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Prime Minister Najib Razak, who is also the finance minister, said the government will allocate more funds to develop venture capital and private equity firms.
"We must do everything we can to ensure that Malaysia's capital market doesn't just grow, it grows with minimal risks in a well-regulated environment," he told fund managers and investors at an investment forum.
Malaysia's current capital market is worth 2.0 trillion ringgit, according to local bourse officials.
Najib gave some details of the government's plans to divest its holdings in state-linked companies with the aim of increasing liquidity in the country's stock market.
Federal land authority Felda Global Bhd's sugar refining unit Malayan Sugar Manufacturing would be listed on the stock exchange in July, he said.
Najib said expanding the capital market was a needed to help boost Malaysia's role as an Islamic capital hub.
The Islamic capital market in Malaysia is set to increase almost threefold to 2.9 trillion ringgit by 2020 from 1.1 trillion in 2010, he said.
One economist hailed the plan as demonstrating the government's commitment to bolster the local capital market.
"The plan is geared towards enabling the government to reach its high-income nation target by 2020 through a more facilitative role of capital markets," Yeah Kim Leng, chief economist from ratings agency RAM Holdings said.
But Yeah said it was crucial for the government to maintain investor confidence.
"Higher confidence will mean a more efficient mobilisation and effective harnessing of both domestic and foreign investments," he said.
Najib has unveiled a series of economic reforms since taking power in 2009 aimed at creating 3.3 million jobs and raise Malaysia's average per capita income to 15,000 ($5,000) ringgit by 2020 from about 7,000 at present.
Export-dependent Malaysia was hit hard by the global slowdown but it rebounded with 7.2 per cent growth in 2010 and it is expected to grow five to six per cent this year.