1. Customers’ acceptance on financial institutions’ products: Islamic versus conventional
financial institutions
Abstract
This research in its present form is purely focuses on the customers’ acceptance level on
financial institutions’ products between Islamic and conventional financial institutions in
Malaysia. The main purpose of the study is to analysis and discussed about how was the
respond from customer with the products offered by Islamic and conventional financial
institutions. The findings showed that with the growing of Islamic financial institutions, more
customers began to accept the Islamic products. However, there are still certain group of
customers could not accept Islamic products and prefer in conventional products. The findings
also explained that Islamic financial institutions now operate in over 75 countries with assets in
excess of USD 230 billion and definitely in a position of strength. In general, the research
results supported that conventional financial institutions also offer Islamic products to
customers. Among issues covered in this study were usages of Islamic and conventional
products, customers’ perspectives of Islamic and conventional financial institution products,
and factors that influence customer acceptance.
Keywords: Customer acceptance, financial institutions products, Islamic financial institutions,
and conventional financial institutions.
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2. 1.0 Introduction
The Malaysian financial system comprises of a diversified range of institutions to serve the
more varied and complex needs of the domestic economy. The financial system consists of the
Islamic financial institutions and the conventional financial institutions which co-exists and
operates in parallel. A financial institution is an institution that provides financial services for its
clients and act as financial intermediaries. Financial institution is Malaysia has come a long way
since the 19th century. The financial system in Malaysia is regulated by the central bank, Bank
Negara Malaysia (BNM), a regulatory and supervisory body. The principal objective of the Bank
is to promote monetary stability and financial stability conducive to the sustainable growth of
the Malaysian economy. The statutes applicable to both Islamic and conventional financial
institutions are the Financial Institutions Act 1989. The following table provides an overview of
the number of financial institutions under the purview of BNM as at end-February 2012:
Table 1
Total Malaysian-Controlled Foreign-Controlled
Institution Institution
Commercial Banks 25 8 17
Islamic Banks 16 10 6
International Islamic Banks 5 0 5
Investments Banks 15 15 0
Insurers 36 19 17
Takaful Operators (Islamic Insurers) 12 9 3
International Takaful Operators 1 0 1
Reinsurers 7 3 4
Retakaful Operators (Islamic 4 1 3
Reinsurers)
Development Financial Institutions 6 6 0
Sources: Bank Negara Malaysia 2012
Financial institutions have grown in size and significance in a large number of countries
throughout the world. Other countries, such as Malaysia, Indonesia, Bangladesh, Jordan, and
Egypt, operate Islamic financial institutions alongside conventional financial institutions. Global
financial institutions, such as Citibank, have been offering instruments conforming to Islamic
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3. Shariah in several countries. IFI is also an additional facet of the complex cross-border financial
activities taking place in certain offshore financial centers, such as Bahrain and Labuan,
Malaysia. Islamic financial institution has emerged as a competitive and a viable
substitute for the conventional financial institution during the last three decades. It is true for
Muslim world where presently Islamic financial institution strides at two separate fronts. At one
side, efforts are also underway to cover the entire financial systems in accordance to Islamic
laws (Shariah). At the other side, separate Islamic financial institutions are allowed to operate
in parallel to conventional financial institution.
In Malaysia, separate Islamic legislation and regulations exist side by side with those
for the conventional financial institutions. The legal basis for the establishment of Islamic
financial institution was the Islamic Banking Act (IBA), which came into effect on 7 April 1983.
The IBA provides BNM with powers to supervise and regulate Islamic financial institution. The
financial institutions of Islamic are based on Syariah principles (the Islamic principles). The first
Islamic bank established was Bank Islam Malaysia Berhad, which commenced operations on 1
July 1983. On 1 October 1999, a second Islamic bank, namely Bank Mualamat Malaysia
Berhad was established. Apart from Islamic financial institution, conventional financial
institutions also offer Islamic product through the ‘Islamic Banking Scheme.’ In terms of
products, all Islamic financial institution is offering products based on the Islamic principles.
Islamic financial institution formed in the 1970s in contrast to conventional financial
institution. The Islamic financial institution has been in Malaysia since the set up of the first
Islamic bank on 1st March 1983. Ten years later, the Malaysian government launched the
Interest Free Banking Scheme (SPTF), which later renamed Islamic Banking Scheme (SPI).
Islamic financial institutions have an important role to play in the light of Islamic teachings in
order to please Allah (SWT). According to Dr. Mohammed Alwosabi (2010), they revolve
around several well established concepts based on Islamic Sharia’a. They must operate within
the framework of the religion, based on Quran and Sunna. Malaysia opted for the alternative
gradual way of developing and implementing Islamic banking system. Currently, the country is
actively involved in designing new Islamic financial instruments for capital and money market
transactions.
A single Islamic financial institution did not present the whole financial system. Starting
with Islamic financial institution, later on it allowed conventional financial institutions to offer and
participate in Islamic products through their existing staff and branches. Conventional financial
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4. institutions open ‘Islamic windows.’ Conventional began offer products that complied with
Islamic law. As the size of the potential market became clear, conventional financial institutions
responded with the creation of divisions dedicated to Islamic. Citigroup, HSBC, Deutsche Bank,
UBS, and Standard Chartered Bank were types of conventional financial institution with Islamic
windows. With the increasingly important role of Islamic financial institution, conventional
financial institutions became more dominant. In addition, the proven track record of
conventional banks provides a higher degree of certainty than a newly established Islamic bank.
