Benefit of Islamic banking

Chapter 2: literature review

introductions

The literatures of the research relevant to this area of study are explored and the same are organized based on topic of discussion, Performance, Problem, Prospect, and 5 Factors of Selection towards Islamic Banking.

Performance

K.H.Azam Ahamed (2008), explored about the benefit of Islamic banking in his country, which is Sri Lanka. The author found that even the population of Muslim in Sri Lanka being just 8% of the population, a considerable growth is reported in the past few years. This is because of some benefit provided by Islamic banking industry encourages people to step into Islamic Banking. One of the reasons is profit sharing of a financed project. The financier and the beneficiary share the actual or net profit/loss rather than throwing the risk burden only to the entrepreneur. Besides, Islamic financing is not centered only on credit worthiness and ability to repay the loans and interest. The most important thing that Islamic banking system considered is the worthiness and profitability of a project, while the ability to repay the loan is sub-segmented under the profitability. Beside consider the credit worthiness and interest rate, Islamic banks also apply Islamic moral/ethical criteria in their provision of financing. Another important characteristic which forms the basis for the development of Islamic banks is the relationship with depositors. They deal with their customers on investment grounds rather than a pre-determined fixed interest rate. Furthermore Islamic banks eliminate the barrier between those who save and those who invest, and bring them closer to the real market. The limitation of this study is the author did not much discuss about the challenge and problem faced by the Islamic banks in Sri Lanka.

M. Shahid Ebrahim and Tan Kai Joo (1996), examined the light of modern theories of financial intermediation and Islamic financial contracting of Brunei Darussalam. Besides, the authors also examined about the theory of Islamic banking compare with conventional banking. Islamic banking in Brunei Darussalam is successful controlled about 11.5 percent of total deposits among the banking sector (Boot, A. and Thakor, A., 1997). Thus, there is a dire necessity to complement the existing system with capital markets, as a high proportion of the national savings is placed overseas. This study is structured with cover the important roles played by financial intermediary and banks in the economy. The role of FIs can be best explained by the lack of them in an imaginary assumption. Greenbaum and Thakor (1995) classify FIs as performing two main functions which are The Brokerage Function and The Qualitative Asset Transformation (QAT) Function. The brokerage function refers to the information, timeliness and costs savings that FIs provide in the transformation of assets, while Qualitative asset transformation (QAT) provided a better alternative to finding a counterpart for every transaction. On the other hand, the authors differentiate between the Islamic banks and conventional banks in two ways, which are aims at building a socio-economic order based on justice and considers economic activity as a means to an end and not an end in itself, and concerned with the problem of economic development. The authors also discuss a strategic plan of action for Islamic banking for the future, which include Consume most of the current discretionary income and savings, Invest income and savings in the property/real-estate sector, and Invest income overseas. The limitation of the study is there are still have some issues about innovative solutions are lacking, thus it would be unfair to compare the Islamic banking progress to that of established conventional finance.

Hamim S. Ahmad Mokhtar, Naziruddin Abdullah and Syed M. Al-Habshi (2003), investigated the efficiency of the full-fledged Islamic banks, Islamic windows and conventional banks in Malaysia. The author use the Stochastic Frontier Approach to measure the efficiency of Islamic window performs in Malaysia. By using economic and linear programming techniques, the author had the advantage of following noise in the measurement of inefficiency. This approach needs to specify the functional form for production, cost or profit. The author used two concepts for the study, which are technical efficiency (TE), and cost efficiency (CE). The output-oriented measure of TE is a bank's ability to achieve maximum output by given sets of inputs, while the input-oriented TE reflects the degree to which a bank could minimize its input used in the production of given outputs. Cost efficiency (CE) is a measurement of a bank's cost from the best practice bank's cost if both were to produce the same output bundle under the same market conditions (Berger & Mester, 1997; Vander Vennet, 2002). By using the Stochastic Frontier Approach, the author found that the average TE and CE of conventional banks are higher than the Islamic banking system. This is because Islamic banking is still considered at an early development stage. The limitation of the study is the further investigation should be taken in order to enhance the points that authors suggest.

