1. Abstract
In this study we had learn that Islamic financial institutions and conventional financial
institution which situated globally. Furthermore, Islamic financial institutions established
because of the principles of capitalism by charging interest is forbidden in Islamic law. In
this way Muslim can use the new financial institution services that are acceptable by the
concept of Shariah. The main objective of this research is to investigate the relationship
between customer acceptance and financial institutions and the differences between
Islamic and conventional financial institutions. Through this, we do learn about the
definition of financial institutions. In addition, we study more about the knowledge in
Islamic and conventional financial institution. Besides that, investigating on customer
acceptance of these two financial institution also been done. Subsequent to this analysis,
customer acceptance had been clarified. Furthermore, the financial instruments and the
benefits of Islamic and conventional financial institutions had been stated down. Through
this study, we know that customer acceptance has significance effect on financial
institutions. There are two limitations in this study. First, research and questionnaire of
this study is not available due to the wide coverage of areas. Second, information
collected may not reflect to actual by the limitation of secrecy.
Introduction
An Islamic financial institution has emerged as a competitive and a viable substitute for
the conventional financial institutions during the last three decades. It is especially true
for Muslim world where presently Islamic financial institutions strides at two separate
fronts. Islamic financial institutions are developed base on the concept on Islamic Shariah.
It must operate within the framework of the religion that is Quran and Sunna. In
Mu’amalat, it means the relationship with other human had showed the economic
activities are included. The primary motive of Islamic financial institutions is to ensure
the prohibition of Riba (all forms of unearned income). In 1940s and 50s, it started in the
development of the theory and the first financial institution had introduced in 1970s. In
1990s, it had focus on concentration of Islamic financial institution growing in selected
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2. countries. In 2000s, it starts to develop structured Sukuk and capital market and
commencing of mega project finance, large commercial banks and Islamic derivatives.
The first service apply in Malaysia that relate to Islamic finance is Tabung Haji
(Pilgrimage Fund) in 1967. In 1983, the first Islamic Bank in Malaysia had been
established. By the next year, the first Takaful (Islamic insurance) had introduced.
Nowadays, Islamic financial institutions operate in over 70 countries. According to
Ibrahim Warde, the assets have increased more than fortyfold since 1982 to exceed $200
billion had showed the improvement and widely use of the Islamic financial institutions.
In 1996 and 1997, they have grown at respective annual rates of 24 and 26 per cent.
Some foreign institutions have start to established Islamic banking subsidiaries, now
many conventional banks are also offering ‘Islamic products’ that are sometimes aimed at
non-Muslims. The origin in the phrase financial institution is derived in the Italian phrase
“banco” or desk. Financial institutions come from areas which organizations could safe
loans to buy stock, as well as accumulate the money with curiosity when the merchandise
is marketed. The financial institution has come to a big revolution with the innovation of
technology make it can serve the public within an aggressive market place that cover with
high efficiency and more secure. Conventional financial institutions provide financial
services for its client such as guarantees, funds transfers, safety of wealth, and facilitation
in international trade provide reward as a part of income. However the major driver of
operation of conventional financial institutions is interest. It acts as financial
intermediaries by allocate financial resources from its source to potential users. Since the
conventional financial institutions established under the principles of capitalism and
transect business by charging interest which is forbidden in Islamic law. This is the
reason why Muslims establish their own financial institutions under Islamic principles.
Objective of study
To investigate the relationship between customer acceptance and financial
institutions.
To investigate the differences between Islamic and conventional financial
institutions.
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3. Literature Review
Studies related to financial institutions
Financial institution can categorized in three group, Deposit-taking institutions that
accept and manage deposits and make loans, including banks, building societies, credit
unions, trust companies, and mortgage loan companies; Insurance companies and pension
funds; and brokers, underwriters and investment funds (Siklos, 2001).
There is broad definition for financial institution. In generally, financial institution
is an institution that provides financial services for its clients or members. According to
the Commissioner of Law Revision Malaysia (2006), financial institution means any
licensed bank, licensed merchant bank, licensed finance company, or licensed discount
house, as those terms are defined in the Banking and Financial Institutions Act 1989.
The government of Guyana has defined “depository financial institution” as a
licensed financial institution which accepts deposits and other repayable funds from the
public while “non- depository financial institution” as licensed financial institution which
does not accept deposits and other repayable funds from the public.
According to Peter Thomas (2004), the Norway government has state that
financial institutions is the companies, undertakings or other institutions which carry on
financing activity except public credit institutions and funds, public trustee's offices and
foundations whose primary purpose is not to engage in commercial activity, management
companies pursuant to the Securities Funds Act and investment firms pursuant to
Securities Trading Act.
