islamic banking
DESCRIPTION
Islamic Banking and conventional bankingTRANSCRIPT
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
Figure 3.5 Graphical display of the hypothesized relationship between
Service quality and bank performance 89
Figure 3.6 Graphical display of the hypothesized relationship between
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
Comparative Study of Islamic Banking 2
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).
Comparative Study of Islamic Banking 3
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)
Comparative Study of Islamic Banking 4
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
Comparative Study of Islamic Banking 5
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
Comparative Study of Islamic Banking 6
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.
Comparative Study of Islamic Banking 7
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
Comparative Study of Islamic Banking 8
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.
Comparative Study of Islamic Banking 9
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.
Comparative Study of Islamic Banking 10
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.
Comparative Study of Islamic Banking 11
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
Comparative Study of Islamic Banking 12
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
Comparative Study of Islamic Banking 13
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
Comparative Study of Islamic Banking 14
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.
Comparative Study of Islamic Banking 15
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
Comparative Study of Islamic Banking 16
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
Comparative Study of Islamic Banking 17
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
Comparative Study of Islamic Banking 18
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.
Comparative Study of Islamic Banking 19
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
Comparative Study of Islamic Banking 20
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
Comparative Study of Islamic Banking 21
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
Comparative Study of Islamic Banking 22
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.
Comparative Study of Islamic Banking 23
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,
Comparative Study of Islamic Banking 24
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).
Comparative Study of Islamic Banking 25
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).
Comparative Study of Islamic Banking 26
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.
Comparative Study of Islamic Banking 27
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
Comparative Study of Islamic Banking 28
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
Comparative Study of Islamic Banking 29
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).
Comparative Study of Islamic Banking 30
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).
Comparative Study of Islamic Banking 31
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).
Comparative Study of Islamic Banking 32
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.
Comparative Study of Islamic Banking 33
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
Comparative Study of Islamic Banking 34
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).
Comparative Study of Islamic Banking 35
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.
Comparative Study of Islamic Banking 36
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)
Comparative Study of Islamic Banking 37
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
Comparative Study of Islamic Banking 38
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
Comparative Study of Islamic Banking 39
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).
Comparative Study of Islamic Banking 40
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.
Comparative Study of Islamic Banking 41
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.
Comparative Study of Islamic Banking 42
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).
Comparative Study of Islamic Banking 43
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
Nationalized Commercial Banks 429.7 488.7
Private Banks 1807.2 2044.4
Specialized Banks 70.6 72.2
Foreign Banks 120.2 88.7
Deposits (Rs. Billion) 3255 3852
Nationalized Commercial Banks 665.6 813.1
Private Banks 2425.8 2907.8
Specialized Banks 13.5 13.5
Foreign Banks 150.1 117.6
Net Investment (Rs. Billion) 836.7 1275.5
Nationalized Commercial Banks 179.9 298.7
Private Banks 601.7 934.5
Specialized Banks 16.6 15.8
Foreign Banks 38.5 26.5
Source: Economic Survey of Pakistan, 2007-08
Comparative Study of Islamic Banking 44
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.
Comparative Study of Islamic Banking 45
CHAPTER 3
Literature Review and Theoretical Framework
Service Quality
Customer Satisfaction
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
Comparative Study of Islamic Banking 46
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.
Comparative Study of Islamic Banking 47
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).
Comparative Study of Islamic Banking 48
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)
Comparative Study of Islamic Banking 49
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).
Comparative Study of Islamic Banking 50
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).
Comparative Study of Islamic Banking 51
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).
Comparative Study of Islamic Banking 52
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.
Comparative Study of Islamic Banking 53
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
Comparative Study of Islamic Banking 54
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:
Comparative Study of Islamic Banking 55
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).
Comparative Study of Islamic Banking 56
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).
Comparative Study of Islamic Banking 57
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).
Comparative Study of Islamic Banking 58
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).
Comparative Study of Islamic Banking 59
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).
Comparative Study of Islamic Banking 60
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).
Comparative Study of Islamic Banking 61
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
Comparative Study of Islamic Banking 62
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).
Comparative Study of Islamic Banking 63
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
Comparative Study of Islamic Banking 64
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)
Comparative Study of Islamic Banking 65
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
Comparative Study of Islamic Banking 66
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
Comparative Study of Islamic Banking 67
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).
Comparative Study of Islamic Banking 68
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
Comparative Study of Islamic Banking 69
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).
Comparative Study of Islamic Banking 70
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
Comparative Study of Islamic Banking 71
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
Comparative Study of Islamic Banking 72
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
Comparative Study of Islamic Banking 73
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).
Comparative Study of Islamic Banking 74
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
Comparative Study of Islamic Banking 75
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
Comparative Study of Islamic Banking 76
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).
Comparative Study of Islamic Banking 77
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).
Comparative Study of Islamic Banking 78
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
Comparative Study of Islamic Banking 79
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).
Comparative Study of Islamic Banking 80
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).
Comparative Study of Islamic Banking 81
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
Comparative Study of Islamic Banking 82
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).
Comparative Study of Islamic Banking 83
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
Comparative Study of Islamic Banking 84
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).
Comparative Study of Islamic Banking 85
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
Comparative Study of Islamic Banking 86
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
Comparative Study of Islamic Banking 87
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).
Comparative Study of Islamic Banking 88
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
Customer Satisfaction
Comparative Study of Islamic Banking 89
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
Comparative Study of Islamic Banking 90
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
+
Customer Satisfaction
Bank Performance
Comparative Study of Islamic Banking 91
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
Customer Satisfaction
Comparative Study of Islamic Banking 92
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
zn S
rvc
Dlv
ry
Tng
ble
of S
rvce
Soc
ial R
spns
blty
Comparative Study of Islamic Banking 93
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.
Comparative Study of Islamic Banking 94
CHAPTER 4
Methodology
Research Method
Pilot Test
Main Study
Measures and Instruments
Reliability and Internal Consistency of the Variables
Comparative Study of Islamic Banking 95
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
Comparative Study of Islamic Banking 96
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.
Comparative Study of Islamic Banking 97
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
Comparative Study of Islamic Banking 98
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.
Comparative Study of Islamic Banking 99
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
Comparative Study of Islamic Banking 100
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
Comparative Study of Islamic Banking 101
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
Comparative Study of Islamic Banking 102
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
Comparative Study of Islamic Banking 103
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.
Comparative Study of Islamic Banking 104
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
Comparative Study of Islamic Banking 105
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
Comparative Study of Islamic Banking 106
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.
Comparative Study of Islamic Banking 107
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.
Comparative Study of Islamic Banking 108
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).
Comparative Study of Islamic Banking 109
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
Constructs/Variables of the Study No. of Cronbach’s Guttman Items Alpha Coefficient Split Half-Coefficient
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
Comparative Study of Islamic Banking 110
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).
Comparative Study of Islamic Banking 111
Table-4.7
Reliability Statistics of the Scales for CB
Constructs/Variables of the Study No. of Cronbach’s Guttman Items Alpha Coefficient Split Half-Coefficient
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).
