Trust crisis in islamic banking: Empirical evidence using structural equations modeling.
Mansour, Walid ; Hajlaoui, Leila Lefi ; Abdulkarim, Fadul 等
ABSTRACT
This paper studies the trust crisis of the Islamic banking industry
through a comparative approach. While Islamic banking harks back to the
maxims stemming from Islamic law (i.e., poverty alleviation,
equitability, and social justice), little is known about its failure in
terms of trust. This paper is a first attempt to model the variables
explaining the trust crisis by comparing Saudi Arabian and Tunisian
Islamic banking industries. The empirical design is based on a
questionnaire analyzed using structural equations modeling. The
empirical findings show that the trust is heterogeneously assessed in
the two cultural contexts. Various measures can be enforced to
strengthen the trust in Islamic banks in both countries. Examples of
interesting measures are related to Islamic products development and
favorable regulatory reforms that need to be 'unleashed' to
maintain the trust and sustain the competitiveness and growth of Islamic
banks.
JEL Classifications: G1, G21, Z1
Keywords: Islamic banking; trust; cross-cultural study; structural
equations modeling; Saudi Arabia; Tunisia
I. INTRODUCTION
Although the Islamic financial system is still in its embryonic
stage, Islamic banks are growing at a high, steady rate. The financial
instruments and services of Islamic banks are gaining popularity (1)
despite the legal environments that are not heavily supportive in all
marketplaces. Although the fraction of the Islamic industry's
assets that are compliant to shari'ah (Islamic law) relatively to
some of the largest banks in the world (e.g., Citigroup, HSBC, Barclays
Bank, BNP Paribas) is very small, it is growing rapidly (Ariss, 2010).
Chapra (2012) argues that Islamic banks must collect resources from a
large scale and make them available to a larger scale such that social
problems like poverty and unemployment can be alleviated.
The financial instruments and services offered by Islamic banks
should hypothetically be in line with the maxims of shari'ah.
Indeed, such instruments could be legally tradable only when they are
free of riba (2) (i.e., usury or interest), do not contain gharar
(complexity and/or information asymmetry), maysir (gambling), and are
halal (i.e., permissible). The specificities of Islamic banks'
instruments and services are supposed to have a social responsibility in
terms of poverty alleviation and economic welfare.
The review of previous studies related to Islamic banking reveals
three approaches. The first approach is based on the comparison between
Islamic and conventional banks (Chong and Liu, 2009; Ariss, 2010;
Al-Ajmi et al., 2011). The second approach explores the analysis of
Islamic finance's tradable instruments (e.g., Ebrahim and Rahman,
2005; Bouchard, 2009; Walkshausl and Lobe, 2012). The third approach
deals with regulation and institutional issues (Karim, 2001; El-Hawary
et al., 2007).
The success of financial institutions depends, among other factors,
on the degree of trust, either interpersonal or institutional (Gatfaoui,
2003). Several dimensions exist in the literature (Moorman and Zaltman,
1992): (i) cognitive (trust): when the trust is based on the knowledge
of others; (ii) affective (confidence): when it is based on feelings
toward others; (iii) conative (reliance): when it is part of
organizational routines (Pluchart, 2010). The latter dimension of trust
is designed as a process (Levicki and Bunker, 1996) which is sequential
and represents "the expectations that are within a community
governed by an honest and cooperative regular behavior, based on shared
standards by other members" (Fukuyama, 1994).
Several studies focused on explaining the process of building a
strong trust in financial institutions. However, very few studies were
interested in the process and the corresponding determinants of losing
trust in the case of Islamic banks. In fact, Ajili and Ben Gara (2013)
argue that loosing trust in Islamic banks can be explained in terms of a
weak legal framework, the fear of Islamic connotation activities, the
low adaptation of customers with Islamic financial products, the lack of
information and the lack of specialists/experts in the Islamic finance
industry.
There are no previous studies that investigated the assessment of
Islamic banks trust from the perspective of two different cultural
environments, namely the Saudi Arabian and Tunisian contexts. Indeed,
the study of trust in Islamic banks in Saudi Arabia and Tunisia is
appealing for at least two reasons. First, Islamic banking is more
anchored in Saudi Arabia's financial system since almost all Saudi
banks offer Islamic financial products and services. Second, the
sensitivity of Saudi customers and businesses is higher relatively to
the sensitivity of Tunisian customers and businesses since the latter
have a tighter access to a smaller array of Islamic financial
instruments and services.
The research question of this article can be expressed as follows:
do customers trust in Islamic banks? There are three main objectives of
this article, namely (i) studying the conceptual differences between
Islamic and conventional banks, (ii) determining the trust antecedents
and facets in Islamic banks and (iii) explaining the reasons of losing
trust in Islamic banks in different cultural contexts.
In order to explore our research question and reach the stated
research objectives, we adopt a research methodology based on a
questionnaire and uses structural equations modeling. The major results
show a variety of implications. For example, we show that the Saudi
customers' trust is less sensitive to the costs of Islamic products
and services than the Tunisian customers' trust. In addition, the
customers in both countries seem to be aware of the supplementary legal
considerations that need to fosterer to increase their trust.
The remaining of this paper is organized as follows. Section II
presents the conceptual background and develops the hypotheses. Section
III discusses the research methodology. Section IV presents the data and
explains the results. Section V concludes.
