For the last three decades, we have been experiencing several episodes of financial crisis worldwide with an increasing magnitude for every one of them. Banks were being hold accountable in one episode of these crises. The complex financial instruments but lack of transparency were associated with the failure of the banks during the mortgage financial crisis in 2008. The solutions offered by the majority of central banks do not seem to provide any remedy, instead leading the system to another crisis along the way. Namely the bailouts, the Dodd-Frank act, quantitative easing program; mostly adds even more fragility to the market.

Let’s take an example of the bailouts which utilized by the majority of central banks worldwide. This solution brought us to unintended consequences where the too-big-too-fail banks getting even bigger, facilitating debt to rise, and creating a more unstable financial system¹. The beneficiaries of such bailouts were mostly ultra-wealthy individuals, hence the pol icy contributed to an increasing rate of inequality worldwide.

The failure of central banks to provide remedy from the last 2008 financial crisis had revealed the hazards of unethical and unlawful banking activities. Therefore, it is crucial for the financial system to explore the remedy of such fragility. The one which curbs excessive debt-taking behaviour, promoting fairness and most importantly promoting social justice. This is where Islamic finance came to the picture.

Islamic finance operates in accordance to Islamic law or Shariah, thus it promotes the objectives of Islam or in the Arabic nomenclature defined as the Maqashid of Shariah. These objectives are universal and traditionally consists of the protection of five basic human needs, include protection of our religion (diin), self protection (nafs), family protection (nasl), property protection (maal), and intellectual protection (’aql). In a more contemporary and universal language, these objectives are represented by the Sustainability Development Goals (SDG) initiated by United Nations.

In this article, we would focus our discussion to the biggest industry in Islamic financial system, which is Islamic banking. As of 2019, according to ICD (Islamic Corporation of the Development of the Private Sector), it represents around 69% from the overall Islamic financial system or the total assets worldwide amounted to USD$ 1.993 Trillion. This position followed by the Sukuk market which represents around 19% on the same year, other Islamic Financial Instituttions (IFI’s), Islamic mutual funds and takaful2. As this particular banking industry in most regions are competing with its counterpart, thus it is critical to investigate the factors affecting customers’ preferences towards Islamic banking. We will initiate this discussion by differentiating Islamic banking industry with the conventional one. Also by analyzing recent empirical evidences, we would exhibit whether religious significance of Islamic banks might affect consumer’s preferences in adopting their products.

Islamic banking most distinctive feature is their compliance with Islamic law or Shariah. Therefore, their operation must fulfill Shariah injunctions supervised by Sharia Supervisory Board (SSB) either on corporate level or on national level. The most fundamental concept of Islamic law in regards to the financial transactions are the prohibition of Riba, Gharar, Maysir, Zhulm and Haram substances.

The prohibition of Riba in the context of banking activities implies fixing in advance of a positive return on a loan as a reward for waiting. It makes no difference whether the return is big or small, fixed or variable, an absolute amount to be paid in advance or on maturity or a gift or service to be received as a condition for the loan³. Such prohibition originated from the concept of money as non-commodity, hence it cannot generate any return.

The following concept is more difficult to understand, Gharar is literally defined as unknowingly expose oneself or one’s property to jeopardy. The jurisprudential literature had various definitions, but technically Iqbal et al. (2006)³ defined Gharar related to our context as acts and conditions in exchange contracts, the full implications of which are not clearly known to the parties. Such condition breaches the principle of voluntary consent of all parties, which is one of valid conditions to contracts of exchange in Islam. The objective of such prohibition is to minimize misunderstanding and conflicts between the contracting parties.

The next prohibition is the prohibition of speculative risk taking as in gambling, or in Arabic term called Maysir. Technically, the prohibition of Maysir is the prohibition of wishing something valuable with ease and without paying an equivalent compensation for it or without working for it, or without undertaking any liability against it, by way of a game of chance⁴. And the last two prohibitions are prohibition of Zhulm and Haram substances. The earlier refer to prohibition to transact which may cause harm to others. And the latter is the prohibition related to any specific substances forbidden by Islamic law such as alcohol, arms, pornography, etc. These prohibitions will be our basis to elaborate the operational differences between these two competing financial institutions.

As a financial intermediary, basically Islamic bank provides traditional banking services which channel the funds from surplus unit to the deficit unit. In the conventional banking business model, products on both asset and liabilities side of the bank are utilizing interest for pricing. In contradiction with the prohibition of Riba, it perceives money as a commodity, thus it is available for sale.

Islam do not accept such concept of money, rather it is merely a medium of exchange and unit of account. Hence, it perceives no price of money and the income for Islamic banking is mainly administered through profit and loss sharing. For example, a business project which is to be funded by an Islamic bank, will have to share their profit or loss with the bank according to their initial agreement. By utilizing such mechanism, Islamic banks exhibited their willingness to accept part of the risks as a result of uncertainty in the market. Whenever the market is favourable, these two parties will share the profit and vice versa.

This discussion had brought us to the third distinction between these two contradicting banking system. The willingness by Islamic banking mentioned earlier exhibits all of the parties involved in a transaction are sharing the risks. In contrast, an interest charged by conventional banking is in fact the price on the principal of the loan calculated based on the risks they believed attached to the market at the time of transaction. In other words, conventional banking tries to guarantee their return and implicitly prevent themselves to bear any risks in the market. For this reason, they will deliberately transfer any risk to the other party by charging an interest. In addition, such guarantees expand to charges in the event of default, while Islamic banking do not charge penalty except for the cost incurred in the recovery of repayment.