Comparative Study of Islamic Banking 112
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).
Comparative Study of Islamic Banking 113
CHAPTER 5
Interpretation of the Results
Demographics of the Respondents
Descriptive Statistics of the Variables
Hypotheses Testing
Regression Model Results
Testing the Model
Discussion
Comparative Study of Islamic Banking 114
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.
Comparative Study of Islamic Banking 115
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
Comparative Study of Islamic Banking 116
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
Comparative Study of Islamic Banking 117
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).
Comparative Study of Islamic Banking 118
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.
Comparative Study of Islamic Banking 119
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 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 Product IB Human Element of Service Delivery
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
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.
Comparative Study of Islamic Banking 120
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 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 Product
IB Human Element of Service Delivery
IB Systemization of Service Delivery
IB Tangibles of Service (Servicescapes)
IB Social Responsibility
IB Customer Satisfaction
IB Bank Performance
Min. Max. Mean S.D
Comparative Study of Islamic Banking 121
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).
Comparative Study of Islamic Banking 122
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).
Comparative Study of Islamic Banking 123
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
Comparative Study of Islamic Banking 124
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
Comparative Study of Islamic Banking 125
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
Comparative Study of Islamic Banking 126
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.
Comparative Study of Islamic Banking 127
Table-5.10
Summary of the CBDSQL-CBCS 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
0.223 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.
Comparative Study of Islamic Banking 128
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.
Comparative Study of Islamic Banking 129
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.
Comparative Study of Islamic Banking 130
Table- 5.13
Summary of the CBSQL-CBCS Linear Regression Model (based on SPSS results)
(Coefficients, Standard Error in Parenthesis, t-values in Brackets and p-values in italics)
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.
Comparative Study of Islamic Banking 131
5.4.3 Service Quality and Bank Performance
Table-5.14
Summary of the IBSQL-IBPRF Linear Regression Model (based on SPSS results)
(Coefficients, Standard Error in Parenthesis, t-values in Brackets and p-values in italics)
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.
Comparative Study of Islamic Banking 132
Table-5.15
Summary of the CBSQL-CBPRF Linear Regression Model (based on SPSS results)
(Coefficients, Standard Error in Parenthesis, t-values in Brackets & p-values in italics)
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.
Comparative Study of Islamic Banking 133
5.4.4 Customer Satisfaction on Bank Performance
Table-5.16
Summary of the IBCS-IBPRF Linear Regression Model (based on SPSS results)
(Coefficients, Standard Error in Parenthesis, t-values in Brackets & p-values in italics)
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.
Comparative Study of Islamic Banking 134
Table – 5.17 Summary of the CBCS- CBPRF Linear Regression Model (based on SPSS results)
(Coefficients, Standard Error in Parenthesis, t-values in Brackets & p-values in italics)
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.
Comparative Study of Islamic Banking 135
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).
Comparative Study of Islamic Banking 136
Figure-5.1
Structural Model Results-Relationship among Slty, CrSn and IPRF
Coefficients, T-Values in parenthesis and R2 (RSq)
Comparative Study of Islamic Banking 137
Figure-5.2
Structural Model Results-Relationship among Slty, CrSn and CPRF
Coefficients, T-Values in parenthesis and R2 (RSq)
Comparative Study of Islamic Banking 138
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
Comparative Study of Islamic Banking 139
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.
Comparative Study of Islamic Banking 140
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).
Comparative Study of Islamic Banking 141
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.
Comparative Study of Islamic Banking 142
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
Comparative Study of Islamic Banking 143
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
Comparative Study of Islamic Banking 144
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
Comparative Study of Islamic Banking 145
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
Comparative Study of Islamic Banking 146
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).
Comparative Study of Islamic Banking 147
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).
Comparative Study of Islamic Banking 148
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
H3b 0.229 0.001 Supported
H4a 0.102 0.001 Rejected
H4b 4.857 0.065 Supported
Path Analysis
H5a Path Coefficients of structural model (5.1) Partially Supported
H5b Path Coefficients of structural model (5.2) Supported Source: Generated
Comparative Study of Islamic Banking 149
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.
Comparative Study of Islamic Banking 150
CHAPTER 6
Conclusion, Implications and Suggestions
Conclusion
Suggestions
Limitations and Future Research
Contribution of the Study
Practical Implications
Unique Status of the Study
Comparative Study of Islamic Banking 151
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.
Comparative Study of Islamic Banking 152
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
Comparative Study of Islamic Banking 153
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
Comparative Study of Islamic Banking 154
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
Comparative Study of Islamic Banking 155
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.
Comparative Study of Islamic Banking 156
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
Comparative Study of Islamic Banking 157
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
Comparative Study of Islamic Banking 158
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.
Comparative Study of Islamic Banking 159
References
Abratt, R., & Russell, J. (1999). Relationship marketing in private banking in South
Africa, The International Journal of Bank Marketing, 17(1), 5-19.
Ajakaiye, D.O., & Olommola, A.S. (2003). “Overview of poverty and poverty
reduction” in Ajakaiye and Olomola (edn), Poverty in Nigeria: A
multidimensional perspective, Nigerian Institute of Social Sciences and Economic
Research.
Akroush, M.N. (2008). Exploring the mediating effect of service quality
implementation on the relationship between service quality and performance in
the bankig industry in Jordan, Global Business and Economics Review, 10 (1), 98-
122.
Akhtar, S. (2007). Pakistan-Banking sector reforms: performance and challenges,
Lecture by Governor of the SBP Pakistan at the Graduate Institute of International
Studies, Geneva, 1 February 2007.
Aldrich, H.E. (1979), Organizations and environment, Englewood Cliffs, NJ: Prentice
Hall.
Al-Hawari, M., & Ward, T. (2006). The effect of automated service quality on
Australian banks’ financial performance and the mediating role of customer
satisfaction, Marketing Intelligence & Planning, 24 (2), 127-147.
Al-Harren, S.A. (1993). Islamic Finance: Partnership Financing, Pelanduk
Publications, Selangor Darul Ehsan, Malaysia.
Comparative Study of Islamic Banking 160
Al-Jarhi, A.M., & Iqbal, M. (2001). Islamic Banking: Answers to Some Frequently
Asked Questions, Occasional paper No. 4, Islamic Development Bank, Islamic
Research and Training Institute.
Al-Marri, K., Ahmad, A.M.B. & Zairi, M. (2007). Excellence in service: an empirical
study of the UAE banking sector, International Journal of Quality & Reliability
Measurement, 24 (2), 164-176.
Allred, A.T., & Adams, H.L. (2000). Service quality at banks and credit union: what do
their customers say? International Journal of Bank Marketing, 18 (4), 200-207.
Alsop, R. (1984). Firms try tap growing over-50 population, The Wall Street Journal, 23,
p. 21.
Anakewe, U.P. (2002). Human resource management practices in Nigeria: challenges
and insights, International Journal of Human Resource Management, 13 (7),
1042-1059.
