Executive Summary
The aim of the current report was to investigate customers’ willingness toward Islamic banks and their level of awareness of the products and services offered by Islamic banks in Bahrain. For the purpose of this report, 50 questionnaires were distributed to different customers from one Islamic bank and one conventional bank in the Kingdom of Bahrain. Besides, an interview was conducted with employees in public relations of Islamic banks in order to collect more information about customer attitudes toward Islamic banks and their willingness to shift their accounts from conventional to Islamic banks and vice versa. It is pertinent to mention that several scholars have attempted to explore customers’ preferences in selecting the banks (Islamic as well as conventional). Various customers have different perspectives on Islamic banking.
From the research study, the main findings of the report indicate that Islamic banks earn interest by charging fees for their services, trading, profit and loss division and leasing. In addition, all their instructions are clearly communicated to customers. However, it was found out that conventional banks earned their interests through the traditional banking system on services offered to customers. Although 90% of Islamic bank customers were satisfied with the services offered, the same banks were constrained by-products. The findings also indicate that conventional banks face challenges such as changes in the structure of international markets, excess liquidity and stiff competition from Islamic banks.
The report concludes that most clients prefer the conventional to the Islamic banking systems. In addition, Sharia laws are not strictly adhered to in Islamic banking. We strongly recommend the following measures in the current banking systems:
- Self-employed customers should be targeted.
- Social media marketing is urgently required in Islamic banking.
- Islamic Sharia laws should be adhered to by Islamic banks.
- Auto finance, personal finance and credit cards should be promoted by both banks.
Introduction
Islamic finance originated in the 1960s with the first Islamic Bank, MitGhamr Islamic Bank in 1964 in Egypt. However, the first bank to be completely grounded on Sharia codes was created in 1974 (Nomani & Rahnema, 1994). The origin of Islamic banks in Bahrain dates to 1979 with Bahrain Islamic Bank. Several scholars such as Lateh, Ismail and Ariffin (2009) as well as Nawi, Yazid and Mohammed (2013) have documented customers’ preferences for Islamic banks. However, limited research exists concerning Bahrain. The aim of this report was to investigate customers’ attitudes towards Islamic in Bahrain. To achieve this, a total of 50 questionnaires were administered to Islamic and conventional bank customers. This was complemented by interview sessions with bank employees in April 2014.
Literature Review
Several scholars have tried to understand customers’ preferences in selecting the banks (Islamic as well as conventional) to deal with. Different customers have different perspectives about Islamic banking, but the general idea remains the same. Such preferences differ from country to country due to the existing cultural, legal and financial settings. Lateh, Ismail, and Ariffin (2009) reported that fairness in transactions could be the most commonly considered criterion by customers of Islamic banks. Customers of Islamic banks have been least bothered by the maximization of their profits through bank transactions.
There have been several scholars who have studied the principles of Islamic banking. A gist of such studies suggests that there are two basic principles on which the whole Islamic banking is based. Lateh, Ismail and Ariffin (2009) mentioned that the first one referred to the sharing of profits among the partnership firms. In Islamic terms, this principle is called Mudharabah. The second principle has prohibited the account holders to desist from considering interest (Riba) on money borrowed or lent. There have been certain drawbacks of Islamic banking, which can be attributed to the strict guidelines of Shariah. When we look at these drawbacks from Shariah’s point of view, we understand that it is actually for the good of the masses. Shariah law is not meant to harm anyone due to its principles. Islam does not allow earning money from money. The only ways of earning allowed in Islam are through a business such as trading, manufacturing, and service-oriented jobs. There are restrictions to such businesses also. Certain things cannot be dealt with, such as gambling, pork, intoxicating items, etc. If we think optimistically, such guidelines are better for society as a whole because many malpractices can be avoided by such guidelines (Lateh, Ismail & Ariffin 2009).
Bahrain is a country where there has been a dual-banking system; both Islamic and conventional banks operate in the country. Al-Ajmi, Hussain, and Al-Saleh (2009) stated that Islamic banks had certain guidelines to be followed that were bound by Shariah law. As such, they have to work according to the Musharaka and Mudaraba systems. The Islamic banks have been following such principles in their transactions (Al-Ajmi, Hussain & al-Saleh,2009).
