FACTORS INFLUENCING THE ISLAMIC BANKING AND CONVENTIONAL BANKING USERS. AN ONLINE STUDY.

Transcription

1 FACTORS INFLUENCING THE ISLAMIC BANKING AND CONVENTIONAL BANKING USERS. AN ONLINE STUDY. Nuradli Ridzwan Shah Mohd Dali, Faculty of Economy & Muamalat, Islamic University College of Malaysia, Negeri Sembilan, Malaysia Aznam Mohd Zahar, College of Business and Accounting, Universiti Tenaga Nasional, Pahang, Malaysia ABSTRACT Since the theoretical validity and viability of Islamic Banking were established over a decade ago, private banking and finance operations on non interest basis have grown remarkably. Islamic banking differs from conventional scheme in several important ways. These include the prohibition of transactions based on a fixed or predetermined rate of interest, and the requirement that banks operations be carried out according Syariah requirements through the use of certain financial instruments. At the same time, Islamic banking has been discovered by Western banks as a mechanism to gain access to the large pool of Muslims funds. However, the concepts of Islamic Banking remain uncertain in the minds of majority of those who use banking facilities. It is often thought as a new concept, although it has been around for quite some time. Based on the pre-judgment, most of them still prefer conventional scheme rather than Islamic Banking facilities. Therefore, by having this research on Islamic Banking facilities, hopefully it would broaden the minds of many who are still uncertain about it. 1.1 Introduction Financial system consists of a set of markets, individuals and organizations that trade in those markets and the supervisory bodies responsible for their regulation. The end users of the system are people and firms whose desire is to lend and to borrow. The financial system encompasses the instruments, institutions, markets and rules governing the conduct of trade that expedite the routing of funds from buyers to sellers and from savers to lenders. The importance of financial system increases as the state of an economic development increases. Thus, finance becomes more important and the financial sector becomes larger as the economy becomes wealthier and more complex. The financial sector produces services that increases the efficiency of trade, facilitate saving and accumulation of wealth, and minimize risk. It is among the most dynamic and innovative sector in the economy. As the economy becomes wealthier and more complex, the need for new and different kinds of financial services increases. Among the functions of a financial system: 1. Channel funds from lenders to borrowers 2. Creates liquidity and money 3. Provides a payment mechanism 4. Provides financial services like insurance and pensions 5. Offers portfolio adjustment facilities Generally, the components of a financial system can be basically divided into three categories. They are the financial intermediary, the financial market and the financial instruments. Financial intermediary is an organization which borrows funds from lenders and lends them to borrowers on terms which are better for both parties than if they dealt directly with each other. Financial 1

2 intermediary mostly consist of commercial banks, merchant banks, saving banks, discount houses, nonbanking insurance company, brokerage houses and pension funds. Financial market is an organizational framework within financial instruments can be bought and sold. Financial market consists of capital market, money market, mortgage market and future market. Financial instruments are instruments that are traded in the financial market. Components of financial instruments are stocks, shares, bonds, treasury bills, bankers acceptance and others Islamic Financial System Islamic financial system consists of a set of markets, individuals and organizations that trade in which the markets and Bank Negara Malaysia (BNM) responsible for the regulation. The end users of the system are people and firms whose desire is to have excess and deficit. The activities of this system are in accordance Syariah. 1 The Islamic financial system encompasses the instruments, institutions, markets and rules governing the conduct of trade that expedite the routing of funds from buyers to sellers and from savers to lenders according to the rules of Syariah. Islamic banking (IB) is defined as a banking system whose operations are governed by the Syariah that prohibits excessive rate of interest. The term Islamic Banking refers to the conduct of banking operations in consonance with Islamic teaching. In Syariah, both usury and interest fall into the same category that is called riba. 2 The Islamic economic order is based upon a set of principle found in the Qur an. 3 No matter what aspects of the Islamic economic order is introduced, for practical operations it has to base itself on the Qur anic concept of social justice. The Islamic financial system, therefore, cannot be introduced merely by eliminating riba but only by adopting the Islamic principles of social justice and introducing laws, practices, procedures and instruments which help in the maintenance and dispensation of justice, equity and fairness. (Haron, S. 2004) Financial institutions such as commercial banks, investment banks, merchant banks, finance companies, discount houses and insurance companies that choose to offer products and services without an interest element and adhering to Syariah laws can be considered as performing business using Islamic banking products History and Development of Islamic Banking. 