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HORIZONS UNIVERSITY GLOBAL BUSINESS REVIEW

Vol. 1, No. 1

2017

A Publication of Horizons University Press, Paris, France©2017 All rights reserved

CONTENTS

Welcome by the Publication Editor

Introduction by the Editor-in-Chief

Islamic Banking: The Case Study of QatarAbdulbasit Ahmad Al Shaibei

Reflections on Leading Innovation and ChangeEyal Policar

Independence of Non-profit Organisations: Imaginary or Real?Karla Valeria Feijoo and Ilya Rubenstein

Cross-Cultural Ethical Conflicts: Reasoning DissonanceKhalid Al-Jufairi

Internationalisation of Firms: Towards an Intuitive Contribution to the Psychological Distance ConceptKenneth Kudu

Poverty Alleviation through Islamic Microfinace: Case Study of GhanaIsaac Afram

Editorial Policy & Submission guidelines

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4 Editorial

Introduction by Publication Editor

It is my pleasure to introduce you to the premier edition of the Horizons Global Business Review, a publication by Horizons University Press, Paris, France.

We begin this literary journey by presenting the recent work of new scholars with new visions for researching important new topics germane to to-day’s global populations. With the dual purpose of adding insightfully to the universe of academic knowledge and to helping solve the challenges faced by the communities impacted by that knowledge, we launch our new venture with the hope of making the world a bit clearer, better, and more informed.

In this edition, authors Abdulbasit Ahmad Al Shaibei and Isaac Afram offer perspectives of contemporary Islamic banking practices in Qatar and Ghana, respectively; Eyal Policar presents new conceptualisations of innova-tion and change in dynamic global organisations; Karla Valeria Feijoo and Ilya Rubenstein critically explore the construct of organisational independence amoung NGOs; Khalid Al-Jufairi addresses the interface of ethics and culture in multinational organisations; and Kenneth Kudu offers a case for subjective intuition as an explanation for firms’ internationalisation activities. These six writers represent the very essence of critical thinking, social conciousness, and determination for discussing critical contemporary issues. I hope you enjoy their work as much as I have.

Bonne lecture!

William Wardrope, Ph.D.

Introduction by Editor-in-Chief

Welcome to the first issue of the Horizons University’s journal. Our university welcomes very talented doctoral students from all continents and who produce very valuable research and we offer them as well as students and researchers around the world an opportunity to publish and to share the results of their studies for the benefit of the academic and professional communities. We’re proud to extend our contribution to the advancement of research and knowledge in the field of global business through this journal and open our doors to the leaders in the field. Our strong connection with the business world is also an asset to bring together the corporate and academic worlds.

This first issue presents six fine articles that cover wide areas of global business and give you a taste of the talent that we attract.

Enjoy the reading and we would be grateful to receive your feedback.

Roberta Grossi, PhD, DBA

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Islamic Banking: The Case Study of Qatar

Abdulbasit Ahmad Al Shaibei, Ph.D, Horizons University

Abstract: Global economic changes have increased interest in how banking achieves goals, meets consumer needs, and maintains stability during times of economic downturn. Correspondingly, there has been increased interest in Islamic banking due to its ability to withstand the negative economic effects suffered by many of its non-Islamic counterparts. This research explored the role of the Islamic banking system in the economy of Qatar and The Gulf Cooperation Council, specific challenges encountered by Islamic banking institutions, and types of opportunities are available in the Islamic banking sector in Qatar. The qualitative study developed for the research focused on interviews that enabled the researcher to gather results from 28 employees in Islamic banks in Qatar. The results indicated a variety of themes, challenges of technology, difficulty in maintaining high quality staff, and the value-added advantages of Sharia management. Islamic banks compete within their own industry and with conventional banks; however, restrictions based on regulations and community needs have a direct influence on how the banks can be successful.

ISLAMIC BANKING in the Gulf Cooperation Council (GCC) and Middle East and North Africa (MENA) region has generated much interest as a result of its differing responses to economic conditions, specifically its ability to resist economic downturn (Baten & Begum, 2014; Derbali, 2015; Kashani & Obay, 2010). Emerging from within the financial industry of Islamic countries in which religion dominants society and is the basis for most laws and regulations, this industry was subjected to progressive development over time as a result of the use of numerous capital sources and financial divisions. In turn, a significant number of non-banking institutions were established from the main principles of Islamic banking (Reiter, Stewart, & Bruce, 2011). Today, the current Islamic financial sector comprises a vast number of investment funds, project financial companies as well as Islamic organizations based on essential diplomatic principles. Predicated on the primary ideology of Islamic

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banking—avoidance of interest on consumer loans and restriction of excessive financial speculation—its characteristics differ from conventional (non-Islamic) financial banking fails, the latter of which fails to demonstrate adequate planning procedures that are suitable for Islamic economic systems. It should therefore be noted that the Islamic religion plays an important role in shaping social and banking values. This aspect has prompted the countries in the GCC region to seek other financial mechanisms that are favorable and fulfill Islamic law (Iqbal, 2007). Islamic banking practices have been adequately supported by regional powers in terms of providing sufficient funding to facilitate the operation of this banking system (Iqbal, 2007; Loghod, n.d.). The Islamic system of banking is a unified mechanism to facilitate the financial needs of individuals without posing significant challenges in terms of social status or religious affiliations. Therefore, the literature review focuses on providing relevant information about the promising framework of Islamic banking, with an emphasis on the performance of banking institutions in the GCC region. Little information is published on what forces are behind the growth of Islamic banking (McNamara, n. d.). Abdul-Majid, Saal, and Battisti (2010) caution the necessity to seek in-depth understanding of the perceived benefits to Islamic banks, although research strongly suggests that Islamic banking has been considered an efficient way to help countries’ economies recover from downturn (Baten & Begum, 2014). Islamic banking is swiftly becoming a part of the banking sector in the world (Van Greuning & Iqbal, 2008). It is not limited to GCC and MENA countries and is advancing wherever there is a large Muslim community, even in Western countries. More than 250 banking institutions in over 45 states exercise some type of Islamic banking principles, and the sector has been booming at a level of more than 15 percent yearly for the past five years (Van Greuning & Iqbal, 2008). The current market annual revenue is approximately $350 billion, compared with just $5 billion 20 years ago. According to the World Bank’s report, the Islamic finance industry has expanded by as much as 12 percent annually (Islamic Finance, 2015)

Characteristics of the Islamic Banking System

Islamic financial services, compared with the services provided by conventional banks, represent the specificity of financial institutions that are entirely based on deposit schemes, which are identified as common procedures

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of borrowing and lending money of all major banking activities (Abdul-Majid, Saal, & Battisti, 2010). Similarities exist between how Islamic banking operates, including providing market information and risk management to clients; however, other differences are the result of market, regulation, and laws of the Islamic banking industry (Mansour, Ben Jedidia, & Majdoub, 2015). Islamic banking has the following influences: Mudarabaha (trustee financing) and Sharia Law, which are in addition to the typical regulation and international regulation of the banking industry (Abdul-Majid, et al., 2010; Merchant, 2012; Malik, Malik, & Mustafa, 2011). Sharia is Islamic religious law used to decree rules and principles guiding all aspects of Muslim life, including financial. The five major sources of Sharia law are based on the religious texts of the Quran, the Hadith, Sunnas, Ijm’a, and Ijtihad. Areas of highest control in banking are focused around, profit, interest, risk, and types of production; and result in differences of management focused around shared responsibilities between banks and clients and differences in product or service offerings (Elsiefy, 2013; Soylu & Durmaz, 2013; Denault, 2009). The fundamental principle of Islamic financial law indicates that organizations should be mainly concerned with expanding opportunities for sustainable development rather than being solely focused on generating wealth (Martin, 2012). Indeed, Islamic tenets require that Islamic banks, and all individuals, seek to provide for the impoverishments of society and for the betterment of society, a guiding principle that would enhance global Corporate Social Responsibility if international organizations, such as the UN and the WHO, subscribed more to the body of knowledge that this industry is using (Chintaman & Com, 2014).

Conventional and Islamic Banking Industries

Islamic banking institutions use Profit and Loss sharing (PLs) as an important form of financing, but conventional banks are more focused on presenting investors with options to select a particular interest rate. Early Muslim scholars have extensively emphasized the social welfare dimension, and thus Islamic financial institutions are focused on finding ways to optimize their profits (Chintaman & Com, 2014). Conventional banking is strongly related to credit worthiness, risks, and investor relationships. Islamic banking is focused on investor relationships, where the greater good must be served and credit worthiness is based on the value of the tangible assets linked to it (Mansour, et al., 2015; Siraj & Pillai, 2012). Islamic banks tend to emphasize

8 Horizons Global Business Journal 1 (1)

feasibility and transparency as major values related to the selection of projects to be financed in the long term. Islamic banks practice the collection of alms, identified as Zakat from rich people, which are then provided to the poor (Botis, 2013). Islamic banking also emphasizes the idea of the public interest, implying that Islamic banks are focused on progressive advancement through equity (Salman & Farrukh, 2013). On the other hand, conventional banks tend to be more inclined toward pursuing their own interest instead of placing importance on equity (Baten & Begum, 2014).

Islamic Banking and the 2008 Financial Crisis

According to reports released by the International Monetary Fund, Islamic banks tend to show greater signs of resilience to financial crises compared to traditional banks. In particular, the countries of the Arab region have enormous financial and capital reserves as a result of continuous accumulation of wealth and royalties derived from the exports of its oil and natural gas resources. Parashar and Venkatesh (2010) argued that Islamic banks are safer than conventional banks. The primary reason is their product structure that is essentially asset-backed financing. Research studies prior to the recent global financial crisis have generally concluded that the performance of Islamic banks is better than conventional banks. During the late 1980s and early 1990s rapid industrialization in the emerging economies, as well as conflict in the oil production zones in the Middle East, led to the increased demand of oil to meet energy demands, which resulted in the rise of oil prices globally. Nevertheless, Qatar has not been immune to the global financial meltdown as well the recent drop in oil prices which taken a toll on its economy. This crisis has been significant in Qatar since it has shown that the country is not immune to global financial upheavals due to globalization and interconnection of the global financial economies. The economic downturn provided further natural research to assess how the flexible and transparent structure of Islamic banking can significantly contribute to boosting the competitive advantage of banking institutions in the region. The research can clearly show the performance of Islamic banking during this period and what kind of challenges and opportunities exist for such kind of banking (McNamara, n. d.). Undoubtedly, the pre-global financial crisis period of 2005 to 2007 was marked by extensive profitability of Islamic banks. Thus, it can be concluded that Islamic banks demonstrate more flexible structures compared to conventional banks, as the former are focused on cumulative profitability and presentation of

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a reliable strategy, which is based on greater risk taking. In this context, it can be pointed out that large Islamic banks have demonstrated a tendency to perform better in comparison to small Islamic banks, implying that the overall size of the banking institutions is an important factor of its financial performance (Iqbal, 2007). Factors of diversification, adequate reputation in particular financial markets, and economies of scale have been regarded as the most significant factors contributing to the relatively stable position of Islamic banks during the financial crisis period. The global financial crisis that emerged in 2008 is associated with numerous negative effects on the performance of banks across the world. This prompted a situation in which banking institutions reported excessive losses following the global economic recession (Bashir, 2007). Derbali (2015) investigated the financial crisis, including research finding that causes of the risk of insolvency for conventional banks were likely a result of areas such as interest rates, which are not risks for Islamic banks due to the legality of these practices. all transactions that take place are solely business related or asset related, as these aspects contribute to the better allocation of resource and more optimal handling of banking procedures (Ali, 2007). interest in exploring Islamic banking principles has continuously increased. A number of virtual studies carried out by different experts investigated the functioning of Islamic and conventional banks (Amin, 2013; Elsiefy, 2013). These studies have examined the functionality of over 120 conventional and Islamic banks based in GCC countries following the global crisis, with an emphasis on the negative impacts of that event on banks’ performance. Islamic banking demonstrated a stronger ability to function and remain stable during financial crisis in conventional banking (Derbali, 2015). A greater percentage of Islamic banks were functional in the GCC region (Amin, 2013). In the context of the Middle East, it has been found that the operations of Islamic banks were quite effective despite the economic recession following the global financial crisis (Derbali, 2015; Mohammad Taqiuddin, Borhan, and Sulaiman, 2014; Kashani & Obay, 2010).

