Jan. 4 (Bloomberg) -- Malaysia’s Employees Provident Fund will be forced to buy more Islamic bonds this year as the government cuts conventional note sales to the state-run pension manager, according to Royal Bank of Scotland Group Plc.

Malaysia plans to lower total sovereign sales to 40.5 billion ringgit ($11.8 billion) in 2010 from 52 billion ringgit while maintaining the same number of Islamic bonds sales as in 2009, it said Dec. 21. It will also reduce conventional bond auctions and cut private placements to the Employees Provident Fund to two from eight in a bid to shrink state debt.

“The sharp reduction in private placements to the EPF in 2010 will clearly put the competition pressure back on the demand side,” Chia Woon Khien, emerging markets analyst at Edinburgh-based RBS, said in a note to clients e-mailed today.

Malaysia is the world’s biggest market for Islamic bonds, known as sukuk, and may enable individuals to trade Shariah- compliant debt on its bourse as part of a plan to attract new investors. Global sukuk sales rallied to $20.2 billion last year from $14.1 billion in 2008 after jumping to a record $31 billion in 2007 amid a surge in Arab oil wealth, according to data compiled by Bloomberg.

Sukuk are asset-based securities that pay a profit rate instead of interest, which is prohibited by Shariah law.

Malaysia is planning six sukuk sales this year, the same as last year, starting this month with 3.5-year bonds and ending in November with a 10-year issue, according to a calendar published on Bank Negara Malaysia’s Web site. The calendar doesn’t provide details on the amount to be raised at each sale.

As lower sales boost the cost of buying conventional Malaysian bonds, the EPF may broaden its mandate to include dollar-denominated sukuk, Singapore-based Chia said in her note.

The EPF had 361.1 billion ringgit under management as at Sept. 30, with 97.35 billion ringgit, or 27 percent, invested in Malaysian government securities, according to its Web site.