Assessing Customer Selection Criteria of Islamic Banking in Malaysia

Journal of Environmental Treatment Techniques

2021, Volume 9, Issue 1, Pages: 44-49

J. Environ. Treat. Tech.

ISSN: 2309-1185

Journal web link: http://www.jett.dormaj.com

https://doi.org/10.47277/JETT/9(1)49

Assessing Customer Selection Criteria of Islamic

Banking in Malaysia

Muhammad Hilmi Zakaria, Zalina Zainudin , Abdul Razak Abdul Hadi

Universiti Kuala Lumpur, Malaysia

Received: 21/08/2020

Accepted: 05/10/2020

Published: 10/10/2020

Abstract

Before the existence of Islamic banking in Malaysia, the financial services activities were dominated by conventional way of lending

which is interest-based lending. Since the establishment of Islamic financial services in 1962, there has been enormous growth in the Islamic

products in the banking sector and expected to account for 40 per cent of total financing in Malaysia. However, Islamic banking sector is

experiencing stiff competition from its counterpart, the conventional banking sectors every turn. Bank’s ability to fulfil the customer

requirements is claimed to be one of the essential factors to overcome this stiff competition. This study reviews the literature on the factors

affecting customers’ selection criteria adopting Islamic banks. The study focusses on analysing three factors that play role on customer

selection for Islamic banking namely religion, social influence, and bank image. Conclusion of the literature are drawn that among the

important selection criteria are religion, social influence, and bank image. This study will be useful for Islamic banks to gain more insight

and maintain their existence customer, and policymakers, regulators, and the relevant stakeholders a strategize a method towards the

development and growth of Malaysia Islamic banking and finance industry.

Keywords: Islamic banking, customer selection criteria, religion, Malaysia

banking transaction must be accompanied by genuine underlying

Introduction

trade and business activities that generate legitimate and fair

profits (9). (10) added that Islamic banking not only prohibit

usury, but also any business that associates with the activities of

uncertainty, liquor, gambling, and any unethical business. The

main product that being offered by Islamic banks can be further

divide into five categories which are deposit, financing,

investment, trade financing and card services (11). Islamic

banking industry is emerging with an estimation worth of US$1

trillion and reportedly to be among the most rapidly emerging

sectors in the fiscal world (10).

Up to this date, there are 16 Islamic banks were established in

Malaysia granted licenses to operate as full-fledge Islamic banks

under the monitory of Bank Negara Malaysia with 11 of them

were local banks while the remaining five are from foreign bank

Islamic banking and finance have been practiced in the Muslim

world since the Middle ages (1). The development and the market

on Islamic banking and services is one of the most powerful

sectors in the overall banking market in the world today (2).

Meanwhile in countries like Malaysia, Islamic banking has

becoming a major role in the mainstream banking industry (3). It

also started gaining popularity in other part of the world such as

in Europe and the USA (4). (5) further argue that Islamic banking

is operating in almost every continent. Plus, in some Asian

countries, Islamic banks had emerging into new market

segmentation. In the year 1983, the first Islamic Bank in Malaysia

were established and known as Bank Islam Malaysia Berhad

(

BIMB) in 1983. While the early development of Islamic

financial institution can be traced back with the establishment of

Malaysian Pilgrimage Board or Tabung Haji in 1963 and been

suggested by Yang Mulia Ungku Aziz (6). Unlike their

counterpart, the conventional banking system and Islamic

banking system are quite differed in term of the contract and the

process.

In addition, the creation of Islamic banks draws more

opportunities for those who have religious barriers in doing

financing (7). Since successful operation of Islamic banks in some

countries such as Malaysia, Sudan and Bahrain, the existence of

Islamic banking seems offering an alternative method of

commercial banking (8). Islamic banking is governed by Shariah

rules that prohibit interest-based transaction and the Islamic

(

6).

As the end-2017, the figure for Islamic banking system total

assets stood at RM 829.4 million and the figure is steadily

increasing from 2014. The figure indicates a positive growth from

the Islamic financial sector. Plus, the total number of financing

created by Islamic financial institutions grew by 10.5 per cent in

2018 to RM 668.7 billion (2017; 9.4 per cent) while conventional

loan growth grew by 3 per cent (13). Moreover, Islamic financing

grew 11.8 per cent during 2016 compare to 9.4 per cent on 2017.

This is mainly because of the numerous demands for shariah

compliance financial solution for household sector (14).

