Islamic Banking in Pakistan: A

consumer perspective
August 28, 2009 in Islamic banking | by ibfn

THE Idea of Islamic Banking is still hot these days in Pakistan. Either completely
new Islamic institute are being emerged or recent traditional banks are opening
additional branches focusing in Shariah-based Financing products/services. But still
consumers doubt that how much are they Islamic? Three years back, Fazal Ahmed,
chief financial officer of the Islamic Investment Bank quoted that “Pakistan followed
Malaysia and Bahrain considered the role models of Islamic banking while it
formulated its regulations, now Pakistan has the best possible framework for Islamic
banking that it can”. But, at the end of the day, government institutions and
authorities cannot judge whether they have proved themselves or not while
consumers do.Now, according to the average consumer of the Islamic banks in
Pakistan they still have doubt in their mind from the scratch to the main services
provided by Islamic Banks.

Consumers would be open to the thought of acquire Islamic banking products and
services given that the organization that is offering the service is renowned, and
better customer service features such as ATM access, phone banking and so on, are
offered. This provides a great prospect for Islamic financial organizations in a market
that already have many other competitive existing commercial banks. If Islamic
financial organizations can make on their understanding and status in the monetary
world, and can offer Islamic banking products/services in non Islamic markets such
as Singapore, United Kingdom, Australia, they can plan to increase an emergent
consumer base of the local residents in Pakistan, some of who may have beforehand
excused themselves from dealing with the usual financial organizations because of
the use of interest. The consumers still also believe on the fact the lack of
consciousness about some basic concepts and philosophy of Islamic banking. In
Pakistan, a number of consumers would not adopt halal banking products because
they feel insecure that what will happen if credit facilities were taken away. In the
Islamic monetary structure money is not lent out, as an alternative it is an asset-
backed scheme where monetary organizations invest in projects. Consequently,
financial organizations deal in equity, not debt. To counter this inadequacy, some
banks have started issuing ‘debit’ cards. These cards are alike to the credit cards
excluding the actuality that they use the consumers own funds as an alternative of
trust on any credit. Another concern is that of sharing profits and not losses. A lot of
consumers who have been using the Islamic banking services were not educated
about the loss sharing concept earlier. This would designate that some economic
organizations have been assuring profits. In fact, it breaches the fundamental law of
Islamic financing structure that is, relating compensations to risk. Any kind of money
earned on investment without risk is simply interest more willingly than profit.

So, it reveals the fact that, in order to recognize how the Islamic structure makes a
distinction between profit and interest, they have to look at the dissimilarities in
financial beliefs. Because past experiances have already shown that the rationale of
‘monetary and financial standing’ is very important for a consumer to select a
particular bank. In capitalist theory, capital and entrepreneurs are taken care of as
two separate identities of production where the first identity acquires interest and
the second identity is permitted to get the profit. It is implicit that interest is a fixed
return to offer capital, and profit can simply be produced after allocating the fixed
return to land, labor and capital. On the contrary, the Islamic monetary system does
not regard as capital and entrepreneurs as separate identities of production. It
accepts as true that each individual who puts in capital in the figure of money to a
business enterprise assumes the risk of loss and as a result is permitted to a
proportional share in the actual profit. The system is caring of the entrepreneur, who
in a capitalist economy would have to make fixed interest repayments even when the
venture is making a loss. Capital has a fundamental aspect of entrepreneurship, until
now as the risk of the industry is apprehensive and for that reason, rather than a
fixed return as interest, it develops profit. So, as much profit one earn of the
business, the more return on capital. The profit would be privileged if there are no
fixed interest repayments. In this fashion the profits produced by the money-making
activities in the public are uniformly dispersed among those who have given capital
to the organization. In this way, an integration of social responsibility and extra
Islamic values in rewarding consumers’ needs to be worthy of ultimate consideration
as it signifies an excellent and basic discrimination between Islamic and conventional
banking systems, and potentially competent to push Islamic banking to better
pinnacle in securing consumers’ gratefulness and response.

Top researchers in the area of Islamic Finance have affirmed that assurance made by
organizations that consumers will take delivery of a set rate of return without having
to acquire losses are prohibited and immoral. Thus far, not only are financial
organizations enduring the practice but government societies in Muslim nations are
also contributing venture openings with certain income. Taking into consideration,
that the Muslim administration is accountable for overseeing the structure in order to
battle the prohibited practices of monetary institutes, by giving definite returns; the
governments are seen to be overlooking the performance of the monetary
organizations. Even though these proceedings may assist Islamic Banks develop in
the short run, but in the long run overall cost will prevail over the profit in shape of
damage to the repute and legitimacy. Such progress also offer ammunition to the
detractors of the system who are previously questioning whether the structure is
nothing more than an interest based system operating under the guise of profit.

The most essential information discovered by the past behaviors is that consumer
satisfaction over and over again is directly related to the quality of services that
Islamic banks offer. The excellence of services comprises of factors like taking care
of consumers with politeness and admiration; workforce capability to put across faith
and self-assurance; effectiveness and efficacy in managing any operation; and well-
informed and attentiveness in offering clarifications and answers relating to the
products and services of an Islamic bank.

As a result, Islamic bankers can no more rely only at marketing strategy of pulling
religious and holy consumers towards them who might only worry about Islamicity of
banking services. Some significant insights acknowledged on the bases of different
thoughts of consumer baking selection criterion entails the requirement for Islamic
banks to improve its quality of services which is at the present measured as an
important success factor that have an effect on an institute’s competitiveness. With
respect to the standing of a variety of bank selection criterion, some of these would
undoubtedly revolutionize accordingly of people having turn out to be extra
conscious of the culture of Islamic banking. For instance, media advertising would be
probable to have an extreme good impact on Muslims. The aspiration by Muslims to
be compensated a high rate of interest have to decrease. In case of non- Muslims,
media advertising may turn out to be well rated accordingly of being uncovered to
revealing bank promotion.

Besides this, an additional considerable subject, which needs awareness, is the need
to strengthen community learning and understanding towards the distinguishing
features of Islamic banks and how it may beneficially go with the concern of
consumers in their economic transactions. Islamic banks have latent of being
advertised to different sectors of consumers who are worried with the legality of the
ability from Islamic viewpoint and those who try to find for service value, handiness
and well-organized business. Customer learning programs are for that reason vital if
they are to amplify the level of customer consciousness about the distinctive features
of Islamic banking and the range of services and products offered by it.

On the whole, after consumers have been uncovered to the ethnicity of Islamic
banking, it would be anticipated that consumer’s knowledge of what Islamic banking
engages would enhance and their thoughts towards this type of banking should vary.
The change would be estimated to be much bigger in local consumers. Similarly with
the standing of the different banking selection criterion. Shifts would be likely, extra
predominant with banking customers throughout the country. (This article is
contributed by Fahad Ramzan, courtesy: Pakistan Times!)