Empirical Study on Adoption of Islamic Banking System Using Quantitative Method: A Case Study of Afghanistan

Transcription

1. TUJISE Turkish Journal of Islamic Economics Empirical Study on Adoption of Islamic Banking System Using Quantitative Method : A Case Study of Afghanistan Khatera Naseri Ashurov Sharofiddin Abstract: Although the background of the banking system goes back as far as 1933, Islamic finance is still new in Afghanistan. The history of the first full-fledged Islamic bank began as recently as 2018 with the conversion of Bakhtar Bank, a conventional bank, to the Islamic Bank of Afghanistan (IBA). There have been numerous studies done worldwide, but no empirical study has examined the subject of Islamic banking adoption in the specific context of Afghanistan. Therefore, this present study investigates the adoption of Islamic banking in Afghanistan, using a case study of Herat province, based on Rogers’ (1983) Diffusion of Innovation Theory, to determine the impact of awareness, product knowledge, religiosity, relative advantage, compatibility, and complexity on the adoption of Islamic banking. A quantitative approach to the stratified convenience sampling method was used in this study. Questionnaires were distributed to 334 bank customers and the responses analyzed using SPSS v22. The multiple regression analysis finding indicated that product knowledge, relative advantage, and religiosity significantly and positively influenced the adoption of Islamic banking. It is suggested that the government and financial institutions should support Islamic banking with beneficial policies and initiatives to enhance the knowledge of the public about the significance of Islamic banking activities. Keywords: Diffusion of innovation theory, Islamic banking, Adoption, Afghanistan JEL Classification: C12, G21, O31 Lecturer, Herat University, Afghanistan. khateranasiri@gmail.com Asst. Prof. Dr., International Islamic University Malaysia (IIUM). ashurov@iium.edu.my © Research Center for Islamic Economics 10.26414/A169 TUJISE tujise.org Submitted: 12.03.2020 Revised: 15.06.2020 Accepted: 20.07.2020 Online First: 15.08.2020
2. Turkish Journal of Islamic Economics (TUJISE) Introduction Islamic banking as a novel and alternative banking option in the global financial system has emerged since 1970 and has grown at an average annual rate of 14 – 18% over the past four decades, and even penetrated to western countries. The establishment of Islamic Financial Institutions (IFIs) has been increasing, and currently, they can be found in more than 75 countries (Yahaya, Hamid, Idris, & Haji-Othman, 2016). One of the Da Afghanistan Bank’s (Central Bank of Afghanistan) commitments is to promote Islamic banking in Afghanistan by establishing a legal and regulatory framework for Islamic banks. Towards this end, Da Afghanistan Bank (DAB) recently issued specific Islamic banking regulations that include Islamic Banking Regulations, product outlines, Shariah parameters, guidelines, and other regulations (Da Afghanistan Bank, 2019). To date, DAB has issued licenses for numerous Islamic banking windows of conventional banks, which now offer Islamic banking products and services. However, the existence of Islamic banking windows is not enough to meet the national demand. There is an urgent need for Full-Fledged Islamic Banks (FFIBs) in Afghanistan. Hence, following the “Regulation for Conversion of a Conventional Bank into an Islamic Bank”, DAB set comprehensive guidelines and criteria for such conversion (Da Afghanistan Bank, 2018). The Afghan banking system has faced many challenges in terms of regulations, modernizing, and a low number of depositors and borrowers, etc., since the first bank (Bank Millie Afghan) was established in 1933 (Khelwati, 2008). Although it has seen improvements since the establishment of the new government in 2001, with the help of international donors, Islamic banking is still new in Afghanistan and the first FFIB was recently set up in 2018. In terms of research, some limited empirical studies have been conducted in general on the Afghan banking system, but to the best knowledge of the researchers, there has not been any empirical study done specifically on Islamic banking adoption in Afghanistan. Researches done on the financial sector of Afghanistan report that overall, the number of Afghans who deal with banks is low. In Afghanistan, which is a majority Muslim country, it is estimated that only 10% of adults (and only 3.8% of adult women) have bank accounts, and loans to the private sector make up just 3.5% of GDP. Moreover, formal enterprises’ accessibility to banking accounts is only twothirds and just 2% of companies use bank loans to finance their investments (Rostom, 2018). 2
3. Naseri & Sharofiddin, Empirical Study on Adoption of Islamic Banking System Using Quantitative Method: A Case Study of Afghanistan Furthermore, according to Da Afghanistan Bank (2019) there is a very large gap between the number of depositors (3.83 million) and the number of borrowers (a little more than 67,000). Based on the Afghanistan National Statistics and Information Authority (2019), the total population of all provinces is 30,075,018. In 2019, only 12.7 % of the total population had bank deposit accounts, while 0.22 % of the population borrowed from the banks. Besides, in Herat province, which is the focus of the case study, the total active accounts were 203,236 in 2017. With the population of Herat at 2,050,514 therefore, only .9 % of the Herat province population who had active bank accounts in 2017. Thus, it is clear that in general, few of the country’s population deal with banks (Economics Faculty of Herat University, 2017; National Statistics and Information Authority, 2019). The relationship between the banking system and the development of countries is a concept that has been discussed among scholars. The banking system has always played a crucial role in the socio-economic development of countries, whether developed or developing. Some studies such as Kaushal and Ghosh (2018) found a long--term relationship between economic growth and the development of the banking and insurance sectors. IMF assessed the effect of Islamic banking on economic growth in their