Islamic banking strategy and market differentiation in finance

Islamic Marketing Strategy

As the population of Muslims is increasing over time, there is also an increased demand of the introduction of Islamic principles in different sectors. One of these sectors that have seen a great deal of Islamization lately is the marketing sector. Muslims now want a marketing system that is in accordance with the laws of Shariah. One of the most projected examples of this is the introduction of Islamic banking to provide alternate products and services to the Muslim customers. Many researches and studies have been carried out to see what the response of the Islamic marketing strategies has been over the years. In this paper, we shall first look at in detail what is actually meant by the Islamic marketing strategy and how the Islamic laws pertaining to business differ from the conventional laws. We shall then look at how these strategies have been adopted by banks to introduce Islamic Banking. Towards the end of the paper, we will also take a look at the other markets that can be tailored according to the Islamic laws.

1.1 Introduction

1.1.1 What is the Islamic Marketing Strategy?

The major difference in Islamic and conventional banking and marketing comes out when talking about interest or riba how it is put in Arabic. (Hassan, Chachi and Latiff, 2008 p.27) Islamic Banking takes part in an equity-participation system, however the rate of return is not pre-determined or guaranteed. However, when conventional banking is when the rate of return is determined and all the systems of debt and equity are driven by interest. (Hassan et.al, 2008 p 27) This difference merely stems from the idea of interest being prohibited in Islam. The concept of Interest in strictly forbidden in Islam, and any person who takes or participates in taking or giving of interest will be punished severely. Marketing stems out from this that no unfair purchase or selling is allowed in Islamic markets. Further details and explanation of the marketing strategy will be discussed below.

1.1.2 For Better or for Worse?

The mere idea of doing something different provides for Muslim or Islamic Bankers ways to differentiate their services from the rest of the banks. Even though this idea of banking only came forward like 2 decades ago, it has caused investors to look more closely into it and even prefer it. Even though this form of banking can have a negative side, the mere idea of being a new kid on the block can go on to attract more and more customers in the long run. This idea can go on to augment the number of shares Islamic banks have in the market today. Banks like Dubai Islamic Bank in the UAE and Bank Shariya Madiri Indonesia have gone to expand and make many branches in their respective companies.

There is a down side however. The downside in this entire scenario is that there would be more competition among the national and multinational conventional banks. The Banks will face more and more competition not only from the Islamic windows from the traditional banks but also amongst each other. Even though the facility that the new strategy is offering in the long run is new and attractive, it's become very common now. Thus, in order to make their strategy of Islamic banking work, the Islamic Banks must be able to secure a competitive advantage and maintain a strong position. (Hassan et.al, 2008 p.28)

1.1.3 Why Research on it?

The marketing ethics that come out forward in the Islamic banking world are under-researched. Even though many have researched the banking systems, the marketing morals linked to this are not as well studied. Even though this discipline is found all over the world, there is no proper definition of it anywhere. (Husssnain, 2011) This system has the possibility of providing a good means to of marketing to the 1.7 billion Muslims all over the world. Furthermore, the effect of this marketing is not well documented. As mentioned earlier, many countries have prominent Islamic banking systems but none of them have been looked at in detail. It should be studied how these ethics go on to benefit the customers and the consumers in the long run.

2. 1 Explaining the Islamic Marketing Strategy

2.1.1 What is marketing?

Marketing is a subject that is completely evolving over the years and is changing as the needs of the customer changes as well. The major focus that is being created in marketing all over the world is the need to make a better relationship with the customers. (Husssnain, 2011 p 2) The need for a better relationship steams from the profit and the benefits attached to being faithful with the customer. Gone are the days when things were made with a little quantity and sold instantaneously. However, with things being made on a large scale, there needs to be a strategy or a plan to attract customers and thus have your product sold. A marketing strategy is not only a tool to organize the plan with which vending will take place but a lot more now. The organization also uses marketing to look over the benefits of other stakeholders in the process of selling. This process is basically composed of systems in which the object is to make products, interact with the customers and provide them with the product or services they want. (Husssnain, 2011 p.2)

