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IBIMA Publishing

Journal of Electronic Banking Systems
Vol. 2010 (2010), Article ID 750059, 10 pages

Conceptual Framework for the

Adoption of Islamic Retail Banking
Services in Malaysia
Seethaletchumy Thambiah, Uchenna Cyril Eze, Khong Sin Tan,
Robert Jeyakumar Nathan, and Kim Piew Lai

Multimedia University, Selangor, Malaysia


The aim of this study is to identify factors that influence the adoption of Islamic retail banking
services among the banking consumers in Malaysia, specifically in the urban and sub urban
regions of Malaysia. Islamic banking has evolved as a new reality in the international financial
scene since 1970s. Since then numerous studies have been undertaken by researchers to
examine issues related to Islamic banking across the globe. However past literature, revealed a
lack of marketing studies on Islamic retail banking services. Roger’s innovation diffusion model
underpins the conceptual development in the paper. This study aims to fill the gap in the
literature by providing a framework to assess the adoption of retail Islamic banking services in
Malaysia. Comparative study on factors influencing consumer adoption behavior on Islamic
banking services between Malaysia’s urban and sub urban regions would provide compelling
insights into this segment of the banking industry that will be useful to both consumers and

Keywords: Adoption Framework, Islamic banking, Malaysia


Introduction prohibition of monopoly, and cooperation

According to a research study conducted for the benefit of society and development
by Fazlan et al., (2007), the emergence of of all halal aspects of business that are not
interest-free financial institutions has prohibited by Islam (Haron, 1997;
created a new dimension to economic Mirakhor, 2000). Unlike conventional
models Widely known as Islamic banks, banking system, the Islamic banking
these interest-free institutions are system prohibits usury (riba), the
organized financial intermediaries which collection and payment of interest, instead,
operate in accordance with Islamic law it promotes profit-sharing in all conduct of
(Shariah Law) (Iqbal et al., 2007; M.Kabir H banking businesses (BNM, 2007).
and Mervyn KL, 2007). The term “Islamic
Banking” is defined as the conduct of Over the past four decades, Islamic banking
banking operations in consonance with has emerged as one of the fastest growing
Islamic teachings (Mirakhor, 2000; Haque industry, at an estimated growth rate of 15-
et al., 2007). The main principles of Islamic 20 percent per annum (Haque et al., 2007).
banking activities comprise of prohibition It has spread to all corners of globe and
of interest or usury (riba) in all forms of received wide acceptance by both Muslims
transaction, undertaking business and and non-Muslims (Aziz ZA, 2006). Great
trade activities on the basis of fair and emphasis is given by the Malaysian
legitimate profit, giving zakat (alms tax), government to develop a well functioning

Copyright © 2010 Seethaletchumy Thambiah, Uchenna Cyril Eze, Khong Sin Tan, Robert Jeyakumar
Nathan, and Kim Piew Lai. This is an open access article distributed under the Creative Commons
Attribution License unported 3.0, which permits unrestricted use, distribution, and reproduction in any
medium, provided that original work is properly cited.
Contact author: Seethaletchumy Thambiah, ,
Journal of Electronic Banking Systems 2

