Introduction
The importance of effective leadership in guiding, man- The chapter will conclude with an interview with a current leader of Islamic banking and finance, Dato’ Sri Zukri Samat, CEO of Bank Islam, Malaysia. In the interview, we gain an insight into the leadership of man who managed to change the fortunes of a bank that was at one point looking towards insolvency and is now one of the leading Islamic banks in Malaysia.
Effective and Ethical Leadership
Islamic banking and finance (IBF) has attracted huge attention not only from Muslims but also from national and global conventional financial institutions. The recent 9th World Islamic Economic Forum, held in London in September 2013, is a testimony to this fact. However, the industry is at its infancy and has a lot to learn and develop – particularly in nurturing its distinctive Shari’a-compliant identity, its governance and management systems, operational efficiency, customer relationship management and strategies for sustainability. For the industry to grow and increase its impact and contribution there needs to be an ongoing effort in the development of new Shari’a-compliant products that provide a viable alternative to conventional banking and finance while trying to achieve Islamic objectives in the wider economy. Efforts are required in developing effective marketing strategies, in developing effective institutional systems and standards that must be met by the industry – including the standardization of law, accounting, governance, regulations, etc. All this indicates a need for effective leadership; a leadership that has, on the one hand, a deeper understanding of the contemporary global economy and how it operates, and on the other, a clear vision on where to steer this infant but growing industry in light of a deeper understanding of the Shari’a, and a motivation to drive positive change in order to have an irreversible impact on our economies.
Effective leadership is a crucial factor in driving development, growth, innovation and progress in any industry. Literature on leadership suggests that companies with above-average leadership-team strength enjoy above-average revenue growth, relative to their industries (Holden 2003). Moreover, successful organizational transformations are mostly attributable to leadership ability. Effective leadership is required to take any organization and industry forward, and lack of effective leadership generally results in imitation, inertia, lagging behind and even decline of industries.
Our Changing Context: Understanding the Key Drivers of Change
It is said that we are living through a period of unprecedented transformative change, and this requires leaders with a new vision, new approaches, new set of skills, new management tools to operate effectively and a greater ability to adapt to continuous change.
The literature highlights that the key drivers of change in the age of globalization are numerous but technology and economic factors appear to be the most important, and both are driven in turn by the neoliberal ideology and advanced capitalism. Neoliberal ideology is underpinned by a belief in markets as the best allocator of resources in society; by a belief that government intervention in markets hinders economic growth in the long term; and by a belief that reliance on market forces will bring prosperity, liberty, democracy and peace to the whole of humankind. Neoliberalism has emerged through the works of intellectuals such as Herbert Spencer, Friedrich Hayek, and Milton Friedman, together with the late-twentieth century brand of Anglo-American conservatism (“neoconservatism”) promoted by political leaders like Keith Joseph, Margaret Thatcher, and Ronald Reagan. These intellectual and political leaders placed an emphasis on a number of policy prescriptions such as liberalization (i.e. the need for free markets – to enable free movement of goods, services, people, and money), deregulation of markets and business, removal of government controls on wages, prices, etc., privatization of state enterprises and functions, and elimination of tariff and other barriers to free trade. As a consequence of aggressively implementing policies to realize these ideas, we are witnessing today the internationalization of economic activity (particularly in trade and finance), global liberalization (i.e. of domestic and international economies), technological developments and innovations to facilitate this process (ICT revolution to achieve speed and cost reductions) and globalized production structures.
Technological developments are changing our concept of time and space. According to Manuel Castells (2000) a new concept of time (timeless time) and space (virtual space) is emerging in this Information Age. From a cyclic concept of time through to a linear concept of time, we are now witnessing the emergence of “timeless time”. Due to the powerful capabilities of information and communications technologies (ICT) of automating, networking and even transformation, organisations are able to operate in real-time on a planetary scale. Time is dissolved by enabling the disordering of a sequence of events and making them simultaneously such as real-time parallel and concurrent processing and coordination of social and business activities.
Manuel Castells suggests that developments in technology and the new economic paradigm are leading to the emergence of new social structures (a network society), a new economy (a global informational economy) and a new culture of “real virtuality” (Castells, 2000). We are witnessing the erosion and weakening of national and cultural boundaries, greater reflexivity and a rapid increase in the flows of people, technology, money, media/cultural products and ideas. “The old organizational pyramids of the nineteenth century are crumbling, being replaced by upside-down pyramids and circles and connections.” (Greenleaf, 1997)
As an example, the way we conceptualize technology has changed gradually through time. First, the internet was conceived simply as technology to exchange information. Later it became a social space for communication and interaction. Then it became a marketing tool, a business tool and now it is conceptualized as a global space through metaphors such as global village(s). The control over national economies is eroding as technological and economic drivers are disintegrating national borders and leading to a global information economy (with global networks; increasing pressure to compete), and global customers, products, operations, resources, and collaboration, and low labour cost in many developing countries.
