research papers on islamic banking

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12 Islamic banking: A Review of the Empirical Literature and Future Research Directions

Narjess Boubakri is the Bank of Sharjah Chair in Banking and Finance, Professor of Finance and Head of the Finance Department at the School of Business Administration of the American University of Sharjah. Her research interests include, among other things, privatization, corporate governance, political economy of reforms, institutional economics, and the impact of institutional infrastructure on corporations. Her papers have been published in the Journal of Finance, the Journal of Financial Economics, the Journal of International Business Studies, the Journal of Accounting Research, and the Journal of Financial and Quantitative Analysis, among others. She acts as Associate Editor for the Journal of Corporate Finance, as Editor in Chief for Finance Research Letters, co-editor for the Quarterly Review of Economics and Finance, and is on the editorial boards of Emerging Markets Review and the Journal of International Financial Markets Institutions and Money.

Ruiyuan Ryan Chen is an Assistant Professor of Finance at the West Virginia University. His current research focuses on state ownership, corporate governance, and corporate cash holdings. His research has been published in Emerging Markets Review, the Journal of Corporate Finance, and the Journal of Financial and Quantitative Analysis.

Omrane Guedhami is the C. Russell Hill Professor of Economics and Professor of International Finance at the Moore School of Business at the University of South Carolina. His current research focuses on corporate governance, privatization, corporate social responsibility, and formal and informal institutions and their effects on corporate policies and firm performance. His research has been published in the Journal of Financial Economics, the Journal of Accounting Research, the Journal of Accounting and Economics, the Journal of Financial and Quantitative Analysis, the Journal of International Business Studies, and Management Science, and the Review of Finance, among others. He is a member of the editorial boards of major journals, such as Contemporary Accounting Research and the Journal of International Business Studies, and is currently serving as a Section Editor at the Journal of Business Ethics and Associate Editor of the Journal of Corporate Finance and the Journal of Financial Stability.

Xinming Li is an Associate Professor of Finance at the School of Finance at Nankai University and a consultant at the World Bank Group. He is also the holder of the Emerging Scholars Award by the Federal Reserve and the Conference of State Bank Supervisors. His research areas include a variety of topics related to banking and financial institutions, corporate finance, and international finance.

• Published: 06 November 2019
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The last two decades have witnessed a tremendous global growth in Islamic finance and banking, mainly prompted by the global financial crisis. This growth has been accompanied by an increasing interest among researchers, policymakers, managers of financial institutions, and the public about the functionalities of the Islamic banking system and how it differs from conventional banking. Against this backdrop, we start this chapter with an overview and assessment of the practice of Islamic banking around the world. Then, we discuss its primary characteristics, including its underlying principles and common financial products. Next, we review the key findings in the empirical literature on the differences between Islamic and conventional banking at the micro and macro levels. We conclude with a discussion of avenues for future research.

12.1 Introduction

The last two decades have witnessed dramatic global growth in Islamic finance and banking. Since the founding of the first Islamic bank in 1975, Islamic financial assets in the banking, capital markets, and insurance sectors have reached over $2 trillion (IFSB, 2018 ), 1 and more than 350 Islamic banks now operate worldwide.

The term “Islamic banking” refers generally to banking operations conducted under Sharia law, which mandates banking transactions be subject to three sets of constraints. First, payments or receipts of interest ( Riba ), whether nominal or real, are prohibited. In this sense, Islamic banking is basically an interest-free model. Thus, because money cannot reward money, Islamic transactions must be backed by tangible assets. Second, Gharar and Maysar , speculation and excessive risk-taking or betting, respectively, are prohibited. In practice, this means, for example, that Islamic banks cannot trade derivative products. 2 Third, Islamic banks are prohibited from financing activities that are illegal under Islamic law, or that are viewed as having a negative impact on society, such as those involving alcohol or gambling.

In this chapter, we provide an overview and assessment of the practice of Islamic banking around the world. Section 12.2 provides a brief review of the growth of Islamic banking. In section 12.3 , we discuss its primary characteristics, including its underlying principles and common financial products. In sections 12.4 and 12.5 , we review key findings in the empirical literature on the differences between Islamic and conventional banking at the micro and macro levels. We conclude in section 12.6 with avenues for future research.

12.2 Growth of Islamic Banking around the World

Modern Islamic banking dates to the 1970s. The first international Islamic bank, the Islamic Development Bank (IDB), was founded in 1975 by members of the Organisation of Islamic Cooperation. IDB’s aim was to cater to the Muslim population’s needs while fostering economic and social development in accordance with the principles of Sharia law, a set of Islamic principles derived from the Koran.

The first modern (private) Islamic bank, Dubai Islamic Bank, was also established in 1975. Although privately owned and operated, it relied on a committee of religious Sharia advisors to conduct its operations. Next, the Kuwait Finance House was established in 1977. Unlike Dubai Islamic Bank, Kuwait Finance House was majority owned by government ministries. Two additional Islamic banks were founded by governments in 1977, Faisal Islamic Bank of Sudan and Faisal Islamic Bank of Egypt. 3

During the 1980s, reforms in Iran and Sudan removed all interest-based operations from the banking sector, resulting in the first fully Islamic national banking systems (Wealth Monitor, 2016 ; Hassan and Aliyu, 2018 ). Islamic banks were also introduced in other countries with large Muslim populations, such as Malaysia, Bangladesh, Mauritania, and Saudi Arabia (Imam and Kpodar, 2016 ).

The 1990s witnessed a greater acceleration in the establishment of Islamic banks “after the applications of Islamic finance functions were acknowledged by the International Monetary Fund (IMF) and the World Bank [in] the early 1990s (Iqbal and Molyneux, 2005 )” (Alandejani, Kutan, and Samargandi, 2017 ). The pace quickened again after the global financial crisis (GFC), 4 because it cast doubts on the proper functioning of conventional banking, which, in turn, created interest in alternative models such as Islamic banking (Beck, Demirgüç-Kunt, and Merrouche, 2013 ; Hassan and Aliyu, 2018 ).

Zaher and Hassan ( 2001 ) argue that the liberalization of capital markets, the global integration of financial markets, structural macroeconomic reforms, and the introduction of innovative Islamic products also contributed to the growth of Islamic banking. The substantial rise in consumer demand for Sharia -compliant contracts has led multinational banks such as Chase Bank, Citibank, ABN Amro, and HSBC to establish Islamic finance branches while conducting separate conventional banking operations.

In 1991, to support this growth, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was created to set accounting, auditing, and Sharia standards for Islamic financial institutions. In 2002, the AAOIFI was complemented by the Islamic Financial Services Board (IFSB), which sets prudential standards and regulates the industry, and the International Islamic Financial Market (IIFM), which focuses on developing a robust, transparent, and efficient Islamic financial market. 5

As we note in the Introduction, today there are more than 350 Islamic banks worldwide, operating in countries as diverse as Switzerland, the US, France, Germany, Thailand, Singapore, India, China, and Australia. In January 2018, Islamic banking was also present in South America, where a conventional bank in Suriname was recently converted to a Sharia -compliant Islamic bank (IFSB, 2018 ). Despite the wide reach of Islamic banking, however, industry assets are highly concentrated in a small number of countries. In particular, the oil-exporting Gulf Cooperation Council (GCC) countries, Malaysia, and Iran together account for more than 80 percent of the industry’s assets (Islamic Finance Outlook, 2018 ). 6

At a country level, as shown by Figure 12.1 , Iran has the largest share of the Islamic banking market with 34.4 percent of global Islamic banking assets, followed by Saudi Arabia (20.4 percent), United Arab Emirates (9.3 percent), Malaysia (9.1 percent), Kuwait (6 percent), and Qatar (6 percent) (IFSB, 2018 ). Within countries, the share of Islamic banking has been growing as well. For example, Islamic banking now accounts for 61.8 percent of the domestic market in Brunei, followed by Saudi Arabia at 51.5 percent of the domestic market (IFSB, 2018 ).

Shares of Global Islamic Banking Assets (1H2017).

Looking at different sectors of the Islamic banking industry, the IFSI Stability Report (IFSB, 2018 ) shows that assets and financing each grew at a compounded rate of 8.8 percent between 2013 and 2017, while deposits grew at a compounded rate of 9.4 percent over the same period. In countries with a smaller Islamic base, these growth rates have been even more notable. Oman, for example, saw increases in Islamic banking assets, financing, and deposits of more than 30 percent each in 2Q2017. In the United Arab Emirates, both Islamic banking assets and financing grew by 7.4 percent, exceeding the average asset growth of 4.9 percent for conventional banks over the 2Q2016-2Q2017 period.

To provide further evidence on the worldwide growth of Islamic banking, we turn to Bankscope, 7 which contains detailed information about Islamic banking over the 1999–2014 period, and is widely viewed as an excellent source of information on Islamic finance. Figure 12.2 plots the number of Islamic banks between 1999 and 2014. As can be seen, the number reporting to Bankscope increased from thirty-six in 1999 to 104 in 2014, with a peak of 116 in 2011.

Figure 12.3 plots the total assets of Islamic banks. The figure shows that total assets increased dramatically, from around $18 billion in 1999 to $262 billion in 2014, with the level more than doubling after the GFC. In Figure 12.4 , we note that Islamic banks account for a small share of total bank assets globally—less than 3 percent of total banking sector assets in 2014—but, in Figure 12.5 , we see the share has been increasing. For example, in the twenty-eight countries with at least one Islamic bank over the 1999–2014 period, the proportion of Islamic bank assets increased from less than 1 percent in 1999 to a peak of more than 3 percent in 2013. Figure 12.5 shows that, in a large number of countries, and mainly in GCC countries, Islamic banks account for a significant share of assets in the domestic market. Note that the entire banking systems of Iran and Sudan are Islamic, while in Brunei they account for more than 57 percent, followed by Saudi Arabia (51.1 percent), and Kuwait (39 percent).

Number of Islamic Banks Reporting to Bankscope.

Islamic Banks’ Total Assets (million $).

Share of Islamic Banks’ Assets in Total Banking Sector Assets (%).

Share of Islamic Banks’ Assets in Total Banking Sector by Country (1H2016).

Looking ahead, Islamic banking is expected to continue growing. Imam and Kpodar ( 2013 ) show that factors contributing to the development of Islamic banking in a given country include the size of the Muslim population, income per capita, the level of interest rates, whether the country is a net exporter of oil, the size of trade with the Middle East, the level of economic stability, and proximity to Malaysia and Bahrain (two Islamic financial centers). However, while important for conventional banking, they find that the quality of a country’s institutional environment does not matter for the diffusion of Islamic banking. 8 As Figure 12.6 shows, the Muslim population is projected to increase from 1.3 billion in 2010 to over 1.6 billion in 2030. Because people in countries where the majority of residents identify as Muslim tend to have at least some familiarity with Islamic banking (PricewaterhouseCoopers, 2014 ), growth in the world’s Muslim population alone supports an increase in Islamic banking over time. The fact that Islamic banks are regarded as following an ethically and socially responsible business model and are perceived to show higher resilience during times of economic distress are likely to further contribute to the growth.

World Islamic Population 1990, 2010, and 2030 (millions).

12.3 Characteristics of Islamic Banking

12.3.1 islamic banking: underlying principles.

Islamic banks follow the religious principles of equity, participation, and ownership as embedded in Sharia law. Accordingly, as we discuss above, Islamic banks cannot charge predetermined interest rates ( Riba ), take excessive risk, speculate ( Gharar ), or bet ( Maysar ), and they are prohibited from trading in asset classes associated with illegal activity or negative social outcomes, such as alcohol, drugs, and weapons. As Zaher and Hassan ( 2001 , p. 158) put it, “exploitative contracts based on Riba (interest or usury) or unfair contracts that involve risk or speculation” are prohibited.

To elaborate, Riba —an important feature of conventional banking—corresponds to the “fixing in advance of a positive return on a loan as a reward for waiting to be repaid” (Zaher and Hassan, 2001 , p. 156). The prohibition of Riba , which is an increase in money not connected to a tangible real economic increase, is consistent with the principle of equity. Thus, the weaker contracting party in a financial transaction is protected from an increase in wealth that is not related to a productive activity (Hussain, Shahmoradi, and Turk, 2015 ). Moreover, the prohibition of Riba is consistent with the principle of participation, which ensures both borrower and lender share in the risk of a project (Zaher and Hassan, 2001 ). The prohibition of Gharar , or excessive risk-taking, is similarly in line with the equity principle, as it decreases information asymmetry and contract ambiguity. Instead, Islamic banks rely on the idea of risk sharing on both the liability and asset side. They also follow the idea “that all transactions have to be backed by a real economic transaction that involves a tangible asset” (Beck, Demirgüç-Kunt, and Merrouche, 2013 , p. 433), which is in line with the participation and ownership principles. For example, profit-and-loss sharing involve providing financing to anyone with a productive business venture idea. The borrower and the lender work closely together and share the risk of the venture, which is selected based on its projected returns. The return earned on capital is thus associated with productive activity, is backed by an asset (i.e., the requirement of asset ownership before a return can be earned), and is determined only ex post by the asset’s performance and not the passage of time (Hussain, Shahmoradi, and Turk, 2015 , p. 6). This idea of “zero risk entails zero return,” where risk relates “primarily to the real-sector uncertainties, not the risk of borrower delinquency” (Ariff, 2014 , p. 734), is a key feature of Islamic banking. Under this framework, Zaher and Hassan ( 2001 ) argue that depositors in Islamic banks can be viewed as “shareholders,” because they earn dividends when the bank makes a profit and lose money when the bank records a loss.

The principles above are at the core of the differences between Islamic and conventional banking systems, as summarized by Errico and Farahbaksh ( 1998 ) and illustrated in Table 12.1 .

12.3.2 Islamic Banking: Financial Products

Islamic scholars have developed several Sharia -compliant financial instruments that not only avoid the payment or receipt of interest at a predetermined rate (Čihák and Hesse, 2010 ), but also include risk sharing. These Islamic financial contracts fall into two asset categories: equity and debt. Table 12.2 summarizes the six basic Islamic finance instruments, which are discussed in more detail next.

On the equity side, Islamic banks offer Mudaraba (silent partnership) and Musharaka (joint partnership) contracts. A Mudaraba contract is structured as a profit-sharing and loss-bearing contract, whereby a principal (the bank or investor) provides funds to an agent (entrepreneur), who in turn provides effort and management expertise for the project. Under this contract, although the entrepreneur controls and runs the business, the bank that provides the capital can participate in the decision-making. In this case, losses are borne exclusively by the bank, while profits are shared at a pre-agreed percentage. This structure is comparable to conventional limited partnerships.

A Musharaka contract is an alternative profit-and-loss partnership arrangement. Under this type of agreement, two parties (the bank and the client) provide the capital needed to finance a project, so profits as well as losses are shared by both parties. Here, profits are shared based on a pre-agreed percentage, while losses are shared in proportion to each party’s equity participation. This type of contract comes closest to the principles of equity and participation that form the basis of Sharia law, since it involves risk sharing, asset ownership, and no interest. It is most suitable for financing long-term projects.

On the debt side, Islamic banks offer Murabaha, Ijara, Salam , and Istisna . A Murabaha contract is a cost-plus-profit transaction commonly used for consumer loans, trade finance, corporate credit, real estate, and project financing. Under this type of contract, the Islamic bank purchases goods on behalf of the customer and then resells them to the customer at a mark-up. This type of contract is essentially an asset-backed loan plus a deferred payment sale transaction. The contract terms cannot be altered during the life of the contract, even if the client defaults or is late making payments. The mark-up is determined based on LIBOR, the type of good being financed, the overall amount of the transaction, and the client’s credit history. Under this type of contract, the benefits and risks of asset ownership are transferred to the client along with ownership, but the bank shares in the project’s risk because it assumes liability if the goods it purchased were defective. In case of default, however, the ownership rights of the asset return to the bank.

Under an Ijara contract, the bank retains ownership of the goods, leasing them out for pre-agreed payments (to avoid speculation) over a pre-agreed period of time, just as in a conventional leasing contract. Because the bank owns the asset, it assumes responsibility for its maintenance and insurance. Ijara payments can be changed during the contract period, unlike Murabaha payments.

A Salam contract is a forward agreement whereby delivery occurs at a future date in exchange for spot payments. According to Hussain, Shahmoradi, and Turk ( 2015 , p. 9), “Such transactions were originally allowed to meet the financing needs of small farmers as they were unable to yield adequate returns until several periods after the initial investment.” To be Sharia -compliant, payment under these contracts must be made in full at the beginning of the contract period. This type of contract thus entails a spot obligation for the client and a future obligation for the bank.