Finally, financial institution may to include mortgage lending businesses.
Mortgage lending business means that organization which finances or refinances any debt
secured by an interest in real estate, including private mortgage companies and any
subsidiaries of such organizations, and whose activities affect interstate or foreign
commerce (Kenny, Boyce and Warin, nd).
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4. Studies related to conventional and Islamic financial institution
There are the differences between conventional and Islamic financial institution, the
difference is showed below:
2.1 Deposits
Both conventional and Islamic financial institutions collect deposits from their saver.
However according to Hanif (2011), there are different in rewarding their depositor.
Under conventional system reward is fixed and predetermined while under Islamic
deposits are accepted through Musharaka and Mudaraba where reward is variable. Under
conventional system total risk is born by the bank and total reward belongs to it after
servicing the depositors at fixed rate while under Islamic system risk and reward both are
shared with depositors.
2.2 Home loan
Home loan interest rates are available in conventional financial institutions. According to
Noriza (2009), lending with interest is not allowed for Muslim. Conventional housing
loan lend money for house purchasing while Islamic banking mostly structures on buy
and sell basis on purchasing a house. Thus, most of Islamic home financing involve
purchase and subsequent sale of asset at certain fixed price. Conventional financial
institution charge interest in home loan while Islamic home financing did not usury
which means there are no interest charges in paying back the house financing at the end
of the maturity period. Customers of Islamic financial institution only have to pay back
the price that has agreed upon agreement by both parties between the bank and the
customer after the profit margin had been calculated.
2.3 Overdrafts or Credit Cards
According to Hanif (2011), conventional banks offer the facility of overdrawing from
account of the customer with interest. One of its form of example is use of credit card
whereby limit of overdrawing for customer is set by the bank. Credit card is not offered
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5. by Islamic banks except in the form of Murabaha for example provide facility of debit
card. Under conventional banking a customer is charged with interest once the facility is
used. However under Murabaha, profit is due when the commodity is delivered to the
customer. Default customer is charged with further interest for the extra period under
conventional system however extra charging is not allowed under Murabaha.
2.4 Investments
In order to maintain liquidity conventional banks have many avenues including
government securities, shorter term loans and money at call and short notices, leasing
companies’ bonds, investment in shares and others. Conventional banks can also create
liquidity by issuing the bonds against their receivables. Commercial banks are also
protected by central bank by providing liquidity in rainy days for interest. Interbank
deposits are also rewarded in the form of interest by commercial banks. For Islamic
financial institutions avenues are very limited to create required liquidity at the same time
to earn some revenue by investing in short term and liquid securities. Compare to
conventional, Islamic financial institution cannot invest in government securities, short
term loans, bonds and money at call and short notices because of interest based
transactions (Hanif, 2011).
2.5 Stability
According to research by Beck (2010), his survey result has showed that conventional is
more stable compare to Islamic financial institution. Islamic banks are not more stable
and not liquid than conventional banks due to lower profitability and lower capitalization.
He found that conventional banks are more cost efficient and better capitalized than
Islamic financial institution. Higher complexities in Islamic banking might result in
higher costs and thus lower efficiency of Islamic banks.
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6. Studies related to customer acceptance on financial institutions
From the report from Khazeh and Decker (1992), interest rate was one of the top five
determinants factors that influenced the acceptance on banking decision. The evidence of
interest rate has supported by Ongena (2009). Paying highest interest rates on saving
accounts also rank in second place for consumer to choose the financial institution in the
research by Safakli in year 2007. Same with the Islamic financial institution, Islamic
financial institution always offer higher interest rate compare to conventional (Rosly,
2005). Gerrad and Cunningham (1997) also found that profit or interest rate served as a
reason for people maintaining their relationship with Islamic banks. However, the
revenue of Islamic financial institution is low due to high interest rates.
Customer perception of risk is also factors that influence the acceptance of
financial institution. The higher financial institution or instrumental risk, the higher return
for the consumer (Faulhaber, n.d.). However, the consumer more prefers large financial
institution. There is the relationship between the sizes of the financial institution to the
risk. McAllister and McManus (1993) found that increasing size permitted lower risk
costs for banks resulting from inventory economies. Reputation of financial institution
was one of the method that consumer to determine the risk of the firm (Ongena, Tümer-
Alkan and Vermeer, 2010). In Islamic financial institution, according to Noriza (2009),
Islamic banking products and services normally subscribe to fixed rate mechanism which
provides certainty, clarity and predictability. Home loan financing is stable due to flat
profit rate imposes on the financing.
Cost will influence the acceptance of consumer in choosing financial institution.
