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Nature Of The British Constitution

Abstract

This research probes in to the question that can Pakistan economy replace conventional banking with Islamic banking. For this, the paper has highlights some variables extracted from the literature. Based on these variables a questionnaire was floated in the banks; Islamic and conventional both.

Data and the regressions showed that “Business development, profitability, liquidity and solvency”, “Improper implementation of Islamic banking practices and principles” and “Conventional banks established and old” are the most important variables affecting the substitution process. Another important variable was “Islamic roots and religious factors”, which according to a general view aids in implementing Islamic banking. But according to the research and findings this factor is not at all important, as in the case of Pakistan.

There is a general perception in the mind of the banking customers that Islamic banks aren’t investing in Sharia ways. There is lack of trust, which needs to be developed. This trust would help defeat the established roots of conventional banking. And for banks to at least take an initiative in introducing Islamic banking, “Business development, profitability, liquidity and solvency”, these factors are an incentive.

Acknowledgements

All thanks to Allah Almighty for giving me the ability and opportunity, required to complete this thesis.

My thanks and appreciation to managers and staff at the Bank Islami, Bank Al-Habib, Bank Al Bank Alfalah and Dubai Islamic Bank, for their time and information. Without their cooperation data collection would have been difficult. I would specially like to thank Mr. Fesal Omar, branch manager Bank Islami and Mr. Aurangzeb Khan, manager operations Bank Al-Habib.

Thanks to all my teachers till this date, without them I wouldn’t have been able achieve this. Especially the support and help of my supervisor, Ms. Sahr Nawaz, was invaluable in making it possible for me to complete this thesis.

And in last I would specially like to thank my parents for their support, encouragement and love all these years. God Bless you!

Chapter-1: Introduction

An Overview of the topic

Islamic banking is the fastest growing mode of banking and relatively newer to the conventional banking system. This banking system strictly follows and practices the Islamic rules (Sharia) of investing in non-Riba (interest free) based tools and shares profit on the basis of Islamic profit and loss sharing rules.

Islamic banking was introduced completely on full scale during Zia’s era. But after his era this banking system took a downturn. In past what we can see is that Islamic banking hasn’t been able to establish its roots in Pakistan completely, despite Pakistan being a Islamic nation. There are many reasons to this. But recently State Bank of Pakistan (SBP) has taken some initiative through its policies to introduce Islamic banking step by step. Now every bank in Pakistan is regulated to practice Islamic banking along conventional banking.

This paper based on this has tried to answer the question that, will SBP’s be able to substitute Islamic banking with conventional banking in the future? For this purpose the paper has been organized into sections which consist of literature review, methodology, hypothesis building, analysis and finally the conclusion.

Managerial Concern

The main reason behind this research is to see if Islamic banking is compatible in an economy. Will it be able to support any economy and prevent the recessions? Most importantly will it be able to substitute the conventional banking and support the weak Pakistan economy in coming years?

This paper will be quite vital for a number of institutes and bodies; namely State Bank of Pakistan, Governments around the world and banks, who seek to invest in new ventures. This research will help these institutes to figure out the problems, and on the basis of these problems they can implement Islamic banking in better way.

Study Objectives

The objective of this study is to reach a conclusion that is Islamic Banking system a substitute of conventional banking system? More specifically the objectives will be:

To probe into the problems, the Islamic banks are having.

To highlight factors and variables, and analyze their positive or negative influences upon Islamic banking system in an economy.

To come to a final conclusion, that would non-Riba based system be as healthy, attractive, supportive and beneficial to any economy as interest based economy.

Related Definition

No full scale implementation:

A system introduced in an economy without proper supporting institutions.

Absence of Islamic Secondary Markets:

Islamic secondary markets are purposed secondary markets which would trade securities abiding the Islamic principles.

Improper Implementation of Islamic Banking Practices and Principles:

The non-Islamic or conventional banking practices practiced in Islamic banks.

Conventional Banks Established and Old:

It is the factor which explains that conventional banks being old and established have an edge over their new counterparts, Islamic banks.

Islamic Roots and Religious Factors:

A country with Islamic roots encouraging Islamic banking system

Reduced Risk:

The factor of uncertainty is reduced with, no use of speculative financial instruments and interest based tools.

Global Financial Crisis:

The economic distress or collapse of major global economies is called global financial crisis.

Interest Free Loans:

The loan offered to customers without Riba or interest on the basis of profit and loss sharing.

Business Development, Profitability, Liquid and Solvency:

Business development ratios are the indicators of financial progress and development over time measured by total asset growth, deposit growth, advances growth and investment growth.

Profitability is the ultimate test of managements operating effectiveness and success of a company.

Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

The solvency ratio measures the size of a company's after-tax income, excluding non-cash depreciation expenses, as compared to the firm's total debt obligations. It provides a measurement of how likely a company will be to continue meeting its debt obligations.

