Islamic Banking

A Comparative Study of Islamic Banking in Pakistan:

Proposing and Testing a Model

BY

Ashfaq Ahmad

PhD Scholar

117/FUIMCS/Ph.D(MS)-2006

FACULTY OF

MANAGEMENT SCIENCES

2009

A Comparative Study of Islamic Banking in Pakistan:

Proposing and Testing a Model

A thesis submitted to the

FUIEMS

Foundation University, Islamabad

In partial fulfillment of the requirements for the degree of

DOCTOR OF PHILOSOPHY

In

MANAGEMENT SCIENCES

BY

Ashfaq Ahmad

PhD Scholar

FACULTY OF

MANAGEMENT SCIENCES

2009

APPROVAL SHEET

Approved by

External Examiner External Examiner

(Prof. Dr. M. Hayat Awan) (Dr. Mahmood A. Bodla)

Internal Examiner Head of the Department

(Dr. Hamuyoun Naeem) (Prof. Dr. M. Iqbal Saif)

Director/Dean Faculty of

Management Sciences

(Prof. Dr. Aftab Ahmad)

CERTIFICATE

I have supervised Mr. Ashfaq Ahmad, PhD Scholar at Foundation University Institute of

Engineering and Management Sciences, Islamabad. The candidate has completed his PhD

thesis successfully. The dissertation titled “A Comparative Study of Islamic Banking

in Pakistan: Proposing and Testing a Model” is worth submission for the award of the

degree.

Dr. Kashif-ur-Rehman

Associate Professor

Department of Management Sciences

Iqra University, Islamabad

DECLARATION

I, Ashfaq Ahmad, Ph.D scholar in the subject of Management Sciences, hereby

declare that the materials included in this dissertation are my own work and have

not printed, published and/or submitted as research work, dissertation or

publication in any form by anyone in Pakistan or abroad.

(Ashfaq Ahmad)

PhD Scholar

DEDICATION

This work is dedicated to my parents, brothers and sisters who encouraged

me to face any challenge.

VII

Table of Contents

Description Page No.

List of Abbreviations XI

List of Tables XIII

List of Figures XV

List of Appendices XVI

Acknowledgement XVII

Abstract XIX

Chapter 1 Introduction 1

1.1 Background History of the Study 2

1.1.1 Islamic Banking 4

1.1.2 Islamic and Conventional Banking 5

1.2 Broad Problem Area 8

1.2.1 Pakistani Banking Sector 9

1.3 Identification of Knowledge Gap 10

1.4 Statement of the Problem 13

1.5 Objectives of the Study 14

1.6 Significance of the Study 15

1.7 Definition of the Variables of the Study 16

1.8 Organization of the Dissertation 18

VIII

Chapter 2 History and Development of Conventional and

Islamic Banking in Pakistan 19

2.1 History of Banking Development in Pakistan 20

2.2 Prohibition of Interest in Islamic Banking 26

2.3 Functions of Islamic Bank 32

2.4 Operations and Products of Islamic Bank 36

2.5 Service Quality of Pakistani Banking Sector 41

2.6 Customer Satisfaction of Pakistani Banking Sector 41

2.7 Performance of Pakistani Banking Sector 42

Chapter 3 Literature Review and Theoretical Framework 45

3.1 Services 46

3.1.1 Definition of Service and Service Quality 47

3.1.2 Dimensions of Service Quality 50

3.2 Customer Satisfaction 61

3.2.1 Defination of Satisfaction 61

3.2.2 Customer Satisfaction in Banking 62

3.2.3 Determinants of Customer Satisfaction 65

3.3 Bank Performance 70

3.3.1 Performance Evaluation of Islamic Banks 72

3.3.2 Performance of Pakistani Banking Sector 73

3.4 Service Quality and Customer Satisfaction in Banking 77

3.5 Service Quality, Customer Satisfaction and Bank Performance 81

3.6 Hypotheses, Conceptual Model and Theoretical Framework 85

IX

Chapter 4 Methodology 94

4.0 Research Method 95

4.1 Pilot Test 97

4.2 Main Study 100

4.3 Measures and Instruments 103

4.4 Reliability and Internal Consistency of the Variables 108

Chapter 5 Interpretation of Results 113

5.0 Results 114

5.1 Demographics of the Respondents 115

5.2 Descriptive Statistics of the Variables 119

5.3 Hypotheses Testing 121

5.4 Regression Model Result 124

5.5 Testing the Model 135

5.5.1 Relationship among Service Quality, Customer Satisfaction

and Performance of Islamic Banks in Pakistan 136

5.5.2 Relationship among Service Quality, Customer Satisfaction

and Performance of conventional Banks in Pakistan 137

5.6 Discussion 143

Chapter 6 Conclusion 150

6.1 Conclusion 151

6.2 Suggestions 153

6.3 Limitations and Future Research 155

6.4 Contribution of the Study 156

X

6.5 Practical Implications 157

6.6 Unique Status of the Study 158

References 159

Appendices 179

XI

List of Abbreviations

CB Conventional Bank

IB Islamic Bank

SBP State Bank of Pakistan

Prf Bank Performance

DSQL Dimensions of Service Quality

CS Customer Satisfaction

ANOVA Analysis of Variance

SEM Structural Equation Modeling

SE Standard Error

df Degree of Freedom

SQL Service Quality

Tgty Tangibility

Rlty Reliability

Rspv Responsiveness

Asnc Assurance

Epty Empathy

Csrv Core Service

Helmt Human Element

Smdlv Systemization of Service Deliver

TgSv Tangibles of Services

Slrby Social Responsibility

XII

Cprf Conventional Bank Performance

Iprf Islamic Bank Performance

IBSQL Islamic Bank Service Quality

CBSQL Conventional Bank Service Quality

IBCS Islamic Bank Customer Satisfaction

CBCS Conventional Bank Customer Satisfaction

Slty Service Quality

Srsn Customer Satisfaction

PLS Partial Least Square

GDP Gross Domestic Product

ROI Return on Investment

ROE Return on Equity

UAE Unite Arab Emirates

SOPs Standard Operating Procedures

XIII

List of Tables

Table Description Page No.

Table 1.1 Difference between Islamic bank and Conventional Bank 7

Table 2.1 Financial performance of Islamic banks 35

Table 2.2 Financing Products offered by Islamic Banks (in %) 36

Table 2.3 Performance of Pakistani Banking Sector 43

Table 2.4 Performance of Islamic banks in Pakistan 44

Table 3.1 Dimensions of Service Quality used in Banking sector 53

Table 3.2 Sources and Uses of Funds by Islamic banks in Pakistan 75

Table 4.1 Reliability Statistics of the Pilot-Test 97

Table 4.2 Descriptive statistics of the Pilot-Test 99

Table 4.3 Selected Banks included in the Study 101

Table 4.4 Details regarding Branches and Respondents (City Wise) 102

Table 4.5 A Summary of All Variables Operational for the Study 105

Table 4.6 Reliability Statistics of the Scales for IB 109

Table 4.7 Reliability Statistics of the Scales for CB 111

Table 5.1 Summary of Demographics of Respondents 115

Table 5.2 Skewness and Kurtosis of the Constructs and Variables 119

Table 5.3 Descriptive Statistics of the Variables 120

Table 5.4 Independent Samples T-Test for difference in perception

Of Service Quality between Male & Female customers of IB 121

Table 5.5 Independent Samples T-Test for difference in perception

Of Service Quality between Male & Female Customers of CB 122

XIV

Table 5.6 Summary of Correlation between Selected Variables 123

Table 5.7 Summary of Pair wise Correlation between Selected Variables124

Table 5.8 Summary of IBDSQL-IBCS Linear Regression model 125

Table 5.9 Summary of Multincollinearity coefficients 126

Table 5.10 Summary of CBDSQL-CBCS Linear Regression model 127

Table 5.11 Summary of Multincollinearity coefficients 128

Table 5.12 Summary of IBSQL-IBCS Linear Regression model 129

Table 5.13 Summary of CBSQL-CBCS Linear Regression model 130

Table 5.14 Summary of IBSQL-IBPrf Linear Regression model 131

Table 5.15 Summary of CBSQL-CBPrf Linear Regression model 132

Table 5.16 Summary of IBCS-IBPrf Linear Regression model 133

Table 5.17 Summary of CBCS-CBPrf Linear Regression model 134

Table 5.18 Relationship among Slty, SrSn and Prf 138

Table 5.19 Structural Model-Bootstrap for IB 141

Table 5.20 Structural Model-Bootstrap for CB 142

Table 5.21 Summary of Hypotheses 148

XV

List of Figures

Figure Description Page No.

Figure 1.1 Role of Financial Intermediaries (Banks) 3

Figure 2.1 Functions of Islamic bank 33

Figure 2.2 Operations of Islamic bank 37

Figure 2.3 Contributors towards deposits of Islamic bank 38

Figure 2.4 Contribution of Islamic banks towards financing products 40

Figure 3.1 Expectation-Outcome experience of bank customers 63

Figure 3.2 Customer Satisfaction for better Performance 64

Figure 3.3 Total Assets of the banking system 74

Figure 3.4 Graphical display of the hypothesized relationship between

Service quality and customer satisfaction 88


Service quality and bank performance 89


Customer satisfaction and bank performance 90

Figure 3.7 Mediating role of customer satisfaction between services

Quality and bank performance 91

Figure 3.8 Conceptual model: Service quality, Customer

Satisfaction and Bank Performance in Pakistan 92

Figure 5.1 Relationship among Slty, Crsn and Iprf 136

Figure 5.2 Relationship among Slty, Crsn and CPrf 137

XVI

List of Appendices

Appendix Description Page No.

Appendix I Questionnaire 185

Appendix II List of banks operating in Pakistan 197

Appendix III Definition of Terms 200

Appendix IV Results of VPLS 201

XVII

ACKNOWLEDGEMENT

With the name of Allah Almighty the most merciful, the most beneficent, I am very

thankful to Him for His blessings and pray for complete success in this life and life

hereafter. Allah Almighty equipped human beings with the light of knowledge in the era

of darkness of illiteracy and lack of direction. Human beings are blessed by the set of

instructions through revelation as given by the Creator of this universe.

I salute and pay my heartiest tribute to the Holy Prophet Muhammad (peace be upon him)

being an ideal personality to follow his practices. The Holy prophet Muhammad (Peace

be upon him) preached Islam as the religion of peace, brotherhood and welfare oriented

for success in this life and in the life hereafter.

I am very thankful to my parents, brothers and sisters who encouraged me and supported

me to face any challenge in life. I am also indebted to everyone who helped me during

this period of study. I am really grateful to my supervisor Dr. Kashif-ur-rehman for the

kindness, guidance and supervision. I always remember the motivation and

encouragements of respected Dr. Iqbal Saif to complete this journey on time.

XVIII

I really appreciate the efforts and support provided by my friends and colleagues

especially Mr. Asad Afzal Humayun, Dr. Humyoun Naeem, Dr. Ahmad Jamal, Mr.

Salman, Dr. Muahmmad Nadeem Safwan, Mr. Malik Muhammad Hayat, Mr. Aslam Dar,

Mr. Hafeez Ullah, Ms Firdous Faqeer Hussain, Mr. Muhmmad Siddique and Mr.

Mehmood-ul-Hassan.

Finally, I give special thanks to my university, the university of Sargodha, Sargodha for

financial support and study leave to successfully complete my PhD. I am also grateful to

my Ex-Vice Chancellor Dr. Riaz-ul-Haq Tariq for his great initiative to promote research

and development ventures. I am also impressed by the Vice Chancellor, Dr. Muhammad

Akram Chaudhry for his productive and long lasting decisions. I really appreciate the

efforts of HEC to provide an opportunity for accomplishment of my PhD.

May Allah Almighty give us courage and taufeeq to follow the instructions of the Holy

Quran and the practices of the Holy prophet Muhammad (Peace be upon him).

(Ashfaq Ahmad)

XIX

Abstract

This study examines the relationship between service quality, customer satisfaction and

bank performance by conducting a comparative analysis of Islamic banks and

conventional banks in Pakistan. Inception of Islamic banking in Pakistan has created

multiple challenges for banking industry. Pakistani banking industry consists upon

Islamic and conventional banks that are competing for more and more customers by

delivery of quality services to have satisfied customers for better performance. On the

basis of theoretical background, a model is proposed and tested in Pakistani environment.

A structured questionnaire has been developed for the study in the light of the existing

literature. Data were collected from 1440 respondents by self-administrated questionnaire

by using stratified sampling. A number of tools e.g. SPSS and VPLS etc. are used for

data analysis. A set of statistical techniques e.g. T-test, Regression analysis, Correlation

and Structural Equation Modeling are applied by the researcher to test the hypotheses of

the study. The results indicate a strong positive relationship between service quality and

customer satisfaction in the banking sector of Pakistan. Findings shows that service

quality and customer satisfaction have weak influence on performance of banks. The

study has a number of implications for bankers, policy makers and academicians.

Key Words: Islamic Bank, Conventional Bank, Riba, Service Quality, Customer

Satisfaction, Bank Performance, Pakistan, Banking Sector.

Comparative Study of Islamic Banking 1

CHAPTER 1

Introduction

Background

Broad Problem Area

Identification of Knowledge Gap

Problem Statement

Objectives of the Study

Significance of the Study

Definition of Variables

Organization of the Dissertation


1. INTRODUCTION

1.1 Background of the Study

Banking industry is playing an essential role towards economic development and well

being of any society. Banking activities are crucial for healthy economy, which leads

towards the list of developed nations of the world. Industrial revolution during 18th

century has expanded the trade and business activities by the inception of large-scale

production. Banking gained importance as an essential facility to promote business

operations. In today's global and borderless market, product/service quality and customer

satisfaction may increase the performance of banks for the successful survival.

Greece experienced very sophisticated practices that were undertaken by temples, public

bodies and private entrepreneurs to accept deposits, make loans and engaged in book

transactions. Rome adopted and regularized the practices of Greece. Banking activities

were considered essential in Babylonia in the second millennium B.C. Bankers from

North Italy, collectively known as Lombards, set up Medici bank in 1397 and introduced

double-entry system. The Rothschilds introduced commercial banking as services for

customers by the early 17th century. Banking in undivided India was originated in 18th

century by the inception of The General Bank of India in 1786. In Pakistan, banking

activities are initiated after its independence on August 14, 1947. Pakistani banking

sector witnessed a major change due to key role of private sector having about 80% of

banking assets (Economic Survey of Pakistan, 2007-08).


Banks play a vital role in mobilizing funds and stimulating investment for productive

ventures. They accept deposits from the general public and advance loans to the

entrepreneurs to enhance investment activities that are inevitable for a healthy economy.

Banks develop a link between surplus and deficit units to promote the trade and business

activities. The role of bank is shown in the following manner.

Figure-1.1

Role of Financial Intermediaries (Banks)

Source: Generated

Financial intermediaries facilitate the investors to provide finance according to their

requirements by considering the risks and returns attached to different projects. Banks

pool the funds by accepting deposits from the savers and provide these funds to

entrepreneurs for productive ventures to generate profits. An efficient inter-mediation

increases the productivity and return of investment for long term benefits.

Savers (Surplus Units) Small households or institutions

with smaller amounts Risk averse

Entrepreneurs (Deficient Units)

Organized firms with professional skills requiring larger funds

Financial Intermediation (Banks) Financial Markets especially banks Reduce Risks Pooling small funds to remove

mismatch and exploit opportunities (Size, Maturity, and Liquidity Preference)


There are two banking systems that exist in Pakistan namely Islamic banking and

conventional banking. The Islamic bank (IB) and conventional bank (CB) is

differentiated on the basis of objectives, Riba and risk sharing practices. IB follows

principles of Sharia’h given by Allah Almighty while CB follows manmade SOPs; IB

generates income as profits that is variable while CB earns from the interest that is fixed;

risk is shared among lender, borrower and bank in IB while CB transfers the whole risk

to others; IB is trade oriented unit while CB works as a pure financial intermediary to

deal on the basis of interest.

1.1.1 Islamic Banking

State Bank of Pakistan (SBP) defined Islamic banking as “banking in consonance with

the ethos and value system of Islam and governed, in addition to the conventional good

governance and risk management rules, by the principles laid down by Islamic Sharia'h”.

Islam is defined as total submission to Allah Almighty without any condition. It is a

complete code of life that consists upon the instructions of Allah Almighty and the

practices of the Holy Prophet Muhammad (Peace be upon him). Everyone in this world

performs religious, social and economic activities in one's life. But most of the times

social and economic activities are originated and linked with the religious activities.

Islam provides a comprehensive set of instructions to face any challenge. Economic

activities reflect the earning and spending pattern of people, which is closely associated

with religion in the form of being permissible (Halaal) or forbidden (Haraam). The Holy

Quran has clear instructions regarding business and trading activities as earnings from


trade (Bai) is halal but interest (Riba) based activities are haraam. Banking activities are

the part of economic activities and Islam allows riba-free banking only.

In Egypt the first modern Islamic bank was established in 1963 according to the

principles of Islamic finance. The Organization of Islamic Conference (OIC) also

supported the Islamic financial system in 1973 at Jeddah, Saudi Arabia. Similarly a

number of Islamic banks were established as Philippine Amanah Bank in 1973; Dubai

Islamic Bank in 1975; the Faisal Islamic Bank of Sudan in 1977; the Faisal Islamic Bank

of Egypt in 1977; the Bahrain Islamic Bank in 1979, and Meezan Islamic bank of

Pakistan in 2002. In Malaysia, Islamic Banking Act was passed in 1983 to transform the

interest-based conventional banks into Islamic banks. During the decade of 1990s,

Islamic banking practices were initiated all over the world especially in the Muslim

dominated parts of the globe. Further, the beginning of 21st century proved a success for

Islamic banking as a large number of banks started to deal in products/services according

to principles of Sharia'h. It is suggested that riba-free and equity based economy is

necessary to realize the benefits of Islamic financial system and to ensure the well being

of mankind (Chapra, 1985).

1.1.2 Islamic and Conventional Banking

The basic aim of the Islamic banking is to perform interest-free activities based on

principles of Sharia’h and carry out only Halaal (permissible) transactions. The most

important feature of Islamic banking is the sharing of risk among the investors, the bank


and the borrowers. Islamic banking focuses on fairness and freedom as a centrally

controlled and individually managed system according to the instructions of Allah

Almighty. The existence of two bank streams i.e. conventional banks and Islamic banks

requires a study to analyze service quality, customers' satisfaction and bank performance

in Pakistan.

Al-Jarhi and Iqbal (2001) defined Islamic bank as a banking institution conducting all

known banking activities including borrowing and lending without interest. It mobilizes

funds on the basis of Mudarbah or Wakalah and may accept demand deposits as interest

free loan. It deploys funds on profit and loss basis or may advances on debt creating basis

according to the principles of Sharia’h being an investment manager. It is evident that

Islamic banks are more focused towards just and equitable distribution of resources as

compared to conventional banks (Siddique, 1985).

Islam has provisions for innovative products and practices by using the Ijtihad according

to the holy Quran and Sunnah as the origin for all deeds. Islamic bank works as Mudarib

to invest savers’ funds in general investment fund, specific investment fund or accept

demand deposits on interest free basis. It can also perform the function of investment

manager (Wakalah) and generate revenue as service charges. While in conventional

banking investors are guaranteed a predetermined rate of interest and it aims to maximize

the return even at the cost of society or other stakeholder. In conventional banking

excessive use of credit and debt financing can lead to financial problems and promote

materialistic attitude that leads to exploitation, which is fatal for society.


The main difference between Islamic and conventional banks is summarized in table 1.1.

Table-1.1

Difference between Islamic Bank and Conventional Bank

Main Difference

Islamic Bank Conventional Bank

Principles

Islamic banks follow the Principles of Sharia’h given by Allah Almighty to perform operations and activities.

Conventional banks follow manmade principles to perform operations and activities

Source of Earnings

Profit, service charges and consultancy fee is the main source of earnings of Islamic banks. Profit is variable which may be negative in case of loss.

Interest is the main source of income for conventional banks that is charged on different types of loans/products. (Difference between interests charged from borrowers and paid to depositors). It assures a predetermined rate of interest.

Risk Sharing

Risk is shared among borrower, lender and bank.

Risk is fully transferred to others.

Profit Maximization

It aims at maximizing the profit but subject to principles of Sharia’h.

It aims at maximizing the profit without any restriction even at the cost of other stakeholders.

Objectives

Islamic bank works as a trading concern (Mudarib or Wakalah) to generate its income.

It generates income as financial intermediary. Its prime goal is the maximization of shareholders’ value at any cost.

Nature of Earnings

Income of Islamic banks varies depending upon business environment. It may be negative in case of loss.

Income of conventional bank is constant even if business suffers from loss because it charges fixed rate of interest irrespective of profit volume.

Source: Generated


1.2 Broad Problem Area

The basic aim of the Islamic banking is to perform interest-free activities. While in

conventional banking investors are guaranteed a predetermined rate of interest and it aims

to maximize the return even at the cost of society or other stakeholder. Financial sector

reflects the overall trend of the economy and banking institutions are the main component

of it. In Pakistan, there are a number of conventional banks that are providing a variety of

products to their customers but most of the products are riba (interest) based which are

contradictory to the principles of Sharia’h.

Islamic bank plays a more active role for the economic development of any country by

mobilizing the funds from savers (to provide these funds) to entrepreneurs. It helps to

eliminate undue exploitation of different stakeholders that is created by interest based

banking system. It also encourages welfare oriented business projects with high

profitability that leads to improved quality of life. Islamic banks help Muslim Ummah to

invest their savings for halal returns according to principles of Sharia’h. Islamic banks are

equally beneficial for non-Muslim community by promoting brotherhood and

cooperation in the society. Islamic banks play a vital role in the economy to promote

productive activities that enhance economic growth and prosperity. Islamic banks ensure

stable economy; fair distribution of income; reduce injustice; risk sharing, lesser financial

crisis; facilitate production and business activities.


Friedman (1969) suggested that a nominal zero interest rate is necessary condition for

optimal allocation of resource. It was found that zero interest rate is required and

sufficient for allocative efficiency by investigation within general equilibrium models

(Wilson and Charles, 1979; Cole and Kocherlakota, 1998). Literature also supported that

interest-free (profit and loss sharing) system is viable and superior to an interest-based

system (Chapra, 1985; Mirakhor, 1997). Islamic banks deal in equity based (profit/loss)

contracts that are more suitable for the economy as compared to interest-oriented

conventional banks. Similarly, both banking streams provide a set of products and

services that requires a comparative study to assess their performance on the basis of

service quality and customers’ satisfaction.

1.2.1 Pakistani Banking Sector

State Bank of Pakistan is the central bank of Pakistan that regulates the banking sector by

devising monetary policy according to changing environment. Pakistani banking sector

has shown outstanding performance during last few years due to greater participation of

private sector and foreign investors. Services sector is growing component of gross

domestic product (GDP) all over the world as evident from last few decades. Pakistan has

also experienced an unprecedented growth in the services sector especially banking

sector due to its increasing contribution towards GDP. There are more than 50 banks

actively working in Pakistan to provide quality service to meet customers' expectation.


Arby (2003) investigated the performance of commercial banks in Pakistan. It is found

that the profitability of state owned banks has reduced as compared to private banks with

the passage of time. Financial sector especially banking industry enjoyed numerous

benefits from structural transformation of state owned banks to private banks. Currently,

there are several banks that are providing services to customers according to the

principles of Sharia’h. At the end of April 2007, there were 6 full-fledged Islamic banks

with 108 branches and 13 conventional banks having 58 branches offering interest free

products in Pakistan (SBP, 2007). Commercial banks have shown an outstanding

performance during last few years and attracted a considerable amount of foreign direct

investment (FDI) in the industry. Banking industry experienced an expansion in its

branch network and volume of total banking assets. The total number of branches has

reached at 8233 by an increase of 343 branches within six months. Similarly total-

banking assets stood Rs. 5155 billion by an increase of 203.1 billion in the first six

months of the financial year 2007-08 (Economic Survey of Pakistan, 2007-08).

1.3 Identification of Knowledge Gap

Services industry particularly banking sector is growing across the globe during the

decade of 1990s. The 21st century came with blending of opportunities and threats for the

banking sector due to inception of Islamic banking practices in different countries like

Malaysia, Pakistan, Bangladesh, Bahrain and even in non-Muslim parts of the globe. The

existence of Islamic and conventional banks created competition among banks to meet

customers’ expectations for long term benefits. This competition leads to concentration

on service quality issues according to bank customers’ requirements.


Gronroos (1982) investigated the service quality in the banking sector and explored three

dimensions of it. Similarly, ten dimensions of service quality were found and finally

summarized into five dimensions in term of SERVQUAL instrument (Parasuraman et al.,

1985; 1988; 1991). Then service quality was linked with satisfaction of bank customer to

assess the magnitude of the relationship (Sureshchander et al., 2002). The relationship

between service quality and customer satisfaction is investigated due to increasing

competition in the banking sector. Similarly, there are also some studies that measured

the relationship between service quality and bank performance. (Levesque and

McDougall, 1996; Yavas et al., 1997; Lassar et al., 2000; Mishkin, 2001; Kayis et al.,

2003; Curry and Penman, 2004; Jabnoun and Khalifa, 2005; Nelson, 2006; Razak, Chong

and Lin, 2007). Almost negligible contribution from the developing countries in the

banking sector especially after inception of Islamic banking practices. However, there is

no research available that further found the impact of customer satisfaction on bank

performance.

Pakistani banking sector concentrated on quality oriented services after financial

liberalization in 1992 due to an active participation of private sector banks. Banks are

performing multiple functions to provide a variety of products and service for different

segments of the economy. Since its creation, Pakistani banking sector has experienced

very turbulent environment due to unstable policies and uncertainty. Private sector banks

dominated during 1950s and 1960s but they were nationalized in 1974. Nationalized

banks showed very poor performance due to inferior products/services that resulted into

the privatization of banking sector in 1992. State Bank of Pakistan has initiated working


for the inception of Islamic banking practices in 2000 and Meezan Islamic bank was

registered as first full-fledged Islamic bank in 2002. Islamic banks are new entrants in the

Pakistani banking industry and also require a comparative study to assess the

performance of their operations and products/services.

Islamic banks have a number of opportunities in Pakistan with a population of more than

96% Muslims. Islamic banks have to face multiple challenges due to strong reaction from

conventional banks because they were deep rooted and popular among the public to meet

their requirements. The increasing number of conventional and Islamic banks created a

healthy competition for the provision of quality service to retain satisfied customers for

long-term benefits. The banking industry experienced an expansion due to diversification

and innovation of products/services. Everyone tries to introduce innovative products and

services by beautiful blending of traditional facilities and modern technology to cope

with each other for greater number of customers that leads to more profitability. The ups

and downs in the growth of banking sector requires a study to analyze the performance

by considering quality of services offered by banks in relation to customer satisfaction.

There are studies about two banking systems (Islamic banking and conventional

banking); plenty of studies are available regarding different aspects of conventional

system while rare for the other. The acute shortage of literature regarding Islamic banking

system inspired the researcher to conduct a comparative study in Pakistan. This research

is an effort to fill this gap in the literature. This study aims to examine the two banking

streams i.e. Islamic banking and conventional banking in Pakistan with reference to


service quality, customer satisfaction and bank performance to fill the knowledge gap in

the existing literate. The relationship between service quality and satisfaction of bank

customers is investigate in the different parts of the world but there is severe shortage of

studies regarding Pakistani banking sector. In Pakistan, no empirical research has ever

addressed the issue of service quality, customer satisfaction and bank performance.