Under the last type of debt contract, Istisna , both payment and delivery occur in the future. This type of contract is effectively a pre-delivery financing and leasing contract. It is used primarily to finance large-scale, long-term projects (Zaher and Hassan, 2001 ). Notably, Istisna is a three-party contract. The bank acts as an intermediary between the client, from which it receives payments, and the manufacturer, to which it makes installment payments, because it is the bank that commits to buying the assets. Of the various types of debt instruments in Islamic banking, the last two types, Salam and Istisna , are used least often.

In practice, several of these Sharia -compliant products do not appear to differ that much from conventional products. This is because of the “close alignment of the competitive rates paid by Islamic banks on investment deposits with deposit rates at conventional banks, as well as with the benchmarking of Islamic financing rates on the asset side of the balance sheet to the LIBOR” (Hussain, Shahmoradi, and Turk, 2015 , p. 12). 9 Moreover, in terms of their business models, Beck, Demirgüç-Kunt, and Merrouche ( 2013 ) and Čihák and Hesse ( 2010 ) find few significant differences in business orientation, asset quality, efficiency, or stability between Islamic and conventional banking. However, a closer look at the two sets of products reveals major differences in terms of asset ownership, 10 interest, equity, and risk sharing, as explained above. Moreover, there are differences in the degree of permissibility of some Sharia -compliant products from one country to another (Song and Oosthuizen, 2014 ). For example, Tawarruq , instruments used by Islamic banks to fulfill clients’ demands to extend personal loans, are permitted in the UAE but not in Iran.

The most recent Stability Report (IFSB, 2018 , p. 88) reports that household and personal financing constitute the main financing activities of Islamic banks (42 percent of total Islamic bank financing in 2017) (p. 94), followed by manufacturing and retail trade with 21 percent. In terms of contracts, Murabaha and Ijara dominate Islamic banking transactions, accounting for up to 7 percent. In comparison, profit-and-loss-sharing contracts represent only 5 percent of transactions with Islamic banks (Hassan and Aliyu, 2018 ). In Oman, where Islamic banking is growing at the fastest rate, Musharaka and Ijara account for 76.5 percent of total financing by Islamic banks, with these contracts used largely for real estate purchases and consumer financing (IFSB, 2018 ).

12.3.3 Islamic Banking versus Conventional Banking Balance Sheets

Van Greuning and Iqbal ( 2007 ) provide a detailed comparison of the balance sheets of a conventional bank (Table 12.3 ) and an Islamic bank (Table 12.4 ), highlighting differences in terms of risk. For a conventional bank, the liability side includes demand and savings deposits, term certificates, and capital. The asset side includes marketable securities, lending to consumers (individuals/households) and corporations, and trading accounts. According to van Greuning and Iqbal ( 2007 , chapter 2 , pp. 16–21), this structure (1) generates an asset-liability mismatch, because “the deposits create instantaneous pre-determined liabilities irrespective of the outcome of the usage of the funds on the asset side,” and (2) exposes the bank to maturity mismatch risk, reducing their incentives to fund long-term non-liquid projects because “medium- to long-term assets are financed by the stream of short-term liabilities.” Because they do not typically have access to traditional money markets, managing short-term liquidity positions in Islamic banks can be challenging.

In contrast, for an Islamic bank, the use (by entrepreneurs) and mobilization (by depositors) of funds intermediated by the bank are structured as profit-sharing contracts among depositors, the bank, and entrepreneurs. In other words, unlike conventional banking, Islamic banking is viewed as a “pass-through” financial intermediation arrangement, whereby profits and losses are passed to depositors and investors (van Greuning and Iqbal, 2007 ). More specifically, on the liability side of an Islamic bank’s balance sheet, we find demand deposits and (risk-free) investment accounts from customers. These investment accounts are linked to either the Islamic bank’s profits or to a specific investment account on the asset side of the bank’s balance sheet, and they share in the bank’s profits (depositors receive dividends) and losses. In comparison, savings and time deposits on the liability side of conventional banks earn interest on the spot, even if the funds are not deployed to productive use by the bank. In Islamic banks, demand deposits ( Amanah ) are entrusted to the bank. If these funds are used by the bank and generate returns, only then are they shared with depositors (Hassan and Aliyu, 2018 ).

On the asset side, we find Islamic financing and investing accounts. As shown in Table 12.4 , while non-profit-and-loss-sharing debt-based contracts such as Murabaha and Ijara dominate the asset side, the Mudarabah contract on the liability side is the basis of Islamic banking. Alzahrani and Megginson ( 2017 ) argue that risk sharing in Islamic banks allows for a better matching of assets and liabilities because investment accountholders on the liability side absorb any losses on the asset side. Indeed, because Islamic bank depositors’ returns are linked to the bank’s return on assets, the bank’s exposure to the asset–liability mismatch, typical in conventional banks, disappears. Furthermore, in line with the principle of risk sharing, an Islamic bank is exposed to the liability of the assets it purchases and sells to clients. This is not the case in conventional banks that finance an asset by extending a loan to the customer, regardless of the asset. Because an Islamic bank’s assets comprise real asset-based investments, “the lending capability of the [Islamic banking] sector is bound by the availability of real assets in the economy. Thus there is no leveraged credit creation” (van Greuning and Iqbal, 2007 , chapter 2 ). Finally, because interest is prohibited, Islamic banks cannot issue debt to finance assets, which also mitigates the creation of leverage. Because Islamic banks are unlevered, they are considered to be less risky during crises. Note further that conventional banks are allowed to trade in complex derivatives that appear on their balance sheets, while Islamic banks are prohibited from doing so (Hassan and Aliyu, 2018 , p. 28). These features of financial intermediation, together with better monitoring incentives of assets and borrowers in the risk-sharing partnership contracts that characterize Islamic banking, contribute to the stability of Islamic banking systems.

Doumpos, Hasan, and Pasiouras ( 2017 ) note that the differences between the balance sheets of Islamic banks and conventional banks have several operational implications. For example, while conventional banks are able to use both debt and equity to finance their asset portfolios, Islamic banks can only use equity financing and deposits, which limits their liquidity on the asset side. In addition, because Islamic banks engage in risk-sharing partnership contracts, they are not allowed to require collateral to reduce credit risk, as conventional banks do. This puts an additional burden on Islamic banks in terms of appraising and assessing which projects to finance. Beck, Demirgüç-Kunt, and Merrouche ( 2013 ) argue that such complexities in Islamic banking products, including legal and compliance risks, increase the overall operational risk of Islamic banks compared to conventional banks. However, the fact that they are restricted to certain asset classes, do not trade in risky securities such as derivatives, and do not engage in excessive risk-taking may also increase their relative stability compared to conventional banks.

12.4 Review of the Literature Comparing Islamic and Conventional Banks: Micro-Level Evidence

In this section, we review the literature on the financial characteristics of Islamic banks in comparison to conventional banks, their relative performance and efficiency, stability during crises, and other micro-level outcomes such as liquidity, corporate social responsibility, and transparency. 11 Appendix 12. A provides an overview of the studies.

12.4.1 Profitability and Efficiency

Despite being guided by such principles as justice, fairness, and concern for the general welfare of the people, Islamic banks are nevertheless also profit-seeking entities, just like conventional banks. Extensive research on the relative performance of Islamic and conventional banks has found mixed results thus far. Some authors find that Islamic banks are not distinguishable in practice from conventional banks (Siddiqi, 2006 ; Bourkhis and Nabi, 2013 ); others find that Islamic banks outperform their conventional bank counterparts in terms of profitability and efficiency. Baele, Farooq, and Ongena ( 2014 ), for example, find that loans from Islamic banks are less likely to be overdue or in default, suggesting that individual and systemic risk from loan defaults may be less likely to materialize for Islamic banks. Beck, Demirgüç-Kunt, and Merrouche ( 2013 ; Tables 12.5 and 12.6 ) show that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality, and are better capitalized. These findings broadly confirm prior literature (e.g., Olson and Zoubi, 2008 ; Turk-Ariss, 2010 ; Hasan and Dridi, 2011 ; Abedifar, Molyneux, and Tarazi, 2013 ). Some authors argue that it is because of their higher capitalization and asset quality that Islamic banks were able to outperform their conventional counterparts during the GFC (e.g., Bourkhis and Nabi, 2013 ).

Note : **significance at the 5% level; ***significance at the 1% level.

Note : *significance at the 10% level; **significance at the 5% level; ***significance at the 1% level.

Regarding the relative efficiency of Islamic versus conventional banks, the evidence is also inconclusive. An early study by Bader et al. ( 2008 ) found no significant differences in efficiency. And, according to Yahya, Muhammad, and Hadi ( 2012 ) and di Mauro et al. ( 2013 ), there was no efficiency gap between Islamic banks and conventional banks before the GFC. Instead, Srairi ( 2010 ) shows that Islamic banks are, on average, less cost- and profit-efficient than conventional banks. However, a more recent study by Doumpos, Hasan, and Pasiouras ( 2017 ) showed that Islamic banks outperformed conventional banks in the Middle East and North Africa (MENA) region, but underperformed in the GCC and Asian countries. The international comparison of Islamic and conventional banks in terms of cost and profit efficiency shows that Islamic banks in advanced economies “seem to be more efficient than those in other countries. This could be partly explained by well-established regulatory frameworks, more advanced human capital, and better risk management practices in these countries (Tahir and Haron, 2010 )” (Hussain, Shahmoradi, and Turk, 2015 , p. 17).

These mixed results in the literature have led to a debate over the appropriateness of using separate indicators of performance and efficiency. Bitar, Hassan, and Walker ( 2017 ), for example, argue that conventional bank accounting indicators used in the literature are relatively one-dimensional, and may lead to contradictory results. Some authors use them to assess risk, loan-loss reserves to gross loans, or the standard deviation of return on assets, while others may use the net interest margin or the z-score. The authors therefore propose using a principal component analysis that encompasses twenty indicators of bank financial strength. Using a sample of 8,615 banks (including 123 Islamic banks), they show that capital, volatility of returns, liquidity, and profitability capture most of the variance of the financial indicators of bank characteristics. They also show through Logit and Probit regressions that Islamic banks are more highly capitalized, more liquid, and more profitable, but have more volatile earnings relative to conventional banks in Europe and the US. They then focus on the sample of countries where dual banking systems exist, and find that Islamic banks and conventional banks are indistinguishable in terms of liquidity and volatility of earnings.

Doumpos, Hasan, and Pasiouras ( 2017 ) further emphasize the mixed results in the literature in their focus on the relative financial strength of Islamic and conventional banks. They build a multi-criteria index that aggregates various dimensions of bank capital strength, asset quality, earnings, liquidity, and management quality in controlling expenses. The authors argue that Islamic banks may have more financial strength, given their reliance on profit-and-loss sharing, which allows them to transfer risks from the asset to the liability side. However, they also counterargue that Islamic banks may have less financial strength, given their restrictions to certain asset classes, prohibition from using derivatives as hedging instruments, and the moral hazard issues embedded in Islamic contracts. Their results show that banks are substantially different when using individual financial ratios; however, they find no significant difference in overall financial strength between Islamic and conventional banks. When considering geographic location, Doumpos, Hasan, and Pasiouras ( 2017 ) observe that conventional banks perform better than Islamic banks or banks with Islamic branches in Asia and the GCC. The reverse is true in MENA. Control of corruption and government effectiveness are two institutional characteristics that affect financial strength.

Alandejani, Kutan, and Samargandi ( 2017 ) adopt a different approach, and focus on bank failure risk. To conduct their analysis, they focus on Islamic and conventional banks in GCC countries, and examine the explanatory power of bank-level and macro-level determinants using hazard and survival functions. They find that Islamic banks have a shorter survival time, and a higher incidence rate of failure, than conventional banks. They also show that the hazard rate of Islamic banks (conventional banks) increases (decreases) with higher net interest margin ratios, suggesting that Islamic banks and conventional banks obey different dynamics. The authors contend that the higher government ownership associated with conventional banks, which provides them with an implicit bailout guarantee in cases of distress, may explain why their failure rate is lower than that of Islamic banks.

12.4.2 Stability and Performance around the GFC

Several theoretical arguments suggest that Islamic banks should be more resilient to crises. First, the use of leveraged transactions, as well as complex securitization products and derivatives, in the conventional banking system have often been cited as the main cause of the GFC (Sorwar et al., 2016 ). Since excessive risk-taking (i.e., Gharar ) and trading in derivatives are strictly prohibited in Islamic banks (as discussed above), one would expect lower risk exposure for the latter than for conventional banks (Čihák and Hesse, 2010 ; Pappas et al., 2017 ). Second, short-selling is not permissible in Islamic banks. Third, Islamic banks “are able to pass through a negative shock from the asset side (e.g., a Musharaka loss) to the investment depositors (a Mudaraba arrangement),” resulting in less vulnerability to risk (Čihák and Hesse, 2010 , p. 98). In effect, the profit-and-loss-sharing banking instruments, and the asset-backed financing of Islamic banks’ operations linking financing to production, contribute to “curb excessive leverage” (Hussain, Shahmoradi, and Turk, 2015 ; Alzahrani and Megginson, 2017 ). Fourth, the enhanced monitoring of investment accountholders, who are also less likely to withdraw their funds because of their religious beliefs, suggest that Islamic banks are less vulnerable to downturns compared to their conventional bank counterparts. In addition, their superior asset quality and higher capitalization ratios provide Islamic banks with a buffer during downturns.

However, other arguments in the literature suggest the contrary. For example, Sorwar et al. ( 2016 ) suggest that the prohibition against using derivatives means Islamic banks cannot manage or hedge against risk effectively. In addition, Islamic banks cannot access the interbank market for liquidity because of its interest-bearing features. In this vein, Wiyono and Rahmayuni ( 2012 ) observe that, unlike conventional banks, Islamic banks are more exposed to liquidity risk. This is because they cannot benefit from central banks’ liquidity provisions during liquidity shortages because they are based on interest lending (Alqahtani, Mayes, and Brown, 2017 ). Moreover, the complexity of Islamic financial instruments, combined with their regulatory and compliance risk, increase their exposure to overall operating risk (Beck, Demirgüç-Kunt, and Merrouche, 2013 ). Finally, and as shown by Khan ( 2010 ), there is a high correlation between the profit-sharing ratios in Islamic banks’ instruments and standard interest rate proxies, such as LIBOR rates. This suggests that Islamic banks are as exposed to market risk as conventional banks (Sorwar et al., 2016 ). Beck, Demirgüç-Kunt, and Merrouche ( 2013 ) conduct a comparative analysis of Islamic banks and conventional banks during crises (Table 12.7 ). Using several indicators of asset quality and stability, they show that Islamic banks are more likely to be negatively affected during times of distress. They find evidence of higher capitalization during local crises, and a stronger negative trend in the capitalization of Islamic banks than in conventional banks. They observe no significant difference in z-score, profitability, or maturity mismatch. Islamic banks, however, have higher loan-deposit ratios, lower non-performing loans, and lower loan-loss provisions than conventional banks.

Several authors have tried to disentangle these effects, and to examine the validity of these arguments around the GFC, which is considered an ideal setting given its exogeneity. The results to date remain mixed. In a seminal work focused on Islamic banks in the GCC, Olson and Zoubi ( 2008 ) observe a higher profitability of Islamic banks versus conventional banks based on profitability ratios, efficiency ratios, asset quality, and cash/liquidity ratios. Prior to the GFC, Islamic banks held more cash and had fewer loan-loss provisions. In a follow-up study, Olson and Zoubi ( 2016 ) explored the recovery period, and observed a convergence toward the mean for Islamic and conventional banks alike in terms of profitability (measured by return on assets (ROA) and return on equity (ROE)). They show that the speed of convergence was relatively slower for Islamic banks, although they also performed better prior to the crisis. Rosman, Wahab, and Zainol ( 2014 ) find that Islamic banks in Middle Eastern and Asian countries were able to maintain their technical efficiency during the GFC due to their capital buffers and higher profitability. Johnes, Izzeldin, and Pappas ( 2014 ) report lower efficiency for conventional banks in the GCC prior to the crisis (2006–8), and a slight decline in the level of Islamic banks’ revenue and profit efficiency during the GFC. They attribute these results to Islamic banks’ superior asset quality, confirming findings in Hasan and Dridi ( 2011 ) and Pappas et al. ( 2017 ). Alqahtani, Mayes, and Brown ( 2017 ) add to this evidence by examining the pre-crisis, crisis, and recovery periods. They show that, during the GFC, Islamic banks were more cost-efficient than conventional banks. After the crisis, however, Islamic banks underperformed conventional banks, and lost their cost-efficiency superiority. The authors interpret this evidence as follows: Islamic banks were less exposed to the GFC because, unlike conventional banks, they were constrained from trading in risky, highly leveraged asset classes. In the aftermath, when the shock spilled over from the financial to the economic sector, and given that Islamic banking is asset-backed, Islamic banks suffered more heavily from the repercussions of the GFC (p. 60).

