Ethics beyond Religion: The Case of Al Rayan Bank

Abstract

The Islamic banking system which is also known as non-interest banking is normally based on sharia laws, otherwise referred Islamic principles and also by Islamic economics. Al Rayan Bank which was the primary focus of this research is one of the Islamic banks in the UK and which was formed back in 2004 to offer financial services that are Sharia compliant to customers from any faith. This dissertation sought to identify ways through which Al Rayan Bank could be able to attract even more non-Muslim customers. Secondary research was used in this study. This involved careful study and analysis of previous studies to identify ways through which more Non-Muslim customers could be attracted to bank with Al Rayan bank. The study is of value to the managers of Al Rayan Bank who would get to know of strategies they could use so as to market themselves even more to non-Muslim customers and as such competing in an even more effective way with other established banks in the UK.

Chapter One: Introduction

1.1 Background to the study

Banks are financial institutions that are usually licenced to give out loans and also receive deposits. There are a range of services that banks may provide and these include; management of wealth, safe deposit boxes and currency exchange (Cranston, 2018). Typically, there exists two types of banks; retail/commercial and investment banks. In a majority of countries across the world, either the central bank or the national government regulates these banks. In the UK, three main regulators regulate banks and they are the Bank of England, Prudential Regulation Authority (this is a division of the BoE) and the Financial Conduct Authority (Singh, 2016). In the UK, PRA and FCA are the lead bank regulators while the BoE plays the role of a resolution authority, whose responsibility primarily is exercise of resolution and regulatory intervention. These resolution powers are normally in relation to banks that either have a high likelihood of failing or which are already failing. The FCA acts as the conduct regulator while PRA acts as the prudential regulator.

Commercial banks are normally concerned with reception of deposits and management of withdrawals in addition to supplying short-term loans to small businesses and individuals. Primarily, customers would use these banks for acquiring home mortgages, basic checking and savings accounts and certificates of deposit (Barth, Litan and Brumbaugh, 2016). On the other end, the focus of investment banks is providing corporate clients with services like assisting with merger and acquisition (M&A) activity and underwriting.

1.2 Islamic banking

The Islamic banking system which is also known as non-interest banking is normally based on sharia laws, otherwise referred Islamic principles and also by Islamic economics (Imam and Kpodar, 2016). This banking system is governed by two fundamental principles which are prohibition of payment and collection of interest by investors and lenders and sharing of losses and profits. Collection of “Riba”, which is the Islamic name for interests, is prohibited. Additionally, in this banking system, there are Islamic rules which are normally placed on transaction and these are normally known as Fiqh al-Muamalat. Within Islamic banking, financial transactions are typically viewed as a culturally distinct form of ethical investing (Hassan, Aliyu and Brodmann, 2017). For example, any investments that involve any forbidden items like gambling, alcohol and pork are prohibited. It is worth noting that the principles of Islamic banking follow Sharia law. Sharia law is obtained from the actions of the Prophet Muhammad (PBUH), the recorded sayings, and the Quran and the Hadith (Hefner, 2017). In instances where queries arise, additional information is obtained from reasoning independently based on customs and scholarship and consultations with learned scholars (Hussain, Shahmoradi and Turk, 2016). At all instances, bankers here always ensure that at no point do their ideas deviate from the Quran`s fundamental principles.

Al Rayan Bank which is the primary focus of this research is one of the commercial banks in the UK and which was formed back in 2004 to offer financial services that are Sharia compliant to customers from any faith. Today, the bank which has branches in Manchester, Birmingham and London claims to operate in line with Islamic principles entirely. There are five values which drive this bank and these are; pioneering, good value, secure, community oriented and Sharia compliant. The bank served 77,000 customers as of 2017 and has an independent Sharia Supervisory Committee and a Sharia department all which ensure compliance of the products they offer with Islamic teachings (Bloomberg, n.d.). One of the most important factors for this bank is faith and this always sees them close on all Friday afternoons, something that gives their members of staff an opportunity to attend Friday (Jummah) prayers.

Bank League Tables 2017 named Al Rayan Bank as the third fastest growing bank across the UK. This was a financial analysis of all the I55 incorporated banks in the UK. In December 2016, the bank announced that the value of its commercial and retail assets had for the first time, passed the £1 billion mark. In November 2017, Moody`s which is a global credit agency awarded the bank the Aa3 deposit rating and with that, it went to become the first Islamic bank in the UK to ever receive an official rating.

1.2 Islamic banking

In banking, ethics are of great importance both for the society and even for the economy. Paulet, Pamaudeau and Relano (2015), advocate for anchoring of ethics on four main pillars. Banks must first comply with all of a country’s set rules, regulations and frameworks that are normally set so as to ensure that all operations are sound and also to enhance the society’s confidence. These regulations and laws, may among other factors, be related to qualifications and tenure of members of the board of directors and managing directors, adequacy of capital, representation of depositors on the Boards, maximum limits on single party exposure, requirements for credit rating, credit/deposit and liquidity ratios, maximum shareholding by members of a family and many others (Ferreira, Jalali and Ferreira, 2016).

Additionally, banks are normally subject to provisions of security laws, tax laws and company law. It is considered unethical to circumvent any of these legal provisions. And while the universe of ethics and the universe of law are never coterminous, violation of law is never ethical. Additionally, banks must also always ensure equitable and fair treatment of all their stakeholders. Various stakeholders’ interests for example depositors, shareholders, employees and borrowers do not always coincide (Chew, Tan and Hamid, 2016). For instance, a bank may be inclined towards offering depositors with low returns and charging interest rates that are high from the borrowers in a bid to maximize dividend and profits for the different shareholders. It is necessary to ethically balance conflicts of interest like these keeping in view the greatest good for the greatest number.

Banks are always also required to always ensure that they always disclose their financial health fully, transparently and in a manner that is truthful. Finally, banks must also always behave as corporate citizens who are always socially responsible. According to Chew, Tan and Hamid (2016), the primary social responsibility of any business is to use its resources and further engage its resources in activities that are designed to increase profits while also staying within the rules of the game. While one may interpret this statement to imply that businesses are simply intended at maximisation of profits without violation of regulations and laws, all businesses are also required that while in their bid to make profits, they must also always ensure that their activities never inflict any negative externalities in the environment in which they operate in. And while, today, most banks and businesses pride themselves in fulfilment of their responsibilities socially by making donations to clinics, offering support to charitable organisations and offering scholarships, it is necessary to view social responsibility from a wider perspective as this only touch the fringe (Barth, Litan and Brumbaugh, 2016).

