barriers to adoption of islamic banking in pakistan

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Barriers to adoption of Islamicbanking in Pakistan

Irfan ButtSuleman Dawood School of Business,

Lahore University of Management Sciences, Lahore, Pakistan

Nausherwan Saleem and Hassan Ahmed Lahore University of Management Sciences, Lahore, Pakistan

Muzammil Altaf Lahore University of Management Sciences, Lahore, Pakistan and

Altaf and Sons Publishers, Karachi, Pakistan

Khawaja Jaffer Lahore University of Management Sciences, Lahore, Pakistan, and

Jawad Mahmood Lahore University of Management Sciences, Lahore, Pakistan and

Millennium Industries Pvt Ltd, Lahore, Pakistan

AbstractPurpose – The purpose of this paper is to report the ndings of a pilot study conducted in Pakistan,about the barriers perceived by users and non-users of Islamic banking when selecting Islamic banks.Design/methodology/approach – This study was conducted to include two types of bankingcustomers, users (customers of Islamic banks only and, Islamic and conventional banks both) andnon-users (customers of conventional banks only). The qualitative research included in-depthinterviews with managers of Islamic banks and two focus groups with users and non-users,respectively. The survey questionnaire that was subsequently designed received 109 responses.The analysis includes hypothesis testing, factor analysis, and cluster analysis.Findings – A narrow branch network, inconvenient branch locations and perception that “Islamicbanks do not completely follow Islamic principles” acted as barriers for non-users when selectingIslamic banks. Further, “a religious ruling against Islamic banks” was not considered an importantbarrier when selecting Islamic banks.Originality/value – This research outlines an alternative methodology of looking at bank selectioncriteria, by measuring the other side of the coin, i.e. the barriers perceived by users and non-users of Islamic banking when selecting Islamic banks. Compared to the prevailing literature on the subject,such an approach is enlightening and can have enormous potential as it directly measures theperceived barriers towards Islamic banking. Furthermore, this pilot study is also an importantcontribution to the limited literature on consumer attitudes towards Islamic banking in Pakistan,

where the operations of Islamic banks are still in their formative stage.Keywords Pakistan, Islamic banking, Consumer perception, Barriers, Branch network,Islamic principles, Consumer behaviour, Islam

Paper type Research paper

1. IntroductionWith the rapid growth of the global economy along with the expanding economy of Islamic countries, Islamic banking is evolving to play a vital role in the world.

The current issue and full text archive of this journal is available atwww.emeraldinsight.com/1759-0833.htm

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Journal of Islamic MarketingVol. 2 No. 3, 2011

pp. 259-273q Emerald Group Publishing Limited

1759-0833DOI 10.1108/17590831111164787



Exponential growth in the last decade has resulted in Islamic banks’ expansion inover 53 countries with a total of 400 banks.

In Pakistan, Islamic banking started with the prohibition of Riba (interest) in 1970,with most of the practical steps taken in 1980. It is estimated that total assets of theIslamic banking industry will reach over Rs 1 trillion by the year 2012. The branchnetwork is expected to exceed 1,200 branches in ve years. The deposits are expectedto reach about Rs 1 trillion. In combination with the introduction of new sectors into thefold of Islamic banking, i.e. Islamic micronance and agriculture services, it isprojected that the Islamic banking industry will capture a 12 percent share of the totalbanking industry in the year 2012 (State Bank of Pakistan, 2008).

An underlying basis of operations and services differentiate the Islamic bankingsystem from the conventional banking system. According to the State Bank of Pakistan, Islamic banking is dened as a banking system which is in consonance withthe spirit, ethos and value system of Islam and governed by the principles laid down byIslamic Shariah . Interest free banking is a narrow concept denoting a number of banking instruments or operations which avoid interest. Islamic banking is structurednot only to avoid interest-based transactions prohibited in Islamic Shariah but also tocircumvent unethical and un-social practices. In a practical sense, Islamic banking isthe transformation of conventional money lending into transactions based on tangibleassets and real services.

According to Islamic Shariah , Islamic banking cannot deal in transactionsinvolving Riba (an increase stipulated or sought over the principal of a loan or debt).Furthermore, they cannot deal in the transactions having the element of Gharar (deception) or Maiser. Moreover, they cannot deal in any transaction, the subject matterof which is invalid ( haraam in the eyes of Islam). Islamic banks focus on generatingreturns through investment tools which are a Shariah compliant. Islamic Shariah linksthe gain on capital with its performance. Operating within the ambit of Shariah , the

operations of Islamic banking are based on sharing the risk which may arise throughtrading and investment activities using contracts of various Islamic modes of nance(State Bank of Pakistan, 2008).

