Malaysia is not threatened by Singapore's ambition to become an international hub for Islamic financial services, and has proposed an Islamic universal bond to help Muslim nations get cheaper funding, a report said today.

The central Bank Negara governor Zeti Akhtar Aziz was quoted by the New Straits Times as saying that Singapore's plan to send a team to the Middle East early next year to explore Islamic banking would help hasten global development of Islamic banking and finance.

"We welcome it, the market out there is very large," she said.

While Malaysia, which has fast-tracked reforms in a bid to become a key Islamic financial hub in Asia, has an edge over Singapore, the service-oriented republic may be able to catch up in a short time, industry observers said.

There are now more than 200 Islamic financial institutions operating in 48 countries with combined assets worth more than US$200 billion, and growing at an annual rate of 12-15 percent, the newspaper said.

Zeti meanwhile, has proposed the creation of an Islamic universal bond to enable Muslim nations with relatively low credit ratings to get cheaper funding, and to promote greater cooperation among the Muslim world.

New licences

She said interested countries and selected organisations could be invited to sell assets to a special purpose vehicle, which in turn would lease back the assets to them. Proceeds could then be transferred to the participating nation for socioeconomic development.

"This could be an avenue for countries that have not secured stronger ratings to get more competitive funding," she added.

Bank Negara has constantly urged local banks to be more innovative in tapping new markets and growth opportunites.

The central bank has said it would issue three new licences to foreign banks this year, with the first one awarded to Kuwait Finance House in May. The government has also 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 June, assets in Malaysia's Islamic banking sector stood at RM89.1 billion, representing nearly 10 percent of the overall banking system, and the government aims to double this to 20 percent by 2010.