Proposal title: Assessment of customer perception on Islamic banking products and

financing in the case of commercial bank of Ethiopia Adama district

ARSI UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF MANAGEMENT
MBA PROGRAM

A Proposal Submitted to Arsi University College of business and economics

department of Management for Partial Fulfillment of the Requirements of
Masters of Business Administration (MBA)
By: Mohammed Mustefa

Advisor:_Abebe S .(Dr)

Feb 05, 2024

Asella, Ethiopia

1
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 Kedir

Signature of the student: __________________

Date: Feb 05, 2024

2
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 people far away from the usage for due
to their religious matter. Today, Islamic banking has 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 suits their need. Therefore the current study
will focus on assessment of perception customer in Islamic banking product and financing in the
case of CBE Adama district. The researcher will use both primary and secondary sources of data
collection methods. The target population for the study will be 203,000 CBE customers who have
maintained interest free bank account. The sample size for the study will be 385 interest free
banking customers and 40 employees under selected branches. The researchers will probability
and non-probability sample mainly purposive and convenience sampling to obtain answer from
the respondents. The type of the research to be used for the current study will be quantitative and
qualitative research. To collect the relevant data for the study the researchers will use
questioner and interview. Both primary and secondary sources of data collection will be used in
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 on the basis of the finding of the study.

3
 Table of Contents
Abstract I
CHAPTER ONE ...2
1. introduction 1
1.1 Background of the study .4
1.2 statement of the problem .5
1.3. Research question ……………………………………………………………………………………………………………………………6
1.4 objective of the study …………………………………………………………………………………………………………………….9
1.5 significance of the study………………………………………………………………………………………………………..………10
1.6 scope of the study ………………………………………………………………………………………………………………………..10
1.7 Definition of key terms………………………………………………………………………………………………………………….10
1.8 Organization of the study ……………………………………………………………………………………………………….…….11
CHAPTER TWO
2.Itroduction ………………………………………………………………………………………………………………………………………12
2.1 Literature review……………………………………………………………………………………………………………………………12
2.2.Concept of Islamic banking…………………………………………………………………………………………………………...12
2.3 Islamic banking principle……………………………….………………………………………………………………………………13
2.3.1 Principle of profit and loss sharing …………….……………………………………………………………………………….14
2.3.2 Prohibition of riba…………………………………….………………………………………………………………………………..14
2.3.3 Sharia approved …..........................................................................................................................14

2.3.4 Money is potential capital…............................................................................................................15

