Islamic banking is poised to capture 20 percent of the assets of the local banking sector by 2010 from eight percent presently, Zeti Akhtar Aziz, central bank governor said today.

"Today, Islamic banking in Malaysia has firmed its position as a viable and vibrant component of the banking system," she said at a banking conference.

"We capitalized on the dual banking system which we believe is the right approach, and we will continue to embark in this direction."

At the end of March 2002, the assets mobilised by the Islamic banking sector amounted to RM59 billion.

Deposits and financing mobilised during the same period amounted to RM48 billion and RM30.1 billion respectively.

Zeti said Malaysia would create policies to increase the capability of the Islamic banking players and to set the stage for Malaysia to be an active player in global developments in Islamic banking and finance.

Innovative foreign banks

Foreign banks operating in Malaysia, she said, remained ahead compared to local banks in terms of services and capabilities.

"The more innovative foreign banks have in fact continued to grow their business despite the branching restriction," the central bank governor said.

"The foreign banks have generally been able to identify and react to changes in the market much faster than most domestic banking institutions."

To improve the level of competitiveness, Malaysia had consolidated its 54 domestic banking institutions into 10 banking groups.