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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 of Corporate 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 Akademik pusat Khldma . SARAWAK Ui'ilVE ITI I LAYSJA TABLE OF CONTENTS CHAPTER TITLE PAGE TITLE 1 2 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 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 LITERATURE REVIEW 2.1 Islamic banking in Malaysia 12 viii 2.2 Awareness of Islamic banking products and services among Non-Muslims 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 3 17 44 METHODOLOGY 3.1 Research Design 45 3.2 Data collection methods 46 3.2.1 Primary data 46 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 Constructs measurement 56 3.6.1 Nominal scale 57 3.6.2 Interval scale 57 3.3 3.6 ix 3.7 3.8 3.9 4 Data processing 57 3.7.1 Data screening 58 3.7.2 Data coding 59 3.7.3 Data analysis 59 Descriptive analysis 60 3.8.1 Reliability test 60 3.8.2 Pearson Product Moment Correlation 61 3.8.3 Multiple linear regressions 63 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 77 4.3.3 Understanding of non-Muslims towards x Islamic banking 77 4.3.4 Attitude of non-Muslims towards Islamic banking 78 4.3.5 Banking selection criteria towards 5 Islamic banking 79 4.4 Analysis of the multiple regression 80 4.5 Conclusion 84 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 TITLE NO 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 4.6 Frequency and Percentage of Respondent according to Monthly Income Level 70 4.7 Cronbach's A'lpha 72 4.8 The Correlation Coefficient of the Awareness, Understanding, Attitudes, 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 Khidma t 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 ,t he 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. 10 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. 11