1.4 Research question

1. How can Al Rayan Bank`s ethical banking move beyond religion so as to attract even more non-Muslim customers?

1.5 Objective/Aim of the study

This dissertation will seek to identify ways through which Al Rayan Bank can be able to attract even more non-Muslim customers.

1.6 Problem Statement

Today, one of the most critical strategies for any financial institutions is building long-term relationships with customers. With the increased competitiveness across the banking sector in the UK, it is necessary that each and every bank comes up with strategies that would see them attract even more customers while still remaining appealing to the old ones. Customer loyalty has over the years been considered as a vital objective for any bank that aspires to grow and survive. Across the industry, it is generally accepted that there are high costs attached to obtaining new customers. That is the reason why Al Rayan Bank definitely needs to diversify its customer base to include even more non-Muslims. In banking patronage, Religion is no longer an important factor and this is the reason why it has become increasingly important for Islamic banks to better understand the preferences, needs and behaviours of their target group customers so that they can continue staying in the game. It is as such necessary to properly address strategies that are tailored to ensure customer acquisition and retention. Even though different strategies have been conducted in different parts of the world aiming at identifying strategies that could be used to attract non-Muslim customers to Islamic banking, across the UK, these studies are inadequate. This study tries to provide answers to the question; “what strategies can Al Rayan Bank adopt to continue attracting Non-Muslim customers.

1.7 Significance of the study

This study will be of value to the managers of Al Rayan Bank who will get to know of strategies they could use so as to market themselves even more to non-Muslim customers and as such competing in an even more effective way with other established banks in the UK. A platform for future research on both public and private organization customer attraction strategies will be created in this study. For academicians, a foundation upon which other replicated and related studies will be formed upon which the other studies can be based on.

1.8 Outline of the study

The study contains a literature review, a methodology chapter, a data analysis chapter and a conclusion. The literature review provides discussions of information that is already published on Islamic finance and ethical banking. The methodology chapter outlines the procedures that were followed for collection of data and its analysis. The collected data is then analyzed in chapter four and also discussed extensively. The conclusion makes an overall remark of the observations made in the study.

Chapter 2: Literature Review

2.1 Islamic banking

The definition by Hassan, Aliyu and Brodmann, (2017), of Islamic banking simply as an interest free banking system fails to provide the correct picture of Islamic banking and to some extent actually brings about some sort of confusion. While the nucleus of the system involves prohibition of payment and receipt of interest, the system is also supported by other principles derived from Islamic teachings and which advocate for individual duties and rights, equitable distribution of wealth, fulfilment of obligation, sharing of risks, sanctity of contracts and property rights (Gheeraert and Weill, 2015). It is also worth noting that the Islamic financial system is also not just limited to banking but also covers capital markets, capital formation, insurance and other different types of financial intermediation. The Islamic financial system further suggests the necessity of ethical and moral aspects within regulatory frameworks and sound and prudent controls (Shaban, Duygun and Fry, 2016).

Ibrahim (2015) posits that the Islamic financial systems philosophical foundation goes beyond the interaction of economic behaviour and factors of production. It is only in the context of social and economic justice, wealth distribution and business ethic can these system be appreciated fully. All these are factors that are at the centre of moral economies. And while the primary focus of conventional financial systems is on the transactions financial and economic aspects together with their material outcomes, equal emphasis is placed by the Islamic system on the moral, ethical, social and public interest dimensions aimed at enhancement of fairness and equality (Waemustafa and Abdullah, 2015).

Narayan and Phan (2017) argue that while it is not a must that clients and practitioners within this system are Muslims, it is compulsory that they accept the moral and ethical prohibitions that are underscored by values that are emphasised by Islamic teachings founded on the conduct of Prophet Muhammad (PBUH), the Hadith, interpretations of Islamic scholars and the Qur`an. As such Islamic finance can either be viewed as a form of ethical lending or ethical investing, except that loans have to be free of interest. Maghrebi, Mirakhor and Iqbal (2016) in their study summarises that the “maqsid” (objectives) of transactions in Islamic finance are; 1) being true to the Sharia principles of justice and equity, 2) being free of unjust enrichment, 3) based on true consent of any involved party and 4) must be an integral part of an economic activity or real trade such as a lease, sale, partnership or manufacture.

There are different instruments that are offered by Islamic markets aimed at satisfying users and providers of funds in different ways: investment, trade financing and sales. The basic instruments in Islamic finance are leasing (Ijarah), sharing of profits (Mudarabah), forward sale (Salam), partnership (Musharakah) and cost-plus financing (Murabaha) (Musa, 2015; Kassim, 2016; Alam, Gupta and Shanmugam, 2017). These are the instruments that serve as the building blocks for development of wide arrays of financial instruments that are more complex and this is a good suggestion that there exists a huge potential for financial expansion and innovation in Islamic financial markets.

The fundamental principles of the Islamic financial system are;

2.1.1 Prohibition of interest

In Islamic finance, tying of predetermined, fixed or positive rates to the amount of principle and the maturity is prohibited. The prohibition of “Riba”, is the basis for the prohibition of interest. According to Hassan and Mollah (2018), there is a general consensus among scholars in Islam that “Riba” is quite wide and actually even covers charging of interest and not only usury. Arguments of property rights, equality and social justice form the basis for this prohibition.

Gilani (2015), posits that while Islam encourages earning of profit, the reasons why charging of interest is prohibited is because profits, determined ex ante, are costs that are accrued regardless of the operations of a business and wealth may not be created whenever there are business losses while, when determined ex post, are normally symbolic of creation of additional wealth and successful entrepreneurship. According to social justice, lenders and borrowers must always share losses as well as rewards in a manner that is equitable and that the process of accumulation of wealth and its subsequent distribution in the economy must also be fair and symbolic of productivity (Paulet, Pamaudaeau and Relano, 2015).

