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Marketing Strategy of Islamic Banks:: Working Paper Series 006
Marketing Strategy of Islamic Banks:: Working Paper Series 006
Creating Dynamic Leaders This paper was presented at the International Seminar on Enhancing Competitive Advantage on Islamic Financial Institutions, Jakarta, 7-8 May 2005 and has been accepted for publication in the Journal of Islamic Banking and Finance, Jan-March 2006.
Abstract
Marketing strategy is one the most important areas that needs to be carefully examined by the policy makers of Islamic banks. This stems from the need to improve the performance and ensure sustainable growth of Islamic banks as competition in the banking industry intensifies. A sound marketing strategy becomes imperative as Islamic banks not only operate in an environment where service quality and financial returns are perceived as the essential criteria from customers viewpoint, but they must also compete with conventional banks which are known to have better experience and expertise in the banking business. Religious element, which was once thought as the major factor that drives Muslims to use Islamic banking facilities offered by Islamic banks, has now become irrelevant to Muslim customers. Coupled with an increasing competitive environment from both Islamic and conventional banks and changes in customers perception; it is of paramount importance for Islamic banks to assess the effectiveness of their marketing strategy. This paper reviews the current marketing strategy of Islamic banks in Malaysia. Among the topics highlighted are strategies related to product, pricing, promotion, distribution channel, and human resources. The study finds that the newest Islamic bank and Islamic banking department of conventional banks have more aggressive marketing objectives than the pioneering Islamic bank.
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Introduction
Malaysia was one of the pioneering countries to have introduced Islamic banking and is highly committed in not only developing an Islamic banking system but also a complete Islamic financial system. The Islamic banking system in Malaysia started in 1983 when the first Islamic bank, Bank Islam Malaysia Berhad (BIMB) commenced its operations. It was the objective of the Malaysian government to develop the Islamic banking system parallel to the conventional system. Instead of establishing many new Islamic banks, the government introduced a concept of Islamic window, which allows the existing conventional banks to introduce Islamic banking products to customers. The concept of Islamic window started in March 1993 when the Central Bank of Malaysia or Bank Negara Malaysia (BNM) introduced the Interest-Free Banking Scheme. Twenty-one Islamic financial products were developed to cater for this scheme with initial participation from only three major banks. By July of the same year, this scheme was extended to all financial institutions in Malaysia. As at end of 2004, BNM had introduced a total of 22 banking products and services for Islamic banking system in Malaysia (www.bnm.gov.my). Currently, the system is represented by three Islamic banks, 7 domestic commercial banks, five merchant banks, seven discount houses and four foreign- owned banks. As a result of the financial turmoil in 1997 and liberalization of the world banking system, Malaysia developed a blue print for the development of the financial sector in the country and this ten-year plan is known as the Financial Sector Masterplan. The aim of this plan is to create a more efficient and competitive, innovative, technology-driven, and strategically focused financial system. The plan includes further developing the Islamic financial system as the key player in the Malaysian and in-
ternational banking sector. In view of this, the Malaysian governments target is for the Islamic banking and takaful industry to achieve 20 percent share of the total banking system by 2010. Currently, Islamic banking assets accounts for about 10 percent of the market share of the total banking assets in Malaysia which amounts to RM90 billion, registering an average growth of about 42 percent over the last 10 years. In terms of market share of deposits and financing, Islamic banking held 11.2 percent of total deposits and 11.3 percent of total financing as at end-2004. In line with its objective to increase the number of players in the Islamic banking system, BNM encourages local banks to convert their Islamic banking department into subsidiaries and allows foreign Islamic banks to establish their subsidiaries in Malaysia. The second Islamic bank, Bank Muamalat Malaysia Berhad (BMMB), was established on October 1, 1999 and it had an initial shareholders fund of RM300 million, assets of RM2.5 billion, a network of 40 branches and a workforce of 1,000 personnel (Bank Muamalat Annual Report, 2000). An important milestone taken by BNM in positioning Malaysia as an international Islamic financial hub was to bring forward the liberalisation of its Islamic banking sector to 2004, three years ahead of the World Trade organisations deadline, by granting three new Islamic bank licenses to foreign parties. These three Islamic financial institutions are from the Middle East, namely the Kuwait Finance House, Al-Rajhi Banking & Investment Corporation and a consortium of Islamic financial institutions represented by Qatar Islamic Bank, RUSD Investment Bank Inc, and Global Investment House. BNM also issued five new licences for domestic banks to create Islamic subsidiaries. The RHB Bank is the first local bank to have a full fledge Islamic bank subsidiary. This subsidiary, named RHB Islamic Bank commenced its operation on the 16th
