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Original Article

Bank image in the UAE: Comparing Islamic and conventional banks

Received (in revised form): 13th August 2009

Hussein A. Hassan Al-Tamimi

is an associate professor of Finance at University of Sharjah, where he teaches fi nancial management, corporate fi nance, investment analysis, fi nancial markets and institutions, banking operations and risk management. His current research focuses on capital budgeting, risk management, corporate governance, fi nancial performance and fi nancial markets.

Adel Shehadah Lafi

is a chief fi nancial offi cer at Al Habtoor Engineering Enterprises Company. His current research interest focuses on capital budgeting, service quality and Islamic fi nance.

Md Hamid Uddin

is an associate professor of Finance at University of Sharjah. His area of research includes corporate fi nance, asset pricing, portfolio investments, IPO price behavior and so on. He teaches investment and portfolio management, corporate fi nance, fi nancial markets and institutions, and international fi nance at both graduate and undergraduate levels.

ABSTRACT This study investigates how bank customers in the UAE view Islamic banks versus conventional banks and whether this image affects customer loyalties or selection of a bank. We distributed a questionnaire to a convenient sample of UAE bank customers that focused on fi ve areas: bank image, bank products, service quality, cultural aspects and religious factors, in addition to demographic attributes of the sample. The main fi ndings of this study are: fi rst, most UAE bank customers prefer banking with Islamic banks, although they are not satisfi ed with the quality of products and services; second, customers generally have a positive image of whatever bank they dealt with; third, the regression analysis results indicate that the most important factor in choosing a bank was bank products followed by service quality and then religious factors; fourth, there is a signifi cant difference between how customers perceive UAE Islamic banks versus conventional banks; fi fth, there is a signifi cant difference in how customers perceive UAE Islamic banks based on their gender, education and duration of the relationship; and fi nally, there is a signifi cant difference in how customers perceive UAE conventional banks based on their gender. Journal of Financial Services Marketing (2009) 14, 232– 244. doi: 10.1057/fsm.2009.17

Keywords: bank image ; Islamic banks ; conventional banks ; bank products and services

Correspondence: Hussein A. Hassan Al-Tamimi Department of Accounting, Finance and Economics, College of Business Administration, University of Sharjah, PO Box 27272, Sharjah, UAE E-mail: hussein@sharjah.ac.ae

INTRODUCTION

This study explores how UAE customers

view Islamic banks and conventional banks. We investigate whether this image affects customer preference about the type of bank they want to patronize. In the highly

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Comparing Islamic and conventional banks

competitive UAE market, banking institutions are intensely concerned with customers’ post-purchase behavior. They recognize that merely satisfying customers is not suffi cient to retain their loyalty because even satisfi ed customers may switch to competitors. According to Ekrem et al , 1 in

the past decade, rm image has been recognized as a strategic tool to strengthen a fi rm ’ s competitive position and improve its profi tability. But image alone may not be an adequate source of competitive advantage, as customers also want specifi c products and services. Thus, customers’ image of UAE banks and their services are related to customer preferences. According to the UAE Central Bank, the banking community in the UAE comprises

  • 46 banks, including 21 national banks and

  • 25 foreign banks. Of the 21 national banks,

four are Islamic. Their total assets were AED 118 824 million (about US$ 32 360 million) in 2006, compared with AED 873 156 million (about $237 788 million) for the conventional banks, constituting around 13.6 per cent of total assets of all banks in

the UAE. 2 In 2000, UAE Islamic banks had

  • 96 branches compared to 582 branches for

conventional banks, representing 16.5 per cent of the total number of branches of UAE

commercial banks. 2 Even though there are some similarities between the products and services of conventional and Islamic banks, it is hard to determine why UAE customers prefer to deal with conventional rather than with Islamic banks. We assume that because the UAE is an Islamic country, demand for Islamic banking services should be high. Based on this assumption, Islamic banks have a good opportunity to expand their activities and attract more customers and subsequently open more branches. The small market share of Islamic banks today, as noted above, and the small number of branches implies that Islamic banks in the UAE are not widely accepted. This study investigates the reasons for this.

