The British government will announce on Monday that it is set to become the first western state to issue Islamic bonds, seeking to meet what it believes is a significant demand for this financial product both inside and outside the UK.

In what ministers believe will be an important gesture to Britain’s Muslim community, the Treasury will say Monday that it is paving the way for the launch of the first Sharia compliant UK government bonds by 2008.

The move, to be announced by Ed Balls, the City of London minister, is unprecedented by any western state.

Sharia compliant bonds have hitherto been issued by the governments of Pakistan and Malaysia and also by corporate issuers around the world, but never by a western state.

The UK will not only be looking to issue these government bonds on wholesale financial markets. It will also be looking at using Sharia compliant bonds to allow Muslims in Britain to invest in domestic National Savings products through banks and post offices.

Mr Balls believes that the launch of Islamic bonds will help to bolster London’s role as an international financial centre. The Treasury estimates that total Islamic finance assets worldwide, including private equity and bonds, exceed $250bn (€184bn, £125bn).

But Mr Balls also believes that Monday’s move will send a powerful message to the Muslim community, both in Britain and around the world, that the UK auth­orities are intent on engaging with them in ways that have not happened in the past.

Mr Balls held a meeting with leading Muslim figures in the country last Monday – including the Muslim Council of Great Britain – at which the idea of launching Islamic bonds was discussed.

“We hope Muslim leaders will be impressed that we are now moving towards doing the technical work on this bond issue so quickly,” a senior Treasury figure said last night.

The reason for Islamic finance is that some Muslims believe the Koran prohibits certain practices that are central to western commerce, such as the payment of interest and financial speculation.

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