FACTORS INFLUENCING THE ADOPTION OF ISLAMIC HOME FINANCING IN MALAYSIA. Nur Fadhli Bassir** Zarina Zakaria* (Corresponding Author) Haslida Abu Hasan*

FACTORS INFLUENCING THE ADOPTION OF ISLAMIC HOME FINANCING IN MALAYSIA Nur Fadhli Bassir** Zarina Zakaria* (Corresponding Author) Haslida Abu Hasan* Ervina Alfan* *Senior Lecturer Department of Accounting Faculty of Business and Accountancy University of Malaya 50603 Kuala Lumpur Tel: 603-79673812 Fax: 603-79673980 Email: zarinaz@um.edu.my * MBA Student Faculty of Business and Accountancy University of Malaya 50603 Kuala Lumpur Email: nurfdhli.bassar@fnnfoods.com Biography of Authors Nur Fadhli Bassir obtained his MBA from University of Malaya and currently working with Kraft Malaysia. Zarina Zakaria holds a PhD in Business and Management from University of Nottingham and is currently a Senior Lecturer in Faculty of Business and Accountancy, University of Malaya where she teaches auditing courses for undergraduate and postgraduate. She is an active researcher in Sustainability and Internal Audit in Public Sector. Haslida Abu Hasan (PhD) is a Senior Lecturer at Department of Accounting, Faculty of Business and Accountancy, University of Malaya. She holds a PhD in Accounting from University of Sheffield, United Kingdom, specializing in public sector performance measurement. Ervina Alfan obtained her MBA (Accountancy) from University of Malaya and PhD in Accounting from Manchester Business School. Ervina teaches undergraduate financial reporting courses as well as supervises Masters and PhD students. Currently her research focused is on corporate governance and accountability. 1

Abstract: This study looks at factors influencing the adoption Islamic home financing in Malaysia. By exploring the costumers perceptions towards Islamic home financing as the selection criteria, this study identifies the demographic profile of the Islamic home financing customers and their adoption profile. Several independent variables were used in exploring their effects on adoption namely religiosity, price or cost, brand or reputation and level of awareness. From 143 responses, the findings indicate that Islamic home financing adoption is determined by high religiosity combined with brand/reputation of the financial institutions, cost of financing and high level of knowledge and awareness among Muslims. Of these, religiosity and cost of financing appear to have the strongest determinant for adoption of Islamic home financing in Malaysia. Keywords: Islamic Banking, Malaysia, developing countries Summary: Currently, Islamic financial institutions or banks strategically offering high quality, Shariah compliance products and services to satisfy their customers due to the strong competitive markets, active promotion activities and better understanding of Islamic finance products and services. Islamic home financing is one of the most popular products from the Islamic banking products line up. The purpose of this study is to investigate major factors influencing Islamic home financing adoption in Klang Valley. The present research used and validates the scales for variables developed by earlier studies, namely religiosity, price or cost of financing, brand or reputation of banks and level of knowledge or awareness of consumers on Islamic finance products. With regards to level of importance derived from regression analysis, religiosity and brand or reputation ranks the highest, followed by price and cost (part 2) and level of knowledge or awareness in explaining Islamic home financing adoption in Klang Valley. Price or cost (part 1) does not seem to have significant relationship with the Islamic home financing adoption. Some implications, limitations and recommendations for future research were also discussed in this study. 2

1.0 INTRODUCTION Islamic banking system, as one of the most important players in the service sector, is no longer regarded as business dealing with money transaction only, but also as a business unit that is inescapable in need for successfully winning over new customers and retaining old or current customers (Wilson, 1995; Dusuki and Abdullah, 2007). Islamic banking system has been been in operation for more than four decades and has become a substantial and fastest growing industry. The development of Islamic banking was first started in Mit Ghamr, Egypt in 1963 by Ahmad El Najjar where the German savings bank was modified to comply with Islamic principles. The Islamic Development Bank (IDB) was later established in 1974 as a result of the second Islamic Conference of Foreign Ministers where they adopted a document on Institution of an Islamic Bank, Economics and Islamic Doctrines, then followed by first Islamic commercial bank in 1975, which is Islamic Bank of Dubai (Marimuthu et al., 2010). In the year 1983, Malaysia s entry into the Islamic banking industry started and after more than twenty five years later, it has succeeded in developing attractive and competitive Islamic financial system. Islamic banks in Malaysia offer a wide range of Shariah-compliant financial related products such as takaful (insurance), mortgages (home financing), overdraft, hire purchase, leasing, syndicated financing, personal financing, investment instruments, foreign currency financing and large-scale project financing (bridging financing). In the year 2010, Islamic banking contribute RM 27.1 billion into the Malaysian banking industry, a slight reduced from RM 27.3 billion financing recorded in the year 2009 (Central Bank of Malaysia, 2010). This study focuses on Islamic home financing. Specifically, the study aims to explore the consumers perception towards Islamic home financing as the selection criteria. Henceforth, the research objectives of this study are as follows: firstly, to identify the demographic profile of the Islamic home financing customers; secondly, to explore the adoption profile of the Islamic home financing customers; and thirdly to determine factors influencing the Islamic home financing adoption. 2.0 LITERATURE REVIEW In this section, the system of Islamic banking is discussed in general and followed by the explanation of Islamic home financing concept in Malaysia. It will firstly introduce the Islamic banking system as well as the previous study undertaken on Islamic banking system worldwide before elaborating on the prior studies completed on Islamic home financing. 2.1 Islamic Banking System Islamic banking system financial institutions, products and services designed to comply with Islamic law (Shariah) is one of the most rapidly growing segments of the global finance industry (Gait and Worthington, 2008). Widely known as Islamic banks, these interest-free institutions are organized financial intermediaries, which operate in accordance with Islamic law (Iqbal and Mirakhor, 2007) transactions rules and principles (Shariah) to carry out the business operation (Henry & Wilson, 2004; Iqbal & Mirakhor, 2007; Dusuki & Abdullah, 2007). The main principles of Islamic banks activities 3

