Islamic and Conventional Banking: Customer Satisfaction

Customer satisfaction is a business term which measure that how products and services supplied by a company or business organisation meet or fulfil customer expectations. Customer satisfaction is believed a very important and key performance indicator within a business. In a competitive marketplace where businesses compete for customers, customer satisfaction is a key differentiator and has become a very important element of business strategy. Banking is a customer oriented services industry, therefore, the customer is the focus and customer service is the differentiating factors.

When the banks are offering almost the similar products and services with some principal differences. It is the customer satisfaction that can influence the performance and determine the competitiveness and success of either an Islamic or Conventional bank.

Banks deal with thousands of customers everyday and render different types of services to them. It is a well known reality and fact that no business can exist and grow without customers. And the satisfaction of these customers is as important as the customers itself are important for any business.

Satisfied customers are central to optimal performance and financial returns. Better understanding of customer’s perceptions is important for a Bank to determine the actions required to meet the customers’ needs. Banks can identify their own strengths and weaknesses, where they stand in comparison to their competitors, chart out path future progress and improvement. Customer satisfaction measurement helps to promote an increased focus on customer outcomes and stimulate improvements in the work practices and processes used within the company.

1.2 Research Objectives

The main aim of this study is to:-

• Review and analyse the literature available on both Islamic and Conventional bank with special reference to Pakistan.
• Examine and evaluate the performance of the Islamic and conventional banks in Pakistan.
• Find out the level of Customer’s knowledge about the products and services provided by their banks.
• Find out the factors of customer’s dissatisfaction from the products and services of their bank.
• Find out the main factors of motivation for a customer to deal with either an Islamic or a conventional bank.
• Find out that to what extent customers are satisfied with their banks.

1.3 Research Questions

The research is target to examine the Islamic and conventional banking in Pakistan in relation to product analysis and customer satisfaction. This research will be helpful to answer the following questions:-

• Performance of which form of banking is better than the other and why?
• What are the main differences between the products offered by the Islamic and Conventional banks in Pakistan?
• What is the customer’s satisfaction level with both forms of banking?
• What are the factors of motivation for a customer to deal with a bank?
• What are the main factors of customer’s dissatisfaction from a bank?
• Which form of banking is more rewarding and reliable in Pakistan?
• What are the suggestions and recommendation to improve the services and operations of both Islamic and Conventional banks?

1.4 Research Rational

The Researcher worked in a conventional bank for about 1 year, at the time when there was no Islamic bank in Pakistan. But there seemed to be a demand in the customer for such kind of banks at that time. Researcher is keen to start his career in the banking sector of Pakistan.

At the moment there are about 35 banks working in Pakistan out of which 6 of them are registered as Islamic banks, but majority of the Islamic banks started their operations very recently. But if we compare them with conventional banks in Pakistan conventional banks are much older and larger then these Islamic banks.

The Researcher is committed to investigate the principal difference between the both conventional and Islamic banks, their products, their reliability and the factors encouraging the customers to invest their money in any of these two forms of banking. The researcher will also analyse the key factors which play their role in either the satisfaction or dissatisfaction of the customer of these banks and which form of banking is more successful in relation to customer Satisfaction and why? The researcher will also come out with the suggestions to improve the service of the banks to satisfy their customer.

1.5 Research Context

Banks are performing various functions to provide variety of products and services for different sectors of the economy. Pakistan came into being in 1947; the first Pakistani bank started its operations the same year in the month of September. Since that time Pakistani banking sector is experiencing difficulties due to unpractical policies and uncertainty. Private Sector banks strongly dominated during the first almost 20 years but all the banks were nationalized in 1974, which proved disastrous move for the banking sector of Pakistan. Nationalization of private banks badly affected the performance of these banks. So, these banks were privatized again in 1992. Pakistan’s banking sector consists of Scheduled commercial banks, which include nationalized, foreign and private banks. Pakistan’s banking sector has been going through a comprehensive but complex and very painful process of restructuring since 1997. It is aimed at making these institutions financially sound and forging their links firmly with the real sector for promotion of savings, investment and growth. A complete turnaround in this sector will not be possible and is not expected as well but signs of improvement can be seen.

Islamic banking was started in the late 70’s in Pakistan, but it was initially introduced in the conventional banks. The first Islamic banking license was issued in 2002 to the Meezan Bank Ltd; this bank started its operations in Pakistan in the year 2003. The Islamic banking has gained momentum worldwide. There are more than 185 Islamic banks and financial institutions operating in the world. The popularity of Islamic banking in not limited to Islamic banks only. A large number of conventional banks in Pakistan and all over the world are showing increasing interest in the Islamic banking system as well. The consequence of this is that Islamic banks operating in Islamic countries are faced with strong competition not only from Islamic banks but also from non-Islamic rivals

Habib Bank Ltd

Habib Banks Ltd. was the first commercial bank to be established in Pakistan in 1947. Over the years, HBL has grown its branch network and become the largest private sector bank with over 1,450 branches across the country and a customer base exceeding five million relationships.

