iii

BLUE OCEAN STRATEGY ON SERVICE QUALITY IN ISLAMIC BANKING

SECTOR IN JOHOR

ISHAQ JAAFAR

A thesis submitted in

Fulfilment of the requirement for the award of the

Degree Master of Science in Technology Management

Faculty of Technology Management and Business

Universiti Tun Hussein Onn Malaysia

JUNE 2019

v

ACKNOWLEDGEMENT

First and foremost, I would like to express my deepest thanks to الله, the most gracious

and most merciful God for the blessing, wisdom, health, strength and patience that he

gave upon me throughout this adventurous, and exciting master’s journey.

This journey will not be a dream come true without an intellectual who have

been patiently, supportively and continuously encouraging me to keep on working hard

to complete this thesis. From the bottom of my heart I would like to express my

profound appreciation to my main supervisor, PROF MADYA DR. ROSMAINI BIN

TASMIN, for his insights, words of encouragement coupled with this generous and

patient to reviews, comments, and give thoughtful suggestions to improve this thesis.

I am forever grateful and thankful to have met and been given the opportunity to work

with you.

I would like to dedicate these years of hard work and absence to my family

members Maryam, Ibrahim, Muhammad, Abdullah, Sa’adat and other family

members; my father and mother Engineer Jaafaru Yusuf Riogi and Hajiya Halima

Umar for their endless supports, patient and prayers. Also, to my grandparent, “I

dedicate all this hard work to both of you. Your never give up attitude inspired me

throughout this journey”.

I am also particularly indebted to all my respondents for their support and

willingness to spend their precious time and effort to take part in this study. Their

generosity and honesty are greatly appreciated.

My sincere gratitude also goes to Malaysia Ministry of Higher Education, and

Universiti Tun Hussein Onn Malaysia for providing me with such opportunity to study

in Malaysia.

vi

ABSTRACT

Nowadays, exploiting new markets through the provision of quality services has

become a key criterion for achieving competitiveness in the banking environment.

Growth of Islamic Banks in Malaysia is to facilitate the business in terms of products

and delivery of their services that comply with Islamic law. With more studies

conducted on the quality of service related to customer satisfaction, little or no research

exists in linking the values of Islamic services to competitive advantage. Therefore,

the purpose of this study is to examine: the level of service quality in Islamic banks in

the Johor region, the role of blue ocean strategy on competitive advantage, and the role

of quality of Islamic services in competitive advantage. This study uses a sample of

250 responses at four of Malaysia's leading Islamic banks in which 243 valid responses

were taken. The data collected were analyzed with the help of statistical package for

social science (SPSS). The findings show a high level of service delivery among

Islamic banks, with the CARTER model seen as an important dimension by their

respective customers in Malaysian Islamic banks. Discoveries also show a significant

relationship between: the blue ocean strategy and the competitive advantage and the

quality of Islamic services on competitive advantage. The findings show that

Malaysian Islamic banking customers are satisfied with the quality of service

dependent on their respective banks that take care and understand, deliver services as

promised, deliver prompt and Shariah-compliant services. Additionally, the study

confirms that the provision of quality services with regard to Islamic religious beliefs

will serve as a way of exploiting new markets thus offering competitiveness in the

Malaysian banking sector in general.

vii

ABSTRAK

Pada masa kini, mengeksploitasi pasaran baharu melalui penyediaan perkhidmatan

berkualiti telah menjadi kriteria utama untuk mencapai daya saing dalam persekitaran

perbankan. Pertumbuhan bank-bank Islam di Malaysia mengendalikan urusan dari

segi produk dan penyampaian perkhidmatan mereka yang mematuhi undang-undang

Islam. Dengan lebih banyak kajian yang dijalankan mengenai kualiti perkhidmatan

yang berkaitan dengan kepuasan pelanggan, sedikit atau hampir tiada kajian wujud

dalam mengaitkan nilai-nilai perkhidmatan Islam kepada kelebihan daya saing. Oleh

itu, tujuan kajian ini adalah untuk memeriksa: tahap kualiti perkhidmatan di bank-bank