However, there is abundance of literature regarding service quality and customer

satisfaction in the banking sector but there is scarcity of studies to link these variables

with bank performance. Similarly, Islamic banking practices were newly introduced in

Pakistan that requires a comparative study to contribute towards literature. This study

enhances the body of knowledge in the field of banking by developing a local model of

SQL, CS and PRF to compare Islamic banking with conventional banking in Pakistan.

1.4 Problem Statement

Banking industry stimulates the savings and investment ventures to promote business and

trade activities in the economy. Pakistani banking sector experienced drastic changes

over its 61 years life. Islamic banks have started their operations at the beginning of 21st

century and are competing with conventional banks. Banks develop a liaison between

depositors and borrowers besides other services. The existence of Islamic and

conventional banks in Pakistan created competition to attract a large number of

customers. Everyone is striving to realize greater profits by delivering quality services

according to customers' expectations. A comparative study is demanded/needed based on

the exiting literature to analyze the relationship between service quality, customer


satisfaction and bank performance in Pakistan. This study examines how service quality

affects the customers' judgments towards satisfaction and its impact on the performance

of the Islamic banks as well as conventional banks in Pakistan.

1.5 Objectives of the Study

This study examines the relationship among customers' preference of service quality,

their feelings of satisfaction and performance of banks in Pakistan. Islamic banking

system is growing rapidly during last few years and proved its potential to work as a

compatible and parallel alternative system for providing financial services. This study

analyzes the perception of services quality of products offered by Islamic and

conventional banks with mediating effect of customer satisfaction on bank performance.

There is an increasing competition among Islamic banks and conventional banks to

capture new customers as well as to retain existing customers. It requires a study to

measure the impact of service quality on customer satisfaction towards bank

performance. This study aims to propose and test a model of SQL, CS and PRF by

comparing Islamic and conventional banks in Pakistan. The main objectives of the study

are as under:

To find out the difference in the perception of service quality among bank

customers on the basis of gender in Pakistan

To find out the relationship between service quality of products offered by banks

and customers satisfaction in Pakistan.

To know how customer satisfaction affects the performance of the banks in

Pakistan.


To make a comparative analysis of responses of customers of Islamic banks and

Conventional banks with reference to service quality, customer satisfaction and

bank performance

1.6 Significance of the Study

Banks make heavy investments to attract larger customers for better profitability but

these efforts are useless until and unless proper customer management by provision of

quality services. This study may help the practitioners, bank managers, academician and

policy makers to find out the most important dimension of service quality that yields

more satisfaction for customers in Pakistan. Similarly, it also investigates the relationship

between customer satisfaction and bank performance. There is no research available in

the literature that could show a relationship between service quality, customer satisfaction

and bank performance in Pakistan. This study is also important because Islamic banking

is growing in terms of size and structure at a rate of 114 percent per annum (SBP, 2006).

Sarker (1999) found that Islamic banks could survive in less dominated profit-loss

environments to compete with the conventional banks. It is evident that Islamic banks

ensure just and equitable distribution of resources as compared to conventional banks

(Siddique, 1985). It is found that Hong Kong banks adopted quality initiative gradually

and achieved significant success in quality improvement to meet service standards (Li et

al. 2001). Liang and Wang (2006) empirically investigated the relationship between

service quality and customer satisfaction in Taiwan banking sector and found a positive

relationship. Another study evaluated service quality and customer satisfaction in East


Africa. Findings showed five service components with statistically significant impact on

customer satisfaction (Greenland et al., 2006).

Al-Hawari and Ward (2006) used structural equation modeling and found customer

satisfaction works as mediator between service quality and financial performance of

banks in Australia. Gritti and Foss (2007) studied the relationship between customer

satisfaction and loyalty and its impact on profitability in Italian banking sector. They

reported that customer satisfaction has a direct influence on financial customer value.

However, customer satisfaction scores could increase the bank efficiency by reducing

divergence in efficiency scores (Tripe, 2007). Akroush (2008) investigated the impact of

service quality on bank performance in Jordan and proved that dimensions of service

quality have a strong positive impact on bank performance. It is found that financial

reforms and changes in governance have improved the performance of Pakistani banking

sector over time (Burki and Ahmad, 2008).

1.7 Definition of the Variables of the Study

This study examines how service quality of Islamic banks affects the customer's attitude

towards satisfaction and its impact on bank performance. Firstly, it measures the

magnitude of the effect of service quality on customer satisfaction. Secondly, this

research helps to find out the influence of the customer satisfaction on bank performance.

In Pakistan, banks realized that service quality issues are more important as ever before.

Islamic banks are striving to capture the maximum number of customers to compete with

conventional banks by providing a large number of products as an alternative for interest


based products. It is suggested that managers should consider important elements of

service quality to develop strategies for quality improvement (Hung et al., 2003). Service

is the combination of benefits delivered from a service provider to the service user. Banks

provide financial inter-mediation, consultancy and agency services that are diversified

with the passage of time. Quality is an ability of any product to meet customers'

expectations. Service quality helps to gain competitive advantage for long-term customer

relationship (Zeithmal et al. 2000). Service quality in the banking sector is gaining

importance due to an increased competition for the provision of diversified financial

services.

Satisfaction means a feeling of pleasure because one has something or has achieved

something. Customer satisfaction is the feelings or outcome of a customer's experience

towards product/service after it has been consumed (Solomon, 1996; Wells and Prensky,

1996). Customer satisfaction is getting concentration of top management as a corporate

goal to improve the quality of their products and services (Bitner and Hubbert, 1994).

Customer satisfaction has become important due to increased competition and considered

an essential factor in the determination of bank's competitiveness (Bartell, 1993; Haron et

al. 1994; Chakravarty et al. 1996; Chitwood, 1996; Romano and Sanfillipo, 1996).

Performance evaluation became crucial for the successful survival of the business

organization especially in the banking sector due to competition and customers'

awareness of service quality. Islamic banks also require performance evaluation to

compete with conventional banks in Pakistan. Service firms like banks are continuously

evaluating their performance to cope with the challenge of recent age. It is reported that


banks could capture the added demand by quality investments when market size grows

due to increased barriers to entry (Dick, 2007). The literature provides a foundation to

measure a link between service quality and customer satisfaction. Banks have realized the

importance of service quality for successful survival in today's global and highly

competitive environment (Wang et al. 2003). Service quality and customer satisfaction

could be associated with better performance especially in the banking industry. But there

is shortage of studies in the literature regarding service quality, customer satisfaction and

bank performance especially with reference to Pakistan. This study intends to identify the

essential factors that help bankers to understand customers’ perception of service quality

to have satisfied customers for better performance.

1.8 Organization of the Dissertation

This dissertation consists of six chapters. Chapter one gives an overview regarding the

query by exploring background history and evolution of banking practices. It shows the

broad problem area to identify the knowledge gap and specific problem area by

expression of problem statement. It also reveals the objectives of the study, its

significance and rationale. Chapter two presents a snapshot of historical developments of

conventional and Islamic banks in Pakistan. Chapter three consists upon a rigorous

literature review to develop theoretical framework of the study. It also explains variables

and constructs i.e. service quality, customer satisfaction and bank performance. Chapter

four represents the methodology of the study. Chapter five reflects the interpretation of

results. Finally, chapter six contains conclusion, suggestions and implications of the

study.


CHAPTER 2

History and Development of Conventional and Islamic Banking in Pakistan

History of Banking Developments in Pakistan

Prohibition of Interest in Islamic Banking

Functions of Islamic Banking

Operations and Products of Islamic Bank

Service Quality of Pakistani Banking Sector

Customer Satisfaction of Pakistani Banking Sector

Performance of Pakistani Banking Sector


Chapter 2

History and Development of Conventional and Islamic Banking in Pakistan

2.1 History of Banking Developments in Pakistan

Pakistan came into existence as the first Islamic republic created in the name of Islam on

August 14, 1947. The government of Pakistan is bound to follow the instructions of Allah

Almighty according to Objective Resolution, passed in 1949. Islam is declared the

official religion of Pakistan according to the first constitution of Pakistan in 1956 and all

rules/ regulations should be according to the instructions of the Holy Quran and Sunnah.

The Council of Islamic Ideology was established under the Constitution of 1962, to

eliminate the interest from the economy especially from banking sector. The Constitution

of Pakistan (1973) requires the elimination of interest (riba) from the economy as soon as

possible. The council consulted a large number of bankers and economists to recommend

some alternatives to replace interest-based financial structure in the economy during

1980s. In 1991, Full Bench of Supreme Court of Pakistan ordered the elimination of riba

from the economy until June 30, 1992.

Pakistani banking sector has witnessed drastic changes over a period of 61 years since its

independence. Initially it suffered from acute shortage of resources and uncertainty due to

prevailing political and socioeconomic conditions. Lack of trained human resource and

professionals resulted into poor quality of products and services. Financial liberalization


and deregulation stimulated the competition among banks due to an expansion of the

banking industry. A large number of banks has initiated their operations in Pakistan and

try to attract the maximum number of customers. The inception of 21st century

heightened the competition among banks regarding service quality to have satisfied

customers for better profitability.

State Bank of Pakistan has undertaken a number of initiatives to ensure stability,

transparency and flexible legislation. The regulatory framework encourages “financial

sector growth, diversification and innovation; healthy competition and risk taking to

ensure a sustainable and aggressive income stream; opportunities for enhancing the

franchise value of banks; prudent behavior and effective risk management and loan

provisioning requirement are stringent enough to discourage infection of the loan

portfolio; safeguarding social obligations and consumer interests” (Economic Survey of

Pakistan, 2007-08).

Pakistani banking sector is continuously improving with diversified pattern of ownership

due to an active participation of foreign and local stakeholder. It experienced an

expansion in its network, size and structure due to beautiful blending of commercial

banks, micro finance institutions and Islamic banks in the country. It resulted into an

increased competition among banks to attract a greater number of customers by the

provision of quality services for long-term benefits. The performance of nationalized

banks deteriorated due to government protection to employees that resulted into the

provision of inferior products and poor services. It also discouraged the private investors


and foreign financial institutions. But liberalization of financial sector by privatization

and deregulation during 1990s encouraged local investors and motivated foreign banks to

start their operations in Pakistan. There are drastic changes in Pakistani banking sector

due to strong competition among public, private and foreign banks.

SBP plays an active role to establish a sound Islamic banking system in Pakistan

according to principles of Sharia’h as mentioned in its mission statement that read “To

promote and develop Islamic Banking industry in line with best international practices,

ensuring Sharia'h Compliance and transparency”. SBP issued detailed criteria in

December 2001 for the establishment of full-fledged Islamic bank in the private sector.

Al Meezan Investment Bank received the license from SBP in January 2002 and started

its operations with the name of Meezan Islamic bank as the first Islamic bank from

March 20, 2002 (SBP, 2002).

In 2002, Islamic banks have started their operations in Pakistan and experienced stiff

competition from its peers as well as from conventional banks. Now there are 6 full-

fledged Islamic banks and 13 Conventional banks offering products and services

according to principles of Sharia’h in different parts of the country. They are competing

in a highly competitive environment for the provision of quality services according to

customers' expectations. Now bank customers are much concerned regarding the quality

of services due to increased awareness. They continue to deal with their current bank

only if they feel satisfied; otherwise they feel no hesitation to switch to other banks.


Islamic bank offers a wide range of products on the basis of profit and loss according to

principles of Sharia’h. It develops the sense of collective welfare by sharing the risk

among different stakeholder. While the interest is the central tenet of the conventional

banking and it maximizes the return even at the cost of other stakeholders by transferring

the burden of risk to other parties. It generate exploitative trend that is fatal for the

economy and society. Islamic banks are primarily concerned to eliminate Riba from the

economy by promotion of risk sharing practices for economic prosperity. Islamic banks

work within the limits prescribed by Sharia'h to stimulate business and trade activities.

Galbraith (1975) reported, “The best economic system is one that supplies the most of

what that most people want”. It means that an ideal economic system has the ability to

meet expectations of people what they “want” in a transparent manner. Islamic economic

system is superior because it is based on the principles of justice, transparency and

accountability that ensure substantial economic growth. Islamic bank is beneficial due to

its capability to spread risk in the economy among the concerned parities (depositor,

banker, borrower etc.) according to their contribution (Siddiqui, 1973).

Islam is a complete code of life that consists upon the instructions given by the Allah

Almighty and practices of the holy prophet Muhammad (peace be upon him). The holy

Quran is the written instructions of Allah Almighty for the human beings. It covers all

aspects of human life and all types of activities (i.e. religious, social and economic) that

are performed for the success in this life and in the life hereafter. There are clear

instructions about halal and haraam. Islam is a universal faith that promotes brotherhood,


social equality and fairness in economic activities for the welfare of the mankind

(Chapra, 1985).

The interest-based transactions of conventional banks promote materialistic and

exploitative attitude that is fatal for society. It was proved that equity participation has a

great potential for larger profits along with benefits of decentralized decision-making

(Wieltzman, 1984; 1985). Equity contract is superior to debt contract due to a number of

benefits. It improves the profitability of business units by eliminating the limitations as

imposed by debt. Furthermore, equity based banking contracts stimulate the investment

in the economy (Haque and Mirakhor, 1986). Riba, interest, or usury is strictly prohibited

in Islam as dealing with Riba-based transactions means declaring war with Allah

Almighty and His Messenger (Muhammad, peace be upon him). Interest is an additional

amount paid/received on the principal amount according to an agreement due to a time

period attached thereof. Even a single additional penny on the principal amount or any

other benefit attached with this transaction is considered as Riba (Rehman, 1993).

Uzair (1976) has presented the working structure of Islamic bank and developed a

mechanism to cope with the challenges of risk and interest. Risk of loss is a potential

threat that creates obstacles for productive activities in the economy. The study suggested

that Islamic banks could help to reduce risk to enhance productive activities in the

economy. It is reported that different stakeholders dealing with Islamic bank are risk

neutral and actively engaged in productive activities according to profit and loss based

contracts (Siddiqui, 1973).


Islamic banks affect monetary system by adjusting the demand and supply forces for

money. It is found that Islamic banking system is superior to conventional banking

system as it ensures more stable financial sector (Khan, 1986). In another study, it was

empirically verified that Islamic banking system showed excellent performance by

supporting financial sector in Tunisia (Darrat, 1988). There is an empirical evidence to

find out the influence of Islamic banking practices on monetary stability of Iran. The

study showed mixed results, both for some evidence in favor to support and stabilize

monetary system and somewhat against it (Yousefi, Abizadeh and Mccormick, 1997).

Wilson (1990) remarked the success of Islamic banking that compelled the many

commercial banks to provide Islamic banking products to their clients. It is reported that

profit and loss sharing system generates more profits. On the other hand, interest based

system focus on credit-worthiness. Profitability is more efficient measure for allocation

of funds as compared to credit worthiness. Similarly profit sharing system would be more

stable as compared to interest-based system (Al-Jarhi and Iqbal, 2001).

The existence of two bank streams i.e. conventional banks and Islamic banks poses some

questions about service quality and customers' satisfaction in Pakistan. It is also

important to assess the effect of customer satisfaction on bank performance. Islamic

banks have opened new avenues for acceptance of deposits on interest free-basis and

extend credit facilities excluding interest e.g. Qarz-e-Hasana etc. (Najajmabadi, 1991). It

was found that relationships with bank personnel are important criteria for selection of

bank (Abratt and Russell, 1999).


Al-Jarhi and Iqbal (2001) defined Riba with reference to Sharia'h scholars as “anything

(big or small), pecuniary or non-pecuniary, in excess of the principal on a loan that must

be paid by the borrower to the lender along with the principal as a condition (stipulated or

by the custom), of the loan or for an extension in its maturity.” It is referred as Riba-al-

qard or Riba-al-Quran that is known as interest on loans in recent age. Islam prohibits all

types of Riba not only on loans but also on other transactions as Riba-al-fadl that is

linked with an exchange of commodities. Similarly, interest is prohibited on all type of

activities i.e. whether it is paid/received on consumption or production activities. It is

reported that that the performance of Islamic banks meets the international standards in

terms of profitability (Iqbal et al. 1998).

2.2 Prohibition of Interest in Islamic Banking

Interest based activities are strictly prohibited in Islam as it is ordered by the Allah

Almighty in the Holy Quran. In Islam, religious, social and economic activities have

strong ties with each other, so economic activities (i.e. earning and spending pattern of

any individual) should be in line with the Islamic principles. Banks are actively engaged

in different economic activities by developing a liaison among various stakeholders for

financial and productive ventures. Banking activities must be interest-free and purely

according to principles of Sharia’h for the welfare of the all segments of the society.


2.2.1 Prohibition of Interest in the Holy Quran

Riba is prohibited step by step by Allah Almighty by conveying its pros and cons in the

Sura-e-Rome (30:39) and finally declared haraam in the Sura-e-Al-Bakara (2:275).

Following verses of the Holy Quran clearly reflects the instructions regarding riba.

“ That which ye given in riba in order that it may increase on (other) people's property

hath no increase with Allah; but that which ye give in charity; seeking Allah's

countenance, hath increase manifold” (30:39).

This is the first stage, to convey the pros and cons of riba. In this verse, Allah Almighty

disclosed the pros and cons of riba and ordered to spread charity. People only consider

extrinsic characteristics of riba to increase their capital manifold and ignores the intrinsic

fatal outcome of riba. You must frequently distribute charity, Zakat and Sadaqaat among

deserving people for sake of increase in your income and success in this life and in the

life hereafter.

“That they took riba, though they were forbidden; and that they devoured men's

substance wrongfully. We have prepared for those among them who reject faith, a

grievous punishment” (4:161)

This holy Verse shows the historical perspectives of riba. There are always a segment of

people even in the previous nations of the world, they are used to practice riba-based


activities and swallow the property of others by hook or crook. These people are warned

for exemplary trial and bad consequences of their deeds.

“O ye who believe! Devour not riba, doubled and multiplied; but fear Allah; that ye may

(really) prosper”. “Fear the fire, which is prepared for those who reject faith”. And obey

Allah and the Messenger; that ye may obtain mercy” (3:130-2).

This holy Verse makes a strong foundation for the prohibition of Riba by declaring it as

unwanted activity. The People are ordered to stop eating the earnings from Riba and

follow the instructions of Allah Almighty. It rejects manifold increase in the Riba and

warns the people. It also inspires the human being to be obedient to Allah Almighty for

ultimate success.

“Those who devour Riba will not stand except as stands one whom the evil one by his

touch hath driven to madness. That is because they say: ‘Trade is like Riba'. But Allah

hath permitted trade and forbidden Riba. Those who after receiving direction from their

Lord, desist, shall be pardoned for the past; their case is for Allah (to judge). But those

who repeat (the offence) are companions of the fire; they will abide therein (forever)”

(2:275).

These verses show the final prohibition of riba by the Creator of this universe. The

persons who eat riba are like those that are touched by satan and became unsound of

mind. They foolishly argue that trade is like riba. But trade is declared halaal and riba is


haram by Allah Almighty. So you must follow the instructions otherwise horrible fire is

waiting for you.

“Allah will deprive riba of all blessing, but will give increase for deeds of charity; for He

loved not creatures ungrateful and wicked” (2:276).

Allah Almighty does not bestow blessings upon riba-based activities and orders to stop

them, as He dislikes the violent. But there are uncountable blessings attached with the

deeds of charity and sadaqaat.

“O ye who believe! Fear Allah and give up what remains of your demand for riba, if ye

are indeed believers” (2:278). “If you do it not, take notice of war from Allah and His

Messenger. But if ye turn back, ye shall have your capital sums. Deal not unjustly, and ye

shall not be dealt with unjustly” (2:279).

These verses are related to desired post prohibition behavior of believers. Believers of

Allah Almighty are required to waive of their interest from borrowers and recover only

principal amount. And if you do not ready to accept then ready for war with Allah and

His Messenger, who can fight with Allah?

“If the debtor is in a difficulty, grant him time till it is easy for him to repay. But if ye

remit it by way of charity, that is best for you, if ye only knew” (2:280). “And fear the

Day when ye shall be brought back to Allah. Then shall every soul be paid what it

earned, and none shall be dealt with unjustly” (2:281).


Finally, these verses are the best examples to promote a sense of brotherhood and

collective welfare by cooperation. Because Allah Almighty inspires the people to give

relaxation to the borrower, if he faces some problems to repay the loan, even to write off

the debt as charity if the lender has capacity. This will be resulted into countless benefits

for individual and for the society as a whole. Eventually, people are responsible for their

deeds before Allah Almighty at the Day of Judgment.

2.2.2 Prohibition of Interest in the Ahadith

The Holy Prophet (Peace be upon him) gave us a complete code of life in the shape of

Islam that covers all aspect of human life (i.e. religious, social, and economic activities).

Islam is the religion of peace, brotherhood and cooperation having prime concern of

welfare being totally submissive to Allah. Islam ensures complete success in this life and

the life hereafter by following the instructions of the Holy Quran and Sunnah (practices

of the holy Prophet Muhammad-Peace be upon him). The holy Quran has clearly

declared an interest as haraam and people are prohibited to practice it. Similarly, the Holy

Prophet Muhammad (Peace be upon him) discouraged interest based activities and

strictly prohibited to practice it. Prohibition of riba is depicted from following Ahadith.

Abu Saad al Khudri (R.A) narrated that the Holy Prophet (Peace be upon him) said:

“Gold for gold, silver for silver, wheat for wheat, barely for barely, dates for dates and

salt for salt, like for like, payment being made hand by hand. If anyone gives more or

asks for more, he has dealt in riba. The receiver and giver are equally guilty” (Muslim).


Abu Hurayrah (R.A.) narrated that the Holy Prophet (Peace be upon him), said: “There

will certainly come a time for mankind when everyone will take riba and if he does not

do so, its dust will reach him” (Abu Daud).

Jabir (R.A) narrated that the Holy Prophet (Peace be upon him), cursed the receiver and

the payer of riba, the one who records it and who witnesses to the transaction and said:

“They are all alike (in guilt)” (Trimizi).

Ans Ibn Malik (R.A) narrated that the Holy Prophet (Peace be upon him), said: “When

one of you grants a loan and the borrower offers him a dish, he should not accept it; and

if the borrower offers a ride on an animal, he should not ride, unless the two of them have

been previously accustomed to exchanging such favors mutually” (Kitab al Buyua).

Abu Hurayrah (R.A) narrated that the Holy Prophet (Peace be upon him), said: “On the

night of Ascension I came upon people whose stomachs were like houses with snakes

visible from the outside. I asked Gabriel (A.S.) who they were. He replied that they were

people who had received riba” (Musnad Ahmed).

Abu Hurayrah (R.A) narrated that the Holy Prophet (Peace be upon him), said: “Allah

would be justified in not allowing four persons to enter paradise or to taste its blessings;

he who drinks habitually, he who takes riba, he who usurps an orphan's property without

right, and he who is undutiful to his parents” (Kitab al Buyua).


2.3 Functions of Islamic Bank

Business organization is primarily originated for the sake of profit by performing lawful

activities. Banks are also one of the business organizations that provide a set of products

and services to generate profits. Inception of Islamic banking practices in Pakistan

created multiple threats and opportunities to meet customers' expectations by the

provision of quality services. It initiated a healthy competition for Islamic banks to

compete with their peers and conventional banks for greater profits. It was observed that

the banking industry experienced stiff competition with banks and with other financial

institutions to attract potential customers (Hull, 2002).

Islamic bank works as a trading concern and financial intermediary to perform interest-

free activities purely according to principles of Sharia’h. It is a welfare organization that

promotes business and trade activities by pooling the financial resources for the sake of

profit and loss for mutual benefit. It is found that Islamic bank performs activities in the

right direction towards human development. It plays a positive role towards economic

development having main focus on human development while performing its functions

(Al-Harran, 1993). It is documented that banks have witnessed more profits on Murabaha

facilities as compared to conventional loans due to profit and loss base of Islamic

products (Ebraim, 1999).

Islamic banks perform a variety of fund-based and non-fund based functions to facilitate

their customers. Some important functions are displayed in figure 2.1.


Figure-2.1

Functions of Islamic Bank

Source: Generated

General Investment Fund

Specific Investment Fund

Long Term Musharika, Mudaribah and Diminishing Musharika etc.

Short Term Murabaha, Salam, Muajjal, Istisna etc.

Medium Term

Ijarah, Ijarah-Wa-Iqtina etc.

Accepts Deposits

Islamic Bank

Advance Loans (Financing Products)

Primary Functions Agency & Gen. Utility Functions

Non

-Fun

d B

ased

Ser

vice

s

Fun

d B

ased

Ser

vice

s


Islamic banks perform two types of functions i.e. fund based and non-fund based. Fund

based activities are called primary functions of Islamic bank i.e. acceptance of deposits

from savers on profit & loss basis and lend money to deficient individuals/business units

on profit and loss basis. Islamic Bank accepts deposits against savings and current

accounts. It accepts deposits against investment/savings accounts to generate income

under specific investment account or general investment account. Islamic Bank invests

this amount into different profitable ventures as an agent and shares the consequences.

Bank may receive deposits from people under current account and do not pay any interest

but may charge a fee for its services. Islamic banks lend money to borrowers for short-

term, medium-term and long-term investment (Musharika, Mudariba, Ijara, Salam,

Murabaha etc.) on the basis of profit and loss. In this way depositor, bank and borrower

share risk of loss according to a valid sales contract. It creates a strong economy on the

principles of transparency and accountability.

Uzair (1976) suggested the working structure of Islamic bank and explained its functions.

Banking transactions are undertaken among three parties i.e. actual users of the capital or

entrepreneurs; the bank as an intermediary and partial user of funds; the suppliers of

funds or depositors. The study recommended that all the transactions should be based on

profit and loss contracts among the concerned parties and exclusively interest-free. It is

also reported that Islamic banks could promote savings and investment activities by

determination of an equilibrium profit sharing ratio between depositors and borrowers

(Siddiqui, 1979).


Islamic bank performs some non-fund based functions like agency services and general

utility services. Islamic bank can act as an agent to provide the different types of services

like collection of cheques, collection of dividends, execution of standing orders, and

purchase/sale of securities. It also performs the general utility services e.g. a collection of

utility bills, foreign exchange remittances, providing Hajj services, currency exchanges

and ATM services etc. There is a sharp increase in the volume and market share, which is

depicted in table 2.1 as under

Table-2.1

Financial Performance of Islamic Banks

Indicators FY03 FY04 FY05 FY06 FY07 FY08

(March)

Assets of Islamic Banks 12,915 44,143 71,493 119,294 205,212 200,415

Deposits of Islamic Bank 8,397 30,185 49,932 83,840 146,945 141,933

Share in Bank Assets 0.50% 1.40% 2.10% 2.90% 4.20% 4.10%

Source: Economic Survey of Pakistan, 2007-08

Islamic banks have shown tremendous growth during the recent years. Islamic banks are

offering a variety of products and services to its customers. They strive to expand their

operations and perform multiple functions to attract the prospective customers for greater

profit. It requires the quality initiatives to retain valued customers by meeting their

expectations for better performance. Islamic bank proved a successful experience in

Pakistan and gained popularity among general public.


2.4 Operations and Products of Islamic Bank

Islamic banks are trade oriented financial institutions that provide interest free deposits

and investment opportunities for the people. It accepts deposits from general public under

general investment fund and specific investment fund that is clearly mentioned in the

agreement between the bank and the customer while opening their bank accounts. Islamic

bank actively performs several operations to provide a variety of products according to

customers' requirements. It deals with different types of customers i.e. depositors,

borrowers and service users. It provides credit facilities, financing products, funds

transfer facilities and other services according to customers' needs.

