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Building Intellectual Capital in Islamic Finance throughKnowledge Management strategy

Brick by brick,tile by tile

Islamic Finance is a business and operationalmodel that predominantly relies on its‘intellectual capital’, ‘knowledge assets’ and‘knowledge managers’ to drive its evolution andsustainability in both terms, qualitative andquantitative. Yet some institutions offeringIslamic Financial Services (IIFS) often lack thetools to help them identify the knowledge assetsand the knowledge management value propositionit could develop to deploy resources and achieveefficiency and profitability.

Islamic Finance

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‘Knowledge management’ is one of any organization’smost important strategic resources and is rightfullygaining increasing importance in businesses andcompanies. However, most IIFS don’t yet capitalize onwhat knowledge value they possess or what knowledgeassets they have and should define clear strategies andframeworks to retain and utilize their knowledge assets.Our research did not find or come across a formaldefinition or process that entails knowledge managementin Islamic finance nor do I believe it should be differentfrom knowledge management in other industries ordisciplines. Thus Islamic Finance Knowledge Management(IFKM) could be described or defined as ‘a practice orset of processes that aims to identify and build Sharia’aand business knowledge resources within the institutionto enable and empower capabilities and competenciesto excel in conducting Sharia’a-compliant business andrealize business objectives.’

A knowledge management strategy could help IIFS buildtheir intellectual capital and strengthen their capabilitieson functional, operational and organizational fronts. Thediscussion highlights the importance of developing arelevant set of tools and resources that help IIFS build

capabilities in knowledge management and ultimatelybuild adequate intellectual capital to drive and achievethe desired business objectives. A common theme thatemerges from the discussion is that IIFS ought to have a collaborative approach towards the concept ofknowledge sharing, leveraging their scarce resourcesand 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 effectivemechanism to learn about new Islamic financeproducts, tools, resources, laws, standards,documentation formats or new skills?

• How will they access these tools within largeorganizations and learn to use them or reuse skills,processes and expertise?

• How will they interact with other stakeholders –including regulatory authorities - and have anintellectual knowledge-sharing dialogue to enhancepractice and regulation policies?

• How will regulatory authorities improve practice andregulation development through an effectiveknowledge-sharing approach with market players?

• How can we best promote regulatory consistency andharmonization amongst different markets andjurisdictions around the world?

• How will the Sharia’a Advisors collaborate to developthe profession’s code of conduct and promote itamongst market participants?

A sound Islamic Finance industry would require a betterunderstanding of the knowledge value of each of theabove questions and assess what stakeholders can bringto improve practice.

The American management consultant, educator andauthor, Peter Drucker said: “Today knowledge haspower. It controls access to opportunity andadvancement.” In his book The Practice Management,he interestingly describes it with dual functionalitydepending on our application to knowledge: “If weapply knowledge to tasks we already know how to do,we call it ‘productivity’. If we apply knowledge to tasksthat are new and different we call it ‘innovation’.”

A common theme that emerges fromthe discussion is that IIFS ought to havea collaborative approach towards theconcept of knowledge sharing,leveraging their scarce resources andexpertise and proposing practical stepsto develop a knowledge-sharing culturein the industry

To build an effective Knowledge Management (KM)strategy in Islamic finance and ultimately strengthen theintellectual capital of the organization, it is important totake account of the unique fiduciary investmentrelations and stakeholders structure and business modelof the IIFS and address the pertinent factors that mayimpact strategy development.

• It is vital to assess the individual business1 and Sharia’acompetencies and face up to the need to plug gaps inknowledge and information sharing in the businesssuch as the variations in markets where Islamic financeoperates – the socioeconomic, demography structure,economic buoyancy, business and financeinfrastructure, Sharia’a Law acceptance, talent andhuman capital.

• It is also important to take into account any existingknowledge collaboration initiatives, the professionalculture level of the IIFS, the talent and humanresources 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 knowledgeand sharing this knowledge with peers and industryfellow professionals is extremely important in Islamicfinance. This importance arises from the fact that theindustry is constantly evolving and expanding and yetstill has to reach the scale and scope aspired to. The IIFSleaders are required to exert considerable efforts tosustain forward-looking planning and strategize businesspriorities and ways to harness growth, efficiency,profitability and succession. Several IIFS, industryregulatory authorities and industry professional servicesstakeholders have recognized the importance ofknowledge management initiatives and the supportvalue it brings to the good practice of this niche market.

