The government's investment arm Khazanah Nasional may issue Islamic bonds worth up to RM2.76 billion (US$750 million) and investors have until today to place a bid.

"The demand is huge," the Business Times newspaper said citing an industry source, adding that Khazanah last week toured the Middle East to woo investors flush with petro-dollars.

It said the bonds could be converted into shares of Telekom Malaysia Bhd, Malaysia's top fixed line operator, controlled by Khazanah.

"Investors have until today (Wednesday) to bid for the papers," the newspaper said.

Khazanah has appointed CIMB, HSBC Holdings plc and UBS AG to help arrange the issue, it said. It said the funds would be used for general funding activities.

Leader in Islamic banking

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

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.

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.