A marketing strategy is one of the important areas that needs to be carefully examined by the policy makers of Islamic banks.

This stems from the need to improve the performance and ensure sustainable growth of Islamic banks as competition in the banking industry intensifies.

A sound marketing strategy becomes imperative as Islamic banks not only operate in an environment where service quality and financial returns are perceived as the essential criteria from the customers’ viewpoint, but they must also compete with conventional banks which are known to have better experience and expertise in the banking business.

The religious element, which was once thought the major factor that drives Muslims to use Islamic banking facilities offered by Islamic banks, has now become irrelevant to Muslim customers.

Recent studies have indicated that religion is no longer plays an important factor in bank patronage. Previous studies found that the religious factor is not conclusive enough to drive Muslims to use Islamic banking facilities.

In light of this revelation, Islamic banks have to better understand the needs, preferences and behaviour of their target group of customers in order to stay in the game. Hence, a marketing strategy that is tailored to customer acquisition and retention should be properly addressed.

This becomes increasingly crucial as foreign players enter the market and as products and services become more undifferentiated. Thus, Islamic bank s have to be innovative and creative if they wish to establish a strong competitive position and gain competitive advantage.

Coupled with an increasing competitive environment from both Islamic and conventional banks and changes in customer’s perception; it is of paramount importance for Islamic banks to assess the effectiveness of their marketing strategy. It is worth noting that most Islamic banks operate in a dual banking system. In some cases, conventional banks are allowed to offer Islamic products through an ‘Islamic window’ and in some countries foreign and local banks are granted licences to set up full-fledged Islamic subsidiaries.

As a result of these developments, local Islamic banks are now facing competition stemming from several resources: competition among themselves, foreign conventional banks that have an Islamic banking department and foreign banks that have established subsidiaries.

Other forces of competition that have been proposed by various researchers include: rivalry, customer negotiating power, investor and depositor negotiating power, new entrants and product or service substitutes. In light of this, it is imperative for Islamic banks to focus their marketing strategy on gaining a competitive advantage and mobilising their resources towards this purpose.

Hence, as competition intensifies, Islamic banks have to design an effective performance evaluation system and understand the changing needs of its customers.

Marketing strategy: theory and practice

The adaption of any strategy depends much on factors such as management style and experience of the top management, age of the institution, economic environment, and regulations. A central concept in any strategic marketing management in positioning. This means managing the marketing mix to shape the way consumers view the bank’s products or services relative to its other competitors.

Hence, in order for a bank to establish and reinforce its product’s and service’s position as perceived by the customer, the bank must ensure that its marketing mix is co-ordinated and integrated. The four elements of the marketing mix are product strategy, pricing strategy, distributional strategy and promotional strategy.

Product Strategy

As a service oriented business, image is a central factor in a bank’s effort to differentiate itself from competitors. Generally, the way products or services are made available to a customer helps to create the image of the particular institution in the mind of the customer.

This image is reflected in the customer’s perception and feeling about the products or services being offered. This is important because a customers experience with a particular product or service will affect their attitude towards the bank and other products and services even if they have never used the other products. Under product strategy, customers must also be able to link a specific image with a specific product.

Since customers purchase products and services to satisfy their needs and wants, Islamic banks have to understand the nature of these needs and wants in order to appreciate the kind of benefits customers expect to receive. Among the different kinds of benefits that people expect to get when buying goods and services includes good value for money, novelty, availability, and ease of use.

Benefits enter into the equation when a customer decides to use one product in preference to another. It is the benefits received, which makes a product or service attractive to a customer. In view of this, banks should give more attention to the benefits it creates for the users when marketing a product or a service. Relating this to Islamic banks, they have to be able to communicate these benefits convincingly to the public, either directly or indirectly, in order to persuade the public to use the facilities and products being offered.

Since Islamic banking is an alternative to conventional banking, Islamic banks need to be innovative. Only through innovation in products and services can Islamic banks sustain their competitive advantage against other conventional or foreign banks that offer similar Shariah compliant facilities.

Pricing Strategy

The second element in the marketing mix is pricing. Pricing strategy is another marketing technique that can be used to improve a bank’s overall competitiveness. The key to success is to have a well-planned strategy, to establish policies and to constantly monitor prices and operating costs to ensure profits.

An important part of the pricing strategy is in determining how a product or service is priced. It has been proven in previous research that the majority of customers do not use religion as the main factor when establishing a relationship with Islamic banks. In the case of corporate customers for example, they believe that it is the cost and benefit element that is the most important factor when selecting a financial institution. Most customers still seek the highest return and lowest charges imposed when deciding which bank to place a deposit or obtain funding from.

Generally, marketing textbooks recommend three types of pricing strategies: skimming, penetration, and competitive. There are cases whereby, charges imposed by Islamic banks on financing are much higher than those of conventional banks. This practice not only hinders customers from using Islamic financing facilities, but this will portray an Islamic banks image as a profit maximising institution.

Distribution Strategy

This component of the marketing mix is related to the distribution of services to the ultimate customers. Services that require the customer to go to the producer must be as accessible as possible. Hence, an important consideration in the distribution strategy for banks is the location of their branches.

The task before the management is to select the place where the actual sales is to take place and this should be in the face of conveniences and comforts to the customers. To the extent it is possible; they should reach to the doorsteps of the customers. Thus it is pertinent that the branches are located at a suitable point. However, a study conducted on Malaysian customers found otherwise.

Although Malaysian customers do not perceive location as one of the top priorities, policy in  ensuring the accessibility of banking services to customers is regarded as an important distribution strategy by most banks.

Since sales and market share are both contingent upon distribution (i.e. market coverage and distribution intensity), products and services must be made easily accessible to the end-users.

**This article was first published in The Halal Journal Jul/Aug 2005 edition, and was written by Sudin Haron and Wan Nursofiza Wan Azmi.