Research of Mooradian and Ryan (2011) shows that cost of transfer is another factor that
influence consumer and corporate to choose the financial institution. This cost includes
cost of electronic payments, charges on foreign exchange, drafts, cheques and trade and
export finance charges. The situation is same in Islamic financial institution. In the report
of Marimuthu (2010), the responders have chosen the Islamic financial institution due to
its low service charge and benefit. The evidence on Islamic is also supported by
Juwairiah (2011) in her research.
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7. Convenience is also a factor that consumer to accept the financial institution.
Convenience include factors the such as working hours of the financial institution,
availability ATMs, convenient branch locations and wide branch network convenience,
and the location (Haron, 2005). Kaynak and Whiteley (1999) observed that the
convenience of a bank was a primary motivation for customers in selecting a specific
institution. In survey of Riggall (1980), community in the United States of America
found that convenience of location to both home and work appeared to be the most
influential factor for bank selection by newcomers. Same with the Islamic financial
institution, convenience factor is also support by Juwairiah (2011) that customer to
choose Islamic financial institution. Islamic financial institution gives the optional for
customers either muslin or non-Muslim to choose what type of products that made them
convenience to have.
Awareness of a person to the financial institution influences their acceptance.
Public knowledge, product, marketing of financial institution affects the awareness of a
person to the financial institution (Marimuthu, 2010). Awareness also can influence by
friend or recommendation by a professional (Wangenheim, 2004). For Islamic Financial
institution, according to Haron (2005), public has support and acceptance towards the
Islamic banking. His report state that almost 100% of Muslims and 75% of non-Muslim
aware of the existence of Islamic bank in Malaysia. Through his report, he shows that the
evidence which Islamic bank is not meant for Muslim customers only. Same with the
result by the researcher, Dusuki (2007), customers has positive perception toward Islamic
financial institution. Most of the responder thinks that there is good potential for Islamic
banking.
Finally, religion affects the decision to choose the financial institution. Religion
rank third place in Marimuthu’s (2010) survey. Islamic financial institution is not accepts
by public due to the perception that Islamic banking is for Muslim only.
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8. Discussion and Findings
Customer Acceptance on Islamic versus Conventional Financial Institutions’
Products
There are extremely different between Islamic financial institutions and conventional
financial institutions. The most notable features are the products that introduced by
Islamic financial institution which are likely to those products of conventional financial
institutions. Some of the Islamic financial accessible to investors are including the
insurance, which known as Takaful, Islamic term deposits, mutual funds, treasury
deposits and the most popular Islamic equity, Sukuk. However, Islamic financial system
are based on the Shariah principles where the activities that involved interest, gambling
and speculative trading are strictly prohibited. Syariah is supporting and encouraging as
the activities are can develop the entrepreneurship, trade and commerce and bring in
developments of societal or benefits. In terms of Islamic finance, this principle has give
details about the ethical concepts of money and capital, the relationships between risk and
profit and the social responsibilities of Islamic financial institutions.
For conventional financial system, it is operate based on the debtor creditor
relationship between the depositors and the bank, and the relationship between borrowers
and bank. Interest is considered as the price of credit which may reflect the opportunity
cost of money. Conventional financial system is operate under the principles of
capitalism and transactions business by charging interest which may prohibited in Islamic
Law. Interest charge such as on lending activities have contributed as the main source of
revenue and funding for conventional financial institutions.
Interest paying or receiving on capital or Riba is the most popular aspect of
prohibition in Islamic financial system. Those fixed rate or predetermined rate on
maturity, amount of principal and the fluctuate investments performance are considered
as Riba and it is prohibited in Syariah principle. Conversely, it is encouraged by Islamic
Law as it is the rate of return or profit on capital and there is sharing of profits. In Islamic
financial institutions, there are no provisions to charge the extra money from defaulters.
Nonetheless, they are requiring disbursing a small amount of compensation and which is
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9. proceed toward to charity. Based on the principle, the profit is determined ex-post which
has symbolizes the creation of additional wealth through successful entrepreneurship.
Interest, determined ex-ante which is the cost that is accrued regardless of the outcome of
business operations and may create wealth even if there is business losses.
In conventional sense, the financial institutions such as bank has play the role as
money dealer, has reward the using money with interest under capitalism system, and
thus interest is the source of revenue and fund for financial institutions. For rewarding
depositors, they may get the returns and rewards of savings in the form of fixed interest
or predetermined returns. For long term depositors they may receive a higher return and
higher risks. For example a term deposit is has to deposit or saving in a financial
institution for a fixed period by depositors. They just can withdraw it as it is maturity or
noticed earlier by depositors after numbers of days. Depositors are earning interest on the
investments that made by the bank during their money is in the financial institution. Their
investments contributions are under guaranteed with the length of terms, amount of
deposits, and others conditions that agreed by consumers and banks.
