FACTORS AFFECTING ADOPTION OF ISLAMIC BANKING SERVICES .
http://www.ijssit.comFACTORS AFFECTING ADOPTION OF ISLAMIC BANKING SERVICES AMONGBANKING CONSUMERS IN KENYA1*Patrick Cheruiyot MutaiPhD Finance (Student), Jomo Kenyatta University of Agriculture and Technologypatmutai@gmail.com2**Professor Gregory NamusongeJomo Kenyatta University of Agriculture and Technologygnamusonge@@jkuat.ac.ke3***Professor Maurice SakwaJomo Kenyatta University of Agriculture and Technologymmsakwa@gmail.comAbstractBanking industry is becoming more competitive these days. As a result of this Commercial Banks in Kenyahave to develop relevant products to meet the needs of the clients who are still not served by the CommercialBanks that offer Islamic banking products and other Commercial Banks that do not offer Shariah Compliantproducts. Therefore they have to provide the best avenues through which the untapped market may be reached.The fact that most Commercial Banks in Kenya survive in the market with very few products and almost withthe same features may suggest a problem in product development. The project entailed the concept of newproduct development hence adoption of Islamic banking the objectives of the study were to determine theconsumers’ level of awareness on Islamic banking services. To determine customer attitude and behavioraffecting adoption of Islamic banking service. To determine customer values and beliefs influencing theadoption of Islamic banking services. To determine the level of complexity in Islamic banking services. Theresults show values and beliefs were the biggest impediments towards adoptions of Islamic banking hence thestudy recommended for extensive user awareness of the products.Keywords: conventional banking, islamic banking services, banking consumersINTRODUCTIONThe Commercial Banks and Mortgage FinanceInstitutions are licensed and regulated in pursuantto the provisions of the Banking Act and theRegulations and Prudential Guidelines issued thereunder. They are the dominant players in the Kenyan Cheruiyot, Namusonge, SakwaBanking system and closer attention is paid to themwhile conducting off-site and on-site surveillanceto ensure that they are in compliance with the lawsand regulations (CBK, 2010).As at 31st December 2010, the banking sectorcomprised of the Central Bank of Kenya, as the2747
International Journal of Social Sciences and Information TechnologyISSN 2412-0294Vol IV Issue II, February 2018regulatory authority, 44 banking institutions (43commercial banks and 1 mortgage financecompany), 2 representative offices of foreignbanks, 5 Deposit-Taking Microfinance Institutions(DTMs) and 126 Forex Bureaus. 31 of the bankinginstitutions are locally owned while 13 are foreignowned as shown in chart 1. The locally ownedfinancial institutions comprise of 3 banks withpublic shareholding, 27 privately ownedcommercial banks, 1 mortgage finance company(MFC) while 5 DTMs and 126 forex bureaus areprivately owned. The foreign owned financialinstitutions comprise of 9 locally incorporatedforeign banks and 4 branches of foreignincorporated banks (CBK, 2010).Overview of Islamic BankingThe emergence of Islamic banking system hascreated a new dimension to the current economicmodels (Fazlan et al., 2007). Widely known asIslamic banks, these interest-free institutions areorganized financial intermediaries, which operatein accordance with Islamic law (Shariah Law)(Iqbal & Mirakhor, 2007; Khabir & Lewis, 2007).The term “Islamic Banking” is defined as theconduct of banking operations in consonance withIslamic teachings (Mirakhor, 2000; Haque et al.,2007). The main principles of Islamic bankingactivities comprise of prohibition of interest (riba)in all forms of transactions undertaking businessand trade activities, based on, fair and legitimateprofit (Mirakhor, 2000; Haque et al., 2007). It isone of the most rapidly growing segments of theglobal finance industry, at an estimated growth of15-20 percent per annum (Haque et al., 2007).Starting with Dubai Islamic Bank in 1975, thenumber of Islamic financial institutions worldwidenow exceeds 300 located in 75 countries (ElQorchi, 2005). Islamic banking services provideindirect competition to the services offered byconventional banks.The Islamic banking system is gaining recognitionworldwide. Many international conventional bankshave started to open branches which operate in Cheruiyot, Namusonge, Sakwaaccordance with Shariah principles. The Islamicbanking system is expected to face strongcompetition not only from the Islamic banks butalso from well established conventional banks thatoffer Islamic services (Naser and Moutinho, 1997).Although the Islamic banking system is differentfrom the conventional banking system, there aresome similarities between the two. For instance, anIslamic bank conducts its activities in accordance toShariah principles that strictly prohibit anypayment or receipt of interest. However, the Islamicbanks can also offer services which are similar tothose offered by conventional banks. Whencompetition intensifies and banks start to offersimilar