Islamic banking is a financial innovation which is seen as the most visible economic aspect of Islamization. It has made considerable progress very rapidly not only in Muslim world but even in non-Muslim world in a relatively short span. However, there are reservations by some Muslim economists about reality of Islamic banking. They argue that the progress made by Islamic banking seems to more apparent than real because the guiding principles of Islamic shriah are not being followed in PLS. Fixed-rate type of financial instruments are widely used which are deviation from the Islamic principle of interest free banking. The fact is that these types of fixed income instruments are approved by shariah board. Islamic banks are aiming to evolve a risk-minimizing investment portfolio which contains both the variable and fixed-rate of return types, without any imperfection complex for respecting consumer preferences.(Naqvi 2000)
An Islamic bank is a modified form of jahbadh (which means someone expert in matters of coins, a financial worker, emerged later as bank). The challenges of Islamic banks are similar to conventional financial institutions because they also offer financial services. But Islamic banking has some additional challenges to the conventional banking.
Islamic banking has capability of accommodating business solutions for problems even in instances where the conventional banking fails to give appropriate solutions. Interest based banking is financial intermediation between savers and entrepreneurs. It borrows money on interest and lends it at higher interest rate to people who can use it profitably. On the other hand, Islamic Banking is aimed at sharing of the fruits of economic activity carried out through intermediation bank between savers and investors. Interest is eliminated from Islamic banking system because it is prohibited in Islam. The orders against interest are explicit in many verses of Holy Quran. This also extends to trade and manufacturing of goods that are prohibited in Islam.
Islamic banking is gaining popularity in an era when free market economy is dominating the economic systems. Free market economy has three basic characteristics of free trade, open market for capital and minimized government intervention. These measures have lessened the regional and global barriers in trade. These changes have created an opportunity for Islamic banking to become competitive for its functioning.
Islamic banking can flourish better in an environment which supports basic principles of Islam. Following are requisites of Islamic banking.
There may not be uniformity in the practices established by of Sharia Councils of different countries. Therefore, Supreme Sharia Council representing all Muslim countries is need of the day, to decide about various issues confronted by Islamic banks Fiqh Academy at Jeddah, Saudi Arabia has been established as an initiative under the supervision of the Organization of Islamic Conference. (vi) Uniform Accounting Standards:
There is need of harmonizing accounting standards especially
For evolving from conventional banking into Islamic banking, it can do it easily by formulating strategies and developing shriah board.
Successful management of Islamic banks require the implementation of all the modern management tools of corporate business, including management of human capital, offices, knowledge management and marketing etc.
An independent professional body is needed for ensuring quality banking and standardization of management of Islamic banks and to give confidence to the general public in Islamic banking. This body should be responsible to define, establish and monitor professional standards and ethics of Islamic financial institutions. It may rate the financial health of Islamic financial institutions.
The risk of Islamic banking is higher than a conventional banking which is based on interest. The most common risks in Islamic banking are:
Fiscal and monetary policy changes by government will have direct impact on profitability of Islamic banks because profit and loss of the business enterprises where bank has invested is shared. So the risk is higher than the conventional banks. Islamic banks share the actual results of the business while conventional banks get pre-determined rate of return.So future changer in fiscal and monetary policy should be considered before making any investment.
Islamic bank pool in money from savers on a large scale and shares profit and loss with them. The collected funds have different maturing periods. This portfolio of products is guided by principles of Sharia (Islamic principles). Some of such sharia conforming products are
Murahaba is generally preferred by banks for lending purpose because of its close resemblance with conventional banking instruments. There should also be a mechanism for analyzing new and innovative products in Islamic banking. Properly structuring instruments, detailed documentation, well defined operational system and accounting/audit standards approved by sharia should be given due importance in establishing products. Research and development should get importance for developing new products especially for inter-bank dealings and financing of long gestation period financing.
The Islamic banking system is in an evolutionary stage. It is facing following difficulties;
International Islamic institutions like the Islamic Development Bank can assist in development of Islamic banks in Islamic world. Islamic banking can be focused by making it a separate field of knowledge. There is need to establish a mechanism for transfer of funds from countries with sur funds to countries with shortage of funds. Islamic banking courses should be thought by universities of Islamic countries with the purpose of supplying people having knowledge of finance and sharia both. These courses are taught now at international universities as well. (Iawai 1994)
Asset management seemed to have got less importance by professionals and is considered less exciting and less rewarding than high-volume retail banking or highly compensating investment banking. Now, however, there are certain tools and knowledge to make Islamic asset management a reality. Whether institutional investing for pension funds, takaful (Islamic insurance) companies, corporate treasuries or retail investing for households, the technology exists to create, manage and distribute Islamic mutual funds and other assets on a large scale professionally.
There is gape in demand and supply of Islamic asset management. (Sandwick)
The unfavorable economical and financial conditions in many Islamic countries frustrate adoption of Islamic banking system at large scale. Fiscal, monetary and external sector imbalances of these countries are responsible for failure to provide fertile ground for operation of Islamic banking efficiently. Major changes in structural term can provide Islamic banks with level playing field.
Efficient operating of Islamic financial system would be established when rates of return in financial sector at par with rates of return in real sector. Banking system is financer of fiscal deficit in many Islamic countries. The financial system is regulated by artificially maintaining limits on bank rates for government borrowing at cheaper rates. This repression represents a form of revenue for the government. Government expenditures need to be lowered and/or revenues should be raised to lower this burden. Politically, it is difficult to raise taxes. Imposition of controls on local financial markets is an easy way of earning revenue by governments. Islamic banks and other financial institutions can not achieve their full potential because of these measures. For instance, mudarabah companies may be able to provide higher returns as compared to conventional banking system. But this will put Islamic banks in direct competition with conventional banks for deposits which they use for financing of government deficit. (Mirakhor 1997)
As the features of financial instruments are quite different from conventional banks, their risks are also more sophisticated. This has also bee mentioned by Islamic Financial Services Board (IFSB) in its publication of 2007. Report establishes that Islamic banks have exposure to a wide range of operational risks that can have significant impact on their operational performance. This is because of contractual difference of Islamic modes of finance from conventional instruments.
Risk of loss resulting from inappropriate internal processes, people or systems, or from uncontrollable external events is called operational risk as defined by Basel II. Operational risk is associated with the loss resulting from ‘inadequate or failed internal processes, reputational problems, people and system, legal drawbacks or from external events in Islamic banking. Islamic banks' definition of operational risk gives due importance to legal risk as well as reputational risk. Non-compliance with Islamic economic principles is considered big part of operational risk by IFSB. Failure in meeting this principle may cause transaction to be cancelled and revenue will be lost. Moreover, states IFSB, fiduciary risk arises when Islamic banks fail to perform in accordance to their fiduciary responsibilities which may be implicit or explicit. This damage can cause withdrawal of significant portion of deposits, and a liquidity problem may arise. Customers may stop availing finance from such Islamic bank, and a loss will be incurred.
Operational risk management in Islamic banks is different from conventional banks. A number of additional dimensions need to be considered for analysis. Some of the challenges are similar to conventional banking due to resemblance of some activities with conventional banking. More thorough understanding sources of Islamic banks' operational risk is required. People risk, technology risk, and legal risk should also be considered.
Islamic finance has emerged as one of the key trends shaping global financial markets today. Islamic finance industry assets have surpassed $500 billion and the market growth rate is expected to remain in double digits for the foreseeable future. Rapid expansion of the industry requires well-trained Islamic finance professionals. Consequently, Islamic Finance practitioners are in great demand in whole world.
People risk can have major impact on operational risk because there is dire need of people trained in Fiqh. Banks hire scholars for implementation of Islamic economic principles, but theses scholars do not understand complexities of financial transactions. There is also scarcity of financial economists who understand Islamic economic principles.
With advancement in technology, the Islamic banks' operations have become highly dependent on use of technology with use databases. It is required for effective and efficient decision making in anticipation businesses and clients demands. The use of technology in different ways can be a competitive edge in Islamic banking. If Islamic banks do not use technology may left behind conventional banks. The bank should test and upgrade technology to meet customer needs, market and regulatory requirements and evolving needs of knowledge management.
Legal risk for Islamic bank is very important and it can not be ignored easily. Legal risk may arise because of uncertainty in laws, inability of legal system to enforce financial contracts, legal ambiguity and contract interpretation uncertainty, legal status of financial instruments, legal expert's unavailability and risk of unanticipated changes in laws and regulations. Some aspects of Islamic banking are not covered by law which can also contribute to legal risk.
The operational risk measurement has two dimensions of operational risks, one having high frequency and low severity and the other one characterized by low frequency and high severity. Operational risk analysis includes hazards, events, and consequences. Cause and effect relationship can be established between hazards, resulting events and resulting consequences. Internal control weaknesses or lack of compliance are causes of hazards, events and loss. These are caused by shared responsibility of people, processes IT infrastructure and some unpredictable events. Root cause should be considered more important by Islamic banks than effects. Risk and control information should be integrated in a system. This approach will help Islamic bank to find out root cause and record it in data base. This cause and effect correlation analysis can help in effective operational risk management policies formulation.