Anderson, E.W., & Sullivan, M.W. (1993). The antecedents and consequences of
customer satisfaction for firms, Marketing Science, 2 (2), 125–143.
Anderson, E.W., Fornell, C. & Lehman, D.R. (1993). Economic consequences
providing quality and customer satisfaction, Working paper (Report 93-112),
Marketing Science Institute, Cambridge, M.A.
Angur, M., Nataraajan, R. & Jahera, J.S. (1999). Service quality in the banking industry:
an assessment in a developing economy. International Journal of Bank
Marketing, 17, 116–125.
Comparative Study of Islamic Banking 161
Arasli, H., Katircioglu, S.T, & Smadi S.M. (2005). A comparison of service quality in the
banking industry: Some evidence from Turkish- and Greek- Speaking areas in
Cyprus, International Journal of Bank Marketing, 23 (7), 508-526.
Arby, M.F. (2003). Structure and Performance of Commercial Banks in Pakistan, State
Bank of Pakistan.
Asubonteng, P., McCleary, K.J. & Swan, J.E. (1996). SERVQUAL revitalized: a critical
review of service quality, The Journal of Service Marketing, 10, 62-81.
Athanassopoulos, A., Gounaris, S., & Stathakopoulos, V. (2001). Behavioral responses to
customer satisfaction: an empirical study, European Journal of Marketing, 35
(5/6), 687-707.
Avkiran, N.K. (1994). Developing an instrument to measure customer service quality in
branch banking, The International Journal of Bank Marketing, 12, 10–18.
Ayadi, O. F. (1996). Marketing of bank services, regulations, and bank profitability in
an emerging banking system, African Review of Money, Finance and Banking,
1(2), 107-120.
Bahia k. & Nantel J. (2000). A Reliable and Valid Measurement Scale for the Perceived
Service Quality of Banks, The International Journal of Bank Marketing, 84-91.
Baker, W.E, & Sinkula, J.M. (1999a). Learning orientation, market orientation, and
innovation: Integrating and extending models of organizational performance,
Journal of Market-Focused Management, 4 (4), 295-308.
Baker, W.E, & Sinkula, J.M. (1999b). The synergistic effect of market orientation and
learning orientation on organizational performance, Journal of Academy of
Marketing Science, 27(4), 411-427.
Comparative Study of Islamic Banking 162
Bedal, D. & Power, T. (1995). Cultivating loyal patients, Journal of Health Care
Marketing, 15 (4).
Barney, J. (1991). Firm resources and sustained competitive advantage, Journal of
Management, 17 (1), 99-120.
Berry, L.L., Zeithaml, V.A. & Parasuraman, A. (1990). Five imperatives for
improving service quality, Sloan Management Review, 31 (4), 29-38.
Berry, L.L. & Parasuraman, A. (1991), Marketing Services-Competing through
Quality, New York: The Free Press.
Bitner, M.J. (1990). Evaluating service encounters: the effects of physical surroundings
and employee responses, Journal of Marketing, 54 (2), 69–82.
Bitner, M. J. & Hubert, A. R. (1994). Encounter satisfaction versus overall satisfaction
versus quality: the customer’s voice, in: R.T. Rust& R.L. Oliver (Eds) Service
Quality: New Directions in Theory and Practice, pp. 72–94 (London: Sage).
Bloemer, J.M., de Ruyter, K., & Peeters, P. (1998). Investigating drivers of bank
loyalty: the complex relationship between image, service quality and
satisfaction, International Journal of Bank Marketing, 16 (7), 276– 86.
Bontis, N., Booker, D. L. & Serenko, A. (2007). The mediating effect of organizational
reputation on customer loyalty and service recommendation in the banking
industry, Management Decision, 45 (9), 1426-1445.
Boyd, W. L., Leonard, M. & White, C. (1994). Customer preference for financial
services: an analysis, International Journal of Bank Marketing, 12 (1), 9-15.
Comparative Study of Islamic Banking 163
Brenhardt, K.L., Donthu, N. & Kennett, P.A., (1994), The Relationship between
Customer Satisfaction, Employee Satisfaction and Profitability: a Longitudinal
Analysis, Department of Marketing, Georgia State University, Atlanta, GA.
Brown, K.A., & Mitchell, T.R. (1993). Organizational obstacles: links with financial
performance, customer satisfaction and job satisfaction in a service environment,
Human Relations, 46 (3), 725-727.
Burki, A.A., & Niazi, G.S.K. (2003). The Effects of Privatization, Competition and
Regulation on Banking Efficiency in Pakistan, 1991-2000, Presented at CRC
Conference on: Regulatory Impact Assessment: Strengthening Regulation and
Practice, University of Manchester, Manchester, U.K.
Caruana, A. (2002). Service loyalty: the effect of service quality and mediating role of
customer satisfaction, European Journal of Marketing, 36 (7/8), 811-828.
Chakravarty, S., Widdows, R. & Feinberg, R. (1996). How moments of truth define
bank-customer relationships, Journal of Retail Banking Services, 18 (1), 29-34.
Chapman, L.R., Murray, C.P. & Mellor, R. (1997). Strategic quality management and
financial performance indicators, International Journal of Quality and
Reliability Management, 14 (4), 432-448.
Chapra, M.U. (1985). Towards A Just Monetary System, Leicester: The Islamic
Foundation.
Cheng, C.H., Madan, M.S. & Motwani, J. (1996). Implementing quality management in
the banking sector, Total Quality Manangement, 7 (4), 347-356.
Chernick, M. R. (1999). Bootstrap Methods, A practitioner’s guide, Wiley Series in
Probabilities and Statistics.
Comparative Study of Islamic Banking 164
Chitwood, R. (1996). Selling in a non-sales environment, Bank Marketing, 28 (7), 41-42.
Churchill, G.A. & Surprenant, C. (1982). An investigation into the determinants of
customer satisfaction, Journal of Marketing Research, 19 (4), 491–504.
Cohen, D., Gan, C., Yong, A.H. & Choong, E. (2006). Customer Satisfaction: A study
of bank customer retention in New Zealand, Commerce Division, Discussion
paper No.109, Lincoln University, Canterbury.
Cole, H.L. & Kocherlakota, N. (1998). Zero Nominal Interest Rates: Why they’re
good and get them, Federal Reserve Bank of Minneapolis Quarterly, 22, 2-10.
Crider, D. (2007). Performance measurement of the retail bank, Apexile Solutions IIC.
Cronin, J. & Taylor, S. (1992) Measuring service quality: a re-examination and
extension, Journal of Marketing, 56 (3), 55-68.
Cronin, J., Brady, M. & Hult, G. (2000). Assessing the effect of quality, value, and
customer satisfaction on consumer behavioral intentions in service environments,
Journal of Retailing, 76 (2), 193-218.
Crosby, L.A. & Stephen, N. (1987). Effects of relationship marketing on satisfaction,
retention, and prices in life insurance industry, Journal of Marketing Research,
24, 404-411.
