customers’ preferences for islamic financial …
TRANSCRIPT
CUSTOMERS’ PREFERENCES FOR ISLAMIC
FINANCIAL INSTITUTIONS IN NORTHEAST NIGERIA
BY
MAIGANA AMSAMI
A research paper submitted in fulfilment of the requirement
for the degree of Master of Science in Islamic banking and
Finance
IIUM Institute of Islamic Banking and Finance
International Islamic University Malaysia
SEPTEMBER 2015
ii
ABSTRACT
In 2010, the Central Bank of Nigeria (CBN) introduced a new banking model which
among other types of banks permitted the establishment of Non-Interest banks on the
basis of the Sharī´ah. Following this development, one full-fledge bank (the Jaiz bank
plc) and two Islamic bank windows were licensed which now compete to attract and
retain customers. However studies on customers’ preferences for Islamic banks in
Nigeria that can help the Islamic banks in their marketing strategies are scarce and the
few ones conducted were limited in their coverage as none of these studies captured
the preferences of the customers of the full-fledge Islamic and the Islamic bank
windows. The current study surveyed both the customers of the two types of Islamic
banks in Nigeria with the objectives of determining the customers’ most influential
Islamic bank selection criteria, their preference for bank type, and satisfaction of the
products and services of the Islamic banks in Northeast Nigeria. The study employed
survey research method and both descriptive and inferential statistics were used to
analyse responses of 74 respondents using the Statistical Package for Social Sciences.
Results revealed that bank Islamic law compliance, recommendation from friends and
relatives and bank reputation were the most significant selection criteria of the
customers, hypothesis test indicated that Islamic bank type has influence on customers
preference and 78% of the customers showed that they are satisfied with the products
and services of the Islamic banks in the Northeast Nigeria. These findings are
envisaged to be of importance for the management of the Islamic banks in Nigeria in
designing their marketing strategies besides enriching the literature.
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APPROVAL PAGE
I certify that I have supervised and read this study. In my opinion, the study conforms
with acceptable standards of scholarly presentation and is fully adequate, in scope and
quality, as a research paper for the degree of Master of Science in Islamic Banking
and Finance
...................................
Syed Musa Alhabshi
Supervisor
This research paper was submitted to the IIUM Institute of Islamic Banking and
Finance and is acceptable as a fulfilment of the requirements for the degree of Master
of Science in Islamic Banking and Finance
...................................
Khaliq Ahmad
Dean, IIUM
Institute of Islamic
Banking and Finance
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DECLARATION
I hereby declare that this research paper is the result of my own investigations, except
where otherwise stated. I also declare that it has not been previously or concurrently
submitted as a whole for any other degree at IIUM or other institutions.
MaiganaAmsami
Signature.......................... Date..........................
vi
INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA
DECLARATION OF COPYRIGHT AND AFFIRMATION
OF FAIR USE OF UNPUBLISHED RESEARCH
Copyright © 2015 by Maigana Amsami All rights reserved.
CUSTOMERS’ PREFERENCES FOR ISLAMIC FINANCIAL
INSTITUTIONS IN NORTHEAST NIGERIA
No part of this unpublished research may be reproduced, stored in a retrieval system,
or transmitted, in any form or by any means, electronic, mechanical, photocopying,
recording or otherwise without prior written permission of the copyright holder except
as provided below.
1. Any material contained in or derived from this unpublished research may
only be used by others writing with due acknowledgement.
2. IIUM or the library will have the right to make and transmit copies (print
or electronic) for institutional and academic purposes.
3. The IIUM library will have the right to make, store in a retrieval system
and supply copies of the unpublished research if requested by other
universities and research libraries.
Affirmed by Maigana Amsami.
……………………………. ……………………..
Signature Date
vii
ACKNOWLEDGEMENTS
I am most grateful to Allah (S.W.T) for His mercies, blessings and guidance
throughout my studies. My profound gratitude and appreciation goes to my supervisor
Associate Professor, Dr. Syed Musa Alhabshi who supervised me throughout the
period of writing this research paper. Indeed, his patience, interest and valuable
suggestions have helped greatly in realising this research paper.