Risk and uncertainty or gharar also not allowed in Islamic financial system. It is
forbidden on the selling of goods and services that the seller is not in position to convey
the contracts. He also cannot sell since the goods or services are not belongs to himself.
To avoid the risks, Islamic financial system has regulated that the price and nature of the
goods being transacted are defined in detail and have to be agreed by both parties. The
activities of sale such as the short sales or sales on margin are deeply disallowed. In
constraint, Islamic financial system has strongly recommended and provides some
guidance in order to eliminate consumers’ risk and uncertainty which has supported
within the Syariah principle. The system has advocating risk sharing between the
consumers and Islamic financial institutions. Their loss and profit may be share by
financial institutions and consumers which follow the term that agreed at the beginning of
agreement establish. Apart from this, Islamic financial system always promotes their
customers with entrepreneurship opportunities and discouraging the speculative behavior
among depositors. Customers who have chosen to use Islamic financial system are also
got the preservation of property rights.
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10. For conventional financial customers, they may experience with risks and
uncertainties which may be reflected by the market price movement. Interest rate risk is
the most uncertainty that may faced by a lot of consumers. Interest rates risk has apparent
in prepayment risks, reinvestment risks and re-pricing risks where each of it is related
with money market movements. Since conventional financial institutions are operate
under interest-based system and thus customers are getting assured with a fixed rate
return and have a predetermined rate of interest. For example the loan activities, there
will charge the interest on the loan payments as the revenues and fund sources for a
conventional financial institutions. Interest charge is a fundamental function for a
conventional financial institution as we can seen the service provided such lending
process, there is a compounding interest charge on the payback money depends on the
principle amount, length of loans and other related terms that agreed between banks and
customers. While consumers investing, conventional financial system may put on greater
emphasis on their return or their credit worthiness in order to last long their confidence to
trade with the financial company.
Customers’ satisfaction on each the Islamic financial institutions and conventional
financial institutions are important because this factor can help in facilitate development
of both system. It is depends on the availability of services, quality of services offered
and transactions cost as well which can manipulate consumers confidence level to invest
in a financial institution. According to Saad (2012) research, customers will most
satisfied with those financial institutions that has highly competency, friendliness, and
efficiency of staff. Both of the financial institutions has a good performance but there still
necessary for Islamic financial system to improve its service quality as customers
satisfaction is vital to affecting the competitiveness of an organization. There is also
necessary for Islamic financial system to make more improvement for providing and
upgrading facilities, customers’ services and quality of services. It is fact that Islamic
financial institutions have to put more emphasis in behalf to getting greater acceptance
among non-Muslims investors or customers. Some of the non-Muslims are not select
Islamic financial system as there are lack of understanding and information about it and
there are most of them have the prior perception that it is only reserved for Muslims.
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11. On the other hand, conventional financial institutions may face competitive as
there are upgrading and innovative design on Islamic financial system. Since they are
getting more information about Islamic financial system and more understanding on it,
there may be changes of decision by investors. It is threaten to conventional financial
system due to customer’s withdrawal from and disperse of money investments. It is
happened because the main objective is select for the most appropriate financial
institution to maximizing their wealth creditworthiness. This is because Islamic system is
provide services and products that free from interest charge, various risks and
uncertainties is lower as stated in above.
There are researchers examine that there are more acceptance through
conventional financial system than Islamic financial system because customers are more
knowledgeable with conventional terms and products introduced. Some of the consumers
have made selection on Islamic financial system due to their religious aspects. A religion
factor can be a strong driven for individual preference on selecting financial system. The
stronger commitment on religious may lead the more preferences on Islamic financial
system (Jorg and Kuehn, 2003). However, there still have circumstances that customers
prefer the conventional financial system than Islamic financial system. For example,
when the interaction between consumers and conventional financial institutions are closer
then the institutions will always be the location for invest their money for create wealth.
Besides that, when customers find out the term of Islamic financial system is difficult and
hard to understand or learn about it, they will stay away from it. For most of consumers,
they will make selection on what they most understand and more knowledge on it due to
prevent uncertainties and to avoid any loss on it. Compare with non-Muslims, Muslims
investors are more knowledgeable on Islamic financial concepts and this has show a
stronger preference on Islamic financial system.
Apart from these, the availability of services and products may affect decision on
particular financial institutions. For Islamic financial institutions, there are only the
Islamic products and services that offered while it is differ from conventional financial
institution, it has provided both Islamic products and conventional products and services.
Since conventional financial system can served with various types’ products and services,
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12. it is the priority and underlying for consumers to trading in conventional institutions.
