REPUBLIKA.CO.ID,DUBAI - The chief executive of Dubai Islamic Bank (DIB) said on Thursday it was in talks to buy a 40 percent stake in an Indonesian Islamic lender, as the bank eyes the world's most populous Muslim country to help diversify its revenues.

Though DIB and other banks in the United Arab Emirates are now seeing profits rise on the back of a local economic upturn, many suffered earlier in the decade from the bursting of a local real estate bubble and big debts at Dubai's state-linked firms, highlighting the risks of being reliant on one market.

Adnan Chilwan told reporters on Thursday that DIB hoped to conclude a deal before the end of the year and that it would pay for the purchase using its own cash reserves.

"We see good potential in Indonesia," Chilwan told a media event, declining to name the acquisition target but adding its parent was a listed company.

Chilwan told Reuters in March that DIB planned to expand its operations into Indonesia, Kenya and other African countries. Indonesia has the world's biggest Muslim population but its Islamic finance market lags neighbouring Malaysia: Indonesian Islamic lenders hold about 4.8 percent of total banking assets compared with over 20 percent for their Malaysian counterparts.

Indonesia has 23 Islamic banks, of which only one - PT Bank Panin Syariah Tbk - is listed. The country's central bank expects sharia-compliant banking assets to expand between 19 and 29 percent this year.

Faced with lower revenue and substantial provisioning for bad debts, several UAE banks have taken steps to diversify into other countries.

Last year Emirates NBD completed the purchase of BNP Paribas' Egyptian unit, while National Bank of Abu Dhabi has also said it wants to expand in countries from Africa to Asia.

Earlier on Thursday, DIB posted a doubling of first-quarter net profit to 636.6 million dirhams (173.3 million USD) in the first three months of the year. This was well above the average forecast of four analysts polled by Reuters, who expected a profit of 506.1 million dirhams in the period.

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