My special thanks to my parents for their care and up-bringing. I am also
thankful to my beloved wives, Zarah, Hafsa, Maryam and my Children for their
patience, love and encouragement during my study period. Also worthy to mention is
Muhammad Kyari for supervising the family during my absence.
My appreciation also goes Dr. Muhammad Adamu Machina, Eng. Usman
Abdullahi, Muhammad Idi Kurnawa, M. Abubakar Muhammad, Ahmad Muhammad
Kabono, M. Ibrahimk Zabu, Eng. Ismail Adamu, Bafura Amsami, Sambo Amsami,
Yayya Kellu. Lawan Gasa, M. Adam Jatkwao, Ibrahim Umar (Sheriff) Baba Ahmad
Tijjani, Assadiq, Alhaji Bukar Dapchi, Mustapha Umar, Alh. Ali, M. Umar
Ahmad,Yushau Zakariyah, M. Zakari. M. Muhammad Adam, Alh. Yahaya Ado, M.
Awwal and Abdul-Salam Abdul-Hameed for their kindness.
Lastly, I would like to thank all my lecturers both in the International Islamic
University, Malaysia and the International Institute for Islamic Banking and Finance,
IIUM, my IIBF colleagues, and my colleagues in the Department of Business
Administration, Yobe state University for their encouragement and love.
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TABLE OF CONTENTS
Abstract .......................................................................................................................... ii
Abstract in Arabic ......................................................................................................... iii
Approval Page ............................................................................................................... iv
Declaration ..................................................................................................................... v
Copyright Page .............................................................................................................. vi
Acknowledgements ...................................................................................................... vii
List of Tables ................................................................................................................ xi
List of Figures ............................................................................................................. xiii
List of Abbreviations .................................................................................................. xiv
CHAPTER ONE: INTRODUCTION ........................................................................ 1
1.1 Background of the Study ............................................................................ 1
1.2 Problem Statement ...................................................................................... 3
1.3 Objective of the Study ................................................................................ 3
1.4 Research Questions ..................................................................................... 4
1.5 Limitations of the Study ............................................................................. 4
1.6 Delimitations of the Study .......................................................................... 5
1.7 The Importance of the Study ...................................................................... 5
1.8 Definition of Key Concepts and Terms Used in the Study ........................ 6
1.9 Brief on Nigeria and the NorthEast Nigeria ............................................... 7
CHAPTER TWO: LITERATURE REVIEW ........................................................... 9
2.1 Islamic Banking Concept ............................................................................ 9
2.2 Sharī‘ah Principles and Features of Islamic Banking ................................. 9
2.2.1 Principle of Permissibility of Trade and the Prohibition of Riba ..... 9
2.2.2 The Principles of Profit-Sharing and Profit/Loss Sharing ............. 10
2.2.3 The Avoidance of Excessive Uncertainty (Gharar), Gambling
(Maysir) and Prohibited Goods. ................................................................ 11
2.2.4 Adherence to the Rules for Islamic Contracts ................................ 12
2.2.5 Payment of Zakat (Payment to the Poor) from their Income ......... 12
2.3 Islamic Banking in Some Selected Countries ........................................... 12
2.3.1 Islamic Banking in Malaysia .......................................................... 13
2.3.2 Islamic Banking in Indonesia ......................................................... 14
2.3.3 Islamic Banking in Nigeria ............................................................ 15
2.4 Review of Studies on Customers Bank Selection Criteria and… ............ 17
2.4.1 Studies on Customers Preferences and Selection of… ................. 17
2.4.2 Studies on Customers’ Preferences and Selection of Retail
Conventional Banks in Other Countries ................................................... 19
2.4.3 Studies on Customers’ Preferences and Selection of Islamic Banks
in Other Countries ..................................................................................... 21
2.4.4 Conceptual Framework of the Study .............................................. 24
2.4.5 Hypotheses ..................................................................................... 24
2.4.6 Conceptual Framework for Customers Preference for Isl. Type ... 25
2.4.7 Hypothesis ...................................................................................... 26
2.5 Customers’ Satisfaction of Islamic Banks’ Products and Services .......... 26
ix
2.5.1 Conceptual Framework on Satisfaction Factor .............................. 29
2.5.2 Hypotheses ..................................................................................... 29
CHAPTER THREE: METHODOLOGY OF THE RESEARCH ........................ 31
3.1 The Research Design ................................................................................ 31
3.2 Sample and Sample Size for the Study ..................................................... 31
3.3 Sampling Technique Used in Choosing the Sample of Respondents ....... 32
