Predicting the Customers Attitude towards Islamic Banking: A Survey of Customers from Dera Ismail Khan Pakistan

Euro-Asian Journal of Economics and Finance ISSN: 2310-0184 (print) ISSN: 2310-4929 (online) Volume: 3, Issue: 1 (January 2015), Pages: 53-63 Academy of Business & Scientific Research http://www.absronline.org/journals Predicting the Customers Attitude towards Islamic Banking: A Survey of Customers from Dera Ismail Khan Pakistan Tehseen Ahmad 1 *, Prof. Dr. Allah Nawaz 2, Dr. Saif Ud Din 3, and Sami Ullah 4 1. M Phil Department of Management Sciences QUSIT, DIK Pakistan 2. Department Of Public Administration Gomal University DIK Pakistan 3. Department of Management Sciences QUSIT, DIK Pakistan 4. Lecturer COMSAT Vehari campus Pakistan. Islamic banking is new phenomenon in most of the Islamic countries including Pakistan. There are several issues regarding the establishment of Islamic banking Islamic banking however, problems of user Acceptance are very critical and demanding. A lot of research is underway to unfold the nature of issue and the factors behind it. I extracted a theoretical framework from the existing research for using as theoretical foundation as the research model is used in current study. Most of the current studies reveal this the leading role in creating the user acceptance, played by factors/variables like the Islamic banking facilities and services (IBFS) staff behavior SBH banks quality and credibility as well as the demographic attributes of the customers. The researcher generated a set of hypotheses about the same relationships between the predicators (IBFS, SBH, BQ&C, and demographics) and criterion variances of customer acceptance. For the field study, a questionnaire was used to gather first-hand view on the topic, using five-point interval scale to agree or disagree with the statements to analyze the empirical relationships; several statistical tools have been applied i.e. correlation, regression, and test of significance. The empirical results from the currents study tell this; the relationships (association) between the predicators and criterion variables are highly significant. Key Words Islamic Banking, Customer Attitude, Islamic Banking Facilities and Services, Bank Quality & Credibility, Staff Behavior, Islamic Finance INTRODUCTION Islam is one of the oldest religions of the world followed by 1.2 billion people practicing this great religion. This great religion guide the human being so that they me got success in every field of life and spend their lives with prosperity. Islam is complete code of life and its rules, regulations and principles cover the every aspect of life. By rules regulations we mean Islamic shariah. Its ultimate objective is to establish a just and equitable society for the mankind (Owais, khan, & Zaheer, *Corresponding author: Tehseen Ahmad M Phil Department of Management Sciences QUSIT, DIK Pakistan. E-Mail: tehseen1986@yahoo.com Z. 2011). Over the last 50 years the Islamic banking and its growth become dominant and its shows momentous growths in the Muslim world (Wardey, 2010). The concept of Islamic banking is old; infect the concept of Islamic banking start from to the early 1960 s. Numerous efforts have been made to start full fledge Islamic banks followed by Islamic rules and regulations. Conventional banking is based on interest while in Islam interest is strictly prohibited and vigorous 53

Euro-Asian j. econ. financ. ISSN: 2310-0184 (print); 2310-4929 (online) Volume: 3, Issue: 1, Pages: 53-63 role of interest in the conventional banking system confess the Muslim scholars to find the ways and means to put in order commercial bank on an interest free basis. However, for long period time, the idea of Islamic Banking remained just a dreaming (Ali, Okabi, & Bashayreh, 2014) Islamic Banks are based on the principles of Islamic and Islamic shariah and terminologies are used in Islamic Banking therefore, Islamic banking introduces the Shariah compliant products and services to the consumers with the inclusive goal of obtaining social and economic justice. Exploitation in all its types and manifestations is strictly prohibited in Islam. For the achievement this goal it is considered very essential for the Islamic Banks to constantly undergo rigorous studies for analyzing the attributes of the customers profile in terms of their behavior, habits, perceptions, and education (Awan, 2009). The Islamic banking is acquiring critical and getting popular among businesses and individuals because of religious attachment and affection or due to benefits offered to clients (Ali, et.al, 2014). The role of Islamic banking is considered very important while establishing the equitable society therefore; numbers of non-islamic banks are also realize its importance and established Islamic banking branches in their institutions that following the Islamic Shariah and principles in a various cities of Pakistan ( (Mubeen, Aslam, Al- Hussaini 2014). The Islamic banking facing very strong competitors contest by the Islamic financial institutions all over the world as