Malaysia Sukuks Open to Foreign Banks

The demand for sukuks "significantly exceeds supply," Zeti said.

"Non-Islamic commercial and investment banks licensed by the government will now be allowed to do Islamic banking business as the country aims to position itself as a global hub for the sector," Central Bank chief Zeti Akhtar Aziz said in a statement cited by Agence France-Presse (AFP).

"We want and aim to develop Malaysia into a center for the origination, distribution and trading of sukuks to provide further impetus to the development of an increasingly vibrant and progressive bond market in Malaysia as well as in the Asian region."

However, according to Islamic finance rules, interest payments and profits earned from alcohol, pornography, pork or gambling are still banned.

Sukuks typically work as profit-sharing vehicles.

Companies that have issued Islamic bonds make payments to investors using profits from the underlying business, instead of paying interest.

Malaysia has the world's largest Islamic bond market, accounting for about 47 billion dollars or two-thirds of the total Islamic bonds outstanding worldwide.

Its Islamic finance industry is worth 38 billion dollars in assets ranging from stocks and insurance to home loans and pawn-broking.

Islamic banking assets also make up over 12 percent of the total bank assets, according to the Central Bank.

High Demand

Zeti said Islamic bonds are increasingly becoming more popular and Islamic banks are not able to cope with the high demand.

She insisted that demand for bonds "significantly exceeds supply," noting that the market was growing by an average of 40 percent yearly.

Zeti said Islamic bonds have become vital in channeling funds into emerging market economies.

"This is particularly the case for the Middle East and Asia, which are among the fastest growing regions in the global economy," Zeti said.

"This includes financial needs of the private sector following the privatization and implementation of infrastructure projects."

Despite the impressive strides made by Malaysia's Islamic banking sector recently there have been observations that its bond market had been "very domestic" and needs further room to grow internationally.

"What Malaysia has done in opening up its currency regulations is a means to attract foreign funds, which is the right thing to do," Singapore-based financial analyst Abhishek Kumar told AFP.

"This now is the right thing to do to attract foreign funds. I do know that a lot of countries have been seeing a lot of advantages in sukuks and how much funds and liquidity it grows."

Countries that followed in the footsteps of Malaysia include the United Arab Emirates, Qatar, Bahrain and Pakistan.

Multilateral lending agencies have also made issues to finance development projects, with Islamic bonds now catching on as an attractive instrument of financing.

In January, Britain became the first European country to announce plans to allow its banks to sell Islamic bonds as part of a new drive that gives priority to the expanding Islamic banking.

The Islamic banking industry, which began almost three decades ago, has made substantial growth and attracted the attention of investors and bankers across the world.

There are an estimated 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.