Survival analysis of foreign banks in

Pakistan considering the impact of

market based factors: Political instability,
emergence of Islamic banks and role of
perceived service quality regarding
technological advancements in causing
customer inconvenience

FINANCIAL INSTITUTIONS &

MARKETS
Group Members
Syed Ahmed Ali (16I-0734)
Kainaat Amjad (16I-0737)
Ramsha Waseem (16I-0868)

Submitted to: Mrs. Noureen Adnan

Contents
Introduction............................................................................................................................................. 2
Research Significance.............................................................................................................................. 3
Gap ......................................................................................................................................................... 4
Literature Review .................................................................................................................................... 4
Role of foreign banks in the functioning of an economy ....................................................................... 4
Foreign Banks in Pakistan.................................................................................................................... 6
Reasons for the Failure of Foreign Banks ............................................................................................. 8
1. Political Instability as Factor Responsible for Bank Failure ...................................................... 8
2. Islamic Banking ..................................................................................................................... 11
3. Service Quality & Customer Satisfaction ................................................................................ 15
Standard Chartered as a Model Foreign Bank..................................................................................... 20
1. Brief History .......................................................................................................................... 20
2. Bank’s Basic Services ............................................................................................................ 20
3. Success of Standard Chartered in Terms of its Unique Services .............................................. 20
4. Incorporation of Advanced Technology by Standard Chartered in its Operations .................... 21
Theoretical Framework .......................................................................................................................... 24
Research Design .................................................................................................................................... 25
Participants & Procedures ...................................................................................................................... 25
Measures ............................................................................................................................................... 25
1. Political Instability ......................................................................................................................... 26
2. Islamic Banking ............................................................................................................................. 26
3. Service Quality ............................................................................................................................. 26
4. Financial Performance ................................................................................................................... 26
5. Religiosity ..................................................................................................................................... 26
6. Customer Switching Behaviour ...................................................................................................... 27
7. Failure of Foreign Bank ................................................................................................................. 27
Appendix .............................................................................................................................................. 27
References............................................................................................................................................. 48

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Introduction
Foreign banks are defined as “the banks, which operate in other countries by having their
branches in those countries and following the regulations of both the home and the host
countries” (Bilgrami & Fatima, 2012). Foreign banks are instrumental for any economy as they
bring in foreign capital and improve the quality of services offered for the local customers. They
bring in better technology and look to capture the domestic market. Foreign banks capture
domestic market and indirectly influence the local banks to bring better technology and practices.
This trickling effect from foreign to local banks is beneficial for customers as eventually the
standards of industry are raised and they are offered better technology and services at a lower
cost (Bilgrami & Fatima, 2012); (Allen N. Berger June 2005).

Foreign banks are not only found to contribute for development through foreign direct
investment and introduction of better technology and services but, they also improve the
regulatory system in a country and are linked with better credit extension which is especially
vital for businesses which require significant funding and cannot be catered through domestic
banks due to their limitations (Levine, 1996 & Mishkin, 2007); (Beck et al, 2004); (Berger et al,
2004); (Giannetti & Ongena, 2012).

Various different foreign banks have entered the Pakistani market such as Citibank, HSBC,
Barclays Bank, Royal Bank of Scotland, ABN Amro and Standard Chartered. Almost all of these
banks have left their operations in Pakistan or curtailed their scope but Standard Chartered over
the years has sustained its presence and now is considered in the Pakistani banking industry as a
force to be reckoned with. The study aims to discover the factors responsible for the failure of
foreign banks in Pakistan while taking Standard Chartered, Pakistan as a model-foreign bank,
which has sustained its operations in Pakistan till date.

The study will focus upon the factors of Political Instability, Emergence of Islamic Banks and
service quality and customer satisfaction as the possible factors to have influenced the foreign
bank standings in Pakistan. The instability of government, inefficiency of political parties, poor
law and order situation and a weak political culture along with assassinations create a politically
unstable state. The problem of political instability over the years has had a detrimental effect on
Pakistani businesses. Islamic Banks have emerged as a potent force in the Pakistani banking

2
industry and they are acquiring market share from conventional banks on the basis of religious
beliefs of people.

Finally, Perception of a service’s quality is generally defined as a customer’s judgement based

on the difference between customer’s expectation and customer’s perception of the service
received (Lewis, 1989). Service quality along with customer satisfaction is an important
dimension due to which customers switch from one service to other and from one bank to the
other. The study will not only focus upon the market-based factors for foreign bank failure but
will also look to find out the key differences in the operations of foreign and local banks while
taking Standard Chartered as a model-foreign bank.

Previously banking literature in Pakistan is focused upon the financial and macroeconomic
factors for the failure of foreign banks such as inflation and exchange rate. The study will look to
bridge this gap and will contribute to the banking literature as it will be the first in its nature to
view the foreign bank failure in light of market-based factors. The study will also draw a
comparison between the other foreign banks and Standard Chartered Pakistan as to how come
the latter has been able to maintain its presence in the country and is still taken as one of the best
banks in Pakistan.

Research Significance

The failure of foreign banks significantly affects the economy. Foreign bank presence in the
market contributes to greater stability in the market. It improves the economic conditions as
foreign banks are associated with more credit extension, higher foreign direct investment and
lesser financial risks. Foreign banks serve to increase the quality of the entire banking system as
they influence the local governments and the banking sector to improve their regulations.
Foreign banks also withstand to greater amount of risks and are less affected by the happenings
of local market. In the Pakistani market from (1992-2015) various foreign banks have come in
such as Standard Chartered, HSBC, Barclays Bank, ABN Amro, Royal Bank of Scotland and
Citibank. Over the years only Standard Chartered has been able to sustain its operations in the
market while the remaining banks have either left the arena or have curtailed their operations.

3
The study is aimed at exploring the market-based factors such as Political Instability, Emergence
of Islamic banks and Service quality as the possible reasons for the exit of these banks.
Previously banking literature in Pakistan is focused upon the financial and macroeconomic
factors for the failure of foreign banks such as inflation and exchange rate.

Gap
The study will look to bridge this gap and will contribute to the banking literature as it will be
the first in its nature to view the foreign bank failure in light of market-based factors. The study
will also draw a comparison between the other foreign banks and Standard Chartered Pakistan as
to how come the latter has been able to maintain its presence in the country and is still taken as
one of the best banks in Pakistan.

Literature Review
Role of foreign banks in the functioning of an economy

Foreign Banks play a great role in the economy of any country and they have a major impact on
the banking practices in the market in which they operate. Studies have shown that the presence
of foreign banks in a country substantially lower the cost of intermediation for banks and it
further serves to improve the quality of their practices (Allen N. Berger June 2005). The
presence of the foreign banks increases the competition in the local market. Moreover, they also
bring better products, strategies, technologies and know-how from their own cultures. Foreign
banks also indirectly influence the local governments to improve regulations and to make the
process of banking much more efficient and smoother (Levine, 1996 & Mishkin, 2007).

Domestic presence of the foreign banks also influences the trade activity-taking place in a
country. They make the movement of funds much easier and are especially helpful for the
exporters as the funds can be directly moved to the country, which has the branches of the
similar bank (Claessens & Van Horen, 2013). These banks are also in a much better position to
provide financial products tailored to the specific needs for the exporters or traders such as the
letter of credit etc. The banks that have the knowledge and understanding of the banking

4
practices around the world can only provide these products; they have a competitive advantage
over the banks, which are operating locally.

Foreign banks reduce the level of risk during the financial transactions, which is mainly due to
the reason that there is no asymmetric information or communication gap present across the
borders. In the case of local banks greater risk will be involved due to the limited understanding
of the banking operations at the international level. International banks are also in a much better
position to deal with any sort of legal or regulatory issue and can better enforce the deals
between the parties due to the presence of standard operating procedures and due to their
credibility (Claessens & Van Horen, 2013).

Foreign banks indirectly play the role of diplomatic moderators between the countries, the
presence of an international bank locally increases the trade between the parent country and the
country in which its branches are operating and trade ties eventually lead to stronger diplomatic
relations. Foreign direct investment is a major product of the presence of foreign banks and is
very critical for the industrial sector, however some industries require more funds as compared to
others e.g. production centric industries require funds as they need heavy machinery for their
operations, these funds are generated by international banks and therefore, their presence is
especially helpful for such industries as local banks do not have the capacity to generate such
volume of funds (Zingales, 1998).