Hasan and Dridi ( 2011 ) focus on the GCC countries, as well as on Jordan, Malaysia, and Turkey, to examine the effect of the GFC on the profitability, credit, and asset growth of Islamic versus conventional banks. Their results suggest that large Islamic banks were more profitable than conventional banks during the crisis, but small Islamic banks were not. Čihák and Hesse ( 2010 ) provide supporting evidence that there is a size effect in the relative stability between Islamic and conventional banks. However, their results show that small Islamic banks actually seem more stable than similarly sized conventional banks. Using default rates on loans, Baele, Farooq, and Ongena ( 2014 ) observe that the default rate on Islamic loans is less than half that on conventional bank loans. Farooq and Zaheer ( 2015 ) add supporting evidence from Pakistan, where Islamic banks had lower withdrawals, attracted more deposits, and disbursed more loans than conventional banks during the crisis. The higher liquidity buffers insulated Islamic banks from some of the most negative impacts.

Based on return dynamics, Fakhfekh et al. ( 2016 ) examine the volatility of Islamic and conventional banks during the crisis for banks in GCC countries over the 2006–13 period. They find that Islamic banks were more resilient than conventional banks, and exhibited lower return volatility. Sorwar et al. ( 2016 ) further re-examine the market risk profile of Islamic banks. Their univariate analysis shows that the market risk profile of Islamic banks is no different, on average, from that of conventional banks. However, when they use a VaR multivariate analysis, they find that Islamic banks exhibit lower market risk on average, and that the difference is more pronounced during the crisis period. In addition, they observe that Islamic banks exhibit lower leverage across different sub-periods around the GFC.

Overall, these studies suggest that the asset-based and risk-sharing nature of Islamic contracts limited their exposure to the crisis (Alzahrani and Megginson, 2017 ). Their higher capitalization and asset quality also contributed to their relative resilience (Hasan and Dridi, 2011 ; Bourkhis and Nabi, 2013 ). In addition, Islamic banks may have been less affected by the crisis because they do not hold or trade in conventional securitized assets.

Nevertheless, these positive facets of Islamic banking have been contested by several other authors. For example, Abedifar, Molyneux, and Tarazi ( 2013 ) compare the credit risk and stability (z-score) of Islamic and conventional banks (as well as of conventional banks with Islamic branches). They find no significant differences in insolvency risk or stability, and suggest this is because Islamic banks mostly apply non-profit-and-loss-sharing contracts, which are technically similar to conventional bank practices.

In the same vein, Pappas et al. ( 2017 ) conduct a comparative study of the risk of failure of Islamic and conventional banks using a sample of 421 banks from twenty countries between 1995 and 2010. Their findings suggest that conventional banks have a higher failure rate than Islamic banks. Alandejani, Kutan, and Samargandi ( 2017 ) complement this evidence by including the impact of the GFC. They examine the hazard and survival functions of Islamic and conventional banks over the 1995–2011 period for banks in GCC countries. They show that, during the crisis, Islamic banks had a higher rate of failure, and therefore shorter survival times, than conventional banks, contradicting Pappas et al. ( 2017 ).

Regarding resilience, the IFSI Stability Report 2018 (IFSB, 2018, p. 4) indicates that: “Global Islamic banking has sustained its resilience, and most of its stability indicators are in comfortable compliance with the minimum international regulatory requirements. However, global Islamic banking can no longer claim to be superior to conventional banking in all the stability dimensions. For example, Islamic banks clearly outperform European Union (EU) banks in terms of return on assets (ROA), return on equity (ROE) and cost-to-income, but the capitalisation of EU banks is now stronger than that of Islamic banks and the non-performing loans ratio of EU banks is better than the non-performing financing (NPF) ratio of Islamic banks.”

Thus, the impact of the GFC and the resilience of Islamic banks during economic downturns remains somewhat unclear. Evidence seems to vary with geographic region, bank size, and sample size. Further studies in this area could be enlightening, particularly by exploring the differential impact of Islamic and conventional banks during various banking crises across countries.

12.4.3 Sharia Supervisory Board Corporate Governance and Risk-Taking

Islamic banks have a particular governance structure that involves an additional layer of monitoring of their activities. The Sharia supervisory board (SSB) is the highest corporate governance authority in an Islamic bank (Dusuki, 2012 ). The Sharia board’s role is to advise Islamic banks and to supervise their operations and performance. Abdul Rahman and Bukair ( 2013 ) and Mallin, Farag, and Ow-Yong ( 2014 ) find that SSB size is positively related to a bank’s corporate responsibility disclosure index, suggesting that the larger the board, the stronger its effect on social commitment to society. The SSB’s characteristics are also associated with Islamic banks’ credit ratings (Grassa, 2016 ). In a recent study, Mollah et al. ( 2017 ) examine a sample of Islamic and conventional banks to assess whether their respective governance/organizational structures affect their risk-taking and performance. The authors find that Islamic banks take higher risks and achieve higher performance than conventional banks.

Interestingly, Hussain, Shahmoradi, and Turk ( 2015 ) note that Sharia board size can be costly to the bank, because it can create gridlock and divergence of opinions “among religious scholars regarding the Sharia compliance of specific financial arrangements.” This is particularly true for banks that expand beyond their borders. As mentioned earlier, Sharia compliance in one country does not necessarily apply in another. The AAOIFI and IFSB work toward setting standards and regulatory requirements for the global Islamic finance industry.

12.4.4 Transparency, Earnings Management, and Earnings Quality

Evidence in the literature to date on a link between religion and earnings quality is mixed. For example, McGuire, Omer, and Sharp ( 2011 ) and Dyreng, Mayew, and Williams ( 2012 ) conclude “that religion-influenced firms are less involved in aggressive financial reporting and have higher accrual quality, lower restatements of financial statements, lower risk of fraudulent accounting, and lower forecast errors” (p. 646). Meanwhile, Callen, Segal, and Ole-Kristian ( 2010 ) find no association between religion and earnings management.

The religious principles that govern Islamic banks’ transactions and activities may also serve to mitigate managers’ opportunistic behavior. The mechanisms of enhanced monitoring by investment accountholders in profit-and-loss-sharing contracts, for example, could lead to better earnings quality in Islamic banks. To the best of our knowledge, however, only Abdelsalam et al. ( 2016 ) directly address this issue.

Alsaadi, Ebrahim, and Jaafar ( 2017 ) focus on the relation between Sharia -compliant investments and the quality of financial reporting. They show that firms engaged in CSR activities are less likely to manipulate earnings, and that being included in a Sharia index does not play an important role in determining earnings quality. This latter result suggests there is no significant relation between Sharia compliance and earnings quality. In fact, the authors posit that this is due to managerial opportunism, because managers seem to “use an ethical practice as a label to create the perception of transparency, thereby avoiding scrutiny from stakeholders” (Alsaadi, Ebrahim, and Jaafar, 2017 , p. 170). This evidence goes against the expectation that Sharia compliance with religious norms and moral accountability constraints provides a moral obligation to maintain high quality and transparent standards in reporting financial information.

Abdelsalam et al. ( 2016 ) provide contrasting evidence by focusing on the earnings quality of listed banks in the MENA region. Over the 2008–13 period, their evidence suggests that Islamic banks are more conservative and less likely to manage earnings. Islamic banks are also more likely to employ a Big Four audit firm, suggesting higher quality of financial information. The authors conclude that Islamic banks “operate within a governance framework that enhances financial reporting quality” (p. 156). Abdelsalam et al. ( 2016 ) link this evidence to the extent of agency costs in Islamic banks compared to that in conventional banks. Because Islamic banks are subject to an extra monitoring layer by the SSB, which ensures compliance with moral values, and because of the overall moral accountability of the managers and board members, one would expect fewer agency problems and hence higher earnings quality. However, investment accountholders in Islamic banks tend to give more leeway to managers, potentially increasing agency problems, and hence managerial opportunistic behavior and lower earnings quality as well.

Clearly, there remains great potential in this area of research. Assessing the earnings quality of banks worldwide would be useful to exclude geographically determined results. One could also explore whether the quality of financial information reporting is comparable for Islamic banks across time, including during crises.

12.4.5 Corporate Social Responsibility

With its principles of equity and participation, Islamic banking is viewed as a type of ethical banking. As such, it is supposed to embed ethics and social responsibility in Islamic banks’ activities (Abdelsalam et al., 2016 ). The Islamic Finance Outlook ( 2018 , p. 4) outlines the “natural connection between Islamic finance principles, responsible finance, Sustainable Development Goals (SDGs), and impact investing. All aim to create a more equitable financial system that has a positive tangible impact on the economy and population.”

A recent study on corporate social responsibility (CSR) disclosures of Islamic banks provides interesting insights. Platonova et al. ( 2018 ) show that the CSR activities of Islamic banks in GCC countries are positively related to their long-term performance, confirming earlier evidence on the positive value-enhancing effect of CSR for non-financial firms. Mallin, Farag, and Ow-Yong ( 2014 ) show that Islamic banks with larger SSBs tend to have higher CSR disclosures, thus establishing a link between CSR and corporate governance. However, in a study on UAE banks, Nobanee and Ellili ( 2016 ) find no evidence of a relation between Islamic banks’ performance and CSR disclosure. Note there is a positive relation for conventional banks. Therefore, another future stream of research could focus on assessing the capabilities of Islamic banks to engage in CSR activities. One challenge, however, would be the availability of CSR data on Islamic banks in existing datasets, such as Thomson Reuters’ ASSET4. Field research to collect such data on Islamic banks, identifying all aspects of engagement toward the community, could assist in this endeavor.

12.4.6 Liquidity Creation

Banks provide two overlapping functions in the economy: (1) creating liquidity to provide the non-bank public with access to liquid funds, and (2) transforming risk to provide safer investments. Banks create liquidity “on the balance sheet” by transforming illiquid assets (e.g., small business loans) into liquid liabilities (e.g., transaction deposits), and “off the balance sheet” by providing loan commitments and other guarantees of liquid funds. To transform risk, banks issue riskless deposits to finance risky loans.

The literature on bank liquidity creation has grown extensively since Berger and Bouwman ( 2009 ) developed an appealing measure that captures total bank output.

Based on this measure, and building on the key differences between Islamic and conventional banks’ balance sheets, Berger et al. ( 2017 ) compare the effects on total liquidity creation and its various components, as well as on the financial stability implications of Islamic banking. The authors anticipate two conflicting effects of Islamic banking on liquidity creation. First, Islamic banks create more liquidity because they are generally better at absorbing risk, they are more highly capitalized, and they are less exposed to bank runs than conventional banks. Second, the reduced inclination of Islamic banks to undertake risk, combined with Sharia ’s limits on Islamic bank assets and off-balance-sheet activities, may cause Islamic banks to create less liquidity. In terms of the financial stability implications, Berger et al. ( 2017 ) also provide two conflicting predictions.

First, because Islamic banks may exhibit a greater capacity to withstand negative shocks that could contribute to financial instability, liquidity creation by Islamic banks may contribute less to financial instability than conventional banks. Second, Islamic bank liquidity creation may contribute more to national financial instability because of higher credit risk (e.g., Islamic banks typically do not require collateral from borrowers, exacerbating losses in the event of borrower default).

Using 2000–14 data on twenty-three countries and constructing liquidity creation following Berger and Bouwman ( 2009 ), Berger et al. ( 2017 ) find that Islamic banks create more liquidity per unit of assets than conventional banks after controlling for other bank and country characteristics. They also show that Islamic banks create more liquidity per unit of assets on the asset side of the balance sheet, and less on the off-balance-sheet side, than conventional banks (Table 12.8 ). The authors note that conventional bank liquidity creation contributes to financial instability, while that of Islamic banks has no significant impact. Focusing on banks in the GCC, Mohammad and Asutay ( 2015 ) similarly find that Islamic banks create more liquidity than other banks in a region. Overall, these findings point to the many favorable effects of Islamic banking.

Note : This table shows estimates from regressions analyzing the effect of Islamic banks on bank liquidity creation using ordinary least squares (OLS) analysis. The dependent variable in column (1) is LC (total)/GTA , which is total bank liquidity creation normalized by corresponding gross total assets. The dependent variable in column (2) is LC(asset)/GTA , which is asset components of bank liquidity creation normalized by corresponding gross total assets. The dependent variable in column (3) is LC(liability)/GTA , which is liability and equity components of bank liquidity creation normalized by corresponding gross total assets. The dependent variable in column (4) is LC(off)/GTA , which is off-balance-sheet components of bank liquidity creation normalized by corresponding gross total assets. The key explanatory variable is IB , an indicator that equals 1 if a bank is an Islamic bank. We include country controls such as Interest (lending interest rate), Inflation (country’s rate of inflation), Lerner (Lerner Index), and a broad set of bank-level controls such as Ln_Asset (natural logarithm of bank total assets), Capital (bank capital ratio). All controls are lagged one year, and all columns include year and country fixed effects. Standard errors are clustered at bank level.

***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.

12.4.7 Stock Liquidity

Stock liquidity is an important determinant of financial market development and hence economic growth (Levine, 2005 ). Yet, to date, this remains an underexplored area in relation to Islamic banks. Some recent insights appear in Boubakri et al. ( 2019 ), who examine the comparative stock liquidity of Islamic banks and matching conventional banks in an international cross-country study. The preliminary findings show that Islamic banks have higher stock liquidity than conventional banks (Table 12.9 ). The liquidity effects are particularly important for small Islamic banks, and tend to persist during the GFC in countries with better market development and weaker regulations and supervision. These results suggest that faith-driven investors prefer Islamic banks’ stocks, and disregard what they consider to be “sin stocks” (i.e., some of those offered by conventional banks), which do not conform to their religious beliefs. These findings support the segmentation hypothesis by Merton ( 1987 ). During periods of uncertainty, faith-driven investors find refuge in norm-confirming investments (i.e., Islamic banks). Further investigation is warranted on the determinants of stock liquidity of Islamic banks, and the outcome of such liquidity on the cost of financing of both Islamic and conventional banks.

Note : This table shows regression results relating Islamic banks to stock liquidity. The sample comprises firm–year observations between 1992 and 2014. The dependent variable in Models 1–4 is Amihud illiquidity , which is the average stock return over trading volume. The dependent variable in Model 5 is the logarithm of bid–ask spread. We winsorize all financial variables at the 1% level in both tails of the distribution. t -statistics based on robust standard errors clustered at the firm level are in parentheses below each coefficient.

12.5 Review of the Literature Comparing Islamic and Conventional Banks: Macro-Level Evidence

In this section, we review the literature on the macro-impact of Islamic banking. We particularly examine the link between Islamic banking, on the one hand, and financial development and economic growth on the other. We also review the scarce literature on the impact of Islamic banking on financial inclusion and entrepreneurship, as well as on market competitiveness and power.

12.5.1 Islamic Banks, Financial Development, and Economic Growth

The main functions of financial intermediaries are to mobilize savings and efficiently allocate funds. While doing so, financial intermediaries “mitigate the effects of information and transaction costs and improve the allocation of resources, thus influencing saving rates, investment decisions, technical innovation, and ultimately long-run growth rates” (Imam and Kpodar, 2016 , p. 389). The literature has confirmed how important well-functioning financial markets and institutions are to productive efficiency and economic growth (Levine, 2005 ; Beck, Demirgüç-Kunt, and Merrouche, 2013 ; Abedifar, Hasan, and Tarazi, 2016 ). The spread of Islamic banking as an alternative model to conventional financial intermediation thus raises the question of its impact on the development of the banking system, as well as on overall economic growth.

The following theoretical arguments, discussed at length in Imam and Kpodar ( 2016 , p. 389–91), suggest that Islamic banking is positively related to banking sector growth and economic growth in general. First, Islamic banking provides financing to individuals with no assets. Unlike conventional banks, which require guarantees and collateral to extend loans, Islamic banks are prohibited from engaging in those activities. Instead, the risk-sharing structure of Islamic contracts makes the borrower a partner of the bank. This is likely to encourage entrepreneurs to seek financing, even if they have no collateral or guarantee to offer. Second, Islamic banking mobilizes the savings of Muslims who do not want to use conventional banks, and channels them into the formal sector. Third, Islamic banking principles increase financial stability, because of their reliance on profit-and-loss-sharing and their asset-liability matching. Similarly, their higher capitalization and the prohibition against trading in derivatives are likely to enhance stability and performance during crises. Overall, Islamic banks cater to the needs of Muslim individuals and entrepreneurs, increasing their financial inclusion, alleviating poverty, increasing savings, and, ultimately, enhancing economic growth.