2.3.5 Certainty principle ……………………………………………………………………………………………………………………..15

2.3.6 Openness, Transparency and disclosure principle ………………………………………………………….…….…...15

2.4 Difference between Islamic banking and conventional banking ………….………………………..…..………...15

2.5 Islamic banking products and financial instruments ……………………………………………………………….……16

2.5.1 Wadia product………………………………………………..………………………………………………………………………….16

2.5.2 Murabaha financing ………………………….……………………………………………………………………………………….16

2.5.3 Mudarabah products ………………………………………………………………………………………………………………..17

2.5.4 Musharakah (partnership) venture……………………………………………………………………………………………..18

4
2.5.5 Selam financing ……………………………………………………………………………………………..…………………………18

2.5.6 Istisna financing ……………………………………………………………………………………………………………………..19

2.5.7 Ijara financing ………………………………………………………………………………………….…………………………..….19

2.6 Awareness and understanding of Islamic banking ……………………………………………………..………………..19

2.7 Social influence …………………………………………………………………………………………………………………………...22

2.8 Religiosity ………………………………………………………………………………………………………………………………….…22

2.9 Perception of customer………………………………………………………………………………………………………………...23

2.10 Empirical literature review ………..……………………………………………………………………………………………….24

2.11 Research gap…………………………………………………………………………………………………………….…...………....26

2.12 Conceptual framework…………………………………………………………………………………………………….….……...27

2.13 Research hypothesis ………………………………………………………………………………………………………..…………27

CHAPTER THREE

3. Research methodology …………………………………………………………………………………………………………………..28

3.1 Introduction …………………………………………………………………………………………………………………………………28

3.2 Research approach……………………………………………………………………………………………………………..…………28

3.3 Research design …………………………………………………………………………………………………………………….………28

3.4 Target population……………………………………………………………………………………………………………………….…29

3.5 Sampling design ……………………………………………………………………………………………………………………………29

3.6 sample size determination………………………………………………………………………………………………….…………29

3.6 Data collection methods…………………………………………………………………………………………………….………….31

3.7 data analysis methods ……………………………………………………………………………………………………..……………32

3.8 Validity and reliability test………………………………………………………………………………………………..………..…32

3.9 Ethical consideration……………………………………………………………………………………………………………………..33

a. Research cost and budget………………………………………………………………………………………………….………….34

b. Time schedule for the study…………………………………………………………………………………………………………....35

Reference ……………………………………………………………………………………………………………………………………………35

5
1
 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.
1.1Background of the study
Banks plays an important role in creating efficient and sustainable socio-economic development
of a country through mobilizing resources from the community in the form of deposit and lends
it to people engaged in a profitable business. The growth of Islamic banking in the international
market has been motivated by the need to meet governance, ethical and religious values Bukhari
H.et al (2014). The building of development and growth of Islamic finance relies on beliefs from
religious and moral behaviors. The fundamental sources of Islamic banking and finance is Quran
(the devine revelation) and the Sunna which is the saying and practices of the prophet
Mohammed (P.b.u.h).
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 (Faisal.M. et al 2018).
The history 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 modern 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, Islamic
banking have been emerged several Middle-East countries. Such as Dubai Islamic Bank (1975),
Faisal Islamic Bank of Sudan (1977), Faisal Islamic Bank of Egypt (1977) and Bahrain Islamic
Bank (1979).

1
Meanwhile, 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). Besides to its main stream in the gulf country Islamic banking is
gaining ground over western country like Europe and USA. For instance Western banks such as
Citibank, Standard Chartered Bank, UBS, and HSBC are vital players in the Islamic financial
market (ISRA, 2013).
Islamic finance is said to be more stable than conventional finance because it discourages
speculation; (ii) financing in Islamic finance is asset-based and completely collateralized; and
(iii) it is founded on morally upright values. Islamic financial institutions (IFIs) are seen as a
great platform for promoting financial inclusion, facilitating SMEs' access to capital, and
supporting growth and economic development (IMF, 2015). 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.

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, the majority of the asset of Islamic banking is concentrated in Muslim state
countries. Hence, Saudi Arabia, Iran, Malaysia, Indonesia and Qatar are the dominant country in
the size of Islamic financial asset in the world. As witnessed from the literature sub-Saharan
Africa is the origin of the modern Islamic banking and finance which paved the way for the
current development of Islamic banking. However many African countries including Ethiopia
has adopted the system lately.

Given the increased demand for sharia compliant product and services money conventional
banking and other fully-fledged Islamic banking are offering Islamic banking products and
services as alternative to meet customer expectation and needs. As Africa is the source for the
emergence of the modern Islamic banking, so far Islamic banking was adopted in many parts of

2
the African countries including Ethiopia. Nevertheless, African countries including Ethiopia are
witnessing an encouraging move to bring financial inclusion.

Islamic banking becomes one of the competing financial systems with the existing commercial
banks through providing tailored product and services. It plays a crucial role in the attainment of
macro-economic objectives. It acts as a vehicle for socio economic transformation and also as a
catalyst to economic growth. It plays an important role in mobilizing the nation’s savings and in
channelizing them into high investment priorities and better utilization of available resources. In
the present competitive environment consumers are increasingly aware of alternatives in relation
to services and organizations providing services.

Consequently, expectations rise and consumers become more critical of the quality of services.
Today 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. Internationally Several studies has been made on Islamic banking and finance to
demonstrate customer knowledge, awareness, understanding and perception of customer on the
concept and service of Islamic banking. Many Muslim consumers are willing to invest in Islamic
Banks to endorse their religious faith to deal with financial transactions that are Islamically
lawful. For instance Bashir et.al (2021) stated that Lack of knowledge and awareness of the
system among clients of Islamic Banking does affect preference and perception to a significant
level. Rustam et al. (2011) examined the customers’ thinking regarding Islamic banking in
Pakistan and suggested that in the commercial sector, Islamic banking and services have a strong
impact but many customers do not have sufficient understanding of Islamic banks and their
advertising policies. The results claimed religion to be of utmost importance in the eyes of
customers and then status, bank reputation, bank size, cost, the benefit to the customer and
service delivery.