Islam dalam wilayah Johor, peranan strategi lautan biru kepada kelebihan daya saing,

dan peranan kualiti perkhidmatan islam dalam kelebihan daya saing. Kajian ini

menggunakan sampel sebanyak 250 respon di empat bank Islam terkemuka di

Malaysia yang mana 243 respon yang sah diambil. Data yang dikumpul ini telah

dianalisis dengan pakej statistik untuk sains sosial (SPSS). Penemuan menunjukkan

tahap penyampaian perkhidmatan yang tinggi di kalangan bank Islam, dengan model

CARTER dilihat sebagai dimensi penting oleh pelanggan masing-masing dalan

perbankan Islam Malaysia. Penemuan juga menunjukkan hubungan yang ketara

antara: strategi lautan biru dan kelebihan daya saing dan kualiti perkhidmatan Islam

ke atas kelebihan daya saing. Penemuan ini menunjukkan bahawa pelanggan

perbankan Islam Malaysia berpuas hati dengan kualiti perkhidmatan bergantung

kepada bank masing-masing yang menjaga dan memahami, menyampaikan

perkhidmatan seperti yang dijanjikan, memberikan perkhidmatan segera dan

mematuhi syariah. Tambahan pula, kajian itu mengesahkan bahawa penyediaan

perkhidmatan berkualiti dengan mempertimbangkan kepercayaan agama Islam akan

berfungsi sebagai cara mengeksploitasi pasaran baharu dengan itu menawarkan daya

saing dalam sektor perbankan Malaysia secara amnya.

