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Perception Of Employees Working In Islamic Banks

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Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Thu, 15 Mar 2018

CHAPTER 1

INTRODUCTION

According to Zainol, Shaari, Ali (2008) Islamic banking was not so popular amongst the masses in 1970. But by the 21st century with steady growth Islamic banking became a reality that could not be ignored, where in 1975 the size of the industry was few hundred thousand dollars, it reached to billions of dollars in 2004. According to Zaher and Hassan (2001) shariah-compliant accounts worldwide estimated to 0.5 trillion US Dollars with an average rate of 10-15% per annum.

In year 2000, State Bank of Pakistan finally decided to open Islamic Banks. In 2002, Meezan Bank took the initiative of being a complete Islamic Bank. Every conventional bank now has to have an Islamic Banking Window in it as per State Bank of Pakistan’s regulation.

Since Islamic Banks are new entrants in Pakistani banking industry it requires a comparative thorough study to assess the performance of its operations and products/services. 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, Ahmad, Rehman, Saif (2010).

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).

The existence of Islamic and conventional banks created competition among banks to meet customers’ expectations for long term benefits. There are two banking systems that exist in Pakistan namely Conventional banking and Islamic banking. The Islamic bank (IB) and conventional bank (CB) is differentiated on the basis of objectives, Riba and risk sharing practices. IB follows principles of Sharia’h given by Allah Almighty while CB follows manmade SOPs (Standard Operating Procedures); IB generates income as profits that are variable while CB earns from the interest that is fixed. However, risk is shared among lender, borrower 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. SBP plays an active role to establish a sound Islamic banking system in Pakistan according to principles of Sharia’h as mentioned in its mission statement that read “To support and expand Islamic Banking in line with the best international practices, ensuring Sharia’h Compliance and transparency”.

1.1 Overview

The research captured the perception of the employees working in Islamic Banks and Commercial Banks with Islamic Windows regarding Islamic Banking products and services, training and development, and its potential growth in Pakistan. Questionnaires were submitted to employees working in Islamic Banks and Commercial Banks with Islamic Windows in Karachi, which is the metropolitan city in Pakistan. The results revealed that both the Islamic Windows have almost same perception regarding products & services & the potential growth of the Islamic Banking in Pakistan, whereas, there is a significant difference in their educational background, training & development, and prior experience of working in the same field.

Problem Statement

Since Islamic Banking is still in a growing stage in Pakistan, there are many aspects affecting its growth, the major being the employees that convince customers, family and friends through internal marketing to opt for Islamic Banking services, therefore, they have to be convinced, trained, educated themselves first.

Some other aspects impacting the growth of Islamic Banking are:

Globalization and Liberalization brought in a great deal of competition as many conventional banks across the globe have started Islamic Banking services too.

Innovative technology has brought in tough competition in conducting business, and development of banking sector. In this regard, employees’ skills and expertise are required.

After having a competition from competitors and technological factors, another threat arrived from customers itself, customers being more prudent, educated, well-versed with the services, procedures, laws, rules etc. need to be convinced in the same way and treated more efficiently henceforth.

A research of Hassan and Ahmed (2002) suggests that Islamic Banking products and services do not satisfy the demand of many sectors, hence should be increased in order to penetrate in the current market situation and exploit the same.

This exploratory research is essential because employees serve customers at branch level and each customer is treated as a separate associate to the business hence comprehensive understanding, detailed information & explanation of the concerned areas should be attained to provide to the customers; whereas customers in today’s world are so educated and learned that they demand detailed information and innovative products & services.

Research Hypotheses

Following are the hypotheses tested

H1: There is no significant difference between Islamic Banks and Conventional Banks employees’ perception towards Islamic Banking products and services

H2: There is no significant difference between Islamic Banks and Conventional Banks employees’ perception towards the training and experience gained for Islamic products and services.

