Muslim extremism and the terrorist threat can be overcome by promoting economic development, Malaysia's premier said today as he unveiled a fund to boost the Islamic finance sector.

"A key solution to the major problems faced by Muslim nations today is to promote sustainable and balanced economic development," Prime Minister Abdullah Ahmad Badawi said.

"I believe that we can address the problem of extremism and terrorism by delivering better and more widespread development," he told a forum held ahead of the Islamic Development Bank's (IDB) board meeting here this week.

Abdullah, who promotes a moderate version of Islam in predominantly Muslim Malaysia, said poverty and inequality prevails in many parts of the Muslim world with high illiteracy rates, lack of human development and poor infrastructure.

Among the 57 members of the world's biggest Muslim grouping, the Organisation of the Islamic Conference (OIC), 27 are classified by the World Bank as low-income and 21 are severely indebted, he said.

"Some of the Muslim countries are faced with extremely difficult social and economic problems and are often forced to rely on international aid," he said.

"It is only by promoting economic progress and by ensuring the fruits of development are shared by all that we can make advancement in political, social and religious fields.

"Economic success is a major factor in raising the dignity of the Muslim world and their voice at the global level."

Abdullah announced that Malaysia's central bank will establish an endowment fund of RM200 million to support the development of the potentially lucrative Islamic finance sector.

Officials had earlier said the fund was worth RM100 million.

It will be used to finance research and development in product innovation, scholarships, dialogue among religious scholars and training programmes, he said.

Booming Islamic finance business

As the current OIC chair, Malaysia is leading a push for Muslim nations to focus on economic development, build trade links and develop their financial sectors.

The booming Islamic finance business, which offers products and services that comply with Muslim religious laws banning interest, is estimated to be worth US$200-300 billion and is growing at a double-digit pace annually.

Abdullah said the growth potential of the sector was tremendous, and that Muslim countries must unite to put in place building blocks for a successful global Islamic financial system.

The head of a local Islamic Capital Market unit told AFP that efforts must be made to "harmonise the interpretation" of Muslim religious law, or Shariah, to lend stability and confidence to the Islamic financial world.

"Right now there are too many interpretations based on culture and norms of individual countries," he said on condition of anonymity.

For instance certain Sukuk , or bonds that comply with Muslim religious tenets, issued by Malaysia, Pakistan and Bahrain are not accepted by Saudi Arabia, he said.

Economic and finance ministers from member nations of the IDB, the lending arm of the OIC, are in the Malaysian capital this week for the bank's board meeting which will be held Thursday and Friday.