research, which illustrated that, by keeping the level of financial development and other determinants of growth constant, countries with Islamic banking will find its impact on growth is measurable, and they experience more rapid economic growth than other countries. Countries that are currently, suffering from low growth, a feature often found in Islamic countries, should consider expanding the Islamic financial sector further. As a first step, it is necessary to formulate appropriate rules, regulations, and establish support infrastructures including the necessary skill sets (Imam & Kpodar, 2015). To date, the Afghan banking sector, despite its high liquidity, has failed to play a significant role in supporting more inclusive economic development and financing (Rostom, 2018). This study will identify the relevant factors that may affect the rate of Islamic banking adoption. Six factors may influence the adoption rate of Islamic banking among Afghan consumers such as awareness, product knowledge, religiosity, relative advantage, complexity, and compatibility. To bridge these gaps in the literature, this current research examines Islamic banking adoption in Afghanistan and endeavors to determine the factors that influence the adoption of Islamic banking as a novel; banking service for Afghans. The findings of this study can add to the existing literature on the Islamic financial sector in Afghanistan. Such additional knowledge may facilitate future research 3
4. Turkish Journal of Islamic Economics (TUJISE) on the Islamic banking sector in Afghanistan. In light of the above, the following research questions are formulated for this study: 1. To what extent, does awareness influence the adoption of Islamic banking in Herat province, Afghanistan? 2. To what extent, does product knowledge influence the adoption of Islamic banking in Herat province, Afghanistan? 3. To what extent, does religiosity influence the adoption of Islamic banking in Herat province, Afghanistan? 4. To what extent, does relative advantage influence the adoption of Islamic banking in Herat province, Afghanistan? 5. To what extent, does complexity influence the adoption of Islamic banking in Herat province, Afghanistan? 6. To what extent, does compatibility influence the adoption of Islamic banking in Herat province, Afghanistan? Literature Review The Diffusion of Innovation Theory (DIT) was applied to determine whether the perceived attributes of innovation such as compatibility, relative advantage, and complexity have any influence on the adoption of Islamic banking among consumers. Yahaya et al., (2014) mentioned Rogers’ DIT as one of the most frequently applied models in the study of innovation adoption. Innovation is most commonly defined as “a change in structure, design, of products or processes in which there is a definable new element introduced into the system” (p.15). Innovation is also described as “an idea, practice, or object that is perceived as new by an individual or other unit of adoption” (Rogers, 1983, p.11). ‘Newness’ in innovation is not merely new knowledge. Someone may have been aware of innovation for some time but has not yet developed a favorable or unfavorable attitude toward it, nor has it been accepted or rejected. The ‘newness’ of innovation “may be expressed in terms of knowledge, persuasion, or a decision to adopt” (Rogers, 1983, p.11). On the other hand, ‘diffusion’ is the process by which innovation is communicated through specific channels to the members of a social system. Rogers (1983) also stated that it is a special kind of communication because messages are about new ideas. It is important to note the subtle distinction between the ‘dissemination’ of information and the ‘diffusion’ of innovative ideas. 4
5. Naseri & Sharofiddin, Empirical Study on Adoption of Islamic Banking System Using Quantitative Method: A Case Study of Afghanistan As for adoption, Rogers (1983) indicates a logical progression that shifts from awareness to acceptance and usage of a product or service innovation. Further clarification of adoption is provided by Mariadas and Murthy (2017) who describe it as “how well consumers can receive a product or service as well as how likely they are to use the product or service in the future” (P.188). What is important to note is that DIT presents five constructs that can influence the adoption of any innovation, namely, the relative advantage, compatibility, trialability, complexity, and observability (Ganiyu & Adeosun, 2013). Rogers (1983) again makes a succinct observation of innovation adoption by stating that innovations that are perceivable to people are more likely to have a greater relative advantage, trialability, compatibility, observability, and less complexity of being adopted compared to other innovations. Awareness Awareness refers to customers’ knowledge level of an Islamic banking product or service in terms of how much they know or do not know. Awareness is considered the first step in the adoption of any product or service (Rogers, 1983). In this study, awareness is considered as the general understanding of customers about the Islamic banking concept. Thambiah, Ismail, and Eze (2011) conducted a study on the urban and rural customers’ awareness and usage of Islamic retail banking (IRB) products and services and reported that urban customers were more aware of IRB than their rural counterparts, also noting that awareness and usage of IRB were closely related. Ashurov, Idris, and Othman (2018), and Mahdzan, Zainudin and Au (2017) found that awareness of Islamic banking products and services significantly influences Islamic banking adoption, while a survey in South Africa found that although customers were aware of Islamic banking, their usage rate was still low because for customers when they tried to choose a bank some factors such as lower bank charges, efficiency, availability of ATMs and existence of more branches were more important than only the religious factor (Saini, Bick & Abdulla, 2011). This present study, therefore, assumes the following hypothesis: H1: There is a positive relationship between customers’ awareness of Islamic banking and its adoption. Product Knowledge Knowledge is defined as “information combined with experience, context, interpretation, and reflection, as well as an organized combination of ideas, rules, and 5
