In the Name of Allah The Most Compassionate, The Most Merciful.
For partial fulfillment of the requirements for Master degree in Islamic FinanceSupervisor:2
Effect of Strategic Management practices on Islamic Banks Performance Evidence from Qatar
Adel Mohammed Abou Dahab Mohammed
Prof. Dr. ElSayed El Siefy
31. PrefaceThere are many studies have been conducted to explore the relation/impact between strategic management practice and performance but there is no research investigated this relation in the GCC region. In this research, we examined the strategic management practices in the Islamic Banks and its impact on their performance within the state of Qatar. This includes to what extent it is applicable, what are the implications of applying it, and the consequences of the no-application. We combined in our research between both strategic management framework and financial ratios analysis.
42. Research Problem
A study has been conducted by K.K. Siraj and P. Sudarsanan Pillai during 2005-2010 showed that Islamic banks net profit ratio is lower than the conventional banks even though both market shares and asset growth have increased in the same period. Similarly, a study conducted by El Siefy 2013 during 2006 2010 showed that Islamic banks market share has increased and maintained stronger asset growth, credit growth comparing to the conventional banks before and after the financial crisis. In addition, he stated that there was a slowdown in Islamic banks profitability after the crisis and a significant low performance over most of the period of the research comparing to the conventional.
52. Research ProblemAnother study by Linet Njagi and Henry Kombo, 2014 showed that there is a moderately strong relationship between strategy implementation and organizational performance in commercial banks in KENYA. This has led to the following questions; what are the performance intra Islamic banks? How is it? Based on what? Whether Islamic banks are systemically applying strategic management in their policies or not?Since It is clear that Islamic banks show low performance, and there is an impact/relation between the performance and strategic management.This has led to make an attempt to find whether there is a negative or positive relationship between the performance and the practice of the strategic management or not in Islamic banks.
63. Research Questions ???The research tried to answer the questions of:- Do Islamic banks apply and practice the strategic management or not? Do Islamic banks performance affected by the implementation of strategic management or not?What are the implications of applying strategic management?
74. Importance and Aim of the ResearchFirst, Academic dimension; The researcher has observed no study related or investigated the application of strategic management practice in Islamic banks and its effect on performance in Qatar as one of the worlds main hubs for Islamic financial (QCB Governor). In addition, will provide an important benchmark for future research and the replication of this research would enhance and contribute in providing a considerable understanding of strategic practices in Islamic banks.
84. Importance and aim of the ResearchSecond, Practical dimension; The study will participate in the development and enhancement of Islamic banks performance. Moreover, will give an insight knowledge and experience on how Islamic banks practice strategic management and will highlight the effect of it in this emerging industry. Explore the idea of the application of strategic management in Islamic banks to be more competitive and improve its performance and profitability to strengthen the fact the more the Islamic banks expand and grow the more their impact in the national economy and GDP. Eventually this leads to the optimal welfare of the whole society and meet the objectives of the Sharia.
95. HypothesisIn This Research We Tested the Following Hypothesis:-H1: Islamic banks dont practice strategic management. H2: There is no effect of the strategic management on banks performance.H3: Strategic Management is not an important tool to be used in Islamic banks?
106. Source of DataIn this research we adopted the data available through the below sources:- Secondary data;Islamic Banks reports and statistical dataCentral Bank data statisticsStock Market reportsPrimary data;Literature ReviewClose-ended questionnaire (Derived from Elbanna 2013 & Pachsiry). Personal interviews with Islamic banks CEOs.
117. Limitation of the researchThis research is confined to the State of Qatar and we cannot generalize its results. The sample in this study is limited to four banks only, as a result we couldnt use regression analysis or any other advanced analysis and we used only the mean (average).During the research we faced difficulties to meet the CEOs of the Islamic banks due to their busy agenda and limited time which consume about more than 6 months to get the answers for the questionnaire.
128. Research ProcessThe total population of the Islamic banks in Qatar is four Islamic banks which is limited but give an indication for the total industry. This research selected all of them. The process in this research pursued three steps; Firstly, is the primary data through the literature review and theoretical framework in order to understand the definition and strategic management process. Secondly, Interviews conducted with respondents who are senior executives responsible for strategic planning or others who are considered suitable to respond on their behalf. In addition to a questionnaire answered by the same respondents. Thirdly, this research calculated the financial ratios which are measuring the performance of Islamic banks from 2010 - 2014.