well as from the well-known International non-islamic Banks that providing the services and products of Islamic banking (Quresh, Hussain, & Rehman, 2012). To compete in the banking industry Islamic banks must provide valuable products and services to deal with non-islamic banks instead of just compromise at Islamic principles appearance. These elements are considered very important factors, which require taking into consideration the factors, which convince customers for the Islamic banks (Osman et al., 2009). Taking account a massive literature review; it has been noticed that no study is available to find out the significant prospective factors, which effect customers to deal with IB services and products (Abbasi, Raja, Kamran, Aslam, Ambreen, & Yousaf, 2012). RESEARCH DESIGN Existing research tells that; one of the most common approaches that are used in research is survey. Data collection is considered very important in every kind of research. Questionnaire technique is used in research to collect the data and it is consider one of the most effective tools for collecting the data in social sciences (Babbie, 1993:256-257), through which researchers can collect every kind of data by answering the different questions related to the topic (Yin, 1994:6). In a large population behavior of individual is measured through survey and it is consider outstanding vehicle. So in social nature of the research project data are collected through survey approach (Sassi, & Goaied, 2011). Both qualitative and quantitative sources of data were used for the literature and field surveys. For empirical study, a structured questionnaire was extracted from the literature and filled from the customers of Islamic banking in DIK. The findings were analyzed by using qualitative and statistical tools to analysis data and answer the questions/hypotheses. LITERATURE REVIEW Islamic Banking in Pakistan Various countries of the world are following Shariah based banking system besides conventional banking. Moreover, by Shariah based banking system we mean banking system that is based on Islamic rules. Back in 1973, Dubai Islamic Bank was established in United Arab Emirates and it was the first country, which has the advantage of dual banking system (Mubeen, Kulkarni, &Al Hussaini, 2014). The major dissimilarity between non-ib and IB is, the conventional banking system emphasis initially on the economic and financial aspects of transactions whereas the IB system places equal stress on the moral, social, ethical, and religious dimensions, to 54

Predicting the Customers attitude towards Islamic Banking Ahmad et al. improve and fairness for the betterment of whole world (Hassanudin,Yousof, Hanafi, & Ebrahim, 2013). Ideally, the goal for introducing the interest free banking and removing the interest from the conventional banking system is to discourage the debt-based financial intermediation and to encourage an equity-based intermediation. Therefore, the balance sheet structure of IB model is dominated by PLS on both asset and liability sides and the value of the investors fund represent the actual assets value of the banks (Dusuki, 2007, p. 30). However, due to its robustness and potential stability, theoretically it is appeared to be a good substitute to the conventional or non- Islamic banking system (Muhamad & Muhammad, 2012). Although IB theory is comparatively new in Bangladesh as it started its travelling in 1983, currently, out of forty-seven commercial banks, seven banks are operating in full-fledge IB system (Imtiaz1, Murtaza, Abaas, & Hayat, 2013). The Islamic banking sector is devolving very rapidly due to the rising demand of both the personal and business unit. According to a statistics by central bank of Bangladesh (2010), Islamic banks continued to develop to December 2009, which is reproduced by the raise in terms of assets, deposits of the total banking system, financing. In December 2009, the overall deposit of the Islamic banks and its branches of the conventional banks stood at Taka 532.6 billion which was 29.7% of the deposit of whole conventional banks and 17.5% deposit of the whole banks in Bangladesh. Similarly, in December 2009, Islamic banking and its branches reached to the investment of 492.9 billion Taka, which was 33.2% of all conventional banks and 20.2% of the all banks of the Bangladesh (Rashid & Hassan, 2009). Customer Attitudes Majority of customers in Islamic banks are Muslims therefore, they prefer the Islamic products and services but most of the products offered by the Islamic are identical to the products offered by Non- Islamic banks and this put a very negative effect on the customer behavior. Moreover, the primary objective of Islamic bank should not be to earn profit its primary objective must be welfare of the society and the promotion of Islamic law and regulations. Therefore, several researchers in this field have conducted a number of researches along with all these still many reaches can be done in this particular area to obtain certain precious outcomes for the growth of Islamic banking system in