Untouched Factors (Exchange Rates, Fiscal Policies and Foreign Debt)

The conventional banks deal in three major sectors exchange rates, fiscal policies and foreign debt, which are unresolved in the Islamic banking system.

Chapter-2: Literature Review

Many Islamic countries have opted Islamic banking structures. Worth mentioning here are Pakistan and Malaysia, who are among the few countries who have implemented the Islamic Banking system on a national level scale (Ananymous, 2010). The writer discusses in detail the development of Islamic Banking in both countries during early 1980s.

According to the writer Pakistan is quite different from Malaysia in a sense that Pakistan implemented this banking system at once nationwide. Unlike Pakistan, Malaysia implemented step by step. This the reason that Islamic banking is more established in Malaysia as compared to Pakistan.

The main variables which enabled the system to become prevalent in both countries are the Islamic roots and religious factors. Especially in case of Pakistan this factor worked as a catalyst during the Zia’s era and we can say it was only confined to this era alone. And with his departure the Islamic banking lost its value. But recently in 2001 the State Bank has implemented pro-Islamic banking policies and has vowed to take on Islamic mode of banking in future.

In the case Malaysia, the strong cultural and religious trends towards hajj, pushed the Malaysian government to establish Pilgrims Management and Fund Board in1963. This institution formed bases and the customer base for the newly developed Islamic Banking system in 1980s.At the moment they have Islamic banking along with conventional banking.

According to the writer these two ways of implementing the Islamic banking system had the same goal but different results. The results were not quite fruitful in the case of Pakistan as it tried to employ it overnight. But in the case of Malaysia the results have been quite satisfying due to their stepwise policies, though there are some problems; Malaysia is now inviting foreign investments into their unique dual banking system (Conventional along Islamic banking system).

The comparative (Moin, 2008) provides a good insight comparison between Pakistani Islamic bank; in this study, Meezan Bank Limited (MBL) and 5 conventional banks. He takes 12 financial ratios to evaluate on the bases of profitability, liquidity, risk and efficiency for the period 2003-2007; Rate on Asset, Rate on equity, Loan to deposit ratio, Loan to asset ratio, Debt to equity ratio, Asset utilization and income to expense ratio are used to assess the performance of two. T-test and F-test are used to determine the differential performance between two. And the results according the Shehzad Moin show that MBL is less profitable, less risky and also less efficient than 5 conventional banks. Worth mentioning here is that, as he says conventional banks are more established and old. This could be the reason conventional banks are more profitable and performance wise better. He also adds here that in economies, according to other similar studies, the banks such as Islamic banks of UAE are more profitable, less liquid, less risky and more efficient than conventional banks. In other words he is of view point that in future to come the Islamic banks would prove to be better than conventional banks in Pakistan.

Another issue prevailing and which is still somehow not completely answered is that, how is Islamic banking system, which is interest-free or Riba free, going to deal with the Western interest based system on full scale Islamic model system? The research (Mohsin S. Khan, 2001) discusses these issues. They point out that Islamic system has still a long way on resolving these issues such as exchange rates, fiscal policies and foreign debt. These domains are untouched and still to be answered.

Further they move on to the main crux of the paper; the full scale banking system introduction in Iran and Pakistan. According to them Iran had overnight implementation of the Islamic banking system, contrary to Pakistan, which had it step wise in terms of implementation. In Iran’s case the author takes on the pre-revolutionary economic structure and post-revolutionary internal and external development as variables, which acted as catalyst in implementation of Islamic banking system. The pre-revolution era had some bad policies that stepped forward in bringing the economic system change. Whereas in the post revolution era, some events made it like more likely to bring about fundamental restructuring of economic behavior and institutions foreign; in other words the Islamic economic system. These events include the foreign assets freezing, economic sanctions, Afghan refugee and war with Iraq. These all events summed up to Islamic banking system; as banking system was used for restructuring. In Pakistan’s case, the implementation process was gradual as compared to Iran .And Islamization is the factor which brought about this change. According to the writers the main problem both economies have faced is that, how to finance the deficit of government through banks. The phenomenon of borrowing for Iran is merely a western term, meaning that the banks are government owned and it makes no sense of borrowing and returning, whereas banks lend to each other at fixed rate of return. While Pakistan observes public borrowing at a rate higher than PLS deposits of the banks.

Overall the writers conclude that the Islamic banking system, as feared by many, didn’t collapse rather it enabled rapid growth in private-sector deposits and resource mobilization. The results according to them remain a question under the free market in both economies, because government intervention has made difficult to judge.

