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 (Prof. Dr. M. Hayat Awan)

External Examiner (Dr. Mahmood A. Bodla)

Internal Examiner (Dr. Hamuyoun Naeem)

Head of the Department (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 List of Tables List of Figures List of Appendices Acknowledgement Abstract

XI XIII XV XVI XVII XIX

Chapter 1 Introduction 1.1 Background History of the Study 1.1.1 1.1.2 Islamic Banking Islamic and Conventional Banking

1 2 4 5 8 9 10 13 14 15 16 18

1.2 Broad Problem Area 1.2.1 Pakistani Banking Sector

1.3 Identification of Knowledge Gap 1.4 Statement of the Problem 1.5 Objectives of the Study 1.6 Significance of the Study 1.7 Definition of the Variables of the Study 1.8 Organization of the Dissertation

VIII Chapter 2 History and Development of Conventional and Islamic Banking in Pakistan 2.1 History of Banking Development in Pakistan 2.2 Prohibition of Interest in Islamic Banking 2.3 Functions of Islamic Bank 2.4 Operations and Products of Islamic Bank 2.5 Service Quality of Pakistani Banking Sector 2.6 Customer Satisfaction of Pakistani Banking Sector 2.7 Performance of Pakistani Banking Sector Chapter 3 Literature Review and Theoretical Framework 3.1 Services 3.1.1 Definition of Service and Service Quality 19 20 26 32 36 41 41 42 45 46 47 50 61 61 62 65 70 72 73 77 81 85

3.1.2 Dimensions of Service Quality 3.2 Customer Satisfaction 3.2.1 3.2.2 3.2.3 Defination of Satisfaction Customer Satisfaction in Banking Determinants of Customer Satisfaction

3.3 Bank Performance 3.3.1 3.3.2 Performance Evaluation of Islamic Banks Performance of Pakistani Banking Sector

3.4 Service Quality and Customer Satisfaction in Banking 3.5 Service Quality, Customer Satisfaction and Bank Performance 3.6 Hypotheses, Conceptual Model and Theoretical Framework

IX Chapter 4 Methodology 4.0 Research Method 4.1 Pilot Test 4.2 Main Study 4.3 Measures and Instruments 4.4 Reliability and Internal Consistency of the Variables Chapter 5 Interpretation of Results 5.0 5.1 5.2 5.3 5.4 5.5 Results Demographics of the Respondents Descriptive Statistics of the Variables Hypotheses Testing Regression Model Result Testing the Model 5.5.1 Relationship among Service Quality, Customer Satisfaction and Performance of Islamic Banks in Pakistan 5.5.2 Relationship among Service Quality, Customer Satisfaction and Performance of conventional Banks in Pakistan 5.6 Discussion 137 143 150 151 153 155 156 136 94 95 97 100 103 108 113 114 115 119 121 124 135

Chapter 6 Conclusion 6.1 Conclusion 6.2 Suggestions 6.3 Limitations and Future Research 6.4 Contribution of the Study

X 6.5 Practical Implications 6.6 Unique Status of the Study References Appendices 157 158 159 179

XI List of Abbreviations

CB IB SBP Prf DSQL CS ANOVA SEM SE df SQL Tgty Rlty Rspv Asnc Epty Csrv Helmt Smdlv TgSv Slrby

Conventional Bank Islamic Bank State Bank of Pakistan Bank Performance Dimensions of Service Quality Customer Satisfaction Analysis of Variance Structural Equation Modeling Standard Error Degree of Freedom Service Quality Tangibility Reliability Responsiveness Assurance Empathy Core Service Human Element Systemization of Service Deliver Tangibles of Services Social Responsibility

XII Cprf Iprf IBSQL CBSQL IBCS CBCS Slty Srsn PLS GDP ROI ROE UAE SOPs Conventional Bank Performance Islamic Bank Performance Islamic Bank Service Quality Conventional Bank Service Quality Islamic Bank Customer Satisfaction Conventional Bank Customer Satisfaction Service Quality Customer Satisfaction Partial Least Square Gross Domestic Product Return on Investment Return on Equity Unite Arab Emirates Standard Operating Procedures

XIII List of Tables Table Table 1.1 Table 2.1 Table 2.2 Table 2.3 Table 2.4 Table 3.1 Table 3.2 Table 4.1 Table 4.2 Table 4.3 Table 4.4 Table 4.5 Table 4.6 Table 4.7 Table 5.1 Table 5.2 Table 5.3 Table 5.4 Description Page No. 7 35 36 43 44 53 75 97 99 101 102 105 109 111 115 119 120

Difference between Islamic bank and Conventional Bank Financial performance of Islamic banks Financing Products offered by Islamic Banks (in %) Performance of Pakistani Banking Sector Performance of Islamic banks in Pakistan Dimensions of Service Quality used in Banking sector Sources and Uses of Funds by Islamic banks in Pakistan Reliability Statistics of the Pilot-Test Descriptive statistics of the Pilot-Test Selected Banks included in the Study Details regarding Branches and Respondents (City Wise) A Summary of All Variables Operational for the Study Reliability Statistics of the Scales for IB Reliability Statistics of the Scales for CB Summary of Demographics of Respondents Skewness and Kurtosis of the Constructs and Variables Descriptive Statistics of the Variables 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 Table 5.7 Table 5.8 Table 5.9 Table 5.10 Table 5.11 Table 5.12 Table 5.13 Table 5.14 Table 5.15 Table 5.16 Table 5.17 Table 5.18 Table 5.19 Table 5.20 Table 5.21 Summary of Correlation between Selected Variables 123

Summary of Pair wise Correlation between Selected Variables124 Summary of IBDSQL-IBCS Linear Regression model Summary of Multincollinearity coefficients Summary of CBDSQL-CBCS Linear Regression model Summary of Multincollinearity coefficients Summary of IBSQL-IBCS Linear Regression model Summary of CBSQL-CBCS Linear Regression model Summary of IBSQL-IBPrf Linear Regression model Summary of CBSQL-CBPrf Linear Regression model Summary of IBCS-IBPrf Linear Regression model Summary of CBCS-CBPrf Linear Regression model Relationship among Slty, SrSn and Prf Structural Model-Bootstrap for IB Structural Model-Bootstrap for CB Summary of Hypotheses 125 126 127 128 129 130 131 132 133 134 138 141 142 148

XV List of Figures Figure Figure 1.1 Figure 2.1 Figure 2.2 Figure 2.3 Figure 2.4 Figure 3.1 Figure 3.2 Figure 3.3 Figure 3.4 Description Role of Financial Intermediaries (Banks) Functions of Islamic bank Operations of Islamic bank Contributors towards deposits of Islamic bank Page No. 3 33 37 38

Contribution of Islamic banks towards financing products 40 Expectation-Outcome experience of bank customers Customer Satisfaction for better Performance Total Assets of the banking system Graphical display of the hypothesized relationship between Service quality and customer satisfaction 88 63 64 74

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 92 136 137

Figure 5.1 Figure 5.2

Relationship among Slty, Crsn and Iprf Relationship among Slty, Crsn and CPrf

XVI List of Appendices

Appendix

Description

Page No.

