Abstract

Islamic banking facilitates Muslims to comply with their religious obligations while fulfilling
their banking needs. Surprisingly, adoption of Islamic banking services remains low compared to
conventional banking in various Muslim countries. The objective of this qualitative study is to
explore why conventional banking customers dont adopt Islamic banking services in Pakistan.
Questionnaire and Semi-structured in-depth interviews were conducted with fifty two customers
of conventional banks. The findings suggest that conventional banking customers are hesitant to
adopt Islamic banking services in Pakistan owing to their lack of knowledge about Islamic
banks, their liking conventional banks because they consider current Islamic banking not really
Islamic, poor service delivery at Islamic bank branches,they also don’t have full freedom to spent
money the way they like or customers like to hold cash in their hand that's why they prefer to use
convectional banking, geographical barriers and some social reasons. The social reasons
preventing adoption of Islamic banking services include friends and family’s influence to open a
conventional bank account, unacceptability of Islamic bank account in ones social circle, and
employers transferring salaries in conventional banks. Based on this research, we propose policy
implications to Islamic banks management for capturing the conventional banks customers in
Balochistan and providing better services really in line with the Islamic principles. Finally,
limitations of this study and future research directions are discussed.

Introduction
The Islamic banking works as per the shariah compliant, all the Islamic banks have their Sariah
board which is composed of directors and mufti and fiqh specialist. The Islamic Banking
promote the ethical and moral values. The conventional banking system structure based on the
interest-based activities, the lenders of the money are liable to pay the fixed amount to bank as
per the prescribed date and rate, and if we look investment side the bank liable to pay the fixed
rate of return continuously. But the structure of the Islamic Finance is based on the business
approved from the Shariah-Compliant, the Islamic Banking system not focus on the provides the
finance to the customer but identify the purpose and need of the loan and provide the customers
assets or goods for business In short, Islamic finance, unlike conventional finance, must be
distinctive in its contractual and transactional features to render it different from conventional
finance although ultimately, both may achieve the same economic benefits.
Islamic finance does not, and should not, deal with money directly as money cannot create more
money by itself. Money must be put into real business activities to earn extra money. This is the
whole basis of trading. In other words, IFIs facilitate the financing needs of customers by
becoming sellers, lessors or partners as the case may be. The function of money has been
transformed from a commodity into an enabler to facilitate trading, leasing and investment. The
pool of money, collected through various Islamic accounts and/or shareholders' funds, is
channeled to finance trade, lease or investment activities. From a micro perspective, the money
has been transferred into real economic stock in order to generate more income. Thus, the profit
generated by IFIs is the outcome of dealing with a real asset rather than a monetary asset.

The investment such as the Mudarabah and Musharakah there is no fixed rate of return, because
the profit is future based and only expectations or predication can be made about the profit
amount. The Islamic Banking system always to do the research about the projects for identifying
the risk factor then invest, and the rate of return in each period is different from another period
due the net profit of the Business. So, there is no 100% assurance about the future prospects
there for the because the future is uncertain and anything could happen such as the natural
disasters etc. Another important aspect is that there is no fraud involve in the business with
guarantee.

Riba may be best equated to usury or financial interest. Any premium charged on money
borrowed is tantamount to Riba irrespective of the amount paid. Riba in its simplest sense is an
advantage to one party at the expense of another for no appropriate consideration. Islamic
commercial law addresses the issue of this unjustified advantage from two possible transactions,
namely in a loan or currency exchange contract as well as in a barter trading contract. Muslim
jurists have unanimously agreed that two separate classes of assets are susceptible to Riba,

namely currency or money and a few commodities, mainly food items. The requirements of an
exchange involving these two types of assets are the same.
 Currency for Currency Food Items for food Items

Subject Matter Shariah Subject Matter Shariah

Requirements Requirements
Same currency  Spot Transaction Same food items  Spot Transaction
[PKR for PKR]  Equal Amount [Barely for Barely]  Equal Amount

Different  Spot Different Food items  Spot

Currency Transactions [Barely for Wheat] Transaction
[USD for PKR]

Asset-based business
The Islamic banking system works on the asset-based businesses rather than providing mark-up
cash loans. The asset-based replace the receiving or paying of Riba the Islamic Bank directly
provide the asset to customers rather than cash loans. The Islamic banking avoids investment in
highly risky businesses, and also avoids the speculation which is haram in Islam. The mode of
the businesses used by the Islamic Banking are highly moral and which are highly supportive in
nature to society.