comprise of prohibition of interest (riba) in all forms of transaction undertaking business and trade activities, based on, fair and legitimate profit (Mirakhor, 2000; Haque et al., 2007). 2.2 Choice Criteria for Banking Drawing on Islamic banking body of research, a number of factors affecting bank selection has been extracted. First, religiosity is likely to affect the selection of Islamic bank as demonstrated by the study conducted by Erol and El-Bdour (1989) who examine the attitude, behaviour and patronage factors of bank customers towards Islamic banks in Jordan. They find that religion is not the main motivation for customer selecting Islamic banks. However, elsewhere, Omer (1992) finds that religion is the principle motivation for Muslims in the UK to choose Islamic financial institutions. This finding is consistent with the findings in Kuwait, Saudi Arabia and Egypt. (Metwally,1996) Bahrain (Metawa and Almossawi 1998, Al-Ajmi et al. (2009) Australia (Jalaluddin & Metwally 1999and Jordan (Naser et al. (1999). In Malaysia, the findings on Islamic financial institution selection criteria are mixed. Haron et al. (1994). find that religious motivation is not the primary motivation for Muslims in dealing with Islamic banks. This is in contrast with the findings of Ahmad & Haron (2002) who find that religious factors were the chief factors affecting banking selection. This finding is supported by Zainuddin et al. (2004) who find that religion has an impact on the attitude towards Islamic bank selection. Dusuki & Abdullah (2006) also had similar findings in their study where respondents were more concerned about religious issue towards Islamic bank services. Moreover, Muslim & Zaidi (2008) have found that religion is perceived as one of the important criteria to be considered for building relationship between customers and banks. Haque et al. (2009) concluded in his study that religious perspective at higher level could make Islamic banking easier and comfortable. Second, interest rate, price or cost could also be one of the factors affecting bank selection. According to Erol et al. (1990), there are significant differences between patrons of conventional banks and those of Islamic banks in their pricing policies. In Poland, Kennington et al. (1996) investigated that price and competitive rates are key factors affecting bank customers decision to select banks. According to Elliot et al. (1996), most customers place a higher value on lower prices and higher transaction on patronizing financial services. Jalaluddin & Metwally (1999) found that expected rate of return is one of the main factor motivates small businesses in Australia to use Islamic banking. The increased importance of interest rate charged by banks was one factor establsied in many prior studies (Boyd et al. 1994; Devlin and Gerrad, 2004; Devlin and Ennew, 2005). Since low profit rate is associated with cheaper cost of financing or total price of the financing, Mokhlis et al. (2008) has suggested that pricing and convenience were the main reasons for selecting a new bank or switch bank. In Malaysia, Ahmad & Haron (2002) and Marimuthu et al. (2010) suggested that cost or benefit is also affecting factors for banking selection whilst. Dusuki & Abdullah (2006) suggested that financial product price factors are also main factors in Islamic banks selection. Likewise, Mokhlis et al. 4

(2008) found out that pricing and convenience were the main reasons for consumer selecting a new bank or switching bank. Third, bank selection could also be affected by branding and good image and reputation of the bank., as a good image is an important aspect for banks in sustaining their market position and creating a long term relationship with customers Muslim et al. (2010). In much earlier study of Islamic banking, Erol & El-Bdour (1989) found out that bank reputation is one of the most important choice criteria for banking either for Islamic or conventional bank. This finding is also supported by Boyd et al. (1994) and Kennington et al. (1996) when they found out that bank reputation is the most important factor affecting bank customers selection in banks. The finding is consistent with the findings in Jordan and Bahrain (Naser et al. (1999, Almossawi (2001). The findings in Malaysia shows that the Malaysian Muslims customers perceive reputation and image of the bank as one of the most essential criteria in the bank selection (Haron et al., 1994, Dusuki & Abdullah (2006), Dusuki & Abdullah (2007). The fourth factor is the awareness and the level of knowledge towards the banks principal culture, products and services. Erol & El-Bdour (1989) mentioned in their findings that the awareness of the Jordanian Islamic bank customers with knowledge of Islamic banking was significantly influenced by their relatives and neighbours. Gerrard & Cunningham (1997), on the other hand mentioned that Muslim, would be more aware of the principles of Islam, although both Muslim and non-muslims would have little knowledge of the culture of Islamic banking. There is therefore a general lack of awareness of the customer regarding the Islamic banking system. Most Islamic banking customers are at least aware of fundamental Islamic terms. Such findings are apparent in studies conducted Metawa & Almossawi (1998) and, Jordan Naser et al. (1999) Similarly, Bley & Kuehn (2004) discovered in their research that Muslim students choose Islamic banking because they are Muslim. Thus, in general, majority of them have low knowledge about banking and finance. Surprisingly, in UK, Karbhari et al. (2004) concluded that most UK Muslims were generally unaware of Islamic banking products and services. Likewise in Malaysia, Haron et al. (1994) found that most of their respondents wished to have a relationship with the Islamic banks if they had a complete understanding of this Islamic banking system. This demonstrates that the respondents were actually have some awareness of Islamic banking but were unaware of specific methods and differences between conventional and Islamic banks. The finding is consistent with the finding by Ahmad & Haron (2002) who find that 65% of the customers have limited knowledge of Islamic banking products and services. As for other factors in selecting a bank, fast, good quality and efficient services are the most important criteria for banking selection (Erol & El-Bdour, 1989, Haron et al., 1994, Boyd et al., 1994, Hegazy, 1995, Gerrard & Cunningham, 1997, Dusuki & Abdullah, 2006). Other than that, location was also important factors for bank customers to select a bank (Boyd et al., 1994, Kaynak & Whitley, 1999). In addition, time, efficiency and pleasant treatment are critical criterion for bank selection. (Kennington et al. (1996). Apart from these factors, convenience for example the availability of parking spaces and 5

