The Islamic finance sector continues to grow rapidly. Initially, the growth was driven by increasing transaction volumes of a rather small number of Islamic banks. Since the early 1990s, the number of Islamic financial institutions and the total customer base increased considerably, and the last decade saw the establishment and expansion of Islamic windows, Islamic subsidiaries of conventional banks, and the conversion of conventional into Islamic banks. In addition, global conventional players designed Islamic products for high-net-worth individuals and for institutional clients. The competition among Islamic banks and between Islamic banks on the one side and Islamic windows and products of conventional banks on the other side has been intensified substantially, with quantitative and qualitative human resource implications for Islamic banks: they need more and better-qualified personnel, which still is in short supply.
Given the competitive situation, the high growth rates of past years, the experiences of the recent financial crisis (which did not leave Islamic financial institutions untouched, albeit to a lesser degree than their conventional counterparts), and the specifics of Islamic finance, the human capital requirements are particularly high—in product development and product placement (in retail as well as investment banking), but also in risk management, dispute resolution, and restructuring. Islamic banks’ personnel must be familiar with conventional banking products and their status in relation to Islamic requirements, as well as with existing Islamic alternatives and their commercial advantages and disadvantages compared to the conventional products. Executives and staff members must be able to explain the value proposition of Islamic products to individual and institutional Muslim and non-Muslim customers. Furthermore, the management of Islamic financial institutions must be able to design Shari’ah-compliant financial innovations in order to meet the diversified needs of the customers and to keep up the ever-increasing scope of conventional techniques, procedures, and products. Finally, it is often claimed that Islamic banking ties finance to the real economy. Therefore, the personnel of Islamic financial institutions might need more knowledge about the nonfinancial sector than conventional bankers if they take on and hold entrepreneurial risks on their balance sheets, instead of securitising loans and selling them off as it has become the general trend in conventional banking over the last decade.
The human resource literature usually deals with the recruitment, retention, and retirement of “human capital.” Since retirement issues are not yet of major concern for Islamic banks, this topic will be ignored in the following. With respect to recruitment and retention, the following takes up topics of the conventional literature and relates them to the specifics of Islamic banking.
Islamic banks in total can recruit personnel basically from two different groups of potential employees: first, from people seeking first-time employment; and second, from people already employed in the conventional banking sector. None of these people can generally be expected to have in-depth knowledge of Islamic finance. However, the Islamic financial sector has attracted the attention of students and practitioners who are willing to learn about its specifics—on a basic or more advanced level, and with a theoretical or practical orientation. This is substantiated by the growing number of higher education and training institutions offering an increasingly broader spectrum of study programmes and training courses:
Given the recent response of the education and training industry to the growing manpower needs of Islamic financial service providers, it seems that the number of recruitment candidates with a basic and even more specific understanding of Islamic finance is increasing and will continue to do so in the foreseeable future.
While all these initiatives have broadened the pool of talents with knowledge in Islamic finance considerably since the mid-2000s, an increasing number of graduates with academic Islamic finance degrees complain that it is difficult for them to find employment in the Islamic finance industry. This may be due to the fact that the business of many Islamic financial institutions (in particular of Islamic windows and subsidiaries of conventional banks) is largely a Shari’ah-compliant replication of conventional finance. If, for example, 80 percent of the transactions are commercially very similar to conventional transactions, then it can be more cost effective to hire staff with experience in conventional banking and familiarise the new employees with Islamic specifics in in-house training programmes than hiring university graduates with academic expertise in Islamic finance but limited knowledge of conventional finance and no practical experience. Providers of academic degree programmes in Islamic finance should take this into account and design their curricula accordingly. In particular, they should equip graduates to work in conventional financial institutions where they can gain the experience that will make them more attractive as recruits to Islamic financial institutions.
Although a general qualification of employees in Islamic finance is useful, it is not sufficient for Islamic banks in a competitive environment. Their success will not depend mainly on standardised products available from many competitors, but on their own specific products. Familiarising employees with the distinct features of such products remains a prominent task of in-house training departments of each Islamic bank. The growth of external training facilities enables Islamic banks to concentrate their limited training capacities on their specifics. In-house training programmes also offer good opportunities to familiarise employees with the mission, vision, and values of the institution in order to strengthen their motivation and engagement. Unfortunately, empirical studies on the internal human resource development strategies of Islamic banks are still lacking.
A competitive base salary has to be offered for the attraction of new employees (especially if they are to be hired away from conventional banks). Competition may force Islamic banks—at least in the medium to long term—to offer higher salaries for many positions than conventional banks, because Islamic banks require a “double” qualification of their employees in techniques of conventional banking and Islamic finance.
