Bahrain-based Islamic lender Al Baraka is in talks to buy a stake in Malaysia's Bank Muamalat, its chief executive said, with a source adding it could buy up to 49 per cent.

'Nothing has been signed, there are just talks,' Adnan Yousif said.

He said Al Baraka had considered buying a stake before the global financial crisis, but earlier talks had been put on hold.

He said Al Baraka had not made any decisions on the purchase yet and did not elaborate on the stake.

A person familiar with the matter said Al Baraka was looking to buy between 40-49 per cent of the bank and both were likely to sign a non-disclosure agreement by next week.

They 'have not reached the price negotiation stage yet,' the person said, declining to be identified.

Malaysian conglomerate DRB-Hicom holds a 70 per cent stake in Bank Muamalat and state investment agency Khazanah Nasional owns the rest.

The bank's assets totalled about $4.3 billion at September-end.

Al Baraka's interest in the lender comes as Gulf Islamic banks seek new growth areas to diversify sources of earnings as their domestic markets mature.

It is planning to spend $30-50 million to buy a bank in Indonesia as it seeks to expand its global footprint.

Malaysia is courting more foreign investment for the domestic Islamic banking industry to create bigger players and raise its international profile.

The Southeast Asian economy has made its mark as a major Islamic banking hub in Asia but is seen as lacking in global clout, especially in the Middle East.

Its largest Islamic lender, Maybank Islamic, a subsidiary of Malaysia's top bank Maybank, had assets of 35bn ringgit ($10.32 billion) as on September 30 last, according to its annual report.

Saudi Islamic lender Al Rajhi has total assets of around $45 billion.

Malaysia has the world's largest sukuk or Islamic bond market, accounting for about 42 per cent of the $19 billion paper issued last year.

But bankers say most Malaysian sukuk are denominated in the local ringgit currency, which lends the country little global weight.

Malaysia relaxed banking rules last year to allow foreign equity participation of up to 70 per cent in domestic Islamic banks.

But some practitioners say local Islamic lenders have shown little interest in allowing more foreign ownership, partly due to differing interpretations of the Sharia between Malaysia and the Middle East.

One of the growth barriers to the $1 trillion emerging Islamic finance industry has been that it is fragmented between its two main regions - South East Asia and the Gulf Arab region.

Banks spanning both regions would help the industry standardise its products, analysts say. – TradeArabia News Service