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iii
BLUE OCEAN STRATEGY ON SERVICE QUALITY IN ISLAMIC BANKING
SECTOR IN JOHOR
ISHAQ JAAFAR
A thesis submitted in
Fulfilment of the requirement for the award of the
Degree Master of Science in Technology Management
Faculty of Technology Management and Business
Universiti Tun Hussein Onn Malaysia
JUNE 2019
v
ACKNOWLEDGEMENT
First and foremost, I would like to express my deepest thanks to الله, the most gracious
and most merciful God for the blessing, wisdom, health, strength and patience that he
gave upon me throughout this adventurous, and exciting master’s journey.
This journey will not be a dream come true without an intellectual who have
been patiently, supportively and continuously encouraging me to keep on working hard
to complete this thesis. From the bottom of my heart I would like to express my
profound appreciation to my main supervisor, PROF MADYA DR. ROSMAINI BIN
TASMIN, for his insights, words of encouragement coupled with this generous and
patient to reviews, comments, and give thoughtful suggestions to improve this thesis.
I am forever grateful and thankful to have met and been given the opportunity to work
with you.
I would like to dedicate these years of hard work and absence to my family
members Maryam, Ibrahim, Muhammad, Abdullah, Sa’adat and other family
members; my father and mother Engineer Jaafaru Yusuf Riogi and Hajiya Halima
Umar for their endless supports, patient and prayers. Also, to my grandparent, “I
dedicate all this hard work to both of you. Your never give up attitude inspired me
throughout this journey”.
I am also particularly indebted to all my respondents for their support and
willingness to spend their precious time and effort to take part in this study. Their
generosity and honesty are greatly appreciated.
My sincere gratitude also goes to Malaysia Ministry of Higher Education, and
Universiti Tun Hussein Onn Malaysia for providing me with such opportunity to study
in Malaysia.
vi
ABSTRACT
Nowadays, exploiting new markets through the provision of quality services has
become a key criterion for achieving competitiveness in the banking environment.
Growth of Islamic Banks in Malaysia is to facilitate the business in terms of products
and delivery of their services that comply with Islamic law. With more studies
conducted on the quality of service related to customer satisfaction, little or no research
exists in linking the values of Islamic services to competitive advantage. Therefore,
the purpose of this study is to examine: the level of service quality in Islamic banks in
the Johor region, the role of blue ocean strategy on competitive advantage, and the role
of quality of Islamic services in competitive advantage. This study uses a sample of
250 responses at four of Malaysia's leading Islamic banks in which 243 valid responses
were taken. The data collected were analyzed with the help of statistical package for
social science (SPSS). The findings show a high level of service delivery among
Islamic banks, with the CARTER model seen as an important dimension by their
respective customers in Malaysian Islamic banks. Discoveries also show a significant
relationship between: the blue ocean strategy and the competitive advantage and the
quality of Islamic services on competitive advantage. The findings show that
Malaysian Islamic banking customers are satisfied with the quality of service
dependent on their respective banks that take care and understand, deliver services as
promised, deliver prompt and Shariah-compliant services. Additionally, the study
confirms that the provision of quality services with regard to Islamic religious beliefs
will serve as a way of exploiting new markets thus offering competitiveness in the
Malaysian banking sector in general.
vii
ABSTRAK
Pada masa kini, mengeksploitasi pasaran baharu melalui penyediaan perkhidmatan
berkualiti telah menjadi kriteria utama untuk mencapai daya saing dalam persekitaran
perbankan. Pertumbuhan bank-bank Islam di Malaysia mengendalikan urusan dari
segi produk dan penyampaian perkhidmatan mereka yang mematuhi undang-undang
Islam. Dengan lebih banyak kajian yang dijalankan mengenai kualiti perkhidmatan
yang berkaitan dengan kepuasan pelanggan, sedikit atau hampir tiada kajian wujud
dalam mengaitkan nilai-nilai perkhidmatan Islam kepada kelebihan daya saing. Oleh
itu, tujuan kajian ini adalah untuk memeriksa: tahap kualiti perkhidmatan di bank-bank
Islam dalam wilayah Johor, peranan strategi lautan biru kepada kelebihan daya saing,
dan peranan kualiti perkhidmatan islam dalam kelebihan daya saing. Kajian ini
menggunakan sampel sebanyak 250 respon di empat bank Islam terkemuka di
Malaysia yang mana 243 respon yang sah diambil. Data yang dikumpul ini telah
dianalisis dengan pakej statistik untuk sains sosial (SPSS). Penemuan menunjukkan
tahap penyampaian perkhidmatan yang tinggi di kalangan bank Islam, dengan model
CARTER dilihat sebagai dimensi penting oleh pelanggan masing-masing dalan
perbankan Islam Malaysia. Penemuan juga menunjukkan hubungan yang ketara
antara: strategi lautan biru dan kelebihan daya saing dan kualiti perkhidmatan Islam
ke atas kelebihan daya saing. Penemuan ini menunjukkan bahawa pelanggan
perbankan Islam Malaysia berpuas hati dengan kualiti perkhidmatan bergantung
kepada bank masing-masing yang menjaga dan memahami, menyampaikan
perkhidmatan seperti yang dijanjikan, memberikan perkhidmatan segera dan
mematuhi syariah. Tambahan pula, kajian itu mengesahkan bahawa penyediaan
perkhidmatan berkualiti dengan mempertimbangkan kepercayaan agama Islam akan
berfungsi sebagai cara mengeksploitasi pasaran baharu dengan itu menawarkan daya
saing dalam sektor perbankan Malaysia secara amnya.