A competitive base pay is not only important for the first-time recruitment of employees but also for retention efforts, since it is costly to replace qualified personnel. Cost factors are not only expenses for new recruitment and training, but in particular the opportunity costs associated with the loss of the specific expertise of a leaving person. Especially in the case of middle and top managers, these opportunity costs can be considerable. The problem is aggravated further if the leaving person is a bearer of “trade secrets.” Thus, in general, it makes sense to make efforts to keep qualified personnel, and retention is one of the major dimensions of human capital management.
However, Islamic banks will hardly be able to recruit and retain highly qualified employees and executives if they cannot offer, in addition to the fixed salaries, attractive performance-related rewards. A vast number of different premium and incentive schemes has been designed for the conventional finance sector. However, not all schemes are readily applicable in Islamic institutions because of Shari’ah or market limitations. For example, schemes of performance-related rewards for top managers and chief executives are often based on stock options. But where stocks of Islamic banks are mainly held privately, and active secondary markets are virtually nonexistent, the otherwise effective instrument of stock options cannot be applied in the Islamic financial services industry.
Without empirical research it is impossible to say how serious the problems of staff fluctuation in the Islamic financial sector are and what kind of performance-related rewards are granted. It would be illuminating to know how many people have left Islamic financial institutions to take up new jobs either in other Islamic, or in conventional financial institutions, or in institutions of the nonfinancial sector (with or without a relation to Islam). Such figures could give an indication, for example, of the strength of the “Islamic commitment” of personnel and could shed some light on the importance of ideological factors for the human capital management of Islamic financial institutions.
The base salary is usually supplemented by other benefits for employees, including, for example, healthcare contributions, housing support, and retirement schemes. Islamic banks can also offer such benefits in principle, but the specifics of a Shari’ah-compliant health insurance or pension plan (as provided by takaful undertakings) may be more complex and difficult to explain to and be appreciated by the beneficiaries than conventional packages.
Job satisfaction is a precondition for continuous and long-term employment in a company. It is the result of a complex bundle of conditions, actions, and circumstances. Islamic financial services are “ideological” products. Those involved in the production and marketing of these products should have a common and consistent understanding of the Islamic content and of its relevance. An explicit mission statement will help to clarify the main issues, to homogenise attitudes, and to motivate the personnel.
For many people, “Islamic” finance implies more than just legally interest-free contracts, and therefore an Islamic financial institution should support some “Islamic” activities outside its core business (for example, charitable events, scholarship programs, healthcare programs for the poor, Islamic art exhibitions, and so on).
A strong commitment of employees to their company will reduce fluctuations of staff, enhance the productivity of the human capital, and improve the economic performance.
Some of the arguments indicating potential obstacles to the unfolding of the human resource potentials of Islamic banks are a bit “soft” in terms of solid empirical support; nevertheless, fractional evidence and “industry talk” indicate that they are by no means irrelevant. The softness of the arguments is due to a huge backlog in empirical research at the firm level.
Many Islamic banks have the character of universal banks—that is, they provide services in a wide range of markets, from retail to investment banking. Given the scarcity of qualified personnel, it is a serious challenge to be competitive. The gathering of information and the timely dissemination of market-related and company-specific knowledge can become decisive competitive factors in a knowledge-driven industry. In recent years a number of institutions and companies emerged which provide specialised information and consultancy services for the Islamic finance industry, ranging from market data to legal advice and ratings of companies and instruments (e.g., sukuk). This allows especially smaller Islamic banks to replace expensive in-house activities by the purchase of external services at lower cost and/or higher quality.
Industry-wide institutions (such as associations or federations) can improve the knowledge base and knowledge management of Islamic financial institutions—for example, by maintaining databases, disseminating best practice examples, formulating guidelines and minimum standards, negotiating with national and supranational regulators, lobbying for Islamic finance, or conducting market research. Recourse to a high-quality support infrastructure can boost the effectiveness of the scarce and expensive human capital in individual firms of the Islamic financial services industry. The production of financial services is primarily based on financial resources and on knowledge—in particular, on the knowledge of how to mobilise and employ funds in a profitable and Shari’ah-compliant way, how to meet the demands of depositors and entrepreneurs, how to reconcile conflicting interests of clients, and how to adapt to legal and regulatory requirements. Not the least is knowledge of financial needs and capabilities of customers.
