Muslims keen to comply with the financial strictures of religious Islamic law may be able to buy Premium Bonds for the first time after a government review announced yesterday.

Ed Balls, the Treasury Minister in charge of City affairs, wants all types of government-sponsored savings products to be accessible to those who adhere to Sharia.

Premium Bonds, a favourite among small savers for 50 years — with the numbers that decide the winning bonds generated by a machine called “Ernie” — will be among the National Savings products to be tested for suitability. All other National Savings accounts will also be examined.

Government bonds — so-called gilts — sold to individuals and big institutional investors will also come under the feasibility study. They may be where the biggest impact of any review is felt.

The Government will issue about £60 billion of gilts this year. The Treasury estimates that Islamic assets top £125 billion worldwide.

Financial products offered by the Government to ordinary Muslim investors present a challenge for National Savings, which provides safe and simple products ranging from Premium Bonds to savings accounts. Premium Bonds will have to overcome two difficulties: Sharia outlaws the payment of interest; and gambling runs contrary to strict Islamic tradition.

Nation states most commonly borrow through the issue of bonds. Several Muslim countries, such as Malaysia, Singapore, Qatar and Dubai, issue a proportion of their national debt in Islamic bonds.

Most Islamic financial products work on the principle of investing in a fixed asset able to generate a rate of return, such as property that yields rent or an asset that can repay a larger capital sum on redemption. These avoid paying interest.

Pakistan has issued an Islamic bond linked to its motorway network, which generates income through road tolls.

The Treasury was unable to say how British bonds might be structured but, if it does find a way, Britain would be the first European state to issue financial products that are compliant with Islamic law.

If National Savings can devise a product that is able to produce a competitive rate of return it would spark interest from non-Muslim investors, who would be attracted by its performance alone.

The commercial sector is already moving into the Islamic market. Lloyds TSB, one of the biggest banks, announced this month that it would provide Islamic accounts for businesses. It also offers Islamic current accounts and mortgages.

The National Savings’ review will report next spring, in time for the Budget, as part of an on-going look at the products offered to retail investors.

Sharia-compliant government bonds, including Premium Bonds, would be aimed at Muslim investment funds or wealthy individuals in Britain or the Middle East.

The Treasury would hope that greater access would reduce central government costs associated with bond issuance as well as making its financial system more inclusive.

Mr Balls is expected to announce the moves today at a conference hosted by the Financial Services Authority. He will say: “Domestically, we will do everything we can to promote new ways for British Muslims to bank, save and borrow using Islamic finance products.”

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