Islamic banking selection criteria: a multi-ethnic perspective

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Islamic banking selection criteria:

a multi-ethnic perspective

Noradilah Abdul Hadi

Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia, Nilai, Malaysia, and

Mohd Rizal Muwazir

Department of Shariah and Management, Academy of Islamic Studies, University of Malaya, Kuala Lumpur, Malaysia

Abstract

Purpose– The purpose of this paper is to examine selection factors among multi-ethnic customers in Malaysian Islamic banking industry. The information is important to reinforce the argument that ethnicity could become signiﬁcant factor in determining customer behaviour.

Design/methodology/approach – This study uses quantitative approach by using questionnaire (Likert scale) to measure respondents ranking of 25 selection factors. A total of 272 valid responses were generated from 450 questionnaires distributed, with 60.4% response rate. The methods of analysis used are descriptive analysis, factor analysis and Kruskal–Wallis test.

Findings– ^Thefindings revealedfive selection factors (religious and ethical, services and convenience, service quality and benefit, external and operational and charges), with religious and ethical factor as the most important criteria for Malay customers. As for Chinese and Indian customers, they chose services and convenience factor.

Originality/value – This study is conducted to gain new insights on the perception of multi-ethnic banking customers in Malaysia towards Islamic banks and how cultural differences might affect their decisions. Theﬁndings are important for further development of the Islamic banking industry in Malaysia considering ethnicity has a major impact on the society. The acknowledgement of similarities and differences between the ethnic groups could strengthen the relationship with the Islamic banking customers.

Furthermore, incorporation of ethnicity factor in bank’s marketing strategies is important to secure competitive advantage particularly in dual banking system such as in Malaysia.

Keywords Bank selection criteria, Culture, Ethnicity, Islamic banking, Islamicﬁnance, Malaysia Paper typeResearch paper

Introduction

Banking industry is a customer-oriented industry, involving regular and high customer contact (Taleghaniet al., 2011) which indicates the importance of understanding customer preferences. It is recognised that many national markets are not homogenous and represent cultural diversity such as in the USA, Australia, the UK and Malaysia. Understanding culturally diverse market is very important to ensure the success of an organisation operated within the multicultural environment. Specific cultures also have strong influence on the choice of products and decision-making of the customer (Laiet al., 2010). Hence, in multicultural societies, ethnicity becomes an important concept in customer behaviour studies, as it potentially influences their behaviour and perceptions. Ethnicity is a characteristic of racial group membership based on some commonly shared features such as language, race and religion (Jamal, 2003). An ethnic group is a segment of larger societies who share a set of common culture traits and participate in shared activities in which the

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Received 11 February 2019 Revised 28 May 2019 28 November 2019 13 March 2020 Accepted 13 April 2020

Journal of Islamic Marketing Vol. 12 No. 5, 2021 pp. 1063-1078

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1759-0833.htm

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common origin and culture are signiﬁcant ingredients (Joyet al., 1991;Yinger, 1985) . It leads to a sense of belonging and may cause them to feel morally responsible for other members within their ethnic group (Mun, 2013).

Additionally, under Weber’s theory of ethnic relation, the deﬁnition of ethnic groups is as follows:

those human groups that entertain a subjective belief in their common descent because of similarities of physical type or of customs or both, or because of memories of colonisation and migration; conversely, it does not matter whether or not an objective blood relationship exists (Weber, 1968p. 389).

However, Durkheimien theory sees ethnicity as a signiﬁcant force for group integration and morality which becomes evident in the analysis of religious belief practices in ethnic groups.

Hence, religion as a social force that keeps society together is a supreme power in either the primitive or modern world and this is important for ethnicity to survive as ethnic symbols need to be regularly reafﬁrmed (Malesevic, 2004).

The use of ethnicity as a predictor in consumption patterns could be seen across various research contexts (Hirschman, 1981; Joy et al., 1991; Mokhlis et al., 2010).Therefore, recognising the needs, similarities and differences of multi-ethnic customers is imperative particularly within customer-oriented industry. Furthermore, the nature of the Malaysian domestic market is highly characterised by the ethnically segmented consumer market which reﬂect cultural differences (Butt and de Run, 2011;Mokhlis, 2012). In relation to the potential of ethnicity as a signiﬁcant factor in determining customer behaviour, this article aims to examine the selection factors among Malay, Chinese and Indian customers in Malaysian Islamic banking industry to gain insights of their preferences.

