Measurements of Service Quality of Islamic Banking in Malaysia: A Non-Malaysian Customers' Perspective

Abstract

The study aims to measures the service quality of Islamic banking in Malaysia from non-Malaysian customers' perspective based on the six different dimensions of the SERVQUAL model, namely, Shariah, assurance, reliability, tangibles, empathy and responsiveness. This study surveyed 100 non-Malaysian respondents from 25 different countries who have first-hand experience with Islamic banking services in Malaysia. The collected data were analysed by using the SPSS v23 for reliability analysis and descriptive statistics. The results indicates that customers' impressions of Islamic banks' service quality in Malaysia did not meet their standards. The independent variables, namely, compliance, assurance, reliability and empathy have positively affected customer satisfaction, while two dimensions, namely, tangibility and responsiveness does not significantly influence non-Malaysian customer satisfaction in the Islamic banking system in Malaysia. The findings of the study suggested that the Islamic banks should develop and obey the customer perception's policy by following customers' expectations and the results are also expected to include recommendations for improving the level of satisfaction of the Islamic banking system's foreign clients in Malaysia. Since this study was limited to Islamic banks in Malaysia, the findings may not be applicable to other traditional banks.

1. Introduction

In developed and developing countries, the banking sector is considered to be one of the most important economic sectors (Mittal & Kamakura, 2001). Likewise, in addition to providing many other financial services, they play a key role as a financial intermediary between savers and investors. However, due to their significant role in the national economy, the establishment of Islamic banks has seen rapid growth over the past four decades and has secured a global presence in both Muslim and non-Muslim countries (Iqbal & Molyneux, 2005; Zeithaml et al., 1990). Islamic banks play the same role as the conventional banks except that they must comply with the Shariah (Henry & Wilson, 2004). and the payment of interest is forbidden in accordance with Islamic values (Khattak, 2010). However, currently, Worldwide, there are more than 300 Islamic banks and financial institutions and their assets are valued at about US$300 billion (Henry & Wilson, 2004; Pollard & Samers, 2007).

Obviously, since its formation in 1983, Islamic banks have contributed to the growth of the Malaysian economy (Mittal & Kamakura, 2001). Since then, Malaysia has become the fastest-growing Islamic banking in the financial industry, Nevertheless, they face stiff competition from conventional banks (Othman & Owen, 2001). The Islamic banking industry needs to understand their customers’ expectations of their business operations to increase the market share, particularly the quality of service provided to increase customer satisfaction (Wajdi Dusuki & Irwani Abdullah, 2007).

This study measures the client experience of Islamic banking services in Malaysia from a non-Malaysian perspective. Increasing the level of quality of the performance would lead to Islamic banking growth and sustainability (Govender, 1996). According to (Parasuraman et al., 2004), deficiency in service quality in Islamic banking sectors is the disparity between customer expectations and real service perceptions. Therefore, this study adopted the SERVQUAL model by Parasuraman et al. (2004) to examine the relationship between five dimensions of service quality including tangibles (physical components), reliability (accuracy of performance), responsiveness (promptness and helpfulness), assurance (knowledge and courtesy of employees) and empathy (caring, individualized attention the firm gives its customers) and customer perspectives in Malaysian Islamic banking sector. A sixth dimension, however, is introduced, reflecting the degree to which Islamic banks are committed to the values of Islamic law and their ability to provide Islamic goods and services (Othman & Owen, 2001).

2. Literature Review

2.1. Service Quality

Literature indicates that service quality is found to be a significant factor for measuring the success of the banking industry (Kemal Avkiran, 1994; Mersha & Adlakha, 1992; Parasuraman et al., 1985). Despite its broad definition, perhaps the most common definition of service quality is the result of the relationship between customer expectations of the service and their perception about performance (Mersha & Adlakha, 1992; Parasuraman et al., 1985; Zeithaml, 1988). Therefore, many companies consider service quality as a significant factor for their competitive feature, as it is the key component for improving their level of competitiveness. Similarly, it’s also considered as a pivotal factor for the significant growth of Islamic banking and for their customers who can expect to receive superior services from the banking sector (Parasuraman et al., 1985). The banking sector seeks to understand customer perceptions about service quality in order to determine their needs and seeks to identify its strengths and weaknesses for improved service quality (Khattak, 2010).