Appendix I Appendix II Appendix III Appendix IV

Questionnaire List of banks operating in Pakistan Definition of Terms Results of VPLS

185 197 200 201

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) Savers (Surplus Units) Small households or institutions with smaller amounts Risk averse Financial Intermediation (Banks) Financial Markets especially banks Reduce Risks Pooling small funds to remove mismatch and exploit opportunities
(Size, Maturity, and Liquidity Preference)

Entrepreneurs (Deficient Units) Organized firms with professional skills requiring larger funds

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.

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 Shariah 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 Shariah 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 Shariah 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 Principles Islamic Bank Conventional Bank

Islamic banks follow the Conventional banks follow Principles of Shariah given by manmade principles to perform Allah Almighty to perform operations and activities operations and activities. 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.

Source of Earnings

Risk Sharing

Risk is shared among borrower, Risk is fully transferred to lender and bank. others. It aims at maximizing the profit It aims at maximizing the profit but subject to principles of without any restriction even at the cost of other stakeholders. Shariah. Islamic bank works as a trading It generates income as financial concern (Mudarib or Wakalah) intermediary. Its prime goal is the maximization of to generate its income. shareholders value at any cost. 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.

Profit Maximization Objectives

Nature of Earnings 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 Shariah.

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 Shariah. 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 Shariah. 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 totalbanking 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 Shariah 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 fullfledged Islamic banks and 13 Conventional banks offering products and services according to principles of Shariah 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 Shariah. 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-alqard 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 Shariah 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 interestfree activities purely according to principles of Shariah. 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 General Investment Fund Specific Investment Fund

Accepts Deposits Non-Fund Based Services

Agency & Gen. Utility Functions

Primary Functions

Islamic Bank

Advance Loans (Financing Products)

Long Term Musharika, Mudaribah and Diminishing Musharika etc. Source: Generated

Medium Term Ijarah, Ijarah-Wa-Iqtina etc.

Short Term Murabaha, Salam, Muajjal, Istisna etc.

Fund Based Services

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 shortterm, 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 Deposits of Islamic Bank Share in Bank Assets

12,915 8,397 0.50%

44,143 30,185 1.40%

71,493 49,932 2.10%

119,294 83,840 2.90%

205,212 146,945 4.20%

200,415 141,933 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 Murabaha Ijarah Musharka Diminishing Musharka Salam Istisna Qarz/Qarz-e-hasna Others FY03 79.4 16.5 1.2 1.6 1.3 FY04 57.4 24.8 1 5.9 0.7 0.4 9.8 FY05 44.4 29.7 0.8 14.8 1.9 1.4 3 FY06 48.4 29.7 0.8 14.8 1.9 1.4 3 FY07 38.9 25.4 0.9 25.1 1.4 0.9 7.1 FY08* 38.7 24.2 1.3 24.8 1.6 2.4 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

Accept Deposits Non-Fund Based Services Customers Customers

Agency & Gen. Utility Functions

Primary Functions Islamic Bank

Customers

Advance Loans (Financing Products)

Long Term Musharika, Mudaribah and Diminishing Musharika etc.

Medium Term Ijarah, Ijarah-Wa-Iqtina etc.

Short Term Murabaha, Salam, Muajjal, Istisna etc.

Service Quality

Bank Services
Customer Satisfaction

Bank Customers

Customers

Fund Based Services

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 Shariah 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 IjarahWa-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 organizations 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; Ibez 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 No. of Braches Nationalized Commercial Banks Private Banks Specialized Banks Foreign Banks Assets (Rs. Billion) Nationalized Commercial Banks Private Banks Specialized Banks Foreign Banks Net Advances (Rs. Billion) Nationalized Commercial Banks Private Banks Specialized Banks Foreign Banks Deposits (Rs. Billion) Nationalized Commercial Banks Private Banks Specialized Banks Foreign Banks Net Investment (Rs. Billion) Nationalized Commercial Banks Private Banks Specialized Banks Foreign Banks Source: Economic Survey of Pakistan, 2007-08

2006-07 7852 1690 5597 534 31 4351.9 836.2 3173 119 223.8 2427.7 429.7 1807.2 70.6 120.2 3255 665.6 2425.8 13.5 150.1 836.7 179.9 601.7 16.6 38.5

2007-08 8233 1715 5935 534 49 5155.1 1017.2 3845.2 1199 172.9 2694 488.7 2044.4 72.2 88.7 3852 813.1 2907.8 13.5 117.6 1275.5 298.7 934.5 15.8 26.5

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 Shariah 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)

Dec-07 Dec-06 Dec-05 Dec-04 Dec-03

Descriptions Total Assets % of Banking Industry Deposits % of Banking Industry Financing & Invest. % of Banking Industry
Number of Full Fledge Islamic Banks

Number of Conventional Banks With Islamic Banking Branches No. of Branches 289 Source: Islamic Banking Bulletin by SBP, 2008.

206 4.3 147 4.1 138 3.6 6 12

118 2.9 83 2.8 72 2.4 4 12 150

72 2.1 50 1.9 48 1.8 2 9 70

44 1.4 30 1.2 30 1.3 2 7 48

13 0.5 8 0.4 10 0.5 1 3 17

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).

