GettyMuslim students will now be able to take out student loans, interest-free
Ministers confirmed on Monday a new finance model will be introduced across the UK which does not conflict with the rules of Islam.
Loans which charge interest, like most student loans in Britain, cannot be taken out by Muslims as it goes against teachings in the Koran.
Campaigners say this is putting some young people off going to university.
To ensure participation and choice are open to all, we plan to legislate for the creation of an alternative model of student finance
The new model could be included in legislation very soon in the hope it will encourage more Muslim teenagers to go to university.
The document said: "We will introduce an alternative finance system to support the participation of students who, for religious reasons, might feel unable to take on interest-bearing loans.
"We have heard that that some students will not access higher education in these circumstances, some will access higher education and use loans but will be troubled by their situation, and others will restrict their choice of course or institution to try to minimise the sums involved.
"To ensure participation and choice are open to all, we plan to legislate for the creation of an alternative model of student finance."Campaigners say Muslim teens have not been going to university as they are not allowed to have loans
Ministers said the new model is necessary after increased interest rates on student loans came into play from 2012.
But they were keen to say students who used the new "halal" loan would not have any financial advantage over those using a normal student loan because they would still pay the same amount back.
In the last census in 2011, there were two million Muslims in Britain, making up five per cent of the population, a rise of two per cent from ten years before.
With 329, 694 Muslim students in England and Wales, the UK is currently at a record high.
The Takaful system, used in many Middle Eastern countries, is a co-operative system of repayment in which users donate small "charitable" contributions for other students to use in the future.
No interest is charged on the loan but the Government said the total paid back would be the same as if they were paying interest, like other students.
Ministers said every student, not just Muslims, would be able to use the system, which is being finalised.Non-Muslim students will also be able to use the Takaful loans Under Sharia law Muslims cannot take out loans with interest
They added the charitable contributions would have to be legally enforceable and could be administered by the Student Loans Company through the tax system, so it is the same as regular student loans.
Students would apply in the same way and enter a contract were they would promise to repay a contribution.
Like regular student loans they would then have to start making contributions to pay the Takaful back when they start earning the repayment threshold.
The white paper added: “This will be open to everyone and will not result in any advantage or disadvantage relative to a student loan, but will avoid the payment of interest, which is inconsistent with the principles of Islamic finance.
“It has the potential to support participation from Muslim students and therefore to help meet the Prime Minister’s clear commitment to increasing the number of BME students going to university.”