13Strategic Management Process
149. Strategic Management Process Thomson (2012), Wheelen &Hungers (2006), Marten , F. (2010)
159.1 STRATEGIC ANALYSIS
MissionValuesLead to the appropriate identification of banks
169.1.1 External Environment Factors:
220.127.116.11 Remote Environment (PESTEL)
18.104.22.168 Industry Environment
Bargaining PowerThreats of entryThreats of SubstitutesBargaining Power
9.1.2 Internal Environment:- ResourcesTangible:- Financial, Organizational, Physical and TechnologicalIntangible Human, Innovation and ReputationCapabilities used to fulfill the entity required tasks to produce and distribute the goods or services provided to the customer by the entity to create value for them.Core competence Valuable, Rare, Costly to Imitate, Non-substitutable.Value chain analysis: the path upon which products or services as value are added prior to reaching the end consumer Inbound logistics: raw material, handling and warehousingOutbound logistics (warehousing and distribution)Marketing and salesService: installation, repair, and sale of parts.
9.1.2 Internal Environment:- OutsourceValuableRareCostly to ImitateNon SubstitutableStrategic CompetitivenessCompetitive AdvantageCore CompetenceCapabilitiesResourcesTangibleIntangibleFour Criteria of Sustainable AdvantageValue Chain AnalysisDiscovering Core competencies
219.1.3 Vision: What do we want to become?To be the UKs first choice ethical, Sharia compliant bank RayanThe vision statement explains the characteristics of the business in the future. There should be three aspects to be included in the vision statement; A core ideology which consists of a statement about the firms values and Reason for Being., An envisioned future describes what the business will be like if it achieves its most important goals, and The recognition of service to stakeholders which shows how the business serves and maximizes the benefits of its stakeholders
229.1.4 Mission: To provide innovative Sharia compliant financial solutions and quality services to our customers. To maximize returns for our shareholders and partners. To nurture an internal environment of qualified professionals and cutting-edge technology. QIBIt determines, clarifies and describes the central purpose and the basic principles that guide the actions of employees, partners, and management. It illuminates which strategy you will use to polish off your goals and objectives.For a good mission statement; It will consist a formulation of objectives that enables progress towards them to be measured, It differentiate the entity from rivals, It defines the business that the entity wants to be in, not necessarily is in, It is relevant to all stakeholders in the firm.It is exciting and inspiring
239.1.5 Values Values Define What Business Stands For They are core rules. They are entities ethical and moral that management holds dear. They are the compass guiding for staff, management, decision making, and leadership in performing their duties. They are constantly referred to in the decision making process
249.1.5 Values Examples:Principles or StandardsSharia Compliance - Service Above Self Be Prepared Do a Good Turn DailyPersonal QualitiesHonesty Communication Being OrganizedCharacter TraitsIslamic - Loyalty Enthusiasm Openness To Others Dedicated Prestigious - ProgressiveCodes of ethicsHippocratic Oath - Ten CommandmentsGoalsLiving a healthy Life - Caring for Others
269.2 STRATEGIC Formulation
279.2.1 Business Level StrategyTo create distinction between the entitys position and those of its competitorsCost leadership:To outperform competitors by doing everything it can to produce goods or services at the lowest possible cost.Low-cost-position relative to a firms peers.Manage relationships throughout the entire value chain.Differentiation:The differentiated product has the ability to satisfy a customers need in a way that competitors cannot.Focus strategy:Directed toward serving the needs of a limited customer group or segment.Cost Leadership and DifferentiationFlexible manufacturing strategies make the choice between these two strategies less clear-cut.The new flexible manufacturing technologies makes diversification inexpensive for firms, allowing firms to obtain benefits of both strategies.
289.2.1 Business Level Strategy
Broad MarketNarrow Market
Cost LeadershipDifferentiationFocused Cost leadership Focused Differentiation
Integrated CostLeadership/DifferentiationCostUniquenessCompetitive Scope
299.2.2 Corporate Level StrategySpecifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets and applied levels of diversification.
309.2.2 Corporate Level Strategy
319.2.3 Functional StrategyFunctional strategy is the approach of functional area takes to achieve entity and business unit objectives and strategies by maximizing resource productivity.
329.2.4 Co-operative Strategy: Strategy in which firms work together to achieve a shared objectives.
339.2.5 Sharia Compliance
359.3 STRATEGIC IMPLEMENTATION
369.3.1 Corporate GovernanceEstablishing the roles of the board and senior executivesExperience with a balance of skills and independence on the board appropriate to the nature and extent of company operations. There is a basic need for integrity among those who can influence a companys strategy and financial performance, together with responsible and ethical decision-making which takes into account not only legal obligations but also the interests of stakeholders. Meeting the information needs of a modern investment community is also paramount in terms of accountability and attracting capital, presenting a companys financial and nonfinancial position requires processes that safeguard, both internally and externally, the integrity of company reporting. Provide a timely and balanced picture of all material matters. The rights of company owners, that are shareholders, need to be clearly recognized and upheld. Every business decision has an element of uncertainty and carries a risk that can be managed through effective oversight and internal control. Rewards are also needed to attract the skills required to achieve the performance expected by shareholders.