The literature provides us with ample empirical evidence to support these arguments. For example, Gheeraert ( 2014 ) uses a sample of twenty Muslim countries for the 2000–5 period, and shows that the introduction of Islamic banks contributed to the development of the entire banking system as measured by the amount of private credit or bank deposits scaled to GDP. Gheeraert ( 2014 ) argues that this positive effect suggests that a nascent Islamic banking industry does not crowd out conventional banking. In fact, the Islamic banking sector acts as a complement to conventional banking. The author identifies several channels by which Islamic banking can impact financial sector development (p. S5). First, by appealing to devout unbanked individuals through Sharia -compliant instruments, Islamic banking mobilizes more capital. Second, Islamic finance fosters financial innovation to attract more depositors, and increases participation in the banking system. It, therefore, creates incentives for other banks to innovate in order to increase their competitiveness. Third, the banking market structure can be affected by the creation of new Islamic banks or the transformation of existing conventional banks into Islamic banks.

Based on the premise that productivity growth plays a more important role than factor accumulation in explaining countries’ growth differences (Easterly and Levine, 2001 ; Caselli, 2005 ), Gheeraert and Weill ( 2015 ) employ a stochastic frontier approach to estimate country-level technical efficiency using a sample of Islamic banks from seventy countries over the 2000–5 period. They detect a non-linear relationship between the development of Islamic banking and macroeconomic efficiency, which means the benefits of expanding Islamic banking beyond a certain threshold will be detrimental to macroeconomic efficiency. The authors posit that this may be because Islamic banking is interest-free, which eliminates the monitoring and corporate governance role of financial intermediaries. Debt financing can play a disciplinary role through interest payment obligations, inducing managers to perform and improve productivity. However, “[t]his incentive scheme can be less efficient in the context of the profit-and-loss-sharing instruments that are proposed by Islamic banks because the replacement of interest-payment obligations by a share of profits reduces the threat of bankruptcy for managers” (Gheeraert and Weill, 2015 , p. 33).

In a more extensive approach, Abedifar, Hasan, and Tarazi ( 2016 ) focus on a sample of twenty-two Muslim countries with dual banking systems over the 1999–2011 period (i.e., where both Islamic and conventional institutions operate). They first examine whether the efficiency of conventional banks is impacted by the competition of Islamic banks, and then examine the overall impact on financial development, economic growth, and poverty. The authors show that the market share of medium-sized Islamic banks is positively associated with the efficiency of conventional banks, suggesting that the introduction of Islamic banking enhances healthy competition. In addition, Islamic bank market share is positively related to fund mobilization, credit allocation, economic growth, and poverty alleviation in countries with relatively greater proportions of Muslims in their populations, countries with higher uncertainty avoidance indices, and countries with lower GDP per capita. The results indicate that, in “more religiously diverse Muslim countries, the market share of conventional banks with Islamic window/branches is positively linked to the efficiency of purely conventional banks” (Abedifar, Hasan, and Tarazi, 2016 , p. 199).

Imam and Kpodar ( 2016 ) assess the relationship between Islamic banking development and economic growth for a sample of fifty-two countries over the 1990–2010 period. They also conclude that Islamic banking is positively associated with economic growth. The authors note that the main channels of transmission through which Islamic banking affects economic growth are capital accumulation and superior financial inclusion.

12.5.2 Islamic Banks, Financial Inclusion, Microfinance, and Entrepreneurship

Given their profit-and-loss-sharing contracts, one would expect Islamic banks to contribute to financial inclusion and to provide needed funds to the unbanked. In Turkey, Aysan, Disli, and Özturk ( 2018 ) observe that most activities of Islamic banks are associated with a greater tendency toward small to medium-sized enterprise (SME) financing than conventional banks. Evidence in Abedifar, Hasan, and Tarazi ( 2016 ) shows that, in Muslim countries, Islamic banks have contributed to reducing poverty and inequality despite their relatively small size compared to conventional banks. Their evidence also suggests that Islamic banks were able to mobilize the savings of Muslim individuals. However, because Islamic financial institutions are more risk-averse than conventional banks, this “might limit entrepreneurship by encouraging borrowers to select low-risk projects or to invest excessively in tangible assets. Furthermore, Islamic financiers may prefer to allocate funds to the real economy, because they are not authorized to allocate financial resources to speculative activities” (Abedifar, Hasan, and Tarazi, 2016 , p. 200). In turn, this can adversely affect entrepreneurship and innovation. Aggarwal and Yousef ( 2000 ) provided supporting evidence in a study conducted two decades ago. They find that Islamic banks’ financing is somewhat biased against agriculture and industry, and that long-term financing is rarely extended to entrepreneurs.

Another fruitful avenue of future research could be to assess the extent to which Islamic banks contribute to project financing. On a related note, a further area of investigation would be to explore how firms make financing choices. Why, and under which conditions, do entrepreneurs or firms choose Islamic bank financing over conventional bank financing in religiously diverse countries? Such an analysis in both Muslim and non-Muslim countries would certainly provide vital insights for regulators and bankers alike to better cater to the needs of borrowers, whether individuals or corporations.

12.5.3 Islamic Banks, Market Discipline, and Market Power

Aysan et al. ( 2017 ) empirically test the claim that “Islamic banks are subject to more market discipline.” To test this conjecture, that “Islamic bank depositors are indeed able to monitor and discipline their banks,” the authors use the natural setting of deposit insurance reform in Turkey in December 2005. 12 According to the market discipline theory, during periods of greater risk, depositors will either require higher returns on their deposits or withdraw their funds from the bank. The results suggest that Islamic bank depositors increased their sensitivity to bank risk after the reform, and hence increased market discipline in the Islamic banking sector.

Aysan et al.’s ( 2017 ) findings suggest that Islamic bank depositors indeed behaved differently than their conventional peers. In the pre-deposit insurance reform period, they find that depositors of conventional banks were sensitive to bank risk, while they did not observe this phenomenon for Islamic depositors. In the post-reform period, however, the authors note that Islamic bank depositors increased their sensitivity to bank-specific risks. Overall, they find that deposit insurance reform resulted in greater market discipline in the Turkish Islamic banking sector, most likely due to increased competition among Islamic banks.

In a study precisely dedicated to addressing the market power issue, Weill ( 2011 ), using a sample of Islamic and conventional banks in seventeen countries over the period 2000–7, observes that Islamic banks have lower levels of market power than conventional banks. This runs against his initial expectation that Islamic banks should have more market power since they benefit from “a captive client base,” with a more inelastic demand driven by religious principles. Weill ( 2011 ) defines market power as “the ability of a firm to influence the price of products and is therefore directly linked to competition since greater competition reduces market power” (p. 292). It is measured by the Lerner index. A comparison of the market power of Islamic and conventional banks is a fundamental issue, because greater bank competition decreases the cost of credit to investors, leading to higher borrowing costs to finance investments. This, in turn, has implications for economic development (Petersen and Rajan, 1995 ; Jayaratne and Strahan, 1996 ; Cetorelli and Gambera, 2001 ) and financial development (Levine, 2005 ).

12.6 Conclusion and Directions for Future Research

To conclude, we first survey recent empirical literature on the micro and macro impact of Islamic banking. We then outline further instructive research directions.

The Sharia principles of profit-and-loss sharing, and the prohibitions on paying and receiving interest and taking excessive risk (e.g., investing in derivatives products) help buffer Islamic banks during financial crises. However, Islamic banks suffer from certain structural weaknesses that can affect their performance, although these weaknesses should resolve organically as the industry matures. For example, the fact that Islamic banks are not permitted to trade complex financial products leaves them with few hedging and diversification opportunities, which increases operating risk. In addition, as Weill ( 2011 ) shows, Islamic banks have lower market power than conventional banks, cannot benefit from liquidity provisions from central banks, and are generally smaller than conventional banks, which puts them somewhat at a disadvantage. As the industry develops, innovative Sharia -compliant products should emerge to help Islamic banks better manage liquidity. Since we focus on Islamic banking in this chapter, we do not discuss early developments along these lines, such as Islamic bonds (or Sukuks ), nor do we cover Islamic funds or insurance.

The Islamic finance and banking sector faces momentous opportunities thanks to a fast-growing Muslim population (which points to increasing demand for Islamic banking services), increased awareness of Islamic banking as an alternative banking model, and the internationalization of Islamic banks in Western countries. The fact that Islamic banking financial intermediation is based on profit sharing rather than lending, and thus helps stabilize financial markets, is drawing increased interest from non-Muslim communities. Nevertheless, major efforts remain to be made to standardize Islamic banking instruments across countries, develop a unified regulatory environment, and further increase awareness of Islamic banks’ activities and instruments.

In its most recent report (Islamic Finance Outlook, 2018 ), S&P notes that the lack of standardization in Sharia boards across banks and countries has been a major hindrance to greater global integration of Islamic finance. SSBs typically issue recommendations based on their own interpretation of Sharia law. A host of other issues regarding regulation also need to be tackled. A recent multi-country report (IMF, 2017 ) identifies persistent differences in the extent to which different countries adapt their prudential, consumer protection, liquidity management, safety nets, and resolution frameworks to the specificities of Islamic banking and the standards issued by IFSB and AAOIFI. The report highlights some weaknesses in Islamic banking licensing policies, whereby the approval process is “conditioned upon proof of ex-ante and ex-post robust Shari’ah governance framework and internal controls tailored to address risks specific to [Islamic bank] operations” (p. 10). The report notes the lack, or partial adoption, of IFSB applicable prudential standards across countries, which undermines comparability of solvency risks.

The academic side has lagged as well. At the micro level, more work is needed on corporate governance mechanisms in Islamic banking, and the extent to which they complement other internal and external governance mechanisms. In addition, questions related to identifying and measuring the specific risks associated with Islamic banking remain to be explored. The cost of debt financing under Islamic banking is also worth investigating empirically, in light of the fact that Islamic bank financing is often argued to be costlier than conventional bank financing.

Moreover, while the literature as reviewed here has been expanding rapidly since the onset of the GFC, the implications of Islamic banking for country-level financial stability remain unclear. One interesting avenue could be to explore the differential effects of banking crises on Islamic versus conventional banks. Given the link between financial system stability and economic growth, this question is very timely. Our survey also identifies a lack of evidence on the corporate social responsibility of Islamic banks. Since Islamic banking is often referred to as ethical banking, and its underlying model is based on principles of social justice, participation, and fairness, this lack is surprising. We thus call for more research on the social implications of Islamic banking.

Intensive research efforts could also be undertaken at the macro level, which, compared to the micro evidence surveyed here, remains understudied. While most macro studies focus on the beneficial effect of Islamic banking on economic growth and the real economy, the evidence is far from conclusive. Similarly, we lack an understanding of how Islamic banking affects financial market development. For example, what are the liquidity implications of Islamic banks, and how do conventional banks compare in terms of stock liquidity?

How Islamic banking is conducted in practice also raises a number of questions. For example, why are Islamic debt instruments more prevalent than equity instruments? What factors drive firms’ choice between Islamic and conventional bank financing? And what is the optimal regulatory framework in dual banking systems, where both Islamic and conventional banks co-exist? An assessment of the practice and implications of Islamic banking in developed countries represents an interesting direction for future research.

Given the growth prospects for Islamic finance, we expect the literature to continue to expand, extending to other aspects of Islamic finance such as Islamic bonds ( Sukuk ), Islamic insurance ( Takaful ), and asset-pricing of Islamic finance instruments. These and other important questions will need to be addressed as Islamic banking and finance instruments spread across the globe. For this to happen, however, a significant hurdle in terms of data compilation needs to be overcome. More interest by major academic journals in the field should encourage researchers to dive into this relatively unexplored area of investigation.

Appendix 12. A: Summary of Islamic Bank Literature

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Islamic banking accounts for the largest share of total assets (76 percent), followed by Islamic capital markets (23 percent), and Islamic insurance (1.3 percent) (IFSB, 2018 ).

Imam and Kpodar ( 2016 , p. 387) define speculation “as increasing one’s wealth by chance rather than productive effort.” Gharar refers to “doubtful or uncertain contracts, such as undertaking a business venture without sufficient information or taking excessive risk,” while Maysar refers to “unnecessary uncertainties not part of everyday life, such as going to a casino.”

The first Islamic bank, Mit Ghamr, was established as a cooperative organization in Egypt in 1964, and was based on profit sharing and interest avoidance (Siddiqi, 2006 ). See https://wealth-monitor.com/features/markets-rewind/history-of-islamic-finance/ .

From the onset of the GFC in 2008 through 2013, the Islamic finance industry grew at a 17.5 percent average annual rate (Ernst & Young, 2015 ; Hussain, Shahmoradi, and Turk, 2015 ).

The IIFM was created by the Islamic Development Bank (Saudi Arabia), Autoriti Monetari Brunei Darussalam, Bank Indonesia, Bank Negara Malaysia, the Central Bank of Bahrain, and the Central Bank of Sudan. See http://www.iifm.net/about_iifm/corporate-profile .

See https://www.spratings.com/documents/20184/4521646/Islamic+Finance+2018+Digital-1.pdf/cf025a76-0a23-46d6-9528-cecde80e84c8 .

Bureau van Dijk’s Bankscope database provides comprehensive coverage of banks around the world, and accounts for at least 85 percent of all banking assets in each country. Although its coverage of small banks might be incomplete, including Islamic banks, the data is valuable for the purpose of illustrating the growth of Islamic banks.

According to the authors, “Because Islamic banking is guided by Shariah law, it is largely immune to poorly functioning institutions—from the judiciary to the bureaucracy—because there is little resort to them; disputes are instead settled within Islamic jurisprudence” (Imam and Kpodar, 2013 , p. 131).

For a discussion of why Islamic banks use interest rates as benchmarks, see https://islamicmarkets.com/articles/the-benchmark-why-do-islamic-banks-use-interest-rate-benchmarks .

Salam and Istisna are the only debt-based financing instruments that do not require physical asset ownership for sale (Hussain, Shahmoradi, and Turk, 2015 ).

For two excellent reviews of Islamic banking and finance, see Abedifar et al. ( 2015 ), which covers studies between 1999 and 2014, and Hassan and Aliyu ( 2018 ), which covers studies between 1983 and 2017. Other recent survey papers include Alzahrani and Megginson ( 2017 ) and Narayan and Phan (2019).

In motivating their setting, the authors note that “Turkey was the first country in the world that had adopted a dual deposit insurance framework in 2001, in which the Islamic deposit insurance scheme operated alongside its conventional counterpart. Unlike the conventional scheme, which was administered by the government, the Islamic scheme was organized and managed by Islamic banks. However, in December 2005, the dual deposit insurance framework was revised and the Islamic scheme was absorbed by the conventional scheme” (p. 259).

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A systematic literature review of risks in Islamic banking system: research agenda and future research directions

• Original Article
• Published: 20 December 2023
• Volume 26 , article number  3 , ( 2024 )

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• M. Kabir Hassan 1 ,
• Md Nurul Islam Sohel 2 ,
• Tonmoy Choudhury 3 &
• Mamunur Rashid   ORCID: orcid.org/0000-0002-6688-5740 4  

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This study employs a systematic review approach to examine the existing body of literature on risk management in Islamic banking. The focus of this work is to analyze published manuscripts to provide a comprehensive overview of the current state of research in this field. After conducting an extensive examination of eighty articles classified as Q1 and Q2, we have identified six prominent risk themes. These themes include stability and resilience, risk-taking behavior, credit risk, Shariah non-compliance risk, liquidity risk, and other pertinent concerns that span various disciplines. The assessment yielded four key themes pertaining to the risk management of the Islamic banking system, namely prudential regulation, environment and sustainability, cybersecurity, and risk-taking behavior. Two risk frameworks were provided based on the identified themes. The microframework encompasses internal and external risk elements that influence the bank's basic activities and risk feedback system. The macro-framework encompasses several elements that influence the risk management environment for Islamic banks (IB), including exogenous institutional factors, domestic endogenous factors, and global endogenous factors. Thematic discoveries are incorporated to identify potential avenues for future research and policy consequences.