Anjum Siddiqui (2004), studied the widely used Islamic banking contracts, risks of the contract, and then performance of Islamic banking. In this paper the author stated that the saving and investment contracts offered by Islamic banking have a different risk profile than conventional bank due the Islamic prohibited of interest. This cause the number of regulatory issues pertaining to capital adequacy and requirements rose. In this study, the author analyzed various types of Islamic financial contracts and explained it. The author also listed the risks of financial contracts which include credit risk, benchmark risk, liquidity risk, operational risk, legal risk, withdrawal risk, fiduciary risk, and displaced commercial risk. The author used Pakistan as his case studied to study Islamic banking in that country. He found that various performance indicators show that there is evidence that Islamic banks in Pakistan tend to engage in little long-term project financing. With the better risk management and maintained adequate liquidity, the banks able to perform well with respect to the returns on their assets and equity. The limitation of this study is the author does not have enough information and relative performance of Islamic versus conventional banks before he make the substantive conclusion as this kind of research need to examine large scale of banks across various countries.

M. Mansoor Khan and M. Ishaq Bhatti (2007), discussed about paradigm of Islamic banking industry and special features, facts and figures over the recent development of Islamic banking globally. In this paper the author explored and found that Islamic banking and finance industry has been improve tremendously and become the alternative choice to conventional banking system across the globe, especially in the Middle East, South East and South East Asia. There are some reasons about the recent success of Islamic banking and finance, such as worldwide spiraled oil prices, prolonged boom in the Middle Eastern economies, product innovation and sophistication and improve of technology advancement. The success of Islamic banking and finance has been attracted 24 percent of world's Muslim population (over 1.3 billion), and other ethical groups across the globe. The limitation of this study is, the author does not use statistical testing and analysis to figure out the main factors and their actual contributions in making Islamic banking and finance emerge as the fastest growing industry of the global finance. The author just uses the on-going developments in Islamic banking and finance industry as consideration.

M. Raquibuz Zaman and Hormoz Movassaghi (2000), examined the major products and services offered by various Islamic banking institutions (IB) as well as analyzing such institutions' financial performance. The author compares the Islamic banking form the aspect of financial position, products and services of Islamic banking to find out how well the Islamic banking industry performed. The authors stated that Islamic banking should follow the follow conditions, which are profits to be shared must be proportional to the funds contributed to the mudaraba account and these cannot be in lump sums or in guaranteed amounts, the loss to the depositor (contributor of funds) cannot be more than the amount of deposit, and the mudarib does not share in the losses, except for the time and efforts put into the management of the mudaraba finds or in cases of mudarib's negligence. The author also found that a true IBI could not offer long-term CDs on fixed rates, nor could it provide fixed-rate mortgages or installment loans. The ideal rates will vary with the changing business and economic conditions so that neither the depositors nor the borrowers and investors face undue economic hardships from financial transactions. The limitation of this journal is the author using the 1996's information and data to analysis the Islamic banking industry, thus this outdated information may not represented the current position of Islamic banking industry.

M. Suyanto (2005), evaluated the performance of bank Muamalat Indonesia during year 2000-2004. The author conducts the research by using statistical technique and made inter-bank comparisons with conventional banks in Indonesia. The author used accounting ratios to help evaluate the bank's performance. This research is conducted by comparing with a smaller bank- Bank Swadesi, a larger bank- Bank Central Asia, and comparison of BIMB and the 145 commercial banks. Those ratios that used are profitability ratio, liquidity ratio, risk and solvency ratio. The financial ratio that the author calculates does not show any different in performance. However, the Non-Net Interest Margin appears to be higher than conventional banks. Besides, the author also found that the Indonesian experience in Islamic Banking is very difference to those found in Bangladesh. The data on Islamic Bank Bangladesh Limited (IBBL) shows that majority of financing has hovered around in the vicinity of 2% during the bank's 16 years existence. Financing to the agriculture has been minimal. (Hassan, 1999). The limitation of the study is the research result may not apply in our country as some of the regulatory different between Malaysia and Indonesia.

Hassan (1999) examines the Islamic baking principles in theory and its application with case study of Bangladesh. The abundance of short-term funds compared to long -term funds available for lending is a rational response on behalf of banks to solve information a asymmetries prevalent in credit market. In traditional finance literature, it is shown that debt contract (murabaha) is superior to equity contract. However, equity contract can be superior to debt contract in an economy where informational asymmetries resulting from adverse selection and moral hazard are trust given to banking firm, It is naturally expected that as a custodian of trust for the depositors'' deposits, Islamic bank is likely to be more liquid and become more solvent compared to its counterpart conventional banks, Islamic bank management, according to Islamic ethics, is accountable to the depositors in this world and the world hereafter for their failure to keep the trust entrusted upon them. It is, therefore, expected that the liquidity and solvency ratio of the Islamic bank will be higher than conventional banks.

