The word ‘bank’ characteristically refers to a financial intermediary that providing deposit facility and whose primary activity is to act as a payment agent for customers and borrow and lend money. (Wikipedia, 2010)
Islamic banking is a system of banking or banking activity that performs the same functions as the conventional system but is constrained by the rules and principles (sharia). Sharia prohibits transaction of payment or acceptance of interest fees for the lending and accepting of money severally, commonly called Riba for specific terms, such as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden). Riba is an Arabic word for the predetermined return on the use of money or excessive interest. Although these principles were used as the basis prosperous economy in the early era, it is only in the late 20th century, an Islamic bank set up Muslim communities to apply these principles within the private or semi-private commercial institutions. (Wikipedia, 2010)
In 1970, Islamic banking was almost unknown and considered to be fond dream. But in the twenty-first century, Islamic banking has become a substantial and fastest growing industry. The size of the industry, which was equivalent to several hundred thousand dollars in 1975, had reached several billions of dollars by 2004. On the Shariah-compliant, it is estimated between the value of total global US$200 billion and US$500 billion and is growing at an average annual rate of 10-15 percent. It is estimated that Islamic banks will control about Muslims’ savings from the 40-50 percent by 2009/2010, for the population of Muslims in the world in 2006 has been calculated at more than 1.2 billion. (Zaher and Hassan, 2001)
According to Wilson (1995) states that Islamic banking is no longer considered as a commercial entity only to the Muslim community’s religious obligations, but more importantly, as a business it is inevitable in the care needs for winning over customers at the same time as reserving the old ones. (Wilson, 1995; Dusuki and Abdullah, 2007)
By the principle, Islamic banking is also different from the conventional banking system. Riba has the same meaning as payment of interest. It is strictly forbid in Islamic banking. A few verses from the Qur’an, Allah is no doubt emphasized that addicting in Riba is like the invitation of the war against Allah and His Prophet Muhammad (pbuh). He is also clearly distinction between Riba and profit and also determined not to be confused between this indoctrination. Furthermore, Qur’an also clearly determines that to make a profit must be earned in exchange from goods and services, but not from the exchange of money itself. Islamic banks have emerged from the fundamental need to achieve this basic right of Muslims to comply with Islamic principles of banking services. (Khan et al, 2008)
The Bank Islam Malaysia Berhad (Bank Islam, or BIMB) was started back in July 1, 1983 with the establishment of the first Islamic banking in Malaysia. BIMB was set up primarily to aid the financial needs of the country’s Muslims and to further stretch its services and products to the whole population at large. BIMB also was established after enacting of the Islamic Banking Act (IBA) in 1983, the IBA allowed the establishment of the first Islamic Bank in Malaysia. BIMB with a paid in capital of RM 79.9 million and an initial authorised capital of RM 500 million is carrying out its activities in an interest free basis. The bank was gradually increased its authorized and paid in capital to RM 2 billion and RM 563 million severally.
In 1993, commercial banks, merchant banks and finance companies were allowed to offer Islamic banking products and services under the Islamic Banking Scheme (IBS). There are required to establish Syariah advisory committees or consultants to advise them and to ensure that the operations and activities of the bank comply with Shariah principles. (Wikipedia, 2010)
The basic concepts in Islamic banking, there are some various Syariah principles used in the diverse range of Islamic banking products. The principles concerned are:
Al- Wadiah principle (savings)
In Al-Wadiah (safekeeping), a bank is considered as a keeper and trustee of funds. This is use under the savings and current accounts. An individual to make a deposit funds in the bank and the bank guarantees refund of the whole amount of deposit, or any part of the outstanding amount, when the depositor requires for it. The depositor, at the bank’s decided, may be encouraged and rewarded with ‘hibah’ (gift) as a form of gratitude for the use of funds by the bank. It is similar to Demand Deposit in an interest-based conventional bank. There are two type of Wadiah, which are Wadiah yad amanah (safe custody-trust) and Wadiah yad dhamanah (guaranteed custody).
Al- Mudharabah principle (profit loss sharing)
Mudharabah is an arrangement or agreement between a capital provider and an entrepreneur, accordingly the entrepreneur can transfer funds for its business activity. Any profits earn will be shared between the capital provider and the entrepreneur whereby to an agreed ratio while losses are endure solely by the capital provider.
Al- Musharakah principle (joint venture)
This concept is normally utilized for business partnerships or joint ventures. The profits earn are shared on an agreed ratio between the partner. While the losses occurred it will be divided based on the equity participation ratio.
Al- Murabahah principle (cost plus)
This concept refers to the selling of goods at a price, which includes a profit margin agreed by both parties. The purchase and selling price, other costs and the profit margin must be clearly stated at the time of the sale agreement.
Al- Bai’ Bithanman Ajil principle (deferred payment sale)
Bai’ Bithanman Ajil (BBA) is refers to the selling of goods on a put off payment basis at a price, which includes a profit margin agreed to by both parties. It concept commonly is used for financing the acquisition of assets. Besides that, interest payment can be averted as the customer is paying the selling price which is not similar interest charged on a loan. The payment usually is based on an instalment basis payable over longer periods compared to murabahah facility repayment.