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TABLE 1: Annual growth of various deposits facilities at commercial banks (%). 2000 2001 2002 2003 2004
TABLE 2: Funds deposited at various deposits facilities of commercial banks (%). 2000 2001 2002 2003 2004
instances, the growth for various types of Islamic deposit facilities were greater than the growth of deposits of the conventional system. This statistics implies that Islamic banking products have now become more popular among Malaysians. Nevertheless, these growth figures alone cannot answer several pertinent questions related to the development of Islamic banking in Malaysia. Such issues include whether all economic units in
Malaysia are really keen with the idea of the superiority of Islamic banking against the conventional banking; whether commercial banks in Malaysia are really committed to adhere to the directive of BNM in promoting Islamic banking products; and whether Islamic banking system has a bright future in Malaysia. Answers to some of these issues can be found by looking at the percentage of the deposits placed by Malaysians in Islamic system against the deposits with the conventional system. The per-
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the perceptions of corporate customers toward Islamic banks in Malaysia, Ahmad and Haron (2002) revealed that Islamic banks had not done enough in marketing their products to corporate sector.
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egory often concentrates on only one market segment of the market. Usually, only one marketing strategy, which is well, tailored to meet the needs of a specific target-market group is developed. As the pioneer Islamic bank in Malaysia, it is inevitable for us to label Bank Islam Malaysia Berhad (BIMB) as a leader in the Islamic banking market. However, rather than portraying itself as the leader in the industry, BIMB adapted a more universal motto called The Bank for All and has the following mission (www.bankislam.com.my):
RHB Islamic Bank is the third Islamic bank in Malaysia and commenced its business operations on 16th March 2005. Upon the launching of this new Islamic bank, RHB Islamic bank had a full-scale advertising campaign by putting an advertisement in all major newspapers in Malaysia of their presence and their commitment towards excellence in customer service by embracing three basic principles which is of trust, understanding and partnership. Based from the advertisement and vision statement given by this new bank, we can generally conclude that RHB Islamic bank wants to become a market leader and not a follower or nicher in the industry.
To seek to operate as a commercial bank functioning on the basis of Islamic principles, providing banking facilities and services to Muslim and the whole population of this country, with viability and capability to sustain itself and grow in the process.
To meet the above mission, BIMB formulated six corporate objectives where one of the objectives is to provide customers with Islamic banking facilities and services of the highest possible quality. BIMB personify itself to the public as a progressive, professional and friendly bank. In the case of Bank Muamalat Malaysia Berhad (BMMB), being the second Islamic bank in Malaysia, we would naturally consider the bank as a follower. However, BMMB should strive to become a challenger to BIMB. BBMB currently adopts the following vision and mission (www.muamalat.com.my): Vision: To be a Strong, Progressive and Modern Islamic Bank offering innovative, quality and competitive products and services. Similarly, the negative growth rate of profits also Mission: To build the Bank into a modern, dynamic and strong Islamic Bank that would play a role in providing a viable alternative to the conventional system and contribute to the development of modern Malaysia. serves as an indicator that BIMB needs to re-examine their position as the leading Islamic bank in Malaysia. This further emphasizes the need for BIMB to formulate a more effective marketing strategy to attract more users and depositors. In fact, to coupe with the new challenges in the market and Even though BIMB has been operating for more than 20 years and had in many occasions become the pioneering institution in introducing new products and services, this leading role has been diminishing in recent years. For example, while the total Islamic deposit at commercial banks was enjoying a 34.8 percent growth in 2004, a negative growth of 8.86 percent was recorded by BIMB. Contrary to the strategy espoused by Islamic banks, conventional banks do not explicitly inform the public the vision and mission of their Islamic banking division. For example, Maybank Bhd. only highlights the general statement of its aspiration to become an institution that plays an important role in the development and promotion of Islamic banking and takaful in Malaysia and afar. The Public Bank Islamic Banking Division also adopts similar approach. Based from the statement published in the banks website, it is clear to us that the Islamic banking products offered by this bank are just an alternative to their conventional products.
