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Building Intellectual Capital in Islamic Finance through Knowledge Management strategy


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‘Knowledge management’ is one of any organization’s most important strategic resources and is rightfully gaining increasing importance in businesses and companies. However, most IIFS don’t yet capitalize on what knowledge value they possess or what knowledge assets they have and should define clear strategies and frameworks to retain and utilize their knowledge assets. Our research did not find or come across a formal definition or process that entails knowledge management in Islamic finance nor do I believe it should be different from knowledge management in other industries or disciplines. Thus Islamic Finance Knowledge Management (IFKM) could be described or defined as ‘a practice or set of processes that aims to identify and build Sharia’a and business knowledge resources within the institution to enable and empower capabilities and competencies to excel in conducting Sharia’a-compliant business and realize business objectives.’

A knowledge management strategy could help IIFS build their intellectual capital and strengthen their capabilities on functional, operational and organizational fronts. The discussion highlights the importance of developing a relevant set of tools and resources that help IIFS build capabilities in knowledge management and ultimately build adequate intellectual capital to drive and achieve the desired business objectives. A common theme that emerges from the discussion is that IIFS ought to have a collaborative approach towards the concept of knowledge sharing, leveraging their scarce resources and expertise and proposing practical steps to develop a knowledge-sharing culture in the industry.

A number of important questions emerge in this regard:

  • How will market participants have an effective mechanism to learn about new Islamic finance products, tools, resources, laws, standards, documentation formats or new skills?
  • How will they access these tools within large organizations and learn to use them or reuse skills, processes and expertise?
  • How will they interact with other stakeholders – including regulatory authorities - and have an intellectual knowledge-sharing dialogue to enhance practice and regulation policies?
  • How will regulatory authorities improve practice and regulation development through an effective knowledge-sharing approach with market players?
  • How can we best promote regulatory consistency and harmonization amongst different markets and jurisdictions around the world?
  • How will the Sharia’a Advisors collaborate to develop the profession’s code of conduct and promote it amongst market participants?

A sound Islamic Finance industry would require a better understanding of the knowledge value of each of the above questions and assess what stakeholders can bring to improve practice.

The American management consultant, educator and author, Peter Drucker said: “Today knowledge has power. It controls access to opportunity and advancement.” In his book The Practice Management, he interestingly describes it with dual functionality depending on our application to knowledge: “If we apply knowledge to tasks we already know how to do, we call it ‘productivity’. If we apply knowledge to tasks that are new and different we call it ‘innovation’.”

To build an effective Knowledge Management (KM) strategy in Islamic finance and ultimately strengthen the intellectual capital of the organization, it is important to take account of the unique fiduciary investment relations and stakeholders structure and business model of the IIFS and address the pertinent factors that may impact strategy development.

  • It is vital to assess the individual business1 and Sharia’a competencies and face up to the need to plug gaps in knowledge and information sharing in the business such as the variations in markets where Islamic finance operates – the socioeconomic, demography structure, economic buoyancy, business and finance infrastructure, Sharia’a Law acceptance, talent and human capital.
  • It is also important to take into account any existing knowledge collaboration initiatives, the professional culture level of the IIFS, the talent and human resources availability, the learning and training culture in the IIFS and commitment from its board and executive management.

The IIFS ability to unlock its practitioner’s knowledge and sharing this knowledge with peers and industry fellow professionals is extremely important in Islamic finance. This importance arises from the fact that the industry is constantly evolving and expanding and yet still has to reach the scale and scope aspired to. The IIFS leaders are required to exert considerable efforts to sustain forward-looking planning and strategize business priorities and ways to harness growth, efficiency, profitability and succession. Several IIFS, industry regulatory authorities and industry professional services stakeholders have recognized the importance of knowledge management initiatives and the support value it brings to the good practice of this niche market.

The following section suggests some of the core building blocks to set forth the KM function in Islamic finance. Five building blocks have been identified for the process of establishing an effective IFKM strategy.