Instruments that used in Islamic financial system are namely using Islamic terms and
there also available in conventional financial system with the common use term name.
Fixed income investments such as bond are known as Sukuk in Islamic financial system.
It is an investment certificate which a proportion customers interest in a pool of assets
that yield to income and capital returns. The returns from the assets will pass to Sukuk
holders, the investors.
Deposits or savings are contributions of savers for getting rewards regardless it is
an Islamic or conventional financial institutions. Under conventional financial system, the
reward is fixed and there may predetermine interest rates based on principle amount. For
Islamic financial system, the reward for customers is variable and is through the concept
Musharakah and Mudarabah. In term of risks, it is higher risk on the long term deposits
than short term deposits in conventional deposits. It is same with Islamic financial system
but there will be profit or loss sharing between depositors and financial institutions. There
are differences between both financial system of deposits which are risk sharing and
rewards. For conventional financial system, the risk is deriving from the institutions itself
and it can own the rest of reward after give out the fixed rate for depositors as agreed. It
is totally diverse from Islamic financial system where the risk and reward are sharing
between depositors and financial institutions. Reward for depositors is always depending
on the outcomes from investments made by Islamic financial institutions. The greater
outcomes of investments bring in higher rewards for their depositors (Hanif, 2011).
Financing is a popular services provided by both financial system where it is go
through Murabaha under Islamic financial system. The purpose of both financial
institutions provides financing services is for gaining rewards from a prolific channel.
Interest payments on loan is seem like the transactions cost, processing fees for an
institutions. Under conventional financial system, financing has served as the credit
facility that address to small and medium business or industry for return. There will be
charges of fixed rate of interest on the credit which is prohibited by Islamic financial
system. As stated, there are derivation of various loans which categorize into short term
loans, overdrafts and long term loans. Within the Islamic principle, it is a cost-plus
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13. financing which used for financing assets and trading activities that the deferred
payments from customers are allowed. To achieve the requirement assets from customers,
Islamic financial company have to start doing business but cannot provide loans services
that involved interest charge. Conventional loans are preferable selection even fixed rate
charge on because it is more simply and easier to get the loan as the terms agreed by
customers.
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14. Islamic and Conventional Financial Institutions Instruments and Activity
Islamic finance had been improved from traditional instrument to modern instrument.
The most different between Islamic Finance and Conventional Finance are on the interest
(riba) factor. Islamic finance instruments are based on interest free while conventional
finance is based on current market interest free. The term interest free brings the mean of
the prohibition of paying or receiving interest on capital in Islamic Finance. Any positive,
fixed, predetermined rate that tied to the maturity and amount of principal is considered
riba. Sharing of risk and return are one of the different between Islamic finance and
conventional finance.
The most commonly used instruments in Islamic finance are Murabahah,
Mudarabah, Istisna’a, Ijara, Musharakah, Sukuk and etc. Here, the characteristic of some
of the most used instrument in Islamic finance will be introduced:
Murabahah
Murabahah is one the most commonly used profit sharing method in trade financing.
Murabaha contract has been applied in Islamic banking business in many ways including
property, vehicle, personal financing and corporate financing. A murabahah is a sale on a
cost-plus basis where payment of the price including mark-up is deferred to a later date.
According to Chong (2009), murabahah is a contract of sale and purchase at a
profit margin between the supplier and the purchaser of the good. The cost and profit
from the transaction must be known in advance and agreed by both parties to the contract.
While Rosly (2011) mention that from a financing perspective, a murabahah contract in
general implies a sale based on installment payments.
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15. Source: Academy for International Modern Studies
It is an investment fund where one party will provides the capital while the other
party will provides the management. Profit sharing will be agreed in an early stage and
the loss is bear by the provider of the funds alone. The parties that provide capital are not
allowed to interfere in the management of business. According to Obiyathulla (1997), this
partnership with the financier as the silent or sleeping partner but the profits derived from
the business or investment are shared by the two parties according to a predetermined
profit-sharing ratio.
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16. Step 1
You supply funds to the bank after
agreeing on the terms of the
Mudharabah arrangement.
Step 2
Bank invests funds in assets or
in projects.
Step 3
Business may make profit or
incur loss.
Step 4
Profit is shared between you and your
bank based on a pre agreed ratio.
d
Step 5
Any loss will be borne by you. This will reduce
the value of the assets/ investments and hence,
the amount of funds you supplied to the bank.
Source: banking info
Istisna’a
According to the Islamic Development Bank (2002), Istisna’a is a contract whereby a
party undertakes to produce a specific thing which is possible to be made according to
certain agreed-upon specifications at a determined price and for a fixed date of delivery.
upon
It is an instrument where the contract can be deal by referring to something that not in
existence at that time. Medium term financing is provided to meet the financing
requirement for manufacturing, supply, or sale if identified goods.