viii
CONTENTS
TITLE i
DECLARATION ii
ACKNOWLEDGEMENT iii
ABSTRACT iv
ABSTRAK v
LIST OF TABLES vi
LIST OF FIGURES vii
LIST OF SYMBOLS AND ABBREVIATIONS viii
LIST OF APPENDICES ix
CHAPTER 1 INTRODUCTION 1
1.1 Introduction 1
1.2 Research Background 2
1.3 Problem Statement 7
1.4 Research Questions 11
1.5 Research Objectives 11
1.6 Justification 12
1.7 Significant of the Research 13
1.8 Scope of the Research 14
1.9 Structure of the Theses 15
1.10 Conclusion 15
CHAPTER 2 LITERATURE REVIEW 16
2.1 Introduction 16
2.2 Strategy 16
2.3 Competitive Advantage 17
2.4 Competitive Advantage Theory 18
2.4.1 Miles and Snow Typology Theory 19
2.4.2 Porters Competitive Theory 21
ix
2.4.3 Tracy and Wiersema’s Strategy 24
2.5 Competitive Advantage Measurement Dimension 26
2.6 Blue Ocean Strategy 28
2.6.1 Concept of Color in Blue Ocean Strategy 29
2.7 Value Innovation: The Cornerstone of Blue Ocean 30
2.7.1 Blue Ocean Dimension 31
2.8 Blue Ocean Strategy as Competitive Advantage 32
2.8.1 Differentiation and Competitive Advantage 33
2.8.2 Low Cost and Competitive Advantage 34
2.8.3 Exploitation of Uncontested Market Space and Competitive
Advantage 34
2.8.4 Opportunity Maximization and Competitive Advantage 35
2.8.5 Value Innovation Strategy and Competitive Advantage 36
2.8.6 Focus on Noncustomers and Competitive Advantage 36
2.9 Concept of Strategy Implementation 43
2.9.1 Concept of Blue Ocean Strategy and Strategic Implementation
44
2.9.2 Six-Path Process 45
2.10 Blue ocean strategy and service quality 48
2.11 The Concept of Quality 49
2.11.1 Concept of Quality Product or Service Features 49
2.11.2 Concept of Quality as Fitness for Use 50
2.11.3 Concept of Quality as Conformance to Requirement 50
2.11.4 Concept of Quality as Associated Features of Products or
Service 50
2.11.5 Concept of Quality as Delighting the Customer 51
2.12 Quality Dimensions 51
2.12.1 Emerging Quality Dimensions 52
2.13 Service 53
2.13.1 Types of Services 54
2.13.2 Characteristics of Service 54
2.14 Service Quality Models 55
2.15 Measuring Service Quality 59
2.16 Perception of service quality 60
x
2.17 CARTER’s Model 61
2.17.1 Compliance 61
2.17.2 Assurance 65
2.17.3 Reliability 66
2.17.4 Tangible 67
2.17.5 Empathy 68
2.17.6 Responsiveness 69
2.18 Islamic Service Quality and Competitive Advantage 70
2.19 Customer Service Delivery in the Banking Industry 71
2.20 Conclusion 72
CHAPTER 3 RESEARCH METHODOLOGY 73
3.1 Introduction 73
3.2 Research Philosophy 73
3.2.1 Ontological Assumptions 74
3.2.2 Epistemological Assumptions 75
3.3 Research Approach 76
3.4 Research Design 77
3.4.1 Research Methodology 78
3.4.2 Hypothesis Development 81
3.4.3 Questionnaire Design 83
3.4.4 Item Selection 85
3.5 Data Collection 90
3.5.1 Population and Sample 90
3.5.2 Sampling Method 91
3.5.3 Determining the Sampling Frame 94
3.5.4 Target Population 95
3.5.5 Sampling Units 95
3.5.6 Sampling Frame 96
3.6 Data Analysis 96
3.6.1 Reliability Test 96
3.6.2 Normality Test 97
3.6.3 Descriptive Statistics 98
3.6.4 Correlation Analysis 98
3.7 Ethical Clearance 99
xi
3.8 Pilot Study 100
3.9 Conclusion 102
CHAPTER 4 RESULTS AND DISCUSSION 104
4.1 Introduction 104
4.2 Reliability Assessment 104
4.3 Normality test 106
4.4 Analysis of Findings 108
4.4.1 Questionnaire returned and usable rate 108
4.4.2 Respondents 108
4.4.3 Gender 109
4.4.4 Age 109
4.4.5 Marital Status 110
4.4.6 Race and Religion 110
4.4.7 Occupation 111
4.4.8 Educational Level 111
4.4.9 Banking Experience 112
4.5 Level of Islamic Service Quality in Islamic Banks 113
4.5.1 Level of Empathy Perception in Islamic Banks 113
4.5.2 Level of Assurance Perception in Islamic Banks 114
4.5.3 Level of Responsiveness Perception in Islamic Banks 114