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in line with the banks aggressive moves to expand services rapidly, BIMB has embarked on a major restructuring of its organization. The six strategic objectives to be implemented are, to aggressively grow consumer-banking business, strengthen commercial banking, develop debt market capabilities, develop risk management capabilities, enhance IT infrastructure and staff competencies. As for the consumer banking business, BIMB overall strategy is to focus on home financing, vehicle financing and credit card business. Since it was launched in July 2002, Bank Islam has currently 60,000 credit card holders and is targeting an annual growth of 50,000 new users for its Syariah-compliant credit card. The credit card, unlike conventional cards that charge interests and compounded interest, states the maximum profit that the bank can make over three-year tenure. In the commercial banking side, this bank aims to establish a strong foothold in the trade finance and small and medium enterprises. As a leader, BIMB has continuously stated its aspiration of continuing its role in developing, promoting and expanding huge transactions in Islamic finance. In the case of BMMB, it is evident from the 2003 annual report that the bank aspires to become a challenger to BIMB. As depicted in this report, BMMBs strategy to compete for a share of the Islamic customer base is to increase its consumer and retail financing at 60 percent level in the year 2005 as well as to increase fee-based income through investment banking division.
tomers perceptions and feelings about the products or services offered. This is important because customers experience with a particular product or services will affect their attitude towards the bank and other product and services as well even if they had never used the other products. Under product strategy, customer must also be able to link a specific image with a specific Since customers purchase products and services to satisfy their needs and wants, Islamic banks have to understand the nature of these needs and want in order to appreciate the kind benefits customers expect to receive. Among the different kinds of benefits that people expect to get when buying goods and services includes good value for money, novelty, availability, and ease of use. Benefits enter into the equation when a customer decides to use one product in preference to another. It is the benefits received, which makes a product or services attractive to a customer. In view of this, banks should give more attention to the benefits it creates for the users when marketing a product or a service. Relating this to Islamic banks, they have to be able to communicate these benefits convincingly to public, either directly or indirectly, in order to persuade the public to use the facilities and products being offered. Since Islamic banking is an alternative to conventional banking, Islamic banks needs to innovative in terms of products and services. Only through innovation in products and services can Islamic banks sustain their competitive advantage against other conventional or foreign banks that offer similar Shariah compliance facilities. Table 3 below presents the list of products and services offered by BIMB and BMMB.
Product Strategy
As a service oriented business, image is a central factor in a banks effort to differentiate itself from competitors. Generally, the way products or services are made available to customers helps to create the image of the particular institution in the mind of the customers. This image is reflected in the cus-
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It can be seen from Table 3 that BIMB is much ahead than BMMB in terms of product strategy with more than 40 Islamic banking products and services being offered. Another distinct edge that BIMB has over BMMB is that their facilities cater for all categories of customers including individual, small businesses, commercial and corporate customers. Similarly, product differentiation strategy is also used by BIMB in both its deposit and financing facilities. On the contrary, Islamic banking facilities available at BMMB are basic banking facilities only. Another important strategy employed by BIMB is the usage of Islamic terminology in promoting its products to customers. For example, Arabic word such as wadi, ijraa, pewani and sakinah are used in labelling various deposit facilities. Again, contrary to BIMB, BMMB uses common terminologies such as wadiah and mudharabah for its deposit facilities. Similar approach is also taken by BIMB when promoting its financing facilities. Instead of categorizing facilities based on the types of facilities, BIMB uses the governing Syariah principles for the respective facilities. It is also evident from Table 3 that BIMB is ahead of the game in the electronic banking (e-banking) services as compared to BMMB. BIMBs innovative
e-banking products and services are another source of competitive advantage it has over BMMB. The introduction of several e-banking services namely internet baking, corporate desktop banking (eBanker), MEPS Inter-bank Giro and most recently, short messaging service (SMS) banking has enabled BIMB to distinguish itself prominently from other players in the market. The SMS banking service offers about 30 different services and transactions, including inquiry funds transfer, financing payments, utility bills payments and mobile phones pre-paid reload. The target customers for this service are student card users who are more adept to mobile telephony technology changes. Table 4 indicates the existing Islamic banking products and services available at the Islamic banking division of Public Bank and Maybank Berhad. Looking at Table 4, we can conclude that these two banks belong to either the category of a market follower or nicher. Both banks do not differentiate their products and services to those offered by BIMB and BMMB. As can be seen, the products and services of these two banks are just basic Islamic banking products. This might be due to the fact that both banks are premier banks in Malaysia. Therefore, they are more interested in marketing conventional than Islamic banking products.
