What are the factors for Islamic Banking Adoption in

Saudi Arabia?
Assaf Zaki Filfian

The adoption of Islamic banking is an under researched area. This

article seeks to contribute to the body of knowledge on the factors
which are important for the adoption of Islamic Banking in the
context of Saudi Arabia. This research suggests that the factors for
the adoption of Islamic Banking in Saudi Arabia are no different than
any traditional banks. Islamic Banking customers view the level of
quality of service they receive as highly important, and balance this
with their religious needs. The senior management of the Islamic
Banks must realize that they need to provide a high quality of service
to be successful. However, Islamic Banking does provide a unique
proposition to customers in Saudi Arabia, and senior management
can use this to develop a competitive advantage for success.

1 Introduction
The adoption of banking by customers around the world is based on financial and other social needs,
such as securing their money or for convenience. However, the ways in which consumers choose
Islamic Banking and adopt it in Islamic countries such as Saudi Arabia is not clear. The adoption of
Supervisors: Dr. kamaljeet Sandu and Dr. Erkan Yalcin

the online (Liu et al., 2008, Masocha et al., 2011, Moga et al., 2011, Ochuko et al., 2009, Poon, 2008,
Xue et al., 2011), mobile (Donner and Tellez, 2008, Laukkanen and Cruz, 2008, Lin, 2011) and
traditional banking have been widely researched. However the factors which contribute to the
adoption of online banking have not been widely researched, especially in the case of Saudi Arabia.
The adoption of Islamic banking is increasing becoming popular in the Islamic countries (Abdul-Majid
et al., 2011, Ahmad et al., 2011a, Ahmad et al., 2011b, Cihak and Hesse, 2010, Khan, 2010, Salehi et
al., 2011, Zarrokh, 2010), however the level of service that these banks deliver and the types of
financial products which attracts the consumers is not clear.
This research aims to investigate the factors which lead to the adoption of Islamic Banking by
consumers in an Islamic country such as Saudi Arabia. This is a qualitative study, intended to
examine and discuss the in-depth and explanatory factors which contribute to the adoption of
Islamic Banking in Saudi Arabia. One of the main conclusions of this research is that customers of
Islamic banking are no different than traditional banks, and Islamic banks need to compete on good
quality of service. However, Islamic banks have a unique proposition, which managers can use to
build a significant competitive advantage over their competitors. This paper has been structured as
follows. Section two discusses the main theoretical approaches as part of the review of literature.
Section three takes into account the methodological concerns of using a qualitative research. Section
four discusses the thematic areas of concern for adoption. Conclusions in section five discuss the
main adoption factors which need to be taken into account.

2 Literature Review
The origin of Islamic banking has been for many years (Abdul-Majid et al., 2011, Ahmad et al., 2011a,
Ahmad et al., 2011b, Cihak and Hesse, 2010, Khan, 2010, Salehi et al., 2011, Zarrokh, 2010), which
has been according to Sharia law and the teaching of the Quran. Islamic banking is seen by the users
as a manifestation of their religious grounds, and an extension in the ways in which Muslims can

practice one of the main pillars of their religion, which is interest free financial transactions (Khan,
2010, Salehi et al., 2011). The interest free institutions, called Islamic banks work within the Islamic
Law or the Sharia, and operate the conduct of their operation within the laws of the religion (Ahmad
et al., 2011b, Ahmad et al., 2011c, Ahmad et al., 2010). The aim of the Islamic banking is to ensure
that the interest and usury are not used in any format, which enables the banks to operate on
providing a reasonable profit for the different companies (Saidi, 2009). These banks also operate on
a number of other issues which includes the distribution of Zakat and ushr, which are other main
principles of Islam (Saidi, 2009).
One of the key factors which has been highlighted in the literature is the level of service quality
which is offered by Islamic banks (Ahmad et al., 2011c, Ahmad et al., 2011d). Customer satisfaction
are one of the key issues which attracts consumers in the online banking or traditional banking
environment (Ahmad et al., 2011c, Ahmad et al., 2011d). However, the focus of most of the Islamic
banking has not been on customer support, and one of the key issues which has been missing from
the customer services is that the level of service must be raised by the banks (Ahmad et al., 2010).
For example, Ahmed et al (Ahmad et al., 2010) was of the view that it remains one of the key issues
for the adoption of online banking in Pakistan, where they investigated a number of different service
levels of the Islamic Banks.
The adoption of Islamic banking has also been compared with the traditional management
structures of the Islamic Banking. One of the key issues which seems to be highlighted in the
literature is the traditional management structure of Islamic Banking, which focuses more on the
religious needs of the customer as compared to their financial needs (Ahmad et al., 2011a, Cihak and
Hesse, 2010). The traditional approach to Islamic banking services quality has been a focus on
satisfying the religious needs of the customers which not focusing on the satisfaction levels of the
customer (Ahmad et al., 2011d, Amin et al., 2011, Khattak and Kashif Ur, 2010). However, empirical
research suggest that although the customers are focused on adhering to the principles of Islam,