Mariani Abdul Majid, Nor Ghani Md Nor and Fathin Faizah Said (2001), analyzed the prolific competence of Malaysian commercial (Islamic and conventional) banks over the 1993 to 2000. The authors use the stochastic cost frontier approach and categorize the efficiency of Malaysian Islamic and conventional banks. The authors declared that Malaysian Islamic banks have to operate in an increasingly competitive atmosphere due to the response to the ASEAN Free Trade Agreement (AFTA), and response to the general globalization of markets. Regardless of its growth, the share market of the Islamic banking system in Malaysia is somewhat small compared to the size of the overall banking system. This study finds that there is no statistically significant difference in the level of efficiency between Islamic and conventional banks operating in Malaysia based on data from 1993 to 2000. There is also no substantiation to suggest that bank efficiency is a function of ownership status (public/private or foreign/local). The limitation of this study is the author just using the Malaysian top 5 conventional banks to do the analysis.

Kwan and Eisenbeis (1996) used semi-annual data to find the relationship between scale and efficiency for a sample of 254 bank holding companies from 1986 to 1991. To allow for different production technologies for each size class, the banks were grouped into size-based quartile. The method of maximum likelihood was used to estimate the separate cost for each size quartile. The author found that, smaller banking firms on average were found to be less efficient than larger banking firms after controlling for other factors and smaller banking firms tended to show evidence of larger variations in inefficiencies than larger firms do. These findings suggest that on average, large banking firm operates closer to its respective efficient frontier than the small banking firms. Average inefficiency develops to decline over the period 1986 to mid 1990, apparently responding to the intensified competition in banking molded by market and regulatory changes. Persistence of inefficiency rankings suggests that comparatively efficient (inefficient) banking firms tend to stay comparatively efficient (inefficient) over a fairly long period. The limitation of this paper is the analysis only apply on the conventional banking sector and not compare with Islamic banking. Thus the results may not be suitable for my study.

Mendes and Rebelo (1999) study the performance of 221 Portuguese banks in the 1990-1995 periods by using stochastic cost frontier method. During the period under study, they found that increased competition faced by banks did not lead to an enhancement in the overall cost efficiency. The study also found that there is no clear evidence on the existence of a predictable association between size and cost efficiency. By exerting firm control over cost, banks could in fact remain competitive. In a related study Zaim (1995), found that in the mid-eighties, Turkey had succeeded in prodding commercial banks into taking positive measures to enhance technical as well as distribute efficiencies as the financial reform introduced. The study observes that banks in Turkey recorded some improvement in efficiency during the 1980-1990 periods, by comparing performance between the pre and post liberalization era. To show that savings banks reacted to banking deregulation by engaging in efficiency-enhancing merger activities, Lovell and Grifell-Tatje (1997) used Spanish banking data over 1986-1993 periods to analyzed it. At the same time, the commercial banks instead chose to adjust their loan and deposit interest rates as a way of fending off increased competition from savings banks. Savings banks were also found to have a more efficient form of organizational structure compared to the commercial banks. Chang et. al. (1998) found that foreign-owned multinational banks operating in the U.S. were significantly less efficient than their local counterparts. The study used 1984-1989 banking data and transom stochastic cost frontier method to estimate the cost inefficiency scores. In another study, Mester (1993) uses the stochastic econometric cost frontier approach to investigate efficiency of banks operating in the Third Federal Reserve District in the U.S. using 1991-1992 data. Findings from the study suggests that there is less to be gained in terms of cost savings from changing output size or mix than from using inputs more cost efficiently. The limitation of the study is the information gathered is the authors did not take into account about the publics' views, which is vital for the study.