and efficient Islamic banking system. It is In the context of Malaysia it has been more
not a coincidence that Islamic banking is than two decades now, ever since Islamic
making its progress in Malaysia but it is the banking was launched in Malaysia, way
Malaysian government’s vision to develop a back in 1983, when Bank Islam Malaysia
progressive and robust Islamic banking Berhad (BIMB) first commenced its
industry, rooted in the Islamic core values operations (BNM, 2005). And it is the
and principles that best serve the needs of aspiration of the Malaysian government to
the nation’s economy. It is the aspiration of have a strong Islamic banking industry
the Malaysian government to have a strong capturing 20 percent of market share of
Islamic banking industry capturing 20 financing and deposits in the Malaysian
percent of the market share of financing financial industry by 2010 (Aziz ZA, 2005).
and deposits in the Malaysian financial However, the market share of Islamic
industry by 2010 (Aziz ZA, 2007). assets, deposits and financing as of year
2008, stood at only 15.4 percent, 14.02
Background of Islamic Banking in percent and 13.96 percent of the industry’s
Malaysia total, despite being in operation for the
While the opportunities for Islamic banking past twenty five years (BNM, 2008).
will continue to grow there is a need to Undoubtedly, it is a growing market but the
develop products and services that are in growth is slow compared to some
line with the changing needs and demands countries like Bahrain and Bangladesh
of customers to remain competitive in the which already have exceeded 20 percent of
business. Generally fiercer level of market share in terms of assets, deposits
competition in the banking sector has and financing.
intensified over the past few years not only
in Malaysia but globally. The process of Moreover, Bahrain and Bangladesh also
globalization and liberalization together practice a dual banking system like
with digitalization has fueled the intensity Malaysia where, Islamic and conventional
of business competition today. Islamic banking co-exist, but these countries have
banking in Malaysia, as one of the most successfully captured substantial market
important players in the service industry is share compared to Malaysia. Bahrain which
faced with stiff competition, not only with entered into Islamic banking system in
the long established conventional banking 1978 (Bahrain Islamic Bank), has emerged
system and the international players but into a leading Global Islamic financial
also within themselves. centre in the Middle East within two
decades of its existence (BMA, 2007).
As competition intensifies and as one of the Today Bahrain has the highest
most important players in the service concentration of Islamic financial
industry today, Islamic banking is no institutions than any other country. There
longer regarded as a business entity are 187 banks operating in Bahrain of
striving to fulfill only the religious which 24 are Islamic banks and it has
obligations of the Muslim community, but successfully captured, market share of 32
more significantly as a business that ought percent in terms of assets, 29 percent in
to be as competitive as conventional terms of financing and 37 percent of
banking. This necessitates Islamic financial deposits, respectively (BMA, 2007).
institutions to really understand the needs
of their customers towards Islamic banking Despite that, in the Asian region, the
services. In Malaysia, customers’ positive growth of Islamic banking in Bangladesh
perception towards Islamic banking is far which entered into Islamic banking system
more crucial mainly due to the fact that in 1983 (Islami Bank of Bangladesh), same
Islamic banks have to compete with the time with Malaysia, is extremely
dominant and long established remarkable (CBA, 2007). As of 2007, the
conventional banks in a dual-banking Islamic banking in Bangladesh has
system, since 1983 (Asyraf, 2007). captured market share of 29 percent, 30
percent and 28.5 percent in terms of
3 Journal of Electronic Banking Systems