Ibez 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 1

Author (s)

Dimensions Service Quality Suggest three dimensions of service quality: technical quality; functional quality; corporate image Identified three dimensions of service quality: physical quality; corporate quality and interactive quality Refined their previous work and elaborate three dimensions of service quality Identified ten dimensions of service quality: reliability; responsiveness; tangibility; courtesy; access; credibility; communication; competence; understanding; security Service quality leads to differentiation and enhance competitive position Refined their previous work and compiled ten dimensions of service quality into five: reliability; responsiveness; empathy; assurance; empathy Explored six dimensions of service quality: attitude and behavior; skills and professionalism; accessibility and flexibility; reliability and trustworthiness; recovery; reputation and credibility

1982 Gronroos

2 3

1982 Lehthinen and Lehthinen 1984 Gronroos

1985 Parasuraman et al.

1987 Morre

1988 Parasuraman et al.

1990 Gronroos

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

1992 Cronin & Taylor

Developed SERVPERF to compare with SERVQUAL Developed four factor scale that consists of seventeen items to measure Service quality Identified eighteen dimensions of service quality: aesthetic; availability; attentiveness; access; care; cleanliness; comfort; commitment; communication; competence; courtesy; friendliness; flexibility; functionality; integrity; reliability; responsiveness; security. Explored twenty eight attributes to measure service quality Developed six dimensions of service quality that consists of thirty one items Developed five dimensions of service quality that consists of forty one item scale Used 10 dimensions to measure service quality

10 1994 Avkiran

11 1995 Johnston

12 2000 Oppewal and Vriens 13 2000 Bahia and Nantel 14 2002 Sureshchander et al. 15 2005 Malhotra et al. 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. TangiblesIt 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 Guillen, 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 customeroriented 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

Repeat

Pre Purchase Expectations

Actual Performance

Satisfaction OR Dissatisfaction

Switch Source: Generated

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 Cost (Price) = Expectation (Benefits)

Satisfied Customers

Delighted Customers

(Customers) Brand Loyalty

Greater & Long-term Profits (Better Performance) Source: Generated

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 customers 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 Guillen, 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, Mart 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
Sources Amou nt Deposits Borrowings Capital & Other Funds Other Liabilities Total Uses Financing Investments Cash, Bank Balance, Placements Other Assets Total 1042 12915 8 100 2701 44143 6 100 4539 71493 6 100 14996 11929 4 13 100 8397 1899 1994 625 12915 8652 1242 1978 Percenta ge 65 15 15 5 100 67 10 15

2004
Amou nt 30185 6559 5123 2276 44143 27535 2007 11900 Percenta ge 68 15 12 5 100 62 5 27

2005
Amou nt 49932 9006 7811 4745 71493 45786 1854 19314 Percenta ge 70 13 11 7 100 64 3 27

2006
Amou nt 83740 10843 16348 8363 11929 4 65613 7328 31358 Percenta ge 70 9 14 7 100 55 6 26

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 fullfledged 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 Shariah. 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 Guillen (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 Shariah. 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

Customer Satisfaction

Service Quality

Bank Performance

Comparative Study of Islamic Banking 92 Figure- 3.8

Service Quality, Customer Satisfaction and Bank Performance in Pakistan

Human Element

Tngble of Srvce

Syszn Srvc Dlvry

Reliability Tangibility Assurance

Service Quality

Customer Satisfaction

Social Rspnsblty

Core Service

Responsiveness

Bank Performance

Empathy

Independent Variable

Mediating Variable

Dependent Variable

Conceptual Model and Theoretical Framework

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, Pearsons 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 CB Service Quality CB Tangibility CB Reliability CB Responsiveness CB Assurance CB Empathy CB Customer Satisfaction CB Core Service CB Human Element CB Systemization of Service Delivery CB Tangibles of Service CB Social Responsibility CB Performance No. of
Items

Cronbachs

Guttman

Alpha Coefficient Split Half-Coefficient

4 5 4 4 5 4 8 5 6 6 8

0.750 0.829 0.823 0.769 0.841 0.825 0.917 0.875 0.840 0.879 0.745

0.757 0.800 0.813 0.739 0.699 0.803 0.913 0.829 0.836 0.837 0.711

Comparative Study of Islamic Banking 98

IB Service Quality IB Tangibility IB Reliability IB Responsiveness IB Assurance IB Empathy IB Customer Satisfaction IB Core Service IB Human Element IB Systemization of Service Delivery IB Tangibles of Service IB Social Responsibility IB Performance Source: Generated

4 5 4 4 5 4 8 5 6 6 8

0.849 0.837 0.754 0.759 0.827 0.843 0.898 0.865 0.855 0.867 0.630

0.858 0.764 0.769 0.733 0.730 0.824 0.886 0.845 0.794 0.858 0.624

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

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 -.580 -.829 -.920 -.837 -.927 -.996 -.580 -.785 -.673 -.632 -.508 -.115 -.691 -.507 -.343 -.263 -.095 -.112 -.119 -.502 -.440 -.525 -.609 -.451 -.448 -.211

Kurtosis .019 .408 .365 .353 .618 .777 -.439 -.225 .150 -.349 -.669 -.165 -.415 .003 .147 -.461 -.679 -.800 -.937 .802 .093 .084 .032 -.088 .322 -.023

Comparative Study of Islamic Banking100

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 Banking101 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 Meezan Islamic Bank Dubai Islamic Bank Limited Albaraka Islamic Bank Limited Bank Islami Pakistan Limited First Dawood Islamic Bank Limited Emirates Global Islamic Bank Limited Source: Generated

Conventional Banks National Bank of Pakistan Habib Bank Limited Pakistan MCB Bank Limited United Bank Limited Askari Bank Limited Bank Alfalah Limited

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 Banking102 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 Islamabad Karachi Lahore Peshawar Quetta Rawalpinidi Total CB Branches 78 374 241 76 45 143 Total IB Branches 18 107 67 19 08 16 Selected Customers Employees Branches from each Branch from each Branch 6* 6 6 6 6 6 6** 6 6 6 6 6 6*** 6 6 6 6 6

Comparative Study of Islamic Banking103 Multan Gujranwala Faisalabad Gujrat Sialkot Sargodha 73 96 164 88 101 79 12 07 18 07 07 06 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 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 Banking104 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 (nonhuman 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 Banking105 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 Your bank uses modern looking equipment Your banks physical facilities are visually appealing Tangibles The employees of your bank are neat appearing Service related materials (such as pamphlets, leaflets or reports) visually appealing at your bank When your bank promises to do something by a certain time, it does so Reliability 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 Employees of your bank tell customers exactly when services will be performed Responsive-ness 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 Banking106

The behavior of your bank employees instills confidence in you You feel safe in your transactions with your bank Assurance Employees of your bank are consistently courteous with you Employees of your bank have the necessary knowledge to answer your questions Your bank gives you individual attention Your bank has business hours convenient to all its customers Empathy 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 Diversity and range of Banks services (having a wider range of financial services from the bank, e.g. deposits, retirement accounts, loans for purchase of cars, houses, foreign exchange, travelers cheques, safe deposit lockers, etc.) Banks Service innovation (providing information/details on regular Core service or service basis through post: telephonic banking; ATM; room service facility; cards to defense personnel, etc.) product 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.) 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. Human element of Prompt service to customers. service delivery 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 Banking107

Employees who have the knowledge and competence to answer customers questions having best interests at heart. of Having a highly standardized and simplified delivery process so that services are delivered without any hassles or excessive bureaucracy. service delivery Enhancement of technological capacity (e.g. computerization, networking of operations, etc.) to serve customers more effectively. (nonhuman element) Systematization 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. The ambient conditions such as temperature, ventilation, noise and odour prevailing in the banks premises. Extent of the physical layout of equipment and other furnishings being comfortable for customers to interact with employees. Tangibles of service (servicescapes) 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. 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. Social responsibility 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 Banking108

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 Cronbachs alpha and Guttman Split-Half coefficients. Cronbachs 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.