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Pricing Strategy
The second element in the marketing mix is pricing. Pricing strategy is another marketing technique that can be used to improve a banks overall competitiveness. The key to success is to have a wellplanned strategy, to establish policies and to constantly monitor prices and operating costs to ensure profits. An important part of the pricing strategy is determining how product or service is priced. It has been proven in many previous research that majority of customers do not use religion as the main factor when establishing a relationship with Islamic banks. In the case of corporate customers for example, they believe that it is the cost and
benefit element that is the most important factor when selecting financial institution (Ahmad and Haron, 2002). Most customers still seek the highest return and low est charges imposed when deciding which bank to place a deposit or obtain funding from. Generally, marketing textbooks recommend three types of pricing strategies: skimming, penetration, and competitive pricing strategy. In the case of deposits, the returns given to depositors as at 1 Mac 2005 are listed in Table 5 below. Based from the facts presented in Table 5, it seems that Maybank gives higher returns on its investment deposits comparatively to both BIMB and
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BMMB. One possible reason is that being a bigger bank, Maybank is able to mobilize the funds deposited by it customers more efficiently and effectively. An interesting observation is the returns given by Maybank to small depositors, especially savings account holders. For savings account with the minimum amount of RM2,999 or less, Maybank does not give out any return to the account holders.
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vices to customers is regarded an important distribution strategy by most banks. Table 6 (see page 14) presents the number of branches and Islamic Banking Scheme (IBS) counters for the year-end
Distribution Pricing
This component of the marketing mix is related to the distribution of services to the ultimate customers. Services that require the customer to go to the producer must be as accessible as possible. Hence, an important consideration in the distribution strategy for banks is location of their branches. The task before the management is to select the place where the actual sale is to take place and this should be in the face of conveniences and comforts to the customers. To the extent it is possible, they should reach to the doorsteps of the customers. Thus it is pertinent that the branches are located at a suitable point. However, a study conducted on Malaysian customers by Haron et al. (1994) found otherwise. For example, the authors reported that the top five factors that are considered as important by Malaysian Muslim when selecting their banks are: 1. 2. 3. 4. 5. ers Non-Muslim customers ranked the following as important when selecting their banks : 1. 2. 3. 4. 5. Friendliness of bank personnel Fast and efficient services Reputation and image of bank Speed of transactions Confidentiality of bank Fast and efficient services Speed of transactions Friendliness of bank personnel Confidentiality of bank Knowledgeable about the needs of custom-
1999 to 2003. Since sales and market share are contingent upon distribution (i.e. market coverage and distribution intensity), products and services must be made easily accessible to the end-users. Table 6 clearly shows that conventional banks offering Islamic windows place more importance on their distribution strategy than their Islamic counterparts. With 1410 IBS counters nationwide compared to only 132 branches opened by Islamic banks, conventional banks have a strong channel network that is deemed as a crucial way to gain competitive advantage since distribution channel provides access to market targets. Recognising the importance of distribution strategy as one of the key to successful and effective marketing strategy, Islamic banks had recently introduced the concept of mini-branch and kiosk to their customers in which basic banking facilities are provided through this new distribution channels. These mini branches and kiosks are strategically located at departmental stores and shopping complexes so as they are accessible to the general public.