4 Initially, interest-free banking was first attempted in Malaysia in the mid-1940s. Later on, the first experimental local Islamic bank was established in the late 1950s in a rural area of Pakistan that charged no interest on its lending. A few years later, the establishment of Mit Ghamr Local Savings Bank of Egypt in 1963 marked a new milestone in the modern Islamic Banking system. However, it ceased its operations in The establishment of Islamic Development Bank in 1975 paved the way for the establishment of other Islamic banks in various Muslim countries. To date, 3 Muslims countries (Iran, Pakistan and Sudan) use Islamic Banking system for their entire economy. Other countries still maintain a dual banking. Islamic banks operate not only in all Muslim countries but also in the Western world. There are currently more than 200 interest-free institutions. Many conventional banks offer Islamic banking products and services to both Muslim and non-muslim customers. Products and services at Islamic banks are compatible to those of conventional banks. As a result of these developments, the first International Financial Market commercial operation started in Bahrain at the end of Syariah - Islamic Law. 2 Riba Percentage of profit prohibited by Syariah 3 Qur an Holy Book of Islam 4 Source taken from Islamic Banking and Finance Institute Malaysia journals (2004) 2

3 1.2 Objectives of the Study There are few objectives of doing this research. Firstly, the research is being done in order to identify public s perception towards Islamic Banking System and the Conventional Scheme. Secondly, the research is to identify the factors that influence public decision to choose Islamic Banking facilities as opposed to the Conventional Scheme. Other than that, this research is done in order to identify whether or not individuals preference on the banking system were influenced by their demographic details. Finally, it is being done to look on Islamic Banking facilities usage proficiency based on the outcome of this research. 2.1 Literature Review Interest free banking in Malaysia has one unique feature that sets it apart from the model applied in Iran and Pakistan. According to Rosly, the Malaysia model is based on parallel or dual banking system, which allows interest-based and interest-free banking to coexist and compete for deposits and financing. As the Malaysians are multi-religious and multi-cultural, Islamic banking is therefore expected to deal with situations in which the demand for and supply of excess funds are no longer made on the basis of faith alone but also on factors such as return on deposits, cost of financing and convenience. He also added that religious and non-religious elements in the market segment of the Malaysian Islamic banking industry is likely to affect performance as changes in market interest rates will likely to affect Islamic bankers assetliability management strategy (Rosly, S.A 1999) Rosly did mention that one must be aware that the ability of interest-free bankers to use Mudharabah 5 as the main income generating products is not merely constrained by the legal related problems but equally important is the problem of information cost related to the financial structure of the banking firm. A support system is said to be necessary to ensure that the Mudharabah mechanism is effectively and successfully implemented. It is rather meaningless to arrive at complex formulas or techniques to generate a scheme of realistic profit sharing ratios if there is no transparent system to help overcome the problems caused by moral hazards and adverse selection. According to him, the future of Mudharabah- Musyarakah banking in this country is said to be dependant on the ability of the interest-free banking system to produce such support system (Rosly, S.A 1995a) According to Rosly, by setting up a monitoring agency to detect financial distress in the enterprises and talking measures to restructure or reorganize distressed companies should be the next step towards making mudharabah or musharakah 6 a viable investment tool in interest free banking. In other words, interest free bankers must now think about performing the role of corporate governance such that stable long term relationships among mudharabah partners are maintained. In the long run, the mudharabah via the banking system can play a vital role in generating equitable income distribution among depositors, the bank and the entrepreneurs (Rosly S.A, 1995c) After nearly four decades of their establishment, Islamic banks have managed to position themselves as financial institutions not only playing important role in resource mobilization, resource allocation and utilization but are actively involved in the process of implementing government monetary policy. Haron also did mention that apart from offering almost all traditional banking facilities, Islamic banks also facilitate domestic and international trades. His statement came by referring from few historical examples. The first Islamic bank, pioneered by Mit Ghamr Local Saving Bank, was established in 1963 in a provincial rural centre in the Nile Delta (Egypt). At present, there are more than 200 interest-free institutions operating in 40 nations worldwide and providing services that are compatible to those services offered by conventional banks. In 1985, this system mobilized an estimated US $5 billion fund which currently has increased to US $80 billion. Western conventional based financial institutions such as Citibank, JP Morgan, Deutsche Bank, ABN Amro and American Express have started introducing 5 Mudharabah refers to an agreement made between a capital provider and entrepreneur to carry out business project based on profit sharing basis. 6 Musharakah partnership for a specific business in which the distribution of profit will be apportioned according to an agreed ratio. 3

