Islamic banks have become an international phenomenon as one of the world’s fastest-growing financial sectors. It was estimated that since 2007 the growth rate of Islamic finance products has reached 30%. In addition, Islamic financial institutions are becoming substantial players in the global banking and financial market and therefore a proper definition is essential to understand why they are different; how they started; and how they entered the international banking market. Islamic banks can be used to meet the challenges of this competitive environment, considering that they offer new resources and products, yet new ideologies, and it sets a new discourse. The paper introduces the main sources of Islamic finance principles that are the foundation for Islamic banking practices. The formation and the different structure of an Islamic financial institution and the challenge to corporate governance are of great importance to the conduct of Islamic banking. The need for regulation in the context of Islamic banking and the main risks associated with the different financial products will be rigorously discussed.