H3: There is no significant difference between Islamic Banks and Conventional Banks employees’ perception towards the future potential of Islamic banking in Pakistan.

Outline of the Study

This study examines the perception of employees working in Islamic Banks and Conventional Banks with Islamic Windows regarding products & services, training & experience, and potential growth of Islamic Banking in Pakistan. The population consists of employees working in Islamic Banks and Conventional Banks with Islamic Windows operating in Pakistan. A sample of 200 respondents (employees) is selected for this study by using convenient sampling technique. A structured questionnaire was developed to record their responses. Employees were approached to collect the data by self-administered questionnaires. The questionnaire consisted of 3 sections products & services, training & experience, and potential growth. The 23 questions were divided into 3 sections; with an assessment by a 5 point Likert Scale, where 1= Highly Potential to 5=No Potential. The data was collected from major banks in Karachi. The response was statistically analyzed by using SPSS 17.0 version.

Definitions

Ijarah: To give something on rent.

Mudarabah: A partner is supposed to give money to another partner for investment purposes in commercial projects, this is called Mudarabah.

Murabaha: It is the mortgage refinancing options that meet the Islamic Sharia Law. Murabaha means deferred sale finance.

Musharakah: Partnership in business management where all partners can participate.

Riba: Its usury and is prohibited in Islamic economic jurisprudence. It’s the surplus value without counterpart.

Shari’ah: The fundamental religious concept of Islam. Islamic Laws.

CHAPTER 2

LITERATURE REVIEW

According to Zainol, Shaari, Ali (2008) well-trained and skilled employees are less in number, therefore, educationists and governing bodies should focus on providing and promoting the Islamic Banking system for its sustainable growth to meet the set target of 20% banking assets in Malaysia in 2010. According to them Islamic Bank employees had more knowledge than conventional bank employees regarding same products and services.

As per Ziethaml, Bitner (2000) for sustainable competitive advantage organizations now need improved service quality and increased customer satisfaction. Peters (1999) supports the same by saying that service quality leads to lower cost, higher customer service, better products and services, and higher margins.

As per the internal marketing aspect Ziethaml (2000) says that outside customer’s perspective reflects that of inside customer’s views. The business entity or an individual is referred to as the outside customer that uses the services, whereas the inside customer are the employees. To satisfy and meet the needs of outside customer, the inside customer should be satisfied and give improved and perfect service quality.

According to Schneider and Bowen (1985) employees can deliver excellent customer services by utilizing the logistics, equipment, management (organizational structure) and the hierarchical infrastructure; eventually this will lead to competitive edge.

In 1988 Bowen and Schneider found out in their research that front-line working employees serve an important prominent role in representing the organization to the outside world; they bring the awareness amongst the public through word of mouth and their behavior henceforth is assessed by the customers. Since Islamic Banking is based on front-line employees’ relation with customers, it is essential to understand the importance of the front-line employees.

Hamid and Nordin (2001) determined the importance of education in Islamic banking, and discovered that customers possess very limited knowledge of Islamic banking, in that 60% of the respondents could not differentiate between Islamic banking products and conventional banking products.

According to Hassan and Ahmed (2002) the customers and employees of the Islamic bank in Dhaka, Bangladesh, found that the respondents were not interested in conducting banking transactions in Islamic banks because they believed that only the name of the bank had been changed to reflect that it was an Islamic-based bank; they believed that interest, which is prohibited in Islam, was still practiced. Overall, the researchers determined that the customers’ and employees’ understanding the concepts and practices of Islamic banking is still vague. The authors recommend that to prevent any misunderstanding, adequate training must be given to the employees, future researchers and also the customers.

According to Makiyan (2002) research revealed that the infrastructure problem experienced by banks’ employees in Iran was due to inadequate knowledge and training.

Whereas Haron and Ahmad (2002) have highlighted that nearly 65% of corporate banking customers clarified that they had very limited knowledge of Islamic banking. The authors further stressed that the banks do not put much effort into marketing their products or educating their customers.

