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Abstract
The aim of this study is to identify factors that influence the adoption of Islamic retail banking
services among the banking consumers in Malaysia, specifically in the urban and sub urban
regions of Malaysia. Islamic banking has evolved as a new reality in the international financial
scene since 1970s. Since then numerous studies have been undertaken by researchers to
examine issues related to Islamic banking across the globe. However past literature, revealed a
lack of marketing studies on Islamic retail banking services. Roger’s innovation diffusion model
underpins the conceptual development in the paper. This study aims to fill the gap in the
literature by providing a framework to assess the adoption of retail Islamic banking services in
Malaysia. Comparative study on factors influencing consumer adoption behavior on Islamic
banking services between Malaysia’s urban and sub urban regions would provide compelling
insights into this segment of the banking industry that will be useful to both consumers and
industry.
Copyright © 2010 Seethaletchumy Thambiah, Uchenna Cyril Eze, Khong Sin Tan, Robert Jeyakumar
Nathan, and Kim Piew Lai. This is an open access article distributed under the Creative Commons
Attribution License unported 3.0, which permits unrestricted use, distribution, and reproduction in any
medium, provided that original work is properly cited.
Contact author: Seethaletchumy Thambiah, , seethaletchumy@mmu.edu.my
Journal of Electronic Banking Systems 2
and efficient Islamic banking system. It is In the context of Malaysia it has been more
not a coincidence that Islamic banking is than two decades now, ever since Islamic
making its progress in Malaysia but it is the banking was launched in Malaysia, way
Malaysian government’s vision to develop a back in 1983, when Bank Islam Malaysia
progressive and robust Islamic banking Berhad (BIMB) first commenced its
industry, rooted in the Islamic core values operations (BNM, 2005). And it is the
and principles that best serve the needs of aspiration of the Malaysian government to
the nation’s economy. It is the aspiration of have a strong Islamic banking industry
the Malaysian government to have a strong capturing 20 percent of market share of
Islamic banking industry capturing 20 financing and deposits in the Malaysian
percent of the market share of financing financial industry by 2010 (Aziz ZA, 2005).
and deposits in the Malaysian financial However, the market share of Islamic
industry by 2010 (Aziz ZA, 2007). assets, deposits and financing as of year
2008, stood at only 15.4 percent, 14.02
Background of Islamic Banking in percent and 13.96 percent of the industry’s
Malaysia total, despite being in operation for the
While the opportunities for Islamic banking past twenty five years (BNM, 2008).
will continue to grow there is a need to Undoubtedly, it is a growing market but the
develop products and services that are in growth is slow compared to some
line with the changing needs and demands countries like Bahrain and Bangladesh
of customers to remain competitive in the which already have exceeded 20 percent of
business. Generally fiercer level of market share in terms of assets, deposits
competition in the banking sector has and financing.
intensified over the past few years not only
in Malaysia but globally. The process of Moreover, Bahrain and Bangladesh also
globalization and liberalization together practice a dual banking system like
with digitalization has fueled the intensity Malaysia where, Islamic and conventional
of business competition today. Islamic banking co-exist, but these countries have
banking in Malaysia, as one of the most successfully captured substantial market
important players in the service industry is share compared to Malaysia. Bahrain which
faced with stiff competition, not only with entered into Islamic banking system in
the long established conventional banking 1978 (Bahrain Islamic Bank), has emerged
system and the international players but into a leading Global Islamic financial
also within themselves. centre in the Middle East within two
decades of its existence (BMA, 2007).