Curry, A & Penman, S. (2004). The relative importance of technology in enhancing
customer relationship in banking – a Scottish perspective, Managing Service
Quality, 14 (4), 331-341.
Dabholkar, P.A., Thorpe, D.I. & Rentz, J.O. (1996). A measure of service quality for
retail stores: scale development and validation, Journal of the academy of
Marketing Science, 24 (1), 3-16.
Comparative Study of Islamic Banking 165
Darrat, A.F. (1988). The Islamic interest-free banking system: some empirical
evidence, Applied Economics, 20, 417-425.
Davidson, A.C. & Hinkley, D. (1997). Bootstrap Methods and their Applications,
Cambridge: Cambridge Series in Statistical and Probabilistic Mathematics.
Day, A. (1994). Continuous learning about markets, California Management Review, 36
(4), 9-31.
Dess, G.G. & Robinson, R.B.J. (1984). Measuring Organizational Performance in the
Absence of Objective Measures: The Case of the Privately-Held Firm and
Conglomerate Business Unit, Strategic Management Journal, 5 (3), 265-273.
Deshpande`, R., Farley, J.U, & Webster, F.E. (1993). Corporate culture, Customer
orientation, and innovativeness in Japanese firms: A Quadrad analysis, Journal
of Marketing, 57 (1), 23-37.
Despensa, G. (1997). Use logistic regression with customer satisfaction data,
Marketing News, January 6, p.13
Dick, A. A. (2006). Nationwide Branching and Its Impact on Market Structure, Quality
and Bank Performance. Journal of Business, 79, 567–92.
Dick, A. A. (2007). Market Size, Service Quality, and Competition in Banking,
Journal of Money, Credit and Banking, 39 (1).
Duncan E. & Elliot G. (2002). Customer Service Quality and Financial Performance
among Australian Retail Financial Institutions, Journal of Financial Services
Marketing, 7 (1), 25-41.
Comparative Study of Islamic Banking 166
Duncan, E., & Elliott, G. (2004). Efficiency, customer service and financial performance
among Australian financial institutions, The International Journal of Bank
Marketing, 22 (5), 319-342.
Ebrahim, M.S. (1999). Integrating Islamic and conventional project finance,
Thunderbird International Business Review, 41 (4/5), 583-609.
Ebrahim, M.S. (2000). Pricing asset backed Islamic financial instruments, International
Journal of Theoretical and Applied Finance, 3 (1).
Ebrahim, S. M., & Joo T. K. (2001). Islamic banking in Brunei Darussalam,
International Journal of Social Economics, 28 (4), 314-337.
Economic Survey of Pakistan, (2007-08), Ministry of Finance, Government of Pakistan:
Islamabad.
Efron, B. (1979). Bootstrap Methods: another look at the Jackknife, Annals of
Statistics, 7, 1-26.
Ennew, C.T. (1996). Good and bad Customers: the benefits of participating in the
banking relationship, The International Journal of Bank Marketing, 14 (2), 5-13.
Ernst & Young. (1995). The Ernst & Young Guide to Performance Measurement for
Financial Institutions, Revised Ed. McGraw-Hill.
Falk, R.F., & Miller, N.B. (1992). A printer for soft modeling, Akron OH: The
University of Akron.
Fox, J. (2002). Bootstrapping Regression Model, Appendix to An R and S-PLUS
Comparison to Applied Regression.
Fu, J. (2006). Visual PLS 1.04b, National Kaohsiung University of Applied Sciences.
Comparative Study of Islamic Banking 167
Furer, O., Ching-Liu, B.S. & Sudharshan, D. (2002). The relationship between culture
and service quality perceptions, Journal of Service Research, 2 (4), 355-370.
Friedman, M. (1969). The optimum quantity of money, The Optimum Quantity of Money
and Other Essays, Chicago: Aldine, pp. 1-50.
Galbraith, J.K. (1975). Economics and the Public Purpose, New American Library, New
York, p.3.
Galloway, L. & Ho, S. (1996). The model of service quality for training, Training for
Quality, 4 (1), 20-26.
Gefan, D., Straub, D.W. & Doudreau, M. (2000). Structural Equation Modeling
Techniques and Regression: Guidelines for Research Practice, Communications
of AIS, Vol. 4, No. 7.
Gefan, D. & Straub, D. (2005). A practical guide to factorial validity using PLS-Graph:
Tutorial and annotated examples, Communications of AIS, 16, 91-109.
Ghannadian, F. F. & Goswami, G. (2004). Developing economy banking: The case of
Islamic banks, International Journal of Social Economics, 31 (8), 740-752.
Glaveli, N., Petridou, E., Liassides, C. & Spathis, C. (2006). Bank service quality:
evidence from five Balkan countries, Managing Service Quality, 16 (4), 380-394.
Gronroos, C. (1982). Strategic Management and Marketing in the Service Sector,
Swedish School of Economics and Business Administration, Helsingfors.
Gronroos, C. (1984). A service quality model and its marketing implications, European
Journal of Marketing, 18, 35-44.
Gronroos, C. (1990). Services Management and Marketing, Lexington Books, Lexington,
MA, pp. 125-53.
Comparative Study of Islamic Banking 168
Greenland, S., Coshall, J., & Combe, I. (2006). Evaluating service quality and consumer
satisfaction in emerging markets, International Journal of Consumer Studies,
30 (6), 582–590
Gritti, P. & Foss, N. J. (2007). Customer Satisfaction and Competencies: An
Econometric Study of an Italian Bank, SMG Working Paper No. 10/2007.
Gounaris, S.P., Stathakopoulos, V. & Athanassopoulos, A.D. (2003). Antecedents to
perceived service quality: an exploratory study in the banking industry, The
International Journal of Bank Marketing, 21 (4), 168-190.
Gulledge, L. (1996). Satisfaction measurement is more than doing surveys, Marketing
News, 30 (22), p.8.
Hackl, P. & Westlund, A.H. (2000). On structural equation modeling for customer
satisfaction measurement, Total Quality Management, 11 (4/5/6), S820–S825.
Hair, J.F., Anderson, R.E., Tatham, R.L. & Black, W. C. (1998). Multivariate Data
Analysis with Readings, 4th edition, Englewood Cliffs, NJ: Prentice Hall.
Hallowell, R. (1996). The relationships of customer satisfaction, customer loyalty and
profitability: an empirical study, International Journal of Service Industry
Management, 7 (4), 27–42.
Holliday, K. (1996). Keeping close to the customer, Bank Marketing, 28 (6), 14-19.
Hanson, W. (2000). Principles of Internet Marketing, Cincinnati, Ohio: South-Western
Ho, C.F & Wu, W.H. (1999). Antecedents of customer satisfaction on the Internet: An
empirical study of online shopping, Proceedings of the 32nd Hawaii International
Conference on System Science.
Comparative Study of Islamic Banking 169
Hanushek, E.A. & Jackson, J.E. (1977). Statistical Methods for Social Scientists,
Orlando, FL USA: Academic Press.
