More Than a Prayer.

Nicholas Bloy had second thoughts about launching a private equity fund that abided by the tenets of Islamic law, or Sharia. His skepticism was understandable: a truly Muslim fund couldn't invest in a multinational corporation like Vivendi because it owns liquor brands like Seagrams, or Boeing because it produces cruise missiles. The fund couldn't even use standard debt financing because strict Muslims shun interest-based banking. But Bloy, a partner in Navis, a company that manages $100 million in conventional equity funds, saw a business opportunity and in October launched a new fund aimed at Muslim investors. It's already attracted more than $10 million in investments, and the firm is optimistic that it could reach 10 times that when the fund closes next year. "We saw a pent-up demand for Islam-compliant investments," says the fund manager.

So have many others. Islamic banking, due to high levels of liquidity and a growing sophistication in investment products, is on the rise. Two hundred Islamic financial institutions--including banks, insurers and mutual funds--now dot Asia and the Middle East. Western banking heavyweights like HSBC, Standard Chartered Bank and BNP-Paribas have launched a full line of products to serve moneyed Muslims from the middle class to the super affluent. And if the field continues on its impressive upward tick--it's said to have been growing at 15 percent a year for nearly a decade--the pious will soon have many more investment vehicles at their disposal.

Malaysia has become a leader in the world of Islamic banking by choosing the most practical interpretations of the term. It has invested heavily in developing a Sharia-friendly financial system--one that forbids charging interest, but that has the regulatory, accounting and compliance standards any investor would expect. The country's Islamic financial institutions--which make up about 8 percent of the banking sector--offer services that mirror and compete with conventional banks. So much so that some question if there is any difference at all. Such is the overlap that more than half of Malaysia's Islamic loans go to non-Muslims. "Islamic banking in Malaysia comes to exactly the same thing as conventional banking," says one Kuala Lumpur-based banker. "You cannot operate without a differential between today's money and tomorrow's money."

Of course, that does, Islamic bankers admit, take a little finesse. Say, for example, a customer in Malaysia wants to buy a house. Under the Islamic option, the bank would purchase the house and sell it to the customer at a higher price. The customer then ...