A survey by Sudin Haron, Norafifah Ahmad and Sandra L. Planisek (1994) in a small town at Kedah and Perlis with a Muslim dominant population discovered that only about 63 percent of the Muslims have understood either partly or completely the difference between Conventional banks and Islamic banks, while about 39 percent of the Muslims respondents believe that religion is the only reason why people patronized the Islamic bank.

A similar situation occurred in Singapore, where 22.6 percent of Muslims deposit money in Islamic banks solely because of religion, Gerard and Cunningham (1997).

One of the contributing factors to this absence of awareness among Muslims is the lack of understanding of Islamic banking. A study conducted in Singapore showed that only 20.7 percent know the meaning of ‘Riba’ and 31 percent know the meaning of Shari’ah. The study also showed that only 3 percent can explain accurately the meaning of Ijarah, Mudarabah and Musharakah. Surprisingly, no one could explain accurately the meaning of Murabaha, Gerrard and Cunningham (1997).

Researchers have looked into attitudes towards Islamic banking and the criteria used by customers to select a particular bank. They have specifically looked into the bank selection criteria used by Jordanian customers to bank either with an Islamic bank or a conventional bank. These studies reported that customers who only do transactions with Islamic banks chose to do so because of provision of fast and efficient service; the bank’s reputation and image; and confidentiality of the bank, Erol and El-Bdour (1989).

They concluded that the Islamic banks should put more coherent efforts to improve their long-term competitive position. Another study conducted by Gerrard and Cunningham (1997) investigating the degree of awareness of the Islamic banking system in Singapore revealed that there was a general lack of awareness of the culture of Islamic banking in both Islamic and non-Islamic communities.

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 139 products of Islamic bank but expressed a sense of dissatisfaction towards some of the services (Naseer, Jamal and Al-Khatib, 1999).

Jabnoun and Khalifa (2005) proposed and tested a measure of service quality to compare conventional and Islamic banks in UAE. The study found out that four dimensions were significant in case of conventional banks. While only personal skills and values were crucial in determining service quality in Islamic banks. It is also revealed 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).

A national level plan was devised to apply the plan, but in view of the mammoth raise, it was decided to Islamize the banking system in phases. Despite the apparent government efforts, Islamic financing in Pakistan could not be accomplished in its true spirit and many challenges are still faced by the banking sector in its implementation. The paper at hand, attempts to explore the strategic policy orientation needed for the promotion of Islamic banking in Pakistan. It is hypothesized that the current strategy directions are not facilitating Islamic Banking in Pakistan and a number of rational impediments are hampering the progress of the system Turnbull and Gibbs (1999). The paper is divided into different sections. Section II discusses the development of Islamic banking in Pakistan focusing on the progress made in the sector and factors that are hurdle in the development of the Islamic banking in Pakistan. Analysis of operating situation is tremendously vital for decisive organizational information. The organization must be true to its objectives and it must show progress towards achieving these objectives, it must also be inexpensively stable and have sustainable growth in an open environment. The era of 1981 earmarked the official accomplishment of interest free banking in Pakistan on profit and loss sharing basis. All the commercial banking held in Pakistani Rupees was affirmed by the Government to be made interest-free from 1st July 1985. From the date, no bank in Pakistan was permitted to accept interest based deposits and all existing deposits were to be based on profit and loss sharing. Foreign banks however, were exempted. A survey in a small town at Kedah and Perlis with a Muslim dominant population discovered that only about 63 percent of the Muslims have understood either partly or completely the difference between the Islamic bank and conventional banks, while about 39 percent of the Muslims respondents believe that religion is the only reason why people patronized the Islamic bank (Khan and Fahim 1983).