Table-2.2

Financing Products offered by Islamic Banks (in %)

Financing Products FY03 FY04 FY05 FY06 FY07 FY08*

Murabaha 79.4 57.4 44.4 48.4 38.9 38.7

Ijarah 16.5 24.8 29.7 29.7 25.4 24.2

Musharka - 1 0.8 0.8 0.9 1.3

Diminishing Musharka 1.2 5.9 14.8 14.8 25.1 24.8

Salam 1.6 0.7 1.9 1.9 1.4 1.6

Istisna - 0.4 1.4 1.4 0.9 2.4

Qarz/Qarz-e-hasna - - - - - -

Others 1.3 9.8 3 3 7.1 6.7

Source: Economic Survey of Pakistan, (2007-08). *(March2008)


Figure 2.2 reflects operations of bank for the provision of service to customers.

Figure-2.2

Operations of Islamic Bank

General Investment Fund

Specific Investment Fund

Long Term Musharika, Mudaribah and Diminishing Musharika etc.

Short Term Murabaha, Salam, Muajjal, Istisna etc.

Medium Term

Ijarah, Ijarah-Wa-Iqtina etc.

Accept Deposits

Islamic Bank

Advance Loans (Financing Products)

Primary Functions Agency & Gen. Utility Functions

Non

-Fun

d B

ased

Ser

vice

s

Fun

d B

ased

Ser

vice

s

Cus

tom

ers

Cus

tom

ers

Cus

tom

ers

Cus

tom

ers

Bank Services Bank Customers

Service Quality

Customer Satisfaction


2.4.1 Acceptance of Deposits

Islamic banks are striving to capture the maximum number of customers to compete with

conventional banks by providing a large number of products as an alternative for interest

based products. Islamic banks supervise deposits (as Mudarib or investment manager).

Profit or loss is shared between banker and the customers according to an agreed ratio. It

is found that customers are rapidly moving from conventional banks to Islamic banks due

to growing trust in the Islamic banking products and practices. There are different types

of customers (i.e. individuals, households, corporate bodies, financial institutions as well

as government and private organizations) that eager to engage in long term relationships

with the Islamic banks (SBP, 2007). The comparison of various contributors to deposits

of Islamic banks is given in figure 2.3

Figure-2.3

Contributors towards Deposits of Islamic Bank

Source: SBP, 2007


Service experiences may create positive or negative feelings and perceptions among

customers. If they have positive feelings regarding bank services as satisfied customers

they may repeat their transactions with the bank. On the other hand, dissatisfied and

unhappy customers may think to switch to other bank. An empirical study was

undertaken regarding the structure and performance of Pakistani banking sector. The

findings showed that equity capital and loans have a positive impact on the bank's

profitability while deposits affect it negatively (Arby, 2003).

2.4.2 Financing pattern and Products of Islamic banks Islamic banks provide a variety of financing products according to principles of Sharia’h

to cope with the challenges of the recent age. These products may be categorized as

short-term, medium-term and long-term according to their specific characteristics.

Islamic banks provide Short-term products like Murabaha; Istisna; Salam and Muajjal

etc. to meet running finance requirements of different business units. Ijarah and Ijarah-

Wa-Iqtina are a medium term financing options offered to the customers. Long-term

financing options consist of Musharika, Mudariba and Diminishing Musharika. It inspires

the people to deal on the basis of profit and loss to enhance the spirit of cooperation. It is

observed that Murabaha and Ijarah financing are very popular among people. But

Mudarbaha is least preferred option with 0% weight-age. It may be due to lack of

supportive financial environment. Increasing contribution of Diminishing Musharika

shows the banks' vigilance to diversify their portfolio by attracting a maximum number of

customers (SBP, 2007).


The financing contribution of each option is reflected in figure 2.4.

Figure-2.4

Contribution towards Financing Products of Islamic Bank

Source: SBP, 2007

Khan (1985) reported that Islamic bank could participate in productive activities by the

provision of funds on profit and loss basis to different industries e.g. manufacturing and

agriculture etc. In the agriculture sector, Islamic banks could participate: by the provision

of inputs to farmers; financing the purchase of inputs; provision of funds at a crucial

stage of harvesting; provision of funds for supportive activities like effective marketing

of farm output. The expansion of the banking industry requires a study to assess service

quality in relation to customers' satisfaction and its influence on bank performance.


2.5 Service Quality of Pakistan Banking Sector

Service is defined as a set of benefits delivered from the service provider to the service

consumer. It is reported that services have four key features that differentiate it from

goods i.e. intangibility, perishability, inseparability and heterogeneity (Parasuraman et

al., 1985). It is observed that service quality is a major factor in reference to customer

acquisition and retention (Galloway and Ho, 1996). It shows the organization’s ability to

meet customers’ desires and needs (Hanson, 2000). Service quality is an important input

of customer satisfaction in the banking sector (Spreng and Machoy, 1996; Gefan, 2002;

Ibáñez et al. 2006; Saravanan and Rao, 2007). Dimensions of service quality differ due to

many factors i.e. prevailing environment, political conditions, socio-cultural differences,

technological advancements and demographic characteristics. Service quality is a

multilevel and multidimensional concept that varies in meanings among researchers

(Cronin et al., 2000). Banks operating in Pakistan have realized the importance of service

quality to expand their operations and portfolio. It is reported that service quality leads to

customer satisfaction in the Pakistani banking environment (Jamal and Naseer, 2003).

2.6 Customer Satisfaction in Pakistani Banking Sector

Islamic banks are competing for more customers with each other besides stiff competition

with conventional banks. Customer satisfaction is getting importance due to expansion of

banking industry and innovative products according to customers’ needs across the globe

especially in Pakistan. It is an action of fulfilling a need, desire, demand or expectation.


Overall satisfaction is the outcome of customer's evaluation of a set of experiences that

are linked with the specific service provider (Westbrook, 1981). Customer satisfaction is

important due to an increased competition in banking sector (Bartell, 1993; Haron et al.

1994; Chakravarty et al. 1996; Chitwood, 1996; Kotler, 2003). It is concluded that

customer satisfaction enhances the reputation of the bank in the service environment

(Bontis, Booker and Serenko, 2007).

2.7 Performance of Pakistani Banking Sector

Islamic banks require performance evaluation to compete with conventional banks in

Pakistan. Bank performance should be evaluated due to stiffer competition and

customers' awareness of service quality. Performance of an organization could be

assessed by resource-based view as explored by a number of researchers (Wernerfelt,

1984; Barney, 1986). It could be linked with market orientation, organizational learning,

human resource productivity, quality improvement or any other component (Day, 1994;

Banker and Sinkula, 1999; Santos-Vijande et al., 2005).

Khalid (2006) reported that the performance of Pakistani banking sector had improved

after privatization. Similarly, banking industry in Pakistan has shown an unprecedented

growth as the best performing sector having banking assets of more than $ 60 billions.

Almost 81% of banking assets are owned by the private sector while foreign investors

contributed 47% of total paid up capital (Akhtar, 2007).


The performance of Pakistani banking sector during last few years is shown in Table 2.3.

Table-2.3 Performance of Banks in Pakistan Indicators 2006-07 2007-08

No. of Braches 7852 8233

Nationalized Commercial Banks 1690 1715

Private Banks 5597 5935

Specialized Banks 534 534

Foreign Banks 31 49

Assets (Rs. Billion) 4351.9 5155.1

Nationalized Commercial Banks 836.2 1017.2

Private Banks 3173 3845.2

Specialized Banks 119 1199

Foreign Banks 223.8 172.9

Net Advances (Rs. Billion) 2427.7 2694


Private Banks 1807.2 2044.4

Specialized Banks 70.6 72.2


Deposits (Rs. Billion) 3255 3852





Net Investment (Rs. Billion) 836.7 1275.5





Source: Economic Survey of Pakistan, 2007-08


Islamic banks are successfully competing with the conventional banks by capturing a

reasonable share of the market. Islamic banks enjoyed tremendous growth within a

shortest possible time. Similarly assets, deposits, financing and customers became

manifold within few years. Financing products offered by Islamic banks became popular

among people due to flexible terms and conditions. The impressive growth of Islamic

banks can be associated with the introduction of new financing products according to

principles of Sharia’h as an alternative for Riba-based financing products offered by

conventional banks. The performance of the Islamic banks is given in the Table 2.4.

Table-2.4 Performance of Islamic Banks in Pakistan

(Rs. in Billion)

Descriptions Dec-07 Dec-06 Dec-05 Dec-04 Dec-03

Total Assets 206 118 72 44 13 % of Banking Industry 4.3 2.9 2.1 1.4 0.5 Deposits 147 83 50 30 8 % of Banking Industry 4.1 2.8 1.9 1.2 0.4 Financing & Invest. 138 72 48 30 10 % of Banking Industry 3.6 2.4 1.8 1.3 0.5 Number of Full Fledge Islamic Banks 6 4 2 2 1 Number of Conventional Banks With Islamic Banking Branches

12 12 9 7 3

No. of Branches 289 150 70 48 17 Source: Islamic Banking Bulletin by SBP, 2008.


CHAPTER 3

Literature Review and Theoretical Framework

Service Quality


Bank Performance

Service Quality and Customer Satisfaction in the Banking Sector

Service Quality, Customer Satisfaction and Bank Performance in

the Banking Sector

Hypotheses, Conceptual Model and Theoretical Framework


Chapter 3

Literature Review and Theoretical Framework

Banks are competing in a highly competitive environment to offer quality oriented

services according to customers’ expectations. Islamic banks face stiff competition from

their peers and conventional banks prevailing in the economy. Different aspects of banks

are studied by researchers e.g. operations, service quality, employee satisfaction,

customer satisfaction, financing products, bank efficiency, financial performance etc. as

the key segments for research. Many studies tried to assess the quality of

services/products offered by the banks. Customers became a center for all banking

activities due to increased competition for greater market share. Banks also focus on

demographic characteristics of customers to assess their needs. Every bank is trying to

enhance its performance by improving its service quality according to customers'

expectations. A number of Islamic banks have started their operations in Pakistan during

last few years. It requires a study to analyze the bank services and its outcomes in the

shape of customers’ satisfaction and performance.

3.1 Services

This study examines the influence of different dimensions of service quality on the

customer's feelings of satisfaction and its influence on bank performance. A model of

service quality, customer satisfaction and bank performance is developed in the light of

literature to measure the performance of Islamic and conventional banks in Pakistan.


3.1.1 Definition of Service and Service Quality

Business is a legal activity that is undertaken to earn a profit. Business activities can be

divided into three categories i.e. manufacturing (conversion of inputs into outputs by a

transformation process); trading (buying and selling of goods) and services (provision of

benefits for reward or fee). Service is defined as a set of benefits delivered from a service

provider to the service consumer. The service firm provides benefits (due to competency,

skills, knowledge and experience etc.) to the customers for the sake of reward (fee,

salary, wages, etc.). Services may be coaching, teaching, consultancy and other modes to

facilitate the customers.

Banks provide financial inter-mediation, consultancy and agency services that are

diversified with the passage of time. Services are different from goods because they are

intangible as they cannot be seen, touched or felt; perishable as we are unable to store

them; inseparable because they are attached with a service provider, and insubstantial due

to heterogeneity (Parasuraman et al. 1985; Hoffman and Bateson, 2002).

Parasuraman et al. (1985) argued that evaluation of service quality is difficult as

compared to physical goods. Physical existence of goods facilitates the customers to buy

them due to its aesthetic characteristics. Services are considered as intangible because we

are unable to see, touch or feel them (Hoffman and Bateson, 2002).


Hanson (2000) suggested that service quality shows the organization's ability to meet

customers' desires and needs. So organization must improve their services to meet the

customers' wants and requirements. It is found that customers' perception of service

quality is very important for managers to compete in the market (Hoffman and Bateson,

2002).

Quality is an ability of any product to meet customers' expectations and requirements. It

is a set of features, characteristics or attributes that are required or expected by the

customers. There are several studies that found a relationship between the service quality

offered by banks and its consequences as satisfaction level among customers. It is

reported that quality is observed as a major factor in reference to customer acquisition

and retention (Galloway and Ho, 1996).

Morre (1987) identified that concentration on service quality leads to differentiation that

enhance the competitive position of the organization for long term benefits. Service

quality and customer satisfaction became core issues for the successful survival of any

service organization. Service quality is considered very important indicator towards

customer satisfaction (Spreng and Machoy, 1996). Service quality got popularity among

professionals and academia due to increased competition. It contributes a lot to gain

competitive advantage to maintain long-term relationship with customers (Zeithmal et al.

2000)


There are two perspectives regarding service quality i.e. one is European and other is

Americans. European researchers concentrate on functional and technical aspects of

services having a keen analysis of organization's image (Gronroos, 1982, 1984;

Lehthinen and Lehthinen, 1982). They focus on three dimensions of service quality to

measure the performance of any product by considering functional quality, technical

quality and corporate image. Service quality is defined as a discrepancy between

expected and perceived service. It is said that service quality is the outcome of customers'

comparison between expectations and performance (Gronroos, 1982).

The Americans' perspective is concentration on functional quality to measure the

performance of services (Parasuraman et al. 1985, 1988, 1991; Kang and James, 2004).

They investigated the service quality of different industries by dividing the service

quality into five dimensions: tangibility, reliability, responsiveness, assurance and

empathy. Firstly, they identified ten dimensions but finally service quality is refined to

five dimensions (Parasuraman et al. 1985, 1991).

Parasuraman et al. (1985, 1988) defined service quality as customers' evaluation between

service expectation and service performance. They compared customers' responses

regarding their perceived quality of services and their pre-purchase expectations. It is said

that service quality represents the answers to some queries like what is expected by

customers? What is delivered? Finally is there any difference? (Woodside et al, 1989).


Asubonteng et al. (1996) defined service quality as the difference between customers'

expectations about the service before its use and their perceptions after receiving the

service. Quality factors vary from one to another in reference to the importance and their

impact on the satisfaction level of the customers. It was found that specific activities like

increasing the speed of processing information have resulted in delighted customers.

Similarly, improvement in the reliability of equipment lessened dissatisfaction (Johnston,

1997). However, it was reported that service quality is the subjective comparison between

what the customers require and what they actually get (Gefan, 2002).

Ibáñez et al. (2006) investigated service quality dimensions and found a significant effect

of service quality on satisfaction in Spain. In another study, a conceptual framework to

measure service quality from the customer's perspective is empirically tested for

convergent validity, uni-dimensionality and reliability (Saravanan and Rao, 2007).

3.1.2 Dimensions of Service Quality

There is an ongoing discussion about the service quality and its dimensions. But there is a

lack of consensus in the literature about the uniform dimensions among researchers. It

may be due to demographics, cultural, religious, geographical or other attributes that vary

form one country to another. Apparently, there are two perspectives of service quality:

Europeans and Americans. Service quality is a multilevel and multidimensional concept,

which varies in meanings among researchers (Cronin et al., 2000).


Gronroos (1982) identified three dimensions of service quality as technical quality (actual

outcome of the service); functional quality (service delivery process by interaction

between service provider and service recipient); and corporate image (perception of

customers about service organization). Similarly, in another study three dimensions of

service quality are identified i.e. physical quality; corporate quality and interactive

quality (Lehthinen and Lehthinen, 1982). Both studies reflect almost the same

characteristics of the service quality.

Parasuraman et al. (1985) investigated the different service industries and explored 10

dimensions of service quality i.e. tangibility, responsiveness, reliability, courtesy, access,

credibility, communication, competence, understanding, and security. They continued

their research to purify the dimensions of service quality and developed a widely used

research instrument called SERVQUAL. It is equally applicable in different service

industries including banking industry. They refined these dimensions and summed up

into five dimensions like reliability, responsiveness, tangibility, assurance and empathy

(Pararsuraman et al. 1988, 1991).

Gronroos (1990) explored six factors of service quality: attitude and behavior; skills and

professionalism; accessibility and flexibility; reliability and trustworthiness; recovery;

reputation and credibility. In another study, a four-factor scale that consists upon 17 items

was used to measure service quality in branches of an Australian commercial bank

(Avkiran, 1994).


Johnston (1995) identified 18 dimensions of service quality to measure the performance

of service industries: aesthetic, availability, attentiveness, access, care, cleanliness,

comfort, commitment, communication, competence, courtesy, friendliness, flexibility,

functionality, integrity, reliability, responsiveness and security. Oppewal and Vriens

(2000) used 28 attributes to measure the service quality in retail banking sector.

Similarly, Bahia and Nantel (2000) found six dimensions of service quality that consists

of 31 items to measure the service quality in the banking sector.

Sureshchander et al. (2002) developed 41 items scale to measure the service quality in

the banking sector. Although there are different dimensions of service quality exist in the

literature. But this study follows SERVQUAL instrument based on five dimensions to

measure the impact of service quality on customer satisfaction and bank performance.

Parasuraman et al. (1985, 1988, 1991b) tested this research instrument in different

industries like banking, insurance and telephone repair industry. The reliability and

validity coefficients of SERVQUAL were very high and increased its acceptability all

over the world. It is also widely used by the researchers to assess the service quality in

the banking sector. The dimensions of service quality are frequently studies by the

researchers according to their own local environment, cultural and socioeconomic

conditions. There are numerous studies that identified a number of dimensions due to

lack of global dimensions. A list of service quality dimensions used in the banking sector

across the globe is given in table 3.1.


Table-3.1

Dimensions of Service Quality used in Banking Sector

Year

Author (s)

Dimensions Service Quality

1

1982

Gronroos

Suggest three dimensions of service quality: technical quality; functional quality; corporate image

2

1982

Lehthinen and Lehthinen

Identified three dimensions of service quality: physical quality; corporate quality and interactive quality

3

1984

Gronroos

Refined their previous work and elaborate three dimensions of service quality

4

1985

Parasuraman et al.

Identified ten dimensions of service quality: reliability; responsiveness; tangibility; courtesy; access; credibility; communication; competence; understanding; security

5

1987

Morre

Service quality leads to differentiation and enhance competitive position

6

1988

Parasuraman et al.

Refined their previous work and compiled ten dimensions of service quality into five: reliability; responsiveness; empathy; assurance; empathy

7

1990

Gronroos

Explored six dimensions of service quality: attitude and behavior; skills and professionalism; accessibility and flexibility; reliability and trustworthiness; recovery; reputation and credibility

8

1991

Parasuraman et al.

Refined five dimensions of service quality and replicate in three service industries i.e. banking, telephone repairing and insurance and devised final version of SERVQUAL


9

1992

Cronin & Taylor

Developed SERVPERF to compare with SERVQUAL

10

1994

Avkiran

Developed four factor scale that consists of seventeen items to measure Service quality

11

1995

Johnston

Identified eighteen dimensions of service quality: aesthetic; availability; attentiveness; access; care; cleanliness; comfort; commitment; communication; competence; courtesy; friendliness; flexibility; functionality; integrity; reliability; responsiveness; security.

12

2000

Oppewal and Vriens

Explored twenty eight attributes to measure service quality

13

2000

Bahia and Nantel

Developed six dimensions of service quality that consists of thirty one items

14

2002

Sureshchander et al.

Developed five dimensions of service quality that consists of forty one item scale

15

2005

Malhotra et al.

Used 10 dimensions to measure service quality

Source: Generated

Parasuraman et al., (1988, 1991) developed SERVQUAL instrument to measure the

dimensions of service quality that is frequently used by researchers. It consists of 22

items that are compiled into five dimensions: tangibility; reliability; responsiveness;

assurance and empathy. This study applied five dimensions of service quality that are

explained as under:


Reliability– This dimension shows the consistency of services towards performance

and dependability.

Tangibles- It shows the physical aspects of the services as physical facilities,

appearance of personnel and tools & equipment used for provision of

services.

Responsiveness-It reflects the willingness or readiness of employees to provide quick

services to customers.

Assurance- This dimension indicates the employees’ knowledge, courtesy and their

ability to incorporate trust and confidence.

Empathy- This dimensions shows the magnitude of caring and individual attention given

to customers.

3.1.2.1 Reliability

Reliability is the ability to perform services dependably and accurately in a consistent

manner. It contains five elements to assess the accuracy and credibility of bank services.

This dimension of service quality evaluates the promises of banks and its execution from

customers' point of view. Reliability is very important determinant of product quality

besides good personal service, staff attitude, knowledge and skills (Walker, 1990).

Berry and Parasuraman (1991) reported that reliable service is the outcome of the

continuous improvement. Similarly in another study, it is found that service reliability is

the service “core” to most customers. So managers should use every opportunity to build

a “do-it-right-first” attitude (Berry et al., 1990).


3.1.2.2 Tangibility

This dimension shows the physical aspects of the services as physical facilities,

appearance of personnel and tools used for the provision of services. It is more concerned

with aesthetic part of the banks. It is found that customers prefer tangible dimension of

service quality in UAE banking industry (Jabnoun and Al-Tamimi, 2003).

Zineldin (2005) studied the product/service quality and customer relationship factors in

Sweden. It is found that a bank can create customer relationships by delivering added

tangible and intangible elements of the core products. Strong competitive positions are

the outcome of product/service quality and differentiation.

3.1.2.3 Responsiveness

This dimension reflects the willingness or readiness of employees to provide quick

services to customers. Customers are very keen to employees' behavior in services

industry especially in the banking industry. It was reported that customers are very

sensitive to employees' working environment in service organizations (Brown and

Mitchell, 1993). It was found that correct match between staff skills and customers'

expectation resulted in better service quality towards customers (Gollway and Ho, 1996).

Service recovery and problem solving have been recognized as important parts of

services quality (Hart et al., 1990; Dabholkar et al., 1996; Swanson and Kelley, 2001;

Nelson and Chan, 2005).


Tahir and Abu Bakar (2007) investigated service quality and customer satisfaction of

commercial banks by using SERVQUAL in Malaysia. They found that responsiveness is

rated as the most important dimension of service quality. It was found that accurate

communication, proper service delivery and effective conflict handling results into

overall customer satisfaction regarding bank services in Malaysia (Nelson, 2006).

3.1.2.4 Assurance

This dimension indicates the employees' knowledge, courtesy and their ability to convey

trust and confidence. Service quality is also linked to the customer satisfaction as how

employees use their knowledge & courtesy and their ability to incorporate trust and

confidence. Parasuraman et al. (1988) reported assurance as an essential dimension of

service quality after reliability and responsiveness towards satisfaction. It is found that a

bank can create customer satisfaction by ensuring trustworthy behavior and reflection of

genuine commitments to service provision (Nelson and Chan, 2005).

Arasli et al. (2005) identified that assurance dimension of service quality has the

strongest impact on customer satisfaction that leads to positive word of mouth outcome.

In another study, overall customer satisfaction was examined in reference to relationship

quality in retail banking sector of Malaysia. The results indicated that trust and

commitment are important factors for customer satisfaction regarding relationship quality

(Nelson, 2006).


3.1.2.5 Empathy

This dimension shows the magnitude of caring and individual attention given to

customers. In the banking sector customer care and individual attention is indispensable

for the better performance due to stiff competition. Bank customers considered empathy

as an important dimension of service quality (Jabnoun and Al-Tamimi, 2003). It is

suggested that employees' commitment to deliver quality services, skillfully handling of

conflicts and efficient delivery of services resulted in satisfied customers for long term

benefits (Nelson and Chan, 2005).

Malhotra et al. (2005) examined the difference in perceptions of service quality

dimensions between developing and developed countries. They found that in developing

countries like India and Philippines results were systematically and significantly

different. It is found that empathy is least preferred dimension of service quality by the

customers of commercial banks in Malaysia (Tahir and Abu Bakar, 2007).

Parasuraman et al. (1991) reported reliability is largely concerned with the service

outcome while others related to the service process. Leeds (1992) reported that service

quality primarily depends upon the dealings of bank personnel. It was found that

approximate 40% of customers switched their current bank due to poor services and

nearly three quarters of banking customers gave the highest preference to tellers'

courtesy. Customers of private banks have higher expectations and perceptions as

compared to the customers of public banks in Greece (Kangis and Voukeates, 1997).


Longo (2000) suggested that bank managers should be more aware about the significance

of quality improvement efforts to gain competitive position in the market. The results of

these efforts are slow and sometimes have little influence. Customers' perception of

service quality is strongly dependent on customers' values and beliefs that vary from one

culture to another (Furer et al., 2002).

Gounaris et al. (2003) explored the service quality in Greek banking industry. The study

showed that the magnitude of the influence of each dimension of service quality on

customer satisfaction is considerably differs. It is reported that technological factors of

service quality are more important as compared to human factors of service quality in

Indian banking industry (Sureshchander et al., 2003). It is said that there is direct and

positive relationship between perceived quality and level of satisfaction (Iglesias and

Guille´n, 2004). Similarly, it was found that expectations of bank customers were not met

due to major gap in the empathy dimension. On the other hand, assurance has significant

impact on the customer satisfaction of bank customers (Arasli et al., 2005).

Jabnoun and Khalifa (2005) proposed a measure of service quality and then tested it in

conventional and Islamic banks in UAE. They found that four dimensions: personal

skills, reliability, values, and image are significant in case of conventional banks. While

only personal skill and values were found significant in Islamic banks. Similarly, service

quality is examined by conducting a survey of 300 bank customers in Thailand. The

study depicted that reliability; serviceability and durability are the most important

dimensions of service quality in the banking sector (Leelapongprasut et al., 2005).


Al-Hawari and Ward (2006) found that customer satisfaction plays an inter-mediator role

in the relationship between service quality and financial performance of the banks in

Australia. An empirical study was conducted in UAE banking sector to investigate the

service excellence. It found a positive relationship between service quality and

satisfaction (Liang and Wang, 2006).

Glavell et al. (2006) conducted an empirical analysis of customers from five Balkan

countries: Greece; Bulgaria; Albania; FYROM and Serbia. The study investigated the

customers' views towards service quality offered by banks. It was found that there is a

significant difference in customers' perceptions of service quality in different countries.

Greek customers have highest perceptions towards service quality. It is suggested that

service quality should be ensured by implementation of total quality management

techniques in the banking sector (Al-Marri, Ahmad and Zairi, 2007).

It is evident that political, technological, environmental and socioeconomic factors

influence the service quality perceptions of customers. Service quality offered by banks is

examined by a comparative study of Bulgarian and Greece banks. The study suggested

that there is a difference about the perception of service quality among customers of

different countries. Findings show that Greece customers have higher levels of service

quality perceptions as compared to Bulgarian customers (Petridou et al., 2007).

Customers perception of service quality could be affected by the demographic features of

the customers especially gender. It is concluded that gender influences the customer

perception of service quality in the banking sector (Spathis et al., 2004).


3.2 Customer Satisfaction

Financial sector has shown unprecedented growth after deregulation in Pakistan.

Pakistani financial markets experienced drastic changes after financial liberalization

during early 1990s that provokes tough competition among financial institutions

especially in banking sector. This competition leads to the introduction of customer-

oriented products in the market to meet the expectations of customers.

3.2.1 Definition of Satisfaction

Satisfaction means a feeling of pleasure because one has something or has achieved

something. It is an action of fulfilling a need, desire, demand or expectation. Every

rationale customer compares the cost (price) and benefit (utility) of any product or

services. Customers compare their expectations about a specific product/services and its

actual benefits. This comparison results into three types of customers: dissatisfied

customers (expectations are more than actual performance of the service); satisfied

customers (actual benefits realized from services are equal to or more than expectations);

indifferent customers (actual performance and expectation are exactly equal).