Metwally (1997) compared the performance of 15 conventional banks and 15 interest-free banks from all over the world. In this study, two groups of banks in terms of liquidity, leverage, credit risk, profit and efficiency are tested for structural differences .The study found that interest free banks face more difficulties in attracting deposits in comparison to the conventional banks. This is because the Islamic banking operates with the primitive professional and ethical standards that exclude the Muslims from paying or receiving any kind of interest. However, this does not mean that the revenue generating activities or money raving businesses are not encouraged. Secondly, interest free banks tend to be more conservative in utilizing funds for lending and are disadvantaged in terms of investment opportunities. As a consequence, this bank has higher cash to the deposit ratio in association to conventional banks. However, statistical results suggest that profitability and efficiency differences are not statistically significant between the two types of banks. The limitation of the study is the author comparing the banks around the world will decrease the accuracy of study as each of the countries has different set of rules and regulation.

Abdus Samad & M. Kabir Hassan (1999), examined the profitability performance of Islamic bank in Malaysia (BIMB) and compared 8 conventional banks by using the financial ratios, and community involvement for the period 1984-1997 Those ratios that used are profitability ratio, liquidity ratio, risk and solvency ratio. The study found that the average profit of BIMB is significantly lower than the conventional banks. This is because people are not willing to invest their money into a system that does not provide any interest on investment. Besides, Islamic banks have higher cash to deposits ratio compared to conventional banks. The authors argued that this is to be expected since the investment opportunity set for BIMB in stocks and securities is smaller due to religious constraint. The limitation of the study is 40% to 70% bankers surveyed indicated that lack of knowledgeable bankers in selecting, evaluating and managing profitable project is a significant cause.

Problem

Abdelkader Chachi (2005), analyzed some of the theoretical and empirical issues that need further research and discussion, in order to provide continued support to the practice of Islamic banking. The first issue is about the problem of asymmetric information and the cost involved in reducing it. Next is the problem of moral hazard in Islamic banking. The author also took consideration about adverse selection problem of verifying ex-ante and intention that frequently involve in transaction. The last problem that the author analyzed is the agency costs and the need for monitoring the counterparties' behavior. The author also studied on specific features of profit sharing contracts and compared to debt contracts. In examining the argument that PLS financing is too risky for banks to adopt, the authors found two fallacies in this line of arguments. First, the variability in the rate of return is not the only risk involved in financial contracts. Second, the so called 'fixed return' contracts, like interest based contracts may not in fact yields a fixed return.

Munawar Iqbal, Ausaf Ahmad and Tariqullah Khan (1998), identified the challenges facing Islamic banking to remain viable, to meet the growing competition and to develop and prosper. The author focused the study on the problems and challenges facing Islamic banking in a mixed environment's private corporate sector. They found that Islamic banking is suffered from the lack of institutional support specifically geared to their needs. Besides, the appropriate legal framework and supportive policies needed to allow financial institution to operate according to Islamic rules and give room in financial markets for Islamic transactions. The lack of effective supervisory framework is also one the weakness of prevailing system and deserves serious attention. Islamic banking do not deal with interest bearing bonds, therefore their need for equity is higher. Lastly, Islamic bank also lack of short term instruments in which they can profitably invest for short periods. The limitation of the study is the author use email to send the questionnaire to the respondents, and only 60% of respondents reply. Besides, the results of the questionnaire have not been fully analyzed.

Mamun Rashid, M. Kabir Hassan and Abu Umar Faruq Ahmad (2008), examined the quality perception of the customers towards domestic Islamic banks in Bangladesh. In this report the authors found that alongside religion being the rigorous factor for choosing Islamic banking, there are other factors which are significant to the customers when selecting a service provider. The study revealed alongside religion, factors like depositors' desire to achieve highest return, convenient financial transactions system, consistency in service with uniformity, and higher cost-benefit implications were substantial to clients for choosing their intended services .The author recommended that interalia, for strict compliance with Islamic Shariah with emphasis on technological development, forming Centralised Shariah council and integrated social development rather than private status building. Otherwise it would be a matter of concern for banks to amplify their customer's satisfaction.

