Islamic Banking Segmentation in Indonesia

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    Rovvy Ocktora2

    Department of Management, Faculty of Economics and Business, Gadjah Mada University



    Islamic banking industry in Indonesia has developed quite rapidly in last decade. Nowadays,

    the Islamic bank only used differentiation strategy in order to compete with conventional

    bank, that is free of riba. To be able to compete between Islamic banks, they need to have

    appropriate segmentation strategy. There are two segmentation strategy that can be use by

    Islamic bank, benefit segmentation and demographic segmentation.

    This research is used Wedel and Kamakura (1998) segmentation based. The demographic

    segmentation is included in observable product specific based. And the benefit segmentationis included in unobservable product specific based.

    The objective of this research is to observe the relationship between demographic and benefit

    of Islamic bank costumer. Before that, the desire consumer benefit must be found. Factor

    analysis and cluster analysis are used to make the benefit segmentation. Then chi square test

    are used to find the relationship between these two variables. This research is conducted in

    Yogyakarta, Indonesia. The result is only age and occupation that have relation with the

    benefit segmentation.

    Keyword: segmentation, demographic segmentation, benefit segmentation, Islamic bank.

    1 This paper was published in Journal of Islamic Business and Economics (JIBE), Laboratory of Islamic

    Business and Economics (LIEB), Faculty of Economics and Business, Gadjah Mada University in December

    2008. This paper originally in Bahasa Indonesia, and then translated into English with minor revision.2 Researcher in Syariah Center P2EB, Faculty of Economics and Business, Gadjah Mada University. Address

    correspondence to [email protected]

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    The developments of Islamic banking in Indonesia are cannot be separate from the

    appearance of the first Islamic bank, Bank Muamalat. This Bank Muamalat is existed

    from 1991. The existence of this Islamic based bank is initiated by Majelis Ulama

    Indonesia (MUI) and supported by Ikatan Cendekiawan Muslim Indonesia (ICMI).

    The upcoming of Islamic bank in Indonesia actually too late if compared in other

    countries in Middle East. But, the existence of Islamic bank gives an alternate choice

    on Indonesian banking industry. That because Islamic banks are using profit and

    loss sharing rather than the conventional banks are still using interest based.

    In their first appearance, public are still skeptic with this Islamic bank. When

    economic crisis strike Indonesia in 1998, a lot of national bank got the effect. So many

    bank must be liquidated and merge with another bank in order to survive from high

    inflation rate. But, bank Muamalat, the Islamic bank is survive from this economic

    crisis. One of the reasons why these banks survive is not using interest system that

    very fragile to inflation.

    Some of bank practitioners are try to develop Islamic bank after they are successfully

    again the crisis. Some of conventional bank started to open Islamic Banking Unit.

    The government are begin to acknowledge this Islamic banking industry. In 1998,

    the law no.10 year 1998 are obtained as replacement of law no.7 year 1992. With that

    law, Islamic bank have a gold opportunity to grow bigger. The conventional bank

    can also open a branch office with Islamic based system.

    Based on Islamic banking statistic, if in year 1992-1998, there is only one Islamicbank, and then on March 2007 there are twenty four Islamic banks. There are

    consists of three Islamic Commercial Bank and twenty one Islamic Banking Unit.

    Besides that, the number of Islamic Rural Bank reached 105 units in the same period.

    The developments of Islamic bank can be seeing on table 1 and graphic 1.

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    Table1. Islamic banking share to total bank, December 2007

    (Billion rupiah)

    Islamic Bank Total Bank

    Nominal Share

    Total asset 36,539 1.84% 1,996,501

    Deposit Fund 28,012 1.85% 1,501,834

    Credit/Financing Extended 27,944 2.79% 1,002,012

    Source: Islamic banking statistic Bank Indonesia

    Graphic1. The development number of office and deposit of Islamic bank,

    January 2007 - January 2008.

    Source: Islamic banking statistic Bank Indonesia.

    Watching this development of Islamic banking industry, there are good businessstrategy needs to be applied. Even though Islamic banking market share is still less

    than 5% from overall national bank, but the growth are increasing year by year. This

    fact is very important and needs to be done by Islamic banking practitioners in order

    to get costumer as much as possible.