Corresponding author: Zalina Zainudin, Universiti Kuala Lumpur, Malaysia. E-mail: hilmi.zakaria@t.unikl.edu.my

Journal of Environmental Treatment Techniques

2021, Volume 9, Issue 1, Pages: 44-49

Table 1: List of Islamic Banks in Malaysia

Name Ownership

acknowledge the critical factors so that appropriate measures can

be taken by the Islamic financial institutions to keep pace with

conventional bank. Thus, it is worth to study and investigate the

critical factor that persuade customer in adopting Islamic banks

since its establishment about 57 years and Islamic banking are not

applicable in Malaysia but also across the globe. Even though

there are more than 50 countries worldwide that using Islamic

banking and finance services (18), and there are many countries

where Islamic banking and finance are still alien to them and need

to be study. To expand, it is vital for the Islamic banking industry

to understand the main reason why the customer would choose to

adopt Islamic banking and finance method.

Technically, this paper will provide more insight by

incorporating Malaysian’s perception towards Islamic banks and

the factor that motivate them to adopt Islamic banks. The

necessity of a continuous research in area in important in order to

obtain a deeper insight of the adoption behavior of the Malaysian

banking customers towards Islamic banking and services

Affin Islamic Bank Berhad

Local

Al Rajhi Banking & Investment Corporation

Foreign

(

Malaysia) Berhad

Alliance Islamic Bank Berhad

Ambank Islamic Berhad

Local

Bank Islam Malaysia Berhad

Bank Muamalat Malaysia Berhad

CIMB Islamic Bank Berhad

Hong Leong Islamic Bank Berhad

HSBC Amanah Malaysia Berhad

Kuwait Finance House (Malaysia) Berhad

Maybank Islamic Berhad

Local

Foreign

Local

MBSB Bank Berhad

Local

OCBC Al Amin Bank Berhad

Public Islamic Bank Berhad

RHB Islamic Bank Berhad

Foreign

Local

(

1,19,20). Hence, in this study first will investigate the individual

Standard Chartered Saadiq Berhad

Foreign

perception of Malaysian towards Islamic banking. Next, it

attempts to identify the critical factors that influence the adoption

of Islamic banking. Up to this date, there is no comprehensive

answer to the question why Islamic banking are unable to attract

more customer.

Source: (12)

Table 2: Islamic Banking System Total Financing

Year

2016

2017

2018

Total Financing

RM billion

549.5

605.5

668.7

Literature Review

Studies regarding bank adoption criteria has been investigated

Source: (13)

from different context. Several studies have put their effort in

understanding customer preference in choosing their bank to

finalize their financial transaction. There are quite significant

numbers of Islamic bank has increased the number of choices for

the customer to adopt them and the factors discussed by the

scholar are 1) Islamic Bank adoption criteria 2) Religion 3) Social

influence as well as 4) Bank Image.

However, the percentage of Shariah-compliant financing share

as a proportion to total banking sector financing only increase by

.7 per cent from 34.9 per cent during 2017 (13). It indicates that

the remaining share still under conventional banking systems.

Similar goes to total deposit where the market share for the total

deposit and investment account for Islamic banking were only

4.9 per cent. Both of the figure could be an indicator that the

.1 Islamic Banks Adoption Criteria

Up to this day, according to (21), currently there are 16 Islamic

public unwilling to adopt Islamic banking system.

By practice, the creation of Islamic banking is not only limited

to the Muslim, but it is open to the non-Muslim as well. However,

Islamic banking faces some difficulties and some challenges in

changing the mind-set of the public. First, Islamic banking has

been thought as the banking services are only applicable for the

Muslim only. The perception has brought an effect where some

of the non-Muslim are reluctant to participate with the Islamic

banking services (15). Next barriers come from the Muslim

perception towards Islamic banking itself. Some of the Muslim

rejected the idea of Islamic banking because of the misperception

that Islamic banking is replication of it counterpart, the

conventional banking (16). The investigation found that Islamic

banking in Pakistan failed to differentiate themselves with the

conventional banking and lead to wrong perception by the

Pakistani consumers and the general perception about Islamic

banking products are not totally Shariah-compliant. Thus,

religious matters are important to the Pakistani before they can

accept Islamic banking. Meanwhile in India, the challenges is to

change the perception regarding Islamic banking is only meant

for Muslim (17). The other challenge faced that been highlight in

the study are the guideline and regulation. Plus, low participation

and awareness from the public regarding Islamic banking

possibly the cause of the low adoption in certain countries (2).

Based on the data above and the arguments, it is crucial to

banks and 26 conventional banks. This further shows a very stiff

competition between banks. In order to remain successful bank,

(

22) reported that a bank need to understand customer behavior

and capable to fulfil customer needs. In order to distinguish

between conventional banking system and Islamic banking

system (4) rule out some of the differences include the fact that

the prohibition of interest in Islamic banking system and the risk

and profit-loss sharing (PLS) is to help to enhance the

productivity of the business. A lot of past literature being

documented regarding the factors for banks adoption such as

convenience, bank image, profit rate, service quality, availability

of automated teller machine (ATM), customer perception, social

influence and so on (7,15,23–29).