II. CONCEPTUAL BACKGROUND AND HYPOTHESES DEVELOPMENT
A. Some Underpinnings on Islamic and Conventional Banks
Over the last 40-plus years, the Islamic banking industry had grown
at a rate of 15 percent (Beng, 2004; Aggarwal and Yousef, 2000; Khan,
2010). Iqbal (2001) claims that the total deposits during 1990-94 grew
at an annual rate of 8.8 percent. According to the World Islamic Banking
Competitiveness Report (3) 2014-15, various aspects characterize the
Islamic banking industry. Some of these aspects include the following: -
the international Islamic banking assets with commercial banks set to
exceed US$778b in 2014; - the global profit pool of Islamic banks is set
to triple by 2019; - Islamic banks in Saudi Arabia, Kuwait and Bahrain
represent more than 48.9%, 44.6% and 27.7% market share respectively.
The financial instruments and services of Islamic banks are gaining
popularity despite the legal environments that are not heavily
supportive. The Islamic financial system stems from shari'ah's
maxims and principles aiming at preserving social justice, equity, and
economic welfare. Furthermore, the modern studies of shari 'ah
focus on its close enforceability in business practice in terms of
spurring entrepreneurship, fair commercial and financial transactions,
efficient financing tools, and protection of property rights. (4)
The most important shari'ah's maxim is the prohibition of
riba (i.e., interest or usury). Islamic banks generate returns to their
depositors in terms of profitability of the projects in which their
funds are invested. Rammal and Zurbruegg (2007, p. 66) maintain that
"since Muslims cannot receive or pay interest, they are unable to
conduct business with conventional banks. To service this niche market,
Islamic financial institutions have developed a range of halal
interest-free financing instruments that conform to shari 'ah
ruling, and therefore are acceptable to their clients."
The Islamic banks' financial instruments and services should
hypothetically be in line with the maxims of shari 'ah. Indeed,
such instruments and services could be legally tradable only when they
are free from riba, do not contain gharar (complexity and/or information
asymmetry), maysir (gambling), and are halal (i.e., permissible).
Alongside with these features, these instruments and services should
have some social responsibility in terms of poverty alleviation and
economic welfare. The activity of Islamic banks should furthermore be
ethically appealing to individuals and companies (Mansour et al.,
2015-a).
Bedoui and Mansour (2015) show that the standard financial
performance must not dominate all objectives since supplementary
objectives must be taken into account. The authors propose a
Pentagon-shaped structure of performance that stems from maqasid
al-shari 'ah (i.e., objectives of Islamic law). They show that the
performance of Islamic banks has several attributes and is not limited
to the financial dimension. Indeed, their main theoretical result is
that an Islamic bank that maximizes its financial profitability at the
expense of the other objectives is poorly performing from the
perspective of maqasid al-shari 'ah.
Table 1-a gives some insights about the baseline differences
between Islamic banks and their conventional counterparts on the basis
of the following criteria: foundation, objectives, interest payment,
incentive-driven problems, socially-oriented vision, risk-sharing and
profit distribution. The comparison of both types of banks shows sheer
evidence that they are different on many grounds. Banning the trading of
financial instruments involving interest is the heart of conflict
between Islamic and conventional banks. Schoon and Nuri (2012, p. 31)
maintain that "people have devised ways to evade the prohibition on
interest by applying, for example, partnership contracts which were
allowed as long as the lender would assume some risk for which he would
be entitled to a share of the profit. Contracts for the sale of goods on
a deferred payment were equally permitted due to the fact that they were
based on a trade."
Although Islamic banks first appeared and propelled in the Muslim
World, some conventional banks in OECD countries (e.g., HSBC's HSBC
Amanah Finance, Citibank's Citi Islamic Bahrain, and JP Morgan)
provide Islamic financial instruments and services through Islamic
windows. While there are various products traded by Islamic banks, the
most known are de jure based on the principle of profit-and-loss sharing
(PLS principle). The popular financial instruments based on the PLS
principle are mudarabah (finance trusteeship) and musharakah (equity
partnership) and PLS sharing accounts to individual customers. The
PLS-based arrangements are theoretically appealing. However, several
recent studies (e.g., Khan, 2010) show that Islamic banks'
participation in these instruments is very low since they are reluctant
to get involved owing to the corresponding high risk of the PLS-financed
projects, Islamic banks' low appetite for risk, and the related
monitoring costs (Archer and Abdel Karim, 2007). In addition, the
depositors of Islamic banks are not willing to take risks due, inter
alia, to the low level of transparency in the banking system. Although
the PLS principle is appealing, Islamic banks may find it difficult to
attract depositors as well as businesses, which may cast doubt on the
effectiveness of the 'Islamicity' of their business
operations.
Mansour et al. (2015-a, p.51) investigate the extent to which
Islamic banks' traded financial instruments are ethical. The
authors conclude that "the practice of Islamic banking
misrepresents Islam and does not contribute to solve social problems.
The interaction between maqasid al-shari'a (objectives of Islamic
law) and qiyas (deductive analogy) provides a supplementary tool for
interpreting the failure of the prior in terms of the practical misuse
of the latter by Islamic banks. This essay provides an interpretive
approach to the current debate about why Islamic banking has failed and
suggests ways to move cautiously in the future."
