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The Relationship between Islamic Work Ethics and the Performance of

Nigerian Islamic Financial Institutions

Saadatu Balarabe Adam

Islamic Business School, Universiti Utara Malaysia, Sintok – Kedah State, Malaysia

Dr. Al-Hasan Al-Aidaros

Islamic Business School, Universiti Utara Malaysia, Sintok – Kedah State, Malaysia

Dr. Suhaimi Bin Ishak School of accounting, Universiti Utara Malaysia, Sintok – Kedah State, Malaysia

ABSTRACT

This study aims at examining the relationship between Islamic work ethics (IWEs) and the

performance of Islamic financial institutions (IFIs) in Nigeria. Literature suggested many factors

as determinant of Islamic financial institutions’ performance. But, few studies have attempted to

consider the influence of Islamic work ethics on the performance Islamic financial institutions in

Nigeria. The limited empirical studies in this field of study have restricted awareness of Islamic

financial institutions which results in absence of information concerning their true nature as well

as their governance in accordance with Islamic principles, which leads to underperformance of

the sector and especially in Islamic corporate governance practice. Therefore, in view of this

deficiency, there is a need for more studies on the IFIs performance, as well as IWEs especially

in Nigeria. Hence, this study aims to fill up the gap that exists in the extant literature by

employing quantitative survey method, using total of 320 practitioners of IFIs in Nigeria

(managers and senior management cadre) in north-western Nigeria. PLS-SEM was used for the

data analysis. It has found that IWEs is positively related to IFIs’ performance. Implication of the

finding and suggestion for future research were also discussed.

Keywords: Islamic work ethics, Islamic financial institutions, PLS

INTRODUCTION

Islamic Financial Institutions (IFIs) have been extensively recognized as a substance supporting

economic development. They assume a critical role in the progress of any country’s economy

(Hasan, 2009; Muneeza & Hassan, 2011). Therefore, they serve as an instrument for economic

recovery and is among the important areas of economic proliferation in both developed and

developing countries (Bukhari, Awan & Ahmed, 2013; Bukair & Rahman, 2015). Thus, the

impact of IFIs on the growth and development of any country’s economy cannot be over

emphasized. Considering the potential and prospects of IFIs, there is an urgent need to improve

the performance of IFIs (Adebayo, 2010; Daud, Ibrahim & Abideen, 2011; Rwegasira, 2000).

Nowadays, the performance of IFIs is becoming an important area of concern among business

researchers, practitioners, governments and international organizations (Daud, Ibrahim &

Abideen, 2011). Empirically, it was revealed that many studies were conducted examining the

relationship between various components of Islamic corporate governance such as board of

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directors, disclosure and transparency requirement, audit practice, investment account holders,

and shariah supervisory board (SSB) and performance of IFIs (Abdel-Baki &

Sciabolazza,(2014); Safieddine, 2009; Al-Tamimi, 2012; Hasan, 2009; Muneeza & Hassan,

2011). However, the findings from these studies are mixed. In particular, some Abdulazeez,

Ndibe and Mercy (2016), Endrin, Ekueme and Edesiri (2015) and Tanko and Oladele (2008)

reported a significant relationship between Islamic corporate governance and performance of

IFIs, while others found no or negative relationship between them (Mohammed, 2012;

Magalhaes & Al-Saad, 2013).

However, Performance of organizations is being related to Islamic work ethics (IWEs) (Abbasi,

Ghulam, & Muzammil, 2012). Studies show IWEs are linked to several individual and

organizational outcomes. Marri, Sadozi, Zaman and Ramay (2016) further suggested that IWEs

can be assessed with organization performance. From the related literature reviewed, there are

few studies that examine the relationship between Islamic Work Ethics (IWEs) and IFIs’

performance in Nigerian context. Equally, most of the previous studies also concentrated on

individual performance and some on conventional organisational performance. Generally, few

empirical studies have been made on relationship of IWEs and IFIs’ performance, particularly in

developing countries like Nigeria; most of the literature on IWEs and performance describes

research conducted in middle east and Asian economies (Abbasi, Ghulam, & Muzammil, 2012;

Marri, Sadozi, Zaman & Ramay, 2016; Yousef; 2001) and mostly used first-generation analysis

techniques (SPSS), neglecting second-generation techniques such as Partial Least Square-

Structural Equation Modelling (PLS-SEM).This indicates an important gaps in the literature.

