Sharia’hpractice at Islamic banks in Pakistan

Muhammad Tariq Majeed and Abida Zainab

Journal of Islamic Accounting and Business Research, 2018, vol. 9, issue 3, 274-289

Abstract: Purpose - Islamic banks provide an alternative financial system based onSharia’h(Islamic law). However, critics argue that operation at Islamic banks is violatingSharia’hparticularly in terms of provision of interest free services, risk sharing and legal contract. The purpose of this paper is to empirically evaluate theSharia’hpractice at Islamic banks in Pakistan by considering some basic principles ofSharia’h. Design/methodology/approach - Primary data are collected from 63 branches of Islamic banks in Pakistan. Questionnaire is used as an instrument. The study uses structural equation modeling that includes confirmatory factor analysis and regression analysis. Data are codified and analyzed using SPSS and Amos. Findings - This study finds that Islamic banks are providing interest free services, ensuring that transactions and contracts offered by Islamic banks are legal and offering conflict-free environment to customers. In contrast, estimated results expose that Islamic banks are not sharing risk andSharia’hsupervisory board is not performing its role perfectly. Similarly, it is found that organization and distribution of zakat and qard-ul-hassan are weak at Islamic banks. Research limitations/implications - Data are collected from Islamabad federal capital of Pakistan that hold just 5 per cent share of Islamic banking industry. This small share may not provide true picture of Islamic banking sector. Practical implications - To ensure risk sharing, Islamic banking industry must consider the development of new modes of financing and innovation of more products based onSharia’h. State Bank of Pakistan should ensure separate regulatory framework that enable Islamic banks to provide qard-ul-hassan, organize and allocate zakat. Originality/value - This paper discusses the perception of bankers, who are actually the executors, aboutShariah’spractices at Islamic banks in Pakistan. There are not many discussions on this topic that could be found, and hence this could be considered as a significant contribution by this paper to the existing literature of Islamic finance.

Keywords: Pakistan; Islamic banks; Structural equation modelling; Shariah practice (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jiabrp:jiabr-03-2015-0011

DOI: 10.1108/JIABR-03-2015-0011

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