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Riba has been at the center of mainstream debate categorizing Islamic finance from its counterpart. While many scholars identify Riba is the excessive amount of additional payment charged or given on the principal amount, for others it is the fixed or predetermined amount of payment on the top of the principal amount. However, the consensus among Islamic scholars forwards the notion that Riba in any form is prohibited in Islam.

Mudarabah is a partnership-based Islamic finance contract between two parties, one party supplying the finance ( rabbulmal ), while the other party gets involved with their physical labor and skills ( mudarib ), granting each party a share of the income at predetermined ratio.

Musharakah is another classical partnership contract in Islamic banking where more than one party contributes in financing a shared company. The contract involves both parties agreeing on sharing profit on an agreed-upon ratio and sharing losses on ratio of equity capital financed.

Operational risk is the potential loss due to inefficient internal processing, system and people, and external factors such as the limited legal support and uncontrollable compliance issues (Čihák & Hesse 2010 ).

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Hassan, M.K., Sohel, M.N.I., Choudhury, T. et al. A systematic literature review of risks in Islamic banking system: research agenda and future research directions. Risk Manag 26 , 3 (2024). https://doi.org/10.1057/s41283-023-00135-z

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A bibliometric analysis of quality research papers in Islamic finance: evidence from Web of Science

ISRA International Journal of Islamic Finance

ISSN : 2289-4365

Article publication date: 31 December 2020

Issue publication date: 6 July 2021

The purpose of this study is to provide quantitative information on the growth of Islamic finance literature. The study focused on publishing trends, countries producing research on Islamic finance, key authors, major contributing organizations, authorship patterns, keywords and articles with the highest citations.

Design/methodology/approach

Bibliometric analysis is applied to analyse the growth and publishing trends in Islamic finance literature. The Web of Science (WoS) database was used to extract bibliometric data covering the period 1939–2019 for Islamic finance literature.

The study finds that Islamic finance research has gained remarkable momentum in the literature. However, such growth is largely manifested in Malaysia because of a conducive atmosphere for this type of research. Interestingly, the study finds that the three most productive journals are located in the UK and Malaysia, while Professor M. Kabir Hassan from the University of New Orleans, the USA appears to head the list of authors with 23 publications on Islamic finance.

Practical implications

This study provides up-to-date literature on the current state of Islamic finance in the world; as a result, it supports the development of policies by the Islamic finance industry. The findings of the study also serve as a reference point for Islamic finance training and educational institutions.

Originality/value

Islamic finance is an emerging financial discipline; as such, there is a need for more awareness of this financial system in the world. Muslim-majority countries, especially Saudi Arabia, Turkey, Indonesia, the United Arab Emirates (UAE), Pakistan and Bahrain, have to include Islamic finance in their curriculum and establish research institutions and research journals. In addition, Arabic language journals should be indexed in WoS and/or Scopus to provide a high-quality publication platform. This study provides a more comprehensive bibliometric analysis on the growth of Islamic finance literature (1939–2019) in the WoS database; most of the prior studies have covered relatively few areas of focus and a lower range of years in some cases.

• Bibliometric
• Islamic banking – bibliometric
• Islamic finance
• Islamic finance – bibliometric
• Research productivity – Islamic finance

Tijjani, B. , Ashiq, M. , Siddique, N. , Khan, M.A. and Rasul, A. (2021), "A bibliometric analysis of quality research papers in Islamic finance: evidence from Web of Science", ISRA International Journal of Islamic Finance , Vol. 13 No. 1, pp. 84-101. https://doi.org/10.1108/IJIF-03-2020-0056

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Copyright © 2020, Bashir Tijjani, Murtaza Ashiq, Nadeem Siddique, Muhammad Ajmal Khan and Aamir Rasul.

Published in ISRA International Journal of Islamic Finance . Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence maybe seen at http://creativecommons.org/licences/by/4.0/legalcode

Introduction

Islamic finance is a system that is based on Islamic principles and values. It eliminates ribā (interest) and ensures a financial system, which is ḥalāl (permissible). It is characterized by the absence of interest-based financial institutions and transactions, doubtful transactions or uncertainty ( gharar ), stocks of companies dealing in unlawful activities and unethical or immoral transactions such as market manipulation, insider trading and short-selling ( Naqvi, 1977 ; Khan, 1995 ; Al-Jarhi, 2016 ; Öndeş et al. , 2019 ). Since its modern inception in the 1960s, the Islamic finance industry has operated mainly through five sub-sectors: Islamic banking, takāful (Islamic insurance), other Islamic financial institutions, ṣukūk (Islamic investment certificates) and Islamic funds. The demand for Sharīʿah-compliant products and services has over the years recorded significant growth with global assets of the Islamic financial services industry reaching US$2.44tn as of 2019 ( The Islamic Financial Services Board, 2020 ). The Islamic Financial Services Board (2020) reveals that the Islamic finance industry achieved a moderate growth of 11.4% in 2019 as compared to 3% in 2018. Assets held by the global Islamic banking sector grew by 2% to US$1.77tn in 2019 from US$1.57tn in 2018 while those of takāful increased by 1% over the same period. Assets held by other Islamic financial institutions were reported to have witnessed some decline. The slowdown in growth was attributed to slowdowns in the industry’s leading markets, notably Iran, Saudi Arabia and Malaysia ( ICD-Refinitiv, 2019 ; Islamic Financial Services Board, 2020).

Islamic finance is evolving rapidly and continues to expand to serve a growing population of Muslims and non-Muslims; it is not confined to traditional Muslim and Arab markets. The active role of the UK in its development is described by some experts as a “standalone” experiment in the development and promotion of Islamic finance outside the Muslim and Arab worlds. In addition, the role of some US financial institutions in the development and promotion of Islamic finance is notable ( Ahmid and Öndeş, 2019 ).

The first academic journal dedicated to Islamic finance was launched in 1983 by King Abdulaziz University, Saudi Arabia and was followed by a similar publication from the Islamic Research and Training Institute (IRTI), which is also located in Saudi Arabia. To date, a number of studies have been carried out on the subject of Islamic finance; some of these studies have focused on bibliometric analysis of Islamic finance literature ( Al-Jarhi, 2016 ; Lone, 2016 ; Shehatta and Mahmood, 2017 ; Firmansyah and Faisal, 2019 ; Rahman et al. , 2020 ). The bibliometric studies are largely related to Islamic banking and finance, ṣukūk literature, PhD dissertations and Islamic economics literature. Other studies have analysed the state of research journals and high-quality papers in Scopus and Web of Science (WoS).

Most of the literature on bibliometric analysis of Islamic finance has covered relatively few areas of focus and a lower range of years in some cases. For example, some studies have just analysed the literature on ṣukūk investment, PhD dissertations and in some instances analysis of articles published in one journal. Thus, a more comprehensive bibliometric study that focuses on more subjects and/or topics in the WoS journals might reveal a different conclusion. The WoS database has shown an upward trend in the publishing of high-quality research papers in Islamic finance ( Lone, 2016 ).

What are the emerging trends in Islamic finance research during 1939–2019?

What are the most productive countries, authors, journals and organizations?

What are the authorship patterns of Islamic finance researchers?

What are the most frequently used keywords in Islamic finance research?

Which paper received the highest citations?

The remainder of this paper is organized as follows. The second section presents a brief review of the related literature while the third section outlines the methodology used. The fourth section presents the results obtained from the bibliometric analysis. Discussion of the results is presented in the fifth section. The last section concludes the paper.

Literature review

it enables an overview of the scientific literature;

it provides a critical and objective summary of selected scientific papers; and

it entails analysis of data that may have more relevance than subjective analyzes ( Andrés, 2009 ; Shehatta and Mahmood, 2017 ).

A small number of bibliometric analyses have been conducted of Islamic finance literature; these studies have focused specifically on Islamic banking and finance ( Narayan and Phan, 2019 ), investment in ṣukūk literature ( Paltrinieri et al. , 2019 ; Rahman et al. , 2020 ) and PhD dissertations carried out in the field of Islamic finance ( Ahmid and Öndeş, 2019 ). Others have analysed the state of research journals and high-quality papers in Scopus and WoS ( Ridhwan et al. , 2013 ; Lone, 2016 ). In addition, some studies have focused on the evaluation of Islamic economics literature ( Firmansyah and Faisal, 2019 ).

Table 1 provides a summary of selected studies that have conducted a bibliometric analysis of Islamic finance literature. Most of the studies shown in the table covered the period 2000–2019 ( Harande, 2008 ; Ridhwan et al. , 2013 ; Lone, 2016 ; Ahmid and Öndeş, 2019 ). Few studies covered a longer period of time ranging from 1950 to 2019 ( Othman et al. , 2009 ; Paltrinieri et al. , 2019 ; Rahman et al. , 2020 ). A visual inspection of Table 1 reveals that the studies have different focuses, have used different approaches and have arrived at different conclusions. These studies provide a basis of comparison for the current study, which is focused on wider themes and concentrates on a much longer period of time. For example, Harande (2008) carried out a bibliometric analysis of Islamic economics literature that sought to find the periodic growth, author patterns, geographical origin and language of dispersion in the literature.

The study by Harande (2008) was based on 51 publications collected from a journal titled Thoughts on Economics for the period 2000–2006, covering seven years of data. He found that 77% of the published papers emanated from Bangladesh while the remaining 23% were shared amongst nine countries. More than 70% of the publications were by a single author. In total, 88% of the publications were in the English language while publications in Urdu constituted 19.6%. Surprisingly, none of the publications was in Arabic. In addition, Othman et al. (2009) conducted a co-citation analysis of Islamic finance literature. The authors focused on highly co-cited authors, highly cited documents, highly cited themes, research fronts and the strength of the co-cited documents. They found that research fronts in Islamic finance strongly focused on ribā and the contribution from Islamic economics. They also documented that highly co-cited authors were from an Islamic economics background.

Ridhwan et al. (2013) conducted a bibliometric analysis of articles published by The Journal of Muamalat and Islamic Finance Research over a period of eight years (2004–2011). The authors analysed 91 articles. Data from each volume of the journal were collected and statistically analysed by using the SPSS software. This study examined many variables, including authorship patterns, length of articles, number of articles published, author’s productivity, contributing institutions and subject area patterns. Dual authorship was found to be prevalent, accounting for 57% of the published articles during the period. The paper also revealed that 80% of the articles were published in English. More recently, Lone (2016) analysed the state of research journals and high-quality papers in Scopus and WoS over the period 2000–2016. The study concentrated on the growth rate, articles indexed, yearly data of papers, number of papers, author scores, university/institution scores and country scores. The author found a significant increase in the number of new journals and published articles from 2012 to 2014. On the affiliation of authors, the study ranked three Malaysian universities as having the highest number of authors followed by the USA and UK, respectively. Surprisingly, Saudi Arabia was fifth on the list.

Narayan and Phan (2019) focused on Islamic bank performance, equity market performance, asset pricing, Islamic bonds, market interactions and ethical issues in finance. The study surveyed 112 articles that were published in top journals. They found that the topic of research is deeply skewed towards bank performance followed by equity market performance.

ṣukūk overview and growth;

ṣukūk and finance theories; and

ṣukūk and stock market behaviour.

nature of SRI ṣukūk ;

competitiveness of SRI ṣukūk ; and

determinants of SRI ṣukūk .

The paper also suggested that there was a high level of collaboration between authors from Malaysia, Australia and the USA.

Ahmid and Öndeş (2019) analysed PhD dissertations on Islamic banking and finance in the UK for a period of 19 years (2000–2018). The authors drew a general map in terms of title, author gender, university, the year and number of dissertations. Data were obtained from the database of the British Library. The study revealed that more than 70% of the dissertations were authored by male candidates and that Durham University had the highest number of dissertations amongst the UK universities.

A recent study by Ali and AlQuradaghi (2019) investigated the academic polemics, stakeholder perceptions and publishing prospects for Islamic economics and finance (IEF) research. To achieve these objectives, the authors used both quantitative and qualitative methods in their study. Specifically, they searched through selected databases to identify leading journals and publishing outlets for IEF research. The study also conducted a survey of IEF experts and interviewed major stakeholders with a view to determining the current trends and future perspectives of IEF research. They documented an increasing interest in IEF research and research output over the past three decades. Firmansyah and Faisal (2019) also conducted a bibliometric analysis on the performance of Islamic economics and finance journals. The data were derived from journals published by Indonesian universities. The study revealed the top five IEF journals in Indonesian universities and the 10 most productive researchers.

Methodology

Bibliometric analysis is an established quantitative method to investigate publishing patterns of scholarly work and it is mostly used in library and information science research to investigate the publishing trends and patterns of topics under investigation. Hence, this study applies a bibliometric analysis in the field of Islamic finance.

The WoS database was used at Imam Abdulrahman Bin Faisal University (IAU), Dammam, Saudi Arabia in September 2019 and data were retrieved on 12 September 2019. WoS is one of the largest peer-reviewed and authentic indexing and abstracting databases of scientific literature. The study is restricted in the document types that it covers, including only articles, proceedings, reviews and book chapters.

The targeted data were retrieved applying the following search queries in the main searching box of WoS: “Islamic Finance*” OR Musharaka OR Sukuk OR “Islamic Capital Market*” OR Takaful OR “Islamic Insurance” OR Mudaraba OR Kafalah OR Murabaha OR Gharar OR Mudarib OR “Bai Inah” OR Musharaka OR Qirad OR Waqaf OR Zakat OR Zakah OR “Qard Hasan” OR Mutajara OR Tawarruq OR Maysir OR Riba OR “Islamic Accounting” OR “Islamic Investment Partnership” OR “Islamic Leasing” OR Istisnaa OR “Bai Al Ajel” OR “Bai al Arboon” OR “Islamic guarantee*” OR “Islamic Bond*” OR “Islamic Tax*” OR “Ijarah” OR “Islamic Charity*” OR “Islamic Trust*” OR “Islamic Stock*” OR “Islamic equity fund*” OR “Islamic Funds”.

After running the above query, the following WoS category: “business finance or ethics or economics or business or management or religion or social sciences interdisciplinary or law or computer science theory methods or international relations or history or political science or planning development or humanities multidisciplinary or computer science information systems” was selected.

The excluded types of documents were “early access or editorial material or correction or letter or book review”. The total results contained 1,235 records. Each record was counter-checked to ensure the relevancy of the data. This practice helped to remove 25 irrelevant records and a total of 1,210 records were found to be correct for data analysis. There was no language filter applied while data retrieving and more than 95% of records were in English (1,167) followed by Malay (14), Turkish (11), Russian (10), French (2), Czech (2) and one each from Spanish, Polish, Indonesian and Croatian. The accuracy of the results was ensured by repeating this process. The researchers used MS Excel, MS Access and VOS-viewer software for data analysis.

Publishing trends in Islamic finance

Figure 1 highlights the chronological distribution of publications on the subject of Islamic finance literature. It shows that the first article was published in 1939 but it did not obtain any citation. However, the first significant publication was noted in 1987; it obtained 68 citations. Publications peaked over the years 2015 and 2019 with 191, 206, 249, 245 and 98 publications in each year, respectively. The year 2017 was remarkable with 249 publications. Similarly, citations of these publications peaked over the period 2010–2017. The 191 publications of 2015 got a maximum of 707 citations.

Country-wise comparison of Islamic finance research

Comparison of Islamic finance research productivity by the top-10 countries is presented in Table 2 . The table shows that only three countries have more than 100 publication records. Malaysia was top in the list with 540 records and was far ahead of other countries with, for example, the UK registering 126 records, followed by the USA with 111 records and others. The United Arab Emirates (UAE) was the last country on the list showing only 39 records.

Most productive journals producing literature on Islamic finance

Table 3 presents the top 10 journals publishing Islamic finance literature. It shows that the Journal of Islamic Accounting and Business Research ranked highest, producing 70 publications on Islamic finance, followed by the International Journal of Islamic and Middle Eastern Finance and Management , producing 60 publications and the Malaysian journal Al-Shajarah , with 46 publications. The last journal in the top-ten list was the Journal of Islamic Marketing with 18 publications.

In respect of citations, the journal Pacific-Basin Finance Journal from The Netherlands, which ranked fourth in the list with 29 publications, received a maximum of 344 citations. Similarly, the journal Research in International Business and Finance , also belonging to The Netherlands, produced 19 publications, but it received 110 citations. Both journals were from The Netherlands and were the highest impact factor journals on the list. This shows that high impact factor journals are cited most frequently as compared to low or non-impact factor journals.