Improvement in economy through the entry of foreign banks is also dependent upon the
individual characteristics of the bank entering into the market, entry barriers and the policies of
the host country. Finally, the impact of foreign banks on the domestic market is also limited to
the relative sizes of the banks entering into market (Garcia Herrero & Martinez Peria, 2007);
(Demirguc-Kunt et al, 2004) ;( Clarke et al, 2002). International banks serve larger firms which
have vast operations around the world due to their funding requirements and frequent
international transactions, they also greatly assist SMEs to launch themselves as effective
businesses in the market while domestic banks cater to the needs of companies having limited
operations (Beck et al, 2004); (Berger et al, 2004); (Giannetti & Ongena, 2012).

Credit extension to the consumers is also affected by the presence of foreign or local banks; the
general view is that the presence of international players in the market will positively influence
credit extension particularly in the low-income countries. However, some researchers argue that
5
credit extension can be limited by the presence of foreign banks as they at times “cherry pick”
customers, thus they take all the big players from the market and squeeze the arena for the local
banks (Detragiache et al, 2008). The negative relationship of credit extension in a market can
also be reversed if a foreign bank acquires a locally distressed bank (Cull & Martinez Peria,
2011). Foreign banks contribute to financial stability in a domestic market as they have the
ability to respond to the shocks in the local market e.g. political circumstances in a country will
affect local banks more than the foreign banks, local banks will limit their credit extension but
foreign banks due to their international support will not do as their parent branches might not
limit extension of the credit (Crystal et al, 2001); (De Haas & Van Helyveld, 2006, 2010).

Foreign Banks in Pakistan

Citibank: Citibank was founded in the year 1812 as the City bank of New York but later came
to be known as the First National City bank of New York. The bank has about 2649 branches in
about 19 different countries. Citibank Pakistan was launched in the year of 1961. However, it is
known for the revolution that it brought to the Pakistani consumer banking industry in the 1990s.
It is known as the first bank in Pakistan to have launched master card, credit card and auto
financing in 1999.

Moreover, it is a pioneer of the personal loan extension to the local consumers in the year of
2000. During the banking revolution of “consumer banking” in the late 1990s Mr. Shaukat
Tareen who later became the Finance Minister of Pakistan headed it. Citibank in the year of 2011
decided to shut down its operations in the consumer banking industry, the current portfolio of the
company includes investment and corporate banking. Citibank started restricting its operations in
the consumer banking market by 2007 and Citi had decided to curtail its operations in Pakistan,
Turkey, Paraguay, Romania and Uruguay.

As of September 30 2011, Citi had about 70 billion rupees in deposits and a total asset book of
about 96.4 billion rupees. The bank had its major deposits coming from multinationals. The bank
had been tilted towards investing in the governmental securities, which allowed it to have an
income growth of about 391% and 1.7 billion rupees in the first nine months of 2011. The bank
along with Standard Chartered became the go to back for financial transactions taking place

6
across the border. Its consumer banking operations were acquired by HBL in 2013 as a move to
strengthen their consumer base in Pakistan (Tirmizi, 2012); (CitiBank n.d.).

HSBC Bank: HSBC is a British multinational investment bank which also provides financial
services. In terms of size it is considered as the 7 th largest bank in Europe by 2018, and the
largest in Europe, with total assets of $2.58 trillion. HSBC has its roots from the Hongkong
origin and its initials stand for Hongkong and Shanghai Banking Corporation. HSBC has around
3900 offices in about 67 different countries with spread over Asia, Africa and Middle East.
Globally it has about 38 million customers and is the sixth largest public company in the world.
HSBC bank started its operations in Pakistan in the year of 1982; at the time of its launch it was
only in the three major cities of Pakistan namely Lahore, Karachi and Islamabad. Hongkong and
Shanghai Banking Corporation directly ran HSBC Pakistan till 2008, but later in the year its
ownership was transferred to HSBC Middle East, a subsidiary of HSBC Hongkong. HSBC had a
total of 10 branches; it decided to quit the market of Pakistan in 2012. HSBC Oman sold of its
branch to Meezan Bank, while HSBC Middle East had already sold its operations to Meezan
Bank and the transaction was complete in the year of 2014 (Pakistan operations: Meezan Bank
agrees to acquire HSBC Bank Oman 2015) ;(HSBC decides to close its operations in Pakistan
2012); (HSBC n.d.).

Barclays Bank: It is a British multinational investment bank which also offers financial services.
Barclays bank has its headquarters in London. It is also indulged in the fields of consumer
banking, wealth management, and corporate banking and investment management. Barclays
bank had about eight branches in Pakistan, which were in Islamabad, Lahore, Karachi and
Rawalpindi. The operations of Barclays bank were purchased by HBL in the year of 2013
(Rahman 2015).

Société Générale: The bank which is also known, as “Soc Gen” is a French multinational
investment bank which is also engaged in providing financial services. It has its headquarters in
Paris, France. Société Générale is considered to be a universal bank and provides international
retail banking, private banking, and asset management and security services. It is considered as
the sixth largest bank in France and the third largest in Europe on the basis of total assets. The
bank when launched in Pakistan had 79 branches and was the biggest foreign bank in Pakistan
but its operations were sold to Meezan Bank in the year of 2002 (Qurat ul ain n.d.).

7
Royal Bank of Scotland: The bank, which very commonly is known, as “RBS” is a banking
subsidiary of the Royal Bank of Scotland group along with NatWest and Ulster bank. It has more
than 700 branches mainly in Scotland but also spread all around England & Wales. RBS was
launched in Pakistan in the year of 2007 when it purchased operations from a financially
troubled Abn-Amro in 2007 to enter into the Pakistani market. It had about 75 branches in 24
cities of the country and employed more than 5000 people. The bank sold of its operations to
Faysal Bank for 41 million Euros in year of 2010.

The only foreign banking operating successfully in Pakistan is Standard Chartered which has its
roots from Singapore and it has more than 200 branches in the country and is considered as one
of the best banks in Pakistan in terms of its practices. A major aim of the study is also to evaluate
why Standard Chartered has maintained its footings in the market till date and why no other
foreign bank has been able to do so (RBS sells its operations in Pakistan 2010), (Iqbal 2010).

Reasons for the Failure of Foreign Banks

1. Political Instability as Factor Responsible for Bank Failure
Foreign banks move into a country and start their operations mainly due to political stability.
According to the theory of Foreign Direct Investment, banks move into a country due to stable
political environment, well established infrastructure and financial openness. The theory of
International banking also provides literature on the movement of foreign banks abroad. The
theory suggests that banks move to a country where they have a comparative advantage, which
can be either informational or structural in nature. Gary & Gary (1981) & Yannopolous (1983)
found out that banks locate or move to foreign countries or pursue foreign ventures as they track
their customers or multinationals when they take their setups to different international markets.

Political conditions strongly influence the economic growth and it particularly results in lower
rates of economic advancement (Huntington (1968) & Moore (1966)). Economic growth slows
down as a result of political instability as the resources, which are spent on controlling the
uncertainty, and reducing the instability could have been utilized to an area where they could
have been used much more productively. Moreover, political instability results in capital flight,
higher inflation, frequent changes in exchange rates and all these factors hamper the functioning

8
of the economy. They slow down the process of growth and contribute to financial instability
which eventually leads to failures of foreign banks in the market (Olson, 1982).

Olson (1982) further stated that unstable political markets are characterized by a great amount of
income inequality where wealth is concentrated only in a few hands, this restricts the movement
of foreign banks in to an economy as foreign banks have a higher cost bill as compared to the
local banks, therefore while entering a market they eye greater levels of deposit creation and
profits but when wealth is concentrated among a few and there is great disparity among the
classes it is no longer fruitful for them to function in an economy and hence, they leave the
market.

Political Instability is inversely associated with regime stability and economic development
(Muller, 1998). Studies have focused upon the activities of foreign banks in countries such as
Korea, Japan and USA (Ursacki & Vertinsky, 1992). Grosse & Goldberg (1991) found that the
presence of foreign banks in USA has a positive influence on the foreign direct investment along
with foreign trade (Heinkel & Levi, 1992); (Nigh et al, 1986). The size of banking sector also
increased as result of the presence of foreign banks and the country risk has reduced (Hultman &
McGee; 1989). According to Shapiro (1985), the creditworthiness of a country, which is its
ability to finance external debt, is dependent upon the people as governments generate their
reserves from people by enforcing taxes.

Uncertainty is also caused by the political conditions prevalent in the market. Political instability
comes in different forms and it is important to distinguish among them as different forms of
political instability have different levels of impact upon the businesses and the creditworthiness
of a country. Hurwitz (1973); Taylor & Jodice (1983) the first type of political instability defines
it in terms of governmental regime longevity, the frequency of change of a regime is inversely
proportional to the stability and economic growth in a country. Political instability is also viewed
in terms of legitimacy of the government, which is the extent to which the people have freedom
in a state and enjoy their political rights. It also highlights and includes the fact that whether a
country is ruled by a democratic government or by an authoritarian government.