A large number of studies have examined the subject of selection criteria in the context of banking services (Andersonet al., 1976;Boydet al., 1994;Devlin and Gerrard, 2005;Gait and Worthington, 2008). Previous studies in bank selection criteria revealed various factors that have signiﬁcant impact on the decision-making process of the customers. Among the common factors are fast and efﬁcient services, friendliness of bank employees, reputation and image of the bank, location of the bank, availability of automatic teller machines (ATMs) and rate of return (Erol and El-Bdour, 1989;Metawa and Almossawi, 1998;Dusuki and Abdullah, 2007;Boydet al., 1994;Abdullahet al., 2012). Meanwhile, socio-demographic of customers and types of banks (either Islamic or conventional banks) are determining the relative importance of each factor as well (Metawa and Almossawi, 1998;Abdullahet al., 2012). Therefore, the degrees of importance for selection factors are varied and cannot be generalised because of different populations, cultures and geographic areas.

Literature review

Malaysian background and Islamic banking

Malaysian society is associated with distinct cultural traditions, language and religious beliefs. According to the Census 2010, with a population of 28.3 million, the major ethnic groups in Malaysia are Malays, Chinese and Indians (Department of Statistics Malaysia, 2010). The majority group is made up of indigenous peoples known asbumiputerawhich refers to the Malays and indigenous people of Malaysia. Thebumiputerasconsist of 67.4%

of the total population; of this percentage, Malays comprise approximately 54% and followed by Chinese with 24.6%, Indians 7.3% and Others 0.7%. In terms of religion, Islam was the most widely professed religion in Malaysia with the proportion of 61.3%, followed by Buddhism at 19.8%, Christianity 9.2% and Hinduism 6.3% (Department of Statistics Malaysia, 2010).

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Malays are considered as the most homogenous ethnic group in terms of culture, language and religion (de Runet al., 2010). According to the Malaysian constitution, a Malay is a person who was born locally, habitually speaks Malay, follows Malay customs and professes Islam (Hirschman, 1987;Hashim, 1976). The religion of Islam is closely associated with Malays, which significantly makes up their identity and affects their culture (Kamaruddin and Kamaruddin, 2009). It also signifies the fact that Islam is the official religion in Malaysia and Muslims as the largest group in the country. The Chinese and Indian communities are supposed to consist of the descendants of immigrants from China and the Indian subcontinent (Hirschman, 1987). Historically, there was mass immigration especially from southern China and India under British colonial rule to provide a labour force (Chuah et al., 2014). This event marked the formulation of multi-ethnic society in Malaysia. In terms of religion, the Chinese are a mixture of Confucianists, Taoists, Buddhists and Christians (Storz, 1999). Meanwhile, the majority of Indian immigrants in Malaysia consist of Tamils from Tamil Nadu, Kerala and some Sri Lankan Tamils with most of them are Hindus (Jahnichen, 2010).

It is reasonable to note that these ethnic groups have their own cultural values and practices. In relation to this,Awanget al.(2012)described the cultural values of the major ethnic groups in Malaysia; Malays have respect for others, faith in God, humility, indirectness, politeness, afﬁliation, appreciative, loyalty, obedience and tolerant; Chinese place major importance on diligence, perseverance, education, wealth and orientation towards family; whereas Indians have high values for the fear of God, sense of belonging, kinship, family, loyalty, modesty, participation, hard work and security. Meanwhile, a comparative research study by Fontaine and Richardson (2005) on cultural values in Malaysia identiﬁed that the key difference between the three major ethnic groups was the cultural perception towards religion. Apart from the rating of the value“devout”, the ethnic groups share most cultural values.