Financial institutions have recently added operation risk in the list of risks faced by Islamic banks. Operational risk in Islamic banks can be managed in the same way as managed by conventional banks with addition of several elements. Unique features of Islamic banking contracts, the operational risk in Islamic financial institutions is significantly different from conventional banks. The operational risk for Islamic banks is very important because of relatively higher complexity of contracts and fiduciary obligations. This risk can cause losses to all financial institutions. Various techniques are being implemented in Islamic banking and conventional banking as well to mitigate this risk. The non-availability of loss state is hindrance in implementing sophisticated statistical techniques. This lack data will not be an issue in near future because of rapid growth of Islamic banking in recent years. (Izhar)
There are around 1.61 billion Muslims globally, thus making Islamic Banking segment as the fastest growing discipline in financial industry. Banks have to offer products matching the needs of existing customers and for attracting new customers. so documenting policies and training human capital to fulfill these demands is necessary to compete financial industry. (The Rise of Islamic Banking)
The first step an Islamic financial institution can take to become compliant with traditional and Islamic banking principles is documentation. Bank staff should be able to reference policies. By providing clearly written, readily available policies and procedures, financial institutions can provide proof that they are remaining compliant with general banking principles and the laws of Shari'ah. Documentation is an especially important tool for a financial institution's Shari'ah board. The board of Shari'ah experts and scholars can use documentation to record their established guidelines for the policies and procedures with which the Islamic bank must comply. Through proper documentation, the board can more effectively advise and audit the Islamic financial institution. Documentation can also act as a resource for employees at the bank. By providing documentation, the policies and procedures will be more easily accessible to bank employees, helping them to quickly find answers to their questions.
After properly documenting all policies and procedures, Islamic banks should also quip their employes with knowledge of Islamic economic principles. However, training for employees on both general and Islamic banking principles does not have to be a costly or time-consuming process. E-learning is a cost-effective way to educate employees on general banking principles as well as Islamic banking law. E-learning is very cost effective way of learning. It can be used for refresher training and new hire training. Training will not only help bank employees to become familiar with general banking principles, it will also teach them about the complex regulations that apply to Islamic products and services. Through these training programs, employees will gain the knowledge and tools needed to benefit t the customer-bank relationship. By providing training for employees on the policies and procedures of conventional and Islamic banking, banks will experience the following benefits:
Training for all employees will guarantee that standard procedure is being taught and practiced across the bank. Unlike classroom training, e-learning sessions are identical, creating consistency in training. Additionally, standardization will ensure that all Islamic banking customers receive a consistent standard of personalized customer service each time they enter the bank.
Risk will be reduced by training people about conventional and Islamic banking. By creating a more knowledgeable and confident group of employees, fewer mistakes and costly errors will occur.
Banks that train their employees on the principles of Islamic banking will be more prepared to deliver excellent customer service and provide the most up-to-date products and services to their banking clients. Having an educated, knowledgeable staff at an Islamic financial institution will help customers feel reassured and satisfied with their banking experience, keeping them coming back. Through excellent customer service, Islamic banks will also be able to attract new clients.
The division of the operational strategies will be according to the functional activities undertaken by IBs, i.e. Finance, Marketing, Human resources, and Information management.
These strategies are related to money procurement from different resources and investing funds through proper allocation in order to achieve an acceptable profit.
According to fund raising, IBs will face a kind of disintermediation as a result of financial liberalization and openness which encapsulate more profitable choices for the depositors of IBs. Hence, IBs are invited to reduce operational costs in order to attain greater returns for the depositors as the stockholders.
Diversification of fund resources according to Liability Management Theory will be a wise arrangement that can be followed by IBs; this can be realized by relying on non-conventional resources that are supplied by Islamic financial system as Sukok (Muqarada Bonds) which can be issued in the international financial markets. Besides, IBs can benefit from the financial liberalization to issue and list its own stocks in these markets.
In addition, IBs can maximize the opportunities of financial globalization by starting to make particular arrangements to establish money market between them domestically and globally.
On the investment side, Comprehensive Banking concept considered as a viable strategy which is compatible with IBs nature as comprehensive financial institutions, this needs to decrease the ependence on fixed return modes. Murabaha (Sale Financing) for the benefit of Profit-Loss-sharing (PLS) modes. Such diversification of investment modes can be achieved by direct investment or trading on the current Islamic financial instruments that are available in the international financial markets, beside investing in Islamic-acceptable mutual funds, or establishing special mutual funds belongs to IBs.
IBs will be faced by the problem of increasing the complications of customers' needs as a result of financial openness and availability of alternative choices for them in finance and investment.
These threats needs strategic response from IBs to face and reduce its negatives .IBs have to adopt a Customer- Oriented strategy instead of Product Oriented one ,because the contemporary trend in bank marketing focuses essentially on the customer, the availability of a wide range of banking services is not enough alone. Such challenge requires reviewing the current marketing strategies of IBs by pricing it properly and dissemination it to a targeted sectors of customers in a better way.
The second threat that faces IBs is the hostile propaganda against IBs in the aftermath of 11 September events, were the IBs are connected in a stereotype way to the so called terror ". This campaign should be encountered through adapting defensive informative strategy to explain its nature and economic role .These efforts will not be confined to the efforts of the IBs individually, rather, it must be one of the key axes of "Globalization Strategy" of all IBs around the world, which is to be discussed later on.
Human resources constitute the corner stone in delivering banking service in all banks and IBs in particular. This element is of a great importance for the IBs to face the future challenges of financial globalization, because adopting and implementing the other strategies depend heavily on human resources. IBS strategies in this regard rest on tow props (elements):
This requires the IBs to meet its increasing need for employees whom have the professional abilities as bank employees, beside a good knowledge of economic matters of Islamic Shariah. Preparation efforts are needed to qualify new employees before taking place in doing their jobs, current employees are to be subject to intensive training courses to empower their professional and religious knowledge .IBs can do so by establishing specialized departments or training centers.
The other face of training and development IBs' employees are to concentrate on educating themselves to create a well- shaped perception about the phase of financial globalization and its importance, in order to prepare themselves practically and mentally to cope with the opportunities and threats that will face IBs as consequences of it.
As the targeted change for IBs to be deep and structural, the leaders of such changes must have unique traits like awareness, knowledge, and enough flexibility to adopt the overall and operative strategies, and to lead their banks to be part of Globalization Strategy" which will contain all IBs.
The current traditional leaders of IBs are invited to take brave strategic decisions as a proper response of the degree of globalization challenges, by giving young leaders the opportunity to lead IBs in navigating toward the future and manage strategic change.
The vast technological developments in computer science and telecommunications, beside the developments in management science have lead to a great dependence on information, computerized activities and computerized information systems in particular. Banking industry is one of the biggest customers of these technologies. Financial globalization and information explosion enhance the abilities of banks to depend heavily on producing computer - based financial services as ATM, money transfer, automated banks...etc, and doubled the need to develop banking industry and improve its services.
The ability of IBs to adopt and implement the mentioned strategies must stand basically on a solid information structure. Hence, implementing information strategy must be pre and parallel to implementing the other strategies.( Ailouni 2008)
To effectively support business operations, Islamic banks need parameterized tools that do not require extensive coding or code wrapping and enable the timely launch of Islamic products. Intense competition also means that the core system must help increase customer profitability and enable the business to offer customers the right products. An integrated infrastructure that does away with disparate system, and application and data silos can provide a complete picture of the bank's customers and business operations. For conventional banks operating an Islamic window, it is essential that the core system is also able to segregate Islamic from conventional funds.
The process of creating, capturing and using knowledge for enhancing organizational performance is termed as knowledge management. It is meant for creating depository of organizational knowledge and sharing of knowledge for achieving organizational goals. The integration and implementation of knowledge management within the organization helps create models or improve the previous models in order to enhance organizational survival. Sharing insights and learning among dispersed groups of professionals can yield great benefits in terms of customer satisfaction and speed of solution delivery. On the other hand, it can build harmonious relationship between the employees and managers. Knowledge management can be very helpful in dealing with risks of the Islamic banking. It can make the operations more smoother.
Knowledge is the most difficult process because the human qualities of knowledge, such as experience and beliefs, are not only the most valuable but difficult to manage (2006). A successful knowledge management focuses in the realm of organizational behavior. From the knowledge management, the foundation of creativity, innovation, organizational, learning, organizational memory, and dynamic capability can be established.
The action taken in the knowledge management process begins with the formulation and implementation of strategies that can be used in organizational knowledge or distribution. The strategies might include the basic management functions to monitor and measure the knowledge asset and processes.
