The Malaysian government's investment arm Khazanah Nasional will soon issue Islamic bonds to raise up to a billion dollars, a move economists said will capitalise on demand from Middle East investors flush with petro-dollars.

Second Finance Minister Nor Mohamed Yakcop was quoted by the Business Times newspaper today as saying that Khazanah would issue the Islamic bonds soon.

"It's a new Islamic instrument and a most sophisticated one. I was told that this will take Islamic finance to a new level," he said.

Earlier reports said Khazanah had revived plans to raise between US$500 million and US$1 billion in Islamic bonds this year.

Islamic financial practices ban the payment or receipt of interest or any transactions that include alcoholic beverages or gambling, which are banned by the Koran.

Hardeep Singh, economist with Bank of Tokyo-Mitsubishi (Malaysia), said there was substantial interest from Middle East funds in investing in well-rated companies such as Khazanah and the time was ripe to woo those funds.

"There is US$66 billion worth of surplus funds available to investors from the various Middle Eastern countries," he told AFP .

Stakes in TNB and TM

"Khazanah should issue the bonds as soon as possible to tap into the huge surplus petro-dollar funds since the market is right now ripe for Islamic bonds," he added.

Khazanah holds some US$16 billion in assets, among them stakes in power utility Tenaga Nasional and Telekom Malaysia, a telecommunications giant with a monopoly in fixed line operations.

Largely Muslim Malaysia is the current Asian leader in Islamic banking after introducing services in 1983.

To cement its position, the country is liberalizing its Islamic financial system and promoting itself as a center for education on Islamic finance.

Khazanah, which means "treasure" in Malay, has been charged by the Malaysian government to hold and manage its commercial assets since 1993.

It has been making investment forays in the region, including a US$327 million takeover of Indonesia's Bank Lippo and the purchase of a stake in Singapore's MobileOne.