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Mohammed Obaidullah Plan of the Study Introduction

2. 3. The Changing Environment in the Islamic world Understanding the Consumer and the Market 1. 2. 3. 4. 4. Importance of Religion and Culture Survey Evidence on Bank Patronage Factors Islamic Values an Behavioral Patronage Factors Segmentation of Market

The Islamic Financial Services Mix 1. Product 1. 2. 2. 3. Price Promotion 1. 2. 3. 4. Advertising Personal Selling Public Relations New Product Development Branding

Distribution 1. 2. People Processes







The Islamic financial services industry has, in recent years been among the fastest growing in the world economy. The industry was born as a strategic response to growing religious consciousness in the Islamic world. Given that the conventional financial system is largely riba-based, Islamic banks and financial institutions over the last two decades have concentrated on product development. Some industry observers feel, this emphasis on developing and managing products, that would conform to event of Islamic law,- has perhaps led to a neglect of other elements of the marketing mix. In fact the extent to which Islamic financial services organizations are, or can be truly marketing oriented is open to debate. Some even question whether they should have a marketing orientation at all (Wilson, 1996). Additionally, there is a near-total confusion in the industry about potential use of religion and culture-driven marketing strategies, through these factors were primarily responsible for birth of this industry. Marketing of Islamic financial services is currently the subject of much deliberation and discussion among the banking community. This no doubt, reflects a shift in focus from product development to other dimensions of marketing. But the approach to marketing remains largely tactical, rather that strategic. While organizations, to some extent, are performing various marketing functions, such as, promotion and advertising marketing as a business philosophy is conspicuous by its near-total absence in this industry. In this study, we attempt to derive insights from valuable empirical evidence from a host of research studies, which might be to relevance for the serious marketer. We also seek to highlight cases of specific marketing strategies tried in the industry - other successful and otherwise, the lessons from empirical research as well as from the case example should help address many issues concerning strategic marketing of Islamic financial services, around which much confusion prevails.

2. The Changing Environment in the Islamic World

The entire Islamic world is a potential market of Islamic financial services, in a large part of which, Islamic financial institutions co-exist with their conventional counterparts. The environment in which the providers of Islamic financial services operate however is undergoing continuous change. This creates new opportunities to be exploited and new threats to be countered. The change may be culture-related, such as growing religious consciousness, or demographic, such as, growing affluence of the younger generation or its the nature of policy and regulatory changes, such as opening up of the sector to greater competition, requirements relating to capital adequacy and the like. Such changes invariable call for a strategic response on the part of the organizations affected by them. Growth of Islamic awareness and consciousness continues to be the key environmental factor that needs to be continuously monitored for banks and financial institutions operating in the Islamic world. It is the key determinant of success or otherwise of any potential marketing strategy, which may or may not use the religion and culture factor. This factor has been singularly responsible for the birth an subsequent growth of the industry in the past, which has been well documented. As At-Tawhiri (1988) noted, "the emergence of Islamic awareness in the Saudi economy is highly significant." In a subsequent study, AtTawjiri (1991) wrote, "The culture of Saudi Arabia is clearly an impediment to the activities of interest-based banks. As the Kingdom of Saudi Arabia is a Muslim country, which strictly follows the rules of religion, the taking of interest r dealing with money is considered and

immoral act, even a sin." As Habib et al (1987() also noted, "resulting from this zeal, lager amounts of money in the Saudi economy are believed to the untapped. " At Tawjiri (1991) asserted that "the demand for Islamic -oriented banks in the Kingdom is increasing. The transformation of Al-Rajhi from a conventional banks to full-fledged Islamic bank) is one facet of this demand." Another factor of considerable importance is the regulatory framework. The role of this factor in creating new opportunities and threats for organizations has been well documented for the Malaysian system. The framework for Islamic banking was crated in the year 1983 in h form of the Islamic banking Act under which the Bank Islam Malaysia Berhad (BIMB) was established, This Faeda (STPF) or the interest-free banking scheme was launched, which enabled conventional bank is and financial institutions to open "Islamic windows." And offer Islamic financial products and services, As a result at end 199, a total of 48 other financial institutions had participated in this scheme. A straight forward implication of the policy change for BIMB was that its share in Islamic deposits declined from 65.7 percent in 1995 to 45.2 per cent in 1996. Thus, the 48 conventional financial institutions have steadily eaten into the Islamic deposits base of BIMB, the only full-fledged Islamic bank in Malaysia, The environment now poses still greater threats for BIMB. In an effort to encourage greater competition in the sector all the conventional banks participating in STPF are now allowed to set up branches fully dedicated to Islamic banking. This according to Bank Negara, the central bank of the courtly, "would encourage them to be more focused and commit more resources towards the development of Islamic banking. If the 48 conventional institutions set up dedicated Islamic banking branches, there may be far-reaching implications for the entire sector. In Saudi Arabia too the role of the regulator, the Saudi Arabia Monetary Agency (SAMA) has been quite significant. The SAMA has recently allowed the country's largest conventional bank, National commercial bank (NCB) to open dedicated branches offer sign only interestfree banking and financial services. Similar permission has also been accorded Riyadh bank and others. This policy change, according to observers, may affect the operations of Al Rajhi Banking and Investment Corporation (ARABIC), the only bank in Saudi Arabia claiming to operate under Sharia principles, Dedicated branches may reduce large amount of confusion and mix-up present with the functioning of Islamic windows" of commercial banks and hence widen the Islamic deposit based of these banks. Another environmental factor which has been highlighted by researchers quite often as affecting the banking and financial sector in the Islamic world relates to government expenditure. Financial crises has often led to a cut in infrastructure-related spending. For the Kuwaiti bank. Yavas et al (1990) discussed the negative impact of the decline in oil revenues and consequently, in the government's ability to finance public projects and commercial activities, the gulf was between which was heavily financed by Kuwaiti banks; the spectacular crash of the unofficial Kuwaiti stock market in 1982 which dealt a serve shock to the banking community and led to a more interventionist approach of the central bank. As the authors noted "All of these developments coupled with the intensifying competition between commercial banks and other financial institutions make it imperative for commercial banks to reconsider their orientations." For the Saudi banks, Yavas (1988) detected a similar phenomenon at work. As he wrote 'Today, the hey days of easy profits and fast growth are over for the Kingdom's conventional banks. On the one Island, a slow down in government spending due to a decline in oil revenues squeezes profits, on the other hand, the already competitive environment becomes even mole so with the entry of a new line of players." At-Tawjiri (1991) also noted, With a decline in oil relentless and the resulting fall in govt. expenditure e, completion of infrastructure, the bank strategists face