3.4 Instrumentation ......................................................................................... 33
3.5 Reliability and Validity Test on the Instrument ....................................... 34
3.6 Data Collection Procedure ........................................................................ 34
3.7 Data Analysis Techniques Used in the Study ........................................... 35
3.8 Limitation of Survey Research ................................................................. 35
CHAPTER FOUR: DATA DESCRIPTION AND ANALYSIS ............................ 36
4.1 Introduction............................................................................................... 36
4.2 Profiles of the Respondents ...................................................................... 36
4.3 Criteria Used in the Choices of Isl. Financial Inst…: Survey Findings ... 38
4.3.1 Low Service Charges ..................................................................... 39
4.3.2 Fast and Efficient Service .............................................................. 39
4.3.3 Bank Reputation ............................................................................. 40
4.3.4 Recommendation from my Friends and Relatives ......................... 40
4.3.5 Customised Service ........................................................................ 41
4.3.6 Bank Staff Friendliness .................................................................. 41
4.3.7 Bank Parking Facilities .................................................................. 42
4.3.8 Bank Location ................................................................................ 42
4.3.9 Bank Islamic Law Compliance ...................................................... 43
4.3.10 Bank Profitability ........................................................................... 43
4.3.11 Easiness of Financing Facility ....................................................... 44
4.3.12 Availability of Branches across Nigeria......................................... 44
4.3.13 Availability of Mobile Banking Facility ........................................ 45
4.3.14 Ranking of the Factors Influencing Customers’ Preference for
Retail Islamic Banks ................................................................................. 45
4.3.15: Hypotheses Testing ....................................................................... 46
4.4 Customers’ Preferences for Islamic Bank Type ....................................... 48
4.4.1 Complete Segregation of Islamic Funds ........................................ 48
4.4.2 Support from Conventional Operations ......................................... 49
4.4.3 Islamic Bank Customers Complete Confidence in Sharī´Ah
Compliance of all Islamic Banking Activities .......................................... 50
4.4.4 Significant Independence from Conventional Operations ............. 50
4.4.5 Active in Zakat and Charity Contribution ...................................... 51
4.4.6 Support for Social Development and Related Causes .................... 51
4.4.7 Hypothesis Testing ......................................................................... 52
4.5 Level of Customers Satisfaction Isl… Products and Services.................. 53
4.5.1 Ethical and Professional Dealings with Customer ......................... 53
4.5.2 Product Knowledge ........................................................................ 53
4.5.3 Quick Handling of Problem ........................................................... 54
4.5.4 Bank Services are Consistent with my Religious Values .............. 55
4.5.5 The Bank’s Services Customise to my Needs ................................ 55
4.5.6 The Bank Delivers its Promise ....................................................... 56
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4.5.7 Easiness of ATM Services ............................................................. 57
4.5.8 Timely Response to My Banking Needs ........................................ 57
4.5.9 Attractive Financing Rates ............................................................. 58
4.5.10 Attractive Investment Rate ............................................................. 58
4.6 Overall Satisfaction with the Retal Islamic Bank ..................................... 59
4.7 Rankings of the Factors Influencing Satisfaction Level ........................... 60
4.8 Hypotheses Testing ................................................................................... 61
CHAPTER FIVE: DISCUSSIONS ON STUDY FINDINGS ................................ 64
5.1 Findings on the Selection Criteria ............................................................ 64
5.1.1 Attainment of Study Objective One… ........................................... 65
5.2 Findings on Customers’ Preference of Islamic Bank Type ...................... 66
5.2.1 Attainment of Study Objective two… ........................................... 66
5.3 Findings on Customers Satisfaction Level ............................................... 67
5.3.1 Attainment of Study Objective Three… ........................................ 67
CHAPTER SIX: SUMMARY, CONCLUSION AND RECOMMENDATION .. 68
6.1 Summary of Findings ............................................................................... 68
6.2 Conclusion ................................................................................................ 69
6.3 Recommendation ...................................................................................... 69
6.4 Suggestion for Future Research ................................................................ 70
BIBLIOGRAPHY ...................................................................................................... 71
APPENDICES ............................................................................................................ 78
APPENDIX 1: Research Quesionnaire ............................................................ 78
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LIST OF TABLES
Table No. Page No.
