ARSI UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT
MBA PROGRAM

Thesis Title: Assessment of customer perception on Islamic banking product and finance:
Case study at commercial bank of Ethiopia Adama district

By: Mohammed Mustefa

Advisor:_Abebe S .(Dr)

A Thesis Proposal Submitted to Department of Management for Partial

Fulfillment of the Requirements of Masters of Business Administration
(MBA)

Jan 08, 2024

Asella, Ethiopia
 DECLARATION

I, Mohammed Mustefa, declare that the work included in this research proposal is my own work
carried out by me under the guidance of my advisor. The research proposal has not been
submitted for any other purpose to any other higher education institution/s.

I also declare that I have adhered to all principles of academic honesty and integrity and have not
misrepresented or fabricated or falsified any idea/data/fact/source in my research proposal
submission and the sources used are duly acknowledged. I understand that any violation of
academic integrity will be cause for disciplinary action by the University.

Name of the Student: _Mohammed mustefa

Signature of the student: __________________

Date: Jan 08, 2023

 Abstract
Islamic banking service has been started in Ethiopia ten years ago when NBE had issued
directive No SBB/51/2011 which allowed the existing commercial banks to offer Islamic banking
product and service through dedicated window to those far away from the usage for due to their
religious matter. Today, Islamic banking and finance are gaining popularity among Muslim and
no-Muslim countries. Also Islamic banking became competitive banking in the financial
industries which offer tailored product and financing that are consistent with sharia principle at
affordable price and charge. Hence understanding the perception of customer will help the bank
to determine or correct the product and finance that suit their need. Therefore the current study
will assess the perception of customer in Islamic banking product and finance the case of
commercial bank of Ethiopia Adama district. The researcher will use both primary and
secondary sources of data collection methods. The target population for this study will be
commercial bank of Ethiopia customer who walks in to branches under Adama district. The
researcher will use convenience sampling of non-probability sampling to select the sample size
The researcher will use quantitative research approach for the current study. To analyze and
explain the variable under study the researcher will use descriptive and inferential statistics.
Finally the researcher will draw conclusion and recommendation for the organization under
study.

Key words: customer perception, social influence, awareness, product and service quality

Table of Contents
Abstract...........................................................................................................................................I.

CHAPTER ONE.............................................................................................................................1.

INTRODUCTION......................................................................................................................1.

1.1Background of study..........................................................................................................1.

1.2 Statement of the problem...................................................................................................2

1.3 research question --------------------------------------------------------------------------------------5

1.4 Objective of the Study......................................................................................................5.

1.5 Significance of the Study..................................................................................................6.

1.6 Scope of the study.............................................................................................................6.

1.7 organization of the study..................................................................................................6.

CHAPTER TWO............................................................................................................................7.

introduction ................................................................................................................................7.

2.1 litratue review ..................................................................................................................7.

2.2 concept and definition of islamic banking........................................................................7.

2.3 islamic banking principle .................................................................................................9.

2.4 diference between islamic banking and conventional....................................................10.

2.5 islamic banking product and financial instruments.........................................................11.

2.6 awareness about islamic banking .......................................................................................14.

2.7 knowledge and understaing of islamic banking..............................................................15.

2.8 willingness to accept islamic banking ...........................................................................17.

2.9 the perception of in slamic banking ..............................................................................17.

2.10 Emperical study at national levell.................................................................................18.

2.11 Research gap.................................................................................................................20.

2.12 Conceptual framework.................................................................................................21.

CHAPTER THREE..............................................................................................................22.
3.Research design and methodology ...........................................................................................22.

3.1 Introduction ....................................................................................................................22.

3.2 Research Aproach..........................................................................................................22.

3.3 Research design..............................................................................................................22.

3.4 Target Population............................................................................................................22.

3.5 Sample size determination .............................................................................................22.

3.6. Data collection methods .............................................................................................23.

3.7 Data Analysis methods...................................................................................................23.

3.8 validity and reliability test..............................................................................................23.

3.9 Ethical consideration of the study...........................................................................................23.

CHAPTER FOUR ...................................................................................................................24.

4.1 Research cost and budget................................................................................................24.

4.2 Time schedule for the study............................................................................................24.

References..........................................................................................................................................
Chapter one
1. Introduction
This study will examine the perception of customer in Islamic banking product and finance
offered by commercial bank of Ethiopia case study at Adama district. Under this chapter the
researcher will try to present topics such as background of the study, statement of the problem,
research question, and objective of the study, significance of the study, scope of the study and
organization of the study.
1.1 Background of the study
Even though its name related with Islam, Islamic banking is not a religious product .But its
working principle and governance is based on the Islamic law called sharia. Islamic banking and
Finance has distinctive characteristics because its foundation is based on Sharia principles and
rules of Islamic law. Its foundation stems from two Islamic laws namely Quran (the divine
revelation and Sunna (the action and practice of the Prophet Mohammed P.b.u.h). Hence ,Unlike
conventional banking Islamic banking and finance do not engage in any business transactions
involves interest because Quran condemned interest or Riba in strongest terms and warns those
dealing in interest to take notice of war against Allah and his messenger( verse.2.279). Islamic
banking does not only avoid interest-based transactions, but it also circumvents unethical and un-
social practices. For instance, Islamic banking and finance do not invest in business activities
like trading of alcohol, pork, pornography, prostitution and other related activities in which its
ultimate result is uncertain or excessive risk exist. Rather Islamic banking and finance engages in
sharia permissible business activities.
The origin of the modern Islamic bank can be traced back to the very birth of Islam when the
Prophet himself acted as an agent for his wife's trading operations. Islamic partnerships
(mudarabah) dominated the business world for centuries and the concept of interest found very
little application in day-to-day transactions (Toutouchain , 2021). The first experience of opening
an Islamic bank dates back to 1963 in the Egyptian city of Mit Ghamr, when Dr. Ahmed Al-
Najjar suggested establishing a local Islamic savings bank (Orhan, 2018).
After the Egyptian experience, the Islamic Development Bank was established in Jeddah in 1975
according to a decision issued by the meeting of the finance ministers of Islamic Countries. In
1973 the Dubai Islamic Bank, in 1979 Bahrain, in 1982 Qatar Islamic bank was established.

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 After 1980, Islamic banking and finance has been adopted by many parts of the world
including Muslim and non-Muslim countries. For example, Islamic banks are in operation in
countries such as Denmark, France, Luxembourg, Switzerland, the United Kingdom, South
Africa, and Nigeria (Hussain et al., 2015). Western banks such as Citibank, Standard Chartered
Bank, UBS, and HSBC are vital players in the Islamic financial market (ISRA, 2013).
Globally; Islamic banking has significantly increased in size and quantity throughout the
financial industry internationally, drawing customers from Muslim and non-Muslim nations
(Dogarawa, 2011). Islamic business and financial assets, which account for less than 1% of the
entire worldwide financial assets, have grown more rapidly than conventional finance ever since
financial meltdown of 2007–2008, and this trend is likely to continue eventually (Fong et al.,
2017). For instance according to IFDI report (2022) Islamic banking and finance is operating
over more than 80 countries and has more than 1,900 Islamic financial institutions like (banks,
insurance, Sukuk or bond, mutual fund) and others in both Muslim and non-Muslim countries.
The total net worth of Islamic finance has surged to $4.5 trillion in 2022 and the year on year
growth compared with last period was also 11% which is higher than the growth of other
financial institution. Furthermore, Saudi Arabia, Iran, Malaysia, Indonesia and Qatar are the
dominant country in the size of Islamic financial asset in the world.