the availability of automated teller machines is also an important factor in determining attitudes of Muslims towards Islamic banks (Metwally, 1996, Lee & Marlowe, 2003, Dusuki & Abdullah, 2007, Almossawi (2001)). 2.3 Choice Criteria for Home Loan According to Ferguson & Smets (2010), affordable home financing markets will grow exponentially as 90% of the net increase in world population of 4 billion people by 2050 is projected to reside in the urban areas of developing countries. Since many people will earn low to moderate-incomes and construct their homes progressively, financing for incremental housing has a huge potential market (Ferguson & Smets, 2010). By definition, conventional home loan or mortgage loan is a system of scheduled payments of interest and repayments of principal to the bank to secure a real property (Tse, 1997). Islamic home financing is one of the most popular products from the Islamic banking products line up. In contrast with conventional home loan, Iqbal & Mirakhor (2007), Khir et al. (2007) and Haron (2005) found that Islamic home financing is a Shariah based home financing where elements of interest rate and uncertainty are prohibited. According to Ebrahim & Joo (2001), instead of interest rate, Islamic home financing is emphasis on flat rate or profit rate. Thus, the monthly payment will be unchanged from the beginning to the settlement (Amin, 2008). Ford & Jones (2001) investigated the important criteria in choosing a home mortgage in London. They found that the choice criterion for home loans is mainly influenced by customers previous experience with the banks. Advice of intermediaries also affected an individual with a selection of a mortgage provider. They also found that reputation is the important criteria in selecting type of home mortgage. Devlin (2002) and Devlin & Ennew (2005) have found that professional advice is the most common choice criteria and the most important factor for customers. In his analysis, Devlin (2002) examined the choice criteria in bank selection for home loans in UK. In addition, interest rates (Devlin & Ennew 2005), loan availability, and previous relationship with the bank, low repayment penalty(mylonakis 2007) and customer income Nichols et al. (2006) are also considered to be important factors in selecting a mortgage provider. On the other hand, service quality was found to be the least important choice criterion. In Malaysia, Amin (2008) and Taib et al. (2008) suggested that religiosity or Shariah principle, lower monthly payment, transparency practice, interest-free practice and 100 per cent financing are the first five decision criteria considered as being very important. The least preferred criteria, among others, are recommendation, longer financing period, product range and branch location. Results also suggested that a small number of significant differences are apparent in the importance of choice criteria with respect to gender, marital status and age range. On the contrary, Mahmud et al. (2009) concluded that one of the most important reflections of their positive attitude is advice from third party. This factor implies that the findings on both Islamic and conventional home financing selection criteria are rather mixed, suggesting that apart from the religious beliefs, many home financing customers could be influenced by other people advice. The product advantage of Islamic home financing like interest free and flat rate have attract customers to choose Islamic home financing product. This is because, these advantages are not offered by conventional home financing. 6

3.0 RESEARCH METHODOLOGY Questionnaire survey was used as the primary form of obtaining responses from Islamic home financing customers or potential customers about their perception of Islamic home financing adoption. Survey approach was chosen because it provides fast, cheap, accurate and efficient means of assessing information about the population. Non-probability convenience sampling method was chosen for this research because of time and cost constraint. This convenience sampling method has also been used in previous study by Dusuki & Abdullah (2006), Amin (2008) and Haque et al (2009). Although this sampling method is limited in representing the whole population, it is the best viable alternative for getting the valuable feedback on trends existing among the community with respect to their type of home financing adoption and related issues. The sample was confined to respondents from Klang Valley area. The respondents of this study were the Islamic home financing customers as well as non-customers that potentially to adopt the Islamic home financing products. The survey instrument was a four-page questionnaire consisted of three sections. Part A was designed to obtain the adoption profile of respondents. Part B was designed to determine factors influencing the Islamic home financing adoption in Klang Valley, Malaysia. A five-point Likert scale ranging from 1 (Strongly disagree) to 5 (Strongly agree) were used. The input for the factors influencing Islamic home financing was derived and adapted from previous Islamic and conventional banking patronage studies from Haron et al. (1994), Gerard & Cunningham (1997), Metawa & Almossawi (1998), Devlin (2002), Mylonakis (2007), Nichols et al. (2005) and Amin (2008). As this study applied the same construct used by Dusuki & Abdullah (2006) in order to measure Islamic home financing products adoption, a few adjustments were made to the original questions to suit the research context, by adapting the construct obtained from Dusuki & Abdullah (2006). Part C was designed to obtain the demographic information of the respondents which are gender, age group, education level profession, income level and religion. 3.1 Hypothesis Development The dependent and independent factors in this study are identified with the considerations of factors specified in the literature review earlier. 3.1.1 Adoption Fishbein & Ajzen (1975) introduced the Theory of Reasoned Action (TRA) in an attempt to establish a relationship among beliefs, attitude, intentions and behaviour. Later, Ajzen & Fishbein (1980) defined TRA as a two unique factors that contribute to intended behaviour or behavioral intention, which are attitudes towards the behaviour and subjective norm. Behavioral intention will then lead to actual behaviour. For instance, one s attitudes towards Islamic home financing and combined with subjective norms about the Islamic home financing, will lead to one s intention to adopt Islamic home financing, which will then lead to the actual Islamic home financing adoption. Hence, the questions asked in determining the adoption of Islamic home financing are, i) Do you 7

