International Journal of English Literature and Social Sciences (IJELS) Vol-4, Issue-1, Jan - Feb, 2019

https://dx.doi.org/10.22161/ijels.4.1.32 ISSN: 2456-7620

Quantifying the Preference of Islamic Banking in

Pakistan
Sadaf Mustafa1, Abdur Rafay2, Syed Shoeb Ahmed3
1 Department of Commerce, University of Karachi, Karachi, Pakistan
Email: ameerfatima48@yahoo.com
2 Department of Commerce, University of Karachi, Karachi, Pakistan
3 Department of Public Administration, University of Karachi, Karachi, Pakistan

Email: s.ahmedku@gmail.com

Abstract— The core reason of this research is to Islamic banking. The international expansion of the
ascertain the factors behind preference of Islamic Islamic banking industry including Pakistan has
banking in Pakistan. The nature of this study is accelerated since 2002 [3].
quantitative and the essential objective of this study is to In the current scenario Islamic banking is growing at a
find out that why the preference of Islamic banks in very rapid pace, more and more people are preferring
Pakistan has increased over the time. The research Islamic banking and are paying more attention to the
design used to accomplish this result is correlation profit and loss sharing institutions [4]. Islamic banking
research design and the tool used to conduct this has taken huge steps in the elimination of Riba banking
research is questionnaire. Out of the 100 respondents the that is interest banking and has encouraged many
full 100% replied. The ratio of female respondents to individuals on doing interest free banking.
male respondents was relatively very low. The The objective of this study is to examine about the fact
questionnaires were distributed to those individuals who that why conventional financial institutions that have been
were employed and had a bank account. Questionnaire operating for a very long period of time almost 3
responses were given on a likert scale, with response 1 as centuries with a very strong base have begun to plummet
strongly disagree to response 5 for strongly disagree. The sharply for over some decades and at the same time
results were analyzed using basic statistics, including Islamic banking is making its expansions internationally
measures of central tendency. The findings of this specially in the Muslim countries, with rapid growth rate.
research indicate various factors that account for The upright expansion of Islamic banking in a very short
preference of Islamic banking. The factors include period has astonished everyone specially the western
reputation, Shariah compliance, customer satisfaction professionals and analysts. A huge exploration is being
and service quality. This study will be supportive to those done on the Islamic finance and many people are doing
individuals who prefer opening their account in Islamic research on Islamic finance and banking. A total of 970
banks. By this study, the individuals can get a lot of help books were published in a short time. In addition,
that what are the major factors that are considered by thousands of research articles have also been devoted to
different individuals. research on Islamic finance, studying topics ranging from
Keywords— Islamic banking, shariah compliance, differences in conventional versus Islamic banking to
profitability of Islamic banking sector. state regulations and control on Islamic financial
institutions. This little information about the researches
I. INTRODUCTION and books that are being published shows the increasing
Islamic banking started to come into appearance in the curiosity of the researchers in the Islamic finance.
1970’s. From that period of time it has been on the rise Islamic banking preference has increased rapidly over the
and is constantly emerging internationally [1]. At the past three decades. Islamic banking first was only
moment Islamic banking industry stands at the operating in the Muslim nations but now it has gained
benchmark of 1 trillion US dollars year end 2008 [2]. It is international recognition. It is spreading its operations in
an educated guess of the international credit rating agency the western countries also and is achieving its objectives.
that the Islamic banks have the potential to expand to 4.0 Individuals all over the world prefer Islamic banks. This
trillion US dollars. Countries like UK, France, China, research is carried out to find out the factors that affect
Singapore and most of the different countries have the individual’s perception of preference, this study is
developed supervisory body to smooth the progress of only limited to Pakistan scenario.