2.0 Objective
- To compare the Islamic and conventional product
- To identify the benefits and limitations of financial institutions product between Islamic
and conventional financial institutions
- To analyze factors that influence customer decision
- To measure customer acceptance on financial institutions product
3.0 Literature Review
The differences between Islamic and conventional financial institutions
Islamic Financial Institutions (IFIs) are running in the same society where conventional financial
institution are operating and perform all those functions which are expected from a financial
institution. IFIs are assisting business world by providing all the services required to run the
economy smoothly, however, the philosophy and operations are different (Hanif, 2011). For
example in term of product both Islamic and conventional banking is provided credit cards to
the customer. Mohd Dali & Hamid (2007) has studied the relationship between demographic
factors and the usage of Islamic credit card as well as conventional credit card demonstrates
their interdependence. Based on the finding, it is stated that there is positive relationship
between usage rate and income. It was due to the fact that most of the card issuers normally
grant a higher credit limit among the higher income group. (Mansor & Che Mat, 2009).
The main underlying difference between conventional and Islamic financial institutions
is that the Islamic financial institution is focusing on Shariah (Islamic law) compliant in doing
business. Shariah as the basis of Islamic financial institution that meets the religious
requirements of Muslims in line with their aqidah is the main factor that distinguishes Islamic
financial institution from conventional financial institution.
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5. Islamic financial institutions prohibit the element of Riba (interest) in business. Riba
means charging predetermined additional amount on a loan extended based on length of credit
period and usually use in conventional financial institution. The elimination of interest in IFI
arises from the fact that Islam does not recognize money as a commodity and thus there
should not be a price for its use. Money is perceived only as a medium of exchange, store of
value and unit of measurement. Islam, instead, encourages business and trade activities that
generate a fair and legitimate profit. For example, instead of charging interest on financing
given out, Islamic banks give financing based on Musharakah and will share any profit and loss.
In conventional financial institution for example in banking institution, the banker-customer
relationship is a debtor-creditor relationship where the bank earns revenue by making a spread
between the interest charged on the borrower of funds and interest paid to the depositors. In
Islamic banking, the banker-customer relationship is not a debtor-creditor relationship but is
based on a different contract that is entered into by the Islamic financial institutions and the
customer (Aziz, 2006).
IFIs also cannot provide finance for an activity which is prohibited by Sharia
irrespective of its profitability and economic viability e.g. business of liquor, pork and
pornography (Hanif, 2011). Under Islamic financial system when financing is provided under
profit and loss sharing although profit can be shared as per agreement between the parties
involved however loss must be shared according to capital contribution/ownership.
Features of the Islamic and conventional financial institution are shown as below:-
Islamic financial institution Conventional financial institution
Based on the principles of Islamic Shariah Based on fully manmade principles
It promotes risk sharing between investor and The investor is assured of a predetermined
entrepreneur rate of interest
Aims at maximizing profit but subject to Aims at maximizing profit without any
Shariah restrictions restriction
Deal with Zakat It does not deal with Zakat
Participate in partnership business Lending money and getting it back with
compounding interest
No provision to charge any extra money from It can charge additional money (penalty and
the defaulters. Only small amount of compounded interest) in case of defaulters
compensation and these proceeds is given to
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6. charity. Rebates are given for early settlement
at the Bank’s discretion.
It gives due important to the public interest. Its Very often it results in the bank’s own interest
ultimate aim to ensure growth with equity. becoming prominent. It makes no effort to
ensure growth with equity
Based on a Shariah to approved underlying For interest-based commercial banks,
transaction borrowing from the money market is relatively
easier
Pay greater attention to developing project Since income from the advances is fixed, it
appraisal and evaluations gives little importance to developing expertise
in project appraisal and evaluations
Emphasis on the viability of the project Emphasis on credit-worthiness of the
customers
The status of Islamic financial institution in The status of a conventional financial
relation to its customers is partners, investors institution, in relation to its customers, is
and trader, buyer and seller creditor and debtors
Can only guarantee deposits for deposit Guarantee all its deposits
account, which is based on the principle of al-
wadiah, thus the depositors are guaranteed
repayment of their funds, however if the
account is based on the mudarabah concept,
customer have to share in a loss position
Islamic financial institution products
Emerge of the Islamic financial institution and other financial institutions are started on
the early 20th century. Banking is the most developed part of the Islamic financial institution.
For example, in Malaysia 1983 the first Islamic bank are launched and the government started
issuing Shariah compatible investment certificates under the 1983 Government Investment Act
(Shabshigh, 2007). Islamic banking is based on the principles of Islamic economics and the
Islamic banks are set up to operate in accordance with the Islamic Shariah principle.
The development of the institution has created several products that following the
Shariah compliance. Based on the principle that established by the Shariah as well as other
jurisprudence or rulings, issued by qualified Muslim scholars has become a common practice
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7. for Islamic Banks to appoint the Shariah Supervisory Board (SSB) or at least the Shariah
Scholars (El Tiby, 2011). According to Tayyebi (2008) supported that the SSB are responsibility
to review and approve financial practices and product for compliance with Islamic principles.
The benefits affect the services and product offered by the institutions. Therefore, the contract
that offered the new product and service could be declare in Shariah court. In consequence,
reducing or minimize Shariah risk, which risk is in terms of agreed in the contract do not
effectively comply with Islamic jurisprudence and not valid under Islamic law. There are many
Islamic banking products introduced in this recent time that can solve the problem of unlawful
elements such as riba, gharar, and gambling. Beside, Islamic bank is structures different from
conventional bank, under Islamic banking because the institution must have a different set of
rules of the Holy Qur'an. These profit-and-loss sharing methods are implying the different
relationships than under interest-based borrowing and lending (Visser, 2009).