The failure of Islamic banks is engendered by the misrepresentation
of maqasid al-shari'ah in practice (Chapra, 2012). Indeed, most of
Islamic banks in the world either chosen willingly or were forced (i.e.,
for profitability purposes) to not be 'fully' compliant to
shari'ah. Khan (2010) concludes that Islamic banks follow
shari'ah in a 'disguised' way. The misrepresentation
distorted the vision of Islam and brought forth a trust crisis between
Islamic banks and their individual customers and businesses. Indeed, the
trust of businesses and individual customers towards Islamic banks has
been impaired. Recent studies (e.g., Habib, 2011-b; Dusuki, 2010; Dusuki
and Abdullah, 2007) show that there is distortion in the vision of
maqasid al-shari 'ah.
As claimed in the legendary treatise of Al-Ghazali (1109/1937), the
vision of maqasid al-shari 'ah brings benefits, justice, and
equitability to individuals and society as a whole. The financial
innovations that are traded in modern Islamic financial markets are
supposed to achieve such goals. However, recent studies (e.g., Dusuki
(2010)) document that the financial innovations that are compliant to
shari'ah brought forth several controversies. Indeed, Dusuki (2010,
p. 204) that "some innovations which try to achieve the same
economic outcome like conventional instruments distort the vision of
Islamic economics based on justice and equitability. This distortion
stems from the restricted view of understanding shari'ah, by only
focusing on the legal forms of a contract rather than the substance
especially when structuring a financial product. The overemphasis on
form over substance leads to potential abuse of shari'ah principles
in justifying certain contracts which is in fact contradictory to the
shari 'ah text and ultimately undermining the higher objectives of
shari'ah."
Islamic banks developed several financial products over the last
forty-plus years either to create value, diversify portfolios or hedge
risks. Mansour et al. (2015-b) developed a PLS-based financing model
based on increasing musharakah in which the cash flow risk is hedged
recursively. The Islamic financial engineers were poorly performing over
the same period because the only achievement they did is limiting the
set of instruments to the classical modes and/or suggesting hybrid
products without innovative ideas in terms of value creation and risk
hedging. Accordingly, no innovations have been developed to meet the
needs of modern financial markets and face the new phenomena such as
market integration, capital-market imperfections, and shocks
transmission. The poor performance of Islamic financial engineers (i.e.,
lack of specialists/experts) did not provide innovative Islamic
financial instruments that can draw the attention of individual
customers and businesses. Iqbal (2012) claims that the current products
traded by Islamic banks and shari 'ah-compliant financial
institutions were developed centuries ago and do not sufficiently meet
the needs of modern society. Habib (2011-a) criticizes the set of
Islamic financial innovations and evaluates the product development
including the types of products used by Islamic banks and the approaches
adopted to develop them.
There is wide gap between the ideals of Islamic banks and their
business practices in real world inasmuch as it is frequently hard to
distinguish between the products offered by Islamic and conventional
banks. The following citation gives an interesting insight regarding
this issue: Khan (2010, p. 850) argues that the rules of Islamic banks
make them "more economically efficient than conventional banking
and promote greater economic equity and justice. To what extent, then,
do actual Islamic Banking practices live up to the ideal, and how
different are they from conventional banking? A preliminary
investigation shows that, three decades after its introduction, there
remain substantial divergences between IBF's (Islamic banking and
finance) ideals and its practices, and much of IBF still remains
functionally indistinguishable from conventional banking."
Iqbal (2012) argues that there are many examples of clear
divergences in theory and practice. According to Iqbal, the most serious
divergences are (i) genuine versus synthetic murabahah, (ii) individual
versus organized tawarruq (iii) buy-back arrangements in sukuk, (iv)
ensuring fixed return through hybrid contracts, and (v) problems in
shari'ah-validation procedure. The latter divergence can have a
sizable impact on the loss of trust. Indeed, when Islamic banks are not
endowed with highly qualified experts/specialists in the field who can
provide customers and business with distinguished products and business
solutions that meet their needs, the trust level becomes impaired. As a
consequence, Islamic banks fail to sustain the trust of their customers
and businesse.
The lack of experts/specialists can be revealed through two
reasons. The first reason consists in the inefficient contribution of
Islamic banks' shari'ah boards. The latter consists in few
scholars in Islamic jurisprudence that exclusively certify the products
as shari'ah-compliant through a simple replication of conventional
banks' products using Islamic terminology, standard and
interest-based banking products (Khan, 2010). In this respect, Islamic
banks' failure consists in camouflaging the products of
conventional banks behind the 'Islamic identity' without a
genuine innovation in the specificities of the products they offer. The
second reason is that there are too few scholars in the industry who are
eligible to issue fatwas (i.e., Islamic legal certifications). Morais
(2007) argues that the prominent scholars are less than twenty in the
world. They are present in more than 40 boards in Islamic banks to
simply give their certifications or translate financial monikers into
the jargon of shari'ah to give them the Islamic label. (5) After an
interview with a banker from National Bank of Dubai, Foster (2009)
maintains that the issuance of fatwas became like shopping. Indeed, the
banker claims that, if a shah 'ah scholar does not issue the
certification, "we phone up another scholar, offer him a sum of
money for his services and ask him for a fatwa. We do this until we get
shari 'ah compliance."
The Islamic banking industry faces a variety of failures and
potential challenges. Indeed, Islamic financial institutions, not only
Islamic banks, face a variety of potential challenges that basically
stem from their current failures. As Table 1 -b shows, Islamic financial
institutions are principally facing the challenge of innovating new
Islamic financial products and services that are simultaneously
profitable and satisfying the needs of their clients. In other words,
Islamic banks must specifically pioneer new Islamic financial
innovations that not only meet the requirement of shari 'ah but
also help them to increase their market share and sustain their
long-term growth.
