Islamic Deposits and Investment

products

MBA -Week 1&2

Dr Dzuljastri Abdul Razak

Associate Professor

Dept of Finance, KEMNS

International Islamic University Malaysia

(dzuljastri@iiu.edu.my- 16.01.12-updated )

TOPICS

1. Overview of Islamic Banking and Profit

Sharing Operations

2. Deposits and Investment Products

3. Marketing Aspects of Islamic Financial

Services

1. Overview of Islamic Banking and

Profit Sharing Operations.

Global overview of Islamic Finance

Annual growth at 15-20% (Abdul Razak,2011)

Shari’ah-compliant assets are estimated at

$895billion in 2010. (The Banker, 2010)

Islamic finance has spread in more than 400

countries globally.

According to the Vatican, “The ethical principles

on which Islamic finance is based may bring

banks closer to their clients and to the true spirit

which should mark every financial service”

(Bloomberg.com, 2010)

4

5

Malaysia’s aspiration in Islamic finance

•Aspiring to become the international center for

Islamic finance

•The only country with a complete banking and

Takaful system

•Premier country in the issuance of Sukuk globally

•More than 88% of stocks in Bursa Malaysia are

Shari’ah compliant

INTERNATIONAL ISLAMIC BANKING SCENE

•Islamic banking emerged as a new reality in the

international financial scene since 1970s. Its

philosophies and principles are based on Shariah

principles, outlined more than 1,400 years ago.

•The emergence of Islamic banking is related to the

revival of Islam and the desire of Muslims to live all

aspects of their live in accordance to the teachings

of Islam.

INTERNATIONAL ISLAMIC BANKING SCENE

• Islamic financial products are aimed at individual

and business who wish to comply to Islamic laws

(Shariah).

• The annual growth of Islamic financial institutions

(IFI) is estimated to be 15% worldwide (past 10

years)

• According to Standard & Poor, growth rate of

Islamic Banking outpaced conventional banking

(past 10 years) with asset amounting to US 200bil-

US300bil

• - Global Market Size

US Equity Market US$ 12.7 trillion (46% Global)

Global Equity Market US$ 27.0 trillion (Estimate)

Islamic Equities @ 30% US$ 8.0 trillion (Potential)

Islamic Financial Assets US$ 400 billion (UAE MOF)

US $ 700 billion (Dec. 2007)*

Islamic Money Market US$ 30 – 50 billion

Sukuk Market US$ 17.98 billion (LMC)

(Source : IIFM & LMC, 2005)

* Growing at 15-20% p.a. (Mckinsey) Islamic asset to hit U.D 1.4 trillion by 2010 ( zawya.com)

INTERNATIONAL ISLAMIC BANKING SCENE

$25

Billion $400

Billion

INTERNATIONAL ISLAMIC BANKING SCENE

- Estimated Islamic Financial Market Size

$8

Trillion

$2 Billion

ESTIMATED GLOBAL ISLAMIC MARKET

average annual growth rate between 10-20% over the past decade

Islamic

Financial Asset

Islamic Equity

Islamic

Money Market

Takaful

(Sources : IIFM, LMC, SC & BNM)

“Islamic banking refers to a system of banking or

banking activity that is consistent with the

principles of Islamic law (Shariah) and its

practical application through the development of

Islamic economics. Shariah prohibits the payment

of fees for renting of money (riba, usury) for

specific terms, as well as investing in business

that provides goods or services considered

contrary to its principles”

( http://en.wikipedia.org/wiki/Islamic_banking/2/3/09 - 6.45 pm)

A definition of Islamic Banking

“Islamic bank” means any company which carries

on Islamic banking business and holds a valid

license; and all the offices and branches of such

a bank shall be deemed to be a bank”

“Islamic banking business” means banking

business who aims and operations do not involve

any element which is not allowed by the Religion

of Islam”