2.1.2 What Islam says about it?

Fourteen hundred years ago when the book of Islam was revealed, it had directions on how deal with vendors and purchasers. Certain morals and set of etiquettes were set out forward that guided the Muslims in acting properly in the market. As mentioned above, the major way in which Islam does business is by ensuring that none of the parties gets hurt.(Husssnain,2011 p.2) A strong emphasis is laid on the fact that any person or part will not gain profit they are not worthy of. Similarly, any person or party will not be charged with a loss that he doesn't deserve. Islam is considered a way of life and thus it provides insights on how to deal with businesses as we. It is believed that once marketing ways get mixed with a proper ethical doctrine, then it is likely that this system would be a success. (Husssnain, 2011 p.3) The fact that the Islamic Marketing strategy hints on or actually picks up from religion makes it a very sensitive topic. Thus, it should be noted that people can agree with it but not go on to criticize or condemn it.

2.1.5 Setting the price

Even the simplest rule dictating marketing states that the policy of pricing a product involves a lot of manipulation and thinking by the marketing strategists. The product is priced in such a way that the retail price is shown way more than what the retailers are actually charging. It is tactics like these that cause a customer to think he or she is getting a good deal and thus they eventually buy the product. (Shaw, 1996) Similar tactics are used in sales when the prices of products are increased before a certain sale is supposed to take place. All these tactics go on to affect the customer at a psychological level and thus it convinces them to buy the product.

The aforementioned tactics and clever tricks as one might say are not allowed in Islamic law. The religion forbids a person or a firm in this matter for getting something that they didn't do the labor for. In other words, if their labor allows them a lower profit, then it is reduced profit that the person or the organization should attain. (Shaw, 1996) Another important thing is that in marketing for goods under Islamic law, a product's price should not be changed without fixing the quantity or quality of the product. These methods also lead to unfair gain by the organization and is thus not allowed. (Ibn Taymiyah, 1982). Here it should be argued that controlling or changing the price in order to meet the requirements of the market is allowed. (Hassan et.al, 2008 p 31) The conventional rule of supply and demand is also allowed in Islam. Thus, when a certain commodity is decreasing, it is allowed to increase the prices and thus provide better opportunities for the sellers. However, it is not permitted to decrease the prices so that the competitors are left in loss. One time, the second Caliph Umar Ibn Al-Khattab was passing by and noticed that one of the vendors was selling raisins at a decrease price only to put rivals at loss. The Caliph told him himself to increase the price or leave the market right this instant. (Malik, 1989) Even though competition in a healthy way is allowed in Islamic market, there shouldn't be any unfair dealings. Thus competition is allowed if a certain vendor doesn't collect all the products, doesn't make corner products, manipulates the price such that he sells products at a much lower rate and if trade isn't restricted. (Niazi, 1996)

2.1.6 Distribution of a product.

In the Islamic marketing strategy it is noted that allotting the sale of products in a certain area should be done to exploit the so. Many a times, there is distribution of a product in ways that would go on to damage the society in the long run. For instance, there is utilization of packaging designs without enough security. Toxic products like petrol and gasoline are transferred over public highways. These can pose a great risk for the public. The distribution channels that are made so the product is delivered to the customer should be fair and easy to access. Delivery of the product was an important aspect mentioned earlier. Thus, delays in the delivery that causes the customer to come again and again would be unethical. The basic trend seen is that firms and organizations should make it easy for the customer to gain access to their products. This rule of Islamic marketing is still developed in the conventional techniques and is applied in most places around the world.

2.1.7 Importance of People

Islamic law gives importance to the people and to the concept of fair treatment. Thus, it becomes false practice to fool the customer into believing something that is not true. Similarly, it is also wrong to make them think or believe that they want something. A much clearer example of this is when people see slim super models acting in advertisements; subconsciously they are affected by it. They want to look like that person and thus be attractive. Along with stereotyping, these sort of advertisements mess with the intellect and the subconscious mind of the person. Along with making them feel bad about themselves, these sorts of promotion ads also cause the person to change their decision. Impairment of the decision making process is prohibited in Islam. Conventional marketing strategies take over the freedom of intellect of the person. They force the person into believing that they want a certain commodity. Consequently, their decision making power is taken over. Another important concept is that the person who does hard labor to earn money, he should spend it with proper consent and freedom. He or she shouldn't not be a victim of stereotypes by the media that force him to purchase a certain service.