The research paper (Muhammad Azhar Sheikh, 2010) is based on the sample taken from Bahawalpur, Pakistan. He compares the two banking systems on the basis of customer satisfaction. According to him, the customers are the one to be satisfied at the end of the day. And there are specific set of variables associated to each banking system, which are base to customer satisfaction level. According to his study economic benefits, financial position of banks, latest facilities, interest on deposits, strong global image and reputation are factors effecting the customer attraction towards conventional banks, while interest free loan, financial position of banks, Islamic teaching and Sharia, knowledge of Islam and religious environment are factors motivating customers towards Islamic Banking.

According to his findings conventional bank customers are more satisfied, based on the above mentioned factors, than the Islamic bank customers. He concludes by saying that Islamic banks should introduce attractive marketing campaigns, lay attention to service quality and stress more on promoting their Islamic instruments.

Analyzing the Islamic Banking system in the Middle East and North Africa region, has opened new avenues of problems and hurdles in developing the Islamic economic system to its full. The paper (Moore, 2000) discusses a different angle, which according to the writer seems to be the main element of inefficiency and low rate of adoptability in Middle East and North-African economies.

According to the writer there are market inefficiencies, which haven’t proved to be beneficial to both modes of banking. For example all these countries (Egypt, Tunisia, Egypt, Sudan, Bahrain, Jordan, Kuwait, Qatar, Turkey and UAE) have Conventional as well as Islamic banking. This has caused head to head competition and in return caused market inefficiencies.

Furthermore he adds politics as one of the main variable that backs up Islamic banking practices in an economy. He says that for Islamic banking system to compete well in an economy, the political as well as the banking system should be competitive rather than restrictive regime. In other words free market. This restrictive regime causes inefficiencies, as in the case of governments’ intervention of fixing interest rates below the inflation rates.

This paper (Md.Safiullah, 2010) takes the recent scenario in Bangladesh. He compares the two banking systems to extract the superiority among two based on their performance. He on the bases of business development, profitability, liquid and solvency, commitment to economy and community, efficiency and productivity drives his results. And according to him the factors, commitment to economy and community, efficiency and productivity, show that conventional banks are performing better than interest-free banks, while based on factors, business development, profitability, liquid and solvency, the Islamic banks are superior to conventional banks. Overall he concludes that Islamic banks are superior to convention banks, but that does not means that conventional banks are not better performing entities rather they have significant contribution to certain segments of the market. Conventional banks should follow Islamic banks by stressing more on human welfare rather than profit maximization.

The research paper (AwwalSarker, 2001) explains the real problem why Islamic banks have not performed at par with their counterparts in an economy. According to Abdul Awwal Islamic banks cannot work at their very best performance until they are under conventional banking system. The reason doesn’t stands with the Islamic banking system rather with the conventional banks working. And unless and until Islamic banking system isn’t introduced at a full scale in an economy, it won’t produce desired results and would lack in some magnitude. For it to be successful and efficient, the Islamic economy must have access to liquidity. And it is only possible if Islamic economy has full fledge Islamic secondary markets. Where Islamic banks can exercise their liquidity and expand business to them. These Islamic models will then help Islamic banks and help them achieve desired efficiency. Abdul Awwal also suggests Islamic GAAP for further strengthening the Islamic banking system.

This research (Ariss, 2010) points out that there is no difference in profitability among two banking systems. Her sample size included Islamic banks and conventional banks from 13 different countries. And she reached to a conclusion that there is difference in asset and portfolio composition but no significant difference in profitability. Recent years show that Islamic banking has been quite popular with the Western banks. And they have been consistently investing their time and assets to Islamic mode of banking. And banks that had invested in the Islamic mode of banking rather than derivatives (prohibited by Sharia) narrowed their exposure to recent shocks of 2007. While on the other hand Islamic banks have shown resilience.

This research (Beng Soon Chong, 2009) explains the real problem prevailing in the Islamic economies when it comes to implementation of Islamic banking system. According to writers theoretically the Islamic banking is based on profit loss sharing (PLS) principle. But when it comes to practice, the things are quite opposite. The Islamic banking practiced is more like conventional banking. There isn’t much to differentiate. The authors of this research have based their study on the largest Islamic banking system, Malaysia. According to them there aren’t any prohibitions in the banking system to restrain Islamic banks from diverting from the PLS mode. Rather Islamic banks are seen having insignificant proportion of PLS based financing on the asset side, where as a significant adoption to PLS principle is seen on the liability side. Thus there should be proper regulatory body to implement the proper practice of PLS and at the same time maintain a good competition with conventional banks.

Another research (Pryor, 2007) explains through his cluster analysis that Islam as religion has no significant impact on economic system. This paper rules out the variable, which considered Islamic roots to be a significant variable in considering Islamic banking as a substitute of conventional banking in Islamic countries. Islam as religion, according to this study has very little impact on economic institutes.