viii

CONTENTS

TITLE i

DECLARATION ii

ACKNOWLEDGEMENT iii

ABSTRACT iv

ABSTRAK v

LIST OF TABLES vi

LIST OF FIGURES vii

LIST OF SYMBOLS AND ABBREVIATIONS viii

LIST OF APPENDICES ix

CHAPTER 1 INTRODUCTION 1

1.1 Introduction 1

1.2 Research Background 2

1.3 Problem Statement 7

1.4 Research Questions 11

1.5 Research Objectives 11

1.6 Justification 12

1.7 Significant of the Research 13

1.8 Scope of the Research 14

1.9 Structure of the Theses 15

1.10 Conclusion 15

CHAPTER 2 LITERATURE REVIEW 16

2.1 Introduction 16

2.2 Strategy 16

2.3 Competitive Advantage 17

2.4 Competitive Advantage Theory 18

2.4.1 Miles and Snow Typology Theory 19

2.4.2 Porters Competitive Theory 21

ix

2.4.3 Tracy and Wiersema’s Strategy 24

2.5 Competitive Advantage Measurement Dimension 26

2.6 Blue Ocean Strategy 28

2.6.1 Concept of Color in Blue Ocean Strategy 29

2.7 Value Innovation: The Cornerstone of Blue Ocean 30

2.7.1 Blue Ocean Dimension 31

2.8 Blue Ocean Strategy as Competitive Advantage 32

2.8.1 Differentiation and Competitive Advantage 33

2.8.2 Low Cost and Competitive Advantage 34

2.8.3 Exploitation of Uncontested Market Space and Competitive

Advantage 34

2.8.4 Opportunity Maximization and Competitive Advantage 35

2.8.5 Value Innovation Strategy and Competitive Advantage 36

2.8.6 Focus on Noncustomers and Competitive Advantage 36

2.9 Concept of Strategy Implementation 43

2.9.1 Concept of Blue Ocean Strategy and Strategic Implementation

44

2.9.2 Six-Path Process 45

2.10 Blue ocean strategy and service quality 48

2.11 The Concept of Quality 49

2.11.1 Concept of Quality Product or Service Features 49

2.11.2 Concept of Quality as Fitness for Use 50

2.11.3 Concept of Quality as Conformance to Requirement 50

2.11.4 Concept of Quality as Associated Features of Products or

Service 50

2.11.5 Concept of Quality as Delighting the Customer 51

2.12 Quality Dimensions 51

2.12.1 Emerging Quality Dimensions 52

2.13 Service 53

2.13.1 Types of Services 54

2.13.2 Characteristics of Service 54

2.14 Service Quality Models 55

2.15 Measuring Service Quality 59

2.16 Perception of service quality 60

x

2.17 CARTER’s Model 61

2.17.1 Compliance 61

2.17.2 Assurance 65

2.17.3 Reliability 66

2.17.4 Tangible 67

2.17.5 Empathy 68

2.17.6 Responsiveness 69

2.18 Islamic Service Quality and Competitive Advantage 70

2.19 Customer Service Delivery in the Banking Industry 71

2.20 Conclusion 72

CHAPTER 3 RESEARCH METHODOLOGY 73

3.1 Introduction 73

3.2 Research Philosophy 73

3.2.1 Ontological Assumptions 74

3.2.2 Epistemological Assumptions 75

3.3 Research Approach 76

3.4 Research Design 77

3.4.1 Research Methodology 78

3.4.2 Hypothesis Development 81

3.4.3 Questionnaire Design 83

3.4.4 Item Selection 85

3.5 Data Collection 90

3.5.1 Population and Sample 90

3.5.2 Sampling Method 91

3.5.3 Determining the Sampling Frame 94

3.5.4 Target Population 95

3.5.5 Sampling Units 95

3.5.6 Sampling Frame 96

3.6 Data Analysis 96

3.6.1 Reliability Test 96

3.6.2 Normality Test 97

3.6.3 Descriptive Statistics 98

3.6.4 Correlation Analysis 98

3.7 Ethical Clearance 99

xi

3.8 Pilot Study 100

3.9 Conclusion 102

CHAPTER 4 RESULTS AND DISCUSSION 104

4.1 Introduction 104

4.2 Reliability Assessment 104

4.3 Normality test 106

4.4 Analysis of Findings 108

4.4.1 Questionnaire returned and usable rate 108

4.4.2 Respondents 108

4.4.3 Gender 109

4.4.4 Age 109

4.4.5 Marital Status 110

4.4.6 Race and Religion 110

4.4.7 Occupation 111

4.4.8 Educational Level 111

4.4.9 Banking Experience 112

4.5 Level of Islamic Service Quality in Islamic Banks 113

4.5.1 Level of Empathy Perception in Islamic Banks 113

4.5.2 Level of Assurance Perception in Islamic Banks 114

4.5.3 Level of Responsiveness Perception in Islamic Banks 114

4.5.4 Level of Compliance Perception in Islamic Banks 115

4.5.5 Level of Tangibility Perception in Islamic Banks 116

4.5.6 Level of Reliability Perception in Islamic Banks 117

4.6 The Relationship between Blue ocean strategy and competitive advantage 117

4.6.1 Elimination dimension has a positive relationship on

competitive advantage. 118

4.6.2 Creation dimension has a positive relationship on competitive

advantage. 118

4.6.3 Reduction dimension has a positive relationship on competitive

advantage. 119

4.6.4 Raising dimension has a positive relationship on competitive

advantage. 120

4.7 Islamic service quality and competitive advantage 120

xii

4.7.1 Compliance dimension has a positive relationship on

competitive advantage. 121

4.7.2 Assurance dimension has a positive relationship on competitive

advantage. 121

4.7.3 Reliability dimension has a positive relationship on competitive

advantage. 122

4.7.4 Tangibility dimension has a positive relationship on

competitive advantage. 123

4.7.5 Empathy dimension has a positive relationship on competitive

advantage. 124

4.7.6 Responsiveness dimension has a positive relationship on

competitive advantage. 124

4.8 Summary of Main Finding 125

4.9 Conclusion 127

CHAPTER 5 DISCUSSION OF RESULTS 128

5.1 Introduction 128

5.2 The Study Findings and the Testing of Hypothesis 128

5.2.1 Hypothesis 1: Testing the Level of Islamic Service quality of

Islamic banks within Johor province of Malaysia. 129

5.2.2 Hypothesis 2: Testing the Relationship between blue ocean

strategy dimensions on Competitive Advantage. 134

5.2.3 Hypothesis 3: Testing the Relationship between Islamic service

qualities on Competitive Advantage. 135

5.3 Summary of the Research 138

5.4 Research Contribution 141

5.5 Implication and Further Research Contribution 142

5.6 Limitation of the Study 143

5.7 Conclusion 143

REFERENCES 141

xiii

LIST OF TABLES

Table 1.1

Table 2.1

Table 2.2

Table 2.3

Difrence between Convention and Islamic Banking

Comparison of Red Ocean and Blue Ocean

Previous Reseach on Blue.Ocean and competitive advantage

The new quality thinking

6

30

39

52

Table 3.1 Average index method scale (Weijters et al., 2016) 85

Table 3.2

Table 3.3

Item scale

Population and sampling size (Krejcie & Morgan, 1970)

86

91

Table 3.4 Number of questionnaire to be distributed based on quota

sampling.

93

Table 3.5 Illustration of Research Frame 94

Table 3.6 The respondents characteristics and demographic information 102

Table 4.1

Table 4.2

Cronbach alpha coefficient (Pallant, 2001)

Cronbach alpha coefficient reliability test in respect of the

research objective

105

105

Table 4.3

Table 4.4

Table 4.5

Table 4.6

The Kolmogorov–Smirnov test

Rate of respondents

Distribution of respondents by banking institution

Distribution of respondents by gender

107

108

109

109

Table 4.7 Distribution of respondents by age 110

Table 4.8

Table 4.9

Distribution of respondents by marital status

Distribution of respondents by race

110

110

Table 4.10 Distribution of respondents by religion 111

Table 4.11 Distribution of respondents by occupation 111

Table 4.12 Distribution of respondents by educational level 112

Table 4.13 Respondents period of experience 112

Table 4.14 Level of empathy dimension in Islamic banks 113

xiv

Table 4.15 Level of assurance dimension in Islamic banks 114

Table 4.16

Table 4.17

Table 4.18

Table 4.19

Table 4.20

Table 4.21

Table 4.22

Table 4.23

Table 4.24

Table 4.25

Table 4.26

Level of responsiveness in Islamic banks

Level of compliance dimension in Islamic banks

Level of tangibility in Islamic banks

Level of reliability dimension in Islamic banks

The Pearson Correlation Test between Elimination dimension and

competitive advantage.