4 interest-free products to customers. Similarly, multinational corporations such as General Motors, IBM and Dewoo Corporation have begun to use interest-free services (Haron, S. & Ahmad, N. 2000) Interest and Profit Rate Haron mentioned that conventional interest rates and rate of profit on funds deposited with Islamic banking system in Malaysia had raised a few important elements. One of it was the acknowledgement by conventional banks that those who are willing to part with their monies must be rewarded. Other than the acknowledgement, the recognition that different types of deposits carry different amount of returns or rewards had been identified. Due to this, he believed that if the management of Islamic banks believes that the attitude of depositors of Islamic banks is indifferent to those of conventional banks, the same rates of return will be rewarded with rates of conventional banks. There are several serious repercussions if the management of Islamic banks believes that depositors at Islamic banks possess similar attitudes to those at the conventional banks. The interest rate will continue to have an influence on the operations of Islamic banks as long as this thought remains in the mind of their management. Findings of Metwally (1997), for example, confirmed that conventional and Islamic banks offer their depositors similar returns (Haron, S. & Ahmad, N. 2000) Interest rate has long been recognized not only by classical and neo-classical economists but also by contemporary economists as one of the factors that determine the level of savings in the economy. Haron mentioned that despite there are cases of inconsistent findings, it is a generally accepted opinion that interest rate has a positive relationship with savings. In other words, customers are guided by the profit maximization theory. Since there is no pre-determined rate of return involved in Islamic banking system, it is unknown whether Islamic bank customers are subjected to the normal conventional theory of economic behavior. He concluded that both interest rate of deposit accounts of conventional banks and rate of profit declared by Islamic banks have strong relationship with the amount of deposits of Islamic banks. The management of Islamic banks is bound to follow the market rate when declaring the rate of profit to their customers, vice versa (Haron, S. & Ahmad, N. 2000) Islamic Banking and its Facilities. Rosly suggested that Islamic bankers nowadays are required to inform Mudharabah depositors how their fund would be utilized. Without asymmetric information, it will be unduly difficult to attract deposits. If the firm has more information than the bank, it is likely that it will try to acquire mudharabah funds when a firm s prospect is not favorable. This is due to mudharabah contract assumes that market risk-related losses are absorbed by the bank. He also added there is a possibility where a firm with unfavorable prospects would in fact want to sell stocks, would bring in new investors to share the losses. Islamic bankers are expected to create a mudharabah system whereby they have control to information (Rosly, S.A 1995b) There are a few empirical researches which find that people who patronize Islamic banks look for monetary rewards. However, this is not necessarily true for all cases. In 1984, Kuwait Finance House did not distribute any profit to their depositors, but there was no evidence of massive withdrawal of deposits. In Sudan, Islamic banks were reported never reward their current account holders, but a bulk of their funds is supplied through these facilities. According to Haron, as institutions whose foundations are based on religious doctrines, it is paramount for Islamic banks management to believe there are other factors that dominate the economic behavior of Muslims. These principles comprise the belief in the Day of Judgment and the life in the hereafter, the Islamic concept of riches, and the Islamic concept of success. He concluded that all these principles are expected not only to have a significant impact on the decisionmaking process of Muslims, but also to have an influence on their perceptions of Islamic banks. (Haron, S. & Ahmad, N. 2000) Khan mentioned that the commercial banks used to find it unfair to disallow them to compete with investment banks and brokerage firms. However, the new rule approved by federal regulators on November 20, 1999 allows commercial banks to establish subsidiaries to market new products and services including securities and insurance as long as subsidiaries' capital and operations are separate 4

5 from the banks. Due to the new rule, Islamic banking which has already been slipping to the control of conventional banks, will find the way even more slippery. Khan expressed his concern on other countries where Islamic banks have their presence adopt such rules. He felt that Islamic banks will face a very tough competition from conventional banks. According to the new rule, the conventional banks can establish Islamic banks subsidiaries, while Islamic banks will not be able to do conventional banking. The conventional banks thus will attract Islamic banking clientele and grab the substantial part of the market share of Islamic banks. Conventional bank may get bigger on account of Islamic clientele while Islamic bank may shrink. He also concluded that Islamic banking may get diluted within the conventional banking unless Islamic banks do something