The type of government influences political freedom and stability, authoritarian governments are
stable in the short-run but unstable in the long-run. A final notion of instability in a market can
be the armed conflict, which is characterized by the presence of civil wars and armed malaria’s
9
operating in it. These instabilities look to hinder the smooth functioning for businesses as well as
for local and foreign banks operating in the economy. Political uncertainty due to elections
(especially when they are in high frequency), weaker government regimes and political or ethnic
violence has been seen to contribute towards the financial crises, which causes the failure of
banks.

Political instability also increases in the market due to principal-agent problem. In Asian markets
there is a problem of crony capitalism (It is an economic system where the system favors those
who are politically powerful or are economically stronger as compared to others) along with
financial fragility (Robinson et al., 2006). Political instability can rise up out of the political
principal-agent problems, intensified advantage of policymakers in terms of information over the
general community (Cassing, 2000). Citizens can be uncertain about policymakers' regarding
bailouts of falling banks, overhauling sovereign obligation, or keeping up a currency peg
(Akerlof & Romer, 1993).

A political crisis arises when the citizens of a country disagree with the policies or regulations of
a government and they rise up and overrule a policy which has been proposed by the
government. This creates serious turmoil for the businesses as the investor confidence goes down
and investors want to be compensated for the presence of risk which turns to increase the cost of
tax and eventually the social cost of policy measures. The presence of risk and the demanded
compensation causes further financial and political problems and leads to uncertainty and effects
investor perceptions. Political factors also lead to social and economic challenges, which are
responsible for the failure of foreign banks in the Pakistani market, some of these economic
factors are:

Inflation: It plays a very important or key role in the failure of foreign banks around the world, it
is due to the reason that when the cost the banks have to bare for their services and infrastructure
exceeds their return, then it no longer feasible for them to continue their business, inflation also
results in lowering the purchasing power of businesses and therefore lesser investment will be
recorded due to which loan extension will be limited and therefore banks will suffer both in
terms of deposit creation and the supply of loanable funds will also be reduced (Dar 2015).

Exchange Rate: It greatly plays a part in failure of international banks as when the value of local
currency deteriorates relative to the dollar or the home currency for the foreign banks, it no
10
longer is a profitable investment for them, as when they send money back to their parent country
the devaluation of money causes losses, the foreign banks due to devaluating currency leave the
local landscape e.g. the value of Pak rupee is going down in comparison to the dollar therefore
for a European or American bank business will not be profitable. (The News International, 2014)

International Recession: The global banking recession that came in the year of 2007 caused a
lot of foreign banks to wind up their operations from different countries. The crisis originally
arose as a banking crisis in the USA. However, it spread to the entire market, its genesis came
from the fact that in the year of 2006-2007 American banks encouraged the consumers to take
mortgages for owning houses and as the credit extension was made very easy, loans were taken
from the bank and consumers ultimately were unable to return the massive amount of mortgages
which caused a lot of banks to go bankrupt and financial bailout packages were given by the US
government in order to help the financially distressed institutions. The recession at the
international level compelled many foreign banks to curtail their operations in the developing
countries including Pakistan (The Business Recorder, 2014).

From the above literature our hypotheses can be drawn that political instability which results
from the various different factors such as government regime longevity, the legitimacy of the
government, the political freedom and the rights available to the people and finally the presence
of armed conflict in a society as stated by Olson (1982) results in financial instability which
eventually becomes the reason for the failure of foreign banks in a country. Political instability is
also inversely associated with economic development Muller (1998). Political instability in
specific causes the flight of capital from a country, it causes an increase in the rate of inflation
along with changes in the exchange rate due to which the profitability for a foreign bank
operating in the domestic market decreases due to which it becomes unfeasible for them to
continue their operations in the market and hence, they leave the arena.

Therefore, in light of the literature our hypotheses would be:

(H1) Financial Instability positively mediates the relationship between political instability and
foreign banks failure.

2. Islamic Banking
An Islamic Bank is a bank that, by its own choice, opts to comply with two sets of law: the law
of the Land (Jurisdiction), and the Islamic Law (Shari'ah). This is why Islamic bankers have two
11
types of legal counsel: traditional “lawyers” and “Shari'ah Councils” (Kinyanjui, S. N., 2013).
Furthermore, Islamic finance can also be defined as finance that complies with Islamic law
(Shariah), which is derived from the Qur'an and other sources. The principles under Shariah
include the prohibition of charging interest and the prohibition against contractual uncertainty
(Gheeraert, L., & Weill, L. 2015).

The Islamic banking system was not competitive during the start in comparison to conventional
banks but the growth of Islamic banking was primarily because the customers of retail banking
industry showed willingness to invest according to their personal beliefs (Abdullah Saif Al
Nasser; S. Datin, & Muhammed, J, 2013). A new process of banking has become apparent which
is known as Profit-Loss-Sharing (PLS) in order to consider the issues of interest based banking
system. Currently, over 60 countries throughout the world are practicing this banking system
with more than 250 Islamic financial institutions in operation (Zaher & Hassan, 2001).

According to the study conducted by Kinyanjui, S. N. (2013), the most significant components
that decide bank choice include Islamic religious belief, social responsibility and cost benefit.
The clients of Islamic banks and conventional banks differ in such a way that the latter is less
acquainted with the products/services that comply with the Shari’ah.

Islamic Banking and Conventional Banking

The emergence of the concept of Islamic banking greatly influenced the way people considered
the existing conventional banks. Banking efficiency model used by Sarkar (1999) examine
Islamic banks’ efficiency in Bangladesh. The study claims that the survival of Islamic banks is
even possible without the need of conventional banking structure. Another analysis conducted by
Alkassim (2005) emphasised on the profitability of Islamic and conventional banks in Gulf
Cooperation Council (GCC) countries for over the time span of 1997-2004. The empirical results
suggested that Islamic banks are well capitalized as compared to conventional banks, which have
better asset quality. Further it also suggested that profitability is a consequence of interest free
lending in Islamic banking sector.

A study by Hassoune (2002) using a linear regression technique found that Islamic banks’ Return
on Equity is more predictable contrasted with traditional banks particularly because the latter is
greatly influenced by interest rate fluctuations. Moreover, Islamic banks are found to surpass

12
conventional banks in terms of overall productivity as measured by an income to expenditure
ratio (Hamid, 1999) and profitability, as measured by Return-on-Equity (ROE) (Hamid, 1999;
Iqbal, 2001). Using the DEA method, a correlation of the degree of efficiency among Islamic and
regular financial frameworks in Malaysia between the period 2006 and 2008 shows that a
comparable level of performance can be maintained by the Islamic and conventional banks
(Hisham Yahya; M., Muhammad, J.; & Razak Abdul Hadi, A., 2012).

Alshammari (2002) analysis of the study of banks located in Bahrain, Saudi Arabia, Kuwait,
Oman, Qatar, and the UAE shows that Islamic banks have higher cost efficiency when contrasted
with the commercial and investment banks. According to Abdul-Majid, Saal, & Battisti (2010),
68% banks are cost efficient and the rest 32% are inefficient because of managerial and
regulatory inefficiency. A similar study was conducted by Bashir (2003), concluded that the
performance of Islamic banks is affected by bank’s features and financial environment. On
average, the efficiency of Islamic banks is 92.72% with consideration of regional variation. The
most efficient region is Asia in terms of efficiency of such banks i.e. 96% which include
Pakistani and Malaysian banks (Kablan & Yousfi, 2011). According to State Bank of Pakistan,
for the last couple of years, the rate at which Islamic banks have grown is 27% in total assets and
33.3% in deposits (Khan, M. M. S.; Ijaz, F.; & Aslam, E., 2014). The emergence of Islamic
banking and the financial growth of such banks compared to conventional banks specifically in
Pakistan is thus a factor contributing to the failure and departure of the foreign conventional
banks from Pakistan. Pakistan being a Muslim country with majority of the people practising
Islam as a religion greatly influences the choice of the bank selection.

Religiosity and Emergence of Islamic Banking Services

Religiosity is defined as a “continuous rather than a discrete variable” (Beit-Hallahmi & Argyle,
1997). According to the definition given by McDaniel & Burnett (1990, pg. 101-112) religiosity
as “a belief in God accompanied by a commitment to follow principles believed to be set by
God.” Religion has an impact on the consumers’ lifestyles, which greatly affect consumer
decision behaviour (Delener, 1994; Hirschman, 1983; Sheth, 1974).

