Malaysian state investment arm Khazanah Nasional will team up with Dubai Banking Group and Asia Capital Reinsurance to set up what it says will be the world's largest retakaful (Islamic reinsurance) firm, Khazanah said on Wednesday.

Khazanah and Dubai Banking Group will each hold a 40 percent stake in the firm, ACR ReTakaful Holdings Ltd, while ACR will hold the remaining 20 percent.

By virtue of Khazanah's 32 percent stake in ACR, it would have the largest effective shareholding in ACR ReTakaful, Khazanah said in a statement.

Malaysia, home to the world's largest Islamic bond market, aims to compete with Singapore and the Middle East to become a global hub for Islamic finance.

Khazanah said ACR ReTakaful would have a capital base of $300 million, and would have two operating companies in its stable, to be based in Kuala Lumpur and the Middle East.

'This is an exciting investment for us, as it consolidates Khazanah's position as a key player in the regional reinsurance and retakaful sector,' Khazanah Managing Director Azman Mokhtar said.

The deal was signed in Dubai on Wednesday. It said Malaysian Prime Minister Abdullah Ahmad Badawi and the chairman of Dubai Holdings, Mohammed Al Gergawi, witnessed the signing.

Dubai Banking Group is part of Dubai Holdings, which in turn is owned by the Ruler of Dubai.

Khazanah had invested $200 million into ACR to emerge as the joint largest investor, as well as 175 million ringgit ($55.45 million) into ACR Malaysia to become the major shareholder in the Kuala Lumpur-based reinsurance company.

'We have had a vision for a global retakaful player since our investment into ACR in December 2006, and this retakaful company is the fulfillment of a condition from that transaction,' Azman said.- Reuters