the challenge of reorienting their focus to the non-government and private sector financing." These historical developments affecting the banking and financial sector in the Middle East have a parallel in the current Malaysian financial crisis resulting in the currency and stock markets crashing by more than thirty per cent. The present crisis has already led to pruning of movement expenditure, abandonment of several large infrastructure-related projects, which would have far-reaching implications for the region's banks. Another environmental factor likely to affect the providers of Islamic financial services in a significant way is the growing intentional pressrun these institutions to conform to capital adequacy norms. Recently the Basle Committee on Banking Regulations and Supervisory Practices has proposed the application of a Capital Adequacy Ratio (CAR) framework to commercial banks which should serve to strengthen the soundness and stability of the international banking system; and be fair and have a degree of consistency in its application to banks in different countries with a view to diminishing an existing source of competitive inequality among international banks. While conventional banks have, by and large, no objection to these norms, the same has been an issue of contention for pure Islamic banks. As contended by some Islamic banks, the "traditional" capital adequacy ratio framework is irrelevant for Islamic banks. Karim ( 1996) proposes four scenarios for the calculation of CAR and provides an elegant demonstration of how thc financial and marketing strategies of an Islamic bank would be contingent upon the scenario to be adopted by the regulatory authorities. We have outlined above the diversity, complexity of environmental change that has occurred in the past or might OCCUI ill future affecting the Islamic financial services sector. It may be in the nature of establishment of dedicated branches, or cut in government expenditure in many Muslim countries, or introduction of the traditional or any "modified" version of capital adequacy requirements, of such other environmental factors which call for a strategic response on the part of affected banks and financial institutions. In this situation tactical marketing is no longer sufficient; no financial organization can afford simply to continue supplying the same products to the same markets without some consideration of the longer term implications of the changing opportunities and threats which confront them. The strategic dimension of marketing focuses on the direction, which an organization will take in relation to a specif1c market or set of markets in order to achieve a set of objective. The tactical component refers to the more specific tasks and activities, which have to be undertaken in order to implement the desired strategy. While the focus of the present study is in strategic dimension of marketing, the tactical dimension is not completely ignored. Both the strategic and tactical dimensions of marketing are typically embodied in a marketing plan. Developing such a planned, systematic approach ensures that the marketing efforts of any organization are consistent with organizational goals, interlay coherent and tailored to the needs of identified consumer markets. It is therefore imperative to understand consul1lel-s and markets for Islamic financial services before designing the marketing plan for such services. We turn to this in the following section.

3. Understanding the Consumer and the Market

Marketing is concerned with supplying consumers with products or services, which they want. In order for an organization to be able to do this successfully, marketers need to be able to understand the needs and motivations of existing and potential consumers, as well as how they go about making buying decisions. Though it is common knowledge that the entire Islamic world constitutes the potential market for Islamic financial services, very little clarity exists about buying behavior of bank customers in the Islamic world.

3.1 Importance of Religion and Culture

It is generally felt that banks and financial institutions in the Islamic world have not given adequate emphasis to the role of culture and religion in shaping customer behavior. A survey by At-Tawjiri (1991) to examine the relative importance given by Saudi bank strategists to various variables revealed (see table 1) that "bankers attached low importance to demographic variables. Culture is highly tied to demographic variables and that probably explains the low priority given to this factor as well." Table 1 . Strategists Ratings for Environmental Factors Factors Economy Government Technology Competition Culture Demographic Ranking 1 2 3 4 5 6

Shook and Hasan (1988) highlighted the need for a unique marketing concept in view of cultural differences for banks operating in the Islamic world. As they wrote, "A perception exists among marketers that utilization of the western marketing concept has assisted or will assist developing nations in responding to their unique development needs. However, this view fails to account for the various environmental factors of macro-marketing that make the transition to the marketing concept more complicated than appears on the surface. Differing cultural priorities, lifestyles and buyer decision-making factors, for examples call for reevaluations of efforts and results of the Middle East banks to implement their own unique marketing concept. Indications of what seemed to be effective marketing management are found in the banking activities of some of the larger local commercial banks in Saudi Arabia, Kuwait, Bahrain. Service enhancements have included ATMs, expanded banking hours, regional traveler's cheques and enhanced money market services. Unfortunately however, these marketing activities have evolved towards a sales and deal-oriented approach to bank services. This process places the commercial banks in an increasingly damaging position with consumers in an Islamic society and demonstrates little with regard to the potential for effective consumer-oriented marketing management." As Al-Tawjiri (1991) also noted about Saudi banking strategies, "There is plenty of room for innovation. But the basic problem of bankers in Saudi Arabia is that they would like to imitate the West and transfel the West's knowledge to their environment." Shook and Hasan (1988) also asserted that the Islamic heritage of the Arab Middle East provides a cultural baggage which discourages indiscriminate adoption and application of Western bank marketing elements. Younger Arab consumers, for example, expect products

and services to fit with their family and societal reference bases even though some of these perspectives have been somewhat modified in recent years through exposure of elements of Western culture. According to them, though Arab consumers may accept Western marketing concepts associated with the positive aspects of a service, such as, readily-available consumer or mortgage loans, religion does play the most significant role. Islam sets the patterns of behavioral in all areas of the society. The importance of religion factor in shaping behavior of customers of Islamic financial services can be hardly overemphasized. At the same time it is not hard to find many bank marketers underplaying the importance of this factor in their strategies. Researchers too, have disagreed on the importance the religion factor; especially on its trade-off with returns and convenience-related factors. We attempt to provide a survey of these empirical studies undertaken by researchers to probe into the minds of buyel s af Icl:lmin financial services and identify the patronage factors.