Westbrook (1981) reported that overall satisfaction is the outcome of customer's

evaluation of a set of experiences that are linked with the specific service provider. It is

observed that organization's concentration on customer expectations resulted into greater

satisfaction (Peters and Waterman, 1982). Kotler (2000) defined satisfaction as a


person's feelings of pleasure or disappointment resulting from the comparison of

product's perceived performance in reference to expectations. Customers' feelings and

beliefs also affect their satisfaction level. It is said that satisfaction is a function of

customer's belief about fair treatment (Hunt, 1991).

Customer satisfaction has become important due to increased competition as it is

considered very important factor in the determination of bank's competitiveness (Bartell,

1993; Haron et al. 1994). Satisfaction is a post purchase evaluative judgment associated

with a specific purchase decision (Churchil and Suprenant, 1992). The customer

satisfaction is indispensable for the successful survival of any organization. Continuous

measurement of satisfaction level is necessary in a systematic manner (Chakravarty et al.

1996; Chitwood, 1996; Romano and Sanfillipo, 1996).

3.2.2 Customer Satisfaction in Banking

Financial liberalization and deregulation has increased the competition among banks to

attract potential customers. Every banker tries to provide superior services to keep

satisfied customers. In Pakistan, emergence and growing popularity of Islamic banking

products raises competition among Islamic banks. Islamic banks have to face numerous

challenges in the recent age. Firstly, they are competing with their peers and secondly

they have to cope with the conventional banks. Customer satisfaction is a set of feelings

or outcome attached with customer's experience towards any product/service (Solomon,

1996).


Yi (1990) defined customer satisfaction as a cumulative outcome of perception,

evaluation and psychological thinking of customers when they utilize any service. There

are a number of studies that measured the customer satisfaction towards services in the

banking sector (Anderson et al., 1993; Brenhardt et al., 1994; White, 1994; Bedal and

Power, 1995; Holliday, 1996; Dispensa, 1997).

Satisfied customer is the real asset for any organization that ensures long-term

profitability even in the era of great competition. It is found that satisfied customer repeat

his/her experience to buy the products and also creates new customers by communication

of positive message about it to others (Dispensa, 1997). On the other hand, dissatisfied

customer may switch to alternative products/services and communicate negative message

to others. So, organizations must ensure the customer satisfaction regarding their

goods/services (Gulledge, 1996).

Figure-3.1

Expectation-Outcome Experience of Customers

Source: Generated

Pre Purchase Expectations

Satisfaction OR

Dissatisfaction

Actual Performance

Switch

Repeat


Figure 3.1 reflects expectation-outcome experiences of customers among bank

customers. Customer satisfaction leads to better profitability by retaining existing

customers and to attract new ones. Every organization deploys a reasonable amount to

have satisfied customers. Satisfied customer leads to delighted customers that eventually

create the sense of brand loyalty among customers.

The sequence of customer satisfaction in reference to satisfied customers, delighted

customers and loyal customers can be expressed in figure 3.2.

Figure-3.2

Customer Satisfaction for better Performance

Source: Generated

Cost (Price) = Expectation (Benefits)

Satisfied Customers

Delighted Customers

(Customers) Brand Loyalty

Greater & Long-term Profits (Better Performance)


Organization should convey an attractive message to their customers about their product

mix on rationale basis because exaggeration and unrealistic promises may result in

dissatisfaction among customers. Customer satisfaction is an urgent challenge for Islamic

banks as it was considered in case of conventional banks. Customer satisfaction became

the center of organizational efforts. Financial institutions have experienced an intense

competition and changing expectations of the customers (Cheng et al. 1996).

3.2.3 Determinants of Customer Satisfaction

Banking industry expanded over a number of years due to the introduction of new

products and services. It may be due to an increasing number of new foreign and local

banks and their working pattern as conventional banks or Islamic banks. Both streams of

banks are striving to attract the potential customers at any cost. This increased

competition requires the provision of quality services to have satisfied customers for

sustainable benefits. It is reported that delivery of high quality services is the key to

sustain competitive advantage to have satisfied customers (Shemwell et al., 1998).

Customer satisfaction is the central tenet to compete in the market successfully. It is

prerequisite to retain customers to generate economic benefits. Customer satisfaction is

crucial to realize greater profitability, larger market share and more returns on

investments etc. (Scheuing, 1995; Reichheld, 1996; Hackl and Westlund, 2000).

Customer satisfaction is a multidimensional construct that requires multi-item scale for

its measurement. Researchers agree with the multidimensional nature of customer


satisfaction and measured it accordingly (Westbrook and Oliver, 1981; Crosby and

Stephens, 1987; Supernant and Soloman, 1987; Oliver and Swan, 1989; Oliva et al. 1992;

Bitner and Hubert, 1994; Shemwell et al., 1998; Sureshchander et al., 2002).

Cronin and Taylor (1992) used a single item scale to measure the customer satisfaction.

They asked customers to report overall feeling of satisfaction regarding a specific service

experience. This approach proved insufficient due to concentration on only one item.

Customers' overall satisfaction is investigated by using a four-item scale with reference to

service provider (Bitner and Hubert, 1994). Another study investigated customers'

satisfaction by developing a five-item scale to test their model (Shemwell et al., 1998).

Similarly, customer satisfaction was investigated in banking sector by using a six-item

scale (Prince et al., 1995).

Sureshchander et al. (2002) investigated customer satisfaction by using a forty one-item

scale that is further summed up into five dimensions. They investigated the relationship

between service quality and customer satisfaction in the banking industry. They

suggested five dimensions of customer satisfaction i.e. core service or service product;

human element of service delivery; systematization of service delivery (nonhuman

element); tangibles of service (servicescapes) and social responsibility.

Customer satisfaction appears as the cumulative result of customer’s internal feelings

about their experiences related to products/services. It is suggested that organizations

especially banks should concentrate on customer satisfaction. It could result into repeated


purchase behavior that is inevitable for long-term business success. An empirical study

indicates a strong relationship between perceived service quality, customer satisfaction

and other variables in Australian and Korean banks (Kayis, Kim and Shin, 2003).

Metawa and Almossawi (1998) investigated the banking behavior of Islamic banking

customers in Oman by collecting data from 300 customers. They aimed to find out the

awareness and satisfaction level among customers of Islamic banks by considering their

demographic data. The findings showed that the most of the customers are highly

satisfied with products and services of Islamic banks. They suggested that bankers should

develop professionalism and competency to maintain profitable relations with customers.

Naseer, Jamal and Al-Khatib (1999) examined customer awareness and satisfaction by

using a sample of 206 respondents towards Islamic banking in Jordan. They found

customer awareness about Islamic bank products like Murabaha, Musharka and Mudarba

but expressed a sense of dissatisfaction towards some of the services provided by Islamic

banks. It is investigated that how customer satisfaction affects the customers' behavioral

consequences. The findings showed a strong impact of customer satisfaction on their

decision to stay with the existing service provider and restrain their negative behavioral

intentions. It is reported that there is a positive association between customer satisfaction

and word of mouth communication (Athanassopoulos et al., 2001).


Khalifa and Liu (2003) said that satisfaction is measured by the discrepancy between

perceived performance and cognition like expectations or desires. There are several

factors that yield customer satisfaction but service quality is one of them. It is reported

that customer satisfaction helps to retain customers for greater profitability, increase in

market share and more return on investment (Hackle and Westlund, 2000). It is

investigated that service quality works as input to appear as customer satisfaction (Malta,

2002). It is found that customer satisfaction generates several outcomes like repeat

purchase; loyalty, positive word of mouth and long term profitability (Wirtz, 2003).

Gustafsson (2005) defined satisfaction as a customer's overall evaluation pertaining to

offer. The study found that overall satisfaction has a strong positive impact on customer

loyalty regarding a wide range of products and services. It is explored that there is direct

and positive relationship between perceived quality and level of satisfaction (Iglesias and

Guille´n, 2004). It is suggested that the bank can create customer satisfaction by

incorporating trustworthy behavior, proper communication of information, reflection of

genuine commitment to provide quality services, settlement of conflicts and improvement

in the quality of overall customer relations (Nelson and Chan, 2005).

Ting (2006) investigated the impact of customer satisfaction in Malaysian banking

industry and found a U-shaped relationship between customers' perception of satisfaction

and positive word of mouth referrals in the existence of changing ownership. Structural

equation modeling is one of the statistical tools applied to measure customer satisfaction.

The study was based on 220 customers from 15 retail banks. It was found that overall


customer satisfaction is the key determinant of relationship quality. The main indicators

of customer satisfaction were listed as trust, commitment, communication, service

quality, service satisfaction and service handling (Nelson, 2006).

Cohen et al. (2006) investigated the customer satisfaction in the banking sector in New

Zealand. Findings showed that customer satisfaction is the most important factor that

influences customer decisions. Customers' age groups and educational level also

contributed to their decision whether to stay with a current bank or not. It is evident from

a survey of 230 retail-banking customers that responsiveness and reliability showed

greatest impact on customer satisfaction in United States (Lopez, Hart and Rampersad,

2007).

Molina, Martý and Esteban (2007) investigated the customer satisfaction in retail banking

by an empirical analysis of 204 bank customers. They found a direct relationship between

confidence benefits and customer satisfaction. Norizan and Nizar (2007) investigated

perceived service quality and satisfaction as a key determinant for retention of customers

in retail banking in United Arab Emirates. They found that satisfaction is important for

retention of retail banking customers in UAE. It was found that supplier-customer

relationships are critical in banking sector for delivery of quality services to have loyal

customers for long-term profits (Ndubisi et al., 2007).


3.3 Bank Performance Organization is a structured entity that is established to achieve specific goals. It consists

of physical, human, informational and financial resources that are combined to realize

certain objectives. Business organization is primarily formed for the sake of profit by

performing legal activities. Bank is also one of the business organizations that offer a

large number of products and service for profit. Organization as it is goal oriented,

boundary-maintained and socially constructed systems of human activity (Aldrich, 1979).

Every organization is trying to enhance the performance of individuals for overall

improvement of the whole organization. Performance evaluation enables the organization

to assess its efficiency and effectiveness over a period of time by comparing with its

objectives or with market leader to overcome its weaknesses. Researchers explored a

number of indicators to measure organizational performance (Dess & Robinson, 1984).

There are several criteria to evaluate the performance of banks for successful survival in

the era of globalization and competition. Multiple aspects like profitability, liquidity,

management performance, leverage, market share, productivity, innovation, quality of

products, human resources and sales volume etc. can evaluate any organization. Inception

of Islamic banks necessitated the importance of performance evaluation to compete with

conventional banks in Pakistan.

Tvorik and McGivern (1997) investigated performance by comparing economic and

organizational factors. They concluded that organizational factors influenced the

profitability more than that of the economic factors. Successful organizations realized the


importance of ongoing performance measurement practices (Weiss and Hartle, 1998).

Organization's performance could be assessed by resource-based view as explored by a

number of researchers (Wernerfelt, 1984; Barney, 1986 a,b; Prahalad and Hamel, 1990).

It may be shown by varied combination in the literature. Organizational performance

could be linked with market orientation, organization learning, human resource

productivity, quality improvement or any other component (Day, 1994; Banker and

Sinkula, 1999; Santos-Vijande et al., 2005).

Organizational performance reflects an organization's understanding and knowledge

regarding customer needs and expectations (Kohli and Jaworski, 1990; Deshpande et al.,

1993; Slater and Narver, 1995). It is reported that an organization can maximize the

customer satisfaction for better profitability, increased sales volume that ultimately

improves its performance for long term benefit (Baker and Sinkula, 1999). Generally,

organizational performance is assessed by the application of financial measures. There

are a number of studies in the literature that used non-financial measures to evaluate the

effectiveness and performance of organization (Quinn and Rohrbaugh, 1983;

Venkatramanand, 1986). It is suggested that four models i.e. human relations; internal

process; open system and rationale goal model could represent the organizational

performance (Quinn and Rohrbaugh, 1983).

Wheelen and Hunger (1998) argue that appropriate performance measures depend on the

organizations and their objectives i.e. profitability, market share and cost reduction.

Financial indicator like return on investment (ROI), earning per share (EPS) and return


on equity (ROE) etc. are used by number of organizations to measure their progress.

Return on investment is used to reflect the profitability while corporate performance was

measured by operating cash flows and return on investment capital (Sorenson, 2002).

Rashid et al. (2003) measured firm's financial performance using the financial indicators

such as return on assets, return on investments and current ratios. Financial ratios reflect

the financial performance of the organization by an examination of financial statements

as indicated by profitability, liquidity, leverage, asset utilization and growth ratios (Ho

and Wu, 2006). The relationship between organizational innovation and performance was

investigated by application of return on sales, return on assets, return on equity and

market-to-book ratio (Kuo and Wu, 2007).

3.3.1 Performance Evaluation of Islamic Banks

Islamic banks are competing for more customers with each other besides stiff competition

with conventional banks. There are several measures that were adopted by the researchers

to assess the bank performance like profitability, liquidity, management performance,

market share, sales volume, innovation, productivity, human resources, quality of goods

and service etc. There are different qualitative and quantitative tools that are used to

measure the bank performance. The measure of performance evaluation should be

meaningful. It reflects management's clarity about organization's current situation and its

viability to achieve its goals. It should be manageable as it can be handled easily based on

simple calculations and manipulation of data. It must be measurable as it should be


quantifiable and operationalized. It may be material, as it should provide material results

of significant improvement (Ernst & Young, 1995).

Chapman et al. (1997) examined the influence of quality on the performance of an

organization. The study measured the organizational performance using financial ratios

such as earnings on shareholders funds, return on total assets and labor productivity ratio.

It is found that there is a positive relationship between strategic quality indicators and

financial performance parameters. It is reported that employees of domestic banks do not

contribute towards profitability. But employees of foreign banks significantly contributed

towards profitability (Arby, 2003).

3.3.2 Performance of Pakistani Banking Sector

Pakistani banking sector has shown an excellent growth during last few years. Financial

performance of banking sector was outstanding due to sufficient profitability, strong

solvency, assets management quality, better risk management practices and continuous

improvements for the provision of quality services. Total banking assets surpassed the

limit of Rs. 4 trillion along with Rs. 100 billion pretax profits. Islamic banks also

experienced unprecedented growth by a 67% increase in total assets of this segment.

Islamic banking system has proved a successful alternative for the conventional banking

system (SBP, 2007).


The performance of Pakistani banking system from a period of 2000-2006 is shown in

figure 3.3 as under:

Figure-3.3

Total Assets of the Banking System

CY: Calendar Year; PSCBs: Public Sector Commercial Banks; LPBs: Local Private Banks; FBs: Foreign Banks; CBs: Commercial Banks; SBs: Specialized Banks

Source: SBP, 2007

Islamic banks are successfully competing with conventional banks around the globe and

have a great potential to replace the traditional Riba-based banking system. In Pakistan,

the Islamic banks showed a very satisfactory growth during last few years having a

complete alternative banking system. A very healthy competition is witnessed between

the two banking streams that reflect the superiority of Islamic banks as they are growing


at a rate of 114 percent in terms of size and structure. The total assets are growing at a

very favorable rate of 67% with deposits amounting Rs. 83.7 billion (SBP, 2007).

Progress of Islamic banks in Pakistan is shown in the table 3.2.

Table-3.2

Sources & Uses of Funds by Islamic Banks in Pakistan (2003-06)

(Million Rs.)

2003 2004 2005 2006

Sources Amou

nt

Percenta

ge

Amou

nt

Percenta

ge

Amou

nt

Percenta

ge

Amou

nt

Percenta

ge

Deposits 8397 65 30185 68 49932 70 83740 70

Borrowings 1899 15 6559 15 9006 13 10843 9

Capital & Other Funds 1994 15 5123 12 7811 11 16348 14

Other Liabilities 625 5 2276 5 4745 7 8363 7

Total 12915 100 44143 100 71493 100 119294

100

Uses Financing 8652 67 27535 62 45786 64 65613 55

Investments 1242 10 2007 5 1854 3 7328 6

Cash, Bank Balance,

Placements

1978 15 11900 27 19314 27 31358 26

Other Assets 1042 8 2701 6 4539 6 14996 13

Total 12915 100 44143 100 71493 100 119294

100

Source: SBP, 2007


In today's global, dynamic and competitive environment banks should improve and

diversify their products and services to meet changing customers' demands to enhance

their performance for successful survival. There are a few studies available in the

literature that measured the performance of Islamic banks across the global. Performance

measurement became indispensable for the successful survival banks due to stiff

competition and customers' awareness of service quality. It is reported that Pakistani

banking sector has shown good performance by attracting a large number of customers

due to the provision of quality services (Arby, 2003).

Dick (2003) examined the service quality and bank performance in the United States.

Deregulation increased the branch network of banks to attract more and more customers

that resulted into more profits with increased risks due to changing demographics.

Findings showed that improved service quality resulted in increased service fee and risk

could be reduced by geographical diversification and hedging. It is reported that two

principle paths can improve financial performance of banks i.e. by improving operational

efficiency or improvement in customer services (Duncan and Elliott, 2004).

Dick (2005) reported that market concentration is not affected by its size. Dominant

banks have almost similar influence on markets of different size. The study found that

service quality is enhanced and focused by dominant banks. Performance evaluation

provides sufficient information to take better and informed business decisions. Better

decisions results more profitability and improved performance for the institution and its

shareholders (Crider, 2007).


3.4 Service Quality and Customer Satisfaction in Banking

Islamic banks showed remarkable progress. It has captured a reasonable market share

with excellent growth rate of 114% per annum. The increasing number and size of

Islamic banks is also a positive sign of development and success. There are six full-

fledged Islamic banks working in different cities of Pakistan and 13 conventional banks

have started partial Islamic banking practices by establishing a large number of branches

exclusively engaged in Islamic banking practices (SBP, 2006).

Mishkin (2001) reported that banking and financial services are the integral part of

services industry and its contribution is increasing with the passage of time. However,

expansion of global and integrated banking sector has to face many challenges of

legislation, technological and structural changes (Angur et al. 1999). The relationship

between service quality and customer satisfaction is investigated by a number of

researchers across the globe. It is concluded that there is strong association between

dimensions of service quality and overall customer satisfaction (Anderson and Sullivan,

1993). It is found that the banking industry has a link between service quality and

customer satisfaction (Avkiran, 1994). Islamic banking practices resulted a notable

increase in the supply of loans. It is found that government intervention played an

important role to manage funds besides other economic factors in the economy (Makiyan,

2003).


Levesque and McDougall (1996) investigated the influence of key determinants of

service quality on customer satisfaction in financial institutions. They found a substantial

impact of service problems on customer satisfaction and their intensions to switch. It is

suggested that service quality is an essential determinant of customer satisfaction (Yavas

et al., 1997). Islamic banks working in different parts of the world assessed their

performance in reference to service quality and customers' responses. An empirical study

was conducted to measure customer awareness and satisfaction by using a sample of 206

respondents towards Islamic banking in Jordan. It is observed that customers have

awareness about products of Islamic bank but expressed a sense of dissatisfaction

towards some of the services (Naseer, Jamal and Al-Khatib, 1999).

Bahia and Nantel (2000) developed an alternative scale for measurement of service

quality in retail banking. They developed BSQ and compared with SERVQUAL. They

found that BSQ dimensions are more reliable than SERVQUAL dimensions. In another

study SERVQUAL is compared with Technical/Functional quality of services in private

banks. Results showed that Technical/Functional quality model is better (Lassar et.al,

2000). A survey of 801 customers indicated that customers' perception of service quality

differs in terms of demographic characteristics (gender, ethnicity, education and income)

of the respondents (Urban and Pratt, 2000).

Oppewal and Vriens (2000) empirically investigated the relationship between service

quality and customer satisfaction by using original SERVQUAL instrument with 10

dimensions as devised by Parasuraman et al. (1985). This study gave a direction to relate


service quality and customer satisfaction. Service quality gained significance with the

passage of time due to increased competition among service firms. It was examined that

how customer satisfaction affects the customers' behavioral consequences. The study

found a strong impact of customer satisfaction on their decision to stay with the existing

service provider; and restrain their negative behavioral intentions. (Athanassopoulos,

Gounaris and Stathakopoulos, 2001).

Kayis, Kim and Shin (2003) conducted a comparative analysis of Australian and Korean

banks to find out the quality management practices and its outcomes. They found a

meaningful relationship between perceived service quality and customer satisfaction.

They suggest that organizations should focus on service quality as an input to customer

satisfaction for long-term benefits and business success. Now banks have realized the

importance of service quality for successful survival in today's global and highly

competitive environment (Wang et al. 2003).

Jamal (2004) investigated the customer behavior in retail banking by considering service

quality its outcomes. It was observed that customers have varied experiences of

satisfaction and dissatisfaction for utilization of self-service technologies. Financial

sector is becoming more conscious about the performance evaluation regarding quality of

products/services according to customers’ expectations. In another study, findings reveal

a positive correlation between financial performance and customer service quality scores

(Duncan and Elliott, 2004).


Curry and Penman (2004) reported that service quality is inevitable for differentiation to

compete in the banking sector. They suggested that the right service could retain the

customers for long-term benefits. So, Banks should maintain the level of services by

proper allocation of resources to meet customer requirements. Findings indicated that

financial institutions require reasonable procedures to evaluate the overall satisfaction of

their customers. However, understanding of changing needs and expectations of

customers is an essential prerequisite for the financial sector (Joseph et al. 2005).

Jabnoun and Khalifa (2005) proposed and tested a measure of service quality to compare

conventional and Islamic banks in UAE. The study found that four dimensions were

significant in case of conventional banks. While only personal skill and values were

crucial in determining service quality in Islamic banks. It is found that bank-customer

relationship quality is evident between satisfied and dissatisfied customers. Both types of

customers have clearly distinctive feelings regarding their service experience (Nelson and

Chan, 2005).

Al-Hawari and Ward (2006) found that customer satisfaction plays an inter-mediator role

in the relationship between service quality and financial performance of the banks. In

another study, overall customer satisfaction was investigated in Malaysian banking

industry by collecting data from 220 customers of 15 retail banks. It was found that

overall customer satisfaction is one of the key determinants of relationship quality

(Nelson, 2006). It is suggested that bank should start service quality improvement

programs to enhance customer satisfaction and customer loyalty (Razak et al., 2007).


3.5 Service Quality, Customer Satisfaction and Bank Performance

There are few studies available in the literature that investigated the relationship between

service quality, customer satisfaction and bank performance. Banks are dominant players

of financial market having multiple opportunities in the recent age. Islamic banking

practices came with numerous benefits for individuals, organizations and society. It is

suggested that service performance appraisal system of the organization should be

improved in line with customer satisfaction in the banking sector (Kayis, Kim and Shin,

2003). Financial performance of banks and other financial institutions could be measured

by using the conventional method of accounting as well as latest measures of risk and

expected returns (Duncan and Elliott, 2004).

Swan and Combs (1976) stated that satisfaction could be linked with performance

because people feel satisfied when products perform according to their expectations. But

they experience dissatisfaction when performance is below than their expectations. It is

found that service firms show poor performance due to lack of knowledge about

customers' expectation (Zeithmal et al. 1993). There are few studies that investigated

direct and positive relation between service quality and profitability (Zahorik and Rust,

1992; Heskett et al., 1994; Rust et al., 1995).

The expansion of the banking industry requires a study to assess the service quality

offered by banks and customers' feelings regarding their experience and how it affects

bank performance. It was documented that an increase in service quality and professional


behavior resulted greater customer satisfaction and reduced customer erosion (Leeds,

1992). Heskett et al. (1994) reported that there is an evident relationship between services

and profitability. The study suggested that customer satisfaction affects customer loyalty

that leads to greater profitability. It is concluded that customer satisfaction resulted into

profitability, so banks must focus on each customer to maximize their profits (Hallwell,

1996).

Newman and Cowling (1996) examined service quality in retail banking by comparing

two banks in UK. They found that service quality is essential for banks due to link

between quality, productivity and profitability. They also found that service quality helps

to reduce the costs. It is suggested that the performance of banks can be measured as how

they develop and maintain relations with their customers. The success of banks depends

upon customers' willingness to stay with them (Ennew, 1996). It is concluded that the

success of banks could be evaluated by the implementation of service quality programs to

retain customers as satisfied with services (Yavas, and Shemwell, 1997).

Ebrahim and Joo (2001) reported that Islamic banks have shown an excellent

performance in Brunei Darussalam during last few years and captured 11.5% of total

market share. Islamic banks could reap many benefits due to diversification and

innovation of their products/services according to Priniciples of Sharia’h. It is reported

that customer satisfaction with services in banking has declined over a number of years.

The study recommended that an improvement in service quality is necessary for higher

satisfaction level (Allred, 2001).


Starkey, Williams and Stone (2002) examined the customer management performance in

Malaysia by comparing banking industry with other industries. Findings showed that

customer management performance is very poor in retail banking and insurance industry

as compared to other industries under the study. In another study, 1000 retail banking

customers were analyzed in Malta and it is found that customer satisfaction played a

mediating role between service quality and service loyalty (Caruana, 2002). Similarly,

service quality has significant influence on bank reputation (Wang et al., 2003). It was

found that there is significant relationship between service quality and financial

performance (Duncan and Elliot, 2002).

Jabnoun and Al-Tamimi (2003) measured service quality in the UAE commercial banks

by using a modified version of SERVQUAL. The study found three dimensions as

reliable and valid namely empathy, human skills and tangibles. Similarly, findings of

another study suggested that organizations should concentrate on service quality and

customer satisfaction to gain competitive position in the market for long-term business

success (Kayis, Kim and Shin, 2003).

Mukherjee, Nath and Pal (2003) examined efficiency of banking services by considering

service quality, resources and the performance triad in India. Findings proved that there is

a relationship between resources, service quality and performance of banks. Customers

analyze different aspects of services to repeat their experiences in the future. It is found

that superior delivery of services results into superior profitability (Kotler, 2003). It is

reported that customer satisfaction partially mediates the relationship between effect of


justice and word of mouth in the banking sector (Maxham, 2003). Islamic banking

practices in developing economies helped to minimize risk and inflation. The study

concluded that profit and loss sharing option is very attractive for the bank. Equity based

ventures help the bank to reduce risk and monitoring costs (Ghannadian and Goswami,

2004).

Gao, Jia and Zhao (2006) examined the service quality and its attributes to measure the

performance of retail banks in China. They conducted statistical analysis of the national

survey to identify existing obstacles and their solutions to improve service quality and

customer satisfaction for six major local banks in China. They suggested that provision of

better service quality than competitors could result into satisfied and loyal customers for

greater benefits.

Gritti and Foss (2007) empirically investigated the relationship between customer

satisfaction and loyalty and its impact on profitability in Italian banking sector. They

found that customer satisfaction influences loyalty that results into direct effect on

financial and non-financial customer value. It is reported that bank efficiency and

shareholders' value is the outcome of customer satisfaction score. It is suggested that

customer satisfaction scores require an adjustment for branch locations for customer

service. It could increase the bank efficiency by reducing divergence in efficiency scores

(Tripe, 2007). In another study, the service quality and bank performance examined in

Jordan based on a sample of 346 respondents. Findings showed that dimensions of

service quality have a positive impact on bank performance (Akroush, 2008).


3.6 Hypotheses, Conceptual Model and Theoretical Framework

The expansion of the banking industry requires a study to assess service quality in

relation to customers' satisfaction and its influence on bank performance. Islamic banks

are striving to capture the maximum number of customers to compete with conventional

banks by providing a large number of products as an alternative for interest based

products. In Pakistan, banks are providing a wide range of products and services and

facing intensive competition to attract potential customers. It is reported that banking and

financial services are the integral part of services industry and its contribution is

increasing with the passage of time (Mishkin, 2001). However, expansion of global and

integrated banking sector has to face many challenges of legislation, technological and

structural changes (Angur et al. 1999).