B. Trust in Banking
The concept of trust is used in many social disciplines not only in
the field of marketing or banking (Wang and Emurian, 2004). Despite this
overlap between a variety of fields, the concept of trust remains quite
complex and difficult to measure in banking institutions, which explains
the lack of studies dealing with financial institutions. This is due to
the multifaceted trust construct (6) (Gefen, 2000). In fact, Belanger
and Carter (2008) argue that the trust is defined differently in
numerous studies. For example, Soderstrom (2009) identifies 29 different
types of trust all of which are somewhat different and related to each
other in different ways (Masrek et al. 2012). However, marketing
academicians have accepted that trust is fundamental for building and
maintaining service relationships.
Trust is defined as an expectation (Frisou, 2000), belief (Schurr
and Ozanne, 1985; Anderson and Weitz, 1989; Anderson and Naurus, 1990;
Ganesan and Hess, 1997; Gurviez; 1999; Gurviez and Korchia, 2002), a
willing (Moorman et al. 1993; Chaudhuri and Holbrook, 2001), a
behavioral intention or feeling (Bories, 2007). Mayer et al. (1995)
define trust as "the willingness of a party to be vulnerable to the
actions of another party based on the expectation that the other will
perform a particular action important to the trust or irrespective of
the agility to monitor or control that other party". According to
Muawanah (2010), trust is a willingness to act on the basis of beliefs
about the motives of other parties and the level of risk involved with
action. Trust is often used interchangeably with credibility,
reliability, or confidence.
There is a trend in the marketing literature to distinguish between
two types of trust, namely the interpersonal trust and organizational
trust (Doney and Cannon, 1997; Ganesan and Hess, 1987; Zaheer et al.
1998; Ben Amour, 2000; Kennedy et al. 2001; Gatfaoui, 2003). In fact,
interpersonal trust involves the relationship between two individuals,
especially the customer-seller relationship, while organizational trust
refers to the relation between customers and organizations. According to
Gurviez and Korchia (2002), organizational trust is traditionally made
up of three dimensions, namely credibility (competence or expertise),
integrity (honesty) and benevolence related to the morale side of trust
(Moulins et al., 2010; McKnight et al., 1998; Hadj Khalifa and Kammoun,
2009).
Consumers maintain relationships with the service provider because
they consider that the latter has the required technical skills
(competence) and will do their best to address potential problems
(benevolence) (Moulins et al., 2010). Thus, the organizational trust is
based on the credibility of the company and the corresponding interest
in customer satisfaction (good intentions). These two dimensions of
trust are observed through different studies, e.g., Bidault et al.
(1995), Hadj Khalifa and Kammoun (2009) and Bin Mohamed et al. (2011).
Mansour et al. (2010) study the criteria used by UK customers to rank
banks. The authors show that the costs of services are at the top of
their priorities to exhibit their preferences. We therefore consider
that the cost of products and services need to be included as variable
influencing the antecedents of trust.
While trust emerges quickly, it also can be fragile and might be
broken (Kim et al., 2009). In fact, Ajili and Ben Gara (2013) show that
the reluctance toward Islamic banks can be explained by the absence of a
specific legal framework, the fear of Islamic connotation activities,
the low familiarity of customers with the Islamic banking products, the
lack of information and the lack of specialists in Islamic finance. This
reluctance is expected to have a negative effect on trust (Bin Mohamed
et al., 2011). Figure 1 redesigns the four hypotheses through the
conceptual model.
Hypotheses are suggested based on the prior theoretical
development:
Hypothesis 1 (H1): The lack of specialists/experts has a negative
impact on the Islamic banking trust.
H1-a: The lack of specialists/experts has a negative impact on the
credibility of Islamic banking.
H1-b: The lack of specialists/experts has a negative impact on the
integrity of Islamic banking.
H1-c: The lack of specialists has a negative impact on the
benevolence of Islamic banking.
Hypothesis 2 (H2): The absence of a specific legal framework has a
negative impact on the Islamic banking trust.
H2-a: The absence of a specific legal framework has a negative
impact on the credibility of Islamic banking.
H2-b: The absence of a specific legal framework has a negative
impact on the integrity of Islamic banking.
H2-c: The absence of a specific legal framework has a negative
impact on the benevolence of Islamic banking.
Hypothesis 3 (H3): Higher costs of products and services have a
negative impact on Islamic banks trust.
H3-a: Higher costs of products and services have a negative impact
on the credibility of Islamic banks.
H3-b: Higher costs of products and services have a negative impact
on the integrity of Islamic banks.
H3-c: Higher costs of products and services have a negative impact
on the benevolence of Islamic banks.
Hypothesis 4 (H4): The fear of Islamic activities connotation has a
negative impact on the Islamic banking trust.
H4-a: Fear of Islamic activities connotation has a negative impact
on the credibility of Islamic banking.
H4-b: Fear of Islamic activities connotation has a negative impact
on the integrity of Islamic banking.
H4-c: Fear of Islamic activities connotation has a negative impact
on the benevolence of Islamic banking.
[FIGURE 1 OMITTED]
III. RESEARCH METHODOLOGY
The main objective of this article is to test the trust in Islamic
banking in two different cultural settings, namely Saudi Arabia and
Tunisia. For this aim, we opt a quantitative research based on
questionnaire distributed to Islamic banks' customers. The data
collection spanned over June 2015-August 2015.
