Egyptian cabinet agrees on new mortgage draft law

Published October 3rd, 2000 - 02:00 GMT

The cabinet agreed on the formula of a new mortgage draft law, according to the financial daily Al-Alam Al-Youmlast week. 


The cabinet session agreed on "a system of loan-taking after certain modifications were made [to an earlier draft law] with the aim of energizing and facilitating trade in the real estate market, and to save the market from its current recession, from which it has been suffering for a long time," to quote the paper.  


Minister of Economy and Foreign Trade Youssef Boutros Ghali told Al-Alam Al-Youm that debates on the draft law would be concluded in the People's Assembly after the coming parliamentary elections. He went on to say that the goal of the draft law is "individual financing and ownership of housing - this will contribute to a solution of the housing problem, as well as guarantee the rights of the lending institutions which will finance this system, which, in turn, will help bring much-needed monetary liquidity to the activation of different economic sectors."  


Cairo's moribund real estate market includes over a million empty apartments that could be rented or sold, according to a May 10 article in the official state-run daily Al Ahram entitled "A mortgage law is the solution," in which housing expert and former cabinet minister Milad Hanna estimated that 25 percent of Cairo's housing goes unused. Owners of buildings "have been unable to take advantage" of their property, while as many as a million families are waiting to buy homes as soon as the mortgage law becomes a reality. "This law demonstrably protects the rights and interests of the borrower, the lender and the property owner," asserted the paper. 


According to a 1996 report by Flemings, 1.3 million families in Egypt were "in urgent need of housing."  

The regulatory framework governing Egypt's property market is based on article 1052 of the Civil Code of 1948, which has effectively forbidden banks from repossessing property in the event of default. The code prevents citizens from being evicted from their principal places of residence. Banks, in turn, refuse to accept to the risk of granting loans for housing. 


In a 1997 paper presented to the Egyptian Centre for Economic Studies, Peruvian economist Hernando de Soto estimated that "92 percent of dwellings in the urban sector and 87 percent of holdings in the rural sector are informal" in Egypt. All that property, worth about $240 billion, "is in effect dead capital," said de Soto. "It exists in a universe where there is too much room for misunderstanding, confusion, reversal of agreements, and faulty recollection. It is useless as collateral."  


Egypt's legal framework, vis-a-vis real estate, favors the tenant. Nasser's rent laws froze monthly rental charges for apartments, which, despite decades of inflation, are frequently stuck in the £E 10 to £E 20 bracket.  


In late 1998, an earlier draft of the law went before the Assembly, but was retracted after Sheikh of Al-Azhar University, Mohammed Al Sayyed Tantawi went so far as to issue a fatwa against mortgages, insisting that interest-bearing loans were a form of riba (usury), and, according to the sheikh, haram (forbidden in the Muslim religion). Al-Azhar University is the oldest, and perhaps most highly respected, Islamic institution in the Sunni world. 


While mortgages already exist in Egypt (a law from 1880 makes them legal), there has been no system to guarantee the repayment of loans. As the US Country Commercial Guide for Egypt wrote in 1999: "Mortgages are limited in scope and highly restricted. Real estate mortgages can be registered with the Land Register, but... residential mortgages are unenforceable because there is no right to evict for non-payment." 


“Egyptians [are] used to the idea that you could not be evicted from your principal place of residence," said Hesham El-Safty, commercial banking manager at the Cairo office of the Bank of Nova Scotia. "This is a major psychological barrier which the government and individuals have to overcome.""Under a mortgage law, the legal position would be that you could be evicted," says El-Safty. "It adds up to a sea change." 


The Ministry of Economy and Foreign Trade is supposed to establish an administration for registration, to which would-be lending institutions would have to apply for permission to lend. To do so without permission would be a crime carrying a penalty of up to one year in prison and a fine of £E 200,000. Foreign companies are eligible to lend, but only if certain conditions as yet unspecified in the law are met. 


The draft law was generally expected to be passed by parliament last June, before the end of the last session. "The logic of politics dictates that anything could happen. In theory they could remain sitting until September," said lawyer Amr Abdel Motaal in June.  


Such a law would appear to be the optimal solution for Egypt's stagnant real estate market, especially given the government's stated commitment to developing a market economy. It might also light a much-needed fire under the construction sector, whose stocks in the bourse have long suffered due to the absence of any formal means of taking out a mortgage. "It's very doubtful the law will help investors to engage in new building," says Emad al-Bawab, deputy manager of the Commercial International Bank in Port Said. "The government wants to activate the market and attract new investment, but the huge amount of vacancies makes this very doubtful." 


Ghali, at yesterday's cabinet meeting, said that the new mortgage draft law would "limit the loan-granting activities of insurance companies...and the lending companies that would be established upon the passing of this law." Mohammed Ibrahim Suliman, minister of housing, told Al-Alam Al-Youm on Sep. 26 that "the draft law aims to stimulate activity in the market and allow for greater opportunity to find suitable housing in order to solve the housing crisis." He added that the first half of the coming year will witness real relief in the real estate market, as soon as the new law is implemented, immediately following its passage in the new People's Assembly." – (Albawaba-MEBG) 

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