Parasuraman et al. (1985, 1991b) devised SERVQUAL model and investigated the

service quality. They explored ten dimensions of service quality and refined into five

dimensions. It was documented that an increase in service quality and professional

behavior resulted a greater customer satisfaction and reduced customer erosion (Leeds,

1992). The relationship between service quality and customer satisfaction is becoming

crucial with the increased level of awareness among bank customers (Sureshchander et

al. 2002). Demographic characteristics should be considered by the bank managers to

understand their customers. Customers' perception of service quality differs in terms of

gender, ethnicity, education and income (Urban and Pratt, 2000). This study assessed the

customers’ perception of service quality on the basis of gender due to traditional and


cultural context in the prevailing socio-economic conditions of Pakistan. There are

number of studies that investigated service quality perception of bank customers in the

different parts of the world (Imam, 1987; Anakwue, 2002; Omar and Ogenyi, 2004).

Boyd et al. (1994) investigated the bank selection criteria on the basis of demographic

characteristics and found a significant difference between service quality perception of

white collar customers and low income customers. It is reported that gender roles and

responsibilities are shaped due to specific cultural, social and religious factors. In Muslim

countries male is responsible for financial activities outside the home while female

performs domestic activities inside the home (Obbe, 1980; Kinsey, 1988; Ogenyi, 1997;

Iheduru, 2002). Due to these factors men have more access to banking, education and

insurance facilities as compared to women (Ajakaiye and Olomola, 2003).

Ayadi (1996) concluded that female bank customers are engaged in lesser banking

activities than male customers due to lower income. It is reported that customers'

perception of service quality is very important for managers to compete in the market

(Hoffman and Bateson, 2002). Customers' perception of service quality is strongly

dependent on customers' values and beliefs that vary from one culture to another (Furer et

al., 2002). It is found that gender affects the service quality perception of bank customers

and they show a varied response towards different dimensions of service quality (Spathis,

2004). Similarly, a varied pattern of customer satisfaction and behavioral outcomes is

observed among male and female bank customers (Yavas, Babakus and Ashill, 2007). In

another study, findings showed that there is difference in choice factors by male and


female bank customers in selection of their respective bank (Omar, 2008). Based on these

studies, it can be hypothesized that there is significant difference in the perception of

bank customers on the basis of gender.

H1: There is a significant difference in the perception of service quality among

bank customers on the basis of gender.

Levesque and McDougall (1996) reported that service quality has a significant impact on

customer satisfaction and their intensions to switch. It is found that service quality is an

important determinant of customer satisfaction by dealing with complaint behavior and

commitment in Turkish banking industry (Yavas et al., 1997). However, an improvement

in service quality is necessary for higher levels of satisfaction among banking customers

(Allred, 2001).

Caruana (2002) suggested that banks should concentrate on service quality and customer

satisfaction to gain competitive position in the market. Similarly, it is suggested that

service performance appraisal system of an organization should be improved in line with

customer satisfaction in the banking sector (Kayis, Kim and Shin, 2003). Iglesias and

Guille´n (2004) explored direct and positive relationship between perceived quality and

level of satisfaction. It was reported that in developing countries like India and

Philippines results were systematically and significantly different from developed

countries like U.S.A. (Malhotra et al., 2005).


Curry and Penman (2004) reported that service quality is important for differentiation to

compete in the market and retain the customers as satisfied for long-term benefits.

However, understanding of changing needs and expectations of customers is an essential

prerequisite for the financial sector (Joseph et al. 2005). It is suggested that the meeting

of customers' expectation is crucial to increase customers' satisfaction by delivery of

better quality services (Gao, Jia and Zhao, 2006). It is found that there is a positive

relationship between service quality and customers satisfaction (Razak, Chong and Lin,

2007). Above-mentioned literature provides a foundation to hypothesize that there will

positive relationships between service quality and customer satisfaction in Pakistani

banking sector.

H 2: There is positive relationship between service quality and customer

satisfaction in the banking sector of Pakistan.

Figure-3.4

Graphical display of the hypothesized relationship between service quality

and customer satisfaction

+

Service Quality



Banks are dominant players of financial market having multiple opportunities in the

recent age. It is found that services firms show poor performance due to lack of

knowledge about customers' expectation (Zeithmal et al. 1993). There is an evident

relationship between quality of services and profitability. Customer satisfaction affects

customer loyalty that leads to greater profitability (Swan and Combs, 1976). Hallwell

(1996) concluded that customer satisfaction resulted into profitability, so banks must

focus on each customer to maximize their profits. The success of banks depends upon

customers' willingness to stay with them (Ennew, 1996).

Newman and Cowling (1996) found that service quality is important for banks due to link

between quality, productivity and profitability. Performance of banks could be measured

as how they develop and maintain relations with their customers. Progress of banks can

be evaluated by the implementation of service quality programs to retain customers as

satisfied (Yavas et al., 1997). It can be hypothesized that there will be positive

relationship between service quality and bank performance.

H 3: There is positive relationship between service quality and bank performance

in Pakistan.

Figure-3.5

Graphical display of the hypothesized relationship between service quality

and bank performance

+

Service Quality

Bank Performance


Customer satisfaction is an important driver for better organizational performance

especially in the banking sector due to increased competition. Several studies measured

the relationship between customer satisfaction and performance of the firm (Anderson et

al., 1994; Wiele et al., 2002; Yeung et al., 2002; Al-Hawari and Warid, 2006). However,

there is a severe shortage of literature that specifically measured the performance of

banks with reference to service quality and customer satisfaction. Ebrahim and Joo

(2001) reported that Islamic banks have shown an excellent performance. They suggest

that Islamic banks should diversify their products/services according to principles of

Sharia’h. There is a significant relationship between service quality and financial

performance (Duncan and Elliot, 2002). So it is concluded that superior delivery of

services results into superior profitability (Kotler, 2003). Mukherjee, Nath and Pal (2003)

found relationship between resources, service quality and performance of banks. It is

recommended that profit and loss sharing option is very attractive for the bank. It helps

the bank to reduce risk and monitoring costs (Ghannadian and Goswami, 2004). On the

basis of literature it is hypothesized that there will be positive relationship between

customer satisfaction and bank performance in Pakistan.

H 4: There is positive relationship between Customer satisfaction and bank

performance in Pakistan.

Figure-3.6

Graphical presentation of the hypothesized relationship between customer satisfaction and bank performance

+


Bank Performance


Gao, Jia and Zhao (2006) suggested that provision of better service quality than

competitors could results into satisfied and loyal customers for greater benefits. While it

is found that customer satisfaction plays an inter-mediator role in the relationship

between service quality and financial performance of the banks in Australia (Al-Hawari

and Ward, 2006). It is documented that customer satisfaction results into financial and

non-financial customer value (Gritti and Foss, 2007). It is suggested that customer

satisfaction could increase the bank efficiency by reducing divergence in efficiency

scores (Tripe, 2007). It is reported that quality implementation initiatives mediate the

relationship between service quality and bank performance (Akroush, 2008). On the basis

of literature, it is assumed that customer satisfaction will mediate the relationship

between service quality and bank performance.

H 5: Customer satisfaction mediates the relationship between service quality and

bank performance in the banking sector of Pakistan.

Figure-3.7

Graphical presentation of the hypothesized mediating role of customer

satisfaction between service quality and bank performance

Service Quality

Bank Performance



Figure- 3.8

Service Quality, Customer Satisfaction and Bank Performance in Pakistan

Independent Variable Mediating Variable Dependent Variable

Conceptual Model and Theoretical Framework

Reliability

Tangibility

Assurance

Responsiveness

Empathy

Customer

Satisfaction

Bank Performance

Ser

vice

Qu

alit

y

Cor

e S

ervi

ce

Hum

an E

lem

ent

Sys

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Summary of Hypotheses

H1: There is a significant difference in the perception of service quality among bank

customers on the basis of gender

H2: There is positive relationship between service quality and customer satisfaction in

the banking sector of Pakistan

H3: There is positive relationship between service quality and bank performance in

Pakistan

H4: There is positive relationship between customer satisfaction and bank

performance in Pakistan

H5: Customer satisfaction mediates the relationship between service quality and bank

performance in the banking sector of Pakistan.


CHAPTER 4

Methodology

Research Method

Pilot Test

Main Study

Measures and Instruments

Reliability and Internal Consistency of the Variables


Chapter 4

Methodology

4.0 Research Method

This study examines the relationship between service quality and customer satisfaction

and further how it affects the bank performance. The study aims to analyze the influence

of selected variables in Pakistani banking sector by a comparison of Islamic and

Conventional banks. It intends to test several hypotheses devised in the light of existing

literature in Pakistani perspective. This study investigates the dimensions of service

quality, determinants of customer satisfaction and bank performance. A pilot study was

undertaken (by consulting with bankers, academicians, professionals and customers of

both streams) before conducting the actual survey. The pretest was carried out to test the

model in the local settings as it was tested for the first time in Pakistan.

A total of 2300 questionnaires were distributed among respondents of 144 branches of

selected banks (72 branches of IB and 72 branches of CB). Stratified random sampling

method was adopted for this study as it was used by previous studies (Sureshchander et

al. 2002; Jamal, 2004; Kumar, 2005). Data analysis was carried out by using SPSS 15.0

and VPLS 1.04 to apply regression analysis, independent t-test, Pearson’s correlation and

structural equation modeling. Sample size met the minimum required criteria for the use

of regression (Rosco, 1975; Hair et al. 1992; Lee et al. 2003; Jamal 2004; Morris et al.

2005). Structural equation modeling (SEM) technique was used to test the proposed

model. The conceptual model was tested by using Partial Least Square method that is


consistent with the past studies (Bollen, 1989; Bullock, 1994; Thomson, 1995; Chin et al.

1998; Gefan et al. 2000, 2005)

The population of the study comprised of the customers and employees of Islamic and

conventional banks with 8233 branches (341 braches of IB and 7892 of CB) working in

Pakistan (SBP, 2008). The population consisted of 5671978 bank customers using

products/services of selected banks (468 693 customers of IB and 5203385 customers of

CB). While the population of bank employees consisted of 69056 employees working in

selected banks (3575 employees of IB and 65481 employees of CB). This study is based

on primary data that was collected from the existing customers and employees of selected

banks in Pakistan. This study selected 144 bank branches (72 of IB and 72 of CB) to

collect data from the respondents by stratified random sampling from 12 major cities of

Pakistan that represents all parts of the country.

A structured questionnaire was developed to record the responses of customers and

employees of Islamic and conventional banks operating in Pakistan. Conducting a

comprehensive literature review and consulting with bank managers, professionals and

customers enabled the researcher to modify and refine the research instrument in

Pakistani environment. From each group of bank (Islamic bank or Conventional bank),

customers were selected randomly to collect data by self-administrated questionnaires.

The study also adopted “personal contact” approach i.e. respondents were approached

personally. The researcher explained the questionnaire and the objective of survey by

telling its purpose, the meaning of the items and what is expected from the respondents.


The data were collected by using self-administrative questionnaires from the customers

and employees of Islamic and Conventional banks in Pakistan. It is highly recommended

that questionnaire is a reliable tool to measure the impact of customer service

management on perceived business performance in Malaysian banks and finance

companies (Wei and Nasir, 2006).

4.1 Pilot Test

A pilot study was undertaken before conducting the actual survey. A sample of 408 (102

from each category) customers and employees was selected to compare Islamic and

conventional banks working in Pakistan.

Table-4.1

Reliability Statistics of the Scales

Constructs/Variables of the Study No. of Cronbach’s Guttman Items Alpha Coefficient Split Half-Coefficient

CB Service Quality CB Tangibility 4 0.750 0.757 CB Reliability 5 0.829 0.800 CB Responsiveness 4 0.823 0.813 CB Assurance 4 0.769 0.739 CB Empathy 5 0.841 0.699 CB Customer Satisfaction CB Core Service 4 0.825 0.803 CB Human Element 8 0.917 0.913 CB Systemization of Service Delivery 5 0.875 0.829 CB Tangibles of Service 6 0.840 0.836 CB Social Responsibility 6 0.879 0.837 CB Performance 8 0.745 0.711


IB Service Quality IB Tangibility 4 0.849 0.858 IB Reliability 5 0.837 0.764 IB Responsiveness 4 0.754 0.769 IB Assurance 4 0.759 0.733 IB Empathy 5 0.827 0.730 IB Customer Satisfaction IB Core Service 4 0.843 0.824 IB Human Element 8 0.898 0.886 IB Systemization of Service Delivery 5 0.865 0.845 IB Tangibles of Service 6 0.855 0.794 IB Social Responsibility 6 0.867 0.858 IB Performance 8 0.630 0.624 Source: Generated

Table 4.1 shows the reliability coefficients of the constructs/variables for the data

collected for the pilot study. Cronbach's alpha and Guttman Split-Half were used to check

the reliability of the variables. It ranges from moderate to very high coefficients i.e. 0.630

to 0.968 for Cronbach's alpha and 0.624 to 0.947 for Guttman Split-Half. Service quality

of conventional bank is measured by 22 item scale that produced Cronbach alpha (0.946)

and Guttman Split-Half (0.906). It consists upon five dimensions i.e. Tangibility,

Reliability, Responsiveness, Assurance and Empathy. Customer satisfaction of

conventional bank is assessed by 29 items scale that resulted into Cronbach's alpha

(0.968) and Guttman Split-Half (0.947). It contains five dimensions namely Core

services, Human element, Systemization of service delivery, Tangibles of services and

Social responsibility. Performance of conventional bank is determined by eight items

scale, which showed Cronbach alpha (0.745) and Guttman Split-Half (0.711).

Service quality of Islamic bank is investigated by using 22 items scale that reflects

Cronbach alpha (0.944) and Guttman Split-Half (0.919) having five dimensions i.e.


Tangibility, Reliability, Responsiveness, Assurance and Empathy. Customer satisfaction

of Islamic bank is evaluated by 29 items scale that indicated Cronbach alpha (0.962) and

Guttman Split-Half (0.898). It comprises of five dimensions namely Core services,

Human element, Systemization of service delivery, Tangibles of services and Social

responsibility. Performance of Islamic bank is measured by eight items scale that

produced Cronbach alpha (0.630) and Guttman Split-Half (0.624).

Table-4.2 Descriptive Statistics

-.580 .019

-.829 .408

-.920 .365

-.837 .353

-.927 .618

-.996 .777

-.580 -.439

-.785 -.225

-.673 .150

-.632 -.349

-.508 -.669

-.115 -.165

-.691 -.415

-.507 .003

-.343 .147

-.263 -.461

-.095 -.679

-.112 -.800

-.119 -.937

-.502 .802

-.440 .093

-.525 .084

-.609 .032

-.451 -.088

-.448 .322

-.211 -.023

Constructs/Variables

CB Tangibiles CB Reliability CB Responsiveness CB Assurance CB Empathy CB Service Quality CB Core Service or Service product CB Human Element of Service Delivery

CB Systemiztion of Service Delivery or non-Human element

CB Tangiblies of Services (Servicescapes)

CB Social Responsibility CB Bank Performance CB Customer Satisfaction IB Tangibles IB Reliability IB Responsiveness IB Assurance IB Empathy IB Service Quality IB Core Service or Service

IB Human Element of Service

IB Systemization of Service Delivery or non-Human element

IB Tangibles of Service (Servicescapes)

IB Social Responsibility IB Customer Satisfaction IB Bank Performance

Skewness Kurtosis


Table 4.2 shows the skewness and kurtosis of the constructs and variables for the pilot

study. It indicates the normality of data regarding selected variables of the study. It

reflects the skewness and kurtosis for service quality (its dimensions), customer

satisfaction (its dimensions) and bank performance for Islamic and conventional banks.

4.2 Main Study

A stratified random sample of (1728 respondents dealing with) 144 branches of selected

Islamic and conventional banks was drawn for this study. The population was divided

into two groups of banks according to type of bank (IB or CB) to record their responses.

Then researcher selected respondents randomly from each stratum and combined them to

form the full sample. From each group of bank, customers and employees were selected

randomly to assess their responses. The stratification was done based on the type of the

bank i.e. Islamic bank or conventional bank. Similarly, bank employees were also

selected from each group of the bank to collect their views regarding bank performance.

It enabled the researcher to find out the relationship between service quality, customer

satisfaction and bank performance by comparing both the banking streams i.e. Islamic

and conventional banks.

A self-administrated structured questionnaire was used to collect the data from

participants. Bank customers were approached to get their responses regarding service

quality and level of satisfaction while bank employees were contacted to measure the

performance towards their respective banks. The data were collected from the


respondents residing in the 12 major cities of Pakistan i.e. Islamabad, Rawalpindi,

Lahore, Karachi, Quetta, Peshawar, Gujranwala, Sargodha, Multan, Sialkot, Gujrat, and

Faisalabad. The researcher selected the most populous cities that represent the

approximately 20% of total population of the Pakistan (World Gazette, 2009).The

researcher collected data from the customers and employees of selected Islamic banks

and conventional banks working in Pakistan that is given in table 4.3.

Table-4.3

Selected Banks included in the study

Islamic Banks Conventional Banks

Meezan Islamic Bank National Bank of Pakistan

Dubai Islamic Bank Limited Habib Bank Limited Pakistan

Albaraka Islamic Bank Limited MCB Bank Limited

Bank Islami Pakistan Limited United Bank Limited

First Dawood Islamic Bank Limited Askari Bank Limited

Emirates Global Islamic Bank Limited Bank Alfalah Limited

Source: Generated

The researcher used a set structured questionnaire in English to collect data from

customers of IB and CB as well as from the employees of IB and CB respectively. This

study selected 144 branches of banks (72 branches of IB and 72 branches of CB) from 12

major cities of Pakistan that representing all provinces. A total of 2300 questionnaires

were distributed among respondents to gather their responses. There were 1728


completed and useable questionnaires available for data analysis. Data were organized

and entered into SPSS 15.0 version to apply specific statistical tools to test the

hypotheses of the study. This study used PLS based SEM to investigate the relationships

among service quality, customer satisfaction and bank performance by comparing Islamic

and Conventional banks working in Pakistan. Firstly, Islamic and conventional banks

were selected randomly from the list of banks issued by SBP. Then, the researcher

collected details from the head office of the respective banks regarding addresses and

location of branches in each city and each branch is selected randomly. Similarly,

selected branch was contacted to have the details regarding customers (name and address

etc.). A complete list of customers and employees of selected branches was obtained to

record the responses of 12 respondents (6 customers and 6 employees) that were selected

randomly. The total number of branches and respondents in selected cities are listed in

table 4.4.

Table-4.4

Details regarding Branches and Respondents (City wise)

City Total CB Total IB Selected Customers Employees Branches Branches Branches from each Branch from each Branch Islamabad 78 18 6* 6** 6***

Karachi 374 107 6 6 6

Lahore 241 67 6 6 6

Peshawar 76 19 6 6 6

Quetta 45 08 6 6 6

Rawalpinidi 143 16 6 6 6


Multan 73 12 6 6 6

Gujranwala 96 07 6 6 6

Faisalabad 164 18 6 6 6

Gujrat 88 07 6 6 6

Sialkot 101 07 6 6 6

Sargodha 79 06 6 6 6

*6 Branches of IB and 6 Branches of CB from each city ** 6 Customers of IB and 6 customers of CB from each branch ***6 Employees of IB and 6 employees of CB from each branch

4.3 Measures and Instruments

A survey was conducted using a structured questionnaire in order to empirically measure

and test the magnitude of the relationship among service quality, customer satisfaction

and performance of banking sector in Pakistan. Service firms used SERVQUAL

instrument to investigate the service quality in the banking, insurance and telephone

repair industries. Customers of selected banks were asked to give their responses

regarding their banker by considering different aspects of service quality.

Customers’ responses regarding service quality are collected by a modified version of

SERVQUAL model developed by Parasuraman et al. (1988, 1991). It contained 22 items

divided into five dimensions i.e. tangibility, reliability, responsiveness, assurance and

empathy. Each items is assessed by a seven point Likert scale as it stands for 1 = strongly

disagree to 7 = strongly agree.


Sureshchander et al. (2002) investigated customer satisfaction in the banking sector by

using a forty one-item scale that is further summed up into five dimensions. Customers of

Islamic and conventional banks were approached to collect data regarding their feelings

of satisfaction or dissatisfaction towards bank services. Customer satisfaction was judged

by a modified version of research instrument applied by Sureshchnader et al. (2002). It

consisted of 29 items that were classified into five dimensions i.e. core service or service

product; human elements of service deliver; systematization of service delivery (non-

human element); tangible of service (servicescapes) and social responsibility. Customers

were asked to give their feelings of satisfaction related to their banking experiences.

Customers’ responses were evaluated on a seven point Likert scale ranging from 1

(reflects very high dissatisfaction) to 7 (reflects very high satisfaction) with respect to all

29 items.

There are a number of studies in the literature that used non-financial measures to gauze

the effectiveness and performance of organization (Quinn and Rohrbaugh, 1983; Kohli

and Jaworski, 1990; Baker and Sinkula, 1999). Bank performance was measured by the

collection of data from the employees of selected banks. Performance of Islamic and

Conventional banks is measured by a modified version of an eight-item research

instrument developed by Quinn and Rohrbaugh, (1983). The responses were recorded

regarding bank performance by considering different aspects. Every respondent was

asked to rank a number of aspects regarding his/her bank i.e. quality of product, market

share, internal process coordination, profitability, and personnel rotation etc. Bank

performance was assessed by using five point Likert scale as 1 = Decreasing revolution to


5 = Increasing revolution. Here revolution stands for development or progress (of that

specific element) in relation to specific bank in which respondent is working. A summary

of all variable operational i.e. service quality, customer satisfaction and bank

performance is given in table 4.5.

Table- 4.5

A Summary of operationalization of All Variables of the study

Dimensions of Service Quality Used in the Study

Dimensions Elements

Tangibles

Your bank uses modern looking equipment Your bank’s physical facilities are visually appealing The employees of your bank are neat appearing Service related materials (such as pamphlets, leaflets or reports) visually appealing at your bank

Reliability

When your bank promises to do something by a certain time, it does so When you have a problem, your bank shows a sincere interest in solving it Your bank performs the service right the first time Your bank provides its services at the time it promises to do so Your bank issues error free bills, statements and other documents

Responsive-ness

Employees of your bank tell customers exactly when services will be performed Employees of your bank give you prompt services Employees of your bank are always willing to help you Employees of your bank are never too busy to respond to your requests


Assurance

The behavior of your bank employees instills confidence in you You feel safe in your transactions with your bank Employees of your bank are consistently courteous with you Employees of your bank have the necessary knowledge to answer your questions

Empathy

Your bank gives you individual attention Your bank has business hours convenient to all its customers Your bank has employees who give you personal attention Your bank has your best interests at heart Employees of your bank understand your specific needs

Determinants of Customer Satisfaction Used in the Study Determinants Elements

Core service or service

product

Diversity and range of Bank’s services (having a wider range of financial services from the bank, e.g. deposits, retirement accounts, loans for purchase of cars, houses, foreign exchange, traveler’s cheques, safe deposit lockers, etc.) Bank’s Service innovation (providing information/details on regular basis through post: telephonic banking; ATM; room service facility; cards to defense personnel, etc.) Availability of most service operations in every branch/department of the bank. Convenient operating hours and days (e.g. working on Saturday and Sunday s, extended service hours during evenings, weekdays, etc.)

Human element of

service delivery

Providing service as promised Effectiveness of the employees’ skills and ability for actions whenever a critical incident takes place (i.e. when a problem arises) Whenever a critical incident takes place (i.e. when a problem arises), the degree to which organization succeeds in bringing the condition back to normalcy by satisfying the customer. Prompt service to customers. Extent to which the feedback from customers is used to improve service standards. Employees who instill confidence in customers by proper behavior. Making customers feel safe and secure in their transactions.


Systematization of

service delivery

(nonhuman element)

Employees who have the knowledge and competence to answer customers’ questions having best interests at heart. Having a highly standardized and simplified delivery process so that services are delivered without any hassles or excessive bureaucracy. Enhancement of technological capacity (e.g. computerization, networking of operations, etc.) to serve customers more effectively. Degree to which the procedures and processes are perfectly fool proof. Adequate and necessary personnel for good customer service. Adequate and necessary facilities for good customer service.

Tangibles of service

(servicescapes)

The ambient conditions such as temperature, ventilation, noise and odour prevailing in the bank’s premises. Extent of the physical layout of equipment and other furnishings being comfortable for customers to interact with employees. Having house keeping as a priority and of the highest order in the organization Visually appealing sings, symbols, advertisement boards, pamphlets and other artifacts in the bank. Employees who have a neat and professional appearance. Visually appealing materials and facilities associated with the service.

Social responsibility

Equal treatment stemming from the belief that every one, big or small, should be treated alike. “Service transcendence”- making customers realize their unexpected needs by giving more than what they expect. Giving good service at a reasonable cost, but not at the expense of quality. Having branch locations in most places convenient to all sections of society (e.g. villages, down town areas, etc.) A sense of public responsibility among employees (in terms of being punctual, regular, sincere and without going on strikes). Extent to which the organization leads as a corporate citizen and the level to which it promotes ethical conduct in everything it does.


Determinants of Organizational Performance

Elements

Quality product

Internal process coordination

Personnel activities coordination

Share market

Profitability

Productivity

Voluntary personnel rotation

Personnel absenteeism

4.4 Reliability and Internal Consistency of the Variables

The internal reliability and consistency of the constructs and variables was measured by

the Cronbach’s alpha and Guttman Split-Half coefficients. Cronbach’s alpha and

Guttman split-half coefficients range from 0.579 to 0.961. The coefficients reflected

moderate to high reliability and consistency of the constructs and variables of the study.

Cronbach’s alpha lies between 0 – 1, 0 represents no reliability while 1 reflect the strong

reliability of the research instrument. The researcher has established varied criteria for

alpha coefficients as 0.40, 0.50, and 0.60 or in some cases 0.70. There are several studies

available in the literature that recommended that Cronbach’s alpha should be above 0.60

(Nunnally, 1967; Nunnally, 1978; Peter, 1979; Nunnally and Bernstein, 1994).


Similarly, Cronbach’s alpha above 0.70 is recommended to reflect the construct

reliability (Segars, 1997; Hair et al., 1998). Skewness shows asymmetrical distribution of

data. The coefficient of skewness is used to assess the magnitude of the asymmetry that

lies between +1 to -1. The coefficient of skewness reflects the direction as (+) sign

indicates that data is positively skewed and (–) sign reveals the negative slope while 0

coefficients reflects that there is no skewness. Kurtosis reflects the flatness or convexity

of the curve. It lies between +3 and -3. There are three possibilities as shown by β i.e. 0

indicates that curve is normal, neither flat nor peaked. If it is β > 3 then curve is more

peaked than normal and if β< 3 then curve is flatter than a normal curve.

