Reconciliation or polarization in Islamic bank preference? Socio-political, socio-economic and demographic aspects

Table of contents :
Introduction......Page 1
Overview of the development of Islamic banking in the world......Page 3
Literature review......Page 5
Presentation of survey......Page 6
Reasons for choosing Islamic banks......Page 9
Conclusion......Page 15
References......Page 19

Citation preview

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Reconciliation or polarization in Islamic bank preference? Socio-political, socio-economic and demographic aspects Eskisehir case in Turkey Etem Hakan Ergec

Islamic bank preference

67 Received 10 July 2013 Revised 7 May 2015 9 May 2015 Accepted 26 October 2015

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Istanbul Medeniyet Universty, Eskisehir, Turkey

Bengül Gülümser Kaytanci Anadolu Universitiy, Eskisehir, Turkey, and

Metin Toprak Istanbul University and International University of Sarajevo, Istanbul, Turkey Abstract Purpose – The reasons for Islamic bank preferences have been extensively covered in the literature where religion has been depicted as a strong factor. In the limited number of accounts on this subject in Turkey, it was found that religiosity is a major factor in the selection of Islamic banks. Design/methodology/approach – This study evaluates the findings of a major field work performed in the period between March and May 2011 in Eskisehir with the participation of Islamic bank customers. In the study, a sample of 500 respondents was used and a semi-structured survey was conducted. Findings – According to the findings, religiosity is not the most significant and leading factor in Islamic bank preference; instead, it was found as the fourth most important factor. The study finds that recommendation by friends and relatives is the most significant factor for the people in preferring Islamic banks. The nationalist-conservative people make stronger reference to the religiosity as a factor than the secular-modernist and leftist-social democrat people do. Socioeconomic status is not found as a significant factor in the Islamic bank preference. People in advanced age, men, people with lower income and businessmen/artisan rely on the religiosity in Islamic bank preference as a factor stronger than people from other backgrounds. Practical implications – In conclusion, it could be said that there is a strong relation of substitution between Islamic banks and conventional banks in Turkey and that the Islamic banks play significant role in inclusion of the people staying out of the banking system due to religious concerns and considerations in the financial system. Originality/value – It is very comprehensive, both politically and economically, to handle the issue of Islamic banking. Keywords Interest free banking, Islamic finance, Turkish Islamic economy Paper type Research paper

Introduction More than one-fourth of the world population is Muslim, and Islamic rules are becoming more influential in economic life. At the present time, many conventional banks offer

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Islamic banking products and services. Islamic banking was first introduced in 1985 in Turkey; their activities have, over the time, gained further popularity. Currently, Islamic banks constitute 7 per cent of the banking system. There are a growing number of analyses suggesting that conservatism is on the rise in Turkey in the economic and political fields over the past decade. This study analyzes the Islamic banking customers in terms of sociopolitical identity, socioeconomic status, income, profession and other demographic aspects and discusses whether there is polarization or consensus between the conventional banks and Islamic banks. Islamic faith prohibits interest and interest-based transactions. Money is not a tradable item by which users are allowed to make profit. Instead, it only serves as a device or mode of exchange. Interest-based revenue out of monetary activities is banned under Islamic precepts (Marimuthu et al., 2010, p. 53). Prohibition of interest under Islam is one of the major reasons for the economic actors with a religious reference to stay away from the interest-based conventional banks. Because of this, need for banks based on Islamic rules and considerations separate from the conventional banking system in such economies has emerged (Erdem, 2010, pp. 277-278). Unlike conventional banks, Islamic banks[1] rely on Shariah (Islamic law) in their banking activities. One of the basic principles of Shariah suggests those transactions which include riba (interest) and other risky and speculative transactions (Salehi et al., 2011, pp. 3322-3323). Islamic banks, whose field of activity is defined by Shariah, carry out their activities on profit-and-loss-sharing (PLS) paradigm. Under the PLS paradigm, the predetermined rate of return in financial contracting, which is prohibited, is replaced with an uncertain rate of return that is determined ex post on a profit-sharing basis. Only the profit-sharing ratio between the capital provider and the entrepreneur is determined ex ante PLS contract which, in general, allows two or more parties to pool their resources for investment purposes and to share the investment profit and loss (Chong and Liu, 2009, pp. 126-128). Researchers have started paying attention to the Islamic banks in consideration of their growth and increased prominence in both Islamic and non-Islamic world over the last three decades (Marimuthu et al., 2010, p. 53). A good part of the studies on Islamic banking focuses on the analysis of the customers of these banks. The major motivation in these studies is to offer a sound assessment of the development and evolution of these institutions. In these studies, the level of satisfaction of the Islamic bank customers, their awareness and reasons for preference appear to be the main themes of the research[2]. Defining the factors affecting the selection of Islamic banks appears to hold special importance. There are a number of factors and elements affecting the minds of the customers including cost-benefit, service quality, scale and prestige, staff factor, recommendation by friend and relatives, religious affiliation and advertising. It is natural to believe that religious identity is the most important factor in the decisions of the customers to pick the Islamic banks considering that they rely on the Islamic rules. However, even though a number of studies focusing on the factors for selection of Islamic banks have come to this conclusion, some accounts have found that religious affiliation is not the number-one actor[3]. The findings of the studies vary depending on the country, the region and the time the study was performed. It is important to detect the place of religious affiliation in the decisions of the customers to pick these banks to better understand how they have developed. It is also essential to make reasonable and