The client base of any nancial institution plays a pivotal role in determining itssuccess. Customers require personalized services and full knowledge in order to ensurethat their wealth is invested in a safe manner. Thus, it becomes vital for all nancialinstitutions to have adequate knowledge of consumer perceptions regarding productsand services in order to effectively achieve market growth. Most of the research onunderstanding consumer’s perceptions of Islamic banks investigates bank selectioncriteria of consumers. However, there is hardly any study which explores the barrierswhich prevent or discourage consumers from adopting Islamic banks. This paperattempts to achieve a better understanding of consumer perceptions by studying thebarriers, in order to help Islamic banks utilize potential opportunities throughmarketing strategies.

There has been limited research in Pakistan on consumer perception of Islamicbanks. A review of literature on Islamic banking from across different countries hasshown that diverseeconomic conditionsplay an important role in determining consumerbehavior. Hence, research done on Islamic banking in different countries may notnecessarily apply to conditions present in Pakistan. Both of these factors contribute tothe underlying motivation to research in greater detail on consumer perception with

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regard to Islamic banks in Pakistan with the intent of providing greater knowledge toconsumers as well as Islamic banks.

2. Literature reviewThere has been considerable research in the area of consumer perception and Islamicbanking all over the world. Specic research studies pertinent to our study includeresearch done on bank selection criteria and customer awareness and satisfaction withrespect to Islamic banks. Popular research carried out in this eld includes work doneby Khattak and Rehman (2010) in Pakistan, Erol and El-Bdour (1993) in Jordan, andDusuki and Abdullah (2006) in Malaysia.

In Bahrain, Metawa and Almossawi (1998) conducted a study on bank selectioncriteria which identied factors that affected consumer behavior and bank selection.They pointed out that the religious factor was the most important determinant of bankselection followed by rate of return.

A more recent study in Bahrain by Al-Ajmi et al. (2009) highlighted the exact

standing of religious motives in the bank selection criteria. Al-Ajmi et al. (2009) explainthat previous studies of Almossawi (1998) faced certain limitations and authors triedto address those limitations by introducing ve different factors involved in bankselection criteria. The study concluded that across all three sub-samples of users of Islamic banks, users of conventional banks and users of both Islamic and conventionalbanks, the three most important motives for bank selection were “service quality,friendly personnel, and competent personnel”.

Similarly, a number of studies have been conducted to consider economic factors forbank selection criteria for traditional banks. Gait and Worthington (2008) outlined thatcustomers for traditional banks consider protability factors such as low servicecharges and higher returns to be one of the most important factors in their decision.

Bank selection criteria and reportedunderlying factorshave appeared to differ across

conventional and Islamic bank users, across countries and demographic characteristics.This can be seen clearly from the difference in ndings reported by a variety of researchstudies.

Apart from bank selection criteria, there has also been research conducted oncustomer awareness of Islamic banking basis and products and services offered bythem. In Pakistan, around 68 percent of the respondents knew about the basic serviceslike current account and saving accounts. However, they knew little about productssuch as Ijara, Musharkah , etc. (Khattak and Rehman, 2010). Gerrard and Cunningham(1997) conrmed the same in a study carried out with Muslims living in Australia,which was later also conrmed by Rammal and Zurbrugg (2007). On the other hand,in Jordan, results showed that a high proportion of respondents were aware of Islamicnancialproducts and in addition, were not only using conventional products in Islamicbanks, but also knew about key Islamic Banking terms (Naser et al., 1999).

3. Qualitative research3.1 Design and methodologyFor the purpose of qualitative phase of the research, two different sources of data wereconsidered. First, in-depth interviewswere conducted with Islamic bank experts, in orderto nd out more about the banks’ own perspective about what customers feel aboutIslamic banks and to better gauge their banking preferences and attitudes. The aim was


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also to identify andexplore areas thatwouldbeconsidered fordiscussionsubsequentlyintheresearch.Second, twosets of focus groups were conducted – onewith users of Islamicbanks and other with users of conventional banks, to reveal the varying differences of opinion that exists between users and non-users of Islamic banks to form the primarybasis for the questionnaire development. Two major areas of measurement wereidentied for further research. First, customers’ awareness regarding factors such as theunderlying principles of Islamic banking, products and services, the risk and returncharacteristics and cost and benet analysis, societal impact, and marketing by Islamicbanks was gauged. Second, the research enriched our understanding of customers’ bankselection criterion for the above-mentioned factors. Within this, the barriers towardsIslamic banking faced by non-users and the motivations for users were also considered.

3.2 Findings of qualitative researchIt was generally found that there were wide differences in the opinion of users andnon-users in the focus groups. Also, non-users exhibited a lower level of awareness of Islamic bank products and services. However, when asked about the basis of Islamicbanking in Islam, users and non-users both were keen to point out Riba (interest) as theunderlying basis.

Differences in opinions emerged where people were asked whether they believethe present system to be Islamic or not. Users saw the current system to be a mereturn-around of the conventional system. General awareness of the risk and returncharacteristics of Islamic banks was also relatively low among users and non-users.