In context of Islamic banking, religious beliefs or religiosity is amongst the most common
variables studied (Al-Ajmi et al., 2009; Al-Sultan, 1999; Dusuki & Abdullah, 2007; Erol & El-
Bdour, 1989; Hamid & Nordin, 2001; Hegazy, 1995; Metawa & Almossawi, 1998) conduct
13
toward Islamic banking was found to impact the apparent e-service quality and overall e-
satisfaction with the web based banking provided by those banks. Subsequently, religious
practices affect how consumers evaluate the financial quality (Butt et al., 2013).

According to the study conducted by Al-Sultan (1999) & Metwally (1996), adherence to Islam is
the fundamental component for Kuwaitis’ choice of Islamic banks while keeping in
consideration the element of satisfactory banking services provided by banks. Naser, K., Jamal,
A. & Al Khatib, K. (1999) conducted the study in light of the work of Erol & El-Bdour (1989) &
Erol et al. (1990) concluded that the most important factors while making a choice of Islamic
banking in Jordan are bank reputation and religiosity.

Metawa & Almossawi (1998) explores that in Bahrain, the most considerable factors in the
choice of an Islamic bank is religion and then the element of profitability. Similarly, and in an
Islamic setting where both financial frameworks exist together (Egypt, Kuwait and Saudi-
Arabia), Metwally (1996) shows that Islamic banks and conventional banks don't vary as far as
the costs and benefits offered by bank services or in the capability of faculty and speed of
administration. They find that the fundamental factor clarifying consumers’ decision of an
Islamic bank is religion.

Considering the non-Islamic setting which is totally different in terms of values and beliefs,
Omer (1992) shows in his study that in Great Britain, regardless of whether they had constrained
information on Islamic money, customers of Islamic banks accept that religious factor is the
most significant in their decisions of a bank. Okumus' (2005) study shows that most customers of
Islamic banks in Turkey choose Islamic bank for religious reasons.

From the above literature our hypothesis can be drawn that due to the emergence of Islamic
banking, it has greatly influenced the profitability and the importance of conventional banking
system. Islamic banking can still be operational without the need of conventional banking
(Sarkar, 1999). Furthermore, as mentioned earlier by Alkassim (2005) that due to the interest
free lending in Islamic banking there is more profitability. This implies that the survival of
conventional banks compared to Islamic banks in terms of profitability was low which is why the
foreign banks conventionally operating in Pakistan decided to depart. An important element of
religiosity and majority population of Pakistan being Muslim, the influence to prefer Islamic
banking outweighs that of the conventional banks. As mentioned by the study of Al-Sultan
14
(1999) & Metwally (1996), the Islam as a religion has great influence on the choice of bank. This
might have been the case of Pakistan, which is why the foreign banks operating in conventional
means planned to depart from Pakistan considering the religiosity and consumer preference in
mind.

(H3) Religiosity moderates the relationship between emergence of Islamic banking and Foreign
Banks’ Failure.

3. Service Quality & Customer Satisfaction

Quality is one of the most fundamental considerations for any organization, and this is especially
true for a service centered on customer satisfaction and customer retention, like the banking
sector (Bahia, K.; & Nantel, J. (2000)). It is therefore imperative that such organizations ensure
that they are delivering the best services and they have a good perception in the minds of the
customers. Perception of a service’s quality is generally defined as a customer’s judgement based
on the difference between customer’s expectation and customer’s perception of the service
received (Lewis, 1989). This is the most commonly employed measure of service’s quality in the
banking sector.

Advantages of High Service Quality & Impact of Technological Advancements in Banking

Sector

Upholding high service quality ensures the organization has an edge in terms of customer
satisfaction and fostering a sense of loyalty, having a positive reputation as well as a reduced
number of customer complaints and better customer retention, as supported by some of the
studies (Bitner, 1990; Danaher, 1997; Headley and Miller, 1993; Levesque and McDougall,
1996; Magi and Julander, 1996; Zeithaml et al., 1996). To improve customer’s perceived
quality, technology is being adopted into service industries at an ever increasing rate and an
emphasis on various service providers is being placed by industry bodies to further hasten the
process (Australian Coalition of Services Industries Annual Review, 1997a; 1997b) as this is
fundamental in securing their position in the upcoming era.

One of the most important roles that adoption of upcoming technological innovation in service
sectors such as banking is the reduction in costs and elimination of uncertainties, as discussed by
Kelley (1989). The service sector can improve customer experience by reducing numerous

15
interfaces and help streamline and standardize the processes owing to the use of technology
(Quinn, 1996). Consumers are adopting use of internet related banking services for a number of
reasons, ranging from transfer of funds, payment of bills and mortgages to purchase of financial
instruments, viewing checking and savings account balances, and deposit certificates (Haque et
al, 2009).

Online banking provides a whole host of benefits to its customers. Not only does it provide
increased convenience due to lack of any geographical barriers, it has no limits on operational
timings either, all at a minimal cost (IAMAI’s, 2006). This in turn has revolutionized the very
nature of core product services from packaging to consumption. All this makes it a valuable tool
in providing development and growth opportunities, competitive advantages and enhancing
innovation for banks (Gupta, 2008; Kamel, 2005).

Banks and other businesses are adopting technological advancements in order to enhance their
service quality, attract potential customers as well as to remove inefficiencies (Kannabiran and
Narayan, 2005). Technological innovations have contributed towards improved access and an
increase in distribution channels of banks in the electronic domain, which has come to be known
as electronic banking (Goi, 2005). Some examples of such distribution channels include
Automated Teller Machine banking (ATM), Tele-banking, PC-banking, Phone-Banking, and
most recently internet/online banking (Chang, 2003; Gallup Consulting, 2008).

The biggest shift in banking delivery channels that has been observed since the mid-1990s has
been the use of self-service channels which includes, most notably, online banking services. In
the past few years, customer adoption of internet banking as opposed to branch based banking
has been the trend, exemplified by as many as 55 percent of the customers of private banking in
Finland having an online banking contract with their respective banks (The Finnish Banker’s
Association, 2003; cf. Nordea Oyj, 2003).

Europe both previously and currently serves a leading role in development and adoption of
online banking technology (Schneider, 2001). It has been noted that by late 2000, around 20
percent of banks in the US provided internet banking facilities to their customers. However, only
about 20 percent of customers had an internet connection to avail internet banking services
(Sheshunoff, 2000; Orr, 2001). By the end of 2000, around 120 largest banks in US provided
online banking services (Pyun et al., 2002). Although this figure has steadily grown in the recent
16
years, there is also evidence showing that customers are reluctant in availing online banking
services.

It has been noted that as many as half of all the people that have tried internet services are still
not termed as active users, as mentioned by Robinson (2000). A major difference between
European and US banks concerns the restriction that exists in US on having vast number of bank
branches spread over the whole country (Pyun et al., 2002). Hence, online banking facilities have
encouraged competition between the banks in USA.

It is challenging to deduce whether the introduction of internet in banking space has been more
useful for banks themselves or the customers. However, there is little doubt that it is contributing
towards increasing both customer convenience as well as efficiency of the banking operations.
The customers can, without a need to have a direct interaction with the bankers, make financial
transactions from one corner of the country to another. As a result, there is a massive boom in
innovation and a transformation from traditional practices in banking sector around the world
(Gonzalez, 2008).

There has been a notable shift in many of the existing banking practices leading to an
improvement in performance of the banking services sector thanks in large part to e-banking and
internet banking facilities. The components such as data, hardware, software, network and people
are the vital elements of an integrated electronic system, enabling efficient delivery of services to
customers that are only satisfied when they get maximum convenience the use of such
technologies beholds (Maholtra and Singh, 2007).

Christopher, et. al., (2006) states that e-banking plays a crucial role in establishing a channel
where the products and services are sold and the customers perceive them as necessity in order
for the bank to stay profitable. Banks now have to be more interested in understanding customer
experience (Pyun, 2002), as online-banking is mainly based on users’ satisfaction level.
Therefore, it is very important to assess the ease of user experience for any of the technological
products or services that is brought into the market (Salehi, et. al., 2008). This is especially true
since the general perception of customers regarding services rendered by the bank through
interest is considered to be a key feature just as any other product. This means that convenience
is one of the parameters customers rely on in their decision making process when it comes to
entrusting a banking firm with financial responsibilities.
17
A system that can provide satisfaction to user’s needs grabs attention towards the system and
establishes a measure towards the success of that system. Likewise, system usage rate can serve
as an indicator of acceptance towards new modes of technological innovation. The system can
hence be evaluated to be either good or bad depending on the perception and feeling of a
majority of users regarding the system (Ives et al., 1983).

