International Journal of Pure and Applied Mathematics

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1 Volume 119 No , ISSN: (on-line version) url: ISLAMIC BANKING- A STUDY OF DEMOGRAPHIC PROFILE ON POTENTIAL PATRONAGE IN INDIA [1] Dr.Yaaseen Masvood, [2] Dr.S.Senthil Kumar [1] Asst. Professor(Sr.G), SRM University, Chennai, [2] Asst. Professor(S.G), SRM University, Chennai. [1] masvood@gmail.com, [2] danikapan@gmail.com Abstract - Islamic Banking is any banking activity done in conformance to the law of Islam (i.e Shariah ). The core principle of Islamic banking is the prohibition of dealing with interest. Albeit being new in the Indian context, the world of Islamic finance has come to stay and hence, India needs to capitalize this opportunity. This viable alternative form of banking, also called Shariah banking, has been flourishing across the globe. As Islamic banking will result in the financial inclusion of the marginalized sections of the society, India would do well to implement the same at least in a phased manner. The paper attempts to examine the impact of demographic variables on the patronage towards Islamic banking in India. It is found that though there is a low level of awareness among the respondents, yet there exists a favorable perception towards Islamic banking especially from the city of Hyderabad. Key words: Demographic variables, Interest-free banking, Islamic Banking, Patronage. 1. Introduction 1.1Background Islamic Banking is a system where the various transactions of the banking activities are done in accordance with the teachings of Islam. Hence, the main differentiating factor between conventional banking and Islamic banking is that the former system is interest-ridden while the latter is interestfree. In addition to this no-interest rule, the other principles like profit-sharing, high risk-avoidance are also imbibed in Islamic banking. One of the main objectives of this form banking is to promote the development of the economy by utilizing the resources in a manner that is socially responsible. This is why it is not surprising that even in countries such as Malaysia and UK which are predominantly not Islamic, nearly forty percent of the retail customers of Islamic banks are non-muslims. In addition to this it is also worth mentioning that Islamic banking is not restricted to institutions that are purely Islamic. Conventional banks like Citicorp, ABN Amro, American Express, HSBC, Deutsche Bank, Union Bank of Switzerland and ANZ Grindlays Bank are some of the majors which are foraying into the Islamic financial markets. There are about 100 countries where Islamic banking operations are taking place. Nurturing an ambition of becoming an Asian financial hub, India should not miss out on this opportunity. Hence this study. 1.2 Islamic Methods of finance The application of the concepts of Islam to the financial aspects of one s life is known as Islamic methods of finance. A number of such methods exists. Some of the prominent methods of Islamic finance are Mudarabah or profit sharing, Murabahah or cost plus financing, Musharakah or joint venture, Ijarah or hire purchase, Takaful (insurance) and qard hasana (benevolent loan). 1.3 Regulatory Framework In order to regulate the functioning of Islamic banks and to advise on the Islamic finance standards across the globe, there are regulatory bodies like the Accounting and Auditing Organization for Islamic financial institutions (AAOIFI) and Islamic Financial Services Board (IFSB). While the former was established in 1991, the latter came about in 2002 in Malaysia. In addition, other International Islamic Infrastructure Institutions (IIIIs) were set up. Since then, the Islamic financial institutions are fast becoming a powerful and competitive force in the financial landscape. 1.3 Need for Islamic Banking in India With regard to the banking activities of the Muslim community, the Sachar Committtee report (SCR,2006) has stated that only less than 8% of the Muslim population have bank deposits and there exists a huge gap between the Muslims of this country and the rest of the population. This is primarily because of the non-existence of the interest free banking mechanisms in the country. This also leads to the economic disparity among the populace. In order to overcome this disparity and bring about financial inclusion which would augur well for our national economy, Indian government must give an 2311