LITERATURE REVIEW

A number of empirical studies have discussed service quality, product, satisfactory relationships and their effect on bank image and loyalty. We review some of the most recent studies below but fi rst we review the literature on the three core aspects of our study: conventional and Islamic banks, bank image and service quality

Conventional and Islamic bank products

Islamic and conventional banks are extremely different in products and in basic principles. The former is based on a Shariah foundation (Islamic principles) and all dealings, transactions, business approaches, product features, investment focus, and responsibility

are derived from the Shariah law, leading to

many operational differences compared to conventional banking. For example, when lending money, participation in partnership business is the main function of the Islamic banks. In contrast, lending money and getting it back with compound interest is the business goal of conventional banks. In Islamic banking, the creditor should not

take advantage of the borrower and there should be no reward without taking a risk. Although Islamic banks do not charge a pre-determined interest rate as conventional banks do, they charge a certain amount upon the initial agreement between the bank and the borrower. Conventional banking is essentially based on the debtor-creditor relationship between the depositors and the bank, and between the borrowers and the bank. Interest is considered the price or cost of borrowing, refl ecting the opportunity cost of money. 3 A comparison between conventional and Islamic banks is provided in the Appendix.

Bank image

Boyle 4 defi ned image as ‘ the total impression an entity makes on the minds of people’ whereas Worcester 5 defi ned corporate image as ‘ the net result of the interaction of all

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experiences, impressions, beliefs, feelings and knowledge people have about the company’ . Image can be classifi ed into three types:

corporate image, which refl ects the way people view the whole corporation; product image or the way people view a particular product category; and brand image, which refl ects the way people view a particular brand compared to other brands. 5 According to Ekrem et al , banks today have image and identity problems. They have failed to keep consumers satisfi ed and face ever-increasing competition in markets with little growth in demand. Ekrem et al 1 concluded that a favorable bank image is a critical aspect of a company ’ s ability to maintain its market position and affects core aspects of organizational success such as customer patronage. A favorable bank image has a positive impact on performance and sustainable growth, including market share, over time.

Service quality

Gronroos 6 defi nes service quality as the fulfi llment of customers ’ expectations. Parasuraman et al 7 identifi ed 10 determinants of service quality generic to the service industry, including tangibles, reliability, responsiveness, competence, courtesy, credibility, security, access, communication and understanding the customer. Later, Parasuraman et al 8 developed a 22-item instrument called SERVQUAL that has become widely used as a generic instrument for measuring service quality. SERVQUAL examines fi ve dimensions consistently ranked by customers as the most important for service quality, regardless of service industry. They are:

Reliability – the ability to perform the promised service dependably and accurately. Tangibles – appearance of physical facilities, equipment, personnel and communication materials. Responsiveness – willingness to help customers and provide prompt service.

Assurance – knowledge and courtesy of employees and their ability to convey trust and confi dence. Empathy – the level of caring and individualized attention the fi rm provides its customers.

SERVQUAL scores were defi ned as the gap between customers’ expectations of service quality and their perception of the service quality experience. Howcroft 9 defi nes service quality in banking as consistently anticipating and satisfying the needs and expectations of the customer. Lewis 10 says that in the banking industry, gap analysis has been accepted as a critical tool to measure current levels of service quality. The relationship between image and loyalty has remained a matter of debate among researchers. Liew, in ‘ Banking on a Sharper Image’ , states that the UK banking industry is concerned about its confusing image. This raises the question, How can banks establish programs to create a better image? Liew’ s study revealed that clearing banks are often seen as positive institutions: large and powerful but not customer oriented. Smaller banks are thought to provide more sensitive and friendly services. He also concluded that bank image has far more to do with the underlying policy of the institution than any advertising activity. 10 The relationships among image, advertising effi ciency, customer satisfaction, customer expectation, perceived quality, perceived value, customer complaints and customer loyalty have been investigated by Ekrem et al. 1 They found that bank image and advertising effi ciency infl uence customer loyalty and the antecedents of loyalty signifi cantly. Bravo et al studied the impact of bank image on consumer behavior to identify the main corporate associations that individuals consider when selecting a bank or savings bank. They classifi ed the sample into two groups, customers and non-customers of banking institutions. The corporate image of commercial banks, according to Bravo et al ,