3.2. Survey Evidence on Bank Patronage Factors

Ugur Yavas (1988) undertook a survey of bank customers in Saudi Arabia and noted the role of "deeply ingrained values and religious beliefs" in shaping consumer behavior. He attempted to determine the impo1tance of selected patronage factors and found that a bank's experience, reputation, the quality of services offered and helpful and pleasant personnel are prime considerations for the Saudis when they choose a bank (see table 2). Also ranking in the top five important factors is convenience to work. Advertising and rate of return (implicit interest rates) were among the least important factors. Yavas et al (1990) noted that ethnic heterogeneity at times makes customer service a challenging task. For instance, Kuwait has a large working population from 68 different counties. While the most important aspect of the service for a Bedouin customer is knowing and trusting the bank personnel, for an Indian guest worker, the availability, cost, and timeliness of a money transfer is the most important factor. In a significant study Erol et al. (1990) conducted a survey of Jordanian bank customers. The study attempted to determine the importance of selected patronage factors of bank customer-s in choosing conventional and Islamic banks in Jordan, as also the perceived usefulness of several services offered by conventional and Islamic banks to their users. The researchers found that there are no statistically significant differences between conventional bank customers and Islamic bank customers regarding the rating of the selected banking services (see table 3). The findings indicate that respondents do not differentiate the two types of banks in terms of services offered. Therefore Islamic banks are not distinguishing themselves in terms of services they offer. The implication is that the services offered by Islamic banks should not be a duplication of existing commercial activities. Islamic banks should move away from commercial banking activities and towards profit-loss sharing investment bank services "

Table 2. Patronage Factors for Saudi Bank Customers Factor Experienced bank Reputation Helpful/pleasant personnel Service/quality Convenient to work Saudi Bank Convenient hours Free services Atmosphere Parking ATM Convenient to home I know them Friend's recommendation Advertising National origin prior to Saudisation Rate of return Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Table 3. Rating of Selected Banking Services Service Attributes Saving account Cheque account Night deposits Travelers' cheques Conventional Banks 2.80 3.06 2.45 2.63 Islamic Banks 2.75 3.13 2.31 2.53

Money orders Credit cards Volute location Foreign exchange Offering securities Automatic teller machines Safe deposit boxes Loans Mortgages Saving Plans

2.74 2.61 2.59 2.94 3.00 2.85 2.97 3.16 2.47 2.58

2.71 2.43 2.64 2.96 3.06 2.79 2.93 3.05 2.37 2.57

The study also investigates into bank selection criteria for Islamic banks in contrast to conventional banks and finds statistically significant differences. It is quite interesting to note that in differentiating the two types of banks, the important attributes are availability of credit with favorable terms, lower service charges on cheque accounts, lower interest charges on loans, and higher- interest payments on savings accounts. These attributes are the criteria on which the individuals surveyed placed their emphasis in making a choice between Islamic and conventional banks. The empirical results (see table 4) indicate that there is a preference in making a choice between Islamic and conventional banks. The mean scores of patronage factors for Islamic banks are shown to be higher (i.e. less important) than those for conventional banks. A significant f1nding of this study is that explicit interest rates and fixed-price related banking services do not play important roles in selecting an Islamic bank which directly reflects the customer concerns about riba and underscores the importance of religion factor. It is pertinent to cite here the f1ndings of a similar study conducted for Malaysian customers by Haron et al (1994) which documents useful insights into buyer- behavior for Malaysian banks. The study is a near-replication of the Erol et al (1990) study and the findings are very similar too. The most important patronage factors for Muslims and/or customers of Islamic banks seem to be image, reputation, confidentiality, friendliness of bank personnel, fast an(l efficient service and the like. All these attributes are, interestingly, behavioral. Significantly, very little importance is accorded by customers to interior comfort internal/ external appearance of the bank. Further, explicit interest rates and fixed-price related banking services are not seen to be important, which under-scores the importance of religion factor. In order to demonstrate the similarity between findings of both the studies, we juxtapose them in table 4. Unfortunately, however, Haron et al. arrive at a diametrically opposite interpretation of the findings. The study concludes that "the Islamic bank should not overemphasize, and rely on, the religion factor as a strategy in its effort to attract more customers." It is interesting to note that Haron et al also directly addressed the issue of religion as a motivating factor in their survey. We present the findings in table 5.

Table :4 Relative Importance of Bank Patronage Factors Haron et al (1994) NonMuslims 1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 Fast and efficient service Speed of transactions Friendliness of bank personnel Confidentiality of bank Knowledge about your business Lower interest charges on loans Confidence manager Inter-branch facilities Reputation and image of bank Lower service charge 2 4 1 5 7 7 14 11 3 13 Muslim s 1 2 3 4 5 6 6 6 7 8 2 8 2 10 9 6 11 6 4 1 4 1 Erol et al (1990) Conventiona l 3 Islamic 3

Hours of operations Parking accessibility Financial offered facilities and

15 8

9 10 10 7



18 12

11 12

14 10

13 9

Convenience of location

A wide range of services offered Reception received at the bank Higher interest payment s on savings accounts Overdrafts facilities

16 6 10

13 14 15

11 5 12

9 5 14




8 1 9 2 0 2 1 2 2 2 3 2 4 2 5 2 6 Interior comfort 20 17 18 16

Able to fulfil individual needs Credit with favorable terms Internal appearance of bank

19 9 22

17 18 19 7 16 12 15

Mass media advertising Size of bank

23 21

20 21



External appearance of bank Recommendations by friends

24 25

22 23

19 17

17 15

Table. 5. Knowledge of Islamic Bank Muslims(%) Knowing the existence of BIMB Yes No Source of Knowledge of BIMB (Respondents can give more than one source): Newspapers and magazines Television and radio Friends and family members Meeting (e.g. lub business) Staff of BIMB 78.0 58.7 50 10.7 8.7 46.4 28 23.2 19.2 2 99.0 0.7 74.8 25.2 Non-Muslims(%)

Went to BIMB and asked



Understanding the differences between BIMB and conventional banks: Complete understanding Partial understanding Not sure Hardly Absolutely not No answer BIBM is for Muslim customers: Absolutely Possibly Unsure May not be Absolutely not 6 6 19.3 54.7 14 13.9 17.9 32.5 24.5 11.3 27.3 36 24 10 1.3 1.4 8.6 10.6 40.4 27,8 12.6 0