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sound analyses on the importance of religion in the decisions of the customers for a better assessment of the ability of these financial intermediaries to have substitution or complementary power in the financial system. Overview of the development of Islamic banking in the world Islam prohibits interest-based transaction. According to Islam, money is a device of exchange, and it has no value by itself. Therefore, payment of money through interest cannot be allowed (Marimuthu et al., 2010, p. 53). However, Islam promotes trade and commerce. A great part of Muslims refrains from working with conventional banks to avoid interest-based transactions. This leads to insufficient amount of money in the financial system, where the interest-based banking system also fails to transfer adequate amount of funds. This problem led to popularity of the banks compatible with the Islamic principles (Erdem, 2010, pp. 277-278). There are three major phases in the development and evolution of Islamic banking in modern world. The first phase refers to the period between 1972 and 1975, where Muslim countries enjoyed large amounts of oil revenues and high amount of liquidities in connection with the rise in oil prices. This phase was followed by the period between 1976 and early 1980s, where Islamic banking became popular in Malaysia and England. The final phase refers to the period in the aftermath of 1983, where the Arab countries experienced economic stagnation, and capital outflow was observed in the Gulf countries (Saleh and Zeitun, 2007, p. 42). The first interest-free banking experience was in Egypt in 1963. The first Islamic commercial bank, Dubai Islamic Bank, was founded in 1975 (Marimuthu et al., 2010, p. 53). This was further followed by the foundation of growing number of interest-free banks in the Middle East and other parts of the world, becoming alternatives to the interest-based banks. The size and number of these banks have increased in both Muslim and non-Muslim worlds. It is possible to divide the countries where interest-free banks are available into two major groups. The first includes the countries such as Iran, Sudan and Pakistan, where all banks and financial institutions have to be interest-free and interest-based banking is forbidden. The second groups includes countries including Malaysia, Indonesia, United Arab Emirates, Yemen, Bangladesh, Jordan, Egypt and Turkey, where interest-based and interest-free banks are allowed to operate. The financial institutions offering interest-free instruments may be originated in Muslim or non-Muslim countries (Okumus, 2005, p. 52). It is observed that a number of multinational banks have separate sections offering interest-free Islamic banking products and services. International conventional banks including HSBC, Deutsch Bank, JP Morgan and Standard Chartered Bank have, since early 2000s, created Islamic windows to offer such services (Participation Banks, 2010, p. 32). It is also observed that the Islamic banking market has been growing fast over the past three decades. Currently, there are more than 300 interest-free financial institutions in more than 51 countries. In addition, well over 250 mutual funds comply with Islamic principles. Over the past decade, this industry has experienced growth rates of 10-15 per cent per annum – a trend that is expected to continue (Sole, 2007, p. 9). In 2013, the total amount of interest-free funds is expected to become $1.5 trillion; by 2020, KFH (Kuwait Finance House) estimates that this will become $4 (Participation Banks, 2010, p. 31).

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Overview of Islamic banking in Turkey The Turkish banking system has a dual structure, where interest-based and interest-free banks operate at the same time. There are four Islamic banks, 31 conventional banks and 13 development and investment banks in Turkey. Islamic banks are able to offer interest-free banking services, whereas conventional banks are not allowed to offer these services due to legal restrictions. A great deal of effort has been spent in Turkey in early 1980s to attract capital flows from the Middle East and North African countries. To this end, Special Finance Houses (SFHs) offering interest-free products and services have been found to do this; the first SFH was launched in 1985 (Okumus, 2005, p. 51). The conventional banks were administered by the Banking Law in this period, whereas these institutions enjoyed greater competitiveness because they were not required to observe the provisions of this law. In 1999, these institutions were also included in the scope of the Banking Law under which they have to operate in compliance with the provisions that the conventional banks have to comply with as well (Okumus, 2005, p. 55). By the Banking Law No. 5411 adopted on October 19, 2005, the name of these institutions was changed to the participation bank. The new law classifies the banks as conventional banks, participation banks and development and investment banks. Loans constitute the main funding instruments of Islamic banks. The other banks also hold fixed-income securities in addition to the loans; the Islamic banks do not hold these instruments in their actives as funding instruments because of interest-based revenues out of these assets. The funding sources of Islamic banks are divided into two groups: private current account and participation accounts. Private current accounts represent saving accounts where the customers can withdraw money anytime they want and do not generate any extra revenue for the account holders. Participation accounts, on the other hand, refer to accounts where the customers participate in the loss or profit and where any extra revenue is not guaranteed at the beginning. This suggests that instead of a fixed amount of income or revenue, these banks offer a scheme of participation in potential loss or profit (Erdem, 2010, pp. 285-286). Conventional banks hold the greatest share in the Turkish financial system. Even though the share of the Islamic banks in the system is on rise, it is unlikely that they would have substantial share in the Turkish financial system. However, in parallel to the growth of the interest-free banking in the world, the Islamic banks in Turkey are also improving their share in the system. After 2006, the Islamic banks have improved their actives better than the conventional banks (Arslan and Ergeç, 2010, p. 160). Since then, the market share of the Islamic banks in the total amount of deposits and loans has increased. Table I shows this tendency. The table also presents the shares of the loans of the banks in the total amount of actives. It is observed that this share has increased in the conventional banks between 2006 and 2011. One of the reasons for this increase is the decline in the interest rates of the government domestic debt instruments. Conventional banks are now more successful in transforming the funds it collects into loans. However, the Islamic banks appear to be more successful than the conventional banks in this field. Compared to the commercial banks, Islamic banks show a better performance in converting the funds into loans because they are not able to rely on fixed income securities which are interest-based.