4.1 Profile of Respondents 38
4.2 Low service charges 39
4.3 Fast and efficient service 40
4.4 Bank reputation 40
4.5 Recommendation from friends and relatives 41
4.6 Customised services 41
4.7 Bank staff friendliness 42
4.8 Bank parking facilities 42
4.9 Bank location 43
4.10 Bank Islamic law compliance 43
4.11 Bank profitability 44
4.12 Easiness of financing facilities 44
4.13 Availability of branches across Nigeria 45
4.14 Availability of mobile banking facility 45
4.15
Rank of the factors influencing the selection of retail
Islamic 46
4.16 Selection criteria regression analysis 48
4.17 Complete segregation of Islamic funds 49
4.18 Support from conventional operations 49
4.19
Islamic bank customers complete confidence in Sharī´ah
compliance of all banking activities 50
4.20 Significant independence from conventional operations 51
4.21 Active in zakat and charity contribution 51
xii
List of Tables continues
4.22 Support for social development and related causes 52
4.23 Chi square test table: test statistics 52
4.24 Ethical and professional dealings with customer 53
4.25 Product knowledge 54
4.26 Quick handling of problem 55
4.27 Bank services consistent with my religious values 55
4.28 The bank services customise to my needs 56
4.29 The bank delivers its promise 56
4.30 Easiness of ATM services 57
4.31 Timely response to my banking needs 58
4.32 Attractive financing rate 58
4.33 Attractive Investment rate 59
4.34 Overall satisfaction levels with the retail Islamic banks 60
4.35 Ranking of the factors influencing satisfaction 61
4.36 customers’ satisfaction regression 63
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LIST OF FIGURES
Figure No. Page No.
1.1 Framework of factors for the Selection of an Islamic bank 24
1.2 Frame for customers’ preference of bank type 25
1.3 Framework for customers’ satisfaction 28
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LIST OF ABBREVIATIONS
Freq Frequency
n.d. no date
No. Number
p.b.u.h peace be upon him
S/agree strongly agree
S/disagree strongly disagree
S.W.T SubhanahuWa’ta’ala
Vol. Volume
1
CHAPTER ONE:
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Islamic banking based on the principles of Sharī´ah is a worldwide phenomenon
prevalent in several jurisdictions and countries. According to Solé, (2007), Islamic
banking stretched out not only in Muslim majority nations but also in Muslim
minority countries such as the United Kingdom or Japan.
According to the Ernst &Young World Islamic Banking Competitiveness
Report 2013-14, African nations like Uganda, Malawi, and Kenya etc are more and
more making efforts to establish Islamic banking.
Among the countries in Africa that recently started Islamic banking is
Nigeria.“Central Bank of Nigeria (CBN) Regulation on the Scope of Banking
Activities Ancillary matters, No3, 2010”(CBN,2010,p.1), which took effect on the
15th day of November 2010, issued by the CBN introduced a new banking model
under which Nigeria permitted the setting up of institutions providing non-interest
financial services base on the values of the Sharī´ah and subsequently it issued
guidelines for the conduct and administration of institutions providing non-interest
financial services.
On the basis of the above, the CBN licensed the Jaiz bank plc, a full-fledge
Islamic bank and two Islamic banking windows under Stanbic IBTC bank plc and
Sterling bank plc, parent conventional banks. By convention, a full-fledge Islamic
bank and an Islamic window are similar in terms of products and services but differ in
banking status.
