In 2014, Britain became the first Western country to issue an Islamic bond or sukuk, raising 200 million pounds ($268 million) from a five-year deal that was 10 times oversubscribed.
British government officials said at the time this was a one-off transaction rather than part of a regular programme. But a Treasury spokesperson said the UK government now planned to reissue the bonds when they mature in 2019.
"The UK is the leading Western centre for Islamic finance and the government is committed to ensuring the future success of the sector," the Treasury spokesperson said.
Brexit could threaten London's dominance as a financial centre by potentially making it more difficult for London-based companies to sell products across the EU.
A Reuters survey showed around 10,000 finance jobs may shift out of Britain or be created overseas in the next few years because of Brexit, with Frankfurt and Paris benefiting most.
Bilal Khan, co-chairman and partner at London-based Islamic finance consultancy Dome Advisory, said developing Islamic finance was one way to counteract this, by strengthening London's ties with Southeast Asia and the Gulf, the world's two top centres for Islamic banking.
"Brexit has increased the government's interest in Islamic finance. Because of Brexit, the UK is keen to build economic links with non-EU countries," said Khan, who also serves as a senior advisor to a parliamentary group on Islamic finance.
He said a second sovereign sukuk issue by Britain might be expanded to raise as much as 1 billion pounds.
Islamic finance follows religious principles such as bans on gambling and outright speculation, with interest-bearing products deemed off-limits.
There are more than 20 firms in Britain that offer sharia-compliant financial products, the most of any other Western country.
This includes five Islamic banks: Gatehouse Bank, Qatari-owned Al Rayan Bank, Bank of London and the Middle East <BLME.DI>, Abu Dhabi Islamic Bank (>> Abu Dhabi Islamic Bank PJSC) and a unit of Qatar Islamic Bank (>> Qatar Islamic Bank QPSC).
Issuance of sukuk globally stands at around $342 billion. On the London Stock Exchange there are 65 sukuk listed totalling $48 billion, making it a major listing centre.
Within the EU, Luxembourg also issued a sovereign sukuk in 2014, becoming the first AAA-rated government to issue a euro-denominated Islamic bond.
In April, Britain's central bank took a step towards developing an Islamic money market, saying it would create sharia-compliant liquidity tools for use by Islamic banks.
This would help the UK's domestic Islamic banks, but none of them were hired for the sale of Britain's debut sukuk and there is no indication this might change, Harris Irfan, Managing Director of Cordoba Capital, said. "The City and the UK economy will need a new killer product in the Islamic finance space to really compete again." The industry might have to look beyond traditional areas such as real estate to something more fundamental such as investment into the UK mid-market, something Islamic finance has not cracked yet, Irfan said, referring to mid-market companies.
Richard Segal, analyst at Manulife Asset Management, said government upheavals following the Brexit vote last year might make it harder to develop the Islamic bond market.
"(The sukuk) was an interesting experiment, but without a natural target market. When (George) Osborne was running the Treasury, there was scope for these kinds of experiments ... but nowadays priorities and personalities are different."
There are also Islamic finance opportunities in the insurance business.
This year insurer AIG (>> American International Group), working with London-based Cobalt Underwriting, introduced its first sharia-compliant mergers and acquisitions insurance policy in the Middle East.
The policy covered a deal by a private equity fund of an asset in the United Arab Emirates, Mark Storrie, AIG's emerging markets M&A manager, said.
Kaan Yardimci, executive for international market development at the Lloyd's of London insurance market, told an industry briefing last month that London should seek a range of opportunities in Islamic insurance and reinsurance.
"We already have a number of syndicates that have an Islamic insurance capability. We simply do not think this is enough. We want Lloyd's to punch in line with its weight in the global insurance market."
(Editing by Andrew Torchia and Jane Merriman)
By Bernardo Vizcaino and Carolyn Cohn