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By Fatma Alarimi

MUSCAT, Oct 4 (Reuters) - Oman will open subscriptions on Thursday for its first sovereign issue of Islamic bonds, taking a major step to develop its Islamic finance industry and giving the government a fresh channel to raise money.

Subscriptions to the rial-denominated sukuk will run until Oct. 22, the Ministry of Finance said in an emailed statement on Sunday. The sukuk will have a tenor of five years, with their profit rate set through an auction, and use the ijara structure, a common lease-based Islamic format.

The issue will be open to sophisticated investors - usually taken to mean fund managers, banks and other institutions, as well as wealthy individuals - with a minimum subscription of 500,000 rials ($1.3 million), the ministry added.

The size of the issue will be decided on completion of a book-building exercise. Previously, Omani officials had said they expected the issue to be 200 million rials.

The issue is important for Oman's fledgling Islamic finance industry because it will give sharia-compliant banks, insurance firms and funds a badly needed tool to manage their money more efficiently, which could help them to become more profitable.

Oman launched Islamic finance, which follows religious rules such as a ban on interest payments, later than other Gulf Arab countries, granting licences to two sharia-compliant banks, Al Izz Islamic and Bank Nizwa, in 2013.

There are also half a dozen Islamic windows of conventional institutions; together, the banks and windows account for about 5 percent of the country's total banking assets.

The sovereign sukuk, which will be listed on the Muscat Securities Market, may provide a benchmark which encourages private Omani companies to begin issuing Islamic bonds.

It also allows the government to begin tapping a new source of funding at a time when low oil prices are slashing its export revenues and hurting its finances. The government has boosted domestic sales of conventional bonds this year to cover a big budget deficit.

Bank Muscat, its Islamic window Meethaq and Standard Chartered are lead-managing the sukuk sale.

(Writing by Andrew Torchia; Editing by David French) ((andrew.torchia@thomsonreuters.com; +9715 6681 7277; Reuters Messaging: andrew.torchia.thomsonreuters.com@reuters.net))