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«Asian Journal of Business Research ISSN 1178-8933 Volume5 Issue 1 2015 DOI 10.14707/ajbr.150008 Measuring Service Quality in Islamic Banking: ...»

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Asian Journal of Business Research ISSN 1178-8933 Volume5 Issue 1 2015

DOI 10.14707/ajbr.150008

Measuring Service Quality in Islamic Banking:

Importance-Performance Analysis Approach

Zainurin Dahari

Prince Sultan University, Riyadh

Muhamad Abduh

International Islamic University Malaysia

Kim-Shyan Fam

Victoria University of Wellington


Since the introduction of Islamic bank, the intense competition in the banking industry has been increased exponentially. Islamic banks are not only competing among other Islamic banks providers but also with conventional banks which have offered Islamic windows as an alternative to their customers. As many banks started to offer Islamic banking services/products to the customers, one of the important factor distinguishes those banks in maintaining the sustainability competitive advantage in the industry is service quality. Therefore, the objective of this study is to determine the key dimensions of service quality of Islamic banks by using ImportantPerformance Analysis. Structured self administered questionnaire were used and a total of 276 usable questionnaires were obtained. Factor analysis was carried out to uncover the key dimensions of Indonesian Islamic banking service quality while the Importance Performance Analysis (IPA) was employed to evaluate its level. Factor analysis uncovers five key dimensions including reliability, bank-customer relationship, tangibles, shariah issues and rates and charges. The IPA has plotted reliability, rate and charges, and bank-customer relationship dimensions in possible overkill quadrant which reflects low importance but over-performed by the bank. The dimension of shariah and tangibles are placed at the critical quadrant and thus vital attention from the bank is required. This means that shariah and tangibles are perceived important by customers but very low in performance. Based on this finding, service quality of Islamic banks is still perceived unoptimal by their customers. This implies that Islamic banks should improve their service quality management, particularly on the dimensions of shariah and tangibility.

Keywords : Service Quality, Islamic Banking, Important-Performance Analysis Introduction The year of 1992 was marked as the inception of Indonesian Islamic banking industry with the establishment of the first Islamic bank in Jakarta. The bank has been named as Bank Muamalat Indonesia. It remained the only Islamic commercial bank until the financial crisis 1997, which caused massive instability to the financial systems of many governments, particularly Indonesia. In 1999, the Islamic banks grew in numbers. They were two of Islamic Commercial, one of Islamic Window and 78 of Islamic Rural banks.

Although the development is very slow, it is very convincing for local as well as foreign banks to open their Islamic branches in Indonesia due to the huge number of Muslim population. About 10 Islamic commercial banks with 1,113 branches and 23 Islamic windows of the conventional banks with 251 branches have been established till the year of 2010. The total number of Islamic rural banks also increased significantly from 105 in 2006 to 146 in July 2010. As a result, there are 1,640 branches of Islamic banks spreading in the country as shown in Table 1.

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The consequence of this development is that Indonesian Islamic banks have faced with strong competition not only from other Islamic banks but also from its conventional counterparts. Moreover, a large number of conventional banks have been offering Islamic window. Some established banks have turned their Islamic wings into a full-fledged Islamic banking (i.e., Bank Central Asia Syariah, Bank Syariah Mandiri, BNI Syariah and Bank Rakyat Indonesia Syariah). When competition intensifies and banks started to offer more or less similar products and services, it is the customer's satisfaction on service quality that can influence the performance of an Islamic bank and determines its competitiveness and success (Kamal et al., 1999). Therefore, it is very important for Islamic banks and scholars to evaluate and to improve their service quality. This study, therefore, is aimed at evaluating the service quality of Islamic banking using Importance Performance analysis.

Literature Review Service Quality The success and endurance of banking industry nowadays is really depend on the quality services to customers and Islamic banks are not exception to this. This is due to the fact that Islamic banking industry is facing very strong competition due to technological advancement and improved communication systems. As financial services provided by banks are generally undifferentiated products, one of the strategy that banks can differentiate themselves is on the basis of improved service quality which is critical for expansion of market share (Shafie, Azmi and Haron, 2004).

Islamic Banking

Islamic Banking has been regarded as a noninterest based financial institution following guided by Islamic Laws in its operations (Haque, Usman and Ismail, 2009).

It can be distinguished (Ebrahimi and Moghadam, 2012) from Non-Islamic Banking

on three important grounds:

• No earning of extra interest (Riba)

• Interest rates should be calculated on the basis of Islamic principle

• Banking facilities should be controlled to be spent based on Islamic principles.

The Islamic banking industry is considered as one of the fastest growing industry in the world of finance and received recognition by both Muslims and non-Muslims alike (Bhatti, Zafarullah, Awan and Bukhari, 2011). Islamic banking is not merely of awareness to Muslim customers, but non-Muslim customers see benefits from the system (Amin and Isa, 2008). Many Islamic financial institutions in different countries do not have Muslims majorities but conventional banks have provided banking facilities to attract Muslims customers. The Citibank, HSBC, OCBC and Standard Chartered are examples (Taap, Chong, Kumar and Fong, 2011).

Islamic Banking Service Quality and Customer Satisfaction

In recent studies, Al-Mutawa and Ibrahim (2013) tried to match front-desk employees’ personality traits with the customers’ assessment of Islamic Bank’s service quality in the UAE using Mini-Markers instrument. The SERVPERF instrument and regression analysis have been used to determine the relationship between them. They have found that personality traits do not have interdependent effect on customers’ service quality.

Misbach, Saruchman, Hadiwidjojo and Armanu from Indonesia (2013) have applied Structural Equation Model (SEM) to investigate Islamic bank service quality, trust and satisfaction. They found that responsiveness is the strongest influence factor of Islamic bank service quality. Butt and Aftab from Malaysia (2013) also used SEM to test the relationships among e-service quality, e-satisfaction, e-trust and e-loyalty.

