Ammon News - DUBAI (Reuters) - Kuwait Finance House (KFIN.KW) (KFH), the Gulf Arab state's largest Islamic bank, said on Thursday its 20 percent capital increase had been oversubscribed by shareholders, without providing specific details.

The bank was raising 319 million dinars ($1.12 billion) from the sale of 639 million new shares at 0.5 dinars each - a 35.9 percent discount to the closing price at the start of June, when the offer period was announced.

The share sale, which ran for two weeks from June 5, will boost KFH's paid-up capital by 64 million dinars and would fund the bank's expansion and strengthen its balance sheet.

Kuwait government owns about 49 percent stake in KFH.

Kuwaiti banks have suffered since the global financial crisis because of exposures to the local real estate and stock market whose values have dropped sharply. Exposure to local investment firms who borrowed heavily in the boom years to finance activity in both areas also hit bank balance sheets.

The sale will push the bank's Tier 1 ratio - the key measure of a bank's financial health - towards its 17 percent target for the end of 2013. It currently stands at 13.6 percent, below the 15.5 percent average for the Kuwait banking sector, according to ratings agency Moody's.

Last month, Moody's downgraded KFH by one notch to A1 on the back of continuing pressure on asset quality, an increasing reliance on volatile investment income for revenue and the bank's complex organizational structure.

KFH said in November that it wanted to increase its capital as part of the bank's five-year strategic plan, with shareholders giving assent to the move in April.