Factors Influencing Adoption of Interest Free Banking Products and Services in Ethiopia

Master's Thesis, 2020

82 Pages


Table content

Table content



Lists of Table

Lists of Figures



1.1 Background of the study
1.2. Statement of the Problem
1.3. Objective of the Study
1.3.1 General Objective of the Study
1.3.2 Specific Objective of the Study
1.4. Basic Research Questions
1.5. Scope of the Study
1.6 Significance of the Study
1.7 Limitations of the Study
1.8 Delimitations of the Study

2.1. Chapter Overview
2.1.1. Development of Interest Free Banking
2.1.2. Major Products of IFB
2.2. Theoretical Review
2.2.1. Theory of Planned Behavior (TPB)
2.1.1. Decomposed Theory of Planned Behavior (DTPB)
2.3. Empirical Review
2.4. Conceptual Framework

3.1 Introduction to Research Methodology
3.2 Research Design
3.3 Study Area
3.4 Target Population
3.5 Sampling Frame
3.5.1. Sampling Techniques
3.5.2 Sampling Size
3.6 Source of Data
3.7 Data Collection Method
3.8 Data Collection Instrument
3.9 Data Presentation and Analysis
3.11. Ethical Consideration

4. Results and Discussion
4 .1 Demographic characteristics
4.2. Descriptive Summary of Each variable characters
4.3 Regression Analysis
4.4 Common Assumption Test
4.4.1 Multicollinearity Test
4.4.2 Linearity Test
4.4.3 Normality test
4.4.4 Autocorrelation/Durbin Watson Test
4.5 Linear regression interpretation
4.5.1 Beta Coefficients and variables result definition

5 Conclusion& Recommendation
5.1 Summary of Findings
5.2 Conclusion
5.3 Contribution of the study
5.4 Limitation and Future Area of the Study
5.5 Recommendation of the Study




First and foremost I would like to give my thanks for the almighty of Allah for all things that have been done for me and for being guardians though good and rough times of my life.

Next my biggest gratitude goes to my Family for their endless support throughout my life to make real my dream.

Again my best Excellency and gratitude for my advisor Dr. Dejene Nigusie (PhD) for his assistance and valuable guidance in the preparation of this proposal.

It is my pleasure to give my appreciations for all commercial banks managers and staff members for all their supports toward accomplishment of this study.

Next, I am grateful for all my friends, classmates and work colleagues for their understanding and moral support that is what kept me moving forward.

Finally, my deepest gratitude goes to my beloved friend Mr. Ahmednur Adem, Mr. Siraj Abduro and my brother Mr. Kiyar Ibrahim for your unlimited support through carrying both on my academic and technical support for accomplishment of this study, thus, I want to say thank you for realizing my dream.

Lists of Table

Table 1 :Basic Principles of Islamic Banking

Table 2 General characteristics of respondents

Table 3 summary of important variables

Table 4 Multicolinearity Test

Table 5. Normality test

Table 6 : Model Summary

Table 7 : ANOVA

Table 8: Respective coefficient of variables

Table 9: Coefficients the mediate variable

Lists of Figures

Figure 1 Theory of Planned Behavior

Figure 2 Decomposed Theory of Planned Behavior of (DTPB (Taylor and Todd (1995)

Figure 3 Proposed Model Hypotheses

Figure 4: Dependent Variable Normal P-P plot regression of Adoption of IFB

Figure 5: histogram with normality curve showing distribution of dependent variable

Figure 6 : Q-Q normality plot of dependent variable


AAOIFI: Accounting and Auditing Organization for Islamic Financial Institutions

CBE: Commercial Bank of Ethiopia

CBO: Cooperative Bank of Oromia

DTPB: Decomposed Theory of Planned Behavior

IDT: Innovations Diffusion Theory

IFB: Interest Free Banking

IFBW: Interest Free Banking Window

IFSB: Islamic Financial Services Board

MoFD: Ministry of Economic Development

NBE: National Bank of Ethiopia

OIB: Oromia International Bank

PBC: Perceived Behavioral Control

SN: Subjective Norm

SPSS: Statistical Package for Social Science TRA: Theory of Reasoned Action TPB: Theory of Planned Behavior


The main objective of this study is to identify the major factors influencing the adoption of Interest free banking products and services among customers in Bale Robe town. The research employs Decomposed theory of planned behavior to investigate the influence of customer’s behavior towards adoption of interest-free banking product and services by using Customers Attitude attribute Social influence and perceived behavioral control. Both qualitative and quantitative research approach were applied in the study. The target populations were 13050 customers of four banks in Robe town and the total sample size were 388. A purposive sampling technique was applied. Primary and secondary data were used with five point liker scales to collect data from respondents. Both descriptive and inferential statistics analysis were employed to analyze the data.