There is a variety of measurement scales for trust (Siriex and
Dubois, 1999). However, almost all of them are all inspired from the
trust measurement scales developed by Gurviez (1999). Thus, we adapt
this measurement scale to measure the trust construct completed with
four items from the measurement scale developed by Haj Khelifa and
Kammoun (2009). The original scale of the authors was developed in
French.
The trust antecedent we have expounded in the previous section is
measured through a single measurement scale. This is due to the absence
of measurement scales for these variables in the literature. For this
aim, we conducted 30 individual interviews with marketing professionals
in order to generate one item for each variable.
Trust measurement scales adopted from the literature were
translated into Arabic in order to facilitate the understanding of the
questionnaire in both countries (Tunisia and Saudi Arabia) as
recommended by Fehri (2004). We opt for the method of double translation
because it is frequently used in cross-cultural empirical studies. All
items have been translated from Arabic into French.
We choose a convenient sample of customers of Islamic banks in both
countries. Data were obtained when clients come to their banks (from 9
a.m. to 12 p.m.). Respondents were asked to state their level of
agreement or disagreement with the items of the questionnaire using a
five-point Likert scale, ranging from 'strongly disagree' to
'strongly agree'. At the end, we collected 350 usable
questionnaires in each country. This sample size is compliant with the
rule of Hair et al. (2006) and is sufficient for structural equations
modeling (SEM) (Roussel et al., 2002) using Amos 18.
SEM is used to test the causal relationship between non-observable
variables. It helps econometricians to test hypotheses and measurement
models taking into consideration the measurement errors (Roussel et al.
2002). This method will be used in our research. We will adopt the
two-step modeling approach as recommended by Anderson and Gerbing
(1988).
IV. DATA ANALYSIS AND RESULTS
The profiles of respondents used in this research can be summarized
in Table 3 that shows some characteristics. Table 3 shows a variety of
differences between the two countries. For example, it is noticeable
that the respondents in Saudi Arabia are dominated by males.
The data analysis followed a two-step approach for the SEM method
as recommended by Anderson and Gerbing (1988) in order to ensure the
reliability of the measurement model as well as examining the structural
model. In the first step, exploratory and confirmatory factor analyses
are used to assess the dimensionality, reliability and validity of
constructs using SPSS 21. In the second step, the causal relationships
among all constructs will be studied and the structural model is tested
using SEM.
A. Model Measurement
In cross-cultural studies, the dimensionality of scales used must
be evaluated by an exploratory factor analysis (EFA), as indicated by
Venkatraman and Grant (1986). If the scale is applicable in different
contexts, its structure factor and the model should be equivalent across
all cultures. Thus, a component analysis with varimax rotation using
SPSS 21 software was conducted. The results are presented in Table 4.
After a varimax rotation, the measurement scales maintain the same
factor structure as set out in the literature. The reliability indices
(e.g., Cronbach's alpha) are acceptable for all dimensions of
trust. According to Hair et al. (2006), Cronbach's alpha for all
constructs is considered as acceptable when it is beyond 0.7. In our
case, this means that the data instruments used in this research are
valid and reliable. The final measurement models for all constructs were
further examined via confirmatory factor analysis (CFA) using AMOS 18.
Table 5 shows the indices results for all the CFA measurement models.
The overall level reveals an adequate model fit with the chi-square
statistic ([chi square] = 362.154, p = 0.001) being significant and all
the baseline comparison indices (CFI = 0.977; TLI = 0.973; RMSEA = 0.043
< 0.05; AGFI= 0.814). These indices indicate a good fit of the
measurement model. The measurement scale used has a good internal
reliability as indicated in Table 6. The average variance extracted
(AVE) for each construct is higher than 0.50, which supports the
convergent validity of the constructs (Fornell and Larcker, 1981).
B. Structural Model
The proposed hypotheses, causal relationships and estimation of the
strength of relationships between the variables were tested using
structural equation modeling through AMOS 18. The result of the
model's goodness-of fit determines whether the hypotheses are
supported by empirical data or not (see Figure 2 and Table 7).
C. Discussion and Policy Implications
In order to discuss the results and infer the corresponding policy
implications, we interpret the regression fits in Table 7. Regarding the
impact of lack of specialists/experts on the trust in Islamic banks, it
is clear that there is a strong negative significant relationship
between the two variables. This confirms the fact that the lack of
specialists/experts in both countries impairs the customers/business
trust in Islamic banks. Hypothesis 'H1-a' is therefore
supported. The same result applies to the relationship between the lack
of specialists/experts and integrity and benevolence. Hypotheses
'H1-b' and 'H1-c' are supported. The three
antecedents (credibility, integrity and benevolence) exhibit clearly a
negative impact on trust in both countries.
[FIGURE 2 OMITTED]
In statistical terms, we can argue that the structural relationship
is stronger in Saudi Arabia more than in Tunisia. This means that the
trust of Saudi customers and businesses is highly sensitive to the lack
of specialists/experts inasmuch as they consider that the inefficient
contribution of shari'ah scholars and Islamic financial engineers
reduces their trust in Islamic banks' products and services. The
absence of a supportive legal framework seems to be more pronounced in
Tunisia relative to Saudi Arabia, Indeed, the three components of the
trust construct are not statistically significant in Saudi Arabia. This
means that the Saudi customers/businesses are not worried by the legal
framework. Indeed, the Saudi Islamic banking industry is more anchored
in the local financial system relative to Tunisia. Islamic banks in the
Tunisian context are still trying to compete with conventional banks,
both in number and size. According to Vizcaino (2013, 2014), the Islamic
banking industry in Tunisia is currently tiny but is expected to grow
with government and private initiatives. According to the survey study
of the author, around 54% of ordinary Tunisian respondents are in favor
of a switch to Islamic banking. In addition, around 40% claim that they
approve the switching even if their money is not guaranteed. Hypothesis
2 is therefore partially accepted because the legal framework in Saudi
Arabia is more comprehensive than in Tunisia.