Challenges in Islamic Banking

Experience of earlier established Islamic institutions are the pioneer of the Islamic financial sector in GCC countries, which has made other sectors understand that it is achievable to offer Islamic banking services in the GCC region under nonbanking standards (Iqbal, 2007). Surveys and interviews typically demonstrate that the common obstacles that Islamic banking encounters


in GCC are demographic situation, socio-economical, and ethical dimensions, and the guidelines from the government (Suliman & Obaidli, 2011). Moreover, regulatory obstacles, competition from conventional institutions, and lack of sufficiently qualified and trained Saudi, Qatari and Emirati workforce deteriorate the situation. Research found opportunities and challenges that are encountered by Islamic banks, such as e-banking that may have a considerable influence on the future of the Islamic sector in the GCC region (Doraisamy, Shanmugam, & Raman, 2011). International banking is typically not related to culture; however, Islamic banks measure their cultural structure, and the financial performance of some GCC banks as connected and comparative (Iqbal & Mirakhor, 1999). Islamic banks in the GCC did not heavily rely on the kind of comprehensive funding that proved susceptible to market downturns during periods of economic crisis. The regional market also had fundamentally evaded excesses such as the broad-driven real estate crisis that was considered a challenge in some of the GCC countries (Bashir, 2007). Islamic banks now have $1.2 trillion in financial assets, allowing them to support major government-level infrastructure projects through direct support or sukuk (Islamic law yielding bonds). Currently, countries all over the globe place importance on using Islamic capital markets for financial support in order to prevent a future financial crisis (Iqbal, 2007). Despite emerging challenges, efforts are made by Islamic Banking leaders, including managers, to create a GCC regional financial center of leadership to provide a competitive model, which may refer to the system of global banks (Said, 2013). Managers are able to submit to their local Sharia advisors for approval for implementation, where it is evaluated for appropriateness under Sharia law. One example is the Bahrain’s Unicorn Investment Financial Institution, which has dedicated substantial resources to alter some traditional procedures found in Islamic banks (Ali Aribi, & Arun, 2015). It has been found that greater consolidation with global banks should be undertaken on a wide scale in order to achieve appropriate, long-term outcomes (Ali Aribi, & Arun, 2015). Also, issues related to short-term liquidity management, lack of investment initiatives in the field, and regulatory and tax reforms have been identified as challenges facing the industry (Ahmed, 2011).

Research Questions

In light of the emergence of the Islamic banking industry as an example of economic success, this study was designed to probe past, present, and future

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aspects of the Islamic model. The following research questions were asked:1.What role has the Islamic banking system played in the economies of Qatar and the Gulf Cooperation Council?2. What are the specific challenges encountered by Islamic banking institutions in Qatar?3. What types of opportunities are available in the Islamic banking sector in Qatar?The criteria for the research questions were based on the need to define the role that Islamic banking has, which may indicate the role it may have during a global financial crisis. One cause identified in financial crisis is the position of the financiers (Bashir, 2007). This may be a result of complacency in loans, changes in interest rates, or other risk-taking activities that should be considered in the study of Islamic banking. Another concern is the regulation of Islamic banking, which is conducted by both Sharia laws and legal regulations that occur in all levels of activities, including globally managing risks of money laundering. The type of research design is used to describe specific variables to be explored during the interview process (Angrosino, 2008) and allows for a desired level of accuracy throughout all stages of the research process (Patton, 2002). Interview designs focus on the themes of access to Islamic banking globally, customer education, and challenges to Islamic banking imposed on them by GCC conditions and demographic profiles. These themes created a foundation for this area of the research, which can be compared to the results of current use of Islamic banking, customer perceptions, and the growth of the Islamic banks contributing to the study. In addition, Islamic banking has a focus in Sharia Law, this research explores if employees find that these laws create struggles in maintaining competitiveness, or if they create more success.

Method

Convenience and stratified sampling method was applied in the process of selecting the study’s sample. The sample size was comprised of 28 individuals designated as staff at different Islamic banking institutions, as these individuals’ post varies from top management level to lower level management (Munhall & Chenail, 2007). This type of probability sampling technique can enable researcher to have an adequate coverage of the population, which is based on Cunningham (2014), indicating that current Islamic banks in Qatar includes only four banks. The four included in the population of Islamic banks


are Qatar Islamic Bank, Masraf Al Rayan, Qatar International Islamic Bank, and Barwa Bank. The other banks considered in this sample are located at GCC and provided a base for comparison with the results obtained at Qatar. Using one-on-one interviews in the present study indicates a focus on a qualitative approach to research. It is important for the researcher to obtain understanding through exploring adequate examples provided by participants. Yet the technique relies on respondents to provide accurate answers and thus there may be certain subjectivity and inaccuracy (Munhall & Chenail, 2007). An essential advantage of one-on-one interviews is that they provide quite detailed information, which cannot be obtained with other data collection tools. A phenomenological approach to data analysis consists of focus on understanding theories and applications as they occur in the actual use or experiences ((Hans) Bakker, 2010). In this way, the experiences of Islamic bank managers are shared through their perceptions of the bank’s needs, successes, and activities. The ability to apply phenomenological approaches to the Islamic banking industry can provide access to the “social reality that can be observed directly” ((Hans) Bakker, 2010, p. 674). Phenomenology can be used easily from an inductive perspective, because of the relationship that may be drawn from actual experiences as compared to the previous findings of other researchers. Inductive reasoning is the focus of logic that seeks to make comparisons between what we know and new experiences or information (Patalano, 2005). Demographic Profile of Respondents. A total of twenty eight participants contributed to the study. Participants were 36% CEO (Chief Executive Officers) or presidential level and 29% GM (General managers) or CBO (Chief Brand Officer). Participants in these areas are the leading contributors to the decisions made within a bank; however, Head Sharia Auditors and Head Investors make many of the decisions determining if new products are within Sharia law, or a good investment for the shareholders of the bank. Eighteen of the participants were from banks that also operate outside of the GCC region. Based on the responses, the size of the majority of banks was considered to be medium, operating outside of the GCC, and serving more than a thousand customers. Table 1 depicts the demographic profile of the sample population.

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Table 1

Summary of Participant Demographics

As shown, banks in the sample may partner or collaborate with other banks in order to increase availability of services or to increase productivity of the bank. Some collaborations or partnerships may include international banks. Size of the bank was also asked in the interview process. The size of the bank may indicate importance of different types of customers preferred by the bank, for example, a larger bank may prefer to work primarily with businesses, or a smaller bank may be seeking a niche market. Lastly, this table answers the question of approximate number of customers served, which was used to determine respondent perceptions of size and to compare the more ambiguous question of “size” to a number that could be more valuable in the results of the study. Coding Results. Axial coding was used to determine if connections were found between the activities of larger versus smaller banks. Further, this was used to identify if there were connections between banks operating only in the GCC region versus responses from banks also operating outside of the region. The common theme found between all of the banks was growth,


which occurred regardless of size and was credited to changes in regional infrastructure, customer needs, and regulations. Two common responses were the implementation of improved risk management to manage the requirements of Anti-Money Laundering (AML) and Know Your Customer (KYC). Many of the respondents placed a strong importance on customers, from security to needs assessments. Primary differences for size and operating areas were related to costs and competitiveness. Selective coding found that while some bank leaders did not feel that the younger generation was effective in money management, as compared to older populations, most were implementing convenience products and offerings, such as access to mobile and internet banking. Methods of customer education were also found to be very similar amongst the groups.

Findings

Overview. Numerous themes emerged from participants’ interview responses to a battery of planned and follow-up interview questions, many centering around the requirements of Sharia Law, the needs of the populations using banking services, ethical issues in Islamic banking arising in areas such as compliance and customer/community interaction. In particular, that responses indicated that banks found the needs of younger and aging populations to be driving the changes in offered banking services. Ethics in banking was a priority in many of the responses, specifically in areas where product offerings and competitiveness were discussed. Sharia law was a strong guiding factor in focuses such as sustainability and social responsibility, topics of great concern to globally-operating organizations. Additionally, meeting the needs of older populations, as a result of aging population and extended lifespans, was discussed, especially how those needs conflicted with those of the younger generations, indicating that further research may identify if these needs are conflicting in a way as to create confusion in product offerings and services to consumers Each question was analyzed to identify specific themes that occurred in the responses from the banks. Common themes, such as ethics, technology, information (access and knowledge), and risk management (security of products/qualified human resources) emerged. These themes, as they manifested themselves into different topics, are discussed in the section that follows.

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Changes Occurring in MENA Countries

Common answers from respondents included investments in technology, increases in risk management, growth in assets, expanded offerings, and a focus on customer service in MENA countries. Themes identified in this area were related to the changes in growth, which resulted in the expansion of a number of areas in which the banks were able to invest to meet these requirements. Additionally, sub-themes included a lack of human resources capable of implementing the changes, market competition, compliance requirements, and technology management or security. The availability of qualified human resources talent, or the lack thereof, was a theme found in other areas of responses as well. The concern about accommodating younger clients’ needs was summarized by one CEO’s remark that, “They [youths] are much more educated and exposed to international best practices in customer service”

Banking Technologies and Challenges

The most common types of banking products reported were mobile and internet banking; These responses included references to the services of bill pay and customer relationship management tools. Additionally, shipping via internet (VBV), eFAWATEERcom services, bundling, interactive voice response (IVR), and customer use of ATMs at point-of-business were reported. The primary theme in these responses was increased popularity of technological tools for banking. Challenges encountered when implementation of technology included the lack of qualified personnel to assist customers, customer knowledge of the product uses, implementing technology, and security of the technology. Sub-themes were labeled as human resources, customer education, risk management, and technology. Word use concentrations were made in order to evaluate the number of times respondents used specific words combinations. Word concentrations were found to pertain to the areas of technology, services, or offerings. Technology, the most frequent category, included online banking, mobile products, or bank management products. Services related to the ability of customer service, customer-facing, or service opportunities that allow customers to better understand the offerings they do or want to use. Offerings were the products and services directly offered to the customers. The results were interesting in two primary areas: first, head of investment respondents were the most likely to respond in needs of customer service, only as compared


to other managers. All respondents were strongly indicative that technology has a large importance, and while this typically included product offerings, it was interesting to find that the treasury and CFO (Chef Financial Officer) participants in the study were the most likely of all other managers to select this, and more often than either of the other combinations.

Regulatory Authority in Islamic Banking

Responses regarding regulatory authority was mostly positive, suggesting that participants viewed them as supportive and understanding. Responses included notes that the Sharia Supervisory Board for Islamic Banks was able to coordinate amongst the banks and pioneer compliant banking practices and services. Some challenges were noted as the requirement for review and approval prior to the implementation of innovative products and services. However, some responses noted that the ability to improve upon the Islamic Banking Industry requires that a central Sharia Board (CSSB) be dedicated to regulatory requirements, including an independent sector, for the management of banking control and customer protection. Further, some responses noted that a team dedicated to innovation review and approval would be productive. Responses also pertained to issues of Sharia obedience, banking compliance, or what areas experience unfair or unequal advantages in the banking industry. Other responses were related to delays in product or service approval, implementation of regulations between banks, delays in interactions between banks and difficulties in obtaining funds from delinquent customers. Other areas noted were maintaining an ethical atmosphere, the unfairness of the system, and the challenges of investments that occur internationally. Data also suggested that changes are needed for the future included a focus around unification of Sharia Regulatory bodies, a stronger focus on anti-money laundering (AML) and knowing the customer (KYC), short-term financial instruments, Sukuk, and solutions for liquidity. Further, differentiation was expected to occur as related to quality and efficiency, and international expectations were expected to increase, which would influence the regulatory requirements of the industry.

Competition from Global and Conventional Banking

Responses about the types of changes that could occur in Islamic banking, which would improve the ability to compete with global banks, varied:

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merges and consolidation with larger banks, increased international presence, increased research and development in regards to products and services, and improved mind set for competing with conventional banks, were among the topics mentioned. These themes focused on areas of growth of individual banks as well as products, services, and international presence. Ways in which global partnerships or consolidation could improve upon the functionality and customer offerings for an Islamic bank, also focused on mergers, consolidations, and global partnerships aimed at increasing equity, customer bases, customer services, offerings, knowledge transfer, and improved technologies. Other responses identified the ability to share or receive expert support, efficiency, functionality, increased access to quality talent, and improvements on communications. These themes were focused on growth areas, from equity through human resources, but one respondent said there were risks associated with this type of development. Some of the changes that Islamic banks can contribute to through their own activities or involvement were found to include challenges, such as in rates or agreements and approvals. Other responses focused on the ethical advantages of Islamic banking, which could improve upon offerings of all banks to customers. Reputation of the industry, community offerings and support, and transparency were also listed as the ways in which Islamic banking could contribute. Transparency has grown in popularity over the past decade, and has been tightly linked to media communications as part of ethical interactions with consumers and communities. Lastly, it was noted that advantages would include global awareness of Islamic banking practices and policies.

