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Islamic Banking a Study in Singapore

Islamic Banking a Study in Singapore



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Islamic Banking Research in Singapore is uploaded by Iqbal Sediq
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International Journal ofBank Marketing15/6 [
] 204–216 © MCBUniversity Press[
Islamic banking: a study in Singapore
Philip Gerrard
Division of Banking and Finance, Nanyang Business School, NanyangTechnological University, Singapore
J. Barton Cunningham
School of Public Administration, University of Victoria, Canada
Establishes that, in Singa-pore, which has a minority ofMuslims in its population,both Muslims or non-Muslimsare generally unaware of theculture of Islamic banking.Also the two separate groupshave different attitudestowards the Islamic bankingmovement, with the degree ofdifference depending on thenature of the respectivematter put to them. Forexample, when asked whatthey would do if an Islamicbank did not make sufficientprofits to make a distributionin any one year,62.1 percent of Muslims said theywould keep their depositswithin the Islamic bankingmovement, while 66.5 percent of non-Muslims said theywould withdraw theirdeposits. In relation to bankselection criteria, there wasgeneral accord as betweenMuslims and non-Muslims onthe rating of the variouscriteria. Five significantdifferences were noted, themost relating to “being paidhigher interest on savings”.The desire to be paid higherinterest was far stronger withnon-Muslims.
While the amount of published informationconcerning Islamic banking principles andtheir application in Muslim countries contin-ues to grow, relatively little relates to theapplication of the same principles in coun-tries which have small populations of Mus-lims. This gap will possibly narrow over theyears as Muslim banking becomes even moreinternationalized and forms part of the finan-cial scene in those countries in which Mus-lims are in the minority.One country, which has a minority of Mus-lims in its population, is Singapore. In the1990 census, there were about 350,000 Mus-lims in the resident population of some 2.3million. Even though there is such a smallnumber of Muslims living in Singapore, it ispossible that Islamic banking will be intro-duced into the country in the not too distantfuture. This possibility arises for two mainreasons. First, neighbouring Malaysia andIndonesia have already successfully intro-duced Islamic banking into their financialservices sector. As Singapore is a majorprovider of financial services in South EastAsia, to compete for Muslim sourced depositson an equal basis would require Islamicbanking to be made available in Singapore.Second, Singapore’s Finance Minister, inmid-June 1994, announced that commercialbanks[1] would be permitted, if they felt itwas viable to do so, to set up an Islamic bank-ing operation.There are a range of matters which anylocal bank will have to consider in decidingwhether to start up a local Islamic bankingoperation. While, possibly, all or almost all of Singapore’s 350,000 Muslims would supportany Islamic banking operation, that numberof potential customers may be considered asbeing too small for a viable operation, espe-cially if several banks decide to enter themarket. If the number of resident Muslims isconsidered to be too small to create a viableoperation, local banks may wish to establishif non-Muslims view Islamic banking in apositive way and, if so, establish the likelysupport which they would give.The comments and observations aboveraise a number of questions. For example, incountries where Muslims are in the minority;first, “to what extent are local people aware of the culture of Islamic banking?”; second,“what is the attitude of local people towardsIslamic banking?”; and third, “what are thebank selection criteria of local people?” Bysampling both the Muslim minority and thenon-Muslim majority in such countries,appropriate comparisons can be made.Answers to these questions should proveinvaluable to any bank which is consideringsetting up an Islamic banking operation in acountry which has a small population of Mus-lims.Immediately following this introduction,there is a review of the pertinent literature,this covering the culture of Islamic banking,attitudes towards Islamic banking and thebank selection process. Then, the objectivesof this study are listed and an explanationprovided of the methodology that was used.The results are thereafter presented, followedby conclusions which, among other things,contain general comments about the resultsobtained. The present research produced anumber of interesting ideas for future studiesand these are described in the final part of this paper.
Literature survey
A review of the literature established an idealreference source of materials and researchwritings concerning Islamic Banking, eventhough this merely covered the decade of the1980s (Ali and Ali, 1994). Using this and otherinformation sources, it was found that arange of published information was available.The information was in the form of PhD dis-sertations (El-Bdour, 1984; Khan, 1983), bookswritten by leading academics and practition-ers (e.g. Homoud, 1985; Shirazi, 1990), pub-lished research in the form of reports (e.g.Ahmad, 1987; Iqbal and Mirakor, 1987) and journal articles (e.g. Erol and El-Bdour, 1989;Erol
et al.
