Thesis Islamic Banking in Pakistan
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CHAPTER 11. INTRODUCTIONThere has been large scale growth in Islamic finance and banking in Muslim countries around the world and especially in Pakistan, during the last twenty years. There main objective has been the delivery of social and economic development through financial services in line with Islamic teachings.This study looks into the degree of satisfaction of Pakistani customers to measure the level of success achieved by Islamic Banks.
Islamic banks have grown dramatically in Pakistan over the years.This growth is influenced by factors including the introduction of broad macro economic and structural reforms in Islamic banking, the liberalization of capital movements, privatization, the global integration of financial market and the introduction of innovative and new Islamic products. Islamic finance is now reaching a new level of sophistication. However,it is the customers satisfaction that can affect the performance of a bank and could be a major tool for the judgement of the success. (Jarhi, Mabid Ali, Khurshid Ahmed (1981).Islamic banking has come a long way in a relatively short time and has captured a significant market share from its conventional rivals. Although most of the countries have different Islamic background but they are the major players for revolutionised Islamic financial institutions. The Islamic Banking concept began in Pakistan in the early 1950, where the economists were very keen on the ideology of Islamic banking. Pakistan was the first country to go through full Islamic financial system. The development of full Islamic financial system was Pakistan, Iran and Sudan.The customers of Islamic banks in Pakistan have mixed views about the success and services provided due to a number of reasons e.g. after twenty years the picture changed when leaders realized that Pakistan inherent by British Financial system that should not be changed. Pakistan was trying to change too quickly. But unfortunately it was under the power of British legacy, without its independence and freedom. The first phase of economic reform tooks place in 1979 when zakat was first deducted from different account holders at a certain percentage. This method was not effective, because it is not Islamic that Zakat is distributed through banks. Another objection is that , it is debateable whether the money deducted goes to deserving people, and whether it is effective or not for alleviating poverty . (Aggarwal and Yousaf (2001);Kazarian 1999 and Ray 2002).Pakistan was the first country that uses Hisbah, which controls the market which provides municipal services and settles disputes. In the second phase of Islamic finance, the Pakistan Government outlawed interest and introduced brotherly and godly ways for generating profit. Ironically, foreign banking transaction is still working in western systems. The government was trapped due to its beliefs and culture. This problem further increased when IMF pressured Pakistan to privatize its banking system. Due to a system that lacked planning, these matters got worse in 1992, when the Federal Shariah court declared that interest based banking is not Islamic and would be banned. Finally, in 1998, a decision took place to eliminate riba from its banking system. The Pakistan Banking model teaches us that, interest free banking employ PLS as a source of earning , but it is not functional that 90% of its transactions are locked by its markup. In this way it raises question that the Islamic Banking system created many problems, and only businessmen took new benefits from this model. Therefore this experiment did not achieve its result. (Ahmed, Z., M. Iqbal and M. F. Khan (2001).