to establish their distinction as "Islamic Banks" (Fahim Khan, M. 1999) Islamic banks are currently being criticized on the ground that their operations are almost similar to those of interest based banks. And this can become a major hurdle in the growth of Islamic banks in the 21 st century. As their present organization structure does not allow them to directly carry out trading, leasing and construction activities, therefore it is hard for them to prove the critics wrong. Furthermore, they end up doing only financial operations. Operating under a Bank Holding Company Model, holding separate organizations for commodity trade based operations, leasing based operation, infrastructure operation, insurance etc. will help them wash away most of the above criticism and will make it convenient for regulators also to supervise and monitor their activities (Fahim Khan, M. 1999) In such a system, resource mobilization or creation of liabilities by the Islamic banks assumes importance. Same goes to on the utilization of these resources or financing assets of other entities by Islamic banks on the other hand. According to Khan, the bulk of liabilities of Islamic banks can be decomposed into current and investment deposits. The nominal value of current deposits is guaranteed by the banks. In Malaysia, principle of Al Wadiah (trusteeship) is used for mobilization of demand and saving deposits. These deposits do not receive any return as banks provide transaction facilities. Investment deposits are accepted on the basis of Al Mudharabah (trustee profit sharing). Khan also mentioned the similarities in Malaysia, Pakistan and Iran where profits are shared between the depositors and banks. At the same time, the investment account holders or long term depositors (Malaysia) bear part of the losses if the investment made by the banks is not profitable. In terms of the assets, different principles are used for different kinds of financial facilities offered to customers. For project financing, the principles of Al Mudharabah or Musharakah (partnership or joint venture with profit sharing) are used. The former works in a manner used in the case of investment deposits. In this, bank provides the entire capital and the borrower, often an entrepreneur, provides the management services. The profit is shared accordingly to an agreed proportion while the loss is borne by the bank alone. Under the model of Musharakah, the cost of project with the entrepreneur being shared by the bank based on an agreed proportion basis and both parties have the right to participate in the management of the projects. He mentioned that the profit from the project is distributed according to an agreed ratio, which is not necessarily the same as the share in the cost (Khan, M.Y 2001) Return to banks liabilities is a direct function of the return to their assets as several assets are created as partnership contracts in the Islamic Financial System. The banks can sell their assets or partnership contracts. Since the securities markets are becoming efficient and safe, and disclosure norms, monitoring of banks or firms issuing equity, margins on trading, investors protection norms, settlement procedures, improved credibility of documents and settlements are being introduced, the equity investment in corporate has become safe. Corporate equities can be invested by Islamic banks. In order to be successful in mobilization of resources through issue of equity, firms have to improve their performance. Interest based lending without improving their financing, where the entrepreneurs can borrow huge amounts and divert them to undesirable activities is not the case. Interest based banks suffer from adverse selection weakness. A possible threat for Islamic banks based on equity resources / investments or listed equity investment that equity prices may fluctuate. During the rise in equity prices, there shouldn t be any problem but during the phase of down turn, the Islamic banks may face fall in the value of investment. These banks will have to adopt the technique of Mark to Market and setting up Risk Funds to compensate fall in net worth. Investors protection environment will be able to achieve by the investment of resources done by Islamic banks. A firm issuing equity should undergo full appraisal of its performance and program and has to obtain credit rating from a credit rating agency before coming in the 5

6 market. Islamic banks can invest their resources in these equities. In a way equity based financing can improve debit equity ratio of companies. Furthermore, equity based financing has been considered superior to interest based financing. (Khan, M.Y 2001) Islamic banking system was established in Malaysia since To date, Islamic banking products are available at two full pledged Islamic banks and at all commercial and merchant banks in Malaysia. However, customers are still not accepted these products. The total deposit at conventional banks was RM381 billion while total deposit in Islamic system was RM31 billion at the end of RM416 billion was extended by conventional system, and RM21 billion was given by Islamic system in terms of loans. Since corporate customers are the key players in the economy, it is imperative that the reasons for them to choose or not to choose Islamic system be studied (Ahmad, N. & Haron, S. 2002) Among the Muslim countries that are committed in not only developing Islamic banking system but also a complete Islamic financial system is Malaysia. The Islamic banking system in Malaysia started in 1983 when the first Islamic bank, Bank Islam Malaysia Berhad (BIMB) commenced its