The analysis confirms that perceived trust and compatibility has significant positive relationships, whereas, complexity and perceived risk has negative influence on customers attitude; facilitating condition was found to have a significant positive influence on perceived behavioral control and finally Attitude, Subjective norm and Perceived behavioral control were found to have a significant Positive impact on the customers ’intention toward adoption of the product. Therefore policy makers need to apply better strategies and create an acceptable image of product and service, government support is vital and should consider the perceived behavioral control by facility condition, aggressive promotion and marketing campaign about products, Generally for enhancing intention to use the product the bank shall increase accessibility of its products with the expected services attached.



1.1 Background of the study

Interest free banking is inseparable of Islamic economics which aimed at realization of a greater justice in human endeavor, which is achievable only with participation of all human institution inclusive of financial system (Adeniran, 2013). On the principle that prohibits interest and other unethical and non shariah compliant activities, Islamic banking set to achieve this gigantic objective. In addition, it strive on increasing all Halal aspect of business through provision of products and services base on shariah principle with implementation of legitimate profit and loss sharing, paying Zakah, prohibition of interest, monopoly and other forms of unethical trade and transaction such as dealing with pork, alcohol and gambling (Ayub, 2007; Gait & Worthington, 2008; Sanusi, 2012). Hence, Islamic banking method of financing and or products structure is based on the tract to redress the inherent injustice tied with interest based dealing. These principles, albeit paving the way to achieving social economic progress in the society (Metawa & Almossawi, 1998) have also provided an alternative mode of finances capable of competitively breaking the long established monopolistic position posed by conventional financial system (Aliyu, 2012; Gumel & Othman, 2013). The reality of Islamic banking emergence as an alternative to conventional banking, and its contribution in propelling the development of the global economy has been proven in the international financial outlook (Tahir, Bakar, Ismail, & Wan, 2006). According to Fakhrul Ahsan (1998) and Usman (2003), the role and functions of Islamic banking within the banking system in a modern economy are very important, and in fact, it is at the heart of every robust economy. For the fast four decade, Islamic banking sector has grown in a large scale with a double digit annual growth rate and recently by almost 20 percent (Rustam, Bibi, Zaman, & Rustam, 2011). The institution has witnessed an unprecedented expansion and its effect was observable within the Muslims countries and has extended to all nooks and crannies of the globe. Loo, (2010) and Perry & Rehman (2011) observed that the Institution gained momentum and world recognition for its resistance to the global financial crisis that mars the major financial players of the world. This gave the Islamic finance industry opportunity to widen its horizon to new investors (Quadri, 2011). And hence penetrated the western countries where their presence is also remarkable. For instance, in Denmark, United Kingdom, and USA, and in Luxembourg Islamic banking was in operation since 1978 (Perry & Rehman, 2011). The number of Islamic financial institutions is at rise and established in more than 75 countries (Ayub, 2007; Fatai, 2012; Khan & Bhatti, 2008).As at 2005, the total assets managed under the Islamic banks were $500 billion this figure rose to $700 billion two years later in 2007. The growth of Islamic finance was estimated at $1.8 trillion in 2013 and presently anticipated to hit over $2.2 trillion by the end of 2016(Muslimmirrow.com, (Akmel, 2015) (The 2007 Population and Housing Census of Ethiopia Statistical Report for Country level, 2007)2017). Being the core of the Islamic financial system, and also accounting for 80 percent of its total assets, Islamic banking sector’s assets are expected to exceed $3.8 trillion by the end of 2022 (Saudigazette.com, 2017). Islamic banks were indeed successful in the provision of innovative products and services to their customers irrespective of their faith. For its noticeable achievements, Islamic banking has become attractive so much that many countries are yarning and or struggling to have it in operation like the case of Ethiopian from sub-Saharan Africa that have just embraced and started enjoying the system.

