Final Research Proposal 1c6620

Customer Satisfaction in Islamic Banks of Pakistan

(i)

TABLE OF CONTENTS

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Introduction…………………………………………………………………….. ………1 1.1 Overview of Research……………………………………………………1 1.2 Research Objectives……………………………………………………...2

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Literature Review………………………………………………………………………..3 2.1 Theoretical Framework…………………………………………….3 2.2 Conceptual Framework………………………………………….....6 2.3 Research Questions………………………………………………….8 2.4 Hypotheses Testing………………………………………………….8

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Research Methodology…………………………………………………………………..9 3.1 Research Design………………………………………………………9 3.2 Development of Instrument…………………………………………...9 3.3 Sampling and Data Collection…………………………………………9

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Questionnaire …………………………………………………………………………….11

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Data Analysis……………………………………………………………………………..15

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Conclusion…………………………………………………………………………………16

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References………………………………………………………………………………….18

Customer Satisfaction in Islamic Banks of Pakistan

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RESEARCH PROPOSAL 1. INTRODUCTION 1.1 Overview of the Research The Islamic Banking industry in Pakistan has shown growth over the past few years and it is expected that such positive growth record will continue over time. The Islamic Banking System was first implemented in Pakistan in 1980 by state bank as it introduced some Islamic regulations in the banking ordinance (Sheikh, Taseen, Haider, & Naeem, 2011). Meezan Investment Bank was the very first Islamic Bank that started it‟s operations in 2001. According to a report by McKinsey & Co. (2008), the growth rate of the Islamic banking industry is around 20% per year which is very attractive. In their study, Raza, Saddique, Farooq, & Awan (2012) said that the concept of Islamic banking is very old and was initially established centuries back but it has been introduced in the modern world as a proper banking system in the twentieth century. The Muslim population all over the globe required an Islamic financial institution in order to satisfy their banking needs while following the principles of Islam which is why Islamic banking was introduced. Khattak & Rehman (2008) reported that the major difference between conventional banking system and Islamic banking is that conventional banking is an interest based system while „Riba‟ or interest is strictly prohibited in Islam which is why Islamic banking focuses on activities and provision of Islamic products that discourage interest. As customers are the main source of income for every industry including the banking system, the success of all banks, including Islamic ones, relies on the level of customer satisfaction (Raza et al., 2012). If customers are satisfied with the Islamic banking services the operations of Islamic

Customer Satisfaction in Islamic Banks of Pakistan

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banks would continue successfully, however if the customers are hesitant to adopt Islamic banking products, this industry might soon face its downfall (Doraisamy, Shanmugam, & Raman, 2011). The Islamic banking products introduced by various Islamic banks must be able to satisfy the needs and wants of the customers. Various studies have been conducted in order to determine the key influential factors that can affect the satisfaction of Islamic banking customers. Nasir, Jamal and Khalid (1999) conducted a study in Jordan and determined that due to increasing competition in the banking industry, it is essential for Islamic banks to focus on the satisfaction of their customers. It has also been reported that religion is not the primary factor due to which people opt for Islamic banks; there are various other factors that are involved (Metawa & Al Mossavi, 1998). This research would be focused on the customer satisfaction of consumers who are currently using Islamic Banking services. The purpose of this study is to determine the key factors which can have an impact on customer satisfaction of Islamic Banking customers. 1.2 Research Objectives The main objective of this study has been defined as follows: “To identify major the factors influencing customer satisfaction in Islamic Banks of Pakistan” Through this research paper, we aim to achieve this main objective and conduct a proper quantitative analysis in order to come up with well established results regarding the purpose of our study. The remainder of our research would consist of a literature review, methodology, data analysis and finally we would be providing a conclusion of our research.