Information embedded in routines and processes which enable action is called organizational knowledge. With this, the quality of ideas residing in an organization is identified, interpreted, and internalized. The implementation of knowledge management is part of certain organizational structures. The ideal organizational knowledge, or for some is also called knowledge organization, can utilize the contributed ideas whenever they need to revise the concept of one project (2006). It is more effective when the knowledge begun from top to bottom where there is an existence of communication.
Effectiveness can be achieved by meeting the demands came from the consumers, organization or in the department where an employee is working for. Meeting the deadlines or the product quality is another form of effectiveness and productivity. These behaviors are important and desirable for an organization to achieve positive results such as more effective communication that allows best practices to be shared among the team (2006).
Organizing communication means organizing the knowledge and practice and an organization that promotes this kind of practice can increase effectiveness through increased productivity, proper utilization of resources, or increased organizational flexibility. Practicing the communication positively affect organizationally desirable outcomes which in turn must have positive effect on organizational effectiveness.
For a firm like the Johnson & Johnson that served many individuals in entire globe, effectiveness is already in their pocket and to keep it is another topic. Company's effectiveness is not only based on the consumer satisfaction but also in employee satisfaction. As long as their employee feel the job security and motivated in their field of work, the whole process will be clear. The fact that the organizational behavior plays a small room inside the company effectiveness is another strategy to keep the progress.
Organizational behavior promotes communication - and communication promotes knowledge. In return, the organizational knowledge established the organizational behavior as part of the everyday company routine. The ideas or knowledge that every individual contribute is valued by the firm. All the ideas are examined well and after the successful adaptation, another legacy is left behind that can be used for the next year or product simulation.
Organizational practice on the other hand, is a form of routine or standardized action which is always subject for improvement. All the practice involved in making the product is based from the knowledge they learned and organized. With this, the cycle of acquiring the knowledge and applying it is emphasized and cannot be broken as part of the organization's effectiveness.
The use of knowledge management in the financial sector and banks is increasing becoming a vital aspect and banks are becoming more aware of the significant role it can serve to increase their benefits. Knowledge management, if implemented properly, can improve the ability of their employees to make good decisions, the ability of the bank as a whole to meet customer's need more effectively and with great accuracy. As a result, it will allow them to provide better quality of service than their competitors. This is simply because capturing, assessing and sharing knowledge provides a step ahead to lead in competitive market. Most of the initial work on Knowledge Management implementation has been covered by United States organisations such as 3M, Hewlett-Packard and Xerox. In addition, most publications are either based on specific technologies or written by professionals working with top management in organizations. Therefore most of the available material in knowledge management has little direct association to what is going on in the context of knowledge management in other parts of the world.
Therefore, this chapter examines existing literature in the form of previous studies, which have contributed to the chosen field of knowledge management. It also examines the concept of knowledge management and its development. In the following section, the chapter will analyse the practical aspects of knowledge management, benefits of knowledge management, and barriers to knowledge management in financial services. It also provides readers the knowledge and familiarity into the chosen area of research and also provides a foundation for the research.
The organizations needs to establish knowledge based society through organized feedback from customers, colleagues and other outside stakeholders. There should be a knowledge linkage between the outside and inside. This accumulated knowledge is widely shared in the organization, stored as knowledge base, and utilized for developing new technologies and products customer satisfaction.. A conversion of some sort takes place; it is this conversion process-from outside to inside and back out side again in the form of new products, services, or system-that is the key to understanding why Japanese companies have become more successful. It is precisely this dual internal and external activity that fuels continuous innovation with Japanese companies”.
Furthermore,states three main reasons for the growing attention in knowledge management:
Knowledge management importance is not realized by many mangers. The reasons why knowledge management has become more and more vital and crucial such as challenging field is also not realized by many managers. Regardless of the lack of consensus in agreeing upon a defined characterisation of knowledge management, organisations are attracted to managing knowledge for several reasons such as to achieve marked improvements in financial results and to effectively facilitate management of resources. It will also improve customer fulfillments leading to higher productivity, quality, to improve sales, operations and strategic planning. As a result they will be able to attain superior operational effectiveness to improve the learning process within the organisation and increase the speed of improvement and decrease the market response time as well as examine and redesign processes.
In brief, knowledge management is vital to safeguard and to expand an organization's core competences. All organizations deal with knowledge, either explicitly or implicitly, and, they can use knowledge management as a tool for providing better customer service and making decisions as tactically as possible in order to achieve competitive advantages.
Authors, such as describe knowledge as identified, classified and valid information. Distinction however is necessary as many firms believe that they already manage their knowledge when they are simply managing information. In order for effective knowledge management to take place the understanding of the difference between managing information and managing knowledge has to be acknowledged. Knowledge derives from information that has been through filtered.
Knowledge is information that has been tested and verified. It is richer that data and information. It is a mixture of experiences, values and expert's insight. It originates and applied in the minds of the people who know. Organizational routines, processes, practices and norms are consequences. Data is less valuable than information. For example, although we collect a large amount of data, these data are not useful without modification. After modifying data, its significance becomes information. There are modification processes, such as gathering data, calculating data, or removing errors in data. According to definition of knowledge, after people or organisations use information, and experience and learn something from it, information then changes to knowledge.
In some cases, knowledge is intangible for firms or employers. It is not easy for them to understand and manage knowledge, but it is essential to make the best use of knowledge in a knowledge-based society. Using knowledge is not enough to maintain competitive advantage and develop an innovation. They suggest that firms have to create knowledge constantly.
Furthermore, the understanding of knowledge management in Japanese firms, especially manufacturing industry, is about how they are using tacit knowledge effectively. According to them: Knowledge has two characteristics: Explicit and tacit, and there are four different processes for converting knowledge: socialization, externalization, combination, and internalisation. By these processes, organizations can create knowledge constantly. Socialization is a process in which tacit knowledge belonging to a worker is spread to an organization. Tacit knowledge converts into explicit knowledge through a concept. This process is called externalization. The combination process combines some explicit knowledge through communications, such as conferences, documents, or emails. Internalization is a process of embodying explicit knowledge.
Between these development processes of knowledge formation, the transfer of knowledge is one of most essential and most complex processes. The transfer usually takes place through communication between knowledge workers, for instance e-mails, or from a database. Hence, some organisations actually set up a physical space where their employees can talk with each other. In some Japanese organizations, employees do not like to share their knowledge through e-mail or a database. They prefer to expand their knowledge through an after work dinner and through informal chats (1998).
It is a process of sharing experiences and creating tacit knowledge inside an organisation. In this phase, a tacit knowledge belongs to an individual and spreads to an organisation.
It is a tacit knowledge, intangible knowledge, converts into an explicit knowledge through a concept.
A process of combining explicit knowledge through communications, like e-mails and documents.
It is a process of embodying explicit knowledge.
Despite the numerous publications, research projects and conferences related to knowledge management, no consensus has been reached with regards to what is knowledge management. Even though there are a growing number of established themes, still there are many interpretations of the limitations and content of this new area. The definition of the two elements of the term knowledge management, namely "knowledge" and "management”, varies. According to some authors, knowledge cannot be managed because it is invisible and intangible.
Knowledge management is the systematic and explicit management of knowledge related activities, practices and policies within organisations. The objective of knowledge management is to effectively and efficiently use the existing knowledge of an organisation to create new knowledge to achieve and maintain competitive advantage .
Knowledge management is a complex area of management, and it covers learning & development, information technology, and human resources. The relationship between knowledge management and technology is strong. Certainly, a range of technologies is available to support knowledge management practices, but the effective use of such systems depend on the motivation of knowledge workers.
According to the existing research, there are two broad approaches to knowledge management. One focuses on the ‘hard' aspects and technological issues, the other focuses on the ‘soft' aspect or human and organizational issues.
The relation between knowledge management and technology can be strongly synergistic. There is certainly a range of technologies that support knowledge management practice, but it is important to keep in mind that recent advances have led to faster data transfer. So technology is helping hand in knowledge management rather than central focus. The effective use of such systems is reliant on the motivation of team members to share knowledge and on effective people management. The introduction and implementation of a knowledge tool does not result in a "knowledge environment" if other knowledge management enablers are not supported.
Attitudes to sharing are complex and are affected by organisational norms as well as by personal idiosyncrasy. There is no hesitation that culture also affected them. People need to be pleased to share information, rather than simply holding on to it.
In a practical context hard and soft issues of knowledge management are inseparable as they inform and affect each other. Even if management is aware of the benefits of knowledge management, there is still no clear consensus about just what knowledge is and how knowledge resources should be managed
To explain the concept of knowledge management, a model can be established for scope and functioning of knowledge management system.
In 2001, Collison and Parcell presented a generic model of knowledge management. According to the model:
People are the roots of knowledge and new knowledge can also be created by them. Knowledge is not possible without people..
Appropriate tools are necessary for organisation-wide reliable technological infrastructure development.
Certain processes and procedures are required for capturing, validating, transferring, and disseminating knowledge in the firms.
These three factors overlap for success of knowledge management systems.