There are several common types of Islamic banking products such as al-Wadiah,
which saving or depositors are with guarantee or safe keeping and not receive remuneration for
ventures (Ibrahim, 1997). Al-wadiah is a safe custody contract between the depositor
(customer) and the custodian (bank). In Wadiah, a bank is deemed as a keeper and trustee of
funds. A person deposits funds in the bank and the bank guarantees refund of the entire
amount of the deposit, or any part of the outstanding amount, when the depositor demands it.
The depositor, at the banks discretion, may be rewarded with a ‘hibah’ (gift) as a form of
appreciation for the use of funds by the bank. In this case, the bank compensates depositors
for the time-value of their money (i.e. pays interest) but they used to refer it as a ‘gift’ because it
does not officially guarantee payment of the gift.
Secondly are Mudarabah and this contract of profit sharing where one party in
contributes his entrepreneurial efforts while the other provides capital (Ibrahim, 1997). In
Mudarabah Investment Account the customer provides the capital while the bank manages the
fund. On the other hand, in the Mudarabah project financing, the bank provides the capital for
the customer to manage the business. The customer and the bank will share the profit
according to the ratio agreed before the contract.
Thirdly is Musharakah, also known as joint venture or equity participation (Ibrahim,
1997). Musharakah is normally applied for business partnerships or joint ventures. The profits
made are shared on an agreed ratio, while losses incurred will be divided based on the equity
participation ratio. This concept is distinct with fixed-income investing (i.e. issuance of loans).
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8. Traditionally, this form of transaction has been used for financing fixed assets and working
capital of medium- and long-term duration (Iqbal, June 1997).
Murabahah used to deal with the cost plus or mark-up of product (Ibrahim, 1997). If the
Commodity exchanged for is delivered immediately and sale price comprising cost plus profit
margin is paid in lump sum at a later date. Besides that, in a Murabahah, a financial institution,
instead of lending money, acquires upon request of one of its customers a specified asset for
example the equipment or commodity (Guggisberg & LL.m, 2008).
Bai’ Bithaman Ajil is known as deferred payment sale (Ibrahim, 1997). This contract is
refers to the sale of goods on a deferred payment basis at a price, which includes a profit
margin agreed to by both parties. Customers may be allowed to settle payment by instalment
within a pre-agreed period or on the later date and try to consider lawful in fiqh (jurisprudence).
Fiqh is not a lending transaction but a trading that is not amount that interest rate charges
(Suleiman, 2000 ).
There is another product called Bai'salam or the prepaid purchase (Ibrahim, 1997).
This method is opposite with Murabahah. Generally this contact used to finance agricultural
products. Suleiman (2000) discuss about the transaction of Bai’salam, which the bank gives the
commodity first, and receives the money later. Here the bank pays the money first and receives
the commodity later.
The other product is Qardul Hassan, which mean the benevolent loan or interest free
(Ibrahim, 1997). Qardul Hassan is a loan extended on a goodwill basis, and the debtor is only
required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay
an extra amount beyond the principal amount of the loan (without promising it) as a token of
appreciation to the creditor. In the case that the debtor does not pay an extra amount to the
creditor, this transaction is a true interest-free loan. Some Muslims consider this to be the only
type of loan that does not violate the prohibition on riba, since it is the one type of loan that truly
does not compensate the creditor for the time value of money.
Ijarah Thumma Al Bai’ is variations on a theme of purchase and lease back
transactions (Ibrahim, 1997). There are two contracts involved in this concept. The first contract,
Ijarah contract (leasing/renting) and the second contract, Bai’ contract (purchase) are
undertaken one after the other. For example, in a car financing facility, a customer enters into
the first contract and leases the car from the owner (bank) at an agreed rental over a specified
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9. period. When the lease period expired, the second contract comes into effect, which enables
the customer to purchase the car at an agreed price. In effect, the bank sells the product to the
debtor, at an above market-price profit margin, in return for agreeing to receive the payment
over a period of time; the profit margin on the lease is equivalent to interest earned at a fixed
rate of return. This type of transaction is particularly reminiscent of “contractum trinius”, a
complicated legal trick used by European bankers and merchants during the Middle Ages,
which involved combining three individually legal contracts in order to produce a transaction of
an interest bearing loan (something that the Church made illegal).
In modern business, takaful is one of the ways to reduce the risk of loss due to
misfortunes is through insurance (Ibrahim, 1997). The basic idea behind insurance is the
sharing of risk. The concept of insurance where resources are pooled to help the needy does
not contradict Shariah. Conventional insurance involves the elements of uncertainty (Al-gharar)
in the contract of insurance, gambling (Al-maisir) as the consequences of the presence of
uncertainty and interest (Al-riba) in the investment activities of the conventional insurance
companies which contravene the rules of Shariah. It is generally accepted by Muslim Jurists
that the operation of conventional insurance does not conform to the rules and requirements of
Shariah. Takaful is an alternative form of cover which a Muslim can avail himself against the
risk of loss due to misfortunes. The concept of takaful is not a new concept; in fact it had been
practised by the Muhajrin of Mecca and the Ansar of Medina following the hijra of the Prophet
over 1400 years ago. Takaful is based on the idea that what is uncertain with respect to an
individual may cease to be uncertain with respect to a very large number of similar individuals.
Insurance by combining the risks of many people enables each individual to enjoy the
advantage provided by the law of large numbers.