6. Turkish Journal of Islamic Economics (TUJISE) procedures” (Harun, Rashid & Hamed, 2005 p.24). In this study, product knowledge means the knowledge of customers about some specific and important products of Islamic banking such as Murabaha, Ijarah, Musharakah, Mudarabah, etc. Naser, Jamal, and Al-Khatib (1999) investigated the awareness of customers regarding Islamic banking products and services and came to the conclusion that most customers know specific products like Mudarabah and Murabaha, but most of them are not involved with these products. Another study by Okumuş (2005) in Turkey reported similar findings. Some other researches were done in the context of Pakistan and Malaysia (Khattak & Rehman, 2010; Mariadas & Murthy, 2017). Khattak and Rehman (2010) in their study in Pakistan indicated that customers were aware of some general products such as current accounts and time deposit accounts, but most of them were ignorant about specific products such as Murabaha and Ijarah, whereas Mariadas and Murthy (2017) in Malaysia reported two factors that influenced the adoption of Islamic Banking, which were consumers’ knowledge and consumers’ satisfaction. Based on the discussed literature the following hypothesis is formulated: H2: There is a positive relationship between customers’ product knowledge and the adoption of Islamic baking. Religiosity Some scholars have discussed the religious concept as a multifaceted structure that influences beliefs, identities, and lifestyles and religiosity refer to examine the level of religious practice of customers (Sun, Goh, Fam, & Xue, 2012). In the current study, religiosity has been considered as belief in Allah and as a measure of a Muslim’s religious values and practices in his/her daily life. According to Ahmad, Rahman, Seman and Ali (2008) religion is assumed to significantly influence ethical beliefs, and this in itself will be manifested in the consumer’s daily actions and obligations. The same researchers argued that “The lack of formal religious background in Islamic teachings may explain the reason for low religious belief as well as a lack of awareness for the requirement to only patron Islamic banking” (p.109). Based on their findings, during a bank selection, the availability of ATMs was the most important factor. As such, Islamic bankers should focus on expanding and enhancing their electronic services to attract more customers. Gerrard and Cunningham (1997) researched Islamic banking in Singapore and found that Muslim customers choose to deposit their money in Islamic banks be6
7. Naseri & Sharofiddin, Empirical Study on Adoption of Islamic Banking System Using Quantitative Method: A Case Study of Afghanistan cause of the religiosity factor. Another study by Naser et al., (1999) in Jordan reported that the two leading factors, which motivated consumers to use Islamic banks services, were the bank’s image and reputation, and the religious beliefs. Moreover, a majority of customers (70%) indicated religious reasons as a factor for dealing with Islamic banks. Meanwhile, Bley and Kuehn (2004), and Obeid, and Kaabachi (2016) also revealed the religious factor as a predictor of Islamic banking adoption in their research. In light of the above, the following hypothesis is formulated: H3: There is a positive relationship between religiosity and the adoption of Islamic baking. Relative Advantage “Relative advantage is the degree to which an innovation is perceived as better than the idea it supersedes” (Rogers, 1983, p.15). The degree of relative advantage can be assessed economically; while social prestige, comfort, and satisfaction are also crucial factors. It is not an issue if an innovation has many objective advantages. What matters is whether the individual finds the innovation useful (Rogers, 1983). This study considers the relative advantage factor for the adoption of Islamic banking from economic and social prestige perspectives such as risk reduction, profit, and loss sharing trust and justice. Many studies indicated the consistent influence of relative advantage on adoption. For example, Aziz et al., (2015) stated that there is a positive significant influence of relative advantage on attitude toward Islamic banking products and services. Furthermore, a meta-analysis of innovation features and innovation adoption-implementation by Tornatzky and Klein (1982) found relative advantage to be a significant factor in affecting the adoption of novel innovations. Diffusion scholars consider the relative advantage to be one of the best predictors of innovation adoption. Relative advantage represents the benefits and costs of adopting innovation. The present study, therefore, assumes the following hypothesis: H4: There is a positive relationship between the relative advantage and adoption of Islamic baking. Complexity According to Rogers (1983) complexity is “the degree to which an innovation is perceived as difficult to understand and use” (p.15). The same author argued that some innovations are easily understood, while others are more complex and take a long 7
8. Turkish Journal of Islamic Economics (TUJISE) time before they are adopted. A new idea that is easily understood is adopted more quickly compared to other innovations that require some new skills to be learned before they are deemed adoptable. Some researchers have found the significant influence of complexity on the adoption of Islamic banking ( Jamshidi, Hussin, & Wan, 2015; Thambiah, Ramanathan, & Mazumder 2012) conducted a study to identify the influential factors in the adoption of Islamic banking among Muslims and non-Muslims in Malaysia. The study found that the complexity and adoption of Islamic banking products and services were significantly related. Based on the literature about complexity, the following hypothesis is formulated: H5: There is a negative relationship between complexity and adoption of Islamic baking. Compatibility Compatibility is defined as “the degree to which an innovation is perceived as being consistent with the existing values, past experiences, and needs of potential adopters” (Rogers, 1983, p.15). Customers