The growth of Islaming banking in Malaysia will not hamper mergers in the conventional banking industry, Second Finance Minister Nor Mohamed Yakcop said today.

A sweeping programme two years ago merged the country's 54 banks and finance houses into 10 groups and the central bank has envisaged a second wave of consolidation to leave between six and eight banks ahead of market liberalisation in 2007.

"I don't see a conflict," Nor Mohamed told more than 100 fund managers and investors at a conference here when asked if giving out more Islamic banking licences was in conflict with the government's objective of further consolidating the banking system.

The central bank recently awarded three new Islamic banking licenses to bring to five the number of Islamic banks in the country. This included Kuwait Finance House, which was the first foreign bank to receive an Islamic banking licence in May but has yet to begin operations.

Islamic financial hub

The move is part of efforts to fast-track the liberalisation of the Islamic financial sector to make predominantly Muslim Malaysia a key Islamic financial hub in Asia.

"Having three additional Islamic banks is an attempt to capitalise on funds flowing out from Western countries following the September 11 crisis," Nor Mohamed said.

The government recently said it would gradually award Islamic banking licences to all banks as part of efforts to grow the segment and encourage the expansion of such services offshore.

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