The Prophet Muhammad said, "No babe is born but upon Fitra (as a Muslim). It is his parents who make him a Jew or a Christian or a Polytheist." (Sahih Muslim, Book 033, Number 6426)

Islam is the religion of all Prophets, Adam to Muhammad. Children are not born out of any sin, original, inherited or derived. They are born on the religion of their nature, i.e., Islam.
RECOGNITION OF ALLAH

The question which arises here is, "How can all people be expected to believe in Allah given their varying- backgrounds, societies and cultures? For people to be responsible for worshipping Allah they all have to have access to knowledge of Allah. The final revelation teaches that all mankind have the recognition of Allah imprinted on their souls, a part of their very nature with which they are created.

In Soorah Al-A'raaf, Verses 172-173; Allah explained that when He created Adam, He caused all of Adam's descendants to come into existence and took a pledge from them saying, Am I not your Lord? To which they all replied, " Yes, we testify to It:'

Allah then explained why He had all of mankind bear witness that He is their creator and only true God worthy of worship. He said, "That was In case you (mankind) should say on the day of Resurrection, "Verily we were unaware of all this." That is to say, we had no idea that You Allah, were our God. No one told us that we were only supposed to worship You alone. Allah went on to explain That it was also In case you should say, "Certainly It was our ancestors who made partners (With Allah) and we are only their descendants; will You then destroy us for what those liars did?" Thus, every child is born with a natural belief in Allah and an inborn inclination to worship Him alone called in Arabic the "Fitrah".

If the child were left alone, he would worship Allah in his own way, but all children are affected by those things around them, seen or unseen.

The Prophet (PBUH) reported that Allah said, "I created my servants in the right religion but devils made them go astray". The Prophet (PBUH) also said, "Each child is born in a state of "Fitrah", then his parents make him a Jew, Christian or a Zoroastrian, the way an animal gives birth to a normal offspring. Have you noticed any that were born mutilated?" (Collected by Al-Bukhaaree and Muslim).

So, just as the child submits to the physical laws which Allah has put in nature, his soul also submits naturally to the fact that Allah is his Lord and Creator. But, his parents try to make him follow their own way and the child is not strong enough in the early stages of his life to resist or oppose the will of his parents. The religion which the child follows at this stage is one of custom and upbringing and Allah does not hold him to account or punish him for this religion. (By Abu Ameena Bilal Phillips )