Prime Rate eyes $250m Islamic overnight fund

LONDON (Reuters) - UK-based cash management firm Prime Rate Capital is aiming to raise $250 million for an Islamic cash fund that it says will be the first of its kind to provide sharia-compliant overnight liquidity.

The Islamic Liquidity Fund, which should be ready to launch around March 18, will give banks, insurers and corporate treasurers the ability to park their cash overnight in a sharia-compliant way, said Prime Rate's chief executive Chris Oulton at the Reuters Islamic Banking and Finance Summit in London on Monday.

"It's been described as the Holy Grail of Islamic markets, if someone could devise an overnight instrument and that's what we've done," Oulton said.

The fund was trailed last year but Oulton said it had taken time to get Sharia scholars to understand the structure.

Sharia-compliant cash management must be interest-free. Currently Islamic institutions use non-compliant products such as government bonds to house their cash, or undertake commodity Murabaha transactions on an individual basis.

The latter involve the purchase of commodities, including metals listed on the London Metals Exchange.

The new fund, which will be domiciled in Dublin, will make these transactions on the client's behalf and trade all its net assets every day.

Oulton sees good demand for such a vehicle in the Middle East, the Far East, Britain and continental Europe.

"This fills the overnight liquidity gap," he said, pointing out that other Islamic products often struggled to be fully compliant if they had any cash at all.

"This will facilitate other product development -- it's not just about providing a Sharia cash instrument."

He sees the fund gaining broad acceptance in the Islamic market as it essentially offers the commodity Murabaha technique in a single fund structure.

"At the moment it is pretty much the only technique at their disposal. If a particular panel of scholars is comfortable with commodity Murabaha then they should be happy with the fund as it does exactly the same thing."

(Reporting by Claire Milhench, additional reporting Cecilia Valente; Editing by Hans Peters)