For its continued existence and growth, the Islamic financial sector has to manage different types of knowledge:
A firm’s position in intra-industry competition (that is, competition among Islamic financial institutions) depends mainly on the firm- and customer-specific knowledge. Human capital management is in large part about the generation, utilisation, and retention of tacit individual knowledge. Organisational knowledge in general is a major topic of research work and consulting activities under the headlines of knowledge management and learning organisations. On the one hand, knowledge is a major input for the production of Islamic financial services. On the other hand, the generation and application of new knowledge in Islamic finance (for example, in the form of interest-free financial engineering or new laws and regulations) take place at a fast pace. Thus, Islamic financial institutions must pay attention to the knowledge dynamics in their markets and surroundings and to information and communication technologies.
For the growth of the whole Islamic finance industry, industry-specific knowledge becomes crucial. Activities of financial services firms in the conventional sector have contributed to and are backed by a huge knowledge base. For example, conventional banks and other financial institutions have been operating all over the world for decades (or even centuries); business practices are well documented, profit and loss accounts and balance sheets of many banks are published as time series data and subject to intense analysis and media coverage; depositors and lenders are well informed about the industry; finance and banking has grown into an advanced and diversified subject of academic teaching and research; accounting, legal, and regulatory standards have evolved gradually; banks and other financial institutions as well as money and capital markets have overcome national or regional fragmentations and form a global finance network.
Compared to this level of development, the Islamic financial services industry is still in its infancy. The number of actors as well as their sizes are relatively small; the range of products is still rather limited on the one hand but confusingly differentiated in details between banks on the other hand; comprehensive financial disclosure is more the exception than the rule; benchmarks are rare and media reports are more directed toward insiders than toward the general public; many, if not most, clients of Islamic banks have only a very limited knowledge about the specifics of Islamic finance; the academic community (inside and outside the Muslim world) is only gradually recognising Islamic finance as a subject for serious study and research; accounting practices, legal requirements, and regulatory procedures still differ considerably between countries; Islamic financial markets are geographically still fragmented and lack the depth and sophistication of conventional financial markets, and a global Islamic finance network is a desire but not yet the reality.
Especially in such a fragmented market, independent service providers who work for several Islamic finance institutions can realise economies of scale and scope and can reduce costs and human resource requirements of smaller individual Islamic banks. Specialised companies can, for example:
Recourse to external service providers can enhance the efficiency of a bank’s personnel in its daily operations. Gradually a support infrastructure comparable to that of the conventional finance sector is emerging. Examples of institutions and companies are as follows:
Human resource problems of Islamic banks can be mitigated by an increasing standardisation of products and techniques. When formerly firm-specific knowledge converts into industry-specific knowledge, it can be integrated into academic curricula and industry-focused training programmes of external service providers, and will gradually become common knowledge no longer requiring firm-specific investments. Besides AAOIFI and IFSB, other institutions are working on templates and framework agreements that could reduce transaction and learning costs. For example, Hawkamah, the Institute for Corporate Governance, works on corporate governance issues in general and governance recommendations for Islamic financial institutions in particular. Of more operational relevance are the efforts of the International Islamic Financial Market (IIFM) to develop a generally applicable “Tahawwut (Hedging) Master Agreement” (in cooperation with the International Swaps and Derivatives Association) and to come up with a template for Shari’ah-compliant repo transactions. Such initiatives replace efforts of individual banks so that scarce human resources in the structuring and legal departments would be set free for more firm-specific tasks.
The top management of Islamic financial institutions has to identify the present and anticipate future financial needs of retail customers, entrepreneurial clients and institutional investors. This requires farsightedness with respect to trends in the national and international economy and in the Islamic and conventional financial markets. It is a major challenge for the leadership and top management of Islamic financial institutions to anticipate future needs and demands, to develop innovative products in due time, and to prepare the institution for the provision of new services. This is not different from what is expected from chief executives of conventional banks, but the scope for action of the top management of Islamic banks is more restricted than that of conventional firms: in addition to general legal requirements and state regulations, Islamic financial institutions are subject to the requirement of Shari’ah compliance of all products and procedures.
Very specific human resources, which cannot be found in conventional finance, are required to secure the Shari’ah compliance of all products and procedures of an Islamic financial institution. Two different types of positions have to be filled:
When the first Islamic banks were established in the 1970s, the shareholders installed Shari’ah boards and gave them the authority to decide on the permissibility of products and techniques (although Shari’ah-board rulings and recommendations are legally not binding because the corporate laws of most countries allocate the ultimate decision power to the board of directors). The board positions were filled with recognised Shari’ah authorities with expertise in Islamic contract law and contemporary finance. But the number of scholars with such a multidisciplinary qualification was rather limited, and the rapid growth of the industry led to the accumulation of large numbers of Shari’ah board positions by the most prominent scholars.