Cronbachs 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 Cronbachs alpha should be above 0.60 (Nunnally, 1967; Nunnally, 1978; Peter, 1979; Nunnally and Bernstein, 1994).

Comparative Study of Islamic Banking109 Similarly, Cronbachs 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 i.e. 0 indicates that curve is normal, neither flat nor peaked. If it is > 3 then curve is more peaked than normal and if < 3 then curve is flatter than a normal curve.

Table-4.6 Reliability Statistics of the Scales for IB Constructs/Variables of the Study IB Service Quality IB Tangibility IB Reliability IB Responsiveness IB Assurance IB Empathy IB Customer Satisfaction IB Core Service IB Human Element IB Systemization of Service Delivery IB Tangibles of Service IB Social Responsibility IB Performance Source: Generated 4 8 5 6 6 8 0.867 0.891 0.833 0.855 0.839 0.597 0.852 0.883 0.765 0.815 0.832 0.579 4 5 4 4 5 0.841 0.809 0.784 0.741 0.820 0.834 0.774 0.744 0.705 0.777 No. of
Items

Cronbachs

Guttman

Alpha Coefficient Split Half-Coefficient

Comparative Study of Islamic Banking110 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 SplitHalf (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 Banking111 Table-4.7 Reliability Statistics of the Scales for CB Constructs/Variables of the Study CB Service Quality CB Tangibility CB Reliability CB Responsiveness CB Assurance CB Empathy CB Customer Satisfaction CB Core Service CB Human Element CB Systemization of Service Delivery CB Tangibles of Service CB Social Responsibility CB Performance Source: Generated No. of
Items

Cronbachs

Guttman

Alpha Coefficient Split Half-Coefficient

4 5 4 4 5 4 8 5 6 6 8

0.830 0.831 0.774 0.752 0.826 0.801 0.892 0.845 0.848 0.853 0.715

0.821 0.775 0.728 0.707 0.738 0.791 0.869 0.790 0.817 0.805 0.711

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 Banking112 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 29item 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 SplitHalf (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 Banking113

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 Banking114 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 Pearsons 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 Banking115 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 Gender Male Female Marital Status Single Married Age 18-24 Years 25-34 Years 35-44 Years 45-54 Years 55 Years and above 29.90 39.10 19.70 7.90 3.50 39.10 27.50 13.20 13.70 6.50 44.20 55.80 53.90 46.10 78.90 21.10 75.90 24.10 Percentage (IB) Percentage (CB)

Comparative Study of Islamic Banking116 Educational Level Primary Secondary College University-Master University-M.Phil University-PhD Others Occupation Students Businessmen Education/Medical Services House Wife Bankers Professionals/Senior Management Others Monthly Household Income Under Rs. 10 000 Rs. 10 000 to Rs. 20 000 Rs. 20 000 to Rs. 30 000 Rs. 30 000 to Rs. 40 000 Rs. 40 000 to Rs. 50 000 Rs. 50 000 and above 10.40 22.50 21.80 20.40 8.30 16.70 16.40 18.10 23.60 15.00 12.00 14.80 10.30 30.30 8.60 6.40 19.40 11.90 5.80 23.60 23.10 12.50 4.40 10.60 13.90 6.30 0.90 6.90 28.90 53.50 4.90 3.00 1.90 2.10 6.70 22.20 60.20 4.20 1.40 3.20

Comparative Study of Islamic Banking117 Bank Usage Pttern-(Length of Bank Services Utilization) Less than a Year 1 up to 3 Years 3 Years up to 5 Years 5 Years and above 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). 29.20 53.50 11.80 5.60 15.50 34.00 20.10 30.30

Comparative Study of Islamic Banking118 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 Banking119 5.2 Descriptive Statistics of the Variables Table-5.2
Skewness and Kurtosis of Constructs/Variables Skewness 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 -.701 -.904 -.750 -.681 -.908 -.858 -.822 -.839 -.813 -.781 -.771 -.065 -.859 -1.010 -.552 -.663 -.473 -.452 -.523 -.923 -.642 -.882 -.817 -.629 -.719 -.424 Kurtosis

-.072 .778 .208 .259 .710 .429 .307 .249 .610 .429 .295 -.142 .300 .870 .132 .018 -.012 -.399 -.410 .591 .153 .682 .343 -.023 .112 .336

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 Banking120 Table-5.3

Descriptive Statistics of the Constructs/Variables Min. 1.25 1.20 1.25 1.50 1.00 1.65 1.50 1.63 1.40 1.50 1.67 1.88 1.72 1.50 1.40 1.75 1.75 1.80 2.42 1.50 1.88 2.00 2.00 2.00 2.23 2.00 Max. 7.00 7.00 7.00 7.00 6.80 6.54 6.75 6.63 7.00 6.83 6.83 5.00 6.50 7.00 7.00 7.00 7.00 7.00 6.72 7.00 6.88 7.00 7.00 6.83 6.69 5.00 Mean 4.9854 4.9967 4.8958 5.0465 4.8678 4.9584 4.9160 4.9354 5.0011 4.9093 4.8611 3.7080 4.9246 5.2597 5.1406 5.1715 5.3194 5.1583 5.2099 5.1160 5.1896 5.2622 5.2352 5.1296 5.1865 3.7792 S.D 1.193 1.042 1.099 1.029 1.075 .9340 1.061 1.007 1.001 .9854 1.008 .5886 .9091 1.141 .9949 1.031 .9454 1.017 .8972 1.131 .9589 .9365 .9866 .9615 .8867 .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

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.