The fifth distinction is defined as the link of financial transaction to the assets. The conventional bank do not provide such link, its transaction is purely financial transaction. While Islamic banking conduct financial transaction to either asset-based or asset-backed. Such link reveals the significance of Islamic banking from economics perspective, since their transactions contain real economic activities by either producing or growing the assets. Also, in an effort to achieve the Maqashid al-Shariah, Islamic banking support ethically and morally oriented businesses. Unlike their counterparts, which do not share similar constraints in building relationship with Haram businesses.

The last distinction surely could be summarized from the series of distinction mentioned above. Starting from the discussion of interest and penalty as instruments for conventional banking to guaranteed returns, to the risk transfer and pure financial transaction; lead to an objective which is maximizing profit and economic well-being of the bank. On the other hand, Islamic banks which shares either profit or loss and shares the business risks, eliminating penalty except cost for recovering the payment, and asset-based or asset backed transaction; shows more community oriented objectives which are grounded on ethical, social and moral. Finally, the summary of distinctions between Islamic banking and conventional banking is listed on Table 1 below.

Table 1. Differences between Islamic and Conventional Bank Aspects Conventional Bank Islamic Bank

Theoretically speaking, Islamic banking seemed to be a better choice for the Muslim customers considering its features as detailed above. Does religious significance is the most attractive feature of Islamic banking for the Muslim? The most appropriate response would be to unveil when the Muslim customers encounter between the faith-based features and non faith-based features of Islamic banking, wherein most empirical studies they display a mix result.

Such mix result might be associated to differences in the regions of the studies. Studies conducted in the majority Muslim country have shown the faith-based feature to be one of the major features which attract Muslim customers. Many empirical studies in Indonesia⁵, Bangladesh⁶, Malaysia^{7, 8}, Tunisia⁹, and United Arab Emirates¹⁰ support this claim. An indicator mostly utilized for the faith-based feature is the compliance of Islamic banking products to Islamic law. Although it is crucial to note that the faith-based features do not necessarily becomes the most important features, because they could be embedded into the non faith-based features.

For example, the customers in Bangladesh specified three important non faith-based features for choosing Islamic banks in which the faith-based features are embedded: competence, commitment and the corporate image¹¹. The customers prefer a competent banker who have the skills to answers questions on various Islamic account related services. Also, they would feel safe if their bankers can commit to handle the conflict, able to fulfill promises and maintain their consistency from time to time. In addition, they will definitely look at the bank’s corporate image as well as the convenience offered.

While studies conducted in the minority Muslim country such as United Kingdom¹² and Uganda¹³, have evidenced the non faith-based features to be the determining features to attract customers. The top United Kingdom customers’ criteria in choosing Islamic banks is low service charges and placed their compliant with Islamic law as the second. Similar results also exhibited by a study in Malaysia with multi-ethnic perspective, where China and India ethnicity prefer to non faith based features such as services and conveniences of the banks.

These phenomenon could be justified through behavior intention based on the Theory of Reasoned Action (TRA), which predicted by mainly two components: attitude toward behaviour and subjective norm. The earlier is the learned response toward an object or an act, while the latter is the individual’s perception of social pressure to perform any particular behavior. Hence, it is not impossible to attract non-muslim towards Islamic banking.

As an example, a study in Pekanbaru, Indonesia; initially had shown that both Muslim and non-Muslim entrepreneurs of small and micro businesses have a lack of understanding of Islamic financing process. Hence, low intention to adopt Islamic banking products. Such behaviour successfully altered after a counselling session which increased their literacy by types of Islamic financing, the benefits and the differences with its counterpart. Interestingly, the intention to use Islamic financing is higher on non-Muslim entrepreneurs comparing to the Muslim one.

Once the customers have adopted Islamic banking ser vices, further question might be the factors affecting customers continued intentions to use their services. Some of the studies proposed non-faith based features such as banks’ reliability, customers’ satisfaction, trustworthiness and customers’ service as the important features^{14, 15}. Similarly, a recent study also supported such claim and shows non faith based qualities of Islamic banks such as outcome quality, physical environment quality and interaction quality as influential factors¹⁶. And only one study provided evidences that religious motives and attitudes beside the ease of financing access as significant effects towards continued intentions to use Islamic banking services.

Religious or faith-based features are the most distinctive features of Islamic banking in comparison to the conventional banking. Theoretically, faith-based features of Islamic banking seemed to be better than the conventional banking from customers’ perspectives. Islamic banking do not price money, eliminate interest, share the risk, no excessive penalty, all transactions are assets-based/assets-backed, and most importantly community oriented based on ethical, social and moral.

Whether these faith-based features are the most attracted features for the customers, we should refer the answer to most of the empirical studies which do not agree with the statement. The faith-based features are included in the list of attractive features, but they are not necessarily the most important ones. These features are hand-in-hand with the non faith-based features to attract the customers as well as to maintain their loyalty. Also, the faith-based features are expected to be attached to the non-faith-based features, thus the religious significance can be seen as a whole rather than being atomized.