Strategic Management in Islamic Finance

230 Pages·2007·1.071 MB·English

by  Alexander von Pock (auth.)

Alexander von Pock
Strategic Management in Islamic Finance
WIRTSCHAFTSWISSENSCHAFT
Alexander von Pock
Strategic Management
in Islamic Finance
Deutscher Universitäts-Verlag
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Dissertation Ruhr-Universität Bochum, 2006
1. Auflage August 2007
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Acknowledgements V
Acknowledgements
This dissertation would not have been possible without the help and support of many
people and institutions.
First and foremost, I would like to thank Prof. Dr. Volker Nienhaus, my doctorate
supervisor. I am very grateful for his high level of interest and the many hints he
provided throughout the study. Furthermore, I would like to thank Prof. Dr. Stephan
Paul for his fast and positive review and Prof. Dr. Mario Rese for his willingness to
act as a member of the examination board.
I am deeply indebted to all Islamic banks that participated in the empirical part of this
study. I would like to thank all the professionals for their input and the time they spent
on answering the questionnaires.
This dissertation was generously supported by my employer, the management
consulting firm A.T. Kearney. I am grateful for the financial sponsorship as well as
the assistance the firm provided during my doctorate leave of absence.
Finally, I would like to thank my family and friends for their continued help and
support.

Alexander von Pock
Content VII
Content

1 Introduction............................................................................................................1
1.1 Research Problem..........................................................................................1
1.2 Research Objective and Approach.................................................................2
1.3 Research Structure.........................................................................................3
2 Analytical Framework...........................................................................................5
2.1 Theories of Strategic Management................................................................5
2.1.1 Strategic Management Approaches.......................................................5
2.1.1.1 The Market-based View of Strategic Management...............................6
2.1.1.2 The Resource-based View of Strategic Management............................7
2.1.1.3 New Institutional Economics Approaches.............................................9
2.1.2 Strategic Management Propositions on Banking.................................11
2.1.2.1 Bank Performance: The Importance of Corporate Vision, Mission
and Objectives......................................................................................12
2.1.2.2 The Impact of External Factors on Bank Performance........................13
2.1.2.3 The Impact of Internal Factors on Bank Performance.........................17
2.1.2.4 The Impact of Company Strategies on Bank Performance..................19
2.1.2.5 The Impact of Strategy Implementation on Bank Performance..........20
2.2 Islamic Finance in Theory and Practice.......................................................22
2.2.1 The Fundamentals of Islamic Finance.................................................22
2.2.1.1 Sources, Methods and Schools of Law................................................23
2.2.1.2 Principles of Islamic Economics and Finance.....................................25
2.2.2 Islamic Financial Products...................................................................28
2.2.2.1 Debt-like Instruments...........................................................................29
2.2.2.2 Equity-like Instruments........................................................................31
2.2.2.3 Derivative-like Instruments.................................................................33
2.2.2.4 Hybrid Instruments..............................................................................35
VIII Content
2.2.2.5 Other Transactions and Services..........................................................37
2.2.3 Islamic Finance Markets......................................................................38
2.2.3.1 Overview..............................................................................................38
2.2.3.2 Institutional Framework.......................................................................42
2.2.3.3 Islamic Banking in the GCC area........................................................47
2.2.3.4 Islamic Banking in Malaysia...............................................................57
2.3 Empirical Literature Review........................................................................62
2.3.1 General Studies....................................................................................63
2.3.2 Islamic Finance Studies.......................................................................65
2.4 Conceptual Model and Hypotheses.............................................................67
2.4.1 Overview..............................................................................................67
2.4.2 Hypotheses...........................................................................................71
2.4.2.1 Model 1: Impact of External Factors on Performance.........................71
2.4.2.2 Model 2: Impact of Internal Factors on Performance..........................73
2.4.2.3 Model 3: Impact of Company Strategies on Performance...................75
2.4.3 Summary..............................................................................................77
3 Empirical Study...................................................................................................79
3.1 Research Methodology................................................................................79
3.1.1 Data Collection and Sampling.............................................................79
3.1.1.1 Data Collection Tool............................................................................79
3.1.1.2 Data Generation...................................................................................81
3.1.1.3 Sample..................................................................................................82
3.1.2 Data Analysis.......................................................................................87
3.1.3 Data Measurement...............................................................................91
3.1.3.1 Operationalisation of External Factors................................................92
3.1.3.2 Operationalisation of Internal Factors.................................................93
3.1.3.3 Operationalisation of Company Strategies........................................103
3.1.3.4 Operationalisation of Company Performance....................................108
3.2 Research Findings......................................................................................110
3.2.1 Model 1: Impact of External Factors on Performance.......................110
3.2.2 Model 2: Impact of Internal Factors on Performance........................114
Content IX
3.2.3 Model 3: Impact of Company Strategies on Performance.................120
3.2.4 Summary of Empirical Results..........................................................125
4 Summary and Concluding Remarks..................................................................127
4.1 Analytical and Empirical Summary...........................................................127
4.2 Implications for Islamic Financial Institutions..........................................129
4.3 Limitations and Future Research Suggestions...........................................132
References..................................................................................................................137
Appendix....................................................................................................................153
List of Exhibits XI
List of Exhibits