Share in the total amount of deposits Conventional Islamic Banks Banks

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2006 2007 2008 2009 2010 2011

96.2 95.7 95.7 94.6 94.3 94.2

3.8 4.3 4.4 5.4 5.7 5.8

Share in the total amount of loans Conventional Islamic Banks Banks 94.9 94.4 94.3 93.2 93.4 93.4

5.1 5.6 5.7 6.8 6.6 6.6

Share of loans in the total amount of actives Conventional Islamic Banks Banks 39.4 43.4 42.8 41.9 49.9 54.7

63.4 58.9 62.5 59.0 59.9 64.5

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Table I. Deposit and loan Note: Share: Created based on data from Electronic Data Delivery System of the Central Bank of the shares in the Turkish banking system (%) Republic of Turkey

Literature review There are a number of works and studies focusing on the sociocultural and economic background of the Islamic banking services in the literature. These studies focus on why the customers prefer Islamic banks, their awareness and level of satisfaction, as well as other similar matters. Understanding why these banks are picked by the customers is extremely useful for the administrators of the Islamic banks, the governors of the interest-based commercial for better review of the development of the banking system. Religious reasons, service quality and both religious and economic reasons stand out as the factors for the customers to pick a certain bank. However, religiosity is expected to become the number-one reason for the selection of the Islamic banks considering that they operate in consistent with the Islamic principles. There are many studies in the literature confirming this linkage; however, there are also other works, suggesting that religiosity is not the number-one factor. Table II presents some of the studies focusing on the customers of Islamic banks. In most of these studies, the reasons for preference by the customers over the banks, whereas, in most of others, a more comprehensive approach is adopted to analyze the customer satisfaction and awareness. This study seeks to analyze the importance of religiosity in the preference of the customers. For this reason, not all findings of the studies in the literature are presented in Table II; only the findings relevant to the ranking of religiosity in the factors of preference are depicted. The findings in the studies shown in Table II may vary depending on the country and time where the study was conducted. However, a comparative analysis of the studies above shows that it is not proper to identify religiosity as the sole reason for the preference of the customers toward the interest-free banks. The most relevant studies regarding our research problem are conducted by Okumus in 2005 and Okumus and Genc in 2013 taking the case of Turkey. The findings in these studies reveal that religious affiliation is the number-one factor for the customers in preferring the Islamic banks. However, these institutions offering interest-free banking services have made significant progress in the aftermath of 2006, displaying greater growth rate than the conventional banks. The remarkable growth rate has led to the greater increase in the share of the interest-free banking within the system over the time. Therefore, the number of customers of these banks has also increased. Are these banks still preferred because of religious considerations at the present time? It is really important to

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Country

Author(s)

No. of respondents

Turkey

Okumus (2005) Okumus and Geci (2013) Haron et al. (1994) Ahmad and Haron (2002)

161 bank customers 281 bank customer 301 bank customers 45 firms

Malaysia

72

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Zainuddin et al. (2004)

Pakistan

Dusuki and Abdullah (2007) Elkader (2009) Marimuthu et al. (2010) Idris et al. (2011) Khattak and Rehman (2010) Rustam et al. (2011)

Singapore

Religiosity primary reason Religiosity primary reason Religiosity not primary reason Both economic and religious reasons equally important 123 bank customers Religious reasons and recommendation primary reasons 750 bank customers Religiosity not primary reason 100 bank customers 450 bank customers 250 academics 156 bank customers

Economic reasons important Economic reason primary reason Religiosity primary reason Religiosity primary reason

60 commercial customers 260 bank customers 250 bank customers 300 bank customers

Both economic and religious reasons equally important Religiosity primary reason Religiosity not primary reason Religiosity primary reason

206 bank customers 434 bank customers 371 bank customers 100 bank customers 378 university students Hassan and Kabir (2011) 96 bank customers Gerrard and Cunningham 190 bank customers (1997)

Religiosity not primary reason Religiosity not primary reason Religiosity not primary reason Religiosity primary reason Both religious and economic reasons equally not important Religiosity primary reason Both economic and religious reasons hold equal importance; but not as primary reasons

Abduh and Omer (2010) Indonesia South Africa Saini et al. (2011) Metawa and Almossawi Bahrain (1998) Jordan Naser et al. (1999) Erol and El-Bdour (1989) Bangladesh Rashid and Hassan (2009) Khan et al. (2007) Rashid (2012) Table II. Literature review of costumer of Islamic banking