Ljarah Thumma Al Bai’ principle (hire purchase)
Al Ljarah Thumma Al Bai (AITAB) is lease agreement incorporating sale of leased assets at the end of the lease tenure. In this concept, there are involved two contracts. The first contract is "Ljarah contract (leasing/renting)" and the second is "Bai’ contract (sale/purchase)".
Qard al Hasan principle (benevolent loan/ interest-free loan)
In this, a loan is prolonged on a goodwill basis and the borrower is only needed to repay the amount borrowed. However, the borrower may at his or her discretion, pay an extra amount (without promising it) as a token of appreciation.
Hibah principle (gift)
Hibah is a token given voluntarily. The voluntarily payment of returns is pay by the bank to their saving accountholders. This also is a way for Islamic bank to be competitive with the conventional bank. In addition, the rate of hibah is cannot be declared up-front as otherwise this would be similar to riba or interest. (Wikipedia, 2010)
This study has been carried out to determine in customers’ perception towards Islamic banking. So that, there are some variable will affect customers’ perceptions towards Islamic banking in this main purpose of study. Based on today research, most study are referring to quality and services, staff’s attitude, interest rate, professional advice, convenience, internet banking, and bank’s reputation and satisfaction level between Muslim’s and non-Muslim’s customer.
This purpose of research wills explores and evaluates on some topics which are important information about the Islamic banking system. These kinds of knowledge are becomes an important role to helping customers to clear about the Islamic bank and their perception towards Islamic bank.
Haque, Osman, and Islamil (2009) studied in factor influence selection of Islamic banking found that most of the respondents were not familiar with Islamic banking products and services. Therefore, the first problem statement is some of the customers still can’t unable to differentiate the products and services that provided by Islamic banking. Nowadays, those customers are also confusing the functions that provided between Islamic banking system and conventional banking system.
The second problem statement which is nowadays there are some customers think about that the Islamic banking is just provide the products and services to Muslim and not to non-Muslim. So that, in this research is to make rectify for those customers mindset towards Islamic banking because those customers involve the concept of error.
Therefore, the research question which is "What are the factors that will affect customers’ perceptions towards Islamic banking?"
The research objective of this study is to find out the variable that will affect customers’ satisfaction level towards Islamic banking.
To investigate the relationship between quality of services and the satisfaction level of Muslim’s or non-Muslim’s customer.
To explore the relationship between staff’s attitude and the satisfaction level of Muslim’s or non-Muslim’s customer.
To examine the relationship between interest rate and the satisfaction level of Muslim’s or non-Muslim’s customer.
To determine the relationship between professional advice and the satisfaction level of Muslim’s or non-Muslim’s customer.
To investigate the relationship between convenience and the satisfaction level of Muslim’s or non-Muslim’s customer.
To explore the relationship between internet banking and satisfaction level of Muslim’s or non-Muslim’s customer.
To examine the relationship between bank’s reputation and satisfaction level of Muslim’s or non-Muslim’s customer.
This research can provide the variables which is affecting the relationship between satisfaction level of Muslim’s and non-Muslim’s customer towards Islamic banking. Through this study, customer will have a clearly picture about Islamic banking system and their products and services. Such as, the basic concepts in lslamic banking, there are some various syariah principles used in the diverse range of Islamic banking is clearly presented in this research. In addition, this research also will provide some insight of customers’ perceptions that arouse positive attitude towards Islamic banking. It will influence the customer to use the products and services or not.
Besides that, this study will bring out a lot of useful information to the Islamic banking which are the customers’ preferences on the products and services that provided by them. Therefore, the Islamic banking can more understand their customer’s needed.
This scope of study will focus on perception of all the Muslim or non-Muslim residents who are state in Malacca. By conducting this research, those who are under 18 years old are not conducted in this research because they are still unable to apply the products or services by the bank. This research will distribute minimum 200 pieces of surveys forms around Bukit Beruang, Melaka Raya and Ayer Keroh areas. In this research, is to investigate what are the variables that will affect the customers’ satisfaction level towards Islamic banking in market.
The first limitation of this study is the limitation of time. Within the short period of four months, I don’t really have a proper time to do my research. As this research are required to find lots of journals, articles and other relevant information, etc. Due to the time of customize, I was unable to perform a better quality for my research.
The second limitation is some of the respondents who are lack of knowledge about Islamic banking or they have limited knowledge of banking system, so they will simplified answered the questions. In addition, some respondents who are rushing time and no read through the questions and make an answered.
There will be five chapters in this research:
Chapter one is covering the introduction of the research topic and the research of the background study. A problem statement is clearly states the research problem that need to be solved and the research objective are writing about the purpose of this research. Besides that, signification of study, scope of study, limitation of study and the organization of research project also included in this chapter.