Table-4.6

Reliability Statistics of the Scales for IB


IB Service Quality IB Tangibility 4 0.841 0.834 IB Reliability 5 0.809 0.774 IB Responsiveness 4 0.784 0.744 IB Assurance 4 0.741 0.705 IB Empathy 5 0.820 0.777 IB Customer Satisfaction IB Core Service 4 0.867 0.852 IB Human Element 8 0.891 0.883 IB Systemization of Service Delivery 5 0.833 0.765 IB Tangibles of Service 6 0.855 0.815 IB Social Responsibility 6 0.839 0.832 IB Performance 8 0.597 0.579 Source: Generated


Table 4.6 reflects the reliability coefficients of the constructs/variables used for Islamic

banks. Service quality of Islamic banks is measured by 22 items scale (consists upon five

dimensions). It produced reliability coefficients as Crobach alpha (0.944) and Guttman

Split-Half (0.921). Tangibility dimension consists of 4 items with Cronbach's alpha

(0.841) and Guttman Split-Half (0.834). Reliability contains 5 items and produced

Cronbach alpha (0.809) and Guttman Split-Half (0.774). Responsiveness is the

combination of 4 items resulted into Cronbach alpha (0.784) and Guttman Split-Half

(0.744). Assurance has 4 items with Cronbach alpha (0.741) and Guttman Split-Half

(0.705). Empathy dimension of service quality is the collection of 5 items having

Cronbach alpha (0.820) and Guttman Split-Half (0.777). Performance of Islamic banks is

measured by 8 item scale that produced Cronbach alpha (0.597) and Guttman Split-Half

(0.579). Customer satisfaction is measured by 29-item scale that consists upon 5

dimensions. The reliability coefficients of customer satisfaction are reported as

Cronbach's alpha (0.960) and Guttman Split-Half (0.918).

Core service dimension of customer satisfaction contains 4 items with Cronbach alpha

(0.867) and Guttman split-Half (0.852). Human element is represented by 8 items and

produced Cronbach alpha (0.891) and Guttman Split-Half (0.883). Systemization of

service delivery is the combination of 5 items having alpha (0.833) and Guttman Split-

Half (0.765). Tangibles of services contain 6 items with Cronbach alpha (0.855) and

Guttman Split-Half (0.815). Social responsibility consists upon 6 items and shows

Cronbach alpha (0.839) and Guttman Split-Half (0.832).


Table-4.7

Reliability Statistics of the Scales for CB


CB Service Quality CB Tangibility 4 0.830 0.821 CB Reliability 5 0.831 0.775 CB Responsiveness 4 0.774 0.728 CB Assurance 4 0.752 0.707 CB Empathy 5 0.826 0.738 CB Customer Satisfaction CB Core Service 4 0.801 0.791 CB Human Element 8 0.892 0.869 CB Systemization of Service Delivery 5 0.845 0.790 CB Tangibles of Service 6 0.848 0.817 CB Social Responsibility 6 0.853 0.805 CB Performance 8 0.715 0.711 Source: Generated

Table 4.7 indicates the reliability coefficients of the constructs/variables used for

conventional banks. Service quality of conventional banks is measured by 22 items scale

(consists upon five dimensions). It produced reliability coefficients as Crobach alpha

(0.940) and Guttman Split-Half (0.885). Tangibility dimension consists of 4 items with

Cronbach's alpha (0.830) and Guttman Split-Half (0.821). Reliability contains 5 items

and produced Cronbach alpha (0.831) and Guttman Split-Half (0.775). Responsiveness is

the combination of 4 items resulted into Cronbach alpha (0.774) and Guttman Split-Half

(0.728). Assurance has 4 items with Cronbach alpha (0.752) and Guttman Split-Half

(0.707). Empathy dimension of service quality is the collection of 5 items having

Cronbach alpha (0.826) and Guttman Split-Half (0.738).


Performance of conventional banks is measured by 8 item scale that produced Cronbach

alpha (0.715) and Guttman Split-Half (0.711). Customer satisfaction is measured by 29-

item scale that consists upon 5 dimensions. The reliability coefficients of customer

satisfaction are reported as Cronbach's alpha (0.961) and Guttman Split-Half (0.938).

Core service dimension of customer satisfaction contains 4 items with Cronbach alpha

(0.801) and Guttman split-Half (0.791). Human element is represented by 8 items and

produced Cronbach alpha (0.892) and Guttman Split-Half (0.869). Systemization of

service delivery is the combination of 5 items having alpha (0.845) and Guttman Split-

Half (0.790). Tangibles of services contain 6 items with Cronbach alpha (0.848) and

Guttman Split-Half (0.817). Social responsibility consists upon 6 items and shows

Cronbach alpha (0.853) and Guttman Split-Half (0.805). Cronbach alpha coefficients for

the constructs and variables of the study are consistent with previous researches e.g. 0.67

to 0.83 (Babakus & Boller, 1991); 0.64 to 0.88 (Parasuraman et al. 1988); 0.75 (Carman,

1990); 0.59 to 0.83 (Finn & Lamb, 1991); 0.60 (Nunnally & Bernstein, 1994) and 0.70

(Hair et al. 1988).


CHAPTER 5

Interpretation of the Results

Demographics of the Respondents

Descriptive Statistics of the Variables

Hypotheses Testing

Regression Model Results

Testing the Model

Discussion


Chapter 5

Interpretation of Results

5.0 Results Descriptive statistics are used to have a snapshot of demographic characteristics of the

respondents. Regression analysis is used to test the magnitude of relationships between

the constructs of the conceptual model as proposed in hypotheses. Other statistical tools

e.g. t-test, Pearson correlation, Partial Least Square (PLS) and Structural Equation

Modeling (SEM) are applied by the researcher to analyze service quality, customer

satisfaction and bank performance in Pakistan.

This chapter consists upon seven sections to show the results. Section I represents the

demographic characteristics e.g. gender, age, education level, occupation, monthly

household income and bank usage pattern. Section II shows descriptive statistics

regarding selected constructs and variables of the study. In section III, hypotheses are

tested by application of Independent T-test and Pearson’s correlation etc. section V

reflect the regression models to assess the magnitude of relationship among variables.

Section VI consists upon model testing by PLS based SEM and section VII shows the

discussion.


5.1 Demographics of the Respondents

The researcher collected data regarding the demographics of the respondents i.e. gender,

age, marital status, educational level, occupation, monthly income and bank usage

pattern. In Pakistani culture, Male segment of the population is dominant. They are

supposed to perform the economic activities to generate revenues for their family

members. Demographics of the respondents are shown as under.

Table-5.1

Summary of Demographics of the Respondents

Demographics Percentage (IB) Percentage (CB)

Gender

Male 78.90 75.90

Female 21.10 24.10

Marital Status

Single 44.20 53.90

Married 55.80 46.10

Age

18-24 Years 29.90 39.10

25-34 Years 39.10 27.50

35-44 Years 19.70 13.20

45-54 Years 7.90 13.70

55 Years and above 3.50 6.50


Educational Level

Primary 0.90 2.10

Secondary 6.90 6.70

College 28.90 22.20

University-Master 53.50 60.20

University-M.Phil 4.90 4.20

University-PhD 3.00 1.40

Others 1.90 3.20

Occupation

Students 10.30 23.60

Businessmen 30.30 23.10

Education/Medical Services 8.60 12.50

House Wife 6.40 4.40

Bankers 19.40 10.60

Professionals/Senior Management 11.90 13.90

Others 5.80 6.30

Monthly Household Income

Under Rs. 10 000 10.40 16.40

Rs. 10 000 to Rs. 20 000 22.50 18.10

Rs. 20 000 to Rs. 30 000 21.80 23.60

Rs. 30 000 to Rs. 40 000 20.40 15.00

Rs. 40 000 to Rs. 50 000 8.30 12.00

Rs. 50 000 and above 16.70 14.80


Bank Usage Pttern-(Length of Bank Services Utilization)

Less than a Year 29.20 15.50

1 up to 3 Years 53.50 34.00

3 Years up to 5 Years 11.80 20.10

5 Years and above 5.60 30.30

Source: Generated

Table 5.1 showed that male customers are greater than female customers. In case of IB

79% are male customers and 21% of the sample is represented by female customers.

While the CB reflects that 76% respondent are male and 24% are female. Male customers

are more inclined towards IB as compared to CB but female customers prefer CB as

compared to IB. It is consistent with the literature as men and women are differentiated

due to role and perception in the society (Woldie and Adersua, 2004). Social, cultural and

religious factors also influence the banking activities. Men are responsible for financial

activities outside the home while female performs domestic duties inside the home

(Obbe, 1980). Marital status is one of the important factors in demographic. This study

reveals that 56% married customers and 44% unmarried customers are dealing with IB.

While 46% married and 54% unmarried customers are using the products of CB in

Pakistan. The results showed that married customers are interested in IB while single

customers prefer CB. The distribution of customers according age reflects that young and

mature people (25-34) are more interested to interact with IB while young people (18-24

years) are inclined towards CB. It is found that the majority of primary bank customers

are male between 20 to 55 years old in Nigeria (Ojo, 1994). While most of the customers

of Islamic banks fall in the age group of 25-35 years (Khan, Hassan and Shahid, 2008).


Educational profile of the bank customers shows that majority of IB customers have

University-Master qualification (53.50%) followed by college graduates (28.90%). But

the larger number of CB customers have University-Master degree (60.20%) followed by

college graduates (22.20%). While occupational classification of bank customers

indicates that businessmen (30.30%), bankers (19.40%) and professionals (11.90%)

prefer IB. Similarly, students and businessmen are equally interested in CB (23.30%

each) followed by professionals (13.60%) and bankers (12.20%). On the other hand,

Bank customers with high income i.e. people with income group of Rs 50000 and above

(16.70%) prefers IB as compared to CB customers with the same income group

(14.80%). It is reported that bank customer education and income level have significant

impact on banks usage (Khan, Hassan and Shahid, 2008).

Table 5.1 also shows the bank usage pattern of the customers. Customers are classified

according to time duration being the customers of IB or CB. Majority of IB customers are

banking from 1 up to 3 years (55.30%) with their existing bank followed by bank

experience with less than a year (29.20%). On the other hand, customers of CB have

long-term relations with their existing banks as the majority of bank customers are

banking from 1 up to 3years (34 %) followed by bank experience of 5 years and above

(30.30%). It may be due to the fact that Islamic Banks are new entrants in the Pakistani

banking industry and they have started their operation during last few years (2002 and

onwards). But conventional banks are well established due to long life as they have been

working in Pakistan since the independence of Pakistan i.e. August 14, 1947.


5.2 Descriptive Statistics of the Variables

Table-5.2

Skewness and Kurtosis of Constructs/Variables

-.701 -.072 -.904 .778 -.750 .208 -.681 .259 -.908 .710 -.858 .429 -.822 .307 -.839 .249 -.813 .610 -.781 .429 -.771 .295 -.065 -.142 -.859 .300

-1.010 .870 -.552 .132 -.663 .018 -.473 -.012 -.452 -.399 -.523 -.410 -.923 .591 -.642 .153 -.882 .682 -.817 .343 -.629 -.023 -.719 .112 -.424 .336

CB Tangibiles CB Reliability CB Responsiveness CB Assurance CB Empathy CB Service Quality CB Core Service or Service product CB Human Element of Service Delivery

CB Systemiztion of Service Delivery or non-Human element


CB Social Responsibility CB Bank Performance CB Customer Satisfaction IB Tangibles IB Reliability IB Responsiveness IB Assurance IB Empathy IB Service Quality IB Core Service or Service Product IB Human Element of Service Delivery

IB Systemization of Service Delivery or non-Human Element


IB Social Responsibility IB Customer Satisfaction IB Bank Performance

Skewness Kurtosis

Source: Generated

Table 5.2 shows the skewness and kurtosis for the constructs and variables of the main

study. It reflects the skewness and kurtosis for service quality (its dimensions), customer

satisfaction (its dimensions) and bank performance for Islamic and conventional banks.


Table-5.3

Source: Generated

Table 5.3 shows descriptive statistics for the constructs and variables of the study. It

reflects minimum value, maximum value, mean and standard deviation of each construct

and variable i.e. service quality (its dimensions), customer satisfaction (its dimensions)

and bank performance regarding selected Islamic and conventional banks.

Descriptive Statistics of the Constructs/Variables

1.25 7.00 4.9854 1.193

1.20 7.00 4.9967 1.042

1.25 7.00 4.8958 1.099

1.50 7.00 5.0465 1.029

1.00 6.80 4.8678 1.075

1.65 6.54 4.9584 .9340

1.50 6.75 4.9160 1.061

1.63 6.63 4.9354 1.007

1.40 7.00 5.0011 1.001

1.50 6.83 4.9093 .9854

1.67 6.83 4.8611 1.008

1.88 5.00 3.7080 .5886

1.72 6.50 4.9246 .9091

1.50 7.00 5.2597 1.141

1.40 7.00 5.1406 .9949

1.75 7.00 5.1715 1.031

1.75 7.00 5.3194 .9454

1.80 7.00 5.1583 1.017

2.42 6.72 5.2099 .8972

1.50 7.00 5.1160 1.131

1.88 6.88 5.1896 .9589

2.00 7.00 5.2622 .9365

2.00 7.00 5.2352 .9866

2.00 6.83 5.1296 .9615

2.23 6.69 5.1865 .8867

2.00 5.00 3.7792 .5026

CB Tangibiles

CB Reliability

CB Responsiveness

CB Assurance

CB Empathy

CB Service Quality

CB Core Service or Service product

CB Human Element of Service Delivery

CB Systemiztion of Service Delivery


CB Social Responsibility

CB Bank Performance

CB Customer Satisfaction

IB Tangibles

IB Reliability

IB Responsiveness

IB Assurance

IB Empathy

IB Service Quality

IB Core Service or Service Product

IB Human Element of Service Delivery

IB Systemization of Service Delivery


IB Social Responsibility

IB Customer Satisfaction

IB Bank Performance

Min. Max. Mean S.D


5.3 Hypothesis Testing

Table-5.4

Independent Samples T-Test for Difference in the Perception of Service Quality among Male and Female Customers of IB

Levene’s Test for Equality Gender N M Std. Dev. of Variances T-test for Equality of Mean F Sig t df Sig. (2-tailed) Male 341 5.26 0.83 2.065 0.151 2.968 430 0.003 Female 91 4.95 0.91 Source: Generated

Table 5.4 shows the results for customers' perception of service quality offered by

Islamic banks in Pakistan. Levene's statistic (2.065) for equality of variances is not

significant (p=0.151). So, equal variances are assumed. The t-statistic for equality of

means is 2.968 and highly significant as p-value is 0.003 (2-tailed). There is a significant

difference in the perception of Male and Female customers about service quality of

Islamic banks in Pakistan. The results show that male customers have higher level of

perceptions towards services quality of Islamic banks with lesser variation as compared

to female customers. The null hypothesis is accepted. Customers' perception of service

quality differs in terms gender, ethnicity, education and income (Urban and Pratt, 2000).


Table-5.5

Independent Samples T-Test for Difference in the Perception of Service Quality among Male and Female Customers of CB

Levene’s Test for Equality Gender N M Std. Dev. of Variances T-test for Equality of Mean F Sig t df Sig. (2-tailed) Male 328 4.87 0.95 0.721 0.396 -0.558 430 0.577 Female 104 4.92 0.87 Source: Generated

Table 5.5 reflects the results of Independent Sample t-test for customers' perception of

service quality offered by conventional banks. Levene's statistic (0.721) for equality of

variance is not significant (p= 0.396). So, equal variances are assumed.

The t-statistic for equality of the mean is -0.558 and not significant as p-value is 0.577 (2-

tailed). There is no significant difference in the perception of Male and Female customers

about the service quality of conventional banks. The null hypothesis is rejected. It is

reported that customers' perception of service quality is very important for managers to

compete in the market (Hoffman and Bateson, 2002).


Table-5.6

Summary of Correlation between Selected Variables

Variables Pearson Correlation Sig. (2-tailed)

IBSQL and IBCS 0.698*** 0.000

CBSQL and CBCS 0.696*** 0.000

IBSQL and IBPRF 0.041 0.729

CBSQL and CBPRF 0.034 0.776

IBCS and IBPRF -0.034 0.775

CBCS and CBPRF 0.255** 0.031

*** Correlation is significant at the 0.01 level (2-tailed) ** Correlation is significant at the 0.05 level (2-tailed).

Table 5.6 shows the relationship between IBSQL and IBCS. It is found that there is

strong positive relationship (r = 0.698) between IBSQL and IBCS. It supported the

hypothesis that service quality is positively related to customer satisfaction in Islamic

banks working in Pakistan. It is consistent with the literature as it is reported that there is

a positive relationship between service quality and customer satisfaction (Razak, Chong

and Lin, 2007).

Similarly, table 5.6 reveals that there is a strong positive correlation (r = 0.696) between

CBSQL and CBCS. It supported the hypothesis that service quality is positively related to

customer satisfaction in conventional banks working in Pakistan. The results reflect that

the service quality leads to greater satisfaction among bank customers. It is found that

there is positive relationship between service quality and customer satisfaction in


Pakistan (Jamal and Naseer, 2003). It is reported that the meeting of customers'

expectation is crucial to increase customers' satisfaction by delivery of better quality

services (Gao, Jia and Zhao, 2006).

Table 5.6 indicates a weak positive relationship between IBSQL and IBPRF. The results

are in line with the hypothesis as there is a positive relationship between service quality

and performance of Islamic banks working in Pakistan. Similarly, results reflect the

relationship between CBSQL and CBPRF. There is weak positive relationship between

service quality and performance of conventional banks in Pakistan. Table 5.6 shows

correlation between IBCS and IBPRF. It reflects a weak negative relationship between

customer satisfaction and performance of Islamic banks, as results are contradictory to

hypothesis and it rejects the null hypothesis. On the other hand, there is a significant

positive relationship between CBCS and CBPRF. It supports the hypothesis that there is a

positive relationship between customer satisfaction and performance of conventional

banks. A snapshot of pair-wise correlation between selected variables is shown in table

5.7.

Table-5.7

Summary of Pair-wise Correlation between Selected Variables

Variables Pearson Correlation Sig. (2-tailed)

IBSQL and CBSQL 0.027 0.825

IBCS and CBCS 0.133 0.264

IBPRF and CBPRF -0.150 0.899

Source: Generated


5.4 Regression Model Results

5.4.1 Dimensions of Service Quality and Customer Satisfaction

Table-5.8

Summary of the IBDSQL-IBCS Linear Regression Model (based on SPSS results)

(Coefficients, Standard Error in Parenthesis, t-values in Brackets and p-values in italics)

Constant Tgty Rlty Rspv Asnc Epty R2 F-Stat. D.W. test

0.248 0.360 0.239 0.372 0.151 0.166 0.691 21.227 1.821

0.000

(0.493) (0.135) (0.113) (0.139) (0.112) (0.091)

[5.504] [5.811] [4.831] [5.324] [2.243] [1.621]

0.000 0.000 0.003 0.000 0.028 0.110

Predictor (Constant), IBDSQL Dependent Variable: IBCS

Table 5.8 reflects the results of IBDSQL-IBCS regression model. The coefficient of

determination is 0.691 that indicates the goodness of the model. There is highly

significant linear relationship (i.e. p= 0.000) between the dimensions of service quality

and customer satisfaction in Islamic bank. F-statistics (21.227) reflects that variation

(influence) of Independent Variable (IBDSQL) is appropriately explained in the

dependent variable (IBCS). The Durbin Watson results (1.821) also supported the model.

The estimated regression model is: IBCS = 0.248 + 0.360(Tgty) + 0.239(Rlty) +

0.372(Rspv) + 0.151(Asnc). Four dimensions of service quality namely tangibility,

reliability, responsiveness and assurance have significant (p<0.005) impact on customer


satisfaction in Islamic banks. While empathy has no significant influence on customer

satisfaction (p=0.110).

Table-5.9

Summary of the Multicollinearity Coefficients for IBDSQL-IBCS Regression Model

Dimensions Condition Index Tolerance VIF

Constant

Tgty

Rlty

Rspv

Asnc

Epty

1.000

13.579

14.427

16.563

12.293

21.300

0.496

0.507

0.545

0.472

0.466

2.016

1.971

1.836

2.118

2.146

Source: Generated

Source: Generated Table 5.9 reveals the multicollinearity coefficients for IB to indicate the correlation of the

predictor variables. The coefficients are listed in terms of conditions index, tolerance

level and VIF that remain within the acceptable range. The results show that there is no

multicollinearity among the independent variables.


Table-5.10

Summary of the CBDSQL-CBCS Linear Regression Model (based on SPSS results)


Constant Tgty Rlty Rspv Asnc Epty R2 F-Stat. D.W. test

0.223 0.321 0.251 0.323 -0.089 0.301 0.669 22.087 1.962

0.000

(0.539) (0.116) (0.110) (0.101) (0.096) (0.117)

[5.043] [2.802] [2.286] [2.058] [-0.757] [2.806]

0.000 0.007 0.025 0.034 0.452 0.007

Predictor (Constant), CBDSQL Dependent Variable: CBCS

Table 5.10 shows results of CBDSQL-CBCS model. It reflects that the coefficient of

determination (R2= 0.669) is appropriate and indicates the goodness of the model. There

is highly significant linear relationship (i.e. p= 0.000) between the dimensions of service

quality and customer satisfaction in conventional banks. F-statistics (22.087) indicates

that variation (influence) of Independent Variable (CBDSQL) is appropriately explained

in the dependent variable (CBCS). The estimated regression model is: CBCS = 0.223 +

0.321(Tgty) + 0.251(Rlty) + 0.323(Rspv) + 0.301(Epty). Four dimensions of service

quality i.e. tangibility, reliability, responsiveness and empathy have significant (p<0.005)

impact on customer satisfaction in conventional banks. On the other hand, assurance has

no significant (p=0.452) impact on customer satisfaction in case of conventional banks.


Table-5.11

Summary of the Multicollinearity Coefficients for CBDSQL-CBCS Regression Model

Dimensions Condition Index Tolerance VIF

Constant

Tgty

Rlty

Rspv

Asnc

Epty

1.000

14.595

13.948

16.357

19.640

12.869

0.628

0.491

0.404

0.471

0.494

1.592

2.035

2.475

2.119

2.026

Source: Generated

Table 5.11 indicates the multicollinearity coefficients for dimensions of service quality

and customer satisfaction in case of CB. The table further depicts correlation of the

predictor variables. The coefficients are listed in terms of conditions index, tolerance

level and VIF that lies within the acceptable range. Hence there is no multicollinearity

among independent variables.


5.4.2 Service Quality and Customer Satisfaction

Table-5.12

Summary of the IBSQL-IBCS Linear Regression Model (based on SPSS results)

(Coefficients, Standard Error in Parenthesis, t-values in Brackets & p-values in italics)

Constant IBSQL R2 F-Statistics

1.803 0.641 0.512 67.451

0.000

(0.499) (0.093)

[3.611] [6.888]

0.001 0.000

Predictor (Constant), IBSQL Dependent Variable: IBCS

Table 5.12 shows the results of IBSQL-IBCS model. The coefficient of determination is

0.512 that indicates the goodness of the model. There is highly significant linear

relationship (i.e. p= 0.000) between service quality and customer satisfaction in Islamic

bank. F-statistics (67.451) shows that variation (influence) of Independent Variable

(IBSQL) is appropriately explained in the dependent variable (IBCS). The estimated

regression model is IBCS = 1.803 + 0.641(IBSQL). Service quality has significant

(p<0.005) impact on customer satisfaction in Islamic banks.


Table- 5.13

Summary of the CBSQL-CBCS Linear Regression Model (based on SPSS results)


Constant CBSQL R2 F-Statistics

0.808 0.822 0.495 65.595

0.000

(0.521) (0.102)

[1.551] [8.099]

0.000 0.000

Predictor (Constant), CBSQL Dependent Variable: CBCS

Table 5.13 represents the results of CBSQL-CBCS model. The coefficient of

determination is 0.495 that indicates the goodness of the model. It shows significant

linear relationship (i.e. p= 0.000) between service quality and customer satisfaction in

conventional banks. F-statistics (65.595) reflects that variation (influence) of Independent

Variable (CBSQL) is appropriately explained in the dependent variable (CBCS). The

estimated regression model is CBCS = 0.808 + 0.822 (CBSQL). Service quality has

significant (p<0.005) impact on customer satisfaction in conventional banks.


5.4.3 Service Quality and Bank Performance

Table-5.14

Summary of the IBSQL-IBPRF Linear Regression Model (based on SPSS results)


Constant IBSQL R2 F-Statistics

3.835 0.026 0.002 0.121

0.729

(0.396) (0.074)

[9.676] [0.347]

0.000 0.729

Predictor (Constant), IBSQL Dependent Variable: IBPRF

Table 5.14 shows output of IBSQL-IBPRF model. The coefficient of determination is

0.002, p-value (0.729) and F-statistics (0.121). It reflects variation (influence) of

Independent Variable (IBSQL) in the dependent variable (IBPrf). The estimated

regression model is IBPRF = 3.835 + 0.026 (IBSQL). Service quality has no significant

(p=0.729) impact on performance of Islamic banks.


Table-5.15

Summary of the CBSQL-CBPRF Linear Regression Model (based on SPSS results)


Constant CBSQL R2 F-Statistics

3.760 0.028 0.001 0.229

0.776

(0.502) (0.098)

[7.490] [0.286]

0.000 0.776

Predictor (Constant), CBSQL Dependent Variable: CBPRF

Table 5.15 depicts the results of CBSQL-CBPRF model. It shows R2 (0.001), p-value

(0.776) and F-statistics (0.229). The estimated regression model is CBPrf = 3.760 + 0.028

(CBSQL). Service quality has no significant (p=0.776) impact on performance of

conventional banks.


5.4.4 Customer Satisfaction on Bank Performance

Table-5.16

Summary of the IBCS-IBPRF Linear Regression Model (based on SPSS results)


Constant IBCS R2 F-Statistics

4.082 -0.021 0.001 0.102

0.775

(0.385) (0.073)

[10.600] [-0.287]

0.000 0.775

Predictor (Constant), IBCS Dependent Variable: IBPRF

Table 5.16 reflects the results of IBCS-IBPRF model. The coefficient of determination is

0.001, p-value (0.775) and F-statistics (0.102). It is reported that customer satisfaction

has no significant (p=0.775) impact on the performance of Islamic banks in Pakistan.


Table – 5.17 Summary of the CBCS- CBPRF Linear Regression Model (based on SPSS results)


Constant CBCS R2 F-Statistics

3.020 0.176 0.065 4.857

0.031

(0.404) (0.080)

[7.474] [2.204]

0.000 0.031

Predictor (Constant), CBCS Dependent Variable: CBPRF

Table 5.17 represents CBCS-CBPRF model. The coefficient of determination is 0.065, p-

value (0.031) and F-statistics (4.857). The estimated regression model is CBPRF = 3.020

+ 0.176 (CBCS). Customer satisfaction has significant (p=0.031) impact on the

performance of conventional banks.


5.5 The Model Testing by SEM

Structural Equation Modeling (SEM) investigates both structural model and measurement

model. In structural model, it investigates causation among selected constructs and

variables while measurement model reflects the loadings of items on their constructs.

This study used PLS based SEM to investigate the relationships among service quality,

customer satisfaction and bank performance in Pakistan.

Bogazzi and Fornell (1982) reported that SEM is a second-generation tool for data

analysis based on LIZRAL and PLS. It reflects complex relationships of variables

regarding whole model in a meaningful fashion (Hanushek and Jackson, 1977; Bullock et

al., 1994). SEM is more appropriate for mathematical modeling of complex interactions

of variables for theoretical and practical implications (Dubin, 1976; Bollen, 1989). PLS is

superior over first generation regression models because it has ability to analyze

complicated models in a single and unified process (Gefan, Straub and Boudreau, 2000).