Religion as a selection criterion

detect whether religious affiliation still matters in the customers’ decision to prefer these institutions for a better understanding of the future of the Islamic banks, as well as the other relevant actors of the financial system. Whether Islamic banks still play complementary roles within the banking system is relevant to the answer to this question because to the extent religiosity becomes more irrelevant in the customers’ decision to pick the Islamic banks, the interest-based and interest-free banks will have greater power of substitution. In addition, analysis of how the factors for selection of the Islamic banks are evaluated by the customer profiles is important for a sound assessment of the development of these banks. Therefore, the research question in this study seeks to find out the reasons why the Islamic banks are preferred, and whether the sociopolitical, socioeconomic and other identities of the customers play role in their decisions to pick the Islamic banks. Presentation of survey The research universe is Turkey; the city of Eskisehir has been picked as sample. Eskisehir is a leading city in Turkey considering that it enjoys the status of metropolitan

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municipality, has a sizeable population, greater level of education and level of income. The four Islamic banks in Turkey have branches in the city. For this reason, Eskisehir appears to be a good candidate to serve as a sample[4]. In total, 500 respondents have been picked to conduct a survey; and then gender and age quotas have been imposed. A face-to-face survey technique has been used as a data collection method. A semi-structured form has been used in the survey. The conductors of the survey have been trained before and subsequently a pilot implementation has been made. The survey forms have also been checked for quality during and after the field work. The survey form used in the research includes 27 questions including four open-ended items. Cross checks were also applied by check questions in the survey. The survey included questions on descriptive identity information on gender, age, income, education, sociopolitical identity and socioeconomic status. Diverse movements of thoughts and worldviews have been listed to create sociopolitical identity category and the respondents have been asked to pick a proper identity in this category. The questions in the survey also included information on the political party affiliation as well as religious attitudes including praying and fasting to detect the sociopolitical identity. The respondents were also asked in the survey on what factors they prefer the Islamic banks. Pilot application for the survey has been done in March 1-5; and the actual survey has been conducted between March 10, 2011 and March 25, 2011 with the participation of the respondents. The interviews were held during the presence of the customers at the banks or by appointment in their homes or offices. The findings have been analyzed by statistical software. In the analysis, the simple form of some variables in the survey form has been considered; but, in addition, derived variables based on the evaluation of some variables have also been used. For instance, socioeconomic status and sociopolitical identity have been created based on the combined evaluation of a few variables. The age and income level have been categorized and included in the analysis. The descriptive statistics in the analyses have been tested by chi-square significance test. Cluster analysis and factor analysis have been used in the creation of the combined and categorical variables. Sample profile The general aspects of the bank customers who responded to the questions in the survey are presented in a separate Table III. Further, 71 per cent of the respondents in the sample are male. The dominant character of men in economic life in Turkey is also confirmed in the sample profile as well. In terms of distribution by age, there is a balanced outlook in the sample. Likewise, considering that Islamic banking is for the conservative people in general, it is understandable to see that women are underrepresented in the survey. The ratio of college graduates in the sample is well above the national average. It could be said that two factors are influential in this outcome. First, it should be expected that the level of education of the people engaged in banking activities is relatively better. Second, Eskisehir has relatively well-educated people. In terms of professional affiliation in the sample, private and public sector workers constitute the largest group with 39 per cent. Businessmen and artisans constitute 21 per cent, whereas retired people, students, housewives and unemployed are represented well enough to provide meaningful analyzes.

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Table III. Profile of respondents

Frequency

(%)

Gender Male Female

357 143

71.4 28.6

Age Between 20 and 30 years old Between 31 and 40 years old Over 40 years old

157 205 138

31.4 41.0 27.6

Education Primary school and below Elementary school High school College and above

57 61 177 205

11.4 12.2 35.4 41.0

Job status Paid workers in public or private sector Businessmen or artisan Retired Student Housewife Unemployed

196 106 35 64 61 37

39.2 21.2 7.0 12.8 12.2 7.4

Sociopolitical identity Nationalist-Conservative Secular-Modernist Leftist-Social Democrat

385 92 23

77.0 18.4 4.6

Socioeconomic status Low Middle High

95 223 182

19.0 44.6 36.4

Income (Monthly average) Less than 1,000 TL 1,000-1,500 TL 1,501-2,000 TL 2,001-3,000 TL More than 3,000 TL

38 87 134 198 40

7.7 17.5 27.0 39.8 8.0

History with the bank 0-2 year(s) 2-4 years More than 4 years

241 177 82

48.2 35.4 16.4

Note: ** TL 1 ⫽ US$0.60 (as of 2011 daily average)

The responses to the questions in the survey on education level, life standard, level of income, profession and religiosity, as well as worldview, have been analyzed by utilization of cluster analysis, factor analysis and discriminant analysis and sociopolitical and socioeconomic status variables have been developed.