In Ethiopia, numbers of citizens that have bank accounts are not more than 9% of the population in 2012. Lower access to formal financial services among others stem from people’s culture and belief. Responding to a strong public demand, the National Bank of Ethiopia (NBE) was expected to approve a directive that paves the way for the establishment of what was deemed as the first Islamic bank in Ethiopia. A circulated draft of the NBE directive has allowed Ethiopian nationals to establish a bank exclusively engaged in interestfree banking,” however, that hope was short living as the finally issued directive does not allow the establishment of full-fledged Islamic financial institution. The final directive has only opened the door for “existing commercial banks” to create an interest-free banking window (Mohammed, 2012). As per the Directives of National Bank of Ethiopia SBB/51/2011, all commercial banks that are licensed to engage in the Conventional Banking Business are privileged to engage in Interest Free Banking (IFB) business through the existing branch offices only after securing independent license for running the business, which is subject to fulfillment of some 10 to 11 terms and conditions set out thereof, among others, the directive also orders banks not to go past the maximum share of interest-free banking business in their consolidated balance sheet without prior approval from the National Bank. A violation of this could lead to the closure of an interest-free banking window. Preparation of separate financial reports, keeping all data and ensuring the segregation of activities from conventional banking are also some of the requirements set by the directive. Subsequent to the issuance of the working directive, the NBE has granted the IFB service license to Oromia International Bank S.C on September 16, 2013. Same license is granted to the Commercial Bank of Ethiopia on September 17, 2013. Accordingly CBE using its 23 pilot branches and OIB using its 24 branch offices launched IFB operation on October 24, 2013 and December 16, 2013 respectively. On May 1, 2014, United Bank S.C. began providing IFB service and recently, Cooperative Bank of Oromia, Nib International Bank, Abay Bank and Wegagen Bank have joined the IFB business by giving depository products for the time being. However, Initially, Zemzem, a prospective new bank, requested to join the banking industry as a full-fledged interest-free bank, was unable to start operations as the directive requires that interest-free banking be given alongside conventional banking services. As per Senait, (2015), Zemzem Bank was floating shares with the sole intention of operating interest-free banking, since December 2010. It was able to raise 137 million Br in paid-up capital and 337 million Br in subscribed capital from 6,800 shareholders. Thus, currently, there is no bank which gives full-fledged IFB banking services in Ethiopia as the regulatory organ has only allowed the existing conventional banks, even if currently some private banks are on the process of establishment to give the services fully fledge , the existing banks has allowed only to give the services through separate windows. Therefore Being it is a newly established phenomenon or being window model, the interest free banking in Ethiopia needs to be steady and prepared to compete with the historically dominance conventional commercial banks that are in existence for almost a century. According to the 2007 national census, the Muslim population comprises 33.9% of the total population in Ethiopia CSA (2018), offers the opportunity for substantial customers that would patronize Islamic banking products. As such investigating the factors Influencing the Interest free banking products and services in the country is paramount and timely.

1.2. Statement of the Problem

Banking system is one of the most important economic sectors and strongest financial intermediaries in the economy that plays a key role in economic development in societies through receiving the deposits of depositors and instead pay loans and facilities to applicants and give interest(Iravani et al, 2012) . Ethiopia has large Muslim population whose contribution to the national economy is also enormous. According to the 2007 national census, the Muslim population comprises 33.9% of the total population in Ethiopia CSA (2018); this significant portion of the population remained unbanked for decades. They have been disadvantaged to modern finance, not by design, but due to their faith and the secular nature of the financial industry. They have strong reservations against conventional banks whose functions are based on interest, thus Ethiopian Muslim communities have been excluded from banking sector. They need banking system that best suits their need and at the same time in line with their religion.

In October 2011 NBE directive allows banks to offer interest free banking service alongside the conventional operation. However there was no alternative banking systems for those have problem with existing banking system until September 2013, that launched by OIB and CBE. This is due to Lack of supportive regulatory and policy regimes in Ethiopia that facilitate the establishment of Islamic financial institutions.

The introduction of Islamic banking Window alongside with conventional operations in 2013 has generated new dimension and phenomenal in banking sector in Ethiopia. Moreover, interest-free banking is a new system in Ethiopia which needs a lot of effort and resources to increase customer intention toward adoption of the products and services (Debebe, 2015).

Most of the banks still providing only deposit service and not yet financing their IFB customers, since the sharia principle does not allow them to finance their customer from conventional deposits due to riba or interest. Islamic banking studies are largely conducted in Muslim countries and to a smaller extent among non-Muslims countries. Studies in Ethiopia on IFB have been very few due to the infancy of the industry. Among few studies, Mohammed (2012) has identified the potential challenges of IFB before commencement of the service. This study was undertaken before the practical introduction of the IFB in the country. Therefore, it was not based on actual observation of facts on the ground and research has been limited to the Prospect and challenges of introducing Interest free Banking in Ethiopia. While, Teferi (2015) has identified that introduction of IFB does not only create inclusive financial system for the Muslim population but also has a potential to influence and enhance the economic development of the country through resource mobilization and employment creation by encouraging people to use the banking system. These study was only limited to IFB’s contribution and prospects. On the other hand, there was a work on Customer’s Intention (Debebe A., 2015), (Akmel, 2015; Kerima, 2016; & Abraham, 2017; Guluma, 2017; Nobel, 2019), has conducted a study on factors affecting Customers to Use Interest Free Banking Products and service. Their work has identified the potential challenges as: lack of awareness, regulatory and supervisory challenges, institutional challenges, and lack of support and link institutions as well as wrongful association with specific religion. Few of this study targeting only bank officials and bank employees as study population which excluded customers’ domain and some were limited to single organization and specific area, some of them were lack model specification.