4.5.4 Level of Compliance Perception in Islamic Banks 115
4.5.5 Level of Tangibility Perception in Islamic Banks 116
4.5.6 Level of Reliability Perception in Islamic Banks 117
4.6 The Relationship between Blue ocean strategy and competitive advantage 117
4.6.1 Elimination dimension has a positive relationship on
competitive advantage. 118
4.6.2 Creation dimension has a positive relationship on competitive
advantage. 118
4.6.3 Reduction dimension has a positive relationship on competitive
advantage. 119
4.6.4 Raising dimension has a positive relationship on competitive
advantage. 120
4.7 Islamic service quality and competitive advantage 120
xii
4.7.1 Compliance dimension has a positive relationship on
competitive advantage. 121
4.7.2 Assurance dimension has a positive relationship on competitive
advantage. 121
4.7.3 Reliability dimension has a positive relationship on competitive
advantage. 122
4.7.4 Tangibility dimension has a positive relationship on
competitive advantage. 123
4.7.5 Empathy dimension has a positive relationship on competitive
advantage. 124
4.7.6 Responsiveness dimension has a positive relationship on
competitive advantage. 124
4.8 Summary of Main Finding 125
4.9 Conclusion 127
CHAPTER 5 DISCUSSION OF RESULTS 128
5.1 Introduction 128
5.2 The Study Findings and the Testing of Hypothesis 128
5.2.1 Hypothesis 1: Testing the Level of Islamic Service quality of
Islamic banks within Johor province of Malaysia. 129
5.2.2 Hypothesis 2: Testing the Relationship between blue ocean
strategy dimensions on Competitive Advantage. 134
5.2.3 Hypothesis 3: Testing the Relationship between Islamic service
qualities on Competitive Advantage. 135
5.3 Summary of the Research 138
5.4 Research Contribution 141
5.5 Implication and Further Research Contribution 142
5.6 Limitation of the Study 143
5.7 Conclusion 143
REFERENCES 141
xiii
LIST OF TABLES
Table 1.1
Table 2.1
Table 2.2
Table 2.3
Difrence between Convention and Islamic Banking
Comparison of Red Ocean and Blue Ocean
Previous Reseach on Blue.Ocean and competitive advantage
The new quality thinking
6
30
39
52
Table 3.1 Average index method scale (Weijters et al., 2016) 85
Table 3.2
Table 3.3
Item scale
Population and sampling size (Krejcie & Morgan, 1970)
86
91
Table 3.4 Number of questionnaire to be distributed based on quota
sampling.
93
Table 3.5 Illustration of Research Frame 94
Table 3.6 The respondents characteristics and demographic information 102
Table 4.1
Table 4.2
Cronbach alpha coefficient (Pallant, 2001)
Cronbach alpha coefficient reliability test in respect of the
research objective
105
105
Table 4.3
Table 4.4
Table 4.5
Table 4.6
The Kolmogorov–Smirnov test
Rate of respondents
Distribution of respondents by banking institution
Distribution of respondents by gender
107
108
109
109
Table 4.7 Distribution of respondents by age 110
Table 4.8
Table 4.9
Distribution of respondents by marital status
Distribution of respondents by race
110
110
Table 4.10 Distribution of respondents by religion 111
Table 4.11 Distribution of respondents by occupation 111
Table 4.12 Distribution of respondents by educational level 112
Table 4.13 Respondents period of experience 112
Table 4.14 Level of empathy dimension in Islamic banks 113
xiv
Table 4.15 Level of assurance dimension in Islamic banks 114
Table 4.16
Table 4.17
Table 4.18
Table 4.19
Table 4.20
Table 4.21
Table 4.22
Table 4.23
Table 4.24
Table 4.25
Table 4.26
Level of responsiveness in Islamic banks
Level of compliance dimension in Islamic banks
Level of tangibility in Islamic banks
Level of reliability dimension in Islamic banks
The Pearson Correlation Test between Elimination dimension and
competitive advantage.
