Factors Influencing Consumers’ Financial Transactions in Islamic Banks Compared with Conventional Banks: Empirical Evidence from Selected Middle-East Countries with a Dual Banking System*

Abstract

Despite various evidences that show Islamic banking has gained popularity even by non-Muslim consumers and businesses in many parts of the world, there is still a general misconception that consumer's choice for Islamic banking is only influenced by religious obligations and thus it is just a Muslim-only afffair. Yet, our knowledge of consumer motivations for choosing Islamic versus conventional banking services is modest and the research to date is limited and ambiguous on these key issues. Therefore, this study conducts a two-step empirical analyses and fijirst identifijies the factors influencing customer's decision whether to choose Islamic or conventional banking using Linear Probability Model (LPM) and Tobit estimation method, and as a second step, it investigates the main attributing factors to consumers overall level of satisfaction with the services provided by Islamic banks compared to conventional banks using ordinal-logistic regression model. The study was based on a randomly selected 322 bank customers from Bahrain, Jordan, and UAE. The study confijirms that although religious factors such as Shari'a compliance are important, other non-religious factors including better quality of services and information disclosure are also playing crucial roles for the growing consumers' demand for Islamic banking. Nevertheless; factors such as better rate of return, accessibility to credit, and SMS banking are found to be the main signifijicant determinants of consumers' choice and satisfaction with the services provided by conventional banks. Overall, the recent experience especially after the fijinancial crisis of 2008 demonstrates that Islamic banking system can be part of the solution since it is mainly based on stronger regulatory system.

Just how loyal are Islamic banking customers?

“…However, while the above studies show the importance of worldly factors, conformance to Islamic requirements was found to be the strongest determinant of the choice of an Islamic bank by Nawi et al (2013) and Lee and Ullah (2011) in Malaysia; Metwala and Almossawi (1998) and Abduh et al . (2012) in Indonesia; and Alemu (2012) in Jordan, the UAE and Bahrain.…”

“…Some of the differences among the studies could certainly be caused by the varied research designs employed. As an example, Alemu’s (2012) results may have differed to Al-Tamimi et al ’s (2009) because he did not give the respondents the option to choose, “transmit piety” or “achieve status” as their motivation for choosing an Islamic bank. Other differences could be explained by the differing sampling strategies such as including non-Muslims or conventional banking customers.…”

“…The limited available research indicates that Islamic banking is associated with wealthy, upper-class Muslims (Pepinsky, 2011; Al-Tamimi et al , 2009) which may indicate that price-sensitive customers avoid the high costs of Islamic banking. More directly, Alemu (2012) found, in an international study, that the chief reason for choosing conventional over Islamic banks was, “better rate of return” which indicates that the Muslims that use conventional banks to obtain superior rates while customers of Islamic banks accept inferior rates to obtain other benefits.…”

Customer loyalty to Islamic banks: Evidence from Indonesia

“…PLS system has become a core value that differentiates Islamic banks from conventional (Fianto et al, 2018). Other factors include services and religiosity (Alemu, 2012). Ireland (2018) reports that customers choose Islamic banks if their pricing is the same.…”

The Determinants of Maqasid Shariah Based Performance of Islamic Banks in Indonesia

“…The Dubai Islamic bank is the first Islamic commercial bank and followed by a large number of Islamic banks. Nowadays, there are more than 300 Islamic banks in 75 different countries (Alemu, 2012). Iran, Sudan, and Pakistan have entirely implemented Islamic banking system, while another countries operating in dual banking system, where Islamic banks and conventional banks coexist in a country (Metwally, 1997).…”