Balancing the altruistic ideals of faith with the need to turn a profit has never been easy: Look no further than the Book of Matthew for an early example of what history's most famous carpenter-cum-rabbi thought of money changers in places of worship. But while Judaism and Christianity historically had strict prohibitions against usury, today it is Muslims who adhere to the most stringent rules regarding finance of the three.

Islamic banking is unique in the world of finance, mostly because of what is prohibited. There are some straightforward bans: No investing in businesses that deal with products considered haram, or forbidden, most commonly pork and alcohol, but also Pop-Tarts (gelatin) and some aftershave (alcohol). Speculative bets are barred, and transactions must be based on real assets, not cash flows. By far the most significant rule is the prohibition on charging interest. The ban is meant to reflect the particular ethical responsibilities bestowed upon financiers: Profits and losses should be shared between debtors and creditors.

Many Muslims believe this risk-sharing approach can help remedy our broken financial system, even if it's difficult to square with mainstream, conventional banking. But a new book by financial industry insider Harris Irfan claims that many of the practitioners of Islamic finance have abandoned this honorable aim in an effort to keep up with the sophisticated tools of Western investment banks.

In "Heaven's Bankers: Inside the Hidden World Of Islamic Finance," Mr. Irfan, an observant Muslim, charts a course from seventh-century Arabia, where Muslim traders invented the precursors to modern checks and trusts while plying the Silk Road, to the 1970s and the establishment of the first Islamic commercial lenders in Dubai, as well as the short-lived "Islamization" of Pakistan's economy. But it's the turbocharged present that is the focus of the book: Islamic banking, otherwise known as Shariah-compliant banking, is now an industry approaching $2 trillion, thanks to soaring trade in emerging markets such as Malaysia and the United Arab Emirates.

Mr. Irfan has been a key player throughout much of this contemporary boom, having co-founded the team at Deutsche Bank that pioneered modern Shariah-compliant derivatives. He became the global head of Islamic finance at Barclays Capital in 2009, and is now a managing director at European Islamic Investment Bank, one of the few U.K.-based Shariah-financing boutiques. The book provides an up-close look at the tactics Western banks, like Deutsche, Goldman Sachs and HSBC, have taken to win over 1.6 billion Muslims world-wide, who for years either had to park their religious principles to participate in the global financial system or accept mediocre returns.

But along the way, Mr. Irfan also provides numerous examples of how Western financiers, determined to win over the faithful, have diluted Shariah standards in pursuit of commercial advantage: Bankers delete the word "interest" from deal documents in favor of Shariah-friendly language; Islamic investors wittingly and unwittingly fund businesses where alcohol and pork products are consumed; and Islamic scholars find their names used to suggest that they had given approval to deals they had never reviewed. In one instance that remains murky, a $2 billion Islamic bond deal by Goldman Sachs was sunk after a fatwa, a religious edict green-lighting a deal, failed to pass muster with skeptical Muslim bankers. Even when Western banks go out of their way to accommodate the faithful, things can border on the surreal. Mr. Irfan describes one comic case in which Deutsche Bank is left pondering how a deal that justifies its Shariah credentials by trading real assets can be completed without clogging up the mailroom with millions of sacks of Egyptian fertilizer for years on end.

It's plain, though, that many Western bankers treat Islam as a nuisance: "I don't care about the Shar-eye-ah stuff!" yells one New York-based banker as a cross-border acquisition deal runs into religious requirements. On the flip side, many Muslims, Mr. Irfan argues, also turn a blind eye. Even while chasing a deal to fund a five-star hotel and gigantic clock tower in Mecca, Deutsche Bank finds some companies prepared to settle for Shariah-lite. "I don't understand why you guys need to overanalyse things," the bankers are told by the finance manager at Saudi Binladin Group, the kingdom's biggest construction company. "Just do the deal. Draft up the docs with a structure that roughly works and print the damn thing." Eventually the company loses patience and the deal folds, but not before Deutsche's reputation in Islamic finance is made—in a city where non-Muslims are forbidden, no less.

The industry remains arcane and poorly understood, and often facing accusations that it is somehow linked to terrorist finance: Saudi Binladin Group will forever be overshadowed by the estranged son who ran a rather prominent terrorist network. Banks "are concerned that trading with Islamic financial institutions might somehow taint their own reputation, as if those institutions must by definition have a greater degree of exposure to laundered terrorist money," Mr. Irfan writes. He might have done more to vigorously confront this prejudice.

Given this book's topic, it will find relatively few readers outside of the financial industry. This is a pity, because aside from opening a window into this fascinating world, Mr. Irfan's career provides a case study in the challenges of balancing profit and principle.

As Mr. Irfan assesses the deals he structured at Western investment banks, he realizes that Shariah isn't ultimately being served by the mainstream banking world. Geert Bossuyt, former head of Deutsche Bank's now shuttered Islamic unit, concedes that perhaps "a bank is not an Islamic concept." But Mr. Irfan concludes that for all Islamic finance's shortcomings, its introspection is a source of strength—so long as it can refrain from the self-congratulatory impulses of Western banking and reassert its social mission. His message ought to be recited by bankers of every creed.

Mr. Hunter is a markets reporter at The Wall Street Journal in Hong Kong who previously covered finance in the Persian Gulf.