ISLAMIC BANKING ACT 1983

Religious ethical and societal considerations do not

apply in conventional banking which adopt a capitalist

framework which main objective is profit maximization

and not bound by religious obligations. Hence,

conventional banks are free to provide loans to

customers, use interest rates as its pricing mechanism,

avoid risk and emphasize on profit making that may

infringe the Shariah namely riba, gharar and maisir

Implications of conventional banking

• Comprehensive Islamic financial system covering all financial sectors

– operating in parallel with conventional financial system

• Diversities of players

- 2 domestic Islamic banks (Bank Islam and Bank Muamalat)

- 3 full-fledged foreign owned Islamic banks

(Kuwait Finance House, Al-Rahji Bank and Asian Finance Bank)

- 7 Islamic banking subsidiaries (May bk-i, RHB-i, HSBC Amanah, OCBC i)

- 12 full-fledged Islamic banking institutions

- 9 takaful operators

• Sound and robust Islamic financial institutions governed by

international best practices

• Rapid growth with wide range of product and services

– Retail, corporate & investment banking

• Internationally integrated with international Islamic financial system

MALAYSIAN ISLAMIC BANKING SCENE (March 2006)

MALAYSIAN ISLAMIC BANKING SCENE

- Growth

• Market share of Islamic banking sector

(as at March 2006) (Dec 2008)

• Assets : 11.6% or RM113.5 bil

: 17.4 %

• Deposits : 11.6% or RM85.0 bil

: 18.4 % or RM 92 bil

• Financing : 15.7% or RM67.5 bil

• : 19.1 % or RM 108 bil

• Growing at 18-20 % p.a. since 2000 (international 15-20 %)

Source: BNM Annual Report

Industry's targets

• Financial Sector Master Plan has laid out overall objective of

creating an efficient, progressive and comprehensive Islamic

financial system that contributes to the Malaysian financial sector.

•The targets set by BNM for financial institutions offering Islamic

Banking as a percentage of entire banking industry under the

following horizon : -

Year Dec-2001 Dec-2004 Dec-2007 Dec-2010

Target 8% 11% 15% 20%

Performance of Islamic financial markets (as at March 2006)

• Active money market activities :

• monthly trading & investment turnover of RM21 billion

• Wide range capital market investment avenue:

• Islamic Private Debt Securities (PDS) 40% of outstanding PDS

• Over 80% Shariah approved counters on Bursa

• Over 70 Islamic unit trusts

• Issuance of first Islamic residential mortgage backed securities of RM2.05

billion based on musyarakah concept by Cagamas MBS Berhad

• RM400 million BNM Ijarah Sukuk issued in February 2006

• Malaysia issued world’s first global Sukuk in 2002 amt. USD 600 mil.

• From 2008 onwards, the international Sukuk issuance is estimated to

average USD 40bil a year, with total issuance to reach USD 2 trillion in 2010*

• Islamic Finance pg 16. August/September 2008

• (Sukuk are tradable fixed income securities similar to conventional bond but structured to meet

Shariah requirement representing ownership of an asset)

MALAYSIAN ISLAMIC BANKING SCENE

-Growth

CHALLENGES AND PROSPECTS OF ISLAMIC BANKING

CHALLENGES Regulatory and tax

issues

Product

Development &

Innovation

Human Capital –

Skills & Expertise

Marketing &

Distribution

Channels

Building Credibility

& Confidence

Competition with

conventional banks

Shariah

Harmonization

Risk Management

ISLAMIC FINANCIAL PRINCIPLES

• Islamic approach in business is based on

stipulated Shariah principles and requirements

• Islam has developed its own unique way in

dealing with all aspects of life either business,

economic and social aspects

• Hence we cannot compromise with the Shariah

requirements in the development of Islamic

banking.