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includes services offered, accessibility, corporate social responsibility, global impression, location and personnel. Their work justifi es the importance of satisfaction since it explains to a great extent an individual’ s intention to continue using the services of a particular bank. Kassim and Souiden studied customer retention measurement in the UAE banking sector. There are major differences between our study and theirs. Our study compares UAE Islamic banks and conventional banks, investigates the image UAE customers have of Islamic banks and conventional banks and determines whether this image affects customer loyalties or preference for the type of bank they deal with. Kassim and Souiden’ s 12 study, in contrast, explores how image, perceived service quality and satisfaction determine retention in a retail bank setting. They found that image is both directly and indirectly related to retention through satisfaction, while perceived service quality is indirectly related to retention through satisfaction. Eakuru and Nik Mat 13 studied the antecedents of customer loyalty in banks in South Thailand. They viewed customer loyalty as crucial to long-term profi tability and managing services. They found that perceived service quality relates positively to customer satisfaction, image relates positively to customer loyalty, image relates positively to commitment, and trust relates positively to commitment. Ehigie 14 explored customer loyalty to Nigerian banks by looking at how customer expectations, perceived service quality and satisfaction predict loyalty. He concluded that perception of service quality and satisfaction are signifi cant determinants of customer loyalty, with customer satisfaction contributing more. Fyayan et al 15 studied the use of Internet banking services and its effect on bank image in order to develop a reliable and valid scale to measure the corporate image of a bank in the context of the Internet. According to their research, an Internet bank’ s image is a

multidimensional construct composed of its reputation and security as perceived by the consumer, as well as of the services offered and accessibility. A study by Joseph and Stone 16 on the impact of technology on service delivery and customer perceptions among US customers found a bank’ s ability to provide quick, convenient, personalized, and user-friendly electronic services and the accuracy, security and convenience of accessing information via electronic technology have a signifi cant impact on customer perceptions of service quality. Their study also reported that consumers have a positive perception of technology- based services, as they believe technology delivers services faster and more effi ciently than employees. This may lead to a positive image followed by customer satisfaction and loyalty as described above. Sureshchandar et al 17 examined customer perceptions of service quality in the banking sector of a developing economy, India. They concluded that the three groups of banks in India (public, private sector and foreign) vary signifi cantly in delivering the fi ve service quality factors: core service, human elements of service delivery, non-human elements, tangibles of service and social responsibility. Their results also indicated that foreign banks perform best, followed by private sector banks and public sector banks. Zineldin 18 examined the relationship among product, service quality and customer management in the Swedish banking industry, fi nding that a bank must create customer relationships that deliver value beyond that provided by the core products. Banks can do this by adding tangible and intangible elements to the core products. The necessary condition for creating quality and value added according to this study is quality measurement and control. Zineldin concluded that the most important quality criteria used by customers in selecting a bank related to delivery system and service quality, refl ecting the importance of reliability and responsiveness of the bank. An unsatisfi ed

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customer is probably a potential customer for a competing bank and word-of-mouth from a disappointed and unsatisfi ed customer may harm the bank’ s image. Dusuki and Abdullah 19 studied why Muslim customers prefer to deal with Islamic banks, using a sample of 750 respondents from four different regions in Malaysia. They concluded that the selection of Islamic banks was a combination of Islamic and fi nancial reputation and quality service offered by the bank. Other important factors in bank selection included good social responsibility practices, convenience and product price. Haron et al 20 surveyed 301 Islamic and conventional bank customers, also in Malaysia, and found that the most important factors in bank selection were fast and effi cient services, speed of transactions, friendliness of bank personnel and confi dentiality of the bank. They also reported that 40 per cent of the respondents said that religion was a prime reason for using Islamic banking services. Although there was a high level of awareness of Islamic products among customers, they did not understand the differences between Islamic and conventional banking services. Al-Tamimi and Al-Amiri 21 investigated service quality in UAE Islamic banks using a sample of 311 customers from two UAE Islamic banks. They found a positive and statistically signifi cant relationship between overall service quality and the SERVQUAL dimensions. Empathy and tangibles were the most important dimensions and there was no signifi cant difference between level of overall service quality between the Dubai Islamic Bank and Abu Dhabi Islamic Bank. Naser et al 22 assessed customer awareness and satisfaction towards Islamic banks in Jordan using a sample of 206 customers, fi nding a certain degree of satisfaction with many Islamic banks’ facilities and products. However, the respondents expressed dissatisfaction with some of the Islamic