The IBF industry has to operate and grow in this complex and rapidly changing context. There is an increasingly mobile (nomadic) population, changing lifestyles (due to postmodern ideas), an increasing over-65 population, a breakdown of traditional family structure (e.g. nuclear and even single-parent families requiring more child-care services, eating-out culture, etc.), and, more importantly for the Islamic finance industry, the increasing dynamic and importance of consumers’ power and choice, as well as the rapid political changes taking place. Leadership that fails to grasp these changes and understand the key drivers underpinning them will not be able to develop effective strategies for innovation, and growth and contribute to the progress of the industry.
Envisioning the Industry Through the Islamic Lens
Islamic finance is an effort to apply Islamic principles and values to commerce and financial transactions, with the aim to realise Islamic objectives. These objectives direct attention to reducing or even eliminating exploitation, unfair means of wealth creation, and the concentration of wealth in a few hands; at the same time encouraging enterprise, engaging financial partners in sharing risk and investing in the development of beneficial products and services. Thus, in addition to understanding the context, future leaders in the industry needs to have not only a deeper understanding of Islamic objectives (Maqasid) for financial transactions and the principles that should frame governance and financial products, but they also need to grasp the wider Islamic objectives for social life. It will not be enough for leaders to only have experience in management, planning and strategy. Hybrid leaders are required who will have both management competencies as well as deeper insight into the Shari’a and its application in a rapidly changing environment that is predominantly rooted in capitalist and neoliberal values.
Currently, IBF has not been able to win the confidence of large sections of the Muslim world community (Ummah). Simply because many do not have sufficient awareness or even confidence that it operates wholly according to Islamic principles. They are not able to clearly differentiate between those institutions that employ Islamic concepts to maximize profits only and those that are truly Islamic and are striving to realize the wider Islamic objectives that are beyond profit maximization. There is indeed suspicion and even mistrust amongst a large section of the ummah. Is the industry simply imitating conventional banking and finance products and instruments and labelling them by Arabic terminology? Is the industry effectively regulated by Islamic experts in the field? Is the industry actually achieving Islamic objectives and having an influence on the conventional economic and financial systems?
Thus, for the industry to survive and grow it is essential that future leaders develop mechanisms and structures for the ongoing examination of banking and finance products and instruments pervaded by a deeper under- standing of wider Islamic objectives and principles for social life. This process will assist in the ongoing innovation and development of the industry and enable it to lead rather than follow conventional systems and models. It will also ensure, through this closer alignment of products and instruments to Islamic principles, the development of customers’ trust in the industry as Shari’a compliant. This in turn will ensure customer confidence and loyalty and hence provide impetus for growth.
In order to ensure greater compliance to the spirit of Shari’a, it is essential that the development of Islamic banking and finance is guided by an Islamic framework of thinking rather than conventional ways that are dominated by concerns for profit maximization, market share and efficiency gains. Conventional thinking is on the whole compartmentalized rather than integrated. It is functional and encourages a reductionist view of life and issues. In contrast, Islamic thinking is integrated and holistic. It suggests that life cannot be understood through separating it into its component parts – i.e. into separate social, moral, legal, economic and political aspects. Each aspect of life impacts on other aspects. Social systems impact education, the economy and political aspects, and vice versa. Life needs to be viewed in an integrated way.
With this way of thinking, future Islamic leaders would be able to move away from functional thinking about banking and finance towards integrated thinking as Islam requires. This implies that financial products, instruments and services need to be developed not only in view of Shari’a objectives and principles related specifically to financial transactions but in view of broader Islamic objectives and principles related to other aspects of life – such as to ensure human dignity, social justice, social responsibility, peace and rule of law. This is because financial transactions, decisions, products and services do impact social, cultural, economic, legal and political aspects of life. The Islamic approach advocates that deep consideration ought to be given to both the positive and negative impact of financial transactions, products or instruments on other aspects of life of all parties involved. For example, Islam would recommend that the industry considers whether providing loans based on Islamic principles to customers might, in addition to helping customers, have a negative impact on encouraging the growth of debt in the economy and a culture of dependency on banks as loans have become easily available. If so, then how can these negative aspects be minimized?