Hassan, M. K., & Ahmed, M. (2001), studied on Customers' perception and found that it has become an enduring research agenda in banking. Due to higher demand, specialist research should be done to check updates of satisfaction. Previous studies conducted in this area were mainly centered to service quality, customer satisfaction with Islamic financial services, behavior of customers and their perception regarding existing services and policies of Islamic banks, knowledge of Islamic banking in Pakistan, Malaysia, Kuwait, Iran, and Indonesia etc. Among others, Islamic legal and supervisory frameworks, knowledge of Islamic economics were found to be imperative in advancement of Islamic financial system and customer satisfaction in this industry. Additionally, these studies suggested global uniform legal set-up with respect to Islamic Shari`ah to supervise Islamic banks. As Prophet Muhammad pbuh) said that Muslims must accomplish anything in the most scientific and artistic way (Owen and Othman, 2001), it is vital to consider quality aspects to enhance customer management in Islamic banking.

Owen, L. and Othman, A. Q. (2001), conducted a study regarding the development of service quality and perception of the customers towards Islamic banking. They surveyed the customers of KuwaitFinance House (KFH) and tested famous service quality model, 'CARTER.' Cartermodel has six quality and perception dimensions, explicitly, 'C' for Compliance, 'A' for Assurance, 'R' for Reliability, 'T' for Tangibles, 'E' for Empathy and 'R' for Responsiveness. Compliance had five variables and the outcome is to check the ability to fulfill Islamic Law and to operate under the principles of Islamic banking and economy. Assurance had five variables regarding knowledge and ability of the employees in satisfying the customer demand. Reliability included four variables to ensure the dependability on bank and accuracy of its services. Tangibles had five variables which explained the physical facilities and presentation of services. Empathy, which included nine variables, inspects attention of the personnel towards customer satisfaction and lastly, Responsiveness which had another five variablesused to identify the willingness of the bankers/banks to provide prompt services and help customers. The survey was administered among 22 operating branches of KFH using five-poring Likert scale. Factor analysis was done to show the loading/ weights of individual variables within the factors. The analysis did not show any regression results. The recommendations outlined the importance of knowledge building program on customers, training for employees in both generic and specialised format, communicating the customers regarding new service offerings, cost-benefit aspect of services purchased by the customers, positive word of mouth etc. They also argued that to be successful in Islamic banking, it is not only important to be externally (externally refers to tangible benefits of banking services) unsullied rather it is persistent being acquiescent internally (internally means compliance to Shari`ah and avoiding riba). The authors highlighted the importance of SERVQUAL, SERVPERF models.

Keuhn, K. and Bley, J. (2004), studied the perception and knowledge among students. They tested hypotheses on lack of basic Islamic product knowledge, aspect of religion, cultural differences etc. and found interesting results. Due to language barriers it prohibits students to learn Islamic financial system. Nevertheless, the study was mainly concentrated towards having an adequate marketing and education policy on Islamic banking and economics.

Prospect

James S (2008), examined the prospect of Islamic banking in Malaysia. The local Islamic banking and Takaful industry has made steady progress since the establishment of the first Islamic bank in 1983 and the formation of the first Islamic insurance company or takaful in 1984.the author stated that at the end of 2000, the share of Islamic banking, deposit and financing are rising. The delivery channels have also improved significantly as there are now more than 2,200 branches of Islamic banks and IBS banks offering Islamic banking products and services. In addition, the capital market has seen the rapid growth of Islamic debt and equity markets. Apart from its growing share, the prospects of Islamic banking are also bright with the flush of petroleum money. The limitation of this study is the author is using his own opinion and do not made a big scale of data collection from public to support his opinion.

Sudin Haron and KuMajdi Yamirudeng (2003), studied on the prospects and challenges of Islamic banking in Thailand with the objective to elaborate in the detail those challenges and provide remedial solution. The author discussed that Thailand Islamic banking sector is influenced by Malaysia Islamic banking system and provide an overview of the total banking system and the development of the Islamic banking system in Thailand. The author is expected that expected that Islamic financial institutions in Thailand are able to provide banking products and services not only to Muslims but also to non-Muslim customers. It is the hope of the government that by allowing Islamic banks to operate in Thailand, they would be able to fulfill the following objectives: which are 1) to meet the banking and credit needs for Muslim population in Thailand in conformity with Shariah. 2) To cultivate savings habit among the Thai Muslims, particularly for pilgrimage purposes. 3) To supply low cost funds for entrepreneurs who wish to undertake investment projects especially in the southern border provinces. 4) To attract savings and investments from other Muslim countries. 5) To encourage non-Islamic financial institutions to participate in the Islamic banking sector. Since the Islamic banking in Thailand is relatively new, thus it faced many challenge. Those challenges include economic region, public acceptance, rules and regulations, meeting public demand and infrastructure. As a new market player, Islamic bank faces limited investment opportunities. The government must also play an important role in providing a conducive environment for the Islamic banks to operate. The limitation of the study is the author did not talk much about the prospect of Islamic banking in Thailand.