Therefore, the current study attempts to fill in these important gaps by examining the relationship

between IWEs, and IFIs’ performance in Nigeria, using second-generation analysis techniques

(PLS-SEM). This paper structured into five sections, the second section provide related literature

reviewed, next is the methodology section, section four reported result of the analysis and finally

the discussion and conclusion of the study section.

LITERATURE REVIEW

2.1 Performance of Islamic Financial Institutions

The economic and financial activities of Muslims make it appropriate to adapt to Islamic banking

and finance practice (Othman, Aris, Azli, & Arshad, 2012). Porter (1985), view business

performance strategies as classified into cost leadership, differentiation and focus strategies.

Kaplan & Norton (2001) considered balanced scorecard, a driver to performance. However,

Parnell & Hershey (2005) found out that organization can maximize its performance through

becoming a low-cost producer or service provider and by providing different line of product or

service from its competitors.

Past studies Ball & Brown (1968), found leverage (gearing) a relevant financial measure of

firm’s performance that is implied by a combination of debt on capital structure, though, this has

been debated, but financial leverage continues to affect the financial performance positively.

However, Shim & Siegel (2000) found liquidity which is firm’s ability to possess assets in form

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of short-term debt (one-year period) to be the corporate goal of organization for sound

performance and business survival. Furthermore, Henri (2006) concludes that size is the

yardstick that generally measure growth upon which most firm’s trust as indicator of

performance. The higher the growth rate, the higher the ability of the firm to own assets and

machinery thereby attracting competent management and employees contributing to the

performance of the firm.

From the Islamic perspective, Performance in IFIs is viewed from organization of work or efforts

accomplished and the ethical conduct of employees according to Islamic principles providing the

best route to achieve objectives (Mohamad, 2013). Great number of studies studies measure

performance of financial institutions using Return on Equity and Return on Assets which are

believed to be the best yardsticks to measure performance (Choudhury & Hoque, 2006; Bukhair

& Rahman, 2015). Rahman, Alias, Shahid, Hamid and Alam (2013), specified that employee

performance should be based on justice, accountability, fairness and responsibility which is in

line with (Rana & Malik, 2017) emphasizing on Islamic teachings. for instance, they adopted and

construct 7 questions with the use of 7-point likert scale and further analysis with MS Excel and

SPSS software, revealing that Islamic teachings strike a balance between employer’s role to

show justice and fairness towards employees and at same time guarding the interest of the

organization.

This study intends to give a broader outlook of performance of Islamic financial institutions

which incorporate both the financial and social ethical aspects. It will add to existing

performance measurements. This is going to be in line with Quranic injunctions and teachings of

Islam through Prophet Muhammad (S.A.W.). According to Quran:

“On that day will men proceed in companies sorted out, to be shown the deeds that they (had

done). Then shall anyone who has done an atoms’ weight of good, see it. And anyone who has

done an atoms’ weight of evil, shall see it”. (Quran 99:6-8)

A hadith by Muslim in his Sahih from Abu Hurayrah where the Messenger of Allah mentioned

that both murderer, thief and one who severe ties will all testify to their wrong doings.

2.2 Islamic Work Ethics and Performance of Islamic Financial Institutions

Prior studies have assessed Islamic work ethics (IWEs) include (Rahman, Muhamad, and

Othman 2006), scale development (Ali, 1988, 1992); Business (Rice, 1999; Yousef, 2000; 2001;

Ali & Al-Kazemi, 2007), IWEs and performance of organization (Hayati & Caniago, 2012),

Ethics and performance (Ogbonna & Ebimobowei, 2011), IWEs with corporate governance

(Nor, Mahaiyuddin & Rozlan, 2016). The study Al-Aidarous (2012) suggested further studies on

Islamic ethics when he found developing an ethical code of conduct for Yemen professional

Accountants a relevant guidance in making moral decisions from Islamic context. This study will

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consider researchers little attention to the application of Islamic work ethics to performance of

IFIs as basis.

Other studies on IWEs involve innovation capability with sharing knowledge as moderator

revealed a positive relationship among all the variables, in non-probability sample of 150 public

sector workers in Pakistan (Awan & Akram, 2012). A study in Turkey Yesil, Sekkeli and Dodan

(2012) on a sample of 300 organizations, investigated the implication of IWEs on performance

of companies with 300 sample, found positive influence of IWEs on firm performance. The

study recommended further research mediating with commitment and organizational citizenship.