The basis on which Islamic finance stands is the prohibition of interest and riba. Islamic banking prohibits and avoids all such transactions that lead to activities that are even close to riba, unlike all other conventional banks, who manipulate with customers money (interest). There is a change in Pakistan now, where banking system is gradually being converted into Islamic banking from the conventional based banking model. It (Islamic Banking) is based on the principles of Islamic economics. Basic aim and achievement of Islamic banking is the alleviation of poverty and reduction of income/wealth disparity. This is also done from Zakah, contribution of money to the poorer people. Zakah may add to consumption demand in the economy by redistributing income from the rich to the poor, it is also likely to stimulate investment by checking the tendency to hoard idle cash, thus adding to the production of goods and services of common use for poor, rather than luxury goods for rich. Zakah amount is fixed at 2.5% per annum, which is taken out from the account every year in the Islamic month of Ramzan, in order to be distributed amongst not-for-profit organizations and needy people. ‘No interest’ does not mean that there will be no returns on capital, Islam does not allow for a fixed predetermined rate for a certain factor of production so there will not be any predetermined return that will be attached to the capital, besides that Islam has allowed for profit sharing so profit sharing percentage is fixed but the ratio of return is not fixed. Shook and Hassan (1988) have looked into attitudes towards Islamic banking, and the criteria used by customers to select a particular bank have specifically looked into the bank selection criteria used by Jordanian customers to do banking either with an Islamic bank or a conventional bank. Islamic banking signifies that Islamic banks can contribute great to the economy as in terms of economic growth and development especially in the case of recession or stagnation and low growth level as they are very much concerned about the productive investment. Islamic banking is not only based on Islamic Laws and Shari’ah, but it is another name for social banking that works for the cause of humanity with its basic aim is sharing and community building. Interest is unbearable burden for all the developed countries so the bankers based on Islamic banking are increasingly penetrating in the markets. In late 1970s government of Pakistan has introduced Islamic banking on nationwide scale. A national level strategy was devised to implement the plan, but in view of the board it was decided to Islamize the banking system in phases. Despite the apparent government efforts, Islamic financing in Pakistan could not be practiced in its true spirit and many challenges are still faced by the banking sectors in its implementation stage.

Islamic banking idea is very popular even in these days in Pakistan. Many developments can be seen either in shape of all new institutions which are offering Islamic ways of banking or some banks that are opening the different branches so that they can provide the financing product or service purely based on Shariah. Though the trend is increasing but there are many customers who follow Islam religiously and doubt on the service provided by banks that how much practical implementation is there. To make them satisfy, three years back Mr. Fazal Ahmed, chief financial officer of Islamic investment back declared that Pakistan has based its regulations on the footsteps of Islamic banking of Malaysia and Bahrain, but now Pakistan has the best frame work for Islamic Banking, all it can have. Many customers still have a doubt on the services provided by Islamic banks from the scratch and the government institutions are not sure that the doubts in the minds of average customers have been cleared or not (Shaikh and Samir 1997).

Consumers will be keen interested in the banks that are offering great value and services, and are best in providing financial products along with packages like ATM access, phone banking etc. this provides great opportunity to the financial providers of Islam as compared to conventional banks who are in their mature stage of providing the same. Islamic banking can make their reputation good on consumer understanding, position themselves in the financial world, and offer Islamic banking services in non Islamic countries like Singapore, Australia, etc. they can increase their customers in the local resident of Pakistan. Hence exploring new market and penetrating in the same should be the focus strategy. Consumers will be willing to invest in these banks if they have good image instead of dealing with the usual commercial financial institutions that are interest based. On the other hand monetary organizations invest in projects that are termed as asset-backed scheme. Financial Islamic organization deals with equity not in debt whereas some banks have started providing debit cards for the customers own funds rather than to trust on any credit (loan). Another concept of Islamic shariah banks is sharing profits and not losses; many consumers were not familiar with this loss sharing concept that is also being used in Islamic banking system, Iqbal and Zamir (1997).