2.1.2 Sharing of risk

As a result of prohibition of interest, suppliers of funds are converted from being creditors into investors. As such, in return for a share of profits, entrepreneurs and providers of financial capital share business risks (Raza, 2018).

2.1.3 Prohibition of behaviours that are speculative

Transactions that feature speculative behaviours include such activities like gambling, taking risks and engaging in activities that are highly uncertain. As such, it is always necessary that real assets always back transactions in Islamic finance.

2.1.4 Sanctity of contracts

In Islamic teachings, disclosure of information and contractual obligations are normally treated as sacred duties. Rod, AlHussan and Beal (2015) hold the view that the main reasoning behind this feature is reduction of the risks of moral hazards and symmetric information.

2.1.5 Sharia approved activities

In Islamic finance, only those activities that in no way violate sharia laws qualify for investment. For example, any such businesses that deal with casinos, gambling and alcohol are prohibited. According to Surjaatmadja and Adriansyah (2016), a natural fit for Islamic finance is project finance which puts emphasis on equity participation in transactions that deal with real assets.

2.1.6 Greater Justice in Human Society

Alam, Gupta and Shanmugam (2017) posit that realisation of greater justice is one of the most important objectives of Islam. Societies that are not justice will eventually fall and be destroyed according to the Quran. A set of moral values or rules are required in justice and everyone must accept these and comply with them faithfully. In addition to being stable and strong, for a financial system to be deemed just, it must satisfy at least two conditions that are entirely based on moral values. One of these conditions is that any equitable share of financial resources mobilised by financial institutions should always be available to the poor to help in the expansion of employment, elimination of poverty and also create opportunities for self-employment. The other condition requires the financier to share in the risk to avoid shifting the burden of losses to the entrepreneur. All these are intended at reducing inequalities in wealth and income (Moisseron, Moschetto and Teulon, 2015).

2.1.7 Condition for justice

For purposes of fulfilling the first condition of justice, the entrepreneur and the financier are all required to share profits in an equitable manner as well as profits by Islam. “No risk, no gain”, is one of the basic principles of Islamic finance. This introduces greater discipline into financial systems by motivating financial institutions to access risks in a more careful manner and also monitor borrowers’ use of funds even more effectively (Iqbal and Mirakhor, 2017). Double assessment of risks by both entrepreneurs and financiers helps injecting even greater discipline into the system and also goes a long way in reducing excessive lending.

Waemustafa and Sukri (2016) say that in its ideal form, Islamic finance is intended at helping raise in a substantial way, the level of Profit-Loss-Sharing and loss in businesses. In line with this, creation of debt through direct borrowing and lending is prohibited in the Islamic system of banking. The system advocates for creation of debt through the lease or sale of real assets by means of its sales-and modes of financing that are lease-based.

2.2 Islamic finance products

Over the years, different financial products have been developed that are intended at meeting the needs of customers while also providing alternatives that are Sharia compliant to conventional options that are widely available. According to Abedifar et al (2015), for purposes of establishing social justice, entrepreneurs and investors are required by Islam to share involvement in economic activities that would either result to a loss or a profit. The widely used equity products in Islamic banking that support sharing of losses and profits are Mudaraba and Musharaka products (Belouafi, Bourakba and Saci, 2015).

In Mudaraba contracts, entrepreneurs get capital from financiers, which they use to manage different economic activities such as joint ventures, businesses or constructions. Whenever, a profit is earned from any of these economic activities, the proceeds are shared by both parties and whenever losses occur, the financial loss is only bared by the financier (Kassim, 2016). In those instances that losses are bared as a result of the entrepreneurs’ misconduct, the entrepreneurs share in the loss. In Musharaka contracts, through investment of entrepreneurship and capital, both parties become involved in a joint venture project. All the parties bear any losses or share any profits that are generated by the activity.

According to Azmat, Skully and Brown (2017) Islamic bonds which are known as “Sukuk” are normally very different from conventional bonds. Conventional bonds are only intended at benefiting one party more than the other and as such they fail in promoting social justice. On the other hand, “Sukuk”, are asset based securities, they are normally certificates that are representative of ownership of assets that are tangible, businesses, projects, services and joint ventures. It is a required that every asset that is supportive of “Sukuk” must be compliant to Sharia.

Just like in conventional banking, there are a variety of unique banking products offered in Islamic banking that operate in strict compliance to Sharia law. There are various bank accounts which have different benefits and qualifying criterion. There are diverse types of investment services offered in Islamic banks across the world and these include: Islamic cheque accounts, Islamic investment accounts and Islamic Savings Accounts.

2.3 Ethical banking

In banking, ethics are of great importance both for the society and even for the economy. Paulet, Pamaudeau and Relano (2015), advocate for anchoring of ethics on four main pillars. Banks must first comply with all of a country set rules, regulations and frameworks that are normally set so as to ensure that all operations are sound and also to enhance the society’s confidence. These regulations and laws, may among other factors, be related to qualifications and tenure of members of the board of directors and managing directors, adequacy of capital, representation of depositors on the Boards, maximum limits on single party exposure, requirements for credit rating, credit/deposit and liquidity ratios, maximum shareholding by members of a family and many others (Ferreira, Jalali and Ferreira, 2016).

Additionally, banks are normally subject to provisions of security laws, tax laws and company law. It is considered unethical to circumvent any of these legal provisions. And while the universe of ethics and the universe of law are never coterminous, violation of law is never ethical. Additionally, banks must also always ensure equitable and fair treatment of all their stakeholders. Various stakeholders’ interests for example depositors, shareholders, employees and borrowers do not always coincide (Chew, Tan and Hamid, 2016). For instance, a bank may be inclined towards offering depositors with low returns and charging interest rates that are high from the borrowers in a bid to maximize dividend and profits for the different shareholders. It is necessary to ethically balance conflicts of interest like these keeping in view the greatest good for the greatest number.