Chapter-3: Methodology Analytical Choice

3.1 Research Type

The research carried out is characterized as Basic Research. This research is intended to increase the limits of the knowledge of the topic under study. In doing so, the study aims to verify the acceptability of the given variables. Further on the basis of the results of the variable tests, it will conclude that which variables will be affecting the substitution of Islamic banking the most. Moreover it will also suggest which variables are important for the concerned institutions to consider as integral part of the implementing Islamic banking.

3.2 Data Type & Research period

The research type based on Basic Research needed two sources to conduct the research. These sources used to gather data were Primary data sources and Secondary data sources.

The primary data sources consisted of questionnaire. The questions were based on the variables extracted from the secondary sources. These variables were completely gauged with a likert scale question. The questionnaire consisted of a total of 17 questions.

The secondary data used mainly consists of periodical and scholarly works. Internet was used to search the periodicals. References have been attached in the reference section. These papers were used to extract variables and to understand the relationship to the implementation of the Islamic banking. Further these articles also helped in formulation of theoretical framework and questionnaire.

The questionnaires were floated in a single point in time to the relevant sample; Banking sector. The questionnaires were floated to only bankers, keeping in mind that they are were acting both as customers and service providers.

The research period was from September 2010 to April 2011. The total time that was allocated for his research was eight months. The first four months were allocated for the Literature Review, Theoretical Framework and hypothesis development and the other four months were allocated for research methodology, data collection, analysis and conclusion.

3.3 Research Hypothesis

No full scale implementation:

H0: β=0: “No full scale implementation” has insignificant impact on “Islamic banking a substitute of conventional banking”

H1: β≠0: “No full scale implementation is result of absence of Islamic secondary markets” has significant impact on “Islamic banking a substitute of conventional banking”

Improper Implementation of Islamic Banking Practices and Principles:

H0: β=0: “Improper implementation of Islamic banking practices and principles” has insignificant impact on “Islamic banking a substitute of conventional banking”

H1: β≠0: “Improper implementation of Islamic banking practices and principles” has significant impact on “Islamic banking a substitute of conventional banking”

Conventional Banks Established and Old:

H0: β=0: “Conventional banks established and old” has insignificant impact on “Islamic banking a substitute of conventional banking”

H1: β≠0: “Conventional banks established and old” has significant impact on “Islamic banking a substitute of conventional banking”

Islamic Roots and Religious Factors:

H0: β=0: “Islamic roots and religious factors” has insignificant impact on “Islamic banking a substitute of conventional banking”

H1: β≠0: “Islamic roots and religious factors” has significant impact on “Islamic banking a substitute of conventional banking”

Reduced Risk:

H0: β=0: “Reduced risk” has insignificant impact on “Islamic banking a substitute of conventional banking”

H1: β≠0: “Reduced risk” has significant impact on “Islamic banking a substitute of conventional banking”

Interest Free Loans:

H0: β=0: “Interest free loans” has insignificant impact on “Islamic banking a substitute of conventional banking”

H1: β≠0: “Interest free loans” has significant impact on “Islamic banking a substitute of conventional banking”

Business Development, Profitability, Liquidity and Solvency:

H0: β=0: “Business development, profitability, liquid and solvency” has insignificant impact on “Islamic banking a substitute of conventional banking”

H1: β≠0: “Business development, profitability, liquid and solvency” has significant impact on “Islamic banking a substitute of conventional banking”

Untouched Factors (Exchange Rates, Fiscal Policies and Foreign Debt):

H0: β=0: “Untouched factors (exchange rates, fiscal policies and foreign debt)” has insignificant impact on “Islamic banking a substitute of conventional banking”

H1: β≠0: “Untouched factors (exchange rates, fiscal policies and foreign debt)” has significant impact on “Islamic banking a substitute of conventional banking”

3.4 Theoretical Framework and Variables under Consideration

Improper implementation of Islamic banking practices and principles

Untouched factors (exchange rates, fiscal policies and foreign debt)

No full scale implementation (Absence of Islamic secondary markets)

IS ISLAMIC BANKING A SUBSTITUTE OF CONVENTIONAL BANKING IN PAKISTAN?

Conventional banks established and old

Business development, profitability, liquidity and solvency

Islamic roots and religious factors

Interest free loans

Reduced risk

3.4.1 Reference List of variables under consideration:

The independent variables under consideration are:

No full scale implementation

Improper Implementation of Islamic Banking Practices and Principles

Conventional Banks Established and Old

Islamic Roots and Religious Factors

Reduced Risk

Interest Free Loans

Business Development, Profitability, Liquidity and Solvency

Untouched Factors (Exchange Rates, Fiscal Policies and Foreign Debt)

3.4.2 Theoretical justification

The variables selected from the literature as mentioned above were the most important in explaining the implementation of Islamic banking. These eight variables best explain the relationship to the dependent variable. The analyses can be best done using these variables and would help the paper conclude the best results based on these variables.