The Pearson Correlation Test between Creation dimension and

competitive advantage.

The Pearson Correlation Test between Reduction dimension and

competitive advantage.

The Pearson Correlation Test between Raising dimension and

competitive advantage.

The Pearson Correlation Test between compliance dimension and

competitive advantage.

The Pearson Correlation Test between Assurance dimension and

competitive advantage.

The Pearson Correlation Test between Reliability dimension and

competitive advantage.

115

116

116

117

118

119

119

120

121

122

123

Table 4.27 The Pearson Correlation Test between Tangibility dimension and

competitive advantage.

123

Table 4.28 The Pearson Correlation Test between empathy dimension and

competitive advantage.

124

Table 4.29

The Pearson Correlation Test between responsiveness dimension

and competitive advantage.variables

125

Table 4.30

Summary of research hypothesis 126

xv

LIST OF FIGURES

Figure 2.1

Figure 2.2

Porters five forces model

Value innovation

24

32

Figure 2.3.1 Four action framework 33

Figure 2.4

Figure 3.1

Figure 3.2

Figure 3.3

Classification of non customers

Conceptual framework

Blue ocean streategy and competyetive advanatge

Islamic service quality and competetive advanatge

38

81

82

83

xvi

LIST OF SYMBOLS AND ABBREVIATIONS

AVE

BNM

BOS

Average variance extracted

Bank Negara Malaysia

Blue ocean strategy

CA Competitive advantage

CFA Confirmatory factor analysis

CIMB

DV

ECRI

IV

IFSB

Commerce International Merchant Bankers.

Dependent variable

Elimination, Creation, Reduction and Increase

Independent variable

Islamic financial service board

LV

M

MAYBANK

ML

O

Latent variable

Mean

Malayan Banking Berhad

Maximum likelihood

Original Sample

Q

RHB

ROS

SEM

Quality

Rashid Hussain Berhad

Red ocean strategy

Structural equation model

SPSS Statistical package for social science

STDEV

SQ

VAF

Standard Deviation

Service quality

Variance accounted for statistic

1

CHAPTER 1

INTRODUCTION

1.1 Introduction

This chapter focuses on the introduction of the research which consists of research

background, problem statement, the objective of the research, scope of the research,

and the research significance. Also, the last part of the thesis chapter outlines the

organization of each chapters relating to the research.

The financial institution history is moderately related to money, however,

transaction began most likely before money was been developed. The first main type

of transaction comprises the exchange of goods to goods and which were later changed

to valuable metal like gold. Such valuable items were safely kept in the temples and

different places that were considered at that time as the perfect spot for putting and

storing great and valuable items. The role played by the financial institution is similar

to what it is before, however, it is hard to consider our daily activities without involving

banks. Banks as a business organization go about their business as delegates by

acknowledging deposit from savers and offering loan to borrowers for investment and

they spread between the loan fee paid to contributors and that charged to the borrower

is the benefit or the interest income to the bank. They likewise provide some services

like a letter of credit, delivery certification, banker's acknowledgment, et cetera.

On a basic principle level, these different services are provided by banks and

other related financial and non-financial institutions which are specifically provided

through the capital market. Banks and other financial institutions exist since they are

an effective reaction to the way that information is expensive. With such information,

banks have some expertise in evaluating the credit value of borrowers thereby giving

2

a continuous observing capacity to guarantee that such borrowers can meet their

commitments. They are remunerated for these services by the spread between the rates

they offer to the collected pool of savers, and the rates they offer to potential borrowers.

This procedure is known as maturity transformation, which is at the heart of every

present-day conventional banking system. Banks offer a repository for savings, and

after that change them into extensive (illiquid) assets – housing credits and loaning to

organizations. Also, banks assume a part in giving instalment and settlement services

which are essential for household, business and other money-related establishments to

settle the everyday transaction.

However, an effective and powerful banking system helps to impact the

development and growth of a nation in various divisions of a country economy. The

banking industry overall faces countless difficulties in the global marketplace. Despite

the level of intensity in terms of competition in the banking environment, a bank's

performance should be checked cautiously. Banks are frequently checked for different

reasons. From an early recognition of slow growth in their performance, the bank

regulators can distinguish banks that are encountering issues with the aim that they

could be remedied.