Comparative Study of Islamic Banking121 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 Levenes Test for Equality of Variances T-test for Equality of Mean F Sig t df Sig. (2-tailed) 2.065 Female 91 4.95 Source: Generated 0.91 0.151 2.968 430 0.003

Gender Male

Std. Dev. 0.83

341 5.26

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 Banking122 Table-5.5 Independent Samples T-Test for Difference in the Perception of Service Quality among Male and Female Customers of CB Levenes Test for Equality of Variances T-test for Equality of Mean F Sig t df Sig. (2-tailed) 0.721 Female 104 4.92 Source: Generated 0.87 0.396 -0.558 430 0.577

Gender Male

Std. Dev. 0.95

328 4.87

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 (2tailed). 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 Banking123 Table-5.6 Summary of Correlation between Selected Variables Variables IBSQL and IBCS CBSQL and CBCS IBSQL and IBPRF CBSQL and CBPRF IBCS and IBPRF CBCS and CBPRF Pearson Correlation 0.698*** 0.696*** 0.041 0.034 -0.034 0.255** Sig. (2-tailed) 0.000 0.000 0.729 0.776 0.775 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 Banking124 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 IBSQL and CBSQL IBCS and CBCS IBPRF and CBPRF Source: Generated Pearson Correlation 0.027 0.133 -0.150 Sig. (2-tailed) 0.825 0.264 0.899

Comparative Study of Islamic Banking125 5.4 5.4.1 Regression Model Results 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 0.248 (0.493) [5.504] 0.000 Tgty 0.360 Rlty 0.239 Rspv 0.372 Asnc 0.151 Epty 0.166 R2 F-Stat. D.W. test 1.821

0.691 21.227

(0.135) (0.113) (0.139) (0.112) (0.091) [5.811] [4.831] [5.324] [2.243] [1.621] 0.000 0.003 0.000 0.028 0.110 0.000

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 Banking126 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 Constant Tgty Rlty Rspv Asnc Epty Source: Generated Source: Generated

Condition Index 1.000 13.579 14.427 16.563 12.293 21.300

Tolerance

VIF

0.496 0.507 0.545 0.472 0.466

2.016 1.971 1.836 2.118 2.146

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 Banking127 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 0.223 (0.539) [5.043] 0.000 Tgty 0.321 Rlty 0.251 Rspv 0.323 Asnc -0.089 Epty 0.301 R2 F-Stat. D.W. test 1.962

0.669 22.087

(0.116) (0.110) (0.101) (0.096) (0.117) [2.802] [2.286] [2.058] [-0.757] 0.007 0.025 0.034 0.452 [2.806] 0.007 0.000

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 Banking128 Table-5.11

Summary of the Multicollinearity Coefficients for CBDSQL-CBCS Regression Model

Dimensions Constant Tgty Rlty Rspv Asnc Epty Source: Generated

Condition Index 1.000 14.595 13.948 16.357 19.640 12.869

Tolerance

VIF

0.628 0.491 0.404 0.471 0.494

1.592 2.035 2.475 2.119 2.026

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 Banking129 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 1.803 (0.499) [3.611] 0.001 IBSQL 0.641 (0.093) [6.888] 0.000 0.000 R2 0.512 F-Statistics 67.451

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 Banking130 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 0.808 (0.521) [1.551] 0.000 CBSQL 0.822 (0.102) [8.099] 0.000 0.000 R2 0.495 F-Statistics 65.595

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 Banking131 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 3.835 (0.396) [9.676] 0.000 IBSQL 0.026 (0.074) [0.347] 0.729 0.729 R2 0.002 F-Statistics 0.121

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 Banking132 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 3.760 (0.502) [7.490] 0.000 CBSQL 0.028 (0.098) [0.286] 0.776 0.776 R2 0.001 F-Statistics 0.229

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 Banking133 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 4.082 (0.385) [10.600] 0.000 IBCS -0.021 (0.073) [-0.287] 0.775 0.775 R2 0.001 F-Statistics 0.102

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 Banking134 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 3.020 (0.404) [7.474] 0.000

CBCS 0.176 (0.080) [2.204] 0.031

R2 0.065

F-Statistics 4.857

0.031

Predictor (Constant), CBCS Dependent Variable: CBPRF

Table 5.17 represents CBCS-CBPRF model. The coefficient of determination is 0.065, pvalue (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 Banking135 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 Banking136 Figure-5.1

Structural Model Results-Relationship among Slty, CrSn and IPRF

Coefficients, T-Values in parenthesis and R2 (RSq)

Comparative Study of Islamic Banking137 Figure-5.2

Structural Model Results-Relationship among Slty, CrSn and CPRF

Coefficients, T-Values in parenthesis and R2 (RSq)

Comparative Study of Islamic Banking138 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 Slty->Crsn CrSn-> Iprf Slty->IPRF Slty->Crsn Slty-> CPRF CrSn->CPRF Source: Generated Coefficients 0.864 -0.234 0.232 0.777 -0.059 0.108 T-Values 59.600 -1.9373 1.735 29.072 -1.043 1.611 R2 0.746 0.015 0.015 0.604 0.005 0.005

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 Banking139 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 Banking140 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 Banking141 Table-5.19

Structural Model-Bootstrap for IB Entire Sample Mean of Standard estimate Sub-samples Error 0.6050 0.5819 0.0398 0.8850 0.8879 0.0139 0.8640 0.8675 0.0146 0.8620 0.8617 0.0166 0.8850 0.8871 0.0134 0.8760 0.8741 0.0169 0.9060 0.9071 0.0113 0.8600 0.8602 0.0160 0.9040 0.9038 0.0132 0.9050 0.9058 0.0093 0.8640 0.8645 0.0145 -0.2340 -0.2498 0.1186 0.2320 0.2485 0.1337

Link Slty->Tgty Slty->Rlty Slty->Rspv Slty->Asnc Slty->Epty Crsn->Smdlv Crsn->TgSv Crsn->Slrby Crsn->Helmt Crsn->Csrv Slty->Crsn Crsn->IPRFc Slty->IPRFc Source: Generated

T-Statistic 15.1936 63.5165 59.0578 52.0184 66.0841 51.8604 80.4436 53.6294 68.6515 97.0163 59.6004 -1.9732 1.7352

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 Banking142 Table-5.20 Structural ModelBootStrap of CB Link Slty->Rspv Slty->Rlty Slty->Tgty Slty->Asnc Slty->Epty Crsn->Csrv Crsn->Helmt Crsn->Smdlv Crsn->TgSv Crsn->Slrby Crsn->CPRFc Slty->Crsn Slty->CPRFc Source: Generated Entire Sample Mean of Standard estimate Sub-samples Error 0.8800 0.8814 0.0155 0.8570 0.8596 0.0160 0.5940 0.5789 0.0453 0.8670 0.8667 0.0161 0.8500 0.8516 0.0187 0.8690 0.8682 0.0147 0.9300 0.9309 0.0085 0.9060 0.9055 0.0112 0.9000 0.8989 0.0133 0.8870 0.8871 0.0127 0.1080 0.1209 0.0670 0.7770 0.7811 0.0267 -0.0590 -0.0876 0.0566 T-Statistic 56.9570 53.5677 13.1012 53.7460 45.4452 59.2413 109.6065 81.1537 67.9219 69.5900 1.6108 29.0717 -1.0433

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.