The development of Islamicfinance globally can be traced back in the early 1960s in Malaysia and Egypt (Karasik et al., 2007). Malaysia was one of the first countries to implement a dual banking system that worked in parallel; where conventional and Islamic products are offered simultaneously (Khiyar, 2012;Kashifet al., 2015). The dual banking systems create stiff competition among banks while customers may enjoy selecting the benefits from both systems (Aris et al., 2013).The Malaysian Government plays an important role in the development and growth of Islamic banking by funding Islamic financial service banks and creating the necessary legal framework (Nasser and Muhammed, 2013). It is evidenced that the performance of the Malaysian Islamic banking system was inspiring and there was great support from the political leadership, Parliament and the Malaysian society in general which led to the success of the Islamicfinancial system introduced in Malaysia (Khiyar, 2012). Notably, the Government efforts and initiatives to become a leader in the Islamic world are tied to its colonial and postcolonial history, the integration of religion and ethnicity, which is reflected through its endeavour to promote the country as a global hub for Islamicfinance (Rudnyckyj, 2013).

Islam as the national religion, plays a major role in the identity of Malays and therefore becomes a foundation in the politics and culture of Malaysia (Uddin and Uddin, 2012).

Therefore, Islam played an essential role in the strategy development whereby Islamic values were used as guidance for society and thus created a conducive environment for economic growth (Rudnyckyj, 2013). Accordingly, Islamic banking was introduced to offer Muslimsﬁnancial products in accordance withShariahas theQuransays:

Those who devour usury do not rise except as rises one whom devil has smitten with insanity.

That is because they say,“Trade also is like usury”whereas Allah hath permitted trade and

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forbidden usury. So He to whom an admonition comes from his Lord and he desist, then will that which he received in the pass be his; and his aﬀair rests with Allah. And those who revert to it they are the companions of the Fire; therein shall they abide (Quran, 2:275).

Currently, there are 16 Islamic banks consisting local and foreign Islamic banks offering products and services based on Islamic principles in Malaysia (Bank Negara Malaysia, 2015). The great number of Islamic banking institutions offering Islamic products and services in Malaysia reﬂect the highly competitive environment in the Islamic banking industry. Furthermore, Islamic banks are competing not only among themselves but also with the conventional banks as well because of the similarity of products and services such as saving accounts, current accounts, credit cards and other products and services (Naser and Pendlebury, 1997 andNaseret al., 1999). Likewise, the existence of foreign Islamic banks in the Malaysian banking industry also pressures the local banks to compete as they serve the same market segmentation. With more sophisticated and demanding customers in the banking industry, Islamic banks need to understand their customers and incorporate ethnicity factor in predicting the customers’behaviour.

Ethnicity, marketing and bank selection criteria

Marketeers currently need to have specifically tailored marketing strategies to counter each group of customers that holds specific or similar behaviour and consumption patterns to win their business (Laiet al., 2010). To develop a multicultural marketing strategy, market research is imperative and it starts by understanding the culture of targeted ethnic groups (Emslieet al., 2007). Furthermore, ethnicity is considered one of the most relevant targeting variables in multi-ethnic societies (Butt and de Run, 2011). Targeting refers to a selection of segments that an organisation intends to serve and communicate with which strengthens the perception of that segment being the intended target (Butt and de Run, 2011). A number of companies were motivated to do ethnic consumer segments with targeted marketing in response to increasing diversity in the market and the significant market represented by minority ethnic groups (Emslieet al., 2007). The implementation of ethnic strategies can be informed by developing substantial understandings about the subject and this could be done through research on ethnic group behaviour (Shanmuganathan et al., 2004). Most banks do not emphasise gathering information from ethnic groups either through market research or analysis of customer service because they are relying on the data by value segments (Shanmuganthan et al., 2003). Nevertheless, the analysis of underlying characteristic such as ethnicity can offer a significant contribution in developing proposition or approaches.

Cui (2001)described ethnic marketing as the effort made by marketers to get to a group of consumers most probably because of their distinctive ethnic characteristics. However, ﬁnancial institutions know less about the relationship between ethnicity and customer behaviour compared to retailers (Burton, 1996). As such, a better understanding of customer behaviour inﬁnancial services is valuable to both marketing practitioners and researchers.

Likewise,Butt and de Run (2011)shared a similar view that ethnicity could be used as a target variable particularly for advertising purposes. The past two decades have also witnessed a growing interest in differences between ethnic groups and segmenting the market using ethnicity and culture (Morales, 2004). Consequently, ethnic marketing is receiving more attention from researchers in the consumer behaviour subject area.