The Pearson Correlation Test between Creation dimension and
competitive advantage.
The Pearson Correlation Test between Reduction dimension and
competitive advantage.
The Pearson Correlation Test between Raising dimension and
competitive advantage.
The Pearson Correlation Test between compliance dimension and
competitive advantage.
The Pearson Correlation Test between Assurance dimension and
competitive advantage.
The Pearson Correlation Test between Reliability dimension and
competitive advantage.
115
116
116
117
118
119
119
120
121
122
123
Table 4.27 The Pearson Correlation Test between Tangibility dimension and
competitive advantage.
123
Table 4.28 The Pearson Correlation Test between empathy dimension and
competitive advantage.
124
Table 4.29
The Pearson Correlation Test between responsiveness dimension
and competitive advantage.variables
125
Table 4.30
Summary of research hypothesis 126
xv
LIST OF FIGURES
Figure 2.1
Figure 2.2
Porters five forces model
Value innovation
24
32
Figure 2.3.1 Four action framework 33
Figure 2.4
Figure 3.1
Figure 3.2
Figure 3.3
Classification of non customers
Conceptual framework
Blue ocean streategy and competyetive advanatge
Islamic service quality and competetive advanatge
38
81
82
83
xvi
LIST OF SYMBOLS AND ABBREVIATIONS
AVE
BNM
BOS
Average variance extracted
Bank Negara Malaysia
Blue ocean strategy
CA Competitive advantage
CFA Confirmatory factor analysis
CIMB
DV
ECRI
IV
IFSB
Commerce International Merchant Bankers.
Dependent variable
Elimination, Creation, Reduction and Increase
Independent variable
Islamic financial service board
LV
M
MAYBANK
ML
O
Latent variable
Mean
Malayan Banking Berhad
Maximum likelihood
Original Sample
Q
RHB
ROS
SEM
Quality
Rashid Hussain Berhad
Red ocean strategy
Structural equation model
SPSS Statistical package for social science
STDEV
SQ
VAF
Standard Deviation
Service quality
Variance accounted for statistic
1
CHAPTER 1
INTRODUCTION
1.1 Introduction
This chapter focuses on the introduction of the research which consists of research
background, problem statement, the objective of the research, scope of the research,
and the research significance. Also, the last part of the thesis chapter outlines the
organization of each chapters relating to the research.
The financial institution history is moderately related to money, however,
transaction began most likely before money was been developed. The first main type
of transaction comprises the exchange of goods to goods and which were later changed
to valuable metal like gold. Such valuable items were safely kept in the temples and
different places that were considered at that time as the perfect spot for putting and
storing great and valuable items. The role played by the financial institution is similar
to what it is before, however, it is hard to consider our daily activities without involving
banks. Banks as a business organization go about their business as delegates by
acknowledging deposit from savers and offering loan to borrowers for investment and
they spread between the loan fee paid to contributors and that charged to the borrower
is the benefit or the interest income to the bank. They likewise provide some services
like a letter of credit, delivery certification, banker's acknowledgment, et cetera.
On a basic principle level, these different services are provided by banks and
other related financial and non-financial institutions which are specifically provided
through the capital market. Banks and other financial institutions exist since they are
an effective reaction to the way that information is expensive. With such information,
banks have some expertise in evaluating the credit value of borrowers thereby giving
2
a continuous observing capacity to guarantee that such borrowers can meet their
commitments. They are remunerated for these services by the spread between the rates
they offer to the collected pool of savers, and the rates they offer to potential borrowers.
This procedure is known as maturity transformation, which is at the heart of every
present-day conventional banking system. Banks offer a repository for savings, and
after that change them into extensive (illiquid) assets – housing credits and loaning to
organizations. Also, banks assume a part in giving instalment and settlement services
which are essential for household, business and other money-related establishments to
settle the everyday transaction.
However, an effective and powerful banking system helps to impact the
development and growth of a nation in various divisions of a country economy. The
banking industry overall faces countless difficulties in the global marketplace. Despite
the level of intensity in terms of competition in the banking environment, a bank's
performance should be checked cautiously. Banks are frequently checked for different
reasons. From an early recognition of slow growth in their performance, the bank
regulators can distinguish banks that are encountering issues with the aim that they
could be remedied.