A very popular model employed for studying the acceptance of information systems among
mainstream customer base is the technology acceptance model (TAM) (Davis et al., 1989;
Mathieson, 1991; Davis and Venkatesh, 1996; Gefen and Straub, 2000; Al-Gahtani, 2001). TAM
relates the actual use of system to perceived usefulness (PU) as well as perceived ease of use
(PEOU) that relate to the attitude toward use which relates it to intention and finally connects it
to behavior. Based on TAM, PU discusses the possibility of improved performance for a
particular application for a potential user. PEOU, on the other hand, concerns itself with the
relatively free of effort use of the designed system for the aforementioned user (Davis et al.,
1989).

The attitude of users towards a system at hand has a significant bearing on its successful
adoption (Davis, 1989; Venkatesh and Davis, 1996; Succi and Walter, 1999). In case the users
are reluctant in adoption of a designed information system, both the users and the organization
loses out on all the potential advantages the system affords (Davis, 1993; Davis and Venkatesh,
1996). Conversely, the greater the willingness customers show towards adopting a new system
due to its ease of use, greater the utility they can derive out of it (Succi and Walter, 1999).

As we can see online banking may offer a number of advantages to both the banks and respective
customers. However, globally, there are a large number of private bankers that still don’t use
internet banking channel. There can be a number of factors due to which customers may not opt
for these services. Firstly, access to an affordable and reliable internet connection is a must for
availing these services. Moreover, there is a learning curve involved for anyone who is not
familiar with such services and it takes time and effort on part of the user to develop a familiarity
with the new ways (Mols et al., 1999). Some users have been seen complaining that there is a
difference in their user experience; they are not served the same way they are when in a face-to-
face setting at a branch (Mattila et al., 2003). Also, privacy and security issues can also hamper

18
adoption of such services for concerned users (Sathye, 1999; Hamlet and Strube, 2000; Howcroft
et al., 2002). Due to these critical factors customers switch from one bank to another.

There has been evidence accumulated by Colgate and Hedge (2001) regarding banking
customers in New Zealand and Australia which discusses their reason for changing banks. The
reasons were then characterized important factors, which were failure to provide a service,
pricing, and services denied. The results indicated pricing to be the most important factor in
explaining the switching behavior. Chakravarty et al. (2004) meanwhile studied the role of
relationships between individuals and their banks in an attempt to explain the switching
behavior. The data examined from the survey to investigate customers from US found that
variables that measure numerous dimensions of a relationship highly decreased an individual’s
tendency to switch banks. Such variable include quality of relationship, history of issues arising
with the bank as well as the duration for which an individual may have been a customer. The
research notes that it is significant that loyal customers are maintained and switched behavior are
minimized.

Yavas et al. (2004) considered the case of retail banking sector in Germany and focused on the
impact of satisfaction, service quality, background characteristics and selected behavioral
outcomes and found service quality to be the most important tenant of customer satisfaction that
explains switching behavior aside from other behavioral outcomes.

Hence, the research on this topic leads to the conclusion that customer dissatisfaction and
inconvenience with aspects regarding quality of services rendered, most notably the use of
technology based solutions provided by a particular bank is the major reason why customers
change banks due to this switching behavior banks loss its potential customer which eventually
leads to failure of a bank. Therefore, we can conclude the hypothesis from the above literature:

(H3) Switching behavior mediates the relationship between perceived service quality and foreign
bank failure.

19
Standard Chartered as a Model Foreign Bank
1. Brief History

The history of Standard Chartered bank dates back to 1853 when it was founded by James
Wilson (The Guardian, 2012). In subcontinent, the bank initiated its operations in 1863. It
has the workforce of around 3400 with 68 branches in 22 cities (Press Association, 2012).

2. Bank’s Basic Services

The bank’s basic services include retail, corporate and institutional banking (Standard
Chartered, 2017). In retail banking, the bank provides credit/debit cards, personal loans to the
individuals in need of finances at a certain rate which is known as the lending rate, deposit
taking in which the customers deposit a certain amount of money into the bank with a hope
that the bank would give the required return on their investment at the rate which is known as
the borrowing rate (Investopedia, 2019). Moreover, the bank provides mortgages and wealth
management services as well. Corporate and institutional services include the following:
Yield Enhancement, Business expansion and protection of the businesses (Standard
Chartered, 2017). Through yield enhancement, the bank ensures that its customers have the
ability to assess the level of their cash deposits and to trigger the possibility of identifying the
unused funds for the investment purposes which ultimately yield higher returns in the future
(Yield Enhancement, 2017). Business expansion incorporates lending money to individuals
who want to start their business ventures and protection of the business includes the bank’s
involvement in effective credit risk management strategies.

3. Success of Standard Chartered in Terms of its Unique Services

While all other foreign banks failed to retain their existence in Pakistan, Standard Chartered
remained in the country by providing impeccable customer services (Standard Chartered,
N.d.). The reasons for its success can be explained in terms of its unique services which
made it stand out from the other foreign banks. The bank was known to be as a priority
banking client which made this bank unique in terms of catering its customers in several
ways for example providing the service of privileged pricing (Standard Chartered Priority
banking, 2017). This service of privileged pricing included free international fund transfers

20
which proved beneficial for those customers who were price sensitive and hence the bank
gained a competitive advantage by grabbing a large customer base that were engaged in
international money transfers for example the transaction of remittances. Another service
which can be considered as the unique selling point of Standard Chartered is the extension of
priority banking membership to children and spouse which save the cost of acquiring a new
membership for future generation (Priority Banking Services and Previleges, 2017). In this
way we can say that Standard chartered through its unique selling point played its part in
providing an ease for those customers who can’t afford the transaction cost of international
funds transfer and also encouraged cost reduction for the people who can’t afford the fee of
acquiring new membership and both of these services majorly contribute towards the
enhancement of consumer convenience and satisfaction.

The bank has also coped up with the rising technology in the bank market which made its
services a source of convenience for its users which ultimately led to the fulfillment of its
perceived quality (CBK Annual Report, 2010). Standard Chartered played its part in
establishing its global standings by incorporating those technologies which the other foreign
banks didn’t adopt.

4. Incorporation of Advanced Technology by Standard Chartered in its Operations

Most of the banks in the past have gradually shifted towards the technology adoption. The
common technological deliverables of banks include the service of Internet and mobile
banking and the installation of ATMs at certain points of the region so that the customers
have an easy access to their medium of transactions (Scornavacca & Barnes, 2004). The
increase in the control of personal finances and having an instant access are some of the
major aims of adopting the advanced technology.

The technological innovation in the working of banks further evolved with the introduction
of block chain technology. (Chang jia & Han Feng, 2016). This technology combines various
functional components in order to provide the customers with the ease in payment clearing,
data storage and information transmission.

21
Currently, there are several financial intermediaries (i-e banks) who have implemented the
task of financial transactions on the platform of Block chain but still there are banks who
haven’t adopted this technology in the past for example banks like Barclays and Société
Générale (Mappo, 2018). Standard Chartered used ripple which was an enterprise level block
chain platform for the initiation of its first cross border transaction (Hu Jin Hua, 2016). The
incorporation of this technology gave standard chartered a competitive edge in providing the
service of cross border transactions which took approximately 10 seconds to complete as
compared to those banks who were not using this technology took them on average 1 to 2
days for the transaction to complete ( Mu Qi-Guo, 2016). This service of fast cross border
transactions helped people to conduct their transactions at a lower cost and the fast
completion removed the element of uncertainty in the customer’s mind of doing cross border
transactions and also succeeded in removing any geographical barrier. (IAMAI’s, 2006)

Technology has always been the strength of Standard Chartered because they adopted it to
provide a better and customized customer experience through the introduction of Internet and
mobile banking (Tirmizi, 2013). The growing importance and the independence upon the
usage of Internet for transaction can also be anticipated through the use of a mobile banking
app launched by Standard Chartered known as Breeze Mobile. Major transactions of the
bank are digital ones i.e. either through mobile apps, Internet or through ATMs. In this
regard, other foreign banks like HSBC, Barclays, Citibank, RBS and Société Générale played
their part in developing their Automated Teller Machines and mobile application to cater to
the customer convenience of doing transactions but at the same time, standard chartered did
something which integrated the latest banking technologies into one platform which had a
major impact on consumer psychology in terms of consumer convenience.

The other foreign banks like Citibank, HSBC and Barclays had their Automated teller
machines installed at various points but Standard Chartered had set up a whole digital branch
at Dolmen mall in Karachi where at one point they installed multiple banking kiosks like
ATM, CDM and CDK machines (Press Release Standard Chartered 2013). This branch has
digital product posters, touch screen notice board and an electronic media as well. Customers
visit this branch and operate their transactions without the help of any banking official hence
their ease of doing transaction is enhanced with the help of this digitized branch. This

22
technological contribution of Standard Chartered was competing against the global standards
and customer’s need of having different services at one point was catered.

