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The functioning of the conventional banking system may have been getting competition when the alternative Islamic banking system is available, Shahzad and Rehman (2015). It raises several questions at what extent, Islamic banking system can exist a potential competitor for conventional banking and how sustainable penetration is this for customers? It is observed further from banking industry particularly as it has gained a significant part of market share as well as attention of investors especially after 2007-08 financial crises, which directed to explore opinion, perception and knowledge of customers about banking system, and how different they are from one another such as full-fledge Islamic banks, Islamic banking branches of conventional banks and conventional banks? Shabbir et al. (2015) investigated the relationship between viability of Islamic finance and its impact on global financial stability. Furthermore, this study analyses regarding the practical implications of both conventional and Islamic finance and its impact on global financial stability.
Islamic banks and regular banks both make rivalry between banking system to fulfill the needs and wants of clients and satisfy their desires and in long term benefits for the economy. The regular banks and the Islamic banks are separated generally based on their objectives, riba and hazard sharing practices etc. Furthermore, Islamic banking system has some limitations from Shariah boards and scholars. However, Pakistan is a Muslim country and having the number of inhabitants such as 96% of the Muslims community. On the other side Islamic banks have various types of chances to meet the various difficulties as solid response is opened to meet their customer’s desires. Islamic bank and traditional banks are additionally separated as premium free banks and premium based banks.
Evaluating dual banking system, Metwally (1996) using the data from three Arab countries - Kuwait, Saudi Arabia, and Egypt –showed that there was no difference found in costs and benefits of bank products and services. Moreover, the comparison of conventional and Islamic banks, Hegazy (1995) examined the demographic profiles of customers of Egyptian banks. The results revealed with these remarks that religion became the main factor in the selection of Islamic banks. It further informed that efficiency and quick service of Islamic banks that made it different from conventional banks.
Research of Haron et al., (1994) discussed differences in bank selection criteria of Muslims and non-Muslims in Malaysia. The results concluded that religion was not the main factor for selecting an Islamic bank. The customers would shift to other bank only if the quality of services were better. Although both Muslims and non-Muslims had knowledge of Islamic banking, but few were unaware regarding financing methods used by the banks. Hamid and Nordin (2001) indicated that many customers had knowledge of Islamic banking products, but they could not differentiate between Islamic and conventional products and services. Evaluating perception of customers of Islamic versus conventional banks, Zainuddin et al, (2004) found that Islamic financial services were used by people of mature age and average income while they didn’t use by the age group of less than thirty years and who had low income. They have considered relationship and religion as an important factor for selection of Islamic banks.
This study tries to find out the perception of the existing customers of conventional banks toward Islamic financial institutions. However, first full fledge Islamic bank as Meezan bank started work in 2002. The customers of conventional banks realized the importance and variation on returns in 2007-08 financial crises, when all big brands of financial institutions in the world became the victim of financial issues and Islamic banks remain its values and shares in the market. After that investors have shifted their investment portfolio toward Islamic financial institutions. The purpose of this study is to investigate at what extent customers of conventional banks transferred their investment ratio toward Islamic financial institutions. Moreover, this study also highlighted that after a significant increase in the sense of customer’s portfolio and market shares by Islamic banks and exist as market competitor of conventional banking system in Pakistan.