operations. To develop the Islamic banking system parallel to the conventional system was the objective of Malaysia government. The government introduced a concept of Islamic window which allows the existing conventional banks to introduce Islamic banking products of customers instead of establishing many new Islamic banks. The concept of Islamic window started in March 1993 when the Central Bank of Malaysia or Bank Negara Malaysia (BNM) introduced the Interest-Free Banking Scheme. Initially there were only three major banks participated with twenty-one Islamic financial products were developed to cater for this scheme. This scheme was extended to all financial institutions in Malaysia by July of the same year. The Islamic banking system was represented by two Islamic banks, 17 domestic commercial banks, five merchant banks and seven discount houses at the end of There are also four foreign-owned banks providing Islamic banking products and services (Ahmad, N. & Haron, S. 2002) In United Arab Emirates, the Islamic financial services sector is estimated to be growing at double digit rates, involving over 200 financial institutions with assets estimated to exceed US$200 billion (Al- Dhahiri, Al-Khamiri, and Al-Hamli, 2003). The potential has impact beyond these fertile markets to non- Arab Muslim and non-muslim consumers and businesses while the growth has been most noticeable in Arab Muslim markets. The UAE is a dynamic and growing market for business, particularly in financial services. Global as well as local banks have flourished in recent years in this relatively progressive and vibrant economy (Bley, J. & Kermit Kuehn, 2004) Haron did mention on the situation of Islamic financial institutions in Thailand. The largest institutions in mobilizing funds in Thailand are the commercial banks. Total assets of commercial banks in Thailand stood at 6,466,151 million baht while total deposits and total credits amounted to 5,188,321 million baht and 4,623,331 million baht at the end of Initially, there was no specific law governing commercial banking business in Thailand. The Royal Charter, which was granted through the Minister of Agriculture, is the only requirement to set up a bank in Thailand. Furthermore, there was no tight supervision imposed by the government on the activities of the commercial banks. The Act Regulating Commercial Activities Affecting the Safety and Welfare of the Public B.E. 2471(1928), enacted on 13 October 1928 (Bank of Thailand; 1992) was the first piece of legislation governing the commercial banking business. The establishment of a cooperative society, Pattani Islamic Saving Cooperative, that operates based on Syariah in 1987 was the starting point of Islamic financial system in Thailand. Four other Islamic saving cooperatives were established in Southern Thailand, i.e. Ibnu Affan Saving Cooperative (Pattani), As- Siddiq Saving Cooperative (Songkla), Saqaffah Islam Saving Cooperative (Krabi), and Al-Islamiah Saving Cooperative (Phuket) at the end of These Islamic cooperative societies have successfully established themselves as viable financial institutions in managing and mobilizing Muslims funds in this region. For example, total assets for Pattani Islamic Saving Cooperative at the end of 2001 were 90 million baht, while total assets for the Ibnu Affan Islamic Saving Cooperative were 60 million baht as at the end of 2002 (Haron, S. & KuMajdi Yamirudeng, 2003) According to Yamirudeng, the government of Thailand must also play an important role in providing a conducive environment for the Islamic banks to operate. To protect both banks and customers, appropriate rules and regulations must be introduced. He also agreed that as a new market player, Islamic 6

7 bank faces limited investment opportunities. The issuance of Islamic bonds and bills is one of the measures can be taken by government to overcome this limitation. Lastly, cooperation amongst Muslim countries, especially Malaysia is paramount in assisting Thailand to develop a more comprehensive Islamic banking system (Haron, S. & Yamirudeng, K. 2003) A study by Iqbal showed that Islam approves certain forms of financial contracting and prohibits others based on its justice and welfare implications. Amongst the prevailing forms, profit and loss sharing arrangements on the pattern of equity contracts come closest to the Islamic ethos whilst pre determined fixed interest debt is considered as unjust and a taboo. He figured out that there is also a spectrum of other instruments that resonate with the spirit of syariah and could cater for a variety of investor risk preferences and entrepreneur financing requirements apart from the profit and loss sharing arrangements. However, a need is always felt to synthesize more instruments to broaden and deepen financial intermediation and investment prospects. (Iqbal, Z. 2001) In Malaysia, observations showed that there are two main types of depositors among local Muslims. According to Radiah, the first group represents those who strictly follow the religion in life and want to stick with Islamic banking at any cost. The second group consists of moderate Muslims. They give more priority to service quality and time value of their savings. (Radiah, A. K. 1993) Profits and religion are the main motives behind depositing money with Islamic banks in Malaysia. Haron and Planisek observed that only 40% of the Muslim customers give preferences to Islamic banking. The remaining majority including non-muslim customers considers the time value as more important. They expect their banking transactions to be completed as fast as possible. More