Emirates Bank Group, a banking group controlled by the Dubai government, is setting up a mutual fund to invest in the local stock market that will also take money from foreign investors.

The open-ended fund, which is launched on 1 June, will initially be very small - about AED 30 million ($8.2 million) - and the bank says it will not solicit money from non-residents of the UAE. Non-UAE nationals will not be allowed to own more than 20 per cent of the fund. Yet, its approval by the central bank may be a first step towards allowing foreign portfolio investment in the local market. The news follows an announcement by Saudi American Bank in March that it is setting up a mutual fund to invest in Saudi equities, which will be marketed abroad.

The UAE is a small market with a capitalisation of about $15,000 million, compared to Saudi Arabia's $48,000 million. This is still larger than Oman, which does allow foreign investment through mutual funds. However, the UAE has no official stock exchange, transparency is weak and the market is relatively illiquid. Emirates Bank is also setting up a stock market index, with separate indicators for the banking, services and insurance sectors. There is currently one market index run by the National Bank of Abu Dhabi, while Union National Bank plans another.