    Nowadays, Islamic banks are only made a differentiation against conventional

    banks. They made positioning to costumers that they are free-interest bank. They see

    that Muslims are prohibited to riba, and bank interest is part of riba. But, only some

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    of the people in Indonesia are aware of this fact. The problem is, differentiation

    between Islamic banks is still not clear. The effect is competition in order to get the

    costumer become hard. That why a clear positioning between Islamic bank is


    In more developed economic, the importance of market segmentation in financial

    service sector has been well established. As competition between bank increases,

    each financial service adopted an interesting segmentation strategy (Speed and

    Smith, 1992; Harrison, 1994). Unfortunately Indonesian banking sector segmentation

    that based on needs, wants, and preference are rarely found. Its need to understand

    though, in the developed country, the numbers of segmentation variables arelimited. Its different in western country, where market segmentation from

    costumers has developed rapidly. Lifestyle segmentation or geo-demographic

    segmentation is common in western country.

    Problem Identification

    According to the facts above, the purpose of this research to make an alternative

    segmentation that can be applied in Islamic banking industry in Indonesia. This

    research is trying to do segmentation on Islamic bank customers with some

    variables. There are two kind classifications of segmentation based that used, that is

    demographic and benefit (Wedel and Kamakura ,1998). This research also tries to

    find the relationship between those two variables.


    Market segmentation is the way to increase companys marketing by grouping the

    costumer into a group that have a similar needs and wants. Marketer cannot made a

    segment, but a marketer job is to identified segment and determine where is to be

    the target. The point is market segmentation offering more benefit than mass

    marketing (Kotler, 2003).

    Wedel Smith (1956) first time define market segmentation as viewing a

    heterogeneous market as a smaller homogeneous market, in response to differing

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    preference, attributable to the desire of consumer for more precise satisfaction of

    their varying wants. Based on the other definition of expert, its can generally

    explain that segmentation appear because of heterogeneity of needs and desire of the


    There are many researches about segmenting the financial institution. To facilitate a

    brief analysis of the most pertinent to the financial service sector, the author follow

    Frank et al. (1972) and Wedel and Kamakura (1998). They suggest classifying those

    segmentation variables according to whether they are product specific or

    general (i.e. independent products or service), and also by the extent to which each

    variable might be deemed observable. For more clear can see table2.

    Table2. Classification of Segmentation Variables

    General Product-specific

    Observable Demographic, geographicand socio-economicsvariables

    User status, usage rate,loyalty, stage of adoption

    Unobservable Psychographic, values,personality and lifestyle

    Benefit, perception,preference, intention

    Source: Wedel and Kamakura (1998)

    Demographic Segmentation

    In a demographic segmentation, market divided into groups based on variables.

    Age, gender, monthly income, occupation, and education are the most potential to

    grouping the costumers. Demographic variables are also has very close relationship

    with needs, preference, and consumer used level. Demographic variables are easy to

    measure rather than the other variables. These variables are so important that ifmarket is divided into non-demographic variable, the demographic characteristic is

    still needed. In order to measure segmented target and the medium effectively,

    demographic variables are very important.

    According to Wedel and Kamakura (1998), demographic variable are include in

    general observable based. Information about demographic variable are easy to

    collect and quite reliable. This variable also not gets much problem if its put in

    marketing mix. Some of demographic variables that have been used in demographic

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    segmentation research are: gender (Dikkens and Chappel, 1997; Frank 1989),

    position in the family life cycle (Wells and Gubar, 1966; Lansing and Kish, 1957;

    Reading, 1988; Jonak, 1988), culture (Joy et al., 1991), income (Allt, 1975; Slocum and

    Mattews, 1970; Crisnall, 1992; Monk, 1970), and geographic location (Lunn, 1878). In

    this research used age, gender, marital status, income, education and occupation

    (Schiffman, 2004).

    Benefit Segmentation

    Benefit segmentation watching how the consumer satisfied from a product. Change

    in a life style plays an important role in product benefit for consumer. This also gives

    marketer a chance to create product and service. Main power of this benefit

    segmentation is benefit has causal relationship with behavior in the future

    (Schiffman, 2004).

    Benefit is something that able to make someone to fell satisfied with their needs or

    wants. Someone will choose one from many option because of the benefit from they

    choose. Just like bank customers, they just hoping the benefit from the bank they

    choose. There are many kind of benefit that they get from the bank they choose.

    With many kind of benefit, that can be categorized into each segment.

    Practically, a bank marketer will be successful if he is able to do benefit segmentation

    combine with good marketing mix strategy. Banks are able to get their target

    consumer with the benefit that they offer. With benefit segmentation that will be


    According to Wedel and Kamakura (1998), benefit variable are include in

    unobservable product-specific based. Some research must be done if wanted to

    know what benefit that someone desired. There are some researches that using

    benefits segmentation as variables (Tynan and Drayton, 1987; Loker and Perdue,

    1992; McDougall and Levesque, 1994; Minhas and Jacobs, 1996).

