09 October 2016
More than cost or Shariah compliance, a choice between conventional and Islamic may reduce financing take-up
A recent study examining consumer attitudes to Islamic finance could provide lessons for retail Islamic banks. The study on Islamic microfinance by the Consultative Group to Assist the Poor (CGAP), Yale University and Tameweelcom found less price sensitivity by some consumers (not all) and a lot of focus on simplicity in product offerings and Shariah compliance.
Consumers of financial products are in general price sensitive and as costs increase, demand goes down. But while measuring self-identifying religiosity, the study found that consumers who said they watch religious television were less price sensitive, with demand for a given Shariah-compliant product equivalent to a conventional product that costs 16% less. This correlates with the rule of thumb in Islamic banking that about 30% of Muslims always prefer a Shariah-compliant product with little price sensitivity.
The randomized trial also tested whether the way Shariah compliance is communicated has an impact. It presented Shariah approval from a national Shariah board, the institution’s Shariah board and a respected local religious figure. The study found no difference in terms of impact whether a Shariah authority was presented or if the product was introduced as being generically Shariah compliant.
This finding is in contrast to market expectations (which may be more on the wholesale side of Islamic finance) that top scholars with name recognition provide an advantage. On the retail level, this is less likely to be an issue which should provide comfort for institutions in jurisdictions shifting towards more centralized Shariah governance.
Finally, if you ask Muslim consumers, in theory, whether they want an ‘Islamic’ product or an equivalent conventional loan, they will overwhelmingly choose the ‘Islamic’ product. However when given the option in reality to choose between the two products, they are less likely to make a choice than if presented with only one of the products. The authors attribute this finding to the ‘paradox of choice’ where consumers offered more products are less likely to select either than if they are offered only one product.
This is perhaps the most surprising finding from the study which should challenge the Islamic finance industry to adopt more independence between conventional and Islamic banking units. If a conventional bank thinks they can maintain market share by starting an Islamic window to offer Islamic products alongside conventional products, they may end up turning off consumers.
This reaction will come not from a rejection of the ‘Islamic window’ model but from their internal reaction to being forced to choose between A or B rather than decide whether they want either ‘A’ or ‘B’ in isolation. If this type of reaction is found in other situations, it would offer support for b Qatar’s strict separation of Islamic and conventional banks.
© Islamic Finance Gateway 2016