Reasons why people patronize BIMB: Strictly religion Profitability Both religion and profit Other reasons 38.7 2 52 7.3 30.5 15.2 29.8 24.5

The possibility of respondents establishing relationship after having a complete understanding of the operations of BIMB: Absolutely yes Yes 44 36.7 15.9 37.1

Not sure No Absolutely not No answer

17.3 0.1.37 0

13.9 2 0.7

It is worthwhile to note that as high as 38.7 percent of Muslim customer believe that customers patronize BIMB the only full-fledged Islamic bank in Malaysia strictly for religion (even at the cost of profits); and when religion is combined with profit the cumulative percentage increases to over 90 percent. Only 2 per cent believe that customer of such bank are only guided by the profit motive (even at the cost of religion). This finding in no way indicates that ignoring the religion factor would be a rational course of action for an Islamic bank. As far as trade-off between religion and other factors, there is little evidence. In another study for customers of BIMB in Malaysia, Kader (1993) notes that some customers of BIMB were also depositors conventional banks. They did this primarily because of conveniencerelated factors. "Only I per cent of the responses were motivated by the rate of return factor. A great percentage of responses show the importance of factors related to conveniences namely, thc number of bank branches (22.5 per cent), the availability of ATMs (21.5 per cent) and location convenience (29.5 per cent). Hence, there seems to be some trade-off between religious motivation and convenience and not rate of return (emphasis added)." Surveys of literature on buying behaviors of customers of conventional banks and financial institutions highlight the importance of a variety of factors. Boyd et al (1994) find reputation of the organization as well as interest rates to be more important for bank consumers in USA than factors, such as, friendliness of employees, modern facilities, drive-in facilities etc. Another study by Leonard and Spencer (1991) for the USA market noticed greaterpreference among customers for factors, such as, large size, courtesy of personal, competitive deposit rates, and loan availability. I,aroche et al ( 1986) conducted a similar study in Canada and found location convenience, speed of service, competence and friendliness of bank personnel to be important. Arora et al (1985) find the common choice criteria to be dependability of institution, convenience and ease of transactions, variety of services and size of institution. It may be noted that size was important because customers had a greater amount confidence on large-sized banks. Noting the significance of factors, such as, trust, confidence, reputation, and convenience, many recent studies have advocated the concept of relationship marketing in the financial services industry, especially for commercial and corporate customers. This view is based on the conclusion that commercial customers had favorable attitudes to long-term bank relationships where tile bank behaved as follows: they were responsive to these customers' requests, were knowledgeable about their- customers' business and business needs, and developed close informal working relationships with their customers. The major point of difference between patronage factors of customers of conventional and Islamic financial services seems to be the return factor, which signifies the role of religion. It is of crucial importune at this stage to note further that though the other factors are apparently same for both conventional and Islamic financial services, (such as, building

trust, confidence, and long term relationship, convenience) the methods of achieving these would be very different, since all these are behavioral variables where culture and religion are key determinants.

3.3 Islamic Values and Behavioral Patronage Factors

A hypothesis on trade-off between religion factor on the one hand, and convenience and efficiency related factors on the other, as examined in some of the above studies, take too narrow a view of Islam. A propel emphasis on the Islamic values of punctuality, honesty and integrity, devotion to work, would all lead to greater efficiency. Most of the patronage factors can be addressed and are indeed compatible with a strategic focus on Islamic values. In order to highlight the importance of these values in an Islamic society, we quote some relevant verses of Al-Quran and the sayings of the holy prophet (peace be upon him). Honesty: As reported by Ibn Umar, The Messenger of Allah (may peace be upon him) said "The honest truthful merchant shall be with martyrs on Day of Resurrection" Good Manners: As reported by Abu Huraira, (Allah be pleased with him) the holy prophet (peace be upon him) said "Give currency to salutation. amongst yourself" As narrated by Ata al-Khurasani, (Allah be pleased with him) the holy prophet (may peace be upon him) said "Handshake with one another, fraud will then vanish; and send gifts to one another, you will beget love for one another and rancour will depart" Self-control, Poise, Patience: As reported by Abu Huraira, (Allah be pleased with him) the holy prophet (may peace be upon him) said "The strong man is not the good wrestler the strong man is, in fact, he who controls himself at the time of anger " As reported by Ibn Masud, (Allah be pleased with him) the holy prophet (may peace be upon him) said "Patience is half of faith" Freedom from Pride and Vanity: The holy Quran says Allah does not love any selfconceited boaster." Kindness: It is reported on the authority of Aisha (Allah be pleased with her) that the holy prophet (may peace be upon him) said "Verily Allah is kind and he loves kindness and confers on kindness which he does not confer on anything else besides it (kindness) Trust: The holy Quran says "And fulfill your promises; surely every promise shall be questioned about"(l7: 34) As reported by Abu Huraira, (Allah be pleased with him) the holy prophet (may peace be upon him) said "Pay trust to one who has entrusted you and l e not treacherous to one who was treacherous to you " Humility: The holy Quran says "And make yourself gentle to the believers" (15: 38) As narrated by Zaid bin Talha (Allah be pleased with him), the holy prophet (may peace be upon him) said, "Every religion has a character and the character of Islam is modesty" Mercy: According to the holy Quran "Thou alt the best of the merciful ones".

