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ACCEPTANCE OF ISLAMIC BANKING AMONG NON-MUSLIMS IN MALAYSIA Stellia Djapri Corporate Master in Business Administration 2013

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ACCEPTANCE OF ISLAMIC BANKING AMONG NON-MUSLIMS IN MALAYSIA

Stellia Djapri

Corporate Master in Business Administration 2013

Pusat Khidmat Maklumat Akademik UMVERSITI MALAYSIA SARAWAK

ACCEPTANCE OF ISLAMIC BANKING AMONG NON-MUSLIMS IN MALAYSIA P.KHIDMAT MAKLUMAT AKADEMIK

111111111 IIi'iiillllllllll 1000246875

By

STELLIA DJAPRI

(11031908)

A thesis submitted In fu\tillment of the requirement for the degree of

Corporate Masters in Business Administration

Faculty of Economics and Business

UNIVERSITI MALA YSJA SARA W AK

2013

ii

APPROVAL PAGE

I certified that I have supervised and read this study and in my opinion it conforms to

acceptable standards of scholarly presentation and is fully adequate in scope and quality

as a research paper for the degree ofCorporate Master in Business Administration.

Dr. Mahani bt Mohammad Abdu Shakur

Supervisor

This research paper was submitted to the Faculty of Economics and Business, UNIMAS

and is accepted as partial fulfillment of the requirements for the degree of Corporate

Master in Business Administration.

Dr. Mohamad Affendy Arif

Dean, Faculty of Economics and Business

UNlMAS

iii

STATEMENT OF ORIGINALITY

The work described in this Research Paper, entitled

"ACCEPTANCE OF ISLAMIC BANKING AMONG NON-MUSLIMS IN

MALAYSIA"

is to the best ofthe author's knowledge that of the author except

where due reference is made.

Date STELLIA DJAPRI

11031908

iv

ACKNOWLEDGEMENT

I would like to express my sincere gratitude to those who helped and supported

me in my corporate business project paper to fulfill the needs for the certification of the

Corporate Masters in Business Administration (CMBA).

First and foremost, I would like to thank to my respectable coordinator, Dr.

Mahani BMA Shakur, who has been very helpful and understanding for her great

guidal)ce and lesson to me.

I would like to thank to all my course mates and others who have provided

assistance at various occasions. Their views and tips are useful indeed. Regrettably, it is

not possible to list all of them in this limited space.

My special appreciation is extended to the respondents who spared their time in

completing the questionnaire. I would like to offer special thanks for the supporting from

my family and friends as well for their sincerity and kindness along the way in

completing my thesis.

v

ABSTRACT

(IslamiC banking has been almost three decades when the first Islamic bank makes ,its

debut in Malaysia. Islamic banks have to face stiff competition, especially with

conventional banks which have longer history than Islamic banks. thus, it is important for

the Islamic banks to know the awareness, understanding, attitudes and banking selection

criteria of Malaysians, especially non-Muslims towards it. In Malaysia, we have roughly

40% of the population belongs to non-Muslims and hence non-Muslims market is

respectively important to Islamic ban0 The purpose of this research is to examine the

level of awareness, understanding, attitudes and banking selection criteria towards the

acceptance of Islamic banking among non-Muslims. A total of 384 respondents from

Sibu are chosen for the purpose of this study. For the analysis, Pearson moment product

correlation and multiple linear regressions were adopted to analyze the results. The

results indicated that the awareness, understanding, attitudes, banking selection criteria

do have positive relationship with the acceptance towards Islamic banking. This study

also provides implications for the Islamic bankers to attract non-Muslims customers and

recommendations for future research in Islamic banking.

vi

ABSTRAK

Perbankan Islam telah menjejakkan langkah pertama di Malaysia sejak tiga dekad yang

lalu. Perbankan Islam perlu menghadapi persaingan yang sengit, terutamanya dengan

bank-bank konvensional yang mempunyai sejarah lebih daripade perbankan Islam. Oleh

yang demikian, perbankan Islam wajib mengetahui kesedaran, kefahaman, sikap dan

criteria pemilihan perbankan Malaysia, terutamanya kepada penduduk Malaysia yang

bukan beragama Islam. Kita mempunyai kira-kira 40% penduduk Malaysia yang bukan

beragama Islam, dan pemasaran prod uk berkaitan perbankan Islam adalah penting.