3.1 Researches and Reviews

Needless to say the Islamic marketing strategies are now being applied in the banking sector more than ever. The Islamic banking system is gaining popularity among the economists as well as bankers. Many international banks have now opened their special branches that are in accordance with the Islamic Shariah principles pertaining to banking and marketing strategies. It is expected that the Islamic banking system will have to face intense competition from the Islamic banks as well as the other international conventional banks that have launched their Islamic products and services for its customers (Naser, Jamal and Al-Khatib, 1999). Many studies have been carried out analyze the satisfaction and awareness of the customers with respect to Islamic banking in different countries of the world. The number of correspondents that took place in these studies was different from one study to another. When some of these responses were analyzed, it was found out that most of the respondents were satisfied with most of the products and services offered by the Islamic banks or Islamic banking. However, there were some areas in which these respondents showed their dissatisfaction. When the awareness of these respondents was analyzed, it was concluded that the respondents were aware of many Islamic financial products including Musharaka, Murabaha and Mudabara; meanwhile they also showed that they do not deal with aforementioned products.

Moreover, many studies have also been conducted to determine the main patterns and characteristics of the use of Islamic banking services. A detailed profile analysis and a couple of chi-square tests were carried out to determine these. It was found out that most of the people who were using Islamic banking services belonged to a well-educated background. Almost 80% of these people were 25-50 years of age. On the other hand, more than 50% of the customers who took part in the survey were involved with the Islamic banking services for about more than six years. When these customers were analyzed for usage and awareness, it was found out that these people were well aware of this system and most of them were using current accounts, savings account, automated teller machines and investment accounts. When questioned about their satisfaction with the banking services, the customers expressed most of their satisfaction for the particular service or product that they had bought. However, the highest degree of satisfaction was shown in the investment accounts. On the other hand, the employees of the Islamic banking system claimed that they are most satisfied with the delivery system. The key criterion that was used for the selection of banks (that were included in the studies) was the strict following of the Islamic principles and their rate of return (Metawa and Almossawi, 1998).

Even though Islamic banking is starting to gain momentum in many countries of the world, we can learn a lot about the Islamic marketing strategies by doing a case study in Malaysia. Many research papers have been written about how the strategies worked so well in Malaysia and the response of the customers was also recorded.

3.1.1 General marketing strategy with respect to banking

When we talk about marketing strategy in general, we define it as the strategy that is used by a company in order to achieve its marketing goals, which determine the business objectives of that firm. To put it in other words, the action plans and marketing goals are referred to as the marketing strategy. This strategy is devised with respect to the matters of service or product price, communication, distribution and the process that involves the new product development.

There are many factors that influence the adaptation of a new strategy at the firm level; in this case that is the Islamic banking system. Some of these factors are the experience and style of management, the economic environment of the bank, the age of the institution and regulations. Normally it is not difficult to identify the bank that is a market leader and a challenger for the rest of the banks. Therefore, it might be useful to study the vision, objectives, mission and marketing strategies of the banks that are doing a good job in the field of Islamic banking.

The banks that have an established reputation as a market leader and have occupied a key position in the market can adopt the market leader strategy. Needless to say, when a bank is in a leading position in the market, it will occupy the largest portion of the market. On the other hand, the challenger banks are the ones that occupy the second, third and the following rank and are almost always devising new formulas and going for newer strategies so that they can increase their market share and displace the market leader. However, when the followers switch from one strategy to another, they do this to maintain their current customers and not displace the leader.

They have to do this win a reasonable amount of customers by providing them with distinctive advantages for using their products or services. As for the smaller banks, there are market nichers, who have a limited range of resources and they normally focus on specific customers. Banks that are a part of this category often focus on just a single segment of the market. Generally, just a single marketing strategy is used that is amended and modified according to the demands of a particular group that is the target-market.