The Government of Pakistan privatized HBL in 2004 through which AKFED acquired 51% of the bank’s shareholding and management control. HBL is majority owned (51%) by the Aga Khan Fund of Economic Development, 42.5% of the shareholding is retained by the Government of Pakistan (GOP), whilst 7.5% is owned by the general public i.e. over 170,000 shareholders following the public listing that took place in July 2007. Nepal, Nigeria, Kenya and Kyrgyzstan and rep offices in Iran and China, HBL is also the largest domestic multinational. The bank is expanding its presence in principal international markets including the UK, UAE, South and Central Asia, Africa and the Far East.

Key areas of operations encompass product offering and services in retail and consumer banking. HBL has the largest corporate Banking portfolio in the country with an active investment banking arm. SME and Agriculture lending programmes and banking services are offered in urban and rural centres.

HBL is currently rated AA (Long term) and A-1+ (Short term) and has a balance sheet size over USD 11 billion. It is the first Pakistani bank to raise Tier II Capital from external sources.

Meezan Bank Ltd.

Meezan Bank Limited, a publicly listed company, was incorporated on January 27, 1997 and started operations as an investment bank in August that year. In January, 2002 in a historic initiative, Meezan Bank was granted the nation’s first full-fledged commercial banking license as a dedicated Islamic Bank, by the State Bank of Pakistan.

Meezan Bank has clearly established itself as the largest Islamic Bank in Pakistan with the largest Islamic Banking branch network in the country. The banking sector is showing a significant paradigm shift away from traditional means of business and is catering to an increasingly astute and demanding financial consumer, who is also becoming keenly aware of Islamic Banking. Meezan Bank bears the critical responsibility of leading the way forward in establishing a stable and dynamic Islamic Banking system replete with dynamic and cutting-edge products and services.

During the eight years of its operations as an Islamic commercial bank offering universal banking services to customers, Meezan Bank has been one of the fastest growing banks in the history of Pakistan’s banking sector. Average growth in deposits has been 55% per annum during this period while the branch network grew from 4 to

201. The Bank has established a strong and credible management team comprised of experienced professionals, that have achieved a strong balance sheet with excellent operating profitability and strong ratios, which places the Bank at the top of the Islamic Banking industry. The Bank has been assigned a long-term entity rating of A+ with a ‘Stable’ outlook and a short-term entity rating of A1.

The Bank’s main shareholders are leading financial institutions of the Region namely, Noor Financial Investment Company, Kuwait, a leading investment company based in Kuwait; Pak-Kuwait Investment Company, a AAA rated financial entity in the country and the Islamic Development Bank of Jeddah. The established position, reputation, strength and stability, of these institutions add significant value to the Bank through Board representation and applied synergies.

The bank has developed an extraordinary research and development capability by combining investment bankers, commercial bankers, Shariah scholars and legal experts to develop innovative, viable, and competitive value propositions that not only meet the requirements of today’s complex financial world, but do so with world-class service excellence which our customers demand, all within the bounds of Shariah.

Meezan Bank has a strong technology focus. It has invested heavily in state-of-the-art software applications – namely Temenos T-24 and Oracle. It has also recently upgraded its hardware platform and also has a ‘hot’ disaster recovery site in place to cater to any unforeseen eventualities.

By implementing robust and aggressive strategic and tactical initiatives on the side of consumer banking, Meezan Bank aims to fulfil its prime target of providing customers accessibility and convenience, within an atmosphere and culture of dedicated service and recognition of their needs. The Bank has a rapidly growing branch network across all major cities nation-wide.

Meezan Bank, believe in adding value to its customers’ lives and businesses through dynamic and competitive products and services that fulfil their needs while conforming completely to the dictates of Shariah. At the same time, they endeavor to deliver competitive risk-adjusted returns to our stakeholders

LITERATURE REVIEW

Within the last few years, a number of studies have provided the discipline into the

Practice of conventional and Islamic banking sector. An insight of related studies is as follows:-

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. Persuraman 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 behaviour 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).

The conventional banking theories assume that banks earn profits by purchasing deposits from the depositors at a low interest rate, then reselling those funds to the

Borrowers at higher interest rate, based on its competitive advantage at gathering

Information and underwriting risk (Santos, 2000). Therefore, conventional banks

Make profits from the spread between the interest rate received from borrowers and

the interest rate paid to depositors.