Haque, N.U. & Mirakhor, A. (1986). Optimal profit-sharing contracts and investment
in an interest-free Islamic economy, World Bank and IMF, Washington, DC.
Hart, C.W.L., Heskett, J.L. & Sasser, W.E. Jr (1990). The profitable art of service
recovery, Harvard Business Review, 68 (4), 148-56.
Haron, S., Ahmed, N. & Planisek, S. (1994). Bank patronage factors of Muslim and
non-Muslim customers, International Journal of Bank Marketing, 12 (1), 32-40.
Heskett, J.L., Sasser, W.E. Jr & Hart, C.W.L. (1990). Service Breakthroughs: Changing
the Rules of the Game, Free Press, New York, NY.
Heskett, J.L., Jones, T.O., Loveman, G.W., Sassar, W.E., Jr & Schlesinber, L.A. (1994).
Putting the service-profit chain to work, Harvard Business Review, 72 (4), 164-
174.
Ho, T.C. and Wu, S.Y. (2006). Benchmarking performance indicators, Benchmarking:
An International Journal, 13 (1/2), 147-159.
Hoffman, K.D. & Bateson, J.E.G. (2002). Essentials of Services Marketing: Concepts,
Strategies, and Cases, 2nd ed. Harcourt College Publishers.
Hull, L. (2002). Foreign-Owned Banks: Implications for New Zealand’s Financial
Stability, Discussion Paper Series, DP 2002/05.
Hung, Y. H., Huang, M. L. & Chen, K. S. (2003). Service quality evaluation by service
quality performance matrix, Total Quality Management and Business
Excellence, 14 (1), 79 – 89.
Comparative Study of Islamic Banking 170
Ibáñez, V. A., Hartmann, P., & Calvo, P. Z. (2006). Antecedents of customer loyalty in
residential energy markets: Service quality, satisfaction, trust and switching
costs, The Service Industries Journal, 26 (6), 633 – 650.
Iglesias, P. M., & Yagu¨e Guille´n, M. J. (2004). Perceived quality and price: their
impact on the satisfaction of restaurant customers, International Journal of
Contemporary Hospitality Management, 16, 373-379.
Iheduru, N. G. (2002). Women entrepreneurship and development: the gendering of
microfinance in Nigeria, a paper presented at the 8the International
Interdisciplinary Congress on Women, 21-26 July, Makerere University,
Kampala, Uganda.
Imam, A. M. (1987). Ideology, Women and Mass Media: A Case study of Kano,
Nigeria, Research Report
Iqbal, M., Ahmed, A. & Khan, T. (1998). Challenges facing Islamic Banking, Islamic
Research Training Institute, Occasional paper No.1, King Fahad National
Library.
Jabnoun N., & Al-Tamimi, H. A. H. (2003). Measuring perceived service quality at UAE
commercial banks, International Journal of Quality and Reliability
Management, 20 (4), 458-472.
Jabnoun, N., & Khalifa, A. (2005). A customized measure of service quality in the UAE,
Managing Service Quality, 15 (4), 374-388.
Jamal, A. (2004), Retail Banking and Customer Behaviour: A Study of Self Concept,
Satisfaction and Technology Usage, The International Review of Retail,
Distribution and Consumer Research, 14 (3), 357-379.
Comparative Study of Islamic Banking 171
Jamal, A. & Naseer, K. (2003). Factors influencing customer satisfaction in the retail
baking sector in Pakistan, International Journal of Commerce and Management,
13 (2), 29-53.
Jaworski, B.J. & Kohli, A.K. (1993) Market orientation: Antecedents and consequences,
Journal of Marketing, 57 (3), 53-70.
Johnston, R. (1995). The determinants of service quality: satisfiers and dissatisfies,
International Journal of Service Industry Management, 6 (5), 53-71.
Johnston, R. (1997). Identifying the critical determinants of service quality in retail
banking: importance and effect, International Journal of Bank Marketing, 15 (4),
111–116.
Joseph, M., McClure, C., & Joseph, B. (1999). Service quality in the banking sector: the
impact of technology on service delivery, International Journal of Bank
Marketing, 17 (4), 182-191.
Joseph, M., Sekhon, Y., Stone, G. & Tinsor, J. (2005). An exploratory study on the
use of banking technology in the UK: A ranking of importance of selected
technology on consumer perception of service delivery performance, The
International Journal of Bank Marketing, 23 (5), 397-413.
Kang, G.D. & James, J. (2004). Service quality dimensions: an examinaion of
Gronroos’s service quality model, Journal of Managing Service Quality, 14 (4).
Kangis, P. & Voukelatos, V. (1997). Private and public banks: a comparison of
customer expectations and perceptions, International Journal of Bank
Marketing, 17 (7), 279-287.
Comparative Study of Islamic Banking 172
Kayis B., Kim, H., & Shin, H. T. (2003). A comparative analysis of cultural,
conceptual and practical constraints on quality management implementations-
findings from Australian and Korean banking industries, TQM and Business
Excellence, 14 (7), 765–777.
Khalid, U. (2006). The Effect of privatization and liberalization on banking sector
performance in Pakistan”, SBP Research Bulletin, 2 (2).
Khan, M. (1986). Islamic interest-free banking: a theoretical analysis, International
Monetary Fund Staff Papers, 33 (10, 1-27.
Khan, M.S.N, Hassan, M. K, & Shahid, A. I. (2008). Banking behavior of Islamic
bank customer in Bangladesh, Journal of Islamic Economics, Banking and
Finance, 159-194.
Kinsey, J. (1988). Marketing in Developing Countries, Basingstoke: Macmillan
Education Ltd.
Kohli, A.K. & Jaworski, B.J. (1990). Market orientation: the construct, research
propositions, and managerial implications', Journal of Marketing, 54 (2), 1-18.
Kotler, P. & Armstrong, G. (2001). Principles of Marketing, 9the (Ed.), NJ, Prentice-
Hall.
Kotler, P. (2003). Marketing Management, International Edition, Prentice Hall.
Kuo, T. & Wu, A. (2007). The Determinants of Organizational Innovation and
Performance: An Examination of Taiwanese Electronics Industry, AAA 2007
Management Accounting Section (MAS) Meeting.
Lassar, W.M., Manolis, C. & Winsor, R.D. (2000). Service quality perspectives and
satisfaction in private banking, Journal of Services Marketing, 14 (2/3), 244-71.
Comparative Study of Islamic Banking 173
Leeds, B. (1992). Mystery Shopping’ Offers Clues to Quality Service, Bank Marketing,
24 (11), 24-27.
Lehtinen, U. & Lehtinen, J.R. (1982). Service Quality: A Study of Quality Dimensions,
Service Management Institute, Helsinki.
Levesque, T., & McDougall, H.G. (1996). Determinants of customer satisfaction in retail
banking, International Journal of Bank Marketing, 14 (7), 12–20.