FRAMEWORK FOR PROFIT SHARING & DISTRIBUTION

SOURCES OF FUND USES OF FUND GROSS LESS COST DISTRIBUTABLE INCOME

INCOME

#

•Wadiah Savings/

Students S/As

•Wadiah Current Accont

•Mudharabah Current

Account

•Mudharabah General

Investment Account

• Mudharabah Special

Investment Account

Interbank

Investment

Working

Capital

•BBA Financing

•BBA Refinancing

•Study Financing

•SME Financing

• Unit Trust Financing

•Trade Financing

•Interbank Investment

•Malaysia Government

Investment Certificate

•Islamic Acceptance Bill

•Islamic Debt Securities

Gross

Income

minus :

•General Provision

•Interbank

Investment Cost

•Reserve Cost

•WorkingCapital

Income

Distributable

Income

Bank

(25%)

# Less Statutory Reserve Requirements

Customer

(75%)

OPERATIONS OF ISLAMIC BANKING WINDOWS

IN COMMERCIAL BANKS UNDER DUAL BANKING SYSTEM

CONVENT.

FUND

DIVIDEND

FOR

INVESTOR

INTEREST

TO

CUSTOMER PROFIT

FROM

FINANCING

Islamic Banking

System (IBS)

CONVENTIONAL

INTEREST

INCOME FROM

CUSTOMER

INTEREST FROM

MONEY MARKET

OPERATION

FUND FROM

CUSTOMER/

CAPITAL

FUNDS FROM

INVESTOR/

ENTREPRENEU

R

IBS

FUND

PROFIT FROM

INVESTMENT

PRE- REQUISITE FOR SPI IMPLEMENTATION

Separate working fund from conventional banking

Operations and accounting system separated from conventional

Syariah Panel members to oversee operations and product

development conform with the requirements e.g. no interest

involve, no ambiguity in transaction, investment to be made in permissible business only.

22

N Islamic Banking Conventionalbanking

1 Philosophy is based on Shari’ah

and Tauhid

Philosophy is based on human

theories

2 Financing related to the real

economy i.e asset being financed

Financing is detached from the

real economy i.e not related to the

asset being financed

3 Financier must owned asset being

financed

Possession of asset is not required

4 Partnership concept Debt based concept

5 Money is a medium of

exchange

Money is a commodity

6 Risk is shared Risk is transferred

Comparison between Islamic Banking vs. Conventional

Banking

2. Deposits and Investment Products

(2) TYPES OF DEPOSITS AND

INVESTMENT PRODUCTS

•Wadiah Savings Account

•Wadiah Student Savings Account

•Wadiah Current Account

•Mudharabah Savings Account

•Mudharabah Current Account

•Mudharabah General Investment Account

COMPARISON BETWEEN

ISLAMIC AND CONVENTIONAL DEPOSITS PRODUCTS

Types of Product i) Conventional ii) Islamic

i) Conventional a) Savings Account

b) Fixed Deposit Account

c) Current Account

ii) Islamic

a) Wadiah Savings Account

b) Mudharabah General Investment Account

c) Mudharabah Current Account

Guaranteed

Custody

Return (hibah)is at bank’s

discretion (Wadiah)

Profit-sharing

between bank and

customer

(Mudharabah)

Return is

fixed at the

beginning

of the contract.

Example:

3.5% p.a for

Fixed Deposit

Account

TERMS OF ACCEPTANCE OF DEPOSITS

GUARANTEED SAFEKEEPING

(WADIAH)

PROFIT SHARING INVESTMENT

(MUDHARABAH )

CONCEPT OF MUDHARABAH

A contract where one party provides the capital

(customer) and the other (bank) provides the

expertise in business.

The profit derived from the business will be

shared based on a pre-agreed profit sharing

ratio between the customer and the bank. Loss

will be borne by the capital provider

CONCEPT OF WADIAH

Wadiah is a contract (akad) between the owner

of the asset (customer) and the custodian (bank)

to safeguard the asset on behalf of the customer.