Islamic assets, financing and deposits share for Islamic banking assets, financing
respectively (CBA, 2007). and deposits (2003-2008) is illustrated in
Appendix 1. Therefore, it is imperative to
Therefore in the context of Malaysia, conduct continuous research and
although the number of Malaysian banking periodical surveys in this area to clearly
consumers using Islamic banking products understand the changing needs and the
and services are growing, obviously a benefits sought by consumers, which will
majority still have not adopted the system. definitely help the financial institutions to
The system has not fully reached or make plausible and effective marketing
diffused all levels of community like the decisions regarding Islamic banking
matured market of conventional banking. A products.
successful system is one that has been well
exposed and at the same time well Unfortunately the marketing aspects of
accepted and extensively used by the Islamic banking in Malaysia, although
people (Aziz, ZA, 2007). In this regard, the important, received little attention from
ability of the Islamic banking industry to the scholars especially after the year 1999
capture a significant market share that is (Ahmad et al., 2002; Abbas et al., 2003;
20 percent by 2010, in a rapidly evolving Asyraf et al., 2007). Furthermore, previous
and competitive financial environment, is a marketing studies in Malaysia are limited
challenge. in scope and representation, where the
main focus was consumers of urban
Despite that, although Islamic banks have regions and very limited studies were
been able to grow quickly, their growth has represented by consumers from suburban
been constrained by lack of innovation ( and rural regions (Abbas et al., 2003;
Mirakhor, 2000; Asyraf et al., 2007; Bobat, Haque et al., 2007; Asyraf et al., 2007;
2007). Whereas, innovation is the key to Fazlan et al., 2007). Besides that, most of
sustainable and competitive marketing the previous Islamic banking adoption
advantage which, will ensure the future studies in Malaysia were represented by
growth of Islamic financial markets. Muslim consumers (Kader et al., 1995;
According to Bobat (2007), developing new Naser et al., 1999; Ahmad et al., 2002)and
Islamic financial products in compliance only limited studies have included non-
with the Shari’ah is challenging. Therefore, Muslims as respondents (Haque et al.,
Failure to provide the full range and the 2007; Asyraf et al., 2007).
right quality of products as per the need of
the customers may defeat the very purpose Malaysia cannot remain unaware of the
behind Islamic banks’ existence and to stay new competition growing in neighboring
competitive in the industry. Singapore and Thailand. Singapore is an
important economy in the South-East Asian
Thus, developing innovative products and region, where new initiatives are aimed, in
widening the product range calls for developing Islamic asset management.
substantial and continuous research in this Local financial institutions are warned, that
area because understanding customer without further growth and consolidation
needs is the key factor that determines the of this industry there is a possibility that
consumer demand and successful Singapore will position itself to eventually
marketing of a product or service (Mettawa become the lead player in South-East Asia
SA and Almossawi M, 1998; Naser et al., (Bobat, 2007).
1999). Moreover, success in marketing
relies on information about complete and In this environment, for the Malaysian
up-to-date consumer profiles. Furthermore Islamic financial institutions to formulate
Islamic banking in Malaysia is still at its and implement successful marketing
developing stage and there are tremendous strategies is a challenge again. This is
growth opportunities as it is increasingly because the key ingredient here is a clear
gaining prominence in the region and, as it understanding of the behavior, attitudes
has the potential to be the regional hub of and perceptions of their banking
Islamic finance. The growth in market consumers (Bobat, 2007).
Journal of Electronic Banking Systems 4

examined the adoption of Islamic banking

Research Objectives in Singapore. Moreover, the marketing
The objective of this study is to understand aspect of Islamic banking, though
the nature of consumer adoption of Islamic important, received little attention from
banking, in particular retail banking the scholars (Naser et al., 1999; Almossawi,
services, in urban and sub-urban regions of M 2001; Ahmad et al., 2002; Asyraf et al.,
Malaysia. Specifically the objectives are 2007). This is obvious from the literature
spelled out as below: review, after the year 1999; there have
been very few studies on the marketing
• To determine the factors that affect, aspect of Islamic banking, especially in
Islamic banking adoption in Malaysia where Islamic banking is still at
Malaysia. developing stage.
• To compare the similarities and
differences of factors that affect Apart from the above, in the context of
Islamic banking services adoption Malaysia, the previous studies related to
between the urban and sub-urban Islamic banking adoption is limited in
regions of Malaysia. scope either due to limited sample size or
• To analyze the perception and restrictive in representation (Asyraf et al.,
preference of banking consumers in 2007). As opined by Asyraf and
regard to Islamic banking services in Nurdianawati (2007), research by Ahmad
the urban and suburban regions of and Haron (2002), for instance was
Malaysia. represented by only 45 respondents. As for
Kader (1993, 1995) and Haron et al, 1994),
Theory Building their samples were restrictive in the sense
While numerous studies have been that they were collected from one single
undertaken to examine issues in the wider location or district. Kader’s study (1993,
context of Islamic banking system, 1995), the survey was confined to one
comprehensive and continuous research in location, that is, Kuala Lumpur. Similarly
the area of marketing particularly, for the studies conducted by Haron et al.,
consumer adoption of Islamic banking (1994), the samples were drawn from
services in the specific context of Malaysia three towns namely: Alor Setar, Sungai
has been rather limited. This study aims to Petani and Kangar. Whilst, Asyraf and
address the question about factors Nurdianawati (2007) in their research
affecting Islamic banking adoption not only have included only the major cities of
in the urban regions of Malaysia but most Malaysia, that is, Kelantan, Penang, Kuala
importantly the sub-urban regions of Lumpur and Johore and did not cover any
Malaysia as well. It is crucial to gain a towns from the sub-urban regions and
thorough understanding of the rural regions of Malaysia. These efforts
differentiated needs and preferences of could be inadequate to represent the
customers between these two regions, so overall needs and demand of the banking
that appropriate marketing strategies can consumers in Malaysia. Therefore, samples
be formulated to capture the market, to conduct a comparative analysis for this
instead of having a uniform marketing study will be drawn from the major cities
strategy for all the segments across and towns classified as minor settlement
(Ahmad et al., 2002; Abbas et al., 2003; regions (suburban) of Malaysia, in order to
Asyraf et al., 2007 ). cover wider scope of representation.