The costs of Islamic banks' products and services turn out to
have negative impact on trust for all three antecedents in both
countries. This is clear because all estimates are negative and
statistically significant. However, the trust of Tunisian customers and
businesses in Islamic banks is more sensitive to the costs. This
indicates that, when the costs of products and services are lower than
those of conventional banks, the trust in Islamic banks can improve.
This result is similar to Mansour et al. (2010) who show that,
irrespective of the demographic locations and the religion of the
respondents, the criterion Tow services charges' is at the
customers' top criteria. The Islamic nature of the bank is,
however, placed second, pointing to the importance of religious
orientation. The trust of Saudi customers/businesses to the cost seems
to be less sensitive when compared to the trust in the Tunisian context.
The last factor, namely the fear of Islamic connotation activities,
is shown to be very low and statistically not significant in Saudi
Arabia. This means that the fear of Islamic connotation activities
cannot impair the trust of Saudi customers/businesses and thus for the
three components. For the Tunisian context, all estimates are positive
but statistically significant. This means that the halal (i.e.,
admissible from the shari'ah perspective) industry is not
associated with the fear of Islamic connotation. In contrast, it is
clear that this factor improves the trust in Islamic banks. Indeed, the
fact that Islamic banks design and pioneer halal products and services
according to shari'ah increases the trust. This fact is more
pronounced in Saudi Arabia. Hypothesis 4 is therefore rejected for both
countries.
V. CONCLUSION
This article has explored the issue of Islamic banking trust in
Saudi Arabia and Tunisia. There are various reasons behind the relevance
of this study. Indeed, it does not only address the issue of trust but
also sheds some light on the importance of cross-cultural differences
driving trust. From a theoretical perspective, this article is a
continuation of Ajili and Gara (2013). From an empirical perspective,
this paper is among the rare contributions that study trust in Islamic
banking in different cultural and economic settings. The research
methodology is based on structural equations modeling. A survey is
conducted in Saudi Arabia and Tunisia to investigate the extent to which
customers/businesses exhibit trust towards Islamic banks in both
countries. The concept of trust is operationalized through three
antecedents, namely credibility, integrity, and benevolence.
The empirical results have a number of implications to Islamic
banks and governmental authorities in both countries. First, the lack of
specialists/experts seems to be negatively correlated with trust. It is
not surprising that the poorly-performing contribution of Islamic
financial engineers and shari 'ah scholars over the last 40-plus
years still have an impact on the customers' consciousness about
the Islamic financial products. We can argue that they are skeptical
about the pivotal differences between Islamic financial products and
services and their corresponding conventional counterparts. The
awareness of customers is still very low. In a similar context, Vizcaino
(2013) finds that 64 % of Tunisian respondents said they were unclear
about how Islamic finance worked. This can be interpreted by the fact
that the customers cannot distinguish properly why the Islamic and
conventional products are different and why the prior are halal. Islamic
banks need to give a higher attention to Islamic financial innovations
not only to improve the trust of customers, but also to sustain their
market shares and increase competitiveness.
The legal framework and fear of Islamic connotation do not show
much difference between Saudi Arabia and Tunisia. However, the
governmental authorities in Tunisia are expected to provide a more
favorable regulatory setting to maintain and promote the competitiveness
of local Islamic banks. A supplementary empirical result of this paper
shows that the Tunisian customers' trust is more sensitive to the
costs relative to the Saudi customers.
A number of recommendations can be inferred to help Islamic banks
build stronger trust with their customers/businesses. The top of
priorities of Islamic banks in both countries seems to be related to
Islamic products development. Islamic financial products and services
must simultaneously be compliant to shari'ah and profitable. This
dual challenge is vital for their competitiveness and sustainable
growth. The governmental authorities in both countries have a sizeable
role to spur the trust of customers/businesses owing their sovereign
role in terms of favorable regulatory measures.
ENDNOTES
1. It is noticeable that the Islamic financial products and
services are gaining popularity in Muslim countries where the
religiosity has an impact of their investment choices (see Mansour and
Jlassi (2014) for an exploration of how religiosity can drive finance
and investment decisions).
2. The legal systems in Muslim economies do not have commercial
laws that consider riba as a criminal offence) but only as a moral sin
(Schoon and Nuri, 2012).
3. The report is available at:
http://www.ey.com/EM/en/Industries/Financial-Services/Banking---Capital-Markets/EY-world-islamic-banking-competitiveness-report-2014-15
4. See Mansour et al. (2015-a) for a deep investigation of the
ethical dimension of Islamic banks.
5. Iqbal (2012) reports that the 5 most known scholars in the world
are Abdusattar Abu Ghudda, Nizam Yaqubi, Mohamed Ali El-Gari, Daud
Bakar, and Abdallah al-Manea. They respectively had 101, 95, 86, 43, and
42 positions in different boards.
