Islamic Banking and Finance Review

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

Jawad Khan — 2024-12-29

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.

The Role of Shariah-Compliant Financing and Financial Intermediation in Analyzing the Impact of Financial Inclusion on SME Growth in Balochistan, Pakistan

Chakar Khan — 2024-12-30

This study analyzes how SME growth is influenced by financial inclusion in Balochistan, a province of Pakistan. Furthermore, it also examines how the Shariah-compliant mode of financing and financial intermediation influences SME growth. A sample of 300 respondents was taken from three major cities in Balochistan, namely Quetta, Gwadar, and Turbat, based on judgmental sampling. Structural Equation Modelling (SEM) was employed to evaluate the direct impact of financial inclusion, Shariah-compliant financing, and financial intermediation on SME growth. As far as the direct effect of PLS-SEM is concerned, financial inclusion was found to be statistically significant to financial intermediation and two SME growth dimensions, namely profit growth and sales growth. The other two dimensions, namely market share growth and workforce growth, remain statistically insignificant. Whereas, financial intermediation is statistically significant and impacts negatively on SME growth (profit growth and sales growth) directly. In the case of indirect effect, Shariah-compliant financing was found to have a statistically negative and significant impact on financial inclusion and SME growth dimensions of profit growth and sales growth. Similarly, it was determined that financial intermediation mediates substantially and negatively impacts financial inclusion and SME growth.

Consequences of Earnings Management for Islamic Banks: Evidence from Worldwide, the GCC, and the ASEAN Region

Qazi Yasir Arafat — 2025-02-20

This study aims to empirically investigate the impact of earnings management (EM) on the performance, stability, and managerial incentives of Islamic banks (IBs). Secondary data was obtained from 75 largest IBs (in terms of their total assets) worldwide from 2009 to 2020. The panel data estimation method was used to carry out the empirical analysis. Regression models were used for estimation on the worldwide sample, along with the samples from the GCC and ASEAN regions, respectively. The results showed the significant negative impact of EM on the internal performance (ROE/ROA) of IBs, both worldwide and in the GCC region. On the contrary, the findings indicated that EM does not exert a significant influence on the internal performance metrics of IBs within the ASEAN region. Additionally, no notable effects of EM on external performance, specifically in terms of stock returns, as well as on managerial incentives, were identified across all three sample sizes under investigation. Conversely, a significant negative relationship between EM and stability, as measured by the Z-score, was observed for all. This research is a pioneering empirical investigation into the effects of EM on the performance, stability, and risk-taking behavior of IBs, thereby providing a more nuanced understanding of its implications within the Islamic banking sector.

Unveiling the Risk Determinants in Islamic and Conventional Banks: Empirical Evidence from Pakistan

Ozair Siddiqui — 2024-12-30

This study aims to compare the determinants of the four main risks (credit, liquidity, operational, and regulatory risks) that Islamic and conventional banks face by focusing specifically on Pakistan's regulatory and institutional settings. The study collected unbalanced panel data for the period 2005-2022 and employed the Generalized Method of Moments (GMM-IV) approach to estimate outputs. For the robustness check, the samples were pooled for both groups and the results are re-estimated. The study found that there exist significant differences in the risk determinants of both types of banks. Similarly, there was found a positive and significant association of non-performing loans (NPL) with lag terms for conventional banks (CBs) and an insignificant association for Islamic Banks (IBs). Regarding firm performance, the study found that it does not explain the credit risk for IBs, but reported improved results for CBs. Similarly, the study found significant differences in terms of efficiency for both banks. Additionally, it was determined that derivative contracts increase liquidity and operational risk for CBs, while no such significant association exists for IBs. The findings provide valuable insights for Pakistan's regulatory and standard-setting institutions when developing governing, risk management, and overall operational policies and frameworks for Islamic and conventional banks. The inherent differences in the overall functioning of these banks make their anatomy of risk significantly different. As such, the governing regulations, for example, the Prudential Regulations issued by the State Bank of Pakistan (SBP), need to account for these differences. Although the current literature examines the differences between Islamic and conventional banks from different perspectives, a thorough and holistic comparison is missing. The current study aims to address this gap.

Factors Influencing Investors’ Decision to Invest in Pakistan’s Sukuk Market

Sanaullah Ansari — 2025-03-01

There are several factors which influence investors’ decision to invest in Sukuk market in Pakistan. This study aims to investigate the impact of the most important factors which influence the investors to invest in this market. This study is quantitative in nature. Data was collected from 204 respondents comprising Sukuk investors in Pakistan through a questionnaire. The collected data was analyzed statistically with the help of different tests including correlation and regression. The study found that Sukuk features (SKFR) is the prime factor which influences and encourages the investors to invest. Information about the Sukuk market is generally not available; so, availability of information (AOIN) is insufficient. Religious factor (RLFT) strongly affects investors’ decision because most of the investors prefer to invest in Sharia’h-compliant bonds. Expected returns (EXRT) of Sukuk is also significant because most of the investors are interested to get motivated by good returns. However, reputation of issuers (RPOI) does not strongly affect the investors’ decision to invest in Sukuk market in Pakistan because all issuers presumably have a good reputation. This is a unique study since it discusses the factors which influence the investors’ decision to invest in Sukuk market in Pakistan. The findings of this study indicate that the investors consider the impact of all factors before making their investment decision.