Dr Abdullah Mohammed Seidu (2008), studied on the prospect of Islamic finance in Australia. The author stated that Australia has a stable economy and political situation, thus it would become a hub in Islamic finance for the region over the next 10 to 20 years. A major part of the Islamic finance market serves the Australian Muslim community with more clients and that there is larger potential, also presently, they offer services to nonresident Muslims in other countries who search for investment opportunities. The author also acknowledge that Islamic banking is the largest growing sector in the global banking world, adding that it will be big in Australia, because of his strong belief that it has a real demand .Speaking with confidence, he emphasizes that within five years' Australia would witness the operation of at least one Islamic bank, because of the apparent demand for it. The author also reiterates the growth potential for Islamic finance in Australia, basing it on a number of factors such as the existence of a large number of Muslim communities in addition to the interest of other overseas Muslims, the overwhelming interest by many conventional banks together with the attraction of a number of Islamic banks. On the same note, another industry expert asserts that Australia is making small inroads into this global fast-growing Islamic finance sector with the world's second-largest Islamic financial institution - Kuwait Finance House - setting up a base in Melbourne, says lawyer, Mohamed Ridza, a leading consultant on Islamic finance in Malaysia and managing partner of Mohamed Ridza & Co. The bright and positive prospects of Islamic finance in Australia continue to manifest as preparations are in advance by some Australia universities to offer courses in this field. The limitation of the study the author only concentrates his study on a selective area in Australia. Habibullah Khan & Omar K. M. R. Bashar (2008),

Factors of Selection towards Islamic Banking

Asyraf Wajdi Dusuki and Nurdianawati Irwani Abdullah (2006), examined the main factors that motivate customer to select Islamic bank then conventional banking. The authors collect the data by involving a sample of 750 respondents around Malaysia and using Friedman Test to explore the customer understanding of the banking criteria. In this study, the author found that the most important factor people select Islamic banking is the Islamic financial reputation and quality service offered by the bank. The other factors perceived to be important are good social responsibility practices, convenience and product price. The authors also stated that Islamic banking can no longer depend on marketing strategy of attracting pious and religious customer who might only concern about Islamic of financial product. Besides, the other issue need to be taken consideration is the need to intensify public education and awareness towards the distinctive characteristics of Islamic banks and how it may profitably suit the interest of customers in the financial dealings. This research show that Islamic banks have a huge potential to attract people and able to market various segment of customer who concerned with the legitimacy of the facility from Islamic point of view. Thus the consumer education programs play a vital rule to increase the level of consumer awareness about the specification of Islamic banking. The limitation of the study is the authors just do the research in four main regions in Malaysia.

Ahasanul Haque, Jamil Osman and Ahmad Zaki Hj Ismail (2002), analyzed the factor influence selection of Islamic banking in Malaysia. The author determined the customer satisfaction as the heart of the research. The key concepts and elements of satisfaction provide a template by which information can be gathered about what does and what does not work. Customer satisfaction often depends on the quality of product or service offering. In the context of services, some describe customer satisfaction as an antecedent of service quality (Bitner, M.J., 1990). This study tries to identify the consumer perception about the Islamic banking and the relationship among the affective factors. Quality of services, confidence in bank, social and religious perspective and availability of services are the main factors affecting the customer satisfaction. At the end of the research, the author found that Customer perception and satisfaction can be considered as the key contrast to bank for overall performance. The limitation of this study is the author use the convenient sampling method to collect the data and questionnaire, thus it cannot be able to gather a comprehensive sample of population. Besides, this study also not mentions relationship between the customers' perception and some other very important factors.