Managing customer diversity is vital as multiculturalism affects many countries globally. Hence, there is a need for ethnicity and cultural differences to be fully integrated into the bank marketing literature (Mokhliset al., 2010). Moreover,Armstrong and Haiss (2007)proposed that aspects of ethnicity can be a source of competitive advantage in the

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banking environment as much as within certain national or regional markets because information costs are lower and client identiﬁcation is higher within ethnic groups that share the same language. Therefore, ethnic banking should be considered by the management of Islamic and conventional banks as there is potential to segment customers by their similar traits and cultural differences. Moreover, cultural values may affect the behaviour of customers and their perspectives towards products or services. Thus, customer identiﬁcation could help in improving Islamic banks marketing strategies.

Customer selection criteria in the Islamic banking environment are clearly highlighted by researchers because it is significant and relevant in assisting practitioners and bank marketeers to make decisions. This information is crucial for developing the right marketing strategies to attract customers and lead to profitability. If bank managers could identify and understand the needs of their customers and main selection factor among various ethnic groups, it may lead to the identification of market segmentation for the Islamic banking industry. Table 1 shows research findings from previous literatures in selection factors globally.

Muhamadet al. (2012)suggested that there were four segments of consumers in the Islamicﬁnancial services industry, namely, Religious conviction group; Religious conviction and economic rationality group; Ethical observant group; and Economic rationality group.

Thisfinding leads to new selection criteria for Islamic banking, which is the ethical nature of the bank, because ethics are currently considered as an area for significant discussions in Islamicfinance. Moreover, previous studies argued that the ethical dimension is considered as a main factor for non-Muslims to be attracted to the Islamic financial institutions (Muhamad and Alwi, 2015).

Ethics in Islamic banking is related to social and individual benefits in society (Mansour et al., 2015), which is in line with the objectives ofShariahwhose aim to promote public interest and the prevention of harm. Islamic banks often describe themselves as providers of ethicalfinancial services (Widanaet al., 2015). Theoretically, Islamic banks are linked with ethical responsibilities based on Shariah which promote justice and welfare to society (Mansouret al., 2015). The philosophy of Islamic business requires Islamic banks to operate in a morally, ethically and socially responsible way in accordance with Islamic norms (Dusuki and Dar, 2005). This is different to other organisations that identify making profit as their primary objectives. Hence, Islamic banks need tofind equilibrium between profit and ethical values which should be highlighted in the way they conduct their businesses (Haron and Ahmad, 2000). Nevertheless, there is insufficient effort made by Islamic banks to explain their ethical merits to the customers (Wilson, 2002). Islamic banks should convince and persuade potential customers to transact with them based on their unique characteristics and quality of service which may include being ethical (Wilson, 2002) and help to attract the ethically concerned customers. Likewise, Islamic banks should also emphasise the implementation of Islamic marketing ethics to ensure that their marketing strategies are in line with ethical Islamic boundaries and potentially developing long term customer relationships (Abbaset al., 2019).

In terms of ﬁnancial sector, previous studies suggested that ethnicity should be considered as a construct which has strong potential impact on the use ofﬁnancial services and customers’service expectations (Joyet al., 1991;Snowet al., 1996). It could be concluded that there were clear differences between the ethnic groups involved in the studies.

Furthermore, different ethnic groups perceived the importance of the service quality dimensions differently even though overall, they have similar levels of satisfaction (Lopez et al., 2007). On the other hand, Asian people tend to prefer personalisation and formality during service encounters as they are associated with high uncertainty avoidance and power

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Table 1.

Previous studies in bank selection criteria

Authors/Year Findings

Tesfayeet al.(2019) Thefindings revealed that four factors (technology factors, service quality factors, bank image and reputation factors, and convenience factors) have significant and positive relation with bank selection decision for Ethiopia customers. Meanwhile,financial factor has insignificant relation with customer decision

Chowdhuryet al.(2019) Theﬁndings showed that Religious Preference was the factor that inﬂuenced most customers towards Islamic Banking in Bangladesh irrespective of gender Selvanathanet al.(2018) The study suggested apart from religion, there are other factors such as bank

reputation and cost beneﬁt that could inﬂuence customers in selecting a bank.