own a house?, ii) How many house do you own?, iii) What type of home financing have you selected for your house?, and iv) For your future house purchase, what type of financing you would be adopted? 3.1.2 Religiosity Religion is an element of culture that pervades every aspect of a society and permeates the life of individuals whether one is a believer or a non-believer (Khraim et al., 2010). According to Kim et al. (2004) religion is not a fact that can be dismissed by the marketer as a short-term change, but rather it is a long-term phenomenon, therefore it is considered a valuable construct in understanding consumers. Based on the literature study, a significant number of researchers have concluded that religiosity is one of the main factors for the customers to choose Islamic banking products (Omer, 1992, Metwally, 1996, Gerrard & Cunningham, 1997, Metawa and Almossawi, 1998, Jalaluddin & Metwally, 1999, Naser et al., 1999, Othman & Owen, 2001 and Okumus, 2005). Thus, it is hypothesized that the adoption is positively correlated with religiosity hence the first hypothesis proposed for this study is: H1: High religiosity of Muslim community will lead to Islamic home financing adoption 3.1.3 Price or Cost Price is defined as the amount of money that is charged for different goods and services in a market economy. Prices act as signals that influence the behaviour of both consumer and producers of these goods and services (Farnham, 2005). Total cost is defined as sum of fixed cost and variable cost of using input to produce an output (Farnham, 2005). In this study, output is the financing and input is any other factor associated to the financing. Since low profit rate is associated with cheaper cost of financing or total price of the financing, Metawa & Almossawi (2008) has suggested that cheaper financing rate is one of the main factors for customer. Moreover, it was also supported by Marimuthu et al. (2010) that cost was the most important criteria for customer in selecting Islamic banking. Thus, given that cost or price is one of the main factors for the customers to choose Islamic banking products, the following hypothesis was proposed. H2: Cheaper price or lower cost of financing will lead to Islamic home financing adoption 3.1.4 Brand or Reputation Brand image has been defined as the concept of a brand that is held by the consumer (Dobni & Zinkhan, 1990, p. 118), and it includes symbolic meanings that consumers associate with the specific attributes of the product or service (Padgett & Allen, 1997). It is seen as the representation of a brand in the consumer's mind that is linked to an offering (Dobni & Zinkhan, 1990), or a set of perceptions about a brand the consumer forms as reflected by brand associations (Keller, 1993). Company reputation has been broadly described as the long-term combination of the stakeholders' assessment about what the firm is, how well the firm meets its commitments and conforms to stakeholders' expectations, and how well the firm's overall performance fits with its socio-political environment (Logsdon & Wood, 2002). 8

According to Almossawi (2001), reputation of a financial institution is most important factors affecting bank customers selection of a bank. Similarly, studies by Devlin & Gerrard (2004) and Muslim et al. (2010) have pointed out that bank s image and reputation have retained their degree of importance in consumers minds. Thus, based on the literature study, brand or reputation is a beneficial factor proposed for this study, as predicted in hypothesis three. H3: Brand or reputation of the Islamic financial institutions or banks will lead to Islamic home financing adoption 3.1.5 High Level of Knowledge or Awareness Erol & El-Bdour (1989) found that in Jordan, awareness of the Islamic bank customers with knowledge of Islamic banking was significantly influenced by relatives and neighbours. According to Gerrard & Cunningham (1997), Muslim would be more aware of the principles of Islam, but both Muslim and non-muslims would have little knowledge of the culture of Islamic banking. Furthermore, Metawa & Almossawi (1998) found out that most Islamic banking customer in Bahrain was aware of fundamental Islamic terms except that of more complex Islamic schemes. The findings was supported by Naser et al. (1999) where most Jordanian Islamic banks customers had a high level of awareness of at least some Islamic methods of finance. Bley & Kuehn (2004) discovered in their research that Muslim students choose Islamic banking because they are Muslim. Thus, in general, majority of them have low knowledge about banking and finance. In one of the pioneer research on bank patronage in Malaysia, most of the respondents wished to have a relationship with the Islamic banks if they had a complete understanding of this Islamic banking system (Haron et al., 1994). Marimuthu et al. (2010) has supported this finding in their interesting study where 57.6% of the respondents do not know about Islamic banking concepts and 47.3% perceived that they do not accept Islamic banking due to lack of understanding and information. Thus, the importance of high level of knowledge or awareness therefore becomes the fourth hypothesis in this study as follow: H4: High level of knowledge or awareness in Islamic finance will lead to Islamic home financing adoption 3.2 Data Analysis From a total of 300 questionnaires distributed, 143 questionnaires were returned and deemed usable (valid and completed), thereby yielding a response rate of about 47.7%. Roscoe (1975) has proposed a rule of thumb for determining sample size, if the sample size is larger than 30 and less than 500, it is therefore appropriate for most research. Furthermore, since the number of samples is more than 5 times than the number of variables, it is already adequate for factor analysis (Hair et al., 2006). The responses obtained from the questionnaires were then analyzed using Statistical Package for Social Sciences (SPSS) version 17.0 program. Several analysis were undertaken which includes Chi-square analysis, normality test, and followed by factor analysis which was a data reduction technique that reduces a large number of variables. Last but not least, regression analysis was used to find the best equation to represent the 9

