BNP Paribas, Kuwait Finance House plan Islamic money market fund

BNP Paribas said yesterday it had signed a memorandum of understanding (MoU) with Kuwait Finance House (KFH) to set up a $2 billion Islamic money market fund.

General Manager of the Bahrain-based BNP Paribas said his bank would provide the assets and KFH would structure them according to Sharia before marketing them in the Gulf states. The deal was signed in Kuwait on Thursday.

"The MoU pledges BNP and KFH to assess the whole situation and to develop a fund which meets the Islamic criteria. BNP Paribas will provide the assets, and both BNP Paribas and KFH will market it," Glyn Davies said.

"What we are trying to create is a market money fund because Islamic banks and financial institutions currently have no liquid or negotiable money market of their own," Davies said. "KFH will provide Sharia-compliance expertise. Once the fund is sold, BNP Paribas and KFH will provide secondary market pricing," he added.

A bank statement said the fund will invest in leasing assets and issue liquid tradable certificates, thereby offering a short-term investment opportunity of prime AAA quality.

Islamic states are striving to produce financial instruments that would satisfy the day-to-day liquidity flows of Islamic banks and financial institutions. Malaysia and Gulf market regulators and bankers agreed in February to launch what they called the first global Islamic inter-bank market with Bahrain and Malaysia's Labuan as the two trading centres.

Sharia forbids the payment or receipt of interest, which is equated with the banned practice of usury. Money is made instead using a system of profit sharing from returns on approved investments.

"The Islamic market in short-dated activities is around $80 billion. We are creating a fund of only $2 billion, so it leaves a lot of scope for more liquidity," Davies said. "By the end of June, we should have a special purpose vehicle (SPV) established. The $2 billion assets will be transferred to the SPV, and will be structured by KFH in an Islamic manner so they can be sold on to investors," he said.

Davies said the fund would most likely be set up in France by the end of September, and would be listed in France and Bahrain.