It has been observed that Islamic banks face problems in their functions, and the bankers owe these problems to various reasons. Zainol, Shaari, and Ali (2008) reported that such problems included severe global competition, technological advancement, and an increase in well-educated customers. Over the years, the financial sector has witnessed the emergence of several global players that provided investment and loans based on Islamic principles. Due to the advancement in technology and science, conventional banks have gone far ahead in bringing innovative products for their valued customers. Islamic banks, on the other hand, have been relying on the same old banking instruments and products. Moreover, most of the Islamic banks do not have their own research and development departments to devise new products. This has hampered the progress of Islamic banks to a great extent. The new generation of well-educated customers demands better services and products (Zainol, Shaari, & Ali 2008).
Various studies that have been conducted on the customers’ preference towards Islamic banking revealed that even the non-Muslim customers want to deal with Islamic banks. One such study, conducted by Nawi, Yazid, and Mohammed (2013) analyzed that in countries such as Malaysia, non-Muslim customers preferred Islamic banks and their products such as Bai Bithaman Ajil (BBA). Nawi, Yazid, and Mohammed (2013) further suggested that in Malaysia, people preferred Islamic banks due to their products, whereas in Bahrain, people dealt with Islamic banks due to religious reasons. Almost 70 percent of people in Bahrain are aware of the Islamic banking system and have a better understanding of its various features (Nawi, Yazid, & Mohammed, 2013).
Research Design
For the purpose of this report 50 questionnaires were distributed to different students and doctors from the University of Bahrain and on customers of Islamic and conventional banks, particularly from Bahrain Islamic Bank and Bahrain Bank and Kuwait. Also, two interviews were conducted with two different banks. One interview was conducted with Mrs. Mariam Bucheeri an employee in the customer service department in Bahrain Islamic Bank – Muharraq branch- on 21/4/2014 at 11:30 a.m. The second interview was conducted with Mr.Hisham Jassim Sanad the branch head of Bahrain Bank and Kuwait – Muharraq financial mall- on 30/4/2014 at 4:00 p.m. These two interviews were conducted to collect more information about customer attitudes toward Islamic banks and their willingness to shift their accounts from conventional to an Islamic bank and vice versa.
Main findings of the report
Age of the respondent’s
Findings (Figure 1) indicated that the majority of the respondents were under the age of 20 (48%). It was interesting to note that, 26% of the respondents were aged above 50 years. In general, more than 60% of our respondents were below 35 years of age and this was consistent with population statistics of Bahrain where the majority of the population was below 40 years of age.
Gender of the respondents
Students were requested to indicate whether they were male or female. Our analysis showed that most respondents (70%) were female participants compared to 30% males.
Occupation of the respondents
From our result, there were no self-employed respondents in the study. It can be deduced that, in Bahrain, students do not work as they learn. However, the majority of our respondents (62%) were students while only 38% were employed (figure 3).
Customer level of awareness of Islamic bank’s principles
Out of the 50 respondents selected to participate in this study, more than 40% recorded no or don’t know for this question (Figure 4). Of the 60% who answered it, about 27% agreed that they were aware of Islamic banking principles while more than 25% of the respondents were not aware of these principles.
Preference for Islamic banking
Students was asked whether they had an account with Islamic banks as a proxy for their preference of Islamic banking. Data showed that most respondents had a negative preference towards Islamic banking (Figure 5). This was eminent from the high number (46%) of students not holding an Islamic bank account.
Islamic banks level of compliance
Respondents were requested to give their opinion concerning banks compliance with Islamic sheria law. Results confirmed that majority of the respondents (more than 27%) agreed that Islamic banks complied with the existing Islamic sheria law. However, 17% were not sure while another 13% answered no to this statement of compliance. These groups (No and don’t know) might be non Muslim citizens who were studying in Bahrain.