3
Ethiopia is one among the sub-Saharan African country with the largest population. While the
history of banking service in Ethiopia counted long time, Islamic banking and finance is recent
development in Ethiopia. So far Ethiopia has large number of Muslim population; this would
offer potential opportunity for the development and adoption of Islamic banking and finance.
The study made by (Mohamed, 2012), has found out that there is need for interest free banking
products and services in Ethiopia

In 2011 Ethiopia has adopted the introduction of Islamic banking through amendment of the
business proclamation 592/2008 and issuance of NBE directive SBB/51/2011 that granted
privilege for the existing commercial banks to offer Islamic banking (interest free banking) after
getting license. Following the issuance of this directives 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. he main obstacles to the sector
are identified as negative perceptions of Islamic finance, legal framework issues such as the
exclusivity of banking business activity, restrictions on bank investments, the tax system, the
lack of a controlling mechanism, and last but not least a lack of experts and skilled resources
Saudiq.M,( 2020). 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.
Currently there are 31 banks in Ethiopia including two state owned commercial banks (CBE and
DBE) and 29 private commercial banks that offer banking service(NBE report,2023). Zemzme,
Hajira and Rammis bank are the only fully-fledges interest free banking established in Ethiopia.
Currently almost all commercial banks are offering Islamic banking product and service through
window basis and fully-fledged dedicated branch.

4
However Ethiopia banking industry is still dominated by conventional banking and conduct their
business transaction via conventional banking. For instance according NBE report of Sep 30,
2022 the total resource mobilized by commercial banks had reached 2.2 trillion while the
resource mobilized from Islamic banking and service was only 200 billion birr which too much
low. 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.

CBE has started the first operation of Islamic banking service since Nov, 2013 as important
alternative to conventional banking service through dedicated window basis. Currently the bank
deliver various tailored Islamic banking product and financing to its customer through more than
1936 branches using modern technologies. To bring the financial inclusion and expand the
accessibility of the banking CBE has done a lot through creating awareness and product
innovation.

Furthermore, the de-regulation and sizable liberalization of financial system by the current
government has made impressive working environment for banking industry. CBE has opened
its first fully-fledged dedicated interest free branch induced as Bilal branch in Addis Ababa. In
addition to dedicated window within conventional branch there are 152 fully-fledged interest free
branches across the country. According to the half year report of Dec 31, 2023 CBE has
mobilized 104 billion deposits and maintained 6.6 million interest free banking customers and
the bank has also maintained 50% share of industry. Exclusively CBE Adama district has
mobilized 3.8 million deposits and has maintained 203K interest free banking customers. After
the new reforms made by the Ethiopian government the need for adopting Islamic banking and
competition for resource mobilization from this sectors is increasing among existing commercial
banks and newly introduced banks. This stiff competition may bring various alternative products
for customers to choose if they are not satisfied with their organization.

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

5
1.2 Statement of the problems

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. However, today Islamic banking product and service are recognized by Muslim
and non-Muslims. The Islamic financial institutions are one of the rapidly growing businesses in
the today complex global environment. 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.
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 financial de-
regulation and liberalization has brought substantial move for the development of Islamic
banking (interest free banking) in Ethiopia. Especially the issuance of NBE directive
SBB/72/2019 after the current government promise to allow the fully-fledged Islamic banking
considered as a paradigm shift for the Islamic banking growth. All commercial banks are started
to open fully-fledged branches besides existing dedicated interest free window to maintain their
existing customer and exploit ample resources from the society. Although three fully-fledged
Islamic banking such as Zemzam bank, Hijra bank and Rammis banks joined the industry as one
of the competitor to the existing commercial banks. This change has made good initiation for
muslim community and enhanced banking industry to aggressively work in product innovation
and diversification to ensure their sustainable growth.
Empirical research shows that Islamic banking is gaining popularity across the globe. It can also
play a significant role in the economic development of the country. The product and service of
Islamic banking are adopted by both Muslim and non-Muslim. Islamic banking has become one
of the competitors to the existing commercial banks by offering tailored alternative product and
service at reasonable cost and benefit.
The competition in the banking industry has also changed the perception of customer. They can
easily shift to the competitor if they are not satisfied with the product. Thus Islamic banking

