This dissertation investigates the extent to which between Islam and democracy are compatible in the Muslim world. While some scholars have argued that Islam is inherently incompatible with democracy many have found, in contrast, that Islam has many resources to accommodate a successful democratic state. If Islam is compatible with democratic governance at a doctrinal level, why then are the majority of Muslim countries largely authoritarian? To address this question, I introduce a refinement on this discrepancy by focusing on the coexistence of emerging Islamic institutions with democratic transitions in 49 Muslim-majority states. Traditionally, Islam has been operationalized as a "dichotomous" variable based on demographics or an "attitudinal" measure based on survey responses. Both measures have failed to account for an inherent variation of Islam's role across the Muslim world. I developed a new index to assess the variation in Islam factor across Muslim countries: <italic>Islamic Institutionalization Index</italic> (III). This new index avoids the shortcomings of the current approaches to quantifying "Islam" and captures the range of variation in Islamic Institutions across 49 countries by allowing scholars to gauge the density and level of Islam in each country. With the index I designed, I rely on three different levels of analysis to examine under which circumstances Islam and democracy can coexist. More precisely, by looking into three categories of Islamic institutions (educational, political, and financial), I raise the following question: "To what extent and in what levels do Islamic Institutions support the coexistence between Islam and Democracy?"Analyzing 49 Muslim-majority states, I utilize mixed methodology by using <italic>Configurational Fuzzy-Set Qualitative Comparative Analysis</italic> (FS/QCA) and focused case study analysis. FS-QCA offers an innovative and robust approach to identify configurationally complex factors while discerning the emerging patterns displayed by medium size (N=49) cases. To further explain the complex interplay of conditions, I focus on two case studies in greater detail: Kazakhstan and Turkey. I find a strong empirical association between the density and scope of Islamic political, educational and financial institutions and the existence of democratic norms (civil and political liberties and democratic institutions). Findings further suggest that Islamic institutions can coexist with civil and political liberties when governments allow Islamic institutionalization to function in society with no stern political restrictions. Among the three categories of III, Islamic states with higher levels of <italic>Islamic political institutions</italic> manifest <italic>particularly</italic> higher levels of democracy. Conversely, states that ban the emergence of a range of Islamic institutions in politics, education, and interest-free banking exhibit low levels of freedom and stunted democratic institutions.