A NEW breed of bank is courting Britain’s two million Muslims with loans and mortgages that comply with religious strictures prohibiting the payment or receipt of interest.

Islamic Bank of Britain will be the first fully Shariacompliant institution in the UK, but the venture will be able to tap into a vast and growing network of Islamic finance in the Gulf and the Far East, which is already involved in aircraft, property finance and government bonds. The pool of funds, estimated to be as large as $200 billion (£108 billion) has already attracted UK institutions, such as HSBC’s Amanah Finance, an Islamic bank within HSBC that is active in the Gulf and is already offering Sharia (Islamic law) mortgages to devout UK Muslims.

Iqbal Khan, head of HSBC Amanah Finance, said that the market for Islamic finance went beyond traditional Muslim centres in Bradford or Birmingham. “What surprised me most when we did our marketing is that 400 to 500 people turned up to a meeting in Cardiff,” he said.

Islamic banking is a recent phenomenon. The first institution launched in Dubai in the 1970s, was created to resolve a Koranic injunction that transactions based on riba (interest) are prohibited. Under Sharia, money is not a commodity and to make money from money is prohibited. Therefore Islamic banks do not offer interest on deposits but a profit share.

A range of investment techniques has evolved using the principle of sale and leaseback to allow Islamic financial institutions to provide mortgages and to finance assets, such as aircraft or equipment.

Nick Edmondes, a partner at Trowers & Hamlins, the law firm, said that Islamic banks were once a backwater but have become more sophisticated, engaging in commercial and trade finance such as equipment leasing. “They are growing at a rate of 10 to 15 per cent per year,” he said.

Within the past year Islamic institutions in the Gulf, have funded aircraft purchases worth $240 million, including two Boeing 777 aircraft for Pakistan Airlines and an Airbus A330 for Emirates.

Mr Khan pointed to another driving force, the huge Gulf pension funds, which are no longer content to hand over money to investment banks in London and New York. “They are now making an allocation to Sharia banks. It is a corporate social responsibility movement by Muslims.”

The pool of Islamic capital has even attracted foreign governments. In July the German state of Saxony-Anhalt became the first European government to issue a Sukuk, an Islamic bond. The €100 million (£66 million) five-year floating-rate note was crafted to avoid payment of interest. Instead, borrowers received a rent from a series of government properties that formed the collateral for the bond.