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2. LITERATURE REVIEW 2.1 Theoretical Framework The theoretical framework of this research paper would focus on the main aspects of Islamic banking and customer satisfaction. Islamic Banking & Customer Satisfaction According to Gaith and Worthington (2010), Islamic banking is based on the teachings of The Holy Quran and Sunna along with relative events from Islamic history using certain guidelines in the Shariah such as Riba, Gharrar, Halal or Haram etc. Sharia (Islamic Law) is one of the most rapidly growing segments in the global finance industry. Starting from a few Middle Eastern Muslim countries from 1975, the number of Islamic financial institutions worldwide now exceeds over 300, with operations in 75 countries and assets in excess of US$400 billion (Gait & Worthington, 2008). Islamic Banking is different from conventional banking because Riba (interest) is prohibited in Islam i.e. banks are not allowed to offer a fixed rate of return on deposits and are not allowed to charge interest on loans (Abduh, Kassim, & Dahari, 2012). Trabelsi (2011) said that the unique feature of Islamic banking is it‟s PLS principles, which is predominately based on Mudarbah (Profit Sharing) and Musharkah (t Venture). Under the PLS paradigm, the assets and liabilities of Islamic banks are integrated in the sense that borrowers share profits and losses with the banks, which in turn share profits and losses with the depositors (Khattak and Rehman, 2008). Advocates of Islamic banking, thus, argue that Islamic banks are theoretically better positioned than conventional banks to absorb external shocks because the banks‟ financing losses are partially absorbed by the depositors (Trabelsi, 2011).

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Customer satisfaction can be regarded as fulfilling the requirements of the customers and is a major factor that influences the buying behavior of customers. Satisfied customers tend to come back to purchase more and do positive publicity by telling their family and friends about their good experience (Naser, Jamal, & Al-Khatib, 1999). Those who are not satisfied tend to give negative to others. Customer satisfaction is a determining factor due to increasing competition. Butt and Aftab (2012) studied that there are certain pre-purchase expectations that a customer has and if they are met then the customer is satisfied. Customer satisfaction is closely related to (however not dependant on) the quality of service being provided. The customer compares the actual performance with perceived expectations to determine the quality (Naser, Jamal, & AlKhatib, 1999). There are two major aspects: process aspect and outcome aspect which deal with the actual process and final results of services. Customers judge the quality in relation to their experience. Customer Satisfaction in Islamic Banks A study conducted by Butt and Aftab (2012) showed that the Islamic banking system should govern by the principles of Sharia (Islamic laws). Sharia can be translated as the "path or way" which governs every aspect of a Muslim's life. These laws are grounded on the Quranic philosophy of what is permissible (Halal) and what is not permissible (Haram) for a true believer of its teachings. These laws have significant influence on the consumption behaviours of a devoted Muslim. For example, prohibition against charging or paying interest in Islamic Sharia laws creates difficulties and challenges for devoted Muslims to deal with most of the conventional banking products and services. Therefore, a bank that proclaims and promises

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provision of similar products and services as offered by a conventional bank, but also asserts compliance with the Sharia principles, adds value for its Muslim customers (Butt & Aftab, 2012). Naser, Jamal & Khatib (1999) argued that the criterion via which a customer selects a bank affects the satisfaction. Some of the most important factors are: - Location of the bank Reputation and image of bank – profit rates - Staff friendliness and efficiency and other factors include parking facilities, confidentiality, employee skills, word of friends and relatives, efficiency of services etc. If service is not good enough on these criteria then customer would not be satisfied (Kettell, 2011). Banks need to do effective marketing in order to increase awareness and satisfaction. According to a previous study, consumers preferred banks who offered low service charges and high interest rates for greater profitability. A fast and efficient service was also an attractive feature valued by current and potential customers but the most important element, considered by many, was of feeling secure (Abedniya & Zaeim, 2011). Still in a more competitive environment customer satisfaction was seen as the main driving force. Even after conducting a selfistered questionnaire the above mentioned things were proven. The new finding was that a religious motivation in bank selection did not appear very important (in Jordan) Muslims living in a notionally Muslim country have a greater awareness and knowledge of Islamic banking than immigrant Muslims (Gait & Worthington, 2008). Even though these Muslims (in UK) are ill informed about Islamic banking still prefer Islamic banking over conventional banking. In such instances religion is the primary factor of choice for Islamic banks.