Islamic Banking and the Retail Sector

The number of responses related to bank products or strategies, based upon the growth of the retail sector varied, and included explanations that the banking industry is driven by the corporate sectors and the differentiation between banks can only exist in the areas of quality, service, branding, and the use of technology. Included was the importance of growth when focusing on corporate clients primarily. However, nearly half of respondents remarked that the retail sector was extremely important to the banking industry and contributed to the growth and development necessary for banks to remain competitive. Responses were not bank size-specific. In response to the item,“In what ways does the retail sector influence the design of product offerings developed?”, many responses mirrored the


sentiments of the previous responses focused on the importance of the retail industry including the motivation for designing and implementing new offerings for customers. The ability to specifically offer tailored products to this specific market was noted by many respondents and influenced everything from the technology powering the offerings to the methods in which customers could use their services to accomplish other things. Availability of products seemed to be a growing concern of banks. Specifically, the ability to provide ATM services at workplaces, and the ability to pay bills using a mobile phone, were mentioned. This type of availability ranges from physical to digital availability, which requires that payments and money can quickly and easily be moved from one location to another, specifically in that banks can transfer balances between each other effectively and efficiently, without risks to either the banks or the customers.

Product Innovations

Participants’ comments regarding the ways in which product innovations are developed to compete in the local banking industry focused on meeting customer needs and maintaining a focus on products that can be utilized using new technology or services identified as necessary by changing target markets. Further, the focus of customer-centered services and products identified that banks unable to keep-up with the changing trends and technology would struggle to remain competitive in the industry. Some developments reported included improving customer experiences, such as time and documentation, further the use of virtual banking, and “friendly experience” was noted as essential in being competitive. The two primary themes identified here was customer experience and technology. Some of the primary concerns in product development, regarding priority in the final decision process, were identified as including the quality of information in regards to customer needs, Sharia compliance, competitiveness, and growth in the industry. Many respondents noted that the concern was achieving the best information necessary to develop products that customers really need or want to use, particularly in gathering the information to understand the needs but also remaining compliant with Sharia rules, standards, and regulations. Ethical standards were noted as extremely important throughout the responses. Additional responses suggested that expert advice used to make primary decisions or to improve upon success of new products was found to be relegated

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to teams, third party advisors, and other professionals to develop the new products and services. Other responses included explanation of monitoring processes, levels of product performance, objectives, Sharia specialists, and technicians. While the primary theme was largely teams and experts, some banks noted that the participation in this area was notably leading scholars and experts in Islamic economy. Other notes focused on strategy, Sharia compliance, market research, and internal teams. Sharia compliance and approvals were largely noted in other areas of the responses as well. Types of customer education traditionally enlisted when implementing a new product innovation included many varieties of communication channels and information gathering methods. Some of the respondents answered, “all categories,” and a few identified populations, specifically high and middle education, populations of 30/40 year-olds, and A and B class populations. In addition, some respondents indicated that they use study and focus groups, as well as technology for information gathering. Much of the responses noted responses such as Q&A session, but few respondents specifically indicated mobile, internet, or social media as options. Training for staff was on the list of necessities important to product implementation; however, this area can also be referred back to many previously mentioned needs of the workforce, both available and in the hiring of talent.

Sharia Law and Expert Sources of Decision-Making

One question concerned the influence of Sharia law on global banking competition. Answers focused on the high ethical aspects of Islamic banking, which provides a competitive advantage. Sharia law is recognized, by the respondents, as being a high contribution factor, including in consideration of improvements to transparency and dealings with customers. Other areas noted were fairness, added value to communities, presentation to the public, and the ability to compete with each other under the same operating rules that allow the competition to transcend borders. The primary theme in these responses was that Sharia law provides a foundation of ethical expectations that increase the competitive value of all Islamic banking, as an industry. Respondents in this study all indicated that the organization utilizes consulting experts at least some of the time. Some of the answers stated that this was common and necessary for all banks to do. Areas most often consulted on included design, implementation, needs assessment, or development. Consultants were engaged in areas of IT, marketing, training, needs assessments,


development, capacity building, and strategic planning. Some other areas were indicated, including international regulations, Basel 3, FATCA, human resources, and compliance. Finally, some responses included risk management.

Target Markets

Respondents recognized the growing needs of the younger generation, and were focused on the importance of meeting the high focus that the younger generation has on technology, and their importance generally to the growth of the customer base. In addition, some responses included a concentration on demonstrating the importance of Islamic banking to younger people, innovations to change the perceptions of how finances work, and ways to improve viability of the industry with younger generations. Some respondents indicated that this target market was of only medium importance; however, other respondents also indicated that this target market was easily rivaled by the aging population. The indications were that these two target markets were equally viable populations with considerable differences in needs, interest, and understanding of finances and financial products. The primary theme from these responses was the importance of understanding the needs of the target market and that most banks had a high interest in appealing to this particular target market. Challenges of technologies, when considering meeting needs of the younger generation, were focused on the area of technology and the fast-paced needs of this aspect of meeting the needs of younger generations. Some respondents noted that providing convenience of use features was complicated or challenging. Responses also included notes that not all decision-makers are interested in the heavy investments of technology, and the primary concern of all responses were either changes, risks, or security of the needs. However, a few notes indicated that younger generation needs were linked to their payroll schemes. Lastly, some notes suggested that banks unable to keep up in the technology area of the market were doomed to struggle with maintain a foothold in this market. Types of product innovations or banking activities designed to address the populations of poor in Qatar included areas of pre-paid mobile cards and the mobile ATMs designed to serve the labor forces of larger companies at their organization. Other areas were more focused in the areas of social responsibility and productive free-interest loans, or Al-Qard al-Hasan. One response area

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of social responsibility was in the area sustainability. Lastly, areas included revolving credit, bank assurance products, micro finance, and Hawala, described as Western Union style banking and micro finance. While the most predominate theme was social responsibility, many respondents indicated areas that were innovative in the area of access to the banks. Perceptions about younger generations’ characteristics were specifically focused around their expectations as consumers. These areas included their more brand, global orientation, and technological knowledge. Some interesting comments in this area related to the effect that this generation is having on cash versus digital payment economies and the concept that ideas of reality are shifted by younger populations. Figure 1 demonstrates the relationship that the respondents believed were contributing factors in the knowledge and influence of the youth population, specifically finance, products, services and technology. Knowledge in service and products was attributed to both technology and worldliness.

Figure 1

Contributing Factors to Younger Generations and Islamic Banking

Additional responses in this qualifying question were found in the media, lectures of schools and universities, spokespeople, training, enhanced use


of technology in banking products, and referring back to the general knowledge of the younger population. An interesting response type was the qualification that the younger generation, with full awareness of the banking industry, was university students in finance or related courses. Younger populations were considered generally more knowledgeable regarding product offerings, as compared to the older population. However, some respondents responded otherwise, stating the younger population was not as knowledgeable as their older counterparts. The concept of older populations being more knowledgeable was also found in other yes answers where the same qualifying statement was made. However, the majority of the respondents agreed that knowledge of younger generations is a guiding factor in product offerings. The final themes identified indicated that education and technological awareness and use were contributing to the product offerings of banks, when guiding the goals to service this population. Awareness and knowledge were both used to characterize the population. Some of the focus was customer service standards, which indicated that expectations of younger populations were greater than those of previous generations. Knowledge was also credited to extensive access to medias, such as social and internet media. In addition, respondents noted that customer reactions and surveys were used to assess the knowledge and needs of this target market.

Discussion

The focus of this research was on the perceptions of Qatari banking professionals on the status of the industry in that country. Common areas identified included the importance of the ethical balance in finance that is created by the Sharia law as it relates to control of various banking processes. Maggs (2011) and Bin Chik, (2013) established the strong presence of ethics and Sharia Law in Islamic banking, which provides for everything from how individuals interact with banks to how banks manage contractual agreements or social responsibilities. The focus of ethical balance in finance was expected due to the regulations in which the banks must operate to be Islamic banks. Merchant (2012) suggested that the liabilities of interest-free loans were important to Islamic banking; however, this area was not found in the responses gathered. Other areas that are strongly promoted under these controls is sustainability, social responsibility, and ethical interactions with customers. These areas are strong indicators of a successful design; however, other areas were indicated as

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more challenging. Areas that were identified in these results are also indicative of concerns related to the younger generation. One challenging area is the rapidly-changing banking technology, along with the threats to security these changes represent. Failure to remain current with the changes in technology risks the ability to maintain or obtain customers; however, this failure could also result in increased risks in areas of fraud, identity theft, anti-money laundering (AML), know your customer (KYC). In this regard, technology is reported to be necessary in managing the changing society needs, but also in securing the safety of customers. Liu (2014) reported an increased demand in GCC countries for retail-compliant services, specifically as a result of increasing development and increasing younger populations. The relationship between younger populations and technology is well observed; however, even older populations are using technology and the security of these products is important to safety for banks and their customers. Loong (2013) argued that the IT modernization in GCC banking has continued to be a process that works to achieve IT systems that operate within standards, can be modified and are observable and useful to the public they serve. However, in research such as Iqbal, (2007) technology was not specifically indicated as an obstacle in successful banking in the GCC region. Interviewees did not note this as an obstacle, but clearly a challenge. Moreover, human resources was a common theme found in the results gathered from the respondents; however, this was not a common theme found in any of the research gathered during the literature review. Islamic banking research focused on compliance and ethical issues, but did not report on areas of human or technological resources. Respondents in this research indicated that these areas, above all others, were more likely to create challenges in their ability to remain competitive or to manage the expectations of their consumers. Another consideration was security in these areas as well. This presents a likely problem in that previous research has not considered these focus points and must be part of future investigations to increase value to Islamic banking. Finally, additional areas of interest included the impetus to meet the banking needs of older populations whilst simultaneously accommodating the requirements of younger customers. Further, the research indicated that younger populations may have more information for brands, competition, technology, and international standards, older populations may be more financially education or knowledgeable. It is likely that further research is needed to evaluate the relationship between the knowledge of older customers versus the technology needs of the younger generation to ensure the overlap is productive in achieving


goals for products and services. Maurer (2002) suggested that accounting demands are a result of anthropological evaluation, indicating that the needs of the people are a direct influence on the activities of the bank; however, these results indicate that the needs of the people have grown more diverse, with changing needs between the various groups. If different demographic profiles have extremely different needs, banks could be challenged to find the place in which meeting all these needs remains affordable and feasible. *This manuscript is based on the dissertation of Dr. Abdulbasit Ahmad Al Shaibei, Horizons University. His advisor was Dr. Perry Haan.

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Reflections of Leading Innovation and Change

Eyal Policar, Horizons University

Abstract: This paper examines the link between Leading Innovation and Change for stakeholders in organizations and in small businesses, by extracting the “threads” that link these concepts in recent literature. Based on the metaphor of water currents in a pool, I discuss the intricate labyrinth of decision mak-ing involving creativity, innovation, change and leadership. I further contend that the complexity of these constructs’ relationships must be “navigated” from different angles, keeping as the ultimate objective of maintaining economically efficiency, market competitiveness, sustainability, and most importantly, its val-ue to society.

IMAGINE A POOL. It may be an endlessly large or a very small pool and it is filled with water. It may be situated in a wonderful desert oasis, or high in the mountains, in a city, or near the sea. It is full of objects. Something falls or gets thrown into this pool. A leaf or maybe a stone falls somewhere in the pool. A ripple effect takes place. It may be seamless, incremental or perhaps, furious with bounding waves. Objects in the water change direction and water splashes out of the pool, or possibly the pool deepens forfeiting nothing, creating new space for the shifting objects. The pool is no longer the same. This pool is a metaphor for an organization. The pool’s contents rep-resent the organization’s environment, containing all its products, its stake-holders, and—like leaves and stones floating in the midst—the innovations or changes occurring within the organization. These elements are all influenced by the ripple effects of uncertainty, conflict, ambiguity, and variability that affect all organizational “pools.” But what problems do these buffeting conditions present for the individuals and the organizations?