6
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.
Today Islamic banking product and service are offered accessible to all people globally. Also
after the new transformation made by NBE in 2019 the adoption of Islamic banking product and
service and the competition among banking industry has increased. However, there are
misconception about Islamic banking product and financing both by Muslim and non-Muslim.
Some Muslim think Islamic banking product and service are similar with conventional bank
product. 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. They do not have knowledge and understanding of Islamic banking product.
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 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.
For understanding Islamic banking perception several empirical studies have been made
globally. For instance Belwal and Maqbali (2018) piloted a study on the “A Study of Customers’
Perception of Islamic Banking in Oman”. The study postulated that Oman customers had mixed feelings
about Islamic banks and some of the people do not sure whether Islamic banking are adhere to sharia
principles. Similarly Contech and Hassan (2021) conducted a study on the “An Analysis of Public
Perception of Islamic Banking in the Gambia. According to this study there was lack of awareness for
Islamic banking product offered by AGIB bank. On the other hand Abduh & Omarov (2013), found in
their study that awareness of Islamic banking is very important to increase willingness to deal with
Islamic banks. In South Africa, Bodibe al et. (2016) found that awareness of financial products and
services had a positive influence on the attitudes towards Islamic banking.
Despite several studies have been made in the world by different researcher in different region, in
Ethiopia few studies have been made regarding Islamic banking.
For instance, study by Guluma (2017) investigated the elements influencing Ethiopian consumers'
behavioral intentions to embrace IFB. This research, however, falls short of establishing the precise
practical factors that affect IFB adoption because it is predicated on a widely accepted notion of
behavioral analysis. On the other hand, Yewubedar (2018) also conducted research on challenges

7
and opportunities of interest free banking in case of commercial bank of Ethiopia northern
district. The research concludes that lack of sharia advisors boards, lack of awareness of
customers regarding interest free banking, Lack of confidence by customers, unavailability of the
service in all branches are challenges of interest free banking operation. In addition Robel (2019)
conducted a research on factors affecting implementation of interest free banking service in
Ethiopia: the mediation role of customer involvement. The result of this research showed that
awareness, comparability, complexity, observability, perceived risk; religious beliefs and
customers involvement were significant on the implementation of interest free banking service .
Abudulhadi (2023) study on factors influencing interest free banking: mediating role of
religiosity on selected private commercial banks of Ethiopia. The result of the study shows that
religion has significant impact in the adoption of Islamic banking product and service.
Even though some studies has been made regarding Islamic banking in Ethiopia to the
knowledge of the researcher no study has been conducted on assessment of the perception of
customer in Islamic banking product and financing in commercial bank of Ethiopia.
The customers of Islamic banking do not have knowledge that they can know about the returns
on its investment and actual return on it. The less information about Islamic banking products is
the result of poor understanding of Islamic banking concept and creates a strong impact on
customer’s perception.
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 financing
in the case of CBE Adama district.

8
 1.3 Research question
Research question is a core point that the researcher will go to answer during the study. It must
be specific and narrow. It is a research problem stated in question form which serves as the focus
of the researcher investigation. The researcher has formulated the following research question for
the current study.
1. What are the perception of customer in Islamic banking product and financing offered by
CBE?
2. What is the level of awareness and understanding has CBE customer toward Islamic
banking product and financing?
1. How does product and service quality affects the perception of customer in Islamic
banking and financing?
2. How does religiosity affect the perception of customer in Islamic banking product and
financing offered by CBE?
3. How does knowledge of Islamic financing affect the perception of customer in Islamic
banking product and financing offered CBE?
1.4 Objective of the study
1.4.1 General objective 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 objective of the study
1. To assess the perception of customer in Islamic banking product and finance
2. To analyze the level of the awareness and understanding of customer regarding Islamic
banking product and financing offered by CBE.
3. To determine how product and service quality influence the perception of customers
4. To analyze how religious commitment affect the perception of customer on Islamic
banking product and finance offered by CBE.
5. To explore the impact of knowledge of Islamic financing on customer perception

9
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 convenience, 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, product and service quality and
knowledge of Islamic financing 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. The researcher will use multistage sampling technique to determine
the sample size of the respondent and will also use primary and secondary sources of data.
Finally the researcher will conduct data analysis using descriptive and inferential analysis tools
such as linear regression and correlation methods.
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. It
is also defined as a marketing concept that encompasses a customer's impression, awareness, or
consciousness about a company or its offerings (Business Dictionary, 2020. It’s the process
whereby individuals organize and interpret their sensory impression in order to give meaning to
their environment.