After the success of its first digital branch, the bank moved forward to build similar branches
in several countries like Ivory Coast, Uganda, Ghana, Tanzania, Kenya, Botswana, Zambia
and Zimbabwe which had a huge impact on customer convenience and this can be seen from
the response of the people as after the branch openings, the number of new account openings
were 18000 and it only took 15 minutes for the bank to connect its customers with the
services of its digital branch (SC.com, 2017).

Reflecting upon the past literature on the performance of standard chartered and its
incorporation of advanced technology we can say that this bank as compared to other foreign
banks effectively managed to create its customer value by providing the services which
triggered customer convenience and satisfaction. The adoption of Blockchain technology and
the development of first ever digital banking service gave this bank a competitive edge and
also triggered consumer convenience which is a major contributor toward customer
satisfaction. The combination of all the things mentioned above makes standard chartered a
model foreign bank.

23
Theoretical Framework

Political Instability Financial

Performance

Islamic Banking Foreign Banks Failure

Religiosity

Service Quality Customer Switching

Behaviour

24
Research Design

This study is an exploratory research as its major objective is to explore the dimensions and
factors as to why foreign banks didn’t sustain in Pakistan. Based on the preliminary work we
will investigate through different interviews and secondary data and identify a link between
the factors that led to the departure of foreign banks from Pakistan. We will use questionnaire
to determine the impact of political instability, religiosity and service quality on the failure of
foreign banks. A sample size of 250 questionnaires will be used to extract the necessary
findings.

In this research we will use mixed method to meet the outlined objectives and understand the
major phenomenon concerning the part played by foreign banks in the economy of the
country, to understand the differences between the working mechanisms of foreign banks and
the local banks. We will also enquire about the potential reasons of the sustainability of
Standard Chartered Bank in Pakistan and analyzing its core competencies that led to its
success. The data collection method is cross-sectional as the emphasis is upon collecting data
at a single time period.

Participants & Procedures

We are using a sample of 50 individuals for interview who will be employees of local banks
and ex-employees of foreign banks. We will interview 25 employees of local banks and 25
ex-employees of foreign banks in order to get sufficient information. These banks will include
Meezan Bank, Standard Chartered, UBL, HBL etc. These interviews will also assist us in
building a case study comparing Standard Chartered Pakistan with all the other foreign banks
that have entered the market from 1992-2015.

Measures
We captured the following data in our survey in the questionnaire that was built by developing and
adapting scales from previous research.

25
1. Political Instability
Political Instability is measured using the Jong-A-Pin, R. M. (2008) scale, which is made up of the of 19
items measured using 5-point numerical scale ranging from “1=Strongly Disagree”, “2=Disagree”,
“3=Neutral”, “4=Agree”, “5=Strongly Agree”. Examples of the included items are “Is there a possibility
of Political instability resulting from any politically motivated murder of a high government official or a
politician?”, “Is there a possibility of Political instability by the number of times in a year that a new
premier is named and/or 50% of the cabinet posts are occupied by new ministers?”

2. Islamic Banking

Islamic Banking is 5 items measured using the Hanif, M., Tariq, M., & Tahir, A. (2012) scale which is a 5-
point numerical scale ranging from “1=Strongly Disagree”, “2=Disagree”, “3=Neutral”, “4=Agree”,
“5=Strongly Agree”. Examples include: “Bank provides fast and efficient services?”, “Terms and
conditions for availing Islamic product or investments?

3. Service Quality
Service Quality is measured using the Parasuramanet al., 2005 scale which is made up of the of 27 items
measured using 5-point numerical scale ranging from “1=Strongly Disagree”, “2=Disagree”, “3=Neutral”,
“4=Agree”, “5=Strongly Agree”. Examples of the included “The technology provided by my bank is easy
to use?”, “The technology provided by my bank is user-friendly?”

4. Financial Performance
Financial Performance is measured using the Ni, Na, Egri, Carolyn, Lo, Carlos, Lin, Carol Yeh-Yun
(2015) scale which is made up of the of 4 items measured using 5-point numerical scale ranging from
“1=Strongly Disagree”, “2=Disagree”, “3=Neutral”, “4=Agree”, “5=Strongly Agree”. Examples of the
included “Our return on investment has been substantially better?”, “Our sales growth has been
substantially better?”

5. Religiosity
Religiosity is measured using the Abou-Youssef, M., Kortam, W., Abou-Aish, E., & El-Bassiouny, N. (2011)
scale, which is made up of the of 30 items measured using 5-point numerical scale ranging from
“1=Strongly Disagree”, “2=Disagree”, “3=Neutral”, “4=Agree”, “5=Strongly Agree”. Examples of the
included items are “I believe that prayer (salat) as ordained by God and his prophet is crucial to the life
of a Muslim?”, “I believe and declare that no other God but Allah and Mohammed is God's final
prophet.”

26
6. Customer Switching Behaviour

Customer Switching Behaviour is measured using the Hussain, K., & Rizwan, M. (2014) Scale consisting
of 3 items. A 5-point numerical scale ranging from “1=Strongly Disagree”, “2=Disagree”, “3=Neutral”,
“4=Agree”, “5=Strongly Agree”. Examples of the included items, “I intend to switch my service
provider?”, “Next time I shall need services of other provider?”

7. Failure of Foreign Bank

Foreign bank failure is measured using the Thornhill, S., & Amit, R. (2003) scale consisting of 12 items.
A 5-point numerical scale ranging from “1=Strongly Disagree”, “2=Disagree”, “3=Neutral”, “4=Agree”,
“5=Strongly Agree”. Examples of the included items, “To what extent did the following factors
contribute to bankruptcy: fundamental change in technology within the industry”

Appendix

Political Instability Measuring Scale

Indicators Definition Source

Databanks
Any politically motivated murder or attempted murder of a
Assassinations International
high government official or politician.
(2005)
The number of times in a year that a new premier is named Databanks
Cabinet changes and/or 50% of the cabinet posts are occupied by new International
ministers. (2005)
Dummy variable, 1 if at least 1000 battle related deaths per
year in a conflict between the government of a state and Gleditsch et
Civil war
internal opposition groups without foreign intervention and 0 al. (2002)
otherwise.
The number of extra constitutional or forced changes in the Databanks
Coups d'etat top government elite and/or its effective control of the nation's International
power structure in a given year. (2005)

27
 Any rapidly developing situation that threatens to bring the Databanks
Major government
downfall of the present regime, excluding situations of revolt International
Crises
aimed at such overthrow. (2005)
Any peaceful public gathering of at least 100 people for the
Databanks
primary purpose of displaying or voicing their opposition to
Demonstrations International
government policies or authority, excluding demonstrations of
(2005)
a distinctly anti-foreign nature.
Ethnic tensions An assessment of the degree of tensions within a country
ICRG (2005)
which is attributable to racial, nationality or language divisions.
Databanks
The number of times in a year that effective control of the
Executive changes International
executive changes’ hands.
(2005)
The probability that two deputies picked at random from the Beck et al.
Fractionalization
legislature will be of different parties. (2001)
An assessment of the government’s ability to carry out its
Government stability ICRG (2005)
declared programs and its ability to stay in office.
Any armed activity, sabotage, or bombings carried on by Databanks
Guerilla warfare independent bands of citizens or irregular forces and aimed at International
the overthrow of the present regime. (2005)
An assessment of political violence in the country and its actual
Internal conflicts ICRG (2005)
or potential impact on governance.
The number of basic alterations in a state's constitutional
Databanks
Major constitutional structure, the extreme case being the adoption of a new
International
changes constitution that significantly alters the prerogatives of the
(2005)
various branches of government.
Dummy variable, 1 if there are more than 25 battle related
deaths per year and a total conflict history of more than 1000
Medium civil Gleditsch et
battle related deaths, but fewer than 1000 per year (between
conflicts al. (2002)
the government of a state and internal opposition groups
without foreign intervention) and 0 otherwise.