Tujuan kajian ini adalah untuk mengkaji tahap kesedaran, kefahaman, sikap dan kriteria

pemilihan perbankan ke arah penerimaan perbankan Islam di kalangan penduduk yang

bukan beragama Islam. Sebanyak 384 responden dari Sibu telah dipilih untuk kajian ini.

Modei Pearson dan model regresi linear berganda telah digunakan untuk menganalisis

keputusan untuk kajian tersebut. Hasil kajian menunjukkan bahawa kesedaran,

kefahaman, sikap, kriteria pemilihan perbankan mempunyai hubungan yang positif

dengan penerimaan terhadap perbankan Islam. Kajian ini juga member implikasi bagi

perbankan Islam untuk menarik perhatian pelanggan yang bukan beragama Islam dan

juga cadangan untuk kajian dalam bidang perbankan Islam pad a masa hadapan.

vii

· t l\1aklumat Akademikpusat Khldma . SARAWAK Ui'ilVE ITI LAYSJAI

TABLE OF CONTENTS

CHAPTER TITLE PAGE

TITLE

APPROVAL PAGE iii

ST ATEMENT OF ORIGINALITY iv

ACKNOWLEDGEMENT v

ABSTRACT vi

ABSTRAK vii

LIST OF CONTENTS viii

LIST OF TABLES xii

LIST OF FIGURES xiii

1 INTRODUCTION

1.1 Background of study

1.2 Problem Statement 4

1.3 Research Question 6

1.4 Research Objective 7

1.5 Scope of the study 8

1.6 Significance of the study 9

1.7 Conclusion II

2 LITERATURE REVIEW

2.1 Islamic banking in Malaysia 12

viii

3

2.2 Awareness of Islamic banking products and

services among Non-Muslims 17

2.3 The understanding of Islamic banking products

and services among Non-Muslims 19

2.3.1 Contracts in Islamic banking 20

2.4 Attitudes towards Islamic banking 25

2.5 Banking selection criteria 29

2.6 Acceptance of Islamic banking 34

2.7 Proposed Theoretical Framework 38

2.8 Proposed Conceptual Framework 41

2.9 Hypotheses Development 44

2.10 Conclusion 44

METHODOLOGY

3.1 Research Design 45

3.2 Data collection methods 46

3.2.1 Primary data 46

3.3 Sampling design 47

3.3.1 Target population 47

3.3.2 Sampling size 48

3.3.3 Sampling technique 49

3.4 Survey methodology 50

3.5 Research Instrument 51

3.5.1 Questionnaire design 51

3.5.2 Questionnaire construction 52

3.5.3 Pilot study 56

3.6 Constructs measurement 56

3.6.1 Nominal scale 57

3.6.2 Interval scale 57

ix

4

3.7 Data processing 57

3.7.1 Data screening 58

3.7.2 Data coding 59

3.7.3 Data analysis 59

3.8 Descriptive analysis 60

3.8.1 Reliability test 60

3.8.2 Pearson Product Moment Correlation 61

3.8.3 Multiple linear regressions 63

3.9 Conclusion 64

RESEARCH FINDINGS

4.0 Introduction 65

4.1 Descriptive analysis 65

4.1.1 Respondents Demographic profile 66

4.1.2 Age 66

4.1.3 Ethnic origin (Race) 67

4.1.4 Religion 68

4.1.5 Educational level 69

4.1.6 Monthly income level 70

4.2 Reliability test 71

4.3 Analysis of the relationship between the

Independent variables and Dependent Variable 72

4.3.l Examine the relationship between awareness,

Understanding, attitude, banking selection criteria,

Acceptance towards Islamic banking 73

4.3.2 Awareness of non-Muslims towards

Islamic banking

4.3.3 Understanding of non-Muslims towards

77

x

77Islamic banking

4.3.4 Attitude of non-Muslims towards

Islamic banking 78

4.3.5 Banking selection criteria towards

Islamic banking 79

804.4 Analysis of the multiple regression

4.5 Conclusion 84

5 CONCLUSION AND RECOMMENDATION

5.1 Summary of the main findings 85

5.2 Discussion of the main findings 85

5.3 To test the relationship of awareness,

Understanding, attitudes, banking selection

Criteria towards acceptance of non-Muslims

In Malaysia 86

5.4 Implications of the study 87

5.5 Limitations of the study 88

5.6 Recommendations for future research 89

5.7 Conclusion 90

REFERENCES 91-103

APPENDIX 104-108

xi

LIST OF TABLES

TABLE NO TITLE PAGE

3.1 Table Krejcie and Morgan (1970), p.608 48

3.2 Guildford Suggested Interpretation for the Correlation Coefficient 62

4.1 Respondents Demographic Profile 66

4.2 Frequency and Percentage of Respondent according to Age 66

4.3 Frequency and Percentage of Respondent according to Ethnic Origin 67

4.4 Frequency and Percentage of Respondent according to Religion 68

4.5 Frequency and Percentage of Respondent according to Educational Level 69

Frequency and Percentage of Respondent according to Monthly Income 4.6 Level 70

4.7 Cronbach's A'lpha 72

The Correlation Coefficient of the Awareness, Understanding, Attitudes, 4.8 Banking selection criteria, Acceptance towards Islamic banking. 74

4.9 Interpretation and Computation of the Coefficient of Multiple Determination 77

4.10 Determination of the usefulness of the model 79