10
 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.

11
 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 $4.5 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
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

12
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). 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 their study, Afzal et.al. (2019) had
advised 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
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).

13
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
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.

14
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.

15
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.

16
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 product
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
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

17
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
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.

18
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 and understanding of 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
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.

19
 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.
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

20
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. On the other hand, 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 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

21
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.
2.7 Social influence
Social influence is a concept that refers to the impact of social norms, religious beliefs, and
other external factors on an individual’s decision to adopt a new technology or innovation. Social
influence is one of the key factors that influence the adoption of Islamic banking, as it is
important for consumers to perceive that Islamic banking is socially acceptable and conforms to
their religious beliefs. Several studies have evaluated the impact of social influence on the
adoption of Islamic banking. For instance, Smolo et al. (2020) found that a lack of knowledge
about Islamic banking and finance was a major challenge to developing Islamic finance in
Bosnia and Herzegovina. Bilal and Suleiman (2021) found that subjective norms have a
statistically significant favorable influence on attitudes toward the adoption of Islamic banks in
Oman.

Furthermore Ezeh and Nkamnebe (2022) have evaluated the relationship between social
influence and behavioral intention to adopt Islamic banking and found that perceived social
influence positively influenced the adoption of Islamic banking among non-Muslims in Nigeria.
Based on these mixed findings, it can be concluded that the relationship between social influence
and behavioral intention to adopt Islamic banking is complex and may vary depending on the
context and population being studied. While social influence may be an important factor for
some consumers, it may not be as influential for others. Therefore, it is important for Islamic
banks to understand the social dynamics of their target market to effectively promote their
products and services.

2.8 Religiosity
Religion was defined by Kirkpatrick (2005) as a psychological connection and the primary
emotional relationship to objects. Religion is a cause, a precept, or a set of rituals that people
fervently and firmly adhere to. Islamic banking mainly depends on Islamic Sharia principles, the
believers of Islam are assumed to have sufficient knowledge about the rules and regulations of
Islam. Resultantly, it may be justifiable to assume that customers inspired by Islamic principles

22
may lead them to prioritize Islamic banks over conventional banks. In Muslim-majority countries
such as Saudi Arabia, Pakistan, UAE, religious factors are considered as the crucial determinants
leading to influence consumers’ perception about IBF (Sayani, 2015).
According to (Omer, 1992) in which he revealed that majority of Muslims selected Islamic
banking system due to religious factor and found that mostly Muslims were enrolled to Islamic
banks and the conventional banks who have Islamic windows. He further elaborated that
majority of customers were ignorant of the products and services offered by the Islamic banks
but the only reason of choosing an Islamic bank is the religious factor and the strong belief that it
is an interest-free banking system. According to Janah et.al (2020) religion significantly
influence the decision to use Islamic banking product and service. Meanwhile study made by
Kursheed et.al.(2021) indicated that sharia compliance play prominent role in influencing
customer perception of Islamic banking.
2.9 The Concept of customer Perception
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
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

23
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.
Although 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 undergraduates in South Eastern University of Sri Lanka" non-Muslim
undergraduates have knowledge of Islamic banking & finance
2.10 Empirical research review
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

24
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 Advisor, give the required attention
and 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

25
variables such as 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 financing 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 financing 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, understanding the perception of the customer will help financial institution to create
awareness and devices innovative marketing strategies to maintain their market share. This is
because awareness, understanding and 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.

26
2.12 Conceptual framework
After thorough review of various literatures on the topic of the study the researcher 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)
Religiosity

Awareness and
understanding of IB

Perception of customer on
Islamic banking product and
Product and service financing
quality

Knowledge of Islamic
financing

Sources: own development

2.13 Research hypothesis
The researcher developed the following alternative hypothesis for the current study.
H1: awareness and understanding of Islamic banking product and financing have significant
positive impact on customer perception
H2: Product and service quality of have significant positive impact on customer perception
H3: knowledge of Islamic financing has significant positive impact on Islamic banking customer
perception
H4: Religiosity has significant positive influence on customer perception

27
 CHAPTER THREE
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 approach
According to Khotari (2004) there are two approaches to research which are called quantitative
and qualitative approach. Research approach mainly talk about the type of data to be collected
and how the data collected could be analyzed to answer the research question. Hence the
decision to choose specific research methodology is based on the suitability to answer the
research question. Therefore the researcher will use both qualitative and quantitative type of
research approach.
3.3 Research design
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 commitment, awareness ,product and service quality, and knowledge of
Islamic financing ) on the dependent variable (customer perception of Islamic banking and
financing).

