The government today said it has raised the ceiling of foreign ownership in Islamic banks to strengthen international links and boost its aim to become a key Islamic financial hub in the region.

Commercial banks "can sell up to 49 percent of their Islamic banking unit" but must retain control following any sale, Bank Negara Malaysia governor Zeti Akhtar Aziz told reporters.

Under present rules, foreign investors can only hold 30 percent equity in domestic banks.

Bank Negara last year fast-tracked the liberalisation of the Islamic banking sector, three years ahead of a World Trade Organisation deadline in 2007, by awarding licences to three Middle East players and allowing more local groups to set up Islamic banking arms.

Islamic banking, first introduced in Malaysia in 1983, combines Islamic laws, which forbid interest payments, with modern banking principles.

There are now eight full-fledged Islamic banks in the country. The government has said it would gradually award Islamic banking licences to all banks as part of efforts to make the segment grow and encourage the expansion of such services offshore.

Assets in Malaysia's Islamic banking sector currently represent nearly 10 percent of those in the entire banking system and the government aims to double this by 2010.

High capital inflows

Separately, asked about high capital inflows of RM11.1 billion recorded in the December quarter, Zeti said the central bank was monitoring the situation and would move to absorb excess liquidity.

There was no plan to introduce capital controls relating to inflows, she said.

"We still have the capacity to manage the inflow ... there are no plans to introduce administrative controls," she added.

Asked if Bank Negara would review the ringgit peg of RM3.80 to the dollar fixed since 1998, she reiterated it was not necessary as economic growth has been "steady and solid".

There has been a growing chorus of calls for the government to review the peg amid sharp declines of the dollar and rising import costs but Zeti said "the current exchange rate regime is supported by fundamentals".

The Malaysian economy grew 7.1 percent last year, its fastest pace since 2000 and beating the official target of 7.0 percent. However growth is expected to slow to six percent in 2005, the central bank said Monday.