Determinants of Customer’s Preference toward Interest Free Banking Service: The Case of Oromia Bank

Abstract

The study examined the decision-making process of customers in Oromia Bank (OB) regarding their preference for interest-free banking (IFB) products. The researchers used a multistage sampling method and distributed structured questionnaires to 400 respondents. Descriptive statistics and econometric, specifically multinomial logistic regression were employed for data analysis. The Decomposed Theory of Planned Behavior (DTPB) theory was used to formulate behavioral variables. The results of the study revealed several significant factors influencing customers' preference for different IFB categories, namely Mudarabah, Murabaha, and Qard. Here are the key findings for each category: Mudarabah Category: Customers' awareness: Customers who are aware of Islamic banking services and products are more likely to prefer Mudarabah over Qard. Perceived compatibility: Customers perceive Mudarabah as more compatible with social system norms compared to Qard, leading to a higher preference for Mudarabah. Perceived complexity: Customers prefer Mudarabah if the IFB products and services' procedure, rules, and guidelines are easy to understand. Promotional influence: Well promoted IFB products are more likely to be preferred by customers, leading to a higher preference for Mudarabah when it is well-promoted compared to when it is not or with low promotion. Brand reputation: A well-built brand reputation for IFB products can positively influence customer’s trust. Service quality: Better service quality can attract and retain customers, as well as influence their choices among various products or services. In the case of Mudarabah to Qard, customers are more likely to prefer Mudarabah. Murabaha to Qard Category: Customers' awareness: A higher level of awareness about IFB services and products is associated with a higher likelihood of preferring Murabaha over Qard. Perceived complexity: Customers are less likely to prefer Murabaha over Qard when the procedures, rules, and guidelines of IFB products are complex to understand. Promotional influence: Well-promoted IFB products are more likely to be preferred by customers. Brand reputation: A well-established brand reputation is associated with a higher likelihood of customers preferring Murabaha over Qard. Sharia compliance: IFB products that comply with Sharia rules are more likely to be preferred by customers. Gender: Male customers are more likely to prefer Murabaha over Qard compared to female customers. These findings provide insights into the factors that influence customers' decision-making process while choosing between different IFB products in Oromia Bank.