3.5 Information Gathering

3.5.1 Survey Design

The primary source used to gather data as mentioned before is questionnaire. The questionnaire consisted of 17 questions in total. The questionnaire comprised of mixed type of questions; simple-dichotomy questions, determinant-choice questions and mostly likert scale based questions (1 = strongly agree to 5 = strongly disagree). There were 9 questions specifically gauging independent variables, while other questions were asked to inquire the individual’s current banking status and etc.

3.5.2 Population, Working Population & Planned Sample

The population under research was individuals from banking sector. The sample was collected from Bank Islami, Bank Al-Habib, Bank Al Bank Alfalah (Islamic Banking branch) and Dubai Islamic Bank. The location of the branches of above mentioned banks were in the locality of DHA Lahore. Questioners were floated in all of these banks, regardless of them being conventional or Islamic. The reason behind this was to gather a general perception as well as to find the relationship of the variables in accordance to Islamic banking. If the sample would have been confined to only conventional banking sector the results should have shown biasness.

3.5.3 Sample Size consideration

The sample size, due to time constraint, was kept to 20. The sample size includes equal number of individuals from each bank. The sample size depicts the complete banking sector; Islamic plus conventional banking sector. The questionnaire was filled from Islamic and conventional banking employees. They represent their banking systems plus customers of their respective banking system. Individuals we deliberately selected to be employees as well as customers of the same banking system so that they can represent the system as employees and customers as the users of the respective system.

3.5.4 Choice of sampling techniques

The sampling technique used is non-probability sampling, due to time shortage and on convenience. The other characteristic of the technique is that it is quota sampling; sample representing the desired characteristics of the population.

3.5.5 Field work & Respondents profile

As mentioned above four banks were used. The sample contains four mangers of each branch. They all held MBA degrees. Other sample consisted of staff; with at least Bachelor’s degree. Most of the respondents were male, females were also included. All age group of all respondents was between ages of 21-45.

3.5.6 Data Analysis Tools and Regression

The analysis tools used in this research are as following:

Statgraphics

SPSS

Excel

These tools were used to run regression analysis, cross tabulations and frequency descriptive.

Chapter-4: Estimation, Analysis and Conclusion

4.1. Estimation Results

Multiple regressions were run to check whether Islamic banking is a substitute of conventional banking or not. The following regression helped to determine the values of R-squared, Adjusted R-squared and p-value of the independent variables. Among other values which were extracted to help support above mentioned values are: Durbin-Watson statistic, t-statistics (t-stat), and f-ratio.

Dependent Variable:

IS ISLAMIC BANKING A SUBSTITUTE OF CONVENTIONAL BANKING IN PAKISTAN?

Independent Variables:

No full scale implementation is result of absence of Islamic secondary markets

Improper implementation of Islamic banking practices and principles

Conventional banks established and old

Islamic roots and religious factors

Reduced risk

Interest free loan

Business development, profitability, liquidity and solvency

Untouched factors (exchange rates, fiscal policies and foreign debt)

First Model:

The results of the initial regression are as following:

Multiple Regressions:

Dependent variable: Is Islamic banking a substitute of conventional banking in Pakistan? Independent variables:

Improper implementation of Islamic banking practices and principles

Conventional banks established and old

Islamic roots and religious factors

Reduced risk

Interest free loan

Business development, profitability, liquidity and solvency

Untouched factors (exchange rates, fiscal policies and foreign debt)

No full scale implementation

Standard

T

Parameter

Estimate

Error

Statistic

P-Value

Improper implementation of Islamic banking practices and principles

0.185764

0.0999268

1.859

0.0877

Conventional banks established and old

0.181031

0.0688079

2.63096

0.0219

Islamic roots and religious factors

0.0679231

0.169804

0.400008

0.6962

Reduced risk

-0.0642621

0.255681

-0.251337

0.8058

Interest free loan

0.139522

0.155798

0.895533

0.3881

Business development, profitability, liquidity and solvency

0.193469

0.0954131

2.02769

0.0654

Untouched factors (exchange rates, fiscal policies and foreign debt)

0.00899981

0.0865969

0.103928

0.9189

No full scale implementation

-0.197443

0.165545

-1.19269

0.2560

Analysis of Variance

Source

Sum of Squares

Df

Mean Square

F-Ratio

P-Value

Model

48.1906

8

6.02383

39.95

0.0000

Residual

1.80939

12

0.150783

Total

50.0

20

R-squared = 96.3812 percent

R-squared (adjusted for d.f.) = 94.2703 percent

Standard Error of Est. = 0.388308

Mean absolute error = 0.252486

Durbin-Watson statistic = 1.96343

Lag 1 residual autocorrelation = 0.0126989

The output shows the results of fitting a multiple linear regression model to describe the relationship between dependent, which is the dependent variable, and 8 independent variables. The equation of the fitted model is

Q7 = 0.185764* Improper implementation of Islamic banking practices and principles + 0.181031* Conventional banks established and old + 0.0679231* Islamic roots and religious - 0.0642621* Reduced risk + 0.139522* Interest free loan

+ 0.193469* Business development, profitability, liquidity and solvency

+ 0.00899981* Untouched factors (exchange rates, fiscal policies and foreign debt)

- 0.197443* No full scale implementation

Since the P-value in the ANOVA table is less than 0.05, there is a statistically significant relationship between the variables at the 95.0% confidence level.