Comparative Study of Islamic Banking143 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 Banking144 quality strongly depends on customers 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 customers 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 Banking145 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 Banking146 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 Banking147 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 Banking148 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 T-Statistics H1a H1b 2.065 0.721 ----Supported Rejected F-Statistic R2 Status (Upheld/Rejected)

Correlation and Regression H2a H2b H3a H3b H4a H4b Path Analysis H5a H5b Source: Generated Path Coefficients of structural model (5.1) Path Coefficients of structural model (5.2) Partially Supported Supported 67.451 65.595 0.121 0.229 0.102 4.857 0.512 0.495 0.002 0.001 0.001 0.065 Supported Supported Supported Supported Rejected Supported

Comparative Study of Islamic Banking149 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 Banking150

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 Banking151 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 Banking152 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 Banking153 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 Banking154 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 Shariah. 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 Banking155 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 Shariah. 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 Banking156

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 Banking157 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 Banking158 should also introduce new products and improve existing products/service by innovation according to principles of Shariah. 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 Banking159 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), 98122. 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 Banking160 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), 125143. 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, 116125.

Comparative Study of Islamic Banking161 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, 1018. 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 Banking162 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), 6982. Bitner, M. J. & Hubert, A. R. (1994). Encounter satisfaction versus overall satisfaction versus quality: the customers voice, in: R.T. Rust& R.L. Oliver (Eds) Service Quality: New Directions in Theory and Practice, pp. 7294 (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 Banking163 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 practitioners guide, Wiley Series in Probabilities and Statistics.

Comparative Study of Islamic Banking164 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), 491504. 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 theyre 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 Banking165 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, 56792. 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 Banking166 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 Banking167 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 Banking168 Greenland, S., Coshall, J., & Combe, I. (2006). Evaluating service quality and consumer satisfaction in emerging markets, International Journal of Consumer Studies, 30 (6), 582590 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), S820S825. 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), 2742. 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 Banking169 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), 164174. 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 Zealands 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 Banking170 Ibez, V. A., Hartmann, P., & Calvo, P. Z. (2006). Antecedents of customer loyalty in residential energy markets: Service quality, satisfaction, costs, The Service Industries Journal, 26 (6), 633 650. Iglesias, P. M., & Yague Guillen, 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 trust and switching

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 Banking171 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), 111116. 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 Gronrooss 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 Banking172 Kayis B., Kim, H., & Shin, H. T. (2003). A comparative analysis of cultural, conceptual and practical constraints on quality management implementationsfindings from Australian and Korean banking industries, TQM and Business Excellence, 14 (7), 765777. 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, PrenticeHall. 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 Banking173 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), 1220. 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), 259274. 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 Banking174 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 crosscultural 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., Martn-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 Banking175 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). Taseer-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 Banking176 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 Banking177 Oliver, R.L. & Swan, J.E. (1989). Consumer perceptions of interpersonal equity and satisfaction in transactions: a field survey approach, Journal of Marketing, 53, 2135. 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 genderbased 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 Banking178 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. 120 (London: Sage).

Comparative Study of Islamic Banking179 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`zquezCasielles, 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 Banking180 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, 201214. 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 Banking181 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, 233242. 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),118131.

Comparative Study of Islamic Banking182 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 Banking183 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), 517. 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 Banking184 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 interestfree 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 Banking185 Part I- Bank Usage Pattern 1. Which of the following bank is your main bank (please tick)?
A B C D E F Meezan Bank Limited Dubai Islamic Bank Limited Albarka Islamic Bank Limited Bank Islami Pakistan Limited First Dawood Islamic Bank Limited Qattar Islamic Bank Limited

3. For how long you have been banking with your main bank?
A B C D Less than a Year 1 up to 3 Years 3 up to 5 Years 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 Disagree 1 2 1 2 1 2 1 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 Strongly Agree 6 7 6 7 6 7 6 7 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7

1. Your Islamic bank uses modern looking equipment. 2. Your Islamic banks physical facilities are visually appealing. 3.The employees of your Islamic bank are neat appearing 4. Service related materials (such as pamphlets, leaflets or reports) visually appealing at your Islamic banks 5. When your Islamic bank promises to do something by a certain time, it does so 6. When you have a problem, your Islamic bank shows a sincere interest in solving it 7. Your Islamic bank performs the service right the first time 8. Your Islamic bank provides its services at the time it promises to do so 9. Your Islamic bank issues error free bills, statements and other documents 10. Employees of your Islamic bank tell customers exactly when services will be performed 11. Employees of your Islamic bank give you prompt service 12. Employees of your Islamic bank are always willing to help you 13. Employees of your Islamic bank are never too busy to respond to your requests 14. You feel safe in your transactions with your Islamic bank 15. The behavior of your Islamic bank employees creates confidence in you 16. Employees of your Islamic bank are consistently courteous with you 17. Employees of your Islamic bank have the necessary knowledge to answer your questions 18. Your Islamic bank gives you individual attention 19. Your Islamic bank has business hours convenient to all customers 20. Your Islamic bank has employees who give you personal attention 21. Your Islamic bank has your best interests at heart 22. Employees of your Islamic bank understand your specific needs

3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4

5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5

Comparative Study of Islamic Banking186 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 Banks services (having a wider range of financial services from the bank, e.g. deposits, retirement accounts, loans for purchase of cars, houses, foreign exchange, travelers cheques, safe deposit lockers, etc.) 1 2 3 4 5 6 7 2. Banks 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 Banking187 18. The ambient conditions such as temperature, ventilation, noise and odour prevailing in the banks 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 Banking188 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 Banking189 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 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

2.

Internal process coordination 1. Decreasing evolution 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

3.

Personnel activities coordination 1. Decreasing evolution 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

4.

Share market 1. Decreasing evolution 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

Comparative Study of Islamic Banking190 5. Profitability 1. Decreasing evolution 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

6.

Productivity 1. Decreasing evolution 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

7.

Voluntary personnel rotation 1. Decreasing evolution 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

8.

Personnel absenteeism. 1. Decreasing evolution 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

Bank Experience Please specify your designation. (__________________________________________)

In which of the following banks you are currently working (please tick)?
A B C D E F Meezan Bank Limited Dubai Islamic Bank Limited Albarka Islamic Bank Limited Bank Islami Pakistan Limited First Dawood Islamic Bank Limited Qattar Islamic Bank Limited

For how long you are working in current bank?