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A Pakistani Perspective According to Khattak and Rehman (2010), in Pakistan the first step regarding IBS implementation was taken in 1980, when State Bank of Pakistan made some changes in the rules and regulations of banking ordinance. In December, 2001 the first certificate had been issued to Meezan Investment bank as the first stand alone Islamic Bank in Pakistan. And now with the blessing of Allah in Pakistan till the end of 2007 there were six (6) full-fledged Islamic Banks. (Meezan Bank, Albarka Islamic Bank, Dubai Islamic Bank, Dawood Islamic Bank, Global Emirate Islamic Bank, Bank Islamic Pakistan). The study shows that most of the customers are not aware of the different Islamic banking products such as Ijara financing, Murabaha financing. It means that Islamic banking industry have to give consideration to providing awareness to their customers (Khattak & Kashif-Ur-Rehman, 2010). 2.2 Conceptual Framework The variables that influence customer satisfaction in Islamic banks of Pakistan in our study can be divided in two main types: Independent and Dependent variables. The dependent variable in this study would be identified as Customer Satisfaction whereas the five important independent variables that are known to influence the customer satisfaction can be identified as with the help of the main concepts: Profitability, Confidentiality, Shariah Compliance, Reputation of the bank and Service Efficiency. These are also known to be our „Constructs‟. In a research conducted by Naser, Jamal and Khatib (1999), various variables were identified and analysed in order to determine their impact and importance on customer satisfaction. Butt and Aftab (2012) also came to the conclusion that religion is not the only factor which can influence the choice of the customers.

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Fig 1.0 Conceptual Framework According to Bashir (2013), these contructs can be converted into variables in order to gauge their importance in by operationalizing them in the following ways:

Constructs

Variables -

-

Provision of Islamic Banking Products and Services Following of Islamic laws and principles High profits on savings

-

High return on investments Speed of transactions

-

Prompt Resolution of Complaints Privacy of Information

-

Security in conducting transactions Attractive promotional activities

-

Experienced and efficient management

Shariah Compliance -

Profitability

Service Efficiency

Confidentiality Bank‟s Reputation

Table 1.0

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2.3 Research Questions Based on the above Research Objectives and findings of the literature review, our main research question would be as follows: “What are the major factors that influence customer satisfaction in Islamic banks of Pakistan?” 2.4 Hypotheses Testing Based on the literature review and formulation of objectives and research questions, the hypotheses that we would be testing in our research can be defined as follows: H1: Customer Satisfaction in Islamic Banking is positively associated with service efficiency of the bank. H2: Customer satisfaction in Islamic banking is positively associated with Shariah compliance of the bank. H3: Customer satisfaction in Islamic banking is positively associated with reputation of the bank. H4: Customer satisfaction in Islamic banking is positively associated with the profitability of customer investments. H5: Customer Satisfaction in Islamic banking is positively associated with the confidentiality of information.

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3. RESEARCH METHODOLOGY 3.1 Research Design The study investigates the various factors that influence customer satisfaction in Islamic Banks. This research paper aims at testing the different hypotheses that we have formed in order to come to a conclusion. Our research design based on literature review is descriptive in nature working our way through the details and extracting data for explaining our proposed paper in the best possible manner. We are taking the quantitative approach to analyze the position of Islamic banks within Pakistan by the using the survey instrument in the form of a questionnaire. 3.2 Development of Instrument After the review of our literature and identification of key variables, we created a questionnaire containing 15 questions for us to find out the factors that are associated with satisfaction of Islamic banking customers. Our questionnaire is structured and consists of closed ended questions in order to gain quantitative data for our analysis. There are two parts of the questionnaire; the first part focuses identification of key factors that influence customer satisfaction. There are 2 questions allocated for each variable. The second part consists of demographics in order to determine the respondent‟s profile. 3.3 Sample and Data Collection We are going to use a sample size of 200 customers that have been obtaining Islamic Banking services via non-random sampling technique. The survey would be conducted by distributing questionnaires in different Islamic Banks of Pakistan and the respondents would be selected nonrandomly from the population. The scales that would be used in the questionnaire are: nominal scale for demographics and Likert scale for customer satisfaction. Each variable would be