than half of the Muslim and non-muslim respondents indicated the possibility of establishing relationships with the Islamic banks if they have a complete understanding about their operations. Both of them remarked that the top management of Islamic banks should realize the needs of time value of money and do not solely depend upon Muslims for deposits or as their fund users. They have to expand their base by including non- Muslims as potential customers. (Haron, S. & Planisek, L. 1994) According to Gerrad and Cunningham, both religion and profits are the reasons for Muslims maintaining relationships with Islamic banking in Singapore. However, on a question whether they would maintain their accounts with Islamic banking even if the Islamic bank fails to generate enough profit in any year, Gerrad found that 61.70% of the sample respondents indicated determination of not withdrawing their money. Non-Muslim customers are more profit-oriented as they give more preferences to higher rates of returns. (Gerrad, P. & Cunningham, J.B 1997) 3.1 DATA AND METHODOLOGY Information gathered through out this research can be divided into two types. They are the primary and the secondary data. Primary data which had been used for this study is being obtained through questionnaires. These questionnaires have been distributed through internet. The data involved is in terms of respondents answers and feedbacks. The questions are being developed on my own. Basically, those questions are being constructed into two different parts. The first part of the questions is specifically for those respondents who had used Islamic Banking facilities. Meanwhile, the second part of the questions is specifically for those respondents who had used the conventional scheme. Respondents are given close ended questions and choices of answers to answer those entire questions. Close ended questions involved are the questions where respondents have been asked to state their own reason why they decided to choose either of the banking system. The questions have been asked on both parts, for those who had used Islamic Banking facilities and the conventional scheme. Questions which offer respondents choices of answers are those questions related to influential factors and respondents demographic involved in this study. Those questions based on influential factors have standardized scale of answers. The scales of answers range from strongly disagree, disagree, unsure, agree and strongly agree. On the other hand, choices of answers for questions involved with respondents demographic have 7

8 different range scale of answers. This is due to variety choices of answers which could be selected by those respondents who have different background. The reason behind to have influential factors being asked to both kind of respondents is to look on how respondents reacted towards the perception of these factors which may influence their decision on banking system. Factors such as location of banks, rates and ratios, attractive services associated with products offered, being well informed about the products, promotion by bank officers on duty and influence of mass media, have been asked on both parts, for Islamic banking and the conventional scheme consumers. On the other hand, certain of the factors are being asked only in the respective parts, either for Islamic Banking consumers or conventional scheme consumers. Religious factor and government call have been asked towards Islamic Banking consumers while profit and cost factors have been asked towards conventional scheme consumers only as those factors are only directly related to the banking system specifically.. Questionnaires always ask for respondents demographic. In this questionnaire, the respondents demographic is a bit detailed as respondents are required to state their salary per month, savings per month, types of savings being used and types of loans applied. This is due to the objective of this study in order to analyze the relationship of respondents demographic with their preference on the banking system. Respondents religion, age, and occupation also being asked in the respondents demographic. Besides studying the relationship, generally through respondents demographic we can also see the latest pattern of consumers demographic distinguished by their preference on the banking system. 4.0 Summary of Findings. As the respondents are viewed based on their preferences, both Islamic banking consumers and the conventional scheme consumers had the same opinion. They felt that attractive services associated with the banking facilities and being well informed about the facilities offered had influenced them in their decision to choose the facilities. They didn t agree on the perception of the promotion by the bank officers on duty had influenced their decision. Since religious factor and the government call were only related to those who choose Islamic banking facilities, they did agree that religious factor influenced them in their decisions but they didn t agree the decisions were affected by the government call. Those respondents who use the conventional scheme didn t agree profit and cost factor of the facilities influence them. Based on the outcome of the opinion, those who had use Islamic banking facilities didn t feel that location of banks nearby influenced them but the situation is totally different from those who choose the conventional scheme. Same goes to the influence by the mass media in which Islamic banking consumers are totally against with the perception. On the other hand, those who use the conventional scheme don t find that the