have many reasons to accept Islamic banking, and compatibility is a major factor. Islamic banking offers a variety of products and services, and customers evaluate whether they fit their needs, habits, beliefs, social system norms, values and lifestyle as well (Obeid & Kaabachi, 2016). This current research seeks to investigate the compatibility of Islamic banking from the customers’ perception, and its impact on the adoption of Islamic banking. Also, Echchabi and Aziz (2012) reported that compatibility has a significant influence on the adoption of Islamic banking services. Obeid and Kaabachi (2016) reported the same findings in Tunisia that compatibility is a predictor of Islamic banking adoption and Islamic banking services are compatible with customers’ habits, values, and lifestyles. Hence, based on the above, this study assumes the following hypothesis: H6: There is a positive relationship between compatibility and adoption of Islamic baking. Based on the literature review, six factors such as awareness, product knowledge, religiosity, relative advantage, complexity, and compatibility are considered as independent variables (IVs) and adoption as a dependent variable (DV) in this study. From these independent variables, three out of six variables are adopted 8
9. Naseri & Sharofiddin, Empirical Study on Adoption of Islamic Banking System Using Quantitative Method: A Case Study of Afghanistan from Roger’s Theory, namely, relative advantage, compatibility, and complexity, while the three remaining variables, such as awareness, religiosity, and product knowledge are considered in this study as the contribution of the researcher as they have been tested in different studies around the world. Therefore, the conceptual framework for this research is as constructed as shown below. Figure 1 Conceptual Framework Methodology As this study aims to determine the relationship between independent variables IVs and dependent variable DV, the appropriate method for this study is quantitative. A quantitative research method is especially useful when there is a wish to test hypotheses. We might want to explain something, for example, determining if there is a relationship between two variables (Muijs, 2010). A total of 334 copies of the questionnaire was distributed applying the stratified convenience sampling method to bank customers in Herat province. Stratified convenience sampling was used to ask customers with active bank accounts for their response. The data in this study were therefore derived from primary sources collected through a survey questionnaire. 9
10. Turkish Journal of Islamic Economics (TUJISE) In this study, the stratified sampling method was used to allocate the target population to 11 categories, comprising the active banks as shown in Table 1. It is very difficult to get a detailed list of active bank account holders in Afghanistan. Hence, this study used convenience sampling for gathering the sample from each category instead of using random sampling as that was not possible. The researchers chose a stratified convenience sampling from each group through a sampling ratio and for controlling the sample size of each group: first, the Google Form link was sent to the customers. The sample size of 31 was related to six banks with less active accounts as shown in Table 1, such as the following: Pashtany Bank and Bank Alfalah, which do not have any Islamic banking windows and Ghazanfar Bank, Bank Millie Afghan, Afghan United Bank, and Afghanistan International Bank with having Islamic banking windows. For the remaining five banks, hard copies of the questionnaire were distributed among the Banks’ customers and it continued until the target-stratified sample ratios were attained as illustrated in Table 1. Convenience sampling refers to gathering information from members of the population that are available to provide it. This kind of sampling is most often used in the exploratory phase of a research project and maybe the best way to obtain early and efficient initial information (Sekaran & Bougie, 2016). In the selection process, all the participants were screened before they responded to the survey. In this research, the inclusion criterion was having an active account in one of the commercial banks in Herat province. This was important to ensure that the correct sample was chosen for the research. In most cases where the population is large, sampling is needed. Sample size estimation in research commonly uses the Krejcie and Morgan (1970) method, which involves the following formula (Chuan & Penyelidikan, 2006): S = X2NP (1-P) / d2 (N-1) + X2P (1-P) where: S = the required sample size; X2 = the table value of chi-square for one degree of freedom at the desired confidence level; N = the population size; P = the population proportion (assumed to be .50 since this would provide the maximum sample size); and d = the degree of accuracy expressed as a proportion (.05). 10
11. Naseri & Sharofiddin, Empirical Study on Adoption of Islamic Banking System Using Quantitative Method: A Case Study of Afghanistan At a 95% confidence level with a degree of freedom 1, the chi-square (x2) value is 3.841 and at a 95% confidence level, the margin of error (d2) is 0.05. Hence, with a population of 203,236, the sample size is 383. S = 3.841*203,236*0.5 (1-0.5) / (0.05)2 (203236-1) + 3.841*0.5 (1-0.5) = 383.37 Table 1 Banks’ Active Accounts Active Accounts Percentages = ACs / 203236 Sample= Percentages*400 Valid Questionnaires Pashtany Bank 1563 0.007690567 3 3 2 First Micro Finance Bank 30700 0.151055915 60 50 3 Maiwand Bank 27069 0.133189986 53 53 4 New Kabul Bank 90110 0.443376174 177 122 5 Ghazanfar Bank 1542 0.007587238 3 3 6 Bank Millie Afghan 2418 0.011897498 5 5 7 Islamic Bank of Afghanistan (FFIB) 10804 0.053159873 21 21 8 Azizi Bank 28908 0.14223858 57 57 9 Afghan United Bank 4200 0.02066563 8 8 10 Bank Alfalah 422 0.002076404 1 1 11 Afghanistan International Bank 5500 0.027062135 11 11 203,236 1 400 334 No. Banks 1 Total Source: Economics Faculty of Herat University (2017) The sample size for the population of 203,236 according to the Krejcie and Morgan, (1970) formula for this research determined 383 participants. A sample size of more than 30 and less than 500 is adequate for most researches (Sekaran & Bougie, 2016). Therefore, to get the sample size the researcher decided to have two forms of questionnaire distribution. For those six banks having a smaller number of active accounts as mentioned before, the questionnaires were distributed through Google Form due to time and cost limitations. The total sample needed for 11