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assessed by a 5 point Likert scale where 1 stands for „strongly agree‟ and 5 stands for „strongly disagree‟. Data collection is done through electronic surveys and manual handout questionnaires that would be distributed to the customers of different Islamic Banks. The quantity of electronic surveys would be about 100 and the handout questionnaires about 100 too. Assessing reliability of sample collected The probability of response rate of customers that would be reasonable to help in analysis of the collected data is estimated around 85%. After collecting data from the respondents, the improper samples would be discarded and the usable questionnaire data would be utilized to formulate our findings with the help of our literature review.

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4. QUESTIONNAIRE CUSTOMER SATISFACTION IN ISLAMIC BANKS OF PAKISTAN Purpose: The purpose of this survey is to determine and identify the factors that influence customer satisfaction in Islamic Banks. The survey aims at finding the most important aspects of Islamic banking considered by the customers.

1. Please choose the Islamic Bank that you are currently a consumer of (choose all that apply):  Al Baraka Bank  Bank Islami Pakistan Limited  Burj Bank  Dubai Islamic Bank Pakistan Limited  Meezan Bank Limited  Askari Islamic Bank 2. How long have you been obtaining the services of your current Islamic Bank?  Less than 1 year  1-3 years  4-6 years  More than 6 years

3. How would you rate your satisfaction level with your current bank based on the following factors?

Provision of Islamic Products Following Islamic Principles Privacy of Information Security of transactions Return on Investment Profit on Savings

Highly satisfied 1

Satisfied

Neutral

Dissatisfied

2

3

4

Highly Dissatisfied 5

1

2

3

4

5

1

2

3

4

5

1

2

3

4

5

1

2

3

4

5

1

2

3

4

5

Customer Satisfaction in Islamic Banks of Pakistan

Complaint Resolution Speed of Transactions Promotional activities Experience of management

Highly satisfied 1

12

Satisfied

Neutral

Dissatisfied

2

3

4

Highly Dissatisfied 5

1

2

3

4

5

1

2

3

4

5

1

2

3

4

5

4. Do you feel secure while conducting transactions with your bank?

5. Do you trust your bank in keeping your important information private?

6. In your opinion, is it important for an Islamic bank to follow Islamic principles?

7. Do you think that your bank provides sufficient Islamic banking products to choose from?

Customer Satisfaction in Islamic Banks of Pakistan

8. Do you believe that the promotional activities conducted by your bank are satisfactory?

9. Do you believe that your bank has an experienced management?

10. Do you believe that your bank helps you in conducting speedy transactions?

11. Do you believe that your bank is quick in handling your complaints?

12. Do you believe that your bank provides you a satisfactory return on your investments?

13. Do you believe that your bank provides you a satisfactory profit on your savings?

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Customer Satisfaction in Islamic Banks of Pakistan

Demographics: 14. Age:  18-25 years  26-33 years  34-41 years  42-50 years  Above 50 years

15. Level of education:  Matriculation  Intermediate  Graduate  Post-graduate  Other (Please Specify): ______________ 16. Monthly Income Level: Less than Rs. 20,000 Rs. 20,000-50,000 Rs. 50,000-80,000 Rs. 80,000-110,000  Above Rs. 110,000

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5. DATA ANALYSIS A statistical package for social sciences (SPSS) version 17.0 will be used to analyze the data from the questionnaires. SPSS would be used to record the data and also perform a statistical analysis on the responses received from the customers. In order to initially check the reliability of the data we would be applying Cronbach‟s alpha. Internal consistency of the whole scale is the most widely accepted measure of reliability. It is obtained by coefficient alpha known as Cronbach‟s alpha. Factor analysis technique will be applied to help in reducing the variables in order to get the effective results. The prime factors will be computed through the compute variable technique. The questionnaire consists of questions that would help in establishing the primary factors that influence customer satisfaction in Islamic Banks. Descriptive statistics via SPSS will be used to shape the respondents profile and arithmetic mean of each category as well as each factor will be calculated separately to rank the factors on the basis of respondents‟ responses. Descriptive analysis will be used to carry out the data analysis on the respondent‟s profile. The profile is one of the sections in the questionnaire in this study. In order to test the hypotheses formulated previously, the linear regression analysis will be applied.