6. Trust is considered as a multifaceted construct because it is
determined by several factors. Our empirical deigns uses three factors
that influence trust in Islamic banking, namely credibility, integrity,
benevolence.
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Walid Mansour (a), Leila Lefi Hajlaoui (b) Fadul Abdulkarim (c),
Mohammad Nassief (d)
(a) Islamic Economics Institute, King Abdulaziz University, Jeddah,
Kingdom of Saudi Arabia; Dar Al-Hekma University, Jeddah, Kingdom of
Saudi Arabia; ECSTRA Research Lab, Institut des Hautes Etudes
Commerciales, Universite de Carthage, and Universite de Sousse, Tunisia
wmmansour@kau. edu.sa
(b) Qassim University, Kingdom of Saudi Arabia; URISO Research lab,
Faculte des Sciences Economiques et de Gestion, Universite Tunis El
Manar, Tunisia
lefileila@gmail, com
(c) Islamic Economics Institute, King Abdulaziz University, Kingdom
of Saudi Arabia
falbashir@kau. edu. sa
(d) Islamic Economics Institute, King Abdulaziz University, Kingdom
of Saudi Arabia
manassief@kau. edu.sa
(*) This project was funded by the Deanship of Scientific Research
(DSR), King Abdulaziz University, Jeddah, under grant N.
(G-1436-121-161). The authors, therefore, acknowledge with thanks DSR
technical and financial support.
Table 1-a
A comparison between Islamic and conventional banks
(Source: Adapted from Majdoub et a). (2016))
Type of Foundation Objectives
Bank
Islamic Operations are The objectives
based on the should stem from
axioms and maqasid al-shari 'ah
principles (i.e., objectives of
stemming from Islamic law). Ibn
the two sources of Ashour (1945) notes
shari'ah: Qur'an two general aspects
(Muslims' Holy of maqasid al-
Book) and shari 'ah: promoting
Sunnah (Prophet welfare (jalb al-
Muhammad's masalih) and
practice). avoiding evils (dar 'a
al-mafasid).
Conventional Operations are The objectives of the
based on financial
manmade intermediation stem
microeconomic from shareholder
principles of profit maximization.
utility Trading complex
maximization. financial instruments
The products, can be harmful to the
instruments, and economy as a whole
services are in terms of value and
derived from job destruction.
profit
maximization.
Type of Interest Payments Incentive-driven
Bank Problems
Islamic Interest is the heart Islamic banks
of conflict between suffer from
Islamic and incentive
conventional banks. problems.
Money cannot be Islamic financial
rented out to engineering with
generate a return. It its foremost PLS
is only a commodity principle
for exchange endeavors to
purposes. A bank alleviate these
cannot charge pre- problems.
determined financial
fees on loanable
funds.
Conventional Conventional banks Information
charge interest asymmetry
irrespective of the impairs the
future cash flow contracting
streams the project relationship and
will generate. In the affects the
extreme case of bank's ability to
default, a bank has generate profits
the right of and raise funds.
foreclose, as a non- Banks must pay
residual claimant. a premium to
obtain external
funds, which
affects
profitability.
Type of Risk sharing and Socially-oriented
Bank Profit Distribution Vision
Islamic The return of The primary aim is to
Islamic banks must serve the general
be generated from interest in equitably
risk sharing among growing the economy.
the contracting The best-known tool
parties. Equity-like is Zakah, which
Islamic financial contributes to poverty
contracts (i.e., alleviation and social
musharakah, equity. People with
mudharbah) excess savings pay
illustrate this Zakah to poor people
principle. and/or entrepreneurs
with innovative ideas
but with no funds.
Conventional The pivotal function Conventional banks
is to lend money focus on credit
and get it back with worthiness in
pre-determined managing the debtor-
conditions in terms creditor relationship
of an interest rate, and place less
maturity, and emphasis on project
coupon payments. valuation and future
The firm bears all outcomes for the
risk and must repay society. Goals such as
the bank poverty alleviation,
irrespective of the ethical investments,
future cash flow social equity, and
streams. economic welfare are
not paramount.
Table 1-b
Failures and potential challenges
Failures Challenges
1. Whilst Islamic finance experts 1. The Islamic finance industry
do not 'like' conventional finance has to develop new financial
products and institutions, they innovations and launch new
simultaneously adopt very similar institutions that simultaneously
financing techniques that are fit the shah'ah requirements and
close to being based on interest. contribute to economic growth.
2. Islamic finance experts are 2. Development of risk-hedging
unable to revolutionize the techniques and instruments that
industry through new financial are compliant with shah 'ah
innovations. requirements.
3. The Islamic finance industry is 3. New strategies must be
a player with around 2 percent of developed to conquer new markets
the global finance industry. not only in Muslim countries but
also in the West.
4. The Islamic finance industry 4. IFIs need to foster the
does not contribute efficiently microfinance environment by
to economic development. offering interest-free
microcredits.
5. The social-oriented role is 5. Propelling the role of Islamic
marginalized. Islamic financial financial institutions in
institutions remain inactive in alleviating poverty and creating
financing projects that contribute jobs (maqasid al-shah 'ah).
to social objectives.
6. Islamic finance and firm 6. More pronounced role of the
dynamics. The financial products interaction of Islamic finance with
and innovations offered by Islamic firm dynamics in terms of growth,
financial institutions did not survival, age, and profit.
take account of variables that
affect positively firm dynamics.