Sympathy and cooperation: The holy Quran says; "Sympathize and cooperate with one another in righteousness and piety and do not cooperate in sin and aggression but keep your duty to Allah" (5 2) As narrated by Abu Musa (Allah be pleased with him), the holy prophet (may peace be upon him) said " A believer is like a brick for another believer, the one supporting the other". In addition to the above, Islam places a lot of emphasis on avoiding unproductive use of time According to a hadith quoted by Imam Malik, the Prophet (peace be upon him) said " Proof of a Muslim's sincerity to Islam is that he pays no heed to what is not his business" Further, Islam exhorts all employees ol an organization to give what is expected of them "in full measure" The holy Quran says "Woe to those that deal in fraud; those who, when they have to receive by measure, exact full measure; but when they have to give by measure or weight, give less than due " (83 1-3) It may be noted here that a possible conflict between some of the above norms of behavior and profit seeking objective of the bank cannot be ruled out. However, the issue of not of any relevance in the current context. What we intend to emphasize here is that an overall organizational focus on these norms of interpersonal behavior are in conformity with hard research evidence on patronage factors of bank customers and hence, is a precondition to long term growth, profitability, and survival of the bank

3.4 Segmentation of Market

The effectiveness of strategic marketing depends very much on proper segmentation of the market, targeting and positioning of the financial product This obviously depends upon a proper under-standing of the market and the factors that influence the buying behavior of individuals as discussed above The process begins with the identification and profiling of different market segments, followed by the selection of particular target markets and finally the positioning of the offering in the mind of the customers to communicate the benefits the customer is seeking A range of bases for effective market segmentation have been discussed by researchers Kotler has identified the following criteria measurability - there must be some way of measuring the size and purchasing power of the segment(s); accessibility - the firm must be able to reach the segment(s); substantiality - the segment(s) should be economically viable; and actionability - the degree to which effective marketing programs can he designed and implemented to attract and serve the sentiment(s) A few other properties, such as, uniqueness, in terms of the segment' s response to marketing, stimuli and the stability of the segment over time have also bee discussed in segmentation literature In general, banks and financial institutions in the Islamic world have been slow in realizing the potential of market segmentation As Kumou (1985) observes, "Marketing departments in Turkish banks did not exist until 1983 and lack of marketing orientation permeated among the banks Several bankers were not aware of the concept of market segmentation" Other studies also reveal that in the Islamic banking industry, attempts at segmentation have not been very systematic. While market segmentation and positioning has been attempted using several bases, such as, dividing and subdividing the market broadly into (1) domestic and intentional markets; (2) rural and urban markets; (3) individual and corporate customers; (4) low networth and high networth individual customers etc. by providers of Islamic financial services, organizations have, in many cases, suffered because such segmentation and positioning was not rationally attempted. A case in point is the

B1MB in Malaysia, which has targeted all its services at the urban consumers. As Kader (1993) notes All BIMB branches were concentrated in urban areas. The establishment of BIMB branches in the urban areas has only effected a transfer of resources within the market with little impact on mobilizing new deposits which the interest-based banks might have failed to attract previously because of riba. It is therefore not surprising that even after ten years in the market the market share of BIMB in deposit mobilization accounted for less than 2 per cent of total domestic commercial bank deposits. It is envisaged that potential new deposits for BIMB can be mobilized more from the rural areas where a sizable portion of savings are being hoarded because of the absence of halal outlets. The findings of Prof Ungku Aziz in the late 1950s had shown that Muslims in rill-al areas were highly pious and had perfected to hoard their savings rather than save in the interest-based banks. It would be of great interest to find out if such behavior persists today and test the impact of Islamic banking on the mobilization of these rural savings." Kader suggests that the market for Islamic financial services consists of three major segments: the strict or pious Muslims who totally avoid the interest-based banks; the less strict Muslims who hold accounts both at BIMB and interest-based banks; and the least strict Muslims who only patronize conventional banks. As she notes, the banking behaviors of these groups differ in many ways and an understanding of their differences may provide some useful information for BIMB so that different products can be targeted for different groups of bank customers. For the Middle East banks, Shook and Hasan (1988) have documented similar cases of failure in propel- segmentation and positioning, As they wrote During the 1970s many commercial banks had an opportunely to develop consumer-oriented banking services. In stead of responding to this opportunity, they chose the easy way by viewing themselves as fee-bankers, focusing on short-term strategies and high return banking activities such as trade and construction contract financing and foreign currency consumer accounts." They also noted that" managers in Middle East banks had a very limited capacity to accept innovative changes. An innovative approach to banking may help many banks to respond to high competition in over banked market segments (for example, the higher income segments) and move aggressively into other segments." Much of the problem in market segmentation and positioning by Banks in the Middle East can be attributed to the dearth of information and data necessary to gain an understanding of the market. As Shook and Hasan (1988) point out "Middle Eastern consumer marketing information databases have been established along very broad demographic lines rather than oriented towards specific measures of personality, lifestyle, and other psychographic considerations which would be more effective in understanding and influencing the buying process. The lack of effective market research information has caused branch and line managers to continue to spend a disproportionate amount of bank resources on traditional but low volume and low profit banking activities."

4. The Islamic Financial Services Marketing Mix.

In this section we review various elements forming part of the marketing mix for Islamic financial services. Traditionally, the marketing mix for any product comprises four elements - product price, promotion and distribution. The marketing mix has both strategic and tactical dimensions. The strategic dimension of marketing mix is primarily concerned with decisions about relative importance of the mix elements for a particular product - market combination. The tactical dimension of marketing mix works within the framework created by decisions regarding the balance of tile mix and is concerned primarily with the specification of precise details for each element of marketing mix. We would naturally focus on tile former. We would also focus on stone specific elements of marketing mix, such as,

people, an(. processes which are mole relevant for services in general. The inclusion of these additional elements have been advocated considering the special features of services, namely; intelligibility (services are processes or experiences rather than physical objects and therefore cannot be possesses and also difficult for consumers to grasp mentally); inseparability (services are typically produced and consumed simultaneously); and heterogeneity (there is great variability in quality of services, since services depend upon input from both service employees and consumers for their production.), fiduciary responsibility (financial service providers have the implicit responsibility for the management of their customers' funds and of providing prudent financial advice to their customers); and two-way information flows (they involve a series of regular two-way transaction between buyers and sellers over an extended period of time.)

