By Andrew Torchia

Dubai will compete with London for a share of Islamic banks' liquidity management business by offering a new platform for murabaha trading.

Many Islamic banks around the world manage their short-term funds with murabaha, in which one bank acquires merchandise and another agrees to buy it at a mark-up. Traditionally, banks from the Gulf and as far afield as southeast Asia use commodities traded on the London Metal Exchange (LME) as their merchandise.

The NASDAQ Dubai bourse now hopes to grab some of that business with its own murabaha trading system, which has just completed a pilot period successfully, officials said on Wednesday.

"We think we can become a regional player and ultimately a global player by focusing on being fast, cost-effective and efficient," NASDAQ Dubai's chief executive Hamed Ahmed Ali told reporters.

The system may initially at least find it hard to compete with the liquidity and name recognition of the LME, but Ali noted it would have the advantage of operating in a Gulf time zone, potentially making it attractive to Islamic institutions in the region and southeast Asia.

Also, the system is expected to have the support of the Dubai government, which has made developing the emirate's Islamic finance sector a policy priority, and has close ties to many banks and companies in the United Arab Emirates.

Since last year, NASDAQ Dubai has taken steps towards rivalling London as a centre for trading Islamic bonds, as many Dubai-linked firms have listed their sukuk on the exchange.

Emirates Islamic Bank, a Dubai-based institution, is backing the new murabaha system and in the six-month pilot phase handled over 2 billion dirhams ($545 million) worth of financing business for its clients on the platform, it said.

Exchange officials said they would talk to other regional banks in coming weeks and months in an effort to secure their participation.

Emirates Islamic's chief executive Jamal Bin Ghalaita said the system would not try to replace the LME, which would remain an important centre for Islamic liquidity management.

"Instead, we expect both centres to benefit - new liquidity will be generated by their interaction," he said.

NASDAQ Dubai's system trades certificates which are backed by assets; each certificate has a fixed value of $10 so deals can vary widely in size. Deals so far have been backed by real estate, but future deals could use sukuk, equities or other assets, officials said.

Ali said NASDAQ Dubai would look in future to expand the range of Islamic structures traded on its platform; it might for example add ijara, a common sharia-compliant leasing format.

Last year the Dubai Multi Commodities Centre (DMCC) launched a sharia-compliant commodity trading platform which Islamic banks could use to manage fund flows; its system allows trade in receipts representing ownership of commodities stored at warehouses.

Ghalaita said the NASDAQ Dubai platform, focusing on trade backed by non-commodity assets, would complement rather than compete with the DMCC's commodities-oriented system.