They could invest in the ordinary shares of listed companies that they felt complied with the tenets of the Koran. But the prohibitions against earning interest on any money invested meant that collective investment schemes, such as unit and investment trusts, were mostly out of bounds to devout Muslims.
According to Hamish Archibald, of City Financial Managers: "Under the regulations governing unit trusts, a fund manager has to invest to maximise the returns to shareholders. This means that any cash in the fund has to earn the highest rate of interest that is prudently available." Even ethical funds had no appeal as these fell down on this score. This has meant that in order to have a well-diversified portfolio, a Muslim had to be sufficiently wealthy to invest directly in a portfolio of shares rather than spread risk through pooled funds.
However, with the emergence of OEICs (open-ended investment companies), new funds with a company-type structure that are set to replace traditional unit trusts, this specific regulation is removed. This is the key difference that has allowed such a fund, Al-Safa Investment Fund, to be launched, according to Mr Archibald, whose London-based firm looks after the fund's administration services.
At long last, devout UK Muslims have an authorised fund in which they can invest. Set up as an OEIC, investment management has been delegated to Greig Middleton.
The fund will invest in accordance with Sharia (Islamic religious law). This means it will only invest in a company after the managers decide it meets all the requirements of the faith and that it meets the approval of an independent supervisory board qualified in Sharia.
As well as any interest-earning deposits or stock, there is a long list of other prohibited investments. These include anything to do with banking, life assurance, alcohol, gambling, pornography, any company involved with pork or pork products, and any other company that the supervisory board finds unacceptable. Interestingly, unlike ethical funds, Al-Safa could invest in armament manufacturers.
Brian Tora, the head of Greig Middleton's Asset Management arm, who is also a regular columnist in The Independent, will be selecting the portfolio from companies in the FTSE 350.
"While there are a lot of companies we can't invest in," says Mr Tora, "there are probably 200 or so that fit the criteria from which we can select our shares. We initially want to invest in 25 or so companies, building up to maybe 70 holdings."
How popular the fund will be is difficult to judge. "I think that it is a good start," says Bipen Patel, of Forum Associates, a Bolton-based independent financial adviser. "But selling a fund that invests according to Muslim principles is appealing to a niche market that has no awareness that such a fund exists.
"Much will depend on the supervisory committee's credibility with the community and where they draw the line on investments."
Four members have been appointed to the supervisory committee, all well-known members of the Muslim community and all qualified in Sharia.
They are Dr Sharhawy, a respected member of the Islamic Cultural Centre in London; Mohamed Rafiq, experienced in both banking and finance; Dr Gamal Manna, a professor of Sharia in Toronto; and Dr Abdul Rahman, an imam at Cairo's Al Azhar University.
"It has taken us over three years to find someone to launch a fund that invests in strict adherence with our religious laws," says Ian Thomson of STZ, the London-based Muslim partnership which initiated Al-Safa Investment Fund. "Greig Middleton was recommended as they are the country's leading private client stockbroker and a well-known fund-management group."
Minimum investment in Al-Safa fund is pounds 1,000, or pounds 50 per month. It has an initial charge of 5.3 per cent and an annual charge of 1.75 per cent. As the initial offer period closes on 29 March, units are being created on application, so it can be used for a PEP if applications are received before the end of the financial year. Otherwise it can be included in an Individual Savings Account after 6 April.
Contacts: Greig Middleton on 0171-655 4000; City Financial Managers on 0171-556 8800; Forum Associates on 01204 433755