12. Turkish Journal of Islamic Economics (TUJISE) these six banks was 31. Hence, the questionnaires were sent to 82 bank customers and 31 of them were used as a valid sample to control the strata sample size. Moreover, the remaining 51 questionnaires dropped from the sample were filled by other bank customers and not the customers related to these six banks. Furthermore, 400 hard copies of the questionnaire were distributed to the customers of five banks with a large number of active accounts such as First Micro Finance Bank, Maiwand Bank, New Kabul Bank (Islamic banking window), Islamic Bank of Afghanistan (Full-fledged Islamic banks), and Azizi Bank. From all distributed questionnaires, 356 were returned, and 10 questionnaires (three related to First Micro Finance Bank and seven related to New Kabul Bank) were excluded from the data entry phase for various reasons including incomplete responses. Therefore, the total number of responses for questionnaires was 377, which included 31 from Google Form and 346 (out of 400). However, 43 questionnaires were deleted during data analysis due to the existence of outliers, and the remaining 334 questionnaires were used for the eventual data analysis of this study. To obtain the necessary information about the factors influencing Islamic banking adoption the combination of an adapted and self-administrated questionnaire was employed. The questionnaire from Thambiah (2012) on IRB adoption that was conducted in Malaysia was considered as the main basis for developing the questionnaire for this study. However, there were some questions adapted from Ashurov et al., (2018), Al-jabri and Sohail (2012), and Azam, Qiang, Abdullah, and Abbas (2011) and self-developed questions. This study used the Statistical Package for Social Sciences (SPSS 22) to analyze the data. The multicollinearity of the variables, the descriptive analysis, correlation, and multi regression analysis was done, to test the relationship between dependent and independent variables. The regression and correlation analysis would be used to determine the acceptance or rejection of the research hypothesis. Reliability Analysis Findings Cronbach’s alpha ranges from zero for a completely unreliable test (although technically it may be below zero) to a completely reliable test. For the Cronbach’s alpha value for the reliability of the questionnaire, an alpha score above 0.75 is usually used to illustrate a scale of high reliability, generally ranging from 0.5 to 0.75 as a relatively valid scale (Hinton, Brownlow, McMurrar, & Cozens, 2004). Therefore, according to Table 2, none of the variables has low reliability due to none of them being below 0.5. 12
13. Naseri & Sharofiddin, Empirical Study on Adoption of Islamic Banking System Using Quantitative Method: A Case Study of Afghanistan Table 2 Reliability Test (Cronbach’s Alpha) Variables Number of questions Cronbach’s Alpha Average mean value Awareness 5 0.715 3.968 Product Knowledge 5 0.912 2.174 Religiosity 4 0.746 3.7175 Relative Advantage 5 0.804 3.198 Complexity 5 0.707 2.614 Compatibility 5 0.882 3.948 Adoption 5 0.817 2.768 Overall 34 0.869 Demographic Characteristics of Respondents The background of the respondents consists of their age, gender, marital status, education, employment status, and type of employment, income level. Table 3 Demographic Characteristics of Respondents Demographic Age Gender Marital Status Education Info Frequency Percentage Below 20 12 3.6 21-25 131 39.2 26-35 144 43.1 36-45 39 11.7 46-55 6 1.8 Above 55 2 0.6 Male 219 65.6 Female 115 34.4 Single 136 40.7 Married 198 59.3 High School 71 21.3 College 38 11.4 Bachelor 169 50.6 Master 51 15.3 PhD 5 1.5 13
14. Turkish Journal of Islamic Economics (TUJISE) Employment Type of employment Income Level Yes 298 89.2 No 36 10.8 Government Sector 133 39.8 Private Sector 168 50.3 Student 15 4.5 Housewife 13 3.9 Others 5 1.5 Less than 10000 103 30.8 10001-20000 100 29.9 20001-30000 78 23.4 30001-40000 22 6.6 40001-50000 14 4.2 More than 50000 17 5.1 Most of the respondents (43.1%) were between 26 and 35 years old. Respondents aged between 21 and 25 years represented 39.2%, and respondents aged between 36 and 45 years made up 11.7%. Collectively, these three age groups represented 94% of the respondents in this study. However, the respondents below 20 years of age, 46 to 55 years old, and above 55 years collectively represented 6%. Hence, most of the respondents were young and between the ages of 21 and 45 years. Also, most of the respondents were male (about 65.6%) while 34.4% of the total respondents were females. Furthermore, most of the respondents (59.3%) were married while those who were single made up 40.7%. From all respondents, 50.6%. Have a bachelor’s degree while 21.3% were school diploma holders, 15.3% held a master’s degree and college diplomas and PhD holders made up 11.4% and 1.5% respectively. As most of the participants had a bachelor’s degree it shows that the general education level has increased in Afghanistan. Most of the respondents (89.2%) had a job while only 10.8% of them were unemployed. Therefore, it can be stated that most of the respondents were employed, and having a salary account in an Afghan bank was common. The majority (50.3%) of the respondents were private-sector employees. However, the respondents with jobs in the government sector comprised 39.8%. The other three groups of respondents such as students, homemakers, and others made up about 10%. Finally, as can be seen, the majority (30.8%) of the respondents had a low-income level of less than AFN10, 000. The next two other levels of income, AFN10,001-20,000 and AFN 20,001-30,000 represented 29.9% and 23.4% respectively in this study. However, the three remaining income levels of AFN 30,001-40,000, AFN40,001-50,000, and above AFN50,000 made up 6.6%, 4.2%, and 5.1% respectively It shows that the income levels of participants were low. 14
