Importance of religiosity dimension in strategic management accounting for IFIs

Citation

Haniffa, R. and Hudaib, M. (2011), "Importance of religiosity dimension in strategic management accounting for IFIs", Journal of Islamic Accounting and Business Research, Vol. 2 No. 1. https://doi.org/10.1108/jiabr.2011.43102aaa.002

Importance of religiosity dimension in strategic management accounting for IFIs

Article Type: Editorial From: Journal of Islamic Accounting and Business Research, Volume 2, Issue 1

Introduction

Financial services sector is a highly competitive market especially following deregulation in the 1980s. Hence, it is not surprising to find banks continuously searching for new strategies to outperform their competitors as the traditional focus mainly on “bottom-line” figures, cost control, efficiency, effectiveness and shareholders’ value are no longer sufficient in meeting new challenges in the environment. To differentiate themselves from their competitors, most banks started to focus on product and delivery innovation. However, their myopic strategy and failure to appropriately incorporate risks and the wider impact on the economy and society may be blamed for the recent spate of scandals and financial crisis. It would not be surprising to find that most failed banks actually have poor strategic management accounting system for identifying and analysing their customers’ profitability, product costing, and performance evaluation and reward.

Strategic management accounting (SMA), which involves analysis of financial and non-financial data on customers, products and competitors business strategies, may help banks better plan their strategies and respond to the changes in the environment and stakeholders expectations. This involves focusing on three core strategic dimensions, namely revenue management, cost management and performance management.

Strategic revenue management (SRM) involves optimising the organisation’s customers’ profitability by synchronising financial and non-financial knowledge about current and potential customers with product/services, besides optimising the capabilities of the resources available. Strategic cost management (SCM), on the other hand, involves value chain analysis and scrutinising the costs structure to improve efficiency and meet customers’ satisfaction. The third dimension, strategic performance management (SPM), involves looking at how organisational leadership influence the system for effective planning and control of resources as well as performance evaluation and rewards. In other words, the quality of the SMA dimensions is significantly influenced by the leader’s belief, value and preferences (leadership style) in shaping the organisational structures, systems and processes and eventually the success or failure of the organisation. They (leaders values, belief and preferences) are also important in contributing to the organisational culture.

Religiosity dimension in SMA of IFIs

Islamic financial institutions (IFIs) are among a new wave of ethical organisations penetrating the global market. Owing to the need to comply with shariah principles as a strategic option, the objectives, operations and reporting practices of such organisations should be different from their conventional counterparts. The nature of risk and accountability in IFIs are more complex than conventional financial institutions. Although the three core dimensions of SMA (i.e. SRM, SCM and SPR) may be relevant for strategic planning, a fourth dimension, i.e. religiosity, should be integrated in the strategies of IFIs. This dimension should steer the other three dimensions to ensure that maqasid al-shariah (the objectives of the shariah), which is to provide for the well-being of society and serving public interest, is not compromised by IFIs. This means that the focus of the strategy for IFIs should not solely be on maximizing shareholders return on equity but more importantly on fulfilling maqasid al-shariah by paying due consideration to strategies that will help to contribute to social justice and promote sustainable development projects. Therefore, IFIs need a more sophisticated information system to enable the leadership to ensure that the religiosity element is integrated when setting strategies on types of products to offer, types of customers that will benefit from the various products on offer, the pricing of the various products on offer and the reward system for employees.

Since it is the top management who is involved in setting the strategic direction of the organisation, the attitude and behavior of the leaders are particularly important. The leadership of IFIs must comprise of individuals imbued with true Islamic values in order that the strategies developed encompass the religiosity dimension in all aspects of the business to safeguard the interest of all stakeholders in line with shariah principles. The Quran reveals the importance of undertaking strategic planning by the leadership as told in Surah Yusof (Chapter 12):

“O Joseph!” (he said) “O man of truth! Expound to us (the dream) of seven fat kine whom seven lean ones devour, and of seven green ears of corn and (seven) others withered: that I may return to the people, and that they may understand” (12:46).

(Joseph) said: “For seven years shall ye diligently sow as is your wont: and the harvests that ye reap, ye shall leave them in the ear, – except a little, of which ye shall eat.” “Then will come after that (period) seven dreadful (years), which will devour what ye shall have laid by in advance for them, – (all) except a little which ye shall have (specially) guarded.” “Then will come after that (period) a year in which the people will have abundant water, and in which they will press (wine and oil)” (12:47-49).

(Joseph) said: “Set me over the storehouses of the land: I will indeed guard them, As one that knows (Their importance)” (12:55).

Thus, did we give Established power to Joseph In the land […] (Surah Yusof, 12:56).

The above verses clearly indicate the importance of the religiosity dimension for strategic planning being undertaken by the leadership of the organization. Unfortunately, the top management in most IFIs tend to separate the religiosity element to be handled by the shariah board. Often, this is limited to only decisions related to permissibility (halal) of the product and not other aspects of the strategies. In order for maqasid al-shariah to be achieved, it is important for both top management and the shariah board members of IFIs to work together in setting strategies for the organizations. This would ensure that the strategies set by IFIs will serve communities and not markets; fulfill aspirations in widening ownership base of society; offer responsible finance by restraining consumer indebtedness, promote ethical investment and engage in social responsibilities initiatives; and provide stability by linking financial services to the productive and real economy.

Leadership driven by shariah values will also contribute to efficiency as it enables a culture of trust and self-control to develop within the organization as indicated in the Quran:

Allah has promised, to those among you who believe and work righteous deeds, that He will, of a surety, grant them in the land, inheritance (of power), as He granted it to those before them; that He will establish in authority their religion – the one which He has chosen for them; […] (Surah Al Nur, 24:55).

The relationship between leadership style and how adherence to Islamic values may lead to better control as envisaged in the Quran is shown in Figure 1.

Figure 1 The link between leadership style and level of enabling and control

Hence, it is difficult to see how IFIs can truly implement Islamic SMA if the separation continues or when the leaderships are devoid of Islamic values. The issue of leadership and the implementation of Islamic SMA within IFIs is an important issue needing attention if the organizations are to survive in the long term. Unfortunately, there is a dearth of literature and research that looked into this matter. Hopefully, this editorial piece will ignite readers to consider looking at this issue.

Roszaini Haniffa, Mohammad Hudaib