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International Journal of English Literature and Social Sciences (IJELS) Vol-4, Issue-1, Jan - Feb, 2019
https://dx.doi.org/10.22161/ijels.4.1.32 ISSN: 2456-7620
II. RESEARCH OBJECTIVE total assets of conventional banks were 87.91% in the
This research was conducted to discover the preference year 2000, which has decreased to 85.84% in 2005 with
that people are giving to Islamic banks in Pakistan over 40.64% growth rate [7]. While the total assets of Islamic
traditional financial institutions, or commercial banks. banks increased by 2.07% which were from 12.09% in
Specific objectives of this research are given below: 2000 to 14.16% in 2005 and had a growth rate of 50.53%.
 The level of preferences people give to Islamic banks the data indicates that conventional banks dominated the
over conventional banks GCC countries in the past but as the time is passing by
 The level of awareness people have in Islamic and keeping in view the current data statistics Islamic
banking methods over the conventional banking banks are growing at a much rapid pace that of
methods conventional banks [4].
 Measures the profitability of the Islamic banks over [8] stated that to guarantee the Islamic banking sectors
conventional banks long-term growth and success we will have to overcome
 Measures the satisfaction of customers and the the lack of knowledge people have about Islamic banking.
service that is provided to them by the Islamic We will have to select the places that we target and make
financial Institutions over the conventional financial them aware of the Islamic banking concepts by taking
institutions these positive steps and by entering more markets of
 Measure that does the reputation of the institution friendly Islamic banking products would enter in the
effects it in a positive or negative manner competitiveness with conventional products. By helping
 The level of Shariah compliance of the product that is and making it easy for them to grasp the products that are
offered by Islamic banks. being offered by the Islamic banks will help customers in
making better choices [8]. The consumers have additional
III. RESEARCH HYPOTHES ES benefits of insuring that the services that are being
H1 : Preferences of customers effect banks customer base provided either by conventional or by Islamic bank, do
H2 : Profitability of a bank increases customer retention they give proportionate value to the customers. This is
rate one of the most important part of a growing financial
H3 : Awareness about Islamic banking would retain new services sector.
customers Masruki, Ibrahim, Osman and Wahab stated that if the
H4 : Shariah compliance retains new customers profitability of Islamic bank is compared with
H5 : Employee-customer positive interaction and service conventional banks, the end result they came up with was
quality increases customer loyalty astonishing, as conventional banks are more profitable
H6 : Reputation of a bank will affect a customer’s than Islamic banks [6]. But Islamic banks have a much
psychology effective liquidity rate than of conventional banks.
Conventional banks have a higher profitability rate
IV. LITERATURE REVIEW because of the increased net financing and they have
Islamic banking activities are not restricted to Arab soil or better quality of assets. The liquidity ratio that Islamic
Muslim nations but it is expanding its operation around banks have could be because of the financings done with
the globe [5]. One motive is the growing trend of going a limitation that is the financing must be Shariah
beyond the national boundaries and bringing together compliant.
Muslims into a political and economic entity that could Abdul Hafeez Qureshi, Zile Hussain and Kashif Ur
change the model of the world trade. Since Muslims are Rehman stated that customers in Pakistan like relieve and
vision to follow Islamic traditions, there is a trend to luxury to perform a transaction with Islamic bank or
develop an Islamic economic system in every Muslim conventional bank. Religions point of view of the
nation and to restore Shariah law as the basic source for customers is important but only reliability of religious
legislation. [6] states that almost 100 percent of the perception cannot accomplish the need of the customer
Muslim population in Malaysia was aware informed of [9]. Many factors play an important role in the process to
the Islamic banking system, the main sources behind this attract customers toward them let it be a conventional or
information were newspapers, magazines, and media and an Islamic institution. Most banking customers would not
radio. want to continue transactions with banks, until both the
Market analysis based on the total assets that were made banks offer essential services and benefits according to
public in the financial statement gave the evidence that the demand of the consumers.
conventional banks are dominant in the GCC countries. Beng Soon Chong & Ming-Hua Liu stated that in their
But over the time conventional banks market share is paper they made an attempt to find out that whether
decreasing over Islamic banks [7]. As the data suggest the Islamic banking has some distinction from conventional
banking. They identified a unique feature that
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International Journal of English Literature and Social Sciences (IJELS) Vol-4, Issue-1, Jan - Feb, 2019
https://dx.doi.org/10.22161/ijels.4.1.32 ISSN: 2456-7620
distinguishes between the Islamic and conventional [12] stated in their study that consumers from both sides
banking is the PLS paradigm [10]. Still they discovered of the financial institutions let it be convention or Islamic,
that Islamic banking is not very much unique of were satisfied by the services being provided to them.
