The UK can become the leading European financial centre for Islamic finance, the Financial Services Authority (FSA) has suggested.
It has published a paper detailing its role in promoting the UK in this area, which has been experiencing steady growth worldwide and is worth about £250 billion.
The FSA claims it has encouraged this growth with an "open and flexible regulatory environment".
Examples of how issues have been dealt with using the existing regulatory framework are included in the document.
It also identifies issues specific to Islamic finance as well as opportunities.
FSA chairman Callum McCarthy said: "There is huge potential for an expansion of Islamic offerings in the UK's financial markets, which will in turn boost London's position as an international financial centre."
A spokesperson for the Debt Management Office said that the government was seeking to promote competitveness and innovation in financial services and Islamic finance is recognised as a high-growth area.
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