Li, E.Y., Zhao, X. & Lee, T. (2001). Quality management initiatives in Hong Kong's
banking industry: A longitudinal study, Total Quality Management and Business
Excellence, 2 (4), 451 – 467.
Liang, C. & Wang, W.H. (2006). The behavioural sequence of the financial services
industry in Taiwan: Service quality, relationship quality and behavioural loyalty,
The Service Industries Journal, 26 (2), 119 – 145.
Longo, C.H.J. (2000). Total quality management in the UK financial services: some
findings from a survey in a Northeast of the England, Total Quality
Management, 11 (1), 23-30.
Lopez, J., Hart, K.L., & Rampersad, A. (2007). Ethnicity and customer satisfaction in
the financial services sector, Ethnicity and Managing Service Quality, 17 (3), 259-
274.
Maikranz, J. M., Steele, R.G., Dreyer, M., Stratman, A. & Bovaird, J.A. (2007). The
relationship between hope and illness-related uncertainty to emotional adjustment
and adherence among pediatric renal and liver transplant recipient, Journal of
Pediatric Psychology, 32, 571-581.
Comparative Study of Islamic Banking 174
Makiyan, N.S. (2003). Role of Rate of Return on Loans in the Islamic Banking System
of Iran, Managerial Finance, 29, 62-69.
Malhotra, N. K., Francis M. U., James A., Shainesh, G. & Lan, W. (2005). Dimensions of
service quality in developed and developing economies: multi-country cross-
cultural comparisons, International Marketing Review, 22 (3), 256-278.
Maxham, G. J. & Netemeyer, G. R. (2003). Modeling customer perceptions of
complaint handling over time: the effects of perceived justice on satisfaction and
intent, Journal of Retailing.
Meyers, J.W. & Scott, W. R. (1983). Organizational environments: Rituals and
rationality, Beverly Hills, CA: Sage.
Metawa, A.S. & Almossawi, M. (1998). Banking behavior of Islamic bank customers:
perspectives and implication, International Journal of Bank Marketing, 16 (7),
299-313.
Mirakhor, A. (1997). Progress and Challenges of Islamic Banking, Review of Islamic
Economics, 4 (2).
Mishkin, F.S. (2001). The Economics of Money, Banking Financial Markets, 6th ed.,
Addison-Wesley, Reading, M.A.
Molina, A., Martý´n-Consuegra, D., Esteban, A. (2007). Relational benefits and
customer satisfaction in retail banking, International Journal of Bank Marketing,
25 (4), 253-271.
Morre, C. D. (1987). Outclass the Competition with Service Distinction, Mortgage
Banking, 47 (11).
Comparative Study of Islamic Banking 175
Moutinho, L. & Smith, A. (2000). Modeling bank customer satisfaction through
mediation of attitudes towards human and automated banking, International
Journal of Bank Marketing, 18 (3), 124-134.
Mukharjee, A., Nath, P. & Pal, M. (2003). Resource, service quality and performance
triade: a framework for measuring efficiency of banking services, Journal of the
Operational Research Society, 54 (7), 723-735.
Naser, K., Jamal, A., & Al-Khatib, K. (1999). Islamic banking: a study of customer
satisfaction and preferences in Jordan, International Journal of Bank Marketing,
17 (3), 135-150.
Najamabadi, M.H. (1991). Ta’seer-e Tahavolat-e Ban-kadri Jadeed dar Abzar-e
Siasathay-e Pouli va Etabar (The impact of new banking reforms on monetary and
credit policy tools)”, Presented at the First Seminar on Monetary and Foreign
Exchange Policies, Tehran, Iran.
Ndubisi, N.O., Wah, C.K. & Ndubisi, G. C. (2007) Supplier-customer relationship
management and customer loyalty: The banking industry perspective, Journal of
Enterprise Information Management, 20 (2), 222-236.
Nelson, N.O., & Chan, K.W. (2005). Factorial and discriminant analysis of the
underpinnings of relationship marketing and customer satisfaction, The
International Journal of Bank Marketing, 23 (7), 542-557.
Nelson, N.O. (2006). A structural equation modeling of the antecedents of relationship
quality in the Malaysia banking sector, Journal of Financial Services Marketing,
11 (2), 131-141.
Comparative Study of Islamic Banking 176
Newman, K. & Cowling, A. (1996). Service quality in retail banking: the experience
of two British clearing banks, The International Journal of Bank Marketing, 14
(6), 3-11.
Norizan, M. K. & Nizar, S. (2007). Customer retention measurement in the UAE
banking sector, Financial Services Marketing, 11 (3), 217-228.
Nunnally, J.C. (1967). Psychometric Theory, New York: McGraw –Hill.
Nunnally, J.C. (1967). Psychometric Theory, Second edition. New York: McGraw –Hill.
Nunnally, J.C. & Bernstein, I.H. (1967). Psychometric Theory, Third edition, New
York: McGraw –Hill.
Obbe, C. (1980). African Women: Their Struggle for Economic Independence, London:
Zed Books
Ojo, J. A. T. (1994). An overview of the Nigerian banking system, Working paper,
Department of Finance, University of Lagos, Nigeria.
Ogenyi, V. O. (1997) Cultural and social impediments on the performance of female
personnel managers in Nigerian work environment, Unpublished dissertation,
Theme Valley University, London, UK.
Oliva, T.A., Oliver, R.L & MacMillan, I.C. (1992). A catastrophe model for
developing service satisfaction strategies, Journal of Marketing, 56, 83-95.
Olorunniwo, F., Hsu, K.M. (2006). A typology analysis of service quality, customer
satisfaction and behavioral intentions in mass services, Managing Service
Quality, 16 (2), 106-123.
Comparative Study of Islamic Banking 177
Oliver, R.L. & Swan, J.E. (1989). Consumer perceptions of interpersonal equity and
satisfaction in transactions: a field survey approach, Journal of Marketing, 53,
21–35.
Omar, O. & Ogenyi, V. (2004). A Qualitative evaluation of women as managers in the
Nigerian civil service, The International Journal of Public Sector Management,
17 (4), 360-373.
Omar, O. (2007). Gender-based retail bank choice decision in Nigeria, Journal o Retail
Marketing Management Research, 1 (1), 20-31.
Omar, O. (2008). Determinants of retail bank choice in Nigeria: a focus on gender-
based choice decisions, Service Business, 2 (3), 249-265.
Parasuraman, A., Zeithaml, V.A. & Berry, L.L. (1985). A conceptual model of service
quality and its implications for future research, Journal of Marketing, 49, 41-50.
Parasuraman, A., Zeithaml, V.A. & Berry, L. (1988). SERVQUAL: a multiple-item
scale for measuring customer perceptions of service quality, Journal of Retailing,
64, 12-40.
Parasuraman, A., Zeithaml, V.A. & Berry, L.L. (1991a). Refinement and reassessment
of the SERVQUAL scale, Journal of Retailing, 67 (4), 42-50.
Parasuraman, A., Berry, L.L. & Zeithaml, V.A. (1991b). Understanding customer
expectations of service, Sloan Management Review, 39, 39-48.