Abbasi, Ghulam and Muzammil (2012) on a sample of 240 employees of service firms found

that IWEs are related to learning and innovation that could affect positively the performance of

firms. A study Kumar and Rose (2010) investigates 472 Malaysian public servant using

convenience method and a 5-point scale, revealed positive relation between IWEs and innovation

capability and suggested further studies on IWEs to enhance performance. An examination in

Jordanian press foundation with 204 sample using a stratified random sampling and multiple

regression analysis found IWEs with no significant effect for commitment due to demographic

factors and showed significant effect due to educational level (MKAlhyasat, 2012). The

implication of IWEs on business was studied by (Rice, 1999). Furthermore, most of the studies

on IWEs is either on relationship to job satisfaction or organizational commitments or both. For

instance, Marri, Sadozi, Zaman and Ramay (2016) using a sample of 397 agriculture sector

workers in Pakistan, found positive relationship between IWEs, organizational commitment and

job satisfaction. Ahmad, Shad, Mumtaz and Tanveer (2012) showed positive relationship

between ethics with job satisfaction when climate is good and supportive management on ethical

behaviour with a 77% response rate and Cronbach alpha ranging 0.714-0.846, using statistical

package for social sciences (SPSS). While Ali and Al-Kazemi (2007) believes work ethics

further creates organizational value, loyalty and profitability. However, this loyalty is greater

with Arab expatriates than Kuwait employees among the 762 managers. Similarly, Yousef

(2000), found employee IWE in UAE to directly and positively influence their attitude towards

organizational commitment and change which is consistent with findings of (Othman, Rahman,

Malek & Osman, 2004; Haroon, Fakhar & Rehman, 2012; Athar, Shahzad, Ahmad & Ijaz,

2016), IWEs result in greater organizational and employee commitment to attain set goals. Athar

et al., (2016) add job satisfaction as a mediator, adopted (Ali & Al-Kazemi, 2007) IWEs scale

using 17 items, a Cronbach alpha of 0.85 used a 5-point likert scale, suggested organization to

adopt ethical framework based on Islamic values as guide to work efficiency.

Mohamed, Abdul Karim and Hussein (2014) associated IWEs with use of computer ethics, job

satisfaction and organizational commitment in Malaysia. The study surveyed academic staff and

with Cronbach’s coefficient, tested reliability of the multi item scales, ranges .781 - .921

adequate level, as such good scales, with 7-point scale options, found positive relationships. A

recent study Salehi and Babajani Baboli (2017) on work ethics, management style and job

satisfaction using a stratified sample of 75 Iran university employees revealed work ethics and

management components having significant relationship with job satisfaction. Ali and Al-

Owaihan (2008) found IWEs to contribute to performance leading to higher prosperity and

societal welfare after a critical review of countries studies on 100 UAE employees attitude.

Sarwar and Aburge (2013) studied IWEs in relation to management challenges of the 21st

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century. Rokhman and Hassan (2014) studied IWEs and organizational justice. Therefore, based

on the literatures, this study hypothesized that:

H1: Islamic Work Ethics positively and significantly influenced the Performance of Islamic

Financial Institutions in Nigeria.

METHODOLOGY

Considering the present research’s hypothesis and framework, a quantitative approach was

employed. A single cross-sectional survey design was used for data collection, i.e. the researcher

collects data at a single point and time and only once during the whole study (Sekaran & Bougie,

2010). The cross-sectional survey method is appropriate here to achieve the overall goal of the

study. The target population is all the 16IFIs as contained in the Central Bank of Nigeria

directory. A survey design via questionnaire was chosen as the tool for the collection of data. A

total of 320 questionnaire was administered personally to practitioners of IFIs in Nigeria

(managers and senior management cadre), as this is the best method to collect all the complete

responses in a short period of time (Sekaran and Bougie, 2011). It enabled the researcher and

research assistant to distribute questionnaires to a large number of targeted respondents at one

time, in different places. Cluster sampling technique was employed here, by allocating each type

of IFIs as clusters with samples selected randomly from each. Sample were selected from the

sample frame through simple random sampling, with samples selected randomly from each

based on the respective sample size. 280 questionnaires were retuned and useable for the purpose

of this study.

3.1 Measurement of Variables

Variables under study were measured using the adapted items from the prior literature.

Specifically, this study measured two variables: IFIs’ performance and IWEs all in 7-point Likert

scale where ‘1’ denotes ‘strongly disagree’ and ‘7’ denotes ‘strongly agree’. IFIs’ performance

measured as dependent variable in this study and operationalised as an organisational successes

that cover operational and financial outcomes; performance is divided into financial and non-

financial. In addition, Nine items on IFIs’ performance were adapted from Suliyanto and Rahab

(2012). IWEs is an independent variable that measured using 11 items from the scale of Ali and

AlKazmi, (2007) which is rooted to (Ali, 1988) and in line with (Sarwar & Aburge, 2013).