conventional banking with respect to the PLS paradigm. However, the consumers of the conventional banking
On the asset side of the balance sheet they found out that services were more satisfied by the consumers of the
an insignificant portion is based on the PLS paradigm. In Islamic banking services. The examination of the data
Malaysia non PLS financings are still being done by the gave a clear result that the factors that made conventional
Islamic bank that is admissible by the Shariah law, but consumers more satisfied than Islamic consumers were
ignore the spirit of usury prohibition. economic benefits, financial position of the bank, interest
Abdul Ghaffar Awan stated in research that expansion of on deposit, strong global image and network reputation.
Islamic banks in comparison with some specific Muhammad Shehzad Moin stated that the result of study
conventional banks during the year 2006-2008 explain show that conventional banks are more profitable and are
that Islamic banks have had constant expansion right from largely different in two different ratios the ROE and the
the time they entered into the market [5]. As we have seen PER [1]. The study shows that conventional banks don’t
rapid expansion in the area of Islamic banking, the total largely differ from Islamic banks in the ROA ratio.
assets of the banks have also increased rapidly. Additional examination of the result showed that Islamic
Beck (2010) states that Islamic banking is making its path banks are catching up with the conventional banks and
in the western nations and in expanding its network to could outperform conventional banks in the mere future.
many new western countries. Islamic banking is a In a different study of comparing conventional banks with
tendency that is most likely will carry on as oil exporting the Islamic banks, the MBL has outrun many of the
nations keep on building their wealth, GCC and south conventional banks.
East Asian markets expand in the future and the [13] stated that Islamic banking is one of the fastest
companies on western side compete with one another to expanding sectors of the financial services sector. It has a
attract international investors [2]. However, even though large contribution in the global financial market and it has
Islamic banking is expanding at a very rapid pace in the become too big to be ignored by the others. In simple
near past, most of the administrative authorities are words conventional banking is done on debt-based
unknown by the methods by which Islamic banking is principle and the burden on risk is transferred to others
being injected into a conventional system. As Islamic while Islamic banking is purely done on Asset based
institutions keeps on expanding and prospering, the principle and the risk is shared between the parties. The
management or the supervising institutions will have to characteristics of Islamic banks make them much more
be very confident that these new institutions get fully related to the real economy.
integrated with current financial system. This method of Munawar Iqbal stated in his study that analysis of the
integration will not only allow the Islamic institutions to functioning of Islamic banks through some major ratios
function but will also provide a complete statutory gave pleasing results. Islamic banks are well capitalized
framework and will help in developing a helpful financial and they are using their resources is much better way,
network. Islamic banks aren’t cost effective in their operations. The
Muhammad Hanif (2010) stated that the Islamic profitability ratios of Islamic banks can be in fortunate
institutions that are trying to compete with the comparison with the international standards. In should be
conventional banks are too close to them in products that kept in mind that depositor of the Islamic banks demands
are offered and in total cost to consumers. This closeness a higher rate of return because they are sharing more risk
of cost effects the consumer’s perception negatively than that of conventional banks [14].
related to functioning of Islamic banks [11]. Islamic
finance is based on the system of justice and equity it is V. ANALYSIS OF DEPENDENT AND
not based on the principal of capitalism, it should be INDEPENDENT VARIABLES
operated by keeping this function in mind. It has its own Islamic banking preference has increased rapidly over the
system based on equity and risk sharing which create a past three decades. Islamic banking first was only
different economic system. If Islamic institutions want to operating in the Muslim nations but now it has gained
benefit their consumer’s like the conventional institutions international recognition. It is spreading its operations in
and keep on with the conventional banking system then the western countries also and is achieving its objectives.
surely, they will have to leave some certain principles and Individuals all over the world prefer Islamic banks. This
practices, that would not make everyone glad. The research is carried out to find out the factors that affect
essence of Islamic banking is sharing, sharing of risk and the individual’s perception of preference, this study is
reward by both the parties involved the bank and the only limited to Pakistan scenario. The framework below
consumer.