2.2. Customers’ Perception

Customers’ perception of performance depends on their experience (Parasuraman et al., 2004). Prior studies have shown that the overall impression of service by consumers is focused on their perception of the performance (Othman & Owen, 2001). Perceived quality is related but not identical to satisfaction as a type of behaviour and is based on the interaction between performance, expectation, and perception (Parasuraman et al., 1985). Moreover, a deep understanding of the behaviour of customers can help decide how service quality is viewed in the Islamic banking sectors and how it can enhance their service quality. Therefore, this study hypothesised the relationship between six dimensions of the service quality and perception of customers in the Islamic banking sector in Malaysia.

2.3. Measuring Service Quality and SERVQUAL Model

In comparison to Razak et al. (2013) conceded that the SERVQUAL model is the most detailed attempt to measure the quality of service, given the various methods for measuring service quality. However, the model is widely used to measure service quality (Baber, 2019). This model (SERVQUAL) was developed as a generic instrument by Parasuraman et al., (1988) to measure the quality of services based on the focused group. Since its introduction, a multitude of researchers has utilized the 22-item questionnaire to analyse service quality with the inclusion of financial institutions in different sectors of the service industry (Alam & Al-mari, 2020; Baber, 2019; Gounaris et al., 2003; Parasuraman et al., 1988). Therefore, this study adopts SERVQUAL to measure service quality in the Malaysian Islamic banking sector.

SERVQUAL is based on rational and helps to explore how consumers’ perspective is considered to measure the standard of service by testing its relationship between the perceptions of customers and the service provided, based on the assumption that customers will judge the quality of service they receive in relation to their expectations. The literature is relatively conclusive: Parasuraman et al. (2005) and a broad range of study studied (Al-Tamimi & Al-Amiri, 2003; Stamenkovic et al., 2006) with six service quality features; tangible features consisting of physical facilities, equipment, and personal appearance; reliability implies the ability to deliver the promised service in a reliable and precise manner; sensitive features consisting of physical facilities, equipment, and staff appearance.

While researchers with prior experience with the software have been unable to agree on a single dimension, a number of measurements taken by SERVQUAL and how the customers expect it to work have been an issue of contention. As a consequence, all of the sectors have an inconsistent factorial structure and unproven invariance. Furthermore, this supports the conclusions of Babakus and Boller (1992) who concluded that measurement of service quality is a big job. As well as, it is sufficient to say that the results related to the SERVQUAL’s validity are not rigorous enough as the findings from other studies mentioning the results related to SERVQUAL’s dimensionality and other studies that provide a comparative analysis of works that have used the SERVQUAL model identify consumer prospects (Al-Tamimi & Al-Amiri, 2003; Ghasemi & Zahediasl, 2012; Islam et al., 2015; Yavas & Benkenstein, 2007; Zulfiqar et al., 2020).

2.3.1. Compliance with Shariah

Adding Shariah compliance is necessary to measure service quality in the Islamic banking sector (Amin & Isa, 2008; Tran & Le, 2020). As well as, Othman and Owen (2001) modified the SERVQUAL model by adding this dimension which they defined as the ability of a firm to meet Shariah requirements and operate under Islamic banking rules.

2.3.2. Assurance

Assurance takes into consideration employees’ ability and knowledge, as well as their ability to inspire trust (Parasuraman et al., 1985). It includes efficiency to perform the service, respecting customers, and providing financial advice (Fitzsimmons & Fitzsimmons, 2000).

2.3.3. Tangibles

Fitzsimmons and Fitzsimmons (2000) defined tangibles as the appearance of personnel, physical facilities, equipment, as well as materials, while (Ananth et al., 2011) summarised tangibles as modern looking equipment, well-dressed employees, and visually appealing materials.

2.3.4. Reliability

Punctual service delivery is the ability to keep promises with the customer and performing services accurately. It is a crucial factor in the provision of banking services (Yang & Fang, 2004).

2.3.5. Responsiveness

Employee responsiveness is described as the ability of employees to provide services that involve minimal waiting. It includes understanding customers’ needs and safety in transactions (Kumar, Tat Kee, & Taap Manshor, 2009).

2.3.6. Empathy

Empathy is the act of being concerned for others and it is individualized attention to customers. (Ananth et al., 2011) describes empathy as giving individual attention, suitable operating hours, personal attention, and understanding customer’s needs.