3.2 Control Variables

Based on previous work (Abbasi, Ghulam & Muzammil, 2012; Awan & Akram, 2012; Turkey

Yesil, Sekkeli & Dodan, 2012; Ahmad, Shad, Mumtaz & Tanveer (2012), this study includes

industry type, size and age of the firm as control variables, to ensure the quality of the results.

The size of a firm may influence its behaviour and decision making concerning the exploitation

of entrepreneurial opportunities and innovation. In this study, the size was determined by the

number of employees. The age of the firm determines its ability to respond and learn

appropriately, as a result of maturing behaviour and environmental perception. This study

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measured the age by the number of years the institutions had been in existence. Mostly, type of

institution influences its behavior and environmental characteristics. Therefore, institution type

was measured by asking respondents to indicate their type of institution, Islamic bank, takaful,

Islamic micro-finance, Islamic capital market, Islamic banking window or Islamic cooperative

society.

3.3 Data Analysis Techniques

After collection, the data was coded and keyed in to statistical software (SPSS vn 22) for

screening and other preliminary analysis. Subsequently, PLS-SEM (PLS 2.0) was employed to

examine the relations between the constructs of the theoretical model. As a second-generation

method, SEM (Structural Equation Modeling) is acknowledged as an influential substitute to

first-generation approaches, including, for example, multiple regressions. In multiple regression

only one dependent/criterion variable is allowed in the model, but SEM can simultaneously

handle multiple criteria/dependent variables. The inclusion of multiple predictors/independent

variables is allowed in both techniques (Chin, 1998). SEM is widely used by behavioural science

researchers (Gefen, Straub, & Boudreau, 2000), offering the ability to integrate unobserved

(latent) variables in the analysis and use them to execute path-analytic modeling (Chin, 1998).

Latent variables are those variables which are not being observed or measured directly in the

study, but which need to be estimated by other measures (i.e. indicators or items) (Chin, 1998).

In this study, all the variables are latent variables which need to be measured through some

indicators. SEM combines a measurement model (i.e. an outer model) with a structural model

(inner model) (Chin, 1998). This organises the distribution of measures into latent variables,

where the structural model integrates the relationships among predictor/independent and

criterion/dependent latent constructs. This technique enables the researcher to explain, predict

and measure the level of interrelationships among the constructs under investigation (Chin, 2010;

Chin & Newsted, 1999).

3.4 Model for Empirical Estimation

PER= β0 + β1 IWEs + E

Where: β0 = Constant (Intercept)

β1 = Coefficient of IWEs

E = Standard error of estimate

ANALYSIS AND FINDINGS

4.1 Common Method Bias

It is mostly agreed by researchers that common method variance is a key area of concern for

scholars using self-report surveys (Lindell & Whitney, 2001; Podsakoff, MacKenzie, Lee, &

Podsakoff, 2003; Spector, 2006). Therefore, this study conducted a test to check that there is no

variance in observed scores, also correlations are not overstated due to the method’s effect. For

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this, several procedural remedies were adopted to minimise the effects of CMV. Then, the

researcher improved the scale items to reduce method bias by evading imprecise concepts in the

questionnaire; all questions in the survey were written in a simple, concise and specific language.

Furthermore, to reduce evaluation apprehension, the respondents were informed that there was

no right or wrong response to the items in the questionnaire; assuring them their answers would

remain confidential during the research process. Never the less, this study also adopted Harman’s

single factor test proposed by Podsakoff and Organ (1986) to examine CMV. To test method bias

using Harman's (1961) single factor approach, all items of the principal constructs were exposed

to principal component factor analysis (Podsakoff & Organ, 1986). This shows presence of

method bias when the factor analysis provides only a single factor, or when a single factor

represents the highest part of the covariance among the measures (Podsakoff et al., 2003).

Therefore, in the present study, un-rotated factor analysis was used with 20 items of all the

variables of the study, and it was revealed that no single factor accounted for more than 50% of

the variance. The results of the analysis produced nine factors, explaining a cumulative 65.9% of

the variance; with the first (largest) factor explaining 20.12% of the total variance, which is less

than 50%. This is consistent with Podsakoff et al. (2003) and Lowry and Gaskin (2014), who

argue that CMB exists once a single factor explains more than 50% of the variance. The results

of Harman’s single-factor analysis indicate that CMV does not exist between the present study’s

constructs.