4.11 Determination ofthe Multiple Regression Equation for the data 80

xii

LIST OF FIGURES

FIGURES NO TITLE PAGE

2.1 The Hierarchy of Effects 39

2.2 Theoretical Framework on Acceptance ofIslamic banking 40

2.3 Conceptual Framework 43

xiii

I,....

Chapter 1

INTRODUCTION

1.1 Background of the study

Malaysia is one of the most progressive Muslim countries in the world and it has

been promoting the idea of implementing Islamic Banking System (IBS). In Malaysia,

there is two types of separate banking system, which is the conventional banking system

(the well-known banking system), as well as the Islamic banking.

Basically, what is Islamic Banking? Islamic Banking is the banking system that

uses the Islamic law in Malaysia, which known as Shari'ah as the foundation for the

banking system operations, legislations and regulations. This rules and teaching in the

Islamic transactions came from the Holy Quran and the Sunnah of Prophet Muhammad

for over 1400 years ago (Bank Negara Malaysia, 2009). The motive of IBS is to develop

the ring of harmony among the Muslims and to ensure a fair allocation and exploitation

of fund in compliance with the Islamic principles and teaching. This has also indicated

that all the banking operations right from the deposits transactions, financing and

products offered by the Islamic banks to their customers should be in compliance with

Shari'ah law (Abdullah, Sidek, and Adnan, 2012).

1

Malaysia today has one of the world's most sophisticated banking environments

with a well developed financial market even though the practice of Islamic banking and

finance in Malaysia is comparatively new and quick growing. The Islamic financial

industry in Malaysia has faced rapid transformations. The product variety has now

extended into wide array of pioneering instruments using contracts ahead of Murabahah

or Bai Bithaman Ajil (BBA). In the earlier period, there were only some new Islamic

financial products that had been marketed, for examples residential mortgage backed

securities, commodity based financing, as well as investment and equity linked product

based on Musyarakah, Mudarabah and Ijarah. Thus, Islamic banking has become an

essential service being offered (Ranjbar and Sharif, 2008).

There are several important doctrine of IsLam, to help for an improved

understanding oflslamic banking, which are Shari'ah and Muamalat. Islamic banking is a

mere play of semantics by replacing the word "interest" with "profit", or merely another

type of conventional banking minus the interest component. For a better comprehension

of Islamic banking, one must be aware with and understand that Islamic banking and

conventional banking is two separate activities based on diverse values and

considerations. Conventional banking, in four simple words is, "lending money at

interest"; whereas interest or riba in Islam is rigorously not allowed (Abiah and

Wabekwa, 2012).

2

According to Ranjbar and Sharif (2008), Islamic banking is fundamentally a

trading contract which is based on an asset, it may be tangible or not, or financial system

activity. Therefore, the underlying transaction that related to the asset or the activity is as

contradicted to conventional banking where the underlying transaction is money-lending

at an interest. By trading, they often make reference to sale of goods and services. A

valid contract should not contain interest (riba), ambiguities (gharar), gambling (maisir),

and forbidden merchandise such as liquor, pork etc (Ranjbar and Sharif, 2008).

Dusuki and Abdullah (2006) indicate that the bankers acknowledge that Islamic

economics is a development area but it is not for everybody. This is because some of the

investments have no interest free equivalent, which may also crease the sector's

development. Meanwhile, the Islamic banking products often cost more to set up as the

profit restrictions on Shari'ah compliant products are equal with interest rates on non­

Islamic investments. Simultaneously, many Muslims do go for for Islamic approved

banking if they are given a choice. This has become one rationale why the western banks

are dynamic in Muslim countries and are so keen to strengthen their Shari 'ah

identification. There is a fragment of customers within the current market that would

change to Islamic if the value and remuneration offered were comparable with

conventional financial products. It is obvious that Islamic finance has moved into

mainstream (Ranjbar and Sharif, 2008).