Top scholars hold 50 and (much) more board positions; this may be taken as an indication of a particular shortage of human resources in this area. But it could also be the result of strategic decisions of shareholders and CEOs to take (or keep) the same scholars on board as other Islamic banks with which they maintain intensive commercial relations. This may coincide with the interest of the Shari’ah scholars for whom board positions are not only attractive because of reputation but also financially. If the membership in a Shari’ah board promotes the achievement of individual goals of scholars, it is plausible to assume that Shari’ah board members are interested in their reappointment. This may create a de facto lack of independence from the board of directors who suggests candidates and determines the remuneration, and from the shareholders who appoint the Shari’ah board members. In addition, Shari’ah board members have to be aware that the interests of the management may be well represented in the board of directors. This all leads to the hypothesis that Shari’ah board members will not ignore the interests of the management when they formulate a legal opinion (fatwa) regarding products, contracts, techniques, or procedures of their Islamic bank. This does not mean that they accept whatever new financial product or transaction is submitted by the management: it must be a prime concern of the Shari’ah board that the Islamic character of the institution is not questioned by the general public. But the Shari’ah boards must also bear in mind the commercial success of their institutions, and so they make efforts to develop Shari’ah-compliant functional equivalents of what the management initially had proposed.
The accumulation of 50 and more board memberships violates not only Western standards of good corporate governance (issued, for example, by the OECD or the EU), but also recommendations of AAOIFI and IFSB on the composition and procedures of Shari’ah boards. Only very few countries—Malaysia is the most important example—have taken measures to limit the number of board memberships and to increase substantially the number of qualified persons who could fill the board positions in a growing number of Islamic financial institutions. In general, it is a challenge and opportunity for universities with strong departments both of Islamic law and of economics and finance to launch interdisciplinary programmes for the next generation of Shari’ah scholars.
In the early years, Shari’ah boards rejected quite a number of products and business techniques submitted by the management. But over the last decade it seems that the basic attitude of Shari’ah boards has changed. Their verdicts have become far less restrictive and much more permissive. Thus the spectrum of Shari’ah-compliant techniques and products was widened considerably.
The authority of Shari’ah boards of individual Islamic banks is somewhat restricted in those countries that have declared AAOIFI standards binding for their Islamic financial institutions, and in those countries that have installed national bodies as the highest authorities for Shari’ah-compliance assessments: for example, the Higher Sharia Supervisory Board of the Bank of Sudan (established in 1993) and the Shariah Advisory Council of Bank Negara Malaysia (established in 1997). National boards shall ensure consistency and credibility of Islamic finance in general, which could reduce the human resource requirements of the industry. The discretionary power of individual Shari’ah boards of Islamic banks could be constrained if the national boards adhere to a restrictive interpretation of Shari’ah principles. However, if the national boards are more permissible and allow in principle a wide range of products and techniques, they de facto reduce their role to that of the final instance for the clarification of doubtful cases and in dispute settlement.
In a highly competitive environment, the perspectives of a bank will depend crucially on its innovative potentials. In order to keep a competitive edge and to protect against rapid imitation, neither the management nor the Shari’ah board of an innovative Islamic bank have an interest in too much public disclosure of the commercial and Islamic qualities of financial innovations. Islamic banking is by its character more complicated (because it has to meet the requirements of secular law and the Islamic legal system) and less transparent than conventional banking: the need to keep “Islamic business secrets” (to prevent rapid imitation by competitors) makes it more opaque than riba-based banking. Credibility for the Islamic qualities of the products and transactions is thus not achieved by disclosure but by the reputation and public recognition of the members of the Shari’ah board.
In contrast to the early years, when Shari’ah opinions restricted the scope of instruments and products of Islamic banks, today’s Shari’ah boards seem to be much more permissive. A microlegalistic view has become dominant which decomposes complex financial techniques, products, and contracts into a number of basic components that resemble (or are identical with) legal figures of the traditional Islamic commercial law. The Shari’ah quality of these components is then assessed for each component separately. If no objections are raised against any component, the total product gets sanctioned (unless it is an obvious circumvention of the prohibition of riba). This method seemingly supports financial engineering and product innovation in the Islamic segment of the financial market, but it has one very serious weakness: Elements which are perfectly legitimate separately may interact in such a way that—from a macro-systemic perspective—the result may come into conflict with fundamental principles underlying Islamic law and Islamic economics. The dispute over the legitimacy of “Islamised” banking practices in Pakistan from the mid-1980s to early 1990s is a well-documented historical case, while the critique of tawarruq or of repurchase guarantees for sukuk at the issuing price are more recent examples.