2 unprejudiced view into the possibility of introducing Islamic banking in India, at least in a phased manner. Further, as the principles of Islamic finance promote entrepreneurship, it would also bring in a lot of foreign remittances to our country especially from the Middle East. 2. Review of Literature The bank selection criteria (patronage) towards commercial banking have been studied over a long period of time and hence an abundant literature exists. On the other hand, as far as studies of the above nature with specific reference to Islamic banks especially in the Indian scenario are relatively new and therefore not much literature does exist. Jamshidi D., Hussin, N. and Wan, H.L. [1]conducted a literature review of the potential impact of demographic items on the acceptance and usage of Islamic banking services. They found that Islamic banking system needs to attract new customers in order to remain competitive in the market and therefore, using appropriate strategies was needed for such a banking system. Recognizing customers based on their segmentation and preferences will be a mandatory requirement, so that suitable and customized services could be provided to the customers by the banks. Yusuf and Shamsuddin [2] carried out a study to find out about the attitude of Muslims staying outside the Islamic world by carrying out a purposive random sampling of 128 respondents from Leicester, UK. They found out that Muslims had a positive attitude towards Islamic finance as they were willing to change from the conventional system into the Islamic system of finance. Metawa and Almossawi[3] studied the banking behavior of customers of two Islamic banks in Bahrain by surveying 300 customers. They studied the profile of the customers, the relationship between the demographic factors and the bank selection criteria. According to their study, while Religious reason was the most important selection criterion, convenience of the location was found to be the least important. Maran Marimuthu et al., [4] carried out a non probability method of sampling among the 450 respondents from Klang Valley of Malaysia to find out about the acceptance of Islamic banking and the factors that determine it using Chi-square analysis. Cost benefits, service delivery, convenience, influence of friends/relatives were found to have significant relationship with the acceptance of Islamic banking for both Muslims and non-muslims. Idris, A.R. et al., [5] analyzed the factors considered important in the patronage of an Islamic bank by surveying a sample of 250 Islamic bank customers in Malaysia and found that religious value played an influencing role in patronizing an Islamic bank. Guyo, W and Adan, N. [6] examined the factors determining the choice of Islamic banking in Kenya by adopting a simple random sampling of 293 respondents and found that the customers chose the bank without any religious motives although it was largely a Shariah-compliant bank. On the other hand, financing options highly influenced the choice of the bank but bank profits did not have an express influence on bank selection criteria. Friendliness of the staff of the bank also scored heavily on the choice of the bank. A study by Zeyad Saleem Ramadan [7] to investigate the bank selection criteria as perceived by the customers of Islamic banks in Jordan showed that the selection criteria is a mix of both religious and other factors, which were tested. The most important criteria were friendly personnel, Islamic reputation and image, and product price, in that order. It was concluded that Islamic banks cannot attract their customers by the religious aspect alone as it was placed only second in the order of importance in the bank selection criteria. Therefore, it would require Islamic banks to properly understand the needs of the existing and prospective customers and fulfill them in order to survive in the competitive market. Pandu A and Hussain, M.G., [8] studied the introduction of Islamic banking in India and suggested a legal framework. They suggested that though there are constraints in the implementation of Islamic banking in India due to the provisions in the Banking Regulations Act, special provisions could be created, on the lines of provisions for NBFCs, to permit Islamic banking in India so that resources could be attracted from the Middle Eastern countries. This would be useful for the infrastructure facilities and this in turn will drive the economic growth of the country. They also suggested that initially, experimentation with existing models could be carried out and then RBI can issue licenses to global players in a phased manner to drive growth. Islamic windows could be opened in such ventures by following the examples set by secular countries like US, UK, France and Germany and then finally fullfledged Islamic banks can be made operational. Ahangar G.B., Padder M.U.J and Ganie A.H. [9] studied the scope of Islamic banking in India. They concluded that Islamic banking would not only cover the needs of Muslims but also the rest of the population. They added that Islamic banking would benefit India by attracting funds from the Middle East, thereby helping the national current account while keeping the fiscal deficit in check. It would not only help the poor and vulnerable, but also allow small manufacturers, retailers and agricultural 2312