Most prolific authors in the Islamic finance literature

The study also investigated the most prolific authors in Islamic finance ( Table 4 ). Professor M. Kabir Hassan from the University of New Orleans, USA, was top in the list of most prolific authors in Islamic finance with 23 publications getting 79 citations, followed by Umar A. Oseni from International Islamic University Malaysia with 20 publications getting 53 citations. It is worth mentioning that out of the 10 most prolific authors, six belong to Malaysia, two to the USA, one to Turkey and another one to Saudi Arabia. Another interesting aspect was the high citation number received by the publications of Professor Shawkat Hammoudeh from the University of Kansas, USA. He was the last in the most prolific authors’ list with 11 publications but he received a maximum of 222 citations.

Authorship patterns

The authorship pattern in Islamic finance is also presented with publications, publications percentage, citations and citation impact ( Table 5 ). A total of 1,210 articles/book chapters received 3,703 citations with 17.92 citations impact. Two-authors were the top trend of publishing in Islamic finance with 353 publications, followed by single authors with 349 publications and three-authors with 331 publications. The least pattern was nine-authors with only one publication and no citation. However, most citations (1,126) were from the three-author category with 3.40 citations impact. It is interesting to note that the four-author pattern published 120 articles but obtained a maximum citation impact of 4.53.

Highly productive research organization

The top-20 institutions producing research on Islamic finance is presented in Table 6 . All of the institutions produced more than 10 publications. Most of the institutions belong to Malaysia. The International Islamic University Malaysia is on top and far ahead of other universities/institutions with 186 publications. Universiti Teknologi MARA is second with 112 publications. The two universities at the bottom of the list, University Brunei Darussalam and Qatar University have each produced 11 publications.

Type and language of publications

There are four categories in document type: articles, proceedings, review articles and book chapters. Research articles were the most important and dominant document type in Islamic finance. Out of the total of 1,210 records, 924 were articles (76.36%), 259 were proceedings (21.4%), 26 were review articles (2.15%) and one was a book chapter ( Figure 2 ).

The publication language is presented in Table 7 . It is remarkable that out of a total of 1,210 records, English ranked first with 1,167 publications followed by Malay (14), Turkish (11), Russian (10), French (2), Czech (2) and one each from Spanish, Polish, Indonesian and Croatian. It is surprising to note that there is no publication written in the Arabic language which is indexed in WoS. It might be that Arabic articles will not be indexed in WoS until they are translated into English. In fact, the WoS hosts a separate index called the “Arabic citation index” to index Arabic articles.

Keyword analysis

The most frequently used keywords in Islamic finance literature are presented in Table 8 . Out of 3,065 keywords used in the publications, 64 met the threshold criteria (minimum occurrence of a keyword is seven). A threshold is an automated system in the VOS-viewer software that generates keywords on the basis of occurrence. Islamic finance emerged as a top keyword with a frequency of 393. There were five major keywords that had a frequency of over 100 and three keywords having a frequency of over 200, i.e. Islamic finance (393), Sharīʿah/Shariah (249) and Islamic banking (207). The least used keywords ranked at 25 th and 26 th positions were “insurance” and “emerging markets” with a frequency of 11.

Top-10 highly cited articles on Islamic finance

The most cited top-10 articles are listed in Table 9 . Four articles in the top-10 were cited more than 100 times. The article “How ‘Islamic’ is Islamic Banking”? By Khan (2010) in The Journal of Economic Behaviour and Organization received a maximum of 142 citations. This is not surprising as Islamic banking is a major sub-sector in the Islamic finance industry; as a result, there was an increased interest by researchers in this area to ensure that the Islamic banking sub-sector is fully explored and understood. The next most cited article is “social reporting by Islamic banks” by Maali et al. (2006) which received 114 citations. The third and fourth articles obtained 109 and 104 citations, respectively. The article least cited in the list was “ sukuk vs conventional bonds: A stock market perspective” published by Godlewski et al. (2013) with 50 citations.

This paper seeks to provide a bibliometric analysis of the development of Islamic finance literature in WoS indexed journals over the period 1939–2019, covering 80 years of data. A number of interesting points emerged from the results presented in the third section.

Firstly, there was an appreciable rise of publications on Islamic finance in the past five years covered in this study (i.e. 2015–2019). Such a remarkable surge in the Islamic finance literature might be connected with a similar rise in the number of journals that provide additional outlets for such publications. The absence of similar research efforts might be responsible for the low number of publications in Saudi Arabia, Indonesia, Pakistan, the UAE and other countries that have contributed to the literature in Islamic finance.

Secondly, another factor that can explain the high number of publications from Malaysian universities is the conducive atmosphere, which has been created by the government and research and training institutions operating in the country. Governmental support has always been a significant factor in driving the development of the Islamic finance market in Malaysia. Research and training centres on Islamic finance in Saudi Arabia, Iran, Pakistan, Bahrain and the UAE should be encouraged to publish more articles on Islamic finance. In addition, Islamic finance should be included in the curriculum of undergraduate students of social and management sciences (i.e. finance, management, accounting, business administration and economics). In Saudi Arabia, two universities, notably Al-Imam Mohammad Ibn Saud Islamic University (IMSIU) and King Abdulaziz University, are at the forefront of Islamic finance research and should be encouraged and supported to produce more research on Islamic finance in both Arabic and English. At present, WoS has a separate index called Arabic Citation Index which indexes Arabic articles. This Arabic Citation Index should be searched to examine the indexing of Islamic finance articles written in Arabic. There is a need for high-profile journals on Islamic finance (such as ISRA International Journal of Islamic Finance published in Arabic) to collaborate with WoS and Scopus to provide such a platform. In addition to providing a platform for journals in the Arabic language, the WoS may explore other languages such as Urdu, Persian or Hindi.

Thirdly, nine out of the 10 most cited articles on Islamic finance were fairly recent. These studies were published from 2006 to 2018, which indicates that Islamic finance as a discipline is gaining momentum. Only one study was conducted in 1987. This momentum needs to be maintained by all stakeholders of this emerging field of knowledge. Another interesting finding was that some of these studies were carried out by non-Muslims, which showed how the topic of Islamic finance has gained acceptance in the literature.

Fourthly, the current study confirms earlier findings on the growth of Islamic finance literature. The results in the third section reveal a significant rise in the number of articles that have recently been published in top-ranking journals. However, this study is in a number of ways an extension of prior literature; it has covered more themes and 80 years of prior literature in Islamic finance. On the other hand, Lone (2016) analysed the state of research journals and high-quality papers on Islamic finance for only 16 years covering seven related themes. Similarly, Othman et al. (2009) and Narayan and Phan (2019) conducted bibliometric analysis and focused on a fewer number of themes than this study. More recently, the studies by Paltrinieri et al. (2019) and Rahman et al. (2020) were limited to one theme, i.e. ṣukūk literature.

Fifthly, results from the current study contradict Lone’s (2016) findings on publishing trends due to disparity in the publishing dates. This study documents 2015–2019 as the peak period while Lone (2016) found 2012–2014 as the most prolific period on Islamic finance publications. The reason why the peak period is different in Lone’s study is that the study was undertaken most probably in 2015, and therefore at that time the peak period for publications was 2012–2014. Our study confirms the findings of Lone (2016) on research productivity in which Malaysia, the USA and the UK were ranked first, second and third, respectively. Our finding is also similar to that of Othman et al. (2009) , who concluded that Islamic finance is strongly focused on ribā and contributions from Islamic economics.

This paper provides a bibliometric analysis of the growth of Islamic finance literature in WoS indexed journals over the period 1939–2019. In recent years, research on Islamic finance appears to be gaining momentum in the literature. However, such a rise is largely manifested in Malaysia due to a more conducive atmosphere for this kind of investigation. Countries such as Saudi Arabia, Iran, Turkey, Indonesia, the UAE, Pakistan and Bahrain should increase their efforts to support research in Islamic finance. King AbdulAziz University was one of the early institutions that contributed to the emergence of Islamic finance as a discipline; however, this pioneering effort has been overtaken by Malaysian universities, training centres and research institutes. More support should be extended to Saudi universities and research institutes (such as IRTI). The establishment of more research institutes and the inclusion of Islamic finance as a course at the university level will go a long way in improving research in this area. Similar efforts would improve the current state of Islamic finance research in Bahrain, the UAE, Pakistan and other countries that have made some modest contribution in Islamic finance literature. At present, ISRA publishes an Arabic journal in Islamic finance with the same title as the English journal, i.e. ISRA International Journal of Islamic Finance (Arabic) . However, this Journal is not indexed so far. We recommend that this important journal should be indexed in the WoS Arabic citation index. In addition, more Arabic journals in Islamic finance need to be developed by other institutions, especially in the Arab world.

This is a bibliometric study and is limited to one abstracting and indexing database, i.e. WoS. The research is further limited to the literature on Islamic finance published till 2019. The study is also restricted in the document types that it covers, including only articles, proceedings, reviews and book chapters. It would be interesting if further research could be undertaken to compare the output and quality of publications in Islamic finance and mainstream finance.

This study is helpful in understanding the current status of Islamic finance literature in respect of publishing trends, top countries, authors, organizations, journals and frequently used keywords for Islamic finance studies. The study reveals that Islamic finance has gained significant growth in the literature. Hence, it is the need and role of Muslim-majority countries to create awareness about Islamic finance by including it as a subject in the curriculum and promoting more multilingual research, especially in languages such as Arabic and other local languages (besides English) to help local communities better understand the operations of Islamic finance. The countries should also encourage the inception of more journals on Islamic finance to create more platforms for publishing research in this area. In this regard, government support and the role of the academic community will play a crucial role.

Chronological distribution of publications ( n = 1210) in Islamic finance (1939–2019)

Document type frequency in Islamic finance

Summary of selected studies that conducted a bibliometric analysis of Islamic finance literature

Comparison of Islamic finance research productivity of top-10 countries

Top-10 journals publishing Islamic finance research

Most prolific authors in Islamic finance

Authorship patterns in Islamic finance

Top-20 research producing institutions in Islamic finance

Language as a publishing trend in Islamic finance

Keywords of Islamic finance literature with frequency

Most cited articles on Islamic finance

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Corresponding author

About the authors.

Bashir Tijjani, PhD, is a Professor of Accounting and Finance at Imam Abdulrahman bin Faisal University, Dammam, Kingdom of Saudi Arabia. He was formerly the Head of Accounting and Dean of the Faculty of Social and Management Sciences at Bayero University, Kano, Nigeria. He was also the pioneer Dean of the Faculty of Management Sciences at the same university.

Murtaza Ashiq has an MPhil in Information Management from the University of the Punjab, Lahore. Currently, he is working as a Lecturer at the Library and Information Science, Islamabad Model College for Boys, H-9, Islamabad, Pakistan. Prior to this, he worked as Librarian at FG Inter College, Jhelum Cantt. His areas of interest are bibliometric analysis, library leadership, qualitative research, mobile learning and library service quality.

Nadeem Siddique, PhD, is Head of Library, Lahore University of Management Sciences, Lahore, Pakistan. He earned his doctorate from the University of the Punjab, Pakistan. He has more than 20 years of teaching, research and professional experience at the university level in Saudi Arabia and Pakistan. His research interests focus on library automation, library software, content analysis and bibliometrics. He is a founding member and Vice President of the Pakistan Library Automation Group (PakLAG).

Muhammad Ajmal Khan is Head, Library Quality and Academic Accreditation, Deanship of Library Affairs, Imam Abdulrahman Bin Faisal University, Dammam, Kingdom of Saudi Arabia. He has more than 25 years of research and professional experience at the university level in Pakistan and Saudi Arabia. His research interests focus on library automation, library software and bibliometrics. He is also a founder of the PakLAG.

Aamir Rasul is an Assistant Professor at the Department of Library and Information Science, The Islamia University of Bahawalpur, Pakistan. His areas of interest are academic libraries, library automation, digital library, institutional repository, bibliometric study and online information retrieval.

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A Systems View Across Time and Space

• Open access
• Published: 26 February 2021

Customer satisfaction in the digital era: evidence from Islamic banking

• Ghazi Zouari   ORCID: orcid.org/0000-0002-8168-3266 1 &
• Marwa Abdelhedi 1  

Journal of Innovation and Entrepreneurship volume  10 , Article number:  9 ( 2021 ) Cite this article

27k Accesses

29 Citations

Metrics details

Based upon an extended SERVQUAL model, this paper attempts to contribute to the Islamic banking literature by examining the impact of digitalization, as a service quality dimension, on customer satisfaction.

Design/methodology/approach

Two dimensions, i.e., digitalization and compliance, are added to the existing SERVQUAL model of five dimensions. Results are drawn from a self-completed survey of a convenience sample of 145 Tunisian Islamic bank customers for the year 2018. Factor analysis and regression analysis are used to determine factor structure and determine the impact of service quality dimensions, especially digitalization, on customer satisfaction in Islamic banking.

The factor analysis extracted five dimensions of service quality, i.e., confidence, compliance, digitalization, tangibles, and human skills. The paper demonstrates a positive and significant relationship between the main dimensions of customer service quality and customer satisfaction, except for tangibles.

Research limitations/implications

Although the outcomes lend support to the extended SERVQUAL model, the results are derived based on a relatively average sample size in one country (Tunisia). It might also be useful to enlarge the study sample for better generalization of the findings in other countries and include a comparison between Islamic versus conventional banking about service quality and customer satisfaction. Moreover, we can applicate another original method for the Measuring and Implementing Service Quality like the multicriteria method dubbed (MUSA).

Managerial implications

To remain competitive, Tunisian Islamic banks need to pay attention to the way the services are delivered and not take it for granted that customers are only focusing on compliance. Dealing henceforth with Generation Y customers, they must persevere in bringing their customer service into the digital era.

Originality/value

This study is one of the few which tries to investigate the drivers of customer satisfaction for Islamic banks in a Digital Era. It reveals that although customers pay special attention to Sharia laws, the way services are delivered matters to them too. From now on, digital banking must appear among the Islamic bank features to stay relevant in the Digital Era.

Introduction

Across the globe, digital technologies are mushrooming in all areas, including the banking sector (Ganguli & Roy, 2011 ). Especially, newly developed and implemented technologies are changing people’s lifestyle and consumption habits which impacts considerably the nature of companies-customers relationships. This is due to the evolution of the expectations of today’s tech-savvy digital consumers who are looking forward to the delivery of digital solutions by their banks (Sreejesh, Anusree, & Mitra, 2016 ).

The digital transformation in the banking sector is likely to continue and further ramp up given the specifics of the post-crisis market environment. Competing from now on in the digital era, banks are called to greater integration of digital technologies in response to market changes and customers’ needs. Moreover, they must persevere into accumulating digital capabilities to take their customer service into the next level, allowing so to enhance customer satisfaction rates and make higher profits (Reichheld & Sasser Jr., 1990 ) at the same time as ensuring effective automation and related cost efficiency (Alstad, 2002 ).

A dynamic segment that is emerging in the banking sector is Islamic banking. Thanks to the relatively resilient performance of this sector during the most serious financial crisis ever seen, Islamic finance has witnessed remarkable development around the world. Nevertheless, this is not the case in North African countries. The factors that account for this underdevelopment were summarized by Wilson ( 2011 ) as follows: firstly, the limited development of retail banking generally, second the lack of consumer awareness about Islamic banking, and third, the low scale of government support. In Tunisian banking, the Islamic banking sector remains embryonic and struggles to gain market share (Boulila & Ben Slama, 2014 ). The current Islamic banking system comprises four Islamic banks. The first one is “Al Baraka Bank Tunisia” licensed to offer Islamic banking as an offshore institution since 1983. The second is a regional office of the United Arab Emirates (UAE)-based Islamic bank “Noor Islamic Bank” established in June 2008. The third and the most expanded one is “Zitouna Bank” launched in May 2010 by the son in law of the deposed president. The last one is “El Wifak Bank” launched in May 2017. However, there is a sustainable development scope for Islamic banking given the relevant political changes in post-revolution Tunisia and the presence of market push (Gallup, 2014 ), and hence, Tunisian Islamic banks need to take advantage of opportunities associated with the development of the Islamic financial landscape in Tunisia.

Although the whole notion of Islamic banking hints at the fulfillment of religious obligations of pious Muslim customers, Tunisian Islamic banks should not take it for granted that customers are only focusing on compliance and must be more conscious about the service quality evaluation according to customers’ expectations given the fact that service quality is closely related to customer satisfaction in Islamic banking (Janahi & Almubarak, 2017 ). Most banks are on the path to digital adoption to fulfill the ever-increasing needs of the digital generation; however, Islamic banking constitutes a particular banking segment to which conventional marketing rules do not necessarily apply (Muslim, Zaidi, & Rodrigue, 2013 ).