influence of the mass media convince them enough in their decision. Other differences in opinions include the influence of the facilities rates and ratios whom Islamic banking consumers are agree with it while the conventional scheme consumers are against it. Distinguish by their decision to choose either the Islamic banking facilities or the conventional scheme, the results had proved that majority of Islamic banking consumers are Muslims. Most of them are 29 to 35 years old. Majority of them are executives and those who hold managerial posts. They earn around 2000 to 3500 per month and their savings are 200 to 400 per month. Most of them use Al-Wadiah as their main type of savings and applied Islamic housing loans. On the other hand, most of the conventional scheme consumers are Muslims. Most of them are 19 to 23 years of age. Majority of them are college students and graduates. They earn around 1000 to 2000 per month and have 200 to 400 as their savings per month. Most of them use conventional savings as their main type of savings and applied for conventional housing loans. In terms of the relationship between the respondents demographic factors and their preferences on the banking system, it was found that the salaries, types of savings, types of loans and countries of the respondents are related to respondents preferences on the banking system. However, the religions of respondents, age of respondents, occupations of respondents and their amount of savings are not related to their preferences on banking system. 8

9 5.0 CONCLUSION AND RECOMMENDATION Before we look specifically on how Islamic banking facilities are doing so far and being accepted by the public, first we have to see the performance of Islamic banking system as a whole. There are certain reasons on why banking consumers worldwide decide to choose Islamic Banking facilities. Basically, Islamic Banking consumers felt religious factor had influenced them. The responsibility as being a Muslim, to avoid riba by gaining clean income and to follow Syariah principles are among the reasons given by the consumers who use Islamic Banking facilities. Despite the religious factor, those moderate Muslims and non Muslims are being identified as Islamic Banking consumers too. Moderate Muslims are those Muslims who concern about time value of their savings. Meanwhile, the usage of the facilities contributed by non Muslims is a result of the Islamic Banking policy which is open to non Muslims too. Among the reasons given by the moderate Muslims and non Muslims are to avoid uncertainty by having fixed rate on their loans and their preferences on the value of investing through Islamic Banking facilities. On the other hand, consumers world wide have their own reasons to choose the conventional scheme facilities. Although the growth of Islamic Banking had been much under the spotlight of banking system, still Islamic Banking system is not well established and even unavailable in certain countries. Therefore, most of the consumers prefer to use the conventional scheme. The late introductions of Islamic Banking system in countries prove to be decisive too. Consumers are more exposed to the conventional scheme since at the young age. Among other reasons given by the consumers are conventional scheme is being accepted through out world wide, more return provided as conventional scheme is more interest based banking system and financial constraint had forced them to choose the facilities. Surprisingly, the decision of using the facilities is based on pre-judgment for some of the consumers. For some of them, any form of Islamic activities is related to terrorism. Viewing on certain factors which might influence consumers decisions distinguished by their preferences on the banking systems, factor of location of banks nearby had resulted dissent opinions among them. As majority of the respondents are from Malaysia, Islamic Banking consumers for example, didn t find the factor of location of banks nearby influence their decision as Islamic Banking System nowadays can be found not only at full pledged Islamic banks but also at domestic commercial banks, merchant banks and discount houses. On the other hand, those conventional scheme consumers feel affected by the location factors as there are more commercial banks compared to the Islamic banks nearby. Although Islamic Banking System can be found in most of the commercial banks, due to the late introduction of Islamic Banking System, the system itself is still behind the reflection of the conventional scheme. Same goes to the rates and ratios factor, it had resulted dissent opinions among the consumers. Most of the Islamic Banking consumers agree with the perception as Islamic Banking System is well known for its profit sharing ratios. In terms of ratios, the profit sharing ratios in Mudharabah for example, are in favor to the consumers. On the other hand, in terms of rates, the rates might not be as high as conventional scheme facilities rates but the rates are not fixed. Consumers, who prefer to avoid uncertainty, would prefer to choose Islamic Banking facilities. However, the situation is totally different for conventional scheme consumers who felt disagree with the perception of rates and ratios which may influence their decision in choosing the banking system. Conventional scheme which is interest based, may have higher returns like what had been expected by public and its consumers but could give a massive blow to its consumers if the economic status of a country is facing a tough time. Other than factors of location of banks nearby and rates and ratios of the facilities, the influence of mass media had resulted different opinions among the Islamic banking and the conventional scheme consumers. As majority of the respondents are from Malaysia, the best example to explain the whole scenario would be the situation in Malaysia itself. Majority of Islamic banking consumers felt disagree towards the perception of mass media which may influence their decision to choose Islamic Banking system. As advertisements and commercials on banking nowadays are more to the commercial banks, it can be seen clearly those advertisements or even commercials of Islamic Banks are outnumbered. Even if there are issues or arguments on commercial banks which do have Islamic Banking System being 9