A B C D Less than a Year 1 up to 5 Years 5 up to 10 Years 10 Years and above

THANKS FOR YOUR COOPERATION

Comparative Study of Islamic Banking191 Part I- Bank Usage Pattern 1. Which of the following bank is your main bank (please tick)?
A B C D E National Bank of Pakistan Habib Bank Limited MCB Bank Limited Bank Alfalah Limited Askari Bank Limited

3. For how long you have been banking with your main bank?
A B C D Less than a Year 1 up to 3 Years 3 up to 5 Years 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 Disagree 1. Your Conventional bank uses modern looking equipment. 1 2 2. Your Conventional banks physical facilities are visually appealing. 1 2 3.The employees of your Conventional bank are neat appearing 1 2 4. Service related materials (such as pamphlets, leaflets or reports) visually 1 2 appealing at your Conventional banks 5. When your Conventional bank promises to do something by a certain 1 2 time, it does so 6. When you have a problem, your Conventional bank shows a sincere 1 2 interest in solving it 7. Your Conventional bank performs the service right the first time 1 2 8. Your Conventional bank provides its services at the time it promises to do 1 2 so 9. Your Conventional bank issues error free bills, statements and other 1 2 documents 10. Employees of your Conventional bank tell customers exactly when 1 2 services will be performed 11. Employees of your Conventional bank give you prompt service 1 2 12. Employees of your Conventional bank are always willing to help you 1 2 13. Employees of your Conventional bank are never too busy to respond to 1 2 your requests 14. You feel safe in your transactions with your Conventional bank 1 2 15. The behavior of your Conventional bank employees creates confidence in you 1 2 16. Employees of your Conventional bank are consistently courteous with you 1 2 17. Employees of your Conventional bank have the necessary knowledge to 1 2 answer your questions 18. Your Conventional bank gives you individual attention 1 2 19. Your Conventional bank has business hours convenient to all customers 1 2 20. Your Conventional bank has employees who give you personal attention 1 2 21. Your Conventional bank has your best interests at heart 1 2 22. Employees of your Conventional bank understand your specific needs 1 2 Strongly Agree 5 6 7 5 6 7 5 6 7 5 6 7 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7

3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4

Comparative Study of Islamic Banking192 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 Banks services (having a wider range of financial services from the bank, e.g. deposits, retirement accounts, loans for purchase of cars, houses, foreign exchange, travelers cheques, safe deposit lockers, etc.) 1 2 3 4 5 6 7 2. Banks 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 Banking193 18. The ambient conditions such as temperature, ventilation, noise and odour prevailing in the banks 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 Banking194

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 Banking195

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 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

2.

Internal process coordination 1. Decreasing evolution 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

3.

Personnel activities coordination 1. Decreasing evolution 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

4.

Share market 1. Decreasing evolution 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

Comparative Study of Islamic Banking196

5.

Profitability 1. Decreasing evolution 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

6.

Productivity 1. Decreasing evolution 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

7.

Voluntary personnel rotation 1. Decreasing evolution 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

8.

Personnel absenteeism. 1. Decreasing evolution 4. Likely to rise evolution 2. Likely to decrease evolution 5. Rising evolution 3. Neutral

Bank Experience Please specify your designation. (__________________________________________)

In which of the following banks you are currently working (please tick)?
A B C D E National Bank of Pakistan Habib Bank Limited MCB Bank Limited Bank Alfalah Limited Askari Bank Limited

For how long you are working in current bank?

A B C D Less than a Year 1 up to 5 Years 5 up to 10 Years 10 Years and above

THANKS FOR YOUR COOPERATION

Comparative Study of Islamic Banking197 Appendix-II List of Banks Working in Pakistan Name of Bank National Bank of Pakistan

Type of Bank

Address

Public Sector Banks

Specialized Banks

Private Banks

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 # 0915272189, Fax Number: 091-5276838 The Bank of Punjab 7-Egerton Road, Lahore, Telephone Office:0429200173, Fax Number:042-9200297 Industrial Development State Life Building No. 2, Wallace Road, Off. I. Bank of Pakistan I. Chundrigar Road, Karachi, Phone #:0219213615, Fax Number: 021-9213617 The Punjab Provincial Bank Square, The Mall, Lahore, Phone # 042Cooperative Bank Ltd 9211411,Fax #:042-9211442 SME Bank Limited 40,Jang Building, A. K. Fazal-e-Haq Road Blue Area, Islamabad Zarai Taraqiati Bank 1-Faisal Avenue, P. O. Box No.1400, Islamabad Limited Phone #: 051-9252717, Fax #: 051-9252737 ABN AMRO Bank 16 Abdullah Haroon Road, Karachi Pakistan Limited 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 #: 215369283, Fax Number: 21-5877197 NIB Bank Limited Muhammadi House, I. I. Chundrigar Road, Karachi, Phone #: 021-2420333, Fax # 2472258

Comparative Study of Islamic Banking198 Bank Alfalah Limited 2nd Floor, B.A. Building, I.I. Chundrigar Road, Karachi, Phone #: 2416966, Fax #: 2434183 Saudi Pak Commercial Saudi Pak Building, I.I. Chundrigar Road, Bank Limited 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 6th Floor, Sidco Avenue Centre, Maulana Deen Limited Muhammad Wafai Road, Karachi, Phone #:0215686267, Fax Number: 021-5658059 Standard Chartered Bank 3rd Floor, Main Branch, P. O. Box No. 5556 I. (Pakistan) Limited I. Chundrigar Road, Karachi, Phone #: 0212450288-89, 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 Spencer Building, I. I. Chundrigar Road, Limited Karachi, Phone # 2638080, Fax #: 2630496 Oman International Bank Ground Floor, Nadir House Building, I. I. Chundrigar Road, Karachi. Phone #: 0212419294, 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 1st Floor, Shaheen Complex, M.R. Kayani Limited Road, Karachi. Phone #2637787, Fax #2631368 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 Business Executive Centre, F-17/3, Block-8 Limited Clifton, Karachi. Phone #: 021-5820326 Network Microfinance 94 West, 4th Floor, Amir Plaza, Jinnah Avenue Bank Limited Blue Area, P. O. Box 3111, Islamabad, Phone #: 051-111-092-092, Fax #: 051-9206080 Tameer Micro Finance 15-A, Block 7 & 8, Central Commercial Area Bank Limited K.C.H.S. Union, Karachi, Phone #: 021 4325576, Fax Number: 021- 4325575 Pak Oman Microfinance 2nd Floor, Tower C, Finance & Trade Centre, Bank Limited Shahrah-e-Faisal, Karachi. Phone #: 0215630946, Fax Number: 021-5630949

