Islam is the state religion in Libya with about 97% of Libyans being Sunni Muslim. Since independence, the principles of Shariah have at least partly applied in the state, and successive Libyan governments have shown a willingness to implement a dual system comprising Islamic and conventional banking institutions in the future. Nonetheless, the country's financial and banking system remains largely conventional, unlike many other countries with a majority Muslim population, including Egypt, Saudi Arabia, the United Arab Emirates, Turkey, Bahrain, and Malaysia, which have witnessed the development of banking systems with a substantial Islamic component. The objective of this chapter is to investigate reasons hindering the introduction of Shariah-banking system in the state. We find that the weakness of Libyan economy due to long periods of international sanctions, isolation, and systematic corruption, the absence of an Islamic monetary market, the uncertain relationship between the Central Bank of Libya and the newly introduced banks, and the lack of suitable human resources in banking are major challenges facing Islamic banking in Libya.