An Exploratory Study of Risk Perception and Consumer Decision Making in Islamic Banking Products in UAE

Abstract

In spite of the success and growth of Islamic banks, the importance of continually aligning products and services to consumers has been identified as a critical issue in the performance of Islamic banks. Globalisation, technology and liberalised market structures have contributed to a highly dynamic business environment generating significant competitive pressures on the fast-growing Islamic financial sector. Risk perception is acknowledged as an important determinant of risk attitude but few studies have researched the role of risk perception in Islamic banking (IB). This study addresses a limited understanding on how the dynamic and fragile financial context impacts on the risk perceptions of Islamic banking consumers and their decision-making. This research investigated the relationship between risk perceptions of IB products and investment decision-making in terms of switching likelihood and switching intention. A key objective was to determine the switching point and understand the degree to which external conditions influence risk attitudes of risk averse investors towards investments decisions and the decision to change from IB to an alternative banking system. A cross-sectional case study strategy was adopted employing survey and semi-structured interviews to gather quantitative and qualitative data and analysed using Structural Equation Modelling (SEM) and thematic analysis. The results pointed to significant differences in risk perceptions and switching likelihood under different conditions. Key findings indicate that risk perception is not a wholly objective financial cognitive assessment. Rather, the findings point to an interplay of a range of subjective factors that influence risk perceptions towards IB products and decision-making. On the basis of the empirical evidence, IB consumers perceive a higher level of risk associated with three of the four scenarios. Overall, external conditions impact on risk perceptions, which vary across different types of products based on subjective knowledge and information investors possess in relation to those products. In terms of the relation between attitudinal constructs, a key finding reveals that risk perception mediates the effect of risk tolerance and risk aversion on switching likelihood and switching intention. The study makes a key contribution in identifying risk perception as a distinct component of overall risk attitude and its relationship as a predictor and mediator of switching likelihood and switching intention. This contributes novel insight into the interplay between attitudinal constructs, personal and contextual factors in influencing investor decision-making in an Arabic context. A framework is advanced for risk practitioners for assessing risk culture based on understanding of risk perception as a factor amplified by internal and by external factors that affect consumer decision-making.