Most importantly, banks additionally assess their own performance time after
time so as to decide the results of past management decisions, with the goal that
progressions can be made where fitting. Furthermore, any current development in
terms of the modern financial system such can contribute toward its economic
development and advancement in the living standard by giving different services to
the rest of the economy. These incorporate clearing and settlement frameworks to
encourage trade, channelling financial resources amongst savers and borrowers, and
different items or product to deal with hazard and instability.
1.2 Research Background
The Malaysian economy is regarded as one of the fastest growing economies in the
world. Starting from the 1970s, Malaysia has steadily diversified its economy from the
main production to a multi-sector economy. Such development has impacted
Malaysian economy to be characterized among the top three ASEAN members after
Philippines and Indonesia. Malaysian gross domestic product grew by 4.2% in the
3
period of 1957-2017. Also, Malaysian gross domestic worth stood at 296.4 billion
dollars in 2017 according to the world bank (IFSB, 2017).
With the current challenge which exists in the external environment such as
economic recession, Malaysian economy is witnessing a continuous economic growth
and most of which is attributed to the banking industry. The genesis of banks in
Malaysia can be traced back to the 19 centuries with the establishment of the
Mercantile bank (HSBC) which was formally established to promote business and
economic growth within Malaysia. However, with the current level of competition
coupled with wrongful financial practice within the banking environment led to the
creation of an agency known as Bank Negara Malaysia (Central Bank of Malaysia)
which was established in 1957 for the purpose of conducting proper supervision and
overseeing the banks activity within the banking sector with the aim of achieving
sustainable economic growth that will benefit the nation’s economy.
Given the aftermath of the financial meltdown of 1997 in Asia, Bank Negara
Malaysia introduced a standard policy which was called the master plan in the year
2001. The master plan policy focusses mainly on influencing Islamic banking system.
This has resulted in the inauguration of a dual banking practice in Malaysia that is the
utilization of both Islamic and conventional banking within the banking environment.
However, Islamic banks have been in existence as early as 1983 with Bank Islam being
the first Islamic bank in Malaysia. Subsequently, there has being a sustainable increase
in Islamic banking practice due to the world economic turmoil. With such high interest
in Islamic banking, Malaysia is fast becoming a leading force in the Islamic banking
in the world with Iran coming in second place.
Islamic banking has long been in existence within most Islamic countries with
countries such as Malaysia, Turkey, Egypt, Iran, Indonesia, Bahrain and Saudi Arabia
which both countries have benefitted anonymously to its economic growth. According
to IFSB (2017) report, since 1970’s Islamic banking assets were recorded at $1.493
trillion in 2016, with more than 300 Islamic institutions operating within 75 countries
with each and every nation expecting a considerable economic growth in their banking
system (Boudjelal 2006). Islamic banking as a financial institution abide strictly to
Islamic laws which are termed “Shariah law”. The Islamic banking system concentrate
solely on two fundamental principles which are a mutual risk and profit sharing
between parties involved i.e. the bank and the customer’s relationship. In line with the
contract definition which is part of the Islamic banking principles, all related
4
transaction should be related to the business activity and asset. Such principles are
strongly supported by Islamic law because it encourages such activities that manage
entrepreneurship activities and trade which tend to provide more benefits and
economic progress to a given nation. In relation to the Islamic banking principles, all
business activities that involve in the provision of interest (Riba) are generally
prohibited.
The prohibition of interest serves as a silver lining that differentiates the
Islamic banking offering in comparison to the conventional banking system. The non-
acceptance of interest in Islamic banking, is based on the Islamic rule which describes
the act of pricing money as intolerable and unacceptable. This has influenced Islamic
institution toward the non-implementation of a specific fixed rate on return on deposit
and interest on the loan which is contrary to every other conventional banking practice.
Nonetheless, the rights and responsibilities of both parties to a contract in Islamic
banking system are classified highly as transparent and frank. Inevitable to their
business environment and business practice, there is a clear distinction between
Islamic banks and conventional banks with the former to be cornered to be more ethical
and efficient. This is based on the fact that Islamic banks care mainly on the
development of the national economy with little emphasis on itself. This is achieved
with the aim of providing more economic benefit to the community in a diversified
way rather than pure profit, and finally Islamic banking system is built in a manner
that is considered to be safer from the risk of financial stress stemming from
speculative activities (Zaher & Hassan, 2001).
Contrary to the Islamic banking system, the conventional banking system was
established primary based on the provision of a fixed rate of interest. Furthermore, it’s
also known as the pure interest model bank. As business firms, they serves as
intermediaries that borrow from its savers, which leads to paying interest to them and
also lending to borrowers that leads to accumulating interest in the favour of the bank.
