Service Quality in Islamic and Conventional Banks in Malaysia: An Explorative and Comparative Analysis

Abstract

Islamic banks now operate in competition with other Islamic banks, foreign Islamic banks and also with conventional banks offering banking products and services based on Islamic principles. However, it is known that the intense competition in banking industry results in providing better services to the customers as well as providing competitive products.
The aim of this research, hence, is to explore and examine the perceived level of service quality of Islamic and conventional banks in a comparative manner through the perceptions of the customers in Malaysia. This research also aims to explore and examine the relationship between perceived customer satisfactions and the identified service quality dimensions in Islamic and conventional banks.Furthermore, the study also investigates the customers’ level of knowledge and awareness of relevant financial and banking concepts and terms in conventional and Islamic banking in Malaysia with the objective of establishing the sources of patronage and motivation in bank selection. Importantly, the study explores the expectations of the customers on these areas so that a comparison can be made within Islamic and conventional banks and also between these two bank categories to identify service quality gap.
This study utilises a modified SERVQUAL model, which is based on the widely accepted SERVQUAL model and CARTER model to measure the service quality in Malaysian banks. In responding to the aims of this study, a questionnaire survey was utilised with 941 respondents, which was carried out in late2010 in large cities in Malaysia. In analysing the data, descriptive and inferential statistics analyses were employed. The approach taken by the study in examining the service quality gap is to compare the customers’ expectations with their actual perceptions. In addition, the study examined and analysed the customers’ satisfaction relationship with the service quality dimensions.
The findings in relation to customers’ familiarity with Malaysian banking products and services evidenced that they possessed a higher level of knowledge and awareness of conventional banking services compared to Islamic banking services.
The findings on the factors influencing banking selection criteria revealed that ‘religious obligation’ was the most important criterion for the Islamic banks’ customers, while ‘courteous and competent personnel’ was identified as the most important criterion for conventional banks’ customers. In addition, the findings on the factor analysis showed that for Islamic banks, all of the service quality factors could be grouped into three components: ‘service oriented factors’, ‘financial oriented factors’, and ‘religious obligation and image factors’. On the other hand, the factors for the conventional banks are re-classified with factor analysis as :‘service oriented factors’, ‘financial oriented factors’, and ‘marketing oriented factors’.
As for the level of service quality, the main findings produced seven dimensions of service quality: (i) compliance with Islamic values; (ii) assurance; (iii) reliability; (iv) tangible; (v) empathy; (vi) responsiveness; and (vii) social responsibility. For the expectation part, the ‘reliability’ dimension scored the highest average mean for both categories (Islamic banks and conventional banks) while the lowest average mean score for both type of banks was the ‘tangible’ dimension. On the other hand, the ‘assurance’ dimension scored the highest average mean in the perception part of Islamic banks, while ‘reliability’ dimension scored the highest in the perception analysis related to conventional banks. In contrast, the lowest score of average mean for the perception of Islamic and conventional banks was the ‘empathy’ dimension.
The results of the study depicts that all of the service quality gap values (perception minus expectation) were negative which showed that the performances were below expectations (obtaining a negative score), which led to a perception of low service quality. Finally, the regression analysis showed that the most important dimension that had positive direct effect on customers’ satisfaction is ‘tangible’ related factors.
The study has significant implications for Malaysian banks in providing a direction for service quality improvement. It is expected that the study can inform the management of the banks in developing their marketing strategy, which is crucial for emerging intense competition in Malaysian banking in general and for Islamic banking in particular. Lastly, while the Islamic banks have been subjected to criticism for having poor service quality, this study shows that there was not much difference on the service quality gap (perception minus expectation) between the Islamic and conventional banks in Malaysia.