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Bank Mandiri, Indonesia’s largest lender by assets, expects to open its first branch in Malaysia before the end of 2012, after the Malaysian central bank agreed to provide the Indonesian lender with incentives, an executive said.

The central bank, Bank Negara Malaysia, reduced the minimum initial capital requirement for Bank Mandiri to 100 million ringgit ($32 million) for the first year, from 300 million ringgit, Budi Gunadi Sadikin, a director of Bank Mandiri, said in a text message. The news on the requirement was first reported by Kontan newspaper on Thursday.

The Malaysian central bank also allowed Bank Mandiri to offer saving accounts and deposits to retail customers, Budi said.

The Indonesian bank was also given permission to operate cash machines outside its branch or in public areas and to offer saving accounts and deposits to retail customers, he said.

Budi and Pahala N. Mansury, Bank Mandiri’s finance director, did not return calls seeking comment on Thursday.

The approval for Bank Mandiri to open a branch in Malaysia would meet the so-called “reciprocal principle,” which means that Indonesian banks may open branches in Malaysia as Malaysian banks have opened their branches in Indonesia.

Malaysia’s move to allow foreign banks to own bigger stakes in local lenders, grant more licenses and ease short-selling rules comes as it seeks to triple the size of its finance sector by the end of the decade. It forms part of the country’s plan to make financial institutions more competitive, one fund manager said.

“The gradual removal of barriers for overseas investors will result in a level playing field and make the local financial market more competitive,” said Abdul Jalil Abdul Rasheed, chief executive at Kuala Lumpur-based Aberdeen Islamic Asset Management. “We have reached the stage where a lot of the local banks are already strong and can give foreign banks a run for their money.”

Under Malaysia’s first 10-year Financial Sector Master Plan published in 2001, local banks and brokerages were encouraged to merge as rules were gradually eased and more licenses granted.

No other Indonesian banks currently operate in Malaysia. Malaysian banks, meanwhile, have been opening in Indonesia in the past few years. Maybank, the biggest lender in Malaysia, operates in Indonesia through its 97 percent ownership in Bank Internasional Indonesia,

The opening of Bank Mandiri’s branch in Malaysia would follow the lender’s move to soon open a branch in Shanghai.

Haryanto Budiman, an executive vice president at Bank Mandiri said in October that the lender was awaiting approval from the State Administration of Foreign Exchange in China. Haryanto said then that the lender expected to open the branch by December. It has since provided no update on the branch opening.

Bank Mandiri president director Zulkifli Zaini said in August that the bank hoped to be a top five bank in Southeast Asia by 2014 and top three by 2020.

Shares in Bank Mandiri fell 1.5 percent to Rp 6,750 on Thursday. They have risen by 5.6 percent this year.

Additional reporting from Bloomberg