Although it draws its fundamental values from practices and core principles that go back centuries to the dawn of Islam, contemporary Islamic Banking started in the early 1960s concurrently in Egypt and Malaysia. In 1962, the Hajj Fund, TABUNG HAJI, was established in Malaysia to accept saving deposits from persons who intend to go for Hajj (pilgrimage) in Makkah and invest the proceeds in accordance with the Islamic law. The Fund grew to provide full scale banking services and to become one of the largest banks in Malaysia. Around the same time a series of small saving/investment banks were established in Egypt's countryside, beginning in 1963 in the village of Mit Ghamr. These small banks also practiced the same principle of interest-free banking.

The theoretical developments of this revolution in the Banking system continued until 1974, when the first Islamic commercial Islamic bank was established in Dubai, putting theory to practice. The same year also witnessed signing the agreement to establish the Islamic Development Bank (IDB) as an inter-governmental pan-Islamic bank. The IDB main objective is to finance development projects in the Muslim countries in accordance with the rules and ethics of Islamic finance. As part of this effort, IDB, through its investment arm "Islamic Corporation for the Development of the Private Sector" (ICD), together with the Government of Maldives established Maldives Islamic Bank in 2010 as way to introduce and develop Islamic Finance in the Maldives.

A short time following the establishment of IDB, Faisal Islamic Bank was opened in Egypt and Sudan (1977), followed by Bahrain Islamic Bank, and Jordan Islamic Bank (1978). By mid 1980s, this new alternative style of banking, based on Islamic principles became an established part of mainstream banking in the Middle East and South Asia. They continued to sprout across South and East Asia in addition to Turkey and the Arab countries.  Subsequently, ethical banks and financial institutions, based on Islamic principles, spread in countries where Muslims are minorities, such as UK, Luxemburg, Denmark, Australia, India and the United States. Many Muslims flocked to these new banking institutions, not only for ethical and religious reasons, but also because they provided professional and friendly services to their customers. Today Islamic banks have more than 300 institutions spread over 51 countries, as well as an additional 250 mutual funds that comply with Islamic principles.