Bank reputation and cost beneﬁt has positive relationship on the decision of customers in choosing Islamic banking, whereas religion shows negative relationship on choosing Islamic banking

Md Nawiet al.(2013) The study has identiﬁed six common criteria for Islamic banks selection, namely, the understanding of Islamic banking concepts,Shariahcompliance, religious contradiction, quality and effectiveness of offerings, willingness to deal with Islamic banks, and prospect and potentials of Islamic banking

Sayani and Miniaoui (2013)

Religious aspect of business was important and there was a positive relationship between religious preferences and selection of bank by the customers in the UAE Echchabi and Olaniyi

(2012)

The quantitativeﬁndings demonstrated that service quality and convenience were the main criterion among Malaysian banking customers. However, the qualitativeﬁndings through the interviews revealed that majority of the customers have chosen Islamic banks because of their religious motivation Abduh and Omar (2012) The result revealed that religiosity was ranked as the most important criterion

and affected the decision-making process of an individual. The second important criterion for the respondents was proﬁtability

Ullah and Lee (2012) In Pakistan, the Islamic bank customers ranked their banks primarily based on conventional competitiveness whereas the compliance part was not considered as the main factor in determining their selection

Mansouret al.(2010) The study showed that irrespective of the demographic features and the religion of the respondents, low service charges were the top criteria for customers in the UK. The Islamic nature of the bank was placed second, pointing to the importance of religious orientation

Dusuki and Abdullah (2007)

Customers in Malaysia rated competent personnel and top service quality as the most highlighted criteria when choosing the bank, whereas the bank location and product prices were considered the least important factors by them

Devlin and Gerrard (2005)

Customers chose common factors which were the location of the bank, family relationship, and recommendation of others

Bley and Kuehn (2004) The authors found that the stronger the religious commitment, the greater the preference among Muslims in the United Arab Emirates for Islamic banking Khoirunissa (2003) In Indonesia, the decisions of customers to save in Islamic banks were inﬂuenced

by economic factors, which included economic beneﬁts, fast services, online facilities, and convenience of location as well as religious factors and motivation from family members

Naseret al.(1999) The customers ranked bank reputation as the key factor followed by religious reasoning

Metawa and Almosssawi (1998)

Bank selection decisions by customers in Bahrain were predominantly religious based decisions. Adherence to Islamic principles was found to be the most important selection criterion, followed by rate of return

Boydet al.(1994) The most important criterion was reputation. Less importance was attached to the friendliness of employees, modern facilities, and drive-in service

Erol and El-Bdour (1989)

Respondents in Jordan were proﬁt oriented and the religious motive was not a signiﬁcant motive for selecting Islamic banks

Tan and Chua (1986) Courteous personnel were a signiﬁcant factor for customers in Singapore and strong inﬂuence of friends, family members and neighbours towards the decisions of customers

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distance index which reﬂected the characteristics of Asian cultures and inﬂuenced their perceived service quality (Kashifet al., 2015). Hence, recognising and incorporating ethnicity and culture could improve the bank’s offering and its quality of service.

Research methodology

This study uses self-administered questionnaire surveys which aim to identify the selection criteria of customers towards their Islamic banks. A reliability test was conducted to examine the consistency of the instrument. One of the most commonly used techniques in measuring the reliability of the questionnaire items is Cronbach’s alpha. In this study, the value for Cronbach’s alpha in the questionnaire is 0.959 which indicates that all items are considered reliable with high consistency for further investigation. The data collection was done in two states, namely, Selangor and Kuala Lumpur because both states are considered as high diversity states (Yeoh, 2013). A total of 450 questionnaires were distributed to the Islamic banks customers in the chosen states within the period of data collection. As a result, 302 responses generated, out of which 272 were usable, valid and completed. This gives the response rate of 60.4%. The questionnaire required the respondents to rate the relative importance of 25 factors (Metawa and Almossawi, 1998; Dusuki and Abdullah, 2007;

Echchabi and Olaniyi, 2012) which inﬂuence their choice of Islamic banking including a new factor, namely, ethical (Muhamadet al., 2012).