Most importantly, banks additionally assess their own performance time after

time so as to decide the results of past management decisions, with the goal that

progressions can be made where fitting. Furthermore, any current development in

terms of the modern financial system such can contribute toward its economic

development and advancement in the living standard by giving different services to

the rest of the economy. These incorporate clearing and settlement frameworks to

encourage trade, channelling financial resources amongst savers and borrowers, and

different items or product to deal with hazard and instability.

1.2 Research Background

The Malaysian economy is regarded as one of the fastest growing economies in the

world. Starting from the 1970s, Malaysia has steadily diversified its economy from the

main production to a multi-sector economy. Such development has impacted

Malaysian economy to be characterized among the top three ASEAN members after

Philippines and Indonesia. Malaysian gross domestic product grew by 4.2% in the

3

period of 1957-2017. Also, Malaysian gross domestic worth stood at 296.4 billion

dollars in 2017 according to the world bank (IFSB, 2017).

With the current challenge which exists in the external environment such as

economic recession, Malaysian economy is witnessing a continuous economic growth

and most of which is attributed to the banking industry. The genesis of banks in

Malaysia can be traced back to the 19 centuries with the establishment of the

Mercantile bank (HSBC) which was formally established to promote business and

economic growth within Malaysia. However, with the current level of competition

coupled with wrongful financial practice within the banking environment led to the

creation of an agency known as Bank Negara Malaysia (Central Bank of Malaysia)

which was established in 1957 for the purpose of conducting proper supervision and

overseeing the banks activity within the banking sector with the aim of achieving

sustainable economic growth that will benefit the nation’s economy.

Given the aftermath of the financial meltdown of 1997 in Asia, Bank Negara

Malaysia introduced a standard policy which was called the master plan in the year

2001. The master plan policy focusses mainly on influencing Islamic banking system.

This has resulted in the inauguration of a dual banking practice in Malaysia that is the

utilization of both Islamic and conventional banking within the banking environment.

However, Islamic banks have been in existence as early as 1983 with Bank Islam being

the first Islamic bank in Malaysia. Subsequently, there has being a sustainable increase

in Islamic banking practice due to the world economic turmoil. With such high interest

in Islamic banking, Malaysia is fast becoming a leading force in the Islamic banking

in the world with Iran coming in second place.

Islamic banking has long been in existence within most Islamic countries with

countries such as Malaysia, Turkey, Egypt, Iran, Indonesia, Bahrain and Saudi Arabia

which both countries have benefitted anonymously to its economic growth. According

to IFSB (2017) report, since 1970’s Islamic banking assets were recorded at $1.493

trillion in 2016, with more than 300 Islamic institutions operating within 75 countries

with each and every nation expecting a considerable economic growth in their banking

system (Boudjelal 2006). Islamic banking as a financial institution abide strictly to

Islamic laws which are termed “Shariah law”. The Islamic banking system concentrate

solely on two fundamental principles which are a mutual risk and profit sharing

between parties involved i.e. the bank and the customer’s relationship. In line with the

contract definition which is part of the Islamic banking principles, all related

4

transaction should be related to the business activity and asset. Such principles are

strongly supported by Islamic law because it encourages such activities that manage

entrepreneurship activities and trade which tend to provide more benefits and

economic progress to a given nation. In relation to the Islamic banking principles, all

business activities that involve in the provision of interest (Riba) are generally

prohibited.

The prohibition of interest serves as a silver lining that differentiates the

Islamic banking offering in comparison to the conventional banking system. The non-

acceptance of interest in Islamic banking, is based on the Islamic rule which describes

the act of pricing money as intolerable and unacceptable. This has influenced Islamic

institution toward the non-implementation of a specific fixed rate on return on deposit

and interest on the loan which is contrary to every other conventional banking practice.

Nonetheless, the rights and responsibilities of both parties to a contract in Islamic

banking system are classified highly as transparent and frank. Inevitable to their

business environment and business practice, there is a clear distinction between

Islamic banks and conventional banks with the former to be cornered to be more ethical

and efficient. This is based on the fact that Islamic banks care mainly on the

development of the national economy with little emphasis on itself. This is achieved

with the aim of providing more economic benefit to the community in a diversified

way rather than pure profit, and finally Islamic banking system is built in a manner

that is considered to be safer from the risk of financial stress stemming from

speculative activities (Zaher & Hassan, 2001).

Contrary to the Islamic banking system, the conventional banking system was

established primary based on the provision of a fixed rate of interest. Furthermore, it’s

also known as the pure interest model bank. As business firms, they serves as

intermediaries that borrow from its savers, which leads to paying interest to them and

also lending to borrowers that leads to accumulating interest in the favour of the bank.