their main need is to fulfill their religious obligations while also fulfilling their financial needs (Ahmad
et al., 2011d, Amin et al., 2011, Khattak and Kashif Ur, 2010). However, many of the Islamic banks,
research suggests, seem to be confused on their main strategic direction, with many not focusing on
fulfilling the customer satisfaction levels as compared to the traditional or conventional banks
(Ahmad et al., 2011c).
The link between the customer satisfaction and the regulatory regimes in Islamic countries is also of
critical importance. From a business management perspective, the senior management in an Islamic
Bank must be able to ensure that their investments and activities are in principle within the Islamic
law, as this would be a key factor with the adoption of the Islamic banking (Saidi, 2009). Ethical
banking, it appears is one of the key concern for banking customers in any standard (Becchetti et al.,
2011, Hopkins, 2010, Salvador-Carulla et al., 2009, San-Jose et al., 2011, Watkins, 2011). However,
the implications of ethical banking also has been established within the Islamic banking domain, and
needs to be established within the context of the Islamic banking models. The customers using
Islamic banking have established a clear approach where they not only require the bank to be
Islamic, but also have a ethically positive impact on the society (Saidi, 2009). However it is not clear
how applicable this will be in a conservatively Islamic country such as Saudi Arabia.
Although the ethical concerns of the customers are one of the main issues which research suggests
as being important in the adoption of the Islamic Banking, this can also be linked with the way in
which senior management in these banks is able to manage and control their operations (AbdulMajid et al., 2011, Ahmad et al., 2011a, Ahmad et al., 2011b). Increasingly, the increase in the
productivity and efficiency of their banking operation (Abdul-Majid et al., 2010) seems to be one of
the main concerns of the senior management (Ahmad et al., 2011c, Ahmad et al., 2010). This not
only takes away the focus from the customer service levels, but also ensures that the decision
making of the senior management in providing a great banking experience to the customer is
diverted (Ahmad et al., 2011c, Ahmad et al., 2010). The perceptions of the senior management are

also critical to the needs of the customer, as the lack of application on the service standards of the
bank can lead to the alienation of the customer, as customers need to be able to use the bank to
fulfill their financial obligations (Ahmad et al., 2011c, Amin et al., 2011, Salehi et al., 2011) However,
it is not clear how the banking community has been using the senior management aspects of the
Islamic banking issues within the traditional banking setup, and needs to be further investigated.
The service level which is provided by the employees of the bank, as compared to the traditional
level of service given by the employees of traditional and conventional banks is also not clear
(Ahmad et al., 2010, Thambiah et al., 2009a, Thambiah et al., 2009b). The adoption of customers,
when the level of service and training to the employees is low seems to suggest that the customers
of Islamic banking are more resilient, and are able to ignore the bad service given by ill trained
employees (Thambiah et al., 2009a). However, it is clear that the lack of service levels by the
employees and staff at Islamic bank can lead to the customer going back to the conventional banks,
as this would mean loss of customers in some countries (Ahmad et al., 2010, Thambiah et al.,
2009a). However, it is not clear if these empirical results are widely applicable, as in a Islamic
country such as Saudi Arabia, where the customer is seen as being ultra-traditional, the tolerance of
poor or bad customer service may be more tolerable.
This review of literature has examined the wider literature on the main factors which are considered
important for the improvement in the adoption of Islamic banking. However, the review of literature
ahs also highlighted a number of significant gaps in literature. One of the key issues which needs to
be investigated is that the adoption of Islamic Banking may be significantly different in the context of
Saudi Arabia, given it as particular institutional and governance structures. The role of ultratraditional religion in the ways that customer choose services has also been a significant missing
aspect of the literature and needs to be further investigated. Another main gap in the literature
seems to be the way in service quality can be improved. Although literature highlighted that service

quality can be one of the most crucial areas, however, the literature is limited on the main aspects of
service quality which the customers seem to use as the benchmark for adopting Islamic banking.

3 Methodology
The main focus of the researcher was to examine and discover contributing factors that play pivotal
role for adoption of Islamic Banking in the context of Saudi Arabian banks. The sample size for this
research focused on collecting data from a total of 20 customers from the banks that have already
adopted Islamic Banking and 20 customers from conventional banks (banks that have no Islamic
Banking in place). Additionally, the researcher has focused on the 10 senior managers each from
Islamic and conventional banks. The choice of such a sample size is valid because this is within the
scope of study. The above mentioned sample size allows the researcher to gain varying insights of
both the customers and senior managers from Islamic and conventional banks This study is spread
over a time period of three months due to limited resources available.
The basic research method tools that have been used by researcher includes semi-structured indepth interviews (Bryman, 2006) both from the customers and the senior managers of the banks
that have adopted Islamic Banking and also from those banks that have not adopted Islamic Banking.
With the help of semi-structured interviews the researcher has addressed the issues such as the link
between level of service quality and religion and employee training and its impact on the adoption
of Islamic Banking. This pre-set questions posed will make sure that the interview process does not
follow an un-intended direction (Patton, 2002). Additionally, in order to keep the result unbiased,
the researcher has given the respondents discretion to unveil any other factors that play vital role in
adoption of Islamic Banking among customers (Davies, 2007) The choice of in-depth interviews
serves as best in such a case due to the fact that interviews are the most powerful tool (Foddy,
1993)for gaining deeper insights and phenomenon that are hidden in the minds of the individual
lived (Frey and Oishi, 1995, Gleadle, 2011, Kvale and Brinkmann, 2009).

