Saudi's NCB IPO survives Sharia shakedown

A Saudi man walks in front of a branch of the National Commercial Bank (NCB) in the capital Riyadh.
Fayez Nureldine | AFP | Getty Images
A Saudi man walks in front of a branch of the National Commercial Bank (NCB) in the capital Riyadh.

Despite last-minute pressure from religious authorities, Saudi Arabia's first non-Sharia bank to go public will be oversubscribed, according to figures from Al Riydadh newspaper, which reported the National Commercial Bank IPO covered at 210 percent.

Billed as the Arab world's largest IPO, Saudi's $6 billion NCB offering was initially touted as a great opportunity to share the wealth with the Kingdom's growing population. NCB planned a two-week subscription period, offering a total of 500 million shares with 300 of those going to the public. They represent 25 per cent of the Bank's capital.

At around 45 riyals a share, significantly below market value, a middle class Saudi could easily turn a profit. But protests from the Kingdom's religious conservatives have kept many Saudis from buying-in. The IPO has received an unprecedented amount of interest not just because of its valuation but also because of what's about to happen to the Saudi market – the Tadawul is expected to open up to foreign investment in the first half of next year – and that attention has raised questions for many conservatives who are concerned about the direction Saudi's financial system will take.

Read More Saudi 'mother of all IPOs' runs into Shariah storm

Saudi Arabia's Grand Mufti, Sheikh Abdul Aziz Al Sheikh, said last Friday that the IPO is forbidden under Islam, which bans usury. Only four of Saudi Arabia's 12 banks are fully compliant with Islamic Sharia laws, though NCB has said it plans to become fully compliant over the next five years. However, that's not quick enough according to the religious authorities – and unrealistic to many analysts.

As public interest began to wane, underwriters HSBC Saudi Arabia and GIB stepped in, prompting HSBC affiliate bank Saudi British Bank to announce they would offer 10 to 1 financing on any investment in the IPO. Other banks quickly followed suit.

As of Wednesday, the IPO was 50 percent covered and on Thursday Al Riyadh newspaper cited the IPO at 210 percent - which means that by Sunday, the close date of the subscription, the larger players will have come in as well, leaving no doubt that the IPO will be heavily oversubscribed.

Read More Saudi bank NCB's share listing attracts strong retail demand

For this last-minute 10-1 financing to have been offered , the Central Bank must have given the OK – thereby giving an implicit backing to a non-Sharia compliant IPO and financing.

It also highlights the culture clash when it comes to what is and is not acceptable behaviour in Saudi Arabia. The number of people participating in the IPO is likely to be lower than what the government was hoping for which means they're going to have to continue to look for ways to get that cash to a rapidly growing – and hopefully not too disgruntled- people.

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