, 1990; Shook and Hassan, 1988; andSudin
et al.
, 1994).Relevant parts of the above informationsources, plus pertinent material from othersources are described in the three-sectionliterature survey below. In the first section,
Philip Gerrard andJ. Barton Cunningham
Islamic banking: a study in Singapore 
International Journal ofBank Marketing15/6 [1997] 204216
the culture of Islamic banking is described; inthe second section, attitudes towards Islamicbanks are reviewed; and, in the third section,bank selection criteria are described.
The culture of Islamic banking
The Quran (Koran), the Muslims’ Holy Book,explicitly deals with economic-relatedmatters and how they apply in Islam. The
, this being the Islamic law of humanconduct, is derived from the Qur’an. The
prohibits what is called “Riba” (i.e.payment over and above what has been lent –which causes the payment of interest orusury to be a wrong). What the
doesnot prohibit is profit acquired from a tradingactivity, the reasoning behind this positivestance being that there is a risk of lossinvolved in any trading activity. With Riba, intheory, there is no risk of loss. For example,with a conventional fixed-term deposit, all adepositor has to do is wait until the maturitydate of the deposit comes along and, if themandate that he or she gave to the bank wasfor the repayment of capital and interest, thatis what the depositor will get back (inessence, placing monies in a traditional fixed-term deposit involves no risk).Because of Riba, Islamic banks have had todevelop financial products which are not inconflict with the
. This has resultedin traditional deposit and lending products,which are made available by what can becalled “conventional” banks, being restyledso as to satisfy the
. The task hasbeen achieved by creating a number of specialfinancial products (Ali and Ali, 1994). Witheach of these products, the parties (i.e. thedepositors and the borrowers) can be consid-ered as operating in a partnership to which arisk is attached. Both will receive a rate of return which is based on performance –rather than pay interest or receive interest ata pre-determined rate. The four types of prod-uct[2] are briefly described below.The first product is called “Ijara” andinvolves a bank purchasing an asset andleasing it to a client. The second product iscalled “Modaraba” and involves a contractbeing entered into between an Islamic bank and a client whereby the Islamic bank pro-vides all the capital a client needs for anenterprise. The client receives a share in theprofit as compensation for his know-how andmanagement. The third product is called“Musharaka” and it is very similar to“Modaraba”. However, with “Musharaka”,the client provides a proportion of the capitalin addition to management and know-how.The fourth product is called “Murabaha” andinvolves an Islamic bank purchasing goods,or raw materials, or equipment, or machineryor any other items of economic significancefrom a third party at the request of a client.These “goods” are then sold by the bank tothe client on a spot or deferred payment basisat purchase price plus an agreed profit for thebank (some authors describe this as cost-plusor mark-up financing).
Attitudes towards Islamic banking
Part of the study of Erol and El-Bdour (1989),conducted in Jordan, aimed at establishingthe attitude of local people towards Islamicbanking. The authors designed nine ques-tions and/or statements which were pub-lished in the appendix of their article. Onreviewing their results, it appears that thesample was asked to answer each part of every question/statement. The approach mayhave caused problems in the analysis. For,with some statements (e.g. see their “ques-tions” 3, 5, 7, and 9), respondents were askedto answer by stating “yes” or “no” to each of the four prompts, these being I: “stronglyagree”, “agree”, “disagree” and “stronglydisagree”). It appears that some who mayhave said “no” to the “strongly agreed”prompt may have also have said “no” to the“strongly disagreed” prompt. Irrespective of this observation, the authors interpretedtheir results and, in so doing, made the fol-lowing general comments: religious motiva-tion did not appear to play a primary role inbank selection; the opening of new brancheswas not an important factor in increasing theutilization of financial services provided byIslamic banks; while 39.4 per cent of respon-dents would withdraw their deposits if anIslamic bank did not generate sufficientprofit to make a distribution in any one year,30.4 per cent would retain their depositsbecause the Islamic bank could distribute ahigher dividend the following year; there wasa belief that Islamic banks were not offeringsufficient interest free loans which couldcontribute to solving community problems ina just and efficient manner; the eliminationof pre-determined interest rates on loansprovided for, say, housing construction, wouldbenefit borrowers; and, if respondents cameinto an unexpected sum of money, they wouldpredominantly either start a small enterpriseor project or place the monies in a profit earn-ing investment.Because the authors sought answers to eachpart of their statements/questions, any com-parison of the general comments mentionedabove with the results of the present studymust be treated with caution.