3.1.2 Case Study Malaysia

The leader in the Islamic banking market in Malaysia is Bank Islam Malaysia Berhad. It is the leader of the market because it was the first bank to offer Islamic banking services and products to its customers. Another strategy that was adopted by BIMB was that it claims itself to be the "The Bank for All," instead of just labeling itself as the leader of the market. On the official website of this bank, we can see this more universal motto that has been adopted by the Bank. It also states that its main objective is to function as a commercial bank that provides Islamic banking services to the Muslims as well as the general population along with maintaining its growth in the whole process.

In order to meet the mission mentioned above, it was important for BIMB to change its banking strategies that were being used by other commercial banks. Therefore, the bank came up with a formula that was based on six corporate objectives so that it could provide its customers with high quality banking services that in accordance with the Islamic principles. BIMB projects itself as being a bank that is professional and friendly at the same time and yet very progressive. BIMB is the leader of the Islamic banking market in Malaysia, whereas the other bank that provides Islamic banking services is the Bank Muamalat Malaysia Berhad, which can be called the follower but not the challenger. However, BMMB should work harder to become the challenger for the leader of the market.

We shall now look at the vision and mission of BBMB in the following text of the paper.

Vision:

The vision of this bank is very promising for its customers. Its vision is to emerge as a bank that is progressive, strong and offers services and products that are in accordance with the Islamic principles, but at the same time they are competitive and modern.

Mission:

The mission of this bank is to develop a bank into a dynamic, modern and strong one based on the Islamic principles. Moreover, the mission is also to play in role in the provision of an alternative to the conventional banking system that the customers have been trying over the years. Furthermore, the ultimate mission of this bank is to contribute in the development of the economy of Malaysia through its contributions in the banking sector.

The third Islamic bank operating in Malaysia is the RHB Islamic Bank. This bank was started in Malaysia in March of the year 2005 and since then it has been doing some extensive advertising campaigns throughout the country. When this bank was launched, it was advertised in all the local newspapers in Malaysia to tell the public that this was the bank that was committed to provide its customers with the best quality services in accordance with Islamic banking principles. The three basic principles on which this bank based its commitment included partnership, trust and understanding. By analyzing the mission statement that was provided by the bank during its massive advertising campaign, it can be concluded that RHB Islamic bank has the goal to become the leader of the market and not just a follower or nicher in the market of Islamic banking.

It is very easy to identify the difference in the Islamic banks and the other commercial banks. It is not very usual to see the commercial banks providing their mission statements and vision to their customers, which is seen in Islamic banking. If we consider the example of Maybank Bhd, which is a commercial bank, we find out that only the general statement has been highlighted and that is related to the aspiration of the bank to become an intuition that contributes towards the development and promotion of the Islamic banking sector in the country.

The same approach has also been adopted by the Public Bank Islamic Banking Division. From the information that has been provided on the website of this bank, we can conclude that this bank only offers products and services that can be bought by customers as an alternate to the ones that offered by the conventional banks.

It has been more than 20 years since the commencement of BIMB. Since it was the first bank in this field, it became the pioneer as well as the leader of the Islamic banking market in the country. However, as the years have gone by, it can be seen that the dominating role that was being played by this bank has diminished over the years. For instance, in the year 2004, the total Islamic deposit that was there at the commercial banks increased by about 34.8%. Unfortunately a negative growth was recorded for BIMB as the total deposit in the year decreased by 8.86% (Haron and Azmi, 2005).

Another thing that is highlighted by this negative growth over the years is that BIMB needs to review its standing as the leading Islamic bank in Malaysia. The profit rate of the bank has also gone down over the years. This lays emphasis on the fact that BIMB needs to develop a strategy that is more effective so that it can attract a good number of customers as well as depositors (Ahmed and Haron, 2002). A major restructuring of the bank is required to cope with the increasing number of challenges in the Islamic banking market, if the bank wants to stay in the line for progress and expansion. The formula that is being used by BIMB to overcome the profit issues is based on six strategies that need to be implemented. These strategies include the growth of consumer-banking business, improve the IT infrastructure, form debt market capabilities, strengthen commercial banking develop risk management capabilities and improve staff competencies.