Although conventional and Islamic banks facilitate customers in the same market, their
profitability, growth rate and assets are remarkably different which leads us to explore how
customer perceptions are changing to make them move from conventional banks to Islamic
banks globally. Islamic banking and finance has also driven by moral and ethical requirement of
sharia principle. It offer product and financing to those who align and do their business in
accordance with the principle of sharia.

The customers’ thinking regarding Islamic banking in Pakistan has strong impact but many
customers do not have sufficient understanding of Islamic banks and their advertising policies
(Rustam et al., 2011). For understanding customer’s perception regarding Islamic financing,
several factors are pointed out by past research studies, one of them is religiosity. For instance
study by (Souiden and Rani, 2015) revealed that the fear of divine punishment plays a crucial
role in selecting banks for investment purposes in the context of Tunisian.

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1.2 Islamic banking in Ethiopia

In today’s world, Islamic banking and finance is getting wider attention especially after the
world economic crisis. As witnessed from many literatures Islamic banking and finance has
shown tremendous growth even during financial crisis. Now the product and service of Islamic
banking and finance are open to all people of different faith. Ethiopia is one among the sub-
Saharan African country with the largest population. The Muslim population of Ethiopia has
estimated around 40% of the total population.

While compared to its counterpart’s Islamic banking and finance development in Ethiopia is a
recent phenomenon. It has been introduced after the amendment of business proclamation
592/2008 and issuance of NBE directive SBB/51/2011 that granted permission for commercial
banks to offer the service through dedicated windows within the conventional branches. The
Commercial Bank of Ethiopia has launched Interest Free Banking as an alternative to the
Conventional Banking since 2013(www.cbe.com.et). Subsequently Oromia international bank
(OIB), Awash bank (AB), Cooperative bank of oromia (COB) and other commercial banks
followed the footstep of CBE to offer interest free banking product and service for their
customers.

Even though the issuance of NBE directive SBB/51/2011 has laid foundation for introduction
of Islamic banking and finance in Ethiopia, it was not brought so much result in the adoption of
Islamic banking product and service among Muslim community. However, the replacement of
NBE directive number SBB/51/2011 by SBB/72/2019 which allowed the establishment of fully-
fledged Islamic banking. This improvement had made a strong motivation for the adoption of
Islamic banking product and service and has created sprit of competition among existing and
new commercial banks. According to the NBE quarterly report of Sep 30, 2023 there are 31
commercial banks operating in Ethiopia including two state owned commercial banks (CBE and
DBE). Currently all commercial banks are offering Islamic banking product and service through
window basis and fully-fledged dedicated branch.

1.3 History of Islamic banking(interest free banking) in Commercial bank of Ethiopia

Commercial bank of Ethiopia the giant and pioneered bank in Ethiopia has started the first
operation of Islamic banking sin Nov, 2013 as important alternative to conventional banking

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service through dedicated window basis in all branch organized under 15 districts. The bank
decision to start offering this service was to implement the NBE directive SBB/51/2011 and to
retain its existing customer who were initially using special demand deposit which the interest is
not accrue on and to attract new potential customer who will seek the product of Islamic
banking.

Furthermore, CBE has restructured its interest free banking following the amendment of the
NBE directive SBB/51/2011 and issuance of directive SBB/72/2019 which allowed the
establishment of fully-fledged Islamic banking. Recently CBE has been offering diversified and
tailored product and service of Islamic banking in more than 1,900 branches both in window
basis and fully fledged branches. The bank also offer different benefit packages to interest free
banking customers such as ATM service, Mobile banking and others service.

To mobilize more resources and enhance financial inclusion CBE has doing stringent work in
promoting Islamic banking product and service. For instance according to the bank half year
performance report of Dec 31, 2023 has 6.4 million customer bases and mobilized more than 100
billion birr resource. The bank has witnessed that it’s doing a good job to address the need of
customer in providing awareness and enhancing customer service.

In today’s world, globalization has changed the way of doing business and may impact
organization positively or negatively. It will enhance the communication and interaction of the
organization with its customers to offer the best brand or products .On the other side it also offers
the customer to find the better product or brand that label their need if they are not satisfied with
the current product from their existing firm. Customers are the most important stakeholder that
determines the organizational growth and profitability. Hence, understanding customer
experience and customer journey is important for the organization to know their satisfaction
level and perception about the product and service offered. For instance, Kotler and Armstrong
(2005) mentioned that customer satisfaction is a vital factor in customers’ perceptions of bank
services, and their perception will be calculated based on how satisfied clients are with the
quality of the bank services offered.

Although studies made by Asdullah and Yazdifar(2016) classified the factors that influence
customer perception in accordance to their individual, cultural, and social features. Other studies

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made by Newaz et.al(2016) stated religious value as one of the important factors that influence
customer perception in Islamic banking service as the nature of this product heavily coincides
with religious obligation which is based on the Islamic sharia principles.

Currently there are 30 commercial banks in Ethiopia that offer Islamic banking product and
financing. The need for adopting Islamic banking product and finance has been increasing the
new reform made by the commercial bank of Ethiopia. The competition for mobilizing resources
from this sectors also increasing among existing commercial banks and various newly
established commercial banks. However compared to the number of customer using the
conventional banking system, the user of sharia compliant product and service is still low in
commercial bank of Ethiopia and also across the entire banking too. According NBE quarterly
report of Sep 30, 2023 the when compared to its counterparts the deposit proportion of Islamic
banking is only 1%. Thus as long as the number of Muslim population is large and the product
and service is if Islamic banking equally open to all people of different faith ,why Islamic
banking product and financing is not sufficiently patronized is the important question for the
current study.

Therefore the current study will try to assess customer perception of Islamic banking product and
financing in commercial bank of Ethiopia case study at Adama district and at the same time
analyze factors affecting their perception.

1.2 Statement of the problems

In the last five decades Islamic financial institution is one of the fastest growing business over
the entire world including Muslim and non-Muslim country. Currently the Islamic banking and
finance asset registering a massive growth rate and the industry moved from niche market to
global market. For instance According to IFSI(Islamic financial service industry ) report of 2022
the industry has asset worth of USD 4.5 trillion in 2022 and the industry recorded year on year
growth of 11% .The key market areas are Middle East countries such as Malaysia, Pakistan,
Saudi-Arabia, Bahrain, United Arab Emirates and etc. There are 1,900 institution consist of
banking, takaful, and Sukuk market operating over 80 countries in the entire world. Although the
Islamic banking and finance shown considerable performance giving tough competition with
existing conventional banking