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17. Ijara (Leasing)
According to Lewis (n.d.), Ijara literally means ‘to give something on rent’, and
technically it relates to transferring the usufruct of a particular property to another person
on the basis of a rent claimed from him. It is similar with conventional lease but in
Islamic rules. The difference between sale (
(bay) and ijara is transfer of ownership vis-a-
vis transfer of the usufruct (
(manfa’a). That is, the leased property remains in the
).
ownership of the lessor and only its usufruct is transferred. In a simple word, Ijara is a
contract under which the financial institution buys and leases out an asset or equipment
institution
required by its client for a rental fee.
Example:
Source: banking info
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18. Step 1
You pick a car you would like to
Step 2
You ask the bank for Ijarah of the car, pay
the deposit for the car and promise to lease
the car from the bank after the bank has
Step 3
Bank pays the seller for the
Step 4
Seller passes ownership of the car to the
bank.
Step 5
Bank leases the car to you.
Step 6
You pay Ijarah rentals over a period.
Step 7
At end of the leasing period, the bank sells the car to
you at the agreed sale price.
Source: banking info
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19. Musharakha
A Musharakha is a contract among two or more parties, each contributing some of their
capital in a joint commercial venture. Profit ratios have to be specified in advance but in
case of a loss, it must be shared in proportion to the capital sums contributed (Lewis, n.d.).
In Musharakha, all parties have the right to participate in the business run.
Sukuk (Bond)
Sukuk is an investment certificate (bond) that represents a proportionate interest in a
well-defined pool of assets that yield income and capital returns. Usually set up through
the conventional securitization process, with a special purpose vehicle acquiring the
assets, the returns from the assets are passed to sukuk holders (investors). Many
governments had used this method to raise funds for infrastructure (Tayyebi, 2008).
Compare to non- Islamic bond or debenture, the bondholder will get return for providing
capital in the form of interest, while the sukuk holder will have a proprietary interest in
the assets which are being financed but did not get any interest (riba).
According to Hanif (2011), conventional institution is gaining revenue through
lending and accepting deposit, interest that charged on the investor or customer is
their major drive of operation. Instrument that are widely used in conventional
financing are such as: mutual fund, mortgage, insurance, pension fund, credit cards,
personal loans and etc.
Mutual Fund
According to Debasish, a mutual fund is a trust that pools the savings of a number of
investors who share a common financial goal. Investor will get the issued units according
to the amount of money that they have invested. They are known as unit holders. All
investor money will be collected and invest in several different instruments such as
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20. shares, debentures and other securities. The income earned through these investments and
the capital appreciation realized is shared by its unit holders in proportion to the number
of units owned by them. While the Canadian Securities Administrator (2006) defined that
mutual fund as a pool of money that is managed on behalf of investor by a professional
money manager and stocks, bonds or other securities will be invest by the manager
according to the objectives of establishing the fund. For return, investor will get units or
shares that represent their proportion share of the pool of fund. There are variety of
mutual fund such as money market fund, fixed income funds, growth or equity funds,
balanced fund, index funds and etc.
Mortgage
A mortgage loan is a loan secured by real property through the use of a mortgage note
which evidences the existence of the loan and the encumbrance of that realty through the
granting of a mortgage which secures the loan. A mortgage is a loan to finance the
purchase of your home. The home is collateral for the loan, which is also a legal contract
that the debtor will sign to promise of paying the debt, with interest and other costs,
typically over 15 to 30 years. If the debtor fail of can’t afford to pay the debt, the lender
has the right to take back the property and sell it to cover the debt. To repay the debt,
debtor are required to make monthly installments or payments that typically include the
principal, interest, taxes and insurance, together known as PITI (Perkins, 2012).
Insurance
Commercial insurance are almost similar with Islamic insurance (takaful). According to
Khan, insurance is a risk transfer mechanism whereby the individual or the business
enterprise can shift some of the uncertainties of life on the shoulder of the other. Life
insurance is one of the oldest financial services provided. Insurance companies offer their
customer a hedge against the risk of financial loss that follows death, disability, ill health
or retirement. Policy holders receive risk protection in return for the payment of policy
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21. premium that are set high enough to cover estimated benefit claims against the company,
all operating expenses, and a target profit margin. There are many kind of insurance that
provided such as: education, health, life, retirement, purchase of home and etc.
Pension Fund
Commercial pension fund are protects individuals and families against loss of income in
their retirement years by allowing workers to set aside and invest a portion of their
current income. A pension plan places current savings in a portfolio of stocks, bond, and
other assets in the expectation of building an even larger pool of funds in the future. In
this way, the pension plan member can balance planned consumption after retirement
with the amount of savings set aside today.