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

1. The corporate knowledge-sharing competencieswill require an institution to look at three mainareas to achieve knowledge-sharing behavior: • Building the knowledge assets – identify whatconstitutes knowledge asset? and who to sharewith? To build knowledge-sharing relationship bothwithin the organization (intra-organization) andwith other industry stakeholders, as appropriate(inter-industry).

• Building knowledge base – Islamic financial servicemarket and customer data

• Building knowledge value – communicateknowledge assets and apply within the institution.

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The IIFS’s ability to unlock itspractitioner’s knowledge and sharingthis knowledge with peers and industryfellow professionals is extremelyimportant in Islamic Finance. Thisimportance arises from the fact that the industry is constantly evolving and expanding and yet still has to reach the scale and scope aspired to.

Chart 1: The corporate knowledge-sharing competencies

Knowledge-sharing

Knowledge-enabledinnovation

IFKM Strategy

Communityof practice

Culture &norms

Source: Deloitte

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2. Community of practiceCreating communities of practitioners helps IIFS buildintellectual capital and allows Subject Matter Experts(SMEs) to share knowledge assets with fellow peers tooptimize business processes and efficiency. Moreimportantly, they help IIFS achieve business objectivesand better performance. More recently, the industry hadwitnessed the growth of ‘community of practice’ both,within the individual organization, which addressesinternal issues, or within the wider industry domain,which address macro industry practice issues. Thecreation of Thompson Reuters’s IFG Community standsout. When considering the creation of a specializedprofessional community of practice in Islamic finance,the Sharia’a inputs and compliance factors should notbe overlooked.

3. Cultural differences and business norms in theone country or marketKey to the understanding of the national culturaldifference is the knowledge flow between differentstakeholders to better understand customer needs andrequirements and thus develop the right products andservices.

4. Knowledge-enabled innovation processProducts and services development in Islamic finance is afundamental driver of sustainable growth in the industryand key to its success is building the knowledge-enabledinnovation process. This act forms a practical insight intocustomer-driven research that helps develop productsand 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 acrossfunctions- Improve internal communications

• Sharia’a-based and customer-focused innovation

5. Developing an IFKM strategyCreating and developing an IFKM strategy begins withpeople and the IIFS should carefully think organization-wide in the process of shaping the IFKM strategy. TheIIFS should leverage on its individual expertise to ensureproper planning, process of its products and measureperformance of the KM strategy. Therefore, the strategydevelopment process should be aligned to the IIFSstrategic objective, market strategy and businessplanning. The role of engaging the organization’sSharia’a Supervisory Boards (SSBs) is vital. The SSBs haveparticular importance in not only vetting products andservices and their compliance, but also in mitigating risksand checking on business processes and help achievethe operational efficiency desired.

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

The IIFS should leverage on itsindividual expertise to ensure properplanning, process of its products andmeasure performance of the KMstrategy. Therefore, the strategydevelopment process should be alignedto the IIFS strategic objective, marketstrategy and business planning.

Knowledge management:Knowledge relates to all the capital owned by peopleand staff of a company: know-how and expertise,competencies, market experiences etc. Knowledgemanagement helps companies turn this humancapital 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 atechnological platform, knowledge management is not only a technological tool. Knowledgemanagement is about effectively managing peopleassets and needs to be balanced evenly between:• People and learning organizations• Process and technology• Collaboration of exchange

Share

Innovate

Reuse

Collaborate

Learn

Peop

le

Process

Technology

Source: Deloitte

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The creation of an enterprise-wide KM function, withclear governance and oversight from the managementand Board helps the IIFS identify skills and resourcesgaps, better use of available intellectual capital that helporganizations achieve business performance.

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

Chart 2: Developing an effective IFKM strategy

Develop a thought foreplanidentifying IIFS activities andtypes of knowledge assets

Identify a knowledge check-listfor products and services and mechanism to share information

Devise a standardized processto create, measure, share andmanage knowledge

Create Key Performance Indicators (KPI) to measure roles in knowledgemanagement function

Planning Process

Products Performance

People

Source: Deloitte

Islamic Finance

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

Endnotes1 Thomas Stewart, Intellectual Capital: the New Wealth of

Organizations, 1997.2 Deloitte Research and Thought Leadership.