This is applicable to Savings and Current A/Cs

Types of Wadiah:

•Wadiah Yad Amanah - Trustee Custody

•Wadiah Yad Dhamanah - Guaranteed Custody

Wadiah

Yad Amanah

Trust Yad Dhamanah

Guarantee

•Custodian of goods act as trustee but not obliged to replace the goods if accidentally lost or damaged

When: •Goods are pooled together not segregated •Custodian utilizes the goods in business •Custodian can impose service charges •Owner gives custodian consent for use of goods

Wadiah Yad

Amanah

Wadiah Yad

Dhamanah

CONSENT GIVEN BY

WADIAH SAVINGS/CURRENT A/C CUSTOMERS

TO USE THEIR FUNDS

Savings accounts may be opened for:-

Individuals

Minors

Joint (two or more individuals) parties

* Societies, associations and institutions other than firms, corporations and

business enterprises

Hibah computation is based on the followings:-

Principal (P) X Time (T) X Rate quoted *

Wadiah Savings A/C

Example: Tier Range Rate (% p.a) Tier 1 Up to RM 1,000 1.05 % Tier 2 RM 1,001 to RM 5,000 1.85 % Tier 3 RM 5,001 and above 2.54 % Hence compute WSA with balance of RM 7,000 for whole of

January 03 based on the above hibah rates. 31/365 X 1.05% X 1,000 = RM 0.89 31/365 X 1.85% X 4,000 = RM 6.28 31/365 x 2.54% x 2,000 = RM 4.31 Total hibah = RM 11.48

Multi – hibah rates

(effective 16/12/06-15/01/07 and 16/01/07- 15/02/07)

Profit Distribution

Please refer to handouts on profit computation (excel

spread sheet)

Please compute hibah based on the following information ? (effective 16/12/06-15/01/07 and 16/01/07-15/02/07) Example: Tier Range Rate (% p.a) Tier 1 Up to RM 1,000 1.15 % Tier 2 RM 1,001 to RM 5,000 1.95 % Tier 3 RM 5,001 and above 2.34 % Hence compute WSA with balance of RM 10,000 for whole of

January 03 2007 based on the above hibah rates.

Exercise on Multi – hibah rates

Example: Tier Range Rate (% p.a) Tier 1 Up to RM 1,000 1.15 % Tier 2 RM 1,001 to RM 5,000 1.95 % Tier 3 RM 5,001 and above 2.34 % Hence compute WSA with balance of RM 10,000 for whole of

January 03 based on the above hibah rates. 31/365 X 1.15% X 1,000 = RM 0.97 31/365 X 1.95% X 4,000 = RM 6.62 31/365 x 2.34% x 5,000 = RM 9.94 Total hibah = RM 17.54

Multi – hibah rates

(effective 16/12/06-15/01/07 and 16/01/07- 15/02/07)

ISLAMIC BANKING DIVISION

Exercise on Multi – hibah rates

Please compute hibah based on the following information ?

(effective 16/12/02-15/01/03 and 16/01/03-15/02/03)

Example:

Tier Range Rate (% p.a)

Tier 1 Up to RM 1,000 1.50 % Tier 2 RM 1,001 to RM 5,000 2.00 % Tier 3 RM 5,001 and above 2.50 %

WSA with balance of RM 8,500 for whole of January 03 based

on the above hibah rates.

MUDHARABAH CURRENT ACCOUNT

What Is Mudharabah Current Account ?

A current account which is based on profit sharing concept of Mudharabah.

Profits gained from investment will be shared between the depositor and the bank based on a pre-determined profit sharing ratio.

Example of dividend calculation: Assume Islamic banking rates are as follows:- Balance Profit Sharing

(Customer: Bank)

0 - 1,999 - 0 : 100 2,000 - 49,999 - 50 : 50 50,000 - 99,999 - 60 : 40

100,000 & above - 70 : 30

…..cont’

MUDHARABAH CURRENT ACCOUNT

Example of dividend calculation:

Assume Islamic banking rates are as follows:- Balance 16/9/06-15/10/06 16/10/06-15/11/06

0 - 1,999 - 0 % 0 %

2,000 - 49,999 - 3.00 % 3.05 %

50,000 - 99,999 - 3.07 % 3.10 %

100,000 & above - 3.15 % 3.20 %

…..cont

MUDHARABAH CURRENT ACCOUNT

Example of dividend computation:-

Assume daily balances in En Ali’s account are as follows for month of October 2006 (31 days)