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Islamic banking and finance operates in accordance with the sharia principle. The sharia
principle derived from the Quran (divine word) and the Sunna (practice and teaching) of the
prophet Mohammed PBUH)). According the Islamic teaching accepting or paying interest is
considered as a severe sin. Because Riba or interest considered as exploitive and unfair which
allow the lender to get benefit at the expense of the borrower without taking or sharing any risk.
The aspiration of the modern Islamic banking is to provide alternative sharia compliant financial
product and service for people who are unable to access conventional financial system due to
their religion. Although Islamic banking offer range of product and service which are similar to
those offered by conventional bank but with slight difference in operation that apply the concept
of sharia principle.
The process of globalization and financial liberalization fueled the intensity of competition in the
business world today. Islamic banking is also become the most competitive and alternative
banking solution over major part of the world. The usage of Islamic banking product and finance
is tremendously increasing in different part of the world including Ethiopia.
The existence of Islamic banking Ethiopia has counted 10 years. However, compared to its
counterparts the growth of the Islamic banking and finance is at the infant age. According to the
Ethiopia census of 2007 the Muslim population account for 34% of the total population. In
response to the long time quest and demand of the Muslim society the previous government
amended commercial code SBB/51/2008 proclamation that paved the way for the establishment
of Islamic banking in Ethiopia. Following this NBE of had issued directive SBB/51 /2011 which
allowed the exiting commercial banks to provide interest free banking through dedicated window
and disallowed the establishment of fully-fledged Islamic banking. Commercial bank of Ethiopia
is the first bank which gets license from NBE in 2023 and commenced the provision of interest
free banking from November 20, 2023. To address the demand of the Muslim community and
bring financial inclusion CBE has played a tremendous role through expanding the accessibility
of the Islamic financial product and service.
The major types of the Islamic banking product and finance are consists of Wadia product (safe
keeping deposit), Mudarabah product (investment account where the profit and loss sharing
between the customer and the bank allowed) and Murabaha (cost plus markup). Wadia products
are deposit taking account were customer can withdraw on demand and not obtain any benefit.
While Mudarabah products are profit and loss sharing account which the customer called

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provider of the fund (rabul-mal) and the bank (mudarib) use its skill and knowledge to manage
and invest the fund in to profitable business venture. On the other hand Murabaha (cost plus
markup) is Islamic financing methods were the customers who apply for financing and the bank
agree on the price quantity, quality and duration for the good to be purchased and sold. As
announced on the half year report 2023/24 CBE had mobilized 102 billion resources from
interest free banking service within the last 10 years.
As it was promised to answer the demand of the society when he was came to power in 2019
the current government has permitted the establishment of the fully-fledged Islamic banking in
Ethiopia which was previously banned other than offering through dedicated window in
conventional banking system. Following this change NBE issued directive SBB/72/2019 which
brought as significant change to promote Islamic banking product and finance. Since then the
movement to expand the interest free banking service has significantly increased and all
commercial banks started opening of the branch which fully provide Islamic banking product
and service. Similarly, fully-fledged Islamic banking such as Hijra bank, Zemzem bank and
Ramis banks are joined the industry. Now the competition for the ample resource from the
Muslim population among commercial banks is increasing.
Hence in the today competitive environment determining perception and intention of customer
towards organizational products is very crucial to build products that suit their need. Thus
Islamic banking product and service offered by commercial bank of Ethiopia are not spared from
being evaluated through the perception of its customer and other people.
To improve Islamic banking product and finance it’s important and necessary for the commercial
bank of Ethiopia to instill positive perception in the mind of its customer. Thus when people
have positive perception of they can more link themselves with the organization products and
also attract others to use the products. With the mechanism of Islamic banking product and
finance there is an ambiguity in the minds of Muslim customer whether the product and
financing offered are in accordance with the sharia principle or not.
They think that the Islamic banking product and service offered is similar to that of conventional
banking service. They also skeptical and fear that the funds collected may be mixed with interest
bearing one. On the other hand non-Muslim also perceive that Islamic banking product and
finance are only for Muslim. According the NBE quarterly report of Sep 30, 2023 the total
number of banking system reached 31 including 2 government owned banks. The total deposit

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mobilized is 2.2 trillion, of which the deposit mobilized from interest free product and service
was only 2oo billion. This shows Islamic banking product and service are not effectively
patronized in Ethiopia. Today in the world Islamic banking is not regarded only for the religious
fulfillment but used as providing alternative product and service consistent with sharia compliant
for both Muslim and non-Muslim customers. The competition in the banking industry has
changed the perception of customer. They can easily shift to the competitor if they are not
satisfied with the product. It’s also necessary for the survival of bank to meet the need of the
customer and provide quality service to create customer positive perception. To the knowledge
of the researcher no study has been conducted on assessment of the perception of customer in
Islamic banking product and finance in commercial bank of Ethiopia.
Therefore the researcher will try to fill this gap by assessing the perception of customer in
Islamic product and finance offered by commercial bank of Ethiopia and equally determines
what factors affect the perception of the customer in interest free banking product and finance in
the case study at Adama district.
1.3 Research question
1. What are the perception of customer in Islamic banking product and financing offered by
CBE?
2. What is the level of awareness CBE customer toward Islamic banking product and financing?
3. How does perceived product and service quality affects the perception of customer in Islamic
banking and finance?
4. How religious matter does affect the perception of customer in Islamic banking product and
financing offered by CBE?
5. How does social influence affect the perception of customer in Islamic banking product and
financing offered by CBE?
1.4 objectives of the study
1.4.1 General objectives of the study
The general objective of the study will be to assess the perception of customer in Islamic banking
product and financing offered by CBE.
1.4.2 Specific objectives
 To assess the perception of customer in Islamic banking product and finance

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  To analyze the level of the awareness of customer in Islamic banking products and
financing
 To determine how perceived product and service quality influence the perception of
customer
 To assess how social value influence the perception of customer in Islamic banking
product and finance
1.5 Significance of the study
Understanding customer perception helps the organization to position itself correctly to highlight
the benefits that the clients are ready to pay for. Hence, the study will provide significant
contribution to planner and policy maker of the bank. To understand the level of awareness and
knowledge of customer towards Islamic banking products and finance the study will be
necessary. The study will provide important insight for the manager to identify the need of
customers and marketing strategies or tools needed to improve the perception of customers.
Finally this study will be used for future empirical research reference.
1.6 SCOPE OF THE STUDY
This study will be conducted at commercial bank of Ethiopia adama district with selected
customer who patronizes interest free banking product and finance and non-customer of interest
free banking. For ease of reach and convienence, geographically the study will bound to
commercial bank of Ethiopia Adama district. Moreover the study will focus on the assessment of
customer perception in Islamic banking product and financing. On the other hand by thoroughly
reviewing different literature the researcher will classified factors affecting customer perception
in Islamic banking product and financing as independent and dependent variable. The
independent variable is religious value, customer awareness, customer perceived product and
service quality and social influence and the customer perception as dependent variable. The
researcher will also use explanatory and descriptive type of the research design with quantitative
type of research approach.
Try to also include: Conceptual, time scope and methodological scopes of the study!!
1.7 Definition of the Key Terms
Customer perception: Customer perception refers to customers’ awareness, their impressions,
and their opinions about a business, products, or brand and it is shaped by multiple variables,
including direct and indirect interactions with the products and services of a firm (Zach, 2019.

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Perception can be defined as the way people see the company product and service. It’s the
process whereby individuals organize and interpret their sensory impression in order to give
meaning to their environment.
Islamic banking and finance: refers to a system of banking or banking activity that is
consistent with the principles of the Sharia (Islamic rulings) and its practical application through
the development of Islamic economics.
Sharia: Hassan, et al. (2013) define Sharia as the bloodstream of Islamic law, the legislative
scheme, or the religious judicial framework that enforces Muslims.
Sukuk is the Islamic similarity of bonds (IMF, 2014).These is bonds that are constructed to
provide Sharia-compliant yields. A Sukuk denotes ownership of a tangible asset associated with
a project or investment opportunities.
Takaful- Takaful relates to Islamic insurance and is an Arabic term that meaning "guaranteeing
each other." Members of an Islamic insurance pool participate to a pooling system to protect
each other from loss or harm. 2014.
1.8 Organization of the study
The study will be organized in to five chapters. The first chapter will deals with introductory
parts considering statement of the problem, research question, objective of the study,
significance and scope of the study and limitation of the study. The second chapter will contain
related literature review and conceptual framework drawn for the study. Chapter three consider
the research design and methodology of the study, chapter for data analysis and finally chapter
five contain summary, conclusion and recommendation.

