Do Customers Patronize Islamic Banks for Shari’a Compliance?

Abstract

Islamic finance has become a vital part of the global financial system with its tremendous growth in assets (Khan and Bhatti, 2008) and resilience to the recent financial meltdown due to its conservative investment approach (Yeates, 2008). However, it is considered as a stone-age industry because of its lack of competitiveness with the conventional banking institutions (El Baltaji, 2010). Thus, one can argue that Islamic banks rely on Shari’a compliance as their core competence and thereby ignore the provision of top-notch products and services to their customers. Some researchers even lament the current form of Islamic banking and blame Islamic Financial Institutions (IFIs) for charging a Shari’a arbitrage premium for their inefficient and costly banking products (El-Gamal, 2005; El-Gamal, 2006). A more recent study has even suggested that Islamic-minded customers are even inclined to sacrifice some of the conventional banking needs for the sake of having access to Shari’a-compliant services (Lee and Ullah, 2011). The matter of fact, however, is that Islamic bank customers have to meet their banking needs in addition to Shari’a compliance. Customers, thus, would happily patronize Islamic banks that are competitive with conventional banking institutions.