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Sociopolitical identity is designed as a more comprehensive and longstanding variable than the political party preference; it reflects the sociological structure in addition to political tendency. To this end, the Turkish society is classified as sociopolitical groups including nationalist-conservative, secular-modernist and leftist-social democrat. There are some overlaps between these groups; however, the Turkish society is mainly divided into these three sociopolitical groups[5]. The social and political tendencies of the Islamic bank customers responding to the survey are thus identified. The findings reveal that the customers are mostly nationalist-conservative people. Further, 77 per cent of the bank customers responding to the survey questions are identified within this group in terms of sociopolitical identity classification, followed by 18.4 per cent of secular-modernist group. In a review of the socioeconomic status rates, the middle-class customers constitute 44.6 per cent of the customer portfolio. Further, 39.6 per cent of the Islamic bank customers have a monthly salary between TL 2,000 and 3,000, constituting the largest segment. The customers were asked to evaluate themselves in terms of income level by comparing themselves to the others; 85 per cent of the respondents identify themselves as members of the middle-class group. The backgrounds of the bank customers also show that the new customers constitute a larger group. In total, 48.2 per cent of the customers have worked with the Islamic banks for a period of 0 to 2 years, whereas only 16.4 per cent of the customers have a history of four years.

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75

Reasons for choosing Islamic banks To better identify the reasons why Islamic bank customers prefer a certain bank, a list of 12 potential factors was formed and presented to the respondents. The respondent was informed he or she could pick more than one options. The results of the responses on the reasons for preference were presented in Table IV. Religiosity is not the number-one reason in preferring Islamic banks; it was ranked fourth on the list. Recommendation by close friends and relatives is the most influential factor in preferring the Islamic banks, followed by the quality of products and service the bank offers and the cost of the service; these are meaningful factors which are also equally influential in preferring interest-based banks. This ranking on the reasons for Selection criteria 1. Advice from relatives and friends 2. Favorable loan conditions 3. The bank provides the service I need 4. Religious reason only 5. Convenience of the branch location 6. Low service charges 7. Advertisements and promotions of Islamic banks 8. Staff friendliness 9. Strong capital structure 10. Speed and efficiency in banking transactions 11. Suitability of counseling services on investment 12. High return

Frequency

(%)*

344 121 96 93 83 64 41 39 33 25 14 12

68.8 24.2 19.2 18.6 16.6 12.8 8.2 7.8 6.6 5.0 2.8 2.4

Note: * Total percentage exceeds 100 because more than one option is allowed

Table IV. Customer’s selection criteria of Islamic banks

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preference holds serious insights and tips based on the views of the current customers as to what the Islamic banks should do to attract new customers. It is clear that some reasons for preferring Islamic banking are overlapping to some extent. Because the subjects were given all choices and asked to just mention the most important one, it would be plausible to ignore this overlapping and take the order of responses as relatively independent causes[6]. However, it is better to take reasons in terms of their orders to attach level of importance. In the analyses, sociopolitical identity, socioeconomic status, age, gender, level of education and profession, as well as income level, have been taken as independent variables. In the decision to take age, gender, level of education, income level and profession as independent variables, the main goal was to take the overall photo and picture of how Islamic banks are perceived by the different social segments in Turkish society. Further, 12 reasons for preference have been analyzed by independent variables and the statistically significant relations have been summarized in Table V. In total, 8 out of the 12 factors influential in preferring Islamic banks have displayed significance depending on the aspects of the customers. The Islamic bank preference factors that display significant differences among the independent variables are religious reasons, recommendation by friends and relatives and promotion and advertisements, whereas the branch location displays differences for level of education. For instance, eagerness to work with the Islamic banks because of religious reasons varies depending on sociopolitical identities, age, gender, income level and profession, whereas staff friendliness becomes significant in terms of income level only. Therefore, those who prefer Islamic banks hold different sociopolitical identities, age groups, different income levels and professions, and religious reason is seen as significant at different levels in each of them. Based on this, it could be concluded that the Islamic bank customers constitute a broad spectrum made up of different social groups and segments. The reasons for picking Islamic banks by men and women are different with the exception of 2 out of 12 items. Another independent variable where the reasons for preference differ so greatly is the profession of the customers. To what extent gender displays different by the Islamic bank preference is covered below. But for now, it is sufficient to say that men refer to economic reasons, whereas women refer to sociological reasons in their preferences. The four factors presented to the respondents in a list of reasons for picking Islamic banks (high return, staff friendliness, swift banking services and efficiency and low amount of cost associated with banking transactions) do not show any difference by the sociopolitical identity, socioeconomic status or other demographic features of the customers. Impact of sociopolitical identity on selection of Islamic banks Religious reasons, recommendation by friends and relatives, strong capital structure and provision of service asked display significant differences by sociopolitical identities. The remaining eight reasons in the list of reasons for preferring Islamic banks do not show any differences by sociopolitical identities. To this end, high return associated with Islamic banks, staff friendliness, promotions, low cost of Islamic bank transactions,

1. Only religious reasons 2. Recommendation by friends and relatives 3. Strong capital structure 4. Advertisements and promotions of Islamic banks 5. Speed and efficiency in banking transactions 6. Convenience of branch location 7. Favorable loan conditions 8. The bank provide the service I need ⴙ

ⴙ ⴙ ⴙ

Sociopolitical identity

ⴙ

ⴙ

Socioeconomic status ⴙ ⴙ

Age

ⴙ

ⴙ ⴙ ⴙ ⴙ

Gender

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ⴙ

ⴙ

Income

ⴙ

Education

ⴙ ⴙ

ⴙ ⴙ ⴙ ⴙ ⴙ

Profession

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77

Table V. Significantly influential factors in selection of Islamic banks (%)