379.3.2 Strategic LeadershipSenior level management involved in quality improvement efforts.
389.3.2 Strategic Leadership: Leaders Qualities
399.3.4 Organizational Strategy
40STRATEGIC CONTROL AND EVAULATION
419.4 STRATEGIC CONTROL AND EVAULATIONCompare actual performance with the expected performanceBenefits of strategic evaluation and control:-They provide direction by enabling management to make sure that the organization in heading in the right direction and corrective actions are taken when needed.They provide guidance to everyone either the managers or workers showing what is happening, performance to the expected and performance improvement needs.They inspire confidence, information about good performance inspires confidence in everyone and leads to better performance.
42Findings of financial ratios
4310. Financial RatiosReturn on Assets: Net Income/Total AssetsReturn on assets is the ratio of annual net income to average total assets of a bank during a financial year.Return on Equity: Net Income/Total EquityReturn on equity or return on capital is the ratio of net income of a bank during a year to its stockholders' equity during that yearReturn on Investment: EBIT/Total AssetsReturn on investmentis the benefit to the investor resulting from aninvestment of some resourceDebt to Equity Ratio: Total Debt/Total EquityThedebt-to-equity ratiois afinancial ratio indicating the relative proportion ofshareholders' equityanddebtused to finance a company's assets.Total Debt Ratio: Total Debt/Total AssetsDebt ratio is asolvency ratiothat measures a banks total liabilities as a percentage of its total assets.
4411.2.2 Findings of Financial Ratios
4511.2.1 Findings of Financial Ratios
4611.2.3 Findings of Financial Ratios
4711.2.4 Findings of Financial Ratios
4811.2.5 Findings of Financial Ratios
49Findings of strategic management Process
5011.1 Findings of Strategic Management Process
51Findings of Strategic Management Process
52Findings of Strategic Management Process
53Findings of Strategic Management Process
54Findings of Strategic Management Process
55Findings of Strategic Management Process
56Findings of Strategic Management Process
57Findings of Strategic Management Process
58Findings of Strategic Management Process
59Findings of Strategic Management Process
60Findings of Strategic Management Process
61Findings of Strategic Management Process
OVERALL Findings STRATEGIC MANAGEMEMENT & ratios
6311.1 Findings of Financial Ratios
PARTICULARSROEROAROID/ETDROVERALL STRATEGIC MANAGEMENT PRACTICERAYAN14.94%2.93%4.00%62.12%12.21%87%QIIB14.63%2.73%3.87%126.13%22.76%56QIB12.59%2.15%2.85%232%39.73%79BARWA7.02%1.48%2.27%135%30.67%77
6411. Findings & ResultsPerformance Indicators and strategic management practice process show that there is a clear positive relation between the practice of the strategic management and the performance. This relation can be observed clearly in Rayan bank which has the highest score 87% in terms of overall strategic management practice, and also the highest score with regard to financial indicators, return on equity, return on assets, and return on investment. In addition it has the lowest score in terms of debt to equity, and total debt ratio.
6511. Findings & ResultsThe result of QIIB is not matching with the aforesaid result and we return this to a non-specialist answers to our questionnaire because we received the answers through the email and we have doubt that the person who answered it seems not from the senior management or a decision maker. In addition, we wouldnt be able to meet anyone of the banks neither the CEO or any senior management representative.
6611. Findings & ResultsBy excluding QIIB from our sample due to the aforementioned reason the results shows clearly that there is also a clear positive relation between the practice of strategic management and the financial performance for QIB and Barwa. QIB bank ranked in the second place in both overall strategic management practice and return on equity, return on assets, and return on investments ( which are the most significant indicators when measure the performance), Whereas, Barwa ranked in the third place for the same indicators.
6711. Findings & ResultsThe result of this research is compatible with the study of Robert Arasa, (2012), David (1997), Greenley, Hofer, (1986), Henderson, (1979), and Schendel, (1978) that companies record improved performance once they effectively embrace strategic planning. study by Linet Njagi and Henry Kombo, 2014 showed that there is a moderately strong relationship between strategy implementation and organizational performance in commercial banks in KENYA.
6812. RecommendationsAs long as all Islamic banks except for QIB dont have a specific department for strategic planning, we recommend highly Islamic banks to have an assigned department to carry over the responsibility of strategic management within each bank. Moreover, provide this department with the talented personnel in order to attain the most benefit from practicing strategic management which will be translated into the banks performance. This will lead to attract more sectors and clients. Ultimately, this for sure will enhance the whole industry.
6912. RecommendationsIn addition, expand the research to include Islamic banks in the GCC region to have clearer vision on the practice of the strategic management within the working emerging banks in this territory. Since we cant generalize the results of this research because of the small sample included in the study. Similarly, explore if there are any other factors affecting the performance of the Islamic Banks in addition to the strategic management.