An Empirical Study of Shar¯ı‘ah Legitimacy of Islamic Banking Operations in Pakistan

Abstract

The legitimacy of Islamic banking refers to the compliance with the precepts of Shar¯ı‘ah (Islamic law) of the pronouncements and their implementation, requisites of various contracts, as well as, realization of the welfare objectives. Therefore, the Islamic banks are supposed to follow the Islamic values focused to bring benefit to the society alongside the commercial motive. These distinguishing features establish identity of the Islamic banks separate from their conventional counterparts and require pursuing normative values of Islamic injunctions. The primary focus of this research is two folds: firstly, considering the legitimacy of Islamic banking practices in holistic perspective including normative concerns directed by Shar¯ı‘ah, and secondly, to gauge the perception of the customers of Islamic and conventional banks about the aforementioned approach of Shar¯ı‘ah legitimacy. The research has been commissioned by developing the constructs of Shar¯ı‘ah legitimacy through extensive review of the relevant literature. At the same time, the empirical analysis based on the opinion of 836 customers of Islamic and conventional banks in all the four provinces and the capital city of Pakistan has produced important conclusions regarding their perception about legitimacy of the Islamic banking practices. The key finding in the theoretical perspective is that the value judgements have been grossly ignored by the Islamic banks. The empirical research indicated that about half of the customers perceived Islamic banking as Shar¯ı‘ah legitimate. On overall basis, the other half viewed contrary to this or preferred to remain indifferent. There is a dire need that Islamic banks should look into the desired goals of Shar¯ı‘ah legitimacy in both contexts; the value judgement and the perception of the customers.