Surprisingly, financial sector and banks play an important role in the economy, there has been a very little research done on the role of knowledge management in the banking and financial sector. The published articles and journals refer to case studies that are often written by technology or solutions firms showing the use of their solutions in the banking environment.knowledge management is about bringing more refined and job specific information to people on an individual basis via a web site. Some banks also take a human resource focused approach and look to e-learning to improve job performance
A number of researchers have conducted knowledge management studies in major banks, and have found the same general findings as the non banking studies. According to a survey, of banking and financial institutions conducted by Xerox Europe, a majority of European banks are unsuccessful developing their intellectual capital by not having an appropriate knowledge management strategy in place. Furthermore, a study conducted in the Australian financial sector shows their intention to manage knowledge and an understanding of internal knowledge sources (tacit knowledge) and recognises that Australian banks focus more on knowledge to support useful process rather than the creation of new knowledge . Both studies found that financial organisations believe that the effective use of knowledge can give strategic benefit.
In addition, the Royal Bank of Scotland stated that today traditional knowledge management, with its focus on areas like collecting knowledge and connecting people is not enough and are developing a human capital model to create an environment in which staff can seek out the right knowledge to help them contribute to the bank's success.
Therefore, to understand and implement knowledge management effectively and efficiently, it is essential for financial organisations to develop and nurture relationships, awareness and a common ground amongst organisational members on the whole.
A number of scholars emphasise the importance of knowledge management as an essential asset in organisations in the knowledge world. Knowledge management has not been discussed as how to apply it and manage it effectively on daily basis. Rather the emphasis remained on theoretical or technological perspective. At the practical level, knowledge management focuses on a set of processes and practices that fall under five headings: creating, sharing, sourcing, mapping and measuring.
In addition, conducted a study in three South African banks, stated that knowledge management is a source to generate visions that drives people's reasoning and the capability that leads to intelligent behavior. Furthermore, they found that it can lead to “improve learning and the ability to stay ahead of competition and changes in the world”, “better problem solving and decision making”, “more innovation and greater creativity”, “higher quality knowledge work”, “improved individual and group competencies”, “more effective networking and collaboration”, “improved customer services by streamlining response time, “higher revenues by getting products and service to markets faster, and “streamlined operations and reduced costs by removing unnecessary processes” .
They state that “the management of knowledge will continue to grow in its importance to business success. Although the knowledge management movement has aspects of faddishness, and it may lose some of its current level of visibility, it must become part of the basic fabric of successful businesses. There are too many knowledge workers dealing with too much knowledge for knowledge management to disappear”.
Knowledge management has emerged to leverage intellectual capital in organisations and people management. In a research conducted by, in Libyan banks, stated that knowledge management is an essential strategic tool, because it can be used for decision-making, mostly for the formation of strategies. In addition, it can also improve the organization's ability to appreciate and manage problems and challenges. Furthermore, the success of most management decisions depends also on competitive effort, which adds “knowledge of customers' attitudes” and “analysis of the competition”.
In addition, the reason for an organisation to work with its knowledge management system can be many. For example, knowledge management system can be use to improve performance, productivity and competitiveness, a way to improve effective acquisition, sharing and usage of information within organisations, a tool for improved decision-making, a way to capture best practice, a way to reduce research costs and delays, and a way to become a more innovative organisation. Without any doubt, effective knowledge management can enable an organization to provide better customer service, managing knowledge is a strategic asset and it must be implemented effectively.
Any organization should have the ability to develop its knowledge and learning capabilities. In this context, the business society has discussed the following core knowledge management ideas, described by KPMG Consulting as:
Furthermore, Arora (2002) suggested that organizations should control their existing knowledge-based activities to prevent re-inventing the wheel and they should constantly increase their competence and skill levels to improve productivity, innovation.
The Japanese Bank of Tokyo-Mitsubishi has set an example by undertaking a knowledge management project to improve and speed up response to customer needs through timely and proper decision-making by frontline staff.
The key areas they have focused on are reforming the knowledge sharing infrastructure and improving the knowledge sharing process. Their goals were to organise and consolidate information that had been scattered around branches and departments, exchange information between the head office and frontline branches and sales offices, create a forum for intellectual collaboration to create new products and services, improve frontline operations productivity and problem-resolution and decision-making capabilities as well as uncover and share knowledge and wisdom possessed by each employee.
As a result they have benefited from improved frontline efficiency, more efficient and active information flow, more interaction among main branches, branch offices and departments and more efficient information transmittal via visible information distribution utilising data tracking functions.
Implementation of knowledge management provides a platform where employees can constructively communicate with each other in a systematic manner to improve efficiency. They'll be able to share feedback that they need to do their jobs well and contribute to each other's career progress. Individuals will feel valued for their unique input and contribution to the growth of the organisation. This platform also builds a greater relationship between employees and their managers where negative practices can be ended and flexibility in managing knowledge can be adopted. The key and most important asset every organisation has is its employees and the knowledge they bring to the organisation can only be fully explored when there is a structured but flexible method. In return employees will benefit from better job satisfaction, extensive knowledge exchange, personal networking, personal growth and development. Furthermore they will benefit from building better team relations and the environment they work in will be more harmonious.
Although knowledge management, which supports an organization's process and decision making capabilities, it can often suffer from not having a knowledge sharing environment.
Experts at the American Productivity and Quality Center (APQC) (2004) who have examined knowledge management in practice state that "many knowledge management projects seem intended to start with a bang but often end with a whimper" for four reasons: business purpose lacking, poor planning and inadequate resources, lack of accountability, and lack of customization. Furthermore, in 1999, Bonfield identified that a knowledge sharing environment can be created by identifying ‘organizational barriers' and ‘persuading people'. He also identifies four potential barriers when organizations are implementing a knowledge management system, such as cultural issues, technological issues, economic issues and market place issues .
In addition, there is agreement within the literature the most important barriers to knowledge management are:
A study conducted by in three major South African financial organisations argue that financial service organisations are failing to tackle knowledge management's real challenges because they do not understand the full implications of knowledge management implementations. According to their study most common barriers to knowledge management are lack of user uptake owing to insufficient communication, failure to integrate knowledge management into everyday working practices, lack of time to learn how to use the system or system is complicated, lack of training and a little personal user's benefit. In short, we can say that knowledge management brings its own challenges, which organisations are not able to address. It is up to management to create a knowledge sharing environment that encourages employees to collaborate and share knowledge.
Furthermore, a study conducted by, in major Canadian financial services organisations, the major problem to employees in managing knowledge are information overload, no centralized responsibility for knowing who needs to know what, knowledge can not be utilized if it is not provided in a proper context and the role of human resources.
Excess of Information is a problem seen in the banks. Often, new products and services, new regulations, new training, new customer information is coming into banking sector and it should be communicated to employees of banks. Banks try to collect new information and send this new information to their branches on a regular basis. This new information is also available on the banks' intranets, so on a certain point if employees want to use this information, they can go on the bank's intranet and use the most recent information. The intranet provides one source of the information and the owners of the information find it easier to keep it current. Employees see the intranet, as a valuable source for information in banks, can provide information in visual form which can be used for presentations of new products to bank's customers. However, “individual information owners decide who needs to know what information and often information is sent to everyone rather than targeting it on a need-to-know basis” . So, there should be one central person ‘knowledge officer' in the banks who can decide we have this important information and these people should observe changes in this information.
Furthermore, frontline customer service is one of the key functions in retail banking sector and deals with sales and service. Frontline customer services staff work directly with the customers to understand their needs, gather the customer's information and their feedback. As retail banking is expanding and focusing on their customer, the frontline customer services staff has to have more skills, more product knowledge, more knowledge on policies and procedures within banking sector.
In the last, frontline customer services staff is involved in the whole business process of the transaction such as loans or mortgage application and they should understand the processes, the business rules and regulations, and how decision are made to accept or refuse applications. They also need to understand why some of the applications are rejected and how they can work with the customer to help them find creative solutions to go through the process. The business process has become segmented because of new information technology. Several processes are controlled by computer systems, and the results generated by them are delivered to the frontline staff. Often they do not have the appropriate knowledge about these results, where they came from and it is difficult for them to work with the customer to advise them alternative strategy. So a system ought to be in place where frontline staff should be encouraged to discuss and come up with creative ideas to solve customer problems.
Therefore, to implement knowledge management into an organisation the above mentioned issues ought to be resolved. This can be done by “the creation of a learning organization where people can share information and ideas to create new ideas”. Knowledge management requires an individual with specific knowledge and skills to champion the concept of knowledge management and spearhead the enormous challenges to overcome inherent obstacles to the free flow of knowledge within an organisation. A knowledge management strategy must be liked to the business strategy and an infrastructure consisting of various knowledge management techniques (such as talk rooms, knowledge fairs, mentoring, storytelling, and communities of practices) and technologies (for instance, intranet, videoconferencing, e-mails, group ware, and knowledge maps) for the transfer of knowledge.
