The giving and receiving of interest is forbidden under Sharia law
The first child trust fund (CTF) to comply with Islamic law or Sharia will be launched in the UK in September.
The government launched the savings scheme for children earlier this year, with children born on or after 1 September 2002 receiving £250 each.
Up until now, parents of the 120,000 eligible Muslim babies could only choose non-Sharia compliant accounts.
Under Sharia law, it is forbidden to give or receive interest and to invest in unethical firms.
The Sharia-compliant CTF, operated by Children's Mutual, will be open for investment from 1 September.
As part of the scheme, every child born in the UK on or after 1 September 2002 gets at least £250 as a starting voucher. Families on low incomes should receive an additional £250.
PRINCIPLES OF ISLAMIC BANKING
All money must be invested in purely ethical industries
The giving or receiving of interest is forbidden
Money cannot simply be traded for money
Money can be used to buy goods or services, which can then be sold for a profit
It is hoped the money will ultimately help towards expenses such as college costs or for a deposit on a home.
The child is not allowed to access the money invested until they reach the age of 18.
People have been able to invest the money since April but none of the accounts complied with Sharia law.
"This account will fill a void, catering for an important growing community of people who up until now may have felt reluctant to invest their CTF voucher as it may have broken Sharia law," Gillian Ford, Children's Mutual spokeswoman told BBC News.
The government welcomed the launch of the CTF.
"The launch of the first Sharia compliant Stakeholder Child Trust Fund makes this universal product a meaningful reality for all children, regardless of their faith," Ivan Lewis, Economic Secretary to the Treasury, said.