The recent development of insolvency of many conventional banks in Nigeria made the Central Bank of Nigeria
(CENTRAL BANK OF NIGERIA) to initiate the acquisition of some banks while others were ordered to merge. This
was a strong signal to seek for alternative banking system. However, the advocacy for the Islamic banking system as
alternative to conventional banking system has been received with mixed feelings. This might not be unconnected to the
secular nature of Nigeria. This paper therefore examines the origin of Islamic banking, Islamic financial system in
perspective, operations of Islamic financial system as well as the challenges and prospects for the Nigerian economy.
The paper posits that awareness, manpower, legal framework, societal belief, cash requirements as some of the
challenges while economic growth, attraction of investors, and fostering of egalitarian society are the likely prospects
for the establishment of the Islamic banking in Nigeria. The paper concludes that Islamic banking system will bring
transformation to all sectors of the economy vis-a viz eradication of poverty, equitable distribution of income and
employment opportunities in the country through effective mobilization and allocation of capital.