Intact episodic memory requires the ability to make associations between the contextual features of an event, referred to as contextual binding. Binding processes combine different contextual elements into a complete memory representation. It has been proposed that binding errors during the encoding process are responsible for the episodic memory impairments reported in schizophrenia. Since the hippocampus is critical for contextual binding and episodic memory, it was hypothesized that patients with schizophrenia would show a deficit in information processing in the hippocampus, measured with functional magnetic resonance imaging (fMRI). In the current experiment, 21 patients with schizophrenia and 22 healthy control participants were scanned while being tested on navigating in a virtual town (i.e. find the grocery store from the school), a task that was shown to be critically dependent on the hippocampus. Between-group comparisons revealed significantly less activation among patients relative to controls in the left middle frontal gyrus, and right and left hippocampi. We propose that the context and the content are not appropriately linked, therefore affecting the formation of a cognitive map representation in the patient group and eliciting a contextual binding deficit.