Saudi Arabia has approved a draft law allowing mortgages to be sold in the kingdom, the state news agency said on Monday.

'It should help address one of the critical social issues in the kingdom - housing,' James Reeve, senior economist at Samba Financial Group, said.

Housing has long been an issue in a fast-growing country of 27 million people, most of whom are under the age of 30, with a lack of low- and medium-cost housing compounded by limited finance options to help bridge the gap to home ownership.

The law is also expected to be a boon for banks, by creating a new revenue stream. Annual demand has been put at 150,000 and 200,000 units per year, according to real estate service company Jones Lang LaSalle.

'Banks are well capitalised, liquid and geared up to provide the lending that is required,' Reeve said.

The long-awaited law has been held up due to considerations around providing mortgage finance in an Islamic sharia-compliant manner, and how to deal with sensitive issues such as letting banks take away a borrower's home if they default.

While not providing details, the statement reported by the Saudi Press Agency said the draft includes measures 'to ensure the fairness of the transaction and the safety of the financial system.'

Home loans do exist in Saudi Arabia, with payments deducted from salaries when these enter bank accounts.

However, the new law allows for the first time the creation of products secured against the property, meaning the borrower can benefit from ownership of the asset, the statement said.

While the announcement came after the market close, shares in Saudi real estate companies jumped on Monday. The real estate index leapt 5.5 per cent, versus the main measure's 0.6 percent advance.

Regulation of the mortgage sector will be undertaken by the country's central bank, the Saudi Arabian Monetary Agency, the statement added.-Reuters