The questionnaires were distributed to the Islamic bank customers using a stratiﬁed random sampling. This type of sampling involves a process of segregation and followed by random selection of subjects from each stratum (Sekaran, 2003). In this study, stratiﬁcation of the population has been considered according to the geographical areas; Kuala Lumpur and Selangor, and ethnicity of the respondents; Malay, Chinese and Indian customers. There were two methods of questionnaire distribution used in this research. First, a drop off approach was used whereby the prospective respondents were approached nicely and asked if they were willing to answer the questionnaires. Second, a mail survey approach was also adopted to increase and improve the response rate. In terms of data analysis, the responses from the questionnaire were analysed using the IBM SPSS Statistics version 20. Next, Factor Analysis was used to reduce the number of variables related to bank selection criteria to produce a manageable set of factors. Then, Kruskal–Wallis Test was used to test the statistical differences between the means for each of the selection factors among ethnic groups in Malaysia. On the other hand, Mann-Whitney test was used to compare scores for two different groups such as between male and female customers. Considering how ethnic and cultural diversity might affect the decision-making of certain group of customers, the following hypothesis was developed for this study.

H1 There is a signiﬁcant difference among various ethnic groups of customers on the ranking of importance for main selection factors

Findings

Background of respondents

As depicted inTable 2, majority of the respondents were female (60.7%) compare to male (39.3%). Then, in terms of age group, the combination of respondents between age 21–30 and 31–40 represents 75.7% of the total respondents. This indicates that the opinions expressed in the survey reﬂect the perceptions of younger and middle-aged respondents.

The age group of 41–50 represents 16.9%, whereas the remaining two age groups were relatively small percentage with above 50 at 4.0% and below 20 at 3.3%.

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The results illustrated in Table 3 shows that 46% of the respondents were Malay followed by 39.3% of Chinese respondents, and about 14.7% of the respondents were Indian.

As for the religion category, thefindings indicate that 47.1% of the total respondents were Muslim, followed by Buddhist at 28.3%, Hindu at 11.4%, Christian at 11.0% and Others at 2.2%. Thefindings indicate that more than half of the respondents were non-Muslim at 52.9%. It seems that the ethnic and religion classification in Malaysia are well reflected in the above statistics as the reported percentages were quite similar to the demographic population in the country.

Factor analysis: bank selection criteria

In this study, an exploratory factor analysis is applied to all the 25 items within the selection criteria section. The result generatedﬁve factors, namely, religious and ethical, services and convenience, service quality and beneﬁt, external, operational and charges.

Factor 1 which encompasses the religious and ethical associated criteria is considered to be the most important factors perceived by the Islamic bank customers with the highest percentage of variance (32.41%) as demonstrated inTable 4. This factor includes“bank contributes towardszakahpayment”,“bank’sﬁnancial activities according to Islamic law”,

“religious commitment”, “ethical investment by the bank” and “bank promotes ethical values in itsﬁnancial activities”(Table 5).

Table 2.

Background of respondents by gender and age

Frequency (%)

Gender

Male 107 39.3

Female 165 60.7

Total 272 100

Age

Below 20 9 3.3

21–30 114 41.9

31–40 92 33.8

41–50 46 16.9

Above 50 11 4.0

Total 272 100

Table 3.

Background of respondents by ethnicity and religion

Frequency (%)

Ethnicity

Malay 125 46.0

Chinese 107 39.3

Indian 40 14.7

Total 272 100

Religion

Muslim 128 47.1

Hindu 31 11.4

Buddhist 77 28.3

Christian 30 11.0

Others 6 2.2

Total 272 100

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The second important factor is the“services and convenience”which contributes 10.17% of the total variance and involves“fast and efﬁcient services”,“internet banking facilities”,

“convenient location of the bank”,“reputation and image of bank”,“availability of ATMs”,

“wide branch network” and“friendliness of bank’s personnel”. This reﬂects that good service and facilities are vital to ensure that customers choose and stay with an Islamic bank. Then, the third factor is service quality and beneﬁt which comprises “customer service quality”, “competent and knowledgeable personnel”, “parking facilities”,

“competitive proﬁt margin”and“bank’s involvement in charity and community projects”.

Table 5.