Date No. of days Balances

1 - 10 10 123,000

11 - 15 5 66,000

16 - 20 5 5,400

21 - 25 5 1,900

26 - 31 6 3,300

…..cont’

MUDHARABAH CURRENT ACCOUNT

Answer: Date Calculation Dividend 1 - 10 123,000 x 3.15% x 10/365 = 106.15

11 - 15 66,000 x 3.07% x 5/365 = 27.76

16 - 20 5,400 x 3.05% x 5/365 = 2.26

21 - 25 no dividend (as bal.< 2,000) = 0.00

26 - 31 3,300 x 3.05% x 6/365 = 1.65 Total = 137.82

MUDHARABAH CURRENT ACCOUNT

Exercise for the computation of dividends for Mudharabah

Current A/C

Assume Islamic banking rates are as follows:- Balance 16/9/06-15/10/06 16/10/06-15/11/06

0 - 1,999 - 0 % 0 %

2,000 - 49,999 - 3.18 % 3.25 %

50,000 - 99,999 - 3.27 % 3.33 %

100,000 & above - 3.35 % 3.40 %

compute dividend using balances on slides no 34

MUDHARABAH CURRENT ACCOUNT

Exercise for the computation of dividends for Mudharabah Current A/C

Assume daily balances in En Johar’s account are as follows for

month of October 2001

(no. of days in the month = 31 days)

Date No. of days Balances

1 - 10 10 23,000

11 – 15 5 116,000

16 – 20 5 400

21 – 25 5 2,900

26 - 31 6 13,300

’

MUDHARABAH CURRENT ACCOUNT

The owner of the fund (customer) places money for a

stipulated period of time (tenor) for the purpose of

participating in the sharing of profits made from the

bank’s investment of funds.

MUDHARABAH GENERAL INVESTMENT ACCOUNT

(MGIA)

• Tenure ranges from 1,2,3 until 60 months

• Minimum amount for 1 month investment is RM5,000

• Minimum amount for 3 months and above investment is RM 500

• Profit sharing

• 75% customer : 25% bank (1 month & above)

• Dividends are accrued on daily basis

FEATURES OF MGIA

Individual below 18 years of age, the account is opened and operated in the name of a trustee.

Joint accounts are allowed for individuals.

Tenor available

1,2,3 - 60 months

Minimum Placement

1 month - RM5,000-00

2-60 months - RM500-00

Statement

Receipt issued with details on amount, tenor and profit sharing ratio.

Eligibility

If a customer place RM10,000 in MGIA on 20/1 until 20/4, with declared rates as below:

rates 16/1 - 15/2 3.30 % 16/2 - 15/3 3.25 % 16/3 - 15/4 3.20 % 16/4 - 15/5 3.12 % Dividend computation RHB Bank Based on daily accrual basis on the prevailing declared rates. (20/1-15/2 = 27 days) 27/365 x 3.30 % x 10,000 = 24.41 (16/2-15/3 = 28 days) 28/365 x 3.25% x 10,000 = 24.93 (16/3-15/4 = 31 days) 31/365 x 3.20% x 10,000 = 27.18 (16/4-20/4 = 05 days) 05/365 x 3.12% x 10,000 = 04.27 Total dividend RM 80.79

Other banks

Based on maturing rate.

(20/1-20/4 = 91 days) 91/365 x 3.12% x 10,000 = RM 77.79

Dividend computation compared to other banks

En Mohd Ali placed a 6 months time deposit for RM 70,000 on December 16, 2000. Due

to unforeseen circumstances, he withdrew his deposits on May 2, 2001 i.e. after the completion of five (5) months. Compute dividends payable to him based of the following dividends rate declared.

16/12/00 - 15/01/01 3.0 % p.a

16/01/01 - 15/02/01 3.2 % p.a

16/02/01 - 15/03/01 3.3 % p.a

16/03/01 - 15/04/01 3.5 % p.a

16/04/01 – 16/05/01 3.3 % p.a

Dividend computation RHB Bank

Based on daily accrual basis on the prevailing declared rates.