Money as medium of exchange

In Islam money is just the medium of exchange and solely business on money is prohibited in
Islam. The additional cost for lending money which is known as interest is strictly forbidden. As
the poor community highly affected from the interest system, the wealthy community get
wealthier and the poor people badly suffered.

Prohibited Trading Items

In addition to avoiding interest (usury) and profit earned from uncertainty, Islamic finance
should not be invested in activities involving, amongst other things, armaments, the consumption
of pork, intoxicants, entertainment, games of chance or pornography. This prohibition includes
the entire economic chain of activities relating to these industries, including their production,
storage, transportation, marketing and advertising.

Gharar

It is the Islamic finance term which means highly risky and uncertain businesses which are
prohibited in Islam. As the loss and gain chances are highly uncertain anything could happen so
therefore the Islam avoids such kind of businesses. As the Islamic mode of banking always
identifies the risk factors through different angles then invest in the certain businesses, this is the
reason that the mostly Islamic banks are always seen in profit rather then loss.

Haram businesses

Haram Businesses are highly restricted in the Islamic finance, the reason is that Islam is a
complete code of life Islam always teaches that never betray or exploit of others for self-benefits.
The Haram business includes the drugs, cigarettes, pork, alcohol, wines etc.

Risk-sharing

In the Islamic banking System, the mutual partnership between customer and bank or among
other partners the risk is shared as per their investment ratio in the partnership, by this way the
rights are not exploited. In Islamic investment products profit is shared among all the partners
while the loss is shared between capital providing partners rather than the skill sharing once.

Free-consent of partners

In Islamic banking there is free consent for the customers for investments. Nobody is compelled
for investing in the business. In holy Quran many times the its clearly mentioned that every
human have their own decision making freedom nobody can enter anyone in the business until
and unless there is self -consent of the investor is present or identified.

There are different kinds of Islamic products with different nature, following are the Islamic
banking product:

Mudarabah

In this business partnership there are two or more parties involve one party shares their
expertise/skills which are known as Mudarib while the other party share the capital which are
called as Rab-ul-mal. The Mudarib will carry out the business Operational activities and shares
the financial statements with the other partners. As the profit of the business will be share as per
the pre-decided ratios. While the loss is only bear by the capital sharing party this is the rule in
mudarabah.

Musharakah
An Islamic partnership in which two or more parties are involved, all the parties shares the
capital with different ratio. The partners share the benefits and bears the loss as per pre-decided
ratio or equally divide the loss and profits. These types of investment are long-term in nature and
these types of partnership investment mostly done in real estate, industries, factories and
agricultural businesses.

Diminishing Musharakah
Diminishing Musharakah is most commonly used for the financing of fixed and movable
assets, long term projects, etc. You and the Bank participate in joint ownership of a property,
equipment or a commercial enterprise. one partner's share is drawn down while it is transferred
to another partner until the entire sum is passed over.

Murabaha

Murabaha is an Islamic product in which the Islamic banks provides the assets to customers,
while the banks purchase the assets from the third party with less price. The Islamic banks
charges the additional fee charges as per their profit for selling the products to the potential
customers. As the banks provides the goods as per the decided date and all the risks bear by the
banks till the delivery of the assets to the customer. The customers avail this product may be on
loan or at installments, it is an allowable in Sharia to sale goods on credit based.

Ijarah

Ijarah is a concept used in Islamic commerce. Ijarah denotes a contract where one party transfers
the right to use an item he owns to another party for a specified period in exchange for an agreed
consideration. According to operating ijarah, an owner of a property leases it to others for a
specified period

Sukuk bonds
Sukuk Certificates represent proportionate beneficial ownership and may be described as an
Islamic Bond for a defined period the risk and return on which is associated with cash flows
generated by a particular asset belonging to the investors i.e. Sukuk holders. Sukuks must be
asset linked.