Banks are always also required to always ensure that they always disclose their financial health fully, transparently and in a manner that is truthful. Finally, banks must also always behave as corporate citizens who are always socially responsible. According to Chew, Tan and Hamid (2016), the primary social responsibility of any business is to use its resources and further engage its resources in activities that are designed to increase profits while also staying within the rules of the game. While one may interpret this statement to imply that businesses are simply intended at maximisation of profits without violation of regulations and laws, all businesses are also required that while in their bid to make profits, they must also always ensure that their activities never inflict any negative externalities in the environment in which they operate in. And while, today, most banks and businesses pride themselves in fulfilment of their responsibilities socially by making donations to clinics, offering support to charitable organisations and offering scholarships, it is necessary to view social responsibility from a wider perspective as this only touch the fringe (Barth, Litan and Brumbaugh, 2016).

The operations of banks normally have far and wide reaching effects on poverty alleviation, employment and growth. As such there is a lot that banks could do to ensure they meet ethical standards. Banks could;

• ensure safety of deposits and fair returns to depositors
• minimise spread between lending rates and cost of funds,
• engage in accounting practices that are transparent
• comply with all rules, laws and regulations that have been promulgated by the relevant authorities
• develop systems for management of risk that are effective
• treatment of client with courtesy
• protection of the rights of the minority shareholders
• set up systems for management that clearly specify the functions of the Board, Heads of Departments and Divisions, Chief Financial Officers among others
• compassionately and fairly treat employees, make arrangements for requisite training of employees
• prompt offering of services
• ensure that there is no discrimination in personnel activities and also support the access to housing, basic health and needs for housing by employees and members of their families
• support only those financial activities that contribute to protection of the environment
• devise products that are innovative without assuming any risk unduly
• arrangement of mortgage programmes that are flexible and that even favour the poor
• Develop internal code of ethics and additionally set up institutional agreements that are capable of monitoring compliance and further suggesting remedial actions whenever necessary.

For banks to be ethics there are also don’ts which include;

• permitting sexual discrimination with respect to employees, depositors and borrowers
• engaging in unhealthy competition practices intended at poaching qualified personnel or even weaning depositors from competing banks
• Financing activities that aggravate injury to human health, promotion of child labour and environmental pollution.
• Engaging in collusive fixing of interests
• Bowing to pressure illegitimately exerted by musclemen, bureaucrats and political personalities.
• Engaging in illegal trade and money-laundering activities

Operating ethically comes with various perks for banks as a relationship that is symbiotic could emerge between competitive advantage and ethics. Through actively pursuing practices that are ethical, banks are able to acquire positive brand reputation. That is good because it would help them increase their incomes and also expand their customer base.

2.4 Non-Muslims

The reason why most people identify Islamic banks with Muslims and Islam is because the banking system is based on Islamic principles. It is however, worth noting that Islamic banks in carrying out their activities are never limited to only Muslims but are also open to individuals who are not Muslims. What that means is that even non-Muslims can get financial services from Islamic banks. People, who are not Muslims can save money with these banks, ask for financing and even enjoy the different services offered by Islamic banks.While Muslims are more able to work together, non-Muslims are characterised by the spirit of capitalism which is commonly attached to them. That is what has made conventional banking more appealing to non-Muslims over the years. Today, however, things are changing and even more non-Muslims have been observed to develop keen interest with Islamic banking. One thing that makes Islamic banking appealing to all is that even non-Muslims have been observed to view it as being relevant and accommodative of all other religions. Sharia laws are in no way discriminative. Physical conditioning, perception, pricing, process, location, social and human resource factors are the main factors that customers give consideration when deciding on the institution to bank with. From these factors, it is clear that religion is never a major factor. Most non-Muslims who decide to go with Islamic banking have actually been observed to have limited knowledge on Islamic banking. The non-interest system is what most of them know about and nothing else.

2.5 Differences between Islamic banking and conventional banking

According to Surjaatmadja and Adriansyah (2016), the most fundamental difference between conventional banking and Islamic banking lies in their governing ideologies. While market economics define conventional banks, Islamic Sharia laws govern Islamic banking. The prohibition of interest-based transactions is one of the cornerstones of Islamic banking. On the other hand, at the heart of conventional banking, there are incomes gained from interests. That Islamic banks are supervised and governed by Sharia boards is another key differentiator of these two banks. These boards are normally made up of Islamic scholars who ensure that the banks do not deviate from Islamic business laws. And while both types of banks aim at growing their businesses through profits and incomes, Islamic banks grow their profits and incomes through strict guidance of Islamic laws. Climent (2018) says that conventional banks do not have any religious obligation on them.

As Islamic banking is considered to be ethical banking, there exist strict regulations that prohibit any forms of ties with businesses that are not considered to be halal. Any investments that deal with halal goods are considered as Haram by Sharia and Islamic banks are required to avoid financing un-Islamic practices and promote values that are Islamic. Any transactions that involve speculation, risk, deception and uncertainty are prohibited in line with Islamic finance. As such, while conventional banks do not have any qualms with transactions that involve speculation and uncertainty, speculative and derivative activities are ruled out in Islamic finance (Raza, 2018).

Finally, while the focus of conventional banks is entirely on accruing profits from their business ties and investments, in Islamic banks, more consideration is given to compliance with Islamic values and public welfare. According to Islamic scholars, the value of money is limited and this is normally the reasoning behind prohibition of interests as the value of money should not just increase because time has passed (Khairi et al., 2018). As such, making of money in Islamic banks is only through trading of services and goods that are Sharia compliant and also working in participatory systems where the clients and the bank share in the profits and losses.

2.6 Why Islamic banks over conventional banks?

2.6.1 Opportunity for fair management of wealth

Islamic banking strives to contribute to achievement of a good life and catering for the wellbeing of the society as a whole. As such, any customer who opts for Islamic banking rather than conventional banking contributes to a fair and holistic system for management of wealth. While Islamic banking prevents the uneven distribution of income within societies, the main focus of conventional banking is one markets and economic transactions.

2.6.2 High ethical standards

With Islamic banking, a customer is always aware of the way through which their funds are used. They always have full knowledge and information about underlying transactions. In line with Sharia law, agreements that are clouded by uncertainty are invalid. Also not allowed within terms of contract are preventable faults and ambiguities. Also prohibited is the acquisition of wealth by chance. Additionally, Islamic banking also prohibits using unfair trading systems to earn money. Activities that are socially harmful are also prohibited.

