Jakarta - The Indonesian parliament on Tuesday passed a Sharia or Islamic banking bill into law, paving the way for the government to ensure legal certainty in running the sharia banking industry in the world's most-populous Muslim country.

All but one of the 10-factions at the House of Representatives (DPR) favoured the passage of the bill into law, with only the Peace and Prosperity Party rejecting it, the state-run Antara news agency reported.

Economists say the long-awaited law will strengthen the regulatory environment and pave the way for further growth of Indonesia's market for Islamic finance.

"That's why the sharia banking industry needs special rulings," said Tukidjo, lawmaker from the Indonesian Democratic Party-Struggle, who like many Indonesians uses only one name.

"The rulings must accommodate both Muslims' and non-Muslims' interests as the banking industry is universal in nature," he added.

Under the new law, foreigners would be allowed to establish sharia banks in partnership with Indonesian citizens or local entities. It would also offer more flexibility to commercial banks, allowing them to convert their business into sharia-compliant banks.

So far, the sharia banking industry in Indonesia had been based on Bank Indonesia's rulings.

Religious Affairs Minister, Maftuh Basyuni, said the government and Bank Indonesia - the country's central bank - would soon issue regulations to implement the law.

Islam bans payment of interest, allowing money to be earned only from physical assets. It also bars investment in alcohol, tobacco or gambling.

Indonesia, the largest economy in South-East Asia, has been slow to tap the fast-growing Islamic finance market, for example to fund its huge infrastructure needs, and has lagged behind Malaysia and Singapore in developing sharia-compliant products.

Indonesia's Islamic banking industry still comprises less than 5 per cent of the total assets of Indonesia's domestic banks. That compared to a ratio of more than 12 per cent in Malaysia.

Indonesia's central bank said recently that three local banks - state-owned PT Bank Rakyat Indonesia (BRI), PT Bank Bukopin and PT Bank Negara Indonesia Tbk (BNI) - have planned to open sharia-compliant units this year.

With nearly 88 per cent of the country's 225 million population Muslim, Indonesia is home to the world's most-populous Islamic nation. (dpa)