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 CHAPTER TWO
2. LITRATURE REVIEW
2.1 Introduction
According to Islamic financial development indicator (IFDI, 2022) Islamic banking is developed
in to rapidly growing segment of international banking and capital market. Today there are more
than 1.900 Islamic financial institution (such as banks, Takaful or insurance, sukuk or bonds)
operating in over 80 countries including Muslim countries and non-Muslim of western countries.
The growth of financial asset is surged to $4 trillion and shows year on year growth of 11%
compared to 2021
2.2. Concept and definition of Islamic banking
Islamic banking is banking system that operates in a manner consistent with sharia principle. The
concept of Islamic banking is not newly introduced. It operates in different countries both
Muslim and non-Muslim country. The Islamic banking design product and offer service in
accordance with Islamic rule. Islamic banking was began on small scale in the mid of 1963 at
Egypt in city of Myhtgamir with aim to serve pilgrims to save their money to perform Hadj and
Umrah (ISRA, 2013). The establishment of this bank provided an input to other Muslim country
to establish financial institutions that liberate their wealth from riba (interest).
Historically, the development of Islamic finance can be traced to the time of the Prophet
Muhammad (p.b.u.h.) (ISRA, 2013). At the time of the Prophet, the principles of justice,
fairness, and equitable economic and financial relationship, derived from the Qur’an and Sunnah
(sayings and practices) of Prophet Muhammad had been established as the cardinal rules of
engagement among the members of the emerging Muslim Ummah (community). Islamic banks,
like their conventional counterparts, act as intermediaries between savers and investors
However, unlike conventional banking system Islamic banking guided by the Islamic law called
sharia. Notably its differ from conventional banking by prohibition of receiving and paying

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interest and instead operate as profit and loss sharing arrangement , prohibition of game of
chance and speculation ,and impermissible business like alcohol
trading ,armaments ,pornography and other business that have social and environmental hazards.
As a result, Islamic banking is developing and openly gaining popularity in the financial sector
(Khattak, 2010). The method has become increasingly popular in developing nations as an
alternative to conventional banking (Islam & Rahman, 2017). Despite their tremendous growth
and expansion, Islamic banks nevertheless find it difficult to compete with other banks in the
financial sector (Hanafi et.al., 2019). This is a clear manifestation of how Islamic banking
growth is still under pressure to advance against traditional competition, particularly in
developing markets (Dalhatu et.al, 2015; Yahaya et al., 2014). This is because modern
conventional banking is well established and powerful in its ability to compete in the banking
sector. In order to compete effectively in the fierce market, Islamic banks must therefore re-
evaluate their clients' awareness initiatives, satisfaction levels, and strategies (Yahaya et.al,
2016). In this regard, (Afzal et.al., 2019) advise Islamic banking to work to win over a sizable
customer base in order to increase revenue and provide services that add value to the client. This
calls for effective customer awareness of Islamic financing products and services, Sharia
awareness, and service quality to increase customer positive perception to choose Islamic
banking product and finance.
Generally, Islamic banking, by the definition of international association of Islamic banks
(IAOIB),” Is a banking system which was established to utilize fund in accordance to Islamic
sharia principle. According to Albakara Banking Group, “Islamic bank is an institution that
mobilizes financial resources and invests them in an attempt to achieve predetermined
Islamically -acceptable social and financial objectives. Both mobilization and investment of
funds should be conducted in accordance with the principles of Islamic Sharia". Among the
purpose of Islamic banking is to increase the ring of unity among the Muslims and to ensure a
fair distribution and utilization of fund in compliance with the Islamic principle and teaching.
This means that all the banking operations right from the deposit transactions, financing and
products offered by Islamic bank to it customer should be in compliance with sharia.
The main objectives of Islamic banking are to improve the system of Islamic banking services
and to help both Muslims and non-Muslims customers. These unique objectives distinguish
between Islamic banking and conventional banking. Another objective of Islamic banking

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activities is to compromise the prohibited of interest (riba) in all forms of undertakings through
business and trade activities, which must be based on fair business and profit and loss sharing.
Islamic banking system was introduced due to the reason that Islamic financial institutions were
needed for customers where they could satisfy their demands according to Islamic sharia law.
The main sources of sharia followed by the Islamic financial institutions are the Holly Quran-an,
Hadith, Sunna, Ijmaa, Qiyas and Ijtihaad. Islamic Banking System (IBS) purely follow the
Islamic Sharia principles to avoid the prohibited act of interest (riba).
According to the Bank of Tanzania (B.O.T, 2009) “Islamic banking refers to a system of banking
activity that is consistent with the principles of Islamic law (Sharia) that derives from Qur’an,
Sunna (the practices and saying of Prophet Muhammad (Peace be upon him), and fiqh and its
practical application through the development of Islamic economics. Qur’an (2:275) prohibits the
payment or acceptance of interest fees (Riba or usury), as well as investing in businesses that
provide goods or services considered contrary to its principles. Also, Qur’an (2:219) and (83:1-3)
prohibits any kind of game of chance (gharar) and any dubious matter”
2.3 Islamic Banking Principles
Islamic banking is the banking system which complies with sharia principles. We can say
Islamic banking serves the purposes of conventional banking, but the main difference is
commitment to sharia principles which prohibit what so called interest. The principles of Islamic
banking are explained above.
2.3.1 Principle of profit and loss sharing.
One of the most important principles of Islamic banking is encouraging Muslim to invest their
money to become partners by sharing profit and loss in the business, instead of investing where
two parties become debtor and creditor. As we know, in Islam profit is considered as the reward
of capital. A depositor in Islamic banks can make a profit through sharing of profit by
contributing his capital to the business partnership and through rental earning on an asset that has
been financed by his capital.
2.3.2 Prohibition of riba
Another principle of Islamic banking is prohibition of Riba (interest).” Interest means an
effortless profit that increase the principal or wealth without paying any effort”. Any payment
over and above the actual return is considered as an interest and in Islam is totally prohibited.”
2.3.3 Sharia approved activities

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All activities which are forbidden in Islam are not allowed in Islamic banking, either by investing
or through supporting those activities. Islamic banking must operate in accordance with the rules
and sharia principles under Islamic trading transaction.
For example, Islamic banking is restricted to finance a wine factory, a casino, a night club or any
other activity prohibited by Islam or known to be harmful to society.
2.3.4 Money is a potential capital
In Islam, money is considered as medium of exchange. This means that money cannot buy
money, except money can only buy goods or services by selling them for profit amount.
2.3.5 Certainty principle
Islamic banking is a principle of certainty. According to this principle, uncertainty, risk or
speculation is totally prohibited in Islamic banking. For that reason, options and futures are
considered as un-Islamic contracts since they determine the rates by interest differential. Minor
uncertainties are permitted when necessary.
2.3.6 Openness, transparency and disclosure principle
In Islam openness, transparency and disclosure of information are most important tasks in any
contractual obligation. The main objective here is to reduce the risk of asymmetric information
and moral hazard problems. The contacting party should know each and everything about the
product or services in exchange.
2.4 Differences between Islamic Banks and Convectional Banks
Islamic banking is including most of the activities of the banks the only things which is make big
difference among them is borrowing and lending is not based on interest, Instead it basis on
profit/loss sharing (PLS). However, the total financial activities of Islamic banking are according
to Islamic law and sharia. They use Islamic instruments to offer financial services to customers.
On the other hand, conventional banking system is based on interest. Moreover; religious rules
are not allowed to interfere in banking system and financial activities. Some major differences of
Islamic and conventional banks are indicated below.

