Abstract

Malaysia has the most active and developed Islamic banking sector in the East Asian region. This sector is set to grow with both Islamic and non-Islamic banks (dual window system) now offering a range of Shariah compliant financial products. With increasing competition in terms of better services and recent specific requirements for Shariah compliance, the Islamic banking sector is not only expected to provide a higher standard of quality service but also to be more focused on being Shariah compliant.

Hence, this study recognizes the need to expand the dimensions of Shariah compliance looking at the impact of both service quality and Shariah compliance in terms of customer satisfaction taking customer satisfaction as a mediator to customer loyalty and customer retention. This research formulates an enhanced model named SCSQ model for service quality and customer satisfaction of Islamic banks in Malaysia.

The main purpose was constructing and evaluating a new model named SCSQ model to measure service quality in Islamic banks. The major objective of this quantitative research study was to examine variables with / without the mediating effect (customer satisfaction). Collecting data for this research, a questionnaire based on literature review and developed according to Malaysian’s cultural setting. Final sample size for analysis was 339 respondents.

Hypotheses were tested using exploratory factor analysis, Pearson correlation, and standard regression analysis. The important findings in this research revealed that mediating effect influence on the relationship between service quality dimensions and Shariah compliance dimensions as independent factors with customer loyalty and customer retention as dependent variables. Hypothesis findings accept all quality service and Shariah compliance dimensions except tangibles dimension for service quality.

The improved SCSQ model presented significant results for both service quality and Shariah compliance that explains Islamic banks customer satisfaction with loyalty and retention in Malaysia. Service quality dimensions: Reliability, empathy and Responsiveness/assurance show significant impact on customer satisfaction and a higher impact on customer loyalty and retention respectively. Shariah compliance dimensions: Shariah compliance institution/product and Islamic bank employees’ ethical conduct show a significant impact on customer satisfaction and the highest impact on customer loyalty and retention respectively.

The findings of this research conclude the significance of Shariah compliance as an independent variable with service quality as well as their positive influence on customer satisfaction as well as customer loyalty and customer retention. Hence the study contributes to the further development of studies in service quality, Shariah compliance, and customer satisfaction with loyalty and retention.

The social change implication for this research is to increase customer satisfaction and improve services in Malaysian Islamic banks.

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