4 Results & Analysis

The results of the in-depth interviews have been thematically arranged for analysis. A number of
major themes have been identified, which the customers and the senior management of the bank
highlighted as significant issues in the adoption of the Islamic Banking. These issues have been
analyzed using coding of the interview transcripts, which have been presented here. This research
suggest that the most significant issues which the customers face are the level of service quality, and
its link with the religious aspects of the banking operation. Another significant concern for the
customers appears to be the lack of training and understanding of the Islamic banking products by
the staff, who are more adapt to the conventional banking system. From a strategic management
position, the senior management was of the view that they need to take a competitive advantage
approach by increasing the adoption of Islamic Banking by customers, as they believed that a
sustained a competitive advantage can be gained by introducing innovative Islamic Bank based
products and services. These themes have been discussed and analyzed in more detail here:

4.1 Service Quality

One of the most significant issue for customers seems to be the level of service that they receive
from the Islamic banks. Despite the fact that the Muslim population in Saudi Arabia seems to be
highly conservative, the focus of the customer still seems to be able to complete the transaction in a
comfortable and transparent manner. One of the foremost customer concern seems to be based on
a lack of focus of the Islamic Banks on the needs of the customers. Many customers complained that
the switch from the conventional banks to the Islamic banks has not been popular with them as they
have faced difficulties in a number of basic banking services such as opening of account and regular
bank statements. On another level, many of the customers were of the view that the Islamic Banks
were unable to provide them with innovative financial products, which meant that their income
from investments had gone down after adopting the Islamic Banks.

4.2 Link between Service Quality and Religion

A surprising result from the interviews with the customers of Islamic banks was that they were
willing to sacrifice some level of service and returns from their investments on the basis of the
implementation of banking system which was based on their religious grounds. However, customers
of the conventional banks appeared to indicate that the results and financial gain from the return of
the conventional products was one of the most significant aspects for them. This indicates that there
are two types of customers of the Islamic banks. The religious customers need to be catered to as
they are the main customer who is adopting the Islamic banking system in the first instance.
However, there is a need for banks to cater to the demands of the non-religious customers too, to
attract then with high financial gains and innovative products and services

4.3 Training of Bank Employees

Another major theme, which was significantly unique in the case of the Saudi Arabian market was
the complaint from the customers regarding the level of service that they receive from the employee
of the Islamic Banks. This was a theme which almost all the customers discussed in detail, and the
focus was that most employees and managers of the banks were focused on the needs of the
customer in the traditional and conventional banking environment, whereas the customer required
a more religious focus in the service they expect from the different bank employees. They felt that in
most cases, the Islamic banks only choose their employees from traditional banks, which was not
working. The customers also complained that the understanding of the senior management
regarding the Islamic nature of the end product was also needed, which would enable the customers
to make more informed decisions.

4.4 Islamic Banking as Competitive advantage

Interviews with the senior management of the Islamic banks in Saudi Arabia shows that they do not
see their investments in Islamic banking as having any significant strategic advantage for their
businesses. This, also showed a lack of foresight and strategic planning regarding the increase in

adoption of customers, and the level of marketing which the senior management supported was
also disjoint. Although many of the senior mangers did not see themselves as possible competitors
to the conventional banking systems, which has limited their approach to Islamic Banking as only an
alternative system.

5 Conclusions
A number of conclusions have been drawn from this research of the customers of Islamic banks and
Transitional banks regarding the adoption of Islamic Banking factors in Saudi Arabia. This study
concludes that there is no reason to believe that the customer in Islamic banking give any less
significance to service quality level. In fact, the level of expectation of the customers of Islamic
banking are more than the traditional banks, as the customer not only want excellent support and
service from the bank as they would in a traditional bank, but also expects the bank to provide this
within the Islamic laws and regulations. In many cases, one of the key factor which hinders the
adoption of the customer is their belief regarding the lack of transparency in the mechanism of the
Islamic banks, as many believe that they would not get a financially viable level of service from the
Islamic Banks. Another key concern for customers is the level of training and expertise of the Islamic
Bank employees and managers.
There is a need for Islamic banks to ensure that all their employees are well versed in the religious
aspects of the Islamic law on financial aspects, which can reassure the customers regarding the level
of service they receive. Another significant conclusion of this research is that the managers of the
Islamic banks should not see themselves as an alternative financial system, which would be adopted
by the customer just because of their religious affiliation with Islam. Rather, there is a need by the
managers to take a more strategic view of the situation, and use the Islamic way of banking as a
significant strategic resource, which can be a stepping stone for long term strategic advantage over
the conventional banks, especially in countries such as Saudi Arabia.

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