It is this type of thinking that will enable future leaders to be vision and mission-driven; to innovate, compete, develop and enable the industry to make a significant impact on the economy and also on other aspects of life. It will enable the industry to be seen as distinct from conventional banking and finance because it significantly distances itself from having material objectives only, such as profit maximization, to having a broader vision that encompasses social, cultural, and economic objectives to improve and sustain social life.
Managing Through the Islamic Lens
Future leadership in the Islamic banking and finance industry, or any other industry for that matter, is required to have a deeper understanding of management tools in order to develop mission-driven efficient, effective and ethical organizations and systems of governance in the industry. In this aspect, future leaders can learn much from Prophet Muhammad as well as from modern management.
For example, the Prophet Muhammad built mission-oriented institutions, which were not motivated by profit or other material interests only, nor worked for short-term objectives (e.g. for quick profits), nor had command and control and hierarchical structures, nor relied heavily on external control mechanisms and bureaucracy, or placed emphasis on status, roles, ceremonies, or other material values. Rather his Islamic-oriented institutions were motivated by higher spiritual values and driven by vision and mission – of bringing social value/benefit or being useful to others and society. His organization (Jamah) had flatter and networked structures; was team-oriented and valued consultation (Shura) and empowerment of workers and managers. He placed emphasis on inner control and motivation mechanisms such as God-consciousness (Taqwa), taking ownership, self-discipline, love for excellence (Ihsan), effectiveness, efficacy, trust, moral values, social responsibility and benefit to society. When planning, organizing or delegating, he gave attention to details. For example, when he made his historical journey to Medina, he planned all minor details, and we see this repeated in all of his actions. He worked to build alliances and coalitions to achieve his vision of a just world order. His system of governance, his participative leadership style based on shura, his attention and closeness to all his team members, etc., all demonstrate his superior management and leadership skills.
History bears testimony to the fact that Prophet Muhammad as a model leader did indeed develop an Islamic-oriented organization that developed a powerful team spirit, gelled its members into a force for positive change, nurtured a consultative culture, and which in turn enabled the warring Bedouin Arab tribes to emerge as a superpower of its time, and who changed the course of human history. Future leaders in the Islamic banking and finance industry need to draw out management and organizing concepts from his life in order to shape a better future for the industry.
This sort of thinking will enable future leaders to design more effective institutions that are both efficient and socially responsible; both profit-maximizing and ethical simultaneously. Effective institutions in turn produce in- novation, growth and progress. Effective Islamic orient- ed institutions endeavour to deliver products/services for societal benefit ethically (for employees, customers, suppliers, etc.), legally (within the law), ecologically (not wastefully) and efficiently (achieve greater output for a given input). They design more effective internal, customer-facing and business partner-facing processes. Process- es and systems that have clear outputs, are streamlined, which cut out fat (i.e. reduce waste, inefficiencies, etc.), and are fit for purpose. They have systems to enable effective horizontal and vertical communication; have dignified control mechanisms that do not treat the workers as ‘things’ but uplift them and nurture a consultative culture (shura-based, knowledge-sharing and team-based) and propel individual and collective growth. In other words, Islamic-oriented institutions should enhance dynamic ca- capabilities, that is, an institution’s “ability to integrate, build and reconfigure internal and external resources to ad- dress rapidly changing environments” Teece et al (1997). Dynamic capabilities enable institutions to “alter their resource base—acquire and shed resources, integrate them together, and recombine them to generate new value-creating strategies” (Grant, 1996; Pisano, 1994).
Essential Leadership Competencies
Future leaders, in addition to having a deep understanding of rapidly changing contexts, understanding of Shari’a objectives and principles for financial transactions and social life in general, as well as understanding the application of management concepts within the Islamic framework, will also be required to develop numerous other competencies to provide effective and ethical leadership in the Islamic banking and finance industry. Future leaders will be expected to challenge ineffective institutional processes, inspire a shared vision, model the way, and communicate effectively through verbal, non-verbal and numerous electronic channels. They will need to lead oneself, others and the organization effectively; each one of these areas requires a new set of skills and abilities.
Foremost in the list of competencies to enable leaders to function effectively in our complex and changing environment is to build and harness social capital in addition to financial capital – that is, the ability of leaders to build trust, link people and engage a network of people and institutions in the role of leadership. Social capital is an important factor in developing competitive advantage as it enables people to pull together, provide emotional, social and economic support to each other, provides access to intelligence and influence, which all assist to develop institutional synergy and momentum for the development and progress. Leadership cannot be provided effectively by a single person – simply due to the rapidly changing and complex environment, which requires a range of leadership abilities, specialist knowledge and skills, and influence that are difficult to be incorporated in any one single person. The emerging leadership requires teams of people in organizations making sense together of the challenges facing them and where they participate in leadership at every level. To nurture and build social capital will necessitate a training environment where networks and coalition building are developed along with team-based skills and effective management of networks. There is a need for leadership to draw on the expertise of Shari’a scholars and academics, finance and banking experts, strategic thinkers, management and ICT professionals as well as networks of other partner organizations in order to build viable and successful institutions. Thus, future leadership will incorporate a range of both hard and soft skills such as being able to manage effective teams and workgroups, building and maintaining relationships, developing others and communicating effectively. Effective teams and business networks facilitate strategic thinking (thinking globally), assist in building partnerships and alliances, and develop shared leadership.
