If appropriate efforts are made then no doubt, we shall be able to show the blessings of Islamic economic system to the rest of the world as a model to follow.

Feb 27 - Mar 05, 2006

Since the early 1980's there has been some practical efforts towards the implementation of Islamic banking, though the Islamic banking started in Pakistan in 1965 with other initial experiments in Egypt (1963) and Malaysia (1963). The early 1990's proved to be the first time when Islamic banking became the buzz word. Meezan Bank came into the Financial Institutes (FI) scene with the hallmark of offering Islamic banking financial products which were claimed to be Shariah compliant. Now being the first one, now whenever Islamic banking term is referred, people relate to Meezan Bank. Now there are two full fledged Islamic banks working and couples of more are in the pipeline to start their operations in Pakistan. This shows the potential and opportunity prevailing in Pakistan with regard to Islamic banking.

Islamic Financial Institutions (IFI) offer Shariah complaint products to the customers but still profit making is also a motive behind the whole IFI organization. Understandingly the customers would definitely improve the potential of the success of IFI and also it would result the expansion of current customer base in Pakistan.

There are certain key factors which formulate or determine the customer's behavior. According to my study what normally drives the customers towards a specific bank are factors like, rate of return, customer service, branch network, banking hours, conformability of financial product, etc.

According to a study comprising a survey of a focus group of people from corporate sector, individual customers and bankers, the rate of return offered by the bank and the customer services make the biggest pie-share while choosing a bank. These factors, collectively account for 74.8% of people who use banking. Rest of the factors are not the decisive ones.

The IFI's in Pakistan are still following the pre-1990 approach when interest-free banking was a hallmark of Islamic finance. This approach makes the management of IFI feel that the only Unique Selling Proposition (USP) available to them is offering "interest-free" financial products, whereas institutionalization of Islamic financial product, also known as Post-1990 phenomenon, has already taken shape in many Islamic and non-Islamic and western countries.

If we take the example of western banks which are offering Islamic banking, their motive of offering Islamic banking or so-called Shariah compliant financial services/products is not for the cause of Islam. They offer such products and services because they believe that offering Shariah compliant financial products will add good to the bank in many ways. Mutual benefits of the bank and the customer also constitute a main reason. It is interesting to know that to a small minority of customers well-versed in current banking system, along with some experienced bankers, they believe that the benefit of Islamic banking system is immense for the bank, society, economy and all the stakeholders.

It is indeed an achievement of IFI's and other supporters of Islamic banking, that people in Pakistan know Islamic banking, be it knowing it in the sense of their existence or regarding their working and differentiation from conventional banks. According to the survey 76.6% people know about Islamic banks, one way or another. Their source of information mainly originates from news (83%) and from the word of mouth (27.4%). Here IFIs should work out that how to impart more information regarding IFIs through other sources. As far as the potential is concerned regarding the usage of IFIs, nearly 61% people showed their interest in availing finance over profit & loss sharing basis. This shows the potential for the absorption of Shariah complaint financing products. The lack of understanding of the concept of Islamic banking itself render the consumer totally helpless to understand the benefits of Islamic consumer banking.

Despite many interested and keen customers, the users of IFIs are not many in Pakistan. According to the survey only 34.7% are actually using IFI for their money matters. This leaves majority of the people who are not using IFIs for their money and financial issues. This figure of 34.7% is not up to the mark if we see the other analysis regarding their interest in IFI's. When they were asked why they don't use IFIs, it was revealed that approximately 38% don't use because of unavailability of knowledge regarding related aspects of IFI's. Here a shocking and unexpected reason which came into discussion was that approximately 21% people are indifferent regarding the interest issue. They don't care whether they are dealing with interest or not. This shows that how much efforts are needed to be put in, in making the mind of the people for their benefit in hereafter and also for the implementation of up to the mark Islamic economic system in Pakistan. After all it's the people who run and implement the system. One of the views showed by the people is the consumers getting confused with interest or Riba-free with profit free mechanism. It is assumed that since it is interest free it will offer little or no profit. Profit is not associated with Islamic consumer banking for a number of reasons. IFIs need to address this issue as well.

Regarding the products of IFI's in Pakistan, 51.1% of people think that the products they are offering are of average in context to their innovation and attractiveness. Moreover, 31% of people rate the IFIs' products as poor in terms of being innovative and attractive.

To promote the Islamic banking in Pakistan the suggestions given by people are:

* Aggressive advertising so that more and more people get to know about Islamic banking.
* Introduction of new and innovative products so that people believe that IFI's have something to offer, other than offering interest free banking.
* Improvement in customer service
* Islamic education campaign
* Islamic economics/banking education campaign.

There are enormous numbers of people who don't believe in banking system altogether. They keep their money stacked somewhere else (capital market or real estate). One of the reasons of their action is the issue of interest.

Today Islamic banking is being introduced in Pakistan in the light of Shariah, but general concept is that Islamic banking is licensed by State Bank of Pakistan which is purely operated on interest basis. This impression seems to be correct but SBP has brought some changes pertaining to its dealing exclusively with IFIs. Their mode of interaction and ruling is different with IFI as compared to conventional banks. This is indeed a great step forward and will definitely open up other areas for better working of IFI's in Pakistan.

In Pakistan, it is needed that IFI's take into the account what customers are really thinking, so that they take such measures which are in accordance with the customer's expectation while keeping in consideration the Shariah constraints. This will indeed lead to the development and enrichment of Islamic banking in Pakistan and would definitely pave the path for true Islamic economic system in Pakistan. If appropriate efforts are made then no doubt, we shall be able to show the blessings of Islamic economic system to the rest of the world as a model to follow.

Author of this article is serving as Assistant Professor at Mohammad Ali Jinnah University (Karachi Campus), Resource Person for Islamic Banking and Islamic Economics, and Islamic Banking Consultant for different banks in Pakistan. He can be reached at;