in the institutional space between primary lenders (banks and finance companies) and capital market investors (institutional buyers of sukuk and mortgage-backed securities). This institutional intermediary role, while invisible to homebuyers, is the plumbing that keeps the mortgage market functioning at scale.
Founding Context and Strategic Purpose
SRC’s establishment in 2017 coincided with the launch of Phase 1 of the Housing Program under Vision 2030. At that time, the Saudi mortgage market stood at approximately SAR 200 billion — a fraction of the SAR 951 billion it had reached by end of 2025. The programme architects recognised that the planned fivefold expansion of the mortgage market would require a capital recycling mechanism that did not exist in Saudi Arabia’s financial infrastructure.
In a primary-only mortgage market, every loan originated remains on the bank’s balance sheet until maturity (typically 20-25 years). The bank’s capacity to originate new loans is constrained by its capital adequacy ratios — regulatory requirements set by SAMA that limit total lending relative to the bank’s equity capital. As the mortgage portfolio grows, it consumes an increasing share of the bank’s lending capacity, eventually crowding out new mortgage origination unless the bank can find a way to release the capital tied up in existing loans.
SRC solves this problem by purchasing mortgage portfolios from banks, freeing up bank capital for new origination. SRC finances these purchases by issuing sukuk (Islamic bonds) to capital market investors, who provide long-term funding backed by the cash flows from the purchased mortgage portfolios. This capital recycling mechanism is the same principle that underpins Fannie Mae and Freddie Mac in the United States, the Canada Mortgage and Housing Corporation, and similar secondary market institutions globally — adapted for Saudi Arabia’s Islamic finance framework and regulatory environment.
Refinancing Operations and Key Partnerships
SRC’s refinancing deals have exceeded SAR 12 billion with an 85 percent growth rate, demonstrating rapid scaling of the secondary market function. The growth rate is particularly significant because it reflects increasing bank confidence in the refinancing model — each successful transaction builds the institutional trust and market infrastructure needed for the next, larger transaction.
The most significant partnership involves Al Rajhi Bank, Saudi Arabia’s largest Islamic bank and one of the most active mortgage originators. Total agreements between SRC and Al Rajhi Bank have reached SAR 10.8 billion for purchase of real estate financing portfolios. This concentration in a single counterparty reflects Al Rajhi’s dominant market position in Islamic mortgage origination, but it also highlights the need for SRC to diversify its bank partnership base as the secondary market matures.
A separate partnership with REDF covers a portfolio worth SAR 10 billion. This REDF partnership is strategically important because it connects the government subsidy programme with the secondary market — REDF-subsidised loans, which carry government-backed profit coverage payments, represent particularly attractive assets for refinancing. The government subsidy stream reduces default risk and provides cash flow predictability that supports tighter pricing on SRC’s funding instruments.
The five-year target of SAR 75 billion in mortgage refinancing represents approximately 8 percent of the total SAR 951 billion mortgage market. While this may seem modest, it reflects a realistic assessment of secondary market development in a nascent market. As banks become more comfortable with the refinancing process and as investor demand for mortgage-backed instruments grows, the pace of refinancing should accelerate — potentially exceeding the SAR 75 billion target.
First RMBS Transaction: A Market Milestone
SRC completed Saudi Arabia’s first residential mortgage-backed securities (RMBS) transaction in August-October 2025, following SAMA’s no-objection approval on August 21, 2025. This transaction marked a watershed moment for Saudi housing finance — the creation of a true securitisation market that enables mortgage risk to be distributed beyond the banking system to a broader base of institutional investors.
The RMBS structure featured senior, mezzanine, and junior tranches plus sukuk compatibility to attract Islamic and institutional investors. HSBC Saudi served as arranger, with A&O Shearman advising HSBC and White & Case advising SRC. The transaction structure followed global securitisation best practices while incorporating the Islamic finance requirements specific to the Saudi market — a significant structuring achievement given the novelty of RMBS in the Kingdom.
S&P Global Ratings described the RMBS market opportunity as “large,” anchored by USD 180 billion in home loans and a well-capitalised banking sector. The “large” characterisation from a global rating agency is significant because it signals to international institutional investors that the Saudi RMBS market has sufficient depth and credit quality to warrant serious allocation.
The implications of the first RMBS transaction extend beyond the individual deal. It establishes legal precedent, regulatory framework, and market infrastructure that subsequent transactions can build upon. Each additional RMBS issuance will be faster, cheaper, and easier to execute because the path has been established. Over time, a liquid RMBS market could provide banks with a continuous capital recycling channel, removing the balance sheet constraint on mortgage origination that would otherwise limit the housing programme’s reach.
Sukuk Programmes: Dual-Currency Funding Architecture
SRC has established a dual-currency sukuk programme architecture that provides both local and international funding for its refinancing operations.
Local Sukuk Programme (SAR 20 billion). SRC completed its SAR 20 billion guaranteed local sukuk programme, including a final issuance of SAR 3.5 billion in dual tranches of 5 and 7 year durations. The government guarantee on the local sukuk programme provides the credit enhancement that enables SRC to borrow at rates close to sovereign levels, minimising the cost of capital that flows through to mortgage pricing. The successful completion of the full SAR 20 billion programme demonstrates the depth of local institutional investor appetite for SRC’s instruments.