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6. CONCLUSION In contrast to the world growth of Islamic banks, the Islamic banks in Pakistan are somewhat underdeveloped and there is still a lot of potential in this market that is yet to be tapped into and nurtured in a systematic way that involves people being informed and educated about the importance of Islamic banking. The dual banking system is effectively doing its job in the current economy of Pakistan but with Pakistan being a sovereign Islamic state, Islamic banks can really prosper if it is brought forward across the general public in a way most acceptable to us all. While religious conviction is a logical key determinant of Islamic finance services, it is often not the only concern that people have, with most customers identifying that a bank‟s reputation, service efficiency, privacy and returns on their investments plays an integral part in their satisfaction with Islamic banks in Pakistan. Our efforts through this research will help in identifying that though there is one driving factor that influences customer satisfaction in Islamic banks there are always sub-factors that are always ing the driving factor that really seals the deal, meaning turning customer satisfaction into customer delight. In our case the major determinant is believed to be Shariah compliance which is basically the religious aspect of Islamic banks that they have to be following the Islamic teachings and not have any conventional bank items involved but this alone is not enough for customer satisfaction. There are various ing factors to be explored in the research. There are however certain hurdles and limitations that can be faced as researchers. The limitations of the current research study are: due to scarce resources the research would be restricted to some cities of Pakistan. In addition, there can be some non-response and respondent

Customer Satisfaction in Islamic Banks of Pakistan

error that would have to be sorted. The last one is the lack of experience and limitation of time since within the short period of four months we would be unable to perform a better quality for our research. In conclusion, it could be said that the focus of the research would completely be on the important factors that can influence the customer satisfaction in Islamic banks.

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References Abduh, M., Kassim, S., & Dahari, Z. (2012). Customer Satisfaction and Switching Behavior in Islamic Banking: Evidence from Indonesia. School of Doctoral Studies (European Union) Journal. Abedniya, A., & Zaeim, M. N. (2011). Measuring the perceive service Quality in the Islamic Banking System in Malaysia . International Journal of Business and Social Science. Bashir, M. S. (2013). Analysis of Customer Satisfaction with the Islamic Banking Sector: A case of Brunei Darussalam . Asian Journal of Business and Management Sciences. Butt, M. M., & Aftab, M. (2012). Incorporating attitude towards Halal Banking in an Integrated Service Quality, Satisfaction, Trust and Loyalty Model in Online Islamic Banking Context. Doraisamy, B., Shanmugam, A., & Raman, R. (2011). A STUDY ON CONSUMERS’ PERFERENCES OF ISLAMIC BANKING PRODUCTS AND SERVICES IN SUNGAI PETANI. Academic Research International. Gait, A., & Worthington, A. (2008). An empirical survey of individual consumer, business firm and financial institution attitudes towards Islamic methods of finance. Kettell, B. (2011). Introduction to Islamic Banking and Finance. John Wiley & Sons. Khattak, N. A., & Kashif-Ur-Rehman. (2010). Customer satisfaction and awareness of Islamic Banking System in Pakistan. Naser, K., Jamal, A., & Al-Khatib, K. (1999). Islamic banking: a study of customer satisfaction and preferences in Jordan. Raza, A., Saddique, U., Farooq, U., & Awan, S. (2012). Customer Satisfaction Towards Islamic Banks: Pakistan's Perspective. Arabian Journal of Business and Management Review. Sheikh, A., Taseen, U., Haider, S. A., & Naeem, M. (2011). Islamic Vs Conventional Banks in Pakistan . Trabelsi, M. A. (2011). The impact of the financial crisis on the global economy: can the Islamic financial system help?