According to Zimbio (2009), although these financial instruments are comparable
to conventional financial products in terms of the basic mechanism underlying their
creation, there are unique religious conditions that Islamic financial products must be
able to meet. Shariah Law permit activities when the lender share in profits or losses
from the capital that lent out, making money by money is not allowed. Incomes on an
Islamic financial instrument are prohibited getting earning through unethical (or non-
Islamic) activity. All goods and services that is unethical such as pornography, lending
for constructing a casino (gambling), trading of alcohol and etc are prohibited by Islam.
The earning of interest on contracts of loan (or Riba) is also prohibited, even if interest on
loans happens to be the backbone of conventional financial instruments. Islamic law
further prohibits debt restructuring that is based on compensations; uncertainty, risk or
speculation (Gharar) in contracts; gambling and games that are based on chance (Qimar).
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22. Why Islamic Financial Institutions Are Preferable?
Islamic financial institutions have operated almost similar with conventional financial
institutions. They also operated essential function as conventional bank. The different is
Islamic financial institutions activities require in the direction of with Islamic law or
Syariah rules. This is also become a benefit in Islamic financial institutions. Because of
following in Islamic law, Islamic financial institutions have perceived as socially
responsible investment. They characterized by ethical norms and social commitments.
Islamic financial institutions operation is integrated with ethical and moral value.
Activities with unethical or unacceptable services are restricted in financing of Islamic
financial institutions. For example, finance in liquor, tobacco and usury activity will not
be accepted in Islamic financial institutions finance. It is because those activities have
conflict with moral value by Islam. Nowadays, ethical issues are being concern in many
sectors. This growth of ethical environment gives competitive advantages to Islamic
financial institutions. They foresee that by communicating effectively about their social,
environmental and economic contribution, they can strengthen their brand, enhance their
corporate reputation with customers and suppliers, and attract and retain a committed and
skilled workforce (Turban and Greening, 1997). This can raise customer acceptance as
well. Hence commitment in ethical and social responsibility will lead to better
performance in terms of profitability.
Islamic financial institutions are remaining the core principle of justice in finance.
Justice often means equal treatment and the equal distribution of advantages and burdens
(Kamali, 2002). Profits sharing are emphasizing among financier and beneficiary in
Islamic banking. Even there is profit or loss, Islamic financial institutions also distributed
fairly among the two parties. This system will contribute to a more fair distribution of
wealth. Furthermore, Islamic financial institutions have different with conventional
financial institutions for the relationship between bank and customer. They recognize
customers as investment partner of their business instead of borrower. Unlike
conventional financial institutions with provided fixed interest rate, Islamic banking gives
higher return to depositors if there are high profitable investments. Profit or losses
22

23. generated from investment will be shared based on the pre-agreed ratio between bank and
the entrepreneur (Marimuthu, 2010).
The principle of Islamic financial institutions include of commitment in socio-
economic justice as well. They have committed to contribute in the achievement of socio-
economic development. Islamic financial institutions have put effort in eliminate
economic ills such as mass poverty and economic injustice. For example, Islamic
financial institutions have provided education scholarship for student and contribute
funds to poverty. Those funds to poverty are usually come from zakah, which is someone
given a fixed portion of their prosperity to charity. This, we can say that Islamic financial
institutions play a significant on socio-economic role that is beyond profit maximization
of their shareholder.
Why Conventional Financial Institutions Satisfied?
Conventional financial institutions are considered as more profitable because it includes
many types of investment and gain earning from interest rate. Islamic financial
institutions are working with Islamic law follow by many restrictions. Islamic law stated
that investments should only support products that are not forbidden. Wealth can only be
generated by lawful trade and investment. For instance, Islamic law prohibits riba. They
prohibited make money from money. Borrowers of Islamic financial institutions only
have to pay fixed repayment rates. Even borrowers can enjoy benefit in fixed rates, but
financial institutions are not enabling to receive profit in interest rate. Besides that, moral
unacceptable services also restricted in financing of Islamic financial institutions. Islamic
financial institutions would not accept transaction in property loan with purpose to
construction of a casino. On the other sides, conventional financial institutions are
interest base oriented. It defines money as a medium of exchange whereby there is no an
indicator to evaluate a thing. Due to this, conventional financial institutions enable to
earn profit from the margin between borrowing and lending rate of interest. They charge
fixed or floating interest rate to depositors. Distinct in interest rate have give advantage to
23

24. conventional financial institutions whereby customer with profit-motivated will more
interest on conventional financial institutions.
