Malaysia's central bank said yesterday it had signed a commodity-based Islamic finance agreement with Saudi Hollandi Bank, the first such pact with an Islamic bank outside Malaysia.

The agreement is based on Bank Negara's Commodity Murabahah Programme, which helps Islamic banks to manage their short-term cash flows.

Islamic finance is a new industry and is still developing instruments that would enable banks to manage liquidity in a way that complies with Sharia, or Islamic law, which bans payment of interest.

Bank Negara signed similar pacts with two Malaysian-based foreign Islamic lenders and six domestic Islamic banks earlier this year.

"The participation of foreign financial institutions would further strengthen the cross-border inter-linkages as well as investment flows between Islamic financial centres," Bank Negara said in a statement.

The new instruments use trade in palm oil, Malay-sia's biggest farm export, to deliver Sharia-compliant, short-term funds to Islamic banks.