Salam

Refers to the purchase of a commodity for deferred delivery in exchange for immediate payment.
Thus, in a Salam contract, the price is paid in full and in advance while the commodity is
deferred to an agreed date in the future. This type of contract might be used where the
commodity price is subject to change. The buyer is locked with the purchase price at contract
date and thus hedged against price increase.

Istisna

In an Istisna transaction, a lender agrees to buy an asset to be delivered once construction or

manufacturing of that asset is complete. ... Once manufacture or construction is complete, the
lender acquires the asset that it can then sell or lease to the contractor, manufacturer, or a third
party for a profit.

Hiba

Gift" is the transfer of certain existing moveable or immoveable property made voluntarily and
without consideration, by one person, called the donor, to another, called the donee, and accepted
by or on behalf of the donee. A Hiba is a transfer of property without consideration.

Problem Statement

This project starting aim is to identify the that what challenges and hurdles facing by the Islamic
banking sectors in Balochistan province. Why people not prefer to avail the Islamic products
while deposits the cash in the current account but not invest in the Islamic products. So, the
interns are going to investigates that what are the root causes that the opportunities for
investment are available but not used. And which course of action should be required to
overcome from these impediments. In order to find the root causes of the impediments the
interns visit different Islamic banks and conduct interview from the Islamic banking staff in
order to collect the data for the analysis purpose of the products. The interns will study the
problem both in the light of Islamic bank and then in the light of the potential customers. Once
the Islamic Banking impediments are identified then the interns investigates which counter
strategies should be used for the promoting the Islamic banking and aware the people about
Islamic banking products and services etc.

What is the need of Islamic banks in Balochistan?

The conventional banking system is very old system, whose purpose is to generates funds
through deposits and use the money for further lending to borrowers by charging interest. Since
after the creation of Pakistan the British established rules implemented and these rules carried
out several decades. Due to the religious perspectives and cultural rituals the people of Pakistan
especially Balochistan community not use the conventional banking systems and avoided banks.
Thus, in order to tackle these problems, the first bank introduced as Islamic bank which was
Meezan bank established in 2002. And in Quetta the first branch of Meezan was established in
2005. Further the people of Pakistan only used the deposit or current account for their cash
security. The other financing modes of the Islamic Banks are not used and considered as Haram
they think that Riba is involved in the Islamic Banking Instruments.

The Islamic Banks further faced problem that mostly the customers use the current accounts for
the deposits, then the Mufti Muhammad Taqi Usmani wrote the book “Introduction to Islamic
Finance” in 2004 in order to aware the business community to avail the services of Islamic
Finances. The writing of this book by the Mufti Muhammad Taqi Usmani solely purpose is to
awoke the people about the financing modes which are approved through the teaching of Islam,
and Sunnah of Holy Prophet. Further the different scholars started to critics this book and started
writing literature against the Islamic Banking and Finance as discussed in the article (Billah,
2017).

Research about Customers about Islamic Banking

Further the Assistant professors of University of Balochistan Conducted research about the
perception of customers of the Islamic Finance in context of Balochistan. As the aim of this
research is to identify as they Customers have the information about the six principles of the
Islamic Finance. The finding of the research was very interesting as the only two or three
customers had knowledge about the principles rest of them did not have knowledge. Some of
them have knowledge Mudarabah and Musharakah but have not any information about other
products.
After the giving interviews to researcher they were pleased that through any source of
information they want to know about the Islamic Banking and its product. The exact comments
of the respondents are given below:

“It’s according to Shariah principles bank provides books, Boucher and other material through
which we come to know that it is really Islamic and we are satisfied.”

“When we opened an account in Islamic Bank, the percentage of profit and loss was not fixed;
and we have no exact information about the rate of return.”

