Birmingham-based Islamic Bank of Britain made a pretax loss of £6.5 million in its first full year of trading.
The Aim-listed company, the only totally Sharia'a-compliant, wholly Islamic bank in the country, said the deficit was due to the costs of expanding the operation.
It now has seven branches, including two in Birmingham, and plans opening more this year.
Operating costs rose by more than half to £3.8 million in the year to December 31, IBB's figures showed yesterday.
Comparison with the previous trading period have been skewed by changing the bank's financial year end to December from July.
But the full-year loss compares with a pretax deficit of £2.7 million in the six months to June 30, 2005.
IBB said customer deposits at December 31 totalled £48 million compared with £2.1 million at the end of 2004 and the customer base had risen to 14,023 from 5,962 at end of June.
The bank has already launched Islamic current accounts, debit cards, consumer financing facilities and business banking and plans this year to introduce a home finance product and internet banking.
"During the year, we have focused on development of our product portfolio and the building of our delivery channel capabilities, and have seen a corresponding impact on customer recruitment numbers," said chairman Abdul Rahman Abdul Malik.
The bank welcomed changes to legislation relating to commercial property and leasing announced in the Budget.
It has been working for an overhaul of the rules to allow thousands of UK Muslim businesses to operate on a level playing field with other businesses.
Many have been penalised for operating according to their faith due to the way that commercial stamp duty and taxation relating to leasing transactions were treated when applied to Islamic financial products, rendering Islamic product options uneconomic.
In two key changes, double stamp duty on commercial property purchased using "halal" finance products is abolished and tax anomalies relating to leasing of property, equipment and plant for businesses, which previously penalised Islamic business practices, in which the payment and receipt of interest is banned, are resolved.
IBB finance director Ashraf Piranie said: "Until now, many Muslim businesses in the UK have either had to exclude themselves from key business initiatives, endure higher tax costs or compromise their faith by adopting business practices which are not 'halal' in order to remain competitive."