The first Hamas-licensed bank in the Gaza Strip has opened for business, a move that could help Palestinians in the territory bypass a financial blockade imposed by Israel and its Western allies.

Hamas, the Islamist group that runs the Gaza Strip, has said it would not control the Islamic National Bank, an assertion disputed by its rivals in the Israeli-occupied West Bank where President Mahmoud Abbas's Palestinian Authority is based.

Mohammed Ghanem, director of funds and investment at the bank, said on Wednesday the institution, which opened on Tuesday, would be providing loans for projects in the Gaza Strip, where 1.5 million Palestinians live.

Bank officials put the bank's starting capital at $20 million and said the money was provided by local businessmen.

The Western-backed Palestine Monetary Authority (PMA) in the West Bank city of Ramallah, which registers and regulates banks, said the Islamic National Bank was established in violation of Palestinian law.

The PMA's position means the institution, operating under Islamic rules that bar charging interest, may have to function autonomously without access to funds in the West Bank or to the global banking system.

"The Monetary Authority informed banks not to deal with us but we are willing to deal with any local bank, and in the future we hope to be able to deal with local and outside banks," Ghanem told Reuters.

Western diplomats said a growing, cash-financed trade through tunnels between the Gaza Strip and Egypt could provide enough liquidity for the new bank to function, free from Israeli restictions that have pushed PMA-regulated banks to the brink.

Citing Hamas's refusal to recognise Israel and renounce violence, the United States and its European allies have long shunned the group, financially and diplomatically, and cracked down on its access to funding after its 2006 election victory.

Israel has kept border restrictions tight along its Gaza frontier following the 22-day war it launched last December in what it described as an offensive to choke off rocket fire by Palestinian militants.

Regulated banks in Gaza have been particularly hard hit by Israeli limits on their access to shekel banknotes, the main currency for Palestinians, making it hard for Abbas to bring in enough cash to pay wages to Palestinian Authority staff there.

Ala Rafati, chairman of the Islamic National Bank, said it would pay the salaries of at least 6,000 of the 23,000 government employees registered with Hamas authorities in the Gaza Strip this month.