Peter, J.P. (1979). Reliability: A Review of Psychometric Basics and Recent Marketing
Practices, Journal of Marketing Research, 16(1), 6-17.
Peter, T. & Waterman, R. H. (1982). In search of Excellence, New York: Harper Row.
Comparative Study of Islamic Banking 178
Petridou, E., Spathis, C., Glavell, N. & Liassides, C. (2007). Bank service quality:
empirical evidence from Greek and Bulgarian retail customers, International
Journal of Quality and Reliabilitly Management, 24 (6), 568-585.
Pfeffer, J. & Salancik, G. R. (1978). The External Control of Organizations, New York:
Harper and Row.
Quinn, R.E. & Rohrbaugh, J. (1983). A spatial model of effectiveness criteria:
Towards a competing values approach to organizational analysis, Management
Science, 29 (3), 363-377.
Rashid, A. Z., Sambasivan, M. & Johari, J. (2003). The influence of corporate culture
and organizational commitment on performance, Journal of Management
Development, 22 (8), 708-728.
Razak, R.M., Chong, C.S. & Lin, B. (2007). Service quality of a local Malaysian bank:
Customers’ expectations, perceptions, satisfaction and loyalty, International
Journal of Services and Standards, 3 (1), 18-38.
Reichheld, F., (1996), The Loyalty Effect, Harvard Business School Press, Boston, MA.
Rehman, G., (1993), Hurmaat-e Sood- Ashkaal ka Ilmi Jaiza (Prohibition of Riba-An
Analysis of Different Kinds of Riba), Institute of Maarif-e Islami, Mansoora,
Lahore, Pakistan.
Romano, R. & Sanfillippo, B. (1996). A total approach: measure scale and service,
Texas Banking, 85 (8), 16-17.
Rust, R. T. & Oliver, R. L. (1994). Service quality: insights and managerial Implications
from the frontier, in: Service Quality: New Directions in Theory and Practice, pp.
1–20 (London: Sage).
Comparative Study of Islamic Banking 179
Rust, R., Zahorik, A. & Keiningham, R. (1995). Return on Quality (ROQ): making
service quality financially accountable, Journal of Marketing, 59, 58-70.
Santos-Vijande, M.L., Sazo-Pe`rez, M.J., Alvarez-Gonza`lez, L.L. & Va`zquez-
Casielles, R., (2005), “Organizational learning and market orientation: Interface
and effects on performance”, Industrial Marketing Management, 34, 187-202.
Saravanan, R. & Rao, K. S. P. (2007). Measurement of Service Quality from the
Customer's Perspective - An Empirical Study, Total Quality Management and
Business Excellence, 18 (3), 435 – 449.
Saunders, M., Lewis, P., & Thornhill, A. (2003). Research Methods for Business
Students (ed. 3), Harlow: Pearson Education Limited.
Segar, A.H. (1997). Assessing the Unidimensionality of Measurement: A Paradigm and
Illustration within the Context of Information Systems Research, Omega, 25 (1),
107-121.
Shemwell, D.J., Yavas, U. & Bilgin, Z. (1998). Customer-service provider
relationships: an empirical test of a model of service quality, satisfaction and
relationship-oriented outcomes, International Journal of Service Industry
Management, 9 (2), p. 155.
Siddiqi, M.N. (1973). Banking Without Interest, Lahore: Islamic Publication.
Siddiqui, M.N. (1979). Banking in an Islamic Framework, Islamic Council of Europe,
pp. 101-111.
Siddiqui, M.N. (1985). Partnership and Profit sharing in Islamic Law, Leicester: The
Islamic Foundation.
Comparative Study of Islamic Banking 180
Slater, S.F. & Nerver, J.C. (1995). Market orientation and the learning Organization,
Journal of Marketing, 59 (3), 63-74.
Solomon, R.C. (1998). The moral psychology of business: Care and compassion in the
corporation, Business Ethics Quarterly, 8, 515-533.
Sorenson, B. J. (2002). The strength of corporate culture and the reliability of firm
performance, Administrative Science Quarterly, 47 (1), 70-91.
Spathis, C., Petridou, E. & Glaveli, N. (2004). Managing service quality in banks:
customers’ gender effects, Journal of Managing Quality, 14 (1), 90-102.
Spreng, R. A. & Mackoy, R. D. (1996). An empirical examination of a model of
perceived service quality and satisfaction, Journal of Retailing, 72, 201–214.
Spreng, R.A., MacKengenzie, S.B. & Olshavasky, R.W. (1996). A re-examination of
the determinants of consumer satisfaction, Journal of Marketing, 60, 15-32.
State Bank of Pakistan (2007), Banking System Review, Banking Surveillance
Department, Islamabad.
State Bank of Pakistan (2007), Islamic Banking Sector Review 2003 to 2007, Islamic
Banking Department, Islamabad.
State Bank of Pakistan (2007), Islamic Banking Bulletin, October - December, 2007.
State Bank of Pakistan (2008), Islamic Banking Bulletin, April- June, 2008.
Starkey, M.W., Williams, D. & Stone, M. (2002). The state of customer management
performance in Malaysia, Marketing Planning and Intelligence, 20 (6), 378-385.
Surprenant, C.F. & Solomon, M.R. (1987). Predictability and personalization in the
service encounter, Journal of Marketing, 51 (2), 86-96.
Comparative Study of Islamic Banking 181
Sureshchandar, G. S. et al. (2002). Determinants of customer perceived service quality: a
confirmatory factor analysis approach, Journal of Services Marketing, 16 (1), 9–
34.
Sureshchandar, G.S., Chandrasekharan, R. & Anantharaman, R.N. (2003). Customer
perceptions of service quality in the banking sector of a developing economy: a
critical analysis, International Journal of Bank Marketing, 21, 233–242.
Swanson, S.R. & Kelley, S.W. (2001). Service recovery attributions and word-of- mouth
intentions, European Journal of Marketing, 35 (1/2), 194-211.
Thompson, R., Barclay, D.W. & Higgins, C.A. (1995). The Partial Least Squares
Approach to Casual Modeling: Personal Computer and Use as an Illustration,
Technology Studies: Special Issues on Research Methodology, 2 (2), 284-324.
Ting, D.H. (2006). Further probing of higher order in satisfaction construct: The case of
banking institutions in Malaysia, The International Journal of Bank Marketing,
24 (2), 98-111.
Tripe, D.W.L. (2007). The Relative Efficiency of Banks, Taking into Account a
Customer Satisfaction Rating, 20th Australasian Finance & Banking Conference
2007.
Tvorik, J.S. & McGivern, H.M. (1997). Determinants of organizational performance,
Management Decision, 35 (6), 417-435.
Urban J. D., & Pratt, D. M. (2000). Perception of banking services in the wake of
banking mergers: an empirical study, Journal of Services Marketing, 14 (2),118-
131.