At International level there are several empirical studies on Islamic banking and finance. For instance, by using Rogers Diffusion Model (2003), studies conducted by Tooraj Sadeghi et al (2011), Thambiah et al. (2012) Lukman et al (2012), Binta, et al (2014), Dariyoush, et al (2014), Akhtar et el (2016) and Yahya, et al (2017) had found that IFB adoption is subject to Relative Advantage, Complexity, compatibility, Attitude, Behavioral intention, Actual Use, Social Influence, Religiosity and perceived behavioral control are found to have significant relationship with customers’ adoption of Islamic banking products and services.

The studies which have been undertaken in different countries shows that even though there are some factors common to many countries, some factors were not commonly influencing adoption of IFB product for all countries; this is due to their different social, cultural, economic, technological, political and religion. Therefore, the study undertaken in other countries such as on Muslim-dominated Countries could be difficult to implement their policy recommendations directly to Ethiopia since there is socio-economic; political and religion difference. Consequently, it is significantly important to realize and figure out the potential factors that influence usage of interest-free banking among Bank customers. And the researcher believes that early exploring these factors will help all stakeholder of IFB to address the problem and speed up implementation of IFB product and service that has important contribution for economic development.

Accordingly, this study was aims to examine the important potential factors that faced by service providers and have an impact on the usage of interest-free banking products, low market share of IFB compared to Conventional banks, in context of Bale Robe Town.

1.3. Objective of the Study

1.3.1 General Objective of the Study

The general objective of this study is to investigate and identify factors influencing the adoption of Interest free banking product and service.

1.3.2 Specific Objective of the Study

More specifically the study seeks to achieve the following objectives.

- To describe the general characteristics of current IFB product users.
- To identify the factors affecting customer’s intention to use interest free banking products and services.

1.4. Basic Research Questions

To get the comprehensive understanding of the phenomenon under investigation, the following postulated research questions need to be addressed.

- What are the various factors influencing customer perception to adopt IFB products and services?
- What are the various factors that affect the attitude towards adoption of IFB?

1.5. Scope of the Study

The study was focus on the factors which influence the adoption of Interest free banking product in both private and government owned banks. These organizations are chosen because that is where the data to be used in the study can be found. The study was carried out in Bale Robe town. This town has been chosen because of suitability for the researcher’s study and the availability of the challenges which observed. The study was be conducted in organizations that have already Started Interest free banking technologies to investigate their factors which influence the adoption of the their interest free banking products as well as to identify those factors which lead them and their customers to adopt less this products. This study was used or collected both qualitative and quantitative data. This study was conducted within five months.

1.6 Significance of the Study

Interest free banking adoption has been carried out in most Ethiopian commercial banks and others private banks as well as by customers. It is believed that different factors affect perception to adopt interest free banking by banks and customers Though the adoption of IFB by banks and customers vary, the outcome of this study further decomposed factors that influence adoption of IFB by customers that can provide solutions that was managerially relevant, pointing to specific factor affecting adoption. This was help banks to develop strategies that accelerate rate of adoption. In addition, since IFB is in its infant stage in Ethiopia, the research results was a valuable reference material for the financial students who wish to understand and undertake similar study on factors influencing adoption of the IFB.

This study is expected to provide a basis for extension of knowledge on The factors which influence’s the adoption of Interest free banking product on their use in various private and government bank organizations in bale robe.

The study was also improves customers awareness, attitudes and their perception towards of new technology by clarifying how this new technology is employed and diffused.

The output of this study was provide useful knowledge for informed decisions and policies in procurement and adoption of interest free banking products in which help for consumers in terms of knowledge of the products, the more knowledgeable the person is about the product, the more likely he or she was utilize the facilities.

The outcome of this study is also expected to improve the adoption of interest free banking products hence improve the perception of customers toward the products and service of which banks deals. Therefore, in order to capture greater market share, consumers must be well informed of the products as well as the interest-free banking system itself. Not only does this study was contributed to the theory, it is also proposed to have practical value as well.