The existing relationship between the customer and the bank is more based on debtors-
creditors relationship. Such relationship comes into play when a bank accepts deposit
from its depositors, in such instance, banks are classified as debtors whereas the
debtors are classified as the creditors. Considering a scenario, where loan is being
provided to the borrower, the relationship will be considered vice versa. The reason by
which conventional banks do provide interest as earlier stated is to create a positive
interest gap. The consequence to that, conventional banks operates in a form that
5
guarantees its success which is realized from the profit derived from the business
environment. However, the conventional bank operates in various forms, one of such
is the commercial banking system where such banking institution engages in
generating profit from margins between the interest rate of the borrower and the
interest rate of lending. Also, conventional banks operate in a form of investment
banks which is considered similar to the client’s agents. In such a pattern, they act as
underwriters for cooperation’s, institutions and government by providing bonds and
another sort of security which is related to raising capital. However, such banking
system does not accept any form of deposit from lenders and also do not provide any
form of loan facilities to its clients. More importantly, they provide services such as
trading of derivatives, fixed income instrument, foreign exchange and stock to the
business corporation. Lastly, the existence of the universal banking system which
engages in a different form of operations such as trading, insurance and investment. In
fact, the universal banking system offers service which is attributed to commercial
banks and investment banks. Such services provided by the investment banking
institution include credit, deposits, loan, and customer advisory in investment projects
and security transactions.
Therefore, Table 1.1 clarifies the differences between conventional and Islamic
banking. For example, from the viewpoint of business policy Conventional banks are
set to maximize the shareholder's value as their main task, whereas Islamic banks have
dual target that is the implementation of Islamic Law objectives and profit making.
The implementation of such Islamic laws can be ascribe as difficult in different
regulatory and competitive environments and could actually make Islamic banks more
risky keeping in mind that the confidence of depositors and investors is difficult due
to Shariah compliance risk.
6
Table 1.1 Fundamental differences Conventional banking and Islamic banking
Conventional Banking Islamic Banking
1. Conventional banks functions and
operating based on principles that are man-
made.
1. Islamic banking functions and operate based
on the principles of Islamic Shariah.
2. The investor is guaranteed a fixed rate of
interest.
2. In contrast, it promotes risk sharing between
provider of capital (investor) and the user of
funds (entrepreneur).
3. It aims to maximize profit without any
restriction.
3. It also aims to maximize profit, but subject
to Shariah restrictions.
4. It does not engage in the provision of zakat. 4. In the modern Islamic banking system, it has
become one of the service-oriented functions of
the Islamic banks to collect and distribute
zakat.
5. Lending money and getting it back with
interest is the fundamental function of the
conventional banks.
5. Participation in partnership business is the
fundamental function of the Islamic banks.
6. The scope conventional banking activities
is narrower when compared with an Islamic
bank.
6. Its scope of activities is wider when
compared with a conventional bank. It is, in
effect, a multipurpose institution.
7. It can charge additional money (compound
rate of interest) in case of defaulters.
7. Islamic banks does not charge any extra
money for their defaulters.
8. It makes no effort to ensure growth with
equity
8. It gives due importance to the public interest.
Its ultimate aim is to ensure growth with equity.
9. For interest-based commercial banks,
borrowing from the money market is
relatively easier.
9. For Islamic banks, it is comparatively
difficult to borrow money from the money
market.
11. Conventional banks place greater
emphasis on creditworthiness of the clients.
11. Islamic banks, on the other hand, place
greater emphasis on the viability of the project.
12. The status of a conventional bank in
relation to its clients is that of creditor and
debtors.
12. The status of the Islamic bank in relation to
its clients is that of partners, investors, and
traders.
In the age of globalization, achieving a high level of superior performance is more of
a difficult and challenging task especially in the service sector. In order to face this
challenging and highly demanding task, many organizations such as banks have
engaged in modifying and improving the quality of their service. Service quality is an
important component in any service sector because service quality helps to maintain
and provide a competitive edge in the marketplace. Therefore, service quality is an
important strategic tool that gives an edge in relation to competition and increases
profitability in a business organization (Tam, 2004). A lot of service industries are
using such a strategic component to attract, convince, and retain customers.
The banking industry has experienced a steady change in terms of being aware
of the continues changing requirements of the economy (Abdullah et al., 2010). As
indicated by Auka, Bosire & Matern (2013), service quality is one of the basic
achievement that figures the impact of the aggressiveness of an organization. A bank
can separate itself from contenders by providing quality service. Likewise, the client
7
won't hold or buy service items from the bank if its related services are poor. In the
event that the bank guarantees the service quality, then the client will be faithful to the
bank to take the service. Clients feel secured when they get quality service. Therefore,
the principle obligation of the bank is to guarantee the quality service to the planned
clients. Researchers such as Vershinina (2017), Lovelock & Wirtz (2007) have both
demonstrated that the act of providing great service quality to clients retains them,
pulls in new ones, positive informal proposal, upgrades corporate picture, ensures
survival and profitable (Negi, 2009; Riadh Ladhari, 2008). It is imperative for banks
to comprehend the changing client needs and receive the most recent data innovation
framework keeping in mind the end goal is to contend in an efficiently and effectively
manner with worldwide organization (Malhotra, 2004; Malhotra & Mukherjee, 2004).
