Consumer Attitude and Adoption of Islamic Banking in Khyber Pakhtunkhwa, Pakistan: An Empirical Analysis using Structural Equation Modeling

Jawad Khan

Jawad Khan School of Economics and Finance, Xi'an Jiaotong University, China

Keywords: Intension; Customer Attitude; Islamic Banking; Descriptive Statistics; Structure Equation Model

Abstract

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The adoption of Islamic banking in Khyber Pakhtunkhwa (KP), a province with a significant rural population and economic challenges, faces unique barriers, such as limited awareness, inadequate financial literacy, and lack of infrastructure. This study aims to analyze the factors influencing customers' intentions toward Islamic banking, using evidence from KP, Pakistan. Primary data was collected from 383 bank customers through a structured closed-ended questionnaire by employing convenience and snowball (non-probability) sampling methods. The dependent variable was the intention to use Islamic banking, while the moderating variable was the attitude toward Islamic banking. The independent variables included customer intimacy, awareness, and social influence. SEM was used to assess both direct effects (such as the influence of customer intimacy and social influence on attitude) and moderating effects (such as how attitude moderates the relationship between awareness and the intention to use Islamic banking). The results indicate that customer intimacy and social influence are statistically significant and positively correlated with the moderating variable, that is, attitude toward Islamic banking. However, awareness, while positively correlated with the attitude toward Islamic banking, remains statistically insignificant. This insignificance may be attributed to several factors, such as the general lack of targeted campaigns or effective educational programs on Islamic banking products, or the entrenched preference for conventional banking systems in the region. It is possible that the awareness of Islamic banking is not sufficiently deep or specific to influence customers' attitudes and intentions significantly. The study suggests that Islamic banks (IBs) in KP should focus on customer intimacy through personalized services and building strong relationships and may leverage social influence from family and peers.

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