Some of the key ndings that emerged from the qualitative research and had notbeen considered before were as follows:

. Managers of Islamic banks were generally aware of the problems faced by usersas these were echoed by the users in the focus groups.

. Non-users pointed out “ambiguity” in products and transactions as a barrier inselecting Islamic banking along with multiple religious rulings regarding Islamicbanking.

. The societal impact of Islamic banks was generally well known. However, it wasnot considered as an important factor for bank selection.

. Non-users pointed out the need to improve marketing methods for Islamic banksto successfully increase market share.

. Complex transaction procedures of Islamic banks were also seen as a majorbarrier by non-users when selecting Islamic banks.

4. Research questionsBased on the results and ndings of the qualitative research, it was decided to rene theresearch objectives and incorporate thewide varietyof opinions to include the following:

. to investigate the barriers that users and non-users face when selecting Islamicbanking;

. to understand the users’ and non-users’ understanding of the underlyingprinciples of Islamic banking; and

. to understand the users’ and non-users’ perception of the extent to which thecurrent Islamic banking system is following Islamic principles.

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5. Quantitative research5.1 The instrument A questionnaire was designed to collect data from the target population. Special carewas taken to omit the use of the word, “barrier” in the questionnaire to remove anypotential biases in responses. The questionnaire was structured into two major sections.

The rst section aimed at gathering basic information about the respondent such asage bracket, income bracket, gender, marital status, type of bank used, Islamic banks’products used if any, and the duration of banking experience. The second sectionconsisted of six questions, each with their own objective. The rst question aimed atgathering an insight into what users and non-users of Islamic banks perceived to be theunderlying basis of Islamic banking. The second question aimed at measuring,on a scale of 1-10, the extent to which Islamic banks are following Islamic principles.Questions 3 and 5 measured, on a ve-point Likert scale, ranging from “stronglydisagree” to “strongly agree”, the “level of agreement” that users and non-users havetowards carefully constructed statements depicting Islamic banks’ current situation.Questions 4 and 6 measured, on a ve-point Likert scale, ranging from “not importantat all” to “extremely important”, the “level of importance” that users and non-usersattach to the aspects mentioned in questions 3 and 5. The rationale for such a divisionwas to identify important barriers towards Islamic banking. For example, if a non-userstrongly disagrees with the statement that Islamic banks are currently completely Riba-free and rates this factor as extremely important for selecting Islamic banks, then,it can be considered as a barrier for that non-user.

After designing the questionnaire, it was pre-tested with a pilot sample of veparticipants. The method used for pre-testing was participative pre-testing wherebythe participants were asked to not only ll the questionnaire but also suggest possibleproblems with the phrasing of the questions and statements in order to bring greaterclarity and ease of understanding for the respondents. Once pre-testing was completed,

the questionnaire was amended in light of the suggestions received from pre-testingparticipants. The nal sample that was selected did not include participants from thepilot sample.

5.2 The sampleThe survey was administered in December 2010, and was distributed by the authors towalk-in customers at 20 branches of Islamic and conventional banks, including Islamicbank windows in Lahore. The branches were selected using random sampling, out of asampling frame including900 branches of banks. In thebranches themselves, systematicsampling was used such that a questionnaire was given to every third customer enteringthe branch premises and respondents were asked to ll the questionnaire on the spot.

The number of responses received in this manner came out to be 109, out of which12 questionnaires were discarded due to missing information. The nal sample,therefore, of 97 responses, consists of 45 non-users of Islamic banks, and 52 users of Islamic banks. The latter category also includes those customers which are currentlyusing the services of both conventional as well as Islamic banks. Although the focusof the study is to gauge what barriers non-users face when selecting Islamic banks,users of Islamic banks were included in the sample in order to nd the basis fordifferentiation and to check the differences in level of agreement about currentIslamic banking system, and the difference in level of importance attached to these


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aspects of Islamic banking. The aim was to extract the opinion of non-users and theexperience of users.

Within the sample, 74.2 percent of the respondents were male and 21.6 percentwere female. The majority of the respondents (54.2 percent) fall within the ages 26-40,while nearly 26.8 percent fell within the 18-25 years of age category. Almost 52.6 percentof the respondents were married, with 36.1 percent single, and the remainingconstituting of missing values. Almost 81.4 percent of the respondents earn less thanRs 100,000 per month, while a small amount of respondents earn more than Rs 100,000per month. The majority of the respondents (51.5 percent) hold at least a Masters or aPhD degree, while 34 percent hold a bachelors degree.