Gefan, Straub and Boudreau (2000) reported that PLS is used by researchers to examine

the significance of association among different variables as a major SEM technique. It

examines influence of relationships on cause-effect paths by considering numerous

variables. PLS is less affected by deviations from multivariate normal distribution. It is

considered as a theory building method (Thompson, 1995; Chin, 1998b). PLS is widely

used by numerous researchers for data analysis tool due to several benefits (Gefan and

Straub, 2005).


Figure-5.1

Structural Model Results-Relationship among Slty, CrSn and IPRF

Coefficients, T-Values in parenthesis and R2 (RSq)


Figure-5.2

Structural Model Results-Relationship among Slty, CrSn and CPRF

Coefficients, T-Values in parenthesis and R2 (RSq)


The results of the PLS structural models are presented in Figure 5.1 and 5.2. The PLS

structural modes indicate coefficients, t-values and R2 similar to simple regression. The

standardized coefficients reflect the relative strength of the statistical relationships. It uses

bootstrap technique to estimate t-values for the constructs and variables understudy.

Similarly, R2 is used to examine the significance of relationships among service quality,

customer satisfaction and bank performance.

Table 5.18

Summary of relationship among Slty, CrSn and IPRF/CPRF based on PLS results

Link Coefficients T-Values R2

Slty->Crsn 0.864 59.600 0.746

CrSn-> Iprf -0.234 -1.9373 0.015

Slty->IPRF 0.232 1.735 0.015

Slty->Crsn 0.777 29.072 0.604

Slty-> CPRF -0.059 -1.043 0.005

CrSn->CPRF 0.108 1.611 0.005

Source: Generated

Table 5.18 shows the relationship between the constructs and variables of the study. It

reflects the coefficients, t-values and R2 for service quality, customer satisfaction and

performance of Islamic banks. There is a strong relationship between service quality and

customer satisfaction while weak relationship is observed between service quality and


performance of Islamic banks as well as customer satisfaction and bank performance.

The results show that service quality significantly affects customer satisfaction as shown

by path coefficients in the structural model (Figure 5.1). But customer satisfaction does

not affect the performance of the Islamic banks as evident from path coefficients. The

results reject the null hypothesis because customer satisfaction does not mediate the

relationship between service quality and performance of Islamic banks.

On the other hand, table 5.18 also reflects the coefficients, t-values and R2 for service

quality, customer satisfaction and performance of conventional banks. Results show that

there is a strong relationship between service quality and customer satisfaction while

weak relationship is observed between service quality and performance of conventional

banks as well as customer satisfaction and bank performance.

The results of structural model (Figure 5.2) reveal that service quality has strong

influence on customer satisfaction as indicated by path coefficients. Similarly, customer

satisfaction affects the performance of conventional banks. It plays a mediating role

between service quality and performance of conventional banks as shown by the path

coefficients of the structural model. The results support the hypothesis that customer

satisfaction mediates the relationship between service quality and performance of

conventional banks.


Bovaird et al. (2007) reported that structural equation modeling (SEM) is frequently used

technique to test the complex models that contain multiple constructs and indicators.

Similarly, PLS is used to analyze predictive complex relationships between variables and

constructs of a given data set. PLS is applied by researchers as an effective estimation

procedure across the globe (Maikranz et al., 2007). It helps to estimate the relationship

among variables and constructs by producing path coefficients (Fu, 2006). Path

coefficients are used to estimate mediating role of customer satisfaction regarding

selected variables (Moutinho and Smith, 2000; Maxhall, 2003) and mediating role of

customer satisfaction with reference to service quality and other variables (Al-Hawari

and Ward, 2006). Bootstrap approach is used for statistical inference based on resampling

methods. In this approach, subjects in data set are resampled with replacement (Efron,

1979). The researcher used bootstrap approach due to a number of benefits.

Fox (2002) reported that bootstrap methods can be used for several sampling schemes. It

is said that “stratified sampling, bootstrap resampling is performed with strata, building

up a bootstrap sample munch as the original sample was composed from subsamples of

the strata”. Bootstrap method is beneficial due to its simplicity and flexibility. It helps to

derive estimates of standard errors and confidence intervals for complex estimators of

complex parameters in a straightforward way. It facilitates the inference about complex

parameters of the distribution e.g. proportions, correlation coefficients, odds ratio and

percentile points. It is suggested that bootstrap is an effective method of testing mediation

because it can be performed with small sample and it does not need normality (Chernick,

1999; Davidson and Hinkley, 1997).


Table-5.19 Structural Model-Bootstrap for IB

Link Entire Sample

estimate Mean of

Sub-samplesStandard

Error T-Statistic

Slty->Tgty 0.6050 0.5819 0.0398 15.1936 Slty->Rlty 0.8850 0.8879 0.0139 63.5165 Slty->Rspv 0.8640 0.8675 0.0146 59.0578 Slty->Asnc 0.8620 0.8617 0.0166 52.0184 Slty->Epty 0.8850 0.8871 0.0134 66.0841 Crsn->Smdlv 0.8760 0.8741 0.0169 51.8604 Crsn->TgSv 0.9060 0.9071 0.0113 80.4436 Crsn->Slrby 0.8600 0.8602 0.0160 53.6294 Crsn->Helmt 0.9040 0.9038 0.0132 68.6515 Crsn->Csrv 0.9050 0.9058 0.0093 97.0163 Slty->Crsn 0.8640 0.8645 0.0145 59.6004 Crsn->IPRFc -0.2340 -0.2498 0.1186 -1.9732 Slty->IPRFc 0.2320 0.2485 0.1337 1.7352

Source: Generated

Table 5.19 shows the results of the structural model bootstrap for service quality,

customer satisfaction and performance of Islamic banks. Bootstrapping is a re-sampling

procedure adopted to enable the inferential hypothesis testing in the PLS for obtaining

standard errors (Wold, 1980; Falk and Miller, 1992). It is used to estimate the significant

relationships among observed constructs. Above-mentioned results are consistent with

the results of regression, as measured by using SPSS for this study.


Table-5.20

Structural Model—BootStrap of CB

Source: Generated

Table 5.20 reflects the results of the structural model bootstrap for service quality,

customer satisfaction and performance of conventional banks. It is used to estimate the

significant relationships among observed constructs. It is found that results of PLS are

consistent with the results of regression, as measured by using SPSS for this study.

Link Entire Sample

estimate Mean of

Sub-samplesStandard

Error T-Statistic

Slty->Rspv 0.8800 0.8814 0.0155 56.9570 Slty->Rlty 0.8570 0.8596 0.0160 53.5677 Slty->Tgty 0.5940 0.5789 0.0453 13.1012 Slty->Asnc 0.8670 0.8667 0.0161 53.7460 Slty->Epty 0.8500 0.8516 0.0187 45.4452 Crsn->Csrv 0.8690 0.8682 0.0147 59.2413 Crsn->Helmt 0.9300 0.9309 0.0085 109.6065 Crsn->Smdlv 0.9060 0.9055 0.0112 81.1537 Crsn->TgSv 0.9000 0.8989 0.0133 67.9219 Crsn->Slrby 0.8870 0.8871 0.0127 69.5900 Crsn->CPRFc 0.1080 0.1209 0.0670 1.6108 Slty->Crsn 0.7770 0.7811 0.0267 29.0717 Slty->CPRFc -0.0590 -0.0876 0.0566 -1.0433


5.6 Discussion

This study was conducted to compare the responses regarding service quality, customer

satisfaction and bank performance of Islamic and conventional banks operating in

Pakistan. The relationship among selected variables was investigated by collecting

primary data from respondents of selected banks. Five hypotheses were developed on the

basis of exiting literature to find out the hypothesized relationships among variables in

Pakistani environment. Demographic profile shows the classification of respondents on

the basis of gender, age, marital status, education level, occupation, income and bank

usage pattern.

The results show that male customers are greater than female customers that were using

products/services of selected banks working in Pakistan. It is consistent with literature as

men and women customers using bank products/services could be differentiated due to

social, cultural, and religious factors. It is evident that male customers perform more

banking activities than female customers (Obbe, 1980; Alsop, 1984; Woldie and Adersua,

2004). Similarly, the most of the customers fall in the age group of 25-34 years in case of

IB and 18-24 year in case of CB. It is in line with literature, it is reported that the most of

the bank customers dealing with Islamic banks fall in the group of 25-35 years besides

education level and income group (Khan et al., 2008).

Hoffman and Bateson (2002) reported that perception of service quality is very important

for researchers and managers to compete in the market. Customers’ Perception of service


quality strongly depends on customer’s values and beliefs that may vary from one culture

to another (Furer et al., 2002). Results show that the service quality perception of bank

customers is different among customers of Islamic and conventional banks. Findings are

consistent and contrary to the hypothesis but both are supported by literature. Findings

reveal that service quality perception of male customers is significantly different from the

perception of female customers in case of IB. It is found that customer’s demographic

features play an important role towards banking experiences (Khan et al., 2008).

Similarly, it is reported that there is significant difference in customers’ perception of

service quality in different countries (Glavell et al., 2006). However, customers'

perception of service quality differs in terms of demographic characteristics (gender,

ethnicity, education and income) of the respondents (Urban and Pratt, 2000).

On the other hand, results show that there is no difference in the perception of male and

female customers about the service quality offered by CB. It is consistent with the

literature as reported that life style and demographic characteristics are important

indicators regarding products/services in retail banking (Galloway and Blanchard, 1996;

Yavas et al., 2004). Similarly, it is concluded that there is no difference in the choice

regarding bank products/services between male and female customers (Omar, 2008).

The second hypothesis of the study assumed that there is positive relationship between

service quality and customer satisfaction in Pakistani banking sector. Results supported

the hypothesis, as there is strong positive relationship between IBSQL and IBCS. It is in

line with previous research that there is strong positive relationship between service


quality and customer satisfaction in Pakistan (Jamal and Naseer, 2003). Similarly, it is

found that there is strong positive relationship between CBSQL and CBCS. Furthermore,

the relationship between SQL and CS is stronger in Islamic banks as compared to

Conventional banks in Pakistan. The results are consistent with the literature, as a strong

relationship is reported between service quality and customer satisfaction regarding

products offered by Islamic banks (Metawa and Almossawi, 1998). The findings are

supported by the previous studies (Athanassopoulos et al., 2001; Jabnoun and Khalifa,

2005; Nelson, 2006). Similarly, Iglesias and Guille`n (2004) reported a direct and

positive relationship between service quality and satisfaction level of customers regarding

their banking experiences. There are a number of studies that reported a positive

relationship between service quality and customer satisfaction in the banking sector

(Levesque and McDougall, 1996; Yavas et al., 1997; Bahia and Nantel, 2000; Oppewal

and Vriens, 2000; Arasli et al., 2005; Al-Hawari and Ward, 2006; Tahir and Abu Bakar,

2007).

The third hypothesis of the study revealed that service quality is positively related to bank

performance. It is found that there is weak positive relationship between service quality

and customer satisfaction regarding Islamic banks. Similarly, weak positive relationship

is found between service quality and customer satisfaction in Conventional banks. The

results are consistent with the literature as positive relationship between service quality

and organizational performance parameters is reported (Chapman et al., 1997). Similarly,

a positive relationship is found between service quality and financial performance of

banks (Duncan and Elliot, 2004). It is reported that there is direct and positive


relationship between service quality and customer satisfaction (Zahorik and Rust, 1992;

Heskett et al., 1994; Rust et al., 1995). Similarly, it is found that there is a significant

relationship between service quality and financial performance of banks (Duncan and

Elliot, 2002). In another study, findings showed that service quality has a positive impact

on bank performance (Akroush, 2008).

This study also investigated the relationship between customer satisfaction and bank

performance. It was hypothesized that customer satisfaction is positively related to bank

performance. Interestingly, it is found that there is weak negative relationship between

customer satisfaction and performance of the Islamic banks. It identified the gap

prevailing in the Pakistani banking sector towards lack of customer orientation and

awareness among bank customers. It could be linked with findings that customers of

Islamic banks have awareness but showed dissatisfaction regarding some of the products

of Islamic banks (Naseer, Jamal and Al-Khatib, 1999).

The results reflect a significant positive relationship between customer satisfaction and

performance of conventional banks. Results are in line with literature, it is found that

customer satisfaction helps to increase the bank performance due to greater profitability,

increased market share and more return on investments (Zairi, 2000). Similarly, customer

satisfaction generates positive outcomes for long-term profitability (Wirtz, 2003; Baker

and Sinkula, 1999). A positive link between customer satisfaction and bank performance

is reported by a number of researchers (Swan and Combs, 1976; Hallwell, 1996; Gritti

and Foss, 2007).


The researcher investigated the influence of dimensions of service quality on customer

satisfaction. It is found that four dimensions of service quality i.e. tangibility, reliability,

responsiveness and assurance have a significant impact on customer satisfaction in

Islamic banking. But empathy has no significant effect on customer satisfaction in

Islamic banks. Similarly four dimension of service quality namely tangibility, reliability,

responsiveness and empathy have a significant effect on customer satisfaction in case of

conventional banks in Pakistan. But assurance has no significant impact on customer

satisfaction in Pakistan. The multicollinearity coefficients and Durbin Watson test also

reveals the absence of the autocorrelation among the selected constructs/variables.

supported the model. The results are consistent with the literature as it is reported by a

number of studies in the banking sector (Parasuraman et al., 1991; Swanson and Kelley,

2001; Jabnoun and Al-Tamimi, 2003, Zineldin, 2005; Nelson, 2006).

The literature helps to investigate the mediating role of customer satisfaction between

service quality and bank performance in Pakistan. The findings showed that customer

satisfaction does not mediate between service quality and bank performance in case of

Islamic banks due to lack of customer orientation and awareness campaigns. The path

coefficients of the structural model (Figure 5.1) represents that customer satisfaction does

not play a mediating role between service quality and performance of Islamic banks. It is

consistent with literature as customer satisfaction does not mediate between service

quality and tangible aspects of service environment (Jamal and Naseer, 2003). It is also

supported by other studies (Maxham, 2003; Bontis, Booker and Serenko, 2007).


On the other hand, customer satisfaction mediates the relationship between service

quality and performance of conventional banks in Pakistan as reflected by path

coefficients of the structural model (Figure 5.2). It is suggested that provision of better

service quality could result into satisfied customers for better profitability (Gao, Jia and

Zhao, 2006). The results are supported by previous studies undertaken in the banking

sector that reveals the mediating effect of customer satisfaction in the different parts of

the world (Moutinho & Smith, 2000; Duncan & Elliot, 2004; Al-Hawari & Ward, 2006).

Table 5.21

Summary of Hypothesis

Hypothesis F-Statistic R2 Status (Upheld/Rejected)

T-Statistics

H1a 2.065 --- Supported

H1b 0.721 --- Rejected

Correlation and Regression

H2a 67.451 0.512 Supported

H2b 65.595 0.495 Supported

H3a 0.121 0.002 Supported


H4a 0.102 0.001 Rejected


Path Analysis

H5a Path Coefficients of structural model (5.1) Partially Supported

H5b Path Coefficients of structural model (5.2) Supported Source: Generated


5.6.1 Comparison between IB and CB Model

This study aims to compare Islamic and conventional banks operating in Pakistan with

reference to service quality, customer satisfaction and bank performance. The researcher

has developed five hypotheses in the light of existing literature to compare the both

banking streams in Pakistan. The results show that there is significant difference in the

perception of bank customers about service quality offered by Islamic banks on the basis

of gender. While there is no significant difference in the perception of male and female

customer regarding service quality offered by conventional banks. Similarly, there is

strong positive relationship between service quality and customer satisfaction as shown

by the responses of the customer of IB and CB. However, results indicate that service

quality offered by Islamic banks leads to greater satisfaction among Islamic banks

customer as compared to customer of conventional banks.

However, the intensity of relationship between service quality and bank performance is

approximately same between Islamic and conventional banks. But there is significant

positive relationship between customer satisfaction and bank performance in case of

conventional bank as compared to Islamic bank. Finally, results IB model reflect that

customer satisfaction does not mediate the relationship between service quality and

performance of Islamic banks. On the other hand, in case of CB model it is found that

customer satisfaction mediates the relationship between service quality and performance

of conventional banks.


CHAPTER 6

Conclusion, Implications and Suggestions

Conclusion

Suggestions

Limitations and Future Research

Contribution of the Study

Practical Implications

Unique Status of the Study


Chapter 6

Conclusions, Implications and Suggestions

6.1 Conclusion

Financial services industry especially banking sector witnessed unprecedented growth

during the last few years in every part of the world. Pakistani economy experienced an

increase in the contribution of the banking sector towards GDP due to an expansion of

the market and diversification of products/service to meet customers' expectations. A

large number of new banks have started operations in Pakistan. Similarly, inception of

Islamic banking operations in 2002 opened new avenues to exploit the opportunities.

Islamic banks are getting popularity due to interest free products, risk sharing activities

and strong ties with the religion. Islamic banks work as welfare organization to promote

trade and economic activities in line with the instructions of Islam to provide a number of

interest-free products/service.

The existence of Islamic and conventional banks in Pakistan created stiff competition

among banks to attract and retain greater number of customers by the provision of quality

services. This study examined the relationship among service quality, customer

satisfaction and bank performance by comparing Islamic and conventional banks

operating in Pakistan. The researcher developed and tested a model of service quality,

customer satisfaction and bank performance in the light of existing literature.


It is concluded that there is significant difference in the perception of customers of

Islamic banks about service quality on the basis of gender. While in case of conventional

banks, there is no significant difference in the perception of male and female bank

customers. The results show that there is strong direct and positive relationship between

service quality and customer satisfaction in Pakistani banking sector. The magnitude of

relationship between service quality and customer satisfaction is greater in Islamic banks

as compared to conventional banks.

It is proved that service quality also influence the bank performance while there is weaker

relationship between customer satisfaction and bank performance. However is found that

that four dimensions of service quality i.e. tangibility, reliability, responsiveness and

assurance have significant impact on service quality except empathy in case of Islamic

banks. Similarly four dimension namely tangibility, reliability; responsiveness and

empathy have significant impact on customer satisfaction in case of CB but assurance has

no significant influence on customer satisfaction.

The study identified significant positive impact of service quality on customer

satisfaction in case of CB but a gap is identified between customer satisfaction and bank

performance in case of Islamic banks. The gap between customer satisfaction and

performance of Islamic banks may be due to the lack of customer orientation. Islamic

banks are more concerned towards expansion of their branch network instead of customer

orientation. Finally, it is proved that customer satisfaction partially mediate the

relationship between service quality and bank performance in Pakistan as shown by the


results of structural models. The results of proposed model reflect that customer

satisfaction does not play the mediating role between service quality and performance of

Islamic banks. On the other hand, customer satisfaction mediates the relationship

between service quality and performance of conventional banks in Pakistan.

It is concluded that managers should improve the quality of services to retain their

customers as satisfied customers for long-term benefits. Similarly, they should make

arrangements to enhance awareness among customers and employees of banks for

improvement of their products/services to enhance performance. Islamic banks should

develop marketable products according to Islamic instructions to compete with

conventional banks. The study has developed an understanding about the relationship

among service quality, customer satisfaction and bank performance regarding Islamic and

conventional bank in Pakistan.

6.2 Suggestions

This study examines the service quality, customer satisfaction and bank performance by

comparing a number of selected Islamic and conventional banks in Pakistan. IB should

enhance awareness regarding its products (services) to compete with CB for long term

benefits and should introduce new products/services according to Shariah principles to

attract greater number of customers. The results show that CS does not mediate the

relationship between SQL and PRF in case of IB. So IB should focus on customer

orientation to have satisfied customers to reduce the gap between CS and PRF.bankers


are required to develop a mechanism to evaluate their services in relation to customer

satisfaction for corrective action by conducting surveys etc. Bankers should introduce

new, diversified and marketable products to meet requirements of different segments of

the economy as weak relationship between SQL and PRF is identified in this study.

Bankers should improve their services by blending of traditional facilities and modern

technology to meet customers’ expectation for better performance in future as service

quality has strong positive effect on customer satisfaction. It is suggested that Islamic

banks should create awareness among bank customers by attractive advertising tactics to

attract greater number of customers. Islamic bank should actively introduce innovative

products and services according to principles of Sharia’h. Islamic banks and conventional

should improve quality of service to meet customer expectations for long term benefits.

They are required to implement an effective mechanism to measure the customer

satisfaction for corrective action.

Bankers should introduce new, diversified and marketable products to meet the

requirements of the different segments of the economy. There is significant difference in

the perception of male and female customers in case of IB. So bankers are should develop

an effective strategy to attract female customers by meeting their specific requirements.

They are required to introduce specific products to meet the expectations of different

segments on the basis of gender, age, qualification etc. They should take initiatives for

active participation of female customer due to remarkable potential as they represent 51%

of total population. Bankers should improve their services by blending traditional

facilities and modern technology to meet customers’ expectation for better performance


in future as service quality has strong positive effect on customer satisfaction as evident

from the results.

Conventional banks could be transformed towards Islamic banking practices to play a

positive role for the welfare of the society to deal in profit and loss basis. IB is better than

CB because Islamic Bank provide its products/services according to principles of

Sharia’h. While conventional bank provides interest-oriented products/services that are

strictly prohibited by Allah Almighty and His prophet Muhammad (Peace be Upon Him).

Similarly, equity based contracts are highly recommended due to long term benefits

towards economy and society (Wieltzman, 1984; Chapra, 1985). However, profit and loss

based equity transactions stimulate investment and productive activities in the economy

(Haque and Mirakhor, 1986; Arby, 2003). Bankers should patch up the service quality

and customer satisfaction towards better performance of the banks especially in case of

Islamic banks to gain substantial benefits.

6.3 Limitations and Future Research

This study has some limitations that might be addressed in future research. Firstly,

subjective dimensions like open-internal process model, rational model and human

relations model were used to measure the bank performance. On the other hand, objective

measures such as profitability (ROE, ROI) and liquidity (Current Ratio, Acid-test Ratio)

might be used to assess the influence of service quality and customer satisfaction on

financial performance of the banks.


Secondly, regression analysis and PLS tools are used to test the proposed model. These

techniques have certain limitations, as simple regression is unable to support the analysis

of all paths at the same time and PLS also has some limitations. LISREL can investigate

the relationship among constructs and variables of the model more appropriately, so this

model might be tested by LISREL for further research. The scope of this study is limited

to banking sector by comparing conventional and Islamic banks in Pakistan. Similar

study may be carried out to compare the practices of conventional and Islamic Leasing

companies and Insurance companies etc. The model should be tested in other services

sectors to check the generalizability of the findings.

Finally, this study only considered the full fledged Islamic banks to compare with the

conventional banks. The researcher does not include the Islamic bank branches (Stand

alone Islamic banking branches-SAIBBS) of conventional banks for sake of precision.

These branches may be taken for further research. Despite the limitations, the study

makes a meaningful contribution in the literature with reference to Pakistan.

6.4 Contribution of the Study

This study contributes towards the body of knowledge to address the issues as identified

in the knowledge gap. It contributes towards theoretical as well as practical fronts.

Several countries especially Muslim countries have initiated Islamic banking practices

along with conventional banking during last two decades that requires a study to compare


the both banking systems. The findings of the study are strong because it covers a large

sample of 144 (72 IB and 72CB) bank branches to collect data from 1728 respondents to

investigate the service quality, customer satisfaction and bank performance of selected

Islamic and conventional banks in Pakistan. Similarly, sample was drawn from the 12

most populous cities of Pakistan from four provinces and capital territory to enhance

generalizeability of the findings.

6.5 Theoretical and Practical Implications

This study has theoretical and practical implications for bank managers, policy makers

and academicians. This study incorporated bank performance with service quality and

customer satisfaction. It helps to enhance the understanding towards the relationship

among service quality, customer satisfaction and bank performance regarding Islamic and

conventional banks in Pakistan. There is lack of customer orientation as well as lack of

awareness about customer rights. Bank managers should take quality initiatives to

improve their products by considering demographic characteristics of the customers to

retain them as satisfied customers for better performance.

The results showed that perception of customers of Islamic banks is greater than the

perception of customer using service of conventional banks. Bankers are required to

concentrate on different dimensions of service quality i.e. tangibility, reliability,

responsiveness, assurance and empathy to improve their products/services to have

satisfied customers. Similarly, banker dealing with Islamic banking should enhance the

awareness about products/services by launching an effective marketing campaign. They


should also introduce new products and improve existing products/service by innovation

according to principles of Sharia’h. On the other hand, conventional bankers should offer

profit and loss based products/services to meet the expectation of bank customers in

Pakistan, a country with population of more than 96% Muslims. They should also

improve the services offered by their special branches offering Islamic banking

products/services. The study could help the bankers to understand the bank customers for

provision of better quality services to retain satisfied customer for better performance.

6.6 Unique Status of the Study

This study is unique in its nature due to a number of reasons. It focused on different

dimensions of service quality and customer satisfaction in Pakistani banking sector. It

incorporated bank performance with service quality and customer satisfaction. It

compared Islamic banks with conventional bank with reference to selected constructs and

variables. It addressed the customers and employees of selected banks for empirical

investigation. The study examined the service quality, customer satisfaction and bank

performance in Pakistani environment. It tested a local model of the SQL, CS and PRF

by considering different constructs/variables empirically.


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Comparative Study of Islamic Banking

185

Part I- Bank Usage Pattern

1. Which of the following bank is your main bank (please tick)?

A Meezan Bank Limited B Dubai Islamic Bank Limited C Albarka Islamic Bank Limited D Bank Islami Pakistan Limited E First Dawood Islamic Bank Limited F Qattar Islamic Bank Limited

3. For how long you have been banking with your main bank?

A Less than a Year B 1 up to 3 Years C 3 up to 5 Years D 5 Years and above

Part II- Service Quality

The following set of statements relate to your feelings about Islamic bank’ s service. For each statement, please show the extent to which you believe your bank has the feature described by the statement. Pick one of the seven numbers next to each statement. Here circling a “1” means that you strongly disagree that your bank has that feature, and circling a “7” means that you strongly agree. There are no right or wrong answers- all we are interested in a number that best shows your perception about Islamic bank.

Strongly Strongly Disagree Agree

1. Your Islamic bank uses modern looking equipment. 1 2 3 4 5 6 7 2. Your Islamic bank’s physical facilities are visually appealing. 1 2 3 4 5 6 7 3.The employees of your Islamic bank are neat appearing 1 2 3 4 5 6 7 4. Service related materials (such as pamphlets, leaflets or reports) visually appealing at your Islamic banks

1 2 3 4 5 6 7

5. When your Islamic bank promises to do something by a certain time, it does so

1 2 3 4 5 6 7

6. When you have a problem, your Islamic bank shows a sincere interest in solving it

1 2 3 4 5 6 7

7. Your Islamic bank performs the service right the first time 1 2 3 4 5 6 78. Your Islamic bank provides its services at the time it promises to do so 1 2 3 4 5 6 7 9. Your Islamic bank issues error free bills, statements and other documents

1 2 3 4 5 6 7

10. Employees of your Islamic bank tell customers exactly when services will be performed

1 2 3 4 5 6 7

11. Employees of your Islamic bank give you prompt service 1 2 3 4 5 6 7 12. Employees of your Islamic bank are always willing to help you 1 2 3 4 5 6 7 13. Employees of your Islamic bank are never too busy to respond to your requests

1 2 3 4 5 6 7

14. You feel safe in your transactions with your Islamic bank 1 2 3 4 5 6 7 15. The behavior of your Islamic bank employees creates confidence in you 1 2 3 4 5 6 7 16. Employees of your Islamic bank are consistently courteous with you 1 2 3 4 5 6 7 17. Employees of your Islamic bank have the necessary knowledge to answer your questions

1 2 3 4 5 6 7

18. Your Islamic bank gives you individual attention 1 2 3 4 5 6 7 19. Your Islamic bank has business hours convenient to all customers 1 2 3 4 5 6 7 20. Your Islamic bank has employees who give you personal attention 1 2 3 4 5 6 7 21. Your Islamic bank has your best interests at heart 1 2 3 4 5 6 7 22. Employees of your Islamic bank understand your specific needs 1 2 3 4 5 6 7


186

Part III- Customer Satisfaction You are requested to tick any one option given against each item to measure the level of customer satisfaction with the bank. You are required to show satisfaction level against each item as: 1=Very highly Dissatisfaction, 2 = High Dissatisfaction, 3 = Slight Dissatisfaction, 4 = Neutral, 5 = Slight Satisfaction, 6 = High Satisfaction, 7 = Very High Satisfaction 1.Diversity and range of Bank’s services (having a wider range of financial services from the bank, e.g. deposits, retirement accounts, loans for purchase of cars, houses, foreign exchange, traveler’s cheques, safe deposit lockers, etc.)