Since 1971, Islamic banks have continued to grow in size and number.The main mission of these banks has been the achievement of social and economic development through the delivery of financial services in line with the principles and teachings of Islam. To achieve their mission, it is imperative for Islamic banks to continue to study the changing behaviour, attitude and perceptions of their customers, especially in the retail sector which constitutes the major portion of the banking business. Overlooking differences between cultures has recently been shown to limit the ability of service multinationals to expand their activities internationally (Kogut and Singh, 1988; Li and Guisinger, 1991, 1992). Furer et al. (2002) argue that the importance and perception of service quality are highly dependent on customers values and beliefs that might change from one culture to another. This dependence has led to increased concern about the relationship between national culture and service quality. Winsted (1997) developed behavioural-based service encounter dimensions for the USA and Japan and identified cultural differences between Western and Asian customers.Customer satisfaction is the feeling or attitude of a consumer toward a product/service after it has been used (Solomon, 1996; Wells and Prensky, 1996). A satisfied consumer will repeat the purchase of the product and convey positive messages about it to others (Dispensa, 1997). By contrast, dissatisfied consumers are more likely to switch to an alternative product/ service the next time he/she recognizes the same need. Not only this, but also his/her dissatisfaction will be reflected in a negative word of mouth which might have a serious damaging effect on the business (Gulledge, 1996). Banking is one of those industries in which consumer satisfaction has attracted the attention of many researchers (for example, Anderson et al., 1993; Bedall and Power, 1995; Brenhardt et al., 1994; Dispensa, 1997; Holliday,1996; Wells and Prensky, 1996; White, 1994). One of the major reasons is that a fiercer level of competition is becoming the most influential factor in determining the competitiveness of banks (Bartell, 1993; Haron et al., 1994). Customer satisfaction is becoming so important to the extent that some banks consider it as a chief element in their marketing strategies. The term "aftermarketing" has been widely used to mean focusing attention and efforts on current customers in order to maximize their satisfaction to secure their retention (Vavra, 1995).The issue of customer retention has been the major concern of many banks. For example, Lloyds Bank (UK) conducted research to identify the process leading from customer satisfaction to account closure and to explore the determinant factors of dissatisfaction. The findings of the study helped Lloyds to design and implement a new customer retention process (Waterhouse and Morgan, 1994). Like Lloyds Bank, the National Bank of Middlebury (USA) also developed a quality service program based on customer retention through service quality. Similarly, the Royal Bank of Scotland uses customer satisfaction to help plot the course toward its vision for the future. The bank is concerned about profitable customer behavior in terms of the remaining with the bank, referring the bank to friends, and repurchasing from the bank (IJRDM, 1995b).
In this chapter the researcher provides a clear definition regarding the issues that should be investigated in this study for achieved its aims and objectives. This study is about customer awareness and satisfaction in Islamic Banking in Pakistan. This research achieve its aims through the following objectives. Measuring the degree of customer satisfaction in Islamic Banking in Pakistan. Investigating the reasons that why customers deals with Islamic Banks. Measuring the customer awareness and perceptions for use of different Islamic Banking products/services. Reasons for dealing with both types of BanksAs it can be seen above, the reseacher aims to attempt to provide the assessment of degree of customer satisfaction towards Pakistan Islamic Banking . Therefore, this study is designed to identify the profile and banking habits of Islamic banking customers in Pakistan as well as their awareness, usage, perceived importance and degree of satisfaction with the current products and services offered by them in Islamic banking sector. CHAPTER TWOBACKGROUNDCHAPTER 22.1 BACKGROUND OF ISLAMIC BANKING IN PAKISTANThe Islamization of the banking and financial system of Pakistan was started in 1977-78. Pakistan was among three countries in the world which had been trying to implement interest free banking at a comprehensive/national level. But as it was a mammoth task, the switchover plan was implemented in phases. The Islamization measures included the elimination of interest from the operations of specialized financial institutions including HBFC, ICP and NIT in July 1979 and that of the commercial banks during January 1981 to June 1985. The legal framework of Pakistan's financial and corporate system was amended on June 26, 1980 to permit issuance of a new interest-free instrument of corporate financing named Participation Term Certificate (PTC). An Ordinance was announced to allow the establishment of Mudaraba companies and floatation of Mudaraba certificates for raising risk based capital. Amendments were also made in the Banking Companies Ordinance, 1962 (The BCO, 1962) and related laws to include provision of bank finance through PLS, mark-up in prices, leasing and hire purchase. (Abbas Mirakhor, 1987; Frederick L, Pyor 1985).Separate Interest-free counters started operating in all the nationalized commercial banks, and one foreign bank (Bank of Oman) on January 1, 1981 to mobilize deposits on profit and loss sharing basis. Regarding investment of these funds, bankers were instructed to provide financial accommodation for Government commodity operations on the basis of sale on deferred payment with a mark-up on purchase price. Export bills were to be accommodated on exchange rate differential basis. In March, 1981 financing of import and inland bills and that of the then Rice Export Corporation of Pakistan