Minor civil conflicts Dummy variable, 1 if there are at least 25 battles related Gleditsch et

28
 deaths per year for every year in the period in a conflict al. (2002)
between the government of a state and internal opposition
groups, without foreign intervention and 0 otherwise.
Databanks
The number of elections held for the lower house of a national
Number of elections International
legislature in a given year.
(2005)
Maximum polarization between the executive party and the Beck et al.
Polarization
four principle parties of the legislature. (2001)
Years of ruling party Number of years that the party of the chief executive has been Beck et al.
in office in office. (2001)
Number of systematic repressions (or eliminations) by jailing or Databanks
Purges execution of political opposition within the rank of the regime International
or the opposition. (2005)
Dummy variable, 1 if the variable "durable" is 0 in the polity IV Marshall and
Regime changes dataset, which means that a new regime has started or that the Jaggers
state is in anarchy, 0 otherwise. (2002)
An assessment of the degree of tensions within a country
Religious tensions ICRG (2005)
which is attributable to religious divisions.
Any illegal or forced change in the top governmental elite, any
Databanks
attempt at such a change, or any successful or unsuccessful
Revolutions International
armed rebellion whose aim is independence from the central
(2005)
government.
Databanks
Any violent demonstration or clash of more than 100 citizens
Riots International
involving the use of physical force.
(2005)
Number of veto
The percent of veto players that drop from the government Beck et al.
players who drop
given the senate does not change. (2001)
from office

29
 Any strike of 1,000 or more industrial or service workers that Databanks
Strikes involves more than one employer and that is aimed at national International
government policies or authority. (2005)

30
 Political Instability
Strongly Disagree Neutral Agree Strongly
Disagree Agree
1 Is there a possibility of Political instability 1 2 3 4 5
resulting from any politically motivated
murder of a high government official or a
politician?

2 Is there a possibility of Political instability by 1 2 3 4 5

the number of times in a year that a new
premier is named and/or 50% of the
cabinet posts are occupied by new
ministers?

3 Is there any probability of Political 1 2 3 4 5

instability when there are a number of extra
constitutional or forced changes in the top
government elite and it has effective
control over the nation's power structure in
a given year?

4 Is there a probability of Political instability 1 2 3 4 5

through any rapidly developing situation
that threatens to bring the downfall of the
present regime, excluding situations of
revolt aimed at such overthrow?

5 Will Political instability result from any 1 2 3 4 5

peaceful public gathering of at least 100
people for the primary purpose of
displaying or voicing their opposition to
government policies or authority, excluding
demonstrations of a distinctly anti-foreign
nature?
6 Will there be Political instability when there 1 2 3 4 5
is a degree of tension within a country,
which is attributable to racial, nationality or
language divisions?
7 Will there be Political instability due to the 1 2 3 4 5
number of times in a year that effective
control of the executive changes’ hands?

31
8 Will Political instability result from the 1 2 3 4 5
probability that two deputies picked at
random from the legislature will be of
different parties?
9 Is there a probability of Political instability 1 2 3 4 5
when there is uncertainty about the
government’s ability to carry out its
declared programs and its ability to stay in
office?
10 Will there be Political instability through 1 2 3 4 5
any armed activity, sabotage, or bombings
carried on by independent bands of citizens
or irregular forces and aimed at the
overthrow of the present regime?
11 Will there be Political instability when there 1 2 3 4 5
is political violence in the country and it has
actual or potential impact upon
governance?
12 Is there any probability of Political 1 2 3 4 5
instability due to a number of basic
alterations in a state's constitutional
structure, the extreme case being the
adoption of a new constitution that
significantly alters the prerogatives of the
various branches of government?
13 Will there be Political instability due to the 1 2 3 4 5
number of elections held for the lower
house of a national legislature in a given
year?

14 Will there be Political instability due to 1 2 3 4 5

polarization between the executive party
and the four principle parties of the
legislature?
15 Is there any probability of Political 1 2 3 4 5
instability due to the number of years that
the party of the chief executive has been in
office?
16 Will there be any Political instability due to 1 2 3 4 5
the number of systematic repressions (or
eliminations) by jailing or execution of
political opposition within the rank of the
regime or the opposition?
17 Will there be Political instability due to the 1 2 3 4 5
degree of tensions within a country, which
is attributable to religious divisions?

32
18 Is there probability of any Political 1 2 3 4 5
instability due to any violent demonstration
or clash of more than 100 citizens involving
the use of physical force?
19 Will there be Political instability due to Any 1 2 3 4 5
strike of 1,000 or more industrial or service
workers that involves more than one
employer and that is aimed at national
government policies or authority?
Financial Performance

1 Our return on investment has been 1 2 3 4 5

substantially better.

2 Our sales growth has been substantially 1 2 3 4 5

better?
3 Our profit growth has been substantially 1 2 3 4 5
better?
4 Our return on assets has been substantially 1 2 3 4 5
better?

33
Customer Satisfaction about Islamic Banking and Conventional Banking in Pakistan

Fully Satisfie Neutr Dissatisfied Fully

Satisfied d al Dissatisfied

1 Islamic Bank
Bank provides fast and efficient
services
1 2 3 4 5
Conventional Bank
Bank provides fast and efficient
services

1 2 3 4 5

2 Islamic Bank
Terms and conditions for availing
Islamic product or investments
1 2 3 4 5
Conventional Bank
Terms and conditions for availing
Islamic product or investments

1 2 3 4 5

3 Islamic Bank
Friendliness of bank personnel
Conventional Bank 1 2 3 4 5
Friendliness of bank personnel

1 2 3 4 5

4 Islamic Bank
Profit and loss sharing

Conventional Bank 1 2 3 4 5
Profit and loss sharing

34
 1 2 3 4 5

5 Islamic Bank
Bank policies are according to
Islamic Law
1 2 3 4 5
Conventional Bank
Bank policies are according to
Islamic Law

1 2 3 4 5

6 Islamic Bank
Location of bank
Conventional Bank 1 2 3 4 5
Location of bank

1 2 3 4 5
7 Islamic Bank
Variety of products and services
offered by the bank
1 2 3 4 5
Conventional Bank
Variety of products and services
offered by the bank

1 2 3 4 5

8 Islamic Bank
The quality of service of e-banking
provided by the bank
1 2 3 4 5
Conventional Bank
The quality of service of e-banking
provided by the bank
1 2 3 4 5

35
36
Religiosity Questionnaire SD D N A SA

1 I believe that prayer (salat) as ordained by God and his prophet 1 2 3 4 5

is crucial to the life of a Muslim

2 I believe and declare that no other God but Allah and 1 2 3 4 5

Mohammed is God's final prophet

3 I believe that fasting during the holy period of Ramadan is one 1 2 3 4 5

of the responsibilities of Muslims that is important to do

4 I believe that hajj pilgrimage for those with the privilege to do 1 2 3 4 5

so is important in the life of a Muslim

5 I believe that there will be the end of time when people will be 1 2 3 4 5
judged according to how they live their life in this world

6 I believe in the reasons of having human beings life and the 1 2 3 4 5

ability to select a way of life either based on God's principles
leading to eternal heaven or the principles God warned us
against leading to eternal hell

7 I believe that Koran is the word of Allah, thus its authority is 1 2 3 4 5

justified
8 I believe that almsgiving (Zakat) is very important in the life of 1 2 3 4 5
a good Muslim to be paid every year

9 Religion is especially important to me because it answers many 1 2 3 4 5

questions about the meaning of life.

10 I read the literature and books about my Islamic faith. 1 2 3 4 5

11 I watch Islamic programs on TV or listen to religious programs 1 2 3 4 5

on radio.

12 I believe that more Islamic programs, channels should be 1 2 3 4 5

offered

37
13 I try to carry my religion over into all my other dealings in life 1 2 3 4 5
(human dealings with my network (family members, friends
and colleagues and financial dealings).

14 I will send my kids to Islamic schools and not to secular 1 2 3 4 5

schools.

15 I believe that veil is obligatory 1 2 3 4 5

16 I am veiled (for female respondents)/ I would convince my wife 1 2 3 4 5

to get veiled (for male respondents)

17 My religious beliefs are what really lie behind my whole 1 2 3 4 5

approach to life

18 If not prevented by unavoidable circumstances, I pray at the 1 2 3 4 5

mosque

19 I believe that praying at the mosque is an added benefit rather 1 2 3 4 5

praying at home or at work

20 I believe that praying Sunna, nawafil, qiyamelleil are extremely 1 2 3 4 5

beneficial for Muslims

21 I always pray Sunna, nawafil, qiyamelleil 1 2 3 4 5

22 One reason for my being a member of a Mosque (or attending 1 2 3 4 5
religious sessions) is that such membership helps to establish a
person in the community

23 Although I am a religious person, I refuse to let religious 1 2 3 4 5

considerations influence my everyday affair

24 A primary reason for my interest in religion is that my mosque 1 2 3 4 5

or my affiliation with a religious group has pleasant social
activities

25 1 2 3 4 5
Occasionally I find it necessary to compromise my religious
beliefs in order to protect my social and economic interest

26 It does not matter so much what I believe as long as I lead a 1 2 3 4 5

moral life

38
27 I pray mainly because I have been taught to pray 1 2 3 4 5

28 The primary purpose of prayer is to gain relief and protection 1 2 3 4 5

29 What religion offers me most is comfort when sorrows and 1 2 3 4 5

misfortune strike

30 The purpose of prayer is to secure a happy and peaceful life 1 2 3 4 5

SD = Strongly Disagree, D = Disagree, N = Neutral, A = Agree, SA = Strongly Agree