So, does the digital transformation phenomenon have any impact on the major service evaluation criteria for Tunisian Islamic banking? And what should be the potential benefits of a customer service digitalization process concerning customer satisfaction in Islamic banking?

The underpinning theme of this study is that the underlying religious philosophy of Islamic finance can no longer be the only source of competitiveness, but that a marketing strategy of ongoing service quality improvement in light of market changes is even more necessary for banks to remain competitive. Given the above, the elaboration of an adapted measurement model of service quality with consideration for new consumption habits seems to be more prominent than ever to enhance service offerings and meet digital consumers’ expectations with the ultimate goal of reaching high levels of customer satisfaction.

This paper looks at the importance of integrating digitization and compliance into consumers’ satisfaction dimensions for the Islamic banking context. To do that, a review of the literature is presented hereafter. The section that follows looks at the methodology and reports on data collection, analysis, and results. The discussion of the findings and subsequent implications are then provided. The final part of the paper draws the concluding remarks and sums up the limitations of the study.

Literature review

Customer satisfaction and service quality.

Customer satisfaction is what a consumer feels about a particular service or product after it has been used (Solomon, 1996 ). It would be considered as one of the primary strategic goals to which every organization shall pay particular attention (Dabholkar, Thorpe, & Rentz, 1996 ). That is because almost all studies show a tight connection between customer satisfaction and repurchase intentions, positive word of mouth (Dispensa, 1997 ), market reputation, and customer loyalty (Cronin & Taylor, 1992 ) leading so to profit increase and cost reduction (Cooil, Keiningham, Aksoy, & Hsu, 2007 ; Kumar & Reinartz, 2006 ). Now, the first thing that came in mind when dealing with customer satisfaction is service quality since satisfaction is particularly sensitive to the level of service quality provided by the organization. It is suggested that service quality is an underlying determinant of customer satisfaction (Yavas, Bigin, & Shenwell, 1997 ); hence, it is important for management to find a concise definition of service quality and search for the most reliable assessment process to ensure high-quality service offerings.

Service quality is defined by Gronroos ( 1983 ) as the fact of meeting what one company’s customers expect from its service offerings while it represents the gap which may exist between what customers expected to get as service and service quality as perceived by them (Parasuraman, Zeithaml, & Berry, 1988 ). Although providing a meaningful measurement tool is essential for service quality management, it is often hard to measure the quality of service due to certain inherent characteristics including heterogeneity, intangibility, perishability, and inseparability (Hoffman & Bateson, 2001 ).

The increasing awareness about the key role of both the concepts of quality and satisfaction in a constantly changing banking market have made of them the focus of a multitude of studies Throughout the body of academic literature, scholars continually refer to Parasuraman, Zeithaml, and Berry’s ( 1985 , 1991 ); Parasuraman et al.’s ( 1988 ) original work. Through numerous qualitative researches, these authors concluded that customers provide a congruous evaluation of service quality regardless of the service industry and then conceived a five-dimension measure scale of service quality and provided concise definitions for each of these dimensions.

Reliability: the ability to be trusted because of performing the promised with precision

Tangibles: the tangible aspects associated with the service like the appearance of employees, physical facilities, and equipment

Responsiveness: the willingness of staff to react to customers quickly and positively

Assurance: the knowledge and courtesy of employees and their ability to convey trust, faith, and confidence among customers

Empathy: the caring and individual attention provided for customers.

Careful empirical testing of the theorized service quality dimensions has led to the recognition of a 22-item scale named SERVice QUAlity (SERVQUAL, Parasuraman et al., 1991 ). The basic assumption underlying the SERVQUAL model is that service quality is interpreted in terms of the gaps which may exist between what customers expected to get as service and service quality as perceived by them. Thus, a low-quality service corresponds to that case in which customers’ expectations are greater than their perceptions while exceeding expectations implies that service quality is deemed high. Since its conception in 1988, SERVQUAL has gained high attention and has been applied in a multitude of service industries, including the banking industry (e.g., Veysel, Erkan, & Hüseyin, 2018 ). Nevertheless, the model faced a wide criticism, mainly directed at its conceptual appropriateness, its operationalization, and the ambiguity of the expectations construct (Buttle, 1996 ). Moreover, empirical evidence does not support the dimensional stability of SERVQUAL, the five-dimensional concept of service quality does not hold up when the research is replicated in different contexts (Babakus & Boller, 1992 ), and the 22 defined items do not load on to the corresponding dimensions regularly (e.g., Carman, 1990 ). Consequently, there may not be a relevant and universal measure of service quality for service industries. Indeed, the relative importance of these dimensions differs from one country to another as well as the demographic characteristics and cultural background of customers. Despite these criticisms, it is recognized that the SERVQUAL measurement tool represents a generic instrument that enables a meaningful assessment for service quality in terms of assurance, reliability, tangibles, empathy, and responsiveness (Saleem, Zahra, Ahmad, & Ismail, 2016 ).

Customer satisfaction and service quality in Islamic banking

Service quality is more likely to gain weight in the banking industry given the constantly changing banking environment. The highly competitive financial market is pushing the banks, including Islamic banks, to constantly rethink their service offerings in light of the evolving customers’ expectations for service quality aspects. Together with conventional banks, Islamic banks aim to meet customers’ banking needs. The main difference between them is mere that Islamic banking conducts its operation based on the principles and teachings of Islam known as Islamic law (Shariah).

Islamic banking transactions are carried out following the rules, regulations of Islamic Shariah, known as fiqh muamalat (Islamic rules on transactions). There is no place for interest receipts and payments, excessive uncertainty (gharar), gambling, speculations, and illegitimate transactions in the Islamic financial system (Khan, 2010 ). It is a complete set of the financial framework based on discipline and promotes the level of fairness and equity in the carrying out of the banking business. However, Profits and Loss Sharing (PLS) remains the feature most emphasized by Islamic banking advocates (Zaher & Hassan, 2001 ). The ban of interest-based financial transactions in Islamic religion and the aspiration of pious Muslims to making a practical reality of their religious values has made from Islamic banking a key player in global financial circles over the past four decades.

Customer service is a major organizational process that companies should optimize to enhance customer satisfaction rates, reach a wider market, and increase earnings (Jahanshahi, Gashti, Mirdamadi, Nawaser, & Khaksar, 2011 ). So, roughly speaking, a large number of the studies analyzing the relationship between service quality and customer satisfaction within Islamic banking have adopted the original SERVQUAL tool as it was conceived by its authors and some of them have used an adjusted version of it. Abdullah and Kassim ( 2009 ) explored the dimensional structure of banking services offered by Qatari Islamic banks.

They defined a set of four quality dimensions that are tangibles, human skills, online banking, and empathy. However, they noted that only two dimensions that are empathy and human skills were significant when examining customer satisfaction. Al-Tamimi and Al-Amiri ( 2003 ) studied the service quality pattern of UAE Islamic banks else.

One of the contributions of the study is the confirmation of the validity of SERVQUAL for Islamic banks, at least for their sample. They also realized that empathy and tangibles were the most important dimensions. In another distinctive study, Amin and Isa ( 2008 ) focused on the association between service quality as perceived by Malaysian customers and their satisfaction level with Islamic banks using an adjusted SERVQUAL model consisting of six dimensions. They added a new dimension under service quality dimensions which they called “compliance” given the foundation philosophy underlying Islamic banking. In conclusion, the researchers suggested that that the standard pattern of Islamic banking service quality should consist of the six dimensions and that the quality of Islamic banks service offerings was correlated with their customers’ satisfaction scores. Furthermore, it is important to highlight the exceptional work of Owen and Othman ( 2001 ) who suggested a new service quality assessment tool for Islamic banks which they called CARTER (Compliance, Assurance, Reliability, Tangibles, Empathy, Responsiveness). The novel set of service quality was defined based on a customized Parasuraman et al.’s ( 1985 , 1988 , 1991 ) five dimensions to suit Islamic banking industry specificities. Yet, a new dimension named “Compliance with Islamic law” had to be included in the existent five-dimensional concept that refers to the ability of the Islamic bank to fulfill with Islamic law and operate under the Islamic banking principles. This dimension includes such items as “Run on Islamic law and principles,” “no interest rates are applicable for neither loans nor savings,” “provision of Islamic products and services,” “provision of free interest loans,” and “provision of PLS-based products.” The study of Owen and Othman has probably some uniqueness despite the handicap of the model’s validity (Hafsa, 2013 ). The problem derives mainly from the sample which took part in this study because it had to represent the clients of only one bank. Later on, some researchers like Osman, Ali, Zainuddin, Rashid, and Jusoff ( 2009 ) and Janahi and Almubarak ( 2017 ) opted for the testing of the CARTER’s validity in different Islamic banks from other regions.

Customer satisfaction and service quality in the digital era

Over time, and due to the digital revolution, society is being confronted with an unprecedented shift away from an industrial to a digital orientation. A new customer generation who grew with Internet democratization is more prone to technological developments. Consequently, the digital transformation has become an obligation rather than a choice for today’s organizations, banks are not excepted given the breakthrough development in fintech solutions. Financial technology, often shortened to Fintech, has become a widely used term today which refers to the adoption of new technologies by the financial service institutions, especially banking institutions. However, by further examining the history of banking activity development, it appears that this is not a brand-new concept. The banking sector is seen as the vanguard sector of the fintech-based service revolution (Barras, 1990 ) so that the banking landscape has witnessed the development of a multitude of fintech innovations that includes Electronic Fund Transfer at the Point of Sale (EFTPOS), Automated Teller Machine (ATM), Internet banking, and mobile banking. Owing to ever-increasing competition within banking services, banks have embarked on the development of technology-driven strategies since empowering customers with technology-based service delivery systems generates cost-savings and improves operational efficiency (Alstad, 2002 ) and should boost customer satisfaction level, allowing to strengthen customer retention and generate further revenues (Reichheld & Sasser Jr., 1990 ).

With more widespread internet penetration and mobile devices especially smartphones, the innovations became more intense from the 2000s onward which may be the starting point for the digital revolution. There is often a great difference between the era of the internet during the 1990s and the digital era at present. Digital has been dramatically reshaping the habits and preferences of consumers, whose lives are more and more involved with digital innovation, leading to a profound impact on the banking industry (Ganguli & Roy, 2011 ). Nevertheless, the impact is not all negative for traditional banks. There are still considerable customer segments showing a preference for brick and mortar experience. However, over time, banks may face a considerable reduction in their customer base when digital natives, who have been immersed in technology their entire lives (Prensky, 2001 ), form the majority of the population unless the banking sector embraces digital transformation. That seems to be more relevant as previous studies show that differences do exist in acceptance and usage levels of technologies across customer segments depending on their beliefs about technology (Dabholker, 1996 ).

Digitalization refers to the process in which the use of digital technology by an organization is adopted or increased (Castells, 2009 ). Regarding banking, that means acquiring technology-centric capabilities that enable new methods of interaction and service delivery to improve customer’s experience. Owing to the technological evolution in the banking sector, we will probably witness another revolution in banks’ marketing strategies (Dootson, Beatson, & Drennan, 2016 ). Although digital banking is technology related, it is service-oriented and designed around the needs of digital natives that grew up with computers as a daily part of their lives and that are living in a broadly interconnected world. To reach a younger and more digitally savvy customer base, marketing efforts should hinge revolve around the offering of personalized services and digitally empowered experiences to enhance customer satisfaction since the latter is widely assumed and assessed to determine repeat sales, positive word of mouth recommendations, and mostly customer loyalty (Bearden & Teel, 1983 ).

In most of the previously undertaken studies, it was suggested that service quality dimensions are the determinant criteria that influence the customers’ decision over the choices in the banking selection. Nevertheless, Islamic banking constitutes a particular segment in which the traditional rules of marketing in the banking industry may not apply due to religious-based reasons. Religion is considered to be the most important bank selection factor (Metawa & Almossawi, 1998 ). However, the evidence did not bear out the claim that Islamic banking reflects Islamic values, previous studies found that the selection of Islamic banks is not founded solely on the customers’ religious beliefs (Dusuki & Abdullah, 2006 ). Therefore, Islamic banks must persevere in working on the demand of, or response to its customers’ needs and wants because it is obvious these factors that develop their perception of quality. The latte, however, is strongly influenced by customers’ demographic characteristics (Urban & Pratt, 2000 ), the development of a valid and distinct measure of service quality is even more vital to address customer needs in an increasingly digital world. Customers are already ahead of many banks in how they use digital technology to manage their financial lives, in fact, according to Ernst and Young ( 2016 ), 81% of Gulf Cooperation Council (GCC) Islamic banking customers are expected to be ready to switch to the bank offering a greater digital experience. This shift towards digital banking means that banks’ marketing management model is changing, making it crucial for Islamic banks to understand the impact of digital banking on customer satisfaction. Previous research has focused on the relationship that may exist between customer satisfaction and e-service quality within the banking sector (e.g., Isaac, 2011 ) and the factors influencing customers’ acceptance of e-banking (e.g., Martins, Oliveira, & Popovic, 2014 ), but digital banking should not be treated as a separate dimension among those which define and shape the service quality concept as pursued in this paper. Digital banking should not only be considered as a kind of service but also as a new feature that must exist among the essential features a bank must acquire.

In brief, overall satisfaction with a service arises from a complex and multidimensional process. Thus, developing service marketing theory requires an understanding of customers’ needs to translate these into the delivery of services matching those needs. The research conducted by Parasuraman et al. ( 1985 , 1988 , 1991 ) claimed that the developed theoretical model will successfully act as a basic template for the assessment of service quality. Nonetheless, this research was conducted 30 years ago. Thus, what may have constituted as significant previously may not be entirely relevant to today’s customers.

Based on the explanations mentioned above and like several studies that have used an adjusted version by integrating compliance (Amin & Isa, 2008 ; Owen & Othman, 2001 ) or online banking (Abdullah & Kassim, 2009 ), this study adopts an adjusted SERVQUAL model applicable to the Islamic banking sector as an instrument to measure customers’ satisfaction. Indeed, the original version of Parasuraman et al. ( 1985 , 1988 , 1991 ) also considers two additional dimensions.

The first one, named “compliance,” refers to the ability of the Islamic bank to comply with the rules and regulations of Islamic Shariah and operate under Islamic banking principles. According to Owen and Othman ( 2001 ), this dimension is the most important when assessing customer satisfaction of Islamic banks. In this context, several studies (Janahi & Almubarak, 2017 ; Osman et al., 2009 ) confirm that this new dimension is essential in the study of the relationship between service quality and the level of customer satisfaction of Islamic banks.

The second one, called “digitalization” refers to the extent to which Islamic banks are embracing digital transformation. This factor is defined by variables such as the provision of online services, whether the bank offers electronic payment solutions, whether it is active in social media, and whether it provides mobile banking services and apps. Several authors (Abdullah & Kassim, 2009 ; Isaac, 2011 ; Martins et al., 2014 ) show that the decision-making process for customers has changed with the proliferation of digital technologies and mobile phone devices. Competing in the digital age, Islamic banks must also take the real “digital train.” They must therefore not only meet the religious needs of the Muslim community but above all understand the environment of their future customers and exploit technological advances to meet the ever-growing needs of the digital generation and create an atmosphere where they represent the bank “Most admired” that young people want to work with.

Measurement instrument

A self-reporting questionnaire was designed to take account of previous research. The instrument contains three sections. The first section was designed to elicit demographic information of Tunisian Islamic banking customers. In the second one, the theoretical service quality dimensions as advanced by Parasuraman et al. ( 1988 ) were adjusted by integrating simultaneously two additional dimensions, compliance, and digitalization, to suit the research context. The original items were translated to French since this language is the most used in the business industry in Tunisia. A pre-test was then conducted with some Tunisian Islamic banks’ customers, and minor modifications were made accordingly to ensure that the questions were not repetitive. A total of 28 items are used to capture respondent views about service quality. Moreover, the paper had to deal only with service quality perception to be more effective (Dabholkar et al., 1996 ). Respondents were invited to rate their answers on a five-Likert scale to improve response rate and avoid respondent fatigue (Herington & Weaven, 2009 ). They were required to point out the level of service quality comprising of seven constructs with various statements ranging from strongly dissatisfied to strongly satisfy. The scale was taken from existing research of Naser, Jamal, and Al-Khatib ( 1999 ) and Akhtar, Hunjra, Syed Waqar Akbar, Ur-Rehman, and Niazi ( 2011 ) to measure satisfaction level of employees regarding the service quality provided by bank. Through the latter section, overall satisfaction is measured using a four-item measure identified based on previous studies (Manrai & Manrai, 2007 ; Munusamy, Chelliah, & Hor, 2010 ; Owen & Othman, 2001 ). To ensure the validity of this research study, the respondents were required to respond to each question. SPSS was used for recording and statistical analysis part and linear regression was used to test the model (Akhtar et al., 2011 ; Fakhfakh, Zouari, & Zouari-Hadiji, 2012 ; Zouari, 2008 , 2011 ; Zouari-Hadiji, 2010 ).