best prediction of factors extracted from several independent variables to predict or explain the Islamic home financing adoption. 4.0: RESULTS AND DISCUSSIONS In this section, the findings of the survey and the results of the research analysis were discussed in detail. 4.1 Demographic Profile of Respondents The demographic profiles of the respondents were presented in Table II where it summarizes the basic statistics on gender, age, educational level, profession, income level and religion of the respondents. Male respondents were more than female respondents where there are 51.7% male respondents in comparison with 48.3% females in this sample size. The female respondents were outnumbered by the male respondents by 3.4%. Majority of the respondents which represented by 49.0% of the respondents are fall in the range of 18-29 years of age. This was followed by 36.4% who fell within the age range of 30-39 years old. Other age group were 40-49 years old represented by 9.8% and 50-59 years old represented by 4.8% of the respondents. This percentage appears to be in line with the findings in previous banking studies. With regards of educational background, majority of respondents were educated with 56.6% holding a bachelor degree, followed by 16.8% holding a master degree or PhD, 10.5% each for diploma and SPM or O-level, 4.9% for STPM or A-level and 0.7% for others. It was clearly indicated that more than 70% of the respondents have bachelor and postgraduate degree. In term of profession or job position, majority 46.9% of the respondents were executive then followed by non-executive at 24.5%, managerial level at 13.3%, unemployed at 7.0%, business owners at 4.9% and the balance was top management at 3.5%. Those in executive and non-executive made up more than 70% of respondents from the sample size. As depicted in Table I, in term of monthly income, majority at 67.1% of the respondents were in the RM1000 to RM5000 monthly income group. This was followed by 17.5% of the surveyed respondents earn between RM5001 to RM9000. Combined together, the respondents in both income groups represented 84.6% of respondents from the total sample. Other monthly income group was below RM1000 at 8.4% and above RM13001 at 4.2%. The smallest group of respondents (2.8%) was those earning between RM 9001 to RM 13000. As for the religion, Muslim respondents were represented by 87.4% from the sample size and non-muslim respondents were at 12.6% of respondents. Therefore this study reported mostly the opinions of Muslims towards Islamic home financing adoption factors. In term of attending religious oriented school or institution, 26.8% of the respondents have never attended religious oriented school or institution. This was followed by 9.9%, those who had attended it for less than one year, 24.6%, those who had attended it for two to four 10

years, 23.2%, those who had attended it for five to six years, and 15.5%, those who had attended it for seven to ten years. With regards to overall knowledge in Islamic banking system, 8.4% of the total respondents have very poor knowledge, followed by poor (19.6%), average (56.6%), good (12.6%) and very good (2.8%). This result broadly matches with the previous result of the respondents attending religious oriented school or institution. The percentage distribution of the respondents who had disagreed that Islamic home financing is of last resort exceeds those who had agreed by more than double. Majority of the respondents which represented 62.9% disagree that Islamic home financing is the last chosen effort while those who agree that Islamic home financing as the last chosen effort made up 37.1%. 11

Table I: Demographic Profile of Respondents Variable Value Description Frequency Valid Percentage (%) Gender Male 74 51.7 Female 69 48.3 Age 18-29 years 70 49.0 30-39 years 52 36.4 40-49 years 14 9.8 50-59 years 7 4.8 Education SPM/ O level 15 10.5 STPM/ A level 7 4.9 Diploma 15 10.5 Degree 81 56.6 Master/ PhD 24 16.8 Others 1 0.7 Profession Unemployed 10 7.0 Non executive 35 24.5 Executive 67 46.9 Managerial 19 13.3 Top management 5 3.5 Business owner 7 4.9 Monthly Income Below RM 1000 12 8.4 RM 1000 - RM 5000 96 67.1 RM 5001 - RM 9000 25 17.5 RM 9001 - RM 13000 4 2.8 Above RM 13001 6 4.2 Religion Islam (Muslim) 125 87.4 Others (non-muslim) 18 12.6 Attendance to religious oriented school/institution Overall knowledge in the Islamic banking system Islamic home financing is of last resort Less than a year 14 9.9 2-4 years 35 24.6 5-6 years 33 23.2 7-10 years 23 15.5 Never attended 38 26.8 Very good 4 2.8 Good 18 12.6 Average 81 56.6 Poor 28 19.6 Very poor 12 8.4 Agree 53 37.1 Disagree 90 62.9 12

