Product development is the most important management facet for any financial institutions. It is a complicated and difficult process that embodies creative thinking, extensive knowledge, patience, perseverance and an encouraging business environment that can afford the risks of this creativity. Since the establishment of the first Islamic banking of Mit Ghamr, Egypt in the Muslim world on 1969, there are numerous products and services that have been offered by them. At initial stage, due to there is no model for Islamic banking in developing new product, most of the products are result of imitation from conventional products and services where they have been Islamized by extracting the impermissible elements in Islamic law such as riba (usury),gharar (uncertainty) and maysir (gambling). Later, they are being known with many names of Islamic financial transaction concepts like murabahah (sale by cost mark-up plus), ijarah (hire), mudarabah (silent partnership) and musharakah (parnership). In recent development, the industry is moving quickly with introduction so many products and services in the market by using many new instruments and complex mechanism in structuring new product. Thus, it is important to study how Islamic banking product is structured, processed, element’s involved, issues and challenges from the aspect of Islamic law (Shari ͨah) perspective in developing new product and Malaysian Islamic banks are taken as a case study.

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