Islamic banking is considered as a different banking stream as it prohibits interest and replaces with (a) profit share and (b) the profit share depends on the extent of the risk participation of the parties. The absence of pre-determined rewards is based on Quranic commands and as interpreted using Shari’ah principles (Ariff, 2006).

Islamic banks showed remarkable progress. It has captured a reasonable market share with excellent growth rate of 114% per annum. The increasing number and size of Islamic banks is also a positive sign of development and success. There are six full-fledged Islamic banks working in different cities of Pakistan and 13 conventional banks have started partial Islamic banking practices by establishing a large number of branches exclusively engaged in Islamic banking practices (SBP, 2006).

The prohibition of interest in Islam caused many writings to come forward with an idea to establish banks that do not work on interest basis. So the basic difference between Islamic banks and conventional banks is that Islamic banks are interest free banks whereas conventional banks are interest based banks. (Kahf 2006) Although interest and profit are very clear concepts but they are misunderstood by many people. Basic difference between interest and profit is that interest is the reward to money and profit is the reward to capital investment. In other words money produces interest and capital investment produces profits. (Toutounchian 2004)

Islamic finance has gripped the world with a strong commitment and passion. It has been depicted that interest in this segment has grown rapidly in almost 60 countries, not only in Islamic countries but in the leading global financial centers. Even United Kingdom has adopted an open door policy and provided a level playing field to Islamic finance and now Singapore is following its lead. (Dr.Shamshad 2007)

Islamic banking has shown tremendous growth in the past 20 years, with estimated deposits surpassing $80 billion in more than 45 countries. Annual turnover is currently estimated at $70 billion and is projected to pass $100 billion by 2000. (O’Sullivan 1994, p. 7) For the last 60 years, the mode of banking in Pakistan was totally of interest based but now there is a shift from western banking to Islamic banking in number of banks in Pakistan and also there are some new banks like Meezan bank which is totally based on Islamic banking. In 2007 Meezan Bank creates a significant milestone in the history of Islamic Banking by opening its 100th branch in the city of Karachi. With 100 branches in 31 cities clearly positions the Bank as the leading Islamic Bank in Pakistan. Two new dedicated Islamic Banks start operations in Pakistan, namely Emirates Islamic Bank and Dawood Islamic Bank. (Meezan Bank 2007)

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 into 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).

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 e t 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).

The working of the customer’s mind is a mystery which is difficult to solve and understanding the nuances of what customer satisfaction is, a challenging task. This exercise in the context of the banking industry will give us an insight into the parameters of customer satisfaction and their measurement. This vital information will help us to build satisfaction amongst the customers and customer loyalty in the long run which is an integral part of any business. The customer’s requirements must be translated and quantified into measurable targets. This provides an easy way to monitor improvements, and deciding upon the attributes that need to be concentrated on in order to improve customer satisfaction. We can recognize where we need to make changes to create improvements and determine if these changes, after implemented, have led to increased customer satisfaction. “If you cannot measure it, you cannot improve it.” – Lord William Thomson Kelvin (1824-1907).

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 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 behaviour in retail banking by considering service quality and 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).

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). On the basis of existing literature, this study examines the perception of bank customers regarding service quality and its impact on customer satisfaction in Pakistani banking sector, we test the following hypotheses.

H1: There will be positive relationships between service quality and customer satisfaction regarding Islamic banks in

Pakistan.

H2: There will be positive relationships between service quality and customer satisfaction regarding Conventional banks in Pakistan.

RESEARCH METHODOLOGY

The main purpose of this research is to analyse the level of customer satisfaction about Meezan Bank Ltd and Habib Bank Ltd in Pakistan.

Many authors and writers have defined research and research methodology, most of them if not completely contradictory with each other but are substantially different.

Webster’s Collegiate Dictionary (1977) defines research as “Studious inquiry or examination; esp. investigation or experimentation aimed at the discovery and interpretation of facts, revision of accepted theories or laws in the light of new facts or practical application of such new or revised theories of lawsâ€?

Andrew and Hildebrand (1982, p. 3) define research as “The orderly procedure by which man increases his knowledge�

3.1 RESEARCH PHILOSOPHY

3.2 RESEARCH APPROACH

Research approach means the approach or the methodology that has been adopted to conduct the research. Research approach involves the selection of research questions, the conceptual framework that has to be adopted, the selection of appropriate research method such as primary research, secondary research etc. There are mainly two types of research approach:-

Inductive approach

Deductive approach

Inductive Approach

An inductive argument is one in which the premises are supposed to support the conclusion in such a way that if the premises are true, it is improbable that the conclusion would be false. Thus, the conclusion follows probably from the premises and inferences. Here is an example:

1. Socrates was Greek. (Premise)

2. Most Greeks eat fish. (Premise)

3. Socrates ate fish. (Conclusion)

It may seem that inductive arguments are weaker than deductive arguments because there must always remain the possibility of their arriving at false conclusions, but that is not entirely true. With deductive arguments, our conclusions are already contained, even if implicitly, in our premises. This means that we don’t arrive at new information — at best; we are shown information which was obscured or unrecognized previously. Thus, the sure truth-preserving nature of deductive arguments comes at a cost.