It has been acknowledged above, how knowledge management still misses a more holistic approach. Human resource professionals should have a major role in tackling the knowledge management matter. For instance, developing a strong organizational culture, team working or the sharing of knowledge across existing departmental limitations have major roles in promoting a culture of openness, which is crucial to the distribution of knowledge. Knowledge management literature has focused more on the technical features of knowledge management. Though, this narrow view presents some restrictions - in many cases, acknowledged through expensive experience identified the following limits:
All this leads to the management of people, specially the management of knowledge workers. It is currently expanding, not only as relating to key workers - typically well educated and highly skilled - but also as a more inclusive notion of any employee working with knowledge. The new economic situation, with growing demands to be broadly skilled, flexible, and accountable and more empowered, requires a different management of people.
Knowledge management literature repeats the importance of supportive cultural values to successfully implement any knowledge management initiative. These cultural values can be founded not only in rigid and bureaucratic structures, but also within companies with flat and flexible organization, due to the existence of sub-cultures. Leadership and the development of rewards play a critical role to changing culture. Managers need to actively support any knowledge management initiative. Thus, senior management's commitment is crucial along the process.
Instant implication of knowledge management for human resource practitioners is the availability of a range of knowledge management tools which can be applied to human resource management objectives. As knowledge workers themselves, Information Technology can significantly help human resource practitioners to be more effective. The capacities of Local Area Networks, e-mail, Internet, on-line libraries and e learning, information are tools able to increase enormously the capability to communicate across the organization.
It is clear from above that there is a strong awareness of the importance of knowledge management in financial service organisations. The majority of the literature review represents knowledge management as a major strategic aspect that supports organisations in a competitive business environment. The literature discussed that financial service organisations have either already implemented knowledge management projects, are in the process of assessing knowledge management, or are planning to implement a knowledge management system.
Although a range of barriers have been identified in implementing a knowledge management system and these barriers must be resolved to deliver an improved service and to minimise costs. Organisations also realise that knowledge management increases the organisation's ability to expose tacit knowledge and the creation of new ideas. According to recent surveys identified in the literature, the value of leadership is one of the main issues in financial organisations. The literature review has stated that the position of knowledge officer is important. Furthermore, according to literature an environment should be created for constant learning. The sharing of knowledge will be high, if a supportive culture characterized by a well balanced infrastructure consisting of human-social techniques is developed with the help of important technological developments.
The themes discussed above will be used in the formation of the interview questionnaire and self completion questionnaire and will also be used for the analysis of knowledge management practice in Islamic Bank of Britain.
One has to provide superior customer service to survive in this completive environment. Providing customers with their wants and customer satisfaction will increase the market share of the organization and thus the profits of the organization will also be higher. Loyal customer is need of the organization.
Electronic customer relationship management is about all marketing activities directed towards establishment, development, and building a long term relationship with its customer. The focus is on improving corporate performance by retaining loyal customers.
Managing knowledge is extremely considered crucial to ensuring growth and creating a shareholder's value. In spite of the vague understanding of what knowledge management by some company's, successful companies like Honda, IBM, and the like, revealed a deeper understanding as they grasp a holistic approach that is beyond the alterations of infrastructure but more of its ability to touch every aspect of a business, transcending divisions, functions, and hierarchies. Knowledge management compliments well with business strategy for staying close to customer and delivering customer satisfaction.. It can help you do a variety of things you are already doing better. Ultimately, knowledge management work needs to be blended in with these other activities or it's unlikely to be effective. The maximization of knowledge management permits to successfully be adaptive by the constant reinvention and optimization leading to innovations, to tap in new market venture opportunities for possible expansion, to get into the latest trend to be a step ahead of the competitors and more decisively efficient. Overall, knowledge management sparks a sea change in the sweeping perspective of the company's business and the challenges it confronts. Furthermore, the embodiment of knowledge management implies the creation of a new corporate mindset which could be a real huge difference in the reverse of fortunes of many. In illustration of not embracing knowledge management by some company from a traditional environment that is assumed to have inept understanding of the essence of knowledge management would resort to cost-cutting actions through firing employees. From a knowledge management approach perspective it is letting go of the potential knowledge that could perhaps boom in the future if only be given ample time and opportunities. Given its fruitful of benefits it brings to the company, knowledge management also have an inclusion of downside risks if not being properly or ineffectively implemented. Among which are the neglecting the potential areas of improvement, miss out opportunities that might be promising, or thrashing of money in the garbage bins on schemes that is ill-conceived. Thus, that is tantamount of the company being left behind by competitors who deploys their knowledge faster and more effectively.
The denigration of knowledge to the level of information management should be looked into and minimize such that information management could not be maximized to its full swing. Information would plainly remained a facts and figures no matter how managed the information is unless it will be utilized not only for plain viewing but utilizing it knowledgeably. For example, reading a company's annual turnover amounting to $400 million, the use of knowledge understands the significance of that figure.
If companies are to flourish in the information environment, after the management of information and knowledge, these two would in turn be integrated in the information system in which they would operate. The presence of an effective information system is very decisive such that the effectiveness of information and knowledge management is somewhat dependent on the functioning of the information system. The information system is like the central processing unit of a computer wherein all the functioning of the hardware and software are dependent. Due to information system technicalities, it is imperative to have an information systems strategy that should be thoroughly and carefully be planned such that it can work and precisely fit in to the corporate strategy as well. IS strategy development is the process of identifying a combination of computer-based applications and implementing them aligned with corporate strategy. This can become a competitive advantage. It combines aim of the organization with the understanding of the organizational information. It is developed to achieve a future vision of the organization. Information system strategy as defined necessitates the provision of computer systems to support information management bearing the intellectual holding of that information (pertaining to knowledge management) that is in accordance to the corporate strategy or the aims of a company.
Knowledge management is important to a certain extent to Islamic Bank because of the wide array of benefits that the bank stands to experience in maintaining and further developing its knowledge management system. Existing literature provides that the proper implementation of knowledge management improve the competency of employees to come up with good and effective decisions and the capability of the bank to develop strategies targeting the needs of consumers especially in a rapidly changing market. With heightened competition, knowledge management allows Islamic Bank to provide a greater quality of service. By knowing the bank's capabilities and the exact needs of the market, the bank can improve its existing services and provide new services, by developing on its limitations and weaknesses, based on its in-depth knowledge of its target market (Davenport and 2001).
Responses of managers and employees show that Islamic Bank approached knowledge management with moderate importance. Although headquarters realised the importance of knowledge management to the bank, this was only to the extent of learning about new happenings in the industry and the market for purposes of top-down decision and policy-making without really considering the bigger role of knowledge management in the quality and efficiency of the performance of front line employees in the different bank branches. Moreover, the bank also approached knowledge management as comprised of hard aspects because the bank's plans for developing knowledge management is the establishment of an Intranet system to link headquarters with the London and regional branches. During the data collection process, the managers and employees have not been apprised of any pending plans to develop the soft aspects of knowledge management.
Results of the data collected on Islamic Bank shows that even if Islamic Bank realised the need to establish a formal and organised system akin to knowledge management, it failed to provide solutions to a number of actual problems. First problem is determining the information needed by front line employees in dealing with customer needs and updating information to prepare front line employees to deal with new issues presented by customers. Second problem is establishing an efficient system of continuous information collection, analysis, sharing and updating of front line employees since there is no officer specifically taking charge of knowledge management. Third problem is opening and developing a two-way channel of communication, with one channel connecting front line employees with managers and the other line linking the bank through the front line employees with consumers.
Due to the need to address these problems to raise the quality of service and competitiveness, Islamic Bank recognised the importance of knowledge management only to the extent of the problem areas it recognised, the need for an information communication system addressed by the Intranet project. Islamic Bank understands knowledge management as the process of collecting, analysing and sharing information to support front line decision-making. The context-based conceptualisation of knowledge management is consistent with the lack of a commonly accepted definition of knowledge management in existing literature so that the studies focusing on this system primarily relied primarily on empirical data documenting the actual experiences of business firms that effectively applied knowledge management. This is perhaps the reason for the low uptake of knowledge management in many industries including the banking and finance industry even if this offers important benefits to any industry.
The extent of knowledge management applied by Islamic Bank showed that it was consistent with existing conceptualisation of this area of management. Islamic Bank recognises two aspects of knowledge management differentiated as hard and soft systems. Islamic Bank considers hard systems as computers with Intranet and Internet linkages and soft systems as the environment, channels and attitudes geared towards open communications to make it easier to share information. However, Islamic Bank has yet to achieve the systematic and explicit management of knowledge that extends to the corporate culture of the company covering its policies, activities and practices mentioned. Islamic Bank has not establishes a team in charge of knowledge management or informed employees of this policy change.
The experiences of Islamic Bank with knowledge management implies the need to develop in-depth and organised learning on knowledge management on a general level through practice-based theories to provide ample support to business firms in applying these theories according to their specific contexts. In the finance services industry, there is need to look into the experiences of a number of banks in order to develop best practices on the means or effective processes of integrating knowledge management into the corporate culture and operations of the banks to achieve the goals of enhancing productivity, quality of service, and competitiveness.