5.3 Results and analysis5.3.1 Underlying principles of Islamic banking . The instrument was constructed in away to rst test the “top of mind” awareness of users and non-users regarding theunderlying principles of Islamic banking and then ask them to rate, on a scale of 1-10,

to what extent these underlying principles are currently being followed by the Islamicbanking industry.The results showed that both users and non-users agreed on the fact that Riba-free

banking was the most important principle of Islamic banking. Investment in Halal businesses was the second most important principle as viewed by users and non-users,both. Further, equal distribution of wealth and prot and loss sharing appeared thenext in importance as part of the underlying principles.

Surprisingly, only 60 percent of non-users (28 out of 45) marked Riba-free bankingas an underlying principle of Islamic banking as compared to 90 percent of users(46 out of 52) who marked Riba-free banking as an underlying principle. This maysignify the lack of understanding of the concept of Riba and how it is being used inconventional banking.

Further, on a scale of 1-10, the users and non-users rated that Islamic banking isfollowing Islamic principles at an average of 5.75 and 4.88, respectively. This ratingsuggests that on average people perceive that Islamic banking is moderately followingIslamic principles. In order to check the difference in the means of users and non-users,an independent samples t -test was conducted on a 95 percent signicance level.It suggested that there was no statistically signicant difference in opinion of bothusers and non-users whether Islamic banking is following Islamic principles.

5.3.2 Factor analysis . As previously mentioned, the instrument was designed in away to check the users’ and non-users’ “level of agreement” and “level of importance”regarding various aspects within Islamic banking. The “level of agreement” depictedthe current situation of certain aspects, as perceived by the users and non-users,in Islamic banking and the “level of importance” showed the importance of theseaspects when consumers select Islamic banking.

Principal component analysis with orthogonal (varimax) rotation was selected toreduce the number of factors while the eigenvalue having a value of more than one wasset as the criterion used indetermining the number of factors. Factor analysis wasrun onboth “agreement” and “importance” category separately. Various unloaded and invalidvariables were discarded during the several runs of principal component analysis. Thefollowing rotated component matrices will show the identied factors in both categorieswhich validly explain the communality within the variables of a particular factor.

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Table I shows the factors identied under the “level of agreement” category. Table IIshows the factors identied under the “level of importance” category.

Three factors were successfully identied in both the categories. The factors aregiven below:

(1) Level of agreement:. services currently offered by IB;. Islamic principles which IB currently follow; and. branch network of IB.

(2) Level of importance:. services preferred by customers;. Islamic principles which IB should follow; and. IB should have wide branch network with convenient locations.

Level of agreement inServices Islamic principles Branches

IB offers tele-banking 0.873IB offers internet banking 0.846IB offers online fund transfer 0.778IB offers SMS banking 0.741IB offers ATM – 1Link/Mnet 0.716IB invests in Halal businesses 0.886IB is completely Riba-free banking 0.880IB promotes equal distribution of wealth 0.706IB has conveniently located branches 0.885

IB has a wide network of branches 0.815Notes: Extraction method: principal component analysis; rotation method: varimax with Kaisernormalization; IB, Islamic Bank

Table I.Factor loadings for the

three factors in the“agreement” category

extracted using principalcomponent extraction

and orthogonal rotation

Level of importance of Services Islamic principles Branches

Internet banking 0.910Tele-banking 0.896SMS banking 0.873ATM – 1Link/Mnet 0.809

Online funds transfer 0.738Investment in Halal businesses 0.885Completely Riba-free banking 0.877Equal distribution of wealth 0.813Conveniently located branches 0.885Wide network of branches 0.860

Notes: Extraction method: principal component analysis; rotation method: varimax with Kaisernormalization

Table II.Factor loadings for the

three factors in the“importance” category,

extracted using principalcomponent extraction

and orthogonal rotation


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The factors identied in the agreement category (Table I) explain around 69.3 percentof the total variance. Of the variance explained, these factors explain 32.4, 21.4, and15.6 percent, respectively.

The factors identied in the importance category (Table II) explain around76.2 percent of the total variance. Of the variance explained, these factors explain36.8, 23, and 16.3 percent, respectively.

In both the categories, services was considered as the most important factor inexplaining the total variance. Islamic principles were the second most important factorand highlighted the three most important underlying variables which dene Islamicprinciples behind Islamic banking. Lastly, branch proximity and network coupled intoan important factor, branches, which highlighted the customer need of accessibility forthe Islamic banking industry.

In order to check the internal consistency and reliability of the variables within eachfactor, the Cronbach’s a values were calculated. For the agreement category of factor,they were found to be 86, 77, and 70 percent for services, following of Islamic principlesand branches, respectively. Similarly, for the importance category, the Cronbach’a values came out to be 91, 84, and 73 percent for services, following of Islamicprinciples and branches, respectively. Since all of the Cronbach’ a values came out tobe greater than 70 percent, the variables within each factor were considered reliableand internally consistent.