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convenience of the branch location, favorable loan conditions, swift banking transactions and efficiency and good counseling services on investment do not display any difference by sociopolitical identities. As expected, the nationalist-conservative group pays greater attention to religious reasons than the secular-modernist and leftist-social democrat groups pay to these reasons. Of those who state that recommendation by friends and relatives plays the greatest role in their decision to work with Islamic banks, nationalist-conservatives pay much attention to this reason, followed by secular-modernists and leftist-social democrats. The nationalist-conservative group pays greater attention to the strong capital structure of Islamic banks as reason to work with these banks than the other groups do. Likewise, nationalist-conservative group respondents state that they find every service and products they are seeking and for this reason, they prefer the Islamic banks. It could be concluded that the members of this group may be stronger than other sociopolitical groups in getting the banking products and services they need (Table VI). Impact of socioeconomic status in selection of Islamic banks No significant impact of the socioeconomic status has been observed in those who identified religious reasons to work with Islamic banks. The reason to prefer Islamic banks for religiosity is almost equally strong in all socioeconomic status. The socioeconomic status of the Islamic bank customers and the reasons to prefer these banks display differences in only 2 out of 12 factors (Table VII): promotions of Islamic banks and favorable loan conditions. Socioeconomic status did not lead to any significant difference in the remaining ten factors of reasons to prefer Islamic banks. High return, staff friendliness, recommendation by friends and relatives, strong capital structure of Islamic banks, efficiency and swiftness in banking transactions, low costs of banking transactions, location of the branch, provision of wide range of products and services and counseling services on investment do not vary by socioeconomic status of the customers.

Table VI. Significantly influential factors in Islamic bank selection by sociopolitical identities (%)

Religious reasons Recommendation by friends and relatives Strong capital structure The bank provide the service I need

Nationalistconservative

Secularmodernist

Leftist-social democrats

Chi-square

p

22.10

1.10

9.50

24.24

0.000

73.80 8.80

61.10 2.10

65.00 –

6.35 6.87

0.042 0.032

23.40

8.40

10.00

12.03

0.002

Table VII. Significantly influential factors in selection of Islamic banks by socioeconomic status Advertisements and promotions of Islamic banks Favorable loan conditions (%)

Low

Middle

High

Chi-square

p

5.00 15.80

13.10 18.70

7.00 38.40

7.185 26.398

0.028 0.000

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The promotions and advertising activities of the Islamic banks have little impact in the decisions of the customers with low and high socioeconomic status to work with these banks, whereas this impact is visible in customers with middle-level socioeconomic status. Therefore, it could be concluded that the customers holding middle-level socioeconomic status are affected compared to customers in other socioeconomic status. The view that the favorable loan conditions of the Islamic banks are influential in selecting these banks differs significantly by the socioeconomic status. To this end, customers with high socioeconomic status indicate that favorable loan conditions affect their decisions more importantly than the customers in other socioeconomic status do. Customers with high socioeconomic status stress that reasonable loan conditions are more important in their decisions to select Islamic banks than the customers with lower socioeconomic status.

Islamic bank preference

79

Impact of education, income and profession in preferring Islamic banks Education level. No significant difference is observed in the attitudes of the customers who have different level of education and identified religiosity as main reason to work with Islamic bank. The difference in the level of education of customers over reasons including high return, recommendation by friends and relatives, strong capital structure of Islamic banks, advertisements and promotions, efficiency and swiftness in banking transactions, low costs of banking transactions, favorable loan conditions, provision of wide range of products and services and counseling services on investment has not been systematically and significantly influential. The only factor where level of education is influential in selection of Islamic banks is location of the branch of the bank. To this end, the number of customers who indicate that location of the branch matters for them in their decision to work with an Islamic bank increases as level of education declines. The customers with low level of education say that they consider location of the branch when deciding to work with an Islamic bank; but, as the level of education increases, the impact of location becomes less significant in this decision (Table VIII). Income level. The income level of customers is not significant in the decision to prefer Islamic banks. To this end, only favorable loan conditions and promotions and advertising activities of the banks are influential in the decision of the customers who have different income levels. This means that the remaining ten factors are not significantly influential in the decisions of the customers with different income levels to prefer Islamic banks. Religious reason, staff friendliness, recommendation by a friend and a relative, strong capital structure, swift banking transactions and efficiency, low costs of banking transactions, convenience of the branch location and provision of the products and service, as well as good counseling service on investment, do not display any significant difference in the customers’ decisions by income level. There is no significant and

Convenience of branch location

Primary

Elementary

High school

College and above

Chi-square

p

25.8

23.2

21.5

9.2

15.157

0.002

Table VIII. Significantly influential factors in selection of Islamic bank by level of education (%)

