Essay: Banking in Pakistan – Islamic and Conventional banking

Pakistan consisting of two banking sectors Islamic and Conventional Banking, (Ahmed, Kashif-ur-Rehman, Saif, & Safwan, 2010) by independence Pakistan used to have only conventional banking sector because inherited from British rule. Pakistan is Muslims dominating country, for practicing Islamic laws in banking it exactly reflect the statement in Pakistan constitution 1973, of barring Riba (Interest) based transactions.
As stated in Article 38(f) of Islamic Republic of Pakistan’s consititution-1973 that ‘Riba (Interest) and its relative transaction will be eliminated as early as possible’ by keeping elimination of Riba (Interest), with the inception of converting economic activities into Islamic law and Shariah basis, and initiate different profit-loss based practices in banking sector, in 1980s. The positive response from Mudarba companies, that were inaugurated in Pakistan and registered in KSE( Karachi Stock Exchange) in 1980, under MCO (Mudarba Companies Ordinance) has provide surface to initiate Islamic banking practices in Pakistan (Awan, 2009), introduce by SBP (State Bank of Pakistan) also looking at growing pace of Islamic banking globally (Ahmed, Kashif-ur-Rehman, & Safwan, March 4, 2011). After independence of Pakistan, private banks were dominated than they nationalized in 1974 and again privatized due to low growth and performance. Before adding the alliance to barred Riba (Interest) based transactions, there was adapted interest based transaction from British, under colonialism; it was dominating system for Muslim societies/countries to avoid this system.
Five Islamic banks (Fully-Fledge) and thirteen Islamic window conventional banks are operating in Pakistan, before 2008 crisis there was six Islamic banks. Well, Pakistan is third country adopted the Islamic practices in banking sector, now holding eighth number in 2013 ranking.
According to (Tribune, 2013), it is phenomenal growth of Islamic banking in Pakistan, 9.7% of total deposit has been deposited in Islamic banks and Islamic window conventional banks, it means each 10 rupees being invested in Islamic banks. Moreover, Rs 837 billion are Islamic asset in Pakistan.
Pakistan’s position rendered more complex by borrowing interest base long term financing from International money lending institutions/government, etc’ for adopting interest free banking system those lender must be satisfied first, yet it does not mean that interest free banking is impossible. People go for profit while availing interest based investment, in same way profit could be gain by investing in Islamic products like Musharqa, Mudarbaha, Murabaha etc’ the world may take a lead and start interest free banking system.
1.1 The problem and its setting
Customers, usually sets their standards according to what they expect about services, but banks are delivering different from customer’s expectations. Banks are mostly unaware about what customers perceive and expect about their service quality should be. This study finds the gap of customers in perceiving and expecting, that would be helpful for banks in delivering services.
1.2 Premise for the study
With the help of result of this study, both types of banks will take market competitive strategic decision according to the customer’s expectation and perception, as this study measuring the service quality gap that mostly exist because of not delivering service quality as customer expect. Moreover, this expectation on different dimension that lead customer to choose either Islamic bank or conventional bank, it depends where customer meet his/her need. This study is helpful in strategic planning to satisfy customer under different dimensions of SERVQUAL.
1.3 Gap in the Literature.
The knowledge of the banking products is very important for both the providers and customer. The customers must know whether the products and services are right for them, while its duty of providers to educate the customers about their products and services in order to have revenue and to be sustainable in the future.
1.4 Broad problem area.
Although there are many concepts and designs of service quality applicable to both products and services, it can be argued in demand of services when compared to products. The nature of services is basically intangible and not storable. This implies better improvement strategies. Quality of goods can be measured objectively by indicators as durability and numbers of defects. Services are the performance rather than objects therefore quality can rarely be measured, inventoried, tested and verified in advance of sale to assure quality. Customers often look for signs of quality and services. It is often complicated to reproduce a service constantly and exactly the same (Ghobadian et al., 1994:45).
1.5 Contribution of the study.
Convenience, Reliability, and Competence are most important dimensions on which banks should keep the consideration. Customers mostly expect more about response from bank employee in delivering service and convenience, as more of young respondents are looking for internet and mobile banking rather ATM, and professionals and executives are mostly transacting in high amount so they go for direct interaction with bank service provider, and customers also expect for attention and quick response from employee. By considering this result they could get the competitive strategic planning.
1.6 Criteria for selecting the target industry/population.
The population selected in this study is customer living in twin cities of Pakistan and its industrial sector.
1.7 Introduction of the target Company/sector.
Islamabad being a capital city consisting of many educated and professional individuals, along with an influx of individuals from Rawalpindi, Therefore all the Banks have branches in the twin cities. Major part of industrial is operating in these cities, along with their field areas spread across the country. To evaluate the services of Conventional and Islamic banks, result will be suitable of this location. The unit of sample in this study is all the bank customers whether they are using Islamic or Conventional banking.