The existing relationship between the customer and the bank is more based on debtors-

creditors relationship. Such relationship comes into play when a bank accepts deposit

from its depositors, in such instance, banks are classified as debtors whereas the

debtors are classified as the creditors. Considering a scenario, where loan is being

provided to the borrower, the relationship will be considered vice versa. The reason by

which conventional banks do provide interest as earlier stated is to create a positive

interest gap. The consequence to that, conventional banks operates in a form that

5

guarantees its success which is realized from the profit derived from the business

environment. However, the conventional bank operates in various forms, one of such

is the commercial banking system where such banking institution engages in

generating profit from margins between the interest rate of the borrower and the

interest rate of lending. Also, conventional banks operate in a form of investment

banks which is considered similar to the client’s agents. In such a pattern, they act as

underwriters for cooperation’s, institutions and government by providing bonds and

another sort of security which is related to raising capital. However, such banking

system does not accept any form of deposit from lenders and also do not provide any

form of loan facilities to its clients. More importantly, they provide services such as

trading of derivatives, fixed income instrument, foreign exchange and stock to the

business corporation. Lastly, the existence of the universal banking system which

engages in a different form of operations such as trading, insurance and investment. In

fact, the universal banking system offers service which is attributed to commercial

banks and investment banks. Such services provided by the investment banking

institution include credit, deposits, loan, and customer advisory in investment projects

and security transactions.

Therefore, Table 1.1 clarifies the differences between conventional and Islamic

banking. For example, from the viewpoint of business policy Conventional banks are

set to maximize the shareholder's value as their main task, whereas Islamic banks have

dual target that is the implementation of Islamic Law objectives and profit making.

The implementation of such Islamic laws can be ascribe as difficult in different

regulatory and competitive environments and could actually make Islamic banks more

risky keeping in mind that the confidence of depositors and investors is difficult due

to Shariah compliance risk.

6

Table 1.1 Fundamental differences Conventional banking and Islamic banking

Conventional Banking Islamic Banking

1. Conventional banks functions and

operating based on principles that are man-

made.

1. Islamic banking functions and operate based

on the principles of Islamic Shariah.

2. The investor is guaranteed a fixed rate of

interest.

2. In contrast, it promotes risk sharing between

provider of capital (investor) and the user of

funds (entrepreneur).

3. It aims to maximize profit without any

restriction.

3. It also aims to maximize profit, but subject

to Shariah restrictions.

4. It does not engage in the provision of zakat. 4. In the modern Islamic banking system, it has

become one of the service-oriented functions of

the Islamic banks to collect and distribute

zakat.

5. Lending money and getting it back with

interest is the fundamental function of the

conventional banks.

5. Participation in partnership business is the

fundamental function of the Islamic banks.

6. The scope conventional banking activities

is narrower when compared with an Islamic

bank.

6. Its scope of activities is wider when

compared with a conventional bank. It is, in

effect, a multipurpose institution.

7. It can charge additional money (compound

rate of interest) in case of defaulters.

7. Islamic banks does not charge any extra

money for their defaulters.

8. It makes no effort to ensure growth with

equity

8. It gives due importance to the public interest.

Its ultimate aim is to ensure growth with equity.

9. For interest-based commercial banks,

borrowing from the money market is

relatively easier.

9. For Islamic banks, it is comparatively

difficult to borrow money from the money

market.

11. Conventional banks place greater

emphasis on creditworthiness of the clients.

11. Islamic banks, on the other hand, place

greater emphasis on the viability of the project.

12. The status of a conventional bank in

relation to its clients is that of creditor and

debtors.

12. The status of the Islamic bank in relation to

its clients is that of partners, investors, and

traders.

In the age of globalization, achieving a high level of superior performance is more of

a difficult and challenging task especially in the service sector. In order to face this

challenging and highly demanding task, many organizations such as banks have

engaged in modifying and improving the quality of their service. Service quality is an

important component in any service sector because service quality helps to maintain

and provide a competitive edge in the marketplace. Therefore, service quality is an

important strategic tool that gives an edge in relation to competition and increases

profitability in a business organization (Tam, 2004). A lot of service industries are

using such a strategic component to attract, convince, and retain customers.

The banking industry has experienced a steady change in terms of being aware

of the continues changing requirements of the economy (Abdullah et al., 2010). As

indicated by Auka, Bosire & Matern (2013), service quality is one of the basic

achievement that figures the impact of the aggressiveness of an organization. A bank

can separate itself from contenders by providing quality service. Likewise, the client

7

won't hold or buy service items from the bank if its related services are poor. In the

event that the bank guarantees the service quality, then the client will be faithful to the

bank to take the service. Clients feel secured when they get quality service. Therefore,

the principle obligation of the bank is to guarantee the quality service to the planned

clients. Researchers such as Vershinina (2017), Lovelock & Wirtz (2007) have both

demonstrated that the act of providing great service quality to clients retains them,

pulls in new ones, positive informal proposal, upgrades corporate picture, ensures

survival and profitable (Negi, 2009; Riadh Ladhari, 2008). It is imperative for banks

to comprehend the changing client needs and receive the most recent data innovation

framework keeping in mind the end goal is to contend in an efficiently and effectively

manner with worldwide organization (Malhotra, 2004; Malhotra & Mukherjee, 2004).