Final Model

The model above had insignificant relationship, thus by removing the insignificant independent variables following were the results:

Multiple Regression

Standard

T

Parameter

Estimate

Error

Statistic

P-Value

Improper implementation of Islamic banking practices and principles

0.156498

0.0686581

2.27938

0.0358

Conventional banks established and old

0.193866

0.0526387

3.68296

0.0018

Business development, profitability, liquidity and solvency

0.214935

0.0621696

3.45724

0.0030

Analysis of Variance

Source

Sum of Squares

Df

Mean Square

F-Ratio

P-Value

Model

47.8625

3

15.9542

126.89

0.0000

Residual

2.13745

17

0.125733

Total

50.0

20

R-squared = 95.7251 percent

R-squared (adjusted for d.f.) = 95.2222 percent

Standard Error of Est. = 0.354588

Mean absolute error = 0.254287

Durbin-Watson statistic = 2.28056

Lag 1 residual autocorrelation = -0.152037

Final model selected:

The output shows the results of fitting a multiple linear regression model to describe the relationship between Q7, independent variable, and 8 independent variables. The equation of the fitted model is

IS ISLAMIC BANKING A SUBSTITUTE OF CONVENTIONAL BANKING IN PAKISTAN? = 0.156498* Improper implementation of Islamic banking practices and principles+ 0.193866* Conventional banks established and old + 0.214935* Business development, profitability, liquidity and solvency

First model having negative relationship with the variables needed some amendment. So the regression was performed again by removing insignificant variables. The weightages of “Conventional banks established and old” and “Business development, profitability, liquidity and solvency” increased showing a significant relationship to the dependent variable. Since the P-value in the ANOVA table is less than 0.05, there is a statistically significant relationship between the variables at the 95.0% confidence level.

4.1.1 Tests of Significance of Regression, Parameters:

The following will be summarizing the regression performed above, and in addition relating it to the hypothesis.

Equation (First Model):

IS ISLAMIC BANKING A SUBSTITUTE OF CONVENTIONAL BANKING IN PAKISTAN? = 0.185764* Improper implementation of Islamic banking practices and principles + 0.181031* Conventional banks established and old + 0.0679231* Islamic roots and religious factors - 0.0642621* Reduced risk + 0.139522* Interest free loan+ 0.193469* Business development, profitability, liquidity and solvency + 0.00899981* Untouched factors (exchange rates, fiscal policies and foreign debt) - 0.197443* No full scale implementation is result of absence of Islamic secondary markets

The equation above explains the relationship between dependent variable with the independent variables of the first model. The weightages of two variables, “No full scale implementation” is result of absence of Islamic secondary markets and “Reduced risk a positive factor in global financial crisis” are negative. Meaning they have negative relationship to the dependent variable.

Equation (Final Model):

IS ISLAMIC BANKING A SUBSTITUTE OF CONVENTIONAL BANKING IN PAKISTAN? = 0.156498* Improper implementation of Islamic banking practices and principles+ 0.193866* Conventional banks established and old+ 0.214935* Business development, profitability, liquidity and solvency

First model having negative relationship with the variables needed some amendment. So the regression was performed again by removing insignificant variables. The weightages of “Conventional banks established and old” and “Business development, profitability, liquidity and solvency” increased showing a significant relationship to the dependent variable.

P-value, R-squared and Adjusted R-squared:

The p-value explains the significance of a relationship between dependent and independent variables. As the taken confidence interval is 95%, thus the values below .05 would be considered significant. The initial tests which were run on the independent variables showed insignificant relationship of independent variables as compared to the dependent variable, except (p-value of .021. The values of R-squared (96.3%) and adjusted R-squared (94.2%) were extremely good, showing the significant relationship. Thus the results indicated that by removing the insignificant variables, the relationship can be improved.

So only “Improper implementation of Islamic banking practices and principles”

“Conventional banks established and old”,” Business development, profitability, liquidity and solvency” were used to run the regression again. And the results, as given in Final model, were extracted. Meaning that:

Improper implementation of Islamic banking practices and principles

Conventional banks established and old

Business development, profitability, liquidity and solvency

are most significant independent variables.