2.6.3 Asset-backed financing

The Islamic banking system is quite stable. The base of the system is set by transactions and as such, it is a more solid asset-backed financing system. Within Islamic banks, lending of funds is normally based on trades that involve actual services and goods. As such, only assets that have intrinsic values are sold for profits. The foundations of Islamic banking are laid on on-liquid assets that are real. Exchange of such types of assets brings about fair profits while also ensuring that the value of money remains stable.

Another good thing with Islamic banks is that they are risk averse. At all times, these banks stay away from businesses that could possibly fall victim to economic bubbles. These banks are also non-speculative in their nature. That puts them in a good position to weather storms whenever things get thick in an even better way than banks with lots of their monies tied up in markets.

2.6.4 Profit-and-risk-sharing partnership

One becomes a business partner when they embark on Islamic banking. This is a co-dependent relationship that is also equal. It gives both parties an equal opportunity to leverage on one another’s competence. While the bank provides the necessary expertise and skills, the customers provide their funds and resources. Sharing of risks in economic transactions is supported by Islamic finance. This by itself provides an incentive that is strong for the bank to allocate resources and also reduce risks. Whenever two or more parties who are involved in an economic activity share risks, the burdens of the risks each party faces are reduced.

It is worth noting that Islamic banks are quite oriented towards investments too. These banks care about financial success as that also affects the success of their respective businesses. This is what makes Islamic banks better than conventional banks as in conventional banks; the risks of paying back loans are bared in full by borrowers.

2.6.5 No interests in Islamic banking

Across Islamic banking, a customer really never has to worry about increasing interest rates. From the very beginning Islamic banks determine their profits and even for floating profit rates, there are always limits that can never be exceeded. Business entities or individuals cannot hoard money or earn interest in Islamic banking. Businesses and individuals are required to continuously use money and ensure it always remains in circulation. This supports economic activities that are productive and that create jobs, trading and investment. The returns from economic activities that are successful are distributed equally to all the involved parties. As such, Islamic banking determines sharing of wealth in a manner that is fair.

Extraction of surplus value is also prohibited in Islamic banks. According to Islamic principles, the practice of paying and receiving interest is not fair. Financing that is interest-based tends to concentrate wealth only on the hands of a few and this leads to inflation and recessions. The conventional banking system, on the other hand, the persons receiving loans assume and bear all risks. The borrowers owe the responsibility of returning to the lender interest and capital. No risks are bared by lenders and at times, lenders use the borrower’s misfortune to acquire wealth for themselves. Islamic banking in all its activities is always against taking advantage of the issues others face.

This study seeks to establish ways through which Al Rayan Bank`s ethical banking can move beyond religion to attract even more non-Muslim customers?

Chapter Three: Research Methodology

3.1 Research methods

There are three types of research methods, quantitative, qualitative and mixed methods which incorporate both quantitative and qualitative methods. Research processes that are quantitative involve collection of data that is quantifiable and use of techniques for data analysis that are relevant for result generation. However, even though quantitative methods are normally bias free which enhances reliability, they do not have the ability to provide data that is rich with regard to people`s opinions, experiences and feelings. On the other hand, with qualitative methods, a researcher is able to collect qualitative data and use techniques for data analysis that are relevant to generate results and achieve the studies objectives. The results in qualitative research are normally based on the researcher`s interpretation. The qualitative research design is adopted in this study.

3.2 Data collection

Secondary research will be used in this study. This involves the summary, synthesis and collation of data already in existence. In this study, the researcher draws data from previous journals. Most of secondary research is normally available on the web and is obtained by simple keying in of phrases and words for what is being sought. In collecting secondary research, research sources will first be identified. That involves narrowing down on the available sources for information and selecting the most appropriate one for providing data and information that would be applicable for your research.

When the sources for collecting data have been narrowed down, existing data will be collected. Data that is related to the research topic could be collected from different sources and these sources are government and non-government agencies, public libraries, the internet and even newspapers. Data should always be collected from sources that are authentic as the research could severely be hampered by incorrect data.

When data has been collected, the next step involves combining and comparing the collected data. This is done to identify any duplication and mark out any repetitive themes in data and also to assemble data in a format that is usable. The final step involves analysis of the collected data. This will be done to identify if the research question has been adequately answered.

Some of the advantages of secondary research are that information here is always readily available. In secondary research, there exist many different sources from which data that is relevant can be collected and used. This is unlike in primary research where researchers have to collect data from scratch. Secondary research is also not as expensive and time consuming as primary research. This is because required data is always readily available and its collection does not cost much especially if it is extracted from sources that are authentic. Conducting secondary research is also quicker and this normally as a result of the availability of data. Depending on a study's objectives, secondary research can be conducted in a shorter time period as compared to primary research. Finally, the organisations and researchers get an idea of the effectiveness of primary research from the data collected through secondary research. From such researchers can form a hypothesis and evaluate costs of conducting primary research.

3.2 Data collection

For purposes of analysing the data that will be collected from the different journals, meta-analysis will be done. Meta-analysis is a statistical procedure which involves combination of data from many different studies. Whenever, consistency of effect size is observed between different studies, meta-analysis is used to identify the common effect, additionally, whenever there is a variation of the effect between different studies, to identify the reason for the variation, meta-analysis may be done.

It is not possible to validate hypotheses based on the findings of a single study and this is because, typically, results vary between different studies. This is the reasoning behind the use of meta-analysis to synthesise data from different studies. And while narrative reviews could be used for presenting data from different studies, these reviews are normally largely subjective and they are not even capable of effectively handling a large number of studies.

Meta-analysis is a formal, quantitative, epidemiological research design that is used to assess the conclusions of previous studies. There are quite a number of benefits in conducting meta-analysis which include; meta-analysis provides a quantitative review of bodies of literature that is also consolidated. The specification of the hypotheses and outcomes tested is normally critical for conducting meta-analysis, just as a sensitive search for literature.

