The "alternative rehabilitation centre" is being promoted by Associate Corrections Minister and Maori Party co-leader Pita Sharples.
The National Government is open to the concept, with Corrections Minister Judith Collins saying she is "very keen" if it can be shown to reduce the Maori crime rate.
Dr Sharples wants the 60-bed institution to be located in an urban centre so education and employment opportunities can be provided to Maori prisoners "who are determined to learn, heal and socialise".
He said the institution would still have security measures: "There'll be locks on the gates."
Dr Sharples said he had previously referred to the centre as an "alternative prison". It would have "less jailers and more healers, teachers, social workers".
Prisoners would have to earn their way into the centre by learning to speak Maori, he said.
They would prove themselves by becoming literate if they were not already, getting involved in a community project or charity from inside and showing good behaviour for four months or more.
Dr Sharples said it would suit prisoners nearing the end of their sentence.
"It could be petty thieves or it could be people who have done major crimes," he said.
The institution would be run by a runanga or committee involving the local iwi or hapu, the staff and the inmates, who would be involved in activities such as setting rosters.
Instead of living in a cell, inmates would live in flats or shared units and be able to move around and cook their own meals.
"They would learn the social skills of living with each other rather than being able to hide in a cell," he said.
Dr Sharples said inmates would go through a programme whereby they healed with their families, the community and the victims. They would also be expected to start preparing for a career.
There was no reason for the public to be concerned that Maori prisoners were getting different treatment.
"When you consider Maori are five times the incarceration rate than others, I think it's got to be a positive thing."
He said there was support for the institution from within Corrections, and he rated chances of National supporting it as "high".
Ms Collins said her ideology for prisons was "doing what works" and she was looking forward to hearing more details from Dr Sharples.
"I'm very keen on it," she said.
"If we can make some real difference in recidivism rates for Maori offending, we're going to make some real difference right across the board because of the 51% of the prisoners who are Maori."
Dr Sharples said the centre was a step on from the Maori focus units currently in five prisons, which he helped develop 11 years ago.
The success of these units would be shown in a Corrections report due to be released shortly, which found Maori in focus units were 7% less likely to reoffend than those in the general prison population.
Act New Zealand MP David Garrett, a former legal adviser to the Sensible Sentencing Trust, said the party would support the proposal.
"If they want to have a go to improve their abysmal recidivism rates, they can try," he said.