Inductive arguments, on the other hand, do provide us with new ideas and thus may expand our knowledge about the world in a way that is impossible for deductive arguments to achieve. Thus, while deductive arguments may be used most often with mathematics, most other fields of research make extensive use of inductive arguments.

Deductive Approach

Deductive argument is one in which it is impossible for the premises to be true but the conclusion false. Thus, the conclusion follows necessarily from the premises and inferences. In this way, it is supposed to be a definitive proof of the truth of the claim (conclusion). Here is a classic example:

1. All men are mortal. (Premise)

2. Socrates was a man. (Premise)

3. Socrates was mortal. (Conclusion)

As you can see, if the premises are true (and they are), then it simply isn’t possible for the conclusion to be false. If you have a deductive argument and you accept the truth of the premises, then you must also accept the truth of the conclusion; if you reject it, then you are rejecting logic itself.

3.3 Research Strategy

Research Strategy basically refers to the method of data collection for the specified topic. The term Data can be divided into further 2 branches.

Primary Data

The primary data basically refers to data which is collected by the researcher for the purpose of answering the problem under discussion. Primary data will be collected through

Secondary Data

The Secondary data is being obtained by the literature study, journals and articles. Secondary data is normally used to understand the problem under discussion and its helps the Researcher to reach its conclusion.

The Researcher will use a quantitative approach for this research study, developing and distributing a questionnaire to customers of Islamic and Conventional banks asking them about their experiences and attitudes in relation to their banks.

The questionnaire will include three types of questions, 1) closed questions, requiring the respondent to answer yes or no, 2) open questions allowing the respondent to elaborate on their answers and 3) multiple choice questions, asking respondents to rate their responses on a scale.

Primary data collection plan: quantitative or qualitative both methods have to be used appropriately in any research paradigm. The researcher will be using a quantitative approach. The survey strategy will be used to collect quantitative data which is associated with deductive approach and philosophically positivist.

The Researcher will distribute questionnaires to the customers from both Islamic and Conventional banks, asking them to complete and return them to the Researcher.

3.4 Research Sample

In research terms a sample is a group of people, objects, or items that are taken from a larger population for measurement. The sample should be representative of the population to ensure that we can generalise the findings from the research sample to the population as a whole.

Probability sampling means a method of sampling that utilizes random selection. In order to have a random selection method, you must set up some process or procedure that assures that the different units in your population have equal probabilities of being chosen. Humans have long practiced various forms of random selection, such as picking a name out of a hat, or choosing the short straw. These days, we tend to use computers as the mechanism for generating random numbers as the basis for random selection.

Non probability sampling does not involve random selection but it does not mean that non probability samples aren’t representative of the population. But it does mean that non probability samples cannot depend upon the rationale of probability theory. At least with a probabilistic sample, we know the odds or probability that we have represented the population well. We are able to estimate confidence intervals for the statistic. With non probability samples, we may or may not represent the population well, and it will often be hard for us to know how well we’ve done so. In general, researchers prefer probabilistic or random sampling methods over non probabilistic ones, and consider them to be more accurate and rigorous.

The Researcher will be using Probability Sampling method for its Primary data collection.

3.5 Research Validity and Reliability

The research is designed very carefully in order to maintain the level of validity and reliability. The study which is used is a test and re test approach in order to reduce unfairness and interviewee possible irritation. Both qualitative and quantitative research method are aimed to achieve high level of validity and reliability. Interviews are based on friendly manner to approach people have available time for interviews. Open ended and close ended questions along with some probe were going to be used during in-depth interview. The ethical principle of collecting data is to avoid subjective selectivity in what we record. Researchers needs to maintenance his objectivity by making sure he collects all data and fully (Saunder`s M. et al 2007).

3.6 Research Ethics

The ethical principle of collecting data is to avoid subjective selectivity in what we record. Researcher needs to maintenance his objectivity by making sure he collects all data accurately and fully (Saunders, M. et al. 2007).

Time Period and

task to do

March 2010

April 2010

May 2010

June 2010

July 2010

August 2010

Weeks,

17,

Prepare dissertation proposal and submission before 29th April 2009.

Continue searching the literature review and its submission to supervisor.

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Weeks,

18,19

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Weeks,

20,21

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Interviewing with participants, and analysing of data simultaneously, gathered from each participant.

Revision of draft and supervisor`s comments.

Meeting with supervisor, Initial start

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