Complexity in Organizations

We live in a world where decisions can never be based on one hundred percent certainty. To think that one can control, even for a finite period of time,

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the intricate labyrinth we weave for others and which others weave for us is simply impractical. Turner-Hampden (1994) defined this as the “masters of par-adox.” Handy (2002) characterised the complexity of organizations as global and local, big in some ways and small in others, and centralised sometimes and decentralised other times. The development of organizations does not always follow familiar patterns—and, enter the complexity—this ambiguity presents the opportunity to weave our capabilities together in seemingly endless ways to use pool of equifinality. Quite possibly, some explanations may lie within the body of scholarship on phenomena such as creativity, innovation, change, and leadership; this article explores the roles of these constructs in the contemporary global organization.

Creativity

Defining creativity is a creative act within itself. Mackay (2010) defined creativity as a process of achieving and expressing new ideas and perspectives. Csikszentmihalyi (1996) characterised creativity as “any act, idea, or product that changes an existing domain or transforms an existing domain into a new one” (p.28). Von Stamm (2008) suggested that it is about the tendency to gener-ate or recognize ideas, alternatives that may be useful in solving problems. It is about grasping and creating opportunities and adding value (Sherwood, 2006). We are not talking about an act of creation in the biblical sense, crea-tion out of nothingness, but rather an idea that’s more in tune with invention. Innovation, as Koestler (1964) believed, was formed from familiarity, and the more familiar the parts, the more striking the new whole. Hadamard (1954) ex-plained this process as seeing things differently, but not in “any” different way. In order to be creative, one has to see things from a different perspec-tive, to be unique, to tolerate flexibility and be unpredictable (Franken, 2006). Creativity could be sparked internally in our mind, imaginary or fantasy or ex-ternal because of our surroundings, or usually a concoction of both. It is always accompanied with emotions and the individual ego. There is always an insight, or stimulus, a provocation, or a problem to be solved which starts the process. Moreover, creativity is primarily an individual act, whether this individualism is acknowledged or not. Creativity and value. Creativity becomes important for an organization when that creativity becomes commercial value. The organizational success that is achieved through creativity must involve people who can think differ-ently, behave differently, and not be afraid to voice their ideas. It must also


initiate and encourage a working environment that stimulates creativity, cou-pled with honest critical analysis. However, according to Kotter (1996) most major change initiatives, whether intended to boost quality, improve culture or reverse a corporate death spiral, fail miserably. He provided an eight stage archetypal strategy for a successful change leading initiative: (1) Establish a sense of urgency,(2) form a political coalition, (3) create a clear vision, (4) communicate that vision, (5) empower stakeholders to work with the vision, (6) construct short term gains, (7) consolidate and build and (8) institutionalize the new approach. It may be the day to day pressures, economic constraints, lack of leadership, poor insight, or people problems which entangle the situation. All the good strategies will fail in the absence of coordination among organization-al members, a common occurrence when authoritative interests meet egoistic interests. Kanter (1983) called this phenomenon the “IKIWISI” Juncture: I’ll know it when I’ll see it. Understanding organizations means understanding both what mangers do and how their work can be structured (Carnall, 2007). Sutton (2001) dra-matically explained the difference between routine management that rewards success and punishes failure and inaction, versus a creative management that rewards success and failure and punishes inactivity. Kotter (1996) believed that creativity was a process, advancing through stages that built on each other rather than an event. Senior and Fleming (2006) argued that creativity was essential to improve and develop new products and services. If certain rules such as restricting criticism, freewheeling, and synthesising critical analysis are observed (Osborn, 1953) creativity may happen. Another example is a tavistock type methodology where the idea of group relations demands listening before speaking, adjusting ones thoughts and patience, and looking for commonality of efforts, functions and motivations (Hayden & Molenkamp, 2002). Organi-zations with a knack for creativity apply different approaches such as giving free think days, encouraging employees, at specified times, to work on anything but their designated workloads. Johnson (2010) used the metaphor of slow incubation moments. The process of creativity although sparked within the individual must be a multi shared type process in order to be embedded within the organization. The new idea/s may differ substantially for the individuals’ initial involvement, sparking new dimensions. Hence exists a major problem where often the individual ego demands ownership. Whatever the case may be there has to be a general atmosphere of devotion, dedication and commitment (Isaksen and Tidd, 2006) and positive team work for success to reign. Indeed, the challenge of any organization is moving forward. Accord-

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ing to Handy (2002) we are victims of events far beyond our control, whereas Leadbeater (2005) argued that big corporations have a built in dependency to reinforce past success. The more often one does something—particularly if he or she is successful at it—the harder it is to find new ways of doing it. We thus become trapped by familiarity and programmed by habit. To find new ways of doing things - to innovate - we have to break out of the familiar; we must “unlearn” our habits. (Sherwood, 2001). As Kotter (1996) stated, it is man-agement’s responsibility to set processes that can keep a complicated system of people and technology running smoothly, this must include planning, budg-eting, organizing, human resource, controlling and the critical factor, problem solving. Handy (2002) believed that the real energy for change, be it personal or in an organization, comes when it is faced with a disaster. Summarily, most scholars would agree that creativity—often occurring in the presence of a cri-sis—is the foundation of innovation.

Innovation

Creativity and innovation are related, yet separate, concepts. It is the matrimony of the two that breeds success. Creativity is about having ideas; in-novation is a much broader concept involving the use of the creative process for gains. In 2008, von Stamm provided a useful distinction between creative and innovative people: creative people think differently, innovative people behave differently. Porter and Ketels (2003) believed that innovation can be defined as the successful exploitation of new ideas, or the introduction of new and im-proved ways of doing things. West and Farr (1990) distinguished workplace in-novation and explained it as the intentional introduction and application within a job, work team, or organization. It can be as limited as a set of ideas or a com-bination of multi-complex such as processes, products, or procedures. Whatever the case, in order for it to be defined as “innovative,” it has to be new to a job, work team, or organization. The key concept inhibits the idea of intentional, as in not only having an idea (creativity) but also planning and implementing its execution. Thus, innovations are often a mixture of emerging processes, adopt-ed and adapted to be realized within the limitations either set by the organiza-tion or by the environment in which it functions. Different types of innovations remedy different situations and decision-makers must fully appreciate this. It may be best to break down the innovation curb according to the situation at hand. Relying on past successes (internally) or, even worse, trying to copy other organizations’ successes (externally) will not work. Both Kanter-Moss (2006)


and Tidd (2006) agreed that innovations do not just “happen,” but instead are actually growth enablers. Thus, innovations rarely progress in a clear and pre-dictable sequence of clear stages (King and Anderson, 2002). Absent in these views are provisions that try to explain the innovation process as a multi-levelled, subjective function. Beer and Nohria (2000) sug-gest that academics and consultants often give very different and contradictory advice on any given problem. For example, economists will recommend the use of incentives tied to shareholder value as the motivating force for change, whereas academics in the field of organization behaviour lean more towards high employee involvement strategies. Lately in some social media such as LinkedIn (www.lnkedin.com), Inc (www.inc.com), Entrepreneur (www.entre-preneur.com), 12mange (12manage.com), these approaches are discussed with eye opening and refreshing ideas. However, more specific research needs to explore the different tactics as they are applied in complex organizational situa-tions. Innovation strategies could be an interesting approach to decide in fore-thought which innovation menu to choose from if such a possibility exists. One such example is Dorfler (2010) who outlined different strategies and pre-emp-tive outcomes. Figure 1 shows how he used animal names as metaphors to de-scribe the different approaches in his “Fit for Innovation” continuum.

Figure 1

Dorfler Anecdotal Fit for Innovation

This approach of characterizing the desired outcome as an animal met-

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aphor will probably work better for companies just starting out, or for smaller organizations. Carnall (2007) concluded that strategic change is both an intel-lectual challenge and a process for handling people and uncertainties; the out-come may not always be what is intended. Research shows that organizations may have different and contradictory rationales all at the same time (Weick, 1979). Generating ideas or situations, communicating or informing, trying and selling the idea to stakeholders, and depending on circumstances define the de-velopment process and prepare to overcome constraints. Gates remarked that “humanity’s greatest advances are not in discov-eries but in how those discoveries are applied to reduce inequity” (2008, 5:39). This may be truer for non-profit organizations, government institutions and qua-si type systems. Frankly, commercial innovation is focused on economic gain. What happens when the goals and strategies of organizations differ or are in direct conflict with the wellbeing of society? Is government the only gate keep-er? Social responsibility and Corporate Social Responsibility (CSR) are noble concepts, but are far from perfect in the more social sensitive industries (Wang & Sarkis, 2013) and far less in the developing countries (Atari, 2013).

Change

There is no great value (other than for the purposes of theory-build-ing) in attempting to isolate innovation from change; for innovation is indeed itself change. In business, no one changes anything unless there is a genuine need to do so. This need can be understood as “constructive restlessness” as described by Kanter-Moss (2006). Managing change is not about managing what changes; it is fundamentally about managing people. Studies on organ-izational changes are widespread; “culture”, “values”, and “politics” seem to be key words denoting organizational successes or failures. A culture that is conducive to innovation and knowledge creation is supportive of innovation, knowledge sharing and creation (Holbeche, 2006). Conversely, Kotter (1996) stated that there are corporate cultures that discourage employees from learning how to lead; such cultures that resist change—and managers who have not been taught how to create change—are lethal to organizational growth. Core values and core purposes although not immediately distinguishable and are re-vised as change matures can be lethal or life giving. The gap between knowing which practices need to be adopted and the practices that are applied in actuality (Schwartz-Hebron, 2012) can make or break stakeholders if they are continual-ly misaligned. Politics is characterized by structures of interests, goals, power


and status which are inherently unstable (Carnal 2007). Politics are symptomat-ic of an organizational climate of conflict and competition; if not cultured into the organizational climate properly, people will retain knowledge as opposed to sharing it (Holbeche, 2006). The resulting loss of status, comfort, or compensa-tion surely will lead to resistance (Davis 2012). According to Hayes (2002), four possibilities for change exist: (1) Tun-ing/no immediate need for change, (2) adaptation/pressing demand for change, (3) reorientation/ redefinition of the enterprise and (4) recreation/transformation of basic elements. Isaksen and Tidd (2006) noted three reasons for change: (1) The escalating pace and volume of change, (2) dealing with greater complexity and (3) more intense competition. Nadler and Tushman (1995) stated that it inevitably involved organizational frame breaking and the destruction of some elements of the system. Destruction is a very disturbing process, thus Chris-tensen (2012) preferred the term “disruptive innovation,” which he maintained should be managed differently from routine innovation, both demanding organ-izational resources. This being the case, ideally change must be pursued after deliberate considerations. Contrarily, it is sometimes necessary for change to go unnoticed, because (a) the current situation is successful, (b) the monitoring of performance is ineffective, or (c) no alternatives are foreseen. One more crite-rion is government intervention (regulation/deregulation). Many companies are faltering because of lack of previous government funding, while others falter/stabilize because of new regulations. Governments are becoming less tolerant of business and organizations that are heavily funded (“BBC budget cut by 16%”, 2010), or vice versa funding ailing but critical businesses (“Government funding boost Australia’s ailing car industry”, 2015). Leading change theories. It is not feasible for any given theory or mod-el of change to encompass all possible situations. At best it can help explain or simplify mazy situations. There are a number of theories that immediately strike a chord. In 1951, Lewin brought forward the three stage model of change which partially still holds true today: (1) Unfreezing; letting go of preconcep-tions, (2) shaping, reshaping or transition; a process if deemed successful will produce the desired outcome, and (3) re- freezing; getting support, agreement, commitment, and hopefully stability. This model assumes that someone has recognized the need for change, someone has analysed and put forward a plan and is in moving towards the implementation mode. Preceding this model was Lewin’s (1951) notion of force field analysis, according to which if the driving forces are stronger than the restraining forces, change will happen. The shaping stage is problematic in the sense that it is a process, and takes time. In today’s

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hectic world before this stage is finished there will be a need to unfreeze again never reaching the re-freeze stage. Holbeche (2006) argued that the basis of sustainable high performance will be an organization’s ability to manage change in ways that energize and enrich employees. In contrast to this idea, the punctuated equilibrium theory put forward by Hayes (2002), accounts for an organization’s evolution through alternating periods of equilibrium and revolutions where structures are funda-mentally altered. If we accept the idea that employees are the core of the busi-ness, it should be noted that most employees do not handle change well and will resist punctuated revolutions. Beer and Nohria’s (2011) Theory E and Theory O give some insight on the totality and the difference between the two. Theory E (economics) is geared towards the creation of economic value, arguing that an organization’s sole ethical contribution to society is profits and economic value, measured by gains to the shareholders. Theory O (organization) focuses on the human capabilities within the organization, relying more on the capabilities of employees to identify, bring forward and solve the issues at hand. Figure 2 pre-sents these perspectives.

