Malaysia will gradually award full Islamic banking licences to all banks as part of efforts to grow the segment and encourage the expansion of such services offshore, reports said Saturday.

"Domestic banks cannot be left far behind in offering Islamic banking products... that is why the government is considering granting the new Islamic banking licences which can also be given to foreign conventional banks," he was quoted as saying by the New Straits Times .

"We will approve them in stages."

Last week, the country's second largest bank Bumiputra-Commerce Bank and RHB Bank announced they have obtained prior approval from the finance ministry to set up full-fledged Islamic banking operations and would get the licences once all conditions were met.

Not operating yet

Malaysia currently only has two full-fledged Islamic banks. Kuwait Finance House became the first foreign bank to receive a full Islamic banking licence in May but has not begun operations.

The central bank has said it would issue three new licences to foreign banks this year to fast-track the liberalisation of the Islamic financial sector to make the predominantly Muslim country a key Islamic financial hub in Asia.

Tengku Putera said last year, Islamic banking grew by 21 percent while Islamic principle-based insurance grew by 22 percent.

As of March, assets in Malaysia's Islamic banking sector stood at RM85.2 billion(US$22.4 billion), representing nearly 10 percent of the overall banking system, but the government aims to double this to 20 percent by 2010, he said.

The Star daily quoted bankers as saying banks that receive the licence must form independent Islamic banking subsidiaries to encourage them to venture overseas and set up operations, especially to tap the market in the Middle East.

Some analysts warn however, that it may be costly to split conventional banking from Islamic banking which combines Islamic laws against interest payments with modern banking principles. - AFP