banks’ services. The fi ndings also indicated that a majority of customers banked with Islamic banks because of religion. Metawa and Almossawi 23 focused their study on customers of Bahrain Islamic Bank and Faisal Islamic Bank of Bahrain, fi nding that customers considered their Islamic principles the most important factor in selecting a bank, followed by rewards extended by the banks, infl uence of family and friends, and convenient location. Metawa and Almossawi concluded that socio-demographic factors such as age, income and education were important criteria in bank selection, a fi nding that indicates religion as the most important reason for customers patronizing Islamic banks. In sum, researchers have devoted many studies to exploring the relationship among service quality, customer satisfaction, the use of technology and loyalty or bank image. But more research is needed, particularly in the area of Islamic banking and specifi cally in the context of the Arab World, including the UAE. Arab countries are generally Muslim and there is a high demand for Islamic banking products and services.

RESEARCH METHODOLOGY

Research questions and hypotheses

The study intends to answer the following three questions:

  • 1. Is the fi rst preference of UAE customers is Islamic banks or conventional banks?

  • 2. If the fi rst preference of UAE customers is Islamic banks, is it based on the type and quality of products or the type and quality of services or on religious and cultural factors?

  • 3. If the fi rst preference of UAE customers is conventional banks, is this preference based on type and quality of products or type and quality of services?

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We also formulate the following three hypotheses:

Hypothesis 1: There is a signifi cantly posi- tive relationship between the image of UAE banks and the quality of bank services, the level of satisfaction with bank products, and religious and cultural factors.

Hypothesis 2: There is a signifi cant differ- ence between customers’ image of UAE Islamic banks and their image of conven- tional banks.

Hypothesis 3: Customers’ image of UAE banks varies depending on their age, gen- der, education and length of relationship with the bank.

As far as the researchers know there is no existing instrument that fi ts the purpose of this study. We therefore developed a modifi ed questionnaire based mostly on the instrument developed and tested by Parasuraman et al , Meiss Alison et al , Bloemer et al and Al-Tamimi and Al-Amimri. 8,21,24 25 We fi rst distributed the questionnaire to seven experts (three academics and four practitioners) to examine the scales, as suggested by Devellis. 26 Accordingly, the authors revised the fi rst draft by eliminating, adding or rewording some of the questions. There were English and Arabic versions of the questionnaire, depending on the respondents’ preference. The questionnaire has fi ve parts. The rst part consists of demographic attributes: age, gender, employment status, education and number of years as a bank customer. The second part concerns bank image and includes 28 questions. The third part consists of 14 questions about bank products. The fourth part has 35 questions about service quality using a 7-point Likert scale to compare perception of quality with expectations. There are six items on the tangibles, seven items on reliability, seven on

assurance, fi ve items on responsiveness and nine items on empathy. Part four also includes one question measuring overall service quality. The last part includes a general question about whether respondents prefer conventional or Islamic banks, and the reasons for their choice.

Sampling and data collection

This research uses a convenient sample of UAE bank customers because it was impossible to distribute questionnaires to all customers. It was not possible to get confi dential information about customer characteristics from banks in order to classify them into different groups for research purposes. The questionnaires were distributed in two ways: some were handed to branch managers who were requested to pass them along to their customers. The authors hand- delivered other questionnaires. Customers could select questionnaires in English or Arabic. From the 800 questionnaires distributed, we received 620 responses, of which 362 were excluded because of incomplete data. The remaining 257 usable questionnaires represent a response rate of 32.25 per cent, considered acceptable. The questionnaires were distributed to customers of the four Islamic banks and the major conventional banks in the three largest cities of the UAE: Abu Dhabi, Dubai and Sharjah. More than 80 per cent of the UAE population lives in these three cities. There were 178 respondents (69.3 per cent) from Islamic banks and 79 (30.75 per cent) from conventional banks

DATA ANALYSIS AND DISCUSSION

The data analysis has three parts: the profi le of the respondents, reliability of the measures and testing the hypotheses.