In keeping with the prohibition of riba, a conventional bond is not permitted. A Sukuk
bond, however, is asset-backed and the returns on it are not fixed, but are linked to the return
on the assets purchased with the proceeds of the issue (Ibrahim, 1997). These asset-based
bonds of medium-term maturity have been issued internationally by sovereign and corporate
entities. Sukuk paper has the advantage of competitive pricing as a risk-mitigation structure. In
2001, the Bahrain Monetary Agency was among the first central banks to issue this paper, in its
case in three- and five-year maturities, with most issues oversubscribed. Qatar issued Qatar
Global Sukuk with a seven-year maturity (the largest issue ever at $700 million). The German
State of Saxony-Anhalt became the first non-Muslim issuer to tap the global Islamic debt
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10. market in 2004, raising some 100 million euro’s via a Sukuk issue in an innovative effort to
appeal to a broader range of investors. More recently, the Islamic Development Bank created
the first program for repeat issues of Sukuk. Widespread Sukuk paper issuance could lay the
groundwork for the emergence of Islamic capital markets. But while the Sukuk market is
developing rapidly, it remains primarily a market where holders keep bonds to maturity with
limited secondary market trading.
In Addition, El Tiby (2011) study that The Islamic Financial Service Board (IFSB)
issued the Adequacy standard (CAS) or the standard for institution offering only Islamic
Services (IFS) that offered the mobilize funds and investment accounts with the shariah
compliant investment and financing instrument. Hanif (2011) supported that these saving
mobilization from savers to entrepreneur. The product that provided by Islamic Financial
Institution can divide into two parts which is deposit and financing and investment. For the
deposit parts, the funds are collected through two concepts; Musharakah and Mudarabah
where reward is variable. The concept is share profit with depositors. Higher weight for profit
sharing is assigned to long-term deposits being available to bank for investing in longer term
projects yielding superior returns and lower weight for short-term deposits which cannot be
invested in long term projects. Suleiman (2000) study the concept of Mudarabah which can be
defined as contract between at least two parties whereby one party, the financier (Sahib al-mal),
entrusts funds to another party, the entrepreneur (Mudarib), to undertake an activity or venture.
The Mudarabah concept has been extended include three parties: the depositors as financiers,
the bank as an intermediary, and the entrepreneur who requires funds. In Musharakah, the
entrepreneur adds some of his own to that supplied by the investors, this can exposing him to
the risk of capital loss. Profits and losses are shared according to pre-fixed proportions, but
these proportions need not coincide with the ratio of financing input. The bank sometimes
participates in the execution of the projects in which it has subscribed, perhaps by providing
managerial expertise.
The Islamic banks rely on four main types of accounts that using on managing the
sources of funds for providing the whole product to customer. First is a current account which is
based on the principle of al-wadiah, which the depositors are guaranteed repayment of their
funds and not receive remuneration for ventures. Secondly is saving accounts also operating
under the al-wadiah, which saving account are earn the depositor income and the Islamic bank
may decide to pay the premium to the holder saving accounts. Next the investment accounts
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11. which operating under the Mudarabah al-mutlaqa principle, in which the mudarib (active partner)
must have absolute freedom in the management of the investment of the subscribed capital.
The last one is Special investment accounts which is also operate under the mudarabah
principle, and usually are directed towards larger investors and institutions. Table 2 shows the
core Islamic principle in financial institution, the relevant explanation and examples of financial
institution products offered.
Table 2: Islamic financial institution products
No Islamic Principle Classification Purpose Financial Institution Products
1 Al-Wadiah Guaranteed For deposit-taking Current deposits, savings deposits
custody products
2 Al-Mudharabah Profit-sharing Investment deposits General and special investment
accounts project financing, sell
and buy back agreements
3 Al-Murabahah Cost-plus For financing facilities Working capital financing, bonds,
commercial papers
4 Bai’ Bithaman Ajil Deferred For house financing Housing loan, negotiable
payment sale instrument of deposit, commercial
property financing, credit card,
umrah financing, project financing
5 Al-Ijarah Leasing For leasing and Leasing of machines, vehicle
vehicle financing financing, financing syndication,
bonds
6 Al-Musyarakah Profit and loss For project financing Project financing, share financing,
sharing unit trust financing, financing
syndication
Sources: International Monetary Fund 2002
Conventional financial institution products
In financial institution, there were many types of products offered by Islamic and
conventional financial institution. There are several principles types of conventional financial
institutions products which is basic account, current account, and saving deposit account. Basic
account can be used for daily usage. For example, pay in wages and daily expenses. Basic
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12. account set up direct debits. However, money deposited may be used in interest bearing
investments. The second one is current account is available at all banking institutions in
Malaysia which can be used for personal or business purposes. As a current account holder,
we are allowed to use cheques as a way to make payments. Different banking institutions have
different requirements for opening a current account. The product features also differ amongst
the banking institutions for example some banking institutions offer interest bearing current
accounts while some do not offer this. Therefore, it is advisable that you seek and compare
which banks offer this before open up a current account (Aziz, 2006). The third one is saving
deposit account which enables us to save or deposit our money into an account and received
high rate of interest than current accounts. In Malaysia, interest earned in our balance is normally
credited to our account every month. The minimum deposit to open a savings account varies from one
banking institution to another and can be as low as RM20 (in the case of basic savings account).
Generally the longer the withdrawal terms the higher the return.
