Before the September 11, 2001 terror attacks on the United States, few in Asia had heard of Islamic financing. Now, the centuries-old concept based on Islamic law is gaining ground in the region.

The global Islamic banking market is estimated to be worth $250 billion, and to be growing between 15 and 20 percent annually. Middle Eastern financial institutions have long dominated the market, with money primarily invested there, in the United States and Europe.

Now Asia is getting a slice of the pie.

After the September 2001 terror attacks in the United States, Middle Easterners - many of whom insist on adhering to strict Islamic law even in their business dealings - began to seek new markets for their cash. With its lively economies, well developed banking systems and large Muslim populations, Asia was well positioned to capture the cash flow.

Mohamed Ross is a director of the Islamic banking unit in Malaysia of British bank HSBC.

"There's a lot of liquidity in the Middle Eastern market with oil at about $56 a barrel," Mr. Ross said. "Where does all these liquidity go? It has to look for a home."

The key to attracting this cash was the presence of a banking system compliant with Islamic law, or Shariah. Islamic law prohibits the charging of interest, called "riba". Unlike conventional banking, where the lending risk is reflected in the amount of interest the borrower pays, in Islamic banking the borrower and lender share both risk and profit.

Typically, instead of lending money to a homebuyer, an Islamic bank purchases the house and sells it to the buyer at a profit. The client then pays off the marked-up price over a set period of time, like a mortgage. No "interest" is involved.

In addition, Islamic investors only buy into businesses whose activities and products are not "haram," or against the teachings of the Koran. Prohibited industries include gambling, pornography, arms and defense, tobacco, and businesses dealing with pork products.

Demand for shariah-compliant investments in Asia has been growing. When the government of Pakistan decided to seek $600 million from the international market in January, it issued an Islamic bond, which paid investors with revenue from a toll highway instead of normal interest. The government received offers worth more than $1 billion, about half of which came from the Middle East.

Badlisyah Abdul Ghani, head of the Islamic unit of Malaysian investment bank CIMB, says there is still a lot of cash chasing few investment possibilities. Mr. Badlisyah says this could help Asian companies raise money to expand their businesses.

"The demand for Islamic finance has been increasing for the last few years," said Badlisyah Abdul Ghani. "As a result, it has basically encouraged a lot more issuers and corporates to tap the market to meet their demand."

In compensation, Asian companies are providing generous returns to their investors. The Dow Jones Islamic stock index for the Asia-Pacific region, composed of 783 companies, rose 11.5 percent last year. As of the end of May, market capitalization for those stocks stood at nearly $2 trillion.

Predominantly Muslim countries are going after these funds in a big way. Malaysia's CIMB for instance, has joined a major Saudi financial company and currently manages millions of dollars of Middle Eastern money.

But non-Muslim countries like Singapore are scrambling to catch up. Over the past year, Singapore has been forging closer relations with countries in the Persian Gulf and building up its expertise in Islamic finance.

Speaking after a recent visit to Saudi Arabia, Singapore's former prime minister, Goh Chok Tong - now the city's top monetary authority - said the Saudis appear to be eager to do business in his country.

"Naturally they want good returns for their funds and they may be looking toward Asia to see if they can increase the return of their funds," said Goh Chok Tong. "So I'm trying to catch their eye."

Islamic banking operations are more mature in Malaysia, Indonesia, Pakistan, Bangladesh and Brunei, all predominately Muslim countries. Malaysia has by far the most advanced system in the region. From only $97 million in assets in 1983, Islamic banking there grew to $21 billion by 2003. About 10 percent of Malaysian banking assets are now "Islamic," and bankers expect this to rise to 20 percent in five years. About half of local bonds issued are Islamic.

HSBC's Mr. Mohamed says the government wants to make Malaysia an Islamic financing hub.

"The Malaysian government, by making a good legal framework, tax treatment, encourage business to be done on par with conventional [financing]," he said. " I think we [Malaysia] would like to be the regional hub if not the global hub for Islamic finance."

As Malaysia faces greater competition, Mr. Badlisyah of CIMB says the country's strong links with Middle Eastern financial institutions will make a difference. Malaysia currently chairs the Organization of Islamic Conference, the largest grouping of Muslim nations.

"You must have strong counterparties, you must have good relationships even with your competitors," he said. "The Southeast Asian market and the Middle Eastern market are very important markets for the Islamic business. It does make sense to have a good bridge between the two markets."

While Middle Eastern cash is jump-starting the region's Islamic banking, bankers predict Asia's millions of Muslims - who are not yet utilizing Islamic financial products - will ultimately fuel its long-term growth.

In Indonesia, which has the world's largest Muslim population, Islamic banking is estimated at only two percent of total banking assets. But global banking giants like HSBC and Standard Chartered see a huge potential, and are opening fully Islamic branches in predominantly Muslim countries.

The short-term challenge, bankers say, is for Islamic financial products to appeal not only to Muslim customers' ethics, but to be competitive with conventional, interest-based financing.

Mr. Mohamed of HSBC says that as the concept spreads through the industry and more sophisticated products are offered, he is optimistic Islamic banking will become part of mainstream finance in Asia.