If the determinant of the importance of managing knowledge management to a business firm is the commitment to the establishment of the hard and soft systems necessary in knowledge management, then Islamic Bank accrues limited importance to knowledge management. Responses offered by employees of Islamic Bank showed that they perceive the bank as not applying knowledge management. This is because of the lack of a team or an officer specifically playing the role of knowledge manager as well as the lack of channels and tools for knowledge management. Due to the lack of observable expressions of knowledge management in Islamic Bank, the employees especially those engaged in front line services who greatly benefit from the information sharing perceive nil knowledge management in the Bank. Moreover, even if information sharing occurs across the different branches and from management to front line employees, the information shared and the channels of sharing information were considered by more respondents as inadequate. This means that Islamic Bank needs to develop a more organised and explicit knowledge management system.
Apart from the limited information shared and channels for information sharing, Islamic Bank does not optimise information. The company has implemented no incentives for information sharing so that employees take greater responsibility in generating knowledge that need to accomplish their work. Access to information by different branches is limited and not uniform and even with sufficient technological tools, these were not maximised in knowledge management. This means that even if the bank has sufficient relevant and updated information, it is not able to effective use the information to support decision-making for front line services in the difference branches. Islamic Bank needs to optimise the use of available information and communication technology for knowledge creation and sharing, shift organisational culture towards knowledge valuation, and provide greater support to employees in accepting and utilising knowledge management channels and systems.
Islamic Bank applies a knowledge management system intended to support the strategy of the organisation to improve the competency of its employees to support front line decision-making that in turn increases the quality of service. With a higher service quality, Islamic Bank expects to enhance its market competitiveness. Although the bank has achieved this goal, it has not achieved maximum results because of the limited use of information in creating and sharing knowledge that reaches the front employees and extends across the different branches. This means that even if Islamic Bank recognises knowledge management as an important factor in achieving high levels of competitiveness from quality service linked to optimum employee performance and productivity, it has not taken advantage of available tools and information to manage organisation-wide knowledge. This coincides with the failures of banks to achieve optimum benefits from managing knowledge because of the application of strategies not appropriate or not exactly meeting the specific context of the bank (Cross, 2001). Islamic Bank could have enhanced the performance and productivity of its front line employees by learning new market demands together with developing best practices on service provision techniques. It could have achieved greater customer satisfaction necessary to create a client base that could have supported the competitiveness of the bank relative to its closest competitors and other industry players.
Based on the four processes of knowledge conversion (Sarabia, 2007), the extent of application of knowledge management in Islamic Bank only extended to knowledge conversion on a branch and not an organisational level. Respondents provide that at the branch level, they are encouraged to share innovative ideas and learning but this is not the case at headquarters. On the organisational level, socialisation does not happen because headquarters is not strongly linked with the branches in terms of knowledge sharing, Due to this weakness in a core process of knowledge conversion, the other processes of externalisation, combination and internalisation do not materialise as a firm value.
In considering the generic model of knowledge management (Collison and Parcell, 2001) consisting of three aspects of people, technology and processes, Islamic Bank primary focused on technology and secondarily on people and processes. The secondary consideration of people as an element of knowledge management is expressed in the activity of headquarters of commissioning information from external sources without conducting internal information gathering based on the feedback of front line employees. The secondary priority for processes as a core aspect of knowledge management is expressed in the non-inclusion of change in corporate culture to enhance open communication channels for top-down and bottom-up feedback exchanges. The aspects of people and processes constitute areas for improvement in Islamic Bank.
Due to the moderately effective use of knowledge in the operation of Islamic Bank, it has not been able to experience the benefits of knowledge management. Knowledge management allow firms to create, share, source, map and measure various aspects of its operations as well as relative competitive position for purposes of strategy formulation and effective application of strategies by employees through knowledge conversion. Technology cannot singly support knowledge management because of the need to focus on people applying technology in processes to achieve productivity and competitive goals.
Islamic Bank's organisational culture is in a way helping the application of knowledge management of the bank and in another way hinders effective knowledge management. On the branch level, communications is open since employees replied that they could discuss results of failed projects with their managers and with team members. Moreover, employees of London and regional branches also reported that they receive encouragement to derive innovative ideas that are important in knowledge management. However, at headquarters, lower number employees agree that the company encourages employees to become innovative. This means that even with open communications and incentives for innovativeness at the London and regional branches, headquarters is not so keen in developing open communications and innovativeness of the organisation. Without sufficient support from headquarters, Islamic Bank cannot develop an effective and comprehensive knowledge management system. Through a bottom-up initiative, top management at headquarters should change their perspectives and prioritisation of knowledge management by realising the importance of this system at the branch level.
Based on the responses of Islamic Bank employees, the bank has the basic technological infrastructures to support knowledge management except only for the need to network or link branches, which the bank is addressing through its Intranet project. However, Islamic Bank has a weak organisational infrastructure to support knowledge management because of the poor linkages or channels of communication between headquarters and branches.
Scarbrough (1999) provides that the commitment of senior or top management is important in the process of implementing knowledge management and change management to facilitate changes in corporate culture and structure to support the achievement of goals. Although Islamic Bank's corporate behaviour shows its realisation of the importance of managing knowledge in competitive business firms because it commissions information gathering, it has not been aggressive or committed enough to implement knowledge management across the organisation. Even if headquarters is planning the establishment of an Intranet system, this only constitutes one hard aspect of knowledge management. Without greater effort from the top management to facilitate the application of knowledge management, the span of benefits would not be realised.
The banking sector, including Islamic Bank, should recognise knowledge management as an important tool for competitiveness. In line with this recognition is the need to develop competencies to support knowledge management. First competency is in organisational communication that covers open and trusting communication attitudes together with multi-media communication channels. Second competency covers change management to facilitate the systematic integration of the value of knowledge and knowledge creation and sharing roles among the members of the organisation. Third competency involves leadership and people management for the leaders to commit to their roles in knowledge management and for the employees to become motivated to engage in innovative activities to support continues information gathering and learning of the organisation. Continuous learning from the experiences of banks, such as Islamic Bank, with knowledge management then becomes the basis of best practices for the sector, a research gap based on existing literature that needs to be filled.
First theme is the conceptualisation of knowledge management to support a commonly accepted definition or understanding of the concept for purposes of application. Existing literature do not provide a commonly accepted understanding of knowledge management especially in the financial services sector. This resulted to the differentiated perception of banks towards knowledge management such as the technological perspective of Islamic Bank of knowledge management different from the fusion of people, technology and processes or the complementary linkage of hard and soft systems. The concept of knowledge management understanding is crucial. As an area of best practices, this means the need to develop an encompassing definition and general principles of knowledge management for the financial services sector that banks can use as guide in managing knowledge. One principle is the holistic approach of knowledge management that involves the fusion of hard and soft systems or people, technology and processes. Another principle is the competency and resource-based approaches that look into the effective development and utilisation of competencies and resources to support the creation, sharing and conversion of information into practical knowledge helpful in improving employee performance in providing quality service that enhances the competitiveness of the firm.
Second theme covers the role of knowledge management to industries such as the financial services sector. Previous studies on knowledge management in banks have identified the lack of uniformity in the perception of the importance of knowledge management by individual firms. Islamic bank accrues moderate importance to knowledge management expressed through its minimal use of information derived primarily from external sources. A similar degree of importance has been accorded to knowledge management by other banks by not considering the value of information when converted into practical knowledge. Because of ambiguities about importance of this area, this area could not be developed in Islamic banking. Apart from the basic international standards on information and communication technology in the financial services sector, limited standards exist covering knowledge conversion in banks. As an area of best practices, this means that need for the financial services sector to develop a common recognition of the importance of knowledge management based on the failures and issues faced by banks, such as Islamic Bank of Britain, in their use of knowledge management techniques for ensuring that banks incorporate knowledge management in their strategies in order to ensure quality service for consumers but also to improve operational efficiency.
Benefits of knowledge management are covered in third theme. Knowledge management is also linked to the benefit of enhanced performance through innovativeness implying benefits on the individual level. Knowledge management is also linked to the benefits of productivity and quality service through decision and policy-making indicating benefits at the organisational level. The issue is the consideration of these benefits separately in existing literature. As an area of best practices, these benefits should be considered as simultaneously occurring with the application of knowledge management in the organisation. Recognition of simultaneous occurrence of benefits is important in enabling the bank to focus on this various levels of knowledge management and look at the management of knowledge on the individual, group and organisational levels to achieve results more efficiently and optimise results. There is need to develop a holistic model highlighting the multi-level benefits of knowledge management coinciding with the various parties and interests as well as competencies and resources involved in effectively managing knowledge to derive the intended outcomes.