Table II: Respondents Home Financing Profile Variable Value Description Frequency Valid Percent 1 House owner No 64 44.8 Yes 79 55.2 2 Number of house owned No house 1 house 64 65 44.8 45.4 More than 1 house 14 9.8 3 Type of home financing (first house) 4 Type of home financing (second house) 5 Type of home financing (third house) 6 For future home financing No house 64 44.8 Conventional home loan 37 25.8 Islamic home financing 42 29.4 No house 64 44.8 1 house 65 45.4 More than 1 house: Islamic home financing 8 5.6 Conventional home loan 6 4.2 No house 64 44.8 1 house 65 45.4 2 houses 6 4.2 More than 2 houses: Islamic home financing 5 3.5 Conventional home loan 3 2.1 Conventional home loan 27 18.9 Islamic home financing 116 81.1 13

4.2 Adoption Profile The adoption profile in general, presented in Table II indicates that 79 respondents (55.2%) declared they have already purchased a house, whereas, 64 respondents (44.8%) were yet to purchase a house. For respondents who already purchased a house, 65 respondents (45.4%) own only one house while 14 respondents (9.8%) own more than 1 house. As a comparison, in their study involving postgraduates students in Malaysia, Taib et al. (2008) indicated that 41% of their respondents had already own a house whilst 59% do not have a house yet. In total, 97% of the respondents have either owned a house or plan to buy one (ibid.). In term of home financing chosen for their first house purchase, 37 respondents (5.8%) had chosen conventional home loan whereas 42 respondents (29.4%) had chosen Islamic home financing. For respondents who had purchased more than one house, 8 respondents (5.6%) had chosen Islamic home financing while 6 respondents (4.2%) had chosen conventional home loan for their second house financing. As for the third house financing, 5 respondents (3.5%) had chosen Islamic home financing and 3 respondents (2.1%) had chosen conventional home loan. As for the future house purchase, 27 respondents (18.9%) will choose conventional home loan while 116 respondents (81.1%) will choose Islamic home financing. Thus, it is clearly stated that in general, the respondents will adopt Islamic home financing than the conventional for financing their next house purchase. 4.3 Factors Influencing Islamic Home Financing Adoption The data from part B of the questionnaire were analyzed using statistical analysis such as normality test, reliability test, factor analysis and regression analysis in order to test the hypotheses developed earlier. Except for item number 4, the skewness values, ranging from -0.978 to 0.870, and the kurtosis values, ranging from -0.797 to 0.887, are considered within normal distribution range. As for item number 4, the skewness value is -2.482 while the kurtosis value is 7.391. This indicates item number 4 is not within normal distribution range and thus, is not qualified to be used for next test and analysis. With regards to factor analysis, the items reflecting each of the four factors extracted from selection items together with the sorted factor loadings are presented in Table III Factor I which loaded with seven items explained 19.00% and Factor II which loaded with six items explained 16.46%. This was followed by Factor III comprising three items and Factor IV comprising two items, explained 11.11% and 8.27% respectively. The component items of each factor were tested for internal consistency reliability using Cronbach s coefficient alpha. The final alpha scores ranging from 0.564 to 0.828 are acceptable for exploratory research (Nunnally, 1978). 14

Table III: Reliability Coefficients of Factors Influencing Islamic Home Financing Adoption and Its Dimensions Factor Alpha Scores Dimensions I 0.828 Religiosity and Brand or Reputation II 0.804 Level of Knowledge or Awareness III 0.804 Price or Cost (Part 1) IV 0.564 Price or Cost (Part 2) The conceptual attributes of items loaded on each of the four-labeled factors as shown in above indicates that each factor had loading of items having similar conceptual attributes. Based on the items that were loaded on each of the factors, the four factors were labeled. First, Factor I, labeled Religiosity and Brand or Reputation, depicts a combination of consumers religion culture with set of perceptions about Islamic home financing brand the consumer forms and is also associated with how well the Islamic financial institutions or banks performs. Second, Factor II, Level of Knowledge or Awareness reflects the consumers level of understanding and knowledge on Islamic home financing products. Third, Factor III and IV, are derived from the same base of questions for Price or Cost. Thus, it is split into two; Price or Cost (Part 1) for Factor III and Price or Cost (Part 2) for Factor IV. Both typifies amount of money that is charged and total cost consumers need to bear for a Islamic home financing products. Based on the factor analysis result, Religiosity and Brand or Reputation is combined into one factor, Price or Cost will be divided into two factors (Part 1 and Part 2) and Level of Knowledge or Awareness will remain the same. The proposed theoretical framework will be changed to a new set of theoretical framework as shown in Figure I below. Figure I: New Framework (based on factor analysis result) Religiosity and Brand or Reputation Price or Cost (Part1) Price or Cost (Part 2) 4.3.1 Regression Level of Knowledge or Awareness H1 H2 H3 H4 Islamic Home Financing Adoption Multiple regression analysis was then conducted in order to assess the predictive power of the predictors (or independent variables) i.e. Factor I to IV in explaining the variance in the criterion (or dependent variable) i.e. Adoption Profile. Based on this analysis, the 15