In addition, the traditional focus of CONCEPTUAL FRAMEWORK

adoption research, always has been on new
product innovations and very small but Diffusion of Innovation Theory (DOI)
growing number of studies have been One of the widely used models in the area
conducted on the adoption of financial of innovation adoption is Rogers’ “Diffusion
services (Sathye et al., 1999; Meuter et al., of Innovation” theory (Rogers E.M, 1999,
1999; Black et al., 2001; Gerard, 2003).One 2003). The scholarly work of Roger (1962)
exception being Yusof (1999), whose thesis has encouraged research studies in the
5 Journal of Electronic Banking Systems

area of diffusion and adoption extensively research is derived from the theory of
(Rogers, 1999, 2003). Approximately 5,200 Diffusion of Innovation model (Rogers,
diffusion studies had been identified by 2003).
Rogers (2003) while working on the 5th
edition of his text. In general, the adoption Research Variables
process has been defined as the process Islamic banking adoption being the
through which individual adopters pass dependent variable, the independent
from awareness to full acceptance of a new variables include: Consumer Awareness,
innovation (Rogers E.M, 1999; 2003). Relative Advantage, Compatibility,
According to Roger there are two levels to Complexity, Trialability, Observability and
adoption. Initially, innovation must be Uncertainty.
purchased, acquired and adopted by
individuals or organizations. Subsequently, Consumer Awareness
it must be either accepted or rejected by Adoption is the acceptance and continued
the ultimate users in the society or use of a product, service or idea. According
community. The relative newness of these to Rogers (2003), consumers go through a
innovations and the associated uncertainty process of knowledge, persuasion, decision
is what differentiates innovation adoption and confirmation before they are ready to
decisions from other types of decision adopt a product or service. Knowledge
making (Gerard et al., 2003). occurs when an individual or other
decision-making unit is exposed to an
However getting a new idea adopted, even innovation’s existence and gains an
it has obvious advantages, is difficult. Many understanding of how it functions (Rogers,
innovations require a lengthy period of 2003). He has quoted this as the “Pre-
many years, from the time when they contemplation” stage. Consumer
become available, to the time when they awareness have been tested as one of the
are widely adopted. Furthermore the same key variable in numerous studies
innovation may be desirable for one specifically in the area of on-line banking,
situation but undesirable for another internet-banking and self- services
potential adopter, whose situation differs technology adoption (Sathye, 1999;
(Erol et al., 1989; Erol et al., 1990; Gerard Suganthi et al., 1999; Yusof, 1999; Gerad et
et al., 2003). Rogers (2003) identified five al., 2003).
main characteristics of innovations:
Relative advantage, compatibility, However, limited studies have investigated
complexity, observability and trialability as on consumer awareness in the area of
the most important explanation of the rate Islamic banking adoption. Haron (1994), in
of innovation adoption (Yusof, 1999; Sohail his studies stated that about 100 percent of
et al., 2002; Rogers, 2003). Most of the the Muslim population and 75 percent of
variance in the rate of adoption of non-Muslims are aware of the existence of
innovations, from 49 to 87 percent is Islamic banking services in Malaysia and
explained by these attributes (Rogers, out of this only 63 percent understood the
2003). Thus, the diffusion literature difference between Islamic banks and
provides an ideal framework to be applied conventional banks. Whereas, some studies
to the present study which, seeks to extend reported, Muslim respondents, though
the research area in a service innovation aware of fundamental terms in Islam, were
context, the innovation being Islamic almost exclusively unaware of the meaning
banking. The study would determine which of specific Islamic financial terms like
factors according to Rogers’ framework Mudaraba, Musharaka and Ijara (Gerard,
(2003), would fare when applied on a 1997; Kamal et al., 1999).
service innovation, more particularly retail
banking services which conform to Islamic Proposition 1: There is a positive
principles. relationship between
customer awareness
Therefore the dependent and independent and the usage of
variable of primary interest to this
Journal of Electronic Banking Systems 6

