Because Allah told them to.
"O Prophet, tell your wives and daughters and the believing women to draw their outer garments around them (when they go out or are among men). That is better in order that they may be known (to be Muslims) and not annoyed..." (Qur'an 33:59)
"Ayesha (R) reported that Asmaa the daughter of Abu Bakr (R) came to the Messenger of Allah (S) while wearing thin clothing. He approached her and said: 'O Asmaa! When a girl reaches the menstrual age, it is not proper that anything should remain exposed except this and this. He pointed to the face and hands." (Abu Dawood)
Men are not supposed to reveal to women, other then their wives, any flesh between the naval and the knees. No gold or shiny things either.
It would seem it serves the same purpose as the female business suit. Maybe the look just needs to be updated. I believe the female family of the prophets were instructed to cover their faces. It is an "option" for all other women.
In general my experience with fundamentalist muslims and their women has been truly odd. What us outsiders with no religion or the wrong religion see smells and looks like oppression. I can't recall ever being allowed to talk to a woman in a hajib, whose face was covered anyway. I got the distinct impression that I was considered cursed and that there was no help for me. Jesus jumpers will generally let me have a normal pleasant conversation with their women folk...
I don't know much about Islam really. I've been meaning to get a few books on it. This is an interesting looking one that i've seen favorably reviewed. Not sure how unbiased it is...
http://tinyurl.com/3erq6