Profi le of study respondents

The study ’ s respondents were asked to provide demographic data on age, gender, income, education and duration of

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banking relationship. Table 1 shows that

about 10.1 per cent of the respondents were 18– 25-year-old, 44.4 per cent were 26– 35- year-old, 28.8 per cent were 36– 45-year-old,

  • 12.1 per cent were 46– 55-year-old, 4.7

per cent were 56– 65-year-old and the remaining 0.5 per cent were 66-year-old or more.

Males comprised 85.6 per cent and females

  • 14.4 per cent. With respect to education, 6.2

per cent had less than a high school diploma

and 6.6 per cent were high school graduates.

Of the college graduates, about 18.7 per cent were diploma or higher diploma holders,

  • 45.9 per cent had a bachelor’ s degree and

the remaining 22.6 per cent had postgraduate degrees. Table 1 also displays duration of banking relationship and shows that 46.3 per cent of the respondents have had a relationship with

UAE banks for four or more years, while

  • 53.3 per cent have dealt with these banks for

fewer than 4 years.

Table 1 : Respondents’ characteristics

Variable

Frequency

%

Age (year)

 

18

– 25

26

10.1

26

– 35

114

44.1

36

– 45

74

28.8

46

– 55

31

12.1

56

– 65

10

3.9

65

and more

2

0.8

Gender

Female

37

14.4

Male

220

85.6

Education

 

Below high

16

6.2

school High school or equivalent

17

6.6

Diploma / higher diploma

48

18.7

Bachelor or

118

45.9

 

equivalent

Graduate

58

22.6

 

degree

Duration (year)

 

Less than 2

50

19.5

2

to less than 4

87

33.9

4

to less than 6

24

9.3

6

and more

96

37.4

Reliability

Reliability of the measures was assessed using Cronbach’ s to measure the reliability of the different categories

that infl uence bank image. It estimates how much variation in scores of different variables is attributable to chance or random errors. 27 A coeffi cient greater than or equal to

0.7 is considered acceptable and a good indication of construct reliability. 28 Cronbach’ s for the categories ranges from 0.907 to 0.927, showing that these measures are reliable (see Table 2).

Descriptive statistics

Table 3 gives descriptive statistics for bank image by categories that infl uence image, namely the fi ve dimensions of service quality:

tangibles, reliability, responsiveness, assurance

and empathy. The statistics include overall service quality, religious factors and cultural factors. Mean values in Table 3 show a mean for

bank image of 4.9, which generally indicates

that UAE bank customers have a positive

image of their bank. The range of mean

values of service quality dimensions and

overall service quality is 4.7– 5.3, indicating

that UAE bank customers are satisfi ed with

overall service quality. Table 3 shows that the tangible dimension has the highest mean. The mean values of service quality dimensions and overall service quality indicate that

UAE bank customers are satisfi ed with overall service quality consistent with the

ndings of Naser and Jamal. 23 The mean

value of religious factors and cultural factors is 4.55 and 4.7, respectively, indicating that these two categories are

important to customers and we should consider the effect of these two categories on bank image. The importance of the

religious factors is in line with the fi ndings

of Naser et al , Haron et al , and Metawa

and Almossawi. 22,20,23

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Table 2 : Reliability of the categories that infl uence bank image

Category

Items – Part II of the questionnaire

No. of items

Bank products

Items 29 – 38

10

0.912

Service quality: Tangible dimension

Items 41 – 46 and Item 69

 