services, customer’s satisfaction caninfluence the performance of an Islamic bank anddetermine its competitiveness and success (Naser,et al., 1999).The most important difference of Islamic bankingfrom conventional banking is the prohibition ofinterest or usury (riba) in all forms of transaction,and promoting profit and loss sharing (PLS) as analternative to Riba. Riba originally Meant “increaseand growth’ as defined in the Quran. Increasemeans the increase over capital or nominal amount,the increase being either large or small. Accordingto Islamic law, Riba technically refers to thepremium that must be paid by the borrower to thelender along with principal amount as a conditionfor an extention in its maturity (Zaheed, et al.,1994). The main sources of Shariah are the HolyQuran, Hadith, Sunna, Ijma, Qiyas and Ijtihad.Principles of Islamic financeThe prohibition of Riba (interest or usury) and theremoval of debt-based financing; second is Ghararwhich is a type of trading that is also prohibited inIslam which according to El Gamal (2001), means“trading in risk”. Gharar occurs when the purchaserdoes not know what has been bought and the sellerdoes not know what has been sold. In other words,trading should be clear by stating in a contract theexisting actual object(s) to be sold, with a price and2748
International Journal of Social Sciences and Information TechnologyISSN 2412-0294Vol IV Issue II, February 2018time to eliminate confusion and uncertaintybetween the buyers and the sellers.Thirdly, Maysir, which is speculation, betting,gambling or taking heavy chances. Maysir isforbidden in Islam because it contains ambiguityand does not guarantee returns for beaters. Risksharing where the provider of financial funds andthe entrepreneur share business risk in return for apre-determined share of profit and losses;desirability of materiality, a financial transactionthat is a direct or indirect link to a real economictransaction; and the Consideration of justice, wherea financial transaction should not lead to theexploitation of any party to the transaction. Theabove prohibitions and recommendations manifestthemselves as the following commercial productsand services offered by Islamic financialinstitutions:Mudharabah (Capital financing):A lendingcontract and has two forms: one tier and two-tier.Both forms involve two parties: one providinglabour (borrower) and the other providing capital(bank) at a predetermined share of risk and return(Hassan & Zaher, 2001). The two-tier Mudarabahworks as a joint stock company, whereby the bank,with shareholders, invests in the fund for thepurpose of lending it out to entrepreneurs. The rateof return is agreed on after expenses have beendeducted. On the other hand, the one-tierMudarabah is a contract between the bank and themoney borrower, to provide capital for a specificproject. The difference between the two-tier andone-tier system, is that the one-tier Mudarabah onlyincludes the bank and an investor. However, in atwo-tier system, there is the bank, an investor and amoney borrower and this works as a stockcompany.Musharakah (Partnerships): Musharakah, similar toMudarabah, is a financial contract between two ormany parties to establish a commercial enterprisebased on capital and labour contribute. The profitand loss is shared at an agreed proportion accordingto amount of contribution (Hassan and Zaher, Cheruiyot, Namusonge, Sakwa2001). For example, if an entrepreneur had fiftypercent of the capital for an investment in project Xbut needs more capital to continue, the bank thenmay fund the other fifty percent with the agreementof sharing profit and loss at a predetermined rate ofreturn.Murabaha (Cost plus profit): refers to a sale of agood or property with an agreed profit against adeferred or a lump sum payment. There are twocontracts in Murabahah: the first contract isbetween the client and the bank, whereas the secondcontract is between the bank and supplier. Theclient (purchaser) orders a certain commoditythrough the bank, the bank then buys thecommodity from the supplier and sells it to theclient with specified profit whereby the client canmake a lump sum or a deferred payment to thebank.Ijara (leasing) or a lease ending in a purchase. Theleasing purchase is another technique adopted byIslamic banks in financing equipments andinstruments for customers. This system is almostsimilar to the leasing activity provided by theconventional banking. Leasing is a contractbetween the bank and the customer to use particularassets. In this case the bank becomes the lessor andthe customer the lessee who wants to use the assetsand pays rent (Zineldin, 1990). The leasingagreement is based on profit sharing in which thebank buy the movable or immovable property andlease it to one of its client for an agreed sum byinstallments and for a limited period of time into asavings account held with the same bank. rchase), when the ownership of the assets istransferred to the clients after the completion of theleasing contract.Quard E Hassan (Interest free loans): Quard EHassan means an interest-free loan given by theIslamic bank to the needy people in the society. Thepractice of dealing with this sort of investmentdiffers from bank to bank. It is normally given to2749