Foreign Banks

Micro Finance Banks

Comparative Study of Islamic Banking199 The First Micro Finance Bank Limited House Building Finance Corporation Pakistan Kuwait Investment Company Limited Pak Brunei investment Company Limited Development Finance Institutions Pak Oman Investment Company Limited Pak Iran Joint Investment Company Saudi Pak Industrial & Agricultural Investment Company Limited Pak Libya Holding Company Limited Pak-China Investment Company Limited Meezan Bank Limited BankIslami Pakistan Limited Albaraka Islamic Bank B.S.C. (E.C.) Emirates Global Islamic Bank Dawood Islamic Bank Limited Dubai Islamic Bank Pakistan Limited Source: SBP, 2008 62-C, Tauheed Commercial Area, 25th Commercial Street, DHA Phase V, Karachi Phone #: 021- 5822432, Fax #: 021 5822434 3rd Floor, Finance & Trade Centre, Tower B Sharea Faisal, Karachi, Phone #: 021-9202314, Fax Number: 021-9202360 4th Floor, Block C, FTC Building, Shahrea Faisal, Karachi. Phone # 5630950-51, Fax Number: 5630939-40 1st Floor, Tower A, Finance & Trade Centre, Sharea Faisal, Karachi, Phone #: 021-5631033 Fax Number: 021-5631025 1st Floor, Tower A, Finance & Trade Centre Shahrea Faisal, Karachi, Phone #: 021-5630960, Fax Number: 021-5630961 Nos. 507-508, 5th floor, Progressive Plaza, Beaumont Road, Civil Lines, Karachi Phone #: 021-5638590-1, Fax #: 021-5638589 19th Floor, Saudi Pak Tower, 61/A Jinnah Avenue, Blue Area, Islamabad Phone #: 051-2800314-15, Fax #: 051-2800308 5th Floor, Block C Finance & Trade Centre Shahrea Faisal, Karachi. Phone #: 021-5630630 & 5630666, Fax Number: 021-5630654 Camp Office, House No. 7-C, Street No. 23, F-8/2, Islamabad. Phone #: 051-8438042, Fax #: 051-8318060-1 2nd Floor, PNSC Building, M. T. Khan Road Karachi, Phone #: 021-5610677,Fax #: 5610676 11th Floor, Executive Tower, Dolmen City Marine Drive, Block-4, Clifton, Karachi Phone #: 021-537979, Fax #: 021-5379796 PICIC Building, 4-Shahrah-e-Aiwan-e-Tijarat Lahore, Phone #:042-6362566, Fax #: 6309965 Hotel Arcade, Sheraton Hotel & Towers Club Road, Karachi. Phone #: 021-5633392 & 5633409, Fax Number: 021-5633427 2nd Floor, Trade Centre, I. I. Chundrigar Road, Karachi, Phone #: 021-2272440, Fax #:2272465 Hassan Chambers, 3rd Floor, Plot DC-7, Block-7, Kehkashan Clifton, Karachi Phone#: 021-5368556, Fax #: 021-5821071.

Islamic Banks

Comparative Study of Islamic Banking200 Appendix-III Riba: Definition of Terms Any excess amount or benefit (than principal amount) given by the debtor for debt or kind A set of instructions consists of the Holy Quran, Sunnah, Ijmah and Qiyas for every walk of life. Consists upon Ijmah and Qiys to innovate banking products according to instructions of Islam. Partnership deed between investor and bank to provide competency & skills to share profit/ loss. All believers of the holy prophet Muhammad (Peace be upon him) also called Muslims. A partnership agreement in which all partners contribute capital and work to share profit/loss. A partnership agreement in which some partners contribute capital and others contribute their competencies to share profit or loss according to an agreed ratio. A lawful consideration as rent for hiring an asset or reward for hiring services 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. Charity, which is given exclusively for sake of blessings of Allah Almighty without any consideration. A contract in which bank made advance payment for goods/services to be delivered at future date A contract of credit sale that allows future payment for manufacturing goods for future delivery

Shariah:

Ijtihad:

Mudarib:

Ummah:

Musharka:

Mudaraba:

Ijarah:

Condition:

Sadaqaat:

Salam:

Istisna:

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 Banking201 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 1.000 Tgty 0.520 1.000 Rlty 0.476 0.728 1.000 Rspv 0.483 0.674 0.691 1.000 Asnc 0.466 0.740 0.700 0.729 1.000 Epty 0.605 0.885 0.864 0.862 0.885 1.000 Slty 0.535 0.702 0.675 0.618 0.710 0.781 1.000 Csrv 0.524 0.725 0.716 0.711 0.784 0.839 0.799 1.000 Helmt 0.416 0.630 0.595 0.639 0.705 0.736 0.727 0.764 1.000 Smdlv 0.552 0.655 0.610 0.626 0.689 0.764 0.775 0.757 0.749 1.000 TgSv 0.392 0.668 0.607 0.607 0.695 0.726 0.698 0.711 0.678 0.757 1.000 Slrby 0.546 0.759 0.720 0.718 0.804 0.864 0.905 0.904 0.876 0.906 0.860 1.000 Crsn 0.098 0.019 0.029 0.034 0.030 0.012 -0.044 Iprfc 0.003 0.084 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 1.000 Tgty 0.474 1.000 Rlty 0.437 0.690 1.000 Rspv 0.442 0.691 0.715 1.000 Asnc 0.445 0.638 0.715 0.697 1.000 Epty 0.594 0.857 0.880 0.867 0.850 1.000 Slty 0.453 0.648 0.693 0.673 0.679 0.777 1.000 Crsn 0.426 0.571 0.620 0.587 0.598 0.698 0.869 1.000 Csrv 0.417 0.615 0.668 0.654 0.691 0.742 0.930 0.756 1.000 Helmt 0.383 0.565 0.622 0.607 0.597 0.690 0.906 0.729 0.826 1.000 Smdlv 0.403 0.591 0.596 0.610 0.591 0.697 0.900 0.720 0.806 0.765 1.000 TgSv 0.401 0.567 0.606 0.565 0.570 0.663 0.887 0.685 0.791 0.752 0.758 1.000 Slrby 0.055 0.053 0.069 0.025 0.062 0.088 0.043 0.053 0.103 0.103 Cprfc 0.058 0.020 0.003