6

0.911

Service quality: Reliability dimension

Items 47 – 54

9

0.907

Service quality: Responsiveness dimension

Items 55 – 59

5

0.911

Service quality: Assurance dimension

Items 60 – 65

6

0.910

Service quality: Empathy dimension

Items 66 – 68 and Items 70 – 72

6

0.905

Religious factors

Items 74 – 76

3

0.922

Cultural factors

Items 77 – 78

2

0.927

Table 3 : Descriptive statistics

Category

N

Minimum

Maximum

Mean

SD

Bank image

255

1.79

6.54

4.9360

1.04119

Bank products

257

1.36

6.64

4.6958

1.17365

Service quality: Tangible dimension

257

1.50

7.00

5.3236

1.01219

Service quality: Reliability dimension

257

1.11

6.64

5.1375

1.21372

Service quality: Responsiveness dimension

257

1.40

7.00

5.1136

1.23333

Service quality: Assurance dimension

257

1.67

7.00

5.0837

1.18532

Service quality: Empathy dimension

257

1.11

7.00

5.1375

1.21372

Overall service quality

257

1.00

7.00

4.8988

1.82792

Religious factors

257

1.00

7.00

4.5512

1.48899

Cultural factors

257

1.00

7.00

4.7082

1.64366

Bank preferences of UAE customers

Table 4 summarizes responses on bank preferences. About 70 per cent of respondents prefer banking with Islamic

banks whereas 30 per cent prefer conventional banks. Of those who prefer Islamic banks, about 26 per cent cite the quality of products and services whereas

  • 58 per cent cite the quality of products

provided by Islamic banks. Only 16 per cent

of respondents attributed their fi rst preference

to the quality of services provided by Islamic banks. Islamic banks clearly need to improve the services provided. About 51 per cent of respondents indicate that their primary reason to bank with conventional banks is the quality of products and services, whereas

  • 28 per cent cite the services provided and

about 21 per cent quality of products. The

results indicate that UAE bank customers are more enthusiastic about their banks than conventional bank customers are about their banks. We believe this implies that Islamic banks have more potential for development and expansion, but they need to develop their services.

Testing the study’ s hypotheses

To assess the predictive ability of different factors such as bank product (PROD), measures of service quality (SERVQ), religious factors (RELG) and cultural factors (CULT), a linear regression analysis was performed with bank image (IMG) as the dependent variable. The regression model is as follows:

IMG = f (PROD,SERVQ,RELG,CULT

where PROD – bank products; SERVQ – service quality measured by the fi ve dimensions: tangible(TAN), reliability(REL), responsiveness(RES), assurance(ASS) and empathy(EMP); RELG – religious factors; and CULT – cultural factors.

We conducted a multicollinearity test to assess the degree of correlation among the independent variables, shown in Table 5. The ‘ rule of thumb ’ test, as proposed by Anderson et al , 29 suggests that any correlation coeffi cient exceeding (0.7) indicates a potential problem. Because, as the table shows, there was a multicollinearity problem, we dropped fi ve independent variables from

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Table 4 : Bank preferences of UAE customers

 

Type of bank

Quality of products

Quality of services

Quality of products and services

No.

%

No.

%

No.

%

No.

%

Islamic banks

178

69.3

103

57.9

29

16

46

25.8

Conventional banks

 

79

30.7

17

21.5

22

27.8

40

50.7

Table 5 : The correlation coeffi cients between independent variables

 
 

PROD

 

TAN

REL

RES

ASS

EMP

RELG

CULT

PROD

1.000

TAN

0.682**

 

1.000

REL

0.615**

0.771**

1.000

RES

0.584**

0.696**

0.844**

1.000

ASS

0.584**

0.734**

0.804**

0.804**

1.000

EMP

0.633*

0.727**

0.819**

0.773**

0.821**

1.000

RELG

0.448**

0.389**

0.374**

0.342**

0.330**

0.511**

1.000

CULT

0.449**

0.398**

0.375**

0.319**

0.328**

0.499**

0.932**

1.000

**correlation is signifi cant at 0.05 level.

the regression model, namely TAN, RES, ASS, EMP and CULT. The remaining three variables were bank product (PROD), reliability (REL) as a measure of service quality, and religious factors (RELG). These factors represent a good combination of the factors that infl uence bank image. Table 6 shows that the result of the regression model R 2 is 0.85. This indicates that the three independent variables explain 85 per cent of the variations of bank image. The R 2 is signifi cant at the 0.01 level. The estimated coeffi cients of two independent variables were, as expected, positive and statistically signifi cant at the 1 per cent level. However, the value of coeffi cients and t statistics indicate that bank products are the most infl uencing factor, followed by service quality measured by reliability and then religious factors. The three variables have a positive effect on customer image of UAE banks, which confi rms Hypothesis 1. This is consistent with the fi ndings of Zineldin and Ekrem et al. 18,1 The cultural factors were dropped because of the multicollinearity problem. Regarding the fi rst preference of customers of the two types of banks, we ran the same

regression model for each type. Table 6 reveals almost the same results for the two types, which confi rms Hypothesis 1. However, the coeffi cient of the religious factor (RELG) is, as expected, positive and statistically signifi cant for Islamic banks but statistically insignifi cant for conventional banks.

