The majority of new words were taken from other Scandinavian languages; kirkja (‘church’) and biskup (‘bishop’), for example.
[1] Many words were also brought in from Danish and German during the language reformation[1] as the Bible was translated into Icelandic.
Kaffi, for example, is an Icelandicised version of the French café or Italian caffè, both meaning ‘coffee’; that is to say that it has been adapted to the rules of Icelandic orthography.
There are numerous other examples, including banani (in that case there was a proposed alternative, bjúgaldin, literally curved fruit, but that did not gain popularity).
In situations like this, it may be awkward or impossible to create words for things that simply do not exist in Iceland by nature; therefore some form of a loanword may have to be used.