Just how loyal are Islamic banking customers?

The purpose of this paper is to determine the rate difference required to persuade Islamic banking customers to switch to conventional banks.

A choice-based conjoint analysis survey was administered to 300 UAE Islamic banking customers. Customer utilities for Islamic and conventional banks, products and prices were developed to test hypotheses while a market simulation estimated the impact of rate changes on choice shares.

Overall, Muslim customers of Islamic banks strongly preferred Islamic banks and products. However, 43 percent were willing to switch to conventional banks to obtain better rates. Indeed, the share choosing conventional banks rose from 25 percent when rates were the same to 68 percent when conventional products offered 2 percent better rates.

This research requires replication and extension in appropriate contexts such as Malaysia and Indonesia. Moreover, the existence of price sensitivity tiers implies underlying benefit segments that should be studied.

As so many Islamic banking customers would switch to conventional banks for better rates, it seems that conventional banks compete with Islamic banks for most clients. Islamic banks should price accordingly.

This is the first study to quantify the loyalty of Islamic banking customers in terms of price and, consequently, the first to demonstrate the existence of price sensitivity tiers. It is also the first in this field to apply conjoint analysis and market modeling.