Stagnant Islamic banking market share in dual-banking system: insights from cognitive psychology study of representativeness and anchoring-adjustment heuristics

Purpose This study aims to investigate the behavioral aspects of Indonesian Muslims that hinder them from switching from conventional to Islamic banks, leading to a low market share of the Islamic banking industry in Indonesia. Design/methodology/approach This study used a quasi-experimental design with a full factorial 2 × 2 between-subjects setup with three scenario-based treatments (operational, income and legal perception) to test the robustness of heuristic decision-making patterns. A total of 320 participants from Islamic and conventional bank customers in Indonesia took part in the experiment. Data analyzed using a one-sample t-test and descriptive statistical comparison to examine heuristic-based behavioral differences across treatments. Findings The empirical results reveal that Indonesian Muslims consistently rely on heuristic reasoning when evaluating banking options. Initial beliefs strongly shape responses to new information, leading to overreaction to belief-consistent information and underreaction to contradictory information. Although switching behavior toward Islamic banks is evident, many consumers continue to maintain accounts in conventional banks due to religious norms, emotional aversion to riba, limited Islamic financial literacy, and institutional constraints such as payroll systems, resulting in a stagnant Islamic banking market share. Sensitivity testing further shows that respondents reacted most strongly when the statement “trade is the same as usury” was framed in legal or Sharia terms, highlighting the dominant influence of the religious status of riba. Practical implications This study implies that Islamic banks should adopt communication strategies that address belief misperceptions of “trade equals riba” by applying cognitive framing, segment marketing based on consumers’ heuristic responses and collaborate with institutions to reduce structural dependence on conventional banks. Originality/value This study is the first to investigate the behavioral aspect that explains the stagnancy of the Islamic banking industry in Indonesia using a theory-driven conceptual framework. In addition, this study simultaneously applies the heuristic theory of representativeness and anchoring adjustment.