7. Islamic finance is neither de 7. Islamic financial institutions
facto ethical nor Islamic. The should be ethical in their business
financial products offered by transactions and fulfill maqasid
Islamic financial institutions al-shah'ah, which qualifies Islamic
are criticized because they are financial institutions to meet the
inconsistent with the claimed Islamic label.
maqasid al-shari 'ah (objectives
of Islamic law).
Table 2
Definition of trust construct (Adapted from Masrek et al., 2012)
Construct Sub-constructs
Trust Credibility: refers to the ability of service provider to
perform what trustee needs.
Benevolence: refers to the service providers' care and
motivation to act in the trustee's best interests.
Integrity: refers to the service providers' honesty and
promise keeping.
Table 3
Respondents' profiles
Saudi Arabia Tunisia
Age 20-30 years 14.28% 2.85%
31-40 years 37.73% 27.71%
41-50 years 26.57% 58.00%
51 years and more 21.42% 11.44%
Gender Male 93.00% 59%
Female 7.00% 41%
Profession Student 19.14% 1.71%
Jobless 4.28% 0%
Having a business 16.28% 51.42%
Employee 60.30% 46.87%
Total (*) 100% 100%
(*) Sample of 350 respondents for each country.
Table 4
Component analysis results (with varimax rotation)
Loadings
Constructs Items (codified) KSA TUNISIA
Cred l 0.890 0.841
Cred 2 0.730 0.805
Credibility Cred 3 0.710 0.776
Cred 4 0.687 0.730
Cred 5 0.642 0.635
Cred 6 0.630 0.600
Integ 1 0.682 0.665
Integrity Integ 2 Integ 3 0.743 0.795 0.720 0.690
Integ 4 0.765 0.680
Benev 1 0.776 0.621
Benevolence Benev 2 Benev 3 0.846 0.717 0.718 0.625
Benev 4 0.878 0.775
Cronbach's Alpha
Constructs KSA TUNISIA
Credibility 0.881 0.835
Integrity 0.725 0.739
Benevolence 0.821 0.802
Note to table: The K.M.O = 0.717 and Bartlett's test of sphericity
displays a khi-square =344.865 with p = 0.00.
Table 5
Overall fit with country level data
Model [chi squre] (ddf) P GFI AGFI RMR
362.154 0.001 0.849 0.814 0.109
KSA (284)
359.303 0.028 0.787 0.740 0.148
Tunisia (310)
Model RMSEA TLI CFI
0.043 0.973 0.977
KSA
0.043 0.974 0.977
Tunisia
Note to table: p< 0.05, GFI > 0.9, AGFI > 0.8, 0< RMR < 0.01, RMSEA
< 0.05, TLI > 0.90, CFI > 0.90
Table 6
Reliability and convergent validity (c.v)
p Joreskog Fornell and Lacker index
KSA TUNISIA KSA TUNISIA
Credibility 0.901 0.879 0.693 0.609
Integrity 0.792 0.780 0.561 0.507
Benevolence 0.870 0.864 0.670 0.650
Table 7
Testing structural relationships
Saudi Arabia
Estimate S.E. C.R. P
Trust credibility [left arrow] lack of
specialists -0.430 0.038 -8.241 (*)
Trust integrity [left arrow] lack of
specialists -0.995 0.081 -10.730 (*)
Trust benevolence [left arrow] lack of
specialists -0.380 0.112 -3.391 (*)
Trust credibility [left arrow] absc of
legal framework -0.021 0.068 -0.311 0.753
Trust integrity [left arrow] absc of
legal framework -0.001 0.093 0.006 0.996
Trust benevolence [left arrow] absc of
legal framework -0.134 0.079 -1.696 0.092
Trust credibility [left arrow] cost of
products and services -0.682 0.069 -5.293 (*)
Trust integrity [left arrow] cost of
products and services -0.300 0.070 -4.280 (*)
Trust benevolence [left arrow] cost of
products and services -0.312 0.082 -3.549 (*)
Trust credibility [left arrow] fear of
Islamic 0.010 0.080 0.120 0.910
Trust integrity [left arrow] fear of
Islamic 0.007 0.076 0.080 0.940
Trust benevolence [left arrow] fear of
Islamic 0.097 0.079 1.230 0.219
Tunisia
Estimate S.E. C.R. P
Trust credibility [left arrow] lack of
specialists -0.423 0.073 -5.930 (*)
Trust integrity [left arrow] lack of
specialists -0.378 0.067 -5.620 (*)
Trust benevolence [left arrow] lack of
specialists -0.244 0.057 3.638 (*)
Trust credibility [left arrow] absc of
legal framework -0.529 0.083 -6.444 (*)
Trust integrity [left arrow] absc of
legal framework -0.824 0.067 -9.930 (*)
Trust benevolence [left arrow] absc of
legal framework -0.762 0.080 -7.039 (*)
Trust credibility [left arrow] cost of
products and services -0.807 0.080 -6.274 (*)
Trust integrity [left arrow] cost of
products and services -0.774 0.054 -7.100 (*)
Trust benevolence [left arrow] cost of
products and services -0.750 0.046 -3.682 (*)
Trust credibility [left arrow] fear of
Islamic -0.943 0.078 9.934 (*)
Trust integrity [left arrow] fear of
Islamic -1.630 0.087 7.948 (*)
Trust benevolence [left arrow] fear of
Islamic -1.174 0.065 6.147 (*)
(*) statstically significant test; S.E.: standard error; P: p-value