this competitive market because the sole objective of IB is welfare of society through producing and preservative real Islamic environment (Khan, 2012). Customer attitude towards the Islamic banking of Bangladeshi s an important suggestions in the view of Bangladeshi customer s is that obeying the Islamic rules and regulations are determined as more essential goal than commercial factors (Jabnoun & Khalifa, 2005). This outcome shows that IB specifically those are operating in Bangladesh must assure to their client that services and products they are offering Islamic and Islamic rules and regulation are followed in true spirit and based on the goal summarized by Islamic Shariah (Abbasi et al., 2012). THEORATICAL FRAMEWORK FIGURE 1 HERE FINDINGS OF THE STUDY Testing of Hypotheses Hypothesis # 1 Customer Attitude is highly associated with predictors. Correlation tool is used to compute the association between the predictors and criterion variable(s). In current field study, the dependent variable CAT was found correlated with all the independent variables including IB-Facilities &Services, Staff- Behavior, Bank Quality &Credibility, Age and Experience. Analysis TABLE 1 HERE The dependent variable of Customer Attitude is significantly correlated with all the predictors or independent variables with R-values of 0.395 [IB 55

Euro-Asian j. econ. financ. ISSN: 2310-0184 (print); 2310-4929 (online) Volume: 3, Issue: 1, Pages: 53-63 Facilities and Services], 0.367 [Staff Behavior], 0.488 [Bank Quality and Credibility], 0.208 [AGE] and 0.224 [Experience]. Hypothesis # 2 Predictors determine the Criterion Variable Regression analysis is utilized to calculate the cause and effect relationships between the research variables. In the current research project, Customer Attitude was determined as the dependent variable, which is adapted by the predictors including IB Stepwise regression has been used to evaluate the role of different predictors in bringing change in the Customer Attitude. The results are given below. TABLES 2, 2.1, 2.2 HERE Three models have emerged through the application of Stepwise Regression procedure to compute the role of predictors in changing the dependent variable. Bank quality and Credibility, IB Facilities and Services, and Age have emerged as the important predictors of the Customer Attitude giving R2 of 0.366, meaning that 37% of change in the criterion variable is happening due to the three significant variables. Rest of the predictors has come up with higher p-values thereby showing insignificant role in the regression process. DISCUSSIONS In the current research project, Customer Attitude was determined as the dependent variable while IB-Facilities & Services, Staff-Behavior, Bank Quality & Credibility, Age and Experience are independent variables and present research project shows that the dependent variable of Customer Attitude is significantly correlated with all the independent variables or predicators. According to Khan, Hassan & Shahid (2008, p.162), the products or services presented by Islamic banks and non-i Islamic banks both are similar in nature but the approach of Islamic banks is entirely different. The approach of Islamic banking is to emphasis primarily on equity participation, equity-based system with zero-based interest, and joint ventures. Islamic banks promotes interest free banking add to this IB also promotes profit and loss sharing system PLS. In conventional banking system the major source of earning is the difference between interest rate. Interest received from the investor and interest paid to the borrower and its difference is the major source of earning. Islamic banking system is totally different from the conventional banking system in number of ways or in numerous esteems. According to Dusuki (2007) p.29, the basic difference that eliminates Islamic banking from Non Islamic banking is the elimination of interest in each and every transactional activity. Other distinguishing characteristic of IBs is it promotes and emphasis on religious and social responsibilities as reflected in all activities as well as in their commercial transactions. Inversely, there are some ongoing disputes regarding IB practice worldwide that there is no difference between the IB activities with conventional banking except the difference is in their name. According to Lewis & Algaoud (2001, p.30) Islamic banking and its system is consider ideal only it follows the profit and loss sharing principle. Based on profit and loss sharing principle or genuine profit sharing principle less than five percent asset of the IB comprises on financing tools. There are number of approaches that are following in IB for financing but the most simple and common approach for financing is debt-based financing so debt based instrument such as Ijarah, Murabahah is used in Islamic banks for financing (Kuran, 2004). Besides interpretation of scholars (economists and Financial analysts), understanding the opinion of customer is also significant and therefore some scholars such as McIver & Naylor (1986); Kotler (1988), Engel, Blackwell, & Miniard (1993) mentioned in their research publications that adapting and understanding to consumer behavior and inspiration is not a choice but an outright compulsory for aggressive development. Knowing the customer s attitude is becoming more and more important due to this competitive environment therefore it will be very difficult to know the customer attitude specially the customers of bank due to this competitive 56