2
The three licensed Islamic financial institutions have since started operations
and one part of Nigeria where these institutions have located their operations is the
Northeast zone of Nigeria.
The Northeast Nigeria comprises of six states of Adamawa, Bauchi, Borno,
Gombe, Taraba and Yobe. The zone has strategic commercial significance because it
shares international borders with the Republics of Cameroon, Chad, and Niger and
evidences exist that there are cross border trade and commercial activities in the zone.
Beside the zone was a part of the early established famous trans-trade route and still
having some traces of prominence.
With the presence of these Islamic financial institutions in the zone, customers
desirous of Islamic banking in the zone can now choose to operate with either a full-
fledge Islamic bank or Islamic bank windows of parent conventional bank.
To be competitive therefore these Islamic financial institutions need to
understand customers’ preferences to assist them in designing marketing policies and
strategies in order to retain existing customers and attract new ones. Kaynak, and
Kucukemiiroglu (1992) as cited by Aregbeyen (2011) have asserted that knowing
customers’ bank preference criteria is useful in getting the proper marketing strategies
that would attract new customers.
This study is thus conceived to explore the criteria upon which customers
choose providers of Islamic banking products and services and the findings is
envisaged to be useful in designing marketing policies and strategies by the Islamic
financial institutions in Nigeria.
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1.2 PROBLEM STATEMENT
In 2010, CBN introduced a new banking model which permitted the establishment of
non-interest banking on the basis of the Sharī´ah in Nigeria. Between 2011 and 2013,
the CBN licensed the Jaiz bank plc, a full-fledge Islamic bank and stanbic IBTC bank
plc and sterling bank plc Islamic bank windows. These banks now compete to attract
and retain customers but studies on customers’ preferences and selection of retail
Islamic banks in Nigeria that would assist the Islamic banks in their marketing
policies and strategies in Nigeria are scarce and the few ones done were limited in
their coverage. Chikezie and Nwukamaka (2014) studied on Islamic banking in
Southeast Nigeria but only conventional banks with Islamic windows operate in the
area .Abubakar,(2014) studied on customers patronage of the Jaiz bank, the only full-
fledge Islamic bank in Nigeria. This study is thus conceived to fill the apparent
existing gap by focusing on customers of the Islamic bank windows and the full-
fledge bank.
1.3 OBJECTIVE OF THE STUDY
1. To explore the pertinent underlying factors affecting customers
preferences and selection process of retail Islamic banks in Northeast
Nigeria.
2. To determine whether institutional type influence customers’ preference
for retail Islamic banks in Northeast Nigeria.
3. To assess the extent of customers satisfaction in the Northeast Nigeria of
the products and services offered by the retail Islamic banks.
4
1.4 RESEARCH QUESTIONS
This study seeks to answer the following questions:
1. What are the most important factors influencing customers’ preferences
for retail Islamic banks in Nigeria?
2. Are customers indifferent in preference and selection criteria for full-
fledging Islamic bank versus Islamic windows of parent-conventional
banks in Nigeria?
3. What is the level of satisfaction of the customers of the Islamic banks’
products and services in Nigeria?
1.5 LIMITATIONS OF THE STUDY
Northeast Nigeria is facing security challenges due to insurgence which renders
travelling difficult and unsafe across the zone. This limits the data collection process
by making it impossible to visit all the six states of the zone. Data collection was
limited to four states namely, Bauchi, Borno, Gombe, and Yobe states. Also, The
sample size for study was limited to 120 account holders and this is due to the fact the
Islamic banks in Nigeria began operations between 2012 and 2013 and thus the
number of account holders of these banks was envisaged to be small. Beside most of
the Islamic bank branches are mostly found in the state capitals and were also newly
opened at the time data of collection.
5
1.6 DELIMITATIONS OF THE STUDY
Nigeria is composed of thirty six states and divided in to six geopolitical zones. This
study is limited to the Northeast geopolitical zone which comprises states of
Adamawa, Bauchi, Borno, Gombe, Taraba, and Yobe.