1.7 Limitations of the Study

The study area was limited to Bale Robe town and data for this study was collected from the banks which started the IFB service due to time and money constraint. In addition the study was including interest free banking customers and staffs of the bank.

The other limitation of this study was also its scope which was limited to factors influencing adoption of interest free banking products and it was scarce of the outcomes on customers saving extents and economic growth.

1.8 Delimitations of the Study

It is bounded by both area coverage and problem addressed. The study was delimited to only identifying the factors affecting interest free banking services on the delivery and use of its products in private and government banks and why services are limited to few products. It is based on the case of four banks-Commercial Bank of Ethiopia, Oromia International banks, Oromia Cooperative Banks and Awash International banks and its customers. Thus, an overall generalization to Bale Robe town may naturally miss few elements. However, it is believed that this four banks, CBE, CBO, OIB and AIB with its extensive branch network in the town, that this may fairly represent the reality of financial services level in the town.



2.1. Chapter Overview

This chapter presents a review of all relevant literature on main facet of innovation adoption of Interest Free Banking. At the beginning of this literature review, the researcher provide some insight on interest free banking developments, general concepts and guiding principles, IFB products and services. Following this, detailed review of the different models and theories regarding adoption of Interest Free Banking was discussed in order to provide a brief description of the research conceptual model development process. Besides, empirical literature review of several widely validated models/theories reviewed and linked to main perspective of Interest Free Banking adoption, which help the researcher to arrive on premises of conceptual model of this research in line with the relevant theoretical models reviewed. Finally, this chapter was concluded with the proposed conceptual framework of the study.

2.1.1. Development of Interest Free Banking

Despite Interest free banking or Islamic banking is a recent phenomenon, the basic practices and principles of Islamic finance date back to the early part of the seventh century (Warde 2013). Its roots belong to the early days of Islam and it was available in all financial matters of state solved through Islamic financial law. Islamic financial system is gradually improved and nowadays it is recommended and exercised by many Muslim countries as well some non-Muslim countries. Modern Islamic finance emerged in the mid-1970s with the founding large Islamic banks such as Dubai, Malaysia, Bahrain and Kuala Lumpur. The development initially occurred through marketing of a steadily expanding supply of Sharia compliant financial instruments. The growth of geographical reach and the emergence of new financial centers for Islamic banking in broad range of retail products and services have largely contributed to make Islamic banking as competitive as the conventional banking method. According to Al-Jarhi and Iqbal (2001), the practice of Islamic banking, at present, takes one of the following forms: (I) Islamic banks operating within a financial system where all banks are Islamized; (II) Islamic banks operating alongside other conventional banks and (III) Shariah- complaint branches, windows and funds established by some conventional banks. Rising awareness and demand for Islamic products, Along with supportive government policies and growing sophistication of financial Institutions, have together raised the rate of growth (Masood, 2014).

In 2008, the Ethiopian Banking Business Proclamation (592/2008) was amended to include a provision for IFB. Three years later, the NBE issued a directive that authorizes the business of IFB (SSB/51/2011). The NBE directive that allowed banks to offer interest-free banking services alongside their conventional operations came into play in October 2011, but IFB in Ethiopia only started in September 2013, when Oromia International Bank (OIB) launched the service. A month later, Commercial Bank of Ethiopia (CBE) joined the market at the end of October, 2013 followed by United Bank which began providing the service on May 1, 2014 (Joseph, 2013, Mikias 2014). Two years later, Abay Bank has again joined as of December 2015; Cooperative Bank of Oromia as of March 2015, Wegagen and Dashen banks has also joined the industry in second half of 2016.

In accordance BSD No SBB/51/2011, the NBE authorizes the business of IFB under the umbrella of the Conventional banking with limited scope: “Interest-free banking business’ refers to banking business in which mobilizing or advancing funds is undertaken in a manner consistent with Islamic finance principles and mode of operation that avoids receiving or paying interest;” and “interest-free banking window” refers to a unit within a conventional bank exclusively offering interest-free banking services.

2.1.2 The Basic Principles of Islamic Banking Vs Conventional Banking

Table 1: Basic Principles of Islamic Banking

Abbildung in dieser Leseprobe nicht enthalten

Source: adapted from Dr. Mohammed (2002)

2.1.2. Major Products of IFB

According to Abdulrazak (2009), Chapra (1986), Hassan and Lewis (2007), Islamic Banking Handbook (First Edition April 2010), Shanmugam and Zahari (2009) and the prevailing local practices governed by the working policies and procedures adopted by Ethiopian commercial banks IFB products are clustered into three broad categories: Islamic Banking Deposit Products(Sources of Funds), Islamic Banking Financing Products (Use of Funds) and Other Services (Trade Service and Other), all with specific services. These IFB products and services was briefly presented that was add to Ethiopian literature.