2.4. Theoretical Framework

3. Methodology

To accurately meet the study aims (see Figure 1), it was decided that a quantitative method would be most suitable, as Islamic banking in Malaysia will be studied to assess the quality of its services. The data was collected by using questionnaires to decide the perception and satisfaction of customers about the services offered by Islamic banks in Malaysia. The questionnaire has three sections. The first section focuses on the SERVQUAL dimensions. Compliance with Shariah, assurance, reliability, tangibles, empathy and responsiveness have 34 items. The second section, customer’s satisfaction, has 3 items. The third section is personal information. The 5-pint Likert scale was adopted to measure the data ranging from “not important” to “very important”. Our respondents are non- Malaysian students at International Islamic University Malaysia (IIUM) with an account in Islamic banks in Malaysia. One hundred questionnaires were distributed to participants. From the number, 83 questionnaires were returned to the researcher with 74 usable questionnaires, as 8 were omitted (see Table 1). All distribution data was analysed using SPSS software.

Figure 1: Theoretical Framework was Developed from SERVQUAL (Parasuraman, 1998)

Table 1: Respondents Profile

The results of this study comprise from the different sections of data analysis. In the first section, this study performs descriptive analysis for the respondent’s demographic information, who have taken part in the study. The second section of the article focuses on the credibility and consistency of the instrument of research. Furthermore, third part of the study measures the gap between the six dimensions of the quality of the services in Islamic banking and the perceptions of the customers in Malaysia. Finally, with the coefficient of correlation, the fourth segment of this study contrasts beliefs and perceptions about the standard of Islamic banking in Malaysia.

4. Results

4.1. Respondents’ Profile

One of the sections of the questionnaire was designed to collect the respondents’ personal information. This section included questions related to the name of the bank, gender, age, current qualification, nationality of the respondents, and years as a customer of the Islamic bank. The following table presents the respondents’ profile.

Personal information provides an overall view of customer characteristics. As shown in Table 4.1, 74 respondents were selected. 62.2% were male participants and 37.8% were female participants. The above table also indicates the age of the participants. 67.6% were aged between 20 to 29 years, 24.3% aged between 30 to 39 years, and 8.1% aged between 40 to 49 years. All respondents are educated. Most of the respondents hold a master’s degree 44.6%, followed by a bachelor’s degree 35.1% as well as 15 respondents with PhD degree. Respondents were from 25 different countries with Yemenis comprising the majority with 18.9%. 8.1% of respondents were customers with Islamic banks for less than a year, 67.6% opened accounts four years ago, and 20.3% opened accounts nine years ago. The other three respondents have been customers of Islamic banks for at least 10 years (4%).

4.2. Reliability Analysis

Reliability measurement was conducted to assess consistency and stability. Cronbach’s Alpha is a reliability coefficient through which values for the seven dimensions were calculated, as presented in Table 2. The closer the Alpha value is to 1, the more accurate each measure’s internal accuracy is. Cronbach’s Alpha was used to measure the reliability analysis which is suggested that all valued for variables are greater than 0.6, which is commonly considered to be the standard for internal consistency representation. It shows that respondents answered the questions critically and without biases (Bahia & Nantel, 2000). The results of the reliability analysis are Shown in Table 2.

Table 2: Reliability Analysis

Table 2 shows that all variables are higher than 0.6. Cronbach’s Alpha for compliance is 0.655 which is considered in the moderate range and therefore is the lowest variable compared to others. The tangible variable measured 0.783 which is in the range of good, and the highest independent variable is reliability with 0.875 which is considered particularly good. In Assurance, Empathy, and Responsiveness scored 0.864, 0.846, and 0.833, respectively. The last variable is the satisfaction comprising threw items. The Alpha value for the three items was 0.788 which is exceptionally good.

4.3. Descriptive statistics

According to Razak et al. (2013), descriptive statistics is a powerful and valuable tool explaining and interpreting data. Table 3 presents the descriptive statistics of non- Malaysian customers’ perception of all six dimensions of service quality in Islamic banks in Malaysia.

