Why Islamic Banks are not Competitive in Islamic Country: An Empirical Evidence from Pakistan Islamic Banking Sector

Abstract

Abstract: Islamic banks are founded on principles that constitute the guidelines governing any Islamic economic or financial dealing. There are almost 180 Islamic financial institutions operating all over the world with 8,000 branches contributing to 71%, or USD 1.72 trillion, of the Islamic finance industry's assets. There has been tremendous growth in the Islamic banking sector especially in Islamic countries with regions like GCC countries and Malaysia leading the way. The situation in the “Islamic Republic of Pakistan” has been quite different where there has been a steady decline in the total number of Islamic banks and their profits. It is important to identify the reason behind decline and failure of Pakistani fully fledged Islamic banking sector. Therefore, this study purpose is to highlight the main reasons for the decline of Islamic banking profitability in Pakistan. According to SBP, Islamic Bank Bulletin 2018, there are currently four fully fledged Islamic banks operating with 12.9% market share of Pakistan's banking industry. This study encompass a period of twelve years (2007 to 2018) which shows a gradual decline in the total number of fully fledged Islamic banks in Pakistan and gradually in the reduction of their profits. This study contributes by analyzing both internal and external factors ((Back specific/Internal, Environmental/Macroeconomic and External Factors) which have led to the decline in the profitability of fully fledged Islamic banks. Study is quantitative in nature and primary data was collected from 508 senior managers of Pakistani Islamic banks. Conclusively, finding reveal that internal/bank specific, external factors have significant and positive impact on Islamic bank’s profitability. The study provides clear, workable policy recommendations to be followed both by the senior banks management as well as the regulatory body (SBP). This study is truly unique as it clearly emphasizes the core weakness within the Islamic banking sector of Pakistan and provides practical recommendations and suggestions to save this declining sector. Keywords: Bank specific factors, Internal factors, Environment specific Factors, External Factors, Profitability, Quantitative Research, Fully Fledged Islamic Banks, Senior Managers, Islamic Bank Bulletin, Primary Data Analysis.