Since the inception of Profit and Loss Sharing (PLS) mode in Pakistani banking sector, the volume of total deposits did not turn down. Total PLS deposits of all scheduled banks increased from Rs 370,281 million to 1,005,738 in 1992 and 2001 respectively thus registering on average a growth rate of 4 percent per annum. In the light of the above-mentioned studies it could be argued that there is no question of the profitability, viability or efficiency of the Islamic banking system. Islamic banks are equally as profitable as any of the conventional banks. The basic issue is the implementation of the Islamic banking in its true spirit. In the light of the literature review and with especial reference to Pakistan, a number of factors have been taken into deliberation in the survey to analyze in depth the challenges and problems faced by the Islamic banking system. One of the factors is sharing of knowledge; where sharing of knowledge is essential for developing a successful economic system as it is not possible for a particular person or a small set of individuals to accumulate all knowledge needed for designing such system. Presently, knowledge sharing on Islamic banking issues is very low; the countries working to develop the system are working in almost isolation. Hence this factor is taken into account in the analysis. Another factor is Legal framework; Legal framework and support impart a positive impact on the effective working of Islamic banking. Third is lack of legal support; lack of legal support may hamper the Islamization process of banking that has pointed out insufficient legal protection as an important problem faced by the Islamic banks in Bangladesh. Fourth factor is public awareness; where public should be made aware of the cultural impact that an Islamic banking system possess. They should be educated on the social benefits that the society would gain from adopting the system, McDougall and Levesque (1994).

CHAPTER 3

RESEARCH METHODS

Method of Data Collection

This chapter explains the methodology used for this research study. The major research question for this study is to recognize the factors that are associated with bankers’ perception on Islamic banking in Pakistan. Quantitative research shows the hypothesis-testing research, whereas this research also uses the quantitative research approach due to explanatory nature of the problem. A structured questionnaire was developed to record the responses. This chapter also discusses the methods to evaluate validity and reliability of research for the factors associated with an insight of bankers’ on Islamic banking in Pakistan. In this research a sample of 200 respondents were selected for this study i.e. employees from both Islamic and Conventional Banks with Islamic Banking divisions in it.

Survey

Survey research is typically associated with the deductive approach. It is an ordinary strategy in business research. It allows the collection of huge amount of data from a considerable population in an economical way, which is based often on questionnaire and where data are standardized and allow easy comparison. The data collection approach used for the research is survey method with questionnaire, being the measurement tool. In this research survey was conducted on different banks to collect the information.

Sampling Technique

The sampling technique was convenient sampling. Questionnaires were personally distributed to Islamic Banks and Conventional Banks with Islamic banking divisions in it; and all the questions were answered and since all questionnaires were self-administered, they were all filled by the employees that were in senior level positions and/or were directly dealing with the customer.

Sample Size

The sample size was 200 respondents, i.e. employees working in Islamic Banks and Conventional Banks with Islamic Windows. Employees were mostly senior level positions and/or were directly dealing with the customer.

3.4 Instrument of Data Collection

The research instrument is based on self administrated survey questionnaire. These questionnaires were filled by staff of different banks. The questionnaire consisted different type of questions. These questions focused on the insight of bankers’ on Islamic banking in Pakistan. The opinion differs from employee to employee and bank to bank. The questionnaires were prepared mainly to check the insight of bankers’ on Islamic banking in Pakistan.

3.4.1. Validity and Reliability Test

Reliability Test was conducted through statistical analysis tool SPSS 17.0 and according to Corn Bach Alpha’s the questionnaire was reliable with a value of 6.5, after which the questionnaire was distributed.

Research Model Developed

Primary research was used.

Statistical Technique

Statistical technique used to evaluate the data collected is t-test and cross-tabulation.

Hypotheses:

There are three hypotheses tested in this research, which are as follows:

H1: There is no significant difference between Islamic Banks and Conventional Banks employees’ perception towards Islamic Banking products and services

H2: There is no significant difference between Islamic Banks and Conventional Banks employees’ perception towards the training and experience gained for Islamic products and services.