Figure 2


Differences between Economic/Organizational Oriented Managers (Beer & Nohria, 2000)

A viable possibility is to integrate the two conflicting practices and em-brace the paradox as is demonstrated in the last column, a combination approach using Theories E and O. This approach demands extraordinary, visionary and patient leadership style, or sequentially two types of leaders. Beer and Nohria (2011) believed that only E followed by O strategy makes sense. Why change fails. As noted earlier, most change efforts fail. Matson (2013) suggested intelligent, fast failure as a perquisite to the alternative of slow,

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“stupid” failure. The idea is to understand as quickly as possible if the change agents are meticulous, if the process is doable, and if the culture, regulations and other incentives are in place. Kotter (1996) identified three elements of failure in organizational change: (1) Capable mangers making critical mistakes, (2) absolutely essential activity versus incredibly difficult activity, and (3) com-mitment of considerable length of time. Inertia is often one of the major barriers to change (Hayes, 2002). Carnall (2007) believed that “reinforcing a risk-averse culture leads to people covering up mistakes” (loc 2616). He argued that failure arrives because there is an absence of an integrated approach between divisions and/or departments, i.e., horizontal change along the customer value stream contrasted with vertical change up or down the organizational structure. Arrays of theories have been studied for the purpose of trying to over-come failure. Some argue that well balanced procedures and process will lessen failure. However, this assumption raises questions such as: what is the pre-ferred method, centralized or decentralized? Should the focus be on only key players or other stakeholder groups? And, what methods should be used assess the situation? Tosi, Rizzo and Carroll (1994) warned that rules and procedures do not necessarily guarantee an absence of conflict. Change is tricky simply because it demands decision making without reliability; one can never be 100% certain about the implications of a decision.

Leadership

The complexity of human nature makes defining leadership a difficult task. It is generally accepted that leadership involves, among other attributes, a willingness to learn, listening before speaking, and embracing the lessons of failure and recognizing the seeds of success. Collins (2001) found that a true leader will attribute success to factors other than him/herself except when things go poorly, and then accept responsibility for those failures. Conversely, poor leaders look for scapegoats when things go wrong and take all the credit when things go right. Yukl (2002) claimed that leadership is the process of in-fluencing others to understand and agree what needs to be done and how it can be done effectively, and the process of facilitating individual and collective ef-forts to accomplish the shared objectives. Kotter (1996) held that leaders should align people with a vision and inspire them to achieve that vision. Leaders lead stakeholders, and need to be focused on the messages they proclaim. They will have to adapt to different stakeholders, such as supporters, denouncers, victims, or champions. Munshi, Oke, Puranam, Stafylaraksi, Towells, Moeslein, and


Neely (2005) proposed that leaders should motivate their followers and design organizational contexts to enable their followers to function effectively. In other words, leadership should exert relative influence, rather than absolute influence. (Smith, 1991). As organizations become more group based, and in many cir-cumstances multidisciplinary, and ad-hock, leaders will have at their disposal more tools to accomplish the tasks but on the other hand it will demand more sophistication, and ingenious ideas from the leadership role. Isaksen and Tidd (2006) understood that leadership for transformation involves making sense out of ambiguity and ill-structured situations. Leadership is about making decisions. This becomes paramount in a leader’s life, and “the task of figuring out how to combine the best of conscious deliberation and instinctive judgment is one of the greatest challenges of our time” (Gladwell, 2005, p. 269). As Stuart-Kotze (2006) argues, a person’s per-sonality is what that person is, behaviour is what that person does and success or failure is the way society measures how that person performs. These dis-tinctions are important in helping organizations remember the past, review the present, and predict the future.

Conclusion

Once again, imagine a pool. After endless times of changing with some improvements succeeding and other failing miserably, it is now refurbished. It is now in better harmony with its surroundings. It is filled with water that is consistently filtered, despite occasional contamination, and the waters are clean not murky. The pool is sustained in a way that the leaves and rocks do not fall randomly anymore; they pass through a labyrinth of mazes before entering the pool. The ripple effects are still there but at times more controllable. The ob-jects floating are in consonance. Water still seeps out sometimes; as some things can never be properly fixed. And the activity within the pool tells of its ongoing evolution: The floating leaves and stones are the innovations, or changes im-provements; the ripple effects are the uncertainties, gains or losses, costs and benefits that are being skillfully managed; and the water seeping out of the pool is the way the organization will react to occurrences within its greater environment. Like people, organizations learn—or fail to learn—from others, from one’s own mistakes, and a from certain level of courage to embrace new challenges.

Author’s Note

39Policar

Eyal Policar is a 30-year seasoned farmer from Israel, a lecturer in agricultural entrepreneurship. He recently received his Doctor of Business Administration degree (DBA) from Horizons University. Dr. Policar seeks to ensure the liveli-hood of the agricultural sector, much of which is small family business, and to safeguard the industry’s vulnerability to future challenges.

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Dorfler, V. (2010). The innovation handbook: How to develop, manage andprotect you’re most profitable ideas. Kogan page limited. London, England. Franken, E. R. (2006). Human motivation. 3rd ed., by CA: Brooks/Cole Publishing Co.


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Gladwell, M. (2005). Blink. Hachette Book Group New York. Governmentfunding boost Australia’s ailing car industry. (2015). Retrieved March 15, 2015, from http://www.bbc.com/news/world-australia-31810731

Hadamard, J. (1954). The Psychology of invention in the mathematical field. Dover Publications, New York,

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Hayes, J. (2002). The Theory and practice of change management. PalgraveMacmillan, Houndmills Hampshire England and New York N.Y.

Holbeche, L. (2006). Understanding change; theory, implementation and success. Elsevier Buttworth-Heinemann Linacre House. Oxford Eng-land.

Isaksen, S., & Tidd, J. (2006). Meeting the innovation challenge: Leadershipfor transformation and growth. John Wiley & Sons Ltd. Chichester West Sussex England.

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King, N., & Anderson, N. (2002). Managing innovation in organizations. Updated and Revised second edition of King & Anderson, 1995. London: Thompson International.

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Independence of Non-profit Organizations: Imaginary or Real?

Organizational Efficiency as a Marker of Independence

Karla Valeria Feijoo, Leiden University (Netherlands),Ilya Rubinstein, Horizons University (France),

IN THE ARTICLE “Ensuring NGO Independence in the New Funding Environment,” Rob Wells (2001) describes the various types of independence NGOs’ have from government control. These include financial independence, organizational independence, and programmatic independence. Financial independence is defined as an NGO having enough resources to promote its mission without relying on government support. Organizational independence is defined as an NGO having the ability to run effectively as well as being able to fulfill requirements and regulations set up by government. Programmatic independence is defined as an NGO’s ability to design and deliver the programs without being influenced by government. The term, NGO, was created by the United Nations (UN) in 1945 out of a need to describe state-independent organizations with which the UN would have relationships. As a rule, an NGO should have organizational structure, be independent of government control and be non-profitable. In summary, an NGO is an entity founded on private initiative to fulfill the goals and objectives of public interest. The existing literature uses the acronym GONGO (Government Organized Non-Governmental Organization) to describe nonprofit organizations that are sponsored by a government to promote its political interests. Can an NGO truly be independent from the government if it relies heavily on government funding? The existing literature suggests a negative relationship between government funding and NGO independence (Tandon, 1987). If the government pays for the NGO’s service then it can dictate exactly what it wants that NGO to do with the funds. In this case we do not examine these organizations because they are not independent from government control. It is essential for NGOs to be independent of governments in order

44 Article

to advocate on behalf of their constituencies who very often cannot speak for themselves. However, in the last few years, many governments across the globe have increased their control of NGOs by challenging financial, organizational, and programmatic independence, according to the reports from the National Council of Nonprofits. In the United States, there were a number of challenges to NGOs in the form of restrictions on compensation and increasing requirements for government contracts. For example, in 2014, in New York, Governor Andrew Cuomo capped the reimbursement amount for the executives of state contractors as well as the reimbursement rate for administrative costs of state contracts. In 2014 in New Hampshire, there was a proposed legislation that would require nonprofits with budgets exceeding $250,000 to send their board president to management training on a biannual basis. That same year, Utah state legislation passed that imposed new requirements and governance mandates on state-nonprofit contracts was enacted (National Council of Non-Profits, 2016). The U.S. legislative action parallels that of other nations. According to the Expert Council on NGO Law (2016), action by the government in Azerbaijan has hindered NGOs’ operation in that country, especially those organizations having a political mission since 2009. This includes increased legislation regarding NGO operations as well as criminal proceedings against individuals involved with NGOs. A law in Spain was passed in 2014 to prevent the financing of terrorist activities, requires that NGOs identify individuals who donate money and resources with a value greater than 100 euros regardless if they are foreign or domestic. And foreign funding in Russia is subject to numerous requirements, monitoring and reporting that make it difficult for donors. In addition, NGOs must report all foreign funds received, detail how funds are utilized and submit online activity reports. Furthermore, foreign funds cannot be utilized for political movements, campaigns, and support (Expert Council on NGO Law, 2016).

Framework for Analysis

In this article, we define independence as the nonprofits’ ability to implement their goals and strategies freely, even if these do not align with those of the government. This definition presumes that nonprofits are not breaking any laws to reach their goals. Independence can be financial, organizational, and programmatic. By contrast, dependence encompasses the mechanisms through which

45Rubinstein et al.

the government can leverage power over non-profits. These include financial support mechanisms, law and legal frameworks, program delivery, and publicity. The financial support mechanism includes grants and subsidiaries. If NGOs are recipient of public funds, then they are dependent on the government for the provision of these services. As the funder, the government is able to dictate the terms by which the services are provided thus reducing an NGO’s financial independence. Another leverage government has over nonprofits is the ability to utilize the existing law and legal framework on which the NGO depends. The government can conduct audits and create laws that force the NGO to change its operations, thus affecting an NGO’s organizational independence. Similarly, the government has control over the program delivery mechanism and publicity to influence the public’s perspective of a nonprofit. This leverage affects the NGO’s programmatic independence. To analyze the dependence or independence of an NGO from government control, we introduce Adil Najam’s Four C’s Model (Najam, 2000). This model considers the interactions between NGOs and government and takes into account both perspectives – those of government towards the NGOs and converseley, the NGOs’ position regarding government. Both government and NGOs pursue certain ends (goals) and each has a preference for means of reaching those ends (strategies). Najam (2000) describes four possible relationships that can emerge from a combined perspective. A cooperative relationship is based on a convergence of goals and strategies of government and NGOs. Cooperative relationships can be found in the policy arenas of human services and relief programs where government and nonprofits agree on the same goals and use the same strategies. Confrontational relationships, which seek different goals with different strategies happen, when government and NGOs consider each other’s goals and strategies to be incompatible to their own. A complimentary relationship exists when government and NGOs share similar goals but prefer different strategies. This is a very common relationship, where government provides funding while NGOs are responsible for the delivery of services. A cooptative relationship is likely when government and NGOs share similar strategies but prefer different goals to reach those objectives.

The Relationship Among Strategies, Goals and Organizational Efficiency

We argue that the government can influence NGOs through strategies rather than through goals. These strategies include financial support mechanisms, existing regulations and legal framework, program delivery mechanisms and


publicity. It is tempting to say that in the case of a cooperative relationship, the NGO is dependent on government; a confrontational relationship ensures an NGO’s independence; and when NGOs and government have complimentary or cooperative relationship, NGOs are somewhat dependent. While Najam’s Framework provides a simple approach to categorize NGO-government relationships, we take the analysis one step further by applying the work of Wells. Wells (2001) notes that there are four elements of an effective organization that will contribute to its independence: (1) A program’s responsiveness to an ongoing need; (2) The extent to which the organization enjoys a positive reputation; (3) The constituency of popular support coming from people or organizations who support the work in addition to the beneficiaries; and (4) a revenue mix that provides a degree of security through a range of income sources, with no over-dependence on any single source of funding. Rob Wells’ four elements of the effective organization demonstrate that if an NGO is strong in all of the four elements, it can be considered independent from government control regardless of the fact that both have the same goals and strategies. Similarly, if an NGO is weak in these four elements, it cannot withstand government pressure. In a sense, these four elements strengthen the NGO’s financial independence, organizational and programmatic independence from government control. An example of a global non-profit that is able to maintain independence from governments because of its strength in these Four Elements is Chatham House.