28
3.4 Target population
The whole collection of instances from which a sample can be chosen and the results
generalized to the entire population is referred to as the target population (Saunders et al., 2016).
CBE has 33 districts across the country which is managed under three regions called south west,
North and central (CBE half year report Dec 31, 2023). The bank has more than 40 million
customers including interest free banking customers. The interest free banking customer base has
been reached 6.6 million.
The researcher will select Adama district commercial bank of Ethiopia for the current study. 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. On the other hand the researcher choose Adama
district CBE because of the fact that there are large potential user of interest free banking
customers. Based on the Dec 31, 2023 half year performance of CBE the total number of
customer using Islamic banking product has been reached 6.6 million, out them the population
for this study will be 202,000 customers who have maintained interest free account under Adama
district branches. To ensure the understanding level of staff on how to support the customers and
how they introduce the Islamic banking product and financing to increase positive perception of
customer the researcher will target 30 employees who are assigned on interest free operation.
3.5 Sampling design
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. It is an
imperative part of a research and aims for utilizing a sample, instead of gathering information
from the entire population. The sample of the representative population can be determined by
either probability or non-probability sampling methods. For the current study the researcher will
use probability and non-probability sampling.
The researcher will use purposive and convenience sampling techniques to distribute questioner
to customers of interest free banking product and financing.
3.6 sample size determination
Determining sample size is very crucial tool to conduct any research because most of the time
it’s difficult to include all participant or target population. The determination of sample size is an

29
important part of a research process. The decisions about sample size determination are
influenced by many Factors that need to be taken into accounts. These factors include the cost
and time constraints, variability of elements in the target population, required estimation
precision and whether the findings are to be generalized and, if so, to what degree of confidence
(Hair et al., 2007) .
For this particular study, sample size decision is made on a case-by-case basis considering the
variety of goals to be achieved by the particular study group and taking in to account numerous
other aspects of the research design.
There are 55 branches under commercial bank of Adama district that offer various banking
service to the customer of the bank. As the researcher is internal stakeholder of the bank and
based on his expirience the researcher purposely select 20 branches considering the number of
customer base ,deposit possition and year of service of branches.
To determine the required sample size of the respondent the researcher will use Fischer et al
(1998) method of sample size determination. Hence the researcher will assume 0.5 (50%) as P
(proportion of population of interest). The confidence interval was set at 95% and minimum
error at 5%. According to Fischer et al (1998) when the population size is over 10,000 the
sample size less than or equal to 385 is appropriate.
The confidence interval was set at 95% and minimum error at 5%. Level C=95% and e=+5%.
2
Z ∗P∗Q
n= 2
d
Where n will be the sample size

z = confidence level of 1.96

p = proportion of variable of interest in the population
q = 1- p
d = precision (0.05 per cent)
2
(1.96) ∗0.5∗0.5
n= =384
(0.05)2

30
Table 3.2 number of sample branches and sample size from each branch
NO BRANCH NAME Sample size
1 Adama 30
2 Adama Main 25
3 Elmukiltu 25
4 Kechema 25
5 Boset 25
6 Berecha 25
7 Abageda 25
8 Boku Shenen 25
9 Sar Tera 20
10 GendHara 20
11 Sekekelo 20
12 Kerayu 20
13 Chefe 15
14 Afiya 20
15 Khadija 10
16 Nur Adama 20
17 Nurel Huda 20
18 Migira 10
19 Lugo 10
20 Hayu 10

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.

31
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 prepare questioner in closed-end format which 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 version 26 to process and
analyze data. The researcher will also use the following regression model:
PERIPF= α+ β1REL+β2AU+ β3PSQ+β4Kn+ℇ
Where PERIPF will represent the perception of the Islamic banking product and financing: AU
represent awareness and understanding of customer in Islamic banking product and finance: PSQ
represent product and service quality of Islamic banking and KN represent social knowledge of
islamic financing. 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.