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systematic difference of tendency among the approaches of the customers in different income groups. The promotions and advertising activities of the Islamic banks have a differing impact upon the decisions of the customers by the income level. To this end, these activities are more influential over the people with low-level income in their decisions. As the income level increases, the favorable loan conditions become more influential over the decisions of the customers to work with the Islamic banks. To this end, the people with high level of income are more sensitive to the favorable loan conditions than the people with low level of income (Table IX). Profession. Professions of the customers have a significant impact on the differentiation of the reasons for the customers to work with Islamic banks. It is expected that the level of preference would be different for the Islamic banks by the people from different backgrounds including unemployed, students, retired, housewife, businessmen and private and public sector workers. High return, staff friendliness, advertisements and promotions of Islamic banks, efficiency and swiftness in banking transactions, low costs of banking transactions, location of the branch and counseling services on investment do not vary by the profession of the customers to prefer Islamic banks. Customers from different professional backgrounds who say religiosity is the primary factor refer to different attitudes. To this end, retired people, public and private sector employees and businessmen make greater emphasis upon religiosity than other groups. Those who identify recommendation by friends and relatives are influential over their decision to prefer Islamic bank show differences by profession. Students, housewives and unemployed people are most affected by recommendation by friends and relatives. The recommendation by relatives and friends is least important for businessmen, artisans and retired people. The view that strong capital structure of Islamic banks is influential in decision to work with these banks varies depending on the profession. To this end, retired people, students and businessmen/artisans pay greatest attention to the strong capital structure of the banks. The impact of the promotions and advertising activities of the Islamic banks varies depending on profession. For businessmen, artisans, students and public and private sector workers, promotion and advertising activities are less significant in their decision to prefer Islamic banks. The decision of the customers who refer to swift banking transactions and efficiency as the main reason to work with the Islamic banks varies by profession. Retired people make stronger reference to this reason as a factor to prefer Islamic banks than the other groups do.

Less than 1,000 1,000-1,500 1,500-2,000 2,000-3,000 Table IX. Significantly influential factors in selection of Islamic banks by income level (%)

Advertisements and promotions of Islamic banks Favorable loan conditions

Greater than 3,000 Chi-square

p

–

30.4

34.8

26.1

8.7

14.611

0.006

5.6%

11.1

18.9

40.1

20.0

43.318a

0.000

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The view that the favorable loan conditions of the Islamic banks are influential in deciding to work with these banks varies by the professions. Businessmen and artisans identify favorable loan conditions as an influential factor for them to decide to work with the Islamic banks, whereas this factor is least significant for students. The rate of those who identify provision of all products and services they want by the bank as the reason to work with the Islamic banks is relatively lower in the businessmen and artisan group than the other professions (Table X). Impact of age and gender upon selection of Islamic banks Age. With the exception of two factors, the reasons to work with the Islamic banks do not vary by age groups. Religious reasons and recommendation by friends and relatives play different roles in the decisions of customers in different age groups. Religious reasons become more influential in the group of advanced age customers in their decision to work with the Islamic banks. In the group of advanced age customers, the number of customers referring to recommendation by friends and relatives as reason to work with the Islamic banks is less than the number of young people referring to the same reason. High return, staff friendliness, strong capital structure of Islamic banks, advertisements and promotions, efficiency and swiftness in banking transactions, low costs of banking transactions, location of the branch, favorable loan condition, provision of wide range of products and services and counseling services on investment do not vary by the age of the customers to prefer Islamic banks (Table XI). Gender. Gender is one of the independent variables, where the reasons for preferring Islamic banks vary to the greatest extent. Men and women have differing tendencies in 5 out of 12 reasons to work with the Islamic banks. The number of men noting that they work with Islamic banks for religious reasons is significantly higher than that of women referring to the same reason. More women identify recommendation by friends and relatives as the main reason to prefer Islamic banks than men do. The number of men identifying strong capital structure of the Islamic banks as the main reason to prefer these banks is greater than the number of women referring to the same reason. The impact of the promotion and advertising activities of Islamic banks upon the decision to work with these banks is more visible in women than it is in men. The number of female customers who note that they prefer Islamic banks because they are offered the services they want is greater than the number of men who refer to the same reason. High return, staff friendliness, efficiency and swiftness in banking transactions, low costs of banking transactions, location of the branch, favorable loan condition and counseling services on investment do not vary by the gender of the customers to prefer Islamic banks (Table XII). Conclusion Islamic banks which started their operation in 1985 in Turkey now hold 7 per cent of share in the banking system as of late 2011. Islamic banks which play a significant role for inclusion of the people who remain outside of the financial system due to religious considerations in the system have a great potential for the future of the Turkish financial system even though they now have a relatively share within the system.

Islamic bank preference

81

Table X. Significantly influential factors in selection of Islamic banks by profession (%)

Religious reasons only Recommendation by friends and relatives Strong capital structure Advertisements and promotions of Islamic banks Speed and efficiency in banking transactions Favorable loan conditions The bank provide the service I need

82

17.9 66.5 6.4 6.9 5.7 28.2 23.1

15.8 59.0 5.9 6.9 5.0 39.6 11.9

48.5 62.5 18.8 18.2 12.5 21.2 9.1

11.0 87.7 11.0 6.8 – 9.6 13.7

15.7 86.6 4.9 11.0 2.4 21.7 26.8

13.2 63.2 – 21.1 – 18.4 36.8

24.694 30.425 12.232 11.8 12.154 22.91 18.457

Paid workers Businessmen and artisan Retired Student Housewife Unemployed Chi-square