2.2 Religion

The discussion on the important of religion in selecting bank

have raised for quite some time but still there is not definite

answer that exists stating religion is the main factor for selecting

Islamic banks (16). It is becoming an important role in people

lives through shaping their believe, knowledge and attitudes (30).

Some of the past literature found that even for Muslim, they are

quite suspicious on Islamic banks whether the Islamic banks is

following shariah or just replicating the conventional. The

perception of the customer itself played a bigger role for them to

Journal of Environmental Treatment Techniques

2021, Volume 9, Issue 1, Pages: 44-49

adopt Islamic banks and it also has become an enduring topic in

the banking industry (31). A study by (32) revealed that among

the non-Muslim in Malaysia, the Baby Boomers have slightly

different perception compare with X-Generation whereas, X-

Generation has a more favorable towards Islamic banks.

Surprisingly, in the study, over two-third of the respondents from

the non-Muslim agreed that the establishment of Islamic banking

do not contradict with their religious believe.

the quality of service provided to the customer and charging a

lower profit rate.

The ongoing controversy has led this study to examine the

contribution of religion towards the customer to select Islamic

banks. Since Malaysia is a multi-racial country and Islam is not

only religion that have been practice in Malaysia, it is wise to

include the religion factor in the study. Plus, from the studies and

argument above, it explains why religion should be tested for a

better understanding

(

23), confirmed that religion is one of the important elements

as it capable to influence the customer cognitively and

behaviourally. A survey from Kingdom of Bahrain by (33)

investigate the important adoption criteria that are considered by

the customer in choosing Islamic banks. The study found that

religious is the main factor followed by service quality. In this

studies, financial benefit is the lesser important factor that

influence customer. It means that most of the customer in Bahrain

is attracted to Islamic banking more because of the religious

factor. On the same note, (34) study the respondents from

Bangladesh to seek the impact of conventional interest rate

towards Islamic banks profitability. On the ground of 320

respondents, the study find that the respondents choose to select

Islamic banks on the basis of religious believe.

In the context of Ghana, (28) found that Muslim in Ghana have

a positive perception towards Islamic banking in all aspect

compared to the non-Muslim. Muslim in Ghana have a stronger

intention to adopt Islamic banking than the non-Muslim.

Comparing with other factors such as banks products, service

quality, profit, bank image, cultural and religion, (35) finding

indicates that religion preferences are the most important

considerations in selecting a bank. The study also revealed that

bank image and profit on deposit do not have influence in bank

selection. (36) draws a conclusion based on their finding, a person

who tend to be more religious will select Islamic banks as their

financial provider. (37) focus on lower income group in Kuala

Lumpur found an interesting finding. The result showed that not

only religious but also attitude and services provision are the main

predictor as well for the customer to choose Islamic banking

products. In other study conducted by (38) by using modified

Theory Planned Behavior (TPB) showed that religion continues

becoming the dominant factor for the people to choose Islamic

banks. This shows that the banks have to maintain their activities

and products align with Shariah. While above result mostly

indicates that religion is important factor, (24,39,40) stated

otherwise. The studies however show that religion is not the main

criteria for Islamic banks selection. (24) revealed in their research

that customer tend to select their banks based significantly on

bank image rather than religious. While (39) from the result based

on 284 respondents in Johor Baharu identify that social influence

and bank image is more important than religion.

2.3 Social Influence

(41) defined social influence as a change in an individual’s

feeling, thought and behavior towards certain thing based on

interaction or feedback from the people surround him/her. Social

influence can further classify as the influence from family’s

member, friend and also neighbor (42). While (43) mentioned that

social influence may arise from their personal interaction with

customer and service employee. (44) select six items to measure

social influence in their study on selection criteria on Islamic

house financing namely, spouse, parents, co-workers, friends,

children, and others. The result from the study confirm that social

influence it is found to be an important factor over selection

criteria on Islamic home financing. It shows that, customers are

prone to accept other people’s opinion before they select their

financial provider. The founding also been supported by (45)

which focus on the intention to adopt Islamic banking products.

Even though the study found that social influence does give a

minor positive influence on the intention to use Islamic banking

products, it shall not be overlooked. It implies that customer still

rely on the opinions of other before using Islamic banking

products. (46) also examined the applicability of the theory of

reasoned behavior (TRA) in predicting Mauritanian intention to

adopt choose Islamic banks. A sample of 227 respondents was

collected and the findings revealed that social influence would

affect the Mauritanian people to adopt Islamic banks in

Mauritania. The findings also showed the one of the main factors

for the correspondent to deal with Islamic banks is awareness.