15. Naseri & Sharofiddin, Empirical Study on Adoption of Islamic Banking System Using Quantitative Method: A Case Study of Afghanistan Correlation Correlation analysis was employed to explain the direction and strength of the linear relationship between DV and the six IVs. Correlation coefficients of Pearson (r) can only obtain values of –1 to +1, which show whether it exists as a positive correlation (with increasing one variable, as another) or a negative correlation (decreasing another by increasing one variable). A full correlation of +1 or -1 indicates that one variable value can be determined exactly by knowing the value of another variable. A scattering of this relation shows a straight line. However, a correlation of zero shows that there is no relationship between the two variables. It indicates that knowing the value of one variable cannot predict the value of the second variable. The scatterplot shows a circle of points, with no specific pattern (Pallant, 2005). According to Sekaran and Bougie (2016) Pearson’s bivariate correlation is considered appropriate for the variables that are measured on the interval scale. Hence, in this study, Pearson’s correlation analysis is used to examine the relationship between the DV and the IVs. Pearson Correlation Pearson Correlation .055 .314 1 15 Adoption Compatibility Complexity Relative Advantage Relig-iosity Product Knowledge Sig. (2-tailed) 1 Sig. (2-tailed) Product Knowledge Awareness Awareness Table 4 Correlations
16. Pearson Correlation .063 .268** Sig. (2-tailed) .248 .000 Pearson Correlation .005 .237** .467** Sig. (2-tailed) .927 .000 .000 Pearson Correlation .043 .157** -.020 .146** Sig. (2-tailed) .433 .004 .712 .008 Pearson Correlation -.026 -.015 .488** .463** -.026 Sig. (2-tailed) .635 .784 .000 .000 .632 Pearson Correlation -.016 .633** .500** .405** .095 .198** Sig. (2-tailed) Adoption Compatibility Complexity Relative Advantage Religiosity Turkish Journal of Islamic Economics (TUJISE) .773 .000 .000 .000 .083 .000 1 1 ** Correlation is significant at the 0.01 level (two-tailed) 16 1 1 1
17. Naseri & Sharofiddin, Empirical Study on Adoption of Islamic Banking System Using Quantitative Method: A Case Study of Afghanistan Table 4 illustrates the Pearson correlation coefficient among each pair of variables listed in a study. There are different interpretations of the Pearson correlation. The Pearson correlation r = .10 to .29 or r = –.10 to –.29 is considered as a small correlation, r = .30 to .49 or r = – .30 to – .49 is considered as a medium correlation, and r = .50 to 1.0 or r = –.50 to –1.0 is considered as a large correlation (Pallant, 2005). In this study, the correlation between the dependent variable and independent variables illustrates a very small negative correlation between awareness and the adoption of Islamic banking, which is -.016 and a small positive correlation between complexity, compatibility, and adoption, that is .095 and .198 respectively, while the .405 shows the existence of a medium correlation between relative advantage and adoption. On the other hand, there is a large correlation of .633 and .500 respectively between product knowledge, religiosity, and adoption obtained from this correlation analysis. Multiple Regression Analysis Multiple regression is based on correlation but provides more complex discoveries than the interrelationships between a set of variables. It illustrates the degree of the variance that can be explained by the IVs. It also indicates the relative contribution of each IV. Tests allow the researchers to determine the statistical significance of the results, both model and individual (Pallant, 2005). In this study, a linear regression analysis was used to find the factors affecting the adoption of Islamic banking in Herat province. Table 5 below shows the result of the linear regression analysis for this study. Table 5 Linear Regression Test Unstandardized Coefficients Standardized Coefficients B Std. Error Beta (Constant) .252 .347 Awareness -.115 .067 -.065 Product Knowledge .491 .038 Religiosity .377 Relative Advantage Model T Sig. .725 .469 -1.715 .087 .521 12.772 .000 .059 .302 6.387 .000 .171 .054 .146 3.157 .002 Complexity .001 .048 .001 .022 .983 Compatibility -.011 .050 -.010 -.226 .822 a. Dependent Variable: Adoption 17
18. Turkish Journal of Islamic Economics (TUJISE) Based on Table 5 above, three out of six independent variables have a significant influence on the adoption of Islamic banking, which are: product knowledge (p=0.000), religiosity (p=0.000), and relative advantage (p=0.002), as p-value is less than 0.05. It can be concluded that enhancing the customers’ product knowledge, religiosity and relative advantage levels will significantly increase their adoption of the Islamic banking level. Furthermore, for these six variables, the influence of awareness and compatibility is negative on adoption and the remaining four variables have a positive influence on the adoption of Islamic banking. However, awareness influences (p=0.1) on adoption whereas complexity and compatibility have no significant influence on adoption. Hypotheses Testing As can be seen in Table 6 below, from the six hypotheses of this study, the hypotheses related to awareness, complexity, and compatibility are rejected, while three hypotheses of product knowledge, relative advantage, and religiosity are accepted. Table 6 Hypotheses Testing Variables Hypotheses P-value Decision Awareness H1: There is a positive relationship between the awareness of customers and the adoption of Islamic baking in Afghanistan. 0.087 Not Supported Product Knowledge H2: There is a positive relationship between product knowledge of customers and the adoption of Islamic baking in Afghanistan. 0.000 Supported Religiosity H3: There is a positive relationship between religiosity and the adoption of Islamic baking in Afghanistan. 0.000 Supported Relative Advantage H4: There is a positive relationship between the relative advantage and adoption of Islamic 0.002 baking in Afghanistan. Supported Complexity H5: There is a negative relationship between complexity and adoption of Islamic baking in Afghanistan. 0.983 Not Supported Compatibility H6: There is a positive relationship between compatibility and adoption of Islamic baking in Afghanistan. 0.822 Not Supported 18