Specific products and services offered by Islamic banks
From figure 7 (appendix 2) below, customers were asked about their dealing with Islamic banks. From the result, they identified four major products: current accounts, savings accounts, auto finance, and personal finance they obtain from these banks. From Islamic banks, 20% of the respondents dealing with Islamic banks were operating savings and current accounts. In general, savings accounts were highly preferred by 60% while personal finance and auto finance current accounts were preferred by 15% of customers of both banks in Bahrain.
Motives behind choosing to deal with Islamic banks
Figure 8 (Appendix 3) presents the findings of respondents’ reasons for dealing with Islamic banks. Out of the students who responded to this question, religious motives, quality of service and the availability of online banking services were considered the most important factors motivating students’ choice of Islamic banks. The high ranking of religious motives is linked to the low-interest rates charged by these banks. However, the least important factors included; the location of the bank, hours of bank’s operation and following Islamic sharia law.
Ranking of religious motives
Table 1: Ranking of religious motives.
Within the religious motives, students were further asked to rank what they considered important in a scale of 1 (highest/most important) to 3 (lowest/least important). The result is presented in the table1 above. Findings indicated that Islamic reputation and image were ranked the highest (5) while Islamic working environment was least important to the respondents and was ranked (6) (table 1). Similar findings were observed by Al-Ajmi et al., (2009) where they observed respondents rating Islamic reputation and image as the most important. In general, both Islamic and conventional banks considered efficiency and quality of service as the most important criteria for consideration by bank management.
Motivation for choosing conventional banks
Clients of conventional banks was asked to rank their motives for choosing between Islamic and conventional banks. Results indicate that the most important motives were the efficiency and better service quality, where a client had an existing account and familiarity with the Islamic banking products and services. However, they rated the bank’s financial strength and meeting customer needs as the least important motives for their selection. These findings contradict Al-Ajmi et al., (2009) conclusion that meeting customer needs were the most important determinant for customers (appendix 1).
Interview findings
An interview session was organized between Islamic and conventional banks employees. Findings showed that Islamic banks earn interest by charging fees for their services, trading, profit and loss division and leasing and. In addition, they give clear instructions to their customers concerning their operations. However, conventional banks followed the traditional banking system earning interest through services rendered. Although 90% of Islamic bank customers were satisfied with services, Islamic banks were constrained by-products. Challenges facing conventional banks included: international markets changes, excess liquidity and strong competition from Islamic banks.
Conclusion
This study estimated customer attitudes towards Islamic and conventional banks in Bahrain. Findings indicate both banks were targeting female students and employees under the age of 20 with limited attention to the self-employed. In addition, there was a high level of awareness about Islamic bank’s principles.
The majority of the respondents preferred conventional to Islamic banks. Findings also indicate that Islamic banks had low levels of compliance with Islamic Sharia laws.
Furthermore, results indicated that religion was the most important motive for selecting Islamic banks.
Recommendations
We highly recommend the following for these banks if they have to increase their visibility and customer base:
- Both banks should target self-employed customers between 35-50 years old.
- Islamic banks need to undertake aggressive social media marketing to sensitize consumers on the benefits of Islamic banking
- Islamic banks need to comply with Islamic Sharia laws
- Both banks should promote auto finance, personal finance and credit card.
References
Al-Ajmi, J., Abo-Hussain, H. & Al-Saleh, N. (2009). Clients of conventional and Islamic banks in Bahrain: How they choose which bank to patronize. International Journal of Social Economics, 36(11), 1086 – 1112.
Lateh, N., Ismail, S. & Ariffin, N.M. (2009).Customers’ perceptions of the objectives, characteristics and selection criteria of Islamic banks in Thailand. GadjahMada International Journal of Business, 11(2), 167-189.
Nawi, F.A.M., Yazid, A.S. & Mohammed, M.O. (2013). A critical literature review for Islamic banks selection criteria in Malaysia. International Business Research, 6(6), 143- 151.
Nomani, F. & Rahnema, A. (1994). Islamic Economic Systems. New Jersey: Zed books limited.