Regulation in Islamic financial institutions is more tight compare with
conventional financial institutions. Islamic financial institutions are regulated by Syariah
Supervisory Board (SSB). Shariah Supervisory Board members have responsibility to
ensure the takaful operations, supervise its development of Islamic insurance products,
and determine the Shariah compliance of these products and the investments. Each
Islamic bank will be supervised by SSB to make sure their transaction is under Syariah
requirement. This has narrowed the scope of Islamic banking. On the other side,
conventional financial institutions have no exist such board. Conventional financial
institutions enable to conduct its business operation as long as they are do not violated the
law the guideline issued by Bank Negara Malaysia (Khir, Gupta, & Shanmugam, 2008).
In other word, conventional financial institutions is aims at maximize profit without any
restriction.
Involve transaction in conventional financial institutions has not necessary to bear
risk like Islamic financial institutions. The main different when engage in any transaction
are conventional financial institutions have elimination of risk while Islamic financial
institutions is bearing the risk among two parties. Conventional financial institutions have
guaranteed all of their depositors. Depositors will only benefit for interest and not for
their liability. For Islamic financial institutions, it promotes risk sharing between provider
and user of fund. If the depositor is based on principle mudarabah, they need to bear on
Islamic financial institutions liability. Other than that, conventional financial institutions
have used several derivatives such as future option and forward option to hedge risk in
transaction. This is prohibited in Islamic financial institutions because it recognizes as
gamble activity and believe to violating Gharar principle. Marimuthu (2010) stated that
contracting parties in Islamic banking should have perfect knowledge of the values
intended to be exchange in the transaction and the terms of the contract should be
well defined and without ambiguity. Uncertainly is not allowed in Islamic financial
institutions. This also implies Islamic banking is used to bear higher risk than
conventional financial institutions.
24

25. Another reason is lack of awareness of Islamic financial institutions compare to
conventional financial institutions. According to Bank Negara Malaysia, current global
Islamic banking assets and assets under management have reached USD750 billion and is
expected to hit USD1 trillion by 2010. Despite the growth of Islamic financial institutions,
there are still many people either Muslim or non-Muslim not familiar with Islamic
financial institutions. The biggest challenge to promote Islamic financial institutions in
the country is lack of awareness of Islamic banking concepts among general public
(Saleemullah, 2010). Many people did not really know to differentiate between Islamic
financial institutions and conventional financial institutions. For conventional financial
institutions, customer had familiar with its system even there is different system in
different conventional bank. In Malaysia, number of conventional bank is still more than
Islamic bank. In Malaysia, there are 16 Islamic banks while commercial banks have 25 in
number (Bank Negare Malaysia, 2012).
25

26. Licensed Islamic Bank in Malaysia
Islamic Banks
1
No. Name Ownership
1 Affin Islamic Bank Berhad L
Al Rajhi Banking & Investment Corporation (Malaysia)
2 F
Berhad
3 Alliance Islamic Bank Berhad L
4 AmIslamic Bank Berhad L
5 Asian Finance Bank Berhad F
6 Bank Islam Malaysia Berhad L
7 Bank Muamalat Malaysia Berhad L
8 CIMB Islamic Bank Berhad L
9 Hong Leong Islamic Bank Berhad L
10 HSBC Amanah Malaysia Berhad F
11 Kuwait Finance House (Malaysia) Berhad F
12 Maybank Islamic Berhad L
13 OCBC Al-Amin Bank Berhad F
14 Public Islamic Bank Berhad L
15 RHB Islamic Bank Berhad L
16 Standard Chartered Saadiq Berhad F
Sources by Bank Negara Malaysia 2012
1
L represent local Islamic bank and F represent foreign Islamic bank.
26

27. Conclusion
In this study, Islamic and conventional financial institutions have being more developed
and competitive nowadays. Instead, their development was due to the increasing in the
numbers of customers which determine their empowerment in the finance industry. Thus,
we can conclude that customer acceptance has significant effect on the financial
institutions comprises of Islamic and conventional financial institutions. In addition,
customer acceptance which represents their perception of risk, interest rates offered by
financial institutions, quality of services and others. As we seen, there is a positive
relationship between customer acceptance and products offered by financial institutions.
Also, there are few factors that differs Islamic financial institutions from conventional
financial institutions, mainly on the instruments and activity of both financial institutions.
Moreover, both Islamic and conventional financial institutions do incur benefits to their
customers. In our opinion, we should encourage people to involve in both financial
institutions as they possibly may compensate with better reimbursement. Well, customer
must be acquainted with their acceptance or perception in order to determine their
products selection for example, expectation on future interest rates of the products. Last
but not least, this study is very good learning course for our group because we
acknowledged deeper understanding about financial institutions.
27

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