Buyers and consumers everywhere throughout the world have turned out to be greater
quality cognizant; hence client needs for higher quality service must be expanded (Lee
& Lin, 2005). So, the mentality of the business environment identifies the client’s
needs as a puzzle, and whoever sort the pieces out correctly, end up capturing a new
market share in which will make competition irrelevant, which is the key to achieving
a blue ocean strategy.
As indicated by Saravanan, Rao & Excellence (2007), service quality has been
characterized as the competitive edge in the service industries, as various business
organizations endeavor to keep up an upper hand in the commercial center and
accomplishing consumers loyalty and satisfaction. The financial services, especially
banks, compete in a market with for the most part undifferentiated products; in this
way service quality turns into an essential focused weapon (Stafford, 2006). Literature
has demonstrated that giving quality service to clients holds them, pulls in new ones,
upgrades corporate picture, prompt positive referral by overhearing people's
conversations, or ensures survival and productivity (Negi, 2009; Ladhari, 2009).
1.3 Problem Statement
The presence of Islamic banking in today’s economic environment is considered to be
the modern development of the financial industry, with the first Islamic financial
institution established around 1950s. But most accurately, the first attempt at Islamic
banking system in Malaysia can be traced back in the mid-1940s, with the main
8
objective of this institution was to invest in prospective pilgrim savings in the real
estate and plantations which were in accordance with Shariah, which was
unsuccessful. Since its establishment, Islamic banks have been operating alongside
conventional banks. Islamic banks much like conventional banks mobilize deposits
and generate loans but adhere strictly to the prohibition of interest which are either
paid or taken, whereby transactions are in accordance with Islamic Shariah law. In
Malaysia, the characteristics of Islamic banks are not merely of interest to Muslim
customers but clearly non-Muslims customers see benefits from such a system. For
Muslim customers, they have an opportunity to invest in a bank that operates based on
their religious beliefs. Meanwhile, non-Muslim customers also have the same
opportunity to choose to invest their money in Islamic banks or conventional banks.
In this situation, Islamic banks is competing the same market segmentation with
conventional and foreign banks. Although, there is a difference between Islamic banks
and conventional banks, they are nonetheless competing in the same market in terms
of offering complementary products and services.
Since its introduction to the financial market in the early 1970s, Islamic finance
products and services has largely increased with a market size of more than the US.
1.9 trillion (IFSB, 2017). According to Young (2016), there are more than 500 Islamic
institutions that exist worldwide. This is largely associated with the current growth of
the Islamic finance which has been attributed towards its economic growth coupled
with the search for funds that are considered a halal or lawful or clean investment. In
the process of selecting an Islamic bank, business clients and investors would love to
gain a good return on their investment with banking firms and financial practice that
adhere to their religious beliefs (Zainordin et al., 2016). The growth in today’s Islamic
banking can be realized at the global stage with a major financial institution not
primarily Islamic banks such as HSBC, Citibank, Deutsche Bank, USB, and Standard
Chartered are presently engaged in providing Islamic product and services through
Islamic windows and with such business line serving as a potential engine of business
growth and also a threat in terms of the growth of the main Islamic banking firms.
However, giving the involvement of non-Islamic banks in the provision of
Islamic bank products and services, the general perception of the public regarding the
financial services and products offered by Islamic banks are similar to conventional
banks and therefore both contain the element of interest when product prices are
considered. As the system is in the evolving stage so there are many factors that hinder
9
its acceptability amongst the general public as people are confused about the Shariah
(law of Islam) compliance of its products. Moreover, Islamic banks might be offering
financial solutions which might not be having as attractive returns as conventional
banks. So if all the principles of Islamic laws are not followed, customers may be at a
disadvantage and suffer loss due to some constraints in the contract.
Moreover, a high level of competition exists in the banking sector globally and
specifically in Malaysian banking today. The growth of Islamic banking has created
competition not only among Islamic banks but with conventional banks as well. So
from the customer’s perspective that is by considering it Muslim and non-Muslim
based customers, there is the need to know how such a banking solution is more
economical and flexible.
Shari’ah-compliant is simply the benchmark or trademark that define Islamic
banks from its fellow counterpart. However, Islamic banks are extremely facing
competition within the Malaysian market, which necessitates great customer service
as a must. The development of Islamic banks is becoming increasingly challenging
with more conventional banks to participate and provide banking products and services
based on Islamic principles (Islamic Funds). Thus, it is very important for banking
firms within the Islamic banking industry to better position them self in order to
confront and respond vigorously to the robustness of the local financial environment.