In the Indonesia context, (47) provides evidence that social

influence significantly and positively influences the intention the

Indonesian to select Islamic banks. In supporting this, (48)

conduct a research that focused on East Malaysia, social influence

is important to develop the people intention to choose Islamic

banks for their mortgage financing. This means that others

opinion is being consider by the applicant before choosing which

financial provider they would choose. On the same note, a study

by (49) proves the significant effect of social influence in an

individual’s decision to opt diminishing musyrakah financing.

The strongest factors among all factors in the study is self-efficacy

which it has becoming an eye opener to the Islamic banks. It

explains that a personal judgement and expectation towards

Islamic banks products effect their intention to adopt any Islamic

banking and financial services.

This may be due to the respondents is closer and to be apart

among their colleague and peers. (11) on the other hand, stated

that major factors behind selecting Islamic banking are services

charges, social influence, and convenience. They further argued

that only 38.9 per cent of the respondent agreed that religion is

the main motive for them to choose Islamic banking. The study

by (40) found religious factor is selecting Islamic banks are

ranked as minor leading factors. The most important factors for

Kuwaiti are quality of services and lower services charge. The

data from the study’s lead to a conclusion that using religion

motive only is not a strong reasoning for the customer to

patronage Islamic banking. Islamic banks have to focus more on

On the other hand, an empirical investigation done by (50)

stated differently. Their found that social influence do not have

influence towards the adoption on Islamic banks in Tunisia. The

study concluded that consumer intention to adopt Islamic banks

are mainly by the information the obtain from the promotional

campaign they receive from the Islamic banks. A recent study by

(51), point out that social influence does not give any effect to the

university students in Ghana in selecting the banks. The students

are more likely to consider cost as the main factor for them in

Journal of Environmental Treatment Techniques

2021, Volume 9, Issue 1, Pages: 44-49

choosing a certain bank. Similar with (52) where social influence

was ranked the most less important criteria in bank selection.

Although the study based on commercial bank selection, it also

valid to be used to the Islamic banks. These studies, however, uses

university student as respondent where they cycle of opinion

received are less reliable mainly because they do not have enough

experience with the banking products and services compare to the

working adults. Thus, it failed to capture an adequate impact of

social influence on the selection of an Islamic banks. On the basis

of this argument, this study proposed to extend the work by

adding social influence as one of the factors need to include in

this study.

loyalty. The study concluded that a bank image is a vital aspect to

maintain the market position and effect the success of the bank

such as customer patronage.

The exact relationship between bank image and Islamic bank

adoption criteria has remained a matter of debate. Even though

the above past literature stated that bank image has led customer

to choose either to choose Islamic banks or to use Islamic banks

products and services, there are still some findings report

differently. (40) reveal in their finding, bank image was ranked at

11 out of 12 factors that been tested. The main factors for

selection of Islamic banks are quality or service, low service

charges and responsive bank staff. Therefore, this study proposes

that bank image to be included in this study as one of the factors

in assessing customer selection for Islamic banks.

.4 Bank Image

Back in 1960, a review on image reveal that bank image in

United Kingdom (UK) was good as gold (53). He stated that

image that brought by the bank act as a brand image where can be

define as a unique characteristic which distinguish one bank to

another in the same class. The image created not only give an

impression towards the public, but it also creates recognition and

builds credibility (54). During the financial crisis 2007-2008, the

image of the bank had been tarnished badly and lead to a trust

issue among the stakeholders, the investors and attitude of

consumers (55). In order to rebuild back a positive image, Islamic

banks in Bahrain and Malaysia have invested in socially

responsible and ethical investments to rebuild the overall

corporate image of an Islamic banks (56). A survey study by (44)

examined the selection criteria for Islamic home financing among

the customer in Malaysia. The result showed that bank image and

reputation play an important role in selecting Islamic home

financing. A good bank image creates more positive perception

and confident between Muslim and non-Muslim and this led to an

increase in applicant in Islamic banks. Meanwhile, a comparative

analysis by (57) reveal bank image is important for foreign bank

customer while for local bank customer, knowledge and

convenience are more important for them. In term of gender,

female showed a better response on bank image and the core

product differ the male, internet banking is important for them.

From student’s perspective, availability, or automated teller

machine (ATM), bank image and convenience parking space are

among the top five factors in bank selection criteria (58). The

young prefer to deal with reputable and well establish banks that

have a good image. It shows that the banks can easily capture their

future prospect by engaging with various public relation

activities. Moreover, from the study, the researcher conclude that

young people tend to act independently rather than relying to

other opinions or recommendation. Similar with the findings by

Proposed Conceptual Framework

3.1 Theory of Planned Behavior (TPB)

In explaining the behavior or the customer, this study employs

theory of planned behaviour to assessing customer selection

criteria of Islamic banking in Malaysia. This study will enlighten

Malaysian customer behaviour in selecting Islamic banks. Theory

of planned behavior is an upgrade from