KUALA LUMPUR, June 21 (IslamOnline.net & News Agencies) – Although Islamic financial services are expanding and fast gaining global popularity, the sector must become more innovative and offer a bigger range of products to overcome challenges, analysts and officials said Tuesday, June 21.

"It is timely to move away from 'plain vanilla' innovation and to embrace a new wave of innovation that will evolve Islamic financial instruments into distinct products," said Malaysia's Central Bank governor Zeti Akhtar Aziz, reported Agence France-Presse (AFP).

She told an Islamic Development Bank (IDB) forum that Islamic financial institutions must respond to consumers' increasingly sophisticated needs.

Zeti regretted that most Islamic financial products were essentially copies of conventional instruments which had been stripped of elements that did not comply with Shari`ah.

Malaysia's top banker stressed that the sector needed to attract an educated workforce and create a pool of experts in the field.

She noted that to help achieve that her country plans to establish an international training institute on Islamic finance.

Asia's top budget carrier AirAsia is in talks with local and foreign lenders -- both conventional and Islamic -- to finance the acquisition of up to 60 new A320 Airbus aircraft worth 3.7 billion dollars.

"While most of the conventional options are offered on a long-term basis to meet the useful life of the aircraft, the current Islamic instruments available are shorter- to medium-term tenure only," Kamarudin Meranum, AirAsia executive director, told AFP.

"There is a maturity mismatch right now. What we hope is that Islamic institutions will be able to meet our requirements and offer us long-term funding".

Malaysia, the current chair of the Organization of the Islamic Conference (OIC), is leading a push for Muslim nations to focus on economic development, build trade links with each other, and develop their financial sectors.

Former Malaysian premier Mahathir Mohamad, who set Malaysia on the path of becoming a hub for Islamic banking, said it was a viable alternative even for non-Muslims.

"I think there is a big future for Islamic banking," he told AFP last week, but noted that one major obstacle was the high cost of borrowing.

"In some instances the cost is higher but the risk is shared. If something goes wrong, the lender also has to bear the cost," he said.

Islamic financial services range from basic investment accounts, equity funds, bonds and more recently Islamic hedge funds and swap equivalents, while more new products are in the pipeline.

The Islamic financial sector is estimated to be worth between 200-300 billion dollars and is growing at a double-digit pace annually, according to AFP.

Islamic financial services are fast becoming the darlings of the global banking industry and top foreign banks like Citibank and HSBC are rushing into the sector to offer Islamic alternatives to their mainstay business.

Malaysia is the current Asian leader in Islamic banking after introducing the service in 1983.

The Islamic banking sector accounts for some 10.5 percent of Malaysia's national system and the government is aiming to raise that to 20 percent by 2010.

Eight fully fledged Islamic banks operate in the country, including three from the Middle East -- Saudi Arabia's largest bank, Al Rajhi Banking and Investment, a consortium led by the Qatar Islamic Bank and Kuwait Finance House.

Khalid Bhaimia, chief executive officer of Malaysia's RHB Islamic Bank, said that in a sign of the growing importance of the Islamic finance sector, RHB Group will this week launch the Dow Jones Islamic Shari`ah Index for Malaysian stocks.