So all these responses relevant to our studies are discussed above which are showing that people
are unaware about this industry and no fixed rate of return is the principle of Islamic Finance a
lots of people switches from this concept.

n Pakistan the total number of Islamic Banks are 3 in which only Balochistan have 65. The
reason is that the people of the Balochistan are aware about the investment and the profit earning
mechanisms. In our province there are three kinds of people are living.
First category, the people which have the knowledge about the Islamic Banking but when
comes the time of Investment they do not invest. There are different reasons the cultural norms,
and the people around not accept the Islamic banking and criticize them that they are involves in
the interest-based business. Therefore, they cannot avail the investment opportunity.

Second category, the people which want to invest but the street mosque scholar point of view
regarding the Islamic Banking and Finance mentally convince them not to invest in it. Rigidity if
SPB or any bank conduct awareness session, as they participate in the session but do not
convince because due to the past information in their mind, they want to invest but do not invest
due to rigidity.

Third category, the people which are completely unaware about the Islamic Banking, its
products and the earning mechanisms. So they are the opportunity for Islamic Banks that conduct
more and more Islamic Banking sessions for the people for aware them about their business
activities. The number of banks in Balochistan are only 134 the table below clearly explain how
many Islamic banks are there in each district of Balochistan.
 Balochistan NO.S
Districts
Chagai 2

Gawader 8

Harnai 1

Jafferabad 1

Kech 2

Khuzdar 4

Lasbela 5

Loralai 6

Noshki 1

Nasirabad 1

Panjgur 2

Pishin 8
Methodology
Qila Abdullah 6

Qila Saifullah 7
Owing to the fact the
Quetta 67 Pakistan is a Muslim
Sibi 2 country and Islamic

Turbut 2 banking is touching upon

the concept of religion,
Zhob 6
therefore, it is assumed
that Ziarat 3 Islamic banking in
Total Branches 134 Pakistan will take lead in
coming years and offset
the concentration of conventional banking in Pakistan. Since it is passing through transition
phase therefore, Islamic banking is facing several challenges at one end, but also providing
opportunities for growth and investment in this area. The purpose of this study is to examine and
analyze the growth and opportunities of Islamic Banking in Balochistan The qualitative research
method has been used in the study to understand the reasons of conventional banking customers
avoidance of Islamic banking services in Pakistan. The data were collected through semi-
structured in-depth interviews owing to the reason that the phenomenon under study has not been
explored previously, which makes the aforesaid data collection technique justifiable (Belk,
Fischer, & Kozinets, 2012). The Muslim customers may disapprove interest based banking
transactions due to their Islamic teachings, but figures suggest that majority of Muslims prefer to
open a bank account in mainstream commercial banks in Pakistan. It is worth investigating why
Muslim customers opt for conventional banks and avoid Islamic banking services. They might
encounter barriers in adoption of Islamic banking (Kamran et al., 2018) For our Research study
We have chosen qualitative method. In conducting qualitative research different methods are
used namely, questionnaire, interview and focus group. We have used primary and secondary
method to obtain data on the subject. In primary research we have taken obtained input from 6
professionals, Islamic bankers and Islamic banking clients. We have asked closed ended and
open ended questions but in a structured way. Data for our primary researches are collected
through two methods namely questionnaire and detailed interview. Research methodology is
based on analysis. This research paper is based on primary data collected from Balochistan
university through 52 questionnaire being distributed online to staff and students of Balochistan
university along 6 interview conducted to professionals of Islamic banking including 03
professional from Bank ul habib, Among others, professionals were selected from State Bank of
Pakistan (SBP), meezan bank limited, BUITEMS university Quetta. Questionnaires were sent on
18 Feb 2022 of and information is gathered online . The core questions addressed during
research include the followings:-

1) Do you think people are aware About Islamic banking & finance and its products?

2) Have you ever attended any training session on Islamic banking and Finance?

3) Islamic finance is based upon shariah principles?

4) Islamic finance activities are interest/ Riba free?

5) DO you know about the principles of Islamic finance?

6) Do you know the difference between conventional and Islamic Banking?

7) The people prefer Islamic finance due to religious motivation?

8) If you get the opportunity to investment and saving which banking sector you will choose ?

9) The people of Balochistan are gaining knowledge and awareness about Islamic banking?