Table 3: Descriptive Analysis

Table 3 shows that the mean values of Shariah compliance of services quality provided by Islamic banks in Malaysia have the highest mean in the range (M = 3.98, STD = 0.629) to constitute the most dominant service quality provided by Islamic banks in Malaysia. This is followed by Responsiveness (M = 3.878, STD = 0.786), Reliability (M = 3.85, STD = 0.898) and Empathy (M = 3.777, STD = 0.697) rated as having a moderate influence on the customers’ satisfaction. However, Assurance (M = 3.T69, STD = 0.92) and Tangibles (M = 3.62, SD = 0.77) scored the lowest mean value and Reliability (M = 3.7956, STD = 0.43851) the lowest mean value to form the least significant dimensions of service quality in Islamic banking in Malaysia. The value of standard deviations was high, showing the dispersion of distribution was spread widely. It implies that the effects of quality of service on customer satisfaction are normal Moreover, it also shows that respondents agreed that it helps to increase the customers’ satisfaction level for Islamic banks. Additionally, this study followed the guidelines suggested by (Hair et al., 2006) to consider the cut-off critical value ± 2.58. Table 4 shows that the value of kurtosis and skewness was within the specified range (± 2.5) for each construct.

Table 4: Skewness and Kurtosis

Table 5 shows that the R-value (0.554) represents the overall value for service quality dimensions Compliance, Assurance, Reliability, Tangibles, Empathy and Responsiveness, which strongly influence customer satisfaction. R-square (R²) value is 0.306, representing 30.6%, which is a moderate explanatory power of regression.

Table 5: Model Summary

*Predictors: (Conastant), Res, C, T, Rel., E, A.

The coefficient of correlation shows the degree to which an independent variable differs from a dependent variable, especially if other independent variables are constant. The beta coefficients show how and to what degree compliance, assurance, efficiency, tangibles, empathy and responsiveness of SERVQUAL dimensions affect the satisfaction of customers with the Islamic bank.

Table 6 indicates that assurance (beta = 0.437, t = 1.918, p < 0.05) and empathy (beta = 0.432, t = 2.232, p < 0.05) have positively significant impact on satisfaction of customers, while empathy (beta = 0.352, t = 2.914, p < 0.05) and assurance (beta = 0.395, t = 2.015, p < 0.05) are found to have a moderate impact on customers’ satisfaction in relation to the Islamic banks. Moreover, responsiveness (beta = 0.327, t = 1.746, p < 0.05) and tangibility (beta = 0.026, t = 0.145, p < 0.05) have the lowest influence on customers’ satisfaction and are therefore insignificant. This, therefore, leads us to accept hypotheses H1, H2, H3 and H5 due to a positive relationship between independent variables and customer satisfaction, while hypotheses H4 and H6 are rejected. The Regression Model is:

Table 6: Correlation Coefficients

a. Dependent Variable: S.

\(\begin{array}{l} \text { Overall Customer }\\ \begin{aligned} \text { Satisfaction }=& 2.079+0.352(\mathrm{C})+0.437(\mathrm{~A})+-0.395-\\ &(\text { Rel. })+.026(\mathrm{~T})+0.432(\mathrm{E})+-0.327-(\text { Res }) \end{aligned} \end{array}\)

5. Conclusion

Nowadays, because of the heavy competition between financial institutions, the banking sector is moving toward integrating financial services. To satisfy their customers, Islamic banks should pay attention to this shift and begin supplying high-quality service. This study sought to determine non-Malaysian customers’ satisfaction with the service quality in Islamic banks in Malaysia by using the SERVQUAL model. This study showed that Shariah compliance has a high mean score while tangibility and assurance did not. This indicates major areas for improvement. The study also concluded that all independent variables have a positively significant impact on customer satisfaction except Tangibility and Responsiveness. Thus, independent and dependent variables should work together to ensure a successful Islamic banking sector. This research observed that service quality is a significantly positive factor for customer satisfaction and that the Islamic banking industry needs to satisfy each dimension of quality of services.

The findings indicates that consumers in Malaysia were seeking more than what they perceived from Islamic banking services. A similar research conducted in India by Banerjee and Sah (2012) on the perceptions of the customers and their expectations from the banking sectors in India found that the customer’s perceptions were less than their exceptions due to non-professional behaviour of the employees, failure of prompt services to solve their issues, and unprofessional behaviour with customers while services are being delivered. To fulfil this gap, this study suggested that the bank should obey the customer’s perception’s policy and more focused on their expectations which they want. Moreover, the banking industry especially Islamic banking should design the standard of their services as per the shariah standards that deliver reliability to the customers, consistently. As well as not try to deliver more than what they are able to deliver. Furthermore, the Islamic banking industry needs to develop well planned organizational planning by following the customers’ expectations according to the Islamic norms and values, which helps to strengthen the dimensions of services quality.