Rotated component matrix on factors inﬂuencing selection criteria

Items Factor

1 2 3 4 5

Bank contributes towards Zakah payment 0.811 Bank’sﬁnancial activities according to Islamic law 0.804

Religious commitment 0.793

Ethical investment by the bank 0.569

Bank promotes ethical values in itsﬁnancial activities 0.547

Fast and efﬁcient services 0.773

Internet banking facilities 0.644

Convenient location of the bank 0.628

Reputation and image of bank 0.606

Availability of ATMs 0.558

Wide branch network 0.470

Friendliness of bank’s personnel 0.469

Customer service quality 0.704

Competent and knowledgeable personnel 0.687

Parking facilities 0.659

Competitive proﬁt margin 0.627

Bank’s involvement in charity and community projects 0.403

Mass media advertisement by bank 0.678

Attractive interior of the bank 0.624

Recommendation by family and friends 0.611

Size of bank 0.593

Wide range of products offered 0.486

Hours of operation 0.740

Bank’s imposes low services charges 0.676

Interest-free transaction by bank 0.518

Table 4.

Total variance explained for selection criteria Item

Initial eigenvalues Extraction sums of squared loadings Total % of variance

Cumulative

(%) Total % of variance

Cumulative (%)

1 8.101 32.405 32.405 8.101 32.405 32.405

2 2.541 10.165 42.570 2.541 10.165 42.570

3 1.660 6.641 49.211 1.660 6.641 49.211

4 1.406 5.626 54.837 1.406 5.626 54.837

5 1.136 4.545 59.382 1.136 4.545 59.382

Note: Extraction Method: Principal Component Analysis

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This factor contributes 6.64% variance. Factor four which associated with external criteria, with 5.63% of total variance and includes“mass media advertisement by bank”,“attractive interior of the bank”,“recommendation by family and friends”,“size of bank” and“wide range of products offered”. The ﬁnal factor is operational and charges which involves

“hours of operation”,“banks imposes low services charges”and“interest-free transaction by bank”. This factor constitutes 4.55% of total variance and seems to be the least important factor by the customers.

Comparative analysis between selection factors and ethnicity

Table 6displays a comparative analysis between the importance offive selection factors and ethnicity of the customers. The analysis above demonstrates that the Malay, Chinese and Indian respondents were significantly different in their perception towards the importance of allfive selection factors, namely, religious and ethical (p= 0.000), services and convenience (p= 0.021), service quality and benefit (p= 0.008), external (p= 0.000) and operational and charges (p= 0.005). The analysis reveals that each ethnic group stands on a different opinion pertaining to the importance of these factors. AndTable 7presents the ranked factors according to the multi-ethnic customers.

Conclusion

The results obtained from the questionnaire suggest that demographic background of customers does inﬂuence their preferences, particularly ethnicity background. The

Table 6.

Kruskal–Wallis Test comparing selection factors amongst various ethnic groups

Ethnic N Mean rank Asymp. sig.

Factor 1

(Religious and ethical)

Malay Chinese Indian

125 107 40

188.84 86.73 106.09

0.000

Factor 2

(Services and convenience)

125 107 40

144.10 120.75 154.88

0.021

Factor 3

(Service Quality and beneﬁt)

125 107 40

149.68 118.45 143.59

0.008

Factor 4 (External)

125 107 40

164.00 106.41 131.05

0.000

Factor 5

(Operational and charges)

125 107 40

152.48 120.09 130.46

0.005

Table 7.

Main selection factors according to ethnic groups

Rank Malay Chinese Indian

1 Religious and ethical Services and convenience Services and convenience 2 External criteria Operational and charges Service quality and beneﬁts 3 Operational and charges Service quality and beneﬁts External criteria

4 Service quality and beneﬁts External criteria Operational and charges 5 Services and convenience Religious and ethical Religious and ethical

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statistical analysis showed a significant value on the differences among the ethnic groups in ranking the importance of certain factors. Overall, customers ranked religious and ethical factor as the most important factor that motivated them to choose Islamic banks. This is particularly evidenced for Malay customers. Based on the Kruskal–Wallis test, Malay ethnic group ranked religious and ethical as the most important factor, whereas this factor was ranked as the least important factor for the Chinese and Indian customers. Thefindings suggest that there is a positive relationship between the selection of Islamic banks and religious motivation among Muslim customers as proposed byLtifiet al.(2016). A possible explanation for this result may be because of the association of Malay ethnic group with Islam as their religion. As stated in Article 160(2) of the Federal Constitution, for a person to be Malay, he must be a Muslim (Mohd Noret al., 2012). In this case, the religion of Islam has significantly influenced the foundation of Malay ethnic group’s identity and culture (Kamaruddin and Kamaruddin, 2009;Uddin and Uddin, 2012).