Chatham House: An Independent Non-Profit

Chatham House is a registered non-profit charity in England and Wales as well as having foreign 501(c)3 equivalency status in the United States. Chatham House was founded in 1920 to create an open dialogue on significant occurrences in international affairs among members of the government, civil society and the private sector (Chatham House, 2016). Each year, the organization has more than 300 private and public events to help realise its mission of “helping to build a sustainably secure, prosperous and just world” by attracting international leaders and the best professionals in their fields from around the world. According to Wells’ framework, Chatham House is an example of an organization that meets the elements necessary to be an efficient, independently functioning organization regardless of country of operation, as

47Rubinstein et al.

described below. Chatham’s Programming in Response to Ongoing Need is reflected by its independent analysis of critical global, regional and country-specific situation. The organization produces reports, documents, books and other materials that are essential resources for managers and policy-makers in government, the private sector and civil society. Additionally, Programming’s magazine, The World Today, offers comprehensive analysis and commentaries on various topics. Chatham House meets the needs of global leaders by providing information needed to manage democratic processes within today’s global environment. Chatham House asserts itself as being “independent and owes no allegiance to any government or to any political body” (Chatham House). It does not take institutional positions on policy issues and aims to provide information. It has a recognizable brand identity, and has positioned itself as the leading independent policy organization. In 2016, Chatham House was ranked number one in the field of foreign policy and international relations by the University of Pennsylvania’s annual Global Go To Think Tank Index. In 2016, The Transparify, a think tank ranking report, rated the financial transparency of 200 think tanks in 47 countries. From this report, Chatham House received four stars rating (out of five) for the quality of the public information on the sources of funding. Popular Support for Chatham House’s activities is provided with funding from more than 158 organizations from around the world. The support comes from the sponsorship of specific projects and activities. The organization’s membership includes about 3,400 individuals and more than 360 corporate members, including private companies, government agencies, embassies, academic institutions, media organizations, and NGOs. The Revenue Mix reflects minimal governmental support, which accounts for only approximately 14% of its funding. Chatham House has relied primarily on membership subscriptions and research grants from foundations, for profit companies, academic institutions, other governments and international organizations to achieve its mission. The diverse portfolio of investors ensures that Chatham House’s operations are not dictated by any one funding source.

Discussion

Determining the independence of the non-profit sector as a global cohesive unit is problematic given the complex and distinct relationship between each non-profit and the government under which it operates. Nevertheless, on a case by case basis, it may be possible to assess the independence of any given


non-profit if the organization uses Wells’ Four Elements as a measure, as in the case of Chatham House. Wells’ four elements of the effective organization demonstrate that if an NGO is strong in all of the four elements, it can be considered independent from government control regardless of the fact that both have the same goals and strategies. Similarly, if an NGO is weak in these four areas, its level of independence is questionable and may require additional evaluation. As a caveat, the possible mitigating factors—such as the paradigm shift following the 2016 U.S. presidential election—may complicate the process by which independence can be identified by NGOs*. The nonprofit sector in the United States, for example, includes not only domestic organizations, but also international organizations which are headquartered in the United States and is subject to its regulatory changes. According to GuideStar (2016), there are about 23,000 nonprofits that fall into this category. An analysis conducted by the Tax Policy Center stated that the results of repealing the estate tax and capping itemized deductions at $100,000 for individuals and $200,000 for couples, the plan advocated by Donald Trump, would cause charitable giving to decline between 4.5% and 9% (Stallworth, Lu, and Steuerle, 2016). Other possible changes, such as the appointment of new U. S. Supreme Court Justices, may also negatively impact nonprofits whose missions fall within causes such as abortion rights, environmental regulations, and class-action lawsuits. Nevertheless, the guidelines offered in this article should provide non-profits with a starting point in assessing their relative independence from financial, organizational and programmatic governmental constraints, and enlighten the path for maintaining independence in times of uncertainty.

*This article was written before the 2016 United States’ Presidential Election.

References

Chatham House (2016). Annual Review 2015-16. Navigating new geopolitics. Global power dynamics. Interdependence and insecurity sustainability and inclusive growth .

Directory of Charities and Nonprofit Organizations GuideStar. Accessed November 25, 2016, from http://www.guidestar.org/nonprofit-directory/international.aspx

Expert Council on NGO Law, Regulating Political Activities ofNon-Governmental Organizations, (2015) https://

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r m . c o e . i n t / C o E R M P u b l i c C o m m o n S e a r c h S e r v i c e s /DisplayDCTMContent?documentId=0900001680640fc2

Najam, A. (2000). The four c’s of third sector-government relations: cooperation, confrontation, complementary, and co-optation. Nonprofit Management and Leadership 10 (4): 375-396.

National Council of Nonprofits (2016). Nonprofit independence. Accessed October 26, 2016. https://www.councilofnonprofits.org/trends-policy-issues/nonprofit-independence

Stallworth, P., Lu, C., & Steuerle, C. E. (2016). Taxvox: Campaigns, proposals, and reforms. Tax Policy Center. Accessed November 25, 2016, from http://www.taxpolicycenter.org/taxvox/both-clinton-and-trump-would-reduce-tax-incentives-charitable-giving

Tandon, R. (1987). The relationship between NGOs and government. Mimeo paper presented to the Conference on the Promotion of Autonomous Development, PARIA, New Delhi.

Wells, Rob. (2001). Ensuring NGO independence in the new funding environment. Development in Practice 11 (1): 73-77.


Cross-Cultural Ethical Conflicts: Reasoning Dissonance

Khalid Al-Jufairi, Horizons University

Abstract: This article focuses on cross-cultural conflicts, referred by as conflicts between home- and host-country standards, where multinational corporations are caught between fully abiding with home-country regulative measures and navigating host-country ethical structures. By examining these conflicts as a situational outcome of the differing value and reasoning system – resonating with both home- and host-country organizations, the article proposes a hypothetical, culture-focused model to help organizations detail key success factors.

ETHICAL BEHAVIOUR is a precondition for an organization to obtain the status of an internationally credible corporation, and is a translation of fully-embracing moral core values, which significantly influence the emergence of informal and formal ethical structures, as well as the measures of business ethics implementation. In society, values help define its members’ core thinking – creating norms, beliefs and history. Organizationally, values serve to convey corporate identity and culture- aligning objectives, unifying goals, measuring milestones, working cross-culturally, and collaborating across functions and national boundaries. When operating internationally, organizations confront a myriad of challenges including cross-cultural ethical conflicts which involve differences in the reasoning processes. This article focuses on cross-cultural conflicts, which I operationalize as conflicts between home- and host-country standards, where multinational corporations are caught between fully abiding with home-country regulative measures and navigating host-country ethical structures or the lack thereof. I examine these cross-cultural conflicts as a situational outcome of the differing value and reasoning systems found among both home- and host-country organizations. I also develop a hypothetical, model for organizations to exercise and implement, to support their decision-making processes. I then analyze different cases which illustrate the model.

The Construct of Corporate Ethical Policies: Cultural Entrenchedness

51Article

Cai, A. Wilson, and Drake (2000) define culture as socially transmitted behaviors, beliefs, values, patterns, and norms identifiable by a group of individuals, correlated and dependent on the set rules, assumptions, and norms. In an attempt to address any cultural or ethical conflicts, many business organizations, namely multinational corporations (MNCs) have developed and implemented corporate ethical policies (CEPs). These policies aim at fostering a culture of ethical conduct, resembling the values for which those MNCs stand. The core of CEP incorporates organizational mission and vision, and also builds in corporate values. Essentially, CEPs are devised to offer a strategic method to help business organizations resolve ethical dilemmas and reconcile any other issues arising in the workplace and within the workforce. Weber and Raveh (1996) define ethics as the guiding principles, which help individuals decide between right and wrong. These principles define how an organization sets the appropriate standards or parameters to judge between ‘right and wrong’ in its business operations. In fact, the most challenging ethical dilemmas that MNC confront today are present within the variation of economic conditions and diverse cultures in which they operate (Moon & Woolliams, 2000). Although MNCs have valid experiences dealing with differences across borders and cultures, most organizations, including these MNCs, find themselves facing predicaments in countries where their ethical and cultural standards clash. An example would be when a host country promotes bribery and nepotism in its work environment, MNCs’ difficult challenge is to abide by the home-country ethical principles while at the same time not violating compliance laws. However, Melé, Debeljuh, and Arruda (2006) point out that an organization may be forced to operate under conditions which its home country’s culture considers unethical, yet MNCs cannot undermine their market value and competitive advantage by accepting these host-country’s measures. For instance, Google has moved its operation from China due to incongruent ethical and compliance issues it found there.

Ethics across Cultures: Arising Conflicts

As business organizations internationalize and establish operations globally, the disparity of CEPs and of ethical behavior becomes apparent. Wilcox (2002) claims that the disparity of ethical standards is the most contributing factor to cross-cultural conflicts, and to the decision-making process between host-country and home-country operations. In order to successfully operate across


national borders and cultures, these corporations have to conduct the necessary inter-organizational and inter-governmental negotiations aimed at ensuring compliance with international ethical standards. According to Weber and Raveh (2002)’s observations, U.S. corporations have been leading the advancement of cultural management theories, research, and practices; subsequently, many MNCs depend on the cross-cultural perspectives and dimensions developed by MNCs with U.S. parent companies and endorsing these MNCs’ best practices. However, differences in business practices throughout the world tend to have major impacts on MNCs’ operations in host countries. Gratchev, Ageev and Hisrich (1995) describe the situation following the dissoultion of the U.S.S.R. and Russia’s transition to capitalism. Gratchev et al (1995) point out that MNCs could not continue operating without paying the Russian mafia, approximately, 20% of profits. These circumstances put MNCs at risk of forgoing operations and comprising organizational integrity. To address ethical challenges across cultures, organizations must demonstrate commitment to developing a set of ethical policies, governing business operations, and defining what they stand for in society, especially in host-country settings, devising strategic methods of dealing with ethical conflicts. If the organization’s value systems are incongruent with host-country culture, Fink, Neyer and Kölling (2007) argue that the organization is able to develop appropriate, yet useful, standards to help its workforce understand its corporate values and culture, and its guiding principles under which the business operates. The latter validates the borne-organizational culture, especially when ethics is integral to the MNC’s operation. Ethics and culture. The role of national or ethnic culture also complicates understandings of what is considered to be ethical. Ethical issues inevitably arise in culturally-specific conflicts. For example, bribery, despite its negative (and illegal) status within Western societies, is a common practice exercised in a number of African countries and is often proclaimed as “processing or facilitating fees.” The rationale predisposes that the host-country borne organizations may consider bribing as an egalitarian ideal for free market competition to foster for personal gains and survival. The Japanese custom of gift-giving may be misinterpreted by other cultures such as the United States, presenting a barrier to business (Sarkar, 2002). In examining ethical policies of large corporations across Argentina, Brazil and Spain, Melé et al (2006) reported that the diffusion of corporate ethical statements and policies in organizations have varying degrees of applications in those countries. In Melé et al (2006)’s study, organizations without formal CEP were forced to develop

53Al-Jufairi

alternative ways of dealing with ethical conflicts, especially when attraction of foreign capital was sought.

MNCs: Organizational Alignment

Incorporating ethics in devising processes and in aligning decision making across cultures, especially between home- and host-country organizations, breeds a new social value in the culturally-specific, host-country workplace; evidenced by the world’s Fortune 10 companies, which are not unaccustomed to working within different cross-cultural settings in both the developed and developing economies. MNCs have a long tradition of employing nationals/locals at its global affiliates and joint-ventures, yet the MNC home-country organization has a universal code of ethics for its entire workforce. Despite uniformity in the code of ethics, stakeholders worldwide experience different levels of engagement. Figure 1 depicts a generic, regional risk mitigation function, and its organizational reporting structure – excluding other business lines of operations.