5.3.3 Hypothesis statements and explanation . In order to reach some conclusiveresults from the research, a number of hypothesis statements were generated in order totest them through statistical techniques. Broadly speaking, the hypotheses aim to testthe differences that exist between users and non-users’ perceptions regarding Islamicbanks. In addition, they will reveal which of the factors can be considered as barriers bynon-users towards Islamic banking. The following alternative hypotheses were formed,based on ndings of the qualitative research and the overall research objective

(the hypotheses were paired together to measure the same factor using the twodimensions of level of agreement and the level of importance attached to that factor):

H1a. There is a difference in the level of agreement about the extent of servicesoffered by Islamic banks, between users and non-users of Islamic banks.

H1b. There is a difference in the level of importance that users and non-users attachto services offered by Islamic banks.

H2a. There is a difference in the level of agreement that users and non-users haveabout the extent to which Islamic banks are following Islamic principles.

H2b. There is a difference in the level of importance that users and non-users attachto following of Islamic principles by Islamic banks.

H3a. There is a difference in the level of agreement that users and non-users havetowards Islamic banks’ branch locations and network.

H3b. There is a difference in the level of importance that users and non-users attachto Islamic banks’ branch location and network.

H4a. There is a difference in the level of agreement about the presence of religiousrulings against Islamic banks between users and non-users.

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H4b. There is a difference in the level of agreement that users and non-users attachto the presence of religious rulings against Islamic banks.

Apart from the tests of the above hypotheses, further analysis was also conducted on

other variables which is covered Section 5.3. The results of testing of H4a and H4b canalso be found in Section 5.3.5.5.3.4 Hypothesis testing . To identify importance barriers towards Islamic banking,

the hypotheses stated in the previous section were tested by comparing the differenceof the means for users and non-users, using the independent samples t -test at 95 percentsignicance level.

It was seen that the users of Islamic banks agree to a reasonable degree that Islamicbanks are offering ATM/1-Link, internet banking, tele-banking, SMS banking andonline fund transfer services (with a mean of 3.89 out of 5) and consider them veryimportant (with a mean of 3.85 out of 5). Non-users agree to a slightly lesser degree,compared to users, that Islamic banks are offering these services (with a mean of 3.59)and attach slightly greater level of importance to them (with a mean of 3.97). Hence,

comparing the means for level of agreement and level of importance for non-users,we can see that services could be a plausible barrier for non-users. We can test thedifference between users’ and non-users’ means to conrm this. For H1a , it was foundthat the difference in level of agreement between users andnon-users about the extent of services offered by Islamic banks was statistically insignicant. Similarly, for H1b , thedifference in level of importance attached to services offered by Islamic banks, was alsoseen to be statistically insignicant. Hence, the major nding from these hypothesespoints to the fact that since, there is no differentiating factor between users’ andnon-users’ attitudes and preferences towards Islamic banks’ services, hence the servicesoffered by Islamic banks cannot be a barrier for non-users for selecting Islamic banks.

Users of Islamic banks consider Islamic banks to be following Islamic principles to areasonable degree (with a mean of 3.48 out of 5) and attach a high level of importance tothis factor for selection (with a mean of 3.76 out of 5). However, for non-users it wasfound that the mean for level of agreement was less (2.96 out of 5) while the mean forlevel of importance for this factor was higher (3.94 out of 5), compared to users. Again,we can test the difference for level of agreement and level of importance between usersand non-users to conrm whether this is a barrier for non-users. For H2a , it was foundthat the difference in the level of agreement between users and non-users about theextent to which Islamic banks are following Islamic principles was statisticallysignicant. In the case of H2b , the difference in the level of importance attached to thisfactor was statistically insignicant. This has an important interpretation for theresearch. Since users agree to a greater extent that Islamic banks follow Islamicprinciples, compared to non-users, and the difference is statistically signicant, andsince they both attach the same level of importance to this factor, hence it can bereasonably judged that non-users perceive this to be a barrier towards Islamic banking.

For the branches’ factor, users of Islamic banks agree to a reasonable degree (witha mean of 3.52 out of 5) that Islamic banks have branches in convenient locations and awide branch network, and attach a reasonable level of importance to this factor (with amean of 3.51 out of 5). However, for non-users, it was seen that the mean is considerablylower for level of agreement (with a mean of 2.52 out of 5), while there is not muchdifference from users in the level of importance attached to this factor (with a meanof 3.31 out of 5). Therefore, H3a was similarly tested and it was found that the difference


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in level of agreement users and non-users have about the convenience of branchlocations and width of branch network is statistically signicant. After testing H3b , thedifference in level of importance attached by both to this factor was statisticallyinsignicant. Hence, it can be said that compared to users, non-users disagreemore withIslamic banks’ having convenient locations and a wide branch network and attach thesame level of importance as users to this factor. Therefore, the branches’ factor can beseen to be an important barrier for non-users towards selecting Islamic banking.