To establish the effect pricing strategies would have on non-Muslim customers the studies that were used are;

Nagle and Müller, 2017

Wuebker, Baumgarten and Koderisch 2017

Rostamkalaei and Freel 2016

To establish whether cost leadership strategies could help Al Rayan bank to attract non-Muslim customers, data was obtained from

Kurt and Zehir, 2016

Das and Ghosh, 2015

Leon, 2015

To establish whether diversification of delivery and distribution channels could help Al Rayan bank attract non-Muslim customers, data was drawn from;

Shaikh and Karjaluoto, 2016

Krishna, 2015

Mullan, Bradley and Loane, 2017

Agarwal and Mehotra, 2017

To establish whether differentiation strategies could be used to attract non-Muslim customers, the studies used where;

Wongsansukcharoen, Trimetsoontom and Fongsuwan, 2015

Yuliansyah, Rammal and Rose 2016

3.4 Ethical considerations

The researcher ensured that the necessary consent had been previously obtained in all the studies used. And because it was not possible to seek additional consent, the researcher had to make a professional judgement on whether their use of secondary data would in any way violate the initial contract that had been made between the primary researchers and subjects.

Chapter four: Results and Analysis

An electronic search was conducted for information on ways through which Islamic banks could attract non-Muslim customers for years 2009 – 2018, using the search terms: (Islamic banking for Non-Muslim customers). The meta-analysis of the results of the different articles examined whether there exists a positive relation between adoption of cost leadership strategies, differentiation strategies, pricing strategies and delivery and distribution strategies. The results of the meta-analysis showed that there that existed a relationship between differentiation strategies, pricing strategies, cost strategies and delivery and distribution strategies.

Cost leadership strategy

Kurt and Zehir (2015), hold the view that while withstanding competition with their low cost structures, cost leaders are always focused on having low unit costs for the different products and services they offer. Efficiency is emphasised in this strategy and maintaining the strategy would require continuously searching for cost reductions in all of the businesses aspects (Das and Ghosh, 2015)

Whenever a bank designs it products and markets them in ways that are more efficient than their customers, it is said that the bank has implemented a cost leadership strategy. Here, any process that does not contribute to minimisation of the cost bas should be outsourced to other organisations and this will be done aiming at maintenance of a cost base that is low (Leon, 2015). With low costs, Al Rayan will be in a better position to offer services and products that will offer features that will be even more appealing to many customers at the lowest competitive prices possible.

Differentiation strategy

Differentiation entails implementing different approaches all aimed at modifying the products and processes a firm has to offer (Wongsansukcharoen, Trimetsoontom and Fongsuwan, 2015). With a differentiation strategy in place, Al Rayan would focus its efforts on offering banking products and services that are unique. Customer loyalty is assured with unique products. The needs of a customer are fulfilled by product differentiation as the process involves tailoring of services and products as per customer’s needs. The most effective way to implement the differentiation strategy is through provision of service to customers that is both unique and superior through offering high quality services which also have high quality features and offering after-service and sale support to customers (Yuliansyah, Rammal and Rose 2016).

A good differentiation strategy will lead to attraction of non-Muslim customers who will get referrals from their Muslim and non-Muslim friends. Islamic banks are able to create unique positions in markets by having products whose products are in terms of value, more competitive when compared to what conventional banks offer. This is one thing that gives Islamic banks an upper edge over their competitors. Islamic finance`s principle of shared risk is a good example of a differentiated product. The principle creates an interesting scenario whereby, for example, in those instances where small business loans are given, banks are deemed as co-owners of the business and not just financiers, who have interest in the success of the business.

This means that the bank will be more involved with the business in a bid to ensure it is a success.

Pricing strategy

Price is one such attribute which needs to give up if certain services and products are to obtained. Customers have in different instances been observed to be conscious about prices in their purchasing behaviours (Wuebker, Baumgarten and Koderisch 2017). As such, price is an important factor in choice situations as consumers typically rely heavily on the prices pegged on alternatives. According to Nagle and Müller, (2017), the role of price as a performance attribute may have a direct effect on the performance of customers and also their intentions behaviour wise. Price is normally the most important determinant for making switching decisions and it is followed by denial of services and service failure (Rostamkalaei and Freel 2016).

Delivery and distribution

This factor is concerned with the accessibility of services and products by customers (Shaikh and Karjaluoto, 2016). Location of a branch is certainly one of the important considerations in the distribution strategy. As such, all Al Rayan bank branches should be placed in places where they can be easily accessed by customers. Today, technology has grown to become a strategic asset which helps improve business processes (Krishna, 2015). It will as such, be necessary for Al Rayan bank to put more effort towards development and implementation of technologies that are up-to-date and that would ease banking experiences.

And with banks continuously embracing information technology, the bank distribution channels overall mix has been changing. Today, the banking environment has witnessed banks that look forward to incorporate technology into their operations and banks have been seen attempting to move transactions of low values from the branch counter to different ATM networks, to the internet and even to mobile banking (Mullan, Bradley and Loane, 2017). That has seen the majority of commercial banks launching websites that are intended to offer bank customers with online services. Today, the internet is used as a channel for distribution. This trend is based on the belief that the future lies in electronic banking (Agarwal and Mehotra, 2017).

Chapter Five: Discussion

5.1 Cost leadership strategy

So as to survive in the UK banking environment that is increasingly competitive, Al Rayan Bank must achieve, even if temporarily, a competitive advantage. If Al Rayan could adopt a low cost/price strategy, their focus would be on providing services and goods at lower costs as compared to their different competitors. Another strategy that they could adopt is providing their customers with services that are superior when compared to the services their competitors offer at an equal cost. A strategy like this would require a system for cost-control that is tight, benefitting from experience curve effects and economies of scale in production (Rostamkalaei, and Freel, 2016).

To achieve a low-cost advantage, Al Rayan will need to have a low-cost leadership mind set and a workforce that will be committed to the low-cost strategy. It will be necessary to discontinue any such activities that the bank does not have a cost advantage in. there are several ways by which Al Rayan could achieve cost leadership and these include; capacity utilization of the funds available, economies of scale, product design, mass distribution and technology (Kurt and Zehir, 2016).

While lowering the costs of the services and products they offer, this will also enable Al Rayan to attract more customers including Non-Muslim customers and their market share will also grow. The cost efficiency of the banks operations will put the bank in a position to mark up prices that are lower than those of competitors and this will in the long run lead to increased sales because the banks competitors will not be in a position to match Al Rayan`s cost base which will be low. If the cost based is maintained at a minimum for longer time periods, stable profits and a consistent market share will be maintained and this will ensure superior performance.