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Table 1.1. Difference between Islamic banking and conventional banking
Islamic banking system conventional banking system
1 The functions and operating modes of The functions and operating modes of
Islamic banks are based on the principles of conventional banks are based on fully manmade
Islamic Sharia. principles
2 Real asset used as a product, money is only Money is used as a product, a medium of
used as a medium of exchange. exchange and store value.
3 Profit is earned on exchanging of goods and According to time value for money interest on
services capital is charged.
4 There is loss sharing between two parties. There is no loss sharing between two parties.
5 There is an agreement for exchange of There is no an agreement for exchange of goods
goods and services in the time of paying out and services in the time of paying out cash
fund under Islamic instrument such as finance or working capital finance
Murabaha, Salam and Istisna contract
6 They believe the inflation can be controlled Due to the reason of inflation the borrower can
on that reason the borrower has no right to increase the price of his goods and services in
charge extra price. order to compensate the cost of products
7 Government should deliver goods to Government can easily get loan from central
national investment fund to obtain loan banks without any capital development
from monetary agency. expenditure
8 In Islamic banks, the greater emphasis is in Conventional banks give greater emphasis on
the viability of the projects. credit worthiness of the clients.
9 The relationship between Islamic banks and The relationship between conventional banks
its clients its coming as partner, investor and and its clients it coming as creditor and debtor.
trader, buyer and seller.

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2.5 Islamic banking product and financial instruments
Islamic banking has made a significant advancement in the creation of diverse products and
service that adhere to Islamic sharia law offered to enhance the satisfaction and the changing
need of the customers. These products and services are arranged as deposit taking contract and
financing contract.
2.5.1 Wadia
Wadia is Arabic word which means deposit. Legitimately, the Hanafy scholars define wadia as a
permission given to someone for keeping the owner’s property explicitly and implicitly (Qaed,
2014) . According to Shafi’i and Maliki scholars, wadiah is presentation in keeping possession of
respectable private goods in specific way. Hanbali scholars add the element of charity and they
define wadia as representation in keeping (other’s property) and it is done (by the keeper) as
charity (system, 2012) ,(Sabiq, 1983) stated al-wadia is keeping something from someone, either
from an individual or organization that must be guarded safe and given back on the demand.
2.5.2 Murabaha financing
According to (Kettell, 2011). Murabaha contract refers to the sale of goods with a pre-agreed
profit mark-up on the cost. Murabaha sale is of two types. In the first type, the Islamic bank
purchases the goods and makes them available for sale without any prior promise from a
customer to purchase them. In the second type, the Islamic bank purchases the goods ordered by
a customer from a third party and then sells these goods to the same customer. In the latter case,
the Islamic bank purchases the goods only after a customer has made a promise to purchase them
from the bank. The basic component of Murabaha is that the seller reveals the actual cost he has
incurred in acquiring the commodity, and then adds some profit thereon. 8 This profit may be in
a lump sum form or may be based on a percentage. The only feature distinguishing it from other
kinds of sale is that the seller in Murabaha expressly tells the purchaser how much cost he has
incurred and how much profit he is going to charge, in addition to the cost.
2.5.3 Mudarabah financing

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Mudarabah is based on trustee partnership, whereby investment account holder acts as the owner
of the capital (rabul maal) and bank as a mudarib (managing partner). In Mudarabah mode of
financing, Islamic bank publicizes its willingness to accept the funds of account holders with the
sharing of profits as agreed between the two parties and the losses being 9 borne by the owner of
funds unless they were due to misconduct, negligence or violation of the conditions agreed upon
by the Islamic bank. A Mudarabah contract may also be concluded between the Islamic bank, as
a provider of capital on behalf of itself or on behalf of investment account holders, and business
owners (Kettell, 2011). In Mudarabah financing, the owner of the capital has no right to interfere
in management of the business enterprises. This is the individual responsibility of the agent.
Though, he has the right to specify such conditions that would ensure better management of his
money, which is why Mudarabah is sometimes referred to as a sleeping partnership.
2.5.4 Musharaka (partnership) venture
Musharaka is a form of partnership between an Islamic bank and its clients, whereby each party
contributes to the partnership capital, in equal or varying degrees, to establish a new project or
share in an existing one, and whereby each of the parties becomes an owner of the capital on a
permanent or declining basis and is owed its due share of profits. Losses, however, are shared in
proportion to the contributed capital. It is not permissible to stipulate otherwise. (Kettell, 2011)
According to Bank Indonesia (2008), under this product, bank and customer shall act as business
partners and provide funds and goods in order to finance a specified business activity. While the
customer shall act as business manager, the bank being the business partner will be able to
participate in the management of business activity in accordance with tasks and authorities
agreed in advance, such as to review and to request evidence related to business performance
report based on the reliable supporting documents.
2.5.5 Salam financing
Salam is a contract which involves the purchase of a commodity for deferred delivery in
exchange for immediate payment according to specified conditions, or the sale of a commodity
for deferred delivery in exchange for immediate payment as mentioned by (Kettell, 2011). It is
described as the transaction of buying and selling of goods using order method with specified
requirements and full cash payment in advance. (Obaidullah, 2005) defines the Salam products
as “a forward agreement where delivery occurs at a future date in exchange for spot payment of
price”. It was originally designed for small farmers and traders. The traders sell their goods to the

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bank on deferred delivery basis. The bank pays full price for 12 delivery goods at present then
they sell it to the market at prevailing price. The bank makes profits from the transaction, since
the spot price that the bank pays is lower than the expected future price.

2.5.6 Istisna`a financing

Istisna is a sale contract whereby the purchaser asks the seller to manufacture a specifically
defined product, using the seller’s raw materials, at a given price. Istisna’a is a sale contract
between al-mustasni (the ultimate purchaser) and al-musania’a (the seller). In Istisna’a, the al-
musania’a based on an order from the al-mustasni undertakes to have manufactured or otherwise
acquire al-masnoo (the subject matter of the contract) according to specification and sell it to the
al-mustasni for an agreed upon price and method of settlement. This may be, at the time of
contracting, by instalments or deferred to a specific future time. It is a condition of the Istisna’a
contract that al-musania’a should provide either the raw materials or the labor (Kettell, 2011).
2.5.7 Ijarah financing
According to the Bank Indonesia (2008) “Leasing transaction on specified goods and/or service
between the owner of leased object including the right of use on leased object and the lessee in
order to earn fee on the object leased”, and Ijarah Muntahiya Bittamlik defined as leasing
transaction between the owner of leased object and the lessee to earn fee on the object leased
with option of transfer of ownership of the leased object. Under these products, the bank shall act
as the fund provider in Ijarah transaction with customer and has the obligation to provide fund
for the realization the supply of leased object ordered by customer. Repayment may be
conducted in the form of installments. (Obaidullah, 2005) argues that, under this product the
bank acts as vendor; the bank may purchase the asset needed by its client from the vendor or the
bank as owner leases the asset to its client for specified rentals and period. Also, if the bank
would not like to deal directly as a vendor, may appoint the client to be as its agent and leasing
the commodity on behalf. The ownership of the asset remains with the bank, the asset reverts to
the bank at the end of the lease period.
2.6. Awareness about Islamic Banking
Awareness is the state or ability to perceive, to feel, to know, or to be conscious of events,
objects, or sensory patterns. Generally, awareness refers to public or common knowledge or