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    Theoretical Framework

    This research replied from Alfansi and Sargeant (2004) research. The title of the

    research is Market Segmentation in the Indonesian Banking Sector: the Relationship

    Between Demographic and Desired Consumer Benefit. On that research said those

    general observable based variables are close to segment criteria such as

    identifiability, sustainability, accessibility, and stability, but weak at actionability,

    and responsiveness. At unobservable product-specific based variables are close to

    actionability and responsiveness, but this variable weak to the other criteria.

    That will be interesting if there is any relationship between those general observable

    based and unobservable product-specific based variable. If there is a relationship can

    be found, there will be an interesting potential segment. As the conclusion of that

    research is, there only one demographic variable that have relation with benefit

    segment, and that is occupation.

    This research want to know the relationship between general observable based and

    unobservable product-specific based variable as Wedel and Kamakuras

    segmentation criteria, if there will be different between conventional banking and

    Islamic banking customers segment. This research tries to do segmentation based on

    benefit from Islamic bank customer. And then if there is a significant correlation

    demographic segmentation, such as age, gender, marital status, monthly income,

    education, and occupation with those benefit segmentation.


    This research conducted in province Daerah Istimewa Yogyakarta, Indonesia. There

    are 3.3 billion populations in this province. Yogyakarta is a representative place of

    social strata existing in wider Indonesia. This area also has a highest development in

    Islamic banking in Indonesia. Up now, there are 21 Islamic bank branch are open in

    this area. Islamic banking growth is 40% per year, highest in Indonesia.

    This research is use survey method, where the population is Islamic bank in

    Yogyakarta. There are 300 questionnaires distributed as a sample, and only 275 are

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    obtained. Sampling method that used are convenient sampling and stratified

    sampling. Stratified sampling is used to get heterogeneity and balancing the sample.

    There are two kind of strata that used, place and occupation.

    This research is using primary data. There are two kinds of data that will be collect,

    demographic variables and benefit variables. The demographic variables that used

    are just like mentioned before. The result of respondent demographic data can be

    seen at appendix 1.

    There are three instrumental tests that used in this research. The first one, factor

    analysis, is used to derive the factors that construct the benefit variable. The item

    that construct benefit variable is from the benefit item from questionnaire. The

    second is cluster analysis, is used to create segment cluster of benefit variables from

    the factors that created. And the last one is chi square test is used to know the

    signification of relationship between demographic variables and benefit segment


    Factor Analysis of Benefit Variables

    Factor analysis is statistical method that used to explain variability among observed

    variables into smaller variable called factor. In this study, factor analysis used to

    classify and simplify the variables benefits received by customers of Islamic banks

    into the factors that shape it, so that can know what are the factors that underlie the

    benefits of Islamic bank customers.

    An interview is held before the questionnaire is distributed. The purpose is to

    explore what are benefits that Islamic bank customer gets. Some of literature study is

    used to complete the benefit item that a banking customer can get. From that

    exploration, there are benefit item that used in this research. The detail benefit item

    and their source are in appendix 2.

    Benefit Factor

    In a validity test, KMO value of 0.896 is obtained so that the research is feasible to be

    tested with factor analysis because its value is more than 0.05. KMO value

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    approaching 1 indicates that factor analysis can be used in the data. The method

    used in the test reliability is Cronbach Alpha coefficient (). According Sekaran

    (2000) the instrument is considered reliable if the alpha value greater than or equal to

    0.7, the measured variables and items can be trusted or relied upon. While the alpha

    value greater than or equal to 0.6 is considered fairly reliable (Hair et al., 1998). In

    this study the Cronbach Alpha reliability of the test is 0.961. Thus, existing data are

    considered highly reliable.

    Based on the data grouping score coefficient matrix that has the greatest value, there

    are 11 grouping factors. Benefits of grouping factors can be seen in appendix 3. All of

    these factors can be named respectively as follows:

    1. Factor 1 = appearance2. Factor 2 = ATM3. Factor 3 = cost4. Factor 4 = service5. Factor 5 = various products6. Factor 6 = sharia compliance7. Factor 7 = branch office8. Factor 8 = employee9. Factor 9 = location10.Factor 10 = reputation11.Factor 11 = extra facility

    Thus, all of factors that underlie all of the benefit variables of Islamic bank customer

    can already be known.

    Benefit Segmentation

    F ratio values and significance levels are used to compare the differences between

    the mean clusters. Giving a label or name on the cluster done accurately describe the

    nature of these clusters. This study used three clusters as analysis. Results from the

    cluster analysis can be see in appendix 4.