Also the study has limited its sample selection to only Islamic banks customers
of Bauchi, Borno, Gombe, and Yobe states due to the insecurity in the study.
1.7 THE IMPORTANCE OF THE STUDY
Islamic banks need to study and understand customers’ preferences for Islamic
financial service providers in order to design marketing policies and strategies so as to
attract new customers and retain old ones as well. Evidences from studies have shown
that beyond religious reasons there are other reasons influencing customers’
preferences for Islamic banks.
The new Islamic banks in Nigeria compete to win customers’ patronage and
therefore to be competitive, they need to understand Nigerian customers’ preferences
and selection of Islamic financial institutions and their products and services.
Study on existing literature indicates that studies on customers’ preferences for
retail Islamic banks in Nigeria are scarce and the few ones done did not cover
customers of the full-fledge Islamic bank and that of the Islamic windows. Thus the
importance of this study can be seen from two aspects: firstly, theoretical
contributions by filling an important gap and therefore adding to body of knowledge
and secondly the results can facilitate the Islamic banks in designing marketing
policies and strategies in order to attract and retain customers.
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1.8 DEFINITION OF KEY CONCEPTS AND TERMS USED IN THE
STUDY
1. Islamic bank: Banking institutions that operate in line with the principles
of Sharī´ah. They operate on the basis of profit sharing, contract of
exchange and prohibition of interest receiving and payment, uncertainty in
transaction, gambling and other prohibited things.
2. ISRA (2012) defined Sharī´ah as the entirety of Islamic teachings and
system, which was given away to Prophet Muhammad (p.b.u.h.) recorded
in the Qurʼ ān as well as deductible from the Prophet’s divinely-guided
way of life call the sunnah. The Qurʼ ān is the word of God while the
sunnah is the sayings, conduct and inferred approvals of Prophet
Muhammad (p.b.u.h.).
3. Full-fledge Islamic bank: This refers to an independent and standalone
corporate bank that is established to conduct Islamic banking business.
4. Islamic window of a parent conventional bank: This refers to a window
under a conventional bank through which Islamic banking products and
services are provided.
5. Financial Services: These are services that pertains individuals, bodies and
their finances.
6. Customer satisfaction: Kortler, Keller, Ang, Leong and Tan (2012) said
satisfaction is one’s judgment of pleasure or displeasure ensuing from
comparing a product seems performance (or result) in relation to one’s
anticipation. If the performance falls below expectation, one is
7
dissatisfied. If the performance equals the anticipation, one is satisfied. If
the performance passes expectations, one is highly satisfied or contented.
7. Customer preference: According to Fife and Schaw (2007), as cited by
Abdullah, Abdurrahman and Hamali (2013) stated that customer
preference is about selections among valued options with acceptance
showing willingness to allow the status-quo.
8. Service quality: Othman and Owen (2002) as quoted by Badara,Nik Mat,
Mujtaba, Al-Rfai, Badara and Abubakar (2013) defined service quality as
the result of the customers general assessment of the differences between
service anticipations and the real service performance.
1.9 BRIEF ON NIGERIA AND THE NORTHEAST NIGERIA
Nigeria is situated in West Africa, sub region of Africa and is sharing borders with
republics of Benin in the west, Chad and Cameroon in the east and Niger in the North.
The country’s coast in the south lies on the Gulf of Guinea on the Atlantic Ocean. The
country derived its name Nigeria from the River Niger which flows through the
country.
Historical sources indicated that Nigeria became a British colony in 1861 and
later divided to two British protectorates in 1898. In 1914 the protectorates were
merged to structure the protectorate of Nigeria. A federal system of government was
instituted in 1954 and the protectorate of Nigeria gained its independence in 1960.
Presently, Nigeria is a federal constitutional republic consisting of 36(thirty six) states,
8
its federal capital territory, Abuja and 774(seven hundred and seventy four) local
government areas.
United Nations Economic Commission for Africa (2015) indicated that Nigeria
has a population of 183.5million people as at 2015, and according to Ploch (2013), the
Muslims amount to 50% of the country’s population, and Christians and indigenous
beliefs amount to 40% and10% of the population respectively. Petroleum and
petroleum products account for 95% of Nigeria’s export and according to Adewale
(2010), the Nigeria is the biggest oil producer in Africa.