Chapter two is writing about literature review. Literature review also can be defined as a summary or overview of journals that related to this research topic "customer’s perception towards Islamic banking". Those journals are will bring out clearly information and knowledge about the Islamic banking.
Chapter three is about the research methodology. It will present theoretical framework, hypothesis development, research design and sampling and data collection. The model specification and estimation procedures will be prepare in theoretical framework. In the research design, that questionnaire have been created for survey those target prospects. Then for the sampling and data collection, it is the definition of the dependent and independent variables and sources of data.
Chapter four is the data analysis for this research project. The data analysis is a process of collection, research, transformation, modelling and prominent objective data, and useful information to show the result to support the decision-making. Moreover, "Statistical Package of Social Science (SPSS)" Software Version 16 will be used in this chapter to calculate and analyse the data, which are frequency, reliability, coefficients, and T-test method.
Chapter five have involved the discussion, limitation, recommendation for future study, social contribution, and the overall conclusion of this research study.
In this chapter two is about literature review. I will review other journals that relevant to this research topic. In the 2.2, those journals are investigating the demographic affect the consumers’ satisfaction level. In the 2.3, those journals are investigating the quality and services. In the 2.4, those journals are discussing staff’s attitude. In the 2.5, those journals are indicating interest rate. In the 2.6, those journals are investigating professional advice. In the 2.7, those journals are discussing convenience. In the 2.8, those journals are indicating internet banking. In the 2.9, those journals are discussing bank’s reputation.
Demographic variables which are gender, age, household income, educational level, and occupation are considered to be important role in customers’ adoption behaviour in banking. (Wan, Luk, & Chow, 2005)
According to Haque, Osman, and Ismail (2009), religion and knowledge are playing an important role to select a bank. Researcher found that most of the customer lack of knowledge about the Islamic banking products like Muderaba, Murabahah, Wadiah etc., but they will buy these products for the reason of religion.
Metawa and Almossawi (1998) found the religion was the primary factor affect customers’ perception in the selection of Islamic banking system and not the return on their investment. Most of the customers were recognising from the fundamental products and services of Islamic banks but they dun have the knowledge about complex Islamic financial system.
Naser et al., (1999) do a survey showed that most of the customers just have a little knowledge about the specific products like Mudarabah and Murabahah. But most of the customers do not use these products before.
Lewis and Booms, (1983); Lehtinen and Lehtinen, (1982); Gronroos, (1984); Parasuraman et al., (1985, 1988, 1994) stated service quality is the outcome of the comparison customers make between the services what they expect (expectation) and what they actually receive (perception). Cronin and Taylor, (1992) said that service quality is an important factor of customer satisfaction.
Parasuraman et al. (1988) used the SERVQUAL method to measuring the service quality of a firm and representing five dimensions: reliability, responsiveness, tangibles, assurance, and empathy.
According to Othman and Owen (2001a), the SERVQUAL was affords technology techniques for measuring and managing service quality. So it has proven to be the most popular tools for measuring service quality. Compared to other service industries, Islamic banking industry operate under different principles and cultures. Therefore an extra dimension must be added to the SERVQUAL method. The developed an instrument called CARTER. It is to measure service quality in Islamic banking. Besides that, to the existing five dimensions in SERVQUAL; CARTER combines with an extra dimension which is "Compliance with Islamic Law". This five dimensions which are run-on Islamic law and principles, no interest neither paid nor taken on savings and loans, provision of Islamic products and services, provision of free interest loans and provision of profit- sharing products.
Kuwait Finance House (KFH), Othman and Owen (2001b) used this model to measure and managing the important of service quality in the Islamic banking industry. They found that quality, satisfaction and service encounter have a positive link. The finding certified the legality of this model for measuring quality of services in Islamic banks. Furthermore, all of CARTER’s six dimensions were rated highly by KFH customers.
CARTER’s six dimensions were conceptualised as a proposed framework for measuring quality of services in Islamic banks.
Table 1: CARTER’s six dimensions as follows:
Means the ability to comply with Islamic Law and operate under the principles of Islamic banking and economy.
Means the knowledge and courtesy of employees and their ability to convery trust and confidence. It also includes verbal and written communication between bank staff and customers.
Means the ability to perform the promised service, dependability and accuracy.
Means the appearance of physical facilities, equipment, personnel, and communication materials.
Means caring, individualised attention which the Islamic bank provides for its customers.
Means the willingness to help customers and provide prompt service.
Sorce: Othman and Owen (2001a)
Lorienc (2003) showed that most of the customers make a transaction were likely used the face-to-face interaction with the tellers or bank’s staff. Their research’s result found that 87 percent of customers were used to visit cashier, 83 percent were visit ATM, and 3 percent were uses internet banking. The suggested from researcher was the banks must have to keep their management staff highly trained and professional if the banks want to have best competition with their opponent. It’s because they have to attract and satisfy their customer with direct interaction.
Haque, Osman, and Ismail (2009) state that bank’s name and reputation are strongly affect customer selecting a bank. They investigate that reputation and image factor are demonstrated as one of the important criteria in the banking selection decision.
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