3

According to Ranjbar and Sharif (2008), many primary commercial banks in

Malaysia have established Islamic banking businesses to hit the opportunities in the US$1

trillion industry. There are a lot of other controls to be put in place to improve the

assertion and strengthen the risk management through the Shari' ah governance and

structure. Non-Muslims now comprised of half of some Malaysian Islamic banks'

customers. Islamic banking products such as mortgage loans and takaful insurance have

drawn considerable implication from Malaysia's ethnic Chinese and Indian minorities.

Shari'ah bonds are among the supreme rising Islamic finance instruments, with recent

issuers coming from non-traditional Muslim markets such as Japan. Although there are

over 300 global Islamic financial institutions, it is just a portion of the total value of the

conventional global banking industry, and the Islamic financial sector is valued at about

$1 trillion (Ranjbar and Sharif, 2008).

1.2 Problem Statement

The introduction of Islamic banking and the changes in the Malaysian financial

landscape has resulted in new measurement and phenomenal in banking sector. Islamic

banking has emerged as one of the highest mounting industries for more than three

decades. It has widened to all corners around the world and received wide recognition by

both Muslims and non-Muslims alike (Iqbal and Molyneux, 2005). Both conventional

and Islamic, Muslims or Non-Muslims customers alike from both conventional and

-------- /~

4

Pusat Khidmat Maklumnt Akademik UNlVERSlTI MALAYSIA ARAWAK

Islamic banking have been accessible with massive choices to choose in terms of banking

products and services had led to changes in customer's taste and demand for improved

and high quality banking services. The aggressive commence of pioneering and refined

products by financial institutions puts remarkable pressures on Islamic banks. In addition,

customers are now spoilt for choices to choose the ones that fulfill their needs and wants

before making any decisions. On the other hand, many people in Malaysia still has a

wrong understanding or thoughts against Islamic banking which among the

misconception is Islamic banking is only for Muslims. It comes to few questions that "to

what extent are non-Muslims aware of Islamic banking products and services and to what

extent are non-Muslims understand about Islamic banking products and services?"

As one of the most important players in service industry at present, Islamic

banking is a business that is ineluctably in need for winning over customers at the same

time as retaining the old ones and it is no longer regarded as a business entity determined

only to take in the religious obligations of the Muslim community (Wilson, 2003). In

Malaysia, Islamic banking not only have to fight with products offered by the long

established conventional banks in a dual banking system, but also among the products

offered by the Islamic banking itself, thus customers' positive attitude towards Islamic

banking is far more important. Since 1983 to date, Islamic banking system operates

similarly with the conventional system as Malaysia has a dual banking. As per today, the

Islamic banking and finance that contributes to the expansion and development of the

Malaysia economy has emerged as an essential element of the overall Malaysian financial

5

system. Thus, a better awareness shall be created among the customers, whereby Islamic

banking is not only an option of financial approach, but it also provides better value

propositions to the consumers in some aspects. It rose up a question that "what are the

bank selection criteria for the non-Muslims" in order to create a better value

propositions?

Due to the heightened competition, it is concerned if is the Malaysian banking

system getting overcrowded. We have to understand what is the attitude of the non­

Muslims towards Islamic banking? The better understanding of the non-Muslims attitude

can help to meet the ever-changing customer wants and expectations of all walks of life.

This is because the aggressive launch of inventive and refined products by financial

institutions put remarkable pressure on Islamic banks.

1.3 Research Questions

• Are the non-Muslims in Malaysia aware of Islamic banking products and

services?

• Are the non-Muslims in Malaysia understood about the basic principles oflslamic

banking?

• Will knowledge and understanding on Islamic banking influence non-Muslims'

acceptance towards Islamic banking products and service?

6

• Will bank selection criteria influence non-Muslims' acceptance towards Islamic

banking products and service?

1.4 Research Objectives

This research is a study of Islamic banking in Malaysia, a country which has a

minority of non-Muslims in its population. This study seeks to establish the level of

awareness that non-Muslims have in relation to Islamic banking, to examine the

understanding of non-Muslims about the basic principles of Islamic banking, the attitude

of non-Muslims towards Islamic banking and a position of the bank selection criteria of

non-Muslims.

• To examine the level of awareness of non-Muslims in Malaysia of Islamic

banking products and services.