Softer skills include the ability to understand oneself as well as others, and this aspect is also emphasized by Islamic teachings. Islam encourages ta’aaruf (getting to know and understand each other), mutual cooperation, respect, forgiveness and mercy towards each other. All these arise from high emotional intelligence, which is seen crucial for leadership effectiveness. Emotional intelligence involves the “ability to perceive accurately, appraise, and express emotion; the ability to access and/or generate feelings when they facilitate thought; the ability to understand emotions and emotional knowledge; and the ability to regulate emotions to promote emotional and intellectual growth” (Mayer and Salovey, 1997).That is, in addition to the skilled use of reason, the ability to learn from experience, the ability to adapt to the surrounding environment, and to have the know-how involved in comprehending social situations and managing oneself successfully, emotional intelligence involves the ability to perceive, express, understand, and regulate emotions in human interactions. Effective leaders identify emotions, understand the causes of emotion to figure out what makes people “tick”, and use and manage emotions to solve problems and make optimal decisions. This enables leaders to tackle interpersonal situations more effectively such as emotional upsets, handling egoism or handling inferiority complex. The importance of emotional intelligence has been made succinctly by Daniel Goleman (1995), who states: “If your emotional abilities aren’t in hand, if you don’t have self-awareness if you are not able to manage your distressing emotions, if you can’t have empathy and have effective relationships, then no matter how smart you are, you are not going to get very far.” (Goleman, 1995)
Moreover, for sustainability and to ensure compliance to Islamic principles, leadership must be morally conscious and practice ethical behaviour. This is important because there is a prevalent belief that enterprises operate in a moral vacuum (McKenna 1996; Kline 2006). Because of this widespread belief that business and ethics do not go together. “Business ethics” is seen as an oxymoron (Donaldson and Werhane 1988; Velasquez 1992; Bird 1996). Unfortunately, both economic and mainstream management theories appear to have evolved over the last 70 years in a way that paid little attention to moral and social principles. Within these theories, managers owe allegiance solely to the owners (shareholders), and drive businesses through the yardstick of profit. The argument is simple: profitability is, after all, a necessary condition of staying in business. It is argued that this viewpoint emerges from a specific secular-materialistic worldview and its ensuing value system. This is why words such as trust, integrity, dignity, care and virtue still fail to hold significant practical meaning (Parvez, 2007)
In view of this, we witness trust between business organisations themselves and between consumers and businesses is declining. Milton-Smith (1995) respectively commenting on 1980’s and 90’s business environment suggests it to be a period of unparalleled greed: one has only to think of Imelda Marcos, Rob- ert Maxwell, BCCI Directors, and Nick Leeson in the Barings Bank collapse. More recently, with corporate collapses such as Enron, Tycho and WorldCom, many questions have been raised about the integrity of business and government leaders. In order to build and sustain trust in the industry, future leaders must set high standards of personal and institutional integrity and ethical behaviour. Inculcating this suggests systems of self-introspection, stock-taking and evaluation are required. Such systems enable increasing self-awareness, managing oneself, increasing capacity to learn, developing adaptability, displaying drive and purpose, and developing moral consciousness, integrity, ethical and professional behaviour.
In summary, the Islamic banking and finance industry has to operate in the economic context created by conventional financial practices, and products and services. Un- fortunately, the conventional banking and finance industry is predominantly driven by economic values and profit-maximizing. This does make it difficult to operate within the Islamic value set and to stand out distinctly in the industry as a viable alternative. Moreover, there is the challenge of understanding the key drivers of our age and how to steer the industry in the emergent turbulent environment. If the Islamic banking and finance industry is to survive, grow, stand out and become a viable alternative, it needs to develop effective responses to both of these challenges. The need to develop and nurture future institutional and industrial leaders who are trained to envision the industry through the Islamic lens, manage through the Islamic lens, have the requisite leadership competencies, management and strategic skills as well as softer skills such as emotional intelligence, must be rooted in Islamic objectives and principles for financial transactions and for the broader social life.