I. IFB Fund Mobilization

- Wadiah Deposit Account (Safekeeping)

It is a peculiar non-earning type of IFB deposit that operates under the contract of Wadiah Yad Dhamanah (guaranteed custody). The bank accepts deposits from its customers looking for safe custody and convenience and requests permission to make use of the customers’ funds for investment purposes promoting transparency. The customers may withdraw their balances at any time. Profit generated from the use of the customers’ funds belongs to the bank. However, the bank may at its absolute discretion rewards the customers by declaring profits to them.

- Demand Deposit (Amana Current Accounts)

Amana Current accounts are non-earning deposits that operate based on the principle of al- wadiah, whereby the depositors are guaranteed repayment or withdrawal of their funds on demand. At the same time, the depositor does not receive return for depositing funds in a current account, because the guaranteed funds was not be used for profit and loss ventures.

- Labbaik-Wadia Saving Account

It is a special saving plan intended to extend alternative for those customers who want to make Hajji and Umrah. The fund was not be used in business not permitted by Shariah.

- Mudaraba-Investment Deposit Account (Restricted Investment Account)

This type of IFB deposit is an earning deposit which is mobilized with the knowledge that bank acts as the Mudarib (manager) and invests the fund in restricted investment based on active intervention of the capital provider complemented with professional advice from the bank side.

The profit on the investment was shared as per agreement and loss was shared by the depositor (capital provider).

- Unrestricted Investment Deposits (Unrestricted Mudaraba)

Unrestricted Investment Deposits is an earning deposit which mobilized with the knowledge that bank acts as the Mudarib (manager) and invests the fund without restriction and intervention of the capital provider in any Sharia compliant manner. The profit on the investment was shared as per agreement and loss was shared by the depositor (capital provider). The bank has discretion to participate in the investment. The bank can pool the money for its daily IFB business activities.

II) Fund Utilization Scheme (IFB Financing Products)

Islamic financing products are highly secured from risk management point of view as the financing shall directly be made to the supplier of the goods or services to manage possible fund diversion, unlike the Conventional banks. Though the resource utilization nature of the IFB business generally consolidates to trading and equity (Musharaka) activities, Islamic mode of financing can be broadly categorized into three: trade-based financing, rental-based financing and partnership-based financing.

A) Trade-Based Financing: It is a means of financing in which Islamic banks provide financing through sale and purchase of tradable goods and services. Islamic banks buy a good or service (directly or through its agent) from the market and sell it to customers on deferred payment basis (installments). The agent may be an employee on Islamic bank, a third party or the customer himself as well. There are four kinds of very common trade-based financing services:

- Murabahah (Cost Plus) Financing

Murabahah means cost plus mark-up sale and it the most popular, convenient and flexible IFB financing product. Based on this contract, the bank may finance customer who wishes to acquire an asset by purchasing the said asset from the developer/supplier and subsequently sells to the customer Shanmugam and Zahari (2009, p. 19).

- Salam Financing

A kind of financing in which a predetermined amount of financing fund is disbursed in advance for a production of specific commodity (most of the time agricultural products) to be delivered in future. Advance based on agreed price for future delivery of agricultural products.

- Istisna Financing

It is a mode of financing for manufactured/built assets. A bank manufactures/builds or get manufactured/built the assets on behalf of the customer at an agreed value, finances the cost and finally the customer settles the financing at an agreed instalment and period.

- Interest Free Export Financing

This is interest free financing services provided for exporters for up to 60 days without any charges. The settlement was through the bank with prevailing buying rate of computable on the approved foreign currency type.

B) Rental-based Financing

- Ijarah Financing

Ijarah means lease or rent. Generally, the contract of Ijarah financing means selling of the benefit or use or service of an asset, for a fixed price or wage. Leasing is a contract between a lessor (bank) and a lessee for the lease of an equipment or machine which is chosen by the lessee from a supplier or manufacturer Shanmugam and Zahari (2009). Islamic banks lease or lease and sell machines or equipments to customers on deferred payment basis.

C) Partnership-Based Financing

- Musharakah (Partnership)

This mode of financing is based on pre agreed arrangements between two or more parties, each contribute capital, and profit or loss is shared between the partners.

- Mudarabah (Joint-Venture)

It is a joint-venture between owner of capital and an entrepreneur who provides the expertise knowledge. The ratio of profit distribution must be agreed at the time of execution of the contract.