Figure 1


Generic, Regional Risk Mitigation Function/Organization

Conceptually, as depicted above, the board of directors are the owners of the business operation, yet the board of directors’ impact on the organization’s decision-making is limited: the CEO and lead country managers nominate members of the executive risk committee. Importantly, the CEO, and the lead country managers and the executive risk committee members, are the major players in setting policies and ensuring compliance with the MNC’s values and the global code of conduct. Tax, audit, advisory, and risk management departments are composed of employees that render the appropriate services to business lines, thus – at all levels of this organizational structure, there is an element of decision-making process and reasoning. In this hypothetical scenario, the audit department is under scrutiny and is also the area of great concern due to its reliance on subjectivity when carrying out auditing tasks. In the said department, auditors exhibit different levels of reasoning, as these

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differences are widely evident between the MNC’s operations in Asia, Middle East, Europe and North America. This condition predisposes the enforcement of a universal code of ethical conduct to mitigate risks resolving similar issues or pre-empts the development of hybridized code of ethics to reconcile uniquely arising dilemmas.

Types Ethics Codes Optimal or Conflictual

Depending on the particular culture involved, an organization may adopt one of several common paradigms for dealing with ethical issues. A universal code of ethics entails the adoption of a uniform ethical system across all cultures and business operations. It disregards the existence of cross-cultural conflicts that may arise from different values observed by distinct communities. This systemic approach is made up of terms and guidelines of reference for all employees irrespective of their place of origin. In fact, Melé et al (2006) argue that a uniform code of ethics implies training all auditors to conform to a single set of guidelines, presumably eliminating cultural nuances, value conflicts, and other disparities which may impair business objectivity. A universal code of ethics has both advantages and drawbacks. Similarity of the value system across all cultures enables an organization to compare decision-making engagements of one country in a specific cultural setting against another (Duh, Belak & Milfelner, 2010). Additionally, a universal code of ethics facilitates employee-rotation of experienced caliber from one cultural background to another. However, this systemic approach has its shortcomings as it may take many years to “re-program” people’s minds, described by Gilman (2005). That is, the business organization must invest in training and “conditioning” of its workforce in order to follow a specified conduct when making decisions. A differentiated code of ethics implies that the organization adopts tailor-made guidelines for all of its worldwide operations. As Wilcox (2002) indicates, this differentiation is based on an individual country’s cultural values as well as the personality dimensions possessed by a given workforce. A differentiated platform for decision-making acknowledges the impact of a culture on the reasoning of its workforce in the workplace. However, according to Gilman (2005), an effective code of ethics covers both internal and external behaviors of the workforce. Yet, a differentiated code of ethics cannot be comprehensive enough to cover both external and internal variables, since outside factors, such as how an auditor treats a client, are not


culturally-sensitive and should be dealt with in uniform fashion across all operations. Additionally, this differentiated approach is only applicable to a workforce with a similar and related cultural background. A hybrid approach to a Code of Ethics involves aligning cultural values to the overall code of ethics for an organizational operating in a host-country setting. It enriches decision-making process by incorporating home- and host- country values. However, a hybrid model of ethical conduct suffers from a cultural disparity as cultural dimensions and differentials provide critical insight of operational engagement, including ethical conduct.

Ethical Reasoning: Hofstede’s Cross-Cultural Evidence

Tsui and Windsor (2001) drew on Kohlberg’s ideas about cognitive moral development by building on Hofstede’s cultural theory to examine the impact of cultural differences on ethical reasoning. Tsui and Windsor (2001)’s study deploys Hofstede’s four original national cultural dimensions – power distance, individualism, uncertainty avoidance, and long-term orientation – in underscoring key factions that may lead to cross-cultural ethical conflicts between auditors in China and Australia as an example. These researchers use the Hofstede’s (1991)’s country rankings of China and Australia as seen in Figure 2.

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Figure 2

Hofstede’s Comparison of Australia & China

Source: Tsui &Windsor (2001), obtained from Hofstede (1991)

Power distance, individualism, uncertainty avoidance, and long-term orientation are products of cultural norms, which have an influence on perceived ethical concerns, alternatives, risks, and consequences (Smith & Hume, 2005). We comparatively explore these four areas with respect to the cultures of China and Australia.

Individualism – Collectivism. Australia’s propensity towards individualism score is considerably higher than that of China. This means that Chinese auditors prefer reasoning in groups as compared to their Australian counterparts who are loosely knit to their team members. As explained in Tsui and Windsor (2001)’s study, China possesses a collectivistic culture, and the workforce originating from the country has a high probability of complying with organizational stipulations. On the other hand, Australian employees belong to an individualist society, and they always endeavor to seek recognition in their daily activities (Tsui & Windsor, 2001). In a hypothetical scenario, the executive risk committee, if dominated by Australian members, is likely to promote an Australian auditor because he or she displays competitiveness in decision making. This move may attract a conflict in China where an employee is promoted based on his or her level of teamwork. Figure 3 presents a decision tree that depicts a possible conflict on employee promotion between Australian


and Chinese managers.

Figure 3

Decision Tree between Chinese & Australian Workplace Cultures

Uncertainty avoidance. As Table 1 illustrates, Australian auditors work in a high avoidance culture as compared with their Chinese colleagues. As a result, employees in Australia’s operation seek both formal and informal methods to lower the uncertainty levels. Formal methods are the organization’s code of conduct and review procedures. Informal tactics entail manipulation of the existing values that depreciates integrity in a decision-making process (Moon & Woolliams, 2000). On the other hand, Chinese auditors face situations requiring decision-making, and are likely to make competent choices. Long-term orientation. Among the countries examined by Hofstede

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(1991), China ranks second in terms of long-term orientation while Australia is 15th. This difference between the Chinese and Australian cultures has a major implication on auditors’ reasoning. In carrying out their professional duties, Chinese employees tend to be more prudent and persistent. In contrast, Australia’s workforce has a tendency to reciprocate favors as Tsui & Windsor (2001) claim. As a result, auditors’ independence in Australia may easily be manipulated through gifts and favors. Power distance. China’s score of power distance is higher than that of Australia. This translates to a culture of high levels of inequality and status gaps in the Chinese organizational structure (Hamilton & Knousr, 2001). For instance, auditors in China regard their seniors as being unapproachable. Consequently, auditors in China have a higher likelihood of failing to take responsibility by shifting any blame to their senior officers (Tsui & Windsor, 2001).

Cultural Distinctiveness: Reasoning Process

Every culture has its distinct value system influencing the reasoning process, and a specific culture alone does not constitute an adequate basis for compelling ethical behavior in an multicultural organization. A hybrid code of conduct may present the best alternative for multinational business organizations. This option recognizes the impact of culture on a workforce’s reasoning while striking a balance between cultural and external values. In Tsui & Windsor (2001)’s study, this modified code of conduct strengthens Chinese managers’ reasoning by bringing in strengths of the Australian culture. For instance, China’s workforce may benefit from Australian’s low power distance. To achieve a minimal power distance in China, Wilcox (2002) argues that the business organization must engage junior employees and their senior staff in group-reasoning activities, which will potentially reduce the perceived unapproachability element from subordinates towards managers. Similarly, Australian auditors should have policies that exhibit a Chinese culture in areas such as collectivism. Tsui & Windsor (2001) point out that such an approach will mitigate the risk of engaging in fraudulent activities when pursuing personal competitiveness and recognition in the Australian culture workplace.

Functionalist Category: Due Diligence

French, Zeiss, and Scherer (2001) tout Trompenaars’ and Hampden-Turners’ dimensions as vehicles to examine ethical principles in business


organizations. The universalism-particularism dimensions models the degree of stereotyping which creates barriers in decision-making process and reasoning – as many French think of Americans as being unprincipled and naïve, while Americans believe that the French rely on a strong sense of hierarchical solutions (French et al, 2001). However, Fang (2005) argues that, despite stereotyping and the cultural differences, most societies have too much in common as opposed to what they believe. That is, organizations can make use of these unique situations to formulate conflict resolution strategies, benefiting both cultural settings of home- and host-country operations. In fact, French et al. (2001) conclude that regardless of the values and principles held in a society, different values and ideals can be balanced by reconciling key issues into achieving a resolution approach of ethical conflicts backed by evidence-based business solutions. Figure 4 showcases a framework that organizations can adopt and follow, adding value to their host-country operations and ensuring that home-country ethical values do not conflict with the principles of the host-country culture. Essentially, in order to strike the desired balance, the relationship of risk and uncertainty is a critical determinant in business operations within culturally-specific settings.

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Figure 4

Cross-Cultural Due Diligence: Ethical Compliance Framework

Cross-Cultural Management:

Organizations’ Competitiveness

Focusing on cross-cultural management enriches organizations’


behaviors across cultures, taking onboard diversity and recognizing differences. The latter assists organizations in developing appropriate motivational and decisions-making strategies within suitable boundaries, despite the cultural ideals in practice. This is largely based on the fact that failure to apply the best cultural and ethical practices may lead to a conflict in the organization’s value system. Additionally, as Adler (1983) argues and as Nollen & Newman (1996) concur, operating within a multicultural business setting expands and enhances organizational culture and performance, creating or regaining a competitive advantage. Also, Fink et al (2007) underline that social values offer specific indicators on how cultural dimensions are drawn, and also provide knowledge on how business organizations should address cultural challenges across functions. Given that cultural, religious, and racial differences are known to contribute to problematic behaviors and attitudes in society, a common ground level is necessary for helping organizations understand how to operate across cultures and national borders and, secondarily, to operate successfully across cultures and borders.

The Key to Success

The impact of culture on business organizations represents in itself a challenge to address that is easily converted into an opportunity to seize. Understanding this relative degree of influence provides MNCs with the ability to diagnose organizational and operational problems (Newman & Nollen, 1996), and to mitigate risks across national borders and cultures. The key to success can be facilitated through the following principles:• Business organizations that understand and take into account national

cultures in operations are best placed to make decisions, and to achieve the desired goals and objectives.

• The adaptability of organizations to different situations is also improved when managers have clear understanding of the diversity of cultural values and of leadership practices that suit each operational locality.

• Knowledge and ethics empower business leaders to shape employee’s beliefs and devise suitable management practices based on those belief structures. Broader understanding of cultures enables organizations to appreciate diversity at the workplace; it also fosters acceptance of divergent opinions and values.

• Business organizations can enhance competitiveness by implementing

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management practices and promoting cultural values that situation-specific. Creativity and flexibility are essential in the ever-changing global business environment.

The degree of cultural convergence (or divergence) significantly informs how organizations should operate across cultures and national borders, and in an increasingly global business environment, striking the balance between standardization and cultural specificity augments an organization’s. In fact, the theory of cultural convergence drives much of the theoretical frameworks of integration and of how modern organizations homogenize processes (Thorne and Saunders, 2002). As Khiliji (2002) explains, that despite an organization’s effort to portray homogeneous behavior as a result of assimilation withinin the corporate culture, there are inherent differences within the workforce which have a great impact on the interaction of stakeholders within the organization. Thus, the convergence theory is based on, and appreciates, the internalization of organizational resources and practices. However, as much as Hofstede (1991) underlines that culture is a critical variable of differentiation across national borders, the advent of globalization has catalyzed the development of universal values that are to be recognized by society across cultural lines. Organizations themselves must devise a set of values in order to operationalize the universal values related to integrity and ethics. Doing so should strike the desired balance in employees’ understanding as they routinely deal with cultural uncertainty is an increasingly global market.

References

Adler, N., J. (1983). Cross cultural management: Issues to be faced. International Studies of Management &organization, 13(1/2), 7-45.

Adler, N., J. (1983). Cross cultural management research: The ostrich and the trend. The Academy of Management Review, 8(2), 226-232.

Cai, D., A. Wilson, S., R., & Drake, L. E. (2000). Culture in the context of intercultural negotiation: Individualism-collectivism and paths to integrative agreements. Human Communication Research, 26(4), 591-617.

Chakrabarti, R., Gupta-Mukherjee, S., & Jayaraman, N. (2009). Mars-Venus marriages: Culture and cross-border M&A. Journal of International Business Studies, 40(2), 216-236.

Corbit, B., Peszynksi, K., Inthanond, S., Hill, B., & Thanasankit, T. (2004).


Cultural differences, information and code systems. Journal of Global Information Management, 12(3), 65-85.

Duh, M., Belak J., & Milfelner, B. (2010). Core values, culture and ethical climate as constitutional elements of ethical behavior: Exploring differences between family and non-family enterprises. Journal of Business Ethics, 97(3), 473-489.