4.1 Other Markets for Islamic marketing strategies

The Islamic marketing strategies are not only confined to the financial sector, but they can be applied anywhere and in any market. In the following text, we shall see what these sectors are and how they vary with Islamic branding and marketing opportunities.

The Islamic branding and its marketing opportunities differ in size and behavior in different countries of the world. It would not be wrong to say that the Muslim markets provide many business opportunities to the brands all over the world. Some of the products in which there is a lot of potential for these opportunities have been mentioned below.

4.1.1 Food and Beverages

According to a study, the global Halal food market has been estimated to be of almost USD 650 billion worth. Moreover, this market provides opportunities for many brands and companies to go international. Many companies that have been established in the Muslim countries are now deciding to expand their business in the international market. Many Muslim states are also assisting these companies and deciding where to open their outlets and start their businesses. Unfortunately most of the brand opportunities that could give the Muslim brands a lot of profit have been occupied by some of the Western brands such as Nestle.

4.1.2 Education

This is another sector that needs a lot of attention. As the number of young people (who are Muslims) is increasing over time, so is the number of Islamic institutions the world over. The number of these intuitions at all levels of education including primary, secondary and tertiary. It has been estimated that by the year 2050, 60% of the total world population (people who are under 18) will consist of Muslims. Therefore, the youth market is a huge future prospect for companies that want to go international. Even though many Muslims have become very modern with the passage of time, surveys and studies have shown that these people stick to the religious values and like to educate their children in Islamic education centers.

4.1.3 Tourism and Hospitality

Another main segment of the Islamic market, which provides products and services for both Muslims as well as people of the other religion, is the Islamic tourism, travel and leisure. There are so many tourists' destinations in the Middle-East. These Muslim countries have also developed some of the best airlines, hotels and resorts for the Muslim people who are only looking for Halal products and services. With their success in their own countries, these companies are now looking forward to expanding their business in the international markets in accordance with the Islamic marketing strategies. Even though, it will take some time for these companies to establish internationally, but there are examples like Al Jawhara Group of Hotels and Resorts that comply completely with laws of Shariah in all their operations.

4.1.4 Medical, Pharmaceutical, Personal Care and Cosmetics

This is another area where the Islamic marketing strategies can earn the companies a great deal of profit. There are many Muslims who adhere strictly to the Islamic principles and go for the things that are in complete accordance of the laws of Shariah. Such people want everything in accordance with these laws even if they are taking medicines or if they are taking any medical or cosmetic treatment. These people want Halal things, no matter where they are. Things in which animal-based gelatin has been used is not consumed by these people. Many companies have already targeted this group of people and they have changed their marketing strategies in a way that comply with the Islamic principles so that they can provide products and services with the best quality to the Muslims. Yet again, Malaysia is one of the very first countries in which the companies have now started to produce only Halal things, even if they are cosmetics or products of general care and medical treatment.

4.1.5 Entertainment

As entertainment is enjoyed by all kinds of people irrespective of their religion, this is another market that can be exploited by people. Different channels are being launched in countries like UK and America that are specifically targeting the Muslim population.

Even though, there are many areas of the market in which many different companies and firms can apply the rules of Islamic marketing, but Islamic banking is the one that has gained the most momentum. This is because people are getting more and more aware of the Islamic principles pertaining to the banking sector and therefore there is a demand for increased number of banks that work on these principles.

5.1 Conclusion

The main purpose for introducing the Islamic principles in the marketing sector is to make sure that the businesses that are being done within the Muslim world or with countries where some other religion prevails are done at peace. The other objective for the Islamization of the marketing sector is to develop relations that are honored by the customers in a better way so that they are satisfied with the products and services they are being provided with.

The conventional and current marketing methods and strategies are being modified in accordance with the Islamic principles and the rules of Shariah as the cultural concepts of the Muslims have a significant effect on the economy of the world (Alserhan, 2009).