As competition intensifies and as one of the Today Bahrain has the highest
most important players in the service concentration of Islamic financial
industry today, Islamic banking is no institutions than any other country. There
longer regarded as a business entity are 187 banks operating in Bahrain of
striving to fulfill only the religious which 24 are Islamic banks and it has
obligations of the Muslim community, but successfully captured, market share of 32
more significantly as a business that ought percent in terms of assets, 29 percent in
to be as competitive as conventional terms of financing and 37 percent of
banking. This necessitates Islamic financial deposits, respectively (BMA, 2007).
institutions to really understand the needs
of their customers towards Islamic banking Despite that, in the Asian region, the
services. In Malaysia, customers’ positive growth of Islamic banking in Bangladesh
perception towards Islamic banking is far which entered into Islamic banking system
more crucial mainly due to the fact that in 1983 (Islami Bank of Bangladesh), same
Islamic banks have to compete with the time with Malaysia, is extremely
dominant and long established remarkable (CBA, 2007). As of 2007, the
conventional banks in a dual-banking Islamic banking in Bangladesh has
system, since 1983 (Asyraf, 2007). captured market share of 29 percent, 30
percent and 28.5 percent in terms of
3 Journal of Electronic Banking Systems
Islamic assets, financing and deposits share for Islamic banking assets, financing
respectively (CBA, 2007). and deposits (2003-2008) is illustrated in
Appendix 1. Therefore, it is imperative to
Therefore in the context of Malaysia, conduct continuous research and
although the number of Malaysian banking periodical surveys in this area to clearly
consumers using Islamic banking products understand the changing needs and the
and services are growing, obviously a benefits sought by consumers, which will
majority still have not adopted the system. definitely help the financial institutions to
The system has not fully reached or make plausible and effective marketing
diffused all levels of community like the decisions regarding Islamic banking
matured market of conventional banking. A products.
successful system is one that has been well
exposed and at the same time well Unfortunately the marketing aspects of
accepted and extensively used by the Islamic banking in Malaysia, although
people (Aziz, ZA, 2007). In this regard, the important, received little attention from
ability of the Islamic banking industry to the scholars especially after the year 1999
capture a significant market share that is (Ahmad et al., 2002; Abbas et al., 2003;
20 percent by 2010, in a rapidly evolving Asyraf et al., 2007). Furthermore, previous
and competitive financial environment, is a marketing studies in Malaysia are limited
challenge. in scope and representation, where the
main focus was consumers of urban
Despite that, although Islamic banks have regions and very limited studies were
been able to grow quickly, their growth has represented by consumers from suburban
been constrained by lack of innovation ( and rural regions (Abbas et al., 2003;
Mirakhor, 2000; Asyraf et al., 2007; Bobat, Haque et al., 2007; Asyraf et al., 2007;
2007). Whereas, innovation is the key to Fazlan et al., 2007). Besides that, most of
sustainable and competitive marketing the previous Islamic banking adoption
advantage which, will ensure the future studies in Malaysia were represented by
growth of Islamic financial markets. Muslim consumers (Kader et al., 1995;
According to Bobat (2007), developing new Naser et al., 1999; Ahmad et al., 2002)and
Islamic financial products in compliance only limited studies have included non-
with the Shari’ah is challenging. Therefore, Muslims as respondents (Haque et al.,
Failure to provide the full range and the 2007; Asyraf et al., 2007).
right quality of products as per the need of
the customers may defeat the very purpose Malaysia cannot remain unaware of the
behind Islamic banks’ existence and to stay new competition growing in neighboring
competitive in the industry. Singapore and Thailand. Singapore is an
important economy in the South-East Asian
Thus, developing innovative products and region, where new initiatives are aimed, in
widening the product range calls for developing Islamic asset management.
substantial and continuous research in this Local financial institutions are warned, that
area because understanding customer without further growth and consolidation
needs is the key factor that determines the of this industry there is a possibility that
consumer demand and successful Singapore will position itself to eventually
marketing of a product or service (Mettawa become the lead player in South-East Asia
SA and Almossawi M, 1998; Naser et al., (Bobat, 2007).
1999). Moreover, success in marketing
relies on information about complete and In this environment, for the Malaysian
up-to-date consumer profiles. Furthermore Islamic financial institutions to formulate
Islamic banking in Malaysia is still at its and implement successful marketing
developing stage and there are tremendous strategies is a challenge again. This is
growth opportunities as it is increasingly because the key ingredient here is a clear
gaining prominence in the region and, as it understanding of the behavior, attitudes
has the potential to be the regional hub of and perceptions of their banking
Islamic finance. The growth in market consumers (Bobat, 2007).