3 enterprises to access finance by to providing equity funding for infrastructure projects which would in turn contribute to the development of the Indian economy. A study by Manzoor Khalidi and Amanullah [10] for finding out about the perception of customers about Islamic banks among 100 customers of Pakistan using Z test revealed that though the respondents had adequate knowledge of the Shariah based banking system, there was doubt about the legitimacy of the Shariah compliance of the Islamic banking products and services and that religion was low in priority with regard to the choice of the bank. Redimerio and Andrew [11] reported, Growing and deepening market for Islamic financing is a key reason why the Islamic finance market is worth to consider for the infrastructure sector. Infrastructure projects are a logical fit for Islamic finance, which is governed by Shari ah and predicted on asset backing and shared business risk. Khan K A [12] studied the need and scope of Islamic banking in India vis-à-vis its present status. It was brought out that Islamic banking would result in financial instruments which would not only be profitable but also be ethically driven. He concluded that the future prospects of Islamic banking in India is very good and it should be looked at as Interest free banking through a broad kaleidoscope and not through a narrow religious prism. Bhat, Z. A., [13] studied the nature, scope and feasibility of Islamic banking in India and stated that Islamic banking can provide loans which are interest free to cater to the huge investment needs of infrastructure building. But, it would be need some strong policy decisions to make it happen. Also, it needs to be positioned as a professional banking entity rather than as a religion-based banking. Basha, S.N. and Ahmed, M. [14] studied the appropriateness of Islamic banking to the Indian Economy and suggested that Indian government must seriously consider adopting Islamic banking as it would solve many economic problems faced by India like suicides of farmers, shutting down of small scale industries, increase in poverty and non-inclusive growth. India may implement the same taking a cue from global examples like that of Singapore and UK. Singh V.G., and Kaur, N. [15] studied Islamic banking in the Indian context doing a SWOT analysis for a clear view of this concept and suggested a 10 point process to make this practically viable to the people of India. They suggested that there are many challenges to be faced by Islamic banks and that they cannot continue to be in the business for religious reasons alone and have to offer products of wider range to be accepted and used by the audience. The banks have to not only offer products that are in compliance with the principles of Islamic finance but also ensure that they remain flexible enough to meet the growing demands of the changing mindset of the Indian customers. A recent study by Aisha Badruddin [16] suggested that there are prejudices about Islamic banking due to the non-availability of any reports on its economic viability and its impact on the inclusive growth in India. It also suggested that efforts should be taken to give training and education in this area by including Islamic banking and finance in the curriculum of professional courses. As Islamic banking cannot be adopted in India under the present legal framework, India can follow the lines of UK and introduce a few amendments to the existing laws in order to govern the Islamic banking business. 3. Research Methodology In order to carry out this study, four cities from the South Indian states were chosen. These four cities were Chennai, Mallappuram, Hyderabad and Bangalore. The reason why these cities were chosen is two-fold. Firstly, it was because these four cities have a very large population of Muslims in these states. Secondly, a large part of this populace has people in their families working abroad, especially in the Gulf region. This results in a very large percentage of foreign remittances from these cities. The target population for this study was any retail customer of banks across these cities. Convenience sampling was followed for carrying out this study. Initially, a pilot study was carried out so as to test the questionnaire s validity. The sample size was determined using the scientific method by using the standard deviation obtained from the pilot study of the sample of 50 respondents. Based on the pilot study, the sample size was fixed at 600. The data collection was done through a structured survey questionnaire. The objectives which were framed in order to undertake this study were as follows: 1. To determine the demographic profile of the respondents. 2. To understand the potential patronage towards Islamic banking among the respondents. 3. To find out the relationship between the demographic variables and the potential patronage towards Islamic banking in India. For the sake of brevity of analysis, the demographic variables - Gender, Age group, Religious background, City of nativity - alone were considered for the study. Towards addressing the 2313