(16/12-15/1 = 31 days) 31/365 x 3.0 % x 70,000 = 178.36

(16/01-15/2 = 31 days) 31/365 x 3.2 % x 70,000 = 190.25

(16/02-15/3 = 28 days) 28/365 x 3.3 % x 70,000 = 177.21

(16/03-15/4 = 31 days) 31/365 x 3.5 % x 70,000 = 208.08

(16/04-02/5 = 17 days) 17/365 x 3.3 % x 70,000 = 107.59

Total dividend RM 861.49

However En Mohd Ali will be paid only 75% X RM 861.49 =RM 646.12

Premature upliftment of MGIA

The concept of MSIA is similar to MGIA i.e the

customer places its fund for a stipulated period of

time (tenure) for the purpose of participating in the

sharing of profits made from the bank’s investment of

funds.

MUDHARABAH SPECIAL INVESTMENT ACCOUNT

(MSIA)

However, the differences are as follows:

MGIA MSIA

(i) Tenure of deposits - 1, 2-60 months 28-92 days

(ii) Minimum amount - RM 5K, RM 500 RM 100K

(iii) Profit sharing ratio - Bk (25%), Cust (75%) negotiable

(r = 12 mths MGIA)

MUDHARABAH SPECIAL INVESTMENT ACCOUNT

(MSIA)

3. Marketing aspects of Islamic Financial

Services

1. To set bank’s vision and mission statement for the bank (Re: MKT 4510 slides)

2. Draw up marketing objectives for growth in Islamic Banking products - e.g. 20 % growth of deposits and financing products over 3 years period (What is expected bank’s income (RM) and no. of accounts to be opened)

3. Environmental scanning of factors that may affect the industry.

4. SWOT analysis i.e. Strength, Weakness, Opportunity and Threat facing the business ---- new product

5. Draw up a marketing strategic plan – Segmentation and target market and adopt the appropriate marketing mix

(7 “P”s). Position the product.

6. Monitor the implementation and control process meet the set marketing objectives.

Steps in developing an Islamic Bank Marketing Strategic Plan

Chapter 1 Version 3e 53

Marketing Process Activities

Understand the organization’s mission

Set marketing objectives

Gather, analyze, interpret “SWOT” information

Develop a marketing strategy

Implement the marketing strategy

Design performance measures

Evaluate marketing efforts--change if needed

4

Chapter 1 Version 3e 54

Environmental Scanning

•Collection and interpretation of

information about forces, events

and relationships in the external

environment that may affect the

future of the organization or the

marketing plan implementation.

4

Chapter 1 Version 3e 55

Environmental Scanning

Examination of macroenvironmental forces

Social

Demographic

Economic

Technological

Political / Legal

Competitive

Helps identify market

opportunities

Provides guidelines for

design of marketing strategy

4

Chapter 2 Version 3e 56

External Marketing Environment 1

Demographics

Social

Change

Economic

Conditions

Political &

Legal Factors

Technology

Competition

Environmental

Scanning

Target Market

Product

Distribution

Promotion

Price

External Environment

is not controllable Ever-Changing

Marketplace

Chapter 2 Version 3e 57

External Marketing Environment 1

Social

Demographic

Economic

Technologic

Political and Legal

Competitive

External

Environmental

Factors

Chapter 1 Version 3e 58

A unique blend of product,

distribution, promotion, and

pricing strategies designed to

produce mutually satisfying

exchanges with a target market.

The Marketing Mix 4

Chapter 1 Version 3e 59

Price

Marketing Mix: The “Four Ps” 4

Promotion

Place

Product

1. What makes financial services different than

goods ?