International Journal of Social Sciences and Information TechnologyISSN 2412-0294Vol IV Issue II, February 2018needy students, small producers, farmers,entrepreneurs and economically deprived segmentsof the society who are not in a position to obtainloan. The main aim of the loan is to help needypeople to be self-sufficient and to raise their incomeand standards of living (Ahmad, 1993; Kazarian,1991; Zineldin, 1990).Aitab (Hire Purchase): According to Al-Zuhayli(2002), Aitab refers to the owning the benefit ofcertain assets for a specific period of time, bypaying an agreed sums of rental, with an agreementthat the owner will transfer the rented asset to thehirer at the end of the agreed period or during theperiod, provided all rental payments or installmentshave been made in entirety. The transfer ofownership is affected by a new and independentcontract, either by giving the asset as a gift, orselling it at an agreed price.Al-Wadiah (Savings Account): Al- Wadiah means‘Trusteeship’, in this case banks act as trustee forits customers. The bank is given the authority bydepositors to use the funds at the banks own risk.This type of deposit is almost similar to a currentAccount” or demand deposit’ except that the bankguarantees its customers the full return of thedeposited fund with any profit. The profit or lossfrom the use of such deposit is shared between thebanks and the depositors at an agreed ratio betweenboth parties (Ahmed, Rahman, & Ahmed, 2006).Al-Wadiah (current Accounts): Islamic banksaccept deposits from customers on current accountsas conventional banks do. Banks use such fundswith the permission of thr customers and at the solerisk of the banks, and hence, the depositors of thistype of account are not entitled to any share in theprofit earned by the bank (Ahmed, et al., 2006; Ali& Sarker, 1996).All the contracts presented are interest-free andrepresent the Islamic bank as an investmentmanager or as an investment deposit. Moreover, ifborrowers default for serious reasons, they are notobligated to repay borrowed money based on profit Cheruiyot, Namusonge, Sakwaand risk sharing. In addition, these lendingcontracts are detailed, with the timing of paymentsand the responsibilities of both parties clearlystated, to prevent confusion and misunderstanding.These contracts lead to a more stable financialsystem that has a favorable impact on both Islamicbanks and overall economic growth according(Iqbal and Molyneux, 2005).On the other hand, every Islamic bank has a Shariahboard that regulates internal operations to maintainconsistency with Islamic rules and principles. Theboard has scholars that approve or disapprovebanking issues (Dar and Presley, 2000). Forexample, issues regarding lending contracts andtheir details need to be followed closely to ensurethat both parties are treated fairly.STATEMENT OF THE PROBLEMIt is nearly half a decade now, ever since Islamicbanking was launched in Kenya, back in 2007,when Gulf African Bank (GAB) and FirstCommunity Bank first commenced its operations(CBK, 2009). And as at December, 2010 the twobanks collectively only commanded a market shareof 0.9% of the banking sector with gross assets ofKsh.16.54bn, net loans and advances of Ksh.9.23bnand deposits of Ksh.13.76bn. The two banks had58,101 deposit accounts and 2,609 loan accounts asat the end of December 2010 (CBK, 2010).This implies that although the number of Kenyanbanking consumers using Islamic banking servicesis growing; a majority still have not adopted thesystem. This paper will therefore review some ofthe factor that affects the adoption of IslamicBanking services in Kenya.SPECIFIC OBJECTIVEi.To determine the consumers’ level ofawareness on Islamic banking services.ii.To determine customer attitude andbehavior affecting adoption of Islamicbanking service.2750
International Journal of Social Sciences and Information TechnologyISSN 2412-0294Vol IV Issue II, February 2018To determine customer values and beliefsinfluencing the adoption of Islamicbanking services.iv.To determine the level of complexity inIslamic banking services.RESEARCH METHODOLOGYThe study adopted a descriptive survey researchdesign. The study was carried out in Nairobi Eastdistrict, specifically Pumwani division. Thedivision is subdivided into five locations: Bahati,Eastleigh North, Eastleigh South, Kamukunji andPumwani. Within Eastleigh, there are three sectionsand these are Section I from Juja Road, Section II,where most of the activities of Eastleigh takesplace, and finally, Section III towards Moi Air base.This study was done in section II because of the factthat the two banks are situated in this area.The target population was all the account holders ofthe two banks which is approximately 65,000 andsince the population is large, the researcher used anequivalent proportion to yield a representativesample. A sample size of 196 will be used to carryout the study. For