Fourth theme covers the complexity and scope of knowledge management. Existing literature recognise knowledge as complex. However, there are limitations in the discussions of the nature and extent of the complexity and scope of knowledge management. This is expressed in the variances of the scope of knowledge management of different banks. In the case of Islamic Bank, it considers knowledge management as complex but recognise the limit of this management area as the technological aspects expected to facilitate the other aspects of knowledge management. As an area of best practices, there is need to recognise the scope of knowledge management as cutting across the different areas of management and operation including people management, change management, strategic management, and other relevant areas of management; multi-levels of the organisations including individuals, departments and the organisation as a whole as well as employees and management; and various competencies and resources including skills and experiences of employees, leadership capabilities of employees, and technological tools to support information collection and sharing as well as knowledge conversion.
Fifth theme involves the organisation of practice-based learning so that lessons from the experiences of banks should be translated into principles and general theories of knowledge management should also be translated into practical knowledge. As an area of best practices, there is need to focus on the application of theories in actual business settings and the derivation of principles from the successes and failures of the business firms..
Responses of managers and employees show that Islamic Bank of Britain approaches knowledge management with moderate importance by considering this merely as a technological issue. This means that Islamic Bank applies a segmented approach, as opposed to a holistic approach, in applying knowledge management. Importance of knowledge management application in bank has been recognized by headquarters. However, this was only to the extent of obtaining information about developments in the industry and its market as basis for top-down decision-making . A top-down decision-making means that the employees at headquarters or employees at the branches are not consulted prior to decision-making so that decisions are handed down only for implementation. This means that headquarters failed to recognise the bigger role of knowledge management in improving the quality and efficiency of the performances of frontline employees in the different bank branches through the exchange of information or feedback.
Moreover, the bank also applied the technological approach to knowledge management by considering this as involving hard aspects. This is expressed through the bank's plans to enhance its knowledge management by establishing an Intranet system to link headquarters with the London and regional branches. During the data collection process, the managers and employees have not been apprised of any pending plans to develop the soft aspects of knowledge management.
The extent of knowledge management applied by Islamic Bank is consistent with existing concepts. Islamic Bank recognises two aspects of knowledge management differentiated as hard and soft systems. Islamic Bank considers hard systems as computers with Intranet and Internet linkages; and soft systems as the environment, channels and attitudes geared towards open communications to make it easier to share information. However, Islamic Bank has yet to achieve the systematic and explicit management of knowledge that extends to the soft systems, such as corporate culture as well as policies, activities and practices mentioned. Islamic Bank has yet to establish a team in charge of knowledge management or informed employees of this policy change and the extent of changes involved.
Knowledge is important to the success of Islamic Bank of Britain in raising its quality of service and competitiveness. Knowledge is needed by the bank in making decisions and policies that provide guidance to frontline employees in servicing bank customers and guidance to managers in assessing the performance of frontline employees. Knowledge is also important to Islamic Bank because of the wide array of benefits that the bank stands to experience in maintaining and further developing its knowledge management system. Existing literature provides that knowledge improves the competency of employees because this constitutes the basis of good and effective decisions) especially in the frontline level; and the capability of the bank to develop strategies that target the needs of consumers especially in a rapidly changing market. With heightened competition, knowledge and its management allows Islamic Bank to determine the demands of customers and provide quality service addressing these needs.
Moreover, knowledge also provides the bank with its capabilities. The bank can improve its existing services and provide new services by developing on its limitations and weaknesses, based on its in-depth knowledge of changing market demands.
Islamic Bank understands knowledge management as the process of collecting and analysing information to develop top-down policies for frontline employees. Although available literature has yet to provide a commonly accepted definition of knowledge management, some of the conceptualisations in literature are consistent with the definition of Islamic Bank that knowledge management involves the collection and analysis of information. However, the definition of Islamic Banks lacks the aspect of information sharing mentioned in literature. This is because of the lack of open communications in Islamic Bank at the organisational level. The limited definition of Islamic Bank of knowledge management is the reason for its slow uptake of knowledge management even if this offers important benefits to the bank.
Results of the data collected on Islamic Bank shows that even if Islamic Bank realised the need to establish a formal and organised system akin to knowledge management, it failed to provide solutions to a number of actual problems. First problem is collating the information needed by frontline employees in dealing with customer needs and updating the information base to prepare frontline employees to deal with new issues presented by customers. Second problem is establishing an efficient system of continuous information collection, analysis, sharing and updating from frontline employees since there is no officer specifically taking charge of knowledge management. Third problem is opening and developing a two-way channel of communication, with one channel connecting frontline employees with managers and the other line linking the bank through the frontline employees with consumers.
These problems occurred because of a number of barriers to effective knowledge management in Islamic Bank. One barrier is the lack of open communications between frontline employees and top management as well as the bank branches and headquarters. Without open venues or channels for communication, it is difficult to organise, analyse and share information coming from the frontline employees who provide accurate information on changing customer needs. As such, decisions made by top management may not necessarily reflect changing customer demands. Another barrier is the limited implementation of knowledge management, with headquarters insufficiently looking at hard systems without considering that soft systems are also necessary to effective knowledge management.
If the determinant of the importance of managing knowledge management to a business firm is the commitment to the establishment of hard and soft systems, then Islamic Bank manages knowledge as a minor process. Responses offered by employees of Islamic Bank showed that they perceive the bank as not applying knowledge management. This is because of the lack of a team or an officer specifically playing the role of knowledge manager as well as the lack of channels and tools for knowledge management. Due to the lack of observable expressions of knowledge management in Islamic Bank, the employees especially those engaged in frontline services, who greatly benefit from information sharing, perceive nil knowledge management in the Bank.
Moreover, even if information sharing occurs across the different branches and from management to frontline employees, more respondents considered the shared information and channels of information sharing as inadequate. This means that Islamic Bank needs to develop a more organised and explicit knowledge management system.
Apart from the limited sharing of information and channels for information sharing, Islamic Bank does not optimise information. The company has implemented no incentives for information sharing so that employees take greater responsibility in generating knowledge that they need to accomplish their work. Access to information by different branches is limited and not uniform and even with sufficient technological tools, these were not maximised in knowledge management. This means that even if the bank has sufficient relevant and updated information, it is not able to use the information effectively to support decision-making for frontline services in the difference branches. Islamic Bank needs to optimise the use of available information and communication technology for knowledge creation and sharing, shift organisational culture towards knowledge valuation, and provide greater support to employees in accepting and utilising knowledge management channels and systems.
Islamic Bank applies a knowledge management system intended to support the strategy of the organisation to improve the competency of its employees to support frontline decision-making that in turn increases the quality of service. With a higher service quality, Islamic Bank expects to enhance its market competitiveness. Although the bank has achieved this goal, it has not achieved maximum results because of the limited use of information in creating and sharing knowledge, which should reach the front employees and extend across the different branches. This means that even if Islamic Bank recognises knowledge management as an important factor in achieving high levels of competitiveness, from quality service that is linked to optimum employee performance and productivity, it has not taken advantage of available tools and information to manage organisation-wide knowledge. This coincides with the failure of the bank to achieve optimum benefits from managing knowledge because of the application of strategies not appropriate or not exactly meeting the specific context of the bank. Islamic Bank could have enhanced the performance and productivity of its frontline employees by learning new market demands together with developing best practices on service provision techniques. It could have achieved greater customer satisfaction necessary to create a client base that could have supported the competitiveness of the bank relative to its closest competitors and other industry players.
Based on the four processes of knowledge conversion, the extent of application of knowledge management of Islamic Bank only extended to knowledge conversion on a branch and not on an organisational level. Respondents provide that at the branch level, they are encouraged to share innovative ideas and learning but this is not the case at headquarters. On the organisational level, socialisation does not happen because headquarters is not strongly linked with the branches to facilitate knowledge sharing, Due to this weakness in the core process of knowledge conversion, the other processes of externalisation, combination and internalisation did not materialise as firm values.
In considering the generic model of knowledge management consisting of the three aspects of people, technology and processes, Islamic Bank primarily focused on technology and secondarily on people and processes. The secondary consideration of people as an element of knowledge management is expressed in the activity of headquarters of commissioning information from external sources without conducting internal information gathering based on the feedback of frontline employees. The secondary priority for processes, that actually constitute the core aspect of knowledge management, is expressed in the non-inclusion of change in corporate culture to enhance open communication channels for top-down and bottom-up feedback exchanges. The aspects of people and processes constitute areas for improvement in Islamic Bank.
Due to the moderately effective use of knowledge in the operation of Islamic Bank, it has not been able to experience all the benefits of knowledge management. (1999) provide that knowledge management allows firms to create, share, source, map and measure various aspects of its operations as well as its relative competitive position for purposes of strategy formulation and effective application of strategies by employees through knowledge conversion. Technology cannot singly support knowledge management because of the need to focus on the people applying the technology to achieve productivity and competitive goals.
