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Factors Affecting the Adoption of Islamic Banking in Pakistan

Ali, Syed Babar and Ali, Syed Muzammil (2011): Factors Affecting the Adoption of Islamic Banking in Pakistan.

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This research is aimed at testing the variables that create the demand for the Islamic banking system. Since Islamic banking is relatively new in the country it is important to understand the variables that drive the preference for this form of banking. Through the literature survey relevant variables of this sector, present in other parts of the Islamic world were discovered. Those variables came out to be: religious conviction, the newness of financial products, new kinds of services and bank reputation. The results of this survey have discerned the most significant variables of this industry in Pakistan. The top two variables that generate the preference for Islamic banking are product quality and compliance with Islamic principles by the bank followed by the quality of services offered by the Islamic bank and last but not least bank’s reputation. The survey also aimed to uncover the performance of these variables in Pakistan. Thus, after the survey, it was clear that although Islamic banks in Pakistan follow religious teaching in their practices but they are still reluctant to completely move to Islamic principles. The obvious reason that comes to mind is the parallel banking system working in the country. The research also reveals that customers of the bank are primarily motivated by the need to adhere to religious principles and take advantage of new products, as an alternative source of financing their needs. Customers of Islamic banks have shown an indifferent attitude toward the shariah supervisory board. This shows that they are not aware of the utility of this board. Research also reveals that Islamic banks have managed to offer services comparable to conventional banks, but there is still scope for innovation not only in the frontier of services but also financial products.

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