Buyers and consumers everywhere throughout the world have turned out to be greater

quality cognizant; hence client needs for higher quality service must be expanded (Lee

& Lin, 2005). So, the mentality of the business environment identifies the client’s

needs as a puzzle, and whoever sort the pieces out correctly, end up capturing a new

market share in which will make competition irrelevant, which is the key to achieving

a blue ocean strategy.

As indicated by Saravanan, Rao & Excellence (2007), service quality has been

characterized as the competitive edge in the service industries, as various business

organizations endeavor to keep up an upper hand in the commercial center and

accomplishing consumers loyalty and satisfaction. The financial services, especially

banks, compete in a market with for the most part undifferentiated products; in this

way service quality turns into an essential focused weapon (Stafford, 2006). Literature

has demonstrated that giving quality service to clients holds them, pulls in new ones,

upgrades corporate picture, prompt positive referral by overhearing people's

conversations, or ensures survival and productivity (Negi, 2009; Ladhari, 2009).

1.3 Problem Statement

The presence of Islamic banking in today’s economic environment is considered to be

the modern development of the financial industry, with the first Islamic financial

institution established around 1950s. But most accurately, the first attempt at Islamic

banking system in Malaysia can be traced back in the mid-1940s, with the main

8

objective of this institution was to invest in prospective pilgrim savings in the real

estate and plantations which were in accordance with Shariah, which was

unsuccessful. Since its establishment, Islamic banks have been operating alongside

conventional banks. Islamic banks much like conventional banks mobilize deposits

and generate loans but adhere strictly to the prohibition of interest which are either

paid or taken, whereby transactions are in accordance with Islamic Shariah law. In

Malaysia, the characteristics of Islamic banks are not merely of interest to Muslim

customers but clearly non-Muslims customers see benefits from such a system. For

Muslim customers, they have an opportunity to invest in a bank that operates based on

their religious beliefs. Meanwhile, non-Muslim customers also have the same

opportunity to choose to invest their money in Islamic banks or conventional banks.

In this situation, Islamic banks is competing the same market segmentation with

conventional and foreign banks. Although, there is a difference between Islamic banks

and conventional banks, they are nonetheless competing in the same market in terms

of offering complementary products and services.

Since its introduction to the financial market in the early 1970s, Islamic finance

products and services has largely increased with a market size of more than the US.

1.9 trillion (IFSB, 2017). According to Young (2016), there are more than 500 Islamic

institutions that exist worldwide. This is largely associated with the current growth of

the Islamic finance which has been attributed towards its economic growth coupled

with the search for funds that are considered a halal or lawful or clean investment. In

the process of selecting an Islamic bank, business clients and investors would love to

gain a good return on their investment with banking firms and financial practice that

adhere to their religious beliefs (Zainordin et al., 2016). The growth in today’s Islamic

banking can be realized at the global stage with a major financial institution not

primarily Islamic banks such as HSBC, Citibank, Deutsche Bank, USB, and Standard

Chartered are presently engaged in providing Islamic product and services through

Islamic windows and with such business line serving as a potential engine of business

growth and also a threat in terms of the growth of the main Islamic banking firms.

However, giving the involvement of non-Islamic banks in the provision of

Islamic bank products and services, the general perception of the public regarding the

financial services and products offered by Islamic banks are similar to conventional

banks and therefore both contain the element of interest when product prices are

considered. As the system is in the evolving stage so there are many factors that hinder

9

its acceptability amongst the general public as people are confused about the Shariah

(law of Islam) compliance of its products. Moreover, Islamic banks might be offering

financial solutions which might not be having as attractive returns as conventional

banks. So if all the principles of Islamic laws are not followed, customers may be at a

disadvantage and suffer loss due to some constraints in the contract.

Moreover, a high level of competition exists in the banking sector globally and

specifically in Malaysian banking today. The growth of Islamic banking has created

competition not only among Islamic banks but with conventional banks as well. So

from the customer’s perspective that is by considering it Muslim and non-Muslim

based customers, there is the need to know how such a banking solution is more

economical and flexible.

Shari’ah-compliant is simply the benchmark or trademark that define Islamic

banks from its fellow counterpart. However, Islamic banks are extremely facing

competition within the Malaysian market, which necessitates great customer service

as a must. The development of Islamic banks is becoming increasingly challenging

with more conventional banks to participate and provide banking products and services

based on Islamic principles (Islamic Funds). Thus, it is very important for banking

firms within the Islamic banking industry to better position them self in order to

confront and respond vigorously to the robustness of the local financial environment.

