Saudi bank’s IPO brings financial redemption after religious controversy

Riyadh’s market on the rise? KhanSaqib, CC BY-NC-SA

Saudi Arabia’s largest lender, National Commercial Bank (NCB) has attracted 215.8 billion riyals (US$58 billion) of bids from about 1.2m investors following its initial public offering. Despite attracting religious controversy for being un-Islamic, the retail portion of the US$6 billion sale was oversubscribed by almost 16 times.

Initial results show that the sale is the second biggest of the year behind Chinese e-commerce giant, Alibaba’s US$25 billion IPO. It is also the largest IPO ever in the Middle East, surpassing the US$5 billion raised by Dubai’s DP World Ltd in 2007.

NCB was the only unlisted lender of Saudi Arabia’s 12 domestic banks, with total assets of US$100.5 billion. It was the most profitable bank in the kingdom last year and this IPO is sure to be part of a careful plan by the Saudi government to spur financial activity.

The kingdom opens its gates

This IPO has a long term financial implication for Saudi Arabia. The kingdom is preparing to open up its stock exchange, valued at about US$590 billion, to foreign investors in the first half of next year. Though currently closed to foreign investors, rules were proposed in August 2014 that would allow them to hold as much as 10% of the value of Saudi Arabia’s Tadawul stock exchange. So this IPO plays an important role in the national economy by boosting confidence in the Saudi stock market.

The IPO also boosts the status of Saudi Arabia in the growing Islamic finance market. The kingdom has been ranked second in Reuters’ list of the 15 largest Islamic finance economies, with US$3.4 billion in assets.

But if we look at a comprehensive set of Islamic finance development indicators, which assess the growth potential of Islamic finance in countries as well as their current state, Saudi Arabia does not rank as highly. This indicator measures not just existing assets, but also how the industry is governed, what research is being done and the level of corporate social responsibility. When these other factors are included, Saudi Arabia ranks ninth on the list.

Courting controversy

The IPO has not been free from controversy in the conservative Muslim nation. In the build-up, some clerics suggested it violated Islamic principles. Sheikh Abdullah al-Mutlaq, a member of the Council of Senior Scholars, Saudi Arabia’s highest religious body, said that subscribing to the NCB IPO was not permissible since the bank had too many dealings forbidden by Islamic law on its balance sheet. He emphasised the point by saying: “Religion comes above everything.”

This view was supported by a fellow council member, Sheikh Saad al-Khathlan, who said the prospectus showed NCB had a high proportion of loans based on interest payments, which are banned by Islam. NCB were forced onto the back foot and pledged to convert their operations into a fully fledged Islamic bank within about five years.

They also received a boost from a former Imam of the Holy Mosque in Mecca, Sheikh Adel al-Kalbani, who compared NCB to Al Rajhi Bank, a major Islamic lender that has already listed successfully on the stock market. He tweeted: “Poor citizens, they don’t know what to do – if they subscribe, they are told they don’t have faith, and if they do not, they are not patriotic.”

The fact is, Saudi clerics have criticised other banks in the past and religious sentiment has not prevented the development of a strong banking sector in Saudi Arabia, including some institutions which pay interest. Plus, as the initial results of the IPO show, the religious controversy did not stop NCB gaining ground and bucking a broader market slowdown.

As Saudi Arabia looks set to open its gates to foreign investment, this IPO marks a significant step in the country’s bid to boost investor confidence in Saudi stock exchange by attracting investment from the super wealthy in the past two weeks of its subscription. And the huge amount of money from excess subscriptions will be returned to investors and funds, meaning the rest of stocks on the Tadawul will probably receive a boost in the coming weeks.