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understanding about a social, scientific, or political issue (Gafoor, 2012). Product awareness,
therefore, is the degree of knowledge that customers have about a product. This involves
developing the knowledge that a product exists, information about its function, benefits, quality,
price, compatibility, and usability. The steps involved in product awareness are brand awareness,
brand image, discovery, observation, information gathering, and trial.
Studies establish that consumers’ awareness significantly influences their attitude and intention
to use Islamic banking products and services and thus more awareness leads to higher intention
to use the Islamic banks (Kewuyemi, 2015; Thambiah et al., 2011). Therefore, continuous public
awareness campaigns that mobilize public interest could contribute to the additional expansion of
the industry to bring about financial inclusion and sustainable development.
Ahmad & Bashir (2014) examined the awareness level of customers about products and services
offered by Islamic Banks. The researcher concluded that there is less awareness among
customers related to Islamic banking terminology, products and services. (Ali and Syed, 2010),
investigated the impact of September 11 on the perceptions and attitudes towards Islamic finance
from professionals. They concluded that the events of 9/11 created negative feelings and
misapprehension for Islam and Muslims; however, it contributed quite significantly to create
awareness and growth for Islamic finance. Similarly, (Hidayat and Al-Bawardi 2012) analyzed
the perception of non-Muslims in Saudi Arabia toward Islamic banking specifically on the
products offered by Islamic banks. The results indicated that all the respondents were aware of
Islamic banking or had an experience with an Islamic bank. (Mahmoud and Abduh 2014),
conducted a study in Mauritania to evaluate the relevance of awareness in gauging the
customer’s intention to deal with Islamic banks. The study used a total of 227 responses to make
analyses. Findings indicated that awareness is a significant influential factor for the attitude
and willingness of customers to deal with Islamic banks. Similarly, (Tara, et al. 2014),
used in their study variables such as religion, perception, awareness, reputation, and
networking as factors that influence Islamic banking in Pakistan. The results revealed that the
perception of Islamic banking was positive. The results further found that awareness was the
highest factor that prompt Muslims in Pakistan to patronize Islamic banks. In contrast, a
recent study by (Sonko ,2020) on customer’s perception towards Islamic banking in the Gambia
found that there is a massive lack of awareness for basic Islamic banking products and services.
2.7 Knowledge and Understanding of Islamic Banking

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In their studies, (Mariadas and Murthy, 2017) and (Mahdzan et.al., 2017), found that knowledge
is a key factor in determining the adoption of Islamic banking. According to (Gerrard and
Cunningham 1997) and (Ellahi et al, 2011), who conducted studies in Singapore and Pakistan
opined that knowledge of products is very essential to induce people towards patronizing Islamic
banks. Similarly, (Hristov and Kuhar 2015), found that the decisions made by customers are
influenced by the amount of information and knowledge they have in their memories. In
Malaysia, (Mahdzan et.al.., 2015), found that the understanding of Islamic banking concepts is a
key patronage factor for Islamic banks in the country. Equally, (Rehman and Shoaib, 2014),
investigated the perception, knowledge, and potential of Islamic banking from the staff of
Islamic banks and Islamic windows in Pakistan. The study used a total of 197 responses to make
analyses. The results of the study showed that the staff of the stand-alone Islamic banks has a
better understanding of Islamic banking than those working in the Islamic windows of
conventional banks. Similarly, (Ahmed, 2014) evaluated the opinions of Islamic banking staff in
Muscat to understand their perceptions toward Islamic banking. The findings of the study
indicated that the level of knowledge for the staff of Islamic banks is very limited. Most of the
staff especially those working in the operations areas have only a diploma or below. (Echchabi
and Echchabi, 2013), found that knowledge has a strong impact on customers in using Islamic
banking products and services. Meanwhile, (Mehtab et.al, 2015), opined that knowledge of
Islamic banking has a strong relationship with the practice of Islamic banking. Bank Selection
Criteria(Gait & Worthington, 2008), investigated the perception, knowledge, and attitude
of individuals, business entities, and financial institutions towards Islamic banking. The study
found that although the religious factor is very important for customers, however, they also
consider factors such as costs, quality of service, and the brand name of the bank in making their
decision to select a bank. Similarly, (Lateh, et all, 2009), also conducted a study in
Thailand to analyze the perception of Muslim and non-Muslim customers regarding the
objectives and characteristics of Islamic banks as well as determine the factors that induce
customers in their bank selection. The results of their study highlighted that the bank selection
criteria for Muslims and non-Muslims are different. The study maintained that the highest
consideration for Muslims is the prohibition of riba while non-Muslims are much more
concerned about bank brand, competent bank staff etc. when selecting banks. (Subhani, et al.
2012), investigated the bank selection criteria in Pakistan. From 300 questionnaires distributed

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among nine Islamic banks, the findings revealed that the highest important factors were high
profit and low charges, followed by religious factors. Furthermore, (Khan and Khanna, 2010),
support the argument that for Muslim customers, religion is the main push factor for selecting an
Islamic bank. Similarly, (Rehman and Masood ,2012), also found in their study on bank selection
criteria that sharia factor was the most important criterion for customers when selecting a
bank even though the efficiency of service was also significant. However, in contrast,
(Uddin, et al. 2016) found that in Bangladesh, majority of the customer’s preferred Islamic banks
over conventional due to lower charges and better service delivery while religion was not
mentioned. (Thambiah, et al. 2010), found that in Malaysia, customers in the urban areas
primarily patronize Islamic banks because of lower charges, higher returns, overdraft, and home
loans that have a fixed repayment period and other related benefits. Likewise, (Awan and
Bukhari, 2011), concluded that two factors that attract the attention of Muslim customers in
selecting a bank are quality of service and product features.
2.8 Willingness to accept Islamic Banking product and finance
The willingness of people to patronize Islamic banking products could be influenced by several
factors. Generally, people with positive perception for Islamic banking are more willing to it than
those with negative perception.
According to the conducted by (Rammal and Zurbruegg, 2007) on the awareness and
willingness of Muslims in Australia to patronize Islamic banking willingness of the customers is
the important measure of perception. The study concluded that Muslims in Australian are
willing to patronize Islamic banks when they offer similar competitive products like
conventional banks. Likewise, (Islam and Rahman ,2017), pointed out in their study that 94
percent of their respondents are willing to pick Islamic banks over conventional if they are
informed properly. A study by (Lujja et.al.., 2018), found that 88 percent of the Muslims in
Uganda will continue to be customers of an Islamic bank due to the influence of Islamic ethical
principles.
2.9 The Concept of Perception in Islamic banking
Customer perception refers to customers’ awareness, their impressions, and their opinions about
a business, products, and brand; and it is shaped by multiple variables, including direct and
indirect interactions with the products and services of a firm (Zach, 2019). It is also defined
as marketing concept that encompasses a customer's impression, awareness, or consciousness