32
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
Ethics governs how researchers behave with regard to the rights of people who are either the
subject of their research or those who are affected by it (Saunders et al., 2016). The researcher
will conduct his study adhering to all ethical manner of the research. To reach the respondents
formal letter was provided to the bank. The respondents were given privileges of not writing
their name and no respondents will be forced to fill the questionnaire unwillingly and without
making the actual purpose of carrying out the research clear to him/her. The purpose of the study
was disclosed in the introductory part of the questionnaire. Furthermore, misleading or deceptive
statements were tried to be avoided, in the questionnaires.

33
 APPENDIX
WORK PLAN AND REFRENCE
a. 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
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

34
b. Time schedule

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

35
 Reference
Abudulhadi (2023) study on factors influencing interest free banking: mediating role of religiosity on
selected private commercial banks of Ethiopia
Ahmed, F. K. (2014), “Banker’s Perceptions on Islamic Banking in Oman,” Asia Pacific
Journal of Research. Vol, 1, No. XVI.
Akmel. (2015) Akmel (2015) CHALLENGES AND PROSPECTS OF ISLAMIC BANKING FOR RESOURCE
MOBILIZATION IN ETHIOPIA COMMERCIAL BANKS.

Aziz (2005): governor of central bank of Malaysia Islamic Finance - Promoting the Competitive
advantage, Putrajaya, 21 June 2005
Bilal, Z.O.,& Sulaiman,M.A.B.A.(2021). Factors Persuading Customers to adopt Islamic Banks

and Windows of Commercial Banks Services in Sultanate of Oman. Review of

InternationalGeographicalEducationOnline,11(4),651–660.

Business dictionary (2020).customer perception :

http://www.businessdictionary.com/definition/customer-perception.htm

Ezeh,P.C.& Nkamnebe,A. D.(2022).Determinants of Islamic banking adoption among

non-Muslim customers in a Muslim zone. Journal of Islamic Accounting and Business

Research 13(4), 666–683. https://doi.org/10.1108/JIABR-10-2021-0280

Fazlan & Mohammad: (2007) the Determinants of Islamic Retail Banking Adoption in Malaysia

International Business & Economics Research Journal (IBER) volume 11(4)

Fauzi, A. I., & Haji-Othman,(2016). Adoption of Islamic banking products and services in

Nigeria: An application of diffusion of innovation theory. Science and Technology

Fauzi & Haji-Othman, (2014) Conceptual Framework for Adoption of Islamic Banking in

36
 Nigeria:The Role of Customer Involvement. European Journal of Business and

Management

Faisal Mustafa , Ambreen Khursheed , Maham Fatima, 2018. "Impact of global financial crunch

on financially innovative microfinance institutions in South Asia,"

Gait, &Worthington (2008), “An Empirical Survey of Individual Consumer, Business Firm and

Financial Institution Attitudes towards Islamic Methods of Finance“International Journal

of Social Economics.Vol. 35 No. 11, pp. 783-808

Hanafi, H., Kasim, (2019). Islamic Mortgage Products: How Aware are Malaysians? Pertanika

Journal of Social Sciences & Humanities, 27(1).

Hair, Joseph F, Arthur H. Money, Phillip Samuel, and Mike (2007). Research Methods for

Business. Chichester: John Wiley and Sons, Print.

Hussain, M., Shahmoradi, A., & Turk, R. (2015). An overview of Islamic Finance. IMF Working

IFDI (2022): press release on the Islamic financial development and projection

International Journal of Interdisciplinary Research and Innovations ISSN 2348-1226

(online) Vol.7, Issue 1, pp:(314-321), Month:January - March 2019, Available at:

www.researchpublish.com

ISRA (2013): International Journal of Islamic Finance: Volume 5

Islam, J.U. and Rahman, Z. (2017), “Awareness and willingness towards Islamic banking among

Muslims: an Indian perspective”, International Journal of Islamic and Middle Eastern

Finance and Management, Vol. 10 No. 1, pp. 92-101.

Janah N., Medias .F and Pratiwi E.K(2020). The intention of religious leaders to use Islamic

banking service: The case of Indonesia. The journal of Islamic marketing.