III. Other Services (Trade Services and Others)

These products are include various international trade services and over the counter services with little or no distinguishing features from the Conventional banking;

a. Different Guarantees
b. All international documentary credit services c. Trading in currencies
d. Debit Card, Charge Card and Credit Card e. Wakalah (Agency)
f. Hawala (Transfer of Debt or Money

2.2. Theoretical Review

2.2.1. Theory of Planned Behavior (TPB)

The Theory of Planned Behavior (TPB) is an extension of the Theory of Reasoned Action (TRA) (Fishbein & Ajzen, 1975), which is widely used in social psychology and marketing studies to explain the determinants of intended behaviors. TPB is a theory that predicts Deliberate behavior, because behavior can be deliberative and planned, and TPB is considered to be more general than TRA because of PBC (Chau & Hu 2002a). Both the TRA and TPB suggest that behavior is directly influenced by behavioral intention. But TPB model adds “perceived behavioral control”to the Theory of Reasoned Action.

According to Ajzen (1991), perceived behavioral control reflects beliefs regarding access to the resources needed to perform a behavior. There are two components affecting perceived behavioral control. The first element is ‘facilitating conditions’ which reflect the availability of resources needed to perform a behavior. This might include access to the time, money, skills and other specialized resources required to perform a behavior. The second element is ‘self-efficacy’. It is an individual’s self-confidence in his/her ability to perform a behavior. According to Ajzen (1991) when individuals believe that they have more resources, they believe they have fewer obstacles and perceive greater control over the behavior, while people lacking requisite resources and confidence perceive little control over the behavior thereby reducing intentions to perform the behavior.

The Theory of Planned Behavior has been successfully applied to various situations in predicting the performance of behavior and intentions, such as predicting user intentions to use a new software (Mathieson, 1991), to perform breast self- examination (Young et al., 1991), to avoid caffeine (Madden et al., 1992) all found that TPB has a better predictive power of behavior than TRA.

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Figure 2.2.1 Theory of Planned Behavior (Source: Adopted from Pavlou, 2001)

2.1.1. Decomposed Theory of Planned Behavior (DTPB)

Decomposed Theory of Planned Behavior (DTPB) indicated that a better understanding of the relationships between the belief structures and antecedents of intention requires the decomposition of attitudinal beliefs. Taylor and Todd (1995) considered that treating the three beliefs as monolithic was obscure the true influence of each of them. This has subsequently given birth to the decomposed theory of planned behavior, which is the extension of theory of planned behavior. Mathieson et al. (2001) indicated that the TRA is a general theory of human behavior while the TAM is specific to information system usage. The antecedents of attitude in the DTPB that are derived from Rogers’s model (2003) are also consistent with the Technology Acceptance Model (TAM) (Davis, 1989). In the DTPB, complexity is similar to perceived ease of use, and relative advantage is comparable to perceived usefulness (Moore and Benbasat, 1991). TAM and DOI can fully cooperate to explain why people accept or reject an innovation. However, since TAM model is specific to information system usage, many researchers did not consider it in predicting adoption of IFB.

Shimp and Kavas (1984) argued that the cognitive components of belief could not be organized into a single conceptual or cognitive unit. Taylor and Todd (1995) also specified that, based on the diffusion of innovation theory, the attitudinal belief has three salient characteristics of an innovation that influence adoption, are relative advantage, complexity and compatibility (Rogers, 1995). Nevertheless, the subsequent studies proved that some of the other dimensions of innovation diffusion theory as well as other dimensions have also a significant influence on the attitude towards behavior, perceived risk and trust Taylor and Todd (1995) showed that the decomposed model of the TPB has better explanatory power than the pure TPB and TRA models. Hence, the belief structure was decomposed into five main dimensions i.e, relative advantage, compatibility, complexity, trust and perceived risk. On the other hand, Subjective norm is composed of two normative beliefs: normative belief and motivation to comply. So, the argument of the researcher’s empirical study is that Interest free banking is a technological innovation and thus the DTPB model provides better diagnostic values compared to original TPB and greater insights into what influences individuals to adopt an innovation. DTPB is composed with

Abbildung in dieser Leseprobe nicht enthalten

Figure 2.2.2 Decomposed Theory of Planned Behavior of (DTPB (Taylor and Todd (1995) Customers Attitude

According to Fishbein and Ajzen (1991) attitude is defined as evaluative effect of individuals"negative or positive feelings in a specific behavior performing. Actually, attitude is related tobehavioral intention of individuals considering the fact that they shape their intentions to do a specific behavior in the direction of which they have positive outcome (Tan & Teo, 2000). Likewise, Attitude toward behavior is the degree to which an individual has unfavorable or favorable appraisal or evaluation of behavior in the question (Ajzen & Fishbein, 1991). There is a tendency to think that Interest free banking is preserved for people of Islamic religion. But, Islamic institutions and instruments have developed in countries where Muslims are minority like United States, United Kingdom and South Africa. The attitude towards the behavior is determined by the sum five perceived attributes of attitudinal belief toward an innovation i.e. trust, relative advantage, compatibility, complexity and perceived risk which may influence customers’ perception to adopt Interest free financial products and services.