strength of the relationship between the independent variables and the dependent variable could be seen clearly. The magnitude of the independent variables influencing the dependent variable will be known as well, as shown in Table IV. Table IV: All Variable Regressions Model Predictors (Independent Variables) Standard Coefficient Beta Sig. 1 Religiosity-Brand/Reputation (Factor I) 0.441 0.000 Level of Knowledge/Awareness (Factor 0.151 0.084 II) Price/Cost Type 1 (Factor III) -0.017 0.825 Price/Cost Type 2 (Factor IV) -0.176 0.025 (Dependent Variable: Adoption to Islamic Home Financing; Adjusted R 2 : 0.261) Only Factor I and Factor IV had significance level of 0.000 and 0.025 respectively which were less than the selected significance level of 0.05. These indicated that there were significant relationship between the dependent variable and the predictors Factor I and Factor IV. Factor II had a significance level of 0.084 which was slightly higher than the selected level of 0.05. This indicated that there was a marginally significant relationship between the dependent variable and predictors Factor II. Factor III had a significance level of 0.825 which was much higher than the selected level of 0.05. This indicated that there was no significant relationship between the dependent variable and predictors Factor III. The Adjusted R 2 figure inferred that 26.1% of the variance in the dependent variable could be explained by the predictors, while the remaining 73.9% was explained by other factors. In this study, this means that the magnitude of the independent variables which are Religiosity and Brand or Reputation, Cost and Level of Knowledge or Awareness could only explain 26.1% from the whole factors that could influence Islamic home financing adoption. The balance of 73.9% was explained by many other factors which were not in this study. Other influencing factors such as friends and relatives influence, bank s staff factors, convenience, service delivery, mass media advertising etc. might influence the respondents and potential customers to adopt Islamic home financing. The standardized coefficients value for Religiosity and Brand or Reputation (β = 0.441) was the highest among the predictors, which indicated that Religiosity and Brand or Reputation was the most important variable in predicting the Islamic home financing adoption. This was followed by Price or Cost (Part 2) (β = -0.176) and Level of Knowledge or Awareness (β = 0.151). Price or Cost (Part 1) did not show any statistical significance when it was regressed with the dependent variable. The analyses discussed have successfully tested and supported the hypotheses except for H2. The second hypothesis, H2: The price or cost (Part 1, Factor III) of financing rate will lead to Islamic home financing adoption was not supported since its regression significance level was more than the selected significant level of 0.05. The fourth hypotheses, H4: High level of knowledge or awareness (Factor II) in Islamic finance will lead to Islamic home financing adoption was marginally significance since its regression significance level was slightly higher at 0.084 than the selected significant level of 0.05. 16

For H4, the Pearson Correlation Coefficients (r) is 0.804 and Standardized Coefficients Beta (β) is 0.151. The other two hypotheses namely H1: High religiosity of Muslim community and brand or reputation (Factor I) of the Islamic financial institutions or banks will lead to Islamic home financing adoption and H3: The price or cost (part 2, Factor IV) of financing rate will lead to Islamic home financing adoption and were supported as the relationship between the variables were statistically significant (significant level lesser than p = 0.05). For H1, the Pearson Correlation Coefficients (r) is 0.828 and Standardized Coefficients Beta (β) is 0.441. While for H3, the Pearson Correlation Coefficients (r) is 0.564 and Standardized Coefficients Beta (β) is -0.176. 4.3.1 Discussion The results assert that Islamic home financing adoption is determined by the high religiosity of Muslim community combined with brand or reputation of the financial institutions or banks, price or cost (part 2) of the financing and high level of knowledge or awareness among Muslims. The combination of high religiosity of Muslim community with brand or reputation of the financial institutions or banks appeared to be the strongest determinant for adopting the Islamic home financing with β is equal to 0.441 which strongly supported H1. This result reinforced earlier studies completed by Omer (1992), Metwally (1996), Gerrard & Cunningham (1997), Metawa and Almossawi (1998), Jalaluddin & Metwally (1999), Naser et al. (1999), Othman & Owen (2001), Okumus (2005) whereby, religiosity is one of the main factors for the customers to choose Islamic banking products, and good image is an important aspect for banks in sustaining their market position and creating a long term relationship with customers (Muslim et al., 2010). This result further supported the finding that customers have high degree of confidence in the banks current practices especially with respect to offering products that are fully Shariah compliant (Dusuki & Abdullah, 2006) and the bank s image, stability and continuity in explaining how customers adopt Islamic home financing (Kennington et al., 1996). The second strongest determinant of Islamic home financing adoption is price or cost of financing (part 2) by the financial institutions or banks with β is equal to -0.176. This negative relationship indicates that the lower the price or cost of Islamic home financing, the higher the Islamic home financing adoption rate will be. Thus, H3 is supported and reinforced earlier studies whereby cheaper financing rate is one of the main factors for customers in selecting Islamic banking (Metawa & Almossawi, 2008 and Marimuthu et al., 2010). Other than religiosity, brand and reputation of the banks, customers always emphasis on factors like lower monthly payment, 100% financing, lower financing rate and low relevant fees and charges which finally will determine the overall cost or price of the home financing (Devlin & Gerrard, 2004, Mylonakis, 2007 and Amin, 2008). Customers who have low income not need to worry about interest jump (Mahmud et al., 2009) and profit oriented customers will carefully compare the overall cost and price of the home financing offered by few banks and will finally choose the cheapest cost option which means highest profit for them as illustrated by Erol and El-Bdour (1989). 17