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International Journal of English Literature and Social Sciences (IJELS) Vol-4, Issue-1, Jan - Feb, 2019
https://dx.doi.org/10.22161/ijels.4.1.32 ISSN: 2456-7620
shows the dependent and independent variables to be VI. RESEARCH DESIGN AND METHODOLOGY
tested. This research was carried out by applying
exploratory research design. The research was
Awareness quantitative in nature. The major objective of this study is
to find out that why the preference of Islamic banks in
Profitability Pakistan has increased over the time.
The research design used to accomplish this
result is correlation research design and the tool used to
Preference of conduct this research is questionnaire. The questionnaire
Islamic banking was designed on a Likert scale that is the respondent has 5
options to choose from that is 1: Strongly Agree, 2:
Agree, 3: Neutral, 4: Disagree, 5: Strongly Disagree. The
Reputation
questionnaire was distributed to 100 respondents the
target sample size was of 150 but due to uncertainty and
Shariah Compliance
other complications some questionnaires weren’t
distributed. Out of the 100 respondents the full 100%
replied. The ratio of female respondents to male
Model Summary respondents was relatively very low.
SPSS tools were used to obtain the results from
R
the data received. The tests that were used to obtain the
Squar Adjusted R Std. Error of
results are Measures of Central Tendency, Correlation
Model R e Square the Estimate
Analysis and Regression Analysis.
1 0.738
a
0.545 0.520 .62076
VII. DISCUSSION AND CONCLUSION
a. Predictors: (Constant), Shariah compliance, This research was carried out by applying exploratory
Reputation, Awareness, Profitability, Customer research design. The research was quantitative in nature.
Satisfaction and Service Quality The major objective of this study was to find out that why
the preference of Islamic banks in Pakistan has increased
Standardiz over the time.
ed The research design used to accomplish this result is
Unstandardized Coefficien correlation research design and the tool used to conduct
Coefficients ts this research is questionnaire. The questionnaire was
designed on a Likert scale. The questionnaire was
Std.
distributed to 100 respondents the target sample size was
Model B Error Beta Sig.
of 150 but due to uncertainty and other complications
(Constant) -.660 .348 .061 some questionnaires weren’t distributed. Out of the 100
Awareness .461 .092 .384 .000 respondents the full 100% replied. The ratio of female
respondents to male respondents was relatively very low.
Profitability .488 .134 .333 .000 The collection of data was completed on the 14th of
Reputation May, after the collection of data SPSS tools were used to
-.016 .129 -.009 .903
obtain the results from the data received.
Shariah The cross tabulation shows that preference having
.267 .090 .225 .004
compliance positive relationship with awareness, profitability,
Customer Shariah Compliance and customer satisfaction and service
Satisfaction Quality. Awareness having perfect positive relationship
.095 .089 .089 .288 with preference, profitability, Shariah compliance and
and service
quality customer satisfaction and service quality. Profitability
having perfect positive relationship with awareness,
a. Dependent Variable: preference
preference, reputation, Shariah compliance and customer
satisfaction and service quality. Reputation has
The Regression Analysis shows Awareness, profitability,
relationship with awareness, preference and Shariah
Shariah Compliance have positive significant relation
compliance, and Shariah compliance has positive
with preference to Islamic banking.
relationship with awareness. The Analysis of independent
variable i.e. Awareness, profitability, Shariah Compliance
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International Journal of English Literature and Social Sciences (IJELS) Vol-4, Issue-1, Jan - Feb, 2019
https://dx.doi.org/10.22161/ijels.4.1.32 ISSN: 2456-7620
with dependent variable i.e. preference to Islamic banking international conference on Business Management,
depict positive relationship. n.d.
[16] A. R. a. A. Rahman, " Study on Islamic banking and
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