The Bank of England has become the first major Western central bank to set out its stall for sharia-compliant deposit facilities as Britain seeks to pitch London as the preeminent global centre for Islamic finance.
Born in its modern form in the 1970s, Islamic finance - which obeys religious principles such as bans on interest payments - has rapidly expanded over the past decade and there are now more than US$2 trillion (NZ$3.03 trillion) in Islamic financial assets.
Joining other central banks in the Middle East and Asia, the Bank of England is trying to allow Britain's five Islamic banks to access an equivalent to its deposit facility, which normally pays interest, something barred under sharia rules.
Britain became the first Western country to issue Islamic bonds in 2014 and the BoE last year became the second Western regulator to join the Islamic Financial Services Board, one of the main standard-setting bodies for Islamic finance.
The BoE will seek views from Islamic banks and others on four potential models, two involving deposit facilities and two involving liquidity insurance.
Stakeholders have until April 29 to give their views, after which the BoE will decide if there is a way forward.
"Its primary focus at this stage is to assess the feasibility of establishing Shari'ah compliant deposit facilities," the BoE said in a statement on Friday.
"The Bank understands that this is the area of greatest demand, given that a more limited range of liquid market instruments is available to Islamic banks compared with other banks."
The British Bankers' Association welcomed the consultation.
"It could play an important role in confirming London as the leading European centre for Shari'ah compliant financing," BBA regulatory director Simon Hills said.