The best way through which Al Rayan bank could use this strategy is trough adopting flat rate profit rates and reducing balance charged to customers in contrast to the fluctuating rates that other conventional banks charge. The bank could also achieve a low cost strategy by formulating policies and procedures that are able to enhance continuous innovation of products that are friendly to customers, business plans that are formulated on the low cost strategy and even formation of microfinance products that are group based aimed at attracting customers who earn low incomes (Das and Ghosh, 2015). Security services and other services like cleaning could possibly be outsourced so as to cut on costs. Al Rayan definitely does not have a competitive advantage on these.

5.2 Differentiation strategy

Al Rayan could also take up the differentiation strategy to attract more non-Muslim customers. Based on the characteristics of the services or product on offer, adopting the differentiation strategy, Al Rayan Bank would be at will to charge prices that are higher. That would however, depend on the quality of service, the service delivery system and the characteristics of the products and services. Differentiation strategies appeal most to knowledgeable and sophisticated consumers whose interest is mainly in the quality of services and products and who are always willing to pay prices that are higher (Wongsansukcharoen, Trimetsoontorn, and Fongsuwan, 2015).

In banks, service is rendered to customers by the interactions between the customers and the employees of the bank. Opportunities for evaluation of services are provided by the interactions between service providers and customers. As such, quality of service can be interpreted as the overall impression of a customer of either the superiority or inferiority of the organisation and its provision of services. It has been established that conceptualising services is harder as compared to products.

In Al Rayan`s efforts to differentiate itself from its competitors, its image would be a central factor. In general, the way through which services and products are made available to customers is normally critical in building a particular institutions image in the customer`s minds. Images like these are normally reflected in the feelings and perceptions of customers of the services and products offered. What is important about image is that, the experiences of customers with particular services and products normally have an effect on the attitudes of the customers towards a particular institution. In line with the differentiation strategy, customers should be capable of linking specific images with Al Rayan Bank because customers normally purchase services and products purposing at satisfying their wants and needs. As such it is necessary that Al Rayan should have a proper understanding of the nature of the needs of Non-Muslim customers so that they can be able to gain an understanding of the kind of benefits these customers would expect to receive. Ease of use, availability and novelty are some of the benefits that banking customers expect to receive from their use of a banks services (Yuliansyah, Rammal, and Rose, 2016).

Souiden and Rani (2015), hold the view that whenever a customer decides to use a product in preference for another, benefits enter into the equation. Services become attractive to customers as a result of the benefits received. In light of this, Al Rayan should strive to give more attention to the benefits Non-Muslim bankers would get from banking with them. The bank should be able to communicate these benefits to existing customers and even potential customers in a manner that is convincing either directly or indirectly. That would go a long way in persuading members of the public to choose an institutions services and products. Al Rayan needs to be very innovative in terms of the products and services it offers because Islamic banking is an alternative to conventional banking. Al Rayan Bank can only be able to sustain its competitive advantage against competing conventional banks through innovation in products and services.

Al Rayan Bank should come up with more differentiation strategies that will see it become more involved in the businesses of their customers and as such become more appealing. When the bank is more appealing to the existing customers, which will lead to more referrals. The management of the bank will also need to develop strategies for advertising that are more appealing and that are in a position to enhance the existing channels of communication between the bank and its customers. Today, there are numerous ways through which a bank may be able to advertise its offerings and these include the use of social media, televisions and radios (Yuliansyah, Rammal and Rose 2016).

5.3 Pricing strategy

The pricing strategy is another technique that could be used to improve the overall competitiveness of Al Rayan Bank. A strategy that is properly planned is the key to success in addition to establishing policies and constantly monitoring operation costs (Wuebker, Baumgarten and Koderisch, 2017). In studies conducted in the past, it has been established that religion is never a major factor of consideration for most customers when choosing the bank to bank with. What most customers seek are high returns with low charges imposed whenever they are making decisions on the banks to obtain funding from and banks where they can deposit.

Al Rayan could seek to gain a strategic competitive advantage through its pricing strategy. In such a situation, the management accounting function would be very helpful as it would assist in assessing the cost structures of different competitors and then subsequently relate that t their prices. It may even be possible to examine competitor’s cost-volume-profit relationship in a bid to predict their responses for pricing. Through monitoring movements in the market share of the major products in the baking industry, Al Rayan Bank could find out the strengths of its other competitors (Al-Azzam, 2015).

Across banks, prices are normally imposed as bank charges, fee implementation and interest rates. At least At Rayan does not charge interests for its loans. Because prices have wider implications for bank customers, switching behaviour in the banking sector is largely influenced by pricing. As such, the focus of customers is mostly on price fairness and any increments in prices deemed as unfair by customers may lead to them switching to other firms (Rostamkalaei and Freel, 2016). As such, Al Rayan bank would need to impose favourable pricing that could influence customers to switch to them from other banks.

Across banks, attraction and eventual retention of customers is largely dependent on the prices they charge for different services and products offered to customers and this is the reason why each and every other bank should always give consideration to the prices their competitors charge. One innovation that could lead to reduced service costs is electronic banking (Leon, 2015). Those customers who use electronic banking can always experience variable and fixed costs that are lower; this is largely as a result of the savings in labour costs and the reduced possibility of human errors with electronic banking. A significant contribution towards bank costs can be made by cost savings that are obtained from electronic banking and there would be a portion of these lowered costs being passed on to customers.

Customers always expect value for their money and this is the reason why Al Rayan bank should focus on providing unique products that are also of a good quality and also after sale support all this aimed at attracting customers. The management of the bank should endeavour to focus strategically on delivery of service whose quality is high as a means of achieving competitive differentiation. Customer loyalty could be enhanced by service product initiatives like provision of financial information and ease of access to accounts (Sia, Soh and Weill, 2016). And while focusing on the range of products they offer, banks should also focus on the people who deliver these services. There are numerous interactions created as a result of the numerous interactions between employees and customers in the service industry. At all times, the banks members of staff should always act professionally, have profound banking knowledge and always have a courteous attitude towards any customer who comes their way. For effective delivery of high-quality services by professional service staff, appropriate strategies for managing people are necessary.