International Sukuk Programme (USD 5 billion). Listed on the London Stock Exchange, SRC’s international programme provides access to the deep pools of global institutional capital. The first issuance of USD 2 billion was completed in February 2025 in two tranches of 3 and 10 year maturities. The issuance was oversubscribed 6 times by over 300 institutional investors — a level of demand that validates SRC’s credit profile and the attractiveness of Saudi mortgage-backed paper to international investors.
The dual-currency approach serves multiple strategic purposes. Local currency sukuk match the SAR-denominated mortgage assets being refinanced, eliminating currency mismatch risk. International USD sukuk diversify SRC’s funding sources, access larger capital pools, and demonstrate the international creditworthiness of Saudi housing finance — supporting the Kingdom’s broader capital market development objectives.
Credit Ratings and Institutional Credibility
SRC’s credit ratings from the three major global agencies — Fitch A+ (Stable), S&P A (Positive), and Moody’s A2 (Positive) — provide the institutional credibility essential for a secondary market institution. These ratings, which are broadly aligned with the Saudi sovereign rating, reflect PIF’s ownership support, the quality of SRC’s mortgage portfolio, the regulatory framework provided by SAMA, and the institution’s governance and risk management practices.
The “Positive” outlook from both S&P and Moody’s suggests potential for further upgrades, which would reduce SRC’s funding costs and increase the range of institutional investors who can participate in its sukuk programmes (many institutional mandates require minimum credit ratings for investment eligibility). A one-notch upgrade would potentially open SRC’s instruments to additional pension funds, sovereign wealth funds, and insurance companies globally.
The ratings also provide a benchmark for future RMBS issuances. RMBS tranches are typically rated independently based on the credit quality of the underlying mortgage portfolio, the structural protections of the securitisation, and the subordination levels of each tranche. SRC’s institutional rating provides a floor reference point for senior RMBS tranches, which may achieve higher ratings than the institution itself if structured with sufficient credit enhancement.
Risk Management and Portfolio Quality
SRC’s risk management framework addresses the specific risks of a secondary mortgage market institution. Credit risk — the risk that borrowers in the purchased portfolio default — is the primary concern. SRC mitigates this through rigorous portfolio selection criteria (purchasing only performing loans that meet specified quality standards), the credit enhancement provided by Dhamanat guarantees on a portion of the portfolio, and the government subsidy support from REDF that reduces borrower payment burden.
Interest rate risk (or profit rate risk in Islamic finance terms) arises from the mismatch between the fixed-rate mortgage assets SRC holds and the rates at which it funds through sukuk issuance. SRC manages this risk through maturity matching (aligning sukuk tenors with mortgage portfolio durations) and through the fixed-rate nature of most Saudi mortgage contracts (which provides predictable cash flows).
Liquidity risk — the risk that SRC cannot meet its funding obligations — is managed through the government guarantee on the local sukuk programme, PIF’s ownership backing, and the diversification of funding sources across local and international markets.
Market risk encompasses the broader risk that the Saudi mortgage market experiences a downturn that impairs portfolio quality. The residential sector index fell 2.24 percent during the year to Q4 2025, and new mortgage origination declined 11 percent in 2025. While these signals suggest market moderation rather than distress, SRC must monitor portfolio performance through economic cycles — not just during the expansion phase that has characterised the market since 2017.
Position in the Housing Finance Ecosystem
SRC’s position in the housing finance ecosystem creates interconnections with every major institutional player. Banks originate mortgages under SAMA’s prudential framework, subsidised by REDF and guaranteed by Dhamanat. SRC purchases these mortgages, freeing bank capital for new origination. SRC funds these purchases through sukuk issued to capital market investors. The resulting capital recycling enables the mortgage market to grow beyond the banking system’s organic balance sheet capacity.
The SAR 10 billion REDF partnership is particularly important because it demonstrates that government-subsidised mortgages are attractive secondary market assets. The REDF profit coverage — providing government-guaranteed monthly payments to cover part or all of the mortgage profit — creates a cash flow stream that institutional investors value for its predictability and credit quality. As the RMBS market develops, REDF-subsidised mortgage pools may become the preferred collateral for securitisation due to their enhanced credit profile.
Strategic Outlook and Growth Trajectory
SRC’s five-year target of SAR 75 billion in mortgage refinancing implies refinancing approximately SAR 15 billion annually — a significant acceleration from the current SAR 12 billion cumulative total. Achieving this target will require expanding bank partnerships beyond Al Rajhi, scaling RMBS issuance as a complement to portfolio purchases, and maintaining investor confidence through consistent credit quality and transparent reporting.
The broader mortgage market context supports SRC’s growth trajectory. The outstanding mortgage book of SAR 951 billion provides a large and growing asset pool for refinancing. SAMA’s rate stability since December 2025 provides a predictable pricing environment. And the housing programme’s continued scaling — with 119 projects under construction delivering 155,000+ units, NHC targeting 600,000 units by 2030, and ROSHN pursuing 400,000 units — will generate a sustained pipeline of new mortgage origination that feeds the secondary market.
The development of a liquid RMBS market remains SRC’s most transformative long-term objective. A functioning RMBS market would create a self-sustaining capital recycling mechanism that reduces dependence on government guarantees and sovereign backing, while providing institutional investors with a new Saudi-denominated fixed income asset class. For the housing programme, it would remove the balance sheet constraint that could otherwise limit mortgage growth as the market approaches SAR 1.3 trillion.
For analysis, see SRC and RMBS Development, SAMA Rate Policy, First RMBS Saudi Arabia, SRC International Sukuk Launch, Mortgage Market Dashboard, and Mortgage Reform section.