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Islamic Finance Principles Performance and Prospects pdf

  • Book Title:
 Islamic Finance Principles Performance And Prospects
  • Book Author:
Essam Ibrahim, Tina Harrison
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Bank Image in the UAE:  Comparing Islamic and Conventional Banks


This study explores how UAE customers view Islamic banks and conventional banks. We investigate whether this image affects customer preference about the type of bank they want to patronize. In the highly competitive UAE market, banking institutions are intensely concerned with customers’ post-purchase behavior. They recognize that merely satisfying customers is not sufficient to retain their loyalty because even satisfied customers may switch to competitors.

According to Ekrem et al,1 in the past decade, firm image has been recognized as a strategic tool to strengthen a firm’s competitive position and improve its profitability. But image alone may not be an adequate source of competitive advantage, as customers also want specific products and services. Thus, customers’ image of UAE banks and their services are related to customer preferences.

According to the UAE Central Bank, the banking community in the UAE comprises 46 banks, including 21 national banks and 25 foreign banks. Of the 21 national banks, four are Islamic. Their total assets were AED 118 824 million (about US$32 360 million) in 2006, compared with AED 873 156 million (about $237 788 million) for the conventional banks, constituting around 13.6 per cent of total assets of all banks in the UAE.2 In 2000, UAE Islamic banks had 96 branches compared to 582 branches for conventional banks, representing 16.5 per cent of the total number of branches of UAE commercial banks.2

Even though there are some similarities between the products and services of conventional and Islamic banks, it is hard to determine why UAE customers prefer to deal with conventional rather than with Islamic banks. We assume that because the UAE is an Islamic country, demand for Islamic banking services should be high. Based on this assumption, Islamic banks have a good opportunity to expand their activities and attract more customers and subsequently open more branches.

The small market share of Islamic banks today, as noted above, and the small number of branches implies that Islamic banks in the UAE are not widely accepted. This study investigates the reasons for this.

Literature review

A number of empirical studies have discussed service quality, product, satisfactory relationships and their effect on bank image and loyalty. We review some of the most recent studies below but first we review the literature on the three core aspects of our study: conventional and Islamic banks, bank image and service quality.

Conventional and Islamic bank products

Islamic and conventional banks are extremely different in products and in basic principles. The former is based on a Shariah foundation (Islamic principles) and all dealings, transactions, business approaches, product features, investment focus, and responsibility are derived from the Shariah law, leading to many operational differences compared to conventional banking.

For example, when lending money, participation in partnership business is the main function of the Islamic banks. In contrast, lending money and getting it back with compound interest is the business goal of conventional banks.

In Islamic banking, the creditor should not take advantage of the borrower and there should be no reward without taking a risk. Although Islamic banks do not charge a pre-determined interest rate as conventional banks do, they charge a certain amount upon the initial agreement between the bank and the borrower.

Conventional banking is essentially based on the debtor-creditor relationship between the depositors and the bank, and between the borrowers and the bank. Interest is considered the price or cost of borrow-ing, reflecting the opportunity cost of money.3 A comparison between conventional and Islamic banks is provided in the Appendix.

Bank image

Boyle4 defined image as ‘the total impression an entity makes on the minds of people’ whereas Worcester 5 defined corporate image as ‘the net result of the interaction of all experiences, impressions, beliefs, feelings and knowledge people have about the company’.

Image can be classified into three types: corporate image, which reflects the way people view the whole corporation; product image or the way people view a particular product category; and brand image, which reflects the way people view a particular brand compared to other brands.5 According to Ekrem et al, banks today have image and identity problems.


 They have failed to keep consumers satisfied and face ever-increasing competition in markets with little growth in demand. Ekrem et al1 concluded that a favorable bank image is a critical aspect of a company’s ability to maintain its market position and affects core aspects of organizational success such as customer patronage. A favorable bank image has a positive impact on performance and sustainable growth, including market share, over time.

Service quality

Gronroos6 defines service quality as the fulfillment of customers’ expectations. Parasuraman et al7 identified 10 determinants of service quality generic to the service industry, including tangibles, reliability, responsiveness, competence, courtesy, credibility, security, access, communication and understanding the customer.

Later, Parasuraman et al8 developed a 22-item instrument called SERVQUAL that has become widely used as a generic instrument for measuring service quality. SERVQUAL examines five dimensions consistently ranked by customers as the most important for service quality, regardless of service industry.

Bank-Level Stability Factors and Consumer Confidence – A Comparative Study of Islamic and Conventional Banks’


The stability of the banking sector is the foundation of steadiness of the entire financial system as banks play a central role in the money creation process; in the payment system, in the financing of investment and in economic growth. Furthermore, to preserve monetary and financial stability central banks and supervisory authorities have a special interest in assessing banking system stability.

Bank stability is normally reflected by features, such as bank runs or illiquidity and subsequent risks relating to illiquidity in the banking sector, which affect their customers and is reflected in their confidence levels.

There are numerous inferences that the product mix of Islamic banks provides more stability1–5 and are not affected by the financial crisis because the nature of an Islamic bank’s product mix, for example, does not trade in the collateralized debt obligation market that has been blamed

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