Relative Advantage

Relative advantage has been designed to reflect perceptions of customers which all or certain qualities of the proposed innovation can offer incremental value to its potential adopter comparing with present available options (Rogers, 2003; Flight et al., 2011). Rogers (1995,2003) have indicated that relative advantage can be explained as economic profitability, discomfort decreasing, saving in time and effort, low initial cost, social prestige, and/or other potential benefits that possible user would receive by applying the current innovation. Potential adopters want to know, if the new idea is better than an existing one. Besides, several scholars have found relative advantage to be one of the best predictors of an innovations rate of adoption (Brown et al., 2003; Tan and Teo, 2000; Hsu et al., 2007; Tung & Rieck, 2005; Thambiah et al.,2011b; Gerrard and Cunningham, 2003). Roger, 2003 and Gerard, 2003 argued that adopters invariably perceived relative advantage in terms of the economic benefits and the costs resulting from the adoption of an innovation and improvements that are afforded to their social status. In addition to these, economic profitability, discomfort decreasing, saving in time and effort, low initial cost, social prestige, the immediacy of the reward and/or other potential benefits that possible user would receive by applying the current innovation, have been described as the subdimensions of relative advantage. The present study therefore intend to examine relative advantage within the dimension of economic benefits (profits earnings, reduce the burden of interest, reduce risk, profit and loss sharing benefits) and fairness (in the conduct of profit sharing, ethical banking system, equal distribution of wealth)


The degree to which a product, idea or innovation seems to be difficult to understand as well as use is main concept of complexity (Rogers, 2003). Actually, complexity explains required level of physical or mental efforts which is needed by individuals for adopting and continues usage of a particular innovation (Nor et al., 2010). An innovation with substantial complexity requires more technical skills and needs greater implementation and operational efforts to increase its chances of adoption (Wang et al., 2007). In addition, it has been hypothesized and proved as complexities have a negative connection with rate of adoption (Rogers, 1995; Ndubisi and Sinti (2006); Lee et al., 2011; Corrigan, 2012) due to the fact that complexity of an innovation, idea or product can act as an inhibitor for its implementation in successful way (Wang et al., 2010). In this study complexity of Interest free financial products and services is observed from whether it requires mental efforts which are needed by individuals for understanding and adopting it and whether the terms and concepts the bank used is difficult for adopting.


Compatibility refers to the degree to which an innovation, idea or product is known to be consistent with past related experience, current values (religious and ethical values basis) and different needs of potential adopters (Rogers, 2003). An innovation is more likely to be adopted when it is compatible with social system norms as well as values (Tornatzky & Klein, 1982; Anuar et al., 2012b). Furthermore, previous studies widely have indicated that compatibility positively influencing adoption and as one of perceived attributes of innovation characteristics in concept of beliefs and past experiences as well as values affect innovation adoption in multiple different context (Tung et al., 2008; Norazah, 2006; Beiglo and Zare, 2011; Wu et al., 2007; Hernandez and Mazzon, 2007; Arts et al., 2011; Giovanis et al., 2012; Papies and Clement 2008; Elahi and Hassanzadeh, 2009). As such, in regards to banking experiences and practices, the Ethiopian banking consumers have already possess banking habits from the long operating conventional banks and Interest free banking functions and operations are new to them. Therefore, this study seeks to examine compatibility concerning IFB in the context of consumers’ felt need for banking based on their religious and ethical values.


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Factors Influencing Adoption of Interest Free Banking Products and Services in Ethiopia
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factors, influencing, adoption, interest, free, banking, products, services, ethiopia
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Beyan Kedir (Author), 2020, Factors Influencing Adoption of Interest Free Banking Products and Services in Ethiopia, Munich, GRIN Verlag, https://www.grin.com/document/1005608


  • TARIKU TAGESSE on 2/7/2022

    it's better and clear for researchers but the theoretical model that are used is not clear for me.

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Title: Factors Influencing Adoption of Interest Free Banking Products and Services in Ethiopia

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