Therefore, from the above discussion, the following of Islamic principles andbranches of Islamic banks have been veried to be important barriers that non-usersface when selecting Islamic banks, while the services offered by Islamic banks wereseen to be unimportant.

5.3.5 Other variables . As mentioned in Section 5.3.2, some of the unloaded variableswere ignored during the analysis. This section would highlight the importance of theseindividual variables and report results of independent tests that were conducted toverify whether these variables act as a barrier or not.

The following variables have critical importance in relation to the Islamic bankingindustry. Some of these variables fall under the banner of criticisms of Islamic banking;while others are seen as important for competition with conventional banks. Thesefactors were:

(1) religious rulings against Islamic banks;(2) risk of loss on deposits for Islamic banks’ customers; and(3) difference in level of returns on deposits compared to conventional banks.

Each of the variables will be seen under the “agreement” and “importance” categoryin order to compare means of each variable under both categories. Furthermore,an independent samples t -test will be administered between users and non-users ineach category. This test will particularly show whether the difference in opinion of users and non-users is statistically signicant or not.

Under the agreement category, we can see that users and non-users were generallyunaware of the religious rulings against Islamic banking with a lower mean of 3.02 and2.82, respectively. However, for both users and non-users “no religious rulings againstIslamic banking” was an important factor when selecting Islamic banking as signiedby a higher mean of 3.48 and 3.63, respectively. Thus, people attaching a neutral opinionabout the prevalence of “religious rulings against Islamic banks” and a relatively higherimportance of “no religious rulings” during bank selection, does notmake this variable aplausible barrier. Furthermore, the t -tests on H4a and H4b also showed that there was astatistically insignicant difference between users and non-users under the “agreement”and “importance” category, when testing this variable. Thus, religious rulings againstIslamic banking are not a barrier for people when selecting Islamic banking.

Furthermore, looking into the “loss on deposits” variable both users and non-usersidentied that either there was a negligible risk of loss or they were uncertain whetherthere would be a loss or not. On the other hand, “no risk of loss” was not a very deningvariable for a consumer when selecting Islamic banking. With statistically insignicantdifference between users and non-users in both categories, we can safely conclude thatpeople were indifferent about loss on deposits. This nding can be backed throughthe fact that State Bank regulations and past performance of Islamic banks has shownno loss on deposits of consumers.

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Lastly, it was seen that both users and non-users rated low on the “returns of Islamicbanks are higher than conventional banks” variable. Furthermore, higher returns thanwith conventional banks was itself not an important criteria when selecting Islamicbanking (3.1 and 3.05). This nding shows that “Islamic banks not having a higherreturn than conventional banks” isnot at all a barrier. However, on the other hand it wasidentied that non-users attached relatively higher importance (3.54) to equal returns toconventional banks and consequently also perceived to some extent that Islamic banksdidoffer an equal return (3.40). With no statistically signicant difference betweenusersand non-users, we can conclude that this variable is not a barrier.

5.3.6 Cluster analysis . In order to classify respondents into groups that are relativelyhomogeneous within themselves and heterogeneous between each other, clusteranalysis was performed to identify possible clusters in respondent population underboth categories of “importance” and “agreement”.

As mentioned before, under the agreement category respondents gave their opinionregarding the current situation of Islamic banking. This basically showed the differentperceptions regarding Islamic banking prevalent in the industry. Similarly, under theimportance category, different consumer preferences were highlighted by the degree of importance they attach to a given variable during bank selection. Cluster analysis wasconducted separately on each of the two categories. Hierarchical Ward’s methodfollowed by K -means clustering was used to identify the distinct clusters within eachcategory. Three clusters were identied under the “agreement” category, where as twoclusters were identied under the “importance” category.

The three clusters identied under the “agreement” category, signied the threeconsumer mindsets regarding Islamic banking, present in the respondent population.Figure 1 will distinguish between each of the three clusters.

Cluster 1 perceives that although Islamic banks are providing satisfactory services,they are not able to follow Islamic principles and provide a wide branch network.

Figure 1.Clusters in level

of agreement category

Cluster 1 Cluster 2 Cluster 30

1

2

3

4

5

Services_A Principles_A Branches_A


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Cluster 2 highlights that Islamic banks are providing exceptional level of servicesand are also adequately following Islamic principles and striving for a reasonablebranch network. Cluster 3 highlights that Islamic banks lack in the provision of services and an adequate branch network, but they have managed to follow Islamicprinciples.

The demographics of these clusters show that the age brackets are widely dispersedwithin clusters 1 and 2, as both have more than 50 percent in the bracket of 26-40, andthe remaining 50 percent is distributed in the other age brackets. However, in cluster3s both age brackets of 18-25 and 26-40 have around 47 percent representation each inthe cluster. There was no signicant difference in the level of education of respondentsin the three clusters as most of them were graduates and post-graduates.