Differences of bank image based on demographic variables

To test the remaining two hypotheses, we ran a one-way ANOVA whose results will be ordered according to the research hypotheses. Table 7 reveals that there is no signifi cant difference between customers’ image of UAE Islamic banks and their image of conventional banks. These results were not expected because we assumed that each of these two types of banks has its own strategies and policies on bank products and service quality. Therefore, the bank image should be different or otherwise Islamic bank products and services are the same as those of conventional banks. This is not the actual case as, for example, Islamic fi nancial instruments such as bonds (Sukuk), Murabaha

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Table 6 : Summary of regression results

Independent variable

Beta

t

Signifi cance

  • (a) UAE banks

( Constant)

5.003

0.000

PROD

0.571

13.009

0.000

REL

0.300

7.105

0.000

RELG

0.116

3.083

0.002

R 2 : 0.850 Adjusted R 2 : 0.723 Standard error of the estimate: 0.551

 
  • (b) UAE Islamic banks

(Constant)

2.032

0.044

PROD

0.581

12.221

0.000

REL

0.307

6.753

0.000

RELG

0.146

3.425

0.001

R 2 : 0.866 Adjusted R 2 : 0.745 Standard error of the estimate: 0.529

 
  • (c) UAE conventional banks

(Constant)

4.590

0.000

PROD

0.506

5.033

0.000

REL

0.334

3.400

0.001

RELG

0.046

0.594

0.554

R 2 : 0.791 Adjusted R 2 : 0.610 Standard error of the estimate: 0.588

 

Table 7 : The results of analysis of variance for Islamic banks and conventional banks

 

Source

Sum of squares

DF

Mean square

F-value

Signifi cance

Bank image

94

Between groups

20.785

160

0.221

1.073

0.344

Within groups

32.964

254

0.206

Total

53.749

and profi t-sharing are not the same as conventional fi nancial instruments. Table 8 shows the results of one-way ANOVA analysis for the UAE Islamic banks’ customer image and demographic variables to test Hypothesis 3. There is a signifi cant difference in customers’ image of UAE Islamic banks based on gender, education and duration of relationship, statistically signifi cant at 1 per cent, 5 per cent and 10 per cent, respectively. These results partially confi rm Hypothesis 3. However, the results indicate that there is, unexpectedly, no signifi cant difference in customers’ image of UAE Islamic banks based on age.

Table 9 reveals the results of one-way ANOVA analysis for the UAE conventional banks’ customer image and demographic variables. There is a signifi cant difference in customers’ image of UAE conventional banks based on gender at a 1 per cent level, confi rming Hypothesis 3 for conventional banks. But because the sample has such a small percentage of females (14.4 per cent), we need to interpret the results cautiously. Unexpectedly, we fi nd that there is a signifi cant difference in customers’ image of UAE conventional banks based on age, education and duration. Hypothesis 3 was not confi rmed.

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Table 8 : One-way ANOVA test: The UAE Islamic banks’ customer image and demographic variables

Between groups

Sum of squares

DF

Mean square

F-value

Signifi cance

Age

80.176

78

1.028

0.945

0.600

Gender

10.556

78

0.135

1.682

0.007

Education

114.952

78

1.474

1.501

0.028

Duration

116.849

78

1.498

1.379

0.065

Table 9 : One-way ANOVA test: The UAE conventional banks’ customer image and demographic variables

