The central bank today said it has awarded an Islamic banking licence to Kuwait Finance House as part of financial liberalisation to make the predominantly Muslim country a key Islamic financial hub in Asia.

"Bank Negara Malaysia has approved the application of Kuwait Finance House to establish a full-fledged Islamic bank in Malaysia," it said in a statement. The new bank will be a wholly-owned unit of Kuwait Finance.

Kuwait Finance is the first to be awarded the licence after Bank Negara announced in September it would issue three new licences to foreign banks this year to fast-track the liberalisation of the Islamic financial sector.

"The decision on the remaining licences will be announced at a later date upon completion of the full evaluation process," Bank Negara said.

As of November last year, assets in Malaysia's Islamic banking sector stood at RM80 billion, representing less than 10 percent of the overall banking system, but the government wants to enlarge this to 20 percent.

Malaysian Islamic banks have voiced fears they may not survive the tough competition from larger and more established foreign institutions.

Islamic banking combines Islamic laws against interest payments with modern banking principles. - AFP