Islamic banking experiences and practices, the Malaysian

services in Malaysia. banking consumers have already possess
banking habits from the long operating
conventional banks and Islamic banking
Perceived Relative Advantage functions and operations are not new to
Relative advantage is defined as the degree them. Therefore it is crucial to test the
to which an innovation is perceived as consistency (felt need, previous banking
being better than the ‘idea’ it supersedes methods) of Islamic banking services as it
(Rogers, 1999). Potential adopters want to may have significant impact on the
know the degree to which a new idea is consumers’ willingness to adopt.
better than an existing one. According to
Yusof (1999), diffusion scholars have found Proposition 3: The adoption of Islamic
relative advantage to be one of the best banking services by the
predictors of an innovation’s rate of Malaysian banking
adoption. Rogers (2003) found that consumers is positively
adopters invariably perceived relative related to the perceived
advantage in terms of the economic compatibility of using
benefits and the costs resulting from the Islamic banking services.
adoption of an innovation and
improvements that are afforded to their Complexity
social status. In addition to these, economic Complexity is the degree to which an
profitability, low initial cost, a decrease in innovation is perceived as difficult to
discomfort, social prestige, savings in time understand and use (Rogers, 2003).As
and effort and the immediacy of the opined by Yusof (1999) any idea could be
reward, have been described as the sub- classified on the complexity-simplicity
dimensions of relative advantage (Gerard, continuum. Some innovations are clearly
2003). Therefore, the present study intend understood by potential adopters whereas
to investigate the economic benefits others are not. Therefore, complexity has
(profits earnings, service charges and been measured in relation to perceptions
incentives) and service delivery (fast and about the purpose of the respective
efficient service, staff competency) of innovation, its intended use and the ease
Islamic banking services, within the with which it can be used (Gerard, 2003). It
framework of relative advantage. is believed that there is a negative
relationship between complexity and
Proposition 2: The adoption of Islamic adoption rate (Rogers, 2003; Gerard,
banking by the 2003).
Malaysian banking
consumers is positively Proposition 4: The adoption of Islamic
related to the perceived banking by the
relative advantage of Malaysian banking
using Islamic banking consumers is negatively
services. related to the perceived
complexity of using
Islamic banking services.
Perceived Compatibility
Compatibility is defined as the degree to
which an innovation is perceived as being Trialability
consistent with existing values, past Trialability is “the degree to which an
experiences and the needs of potential innovation may be experimented with on a
adopters (Rogers, 2003). Thus, limited basis” (Rogers, 2003). However,
compatibility is a measure of the values or customers are unable to try Islamic
beliefs of consumers, the ideas they have banking services beforehand in the same
adopted in the past, and the ability of an way they can test out a hi-fi system or a car
innovation to meet their needs (Gerard, before purchasing. Being an intangible,
2003). As such, in regards to banking Islamic banking services are, produced and
7 Journal of Electronic Banking Systems