Accordingly, bank managers need to be aware of the increasing knowledge on Islamic banking products will lead to the acceptance of the system among Muslim customers as part of their religious commitment.Amin et al.(2013)also recognised that in general, Malay ethnic group value religion more than others in Malaysia. Meanwhile, both of Chinese and Indian customers ranked second factor, namely,“services and convenience” as the most important factor for them. On the contrary, Malay customers chose this factor as the least important factor. Additionally, Malaysia is considered as a collectivist country where the communities placed high importance on culture and value elements such as religious and family, and this includes their decisions onfinancial aspect (Muhamad and Alwi, 2015). This is completely different for Chinese and Indian customers whereas their main consideration would be convenience and reliability aspects. Therefore, Islamic banks should consider religious and ethical factor as a significant value proposition for Islamic banking industry while at the same time emphasising and improving bank’s quality of services. In conclusion, H1is accepted as there is a significant difference between ethnicity of customers and:

religious and ethical;

services and convenience;

service quality and beneﬁt;

external; and

operational and charges.

Research contributions and implications

The empirical evidence gathered from this research has positive implications for the body of knowledge andfinancial institutions. First, thefindings will enhance current understanding on the similarities and differences between the three major ethnic groups of Islamic banking customers in Malaysia, contributing to thefield of marketing forfinancial institutions. In particular, this study extends knowledge in the existing literature on the behaviour of customers within multicultural society by accepting the assumption that ethnicity does influence human behaviour and how they perceived issues such as bank selection factor.

This research is important for further development of the Islamic banking industry in Malaysia considering ethnicity has a major impact on the society. The information provided could improve the understanding of customers particularly from multi-ethnic and multicultural market. By understanding similarities and differences between the ethnic groups, bank marketers may use that information to their advantages so that close relationship with the customers can be built, and subsequently improve satisfaction and

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loyalty among them. Exploring the effect of behaviour across diverse ethnic groups on organisations including Islamic banks is critical particularly in a market that is moving towards greater ethnic diversity. Multi-ethnic society such as in Malaysia has always recognised the strong bond or sense of belonging between the ethnic groups. Thus, bank managers must realise that the effects of ethnic group culture on their decisions and actions are complex and subtle.

Furthermore, this study may beneﬁt the management of Islamic banks in providing a general overview of preferences among the multi-ethnic customers in Malaysia. The important aspect is to strategically market the Islamic products and services according to the demands and needs of the customers. The result could help bank managers make improved decisions about the factors that perceived as important to the particular ethnic groups. Given the importance of religious and ethical factor to the customers, particularly for Malay ethnic group, bank managers should offer to provide better advertisement related to compliance and ethical aspects of Islamic banks to attract customers.

It is reasonable to suggest that ethnic marketing is relevant to be applied in Malaysian Islamic banking industry because of the multi-cultural nature of its customers. Banking institutions that well informed about the ethnic groups in its local market can design their marketing programmes accordingly, targeting strategy that could beneﬁt the institutions.

However, marketers need to be careful dealing with ethnic targeting as it is a major challenge to understand their culture and value system (Butt and de Run, 2011). In particular, Islamic banks need to understand the size and demographic characteristics of the local ethnic markets statistically and optimising the location of the branches to identify the potential customers and how to attract them. Prior studies suggested that when an ethnic group was targeted, they reacted positively and if an ethnic group becomes aware of not being targeted, the group may have negative attitudinal, emotional and behavioural reactions (de Runet al., 2010).

Research limitations

There are two main limitations that need to be considered in this research. First, the sample of this study does not cover the total population of Islamic banks customers throughout Malaysia as the chosen sample is largely from central cities in Malaysia, which is accessible and appropriate for multi-ethnic research to be conducted. Moreover, this research involves three major ethnic groups in Malaysia, with the exclusion of minor ethnic groups. This is because of the representation issue. In particular, previous works on multi-ethnic customers in Malaysia were predominantly conducted among these three major ethnic groups as the percentage and representation of the minor ethnic groups mainly in Islamic banking studies was very minimal, thus not being highlighted .

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