In the aftermath of the Islamic resurgence movement, the call for the abolition of interest and the introduction of profit and loss sharing schemes gained momentum. Islamic writers have concentrated on describing the operations of an Islamic bank in an interest based economy and others have outlined the principles and functions of the Islamic economy. However there has not yet been a comprehensive study dealing with the implications of abolishing interest in a specific country. Therefore the major objective of this thesis is to examine the possible introduction of interest free banking in Kuwait, its implications, operations, advantages and diyantages. It also focuses upon the transformation process necessary to bring about these required changes. The first chapter presents an overview of the Islamic economic system and its underlying principles; these are the cornerstone for any transformation from the conventional economic system to a new Islamic system. The second chapter focuses on Islamic banking, its methodology, objectives and main operations in theory and practice. The third chapter deals with the main features of the Kuwait economy. An emphasis is put upon the existing banking system and the role of the central bank in conducting its interest-based monetary policy. The thesis then describes the changes required in the current financing instruments employed by Kuwaiti banks in order to adapt to a new Islamic system. In this respect it is assumed that the current banking structure will remain intact. Stress is placed upon the changes required in the short, medium and long-term financing instruments used domestically. The central bank's changing role and the monetary policy implications of a new Islamic system are also analysed. The final chapter summarises the findings and recommendations of the thesis and the advantages and disadvantages of interest free banking with reference to Kuwait.