19. Naseri & Sharofiddin, Empirical Study on Adoption of Islamic Banking System Using Quantitative Method: A Case Study of Afghanistan Discussion of the Findings The main purpose of conducting this research was to investigate the adoption of Islamic banking in Afghanistan, through a case study of Herat province. To attain the objectives of this research, the data were analyzed using SPSS v22. The analyses included descriptive, correlation, and multiple regression. The findings of this study show that from six hypotheses three of them, which related to product knowledge, relative advantage, and religiosity were accepted while the hypotheses related to awareness, complexity, and compatibility were rejected. The details of the accepted hypotheses are shown in table 6. The second hypothesis of this study was “There is a positive relationship between product knowledge of customers and the adoption of Islamic baking,” which was accepted. A descriptive analysis was done for the second question, which is “To what extent, does product knowledge influence the adoption of Islamic banking in Herat province, Afghanistan?” As shown in Table 2 the average mean value of this variable (2.174) is less than moderate, it is concluded that customers do not have a lot of knowledge about Islamic banking products and services (Murabaha, Mudarabah, Musharakah, Salam, and Ijarah), maybe it is due to that the Islamic banking concept recently emerged between Afghans. Moreover, multiple regression analysis was performed in Table 5 to determine the effect of product knowledge on adoption. It shows that Product knowledge has a significant influence because of p-value = .000. This significant influence of product knowledge on adoption can be a strong factor for consideration of banks. It means they should consider improving customer knowledge about their products and services in their marketing strategies and this improvement could influence the adoption rate of Islamic banking among them. This finding is supported by studies done by other researchers. Naser et al., (1999) found that customers have a little knowledge of specific products such as Mudarabah and Murabaha, but they do not deal with these products. The same findings by Okumuş (2005) in Turkey show that customers are aware of specific products such as Musharakah and Mudarabah, but most of them do not deal with these products. Besides, Ashurov et al., (2018) reported that customers are not aware of some specific products such as Ijarah, Muhdarabah, Musharakah, and Murabaha, while Khattak and Rehman (2010) indicates that most of the customers are ignorant of specific products such as Murabaha and Ijarah. In this study, the customers’ knowledge about Murabaha, Mudarabah, Musharakah, Salam, and Ijarah contracts is low. Therefore, as the previous researches have shown, with the existence of a low rate of product knowledge among customers their adoption rate of Islamic banking products and services is low as well, which means there is a significant relationship between product knowledge and adoption of Islamic banking. 19
20. Turkish Journal of Islamic Economics (TUJISE) Hence, by improving the knowledge of Afghan customers about Islamic banking products and services, their rate of Islamic banking adoption will increase. The third hypothesis of this study was “There is a positive relationship between religiosity and the adoption of Islamic baking,” which is accepted. A descriptive analysis was performed for the third question, which is “To what extent, does religiosity influence the adoption of Islamic banking”. A descriptive analysis was performed for this variable as shown in Table 2. According to the average mean value of this variable (3.7175), it is shown to be more than moderate. Hence, customers practice religiosity in their daily life. It is maybe due to the majority of Afghans are Muslim and they have religious knowledge. As discussed before according to Ahmad et al., (2008) Muslim’s formal religious education and maturity influence their religiosity. Also, multiple regression analysis was done to determine the impact of religiosity on adoption. It shows that religiosity has a positive effect on Islamic banking adoption and this positive effect is significant because the p-value = .000. Furthermore, the findings of this study are similar to the findings of other researches done in different countries. Gerrard and Cunningham (1997) found that Muslim customers choose to deposit their money in Islamic banks because of the religiosity factor. Another study conducted by Naser et al. (1999) found that one of the factors influencing the adoption of Islamic banking is religious beliefs and it is a reason for the customer to deal with Islamic banks. Moreover, Bley and Kuehn (2004), and Obeid and Kaabachi (2016) revealed from their research, that the religious factor is a predictor for the adoption of Islamic banking. Although, in this study, even the level of religiosity of the banks’ customers is more than moderate and it has a positive significant impact on adoption, but the adoption rate of Islamic banking is low as mentioned before. It can be concluded that even the religious factor is important for them, but it will not be the only factor for motivating people to adopt Islamic banking. This interpretation is supported by the findings of Ahmad et al. (2008) who indicated that when the customers try to select a bank for their dealings, the religiosity factor significantly influences their selections, but it is not the only factor. Therefore, Islamic banks may also focus more on developing and expanding their services to attract more customers. Moreover, Dusuki and Abdullah (2007) argued that Islamic banks cannot rely only on religious products and services but must be able to compete in the banking industry by improving the quality of their products and services, especially in countries with dual banking systems. As such, the religiosity factor significantly influences the adoption of Islamic banking among customers and the descriptive analysis in Table 2 shows a high average mean value of more than moderate. It means that the religious factor is important for Afghan customers so maybe if the banks pay more attention to 20