This makes service quality and value innovation a superior strategic choice to compete
through in the financial market. Therefore, competing through such value innovation
and the provision of superior quality will help in maintaining their customer base and
attracting new ones. Especially with the increase in customer awareness in terms of
religious values and the tremendous choices available to select a certain financial
institution or bank over another, plus the deregulation of the financial service industry
that granted the foreign banks presence in the local market have all contributed to
increased recognition that service quality is centrally an important determinant shaped
customer satisfaction in the case of banks.
In response to the increasing competition stemming from the entrance of new
players into the market, existing conventional banks have started to leverage on their
natural competitive advantages, which include customer loyalty, sensitivity to
religious practices, and a stable base of cheap deposits (Janahi & Al Mubarak, 2017).
In particular, it can be observed that customers are considering and encouraging
Islamic banking transactions regardless of the higher return offer by conventional
10
banks due to its stability, especially after the financial crisis of 2008. This further
increases the competition between Islamic and conventional banks, forcing Islamic
banks to enhance their commercial entrenchment, develop relevant business models,
strengthen their brands and reputation, and provide innovative solutions to a growing
number of clients attracted by the concept of interest-free banking.
In addition, with the lowering of entry barriers and moving towards financial
integration and liberalization, banks are functioning under increasing pressure from
their competitors; hence it is vital that banks maintain a loyal customer base in order
to improve their market position. Consequently, as the practice demonstrates, many
banks are directing their strategies towards increasing customer satisfaction and
loyalty through improved service quality and value recognition. Moreover, with the
advent of international banking and innovations in the market place, customers are
having greater difficulty in selecting one financial institution from another (Dahari et
al., 2015).
With local conventional banks such as Rashid Hussain Berhad, Commerce
International Merchant Berhad, Malayan Banking Berhad and Public Bank adopting
an Islamic model in its operations, which seems rational, as real estate financing is
very well adapted to profit from two main strengths of Islamic banks: customer loyalty
and access to cheap funding. The Banking industry in Malaysia may witness more
banks converting to Islamic finance in a bid to tap into the rising demand for Shari’ah-
compliant products and to avoid the heavy investment required to launch new banks.
However, the idea of Islamic banking is relatively young, and many are unaware of it,
as people tend to deal with highly experienced conventional banks that offer a wide
range of financial instruments. It is therefore unlikely to see them switching to Islamic
banking unless it offers them something extra. Accordingly, it is important for Islamic
banks to be heavily involved in marketing their products and services and educate
people about what they really offer rather than just relying on religious value as
patronizing factors (Amuda, 2015).
There are 16 Islamic banks operating within Malaysia banking industry
constituting of both local and foreign-owned banks (BNM, 2015); nonetheless, the
Islamic banking market is not yet crowded, with only a few midsize Islamic banks
competing in each domestic market, compared to the conventional spread. The reason
is that most foreign conventional banks had not wanted to invest a large number of
resources in Islamic banking because of its short track record, the higher returns in the
11
conventional market, and the uncertainties about its legal and regulatory environment.
Yet as a result of the supportive government policies toward the encouragement of
Islamic finance as part of its offshore banking and financial activity, the Malaysian
regulatory body is participating in changing the picture by emphasizing on the
importance of a sound legal framework of Islamic banking transaction.
Moreover, it evident that banking texts and journals address the general subject
of Islamic service quality in a limited manner. However, little significant mention is
made relating to predicting Islamic service quality as an un-exploited business
environment toward achieving competitive advantage. While the literature is replete
with empirical studies on service quality, customer loyalty, customer retention, and
customer relationships in general, there is a scarcity of empirical studies relating
specifically to predicting competitive advantage. Therefore by considering the state of
the literature in predicting Islamic service quality by examining Islamic bank in the
Johor province of Malaysia, it becomes obvious this is an area that has not been
thoroughly researched.
Therefore, the rising circumstance requires the evaluation of Islamic service
quality in connection to a competitive advantage and to help Malaysian banks to
enhance its service delivery and improve fulfilment and satisfaction in order to
guarantee client retention.
1.4 Research Questions
i. To what extent is the level of Islamic quality within the province of Johor in
Malaysia?
ii. Is there a relationship between blue ocean strategy and competitive advantage?
iii. Is there a relationship between Islamic service quality and competitive
advantage?
1.5 Research Objectives
Specifically, the following objective were set to be achieved:
i. To inspect the level of Islamic service quality within the Johor province of
Malaysian Islamic banks.
145
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