4. 1 Product
The importance of product in any marketing mix can be hardly overemphasized. If the product does not offer the key features that consumers expect then the overall marketing strategy would be a failure even if, others dimensions such as, pricing, distribution and promotion are well taken care of. For customers in the Islamic world seeking ways of savings and investment while avoiding all sinful activities, the conventional banks hardly offered any alternative. This factor was also singularly responsible for the success of Islamic banks which offered Islamic products, even though many of them are yet to pay serious attention to other elements in the marketing mix. 4.1.1 New Product Development This particular element of marketing mix 11as received maximum attention of the Islamic bankers over the last two decades. As noted earlier, developing new Shariah-pemmissible products was of considerable importance, since most of the conventional products do not conformal to tenets of Islamic law. A wide range of products are offered by Islamic banks and f1nallcial institutions to a variety of customer groups in order to meet a variety of customer needs. As discussed in section 2, the needs of these customer groups may vary. Stevenson (1989) identifies six broad generic needs: the need for money (loans); the need to earn a return on money (savings and investment); the need to move money (money transmission); the need to manage risk (insurance); the need for information; and the need for advice or expertise. For customers of Islamic financial services, however we may add another board generic need: the need to avoid what is prohibited under Islamic law, This is amply clear from the various surveys highlighted in section 3 which noted that customer-s of Islamic banks were primarily motivated by the religion factor. This may in fact be the most important need for many customers who would prefer losing returns, rather than investing in a sinful way. As AtTawjiri (1991) observed, "in Saudi Arabia large amounts of money are sitting idle because of people's belief that mixing their money with bank's money puts them in sin." The emphasis accorded to product development is thus, an example of sound marketing strategy. A list of some major products introduced by Islamic banks is provided in table 6 which also depicts the Shariah contract underlying the product. The list is by no means exhaustive. It may be noted that the process of product development in a particular Islamic bank depends to a large extent on the views and attitude of its Shariah Board, and differences exist among ,Shariah experts regarding the permissibility or otherwise of certain contracts. For example, most, Shariah scholars in South East Asia find Bai-al-Einah (Repurchase) and

Bai al-Dyan (Debt Sale) to be permissible and these are widely used primarily as liquidityprovider mechanisms. However, most Middle Eastern Scholars find these contracts and the products incorporating them to be unacceptable. Table 6 : Major products of Islamic Banks Product(s) 1. 2. 3. Investment Account Saving Account Financing Underlying Contract Al-Modaraba Al-Wadiyya, al-Ariyya Al-Modaraba, Al-Musharaka, Al-Ijara, Bai Bithman Ajil, Al-Mudarabaha, alAariyya, Bai -Istisna, Bai-Istijrar, AlWujuh Al-Kifala Al-Havala Al-Wakala, Bai AI Bithman Ajil Al-Kifala Bai-Sarf Al-Ijara-wa-Iktina, Bai Bithman Ajil Al-Modaraba. Bai Al-Modaraba, Al- IjaRA, Al-Ijara-waIktina Al-Modaraba, Bai, Bai-Salam Al-Ijara, Al-Modaraba Shariah-Approved

4. 5. 6. 7. 8. 9. 10. 11. 12.

Guarantees Fund Transfer Stock Broking/Portfolio Management Credit cards Insurance Forex Trading Housing Finance Equity Funds Lease Funds

13. 14.

Commodity Funds Liquidity Management Schemes

4.1.2. Branding Branding is often considered an important element of marketing strategy, since it provides a clear identity to the product in a market place in which organizational boundaries are becoming increasingly blurred. Branding as a process helps build a link between the product and the consumer such that the product is seen by the consumer as having the ability to meet both its functional as well as psychological needs. Successful branding conveys useful information about quality, ensures product differentiation and customer loyalty. Considering the importance of religion and culture in the market for Islamic financial services, and given

that image and reputation of the organization are significant patronage factors for their customers (as highlighted in the survey finding), an Islamic identity for the product would be crucial for its success in the market place. Accordingly, many Islamic banks and financial institutions have sought to use branding for the purpose A case in point is the branding of a recent International growth-oriented open-ended equity fund floated by Al-Tawfeek Company for Investment Funds Ltd., a unit of Dallah Albaraka Group. The fund has been named "AlSafwa" Fund. "Al-Safwa" signifies "Filtering"- a description that indicates a product "distilled to purity". The brand name was deliberately chosen to underline the Shariah-compliance screening device developed and used by Altawfeek. The system automatically filters out and eliminates all debt-securities equity issued by companies engaged in unislamic activities, derivatives and such others which do not qualify the screening criteria. The focus on 'purification" in the brand name seems to be apt in the face of wide spread concern among investors about indiscriminate inclusion of stocks listed on conventional stock markets. Various types of branding have been used by Islamic banks and financial institutions. Some have named their products simply after the underlying Shariah-nominate contracts. Examples are, Al-Wadiya (savings account), Al-Ijara (hire-purchase), Al-Modaraba (general investment account), all of the United Merchant Finance (UMF), Al-Sarf (forex trading) of Perwira Affin Bank Bhd etc. A strategy commonly used in the financial services industry is the "corporate dominant" strategy in which the main element in the brand is the name of the organization or a division of the organization. This strategy is believed to be quite effective when the organization's products are closely related and the organization's generic image is seen to be applicable to all its products. Similar examples also exist in the Islamic financial services instantly where the name of the organization or its division appears, at times along with the underlying, Shariah-nominate contract, such as, Faisal Finance Real Estate Income Fund, Citi Islamic Investment Bank (CIIB) Overnight liquidity Modaraba, National Commercial bank (NCB) Al-Salam (Commodity Fund), First ANZ International Modaraba (FAIM) etc. Another common branding strategy with many banks is to use Arabic names of the product financed or a particular feature of the product sought to the highlighted. Brands which are simple Arabic names of products being financed are Baituna (house financing) and Ardhuna (property financing) of the United Merchant Finance, Manzil (house financing) of the United bank ot Kuwait etc. A fairly common brand name is AlAmeen (credit card of United Merchant Finance) or Amanah (equity fund of DMI) which seek to highlight the importance given to "trust" by the organization. Some seek to provide an Islamic identity to their product by linking them to Islamic personalities such as, the Ibn Majid Islamic Equity Fund of the International Investor, and the Ibn Khaldun International Equity Fund of the PFM Group.

