Abstract
Islamic Banking is not synonymous with interest free banking. It operates on Islamic code of ethics which is based on the Quran. All its funds are asset backed. This makes its entire funds available for investment in the production of goods and services. Islamic banking forbids investment in all economic activities that are socially or morally injurious to the society. It operates on profit and loss sharing motive. Islamic banking was formally introduced into the Nigerian banking industry effective 13 th January, 2012. The introduction generated a lot of controversies. This work examined the problems, challenges and prospects of the new model. It was found that most Nigerians lacked the knowledge of the model and its operations, hence the controversies. The study found that Islamic banking had taken root in many Western countries. The non-interest regime and its ethical principles offered veritable incentives and attractive options for investors. In spite of the controversies and the initial challenges, Islamic banking is suitable for funding entrepreneurship and economic development in the real sector of the Nigerian economy as it provides easy access to cheap source of funds.
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