R-squared and adjusted R-squared values are 95.7% and 95.2% respectively. Thus model is accepted. These values are excellent, thus depicting those changes in independent variable is caused by the dependent variable and better the model explains that change. The value derived is up to the mark and support the model in supportive way.

Hypothesis Testing:

H0: β=0: “No full scale implementation” has insignificant impact on “Islamic banking a substitute of conventional banking ”

H1: β≠0: “No full scale implementation” has significant impact on “Islamic banking a substitute of conventional banking”

P-value for this independent variable is 0.2560. It is greater than 0.05 thus H0 is accepted, meaning that there is insignificant effect on the dependent variable.

H0: β=0: “Improper implementation of Islamic banking practices and principles” has insignificant impact on “Islamic banking a substitute of conventional banking ”

H1: β≠0: “Improper implementation of Islamic banking practices and principles” has significant impact on “Islamic banking a substitute of conventional banking”

P-value for this independent variable is .0358. It is lesser than 0.05 thus H0 is rejected, meaning that there is significant effect on the dependent variable. And H1, alternative hypothesis is accepted.

The article (Beng Soon Chong, 2009) also explains that there is improper implementation of Sharia principles in Islamic banking. It is statistically proved through the sample that too that, the Islamic banks aren’t following the Sharia laws in their practices.

H0: β=0: “Conventional banks established and old” has insignificant impact on “Islamic banking a substitute of conventional banking ”

H1: β≠0: “Conventional banks established and old” has significant impact on “Islamic banking a substitute of conventional banking”

P-value for this independent variable is 0.0018. It is lesser than 0.05 thus H0 is rejected, meaning that there is significant effect on the dependent variable. And H1, alternative hypothesis is accepted. Among all the independent variables this variable has the least p-value.

This article (Moin, 2008) stated that conventional banks being old and established, creates a hurdle in the substitution of Islamic banking. Thus by looking at the profitability and liquidity ratios one can conclude that conventional banks being old and established have caused much problem in the substitution process.

H0: β=0: “Islamic roots and religious factors” has significant impact on “Islamic banking a substitute of conventional banking”

H1: β≠0: “Islamic roots and religious factors” has insignificant impact on “Islamic banking a substitute of conventional banking”

P-value for this independent variable is 0.6962. It is greater than 0.05 thus H0 is accepted, meaning that there is insignificant effect on the dependent variable.

The article (Pryor, 2007) said that there is an insignificant impact of Islamic roots when implementing Islamic banking in an economy. Thus through research this is proved. As a general observation, we can see that Islamic banking was implemented in Zia’s era. But still it hasn’t been able to establish its roots although Pakistan was established on the basis of Islam.

H0: β=0: “Reduced risk” has insignificant impact on “Islamic banking a substitute of conventional banking ”

H1: β≠0: “Reduced risk” has significant impact on “Islamic banking a substitute of conventional banking”

P-value for this independent variable is 0.8058. It is greater than 0.05 thus H0 is accepted, meaning that there is insignificant effect on the dependent variable.

H0: β=0: “Interest free loan” has insignificant impact on “Islamic banking a substitute of conventional banking ”

H1: β≠0: “Interest free loan” has significant impact on “Islamic banking a substitute of conventional banking”

P-value for this independent variable is 0.3881. It is greater than 0.05 thus H0 is accepted, meaning that there is insignificant effect on the dependent variable.

H0: β=0: “Business development, profitability, liquid and solvency” has insignificant impact on “Islamic banking a substitute of conventional banking”

H1: β≠0: “Business development, profitability, liquid and solvency” has significant impact on “Islamic banking a substitute of conventional banking”

P-value for this independent variable is 0.0030. It is lesser than 0.05 thus H0 is rejected, meaning that there is significant effect on the dependent variable. And H1, alternative hypothesis is accepted.

This article (Md.Safiullah, 2010) figured out the following variables to be significant: Business development, profitability, liquid and solvency. Through the research and result this has been proved that on the basis of these factors Islamic banks are performing quite well. Worth mentioning here is that due to the technical nature of this question, this was only pitched to the bankers only. And they on their experience answered it to be important factors.

H0: β=0: “Untouched factors (exchange rates, fiscal policies and foreign debt)” has insignificant impact on “Islamic banking a substitute of conventional banking ”

H1: β≠0: “Untouched factors (exchange rates, fiscal policies and foreign debt)” has significant impact on “Islamic banking a substitute of conventional banking”

P-value for this independent variable is 0.9189. It is greater than 0.05 thus H0 is accepted, meaning that there is insignificant effect on the dependent variable.