21. Naseri & Sharofiddin, Empirical Study on Adoption of Islamic Banking System Using Quantitative Method: A Case Study of Afghanistan increase the quality of their products and services it can positively influence the adoption of Islamic banking services and products among Afghans. The fourth hypothesis of this study was “There is a positive relationship between relative advantage and adoption of Islamic baking,” which is accepted. A descriptive analysis was performed for the fourth question, “To what extent, does relative advantage influence the adoption of Islamic banking”. According to the average mean value of this variable (3.198), it is concluded that the average mean value is more than moderate. Hence, Afghan customers believe in the relative advantage of Islamic banking over the other systems. This view of Afghan costumers can be a strong factor for banks to employ beneficial methods to improve their customers’ product knowledge and offering them, good services to encourage them to adopt Islamic banking products and services. Additionally, Table 5 shows that relative advantage positively affects Islamic banking adoption and this positive effect is significant because the p-value = .002. The outcomes of this study are also in agreement with those of previous studies. Aziz et al. (2015) found that relative advantage positively and significantly influenced customers’ attitudes toward Islamic banking products and services. Latip, Yahya, and Junaina (2017) reported that relative advantage was a second significant factor in the usage of IRB products and services. The significant positive influence of relative advantage on adoption was supported by Al-Ghaith, Sanzogni, and Sandhu (2010), Kolodinsky, Hogarth, and Hilgert (2004), Obeid and Kaabachi (2016), and Tornatzky and Klein (1982). Moreover, a study by Al-jabri and Sohail (2012) also found a positive impact of relative advantage on adoption. Thus, the relative advantage in this study appears to have a positive and significant impact on the adoption of Islamic banking among customers. It shows that the perception of relative advantage increases the adoption rate of Islamic banking products and services. Therefore, it can be concluded that the perceived relative advantage motivates the adoption of Islamic banking products and services. However, awareness of Islamic banking products and services, compatibility, and complexity were found to be insignificant predictors of Islamic banking adoption. This shows that Afghan customers are generally aware of Islamic banking because in this study awareness was considered as the basic knowledge of customers about Islamic banking. For instance, awareness of customers about Islamic banking in general, the concept of profit and loss sharing, the existence of full-fledged and windows of Islamic banking in Afghanistan, and the necessities of Islamic banking operations in society. Also, as a majority Muslim country, they are aware of the basic concept of Islamic banking and it is compatible with their values, experiences, lifestyle, and needs. The insignificant influence of complexity is may be due to that about 70% of the respondents had a College’s or Master’s degree. 21
22. Turkish Journal of Islamic Economics (TUJISE) Conclusion In general, all the objectives of this research have been achieved. It can be illustrated that all research variables have been measured in an effective way employing a quantitative approach. As mentioned earlier, public dealings with the banking sector including Islamic banking in Afghanistan are very low. Consequently, attention needs to be paid to the factors that influence the adoption of Islamic banking, which is important for increasing the adoption and usage rates of Islamic banking products and services. Accordingly, the focus of the current study was to identify the factors influencing the adoption of Islamic banking in the Herat province of Afghanistan by examining the Diffusion Innovation Theory from Rogers. The primary data were collected from 334 participants in Herat province through a quantitative stratified convenience method and subjected to multiple regression analysis. The results show that relative advantage, religiosity, and product knowledge variables have a significant positive influence on the adoption of Islamic banking. It can be concluded that the religiosity and relative advantage of the customers according to the average mean values from the descriptive analysis as shown in Table 2 are higher than moderate (3.7175, 3.198 respectively), but the product knowledge of customers is low, at 2.174, which is less than moderate. Additionally, the constructs related to awareness and compatibility have a negative influence, and the construct related to complexity has a positive influence, while the influence of all was insignificant. The review of the literature indicated that there have been many studies on the adoption of Islamic banking in other countries and some of them applied the Diffusion of Innovation Theory as a theoretical basis for their study. However, this study is pioneering to examine the adoption of Islamic banking in Afghanistan, also based on Roger’s Diffusion of Innovation Theory. Moreover, this study bridges the gaps in the literature about Islamic banking adoption in Afghanistan and can be a useful guide for bankers and policymakers to formulate beneficial policies to enhance the adoption of Islamic banking in Afghanistan. The government and financial institutions have been encouraged to support Islamic banking through their policies and to improve people’s knowledge about the importance of Islamic banking operations to motivate them to adopt it. In addition, because there is lack of empirical studies about the banking system in Afghanistan, this research will provide information about the factors that influence the adoption of Islamic banking and it may be an excellent opportunity for other researchers to study more about the banking system of Afghanistan, particularly Islamic banking and conduct more research in that direction to contribute more in22
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