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If the plan succeeds, the bank's capital will dwarf the competition in an industry packed with small players. Saudi Islamic bank Al Rajhi, the Arab world's largest listed bank in terms of turnover, has a paid up capital of $1.80bn.
Al Masref bank was licensed last month to operate as a commercial and investment bank according to sharia, or Islamic law, which forbids lending or borrowing on interest.
The bank will start operating with a capital of $5bn and wants to raise that to $10bn in the first five years, founding committee chairperson Khalid Al-Suwaidi told reporters in Bahrain's capital Manama.
Al Masref had planned to raise about 60% of the initial $5bn through a public offering this year and the rest through a private placement. However, strong demand from private investors may mean a smaller IPO, Suwaidi said.
He said Al Masref would be the largest Islamic bank in the world, filling a void in the world's biggest energy exporting region, where governments are ploughing record oil revenues into ports, highways and resorts.
"Now foreign banks finance giant projects in our region ... But with the existence of a local, national bank with this size, this should change," Suwaidi said.
The Gulf state of Qatar was the second-largest source of project finance deals last year after China. Qatar's economy minister said last week an estimated $1 trillion worth of deals were planned in the Gulf over the next eight to 10 years.
But Islamic banks lack the scale to take on such projects. Bahrain's central bank governor called for consolidation in the industry last year, saying Tier 1 capital of the largest Islamic banks was around 1% of that of largest global banks.
Islamic finance is one of the world's fastest growing niche markets and caters to devout Muslims who want socially responsible investments that avoid usury, pork, alcohol and gambling.
Suwaidi said the bank would also seek opportunities outside the region.
Jawad Habib, a founding investor, said the IPO would likely be launched in the first half of 2006, with subscription open to international investors.
He said most of the founders were Bahrainis, with others coming from Qatar, Saudi Arabia, Lebanon, the United Arab Emirates, Oman and Kuwait.
Bahrain is the financial hub of the Gulf, with around 360 Islamic and conventional financial institutions including banks, insurance firms, and offshore banking units.