Islamic Bank's organisational culture is in a way helping the application of knowledge management of the bank but in another way hinders effective knowledge management. On the branch level, communications is open since employees replied that they could discuss results of failed projects with their managers and with team members. Moreover, employees of London and regional branches also reported that they receive encouragement to derive innovative ideas that are important in knowledge management. With open communications at the branch level, thefrontline customer service employees are able to have a venue for sharing information and deriving learning that they can apply in servicing customers.
However, at headquarters, a limited number of employees agree that the company encourages employees to become innovative. This means that even with open communications and incentives for innovativeness at the London and regional branches, headquarters is not so keen in developing open communications and innovativeness. Without sufficient support from headquarters, Islamic Bank cannot develop an effective and comprehensive knowledge management system that facilitates the development of knowledge of frontline employees. Through a bottom-up initiative, top management at headquarters should change their prioritisation of knowledge management by realising the importance of open communications as an organisation-wide practice.
Based on the responses of Islamic Bank employees, the bank has the basic technological infrastructure to support the first stages of knowledge management. However, by having only the basic infrastructure, this cannot effectively support the further development of knowledge management because of the poor linkages or channels of communication between headquarters and branches. This is sought to be addressed through the Intranet system but a concurrent change in the organisational structure, especially the development of a cyclical system of top-down and bottom-up linkages, is needed to facilitate open communications. In order to support the use of the wide-ranging modes of multi-media communications, the bank has to develop employee acceptance and appreciation for these tools through a change in corporate culture.
Commitment of senior or top management is important in the process of implementing knowledge management and change management to facilitate changes in corporate culture and structure to support the achievement of goals. Although Islamic Bank's corporate behaviour shows its realisation of the importance of managing knowledge in competitive business firms, because it commissions information gathering, it has not been aggressive or committed enough to implement knowledge management across the organisation. Even if headquarters is planning the establishment of an Intranet system, this only constitutes one hard aspect of knowledge management. Without greater effort from the top management to facilitate the application of knowledge management, the span of benefits would not be realised.
Islamic Bank needs to improve its staff development tools to support knowledge management practices. Most of the respondents provided that they are not even aware of any staff development activities being implemented by the bank. This means that the bank should recognise knowledge management as an important tool for competitiveness. In line with this recognition, it needs to develop competencies to support knowledge management. First competency is organisational communication that covers open and trusting communication attitudes together with multi-media communication channels. Second competency covers change management to facilitate the systematic integration of the values of knowledge and knowledge creation and sharing roles among the members of the organisation. Third competency involves leadership and people management for the leaders to commit to their roles in knowledge management and for the employees to become motivated to engage in innovative activities to support continues information gathering and learning of the organisation. These competencies support continuous learning from the experiences Islamic Bank, with knowledge management then becoming the basis of best practices for the firm.
The case shows that knowledge management is a complex process involving multi-faceted aspects, such as hard and soft systems, encompassing the entire organisation. As such, the impact of applying knowledge management is far-reaching or long-term. Knowledge management concepts offer the benefits of creating, analysing and using information to derive knowledge useful in supporting policy-making at the top level as well as innovative decision-making of front-line employees. Overall, knowledge management constitutes a tool to allow organisations to achieve their competitive goals.
However, the complexity of knowledge management results to difficulties in application. This is caused or worsened by the lack of a common conceptualisation of knowledge management. This means that even if knowledge management offers valuable benefits to organisations, this may be difficult to achieve because of the lack of standards, which finds basis on a clear definition of knowledge management, to support the practice of knowledge management. There are also scant best practices available to guide application in different business settings such as in the financial sector. The themes that emerged from the case highlight the limitations of knowledge management.
Based on the consideration of the experiences of Islamic Bank of Britain with knowledge management, relative to existing theoretical and empirical knowledge, a number of themes constituting the areas for improvement of Islamic Bank emerge.
First theme involves defining knowledge management. Islamic Bank has to expand its definition of knowledge management to support its needs and objectives. Existing literature do not provide a commonly accepted understanding of knowledge management. This resulted to the differentiated perception of knowledge management such as the technological perspective of Islamic Bank of knowledge management, which is different from the fusion of people, technology and processes or the complementary linkage of hard and soft systems. An expanded or holistic understanding of the bank of knowledge management would clearly set out the management of knowledge according to its needs and objectives. As an area of best practices, this means the need to develop a definition that encompasses the general principles of knowledge management together with organisational goals. One principle is the holistic approach of knowledge management that involves the fusion of hard and soft systems; or people, technology and processes. Another principle is the competency and resource-based approaches that look into the effective development and utilisation of competencies and resources to support the creation, sharing and conversion of information into practical knowledge helpful in improving employee performance in providing quality service that enhances the competitiveness of the firm.
Second theme covers the role of knowledge management in facilitating the bank's goal achievement. Previous studies on knowledge management of banks have identified the lack of uniformity in the perception of the importance of knowledge management by individual firms. Islamic bank accrues moderate importance to knowledge management expressed through its minimal use of information derived primarily from external sources. Due to this perception of knowledge management, this area has not been considered for inclusion in firm efforts to develop firm standards based on best practices. Importance of knowledge management for service delivery has been recognized organization-wide. The importance of knowledge management to the bank would be based on the failures and issues it faced in applying knowledge management. Learning from its failures ensures that the bank incorporates knowledge management in its core strategies in order to ensure quality service for consumers and improve operational efficiency.
Third theme covers the benefits of knowledge management. Although existing literature cited the various benefits of knowledge management to business firms in general and to banks in particular, there are limited comprehensive or encompassing models linking various elements of knowledge management with particular benefits. These linkages have not also been clarified by Islamic Bank. Knowledge management should be recognised as influencing efficiency through feedback exchanges among employees, so that this covers group dynamics. Knowledge management should also be recognised as enhancing performance through innovativeness, implying benefits on the individual level. Knowledge management should further be recognised as ushering productivity and quality service through decision and policy-making, indicating benefits at the organisational level.
As an area of best practices, these benefits should be considered as experienced simultaneously with the application of knowledge management across the organisation. Recognition of simultaneous experience of benefits is important to enable the bank to focus on not only one or more areas of knowledge management but also the management of knowledge on the individual, group and organisational levels to achieve results more efficiently and optimally. By looking at knowledge management occurring in various levels, the bank would also adopt a comprehensive approach that targets efficiency on the individual, group, branch and organisational levels. There is need to develop a holistic model highlighting the multi-level benefits of knowledge management coinciding with the various parties and interests as well as competencies and resources involved in effectively managing knowledge to derive the intended outcomes.
Fourth theme involves recognising the complexity and scope of knowledge management. Existing literature recognise knowledge as complex. However, there are limitations in the discussions of the nature and extent of the complexity and scope of knowledge management. In the case of Islamic Bank, it considers knowledge management as a complex system but limits the scope of knowledge management to technological processes only. Without identifying the extent of complexity and scope of knowledge management in the context of the bank's experiences, it cannot be able to develop effective ways of addressing these complexities and working within or around the scope to achieve effective knowledge management.
As an area of best practices, the bank needs to recognise the scope of knowledge management as cutting across the different areas of management and operation to include people management, change management, strategic management, and other relevant areas of management. Knowledge management also involves different levels of the organisations including individuals, departments, branches, headquarters and the organisation as a whole. Knowledge management also affect both employees and management and require various competencies and resources including skills and experiences of employees, leadership capabilities of managers, and technological tools to support information collection and sharing as well as knowledge conversion.
Fifth theme involves the development of practice-based learning so that lessons from the experiences of Islamic bank are translated into practical knowledge. Existing literature on knowledge management can be categorised into philosophical or theoretical and empirical studies. Theoretical studies have given insights into application of knowledge management into various business functions while empirical studies have focused on experience of particular business firms in implementing knowledge management system. Although, these are able to provide important insights into the understanding of knowledge management, information is limited only to either theoretical or practical results. As an area of best practices, the bank needs to focus on the application of appropriate theories in its actual business context to derive learning from its successes and failures. The study on the knowledge management of Islamic Bank of Britain involves the application of theories and the development of best practices from its actual experiences to derive ways of enhancing the bank's application of knowledge management.
Gaps or inconsistencies between the case and theories or models of knowledge management exist. Key to knowledge management is the culture of communication, which was not given sufficient attention by the bank. This was because its priority was on developing the technical aspects. Ideally, communication could have fostered information sharing to spur the creation of practical knowledge, especially among the frontline employees. Knowledge management also intends to encompass organisational operations, processes and relations, such as organisational culture, human resource management, and marketing, in order to achieve the goal of competitiveness. The bank failed to recognise the scope of knowledge management by focusing only on certain aspects. This may be due to the lack of a clear conceptualisation of knowledge management for the financial sector. These are the reasons for the fair achievement of the benefits of knowledge management by the bank. Nevertheless, knowledge management remains an important business tool that involves further clarification and development of best practices. (Critical analysis of Islamic bank in knowledge management)
Source: ChinaStones - http://china-stones.info/free-essays/business/economic-aspect-of-islamization.php