2. What are the characteristics of service product ?

3. Understanding consumers need and wants

Marketing issues for financial services

Tangible

Dominant

Intangible

Dominant

Salt Soft Drinks

Detergents

Automobiles

Cosmetics

Advertising Agencies

Airlines Financial

Management Consulting

Teaching

Fast-food Outlets

Fast-food Outlets

Tangibility Spectrum

Differences Between Services and Goods

Intangibility

Perishability

Simultaneous Production

and Consumption

Heterogeneity

Implications of Intangibility

• Service product is complex and not easily understood

• Services cannot be readily displayed and has to be based on experience e.g. bank’s processing time for a credit application. Hence speed and accuracy is important

• Services has no physical form and cannot be stored

Implications of Heterogeneity/Variability

• Service product is not standardized and has to be

tailored made to need of business e.g. some need

for Islamic Overdraft, others Multiple Trade

Financing facilities (L.C, MWCF, B.G)

• Service delivery and customer satisfaction depend

on employees’ response and action

• Service may be based on past relationship with

bank and needs to be upgraded/review

Implications of Simultaneous Produced and

Consumed

• Requires customer participations and level involved.

• Requires customers’ agreement on the bank’s terms and conditions

• Time of employee’s response affect the service quality.

Implications of Perishability

• Services cannot be returned or resold

• It is difficult to synchronize supply and

demand with services as it is only

“produced” when customer made an

application

• need to review existing line/relationship periodically

Services Products are Different

Goods Services Resulting ImplicationsTangible Intangible Services cannot be inventoried.

Services cannot be patented.Services cannot be readily displayed or communicated.Pricing is difficult.

Standardized Heterogeneous Service delivery and customer satisfaction depend onemployee actions.Service quality depends on many uncontrollable factors.There is no sure knowledge that the service deliveredmatches what was planned and promoted.

Productionseparate fromconsumption

Simultaneousproduction andconsumption

Customers participate in and affect the transaction.Customers affect each other.Employees affect the service outcome.Decentralization may be essential.Mass production is difficult.

Nonperishable Perishable It is difficult to synchronize supply and demand withservices.Services cannot be returned or resold.

Source: Adapted from Valarie A. Zeithaml, A. Parasuraman, and Leonard L. Berry, “Problems and Strategies in Services Marketing,”

Journal of Marketing 49 (Spring 1985): 33-46.

Services Products- characteristics

Service products can be divided into four layers:-

(basic, outstanding benefits, value added)

1. Core - Basic feature e.g. Current A/C is money transmission

2. Tangible - Adds identifiable feature to it e.g. can use ATM

for withdrawal.

3. Augmented – Distinct product features that attract

customer and differentiate it with competitor e.g. Internet facility

4. Potential – Value added feature that benefit it in future e.g.

spiritual and ethical values.

Expanded Mix for Services --The 7 Ps

• Product

• Price

• Place

• Promotion

• People

• Process

• Physical Evidence

Expanded Marketing Mix for Services

PEOPLE PHYSICAL EVIDENCE

PROCESS

Employees

Facility design Flow of activities

Customers Equipment Number of steps

Communicating culture and values

Signage Level of customer involvement

Employee research Employee dress

Other tangibles

Ways to Use the 7 Ps in Marketing Plan

Overall Strategic

Assessment

How effective is

bank’s existing

services marketing

mix?

Is the mix well-aligned

with overall vision and

strategy?-

What are the strengths

and weaknesses in

terms of the 7 Ps?

Specific Service

Implementation

Who is the customer?

What is the service?

How effectively does the

services marketing mix

communicated in terms

of benefits and quality?

What changes/

improvements are

needed?

Positioning

• Positioning is concerned with choosing the

way to present an organization or its

products to a particular target market

e.g HSBC Bank Malaysia is positioning

its Islamic banking product using

the AMANAH brand.

e.g. Maybank positions itself as youthful and

exciting

Positioning

• How does bank position its Classic Credit Card

from its Platinum credit card ?

• How does a Islamic bank position itself from a

conventional bank ?

• Three main characteristics:-

• Perceived uniqueness e.g additional product benefits

• Importance- e.g. premium customer, global networking

• Sustainability- create something unique

THE WAY FORWARD IS

ISLAMIC BANKING & INVESTMENT

Increase market awareness

Increase knowledge and training

Develop new products and services

Expand knowledge to overseas

market

Wallahuwa’alam & Thank You

(dzuljastri@iium.edu.my)

Kulliyah of Economics and Management Sciences

International Islamic University Malaysia