Nigeria’s financial environment comprises of the banking sector, insurance
sector, the capital and money markets, the development finance institutions, the
pensions and fund management sector, the informal financial sector and the regulatory
authorities. The country’s banking sector has been automated with automated teller
machines, internet and mobile banking services as avenues for conducting banking
services and transaction. Nigeria has recently introduced Islamic banking in to its
financial system.
The Northeast Nigeria: Prior to its present status as a geopolitical zone, the
Northeast was a state in Nigeria from 1967 to 1976 and due to series of state creations
by the Federal Government of the country, the Northeast was divided in to six(6)
states consisting of Adamawa, Bauchi, Borno,Gombe,Taraba and Yobe states.
The Northeast Nigeria occupies a strategic location of commercial importance
due to its sharing of international borders with the republics of Cameroon, Chad and
Niger. Evidences exist of significant cross border trades and other commercial
activities between the zone and the neighbouring countries. Islamic banks have
established their operations in the zone.
9
CHAPTER TWO:
LITERATURE REVIEW
2.1 ISLAMIC BANKING CONCEPT
Al-Jarhi, and Igbal (2001, p.23) as cited by Gait and Worthington (2007) have defined
Islamic bank as follows:
An Islamic bank is a deposit-taking banking institution whose scope of
activities includes all currently known banking activities, excluding
borrowing and lending on the basis of interest. On liabilities side, it
mobilises funds on the basis of mudarabah contract. It can also accept
demand deposits which are treated as interest-free loans from the clients
to the bank, and which are guaranteed. On the assets side, it advances
funds on a profit-and-loss sharing or a debt-creating basis, in
accordance with the principles of the Shar’iah. It plays the role of an
investment manager for the owner of time deposits, usually called
investment deposits. In addition, equity holding as well as commodity
and asset trading constitute an integral part of Islamic banking
operations. An Islamic bank shares its net earnings with its depositors in
a way that depends on the size and date-to maturity of each deposit.
Depositors must be informed beforehand of the formula used for sharing
the net earning with the bank.
2.2 SHARĪ‘AH PRINCIPLES AND FEATURES OF ISLAMIC BANKING
Abdul Aziz (2009) stated there are several Sharī ´ah values which are essential for the
functions of Islamic banks.
2.2.1 Principle of Permissibility of Trade and the Prohibition of Riba
One of the fundamental values of the Sharī ´ah which Islamic banks followin their
operations is the permissibility of trade and the ruling out of Riba in all business
transactions. ALLAH (S. W.T.) says “But Allah has permitted trade and Has
prohibited riba.” Qurʼ ān (Al-Baqarah), 2:275. The sunnah also contains prohibition
10
of riba. Metwally (2006), as cited by Gait and Worthington (2007) provided evidence
for the proscription of riba in the sunnah as follows: The Prophet has fated both the
recipient and provider of usury.
Zaher and Hassan (2001, p.156) stated that “the term Riba is used in the
Sharī´ah in two senses. First is ribal al-nasi’ah, which is the fixing in advance of a
positive return on a loan as a reward for waiting to be repaid. Second, riba al-fadl, is
encountered in a hand-to-hand purchase and sale of commodities. The Sharī´ah
prohibits both forms of riba”.
2.2.2 The Principles of Profit-Sharing and Profit/Loss Sharing
Other Sharīʼ ah values of Islamic banking are the arrangements of profit-sharing and
profit/loss sharing. Zaher and Hassan (2001) stated that while current Islamic banking
is seen to be a new development, its early commencement is being traced to the
practice of mudaraba performed by Prophet Muhammad(p.b.u.h) .Under this
arrangement a party supplies fund to a manager who uses his skills and effort and
manage the fund but they only share the returns of the business while Loss from the
business is borne by the capital supplier and the manager suffers from the loss of his
skill and efforts.
The profit or loss sharing on the other hand is an arrangement involving full
partnership in capital and management, and division of profit and loss and is known as
musharakah.