This makes service quality and value innovation a superior strategic choice to compete

through in the financial market. Therefore, competing through such value innovation

and the provision of superior quality will help in maintaining their customer base and

attracting new ones. Especially with the increase in customer awareness in terms of

religious values and the tremendous choices available to select a certain financial

institution or bank over another, plus the deregulation of the financial service industry

that granted the foreign banks presence in the local market have all contributed to

increased recognition that service quality is centrally an important determinant shaped

customer satisfaction in the case of banks.

In response to the increasing competition stemming from the entrance of new

players into the market, existing conventional banks have started to leverage on their

natural competitive advantages, which include customer loyalty, sensitivity to

religious practices, and a stable base of cheap deposits (Janahi & Al Mubarak, 2017).

In particular, it can be observed that customers are considering and encouraging

Islamic banking transactions regardless of the higher return offer by conventional

10

banks due to its stability, especially after the financial crisis of 2008. This further

increases the competition between Islamic and conventional banks, forcing Islamic

banks to enhance their commercial entrenchment, develop relevant business models,

strengthen their brands and reputation, and provide innovative solutions to a growing

number of clients attracted by the concept of interest-free banking.

In addition, with the lowering of entry barriers and moving towards financial

integration and liberalization, banks are functioning under increasing pressure from

their competitors; hence it is vital that banks maintain a loyal customer base in order

to improve their market position. Consequently, as the practice demonstrates, many

banks are directing their strategies towards increasing customer satisfaction and

loyalty through improved service quality and value recognition. Moreover, with the

advent of international banking and innovations in the market place, customers are

having greater difficulty in selecting one financial institution from another (Dahari et

al., 2015).

With local conventional banks such as Rashid Hussain Berhad, Commerce

International Merchant Berhad, Malayan Banking Berhad and Public Bank adopting

an Islamic model in its operations, which seems rational, as real estate financing is

very well adapted to profit from two main strengths of Islamic banks: customer loyalty

and access to cheap funding. The Banking industry in Malaysia may witness more

banks converting to Islamic finance in a bid to tap into the rising demand for Shari’ah-

compliant products and to avoid the heavy investment required to launch new banks.

However, the idea of Islamic banking is relatively young, and many are unaware of it,

as people tend to deal with highly experienced conventional banks that offer a wide

range of financial instruments. It is therefore unlikely to see them switching to Islamic

banking unless it offers them something extra. Accordingly, it is important for Islamic

banks to be heavily involved in marketing their products and services and educate

people about what they really offer rather than just relying on religious value as

patronizing factors (Amuda, 2015).

There are 16 Islamic banks operating within Malaysia banking industry

constituting of both local and foreign-owned banks (BNM, 2015); nonetheless, the

Islamic banking market is not yet crowded, with only a few midsize Islamic banks

competing in each domestic market, compared to the conventional spread. The reason

is that most foreign conventional banks had not wanted to invest a large number of

resources in Islamic banking because of its short track record, the higher returns in the

11

conventional market, and the uncertainties about its legal and regulatory environment.

Yet as a result of the supportive government policies toward the encouragement of

Islamic finance as part of its offshore banking and financial activity, the Malaysian

regulatory body is participating in changing the picture by emphasizing on the

importance of a sound legal framework of Islamic banking transaction.

Moreover, it evident that banking texts and journals address the general subject

of Islamic service quality in a limited manner. However, little significant mention is

made relating to predicting Islamic service quality as an un-exploited business

environment toward achieving competitive advantage. While the literature is replete

with empirical studies on service quality, customer loyalty, customer retention, and

customer relationships in general, there is a scarcity of empirical studies relating

specifically to predicting competitive advantage. Therefore by considering the state of

the literature in predicting Islamic service quality by examining Islamic bank in the

Johor province of Malaysia, it becomes obvious this is an area that has not been

thoroughly researched.

Therefore, the rising circumstance requires the evaluation of Islamic service

quality in connection to a competitive advantage and to help Malaysian banks to

enhance its service delivery and improve fulfilment and satisfaction in order to

guarantee client retention.

1.4 Research Questions

i. To what extent is the level of Islamic quality within the province of Johor in

Malaysia?

ii. Is there a relationship between blue ocean strategy and competitive advantage?

iii. Is there a relationship between Islamic service quality and competitive

advantage?

1.5 Research Objectives

Specifically, the following objective were set to be achieved:

i. To inspect the level of Islamic service quality within the Johor province of

Malaysian Islamic banks.

145

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