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0.000 0.000 0.057 0.067 0.059 0.001 0.005

p

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There are many studies in the literature focusing on the reasons why Islamic banks are preferred; it has been observed that these studies make frequent references to the religious reasons and service quality, as well as economic reasons. There are only a limited number of academic accounts on this subject in Turkey. These studies find that religiosity and religious considerations are influential in the decisions of the customers to prefer Islamic banks. In this study, the reasons why Islamic banks are preferred are analyzed by findings in a field research with particular reference to sociopolitical, socioeconomic and other identity features of the customers. This study evaluates the findings of a major field work performed in a period between March and May 2011 in Eskisehir with the participation of Islamic bank customers. In the study, a sample of 500 respondents was used and a semi-structured survey was used. In the analyses, sociopolitical identity, socioeconomic status and demographic variables have been taken as independent variables. Further, 12 reasons are identified as major reasons for preferring Islamic banks by the customers. According to the findings, religiosity is not the most significant and the leading factor in Islamic bank preference; instead, it was found as the fourth most important factor. The study finds that recommendation by friends and relatives is the most significant factor for the people in preferring Islamic banks. The reasons for preference with the exception of religious considerations may also hold significant impact upon decision to work with the interest-free banks as well. It is observed that while religion is a distinguishing factor in the selection of these institutions, it is not the number-one factor and not the only factor for the customers to work with the Islamic banks. Therefore, it is not realistic to argue that the bank customers rely on only religious motivation in their decisions to work with the Islamic banks. This reveals that the Islamic banks have to pay attention to customer satisfaction to attract further customers because recommendation by friends and relatives is the most influential factor in preferring Islamic banks. A review of the factors associated with the reasons of preference reveals that high return, staff friendliness, swift banking transactions and efficiency, low cost of transaction fees do not display any significant difference by the sociopolitical identity, socioeconomic status and other demographic features of the bank customers in their decisions to prefer the Islamic banks.

Religious reasons only Recommendation by friends and relatives

Below 30

30-40

Above 40

Chi-square

p

14.6 78.3

16.1 69.8

26.8 56.5

8.612 16.441

0.013 0.000

Religious reasons only Recommendation by friends and relatives Strong capital structure Advertisements and promotions of Islamic banks The bank provide the service I need

Men

Women

Chi-square

p

21.6 62.7 7.8 6.2 17.1

11.2 83.9 3.5 13.3 24.5

7.266 21.319 3.129 6.884 3.593

0.007 0.000 0.008 0.009 0.006

Islamic bank preference

83

Table XI. Significantly influential factors in selection of Islamic banks by age groups (%)

Table XII. Significantly influential factors in selection of Islamic banks by gender (%)

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The reasons where the respondents show significant differences in their decisions to prefer Islamic banks include religious reasons, recommendation by friends and relatives and promotions and advertising activities of banks, whereas no significant difference is observed in the location of the branch; with respect to the location of the branch, only the level of education as independent variable displays significance. Religious reasons as a reason to prefer Islamic banks significantly vary depending on the sociopolitical identities, ages, genders, income levels and professions of the bank customers. The nationalist-conservative group pays greater attention to religious considerations than the secular-modernist and leftist-social democrat groups do. In addition, the percentage of the people in this group who refer to the recommendation by friends and relatives as a reason to work with the Islamic banks is greater than that of the people in other groups. Religious reasons become more influential from the younger people to the advanced age people. Religious reasons are significantly influential in the decisions of men to work with the Islamic banks. Retired people, paid workers in public and private sector, as well as businessmen and artisans refer, to religious reason more than people in other groups. Even though their share within the banking system is still relatively low, the Islamic banks have the potential to expand their sphere and domain considering that religious reasons are not the only reasons for the customers to prefer these banks. This indicates that the interest-free and interest-based banks have greater influence of complementarity; therefore, this suggests that both the Islamic and conventional banks have to become more competitive in the spheres of interest-free and interest-based banking. Notes 1. Islamic or interest-free banking notions are used in international literature to define these institutions; however, they are defined as participation banks in Turkey. In this study, Islamic bank refers to interest-free banks and conventional bank to interest-based banks. 2. There are many accounts in the literature analyzing the Islamic banking customers by field researches. These include Okumus (2005), Erol and El-Bdour (1989), Metawa and Almossawi (1998) and Rashid (2012). 3. The following accounts find that religiosity is not the major factor for the customers to prefer Islamic banks: Haron et al. (1994), Dusuki and Abdullah (2007), Erol and El-Bdour (1989) and Naser et al. (1999). 4. There are many cities in Turkey that can be taken as representatives of the country in terms of developments in economic and political identities and transformational patterns. Okumus (2005) and Okumus and Geci (2013) also followed same way and took city level samples. However, to be more precise, we think it would be more appropriate to mention the name of Eskisehir in the heading. 5. In the literature, there are some conventional classifications of political identities. We follow a classification methodology studied by Toprak et al. (2009, 2011) and Toprak (2005), Toprak and Uslu (2009). 6. In the analyses, we prefer descriptive techniques after conducting factor and cluster analyzes and seeing that just descriptive ones also give same outcome quite conclusively. Another reason for choosing descriptive techniques is the similar approach followed in the most of the literature.

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