• . To examine the understanding of non-Muslims In Malaysia about the basic

Islamic banking products and services.

• To examine the non-Muslims' attitude towards Islamic banking products and

services.

• To assess non-Muslims' bank selection criteria towards Islamic banking.

7

1.5 Scope of the study

This study will be conducted at the selected Islamic banks in Malaysia,

particularly in Sibu, Sarawak. According to the latest statistics of year 2010 received

from Statistics Department, Kuching division, the total population in Sibu is 233,446, in

which Muslims comprise only 24,937. The statistics proved that Sibu population is

dominated by a majority of who are ethnic Chinese, especially the Fuzhou, as well as

indigenous Melanau, Malay and Iban. There has been marked increase in public buildings

in recent years in Sibu. Besides, Sibu is recently building UCTS University, which is

estimated to have their official launching on September 2013. It is likely to see much

potential in Sibu for future development and progression, as Sjbu now has a well-built

airport and two 4 stars hotels. According to Parochial Sarawakian (2012), Pehin Sri Taib

indicates that Sibu businessmen are aggressive, bold and they have entrepreneurship

skills and that had made Sibu folk successful. This will be a big driving force behind

Sibu's future transformation into a center for technical, tinancial and education support.

He added to say that, Sibu town would have a major role in helping to make Sarawak be

Malaysia's richest state by year 2030. Thus, there will be great market potential in Sibu.

8

1.6 Significance of ,the study

This study focuses on the awareness, knowledge and understanding, attitudes and

bank selection criteria of non-Muslims that influence the acceptance of Islamic banking

products and services. Malaysia is a multi-racial country. It was shown in government

statistics in the year of 2000 that about 60.4% of the population in Malaysia was

Muslims, which in other word that about 40% of the population in Malaysia was non­

Muslims. Islamic banking is not only available for Muslims, but they also targeted their

market segment in non-Muslims market. Hence, non-Muslims market is evenly important

to the continued existence of Islamic banks in Malaysia. Non-Muslims market is

immense and has a significant possible expansion and development for Islamic banking,

as mentioned earlier, there was 40% of the population in Malaysia was non-Muslims in

the year 2000. Islamic banking will have difficulties to compete with conventional banks

if the level of awareness of non-Muslims is still showing pessimistic. Hence, non­

Muslims market is equally important to the survival of Islamic banks in Malaysia. Non­

Muslims market is big and has substantial potential of growth for Islamic banking. If

non-Muslims keep on ignoring the existence of Islamic banks, they will be facing

problems in competing with conventional banks. Thus, by attracting non-Muslims

customers, it can enhance the long term survival of Islamic banks.

Islamic bankers could set up different kinds of marketing activities or campaigns

for the non-Muslims based on their level of awareness by knowing the level of awareness

of non-Muslims in Malaysia towards Islamic banks. Since the Muslims and non-Muslims

9

in Malaysia are come from different cultural background, by knowing the level of

understanding of non-Muslims towards Islamic banks, the Islamic bankers could use

simpler words when approaching non-Muslims potential customers if they happen to

encounter difficulties in understanding some of terms that is used in Islamic banking and

finance. In addition, by knowing the non-Muslims attitude towards Islamic banks, Islamic

bankers could maintain the attitude if the attitudes are favorable to Islamic banks. On the

other hand, the bankers should try to put in more efforts to change the non-Muslims

attitudes towards Islamic banks if the attitudes happen to be unfavorable because of the

lack of uniformity between Shari'ah principles.

In addition, the bank selection criteria are projected to influence a customer's

overall satisfaction towards his or her bank. This study can help to identify a number of

factors, such as convenience, friends and family recommendations, reputation of a bank,

friendliness of the bank staff, etc. In short, the bankers could use the result from this

study to improve their comprehension on the Malaysia non-Muslims banking users and

the profiles if Malaysia non-Muslims potential customers. Besides, it can also aid Islamic

bankers in formulating different strategies and policies to attract more non-Muslims

banking users by knowing the non-Muslims level of awareness, understanding, and

attitudes and banking selection criteria towards Islamic banks.

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1.7 Conclusion

This chapter lays the background of the study, problem statement, research

questions, research objectives, significance of the study. All these layouts will be used to

analyze the level of awareness of non-Muslims of Islamic banking products and services,

the understanding of Islamic banking products and services among non-Muslims, the

attitudes of non-Muslims towards Islamic banking and the assessment of their bank

selection criteria.

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