In recent years, Algeria has embarked on a series of comprehensive banking reforms aimed at modernizing its financial system and promoting greater financial inclusion. Within this evolving context, Islamic finance has emerged as a promising alternative to conventional banking, offering Shariah-compliant products that align with the ethical and religious values of the predominantly Muslim population. This growing interest reflects the increasing demand for financial mechanisms grounded in fairness, transparency, and shared risk, the core principles of Islamic finance that support socio-economic justice and inclusive growth. Despite these positive developments, the progress of Islamic finance in Algeria remains relatively limited compared to regional and global experiences, primarily due to an incomplete legal and regulatory framework, insufficient institutional capacity, low levels of financial literacy, and a lack of public awareness of Islamic financial instruments. Employing a descriptive-analytical approach, this study examines the current state of Islamic finance in Algeria, its relationship with ongoing banking reforms, and its potential role in achieving the country’s broader development objectives. The findings reveal that, although the policy environment has become increasingly supportive through the establishment of Islamic banks and Islamic windows within conventional institutions, practical implementation remains fragmented and below expectations. This study argues that reinforcing the regulatory framework, improving institutional efficiency, promoting innovation, and enhancing public trust are crucial steps to unlock the sector’s full potential. By situating Algeria’s experience within the wider context of Islamic finance development in emerging economies, this study contributes to the academic and policy discourse on leveraging Islamic finance as a catalyst for inclusive and sustainable economic growth in Algeria.