1 2 3 4 5 6 7 2. Bank’s Service innovation (providing information/details on regular basis through post: telephonic banking; ATM; room service facility; cards to defense personnel, etc.)

1 2 3 4 5 6 7 3. Availability of most service operations in every branch/department of the bank.

1 2 3 4 5 6 7 4. Convenient operating hours and days (e.g. working on Saturday and Sunday s, extended service hours during evenings, weekdays, etc.)

1 2 3 4 5 6 7 5. Providing service as promised

1 2 3 4 5 6 7 6. Effectiveness of the employees’ skills and ability for actions whenever a critical incident takes place (i.e. when a problem arises)

1 2 3 4 5 6 7 7. Whenever a critical incident takes place (i.e. when a problem arises), the degree to which organization succeeds in bringing the condition back to normalcy by satisfying the customer.

1 2 3 4 5 6 7 8. Prompt service to customers.

1 2 3 4 5 6 7 9. Extent to which the feedback from customers is used to improve service standards.

1 2 3 4 5 6 7 10. Employees who instill confidence in customers by proper behavior.

1 2 3 4 5 6 7 11. Making customers feel safe and secure in their transactions.

1 2 3 4 5 6 7 12. Employees who have the knowledge and competence to answer customers’ questions having best interests at heart.

1 2 3 4 5 6 7 13. Having a highly standardized and simplified delivery process so that services are delivered without any hassles or excessive bureaucracy.

1 2 3 4 5 6 7 14. Enhancement of technological capacity (e.g. computerization, networking of operations, etc.) to serve customers more effectively.

1 2 3 4 5 6 7 15. Degree to which the procedures and processes are perfectly fool proof.

1 2 3 4 5 6 7 16. Adequate and necessary personnel for good customer service.

1 2 3 4 5 6 7 17. Adequate and necessary facilities for good customer service.

1 2 3 4 5 6 7


187

18. The ambient conditions such as temperature, ventilation, noise and odour prevailing in the bank’s premises.

1 2 3 4 5 6 7 19. Extent of the physical layout of equipment and other furnishings being comfortable for customers to interact with employees.

1 2 3 4 5 6 7 20. Having house keeping as a priority and of the highest order in the organization

1 2 3 4 5 6 7 21. Visually appealing sings, symbols, advertisement boards, pamphlets and other artifacts in the bank.

1 2 3 4 5 6 7 22. Employees who have a neat and professional appearance.

1 2 3 4 5 6 7 23. Visually appealing materials and facilities associated with the service.

1 2 3 4 5 6 7 24. Equal treatment stemming from the belief that every one, big or small, should be treated alike.

1 2 3 4 5 6 7 25. “Service transcendence”- making customers realize their unexpected needs by giving more than what they expect.

1 2 3 4 5 6 7 26. Giving good service at a reasonable cost, but not at the expense of quality.

1 2 3 4 5 6 7 27. Having branch locations in most places convenient to all sections of society (e.g. villages, down town areas, etc.)

1 2 3 4 5 6 7 28. A sense of public responsibility among employees (in terms of being punctual, regular, sincere and without going on strikes).

1 2 3 4 5 6 7 29. Extent to which the organization leads as a corporate citizen and the level to which it promotes ethical conduct in everything it does.

1 2 3 4 5 6 7 Part IV-Demographics 1. Your Gender: Male Female 2. Your Marital Status: Unmarried Married 3. Your Age: A 18-24 Years B 25-34 Years C 35-44 Years D 45-54 Years E 55 and Over


188

4. Your Educational Level: A Primary B Secondary C College D University-Master E University-M.Phil F University-PhD G Any other (please specify) 5. Your Occupation: A Student B Businessman C Education/ Medical Services D Housewife E Banker F Investor G Professional / Senior Management H Other (please specify) 6. Your Monthly household income: A Under Rs. 10 000 B Rs 10 000 to Rs. 20 000 C Rs. 20 000 to Rs. 30 000 D Rs. 30 0000 to Rs. 40 000 E Rs. 40 0000 to Rs. 50 000 F Rs. 50 000 and above

THANKS FOR YOUR COOPERATION


189

Dear Respondent The researcher requires your valuable responses. This questionnaire was designed to serve as

an instrument for measuring the performance of banks in our country. I know that time is

very valuable to you but please spare a few minutes to answer the following questions. Your

responses must be kept confidential and only used for academic purposes. Your kind

cooperation is highly appreciated.

Bank Performance Please encircle one option which you prefer most suitable with respect to your Bank. Items

are listed in reference to “Evolution” that means progress or development of each dimension

in respect to your bank. Performance is to be measured on Five point Likert scale as given

below.

1. Quality product

1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral

4. Likely to rise evolution 5. Rising evolution

2. Internal process coordination



3. Personnel activities coordination



4. Share market




190

5. Profitability



6. Productivity



7. Voluntary personnel rotation



8. Personnel absenteeism.



Bank Experience

Please specify your designation. (__________________________________________)

In which of the following banks you are currently working (please tick)?

A Meezan Bank Limited B Dubai Islamic Bank Limited C Albarka Islamic Bank Limited D Bank Islami Pakistan LimitedE First Dawood Islamic Bank LimitedF Qattar Islamic Bank Limited

For how long you are working in current bank?




191

Part I- Bank Usage Pattern

1. Which of the following bank is your main bank (please tick)?

3. For how long you have been banking with your main bank?


Part II- Service Quality

The following set of statements relate to your feelings about Conventional bank’ s service. For each statement, please show the extent to which you believe your bank has the feature described by the statement. Pick one of the seven numbers next to each statement. Here circling a “1” means that you strongly disagree that your bank has that feature, and circling a “7” means that you strongly agree. There are no right or wrong answers- all we are interested in a number that best shows your perception about Conventional bank.

Strongly Strongly Disagree Agree

1. Your Conventional bank uses modern looking equipment. 1 2 3 4 5 6 7 2. Your Conventional bank’s physical facilities are visually appealing. 1 2 3 4 5 6 73.The employees of your Conventional bank are neat appearing 1 2 3 4 5 6 7 4. Service related materials (such as pamphlets, leaflets or reports) visually appealing at your Conventional banks

1 2 3 4 5 6 7

5. When your Conventional bank promises to do something by a certain time, it does so

1 2 3 4 5 6 7

6. When you have a problem, your Conventional bank shows a sincere interest in solving it

1 2 3 4 5 6 7

7. Your Conventional bank performs the service right the first time 1 2 3 4 5 6 7 8. Your Conventional bank provides its services at the time it promises to do so

1 2 3 4 5 6 7

9. Your Conventional bank issues error free bills, statements and other documents

1 2 3 4 5 6 7

10. Employees of your Conventional bank tell customers exactly when services will be performed

1 2 3 4 5 6 7

11. Employees of your Conventional bank give you prompt service 1 2 3 4 5 6 7 12. Employees of your Conventional bank are always willing to help you 1 2 3 4 5 6 7 13. Employees of your Conventional bank are never too busy to respond to your requests

1 2 3 4 5 6 7

14. You feel safe in your transactions with your Conventional bank 1 2 3 4 5 6 7 15. The behavior of your Conventional bank employees creates confidence in you 1 2 3 4 5 6 7 16. Employees of your Conventional bank are consistently courteous with you 1 2 3 4 5 6 7 17. Employees of your Conventional bank have the necessary knowledge to answer your questions

1 2 3 4 5 6 7

18. Your Conventional bank gives you individual attention 1 2 3 4 5 6 719. Your Conventional bank has business hours convenient to all customers 1 2 3 4 5 6 7 20. Your Conventional bank has employees who give you personal attention 1 2 3 4 5 6 7 21. Your Conventional bank has your best interests at heart 1 2 3 4 5 6 7 22. Employees of your Conventional bank understand your specific needs 1 2 3 4 5 6 7

A National Bank of Pakistan B Habib Bank Limited C MCB Bank Limited D Bank Alfalah Limited E Askari Bank Limited


192

Part III- Customer Satisfaction You are requested to tick any one option given against each item to measure the level of customer satisfaction with the bank. You are required to show satisfaction level against each item as: 1=Very highly Dissatisfaction, 2 = High Dissatisfaction, 3 = Slight Dissatisfaction, 4 = Neutral, 5 = Slight Satisfaction, 6 = High Satisfaction, 7 = Very High Satisfaction 1.Diversity and range of Bank’s services (having a wider range of financial services from the bank, e.g. deposits, retirement accounts, loans for purchase of cars, houses, foreign exchange, traveler’s cheques, safe deposit lockers, etc.)

1 2 3 4 5 6 7 2. Bank’s Service innovation (providing information/details on regular basis through post: telephonic banking; ATM; room service facility; cards to defense personnel, etc.)

1 2 3 4 5 6 7 3. Availability of most service operations in every branch/department of the bank.

1 2 3 4 5 6 7 4. Convenient operating hours and days (e.g. working on Saturday and Sunday s, extended service hours during evenings, weekdays, etc.)

1 2 3 4 5 6 7 5.Providing service as promised

1 2 3 4 5 6 7 6. Effectiveness of the employees’ skills and ability for actions whenever a critical incident takes place (i.e. when a problem arises)

1 2 3 4 5 6 7 7. Whenever a critical incident takes place (i.e. when a problem arises), the degree to which organization succeeds in bringing the condition back to normalcy by satisfying the customer.

1 2 3 4 5 6 7 8. Prompt service to customers.

1 2 3 4 5 6 7 9. Extent to which the feedback from customers is used to improve service standards.

1 2 3 4 5 6 7 10. Employees who instill confidence in customers by proper behavior.

1 2 3 4 5 6 7 11.Making customers feel safe and secure in their transactions.

1 2 3 4 5 6 7 12. Employees who have the knowledge and competence to answer customers’ questions having best interests at heart.

1 2 3 4 5 6 7 13. Having a highly standardized and simplified delivery process so that services are delivered without any hassles or excessive bureaucracy.

1 2 3 4 5 6 7 14. Enhancement of technological capacity (e.g. computerization, networking of operations, etc.) to serve customers more effectively.

1 2 3 4 5 6 7 15. Degree to which the procedures and processes are perfectly fool proof.

1 2 3 4 5 6 7 16. Adequate and necessary personnel for good customer service.

1 2 3 4 5 6 7 17. Adequate and necessary facilities for good customer service.

1 2 3 4 5 6 7


193

18. The ambient conditions such as temperature, ventilation, noise and odour prevailing in the bank’s premises.

1 2 3 4 5 6 7 19. Extent of the physical layout of equipment and other furnishings being comfortable for customers to interact with employees.

1 2 3 4 5 6 7 20. Having house keeping as a priority and of the highest order in the organization

1 2 3 4 5 6 7 21. Visually appealing sings, symbols, advertisement boards, pamphlets and other artifacts in the bank.

1 2 3 4 5 6 7 22. Employees who have a neat and professional appearance.

1 2 3 4 5 6 7 23. Visually appealing materials and facilities associated with the service.

1 2 3 4 5 6 7 24. Equal treat stemming from the belief that every one, big or small, should be treated alike.

1 2 3 4 5 6 7 25. “Service transcendence”- making customers realize their unexpected needs by giving more than what they expect.

1 2 3 4 5 6 7 26. Giving good service at a reasonable cost, but not at the expense of quality.

1 2 3 4 5 6 7 27. Having branch locations in most places convenient to all sections of society (e.g. villages, down town areas, etc.)

1 2 3 4 5 6 7 28. A sense of public responsibility among employees (in terms of being punctual, regular, sincere and without going on strikes).

1 2 3 4 5 6 7 29. Extent to which the organization leads as a corporate citizen and the level to which it promotes ethical conduct in everything it does.

1 2 3 4 5 6 7 Part IV-Demographics 1. Your Gender: Male Female 2. Your Marital Status: Unmarried Married 3. Your Age: A 18-24 Years B 25-34 Years C 35-44 Years D 45-54 Years E 55 and Over


194

4. Your Educational Level: A Primary B Secondary C College D University-Master E University-M.Phil F University-PhD G Any other (please specify) 5. Your Occupation: A Student B Businessman C Education/ Medical Services D Housewife E Banker F Investor G Professional / Senior Management H Other (please specify) 6. Your Monthly household income: A Under Rs. 10 000 B Rs 10 000 to Rs. 20 000 C Rs. 20 000 to Rs. 30 000 D Rs. 30 0000 to Rs. 40 000 E Rs. 40 0000 to Rs. 50 000 F Rs. 50 000 and above



195

Dear Respondent The researcher requires your valuable responses. This questionnaire was designed to serve as

an instrument for measuring the performance of banks in our country. I know that time is

very valuable to you but please spare a few minutes to answer the following questions. Your

responses must be kept confidential and only used for academic purposes. Your kind

cooperation is highly appreciated.

Bank Performance Please encircle one option which you prefer most suitable with respect to your Bank. Items

are listed in reference to “Evolution” that means progress or development of each dimension

in respect to your bank. Performance is to be measured on Five point Likert scale as given

below.

1. Quality product



2. Internal process coordination



3. Personnel activities coordination



4. Share market




196

5. Profitability



6. Productivity



7. Voluntary personnel rotation



8. Personnel absenteeism.



Bank Experience

Please specify your designation. (__________________________________________)

In which of the following banks you are currently working (please tick)?

A National Bank of Pakistan B Habib Bank Limited C MCB Bank Limited D Bank Alfalah Limited E Askari Bank Limited

For how long you are working in current bank?




197

Appendix-II

List of Banks Working in Pakistan Type of Bank Name of Bank Address

Public Sector Banks

National Bank of Pakistan

Head Office, I.I. Chundrigar Road, Karachi, Phone: 021-9212200, Fax #: 021-9212774

First Women Bank Limited Building, CL-10/20/2, Beaumont Road, Civil Lines, Karachi, Phone#5657681, Fax # 5657755

The Bank of Khyber 24- The Mall, Peshawar Cantt. Phone # 091-5272189, Fax Number: 091-5276838

The Bank of Punjab 7-Egerton Road, Lahore, Telephone Office:042-9200173, Fax Number:042-9200297

Specialized Banks

Industrial Development Bank of Pakistan

State Life Building No. 2, Wallace Road, Off. I. I. Chundrigar Road, Karachi, Phone #:021-9213615, Fax Number: 021-9213617

The Punjab Provincial Cooperative Bank Ltd

Bank Square, The Mall, Lahore, Phone # 042-9211411,Fax #:042-9211442

SME Bank Limited 40,Jang Building, A. K. Fazal-e-Haq Road Blue Area, Islamabad

Zarai Taraqiati Bank Limited

1-Faisal Avenue, P. O. Box No.1400, Islamabad Phone #: 051-9252717, Fax #: 051-9252737

Private Banks

ABN AMRO Bank Pakistan Limited

16 Abdullah Haroon Road, Karachi Phone #: 5683097, Fax Number: 5683432

JS Bank Limited 1st Floor, Shaheen Commercial Complex, Dr. Ziauddin Ahmed Road, Karachi, Phone #: 021-2635208, Fax #: 021-2631803

Allied Bank Limited Central Office, Main Clifton Road, Bath Island, Karachi, Phone #: 5370499 Fax #:021-5370500

KASB Bank Limited Business & Finance Centre, I.I. Chundrigar Road, Karachi, Pone #: 2446800, Fax #9217588

Arif Habib Bank Limited 2/1, R.Y.16 Old Queens Road, Karachi Phone #: 2463570, Fax Number: 2463553

MCB Bank Limited 22nd Floor, MCB Tower, I.I. Chundrigar Road, Karachi, Phone #: 021-2270075, Fax# 2270078

Askari Bank Limited 1st Floor, AWT Plaza, The Mall, Rawalpindi. Phone #: 051-9272289, Fax #: 051-9271982

Mybank Limited 2nd Mezzanine Floor, Business & Finance Centre, I. I. Chundrigar Road, Karachi Phone #: 2440100, Fax Number: 2471951

Atlas Bank Limited 3rd Floor, Federation House, Abdullah Shah Ghazi Road, Clifton, Karachi, Phone #: 21-5369283, Fax Number: 21-5877197

NIB Bank Limited Muhammadi House, I. I. Chundrigar Road, Karachi, Phone #: 021-2420333, Fax # 2472258


198

Bank Alfalah Limited 2nd Floor, B.A. Building, I.I. Chundrigar Road, Karachi, Phone #: 2416966, Fax #: 2434183

Saudi Pak Commercial Bank Limited

Saudi Pak Building, I.I. Chundrigar Road, Karachi, Phone #: 021-2460466,Fax # 2460464

Bank Al Habib Limited Mackinnons Building, I.I. Chundrigar Road, Karachi, Pone #: 021- 2412421,Fax # 2419752

Soneri Bank Limited 5th Floor, Al-Rahim Tower, I.I. Chundrigar Road, Karachi, Phone #2439582,Fax #2439561

Crescent Commercial Bank Limited

6th Floor, Sidco Avenue Centre, Maulana Deen Muhammad Wafai Road, Karachi, Phone #:021-5686267, Fax Number: 021-5658059

Standard Chartered Bank (Pakistan) Limited

3rd Floor, Main Branch, P. O. Box No. 5556 I. I. Chundrigar Road, Karachi, Phone #: 021-2450288-89, Fax Number: 021-2414914

Faysal Bank Limited Faysal House, ST-02, Shahrah-e-Faisal, Karachi Phone #: 021-2795300, Fax #: 021-2793102

United Bank Limited 8th Floor, State Life Building, No.1, I.I. Chundrigar Road, Karachi, Phone #: 2417021 & 90332085,bFax Number: 2413492

Habib Bank Limited 22-Habib Bank Plaza, I.I. Chundrigar Road, Karachi, Phone # 241 1530, Fax # 241 1556

Habib Metropolitan Bank Limited

Spencer Building, I. I. Chundrigar Road, Karachi, Phone # 2638080, Fax #: 2630496

Foreign Banks

Oman International Bank Ground Floor, Nadir House Building, I. I. Chundrigar Road, Karachi. Phone #: 021-2419294, Fax Number: 021-2418920

Deutsche Bank AG Avari Plaza, Fatima Jinnah Road, Karachi. Phone #: 021-5207200, Fax #: 021-5658325

Citibank N.A. 1st Floor, AWT Plaza, I. I. Chundrigar Road, Karachi. Phone #: 021-2638398, Fax # 2638211

HSBC Bank Middle East Limited

1st Floor, Shaheen Complex, M.R. Kayani Road, Karachi. Phone #2637787, Fax #2631368

Micro Finance Banks

Khushhali Bank Limited 94 West, 4th Floor, Amir Plaza, Jinnah Avenue Blue Area, P. O. Box 3111, Islamabad Phone #: 051-111-092-092, Fax #: 9206080.

Rozgar Microfinance Bank Limited

Business Executive Centre, F-17/3, Block-8 Clifton, Karachi. Phone #: 021-5820326

Network Microfinance Bank Limited

94 West, 4th Floor, Amir Plaza, Jinnah Avenue Blue Area, P. O. Box 3111, Islamabad, Phone #: 051-111-092-092, Fax #: 051-9206080

Tameer Micro Finance Bank Limited

15-A, Block 7 & 8, Central Commercial Area K.C.H.S. Union, Karachi, Phone #: 021 -4325576, Fax Number: 021- 4325575

Pak Oman Microfinance Bank Limited

2nd Floor, Tower C, Finance & Trade Centre, Shahrah-e-Faisal, Karachi. Phone #: 021-5630946, Fax Number: 021-5630949


199

The First Micro Finance Bank Limited

62-C, Tauheed Commercial Area, 25th Commercial Street, DHA Phase V, Karachi Phone #: 021- 5822432, Fax #: 021 – 5822434

Development Finance Institutions

House Building Finance Corporation

3rd Floor, Finance & Trade Centre, Tower B Sharea Faisal, Karachi, Phone #: 021-9202314, Fax Number: 021-9202360

Pakistan Kuwait Investment Company Limited

4th Floor, Block C, FTC Building, Shahrea Faisal, Karachi. Phone # 5630950-51, Fax Number: 5630939-40

Pak Brunei investment Company Limited

1st Floor, Tower A, Finance & Trade Centre, Sharea Faisal, Karachi, Phone #: 021-5631033 Fax Number: 021-5631025

Pak Oman Investment Company Limited

1st Floor, Tower A, Finance & Trade Centre Shahrea Faisal, Karachi, Phone #: 021-5630960, Fax Number: 021-5630961

Pak Iran Joint Investment Company

Nos. 507-508, 5th floor, Progressive Plaza, Beaumont Road, Civil Lines, Karachi Phone #: 021-5638590-1, Fax #: 021-5638589

Saudi Pak Industrial & Agricultural Investment Company Limited

19th Floor, Saudi Pak Tower, 61/A Jinnah Avenue, Blue Area, Islamabad Phone #: 051-2800314-15, Fax #: 051-2800308

Pak Libya Holding Company Limited

5th Floor, Block C Finance & Trade Centre Shahrea Faisal, Karachi. Phone #: 021-5630630 & 5630666, Fax Number: 021-5630654

Pak-China Investment Company Limited

Camp Office, House No. 7-C, Street No. 23, F-8/2, Islamabad. Phone #: 051-8438042, Fax #: 051-8318060-1

Islamic Banks

Meezan Bank Limited 2nd Floor, PNSC Building, M. T. Khan Road Karachi, Phone #: 021-5610677,Fax #: 5610676

BankIslami Pakistan Limited

11th Floor, Executive Tower, Dolmen City Marine Drive, Block-4, Clifton, Karachi Phone #: 021-537979, Fax #: 021-5379796

Albaraka Islamic Bank B.S.C. (E.C.)

PICIC Building, 4-Shahrah-e-Aiwan-e-Tijarat Lahore, Phone #:042-6362566, Fax #: 6309965

Emirates Global Islamic Bank

Hotel Arcade, Sheraton Hotel & Towers Club Road, Karachi. Phone #: 021-5633392 & 5633409, Fax Number: 021-5633427

Dawood Islamic Bank Limited

2nd Floor, Trade Centre, I. I. Chundrigar Road, Karachi, Phone #: 021-2272440, Fax #:2272465

Dubai Islamic Bank Pakistan Limited

Hassan Chambers, 3rd Floor, Plot DC-7, Block-7, Kehkashan Clifton, Karachi Phone#: 021-5368556, Fax #: 021-5821071.

Source: SBP, 2008


200

Appendix-III Definition of Terms

Riba: Any excess amount or benefit (than principal amount) given by the debtor for debt or kind

Sharia’h: A set of instructions consists of the Holy Quran, Sunnah, Ijmah and Qiyas

for every walk of life. Ijtihad: Consists upon Ijmah and Qiys to innovate banking products according to

instructions of Islam. Mudarib: Partnership deed between investor and bank to provide competency &

skills to share profit/ loss. Ummah: All believers of the holy prophet Muhammad (Peace be upon him) also

called Muslims. Musharka: A partnership agreement in which all partners contribute capital and work

to share profit/loss. Mudaraba: A partnership agreement in which some partners contribute capital and

others contribute their competencies to share profit or loss according to an agreed ratio.

Ijarah: A lawful consideration as rent for hiring an asset or reward for hiring

services Condition: Thus any excess given by the debtor out of his own accord and without the

existence of a custom or habit that obliges him to give such excess is not considered as riba.

Sadaqaat: Charity, which is given exclusively for sake of blessings of Allah

Almighty without any consideration. Salam: A contract in which bank made advance payment for goods/services to be

delivered at future date Istisna: A contract of credit sale that allows future payment for manufacturing

goods for future delivery Muajjal: A financing contract in which bank purchase goods to be sold to customer

by showing the purchase price and profit margin. Qarz/Qarz-e-Hasna: A debt, which is given without any interest or benefit to meet the

financing need. Diminishing Musharika: A partnership deed in which one party (banker) transfers

(partnership) share to the other party (customer) with the passage of time.


Appendix-IV Results of VPLS for Islamic Banks

Correlation of Latent Variables

Construct/Variables Tgty Rlty Rspv Asnc Epty Slty Csrv Helmt Smdlv TgSv Slrby Crsn Iprfc

Tgty 1.000

Rlty 0.520 1.000

Rspv 0.476 0.728 1.000

Asnc 0.483 0.674 0.691 1.000

Epty 0.466 0.740 0.700 0.729 1.000

Slty 0.605 0.885 0.864 0.862 0.885 1.000

Csrv 0.535 0.702 0.675 0.618 0.710 0.781 1.000

Helmt 0.524 0.725 0.716 0.711 0.784 0.839 0.799 1.000

Smdlv 0.416 0.630 0.595 0.639 0.705 0.736 0.727 0.764 1.000

TgSv 0.552 0.655 0.610 0.626 0.689 0.764 0.775 0.757 0.749 1.000

Slrby 0.392 0.668 0.607 0.607 0.695 0.726 0.698 0.711 0.678 0.757 1.000

Crsn 0.546 0.759 0.720 0.718 0.804 0.864 0.905 0.904 0.876 0.906 0.860 1.000

Iprfc 0.098 -

0.003 0.019 0.029 0.034 0.030

-0.084

0.012 -0.044 -

0.018 -

0.006 -

0.033-

0.033

Results of VPLS for Conventional Banks Correlation of Latent Variables

Constructs/Variables Tgty Rlty Rspv Asnc Epty Slty Crsn Csrv Helmt Smdlv TgSv Slrby Cprfc

Tgty 1.000

Rlty 0.474 1.000

Rspv 0.437 0.690 1.000

Asnc 0.442 0.691 0.715 1.000

Epty 0.445 0.638 0.715 0.697 1.000

Slty 0.594 0.857 0.880 0.867 0.850 1.000

Crsn 0.453 0.648 0.693 0.673 0.679 0.777 1.000

Csrv 0.426 0.571 0.620 0.587 0.598 0.698 0.869 1.000

Helmt 0.417 0.615 0.668 0.654 0.691 0.742 0.930 0.756 1.000

Smdlv 0.383 0.565 0.622 0.607 0.597 0.690 0.906 0.729 0.826 1.000

TgSv 0.403 0.591 0.596 0.610 0.591 0.697 0.900 0.720 0.806 0.765 1.000

Slrby 0.401 0.567 0.606 0.565 0.570 0.663 0.887 0.685 0.791 0.752 0.758 1.000

Cprfc -

0.0580.055

-0.020

0.053 0.069 0.025 0.062-

0.0030.088 0.043 0.053 0.103 0.103

Islamic Banking

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