In clusters 1 and 2, 45 and 55 percent of the respondents had incomes belowRs 50,000, where as in cluster 3 more than 77 percent of the respondents had incomebelow Rs 50,000. This can be due to the age distribution of the respondents as most of them might be young professionals.

In clusters 1 and 3, more than 55 percent of the respondents were non-users, whereas in cluster 2 more than 65 percent of the respondents were users. This aspect signiesthe fact that users who are actually using Islamic banking have rated Islamic bankshigh on these three factors, as done in cluster 2.

Under the “importance” category, the two clusters show the level of importancea respondent attaches to each of the factors when selecting Islamic banking(Figure 2)

Figure 2.Clusters in levelof importance category

Cluster 1 Cluster 2

0

1

2

3

4

5

Services _I Principles_I Branches_I

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Cluster 1 represents a set of respondents who attach moderate importance to thesethree factors. Cluster 2 represents a set of respondents who attach great importance tothese factors during bank selection.

Both the clusters had the same distribution in terms of the age of the respondents.However, in cluster 1, 35 percent of the respondents were postgraduates, whereas incluster 2 more than 65 percent were postgraduates. Higher education may be a reasonfor higher levels of importance being attached to each of the factors. Both clustersalmost had the same percentage of users and non-users within them. This could simplymean that there may be two sets of users and non-users, one which attaches immenseimportance to these three factors during bank selection, whereas the otherwhich prefers other factors than these such as higher returns, etc. It would not besurprising to say that more than 65 percent of the respondent population belonged toCluster 2.

6. Research implications and contribution of research towards literature

This study outlines an alternate way of looking at bank selection criteria of customersof Islamic banks, by focusing instead on the other side of the coin, i.e. the barriers facedby non-users towards Islamic banks. Compared to the current literature on the subject,the methodology used in this research is the rst of its kind and could have enormouspotential. In addition, considering the dearth of literature that currently exists aboutIslamic banking in Pakistan, this study would make a signicant contribution inunderstanding the nature of the customer mindset when he makes a decision betweenconventional and Islamic banks.

The ndings themselves have important research implications. First, religiousfactors such as Riba-free banking, investment by Islamic banks in Halal businesses andequal distribution of wealth, and factors specic to branches of Islamic banks, such asconvenient locations and a wide branch network, were seen to be important barriers

that non-users face when selecting Islamic banks. Hence, the management of Islamicbanks should concentrate more on improving the awareness of people regardingunderlying basis of Islamic banking and howthey are following that basis. Second, theyshould also try making their branch network more accessible to the banking customer.Currently, only Meezan Bank in Pakistan has reasonable branch coverage, whilethe rest of the Islamic banks only have a few branches and that too, only in urbancenters.

7. Research limitations and directions for future researchAs mentionedearlier, this research wasconductedas a pilot study andso currently hasanumberof shortcomings thatshould be addressed through further research in thefuture.

First, the sample size of 97 respondents (including both users and non-users)should be extended to include more respondents in order to get more accurate andrepresentative results. Second, respondents from other cities such as Karachi andIslamabad can also be included in the sample so that the results of the study can begeneralized to a greater population. Third, the survey questionnaire was administeredin only one language, i.e. English, due to a lack of time. Therefore, any future researchshould ensure that the survey questionnaire be translated into Urdu to includenon-English speaking population in the sample also. Fourth, currently thoserespondents who use Islamic banks only, and those who use both conventional


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and Islamic banks, were grouped together to form one group; users of Islamic banks.The future research can separate those who use Islamic banks only so that analysiscan be performed on three different groups of people, those who use Islamic banks only,those who use conventional banks only, and those who use both. Fifth, during the courseof the research, it was seen that considerable differences exist in the service quality andbranch network between the Islamic banks in Pakistan themselves. Therefore, furtherresearch can be conducted into how the perceptions of customers vary across variousIslamic banks in Pakistan.

8. Concluding remarksIt was found that most users and non-users perceive Riba-free banking to be theprimary basis for Islamic banks. Users and non-users both also felt Islamic banks to bemoderately following Islamic principles. While considering barriers faced by non-usersof Islamic banks, it was identied that the perception that Islamic banks do not followIslamic principles, constituted a major barrier for non-users when selecting Islamic

banks. Non-users were also dissatised with the branch network and locations of branches of Islamic banks, and hence found them to be a barrier. Moreover, it wasfound that the services offered by Islamic banks were competitive with the bankingenvironment and hence, did not constitute a barrier. Similarly, both users andnon-users felt the same way about religious rulings against Islamic banking, and henceit was found that non-users do not consider them to be a barrier. Other factors such asthe return offered by Islamic banks, and the risk of loss on deposits were also not foundto be important barriers for non-users when selecting Islamic banks.

