The chancellor has given Muslim leaders private assurances that he wants to create a "level playing field" in the economy, so that more and more "sharia compliant" financial products can be offered to British Muslims.
To comply with sharia law, financial products must not charge or earn interest, which is regarded as usury.
Brown hopes his proposed changes would remove barriers to many British and foreign Muslims participating fully in the financial system. They would help make London the natural home for Islamic funds from around the world, and increase the inflow of investment from oil-rich Middle Eastern countries.
"Making the UK and London a centre for Islamic finance means putting in place the tax and legislative framework that is supportive of Islamic products," said a senior Treasury official.
"On top of this, we’re also looking at promoting the City abroad as a centre for Islamic finance."
Officials insist the changes will not compromise the government’s determination to root out and cut off sources of terrorist finance.
The Muslim Council of Britain will host a large conference in June to showcase Britain to Muslim investors as a "gateway for trade with the Islamic world". The chancellor will be a keynote speaker at the conference, which is expected to have a delegation from every leading Muslim country.
The sharia finance industry is one of the fastest-growing markets in the world, and is estimated to be worth between £200 billion and £300 billion globally.
Industry projections suggest it will grow by 15% a year over the next decade, and will account for 50-60% of the savings of the world’s 1.2 billion Muslims within that time. The Treasury believes London, with its financial and legal expertise, is strongly placed to benefit from this.
Sharia-compliant alternatives to conventional financial arrangements include ijara products, in which rent rather than interest is paid on a mortgaged house, and musharaka, in which a share of ownership is transferred rather than interest paid.
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