4.2 Pricing
In the matter of pricing strategy, Islamic financial products and services differ from their conventional counterparts in some important ways. While a conventional bank can freely set prices of its products and services after considering demand, cost, and competition factors, an Islamic financial organization is additionally constrained by Shariah-related injunctions. For example, most Islamic scholars in the Middle East permit financial options as a promise by the option writer which is binding upon him. But the option cannot be priced or transacted at the option premium, even if there is a willing buyer of the option at the price charged by the option writer. Most dealing in or pricing of options. Controversy also surrounds pricing of bank guarantees under the framework of Al-Kifala. Some scholars do not find charging a fee for providing a guarantee to be Islamically permissible

Another- issue relates to the quantum and manner of service charge to he levied by thc bank fi)r various services provided. Though in principle, service charges are permissible these must reflect the actual cost incurred in providing a particular service to a particular customer As such service charges levied as a percentage of the quantum of financing are frowned upon; also because these permit the entry of riba through the back door In case of Modaraba- and Musharaka-related products the profit sharing rate remains the crucial variable to be determined. Unlike the conventional lending operations where rates are market-driven, in Modaraba and Musharaka operations the bank has a greater role in the pricing process. Similarly for Morabaha and Ijara financing the implicit rates of return are yet to be driven by any benchmark rate. Of course with growing maturity of the industry in certain economics such as in Malaysia there is a move towards bringing greater uniformity in the pricing process with the introduction of Benchmark Islamic Bonds The implicit profit rates on such bonds would serve as a benchmark to which all Morabaha rates would be linked.

4.3 Promotion
Promotion is a means by which organizations provide information about themselves, their services, pricing structures and delivery channels to their existing and potential customers. Promotion may take several forms, such as, advertisement, personal selling, public relations, and sales promotions. 4.3.1 Advertisement Among banks and financial institutions in the Islamic world, there is great variation in the use of advertisement and promotion as a marketing strategy. A study on marketing strategies of the Turkish banks by Kumou et al (1985), for example, reveals that the banks relied heavily on advertisement to attract deposits. T his was to the extent that the banking industry account for :3() to 50 per cent of the total advertising expenditure in the country." On the other hand, another study by Wilson (1996) asserts that Arab and Middle Eastern leans have made very little use of advertisement in marketing their products and services. Further, according to Zeynep et al (1995), "owing to lack of differential services to advertise and their imitative nature, the advertising, efforts of Turkish banks have been grossly ineffective. Qualitative insights obtained from the consumers throughout this study showed that many consumers complained about lack of information in the advertisements and some found them evasive. While banks do provide much of the requested information to consumers who visit a branch personally, the vague nature of current advertisements leads to a problem of" distrust" and many consumers lose interest in the service. Hence, there is a definite need for informative campaigns not only to alleviate current customers' concerns but also to bring more potential customers to the bank." A number of researchers have asserted that the opinions customer-s have of their bank will be developed more through their experiences of their distribution changes than through advertisements. This is in conformity with the findings firm the survey of customers of Islamic banks highlighted in section 3 that customers in choosing a bank give advertisement. An interesting observation of researchers concerning promotion by conventional banks, with implications for Islamic banks, is that public perception of financial services organizations is not particularly encouraging (Devlin et al, 1995) This is attributed to a failure by organizations to live up to the expectations. Promotional activity is merely one source by

which institutions communicate with their public. Where these messages are not compatible with information received from other sources the impact will be sub-optimal. In fact while designing their promotional and advertising strategies, Islamic banks must ensure that the information provided to the consumer- is adequate, accurate and not unjustifiably optimistic about the future. This would indeed conform to the norms of Islamic ethics. The following hadith provides necessary guidance to the financial advertiser. As reported by Abu Hurairah (Allah be pleased with him) the holy prophet (peace be upon him) said "Swearing produces a ready sale; but blots out the blessings". 4.3.3 Public Relations Public relations (PR) is another form of promotion which seeks to establish and maintain mutual understanding between the organization and those with whom it comes into contact. PR uses a variety of tools, such as, Annual Reports, surveys speeches seminars, charitable donations, sponsorships, in-house journals and press releases. Sponsorship of an event as a marketing strategy however requires that either the product is related to the sponsored activity; or the image created by the product related to the sponsored activity or the image created by the organizations is related to the sponsored activity. Speeches and seminars on the merits of using Islamic financial products over the conventional ones are often perceived as part of Dawah or Islamic propagation work and add immensely to the image of the sponsoring organization. For example, the Al-Baraka seminars on Fiqh are perceived more as a positive and definite contribution to extending the frontiers of Islamic fiqh than as an exercise to sort out specific Shariah- related issues in the banks operations. Some Islamic banks, such the Islamic Development Bank and the Dar Al-Maal Al Islami Group have also promoted institutions of learning and publish scholarly works and journals with a view to developing the discipline of Islamic Groups have also promoted institutions of learning and publish scholarly works and hourglass with a view to developing the discipline of Islamic economics and finance. Organizations have also sponsored surveys on Islamic banking at the Harvard University. These successful example should be emulated by other Islamic banks and financial institutions, Islamic banks and financial institutions may also consider sponsoring broadcasts featuring discussions on Islamic banking or even broader issues pertaining to Islam. 4.3.4 Sales Promotion Sales promotion is used predominantly to encourage trial and generate brand switching, although without support from other media, it is unlikely to develop into brand loyalty. Islamic organizations have also started using a range of sales promotion tools to induce customer switching from conventional products, For example when Arab Malaysia bank Berhad (AMMB) recently introduced the first Islamic credit card, called, Al-Taslif visa card, it offered a range of incentives, such as, discounts for Umrah, insurance coverage, settlement of Zakah as well as shopping promotions at shops which conduct business according to Shariah.

4.4 Distribution
Distribution channels are an important means of delivering products and communicating effectively with the market place, There is not much difference between conventional and Islamic financial services as regards the issues governing distribution-related strategies, Branch networks continue to be the basic distribution network for conventional as well as Islamic banks, As revealed by the survey on customers of Islamic banks, convenience