this study, a self-administeredquestionnaire was designed for the bankingconsumers. Open ended and Closed-endedquestions was used to provide a list of possibleanswers which also include perceptual measuresAwareness of Islamic BankingTotaliii.Series1YesNo13534Fig 1: Awareness of Islamic BankingMost of the respondents, 135 indicated that theywere aware of Islamic Banking, while 34 indicatednot being aware. This indicates that even thoughadoption rate was low, most of the respondentswere still aware of the existence of IslamicBanking.Analysis of the respondent’s awareness on theavailability of Islamic banking servicesthat was be rated on five & three-point’s likert scale.Data collected will be analyzed using statisticalpackage for social sciences (SPSS).RESEARCH FINDINGS AND DISCUSSIONAnalysis on the Awareness of Islamic BankingVarious factors including awareness affectadoption of Islamic banking and the researchersought to find out the level of awareness, sources ofinformation on Islamic Banking,the number ofrespondents using Islamic Banking services, thevarious services used and also the duration of use.On the aspect of awareness of Islamic bankingservices, 64.3 percent of the respondents are aware Cheruiyot, Namusonge, Sakwa2751
International Journal of Social Sciences and Information TechnologyISSN 2412-0294Vol IV Issue II, February 2018of Al-Wadiah savings account, 88 percent of therespondents are aware of Al-Wadiah currentaccount while 40.5 percent of the respondents areaware of Quard Hasan (Interest free loan).However, the awareness for the other five Islamicbanking products is below 20 %. Respondents areleast aware of Ijara (Leasing) because only 9.5percent are aware of this banking product.Analysis of the Respondents with IslamicBanking ServicesThis indicate majority of the Islamic bankingproducts are not commonly known to therespondents even though a higher percentage of therespondents were aware of the existence of Islamicbanking. This also implies that a majority of therespondents are aware of the fundamental conceptsof the Islamic banking systems but are not aware ofthe specific Islamic financial services likeMusharakah, Murabaha, Ijara, Aitab and QuardHasan.Out the 135 respondents who were aware of theIslamic Banking services, only 84 have adoptedIslamic banking services while 51 have not adoptedyet. This indicates that even though most of therespondents are aware, quite a number have notadopted yet.Analysis of the number of customers usingvarious Islamic Banking servicesAnalysis on the Sources of Information aboutIslamic BankingOut of the three sources of information listed,friends and families stood out to be the majorsource of information at 51.9%, the media had25.9% while Islamic Banking promotion was leastwith 22.2%. This indicates that the level ofadvertisement by the banks is still very low andfriends and families being the highest source couldbe misinterpreting information on the variousservices or not giving out all the information on thevarious services. Cheruiyot, Namusonge, SakwaFrom the findings, the result shows that Al-Wadiahcurrent account (76.2 percent) is the most popularand widely accepted compared to the otherproducts. The second popular account is Al-Wadiahsavings account with 52.4 percent. Quard Hasan(Interest free loan) and Murabaha (cost plus profit)is also being adopted and used by the consumers.Only 3.6 percent of respondents have Mudharabah2752
International Journal of Social Sciences and Information TechnologyISSN 2412-0294Vol IV Issue II, February 2018(capital financing). None of the respondentssubscribed to the other services; MUSHARAKAH;IJARA (Leasing) and; AITAB (Hire Purchase).This indicates that Al-Wadiah current and savingsaccount are the most popular services and this couldalso imply that the services had easy and simpleprocess compared to the other services.Some of the Islamic Values such conformity toIslamic doctrines, fairness of service pricing andlack of exploitation may have a positive or anegative impact on adoption of Islamic Banking.This study sought to find out which of the factorshad or is likely to have a great influence onadoption.Duration of Service useMajority of the respondents (40) indicated that theyhave been using the services for less than 1 year; 28respondents between 1-2 Years and 16 respondentsbetween 2-3 years. This indicates that majority oftheService satisfaction levelMajority of the respondents, 81 strongly agreedthat, conformity to Islamic doctrines influenced oris likely to influence their adoption thereforepositively influencing adoption. 17 of therespondents indicated fairness of service pricingand 37 indicated that lack of expl
FACTORS AFFECTING ADOPTION OF ISLAMIC BANKING SERVICES AMONG BANKING CONSUMERS IN KENYA 1* Patrick Cheruiyot Mutai PhD Finance (Student), Jomo Kenyatta University of Agriculture and Technology patmutai@gmail.com 2** Professor Gregory Namusonge Jomo Kenyatta University of Agriculture and Technology gnamusonge@@jkuat.ac.ke 3*** Professor Maurice .
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