Ismah Osman, Husniyati Ali, Azinah Zainuddin, Wan Edura Wan Rashid and Kamaruzaman Juffof (2008), identified the relative significance to selection criteria in deciding a bank that has an Islamic banking system by adapting CARTER model and investigate the service quality and customer satisfaction between the full pledged Islamic banking and conventional banks that offering Islamic banking products and services. Islamic banking and finance has contributed to the growth of Malaysian economy since 1983, and this growth is expected to continue because various new players are joining to this Islamic banking sector. The customer perception toward Islamic banking is very important in term of the quality of service and their satisfaction. In this research, the authors found that the compliance to Islamic principles is perceived as the most significant criteria. The study also revealed that people do not much correspond with Islamic financial institutions which are offered free interest loan as the mean observed is lowest. The authors concluded that the full pledged Islamic banks need to ensure their service quality as this will entail customer satisfaction and customer loyalty. The limitation of the study is the researchers only compare the full pledged Islamic banks with conventional banks that offer Islamic banking services and products, while the conventional banks are not included in the research.

Saad A. Metawa and Mohammed Almossawi (1998), examined about the factors of selection on Islamic bank in Bahrain. This study is designed to identify the profile and banking habits of Islamic bank customers as well as their awareness, usage, perceived importance and degree of satisfaction with the products and services that provided by two main Islamic banks in Bahrain. This research conducted by collected a total amount of 300 customers that well educated and have maintained their current banking relationship with the Islamic banks. The most important reason to choose Islamic banking is the perceivable of Islamic principles. The next reason is reward extended by the banks, followed by influence of family and friends, and convenient location. On the other hand, the author also found that socio-demographic factors such as age, income and education were important criteria in bank selection. The limitation of this study is the author only select two Islamic banks' customer in Bahrain, which is Bahrain Islamic Bank and Faisal Islamic Bank of Bahrain to do the research. Thus the outcome that the author gets may not sufficient. There are two limitation of this study. The first is there were only two Islamic banks in Bahrain, which are Bahrain Islamic Bank and Faisal Islamic Bank. Thus the generalization of the findings should consider carefully. Next limitation concerned about the nature of the measures used, which all based upon the perceptions of the participating customers. So the inaccuracies of misinterpretation to certain responses do exist.

Norafifah Ahmad & Sudin Haron (2001), studied about the perceptions of Malaysian corporate customers towards Islamic banking products and services. The authors do a research among the persons responsible for the financial affairs of the companies listed in the Kuala Lumpur Stock Exchange. In the research, the author found that Islamic banking products were not popular among Malaysian corporate customers. Besides, the lack of knowledge about Islamic banking also one of the reason people not to patronize Islamic banking. The most important factors to choose Islamic banking among the respondents is the cost and benefits that can get from Islamic banking to the company. The limitation of the study is the authors only choose the respondents among the persons responsible for the financial affairs of the companies.

Rosenblatt, J., Laroche, M., Hochstein, A., Mctavish, R., and Sheahan, M. (1988), sampled 423 Canadian corporate treasury personnel in their study to determine the responsible person in selecting bank for their organization, factors attributed to the selection of the bank, and perceptions of these personnel on the bank's service quality. They found that almost half of these corporate treasurers were solely responsible in the selection of the bank. The two factors that influenced their decision-making were banks with better branching networks and which offer quality services. Half of the respondents in this survey also preferred the bank to assign special officer who had the most knowledge about the customers' business operations. The corporate treasurers were also more concerned about quality products and services than innovative products. They also were not keen on the concept of "one-stop banking center".

Sudin Haron, Norafifah Ahmad and Sandra L. Planisek (1994), studied about the selection criteria used by Muslims and non-Muslims in a dual banking environment. The researchers also determined about the differences between Muslims and non-Muslims relating to factors which influence their selection decision. In addition, this paper also designed to determine the perceived usefulness of services offered by the commercial banks. The author found that the most important factors that Muslim in Malaysia to select the services of Islamic bank are fast and efficient service, the speed of transaction, and friendly bank personnel and reputation and image of bank. In this study, the author also found was the potentiality of individual customers in patronizing an Islamic bank when they had knowledge of this new system. 80 per cent of Muslim and 53 percent of non-Muslim respondents indicated that they would consider establishing a relationship with an Islamic bank if they had substantial understanding of its operations. Another interesting finding from this study is that both Muslims and non-Muslims value their time highly and expect their banking transactions to be completed as quickly as possible. Another important issue which requires attention is the way bank personnel handle their customers, which definitely involves quality of service. The limitation of the study is the analyses were conducted among the mature people from the working environment and did not include mature people who are less educated or those who never assess the Internet.

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