Sampling and data collection

Data collection has been made based on an online questionnaire for the customers of the two leading Islamic banks in Tunisia “Zitouna” and “Al Baraka.” The choice of the Tunisian context is justified by the fact that households and firms are increasingly interested in the services provided by Islamic banks especially after the Revolution of 2011. So, it is very useful to study the reality of Tunisian Islamic banks which have specificities compared to their counterparts in particular with the promulgation of the new banking law of 2016 recognizing for the first-time banks which apply Islamic law.

The sample which is composed of 145 respondents from all Tunisian governorates was chosen using the convenience sampling technique Footnote 1 . Based on the general guidelines by prior researchers on the sample size (Boomsma, 1985 , Kerlinger, 1986 and MacCallum, Widaman, Zhang, and Hong ( 1999 ) Footnote 2 and given the number of items used in this study (28 items), our sample of 145 respondents therefore meets the minimum requirements from the statistical perspective. We audited the reliability of the survey results based on the Cronbach alpha coefficient. All service quality dimensions, namely compliance, assurance, reliability, tangibles, empathy, responsiveness, and digitalization showed high reliability (0.815, 0.826, 0.896, 0.835, 0.761, 0.899, and 0.825, respectively, See Table 1 ). Moreover, alpha for the overall model had a high score (0.948). This result is obviously within the range accepted by Nunnally and Bernstein ( 1994 ), indicating the measure was robust.

Examination of demographic characteristics indicates that the percentage of male and female respondents is almost equally distributed among the surveyed Islamic bank customers (48% female, 52% male). The sample consisted mostly of young customers (83% aged between 20 and 38) because they have greater access to technology, and they are more likely to reflect digitally savvy customer needs.

Data analysis and results

Descriptive statistics.

The descriptive statistics of the 28 service quality items as well as four customer satisfaction measurement items are shown in Table 2 . Overall, it seems that Tunisian Islamic banking customers dare not fully satisfied with their banks’ services (mean = 3.44). Concerning service quality dimensions, Tunisian Islamic banks are found to be performing best on “tangibles,” displaying a mean rating of 4.06. More importantly, the “compliance” dimension exhibits the lowest mean rating (3.45). This would imply that Islamic banking customers in Tunisia lack confidence that their banks are compliant with Islamic banking principles.

Service quality measurement

Factor analysis was carried out to establish the factor structure of the service quality model relative to the industry and service context under study. Bartlett’s test for sphericity was used to test the null hypothesis that the correlation matrix between the 28 items has an identity matrix. The null hypothesis was rejected (χ 2 = 2917,128 df = 378, p - value = 0.000, Table 3 ). In the Table 4 , The Kaiser Meyer-Olkin measure of sampling adequacy yielded a coefficient of 0.919 which is interpreted as marvelous (Kaiser, 1974 ). These two tests mean the items have adequate common variance and acceptable factorability (Tabachnick & Fidell, 1996 ).

Thus, the 28 items were factor analyzed, producing five oblique factors to retain given that they have eigenvalues greater than one (Kaiser, 1974 ). Oblique factors were preferred because they rotate to simple structures and agree more with psychological theory than do orthogonal factors (Kline, 2000 ). The five-factor solution accounted for a combined 69.93 percent of the total variance (See Table 5 ). A total of 28 items were loaded on the factors but two items had to be removed because their factor loadings are less than 0.4 (Floyd & Widaman, 1995 ). The reliability of the factors was calculated using Cronbach’s alpha. All five factors demonstrate reliability, with Cronbach’s alphas all above the required 0.8 cut-offs (Hair, Anderson, & black, 1998 ). Factors extracted, along with their labeling and analysis, are discussed hereafter. The first factor is labeled “confidence” and it comprises items from the basic Parasuraman et al.’s ( 1988 ) scale regarding the two dimensions of assurance (items 5, 6, 7, and 8) and reliability (items 9, 10, 11, and 12). The “compliance” factor encompasses the need for confidence about the compliance of Islamic banks with Shariah principles (items 1, 2, 3, and 4). We label the third-factor “digitalization,” as these items pertain to the ability of the bank to offer digitally empowered experience to its customers (items 25, 26, 27, and 28). Consistent with Parasuraman et al. ( 1988 ), the fourth-factor “tangibles” refers to the quality of the intangible aspects and visible attributes of the service (items 14, 15, and 16). The last factor includes items of the responsiveness (items 21, 22, 23, and 24) and the empathy (items 18, 19, and 20) dimensions as proposed by Parasuraman et al. ( 1988 ), accordingly, we named it “human skills.”

Satisfaction

The Kaiser Meyer-Olkin measure of sampling adequacy yielded a coefficient of 0.797 which is interpreted as meritorious. The four items used to measure form a single factor accounting for 70.13 percent of the total variance. A Cronbach’s alpha of 0.841 establishes reliability for the measure (See Table 6 ).

Satisfaction is a cognitive evaluation, while loyalty is related to commitment (satisfaction is a necessary but not sufficient condition to loyalty). We note that these four specific items cover both satisfaction and loyalty measures.

Regression analysis

To study the impact of the service quality factors (the five-factor scores as the independent variables) on the satisfaction of Tunisian Islamic banking customers (the dependent variable), multiple regression analysis was applied. The results of the multiple regression analysis are reported in Table 7 .

The service quality dimensions accounted for a significant amount of variance in satisfaction ( R 2 = 68.3, Fisher = 59.91, p value = 0.000). All service quality dimensions tend to be highly correlated with satisfaction, except for tangibles.

The greatest influence on satisfaction is made by “Confidence” ( ß = 0.376, t student = 4.850, p value = 0.00) and then “Human skills” ( ß = 0.297, t student = 4.127, p value = 0.00). Hence, the need for a positive personal interaction inspiring trust and engagement is a significant predictor of customer satisfaction in Tunisian Islamic banking. The next strongest contribution is made by “Compliance” ( ß = 0.207, t student = 3.895, p value = 0,00). Accordingly, running on Islamic law principles is of special interest to Islamic banking customers. “Digitalization” is found to have the fourth strongest influence on satisfaction ( ß = 0.190, t student = 3.414, p value = 0.001). Therefore, the results show that digitalization of Islamic banking is in the customers’ interest. “Tangibles” makes the smallest contribution ( ß = −0.029, t student = −0.485, p value = 0.628) which is not statistically significant. The results provide predictive validity for the model, with examination of the t values indicating that “Human skills,” “Confidence,” “Compliance,” and “Digitalization” contribute to prediction of satisfaction.

In today’s digital era, Islamic bank managers need to understand what criteria are being used by customers to evaluate their services as consumer behavior patterns are changing due to the current digital trend. The current research makes important contributions to the field of banking services by identifying the major service evaluation criteria for Islamic banking by Tunisian Customers. The analysis of the 28 items expected to assess the service quality in this study allows us to identify five dimensions of service quality in the case of Tunisian Islamic banking. These dimensions are confidence (reflecting reliability and assurance), compliance, digitalization, human skills (reflecting empathy and responsiveness), and tangibles.

In the previous empirical studies, which employed the SERVQUAL instrument in modified form, a wide variety of service quality structure has been revealed, the number varying according to the examined service sector (Buttle, 1996 ). Consequently, keeping in mind that the adjusted SERVQUAL instrument was used in a context (the Tunisian Islamic banking sector) different from those investigated by Parasuraman et al. ( 1991 ), it seems to be not surprising to identify a distinct standard for banking service quality evaluation.

As expected, the findings of this study prove that providing the best service quality may result in higher satisfaction levels among Tunisian Islamic banking customers. This result goes online with previous research that stated that there was a strong link between service quality and customer satisfaction in Islamic banking (Owen & Othman, 2001 ). Although Islamic banking customers are satisfied with the overall service quality provided by their banks, it is not guaranteed that their customers do not switch to other banks. Therefore, Islamic banks need to strengthen their customer relationship management through the enhancement of customers’ trust in Shariah compliance. Our results suggest that Islamic banking customers attach great importance to the compliance dimension. The latter may determine the decision-making behavior of pious customers on whether they will continue the relationship with Islamic banks (Hassan & Lewis, 2007 ). Although Shariah compliance was well ranked as a determining factor, it was not the most significant factor. This result is in line with those of Hayat and Khuram ( 2011 ) who specified that the majority of Islamic banks customers value product features and quality of service as major factors for making a selection of Islamic banks at the expense of religious beliefs. Therefore, Islamic banks need to better examine the drivers of their market identity and must consider service quality as equally important to “Sharia compliance” in designing the marketing strategy of Islamic banking services. The development of valid and distinct measures of service quality according to the upcoming digital customer needs remains one of the most important aspects to make customers, especially with the quick-spreading digital transformation all over the world. Indeed, our results prove that digital banking is a major determinant when it comes to overall customer satisfaction and that Generation Y displays a clear preference for digital channels. That result was not surprising since customers’ intentions to use technology are heavily influenced by their attitude towards technology (Gurjeet & Sangeeta, 2013 ). Given the fact that Tunisia, and the world, by and large, are becoming increasingly more digitalized, the ease of switching banks will increase customers’ expectations (Heffernan, 2005 ). The challenge for Islamic banks is to adapt their strategy to match Millennials’ habits and behaviors who are looking for digital banking offerings matching their lifestyle needs. Be that as it may, some considerations should be taken into account when implementing digital banking. Convenience and security issues play a crucial role (Anthony & Yamit, 2017 ; Mbama & Ezepue, 2018 ). By 2025, Josh ( 2014 ) estimated that Generation Y would represent nearly half of the total active population in the world. Hence, to remain competitive, Islamic banks must thrive to move away from traditional banking to develop products and services that truly reflect the digital transformation of today’s young customers’ demand. More importantly, the research findings suggest that human-based service delivery is the most relevant customer satisfaction criteria most customers ever have. People still like human interaction and trust people more than technology, even if customers are increasingly interacting with technology. This result goes online with Luiz and Smith ( 2000 ) who stated that “bank customers’ attitudes towards the human provision of services and subsequent level of satisfaction will impact on bank switching more than when the same service delivery is made through automation.” Better experiences are not exclusively about better technology. The human resources factor also matters and customers are always in need for a positive personal interaction inspiring trust and engagement (Jabnoun & Al-Tamimi, 2003 ). In other words, digital is not an end in itself, but it is serving as a means to reach the organizational objectives of Islamic banks. Consequently, Islamic banks must leverage appropriate technology to develop new digitalized systems but most importantly commit to a new engagement model that focuses on the human touch while matching the customers’ level of expectation with the new systems. Finally, “tangibles” are found to have the least impact upon satisfaction which is not significant. In our opinion, “tangibles” are important, but automatically expected by Tunisian Islamic banks customers. Islamic banking is a relatively recent phenomenon in Tunisia, and Islamic banks have mostly new buildings and modern looking equipment. Thus, tangibles may constitute a hygiene factor (Herzberg, 1982 ), so that it is considered by customers as an expected requirement but leads to no dissatisfaction rather than satisfaction.

Conclusion and recommendations

A rich stream of literature in the areas of service quality and customer satisfaction has evolved and reproduced over the past two decades. Nevertheless, such studies in Tunisian Islamic banks remain scarce. In this age of digital transformation, Islamic bank managers need to understand what criteria are being used by customers to evaluate their services. This paper highlights the importance of the service quality-adjusted pattern and its potential impact on customer satisfaction of Tunisian Islamic banks. The study proposed that the SERVQUAL dimensions would replicate in the Islamic banking industry but with certain modifications given the foundation philosophy underlying this banking sector. Most importantly, the research proposed that digitalization is an essential determinant of service quality and overall customer satisfaction for today’s digital customers. The findings reveal that Islamic banks need to pay attention to the way the services are delivered and not take it for granted that customers are only focusing on compliance. To remain competitive, Islamic banks must update their service quality set to align with the upcoming digital customer needs. However, it is important not to neglect the core role of human-based service delivery in driving engagement, loyalty, and customer satisfaction.

Limitations and future research

First, further research should be considered to gather more information regarding the impact of the digital transformation on the evaluation of service quality and customers’ satisfaction by Islamic vs conventional banks. Second, the study utilized an average convenience sample instead of a random sample. Therefore, it is suggested to enlarge the sample size for better generalization of the findings in other countries. Moreover, although the web-based survey approach has enabled the research to prevent respondents from submitting incomplete questionnaires, which is an advantage, any study based on a predesigned questionnaire suffers from the limitation of dishonesty and differences in understanding and interpretation. Third, although tests for reliability and validity provide initial support for the adopted measures, there remains a possibility that not all service quality dimensions are captured. Thus, qualitative interviews with customers are recommended to explore any other aspects that may contribute to the development of a more meaningful measurement of service quality. Fourthly, another limitation concerns the strong assumption adopted for the transformation of Likert scales which give ordinal data into a cardinal scale in order to quantify customer satisfaction. Finally, and to test our model, we can future studies can applicate another original method for Measuring and Implementing Service Quality like the multicriteria method dubbed MUSA (MUlticriteria Satisfaction Analysis) Footnote 3 .

Availability of data and materials

All data generated or analyzed during this study are included in this published article (and its supplementary information files).

This is a non-probability sampling technique which implies that the sample was chosen for accessibility reasons (Bryman & Bell, 2007 ).

As the factor analysis method will be used for processing the data collected through the questionnaire, the sample size must meet the requirements of said method. Researchers are far from unanimous on this point. Indeed, some consider that the size of a sample must be greater than 100, that the size of 200 is considered important, and that 50 represents a minimum threshold required (Boomsma, 1985 ). In general, the proposed ratios range from an absolute minimum of 5: 1 (5 responses per item) to an absolute maximum of 10: 1 (Kerlinger, 1986 ). According to MacCallum et al. ( 1999 ), a size between 100 and 200 is recommended.

The chief objective of MUSA is the development of a model able to evaluate the level of customer satisfaction both globally and partially for each of the characteristics or attributes of the product or service being considered. Furthermore, the method aims at providing an integrated set of results capable of analyzing customer needs and expectations and to justify their satisfaction level. (Grigoroudis & Siskos, 2010 )

Abbreviations

Automated Teller Machine

Compliance, Assurance, Reliability, Tangibles, Empathy, Responsiveness

Electronic Fund Transfer at the Point of Sale

Gulf Cooperation Council

MUlticriteria Satisfaction Analysis

SERVice QUAlity

United Arab Emirates

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About the authors

Ghazi Zouari is an Associate Professor in Finance and Accounting Methods at the Faculty of Economic Sciences and Management of Sfax, University of Sfax, Tunisia. He is a Head of the Management Department, Chairman of the Thesis and Habilitation Research Committee, Responsible for a research team at the Research Laboratory of Information Technologies, Governance, and Entrepreneurship (LARTIGE) at University of Sfax and Official subscription representative of the Publishing house “Virtus Interpress.” His domain of expertise is the decision process, organizational architecture, R&D investment, behavioral finance, Islamic finance, FinTech, and corporate governance.

Marwa Abdelhedi is a PhD Student in Finance and Accounting Methods at the University of Sfax, Tunisia. Her main research interests are related to corporate governance, Islamic finance, Fintech, and firm value.

None declared under financial, general, and institutional competing interests.

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Zouari G and Abdelhedi M analyzed and interpreted the association between digitalization and compliance, as a service quality dimension, and customer satisfaction. They proposed an extended SERVQUAL model that has five dimensions of service quality, i.e., confidence, compliance, digitalization, tangibles, and human skills and they demonstrate a positive and significant relationship between the main dimensions of service quality and customer satisfaction, except for tangibles. Consequently, Tunisian Islamic banks seeking performance need to pay attention to the way the services are delivered and not take it for granted that customers are only focusing on compliance. Dealing henceforth with Generation Y customers, digital banking must appear among the Islamic bank features to stay relevant in the Digital Era. The authors read and approved the final manuscript.

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Zouari, G., Abdelhedi, M. Customer satisfaction in the digital era: evidence from Islamic banking. J Innov Entrep 10 , 9 (2021). https://doi.org/10.1186/s13731-021-00151-x

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Received : 22 April 2020

Accepted : 01 February 2021

Published : 26 February 2021

DOI : https://doi.org/10.1186/s13731-021-00151-x

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