Islamic banking is based on the principles of islamic law as well as its practical application
through the development of islamic economics. Islamic law prohibits ‘usury’, i.e collection
and payment of interest on deposits. The recent global economic and financial crisis has
exposed the deficiencies in the conventional banking system due to effect of interest rate.
This calls for the development of islamic banking as a viable alternative to save millions of
the citizens from abject poverty. This study sought to find out the emergence and
significance of islamic banking as a panacea to Nigerian economic instability. It is in
pursuance of this that made the researcher to take a critical look at the concept of islamic
banking, history of the critique of usury, rationale for interest rate abolition, modern
application of usury prohibition as well as terminologies in islamic banking and likely
benefits of islamic banking on Nigerian economy. Hypotheses were formulated to guide the
study and the data collected analysed with the aid of chi-square, it was thereby inferred that
there exists a significant effect of the emergence of islamic banking in resolving economic
instability in Nigeria.