In conventional product, financial institutions also provides bank cards to the citizen in
Malaysia which is debit card, credit card, and prepaid card. For debit card, it’s a payment card
where the transaction amount is deducted directly from the bank account. Debit card is less
interest charged than credit cards. If the cardholder doesn’t have enough money in the bank
account, the cardholder is unable to use the card to make payments. For the prepaid card, the
terms are irregular. Prepaid card charge may be a flat rate or percentage of transaction. For
credit card, it enables its holder to buy goods and services with a credit line given by credit card
issuer and the amount will be settled at a later date. Cardholders are billed on a monthly basis
and would have to bear finance charges (interest) on the outstanding amount if full payment is
not made by the due date. Examples of credit card are Visa and MasterCard. A tiered pricing
structure for credit card was implemented in July 2008 by Bank Negara Malaysia (BNM) with
the objectives to promote prudent financial management and inculcate good financial discipline
amongst credit card users. The tiered pricing structure is based on the following tiers:
Tier 1 Maximum of 15% per annum (those who promptly settle their minimum payment
due for 12 consecutive months)
Tier 2 Maximum of 17% per annum (those who promptly settle their minimum payment
amount due for at least 10 months in a 12-month cycle)
Tier 3 Maximum of 18% per annum
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13. Other than this, conventional financial institutions also offer loan products which are
personal loan, student loan, property loans, hire purchase, and share margin financing. For
property loans or property financing is a facility granted for several purposes which purchase of
residential property from individual vendors and developers. Refinancing residential property
after the initial loan has been fully settled or partially settled, refinance the existing property
loan which is high in interest rate with a new property loan which is low in interest rate. So the
interest cost will be reduced and refinance the existing property loan with high monthly
instalment due to short tenor with a new property loan with low monthly instalment by
lengthening the loan tenor. Insurance is the transfer of the risk of a loss from one entity to
another in exchange for payment. Insurance is a form of risk management used to hedge
against any uncertain loss. Conventional financial institution offered for vehicle, property, health,
life, sickness and unemployment insurance. Premium is paid to insurance company by a pool
of policy holders. Insurance company invests premium and earns income until claim is made.
Islamic products and conventional products:
Islamic financial institution products Conventional financial institution products
Wadiah (Safekeeping) Basic account
Mudarabah (Profit loss sharing) Current account
Musharakah (Joint venture) Saving deposit account
Murabahah (Cost plus) Bank cards
Bai’ Bithaman Ajil (Deferred payment sale) Personal loans
Wakalah (Agency) Flexi loans
Qardul Hassan (Benevolent loan) Student loans
Ijarah Thumma Al Bai’ (Hire purchase) Mortgages
Bai’ Al-Inah (Sell and buy back agreement) Insurance
Hibah (Gift)
Takaful (Islamic insurance)
Sukuk (Islamic bonds)
Perceptions of customers
According to Albrecht (2003), perception is the act of discerning, realizing, and becoming
aware of though the senses. The customer perception is often identified by their level of
satisfaction towards particular products. Customer acceptance is usually measured in terms of
product quality and product features offered by an institution. Nowadays, current marketplace
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14. has become more competitive since consumers of all products and services tend to become
more demanding. As a result, there is a continuous increase in customer expectations and
customers’ successive demands within the improvement of the quality of products
(Parasuraman et. al., 1988).
Islamic finance are the financial institutions, products and services designed to comply
with the central tenets of Sharia or Islamic law is one of the most growing segments of the
global finance industry which more focused on banking (Gait & Worthington, 2007). Islamic
banking is a form of modern banking based on Islamic legal concepts developed in the first
centuries of Islam (Schaik, 2001). The Islamic banking system in Malaysia has evolved as a
competitive component of the overall financial system, complementing the conventional
financial system as a driver of economic growth and development. As competition intensifies in
the banking industries today, Islamic banking is no longer regarded as a banking service
striving to fulfil only the religious obligations of the Muslim community, but more significantly as
an innovation in the banking industry, that ought to be, as competitive as conventional banking.
This necessitates Islamic financial institutions to understand the real needs of their customers
towards Islamic banking services (Thambiah et al., 2011).
The establishment of Islamic banks has grown rigorously for the past four decades.
According to Iqbal & Molyneux (2005), since the Islamic bank was established, the whole world
received it and accepted by both Muslims and non-Muslims. This is because Islamic banks play
their role similar to conventional banks except that they have to conform to Islamic principles
and regulations (Osman et al., 2009). Haron, Ahmad, & Planisek (1994) studies are considered
as the earliest patronage studies on Islamic banking. Using both conventional and Islamic bank
customers, they found that customers who patronized Islamic banks perceived that the three
most important criteria in bank selection were the provision of a fast and efficient service,
bank’s reputation and image, and confidentiality. According to Khattak (2011) research in South
Africa they found out that the corporate customer perceived that quality of service was the most
important factor in choosing product in financial institution. Beside factors such quality of staff,
bank manager’s attitude, and price of service also influenced their choices. Researcher’s study
of Hong Kong corporate customer found out that they prefer big and reputable banks and split
banking to deal with (Chan and Ma’s, 1990). Tyler and Stanley (1999) used orthodox grounded
theory in their study with the objective of identifying key elements of perceived service quality
by large corporations. They found that elements considered important were reliability,
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15. assurance, empathy, responsiveness and pro-activity. Haron et al. (1994) sought to establish
the selection criteria used by Muslim customers in Malaysia when selecting their banks. The
three most important criteria perceived by Muslims in Malaysia were the provision of a fast and
efficient service, the speed of transaction, and friendly bank personnel. In addition, Haron et al.
(1994) study show that 80 per cent of Muslim and 53 percent of non-Muslim respondents
preferred establishing a relationship with Islamic institution if they had a clear understanding of
its operations.