It is not clear to what degree clients of Islamic banks and public opinion leaders require a very strict adherence to the substance of the rules and principles of Islamic commercial law. Rather, evidence suggests that they are more concerned with the observance of formal Islamic legal requirements. The idealised vision of the early years has become a minority position. With conventional banks making inroads into the Islamic finance industry, managers of Islamic banks were eager to introduce Shari’ah-compliant functional equivalents to those structured products that have generated the highest returns (at the price of high risks) in conventional banking. The highest profits (and losses) were made by derivatives, and several Islamic financial institutions have developed (with the approval or even support of their Shari’ah boards) prototypes of Shari’ah-compliant derivatives trading techniques. These prototypes have not yet been rolled out because of some unsettled Shari’ah issues. But it seems that these issues are more of an operational and less of a fundamental nature: It is not the rejection of derivatives and trading in principle but the preference for their own products and techniques that so far hindered the emergence of an active market. There is also more caution in the aftermath of the conventional financial crises, but this means only a postponement and not a cancellation of plans.
Reports on ideas for Shari’ah-compliant trading techniques are taken by critical observers (e.g., many Islamic economists) as an indication that the present Shari’ah scholars are too captive in their micro-legalistic methodology to see the questionable macro-systemic implications of their fatwas. From this perspective it is logical to call for an additional qualification or training of Shari’ah board scholars in Islamic economics (or the inclusion of economists into Shari’ah boards—at least on the national level). This adds another dimension to the human resource requirements of Islamic banks, but it could indeed improve the consistency and credibility of the claims of a superiority of an Islamic finance system in term of allocation, distribution, and stability.
There is a growing awareness that the authenticity and quality of Islamic finance can hardly be ensured by Shari’ah boards whose members are overburdened by too many board memberships, are exposed to many conflicts of interest by memberships in boards of competing companies, are fixated on a questionable micro-legalistic methodology, and are lacking a macro-systemic understanding of their micro decisions.
One way out would be a stronger role played by regulatory authorities. National Shari’ah boards could limit the discretionary power of individual Shari’ah boards—provided that the members of the national board are more restrictive than the members of individual boards. But this cannot be taken for granted, at least not for the time being. However, there is a growing awareness of regulators that a mere microlegalistic Shari’ah compliance does not create a more efficient, just, or stable financial system.
Regulatory authorities should only regulate the basics and leave enough room for financial innovations. But once the basic operational tools are more or less the same for all Islamic banks, innovative products and techniques will become decisive in competition. It is hard to see where Islamic banks could make a breakthrough with financial innovations in retail banking and consumer finance. Most Islamic banks have replicated the full range of conventional services, and a commercial success in this market depends not on product innovation but on pricing and the overall service quality and customer satisfaction. The contribution of Shari’ah boards looks quite marginal.
Much more scope for innovation and unexploited profit potentials can be found in corporate finance, project financing and investment banking. Success in this area depends at least as much (if not much more) on the tax-saving and risk-minimising legal structure of a transaction as on its Shari’ah compliance. Tax issues and secular contract law are beyond the capacity of many Shari’ah scholars. This is where the expertise of law firms and business consultancies comes into play. They bundle top-level financial engineering with first-class Shari’ah expertise and intimate knowledge of relevant markets. They can take recourse to extensive experiences with conventional deals, and they have substantially upgraded their Shari’ah competencies over the last decade. It seems that not only their services (in particular of British law firms and American consultancies) are in increasing demand by Islamic banks in all parts of the world, but also that the most innovative deals have been structured by them. Systematic empirical studies are still lacking, but fractional evidence suggests that the importance of Shari’ah boards for innovations in Islamic finance decreases while law firms and consultancies take the lead. This shifts human resource requirements and worries from the Islamic finance institutions to the external consultants, and it helps to better utilise scarce top-quality human resources.
These trends, taken together, suggest that the importance of Shari’ah boards and individual Shari’ah scholars will decrease in the medium term while state-sanctioned or public authorities and specialised service providers may increasingly influence the development of the Islamic finance system. This, combined with market pressures on Islamic financial institutions to offer products that are close substitutes for conventional products, may mean that the Islamic and the conventional financial sectors are likely to move closer to each other, so that formerly clear demarcation lines become further blurred in the not too distant future. To prevent such a loss of distinctiveness in substance, the top managements of Islamic banks face a formidable challenge. In particular, they need to differentiate their products from conventional ones by innovations that allow them to assert value propositions other than (formal) Shari’ah compliance. To prepare for such a positive development (or to prevent potential negative developments), future studies and scenario exercises may be needed—techniques that are not yet on the agenda of training companies, course providers, and seminar organisers.