Predicting the Customers attitude towards Islamic Banking Ahmad et al. environment (Rose & Marquis, 2006). Bangladesh following the dual banking system therefore, they are facing very Due to the dual banking system in Bangladesh; the banking sector is facing very high competition. In this critical situation the bankers have to work very hard because they not only have to attract new customers or bank clients but also have to preserve the old customers or bank clients. As in Bangladesh Islamic Banking is new wherefore, it has to face more intensive competition as compared to non Islamic banking system. Non Islamic banks also have to face the competition but Islamic banks have to face more competition because these are entirely new. Besides this conventional banking system the Islamic banks have to compete with the various foreign banks that are offering a number of facilities and benefits to their customers. There are number of established banks such as Citi bank HSBC, and Standard Chartered and so on and IB has to survive among all these banks and have to compete with these international banks. According to Kayak, Odabasi and Kucukemiroglu, (1992) today rivalry among different banks are not restricted to geographical boundaries of one country banking industry covers the whole world and huge competition exist among the different banks of the world including financial intuitions or non-banks (Cohen, Gan, Yong, & Choong, 2006). In Bangladesh various Islamic Banks offerings various Islamic modes of financing such as Ijarah, Murabahah etc. in order to enhance and kept the market share. And these Islamic modes of financing are opposite to the mode of financing offered in conventional banking system in terms Islamic rules and regulations i.e Islamic shariah. In Bangladesh most of the Islamic banks in the sphere and all over the world following debt based instrument technique. According to Kuran (2004); Lewis and Algaoud (2001); Iqbal and Molyneux (2005), the use of profit and loss sharing technique, such as Musharakah and Mudarabah financing have dropped to approximately insignificant percentage. In Malaysia there are contemporary issues against IB because people of the Malaysia think that there is no difference between the IB and non-islamic banks. While various people of Bangladesh think that there is the only difference of name between Islamic and conventional banks but both are similar in operations. In this regard they give the argument that profit rate given in Islamic banks is similar to the Interest rate offered in Conventional banking system and both the rates are fixed prior to the investment. However, Islam defines interest as any excess or addition over principle is called Riba i.e. Interest, and it consists of lending and interest regardless of the rate whether it is high or low and it is calculated as RIBA (Uddin, 2007). Islamic banks have to face many problems if they want to attract new customers then they will have to introduce the new products similar to the products offered by the conventional banks because in this competitive environment it is very necessary. Therefore, Ansari & Memon (2008) argued that due to the utilization of Riba i.e interest rate of non-islamic banks as a yardstick, IB offers a number of products that are very similar to products offered by the conventional banks i.e that are similar to the products offered on interest basis and that creates doubt for these particular products. Most of the people in Bangladesh are Muslim and almost 95 percent consumers of Islamic banks of Bangladesh are Muslim. Therefore, the breach of Shariah principle might negatively affect consumer behavior toward IB and thus it will negatively affect the IB business in Bangladesh. Islamic banking is new phenomenon in most of the Islamic countries including Pakistan. There are several issues regarding the establishment of Islamic banking IB however, problems of user Acceptance are very critical and demanding a lot of research is underway to unfold the nature of issue and the factors behind it. Under the constant guidance of my supervisor, I extracted a theoretical framework from the existing research for using as theoretical foundation as the research model is used in current study. Most of the current studies reveal this the leading role in creating the user acceptance is played by factors/variables like the Islamic banking facilities and services (IBFS) staff behavior SBH banks quality and credibility as well as the demographic attributes of the customers. The scholars generated a set of hypothesis about the same relationships between the predicators (IBFS, SBH, BQ&C, and 57