However, according to the research made by Ahmad & Haron (1999) Islamic banking
products seem were not popular among Malaysian corporate customers. About 65 per cent of
the respondents believed that Islamic banks must adopt profit-maximization principle in order to
survive in the competitive business environment. This perception however is contradictory with
the objective of Islamic banks, i.e. combination of moral and profit motives (Ahmad & Haron,
1999). Besides that, in Ahmad & Haron research, about half percent of the respondents
believed that Islamic banking products and services had a well potential to be accepted by
customers. About 75 per cent of the respondents indicated that Islamic banks in Malaysia
however have not done enough marketing in promoting their products and services to
corporate customers.
In 1984, Bank Islam Malaysia introduced the house financing concept named Bai’
Bithaman Ajil (BBA). According to Aris et al (2011), since Bai’ Bithaman Ajil (BBA) introduced,
many views, studies and comments have been made on the concept of the product which is
claimed to be unacceptable by other Muslim countries. Over the years, controversial cases on
BBA house financing have emerged and are increasing in numbers. This posed problems to
the consumers, financiers and also the regulators. To overcome this, Musharakah
Mutanaqisah (MM) house financing concept was introduced by the Islamic financial
institutions (IFI) (Aris et al ,2011).
Ahmed et al. (2010) reported that ease of product significantly influence the customer
acceptance level in case of Islamic and conventional financial institutions. The results showed
that customers prefer Islamic products compared to customers of conventional banks. In a
survey conducted, Omer (1992) found a high level of ignorance among the 300 interviewed
Muslims with regard to what constitutes acceptable Islamic finance principles. He reported that
the higher the religious commitment and the lower the level of general education, the stronger
the preference for Islamic over conventional financial institution products. This factors were
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16. supported in the study of Amin, Isa & Mohd Suradi, in their study show the result that Muslim
customer are more concerned whether the products and services are syariah compliant or
opposite. Once again, this was proved, religion will affect customers accept Islamic products
than conventional.
However, Haron, Ahmad and Planisek (1994) found that the selection criteria of
Muslim customers in Malaysia were largely based on non-religious aspects, such as service
efficiency, transaction speed, and the friendliness of bank personnel. Even with these results,
some 40% of the respondents indicated that religion was a prime reason for using Islamic
financial institution products. They noted that although there was a high level of awareness of
Islamic products, there was a poor understanding of the differences between Islamic and
conventional financial institutions, as well as weak knowledge regarding Islamic products. Thus,
Gerrard and Cunningham (1997) found that there were no difference between Muslims and
non-Muslims on financial institution product selection criteria. Results showed that nearly 25%
of the customer choosing Islamic financial institution products because of religion factors.
Different researchers have set different criteria’s for the measurement of customer perception.
There were many factors that can influence customer acceptance level.
Abdullah & Dusuki (2006) make study on the customers’ perception of Islamic hire-
purchase facility in Malaysia to measure customers’ satisfaction in that type of Islamic bank
product. Islamic hire-purchase mode of financing commonly known as ijarah wa-iqtina’ is a
unique contract which involving a combination of leasing (ijarah) and sale at different stages of
transactions. The main reasons why the ijarah contract has become one of the most popular
financing modes is the fact that few people can afford to buy a house or land on a cash basis.
In Malaysia ijarah wa-iqtina’ is commonly known as al-ijarah thumma al-bai’, which is
abbreviated in the commercial practice as AITAB (El-Din & Abdullah, 2007). Abdullah & Dusuki
(2006) choose AITAB to survey Islamic banks customers’ perception toward its facilities for the
reason that the progress made to date in the study of customers’ perception towards Islamic
banks, more focused research studying specific products offered by Islamic banks remain
embryonic. Moreover, more specific research to study customers’ views on AITAB is almost
non-existent.
In their study, the results indicate that 87.2 percent of the respondents expressed their
satisfaction with AITAB facility offered by various Islamic financial institutions. Since satisfaction
is an important component of the total package of value required by customers, financial
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17. institution can use a segment of satisfied customers in their marketing strategy and promotional
tools to attract new customer. Major corporate customers somehow viewed that Islamic banks
have not done enough in educating their customers and promoting product. This was
supported of an evident where 49% respondents agreed that Islamic banks had not done
enough in marketing their product. It is also lack of Islamic product varieties, lack of available
credit with favourable term, lack of investment opportunities, insufficient of branches and lack of
financial counselling (Marimuthu et al., 2010). However in Abdullah & Dusuki finding, their
respondents have indicated their awareness and knowledge about AITAB from various sources
information such as advertisements, banks’ prospectus, and conferences and seminars.
Besides direct effort by banks ‘mouth-to-mouth’ communication is undoubtedly among the
strongest communication tool in forming expectation and influencing subsequent purchasing
behaviour. This substantiated by the fact that 30 percent of the customers have been
influenced to use AITAB facility based on recommendation made by friends and dealers. This
fact was supported by Marimuthu et al., (2010) which indicate that friend and relatives are the
important criteria which will deliver word-of-mouth in the formation of attitudes in a service
purchase decision making context. In addition, 79 percent of Abdullah & Dusuki (2006)
respondents agree AITAB is in accordance with syariah. The results indicate high responds
which reflects the positive perceptions amongst the customer towards AITAB. It implies that
customers have a high degree of confidence in the banks’ current practices especially with
respect of offering products that are fully syariah complaint.