Bank selection criteria
Much has been written since the early 1960son the theme of the bank selection process
Philip Gerrard andJ. Barton Cunningham
Islamic banking: a study in Singapore 
International Journal ofBank Marketing15/6 [1997] 204–216
(see, for example, the published articles of Anderson
et al
. (1976); Holstius and Kaynak (1995); Kaynak (1986); Kaynak 
et al
. (1991);Laroche
et al
. (1986), and the working paper of Chan (1989)) but, for the purposes of the pre-sent study, focus will be made on the pub-lished works of Erol and El-Bdour (1989), Erol
et al.
(1990) (because, in these two studies, theauthors compared the bank selection processin relation to “conventional” and Islamicbanks) and Sudin
et al
. (1994) (because theseauthors compared responses about the bank selection criteria of both Muslims and non-Muslims).In addition to establishing attitudestowards Islamic banking, Erol and his co-researchers (1989 and 1990) sought to estab-lish, then compare, the bank selection crite-ria of customers of conventional and Islamicbanks in Jordan. The respondents had tosatisfy the researchers criteria that theyshould maintain a relationship with either aconventional bank or an Islamic bank (i.e.they must not have had a relationship withboth types of bank). The researchers’ ques-tionnaire contained 20 bank selection crite-ria. For those who patronized Islamic banksalone, the three most important bank selec-tion criteria were: “the provision of a fast andefficient service”, “the bank's reputation andimage” and “confidentiality of the bank”. Thesame three factors were of greatest impor-tance to those who patronized conventionalbanks alone, but in a different sequence, thesequence being: “confidentiality of the bank”,“the bank’s reputation and image” and “theprovision of a fast and efficient service”.There were significant differences betweenthe patronizers of the two types of bank asregards pricing policies (these being theavailability of credit on favourable terms,lower service charges on cheque accountsand for other services, lower interest chargeson loans, higher interest payments on savingsaccounts – which were significantly moreimportant as regards those who patronizedconventional banks). Two other bank selec-tion criteria were found to have significantdifferences, these being the need for a widerange of services (this was more importantfor those who patronized conventional banks)and those wanting financial consulting ser-vices to be provided (this was more importantfor those who patronized Islamic banks).Sudin
et al
. (1994), among other things,sought to establish the relative importance of certain bank selection criteria using a sampleof Muslims and non-Muslims, none of whomhad to be patronizing an Islamic bank at thetime of the study. Twenty-six bank selectioncriteria were listed in their questionnaire.The respondents lived in three medium-sizedtowns in Malaysia which had a somewhatequal distribution of Muslims and non-Mus-lims. The three most important criteria in thebank selection process for Muslims were:first, “the provision of a fast and efficientservice”; second, “the speed of transaction”;and third, “friendliness of bank personnel”.As regards the non-Muslims, the three mostimportant bank selection criteria were: first,“friendliness of bank personnel”; second,“the provision of a fast and efficient service”;and third, “the reputation and image of thebank”.Published literature has been sourcedwhich explains the culture of Islamic bank-ing, the attitude of Muslims to Islamic bank-ing in a country where Islamic banking hasbeen well developed and the bank selectioncriteria of people living in countries whichhave majorities of Muslims in their popula-tion.
The present research, as mentioned in theintroduction, is a study of Islamic banking inSingapore, a country which has a minority of Muslims in its population. More particularly,the study seeks to establish the level of aware-ness that Singaporeans have in relation to theculture of Islamic banking, the attitude of Singaporeans towards Islamic banking and aranking of the bank selection criteria of Sin-gaporeans – and for each part of the study, tosee if Muslim responses are different fromnon-Muslim responses. In the context of whatis said immediately above, the following threehypotheses were formulated:1Muslims, in contrast to non-Muslims, willbe more aware of the culture of Islamicbanking and, as a consequence, be moreaware of the meaning of fundamentalterms used in Islam and Islamic bankingand finance.2Muslims, in contrast to non-Muslims,presently have a different attitude towardsIslamic banking.3 There will be no significant differencesbetween Muslims and non-Muslims in theranking of the various bank selectioncriteria.
Research design
Survey forms were developed and people whowere entering or leaving Singapore’s under-ground system (the MRT) were approachedand asked if they would be prepared to com-plete the questionnaire. Stations in threelocations were chosen, namely Bukit Batok in

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