4.2 The Measurement Model

The main objective of measurement model is to filter the data, which is to evaluate and confirm

the constructs validity and reliability before establishing the goodness of measures. The data

were evaluated through the indicators reliability, with 0.4 is accepted. While for internal

consistency, using composite reliability, 0.7 is considered accepted level. Convergent validity

using average variance extracted (AVE), which must be 0.5 and above (Chin, 1998). For

discriminant validity using factor loading, any item loading on the other construct higher than

their loadings should be deleted (Chin, 1998; Hair, 2010). Later, in order to satisfy the

measurement model, some items were deleted: PER3, PER4, IWE4, IWE6, IWE7, IWE9

because they did not meet with the minimum benchmark (Chin, 1998; Hair, Babin & Anderson,

2010). Hence, it is determined that the instrument adapted in this study is reliable, since none of

the items is with less than 0.4.

All the items loaded on their individual construct ranges from 0.536 to 0.813, which is

considered acceptable as the all values range above the cut-off point of 0.4 (seeChin, 1998; Hair,

Ringle, & Sarstedt, 2011). Likewise, the composite reliability, value ranges from 0.826 to 0.941

which is greater than the suggested value of 0.7 (Hair et al, 2011). To determine the convergence

validity, AVE was used. The AVE ranges from 0.518 to 0.548, also above the minimum cut-off

point of 0.5 (Hair et al, 2011). Finally, to determine the discriminant validity, the AVE is

compared to correlation squared of the interrelated variables of concerned constructs which

indicates adequate discriminant validity. Table 1 presents factor loading.

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Table 1: Factor Loading

Items Factor Loadings Composite Reliability AVE

PER1 0.789

PER2 0.794 0.826 0.548

PER5 0.557

PER6 0.793

PER7 0.719

PER8 0.775

PER9 0.813

IWE1 0.569

IWE2 0.688

IWE3 0.753 0.941 0.518

IWE5 0.714

IWE8 0.767

IWE10 0.536

IWE11 0.724

4.3 Structural Model

After achieving the requirement of the measurement model (construct validity and reliability),

the next step involved testing the proposed hypotheses of the study by running PLS Algorism

and Bootstrapping in Smart PLS 2.0. Table 3 present the hypothesis testing results.

Table 3: Hypothesis Testing Results (Direct Relationship)

Hypotheses Relationships Beta SE T Statistics

H1 IWE -> PER 0.361 0.047 7.736

Table 3, predicted the statistical analysis proved that H1 is supported where IWEs is

significantly and positively related to IFIs’ performance (β=.361; t=7.736). To summarise, the

direct relationships between the latent exogenous and endogenous constructs is supported

empirically, in line with its respective hypothesis statements.

DISCUSSION AND CONCLUSION

The primary objective of this study is to assess the relationship between IWEs and the

performance of IFI’s in Nigeria. Generally, this study has succeeded in advancing the current

understanding of the key determinants of IFIs’ performance by testing the above-mentioned

research hypotheses. The objective was therefore to examine the relationship between IWEs and

IFIs’ performance, that is to determine whether IWEs can be a good predictor of the performance

of Nigerian IFIs. It was proposed that IWEs is significantly related to IFIs’ performance. H1 was

thus formulated and tested using PLS path modeling. The relationship was found to be positively

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significant. This signified that H1 is supported. This empirical finding agrees with the results of

earlier studies (Abbasi, Ghulam & Muzammil, 2012; Awan & Akram, 2012; Turkey Yesil,

Sekkeli & Dodan, 2012; Ahmad, Shad, Mumtaz & Tanveer (2012) which argue that IWEs

significantly influences performance.

In conclusion, the findings reported that IWEs has a significant and positive influence on

performance of IFI. Theoretically the study provides further understanding on the importance of

IWEs in predicting IFIs’ performance, additional empirical support for the research framework,

and validation of the proposed framework. Likewise, this study contributes by providing

empirical evidence to support Islamic critical theory. Therefore, this study suggests that IFIs may

need to employ IWEs culture to improve their performance.

Consequently, the present study is useful to the government and its agencies, financial

institutions’ practitioners, as well as business and academic researchers, in furthering

understanding of how IWEs influence IFIs’ performance in Nigeria.

This study suggests for future empirical studies on the relationship between Islamic corporate

governance and IFIs’ performance should be conducted to study the situation in Nigeria.

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