Euro-Asian j. econ. financ. ISSN: 2310-0184 (print); 2310-4929 (online) Volume: 3, Issue: 1, Pages: 53-63 demographics) and criterion variances of customer acceptance. Likewise, the researchers on the topic to explore, analyze, and communicate their findings and results used multiple research approaches and tools. The researcher has applied qualitative tool of thematic analysis like argumentation to analyze the results of current studies (research paper). For the field study, a questionnaire was used to gather first-hand view on the topic, using five-point interval scale to agree or disagree with the statements to analyze the empirical relationships; several statistical tools have been applied i.e. correlation, regression, and test of significance. Both questionnaire and empirical studies on the topic present diversity of findings about the role of major variables regarding the numbers of variables 2. Their inter relationships. The results differ from advanced to developing countries as well as from country to country. Even there is variety of results between Middle Eastern and Asian states. Likewise, the current study has come with universally common as well as unique finding thereby generating further hypothesis to be handled by forthcoming researcher. The empirical results from the currents study tell this the relationships (association) between the predicators and criterion variables are highly significant. Numerous researchers have conducted research on the Consumer s behavior and studied selection criteria of banks e.g- Whiteeley and Kanynak (1999) concluded that while choosing a bank, the satisfaction of consumer as well bank both are very essential. Similarly, Nor and Wel (2003) concluded that the location is very significant factor for customer that convince a customer too choose a bank. However, Almossawi (2001) and Kennington et al (1996) determined the reputation of the bank is foremost factor for customers to choose a bank and reputation is also helpful to attract more customers. On the contrary, Owusu, Frimpong (1999); Ta abd Gar (2000) and Kaynak and Harcar (2005) found that customers choose a specific bank based on the factors (profitability) such as high interest rates and low service charges. Devlin (2002) suggest that for getting loan specially the loans for home, consumers are mostly motivated by the professional advice. However, Harcar and Kaynak (2005) also conclude that an efficient, effective and fast, service was also a very significant feature valued by the existing and new customers, while Gerard and Cunningham (2001) concluded that safety and security are the most important factors for many customers for selecting bank for depositing their surplus money. A survey in UAE was conducted by the Kuehn and Bley (2004) in which financial aspect of both the conventional banks and Islamic banking system was studied. They determined that Muslim student due to their religious attachment prefer Islamic banks and financial institutions based on the Islamic shariah while a large numbers have the knowledge about the non-islamic banks and interest based financial system. Another study has done by Okumus (2005) in Turkey on Bank choosing criteria and interest free banking and customer satisfaction and this particular study was conducted outside the Southeast Asia or Middle East in a predominantly non-sectarian Muslim country. One vital findings of project utilization of IB products and services the primary and only motivation is religious attachment. CONCLUSIONS In the service sector, the provision of high-quality customer service is of essential and paramount significant. This paper trying to estimate customer awareness and use of Islamic banking products. If Islamic banks have to achieve their mission and objectives, they will have to understand their consumer opinions. Despite the popular claim that Islamic banks are true reflections of Muslim lifestyles and practices, and that customer s respect and believe in their principles, researcher shows that religious motivation is not the only criterion for the selection of IB institutions or services. Studies recognized various other factors, such as costs, service delivery (fast and efficient), benefits, the size, and reputation of the bank, convenience (location and ample parking), and the friendliness of bank personnel as significant 58

