I've heard that it could be used in that context, but that it was primarily just a term that referred to the faith in general.

I see it used the most by right-wing political commentators, have have done a fine job of loading it up with their bigoted attitudes towards Muslims in general. It may have been a perfectly neutral term to describe a particular sect to begin with, but now it's seen as part of the vocabulary of anti-Muslim sentiment even though it still doesn't mean "Muslim" in general.

People who are trying not to seem bigoted against Muslims use different vocabulary for the same sort of thing--"Islamic Extremist" or "Radical Islam" or the like.

In the United States, at least. It's probably very different elsewhere.