During research We have also made structured interviews with two bank managers of Islamic
banking and some 3 of their employs, asking 15 questions related to topic15. The interviews
were scheduled after taking prior appointment from Islamic banking professionals and they
provide responses. Likewise, three interviews16 were also obtained from same bank’s customers
through structured interview. The existing literature is the secondary data for Research study and
is obtained through various resources such as Periodicals, Journals, Newspapers, and Internet to
review challenges and growth in Islamic Banking. While getting input through six interviews
there is possibility of disruption which cannot be ruled out. Similarly, it is not possible to use
tape recording or other recording device while taking interview with professional, since everyone
has their own reservations and there is a possibility that interviewee feel hesitate to transfer the
information. Similarly, questionnaires were sent to professors and student of UOB on their
official emails and follow up made on phone calls. In 30% cases responses were given by
professionals on follow up phone calls due to their acute busy schedule in, and outside.
Results and Discussion Of Questionnaire

The purpose for this study is to explore challenges, development and impediments faced by
Islamic finance for Islamic banking in Balochistan. Responses received through questionnaire
and interviews are matched with the aim and objectives of the Research Paper. More specifically,
primary and secondary research results are matched and compared to find out the actual position
of Islamic Banking system, its present position, challenges faced and underlying opportunities.

This is what the primary area in research to find out as the professors are aware with the basic
understanding of Islamic Banking. All the questionnaires were collected in time. Data is
analyzed on the basis of percentages extracted from the number of responses to each question by
the respondents. In assessing the responses to the question that ‘Do you think people are aware
About Islamic banking & finance and its products?’, We have received 25% responses where
respondent marked ‘Yes’ to this question. Whereas, 75% said No’ . Please refer the details in
following bar chart.

Chart no:1

Results

25%

75%

no yes

Source Distributive questionnaire

In assessing the responses to the question that ‘Have you ever attended any training session on
Islamic banking and Finance?’, We have received 81% responses where respondent marked ‘No’
to this question. Whereas,19 % said ‘Yes’.concern for the details in following bar chart.

Chart no:2

result

19%

81%

yes no

Source Distributive questionnaire

In assessing the responses to the question that ‘DO you know about the principles of Islamic
finance?’, We have received 35% responses where respondent marked ‘No’ to this question.
Whereas, 65% said ‘Yes kindly refer the details in following bar chart.

Chart no: 3
 result

35%

65%

yes no

Source Distributive questionnaire

in our study people were asked about to know the difference between conventional and Islamic
Banking 40% answered no to question while 60% reveal yes responded
Chart NO:4

result

40%

60%

yes no

Source Distributive questionnaire

In our questionnaire we also asked people how they observe the certain development in the field
of Islamic finance like “Islamic finance is based upon shariah principles” where in this case 27%
were strongly agree with32% agree, 31% were in between along with 4% strongly disagree with
6% disagree this result can be observed below in the chart.

Chart no: 5

result

4% 6%
27%

31%

33%

Strongly disagree Disagree Neither agree nor disagree

Agree strongly Agree

Source Distributive questionnaire

Assessing data for our questionnaire we also asked people how they observe the certain
development in the field of Islamic finance like “Islamic finance activities are interest/ Riba
free?” where in this case 21% were strongly agree with 38% agree, 23% were in between along
with 6% strongly disagree with 12% disagree this result can be observed below in the chart.
Chart no:6

result

6%
21% 12%

23%

38%

Strongly disagree Disagree Neither agree nor disagree

Agree strongly Agree

Assessing data for our questionnaire we also asked people how they observe the certain
development in the field of Islamic finance like “the people prefer Islamic finance due to
religious motivation?” where in this case 28% were strongly agree with 48% agree, 14% were in
between along with 2% strongly disagree with 8% disagree this result can be observed below in
the chart.

Chart no:7

result

2% 8%

28%
14%

48%

Strongly disagree Disagree Neither agree nor disagree

Agree strongly Agree
 Source Distributive questionnaire

Assessing data for our questionnaire we also asked people how they observe the certain
development in the field of Islamic finance like “The people of Balochistan are gaining
knowledge and awareness about islamic banking?” where in this case 12% were strongly agree
with 44% agree, 12% were neither agree nor along with 6% strongly disagree with 26% disagree
this result can be observed below in the chart.