4.0 Discussion and Findings
Benefits and limitations of Islamic and conventional financial institutions product
Malaysia is one of the countries that practiced dual financial institution system offered by banks
namely Islamic banks and conventional banks. According to Nurhidayah (2009), the banking
system in Malaysia is regulated by the Central Banks; Bank Negara Malaysia, a regulatory and
supervisory body. The statutes applicable to both Islamic and conventional banks and financial
institutions are the Banking and Financial Institution Act 1989 (Act 372) (BAFIA) and the Islamic
Banking Act 1983 (Act 276) (IBA). The financial institutions act as an intermediary for the
savers called the surplus units and the borrowers called the deficit units (Institute Bank-Bank
Malaysia, 2010). In 1983, the Islamic banking was first introduced in Malaysia. More than 50%
of the population in Malaysia is made up of Muslim, Islamic banking institutions in Malaysia
have introduced similar facilities offered by their conventional counterparts that are based on
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18. selected Shariah concepts. Muhammad and Abdullah said that the core of Islamic financial
products is the Shariah compliance. Generally, the Islamic banking product was formed by
using the principle of muamalat such as Murabahah, istis’na, ai-samam, al-ijrah, Mudarabah,
Musharakah, Wakalah, al-kafalah and so on. There are currently more than 50 products in the
case of Islamic in Malaysia (Zakaria, 2009). The products must be islamically acceptable and
economically viable in all aspects. While in conventional banking sector, Malaysia has nine
major domestics’ banks and 13 foreign banks. There are four stands out as market leaders
which are Malayan Banking, CIMB, Public Bank and RHB Bank that have together captured a
70% market share in the conventional market. According to Institute bank-bank Malaysia
(2010), there are three main types of product that they have in conventional financial institution
that are liquidity products, wealthy management products and loan products. Under the three
main types of product there are many more products. As we know, both Islamic and
conventional financial institution gives benefit to the user.
One of the benefit using Islamic financial institutions products is non-interest.
Mohammad and Ahmad said that “elimination of interest is the basic requirements of an Islamic
order”. As we know, Riba or interest is prohibited under the Shariah. Riba or interest can be
defined as ‘any increase or profit on a loan which has matures, in return for an extension of the
maturity date, in case the borrower is unable to pay, and any increase or profit on the loan at
the inception of the loan agreement. Both forms of usury or Riba are prohibited under the
Sharia’ (The Islamic Fiqh Academy). This prohibition is strict and absolute. The Holy Qur’an in
verse 278 of Surah Al-Baqarah states: “O ye who believe! Fear Allah and give up what remains
of your demand for riba, if ye are indeed believer” and verse 2:279 says “If you do it not, take
notice of war from Allah and His Messenger, but if ye turn back, ye shall have your capital
sums. Deal not unjustly and you shall not be dealt with unjustly. Non interest can give benefit
to believer of Allah.
The Islamic banks need to focus on the debt-financing and services such as fees,
guarantees and commissions to maintain degree of liquidity and low risk. The product called
debt financing which are Bai-Bithamin Ajil, Murabahah and Ijarah gives major contribution to
the growth of Islamic banking financing. So, using debt-financing activities gives benefit to the
Islamic banks to growth their banking financing in order to increase bank’s profit. Another
benefit is cost effective. Financial institution have offered internet banking services to perform
their banking and payment transaction. Customers can made a payment by using internet
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19. banking services for both Islamic and conventional financial institution. Internet banking is offer
users to ease of undertaking transactions from virtually anywhere because of the providing
services by can access 24 hours a day. By having internet banking services, the payment to
those products can be smooth and can save user’s cost.
The objective of conventional financial institution is to develop of low risk products.
According to Institute Bank-Bank Malaysia, wealth management products help customers with
different level of risk appetite to plan for their financial securities. By purchasing wealth
management products, customers would gain benefits. The benefits that customer gains are
able to minimize risk in life as they themselves and their wealth are well protected, able to
minimize returns by creating an efficient investment portfolio and have an efficient wealth
transfer tool via estate planning. Other than that, there is no restriction policy or discriminatory
practice adopted by Islamic banks and local conventional banks which operate through their
Islamic windows has made Islamic products and services accessible to non-Muslims. This
success is evident by the rapid expansion of Islamic financial institutions and its acceptability
by both Muslims and non-Muslims and the retail and corporate sectors (Zaharaton, 2004).
However, both financial institutions are still having limitations. One of the limitations of
Islamic financing institution product is the BAFIA did not allow the bank to involve with none
banking activities, such as insurance, stock broking and others. The bank can only form
subsidiaries if it wants to play actively in these non banking activities. But this effort may
increase the cost of operation rather than one bank carried out the operation in one roof
(Zakaria, 2009). Islamic banking can reduce costs of operation and lower marked up charged
to users of Islamic banking products and services but they have to compete in banking industry
by try to achieve the status economy of scale. The Islamic financial institution has to be more
aggressive. Another limitation is the lack of accuracy in the application of the Shariah principle
to Islamic banking. For Islamic countries to operate, in a practical manner, the application of
Shariah principles to the accounting and operation of Islamic banks is important. But, the
Shariah does not directly refer to banking or its accounting, but to board issues relating to the
prohibition of the paying and receiving of Riba, transactions relating to pork, gambling, and
speculation and so on.