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about a company or its offerings (Business Dictionary, 2020). It is the process through which
consumers select, organize and interpret the information they gather through their senses (mouth,
eye, ear, nose and skin) in order to provide themselves with a meaningful and coherent view of
the product or service. The ultimate aim of every business is to increase sales by finding out the
factors that drive consumers’ buying decisions. Therefore, thorough examination of customers’
perception and awareness is critical to the success of any business endeavor. (Pratiwi et al. 2019)
studied "Perception of Non-Muslim Religious Leaders to Islamic Financial Institution". This
study aims to determine the perception of religious leaders regarding the existence of Islamic
financial institutions. Data for this study was obtained through interviews with religious leaders.
The findings of this research showed that socialization efforts regarding the existence of Islamic
financial institutions in the religious community were still needed so that the actualization of the
concept of Islam through inclusive financial institutions Another study was conducted by
(Nimsith et al.., 2018) regarding Awareness of Islamic Banking Products and Services among
Non-Muslims in Sri Lanka. One of the main purposes of this study is to examine the level of
awareness, understanding and perceptions of non-Muslims in Sri Lanka of Islamic Banking
products and services. And also, this study aims to identify if there is any demographic influence
on the awareness, understanding and perceptions of Islamic banking products and services
among non-Muslims in the Ampara district. 200 respondents from different areas in the Ampara
district have been selected for this study. According to the study's finding, non-Muslims’
understanding level towards Islamic banking concepts is average, and their perceptions of non-
Muslims towards Islamic banks vary among themselves. (Safrin & Nairoos, 2019) studied
"Attitudes of Non-Muslims on Islamic Financial Institutions could be realized.
(Sulaiha & Mazahir, 2018) conducted a study entitled "Awareness of non-Muslims about Islamic
financial institutions in Colombo district". The primary objective of this study is to determine the
awareness level of non-Muslims in the Colombo district about Islamic financial institutions. The
secondary objective is identifying whether they realize the differences between IFI and CFI. For
this research, 200 questionnaires were distributed to non-Muslims in the Colombo district. The
research findings show that non-Muslims of the Colombo district have a general awareness level
of Islamic financial institutions but require further knowledge to better understand the difference
between Islamic financial institutions and conventional financial institutions. According to the
study "The perception about Islamic banking and finance system among non-Muslim

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undergraduates in South Eastern University of Sri Lanka" non-Muslim undergraduates have
knowledge of Islamic banking & finance
2.10 Empirical study at national level
Interest free banking is an infant stage in Ethiopia banking industry is not a well-studied area,
through; few studies were conducted on the attributes of IFB. For instance, (Mohammed, 2012)
has studied the Prospects, Opportunities and Challenges of Islamic Banking in Ethiopia” and his
work has identified the potential challenges as: lack of awareness, regulatory and supervisory
challenges, institutional challenges, lack of support and link institutions, gap in research and
development in Islamic studies, lack of qualified human resource as well as wrongful association
with specific religion and the global terrorism. On the other hand (Teferi’s, 2015) study about the
“Contribution of IFB to economic development and its prospect in Ethiopia”. He assessed the
contribution of the inclusion of the Muslim population in the banking (financial system) to the
economic development and GDP growth. Another study by (Debebe, 2015) has conducted a
study on “Factors Affecting Customers to Use Interest Free Banking in Ethiopia”. The study is
centered on “customer” intention and willingness to use interest free banking‟. The result
showed that perceived relative advantage, perceived compatibility, customers‟ level of
awareness and subjective norm have a significant positive effect on the attitude towards interest
free banking in commercial bank of Ethiopia. This study is about effect assessment on the
attitude towards IFB usage which does not address the factors determine on implementation of
Interest free Banking products and service in Ethiopian. (Akmel ,2015) the study focused on
assessing challenges and prospects of Islamic banking service in resource mobilization efforts in
three commercial banks in Ethiopia. This study is more concentrated on the challenges in the
banks’ operational activity of resource mobilization. The research made by (Kerima ,2016) finds
out the following challenges: lack of capacity to deliver IFB product at full rage, lack of
awareness of customer about IFB products, lack of trust and confidence of customers, inadequate
marketing and promotion, double taxation, nature of IFB products, unavailability of IFB
products in all of its branches and the IFB being delivered in a Window model. Accordingly, the
following recommendations were forwarded by her aggressive promotion and marketing
campaign about IFB products, provide sustainable and continuous training to build the capacity
of the manpower, the bank shall increase accessibility of its products with the expected services
attached to the products, the bank has to have Sharia’h Advisor, give the required attention and

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focus for the business and the bank has to be transparent in its IFB business undertaking, in
addition to these NBE directives, tax and ECX law shall include exceptions for IFB business.
Finally a research conducted by (Abraham, 2017) has studied “determinants of customers’
intention to use interest free banking products and factors affecting employees’ product
knowledge”. Unstructured questionnaire was used to collect qualitative data on customers’ use
intention. In general, eight and three hypotheses were developed and tested on customers’
intention (the study was conducted by TRA Model) and employees’ product knowledge of the
CBE with a sample size of 369 and 77 individuals respectively. Both descriptive and inferential
analytical techniques were used. To analyze the relationships among the variables, on the other
hand, multiple regression and structural equation modeling (SEM) were employed. The results
that of the study on customers’ intention showed that, except for Knowledge, all the other
variables: Attitude, Social Effect, Perceived Financial Cost and Religious Belief have significant
on IFB use intention. Moreover, except for Underlying Arabic Terminology, the other two
variables: Underlying Sharia’ Principles and Training have significant on Product Knowledge of
employees. Furthermore, chi-square test was used to analyze the association between selected
demographic factors and IFB usage intention. The findings of this study have shown that, except
for educational level, all other demographic factors found to have an insignificant on IFB
adoption intention.
2.11 Research gap
Based on the literature review above, it can be conclude that the level of knowledge of the
various Islamic banking product and finance is weak among bank customer and also the
perception on Islamic banking is partly influenced by religious inclination and other individual
factors such as service quality, awareness, cost and benefit and others. Furthermore, from the
knowledge of the researcher no studies were investigated the perception of customer in Islamic
banking product and finance in Ethiopia. But similar studies have been performed in other
countries like Malaysia, Saudi Arabiya, Pakistan Singapore, Thailand and other countries. Most
of the studies have been done in a country were Islamic banking growth and usage are highly
practiced.
Generally, when Islamic financial institutions have clear understanding about the user’s
awareness, understanding and perception, it will help them to create suitable marketing strategies
to take a larger share of the financial market. This is because awareness, understanding and

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perceptions are the foundation of usage of Islamic banking products and services. If majority of
population are not aware and do not understand the Islamic banking products, they would not
take the initiative to adopt Islamic banking products.

2.13 Conceptual framework

The researcher will formulated the following conceptual model to assess the perception of
customer in Islamic banking product and finance in the case of commercial bank of Ethiopia
adama district. The researcher will also categorize the variable of study as independent variable
and dependent variable as depicted in the following diagram.