Comparative Study of Islamic Banking 182
Uzair, M. (1976). Some Conceptual and Practical Aspects of Interest-Free Banking,
Studies in Islamic Economics, 37-57.
Venkantraman, N., & Ramanujam, V. (1986) Measurement of business performance
in strategy research: A comparison of approaches, Academy of Management
Review, 11, 801-814.
Walker, D. (1990). Customer First: A Strategy for Quality Service, Gower, Aldershot.
Wang, Y., Lo, H. & Hui, Y.V. (2003). The antecedents of service quality and product
quality and their influences on bank reputation: evidence from banking industry in
China, Managing Service Quality, 13 (1), 72-83.
Wei K.K., & Nair M. (2003). The effects of customer service management on
business Performance in Malaysian banking industry: an empirical analysis, Asia
Pacific Journal of Marketing and Logistics, 18 (2), 111-128.
Weiss, B.T. & Hartle, F. (1998). Reengineering performance management:
Breakthroughs in achieving strategy through people, The Hay Group, St. Lucie
Press, Roca Raton, Florida.
Weiltzman, M. (1984). The Share Economy, Harvard University Press, Cambridge, M.A.
Weiltzman, M. (1985). Profit sharing as macroeconomic policy, American Economic
Review, 41-45.
Westbrook, R.A. & Oliver, R.L. (1981). Developing better measures of consumer
satisfaction: some preliminary results, in Monroe, K.B. (Ed.), Advances in
Consumer Research, Association for Consumer Research, Ann Arbor, MI, 94-99.
Wernerfelt, B. (1984). A resource-based view of the firm, Strategic Management
Journal, 5, 171-180.
Comparative Study of Islamic Banking 183
Wheelen, L.T. & Hunger, D.J. (1998). Strategic Management and Business Policy:
Entering 21st century global society, Sixth Edition, Addison-Wesley.
Wilson, C. (1979). An Infinite Horizon Model with Money, in Jerry R.G. and Jose`,
A.S., (eds.), General Equilibrium, Growth and Trade, New York: Academic
Press, 81-104.
Wilson, R. (1990). Islamic Financial Markets in the Global Economy, Edinburgh,
Edinburgh University Press.
Woldie, A. & Adersua, A. (2004). Female entrepreneurs in a transitional economy:
businesswomen in Nigeria, International Journal of Social Economics, 31 (12),
78-93.
Wold, H. (1980). Soft modeling: intermediate between traditional model building and
data analysis, Mathematical statistics, 6, 333-346.
Woodside, A.G., Fery, L.I. & Daly, R.T. (1989). Linking service quality, customer
satisfaction, and behavioral intention, Journal of Health Care Marketing, 9 (4), 5-
17.
White, D. (1994). Familiarity breeds content, Banking World, 12 (5), p. 18.
Yavas U., Bilgin Z. & Shemwell D. J. (1997). Service Quality in the Banking Sector
in an Emerging Economy: A consumer Survey, The International Journal of
Bank Marketing, 15 (6), 217-223.
Yavas,U., Benkenstein, M., & Stuhldreier, U. (2004). Relationships between service
quality and behavioral outcomes A study of private bank customers in Germany,
The International Journal of Bank Marketing, 22 (2), 144-157.
Comparative Study of Islamic Banking 184
Yavas, U., Babakus, E. & Ashill, J. N. (2007). Gender-based differences in customer
perceptions of frontline employee performance: a banking study in New
Zealand, Service Marketing Quarterly, 28 (3), 117-129.
Yi, Y. (1990). A critical review of consumer satisfaction in Zeithaml, V.A. (Ed), Review
in Marketing, American Marketing Association, Chicago, IL, pp. 68-123.
Yousefi, M., Abizaden, S. & McCormick, K. (1997). Monetary Stability and interest-
free banking: the case of Iran, Applied Economics, 29 (7), 869-876.
Zeithaml, V.A., Parasuraman, A. & Berry, L.L. (1990). Delivering Quality Service:
Balancing Customer Perceptions and Expectations, New York: The Free Press.
Zahorik, A.J. & Rust, R.T. (1992). Modeling the impact of service quality on
profitability: a review, in Swartz, T.A, Bowen, D.E. and Brown, S.W., Advances
in Service Marketing and Management, Vol. 1 JAI Press, Greenwich, pp. 247-276
Zeithmal, V.A., Parasuraman, A. & Malhotra, A. (2000). Service quality delivery
through websites: a critical review of extant knowledge, Journal of the Academy
of Marketing Science, 30 (4), 362-375.
Zineldin, M. (2005). Quality and customer relationship management as competitive
strategy in the Swedish banking industry, The TQM Magazine, 17 (4), 329-344.
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
Comparative Study of Islamic Banking
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
Comparative Study of Islamic Banking
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
Comparative Study of Islamic Banking
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
Comparative Study of Islamic Banking
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
1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral
4. Likely to rise evolution 5. Rising evolution
3. Personnel activities coordination
1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral
4. Likely to rise evolution 5. Rising evolution
4. Share market
1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral
4. Likely to rise evolution 5. Rising evolution
Comparative Study of Islamic Banking
190
5. Profitability
1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral
4. Likely to rise evolution 5. Rising evolution
6. Productivity
1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral
4. Likely to rise evolution 5. Rising evolution
7. Voluntary personnel rotation
1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral
4. Likely to rise evolution 5. Rising evolution
8. Personnel absenteeism.
1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral
4. Likely to rise evolution 5. Rising evolution
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?
THANKS FOR YOUR COOPERATION
A Less than a Year B 1 up to 5 Years C 5 up to 10 Years D 10 Years and above
Comparative Study of Islamic Banking
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?
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 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
Comparative Study of Islamic Banking
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
Comparative Study of Islamic Banking
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
Comparative Study of Islamic Banking
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
THANKS FOR YOUR COOPERATION
Comparative Study of Islamic Banking
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
1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral
4. Likely to rise evolution 5. Rising evolution
2. Internal process coordination
1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral
4. Likely to rise evolution 5. Rising evolution
3. Personnel activities coordination
1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral
4. Likely to rise evolution 5. Rising evolution
4. Share market
1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral
4. Likely to rise evolution 5. Rising evolution
Comparative Study of Islamic Banking
196
5. Profitability
1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral
4. Likely to rise evolution 5. Rising evolution
6. Productivity
1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral
4. Likely to rise evolution 5. Rising evolution
7. Voluntary personnel rotation
1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral
4. Likely to rise evolution 5. Rising evolution
8. Personnel absenteeism.
1. Decreasing evolution 2. Likely to decrease evolution 3. Neutral
4. Likely to rise evolution 5. Rising evolution
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?
A Less than a Year B 1 up to 5 Years C 5 up to 10 Years D 10 Years and above
THANKS FOR YOUR COOPERATION
Comparative Study of Islamic Banking
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
Comparative Study of Islamic Banking
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
Comparative Study of Islamic Banking
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
Comparative Study of Islamic Banking
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.
Comparative Study of Islamic Banking 201
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