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    From the table note that the level of significance of the table shows that the level of

    significance of the table shows that the ten variables were significantly different with


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    Table3. Signification Test

    Variables Chi Square Df. Sig.

    Gender 5.316 2 0.070

    Age 23.936 8 0.002

    Monthly income 8.082 6 0.002

    Occupation 15.082 6 0.232

    Marital status 8.8839 4 0.065

    Last education 4.553 8 0.804

    From Table 3 it can be seen that the value of 0.05 significance demographic variables

    significantly related to the variable benefit with significance value 0.05.

    Thus, demographic variables related to the variable benefits in segmenting

    customers of Islamic banks are the variables of age and occupation. As for the

    variables of sex, monthly income, and last education did not have the relationship

    with the segmentation of variable benefit.

    Discussion of Results

    In this research can be concluded that age differences can be categorized into the

    benefit segmentation that created. In a different age level, customers will tend to be

    associated with one of the benefits offered by Islamic banks, whether its cost

    advantages, the major product benefits, convenience or profit.

    So it is with monthly income. At a different level of income, customers will tend to

    be associated with one of the benefits offered by Islamic banks, whether its cost

    advantages, the major product benefits, convenience or profit.

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    Managerial Implication

    The results of this study concluded that demographic segmentation variables that

    have a relationship with the benefits segmentation variables are the age variables

    and occupation variables. This is considered quite disappointing because it was still

    less able to benefit segmentation targeting the consumer to do targeting based on age

    and employment, especially if the Islamic banks would like to offer specific benefits

    to the clients.

    Although only age and occupation variables that can be targeted to offer the benefits

    of Islamic banking, Islamic banking practitioners can still get a lot of customers if

    they can make the most of the intended target market. By knowing the benefits that

    can be offered and the right target market demographic, the marketing focus will be

    more to produce than on mass marketing (Kotler, 2003). Islamic banking

    practitioners can perform combinations to focus on the benefits offered or

    demographic target market.

    Viewing of the three segments that form, namely the cost segment, the main

    products, and convenience, the practitioners of Islamic banking can take advantage

    of the benefits sought by the character of the community by focusing on one segment

    of those profits. At the focus of these segments, Islamic banking marketers can do

    concentrated segmentation with segment targeting certain advantages with a specific

    target market demographics, whether based on age or occupation.

    If every Islamic banks successfully targeting a variety of target markets in each

    segment, the development of Islamic banking in Indonesia will be more organizedand focused. With the increasing number of Islamic banks that hold more and more

    customers will not occur because the seizure of any Islamic bank already has a

    different focus positioning that will be devoted to other prospective customers.

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    For further research on the same topic should be able to consider the suggestions as


    1. Distribution of respondents demographic variables in order to more evenlyand to represent each of the variables such as gender, age, income,

    occupation, marital status, and education last.

    2. In finding the relationship between the general categories of variables that canbe observed with category-specific products that can not be observed in the

    classification of Wedel and Kamakura (1998) not only between demographic

    variables only, can also use the socio-economic variables.

    3. To find out more about the relationship between demographic variables withthe variable benefit could use more information such as conjoint analysis

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    Appendix 1.Respondent Demographic Data

    Variables Frequency Percentation

    Gender Male 165 60 %

    Female 110 40 %Total 275 100 %

    Age Less than 25 year 208 75,6 %

    Between 26-34 year 33 12 %

    Between 35-44 year 18 6,5 %

    Between 45-54 year 15 5,5 %

    More than 55 year 1 0,4 %

    Total 275 100 %

    Monthly income Less than Rp.500.000 83 30,2 %Between Rp.500.000 Rp.1.000.000 107 38,9 %

    Between Rp.1.000.000 Rp.1.500.000 39 14,2 %

    More than Rp.1.500.000 46 16,7 %

    Total 275 100 %

    Occupation Student 158 57,5 %

    Employee 78 28,4 %

    Entrepreneur 33 12 %

    Others 6 2,2 %

    Total 275 100 %

    Marital Status Single 217 78,9 %

    Married 57 20,7 %

    Divorce 1 0,4 %

    Total 275 100 %

    Last education Junior High School 4 1,5 %

    High School 168 61,1 %

    DIPLOMA 25 9,1 %

    Undergraduate 66 24 %

    Master 12 4,4 %

    Total 275 100 %

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    Appendix 2. Benefit items that used