Independent variable (IV) dependent variable (DV)

Religious matter

Awareness of Islamic
banking product and
financing Perception of
customer in Islamic
banking product and
Perceived Product and finance
service quality

Social influence

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 Chapter 3
3. Research design and methodology
3.1 Introduction
Under this chapter the researcher will mention the research design, target population, sampling
and sampling design, data collection method, sources and types of data, methods of data analysis,
validity and reliability and ethical consideration to be employed.
3.2 Research design and approach
Research design is a detailed framework within which the research is conducted. It is the
blueprint for fulfilling research objectives and answering research questions (John et al., 2007.
On the other hand it’s a master plan specifying the method and procedure to collect and analyze
data needed for the study. The study will be conducted in the context of commercial bank of
Ethiopia Adama district. The researcher will assess the perception of customer in Islamic
banking product and financing and at the same time examine factors affecting their perception.
Hence the researcher will employ quantitative type of research for the current study. According
to (Matthews, 2010) quantitative research is the kind of research that is useful for the collection
of numerical data which is structured and which could be represented numerically . To
understand the perception of customer in Islamic banking product and financing and describe the
demographic feature of the respondent the researcher will use descriptive research design.
Although the researcher will use explanatory research to examine the effect of independent
variable ( religious matter, awareness ,perceived product and service quality, and social
influence) on the dependent variable (customer perception of Islamic banking).
3.3 Target population
Target population is the entire population from which the sample the population taken from.
Thus the target population for this study will be customer of commercial bank of Ethiopia who is
walk in to branches to get the various types services. The rational for selection of CBE is because
of the fact that, it is the pioneering and giant bank of the country which has large volume of
customers. Currently the bank has been organized under 33 districts and has more than 1,936
branches that provide different product and service to its clients across the country. To achieve
its research objective the researcher will conduct his study commercial bank of Adama district.
As per quarterly report of sep30, 2023 there are over 55 branches offering banking service under
commercial bank of Ethiopia Adama district and the number of total customer has reached to

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1,205,000. Therefore the target population for the current study will be the whole customer who
has account in branches under Adama district.
3.4 Sampling frame
The sampling frame from the target population will be further split in to those customers who use
conventional banking service and those customers who use Islamic banking product and finance
both within conventional branch through dedicated window and fully dedicated branch under the
target district.
3.5 Sampling design and sample size determination
Sampling is refers to picking respondent from the target population which statistically
representative. It is an important tool in any study, if the target population is too large. Sampling
design is the technique of sampling method used to select the appropriate sample size which
represents the target population of the study. The sample of the representative population can be
determined by either probability or non-probability sampling methods. Hence for the current
study the researcher will use non-probability sampling. Non-probability sampling is appropriate
when the population of the study has no equal chance of being selected and difficult to obtain
random sampling.
Determining sample size is very crucial tool to conduct any research because most of the time its
difficult to include all participant or target population. To determine the sample size from the
target population the researcher will use simplified proportion formula of (Yemane, 1967:886)
assuming confidence level C=95% and e=+5%.
N 1,205,000
n= 2 n= 2=399
1+ N ( e ) 1+ 1,205,000 ( 0.05 )
Once the researcher has determined the number of sample size to which the questioner will be
distributed, the next step is to identify which branches will be included in the study from the total
number of branches under the case district. Therefore to determine the sample size of branch to
be selected the researcher will use method developed by Carvalho (1984) due to time and
financial limitation.
number of
51-90 90-150 151-280 281-500 501-1200 1201-3200 3201-10,000 10,001-35,000 35,001-150,000
branch
small 5 8 13 20 32 50 80 125 200
medium 13 20 32 50 80 125 200 315 500
large 20 32 50 80 125 200 315 500 800

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Therefore there are 55 branches found under Adama district commercial bank of Ethiopia. Hence
according to (Carvalho, 1984) 20 branches are optimal considering the large simple size from 55
branches. Finally the researcher will select the list of the branch by considering different factors
such as number of the customer base, year of establishment and their place of location in the city.
3.7 Data collection methods
Data collection is the process of gathering information from all relevant sources to find solution
for a research problem. Hence collection of data will be very crucial for any research to aid
comprehensive and reliable information to measure convergence among variables of the study.
For the current study the researcher will collect data from both primary and secondary sources.
The primary sources of data will be collected through formal standard questioner which will be
derived from variable of the drawn in the conceptual model. The researcher will use secondary
sources of data collected from related literature, bank website and others. The researcher will
design a simple and concise questioner that will suit the study objective for the respondent to
respond in trilingual (Amharic, Afan Oromo and English). The questioner will be prepared in
closed-end format which will contain both multiple and scaled question. For the demographic
factor of the respondent the researcher will use multiple choice and for variable both dependent
and independent variable the researcher will apply 5-point likert scale.
3.8 Data analysis methods
According to Kothari, 2004 after the data collected it has to be presented and analyzed in
accordance with the outline laid down for the purpose at the time of developing the
research plan. Hence Considering the study, the primary data that will be collected through
structured questionnaire with closed-end question and will be coded, checked for accuracy and
reliability.
The researcher will use both descriptive and inferential statistics for the current study. The
descriptive analysis will be used to describe the demographic feature of the respondent and mean
of the variable. On the other hand, the researcher will use correlation analysis to identify the
relationship between the study variables. Moreover, researcher will also use multiple linear
regressions to examine the interconnection of the independent variable and dependent variable of
the study. Finally the researcher will use statistical software SPSS to process and analyze data.
The researcher will also use the following regression model:
PIBPF= α+ β1REL+β2AW+ β3PERP+β4SOI+ℇ

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 Where PIBPF will represent the perception of the Islamic banking product and financing: AW
represent awareness of customer in Islamic banking product and finance: PERP represent
perceived product and service quality of Islamic banking and SOE represent social influence.
Whereas β1, β2, β3 and β4 are the predictor of the variable; α is constant and ℇ will be the error
term.
3.9 Validity and reliability
Validity and reliability is very important in most of research to the ensure accuracy and
consistency of information gathered. The researcher will try to avoid any ambiguous, vague
word when developing questioner and will prepare pilot test questioner to check whether it’s
correctly structured or not.
Reliability simply means refers the consistency of the scales employed in measuring the
respondents' response. So in order to determine how well the collected data is consistent with the
construct of the study, the researcher will use SPSS to calculate Cronbach's alpha (α).
3.10 Ethical consideration
The researcher will conduct his study adhering to all ethical manner of the research

APPENDIX
WORK PLAN AND REFRENCE
Under this chapter the researcher will budget fund necessary for the accomplishment of his
research project and prepare appropriate time schedules to finish his thesis.
Accordingly the researcher will estimate the following cost budget for his research project.
4.1 Cost budget
action plan measurement AMT/QT price total cost remark
s.no Stationary
1 Pen Number 10 30 300
2 pencil Number 6 10 600
3 Eraser Number 4 10 40
4 Sharpener Number 2 10 20
5 A4-paper Number 2 PC 600 1200

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6 Secretary service page 60 5/page 300
7 Photo copy page 300 1 300
8 Laminating 20 30 600
9 Bag 5 800 4000
sub total 7360
man power
transportation 3000 3000
Internet cost 1500 1500
sub total 4500
grand total 11,860

4.2 Time schedule

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 October 01- october Nov Nov Jan Jan Jan Feb April May may
No key activities 15/2023 25,2023 07,2023 15,2023 9,2024 15,2024 30,2024 10,2024 15,2024 10,2024 20,2024
review of litrature and thesis title sellection
1
submission of thesis title to department
2
3 Advisor assignment
Modification, adjustment of the title with
advisors consent
4
preparation of first draft proposal
5
Submission of Final Proposal to the
department with confirmation of advisor
6
proposal defense
7
data collection and questioner development
8
First draft thesis submission to the advisor
9
10 Final thesis submission to the department
11 thesis defense

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