Support for H4 validated the hypothesis that high level of knowledge or awareness in Islamic finance will lead to Islamic home financing adoption (β = 0.151, marginally significance). This is in congruent with the findings by Haron et al. (1994), whereby, in one of the pioneer research on bank patronage in Malaysia, most of the respondents wished to have a relationship with the Islamic banks if they had a complete understanding of this Islamic banking system. But, since majority of customers somehow viewed that Islamic banks have not done enough in educating their customers and promoting products and services (Ahmad & Haron, 2002), more seminars should be held to increase the awareness, product promotions and level of knowledge of the customer on Islamic banking products and services (Khattak & Rehman, 2010). It is also necessary that the government and as well as the Islamic banking authorities to take action plans directed toward spreading the culture of Islamic banking via specialized courses and organized seminars as in the case of traditional or conventional banking (Haque, 2010). Islamic banks and financial institutions should consider and take note on people insufficient knowledge and lack of awareness in Islamic banking system especially when promoting Islamic financial services (Marimuthu et al., 2010). Hence, Islamic banks need to better market their products and services and should revamp their marketing activities accordingly, informative, attractive and make it more easy to understand (Ahmad & Haron, 2002). Surprisingly, the other part of price or cost (part 1) emerged as the independent variable with statistically insignificant predictor for Islamic home financing adoption when it was regressed with the dependent variable. This finding suggested that monetary cost did not serve as a barrier to the Islamic home financing adoption. The finding also suggest that customers do not really care much about the price or cost, rather, they are more concern about other perceived more important issues like religiosity (Dusuki & Abdullah, 2006). This finding also showed that customers placed relatively lower importance on the financing rate which will lead to total cost of financing that the customers need to pay, especially by Muslims customers (Gerrard and Cunningham, 1997). Price or cost is also not a real concern for all type of customers since the home financing rate charged is only important as a mortgage choice criterion for younger consumers (Devlin & Ennew, 2005). Further, it was incoherent with Metawa & Almossawi (2008) and Marimuthu et al. (2010) in which cheaper financing rate is one of the main factors for customers in selecting Islamic banking. Perhaps the customers have other more influencing factors besides price and cost like location (Kaynak & Whitley, 1999), convenience such as finding parking space near the bank (Almossawi, 2001) and fast, good quality and efficient services (Hegazy, 1995), to influence Islamic home financing adoption. 5.0 CONCLUSION This present study attempted to profile Islamic home financing adoption in Klang Valley in term of demographics and the factors influencing the adoption. Responses from 143 respondents were collected and analyzed from Klang Valley area through an instruments of four-pages self-administered questionnaire. The respondents of this study were the Islamic home financing customers as well as non-customers that potentially to adopt the Islamic home financing products. 18

Adoption profile indicated that slightly more than half of the respondents have already purchased a house with majority of them has only one house. This is different from what Taib et al. (2008) found in their study with postgraduate students in Malaysia. Slightly more than half of the first houses purchased by the respondents were financed through Islamic home financing with majority of the respondents had chosen Islamic home financing for their second and third house purchase. The adoption profile also has shown that most of the respondents will choose Islamic home financing for their future house purchase. The study successfully revealed that the two dimensions, namely high religiosity of Muslim community and brand or reputation of the Islamic financial institutions or banks, and price or cost of financing rate, do have influence on Islamic home financing adoption. High religiosity of Muslim community and brand or reputation of the Islamic financial institutions or banks has a positive relationship while price or cost of financing rate has a negative relationship with Islamic home financing adoption. Another dimension, high level of knowledge or awareness in Islamic finance, has marginal influence and positive relationship on Islamic home financing adoption. High religiosity of Muslim community and brand or reputation of the Islamic financial institutions or banks appeared to be the strongest determinant for Islamic home financing adoption, followed by price or cost of financing rate and high level of knowledge or awareness of Islamic finance. The more the respondents believe that Islamic home financing is associated with Muslim religiosity level with good brand or reputation of Islamic banks, is cheaper and with good knowledge in Islamic finance, the more they would adopt Islamic home financing for their next house purchase. However, there was no support for price or cost of financing rate (part 2) which has been hypothesized to have negative relationship with Islamic home financing adoption which warrants further investigation. Last but not least, as religiosity level with brand or reputation of Islamic banks, price or cost of financing rate and knowledge level in Islamic finance are prominent factors in understanding Islamic home financing adoption, customer service, bank location, convenience and advice from friends and relatives will definitely accelerate Islamic home financing adoption. 5.1 Implications of the Study This study is not the end but as a means to continue achieving better understanding of factors influencing Islamic home financing adoption from the perspective of users or customers. It will allow Islamic financial institution to prepare themselves for future product launches and enable consumer to choose better product wisely. First, the influencing factors such as high religiosity of Muslim community and brand or reputation of the Islamic financial institutions or banks would be the most important driver of Islamic home financing adoption and should not be neglected in the development of new Islamic home financing products. Islamic banks should conduct regular brand promotion and brand awareness activities to promote the Islamic home financing products as well as enhancing the perceived value and reputation of the banks it selves. In other words, Islamic banks need to ensure their brand names are strong, well known, highly associated with Islam and come with good reputation. 19