Appendix B: Questionnaire
Customer Attitudes Toward Islamic Banks
Thank you for valuable contribution to our survey that aims at investigating customer’s attitudes toward Islamic banks in Bahrain, completing this survey might take approximately 5-7 minutes of your time.
Kindly keep in mind that any information shared will be treated with utmost confidentiality.
Demographic Information
Name: _________________________________________________ (optional)
Gender: ☐ Male ☐ Female
Nationality: ☐Bahraini ☐Non-Bahraini
Age group: ☐ Under 20 ☐ 20-35 ☐ 35-50 ☐ 50+
Educational Background: ☐Secondary school ☐Bachelor ☐Master ☐PhD
Current occupation: ☐ Student ☐ Employee ☐ Self Employed ☐ Other: _________
Marital status: ☐Single ☐Married ☐Divorced ☐Widow/Widower
- Do you know anything about Islamic banks?
☐ Yes ☐No ☐Don’t know/ Not sure
- Are you aware of the principles that Islamic banks follow?
☐ Yes ☐ No ☐Don’t know/ Not sure
- Are you aware of the products and services offered by Islamic banks?
☐ Yes ☐ NO ☐Don’t know/ Not sure
- How are you related to Islamic banks?
☐Customer ☐Employee ☐Sharia Advisor ☐Manager ☐Not related
- Do you have a personal bank account?
☐ yes ☐ No
- Is your personal bank account in (conventional clients please proceed to question no.9)
☐ Islamic banks ☐ Conventional banks ☐ Both
- What are the motives behind your choice to deal with Islamic banks? ( you can tick more than one)
☐ Religious motives
☐ Location
☐ Hours of operation
☐ Availability of online banking
☐ Quality of customer services
☐ Convenience (ex. availability of parking)
☐ Others: ___________________________________ (please specify)
- Religious motives are listed below. Please rank between (1-3) the motives in terms of what you find to be the most important? (1 is highest, 3 is lowest).
___ Islamic reputation and image
___ Fulfillment of religious obligations
___ Islamic working environment
- Which services/products are you involved with in Islamic banks? (You can tick more than one)
☐ Auto Finance
☐ Personal Finance
☐ saving Account
☐ Current Account
☐ Others: ________________________________ (please specify)
Note: Only conventional banks clients can aswer the following question (10-12)
- What are the motives behind your choice to bank with conventional banks? ( you can tick more than one )
☐ Already having an account
☐ Not familiar with the products and services offered by Islamic banks.
☐ Quality and efficiency of services
☐ Meeting the needs of customers
☐ Financial strength and soundness
☐ Others: ________________________________________________________
- Do you agree that Islamic banks comply with Islamic sharia ?
☐ Yes ☐ No ☐ Don’t know/ Not sure
- Are you willing to shift your account to Islamic banks?
☐ Yes ☐ No ☐Don’t know/ Not sure
- For clients banking with both banking system, please list below your motives.
____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
- What are the disadvantages of your banking system?
____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
- What recommendation can you suggest to enhance the services quality offered by Islamic banks?
____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Additional comments____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Thank you for your participation!
Appendix C: Interview Questions
Islamic bank Questions
- How can we define Islamic banks and how they are operating?
- What distinguishes Islamic banks from other banking system?
- Is there are customers shifting their accounts from conventional banks to Islamic banks? If yes? Why ?
- What are the customer motives toward Islamic bank? Their selection criteria mostly based on what?
- As an employee working in Islamic bank what difficulties do you face with the system?
- What are the difficulties that customer faces when dealing with Islamic banks?
- 7 – are the Bahrain Islamic bank customers satisfied with your services?
- What recommendation can you suggest to enhance the services quality offered by Islamic banks?
Conventional bank interview
- How conventional banks differ from Islamic banks?
- What are the challenges facing conventional bank?
- What recommendation can you suggest to enhance the services quality offered by Islamic banks?
Appendix D: Motives for choosing conventional banks
Table 2: Motives for choosing conventional banks.
Appendix E: Products and services offered by banks in Bahrain
Appendix F: Motives behind choosing to deal with Islamic banks