Journal of Electronic Banking Systems 4
area of diffusion and adoption extensively research is derived from the theory of
(Rogers, 1999, 2003). Approximately 5,200 Diffusion of Innovation model (Rogers,
diffusion studies had been identified by 2003).
Rogers (2003) while working on the 5th
edition of his text. In general, the adoption Research Variables
process has been defined as the process Islamic banking adoption being the
through which individual adopters pass dependent variable, the independent
from awareness to full acceptance of a new variables include: Consumer Awareness,
innovation (Rogers E.M, 1999; 2003). Relative Advantage, Compatibility,
According to Roger there are two levels to Complexity, Trialability, Observability and
adoption. Initially, innovation must be Uncertainty.
purchased, acquired and adopted by
individuals or organizations. Subsequently, Consumer Awareness
it must be either accepted or rejected by Adoption is the acceptance and continued
the ultimate users in the society or use of a product, service or idea. According
community. The relative newness of these to Rogers (2003), consumers go through a
innovations and the associated uncertainty process of knowledge, persuasion, decision
is what differentiates innovation adoption and confirmation before they are ready to
decisions from other types of decision adopt a product or service. Knowledge
making (Gerard et al., 2003). occurs when an individual or other
decision-making unit is exposed to an
However getting a new idea adopted, even innovation’s existence and gains an
it has obvious advantages, is difficult. Many understanding of how it functions (Rogers,
innovations require a lengthy period of 2003). He has quoted this as the “Pre-
many years, from the time when they contemplation” stage. Consumer
become available, to the time when they awareness have been tested as one of the
are widely adopted. Furthermore the same key variable in numerous studies
innovation may be desirable for one specifically in the area of on-line banking,
situation but undesirable for another internet-banking and self- services
potential adopter, whose situation differs technology adoption (Sathye, 1999;
(Erol et al., 1989; Erol et al., 1990; Gerard Suganthi et al., 1999; Yusof, 1999; Gerad et
et al., 2003). Rogers (2003) identified five al., 2003).
main characteristics of innovations:
Relative advantage, compatibility, However, limited studies have investigated
complexity, observability and trialability as on consumer awareness in the area of
the most important explanation of the rate Islamic banking adoption. Haron (1994), in
of innovation adoption (Yusof, 1999; Sohail his studies stated that about 100 percent of
et al., 2002; Rogers, 2003). Most of the the Muslim population and 75 percent of
variance in the rate of adoption of non-Muslims are aware of the existence of
innovations, from 49 to 87 percent is Islamic banking services in Malaysia and
explained by these attributes (Rogers, out of this only 63 percent understood the
2003). Thus, the diffusion literature difference between Islamic banks and
provides an ideal framework to be applied conventional banks. Whereas, some studies
to the present study which, seeks to extend reported, Muslim respondents, though
the research area in a service innovation aware of fundamental terms in Islam, were
context, the innovation being Islamic almost exclusively unaware of the meaning
banking. The study would determine which of specific Islamic financial terms like
factors according to Rogers’ framework Mudaraba, Musharaka and Ijara (Gerard,
(2003), would fare when applied on a 1997; Kamal et al., 1999).
service innovation, more particularly retail
banking services which conform to Islamic Proposition 1: There is a positive
principles. relationship between
customer awareness
Therefore the dependent and independent and the usage of
variable of primary interest to this
Journal of Electronic Banking Systems 6
aims to explain how the relationship of the modified or rather altered by the
independent and dependent variables are moderating factors.
Consumer Awareness
Relative Advantage +
+
Compatibility
+
Adoption of
Islamic
Complexity - Retail Banking
Services
+
Trialability
+
Observability
-
Uncertainty
CONCLUSION REFERENCES
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