consumed at the same time. However,

Islamic financial institutions should Proposition 6: The adoption of Islamic
respond to this need by allowing potential banking by the
users to try out their Islamic banking Malaysian banking
scheme. According to Rogers (2003), an consumers is positively
innovation that is trialable can dispel related to the perceived
uncertainty about an idea. Thus, for those observability of using
who are apprehensive about the service, it Islamic banking services.
may give them the necessary confidence to
use it (Gerard et al., 2003). It is believed Uncertainty
that there is a positive relationship Uncertainty is the degree to which a
between trialability and adoption rate number of alternatives are perceived with
(Gerard et al., 2003; Rogers, 2003). If an respect to the occurrence of an event and
innovation can be designed so as to be tried the relative probabilities of these
more easily, it will have a more rapid rate alternatives (Rogers, 2003). Uncertainty
of adoption (Rogers, 2003). As such it is motivates individuals to seek information,
crucial to test the trialability of Islamic as it is an “uncomfortable state of mind”.
banking services as it may have significant According to Roger (2003) a kind of
impact on the consumers’ willingness to uncertainty is generated by an innovation
adopt. that is perceived as new by an individual or
another unit of adoption. The perceived
Proposition 5: The adoption of Islamic newness of an innovation, and the
banking by the uncertainty associated with this newness is
Malaysian banking a distinctive aspect of innovation decision
consumers is positively making process, that is, either to adopt or
related to the perceived reject an innovation. Thus perceived risk,
trialability of using trust and reliability of the system are
Islamic banking services. known to be some of the attributes of
uncertainty (Philip.K and Armstrong, 2001;
Observability Rogers, 2003). It is believed that there is a
Observablity is described as the degree to negative relationship between uncertainty
which the results of an innovation are and adoption rate (Yusof, 1999). The more
visible to others (Rogers, 2003). Some consumers feel uncertain about an
ideas are easily observed and innovation; the lower would be the rate of
communicated to other people, whereas adoption (Rogers, 2003).
other innovations are difficult to observe
or describe to others. According to Yusof Proposition 7: The adoption of Islamic
(1999) and Gerard (2003) this is especially banking by the
true for a service where the characteristic Malaysian banking
of intangibility will hinder its visibility. consumers is negatively
Using this argument in the context of related to the perceived
Internet banking Gerard (2003), uncertainty of using
highlighted that observability does not Islamic banking services.
appear to be a contributor to the adoption
of Internet banking since it is most unlikely
that Internet banking uses are prepared to Conceptual Model
show the results of their financial dealings The Figure 1 below, shows the drived
to third parties. However Yusof (1999) in model from propositions. The model offers
his studies, opined that in the case of the conceptual foundation of the research
Islamic banking adoption, it is possible that to be conducted. The conceptual model of
Muslim consumers would find it easy to this research aims to explain, how the
explain and provide evaluative feedback to perceived attributes of innovation
others regarding the benefits of using determines the adoption of Islamic
Islamic banking services, which would banking, in particular, retail banking
further enhance adoption. services in Malaysia. In addition it also
Journal of Electronic Banking Systems 8

aims to explain how the relationship of the modified or rather altered by the
independent and dependent variables are moderating factors.

Independent Variables Dependent Variable

Consumer Awareness

Relative Advantage +
Adoption of
Complexity - Retail Banking

Figure 1: Conceptual Model of Islamic Retail Banking Services Adoption


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University, Malaysia. Yusof MYR (1999) ‘Islamic Banking:
Adoption of a Service Innovation',
unpublished MSc. thesis, NTU, Singapore.