In Malaysia , Islamic banking now commands 25% share in the banking sector of the country. Although Islamic banking growth story continues to be positive and it outstrips growth of conventional banks, it has started exhibiting some slowdown in capturing the market share from the conventional banks.

This has huge implications for cannibalisation of conventional business by Islamic banking. Almost all major conventional banks now have their own retail Islamic banking operations, and the dust seems to be settling down over the fear of losing business to Islamic banks if they did not opt to offer Islamic financial services. Conventional banks find themselves in comfortable positions of maintaining their market share in the wake of seemingly saturated Islamic banking sector.

After capturing one-fourth of the market, Islamic bankers will have to work extremely hard to gain further grounds, especially if the government’s target of 40% share of total banking assets is to be achieved. This is why Islamic banks need to think outside the box to discover what is possible if they really want to effectively compete with their conventional counterparts.

For an effective marketing strategy, Islamic banks must first know the exact nature and composition of the demand for retail Islamic banking services. Unfortunately, however, no one has spent any serious amount of their research and development budget to study the demand for Islamic banking in the country. Most of the Islamic banking strategies are at best based on some sophisticated in-house guesswork or some incomplete, incorrect and potentially misleading research by the leading consultancy firms, including the Big Four.

More often than not, expected demand for retail Islamic banking services are anchored on the size of the growing Muslim population, which may not be the best or accurate predictor of demand.

The lack of rigour in understanding market behaviour and customer psychology may be an impediment to growth in the long run.

One way of investigating into the nature of demand for Islamic banking is to conduct a nationwide survey-based research to study the financial behaviour of the users of financial services, with specific focus on different segments, geographical regions and demographic groups.

While there has been a push on the supply side, which probably is based on the famous economic law — Say’s Law — which states that the supply will create its own demand, this may not be a sustainable approach going forward. At this juncture, Islamic banks will face severe competition from their conventional counterparts and it will certainly be an uphill task for them to capture further market share with a kind of ease they have been enjoying thus far.

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