ReferencesAl-Ajmi, J., Hussain, H.A. and Al-Saleh, N. (2009), “Clients of conventional and Islamic banks in

Bahrain: how they choose which bank to patronize”, International Journal of Social Economics, Vol. 36 No. 11, pp. 1086-112.Erol, C. and El-Bdour, R. (1993), “Attitudes, behavior, and patronage factors of bank customers

towards Islamic banks”, International Journal of Bank Marketing , Vol. 7 No. 6, pp. 31-7.Gait, A. and Worthington, A. (2008), “An empirical survey of individual consumer, business rm

and nancial institution attitudes towards Islamic methods of nance”, International Journal of Social Economics , Vol. 35 No. 11, pp. 783-808.

Gerrard, P. and Cunningham, J.B. (1997), “Islamic banking: a study in Singapore”, International Journal of Bank Marketing , Vol. 15 No. 6, pp. 204-16.

Khattak, N.A. and Rehman, K.U. (2010), “Customer satisfaction and awareness of Islamicbanking system in Pakistan”, African Journal of Business Management , Vol. 4 No. 5,pp. 662-71.

Metawa, S. and Almossawi, M. (1998), “Banking behavior of Islamic bank customers:perspectives and implications”, International Journal of Bank Marketing , Vol. 16 No. 7,pp. 299-315.

Naser, K., Jamal, A. and Al-Khatib, K. (1999), “Islamic banking: a study of customer satisfactionand preferences in Jordan”, International Journal of Bank Marketing , Vol. 17 No. 3,pp. 135-51.

Rammal, H. and Zurbrugg, R. (2007), “Awareness of Islamic banking products among Muslims:the case of Australia”, Journal of Financial Services Marketing , Vol. 12, pp. 65-74.

JIMA2,3

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Further readingAhmed, I. and Shabbir, G. (2005), “Frequently asked questions on Islamic banking”, available at:

www.sbp.org.pk/departments/ibd/FAQs.pdf (accessed 7 October 2011).Erol, C., Kaynak, E. and El-Bdour, R. (1990), “Conventional and Islamic banks: patronage

behavior of Jordanian customers”, International Journal of Bank Marketing , Vol. 8 No. 4,pp. 25-35.

Islamic Banking Department (2008), Pakistan’s Islamic banking sector review , available at: www.sbp.org.pk/ibd/Islamic-Bkg-Review-03-07.pdf (accessed 10 November 2011).

Metwally, M. (1996), “Attitudes of Muslims towards Islamic banks in a dual-banking system”, American Journal of Islamic Finance , Vol. 6 No. 1, pp. 11-17.

About the authorsIrfan Butt received his PhD from Carleton University, Canada and MBA from the ThunderbirdSchool of Global Management, USA. His industry experience includes working formultinationals in the Middle East. His research interests comprise international marketing,country-of-origin, positioning strategies and emerging markets. His research has appeared in the Electronic Journal of E-Government , the Indian Journal of Business and Economics , Budapest Management Review and the Proceedings of the American Marketing Association (AMA),Administrative Sciences Association of Canada (ASAC), and Australia New Zealand MarketingAcademy (ANZMAC), amongst others. He has received various best paper awards for hisresearch. Irfan Butt is the corresponding author and can be contacted at: [email protected]

Nausherwan Saleem is currently a student of Accounting and Finance. His major area of interest is consumer market research and nance. In order to diversify his area of researchexpertise, he has been working on an Islamic banking project measuring consumer perceptionsof customers in Pakistan. Currently, he is also working on a senior project on Islamic microcreditinstitutions in Pakistan. He will be graduating from LUMS this year and hopes to pursue a careerin Market Research afterwards.

Hassan Ahmed is an undergraduate research student at the Lahore University of Management Sciences, majoring in Accounting and Finance.

Muzammil Altaf is currently studying for BSc Honors in Accounting and Finance fromLahore University of Management Sciences (LUMS), Pakistan. Major areas of interest include thestudy of Islamic sciences and modern banking, commerce and management science and how theformer can be implemented in the context of the latter. He is working on a senior project on thehistory and future prospects of micronance institutions in Pakistan, with special emphasis onthe Islamic micronance industry and also serving as a Senior Executive Member at the LUMSReligious Society (LRS).

Khawaja Jaffer is a research student at LUMS. Jawad Mahmood is currently doing a BSc Honors in Accounting and Finance from Lahore

University of Management Sciences (LUMS), Pakistan. His major eld of interest and research ismarketing and Islamic nance. He is one of the senior research associates at LUMS exploring theIslamic Shariah role and possible implementation in the micronance institutes of Pakistan, alsofocusing on developing a Halal model of micronance as well digging deep to nd the true socialand nancial impact by the micronance institutes in Pakistan over the last decade of itsprominence. At LUMS, he has been a long serving executive member of the LUMS ReligiousSociety (LRS), promoting Islamic lifestyle in an academic manner and opening discussion onvarious issues relating to Islam.


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