Exhibit 1: Global Muslim population in major countries............................................40
Exhibit 2: Banking assets in major Islamic countries..................................................41
Exhibit 3: Islamic equity funds....................................................................................42
Exhibit 4: Major economic and socio-demographic indicators...................................48
Exhibit 5: Importance of oil income in GCC countries except for Oman...................49
Exhibit 6: Banking sector and financial markets indicators........................................51
Exhibit 7: Major Islamic finance institutions in the GCC countries except Oman.....52
Exhibit 8: Profitability indicators for selected GCC Islamic finance institutions.......52
Exhibit 9: Consolidated balance sheets of Islamic banks, % share of total.................53
Exhibit 10: Selected 2002 Executive Opinion Results................................................56
Exhibit 11: Major Islamic finance institutions in Malaysia.........................................60
Exhibit 12: Profitability indicators for selected Malaysian finance institutions..........61
Exhibit 13: Overview of important general studies.....................................................64
Exhibit 13 (continued): Overview of important general studies..................................65
Exhibit 14: Overview of important Islamic finance studies........................................66
Exhibit 15: Conceptual model.....................................................................................68
Exhibit 16: External factors.........................................................................................69
Exhibit 17: Internal factors..........................................................................................69
Exhibit 18: Company strategies...................................................................................70
Exhibit 19: Company performance..............................................................................71
Exhibit 20: Attractive market segments, average rating..............................................83
Exhibit 21: Factors contributing to attractiveness, % of respondents mentioning
factor....................................................................................................................84
Exhibit 22: Measures for effective competition with conventional banks,
average rating.......................................................................................................85
Exhibit 23: Principal company goals, % of respondents mentioning goal..................86
Exhibit 24: Number of people on Sharia board, % share of respondents....................87
XII List of Exhibits
Exhibit 25: Scope of Sharia board functions, % of respondents mentioning function87
Exhibit 26: Construct tests and test method.................................................................89
Exhibit 27: Criteria thresholds used in this study........................................................91
Exhibit 28: Factor “(re)financing opportunities”.........................................................92
Exhibit 29: Factor “regulatory framework and standards”..........................................93
Exhibit 30: Factor “customer relations”......................................................................94
Exhibit 31: Factor “brand image”................................................................................94
Exhibit 32: Factor “distribution capabilities”..............................................................95
Exhibit 33: Factor “market-access core competencies”...............................................96
Exhibit 34: Factor “customer service”.........................................................................96
Exhibit 35: Factor “supporting processes”..................................................................96
Exhibit 36: Factor “resource efficiency”.....................................................................97
Exhibit 37: Factor “technological capabilities and equipment”..................................97
Exhibit 38: Factor “technological expertise”...............................................................98
Exhibit 39: Factor “financial expertise”......................................................................98
Exhibit 40: Factor “financial processing capabilities”.................................................99
Exhibit 41: Factor “functionality-related core competencies”.....................................99
Exhibit 42: Factor “co-operation”..............................................................................100
Exhibit 43: Factor “management quality”.................................................................100
Exhibit 44: Factor “firm culture”...............................................................................101
Exhibit 45: Factor “implementation capabilities”......................................................101
Exhibit 46: Factor “financial standing”.....................................................................102
Exhibit 47: Factor “integrity-related core competencies”.........................................102
Exhibit 48: Factor” reputation as an Islamic company”............................................103
Exhibit 49: Factor “Sharia board efficiency and effectiveness”................................103
Exhibit 50: Factor “cost leadership”..........................................................................104
Exhibit 51: Factor “price leadership”........................................................................104
Exhibit 52: Factor “product quality and design”.......................................................105
Exhibit 53: Factor product diversification.................................................................105