Promotion Strategy
Promotion is the function of informing, persuading, and influencing the customers decision process. Usually the banks marketing manager will respond to the goals and objectives of the bank by formulating various elements of the promotional strategy i.e. personal selling, advertising, sales promotion, publicity and public relations. Promotional strategy is closely related to the process of communi-
Although Malaysian customers do not perceive location as one of the top priorities, nevertheless policy in ensuring the accessibility of banking ser-
cation. A standard definition of communication is the transmission of a message from a sender to a receiver. Marketing communication, then are those
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messages that deal with buyer-seller relationships. Marketing communication is a broader concept than promotional strategy, because it includes word-of-mouth advertising and other forms of unsystematic communication. A planned promotional strategy, however, is certainly the most important part of any marketing communications. Table 7 highlights the existing promotional strategies adopted by selected Islamic banks in Malaysia.
TABLE 7: The Promotional Strategy of Islamic Banks and IBS Banks in Malaysia
Source: Puan Rozi(BIMB), Badrudin Othman(BMMB), Mohd Ali Sharif (Maybank), Mohd Najeeb Abdullah (PBB)
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Table 7 indicates that BIMB is ahead than the other institutions in terms of promotional strategy. The latest promotional strategy undertaken by BIMB is to forge a working relationship with higher learning institutions in Malaysia. Under the on the job training scheme students of higher institutions will undergo training program provided by BIMB and this training program will be incorporated in their academic program. The objective of this scheme is to disseminate knowledge of Islamic banking products and services to students and train them to marketing agents for BIMB. BMMB, on the other hand, has a more tailored promotional strategy of targeting entrepreneurs as its potential customers. This is done through various entrepreneur development programmes which are handled by the banks Entrepreneur Development Department whereby participants are educated on Islamic banking principles and concepts. Training programmes that have been previously offered includes seminars on Islamic banking and product financing for entrepreneurs, workshops on business planning, business management and financial management. As part of the banks promotion strategy, participants are given detailed explanation on the types of products and services offered by BMMB and how their companies can obtain the financing needed from BMMB to start up or expand their businesses. Both Maybank and Public Bank are not as aggressive as the two Islamic banks in terms of promoting their products and services. Part of these conventional banks marketing strategy is to target their markets and in doing so, they already have specific types of potential customer base. Thus, these banks do not need to have an extensive promotional marketing strategy as they only need to extend and pursue marketing to their target customers.
Concluding Remarks
This paper highlights some of the existing marketing strategies adopted by Islamic banks in Malaysia. Theoretically, Islamic banks in Malaysia should not face any difficulties in gaining support from customers as Muslims constitute the majority of the countrys population. However, recent studies have indicated that religious no longer plays an important factor in bank patronage. Works of Rosly and Abu Bakar (2003) found that religious factor is not conclusive enough to drive Muslims to use Islamic banking facilities. In light of this revelation, Islamic banks have to better understand the needs, preferences and behaviour of their target group customers in order to stay in the game. Hence, marketing strategy that is tailored to customer acquisition and retention should be properly addressed. This becomes increasingly crucial as foreign players enter the market and as products and services become more undifferentiated. Hence, Islamic banks have to be innovative and creative if they wish to establish a strong competitive position and gain competitive advantage. In the case of Bank Islam Malaysia Berhad (BIMB), for example, as a market leader in the Islamic banking industry, this bank should take on the role of a barometer of the industry and thus, lead the way in setting price structure for the market making price and making other marketing changes. In reality, however, it is the other Islamic banking providers that are enjoying these competitive advantages over BIMB. In terms of product strategy, BIMB is currently aggressively focusing its marketing efforts on e-banking services. The strategy towards e-banking as an alternative distribution or delivery channel for its customers is done with the long-term aim of saving cost on operating or opening new service outlets or branches. On the promotional strategy side, both Islamic banks are pursuing strategies to educate
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Cravens, David W., Bill Merrilees and Rhett H. Walker (2000), Strategic Marketing Management for the Pacific Region, McGraw-Hill, Australia.
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