39
Service Quality & Customer Satisfaction Scale

Service Quality Items

X1. The technology provided by my bank is easy to use (Chen and Hitt, 2002; Dabholkar and
Bagozzi, 2002; Doll and Torkzadeh, 1988; Josephet al., 1999; Meuteret al., 2000)

X2. The technology provided by my bank is user-friendly (Doll and Torkzadeh, 1988;
Parasuramanet al., 2005; Van Rielet al., 2001)

X3. The technology provided by my bank works accurately and is error-free (Doll and
Torkzadeh, 1988; Josephet al., 1999; Van Rielet al.,2001; Yanget al., 2004)

X4. My bank’s technology is reliable (Dabholkar and Bagozzi, 2002; Josephet al., 1999; Yanget
al., 2004)

X5. My bank’s technology never fails (Meuteret al., 2000; Parasuraman, 2000)

X6. I feel safe using my bank’s technology (Parasuraman, 2000; Yanget al., 2004)

X7. I feel that the risk associated with my bank’s technology is low (Yanget al., 2004)

X8. My personal information exchanged while using technology is not misused by my bank
(Kim and Lim, 2001; Parasuramanet al., 2005; Yanget al., 2004)

X9. My bank’s technology is personalized (Bitneret al., 2000; Chen and Hitt, 2002; Josephet al.,
1999)

X10. My bank’s technology recognizes me by name (Bitneret al., 2000; Josephet al., 1999)

X11. My bank’s technology provides the precise information I need (Doll and Torkzadeh, 1988;
Kim and Lim, 2001; Van Rielet al., 2001)

X12. My bank’s technology provides sufficient information (Doll and Torkzadeh, 1988; Kim and
Lim, 2001; Van Rielet al., 2001)

X13. My bank’s technology provides the reports I need (Doll and Torkzadeh, 1988)

X14. My bank’s technology is accessible beyond regular business hours (Josephat al., 1999;
Meuteret al., 2000; Parasuraman, 2000; Parasuramanet al., 2005)

40
X15. My bank’s technology gives me more freedom of mobility (Meuteret al., 2000;
Parasuraman, 2000)

X16. I find it more convenient to use technology than interacting with branch employees
(Meuteret al., 2000)

X17. My bank’s technology allows me to complete transactions quickly (Josephet al., 1999; Kim
and Lim, 2001; Parasuramanet al.,2005)

X18. My bank’s technology saves me a lot of time, especially when I am pressed for time
(Meuteret al., 2000)

X19. When I contact my bank’s customer service (e.g. call centre –either through phone or
online), my requests are always anticipated properly (Burgerset al., 2000; Rafaeliet al., 2008)

X20. When I contact my bank’s customer service, I am offered proper explanations (Burgerset
al., 2000; Dean, 2004; Rafaeliet al., 2008)

X21. When I contact my bank’s customer service, the representatives are supportive (Dean,
2004; Rafaeliet al., 2008)

X22. When I contact my bank’s customer service, the representatives offer personalized
information (Burgerset al., 2000; Rafaeliet al., 2008

X23. When I contact my bank’s customer service, my calls are always answered promptly
(Danaher and Gallagher, 1997; Dean, 2004)

X24. When there are problems, my bank’s customer service people are sympathetic and
reassuring (Bitner, 1990; Gilbertet al., 2004; Johnson and Sirikit, 2002; Laiet al., 2007)

X25. My bank employees are knowledgeable enough to resolve the problems (Bitner, 1990;
Yanget al., 2004)

X26. My bank resolves my complaints quickly (Josephat al., 1999; Parasuramanet al., 2005;
Sharmaet al., 1999; Yanget al., 2004)

X27. My bank offers a fair compensation for its mistakes (Bitner, 1990; Dabholkaret al., 1996;
Parasuramanet al., 2005)

41
Customer Satisfaction

SAT1. Overall, I am satisfied with my bank (Ganeshet al., 2000; Krepapaet al., 2003; Woo and
Fock, 1999)

SAT2. I think I did the right thing when I chose this bank (Caruanaet al., 2000; Croninet al.,
2000; Oliver, 1980; Olorunniwo and Hsu, 2006)

SAT3. My bank’s services meet my expectations (Aydin and Ozer,2005; Croninet al., 2000;
Levesque and McDougall, 1996; McDougalland Levesque, 2000)

SAT4. I am delighted with my bank (Collier and Bienstock, 2006; Ndubisi and Wah, 2005;
Olorunniwo and Hsu, 2006; Vosset al., 1998)

42
 Service Quality
Strongly Disagree Neutral Agree Strongly
Disagree Agree
1 The technology provided by my bank is easy 1 2 3 4 5
to use.

2 The technology provided by my bank is 1 2 3 4 5

user-friendly?

3 The technology provided by my bank works 1 2 3 4 5

accurately and is error-free?

4 My bank’s technology is reliable? 1 2 3 4 5

5 My bank’s technology never fails? 1 2 3 4 5

6 I feel safe using my bank’s technology? 1 2 3 4 5

7 I feel that the risk associated with my 1 2 3 4 5

bank’s technology is low?

8 My personal information exchanged while 1 2 3 4 5

using technology is not misused by my
bank?

9 My bank’s technology is personalized? 1 2 3 4 5

10 My bank’s technology recognizes me by 1 2 3 4 5

name?

11 My bank’s technology provides the precise 1 2 3 4 5

information I need?
12 My bank’s technology provides sufficient 1 2 3 4 5
information?

13 My bank’s technology provides the reports I 1 2 3 4 5

need?

14 My bank’s technology is accessible beyond 1 2 3 4 5

regular business hours?

15 My bank’s technology gives me more 1 2 3 4 5

freedom of mobility?

43
16 I find it more convenient to use technology 1 2 3 4 5
than interacting with branch employees?

17 My bank’s technology allows me to 1 2 3 4 5

complete transactions quickly?

18 My bank’s technology saves me a lot of 1 2 3 4 5

time, especially when I am pressed for
time?

19 When I contact my bank’s customer service 1 2 3 4 5

(e.g. call centre –either through phone or
online), my requests are always anticipated
properly?

20 When I contact my bank’s customer service, 1 2 3 4 5

I am offered proper explanations?

21 When I contact my bank’s customer service, 1 2 3 4 5

the representatives are supportive?

22 When I contact my bank’s customer service, 1 2 3 4 5

the representatives’ offer personalized
information?

23 When I contact my bank’s customer service, 1 2 3 4 5

my calls are always answered promptly?

24 When there are problems, my bank’s 1 2 3 3 5

customer service people are sympathetic
and reassuring?

25 My bank employees are knowledgeable 1 2 3 3 5

enough to resolve the problems?

26 My bank resolves my complaints quickly? 1 2 3 3 5

27 My bank offers a fair compensation for its 1 2 3 4 5

mistakes?

Customer Satisfaction

1 Overall, I am satisfied with my bank? 1 2 3 4 5

2 I think I did the right thing when I chose this 1 2 3 4 5

bank?

44
3 My bank’s services meet my expectations? 1 2 3 4 5

4 I am delighted with my bank? 1 2 3 4 5

Customer Switching Behavior

1 I intend to switch my service provider. 1 2 3 4 5

2 Next time I shall need services of other 1 2 3 4 5

provider?
3 I would not continue to have service from 1 2 3 4 5
my current service provider?

45
 Foreign Bank Failure

Never Seldom Sometimes Often Almost

Always

Industry Turbulence and Change

To what extent did the following

factors contribute to bankruptcy

1 Fundamental change in technology 1 2 3 4 5

within the industry

2 Fundamental change in market 1 2 3 4 5

conditions within the industry

3 Labour or industrial relations 1 2 3 4 5

legislation

General Management

To what extent was bankruptcy caused

by deficiencies in

4 Breadth of knowledge (across 1 2 3 4 5

financing, marketing, operations, etc.)

5 Depth of knowledge (within financing, 1 2 3 4 5

marketing, operations, etc.)

6 Control 1 2 3 4 5

Financial Management

To what extent did the following

contribute to insolvency

7 To what extent did the following 1 2 3 4 5

contribute to insolvency:

8 Unbalanced capital structure (e.g., 1 2 3 4 5

excessive reliance on short term debt)

9 Undercapitalization 1 2 3 4 5

Market Development

To what extent was bankruptcy caused

by

10 Poor pricing strategy (over- or under- 1 2 3 4 5

pricing)

46
11 Inferior or poor quality of product 1 2 3 4 5

12 Failure to establish a market niche 1 2 3 4 5

47
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