Growth Analysis of Islamic Banking in Pakistan: A Qualitative Approach

By Salman, Asma; Nawaz, Huma et al. | Academy of Accounting and Financial Studies Journal, January 1, 2018 | Go to article overview

Growth Analysis of Islamic Banking in Pakistan: A Qualitative Approach


Salman, Asma, Nawaz, Huma, Bukhari, Syed Muhammad Hassan, Baker, Abou, Academy of Accounting and Financial Studies Journal


INTRODUCTION

Being one of the most developing Muslim nations in the world, State bank of Pakistan has been encouraging and getting the infrastructure for the development of Islamic Banking System. However, the Islamic banking is still relatively in the infancy stage as compared to the more established commercial banking sector in Pakistan. Upon reviewing some prior literature on the Islamic banking of Pakistan, researchers concludes that full-fledged Islamic banks are outperforming in the overall banking sector in Pakistan and earned approximately 8 billion in profit gain for the third quarter of 2011, 58% of growth showing due to the religious factors of the residents of Pakistan which are moved into their customers (Zaher & Kabir Hassan, 2001).

Many leading conventional banks in Pakistan have set up Islamic banking windows parallel to the commercial banking system to fulfil regulatory requirements of state bank of Pakistan(Akhtar, 2007b). In Islamic banking, there are a lot of other governance to be put in place to enhance the trust and confidence to strengthen the risk management through the Shariah rules and framework (Abdullah, Sidek, & Adnan, 2012).Muslims, especially from rural areas, are now make up to more than half of some of the Pakistani Islamic banks' customers(Akhtar, 2007a). Islamic banking products such as Murabaha and Mudarabah have drawn considerable interest from Pakistani religious citizens. Globally, Murabaha and Mudarabah products are among the fastest growing Islamic finance instruments, with study conclusion of many authors based on customer's satisfaction and awareness towards the Islamic banking system. According to the Global Islamic Finance Report, the assets of 1.34 trillion are being managed according to Islamic investment principles, while 20% of banking customers now moved towards Islamic financial products (Dar & Azmi, 2012).

Changes in the Pakistani financial system landscape and the promotion of Islamic banking have generated new dimension and prospects in the banking sector. Such premises had also led to the modification in the customer's choice and demand for effective and highly efficient banking services. Since the development of more financial institutions from last few decades, both conventional and Islamic, customers, Muslims and non-Muslims of different income level group alike have been introduced with enormous prospective products and services to select from in term of their satisfaction and demand. Rather, before making any decision, customers are now spoilt for choices to choose the ones that meet their needs and wants (Thambiah, Eze, Santhapparaj, & Arumugam, 2010).This situation applies to the products and services offered by the Islamic financial institutions same as of conventional banks. These products presented many challenges for products offered by the conventional banking but also among the products governed by the Islamic banking itself. Islamic banking growing and establishing deep roots with Muslims in Pakistan, but still not as much as it should be, where it was reported that 97% of the population in Pakistan are Muslims (Pakistan, 2010).

Is it because of less knowledge and awareness about the governing issues of Islamic products and services or strong concern for profit or any other reasons?, we hypothesize that the effects of Islamic banking system are mediated by the degree of banking awareness and by the degree to which demographic aspects are causation.

More specifically, the study aimed to achieve the following specific research objective:

1. To determine, whether there are respondent background differences in developing positive attitudes towards Islamic banking in Pakistan.

2. To investigate and compare Pakistani residents' perceptions towards the Islamic banking system.

LITERATURE REVIEW

The effect of Islamic finance on Muslim world is well documented. Products and services offered by Islamic banks have the approaches of Islamic banks that are distinctly different from the ones of conventional banks (Chapra, 2000). …

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