Chart no:8

result

12% 6%

26%

44%
12%

Strongly disagree Disagree Neither agree nor disagree

Agree strongly Agree

Source Distributive questionnaire

In assessing the responses to the last question that ‘If you get the opportunity to investment and
saving which banking sector you will choose ’, We have received % responses where respondent
marked ‘No’ to this question. Whereas, % said ‘Yes’.concern for the details in following bar
chart.

Chart no:9
 result

8%

92%

Islamic banking Conventional banking

Source Distributive questionnaire

While conducting detailed interview with three different Islamic bankers of top management
level and customers of these banks We had consulted clarify the reasons of their slow progress in
the province the major impediments being the awareness they emphasis on certain points given
below .

 The primary reasons being the lack of freedom by customer while taking loan from Islamic
banking because its solely assets based.

 Acceptability in public is low

 People mindset still majority of people have doubt about weather Islamic operation are
based upon shariah or not

 Fear of documentation and lack of confidence in Govt agencies

 Conventional banking are usually based on cash loan which is utmost requirement of people
is not possible in Islamic mode.

 Most of the people are not aware about Islamic products offered in Islamic banking.

 In Islamic financing personal gain is quite low that's why people are interested in self
interest and they prefer conventional banks

 Customer misconception about Islamic banking due to lack of marketing from the part of
islamic banking

 Unsatisfactory services experienced by customer in islamic banks

 Lack of trust in islamic banking

Conclusion

In our questionnaire we also asked people how they observe the certain development in the field
of Islamic finance so their result was quite interesting people who do have idea about Islamic
finance and fell good about it were willing to invest in future but currently the ratio was quite
low of business and people taking loan and depositing or using Islamic banking that was
astonishing This research explored the factors impeding financially included consumers to adopt
Islamic banking services Balochistan. searchers have so far generally ignored the factors
impeding affluent and financially included individuals access to Islamic banking services
(Kamran et al., 2018). This research contributes to the extant literature by illustrating various
kinds of barriers that prevent conventional banks customers to adopt Islamic banking services in
Pakistan. This research highlights the impediments encountered by conventional banking
customers to adopt Islamic banking services in Pakistan and elucidates various manifestation of
those impediments. The research findings could facilitate Islamic banks to make proactive
strategies to capture financially included customers in Pakistan and elsewhere. First,
conventional banking customers lack of knowledge and perception regarding Islamic banks
operating in the country raised a variety of doubts in their minds regarding the authenticity and
credibility of Islamic banks operations. They commonly lack confidence and trust on Islamic
banks. The conventional banking customers held various perceptions or misconceptions owing to
a number of reasons including similarity of Islamic and conventional banking, lack of marketing
communications and promotional activities of Islamic banks. Second, major reason of
conventional banking customers avoidance to Islamic banking services was their liking the
conventional banks vis-à-vis Islamic banks. Their loyalty stemmed from a broad product range
of conventional banks, their positive positioning, an extensive branch network in cities, better
services provision and customers perception that the two systems operating in the country are the
same. Third, poor service provided at Islamic bank branches negatively influenced conventional
banking customers to adopt Islamic banking services. They reported to have unsatisfactory
service encounters, cold behavior from front-line staff of banks, small size bank branches,
inadequate seating arrangements and lack of basic facilities like unavailability of drinking water
for customers. These negative experiences motivated conventional banks customers to shun
adopting Islamic banking

services. Fourth, customers also encountered geographical barriers to access Islamic bank
branches. The conventional banks customers seeking to convert to Islamic banking services
desired to have accessible bank branches because distant bank branches cause high travelling
cost, tiredness and time wastage. Lastly, social reasons also impede conventional banking
customers to adopt Islamic banking services in Pakistan. Friends and family in also impeded
adoption of Islamic banking services. The customers could have a fear that their friend and
family members would not like opening an Islamic bank account, might be on account of their
own perception about Islamic practices. Therefore, they shun opening a bank account in an
Islamic bank. Social influences were also manifested in a way that conventional banks were
recommended by employers for salary transfer, which also impeded some customers choice to
adopt Islamic banking services.