The musician, who had a string of hits in the 1960s and 1970s, is chair of the Islamia Schools Trust.
The unit at Cardiff University is the first of its kind in Britain and will lead research on Muslims in the UK.
The centre also offers a postgraduate course called Islam in Contemporary Britain.
Speaking at launch on Tuesday at Cardiff Business School, he said the centre was a “symbol of opportunity” to bridge the gulf of understanding he thought there was between Muslims and wider society.
He said: “Now is a chance, I think, to have a partnership, an academic understanding also, of how Islam impacts on the sociological behaviour of people, Muslims and non-Muslims.
“I think it’s important for non-Muslims to walk a little bit closer towards understanding Islam, and for Muslims to come closer to explaining it in a better, more academic and understandable way.
“It’s a two-way partnership. And (the centre) is a great symbol of opportunity, in the background that we have today, to go forward and perhaps make Islam a bit more integral to the British society, which it is capable of doing.”
Centre director Sophie Gilliat-Ray said Cardiff was an ideal location for the venture because the city was home to one of the oldest Muslim communities in Britain.
“Few people know that the first mosque in the UK was established in Cardiff in 1860,” she said.
“From this early history, there is now a sizeable and well-established Muslim population in the city, making Cardiff one of the best places to fully appreciate the full and dynamic history of Islam and Muslims in Britain.”
The research centre will be based in the School of Religious and Theological Studies. Members of the local Muslim community will form part of the advisory committee.
The university said its aim was to promote “scholarly and public understanding” of Islam and the life of Muslim communities in Britain.
As well as offering new masters and diploma qualifications, the centre will provide professional development courses for specific groups, such as prison officers, police officers and teachers.
The centre will also host a public lecture series and international conferences.
Mohammed Evans, from the Ethnic Minority Achievement Service in Cardiff Council, said the centre would be an “accessible, vibrant, and inclusive hub of learning about Islam in Britain, for Muslims and non-Muslims alike”.
Yusuf Islam – whose songs included Moon Shadow, Peace Train and Morning Has Broken – became a Muslim in 1977.
He did not record another pop song until March 2003, when he contributed to a charity album to raise money for the children of Iraq.