4.1.2. Results of Parameter Tests of Significance

Standard Error of Estimate and Mean Absolute Error:

The standard error of the estimate is a measure of the accuracy of predictions made with a regression line. The standard error of the estimate shows the standard deviation of the residuals to be 0.388308. The mean absolute error (MAE) is a quantity used to measure how close forecasts or predictions are to the eventual outcomes. The mean absolute error (MAE) of 0.252486 is the average value of the residuals. But when the regression was ran again the values of SEE and MAE were 0.354588 and 0.254287 respectively.

T-stats:

The individual t-stats of the Q10, Q11, and Q16 are 2.2, 3.6 and 3.45 respectively, all greater than 2.The coefficients are at least twice as large as the standard error, concluding that the variables in question have a significant impact on the dependent variable. High t-statistics (over 2) mean the variable is significant. Whereas, initially the first table showed only Q11 and Q16’s value greater than 2. Thus removing the insignificant variables provided the desired results.

Durbin Watson Statistics:

The next value mentioned in the model is Durbin Watson (D.W) statistics. The value is 2.2, which is greater than 2, meaning there is no correlation between independent variables and this proves the significance of the model. This means that there is no Serial-Correlation, Multi-Collinearity and Heteroskedasticity. Initially in the first model the D.W was 1.9, which was not explaining the model’s significance up to the desired results.

4.1.2 Regression Summary:

According to the bankers and the most incentive for banks is to implement Islamic banking on the basis of “Business development, profitability, liquid and solvency”. These factors are the main attraction for the upcoming banks as well as for the conventional banks to adapt to Islamic banking. Md.Safiullah in has article has rated them as the most attractive and beneficial factors for Islamic banks. This is also proved by the equation, because this independent variable has the highest weightage.

On the other hand statistically the factor “Conventional banks established and old” has the lowest p-value. This relationship suggests most of the sample considered it to be the one the most important hurdle in the substitution.

Another factor “Improper implementation of Islamic banking practices and principles” is also a factor being hurdle in the substitution. Only if Islamic banks start using proper and authentic Sharia rules to bank, they can ensure the customer base to shift in their favor.

4.2. Descriptives:

Your personal banking account:

Frequency

Percent

Valid Percent

Cumulative Percent

Valid

Is an Islamic banking account with an Islamic bank

14

70.0

70.0

70.0

Is an Islamic banking account with a conventional bank

1

5.0

5.0

75.0

Is a conventional banking account with a conventional bank

5

25.0

25.0

100.0

Total

20

100.0

100.0

The data sample taken has 70% respondents having Islamic banking account with an Islamic bank, while one had an Islamic banking account with a conventional bank. While 5 were conventional banking account holders

The bar chart above shows that a lot people would like to switch to Islamic banking accounts in the nearest future. Thus showing this shows future potential in Islamic banking.

The bar chart above shows that the customer loyalty of Islamic banking customers. Here in the question they are given a dilemma. In which most respondents want to stick to the Islamic banking.

The above bar chart tells most people using Islamic banking is due to being their Islamic background

4.3. Cross Tabulation:

Imagine you are an Islamic bank's customer. Interest rate changes have resulted in conventional banks giving higher returns. You will * According to you why Islamic banking is important Cross tabulation

Count

According to you why Islamic banking is important

Total

Strictly Religion

Profit and loss element

Both religion and PLS principle

Is not

Imagine you are an Islamic bank's customer. Interest rate changes have resulted in conventional banks giving higher returns. You will

Stick with the Islamic bank

8

1

3

2

14

Not sure exactly

2

2

1

1

6

Total

10

3

4

3

20

The above cross tabulation, 8 respondents, explains why the customers will stick to the Islamic banking in the dilemma given in the question. The results explain this that due to the reason that they are strictly Islamic. We can also say that strictly religious wont shift to conventional banking no matter what.

4.4. Limitations of the Study:

Uncooperative banking staff

Biasness regarding views

Respondents’ number was limited as compared to the original population size

The research was conducted in Lahore region. Thus respondents from a single geographical region may perceive Islamic banking differently from other parts of Pakistan.

Time was limitation in carrying out more detailed research.

All banks have not been covered in the sample size.

4.5. Conclusion:

“Business development, profitability, liquidity and solvency”, “Improper implementation of Islamic banking practices and principles” and “Conventional banks established and old” are significant independent variables. First variable explains the positive incentive to substitute Islamic banking. While the second variable suggests that if Islamic work on improving the services they have promised, they might be able to cross the hurdle of third variable. The third variable according to the research is at the moment biggest hurdle in implementing Islamic banking in Pakistan economy. For that they need to work on the second variable.

There are hurdles at this moment. But according to the research customer loyalty and “Business development, profitability, liquidity and solvency” can prove to be steady implementation of Islamic banking in the future. But at the moment the strong base of Conventional banks is proving it to be the difficult. They need to work strictly on implementing Sharia laws to attract deposits.

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