Between groups

Sum of squares

DF

Mean square

F-value

Signifi cance

Age

61.145

59

1.036

1.578

0.149

Gender

11.078

59

0.188

3.192

0.005

Education

48.797

59

0.827

1.506

0.176

Duration

92.152

59

1.562

0.895

0.640

CONCLUSIONS AND RECOMMENDATIONS

This research investigates the image held by UAE customers of Islamic banks and conventional banks to learn whether this image affects their preference for the type of bank they do business with. We used a modifi ed questionnaire in English and Arabic which was distributed to a convenient sample of UAE bank customers of four Islamic banks and the major conventional banks in Abu Dhabi, Dubai and Sharjah. Of the 257 respondents, 178 or 69.3 per cent were from Islamic banks and 79 or 30.7 per cent from conventional banks. Our main fi ndings are:

fi rst, most UAE bank customers prefer Islamic banks; second, UAE bank customers generally have a positive image of the bank they dealt with; third, UAE bank customers are satisfi ed with overall service quality; fourth, the most infl uencing factor on bank image was bank products, followed by service quality and religious factors, consistent with the fi ndings of Zineldin and Ekrem et al 1,18 ; fi fth, there is no signifi cant difference between customers’ image of UAE Islamic banks and conventional banks; sixth, as expected, there is a signifi cant difference in the image of UAE Islamic bank customers based on gender, education and duration of relationship; and fi nally, there is a signifi cant difference in the image of UAE conventional bank customers based on age, education and duration.

Based on these conclusions, we recommend that Islamic banks devote greater efforts to improve their image. Both conventional and Islamic banks need to emphasize service quality more, especially reliability. They need to respond better to inquiries, have adequate cash in cash machines, staff available to help, speedy, effi cient transactions and easily accessible branches. Islamic banks need to concentrate more on service quality, as only 16 per cent of Islamic bank customers prefer banking with them because of the quality of services provided.

RESEARCH LIMITATIONS

This study deals with the effect of service quality and bank products on bank image. To the best of our knowledge, no other study includes these three aspects. This represents a limitation, as it is diffi cult to compare our results or even to use the results of previous studies as a benchmark. The second limitation of this study is that the research would have been more valuable if the sample were divided into Muslims and non-Muslims. This might tell us something about the effect of religion on customer banking behavior. The third limitation concerns the high degree of incomplete responses – more than 50 per cent – which led us to eliminate more than half of the returns.

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Comparing Islamic and conventional banks

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APPENDIX

See Table A1.

Table A1 : Comparison of conventional and Islamic banks

Conventional banks

Islamic banks

  • 1. The functions and operating modes of conventional banks are based on fully manmade principles.

  • 2. The investor is assured of a predetermined rate of interest.

  • 3. It aims at maximizing profi t without any restriction.

  • 4. It does not deal with Zakat.

  • 5. Lending money and getting it back with compounding interest is the fundamental function of the conventional banks.

  • 6. It can charge additional money (penalty and compounded interest) in case of defaulters.

  • 7. Very often it results in the bank’s own interest becoming prominent. It makes no effort to ensure growth with equity.

  • 8. For interest-based commercial banks, borrowing from the money market is relatively easier.

  • 9. As income from the advances is fi xed, it gives little importance to developing expertise in project appraisal and evaluations.

  • 10. The conventional banks give greater emphasis on credit-worthiness of the clients.

  • 11. The status of a conventional bank, in relation to its clients, is that of creditor and debtors.

  • 12. A conventional bank has to guarantee all its deposits.

    • 1. The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah.

    • 2. In contrast, it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur).

3. It also aims at maximizing profi t but subject to Shariah restrictions.

4. In the modern Islamic banking system, it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat.

  • 5. Participation in partnership business is the fundamental function of the Islamic banks. So we have to understand our customer’s business very well.

  • 6. The Islamic banks have no provision to charge any extra money from the defaulters. Only small amount of compensation and these proceeds are given to charity. Rebates are given for early settlement at the bank’s discretion.

  • 7. It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity.

  • 8. For the Islamic banks, it must be based on a Shariah approved underlying transaction.

  • 9. As it shares profi t and loss, the Islamic bank pays greater attention to developing project appraisal and evaluations.

  • 10. The Islamic banks, on the other hand, give greater emphasis on the viability of the projects.

  • 11. The status of Islamic bank in relation to its clients is that of partners, investors and trader, buyer and seller.

12. Islamic bank can only guarantee deposits for deposit account, which is based on the principle of al-wadiah, thus the depositors are guaranteed repayment of their funds, however if the account is based on the Mudarabah concept, the client has to share in a loss position.

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