Predicting the Customers attitude towards Islamic Banking Ahmad et al. criteria for selecting specific Islamic banks. If Islamic Banking is to be established and utilized by the target market, the banks will have to understand their customers and make their services and products easily available. According to this study there are numerous factors contributing in the sluggish progress of Islamic banks i.e. small network of branches, insufficient information about IB services, location of banks, unfamiliarity to financial Teachings of Islam, trust deficiency towards Interest free banking, and shortage of experienced and qualified staff. RECOMMENDATIONS In financial transactions, reliability of the service providers is an important factor of service quality. This study also accepted this hypothesis that reliability influenced satisfaction. Banking institutions require devising strategies to strengthen this dimension of service quality. In Islamic banks, transaction is reliable if it follows the basic principle of justice, transparency, and freeform interest. An interesting outcome is the negative influence of responsiveness on consumer satisfaction, which demands for the redesign of the existing communication network of the banks. Assurance effects the customer satisfaction of the banks along with the empathy as the one of the construct of service quality. Now the world is become the global village and number of communication devices have been devolved e.g internet, the customers demands and expectations have been changed. Now, consumers are demanding quality of services along with Islamic products and services. Nowadays this problem posed for service organization deals with how the result is calculated in comparison with manufacturing process that generates the products. Because of research, some measures are recommended to improve the Islamic banking in D.I. Khan: i. The employees of an Islamic bank must be clear about the concepts of Islamic banking system, in order to motivate customers they must have complete knowledge about the products and services offered by the Islamic Banks. ii. Islamic banking facilities and services play a very significant role while motivating the customers. iii. There is need to aware the people about the products and services of an Islamic bank. Because it is observed that people have poor knowledge of Islamic banking system. iv. Islamic banking industry must conduct its SWOT analysis like other industries, there is need to use its strength to gain any opportunity, and to remove weaknesses and threats. v. There is need to place the Islamic bank at convenient point from where customer easily access the bank. vi. There is need to provide the customer not only the level of satisfaction but the level of delighted. Customer should not only satisfy from bank s services but should be delighted. REFERENCES Ali, M; Okab, R; & Bashayreh, M. (2014). Financial Islamic Banking Development and Economic Growth: A Case Study of Jordan. International Journal of Economics and Finance, 6 (3): 1916-9728. Awan, G.A., & Azhar, M. (2014). Consumer Behavior towards Islamic Banking in Pakistan. European Journal of Accounting Auditing and Finance Research.2 (9):42-65. Awan, A.G. (2009). Comparison of Islamic and conventional banking in Pakistan. Paper presented at 2nd CBRC, 14 November, Lahore, Pakistan. Abbasi, M.T.H., Raja, M.N., Kamran, M., Aslam,S.A., Ambreen, G. &Yousaf, I. (2012). The Tendency of Customers towards the Acceptance of IB in Bahawalpur Region, Pakistan. Research Journal of Finance and Accounting, 3(3):39-51. Al-Oqool1, M.A., Okab,M.., & Bashayreh, M. (2014). Financial Islamic Banking Development and Economic Growth: A Case Study of Jordan. International Journal of Economics and Finance; 6 (3): 1916-971. Dusuki, A.W. & Abdullah, N.I. (2007). Why do Malaysian customers patronise Islamic 59

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Predicting the Customers attitude towards Islamic Banking Ahmad et al. APPENDIX FIGURE 1 Table 1 Correlations of Predictors and Criterion Variables IBFS SBH BQ&C CAT AGE Staff Behavior R.320** 1 P.000 N 132 132 Bank Quality & Credibility R.304**.448** 1 P.000.000 N 132 132 132 Customer Attitudes R.395**.367**.488** 1 P.000.000.000 N 132 132 132 132 Age R -.107.041 -.021.208* 1 P.220.644.810.017 N 132 132 132 132 132 Experience R -.085 -.068 -.163 -.224** -.293** P.331.438.062.010.001 N 132 132 132 132 132 **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). 61

Euro-Asian j. econ. financ. ISSN: 2310-0184 (print); 2310-4929 (online) Volume: 3, Issue: 1, Pages: 53-63 Table 2 Model Summary Model R R Adjusted R Std. Error F Sig. Square Square of the Estimate 1.488.238.232.57446 40.606.000a a 2.552 b.305.294.55075 28.307.000b 3.605c.366.351.52802 24.644.000c Table 2.1 Coefficients of Regression Model Un standardized Coefficients Standardized Coefficients T Sig. B Std. Error Beta 1 (Constant) 1.882.262 7.178.000 Bank quality &Credibility.467.073.488 6.372.000 2 (Constant).749.408 1.837.069 Bank quality &Credibility.388.074.405 5.258.000 IB Facilities &services.387.110.272 3.526.001 3 (Constant).184.423.435.664 Bank quality &Credibility.384.071.402 5.441.000 IB Facilities &services.427.106.299 4.030.000 Age of Respondents.012.004.249 3.513.001 62

Predicting the Customers attitude towards Islamic Banking Ahmad et al. Table 2.2 Excluded Variables Model Beta In T Sig. Partial Correlation Collinearit y Statistics Tolerance 1 IB Facilities and.272a 3.526.001.297.907 services Staff Behavior.186a 2.203.029.190.799 Age.218a 2.934.004.250 1.000 Experience -.148a -1.928.056 -.167.973 2 Staff Behavior.130b 1.549.124.136.762 AGE.249b 3.513.001.297.988 Experience -.138b -1.876.063 -.164.972 3 Staff Behavior.107c 1.329.186.117.757 Experience -.068c -.905.367 -.080.881 63