4 above objectives, the four hypotheses which were formulated were as follows: H 01 : No significant difference exists between the respondents gender and their potential patronage H 02 : No significant difference exists between the respondents age and their potential patronage H 03 : No significant difference exists between the respondents religion and their potential patronage H 04 : No significant difference exists between the respondents city and their potential patronage The above study was carried out using percentage analysis, t-test and one-way ANOVA using SPSS version Data Analysis and discussion 4.1 Respondents Profile and their patronage towards and attitude about Islamic Banking It was found that 76.7% of the respondents were male. Majority (70.3%) were Muslims and the rest were non-muslims. While the majority (48%) of them had accounts in Public sector banks, 42% had accounts in private banks. Respondents from Mallapuram formed 39.2% while the rest were from other cities. In the age category, majority (45%) were in the age group of while a substantial segment (31.7%) belonged to the age- group Respondents gender and their patronage towards Islamic banking From Table 1, it is found that the p value is less than 0.01 for the variable, Attractiveness and hence the null hypothesis (H 01 ) is rejected at 1% level of significance i.e. there is a highly significant difference between the gender of the respondents and their patronage Thus, the male respondents with a mean score of view attractiveness as important bank selection criteria. 4.3 Respondents Age group and their patronage It is found from Table.2 that the p value is less than 0.01 for Products and Services, Attractiveness and Cost/Benefit. Therefore, the null hypothesis (H 02 ) is rejected at a significance level of 1% i.e. there is a highly significant difference between the age group of the respondents and patronage towards Islamic Banking. Thus, the respondents in the age group Above 45 feel that Products and Services and Cost/Benefit are important in the selection of banking services while those in the age group 36-45, feel attractiveness as an important bank selection criteria. 4.4 Religious background of the respondents and their patronage towards Islamic banking It is found from Table.3 that the p value is less than 0.01 for all the dimensions of the patronage Therefore, the null hypothesis (H 03 ) is rejected at 1% level of significance for this variable i.e. there is a highly significant difference between the religious background of the respondents and their potential patronage Based on the mean value, it is found that Muslims have exhibited the highest patronage towards Islamic banking with their means scores being higher than that of Christians and Hindus. This is similar to the findings of Mark Loo [4]. This shows that the religious background plays a vital role in the bank selection criteria of the respondents and the Islamic banking has got a religious connotation that must be dispelled. 4.5 Respondents City and their patronage towards Islamic banking It is found from Table.4 that the p value is less than 0.01 for Products and Services, Vicinity/Ease of Access, Attractiveness, Reputation and Cost/Benefit. Hence, the null hypothesis (H 03 ) is rejected at 1% level of significance for these variables, i.e. there is a highly significant relationship between the city of the respondents and their patronage towards Islamic banks in India. For all the above variables, the mean score is the highest for Hyderabad. This may be because the residents of Hyderabad are more likely to be aware of the concepts of Islamic banking due to the presence of institutions which offer courses on Islamic banking and finance. 5. Conclusion Islamic banking presents a window of opportunity to a country like India due to the fact that a significant percentage of the populace is not taking to the conventional banking methods (which are interest-ridden) due to the religious prohibitions involved. This study helps to understand the demographics of the potential customers and hence, provide better insights to policy makers about the need for the introduction of Islamic banking in India and the need to fulfill the financial aspirations of the marginal sections of the society. 5.3 Suggestions In the current study, it is found that Islamic banking is having low level of awareness among the respondents. However, the attitude towards adoption of Islamic Banking seems encouraging, as reflected in the study. Therefore, Islamic banking can be introduced at least by opening up windows for Islamic banking in conventional banks so that it will 2314