They found that attitude towards Halal banking positively influences perceived eservice quality.

Bhatti, Zafarullah, Awan and Bukhari (2011) have examined key determinants using internal organizational Service Quality Orientation Factors (abbreviated as ISQF) from an employees’ perspective. They studied relationship between ISQFs (employees’ service performance, service concept, employees’ service competence, employees’ training and employees’ customer service orientation) which being critical to improve service quality performance.

Few other service quality models that have been used by researchers include Logit model (Haque, Osman and Ismail, 2009). Logit model is a mathematical model which guarantees that probabilities calculated from Logit model lie within the logical bounds of 0 and 1. They found a positive relationship of quality of service, availability of service, religious perspective and confidence in bank with perception of customers about Islamic banks.

Customer satisfaction has been a critical concept in contemporary marketing thought (Kamal et al., 1999). It is a measure of how organization”s total product performs in relation to a set of customer requirements (Nigel and Jim, 2006). In the banking industry, as competition is becoming tougher, banks are now focusing on increasing customer satisfaction and retention through their improved quality of services (Goode and Moutinho, 1996; Levesque and McDougall, 1996).

Customer satisfaction is very essential for retail banks as it has an impact on the organization’s profit (Levesque and McDougall, 1996). Moreover, in today’s competitive environment, providing quality service is an essential strategy for success and survives (Chiung-Ju and Wen-Hung, 2004; Sadek et al., 2010) because many researches had identified direct and strong relationship between customer loyalty and profitability in retail banking (Trubik and Smith, 2000; Garland, 2002), while other studys found that long-term growth and profitability of banks relies on banks ability to attract and retain loyal customers (Wisskirchen et al., 2006).

Service Quality Model/Dimension

The dimensions of service quality revealed in related with customer satisfaction are vary. Parasuraman has identified eleven dimensions of service quality. They are reliability, responsiveness, competence, access, courtesy, communication, credibility, security, competence, understanding the customer and tangibles (Parasuraman et al., 1985). (Berry et al., 1985; Zeithaml and Bitner, 1996) have been identified that service quality consists of five dimensions: tangibles (appearance of physical facilities, equipment, personnel and written materials), reliability (ability to perform the promised service dependably and accurately), responsiveness (willingness to help customers and provide prompt service), assurance (knowledge and courtesy of employees and their ability to inspire trust and confidence) and empathy (caring and individual attention the firm provides its customers).

While a large number of studies have been carried out in the framework of conventional banking, studys attempted to study customer satisfaction within the Islamic banking framework are limited. Most studys have been discussing the bank selection criteria instead. Although it is connected to customer satisfaction, the focus of the discussion is not specific to the evaluation on service quality but factors determine their intention to patronize an Islamic bank.

Service quality is the main factor which has influenced people to patronize Islamic bank (Haque et al., 2009). However, customers of Islamic banking have shown considerable degrees of satisfaction and dissatisfaction from many Islamic bank’s facilities, services and products in various countries. The customers are aware of specific Islamic banking products such as murabaha, musharakah and mudarabah;

however, they have indicated that they do not deal with them (Kamal et al., 1999;

Okumuş and Şaduman, 2005).

In terms of rating the service quality dimensions, many studies from different countries have presented different results. For instance, in UAE (Al-Tamimi et al.,

2003) and Qatar (Hossain et al., 2009; Kader and Norizan, 2009) it is found that tangibles and empathy are the most important dimensions. In Iran (Golmohammadi and Jahandideh, 2010), it is found that reliability is the most important dimension and tangible is the least important dimension for Iranian customers.

However, those studies seem to ignore one of the most critical dimension for customers in dual banking system countries which is “shariah-issues”.

Therefore, by including some items related with shariah-issues in Islamic banking,

the three research questions (RQ) have been developed:

 RQ1: What are the fundamental dimensions of service quality in Indonesian Islamic banking?

 RQ2: Can “shariah-issues”survive as one of the fundamental dimension in Indonesian Islamic banking service quality?

 RQ3: How is the performance of those service quality dimensions from the perspective of Indonesian customers?

Methodology Data Collection This study used quantitative methods and is mainly based on primary data collected through a self-administered questionnaire. The items have been adopted from many articles. Although the questionnaire has been distributed to more than 300 individual customers of Islamic banks in Jakarta, Indonesia, only 276 questionnaires were usable for analysis.

Factor Analysis Exploratory factor analysis have been carried out to uncover the key dimensions of Indonesian Islamic banking service quality.

It is used due to its dimension reduction function which can help researcher to find fundamentals factors out of long listed questions in the questionnaire. Factor analysis is employed for three main purposes (Bryman et al., 2001). Firstly, it assesses the degree to which items are tapping the same concept. For example, if the respondents have answered question A in similar ways as they responded to question B, this implies that these two concepts are not seen as being conceptually distinct by them. Secondly, if we have a large number of variables, it determines the degree to which they can be reduced to a smaller set. Thirdly, it is aimed to make sense of bewildering complexity of social behavior by reducing it to a more limited number of factors.

For factor analysis to work, we need some relationship between variables and if the R-matrix were an identity matrix, then all correlation coefficients would be zero.

Therefore, we want this test to be significant. In this study, we use Bartlett”s measure to test the null hypothesis that the original correlation matrix is an identity matrix. The Kaiser-Meyer-Olkin (KMO) measure is utilized in order to measure whether factor analysis yields distinct and reliable factors. The rotation method used is varimax method.

Importance-Performance Analysis Importance and Performance Analysis (IPA) is used in this study in order to provide a visual analysis of customers” assessment on Islamic banking service quality.

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