10 introduced recently, again, the reflection of conventional scheme for those commercial banks stands still. For conventional scheme consumers, the influence of mass media didn t convince them enough in their decision to choose conventional scheme. The percentages of those who agree and disagree with this perception remain leveled. Although the advertisements and commercials on banking are more to commercial banks, but still it is overshadowed by other commercials such as commercials on cars and telecommunication networks which involved in price wars. 5.1 Recommendation By revising on factors which may influence Islamic Banking consumers to choose the facilities, majority of them felt that the promotion by the bank officers on duty, the influence of government call and mass media had failed to convince them. By having more persuasive approaches by bank officers, more calls for public towards the facilities by top government officials or ministry and more efforts through mass media may improve the Islamic banking performances from time to time. Once the performances of Islamic Banking system improve as a whole, Islamic banking facilities will attract a massive number of consumers. In terms of relationship between the respondents demographic and their preference on the banking system, it had been identified that salaries of consumers, the types of savings being used by the consumers and the types of loans being applied by them are related to their preference on banking system. In order to improve the performance of Islamic Banking system, Islamic banks should emphasize their efforts by focusing on the target customers for certain of its facilities. As majority of Islamic Banking consumers earn from 2000 to 3500 per month and the number of its consumers decreased as the level of consumers earnings getting higher, they should make adjustments on its facilities target customers to fully utilize this opportunity to attract a large number of consumers. Perhaps, they should focus more on consumers who earn below 3500 per month. On the other hand, the types of savings and loans being offered through Islamic Banking facilities could be made more attractive with attractive services, packages or even benefits associated with it in order to attract massive amount of consumers. By having these sectors improved, consumers would choose Islamic banking system as those 3sectors are totally related to their preference on the banking system. As majority of the respondents are from Malaysia, the outcome for the Islamic Banking facilities provided in Malaysia didn t achieve like what was expected. In terms of Islamic banking facilities, results had shown Al-Wadiah had been the most chosen types of savings for Islamic banking consumers. Mudharabah had been ranked third as a whole and being second to Al-Wadiah for Islamic banking consumers. Each one of us does have our own savings. Although Al-Wadiah had been ranked as the most chosen type of savings, the volume for its target customers isn t an achievement to be proud of. Generally, most of us would open our savings account through banks. By right, opening a savings account at a tender age by 12 would make a person choose either to put his or her savings in a conventional savings or Al-Wadiah account. Since majority of Malaysians are Muslims and since Malaysia was tipped as a role model for other Islamic countries, the possibility for someone to choose Al- Wadiah as his or her savings account is much higher. Furthermore, other than associations or societies which its activities are not prohibited by Syariah, Islamic banking facilities are open to other religions too. Generally, Mudharabah is an investment account accepted based on the Islamic contract. Being ranked third behind other types of loans being used by Islamic banking consumers haven t been the real potential for the leading investment account in Islamic banking facilities. By diversifying its product to GIA (General Investment Account) and SIA (Special Investment Account) in order to attract more banking facilities consumers, an outcome of 20% of the total number of Islamic banking consumers would be disappointing. Again, due to the majority of those who use the conventional scheme are Muslims, the effect would be on those leading facilities of Islamic banking as well as Mudharabah. Besides having efforts to improve Islamic banking facilities as a whole, more efforts should be emphasized on the target customers of Mudharabah. Mudharabah GIA is open for those who are 18 years old and above. Initially, youngsters aged between 19 to 23 years old which is the majority of those conventional scheme consumers, should be attached to Al-Wadiah instead of conventional savings when they signed up for their first savings accounts. Once Al-Wadiah succeed in obtaining great number of customers, those 10

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