5 bring about the desired financial inclusion. This may not only serve the economic needs of potential customers of Islamic banking but also contribute to the economy of the country, at large. Table.1: Relationship between gender of the respondents and their potential patronage towards Islamic banking Patronage Factors Gender N Mean SD t-value Sig Attractiveness Male Female ** Table.2 Relationship between the Age group of the respondents and their potential patronage towards Islamic banking. Age group F Sig Patronage Factors Above 45 value Mean Products and Services SD (6.62) (5.58) (6.10) (7.24) ** Mean Attractiveness SD (3.94) (4.12) (4.08) (4.26) ** Mean Cost/Benefit SD (5.46) (4.70) (5.37) (5.84) ** Table.3 Relationship between the respondents Religious background and their patronage towards Islamic banking Religion F value Sig Patronage Factors Muslim Christian Hindu Products and Services Mean SD (5.75) (7.16) (7.08) ** Mean Vicinity/Ease of Access SD (5.89) (6.21) (6.38) ** Attractiveness Mean SD (4.03) (3.66) (4.04).000** Mean Reputation SD (2.80) (3.32) (3.43) ** Cost/Benefit Mean SD (4.92) (5.47) (5.67) ** Table 4: Relationship between City of the respondents and their patronage towards Islamic banking Patronage Factors Products and Services Vicinity/Ease of Access Attractiveness Reputation City F value Sig Chennai Bangalore Mallappuram Hyderabad Mean ** SD (7.76) (6.52) (5.67) (4.25) Mean SD (6.71) (6.76) (5.05) (4.95) ** Mean SD (3.98) (4.33) (3.54) (3.86) ** Mean SD (3.36) (3.46) (2.97) (2.08) ** Mean ** 2315

6 Cost/Benefit SD (6.13) (5.71) (4.48) (4.52) References [1]. Jamshidi, D., Hussin, N., & Wan, H. (2013). The potential impact of demographic items On Islamic banking services : Acceptance and usage- A literature review. International Journal ofsocial Science andhumanities Research, [2]. Yusuf, M., & Shamsuddin, A. (n.d.). Muslim Consumers' attitude towards Islamic FinanceProducts in a non-muslim country. Jurnal Kemanusiaan, [3]. Metawa, S., & Al Mossawi, M. (1998). Banking Behaviour of Islamic Bank customers: Perspectives and implications. International Journal of Bank Marketing, [4]. Marimuthu, M., Jing, C., Gie, L., Mun, L., & Ping, T. (2010). Islamic banking: Selection criteria and Implications. Global Journal of Human Social Science, [5]. Idris, A., Naziman, K., Januri, S., Asari, F., Muhammad, N., Sabri, S., et al. (2011). Religious value as main influencing factor to customers patronizing Islamic bank. World Applied Sciences Journal, [6]. Guyo, W., & Adan, N. (2013). The determinants of Retail consumer choice of Islamic banking in Kenya. International journal of Arts and Entrepreneurship, [7]. Ramadan, Z. (2013). Jordanian criteria for Islamic Bank selection- Evidence from the Jordanian Banking Sector. International Jounal of Academic research in Accounting, Finance and Management sciences, [8]. Pandu, A., & Hussain, M. G. (2011). Introduction of Islamic banking in India: A suggested legal framework. International Journal of Research in commerce,economics and management, [9]Ahangar, G., Padder, M., & Ganie, A. (2013). Islamic Banking and its scope in India. International Journal of Commerce, Business and Management, [10]. Khalidi, M. A., and Amanaullah (2010), Consumer perception of Islamic banking in Pakistan. Labuan bulletin of international business & finance, [11]. Redimerio, & Andrew. (2011). Will Islamic finance play a key role in funding Asia's Huge Infrastructure task? Standard and Poors. [12]. Khan, K.A., (2013), Emerging Islamic Banking: Its need and scope in India, Pacific Business Review International, [13] Bhat, Z. (2013). Nature, Scope and Feasibility of Islamic Banking in India. Abhinav Journal, [14] Basha N.S., Ahmed, B.,(2013), Relevance of Islamic Banking to Indian Economy, International Journal of Research in Commerce, IT and Management, [15] Singh, V. G, Kaur, N., (2014). Islamic Banking- In Indian Context. International journal of Emerging research in management & Technology, [16] Badruddin, A. (2015). Islamic Banking and Finance in India - Kosher or Myth. International Journal of Management, Innovation and Entrepreneurial Research,

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Perception of Individual Consumers toward Islamic Banking Products and Services in Pakistan

Vol.5 14 Perception of Individual Consumers toward Islamic Banking Products and Services in Pakistan Amer Sohail Assistant Professor Department of Management Sciences, University of Sargodha,Gujranwala