factors, such as, location of the branch is an important patronage factors for customers, it is believed that a kept success factor underlying the Grameen bank experiment in Bangladesh has been the provision of banking services at the door step of the rural customer. An interesting example of Islamic banks using branch location as a marketing strategy has been provided by Wilson (1996). Given the Islamic fervor in many university campuses, a number of Islamic banks have grasped the potential importance of the student market and established branches close to the universities. In Islamic societies women have fully independent legal personalities. Society may also insist on physical segregation of women from men. For example, Saudi women have always inherited property and handled their finances, This fact is of considerable importance for the bank marketers. As Habib et al (1987) observed, "the current proliferation of womens banks which exclusively serve Saudi ladies in a testament to that." Kuwaiti banks however, followed a different strategy. As Yavas et al (1990) observed "Kuwaiti banks did not favour establishing branches that serve exclusively female customers, Instead their approach was to attract more female bank employees" As a brilliant example of distribution oriented strategy that also gave due emphasis to culture and religion-related factors, Shook and Hassan (1988) discuss the case of Al-Rajhi in Saudi Arabia, "the money exchangers have long operated as a force against bank marketing management innovation but today the possess a unique element of service segmentation in the they provide more personalized and localized banking services. The money exchanges have many branches in relatively under banked hinterland areas, generally are located in less pretentious facilities and are regarded with favor since their services are perceived as more in line with local lifestyles, customs trade and interpersonal relationships,. The activities of money exchangers are on the whole profitable as a result of their low cost of operations perceived integrity and honesty, and because their customer are often willing only to accept changeable rates of interest and refuse to do business with commercial banks that offer flat annual rates. Thus, while the money exchangers have in repast operated as a force against change, their Islamic orientation and unique approach to the market today may be considered an innovative marketing approach,. This is the reason underlying the success story of al-Rajhi which used to be the kingdoms largest money exchange, now the third largest commercial bank." With advancement of technology, alternative distribution channels , such as ATMS. have emerged, Al Yavas, (1988) observed in his survey of Saudi customers, ,"One -third of the account holders surveyed indicated that an ATM would be an important consideration for them in choosing a bank if they moved to a new area, Likewise, one-third of respondents stated that they would switch there account to another bank if that bank offered an ATM." Similar findings were reported by other researchers too. And Islamic banks have responded to this customer need. a large number of Islamic banks have been extensively using ATMs. Many others are actively considering their alternative. 4.4.1 People People play an important role in the distribution of financial services, though we have also discussed their role in promotion. Given the overwhelming importance accorded to the "human" aspect of services such as punctuality responsiveness and friendliness of bank personnel by customers of Islamic banks , there factors naturally assume greater significance. As indicated earlier, these are important values in the Islamic framework and the bank management must assertive to inculcate these values among its personnel,. it would be in the interest of the organization if the focus of its training and employee

motivation remains on development of better Islamic personalities in addition to their acquiring sound banking and financial skills, It may be noted that the above combination of religious favor and financial skills is hard to find. "Good Muslims have traditionally avoided banking as a career since the same is perceived sinful. As Kaseem (1989) notes "The influence of Islam and its myriad social prescription in everyday life can be readily seen in the reluctance of Gulf Arabs to works for sinful institutions such as banks". Faced with shortage of manpower, Islamic banks have primarily recruited from the conventional banking community. This underscores the priority to be given to "Islamise" their attitude, over honing up their conventional banking and financial skills. 4.4.2 Processes The process by which service is delivered may include other factors related to the convenience of the customers, such as the working hours, internal and external dcor of the bank, such as, the arrangement o counters etc. Though the latter has been found to of not much significance for the customers, the convenience-related factors re quite important. For example Yavas (1988) notes that "for the Saudis, Thursday is the day most heavily favored for doing their banking followed by Saturday. Because Friday is the official weekend holiday in Saudi Arabia, it appears that the first and the last days of the working week are preferred by most bank customers. Further, morning hours as opposed to afternoon are preferred by a majority of the account holders, This is understandable as in Saudi Arabian banks, just like all other businesses, close during prayer times. Depending on the time of the year, one or two prayer breaks can coincide with the afternoon hour. Perhaps particularly due to inconvenience created by prayer hours, little over half of the bank customers stated that they would like to have the opportunity to make their transactions at any time - day or night seven days a week. Banks should also pay more attention to at least one other convenience-related factors, working hours- which should be adjusted to take into consideration the habits of Saudi customers, by tradition, a typical day for a Saudi starts very early in the morning before down, around the Fajr prayer hour, If banks could start their operations early enough, this would give customers a chance to d their banking before going to work, Results indicated that such a practice, at least in the short run, should be initiates on Thursdays and Saturdays when banking activities are the heaviest." Similarly, if Islamic banks are to concentrates on rural customers with perhaps stronger Islamic beliefs, banking in rural branches should start early in the day. This is one of the success factors underlying Grameen banks success in Bangladesh; where distribution of credit is undertaken daily to framers and workmen at the dawn of the day before they go to work.

5. Conclusion
It is generally felt that banks and financial institutions in the Islamic world have not given adequate emphasis to the role of culture and religion in designing their marketing strategies, through these factors, were alone responsible for the birth of the Islamic financial services industry, A survey of available empirical evince on patronage factors of customers of Islamic and conventional banks indicates that the major point of difference seems to be the return factors. This signifies the overwhelming role that Islamic plays in the savings and investment decision of such customers. Further, through the other patronage factors are apparently same for both conventional and Islamic financial services, (such as,

building trust, confidence, and long term relationship, convenience) the methods of achieving these would be very different, since all these are behavioral variable where culture and religion are key determinants. In designing their marketing mix, Islamic banks seems to have concentrated more on new product development and branding in which Islamic and its culture have been given due prominence. However, they seem to have neglected the other elements of the marketing mix. Of these, it is felt that distribution should perhaps be accorded greater importance than promotion . there is merit in the argument that the opinions customers have of their bank will be developed more through their experiences of their distribution channels that through advertisements. This is in conformity with the findings from the survey of customers of Islamic banks that advertisement is given little importance by customers in choosing a bank. Promotional activity is merely one source by which institutions communicate with their public . Where there messages are not compatible with information received from other sources the impact will be sub-optimal. In fact while designing their promotions provided to the consumer is adequate, accurate and not unjustifiably optimistic about the future. Given the overwhelming importance accorded to the "human" aspect of services , such as punctuality responsiveness, and friend lines of bank personnel by customers of Islamic banks, these factors naturally assume great significance. As indicated earlier, these are important values in the Islamic framework. the inculcation of these values among bank personnel should be viewed as an important training objective. Convention-related factors are a significance for the consumers. As highlighted, the convenience-related needs may also highly culture-specific and quite different for customer of Islamic banks. These should be appropriately taken care of and incorporated in any marketing plan.

6. References
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