37
Khattak (2010): Customer satisfaction and awareness of Islamic banking system in Pakistan.

AFRICAN JOURNAL OF BUSINESS MANAGEMENT 4(5)

Kewuyemi,(2015). Customers Awareness, Attitude and Patronage of Islamic Banking in Nigeria

Islam and Civilizational Renewal, 274 (2625)

Khursheed.A, Fatima M. and Mustefa F.(2021) customer perception towards Islamic banking in

the gulf region. Turkish Islamic journal of economics.

Lujja, Mohammed and Hassan (2018), an exploratory study of public perception in Uganda.

Journal of Islamic Accounting and Business Research. - Emerald, ISSN 1759-

0817, ZDB-ID 2553043-4. - Vol. 9.2018, 3 (08.05.), p. 336-352

M.Gafoor, K. A. (2012). Considerations in the Measurement of Awareness. Online Submission

M..Obaidullah (2005) : Islamic financial service

Mahdzan, Zainudin and Au (2017 the Adoption of Islamic Banking Services in Malaysia

Journal of Islamic Marketing,Vol. 8 No. 3, pp. 496-512

Mohammed, M (2012), “Islamic banking: Prospects, opportunities and challenges in

Ethiopia‟An MBA Thesis submitted to Addis Ababa University, Department of

Accounting and Finance.

Nimsith,(2018). Awareness of Islamic Banking Products and Services among the Non Muslims

in Sri Lanka.3rd International Symposium - FIA, SEUSL. Oluvil: FIA, SEUSL

NBE, (Sep 30, 2023) QUARTERLY REPORT

Orhan, and Zeyneb Hafsa(2018)."Mit Ghamr Savings Bank: A Role Model or an Irreplaceable

Utopia?"

Rehman & Shoaib, (2014),“Employee Perception, Knowledge and Potential of Islamic Banking

Pakistan”. Journal of Islamic Economics, Banking and Finance.Vol.10, No.4,pp.89

38
Safrin,and Nairoos, (2019). Attitudes of Non-Muslims on Islamic Financial Institutions: A Study

based on Sungawila Area in Sri Lanka. International Journal of Research and Innovation

in Social Science, III (XII)

Robel Demissie (2019) conducted a research on factors affecting implementation of interest free

banking service in Ethiopia: the mediation role of customer involvement.

Rustam, S., Bibi, S., Zaman, K., Rustam, A., & Haq, Z. U. (2011). Perceptions of corporate

customers towards Islamic

banking products and services in Pakistan. The Romanian Economic Journal, 41(4), 107-123.

Saunders, M., Lewis, P. & Thornhill, A. (2016). Research methods for business students.

Pearson Education Limited

Sayani, H., & Miniaoui, H. (2015). Determinants of bank selection in the United Arab Emirates.

International Journal of Bank Marketing, 31(3), 206-228

Smolo, E., Šeho, M., & Kabir Hassan, M. (2020). Development of Islamic finance in Bosnia

and Herzegovina. Journal of Economic Cooperation and Development, 41(1),121–144

Subhani (2012) “Consumer criteria for the selection of an Islamic bank: evidence from
Pakistan” International Research Journal of Finance and Economics.Vol. 94, pp.1-9
Sulaiha,& Mazahir, (2018).Awareness of non-Muslims about Islamic financial institutions in

Colombo district.Empowering National Development through Religious, Languages,

Culture and Society. Oluvil: FIA, SEUSL

Salman Bashir, Abeda Sultana, Zein F Y Dweikat and Masherekha Anwar (2021):

Understanding of the Customers Perception on Islamic Banking and Financial Services in

Malaysia: International Fellowship Journal of Interdisciplinary Research Volume 1, Issue

1, 2021, 74 – 90 DOI: 10.5281/zenodo.4480322.

39
Teferi, M.(2015).Contribution of IFB to economic development and its prospect in Ethiopia.

MBA Thesis submitted to Addis Ababa University, Department of management

Thiruvenkatraj and Vetrivel: (2017) study on the customer perception. International journal

(IJRTI | Volume 2, Issue 5) ISSN: 2456-3315

Text book. (Kettell, 2011).ISLAMIC FINANCE AND THE CONCEPT OF PROFIT AND

RISK SHARING

Yewubedar Getachew (2018), Assessment of prospects and challenges of interest free banking in

Ethiopia

in the case of commercial bank of Ethiopia, north addis district

Zach (2019) what is Customer Perception? https://www.discuss.io/voice-of-the-consumer/

40