Because of the introducing the Islamic financial institutions, conventional financial
institution have competitive in order to promote their product and services. It may become one
of the limitations to conventional financial institutions. This is because, not only Muslim but
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20. there are many non-Muslim prefer using Islamic financial institutions. Other than that, there are
still many people did not understand and did not able to differentiate the Islamic banking and
conventional banking. According to economic transformation programme, financial institutions
still have low levels of financial literacy. The level of personal financial literacy nowadays is low
overall. With growing consumerism as well as changing customer expectations, there is a need
to reinforce greater financial literacy to help Rakyat to better manage their personal finances in
line with our move to high income economy. Proper consumer education is needed if new
growth engines such as private, pensions, wealth management and asset management, with
their more complex and complicated products, are to take off.
Customer acceptance on financial institution products between Islamic and conventional
In order to determine the acceptance level, the studies analyze the reasons that determine
customers’ choice towards Islamic and conventional products. The reasons were derived from
the literatures review. Factors that influence customers’ acceptance and selection are directly
related to the factors determining consumers’ choice. The researchers identified various factors
such as the quality of financial institution products and services, religious, existence of
branches, friendliness, customers’ relation, availability of credit, recommendation, location,
speed of processing, uncertainty of return and risk involved, customers’ awareness, and
competitive.
Due to the customer perspectives, we know that customer accept Islamic products
over conventional products. Metawa and Almossawi (1998) investigated the customer
acceptance level of financial institutions products by collecting data from 300 customers. They
aimed to find out the satisfaction and acceptance level among customers of Islamic and
conventional financial institutions by considering demographic data. The findings showed that
the most customers are highly satisfied with the products of Islamic financial institutions. BNM
had gradually implemented measures to ensure the growth in Islamic banking yet the
acceptance of the public toward the Islamic financial institutions is far below the target set by
the BNM. According to a Bank Negara Malaysia (BNM) report on March 2012, total assets in
the Islamic banking sector grew 23.8 to RM434.6 billion. This is evidence that Malaysian
customer now started accepting the Islamic product offered by Islamic financial institution.
Conventional products considered very success. Approximately 44% of customers
accept conventional products (CGAP, 2008). Yet, conventional products do not fulfil the needs
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21. of many Muslim customers. Just as there are mainstream customers who demand Islamic
financial products. Indeed, Sharia compliance in some societies may be less a religious
principle than a cultural one and even the less religiously observant prefer Islamic products.
More than 60% of respondents claim a preference for Islamic products over conventional
products (CGAP, 2008). In addition, BNM report indicated that 50% of the Malaysian customer
considers interest prohibited and would prefer to bank with Islamic financial institutions (CGAP,
2008).
Even though the statistic show us the acceptance of Islamic product but still most
Malaysian people still doubting about the features of Islamic product. They had given too much
trust on conventional product. So, Islamic products are still not fully accepted by customers.
Most of the studies made by researchers conclude that the customer acceptance on Islamic
product is still not satisfying. Researchers mention that Islamic financial institution products will
not be attractive to the market unless and until its costs are lower than those of the products of
the conventional financial institution. They also suggested banker develop professionalism and
competency to maintain profitable relations with customers. According to Al Rajhi Bank
Malaysia director of operations Selamat Sirat, a major headwind faced by Islamic banking
players compared to their conventional counterparts is the public’s perception of Islamic
finance products. Despite the various promotions and write-ups, people are still not well-
educated, not well-informed about Islamic banking. One good example is people are still
complaining that Islamic banking is more expensive than conventional.
From discussion, we can conclude that Islamic products are preferable and customer
can accept with it. Once conventional financial institution can also offer Islamic products, both
will help in boosting Malaysian economy. Gait & Worthington (2007) agree with their findings
which states that customers do not understand about the Islamic banking products such as
Muderaba, Mushaaraka, Murabaha etc. Meaning to says, Islamic products are not totally well
known by people. In contrast, everyone knew well with products of conventional financial
institutions because conventional have a high degree of trustiness’. So, there are still certain
group of people prefer and accept conventional products. Therefore, Islamic financial
institutions should doing more promotion and explain in more details for customer about their
features and ease of use of products which is not only applicable for Muslim; it is also
applicable for Non-Muslim.
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22. 5.0 Conclusion
In the conclusion, our research focuses on the customer acceptance of financial institution
products in Malaysia. Customer is begun to accept the Islamic products since the position of
Islamic financial institution become strength. This is supported with the research where Islamic
financial institution product grew from RM23.8Billion to RM434.6Billion. So, Islamic financial
institution is increasing important. From our study, it has been discussed what types of product
have been offered by both Islamic and conventional financial institution which conventional also
provide shariah compliant product. Customer acceptance in Islamic financial institution shows a
good result in Malaysia especially in Muslim society. This study highlights that the most
important factor perceived by customers in selecting their banks is the religious factor. This
concludes that Islamic financial institution customers are mostly from Muslim and conventional
financial institution are non-Muslim. Generally Islamic financial institution product has proved
vital potential as a competitive and better substituted against conventional financial institution
product in many countries of the world.
To ensure long-term growth and prosperity of the Islamic finance sector, overcoming
widespread ignorance of Islamic financial concepts seems crucial. Educating the market along
with the selection of more market friendly packaging of Islamic products would assist in the
competitiveness of Islamic financial products relative to conventional products. Facilitating the
understanding of Islamic products being offered and making the comparability with similar
conventional products easier will help consumers make better choices. This has the added
benefit of insuring that suppliers of financial products and services, whether Islamic or
conventional, provide comparative value to consumers. This seems essential in an
increasingly competitive financial services sector. From this report it can help to enhance
product and service quality for Islamic financial institution and also conventional financial
institution. Other than that, customers can make better finance decisions after studying Islamic
and conventional. As overall it can make growth of our country’s economy in contributing the
prosperity of household.
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