Lloyds TSB will launch a home finance product which is compliant with sharia law today, a month after introducing an Islamic current account.

The facility - an alternative to a traditional mortgage - conforms with Islamic law, which forbids both the payment and receipt of interest. Rather than lending money to a customer to buy a property, the bank buys a home for the customer, who then pays the purchase price in monthly instalments.

As the bank is the legal owner of the home, the customer also pays a monthly rent, which decreases as the customer buys the bank's share of the property. Eventually the customer buys out the bank, at which point ownership is transferred.

Mark Austin, of the bank's Islamic financial services division, claimed that the new facility will do away with the dilemma of having to go against one's faith or avoid a mortgage altogether.

"Our research tells us that three quarters of the country's Muslims want banking services that meet the needs of their religion, and this new home finance product should help bring a new generation of homeowners onto the property ladder," Mr Austin said.

Islamic mortgages have tended to cost more than standard ones, and have traditionally demanded a 30% deposit. However, competition has recently increased - with facilities now offered by institutions such as independent financial adviser Destini, and HSBC's Amanah Finance division. That competition has driven the required deposit lower - with both Amanah and now Lloyds TSB providing up to 90% of the purchase price.

Although the market is still relatively limited, mainstream banks have finally begun to wake up to the potential in offering sharia-based products to Britain's 1.8 million Muslims. Back in 2002 a report by market analyst Datamonitor estimated that sharia-compliant mortgages would be worth £4.5bn by next year.

Amanah also offers a pension fund which excludes shares in companies dealing in areas such as alcohol, gambling, pornography, pork products, tobacco or conventional financial services.

Lloyds TSB - which has consulted a board of Islamic scholars - will pilot the scheme at the five branches in London, Luton and Birmingham which have offered a sharia-compliant current account since last month.