H3: There is no significant difference between Islamic Banks and Conventional Banks employees’ perception towards the future potential of Islamic banking in Pakistan.

The questionnaire consists of four sections in it, where initial part was to distinguish and record whether it was Islamic Bank or Conventional Bank and which department in that bank. Section 1 was to record general perception of employees regarding Islamic Banking and this hypothesis was rejected, which meant there is a difference between their perceptions regarding Islamic Banking. Section 2 was to find out their past experiences and education regarding Islamic Banking, whether their concepts and knowledge were clear or not and this hypothesis was accepted, which meant both of their concepts and knowledge were equal and there is no difference between the two employees. Section 3 was for their future prediction as per their experience and knowledge since they are in the market dealing with the customer directly and this hypothesis was rejected too, which meant there is a difference between their predictions.

CHAPTER 4

RESULTS

4.1 Findings and Interpretation of the Results

TABLE 4.1

Bank

N

Mean

Std. Deviation

Std. Error

Mean

Product and Services Islamic banking

Conventional banking

84

116

2.2037

2.2037

.40955

.46635

.04469

.04330

Training and Experience Islamic Bank

Conventional banking

84

116

2.5170

2.7217

.73109

.74109

.07977

.06955

Training and Experience Islamic Bank

Conventional banking

84

116

2.1587

2.4052

.65138

.68215

.07107

.06334

The table 4.1 represents the descriptive of the data file. Total sample size used for the analysis is 200 out of which 84 responses were taken from the people working in the Islamic banks and 116 responses were taken from the people working in commercial banks. Islamic Banks products and services mean is 2.20 as compared to conventional banks that is 2.37 a more lower value indicates that people working in Islamic banks do strongly believe that a difference exists among the product and services offered by Islamic banks as compare to commercial banks (Zairani & Rohaya 2008).

The mean value of the training and experience gained for Islamic products and services of Islamic bank employees is 2.51 and the mean value of the commercial bank employees is 2.72 the lower value of the Islamic bank indicates that people working in the Islamic bank are more in agreement that the training provided in both the institutions about the products are similar and hence the knowledge about the Islamic product and services in both the institutions are same, which leads to insufficient amount of knowledge.

Islamic banking employees’ future potential mean is 2.15 as compare to the mean value of the conventional bank that is 2.40. It clearly indicates that the people working in Islamic banks are having different concepts about the future of Islamic banking in Pakistan. Where, the Islamic Banking employees are highly in favour of Islamic Banking; the employees of Conventional Banking are not in favour, the employees of the conventional banks are not in disagreement with the believe of the Islamic banks but do not find that Islamic banks have any profitable future in long term with respect to financial transactions.

H1: There is no significant difference between Islamic Banks and Conventional Banks towards Islamic Banking products and services.

TABLE 4.2

Independent Sample Test

Levene’s Test for Equality of

Variance

t-test for Equality of Mean

F

Sig

t

sig(2-tailed)

Products and Services

1.757

0.187

-2.629

0.009

Training and Experience

0

0.984

-1.926

0.055

Future Potential

0.003

0.955

-2.57

0.011

From the above table it can be observed that the significant value of the Levene’s Test is greater than 0.05 that is 0.187 it means that the basic assumption of the T-test is fulfilled that is the population variances should be equal in the above case (Zairani & Rohaya 2008).

The significant value of the T-test is 0.009 for the product and services that is less than 0.05 therefore; our null hypothesis is accepted. Therefore significant difference exists between Islamic banks and conventional banks towards Islamic banking products and services in Pakistan.

Therefore it can be concluded that employees working in both banks are having different perception regarding the Islamic Bank concept i.e. they need to work over their concepts, which concludes that knowledge of Islamic Banking employees is fairly sufficient then that of Conventional Bank employees.

H2: There is no significant differenc


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