5.4 Delivery and distribution

Even though there is some substantial expenditure required to maintain a network of branch offices, adopting such a strategy would provide low-tech branch based service options and high-tech distribution service options that are also convenient. That would give a bank an opportunity to sell a wide range of banking services to a range of customers that is even wider. Both banking costs and convenience of customers are affected by the movement towards systems of distribution that are not as centralised.

What would lead to increased convenience is the fact that customers will no longer have to travel far for simple intentions like performing the basic banking transactions (Vieira and Sehgal, 2018). Additionally, with the reduction of the number of full service branches, banks overhead expenses will also be lowered. As such, Al Rayan should rethink its strategies and embrace the internet even more aiming at attracting even more customers. That will ensure that the bank is able to effectively compete with other competing banks (Krishna, 2015).

The behaviour of financial services consumers has also been affected by the emergence of financial service industry. Today, customers are able to use their mobile phones for different transactions. What would have otherwise done in banking halls is today transacted through mobile phones thanks to mobile banking technologies (Shaikh and Karjaluoto, 2016). That in a big way attracts customers as they no longer have to frequent banks and their security is also enhanced. Additionally, today, consumers are also capable of purchasing financial products that are nearly identical that are provided by different banks, they are also able to bank and are also more prone to changing their banking preferences (Mullan, Bradley and Loane, 2017). It is as such crucial for the management of Al Rayan bank to have a good understanding of their customer’s behaviour if they really intend to influence them.

Banks can avoid the harmful consequences of customer defection through development of a thorough understanding of different banking factors that affect their customers (Shanmugam et al., 2015). That would put all banks in a better position to enhance its relationship with its customers. For effective and efficient customer service, each and every bank should invest in call centres that are open to customers at all times, and which customers can call in the event any issues arise that require to be solved with emergency. That would go a long way in enhancing offering of services as one does not need to walk to a banking hall to make a call; a call can always be made from one`s comfort zone.

These distribution channels are however not perfect substitutes entirely. This is because, while paying bills, transferring funds, applying for credit cards and checking account balances would not require personal contact between customers and bank staff, at times, applying for business loans, setting up new accounts, closing mortgages, and other transactions whose nature is complex require person-to-person communication and physical spaces that are secured (Al-Azzam, 2015). As a result of these, adopting a combination of delivery channels would be more effective. Today, banks are seen to use their ATMs as multi-purpose facilities because while also being able to perform different transactions, banks could also use these ATMs to advertise the different products they offer. Combining different distribution channels would in the long run lead to an increment in Al Rayan’s customer base, increased referrals and an overall increased market share.

5.5 Conclusion

Al Rayan bank could attract more non-Muslim customers through adoption of the low cost strategy that would see them formulate procedures and policies with the abilities of enhancing their strategies, develop business plans based in the low cost strategy, formation of microfinance products that are group based and innovation of products that are friendly to customers continuously. The microfinance based products that re group based would be aimed at attracting customers with low incomes.

Islamic banks earn an edge over conventional banks from the profit rate they charge on loans (Muhamad et al., 2015). This is because while, Islamic banks offer loans at flat rates, conventional banks offer loans on reducing balances that are ever fluctuating. The management and employees at Al Rayan bank should always be committed towards ensuring that the banks costs always remain low, as such they should endeavour outsourcing any such products that would otherwise add to the banks costs.

Through continuous innovation, Al Rayan bank will also be able to achieve continuous search for cost reduction through continuous innovation and training of its members of staff. The bank will also need to fight the perceptions that Islamic banking is only meant for Muslims in addition to the lack of information among most of the people on the kind of products Islamic banking has to offer. Adopting a proper differentiation strategy will enable the bank to provide services and products that are unique while at the same time reducing chances of default by borrowers in the event one takes a loan and their business collapses.

Al Rayan could also use the pricing strategy for purposes of attracting non-Muslim customers. These strategies would see them maintain their costs of operation at a minimum while also ensuring profits. The bank should also adopt the delivery and distribution strategy as it would see the bank open up even more branches, install more ATM networks, embrace mobile banking and even adopt the internet for its different operations.

5.6 Summary

This study established that adoption of differentiation, pricing, delivery and distribution and low cost strategies are the best ways through which Al Rayan could attract non-Muslim customers. For effective functioning of any institution, strategies are necessary. Through this study, it has been established that low cost strategies are commonly used in different banks and these strategies have guided banks to focus on provision of services and goods at costs that are lower as compared to their competitors. Such a strategy would be best achieved through formulation of procedures and policies that enhance continuous innovation of new products that are friendly to customers, formulation of business plans based on the low cost strategy, and formation of microfinance products that are group based intended at attracting customers whose incomes are low. The banks managers and employees should always be committed to ensuring that they always maintain costs at low levels and this will lead to the bank outsourcing some of its services whenever necessary.

5.7 Recommendations

This study recommends that the management of Al Rayan bank should ensure that it has in place policies intended at ensuring costs are maintained at minimum levels so that even with low incomes, they can remain in a position to make profits. The bank should also continuously train its employees on mechanisms of maintaining low cost strategies while at the same time avoiding incurring any such costs that they could do away with through outsourcing. That would give the bank the opportunity of remaining focused on core banking activities (Souiden and Rani, 2015). The bank should also endeavour to innovate such products that would enable them to effectively compete with other banks. It will also be necessary for the bank to embark on aggressive marketing aimed at changing the mass perceptions that Islamic banks only serve only Muslims (Jameel, 2017).

Al Rayan has already earned itself a unique position in the UK banking sector through provision of quality goods and services and as such, it is recommended that the bank continues investing even more funds towards innovation of unique products in a bid to differentiate themselves continuously. By not only focusing on Muslim customers, the bank should also focus on any such customer that would add value to them and this includes non-Muslim customers.

At all times, before embarking on pricing its products, Al Rayan should always study what its competitors charge for similar products and services so that they can be able to set prices that are acceptable to both current and potential customers. And while technology is widely adopted in most of the banks operations, the concept of information technology should be embraced more whole heartedly through adoption of electronic banking; this is largely because in the near future, only those banks that are capable of offering their customers with more technological features will stand out.

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