1.  The corporate knowledge-sharing competencies will require an institution to look at three main areas to achieve knowledge-sharing behavior:

 

  • Building the knowledge assets – identify what constitutes knowledge asset? and who to share with? To build knowledge-sharing relationship both within the organization (intra-organization) and with other industry stakeholders, as appropriate (inter-industry).
  • Building knowledge base – Islamic financial service market and customer data
  • Building knowledge value – communicate knowledge assets and apply within the institution.

2. Community of practice

Creating communities of practitioners helps IIFS build intellectual capital and allows Subject Matter Experts (SMEs) to share knowledge assets with fellow peers to optimize business processes and efficiency. More importantly, they help IIFS achieve business objectives and better performance. More recently, the industry had witnessed the growth of ‘community of practice’ both, within the individual organization, which addresses internal issues, or within the wider industry domain, which address macro industry practice issues. The creation of Thompson Reuters’s IFG Community stands out. When considering the creation of a specialized professional community of practice in Islamic finance, the Sharia’a inputs and compliance factors should not be overlooked.

3. Cultural differences and business norms in the one country or market

Key to the understanding of the national cultural difference is the knowledge flow between different stakeholders to better understand customer needs and requirements and thus develop the right products and services.

4. Knowledge-enabled innovation process

Products and services development in Islamic finance is a fundamental driver of sustainable growth in the industry and key to its success is building the knowledge-enabled innovation process. This act forms a practical insight into customer-driven research that helps develop products and services that address the needs of customers. However, some internal and external factors emerge:

  • Learning capability
    • Sharia’a considerations and compliance
    • Business, operational, risk management and finance
  • Collaboration within the institution/industry
    • Process to enable sharing knowledge across functions
    • Improve internal communications
  • Sharia’a-based and customer-focused innovation

5. Developing an IFKM strategy

Creating and developing an IFKM strategy begins with people and the IIFS should carefully think organization wide in the process of shaping the IFKM strategy. The IIFS should leverage on its individual expertise to ensure proper planning, process of its products and measure performance of the KM strategy. Therefore, the strategy development process should be aligned to the IIFS strategic objective, market strategy and business planning. The role of engaging the organization’s Sharia’a Supervisory Boards (SSBs) is vital. The SSBs have particular importance in not only vetting products and services and their compliance, but also in mitigating risks and checking on business processes and help achieve the operational efficiency desired.

Nevertheless, any strategy aimed at improving intellectual capital in Islamic finance must consider creating Key Performance Indicators (KPI) of knowledge management to measure performance more effectively. It should also identify what makes knowledge asset, how it can be evaluated, processed, shared and managed.

The creation of an enterprise-wide KM function, with clear governance and oversight from the management and Board helps the IIFS identify skills and resources gaps, better use of available intellectual capital that help organizations achieve business performance.

To conclude, the commonly-used ‘five Ps’ model to develop KM strategies can work quite well for developing KM strategy for an IIFS. What is required though is that the IIFS define its technical competencies resources and the role of its SSBs in developing a meaningful and workable strategy. The following chart draws the lines of what are the key steps to develop the KM strategy.

 

Knowledge management:

Knowledge relates to all the capital owned by people and staff of a company: know-how and expertise, competencies, market experiences etc. Knowledge management helps companies turn this human capital into intellectual capital by creating value.

Intellectual capital1: Is intellectual material – knowledge, information, intellectual property, experience – that can be put to use to create wealth.

The human aspects of knowledge sharing is the largest challenge2: Though supported by a technological platform, knowledge management is not only a technological tool. Knowledge management is about effectively managing people assets and needs to be balanced evenly between:

  • People and learning organizations
  • Process and technology
  • Collaboration of exchange

 

by Dr. Hatim El-Tahir, FCIB, FCISI Director, Islamic Finance Group Leader, Deloitte ME Islamic Finance Knowledge Centre (IFKC), Deloitte & Touche - Bahrain

 

Endnotes

  1. Thomas Stewart, Intellectual Capital: the New Wealth of Organizations, 1997.
  2. Deloitte Research and Thought Leadership.
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