Arab Banking Corporation (ABC) is planning to set up an Islamic banking subsidiary that should become operational within six months. The new institution, expected to be called ABC Islamic Bank, will have a separate capital base and will concentrate on developing a wide range of wholesale banking products to service local Islamic banks.

The plan to set up the subsidiary is part of an overall strategy being implemented by the new management under President Ahmed Abdellatif to increase ABC's Islamic banking services and broaden its activities in South East Asia.

The Islamic bank will have paid-up capital of $25 million, and authorised capital of $100 million. Yet to be decided is whether ABC will raise the capital entirely from its own resources or whether other investors will be invited to join the venture. It will become a separate legal entity, with a three-man Sharia council that already advises the existing Islamic banking division.

The bank will concentrate on correspondent banking and structuring deals - areas which have already been developed by the existing Islamic division. The Islamic division was set up in 1987, but has developed most of its new business since 1992.

In correspondent banking, one of the main focuses will be to develop vehicles that will provide short-term liquidity acceptable to Islamic banks. This is one of the most problematic areas for Islamic institutions which are unable to borrow on the conventional interbank market where interest is paid, and so have difficulty maintaining a liquid balance sheet.

ABC has set up two vehicles that overcome the problems - ABC Islamic Fund and ABC Clearing Company. These allow Islamic banks to trade in shares in both companies on a short-term basis. Depending on which instrument is used banks can buy stocks in the companies and hold them for a matter of days or weeks. When the banks come to sell their shares they realise the difference in net asset value over the period the shares were held. The two companies themselves are involved in a range of activities, mainly covering trade finance.