    No Items Source

    1 Bank reputation 1, 4, 6

    2 Sharia compliance 7, 8

    3 Free of riba 7, 8

    4 Using profit and loss sharing system 8

    5 Security of deposit 8

    6 Fast and efficient service 4, 5, 6

    7 Overall service 4, 6

    8 Fast and accuracy transaction 2, 6

    9 Financial counseling service provided 4

    10 Bank employee wear an Islamic dress 8

    11 Numbers of bank employee that ready to help 3

    12 Knowledge of bank employee 3, 5

    13 Friendliness of bank personnel 1, 4, 5, 6

    14 The respect and consideration that shows bank



    15 Long banking hour 1, 5, 6

    16 High profit and loss sharing deposit margin 8

    17 Lower charges of monthly deposit 4, 5

    18 Free drawing charges 4, 5, 8

    19 Low charge in others service 4, 5

    20 Gift that offered 1

    21 Branch office facility 3

    22 The numbers of branch office in the country 3

    23 Size of branch office 3

    24 Being able to pay bills 4

    25 Wide range of service offered 4

    26 Able to mobile banking 8

    27 Able to internet banking 8

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    28 Availability of ATMs 5, 6

    29 Numbers of ATM booths 5, 6

    30 Join in Union ATM 8

    31 Free charge at Union ATM 8

    32 Interesting ATM card 8

    33 Convenience location 1, 4, 5, 6

    34 Bank location that near resident 8

    35 ATM location that near resident 8

    36 Internal appearance of the bank 5

    37 External appearance of the bank 5

    38 Interior layout of the bank 2

    39 The availability of parking space 1, 4

    40 Confidentiality of the bank 2

    41 Interesting advertising 6

    42 Much known by people 1, 4, 5, 6

    43 Recommended by friend or family 1, 4, 5, 6

    44 Complete and open information in the bank 3, 6

    45 No information being hide 3, 6

    Source: 1 = Anderson et al. (1976); 2 = LeBlanc dan Nguyen (1988); 3 = Lewis (1991);

    4 = Kaynak et al. (1991); 5 = Kaynak dan Kucukemiroglu (1992); 6 = Zineldin (1996);

    7 = research of Bank Indonesia (2007); 8 = interview result

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    Appendix 3. Factor Grouping

    Factor VariableCoefficient

    Matrix Score

    Interesting ATM card 0.149

    Internal appearance of the bank 0.274

    External appearance of the bank 0.254

    1 Interior layout of the bank 0.252

    Confidentiality of the bank 0.139

    Interesting advertising 0.144

    Availability of ATMs 0.246

    2 Numbers of ATM booths 0.269

    Join in Union ATM 0.249

    Free charge at Union ATM 0.244

    High profit and loss sharing deposit margin 0.2143 Lower charges of monthly deposit 0.291

    Free drawing charges 0.298

    Low charge in others service 0.309

    Fast and efficient service 0.337

    4 Overall service 0.315

    Fast and accuracy transaction 0.334

    Being able to pay bills 0.295

    5 Wide range of service offered 0.295

    mobile banking 0.367internet banking 0.304

    Sharia compliance 0.353

    6 Free of riba 0.307

    Using profit and loss sharing system 0.296

    Bank employee wear an Islamic dress 0.282

    Financial counseling service provided -0.125

    Branch office facility 0.472

    7 The numbers of branch office in the country 0.422

    Size of branch office 0.160

    Convenience location 0.190

    Knowledge of bank employee 0.150

    8 Friendliness of bank personnel 0.444

    The respect and consideration that shows bank


    Security of deposit -0.272

    Numbers of bank employee that ready to help 0.307

    9 Long banking hour 0.321

    Bank location that near resident 0.403

    ATM location that near resident 0.299

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    Bank reputation 0.299

    10 Much known by people 0.360

    Recommended by friend or family 0.461

    Gift that offered -0.211

    11 The availability of parking space 0.283Complete and open information in the bank 0.551

    No information being hide 0.392

    Appendix 4. Cluster Grouping

    VariableMean Score

    F Ratio Sig1 2 3

    appearance -.80816 .31498 -.16446 43.412 .000

    ATM .33276 -.00554 -1.90842 31.617 .000

    cost .46263 -.18511 .17060 12.052 .000

    service -.26890 .13488 -.53341 6.281 .002

    Various products -.65452 .27248 -.40981 28.188 .000

    Sharia compliance .17903 -.04287 -.39188 2.272 .105

    branch office .09174 .09963 -2.13620 35.931 .000

    employee -.40444 .12559 .42759 8.987 .000

    location -.48320 .13753 .71014 14.546 .000

    reputation -.10569 .08699 -.75045 4.623 .011

    Extra facility .32237 -.14272 .33739 6.631 .002