Earley, C. P., & Mosakowski, E. (2004). Research edge: Toward culture intelligence: Turning cultural differences into a workplace advantage. The Academy of Management Executive, 18(3), 151-157.

Fang, T. (2005). From “Onion” to “Ocean”: Paradox and change in national cultures. International Studies of Management & Organization, 35(4), 71-90.

Fink, G, Neyer, A., & Kölling, M. (2007). Understanding cross-cultural management interaction: Research into cultural standards to complement cultural value dimensions and personality traits. International Studies of Management & Organization, 36(4), 38-6.

French, W., Zeiss, H., & Scherer, G. A. (2001). Intercultural discourse ethics: Testing Trompenaars’ and Hampden-Turner’s conclusions about Americans and the French. Journal of Business Ethics, 34(3/4), 145-159.

Gilman, S.C. (2005). Ethics Codes and Codes of Conduct as Tools for Promoting an Ethical and Professional Public Service. PREM, World Bank, 3-76.

Gratchev, M.V., Ageev, A.I., & Hisrich, R.D. (1995). Entrepreneurship in the Soviet Union and Post-Socialist Russia. Small Business Economics, 7(5), 365-376.

Hamilton, J. B., & Knousr, B. S. (2001). Multinational enterprise decision principles for dealing with cross-cultural ethical conflicts. Journal of Business Ethics, 31(1), 77-94.

Hofstede, G. (1991). Cultures and Organizations. London: McGrow-Hill. Hofstede, G. (1994). Management scientists are human. Management Science,

40(1), 4-13.Khilji, E. (2002). Modes of convergence and divergence: An integrative view

of multinational Practices in Pakistan, International Journal of Human Resource Management, 13(2), 232-253.

Melé, D., Debeljuh, P., & Arruda, C. M. (2006). Corporate ethical policies in large corporations in Argentina, Brazil, and Spain. Journal of Business Ethics, 63(1), 21-38.

Moon, C. J., & Woolliams, P. (2000). Managing cross-cultural business ethics. Journal of Business Ethics, 27(1/2), 105-115.

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Nollen, S., D., & Newman, L. K. (1996). Culture and congruence: The fit between management practices and national culture. Journal of International Business Studies, 27(4), 753-779.

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Shimoni, B., & Bergman, H. (2006). Managing in a changing world: From multiculturalism to hybridization: The production of hybrid management cultures in Israel, Thailand, and Mexico. Academy of Management Perspectives, 20(3), 76-89.

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Internationalisation of Firms: Towards an Intuitive Contribution to the Psychological Distance Concept

Kenneth Kudu, Horizons University

Abstract: This paper explores the role of pyschic distance on decision-making in firms’ internationalisation processes. A review of the literature on pyschic distance reveals the potential usefulness of applying an intuitive, e.g., subjective, approach to understanding the decisions made to enter foreign export markets, especially those which exist in pyschic-distant contexts. Suggestions for continued research are presented.

THE INTERNATIONALISATION OF COMPANIES has been a wide area of interest for researchers in recent years as companies continue to find new foreign markets to which they can expand their business activities. In that process, they face many challenges such as market risk, geopolitical influences, and logistical problems. These potential obstacles, however, are often outweighed by the promise of economic benefits, especially in the area of foreign direct investment (FDI). Hymer (1976) attributes the emphasis on FDI as a reaction to imperfect market conditions and competitive practices in the world. With respect to developing countries particularly, there is a growing need to develop the body of research which explains the complex factors involved in the internationalisation process. Johanson and Wiedersheim-Paul (1975), and Johanson and Vahlne (1977) are frequently credited with the developing understanding of foreign export expansion, through the Upsala Model. The Upsala Model depicts the “stages approach” of the internationalisation of a firm. An underlying tenant of this model suggests that a company develops its activities internationally by exporting first to psychologically close market before distant ones. As such, a primary concept inherent to the Upsala Model is psychological or “psychic” distance. This discussion sheds a perspective of psychic distance as a multifacted construct that is difficult to capture (O’Grady and Lane, 1996). In this paper, I

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intend to show the link that exists between the subjective perception of psychic distance of a target market and the decision making process. My objective is to help explain the concept of distance by creating an understanding from an intuitive perceptive. Central to achieving that objective is to posit the existence of an intuitive aspect of the decision maker’s perception of distance.

Psychic Distance

The term “psychological distance” was first coined by Beckerman (1956) to study the trade flows between European countries. He addressed the propensity of psychological distance to affect trade patterns. Since his initial work, Beckerman’s term “psychological distance” has been used interchangeably with the more contemporary term “psychic distance.” Beckerman’s idea of nearness and proximity is critical for managers who have never done business out of their home boarders but wish to develop their activities in new markets. Beckerman’s conceptualization of psychological distance was later described by Johanson and Wiedersheim-Paul (1975) as “factors which prevent or disturb the flow of information between the firm and its market” (p.308 ). These factors include differences in language, culture, political systems, education, and industrial development. More current literature casts different light on psychic distance. Evans and Mavondo (2002) described psychic distance as the difference between the country of origin and the host country, highlighting the significance of the differences in countries’ perceptions of cultural and economic conditions. Drogendijk and Slangen (2006) explain how the management team perceives cultural differences between the foreign and exporting countries. Relatedly, Child, Rodrigues and Fryans (2009) describe psychic distance as the decision maker’s perception of the differences in economic environment and how the new market attracts its business interests. On a similar note, Prime, Obadia, and Vida (2009) characterize psychic distance as an internal and unforeseen trend. This phenomenon includes the company’s perception of cultural and business environment issues and management strategies. Individuals’ perception about psychological distance is portrayed by Torre and Rallet (2005) and O’Grady and Lane (1996) who describe psychic distance as the degree of similarity in the characteristics of a country that can cause exporters to group that country with other countries exhibiting similar characteristics. O’Grady and Lane (1996) demonstrate through an empirical study the contradictory results of psychic distance and performance. In the


outcome of their study, they found that while Canadian retailers perceived the United States market to be psychically very close, the success of their entry into that market was not particularly high; the term “psychic distance paradox” was then created to describe this phenomenon. Evans and Mavondo (2002) also portrayed in their empirical findings on Australian retailers the relationship existing between psychic distance and performance. In that same vein, Sousa et al. (2010) also concluded in a similar view in their study on Spanish manufacturers. The overriding conclusion is that companies will therefore extend greater effort to succeed when they are confronted with psychically distant markets. On the contrary, their stay in psychically close markets will engender complacency hence affect their investments strategies. However, researchers on psychic distance have divergent views about the part it plays in the choice of foreign markets. Additionally, some scholars do not agree on the measuring index to be used for psychic distance. In the process of decision making, one of the major issues that managers raise is in regard to the nearness of new markets. The consensus is that psychic distance comes from relational differences between entities where information access and processing are determining factors (Medinets, Muchair, & Odiyo, 2009). A large gap therefore exists between a lack of information and the perception that business across the border of a continent could be beneficial or not. This gap is what may account for psychic distant choices. The difference between this perception and the reality may be explained by lack of market knowledge which Valhne identifies as one of the major limits to internationalisaiton. This lack of knowledge is what Johanson and Wiedersheim- Paul (1975) refer to as psychological distance which they describe as “factors preventing or disturbing the flow of information between firm and market” (p. 308).

Geography, Culture, or Environment?

Many factors contribute to the psychic distance phenomenon. Medinets, A., Muchai, M., & Odiyo, M. O. (2009) psychic distance explain Kenya’s export choices better than geographic distance. In like manner some countries in the British Commonwealth are far apart geographically, e.g. England and Australia, but for different reasons they are near to each other in terms of psychic distance. The same could be said of the United States and England and the United States and Australia. Malhotra, Sivakumar and Zhu (2009) demonstrated in their work on the choice of market that most firms in developing countries had a preference for countries which are close in geographical distance to their home country.

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Figure 1

Psychic Stimuli and distances

Furthermore, Dow and Karunaratna (2006) make a clear distinction between psychic distance and psychic distance stimuli. They classify the perception of psychic stimuli by the individual who makes the decisions as psychic distance. This may include culture, environmental factors, business practices, etc. Psychic stimuli refers to the macro level factors as identified in Figure 1 as cultural distance administrative distance, geographic distance and economic distance (Ghemawat, 2001). This model, based on the work of Johanson and Valhne (1975), Kahneman, Slovic, and Tversky (1982) and Ghemawat (2001), helps to introduce an intuitive explanation of pyschic distance and the complexity of interwoven factors. Expressed in another way, Moalla E. (2011) suggests a model for conceptualization of the distance concept by taking into account both the macro


(objective) and micro (subjective) variables of the distance concept. The multidimensional aspects (administrative, geographic, economic and culture) of the distance concept are also taken into consideration. There is also attention placed on “the individual’s perception of the differences between the home country and the foreign country” (Sousa & Bradley, 2005, p. 44). The literature now distinguishes between objective psychic distance stimuli and subjective perceived psychic distance (Dow & Karunaratna, 2006). The limits identified in Moalla’s work are related to the micro variables. It identifies one particular variable which is the individual’s perception of distance. However, as noted in Moalla’s study, variables pertaining to aspects such as industry structure, the organizational culture, management practices, and the business sector, vary depending on the country. This is especially true in developing markets. For example, the link between the size of firms and psychic distance is portrayed in the works of Nuwagaba D, Ntayi J M,and Ngoma M. (2013) on companies in Uganda. Thus in Africa where sometimes the size of the firm determines the management style, it is noteworthy that resort to intuition (heuristics) in the choice of market could be identified. There is probably and particularly no logical reasoning for the motivation that determines the choice of a country. Could it be as a result of lack of information or a preconceived notion? Even so, some argue that stimuli cannot be an objective motivation in the sense that it is directly linked to a former experience that is engulfed in a perception about the choice of the market. Whereas it may be particularly true for Ugandan firms to shift from exporting to geographically distant countries to nearer countries because of perceived risks as noted by Nuwagaba, Ntayi, and Ngoma (2013), the question that needs to be studied critically is how and where the need to export almost instinctively outside of the continent first arises. Indicators such as language, religion and political systems which are macro level factors that Dow & Karunaratna (2006) refer to as psychic stimuli may possibly explain some of the choices but not all them. Evan and Mavondo (2000) urge that more efforts should be made at discovering the factors that drive perceptions than just being measured directly. We attempt in this paper to explicate one of those factors.

The Intuitive Explanation

The model in Figure 1 depicts possible influences on decision makers who opt to enter specific markets. We use the heuristics (intuitive) concept to describe what goes into the perception of some managers during decision

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making. Heuristics is a mental shortcut that helps us to make decisions and judgments quickly without spending time to research and analyse information into details. In heuristics, mental shortcuts are used applied to facilitate the decision-making process. Past experiences may also be used in making quick decisions with heuristics. If according to Johanson and Valhne (1977), the internationalisation process is made up of the market experience and the market knowledge component then our assumption that heuristics may sometimes play a role in judging the choice of a market is valid. Organisations enter those markets that they know best and only move into more unfamiliar or “distant” markets after feeling that they have gained sufficient knowledge. (Johanson & Vahlne, 1990, in Johanson & Associates, 1994, p. 84) state that “Market knowledge and market commitment are assumed to affectdecisions regarding commitment of resources to foreign markets and the way current activities are performed. Market knowledge and market commitment are, in turn, affected by current activities and commitment decisions.” Valhne and Johanson (1977) also posit that the lack of knowledge of the market creates psychological distance. Firms choose to develop their activities in those markets that they know best and only move into more distant/unfamiliar markets after feeling that they have gained sufficient knowledge. Arising from this thinking, the real question may not be whether or not there is lack of knowledge behind a decision to internationalise, but whether an inexplicable reason exists for choosing to enter a particular market. Enter the concept of intuition. We emphasise at this point that “intuition” is not to be understood in the usual venacular, but rather represents a source of information not readily accessible in the wording of a mission statement or strategic plan. . It is important to give a clearer view of what we think intuition is, for the purpose of this paper and why it may seem to be used interchangeably with heuristics. Our understanding of intuitive decision-making stems from how information is gained vis-a-vis associated learning. Information acquired is kept in long-term memory and then becomes the major fundamental and determining component of a judgment or decision. The basis of intuition is implicit knowledge which is available to the decision maker. The intuition we intend to apply in management is based on the works about heuristics and biases by Amos Tversky and Daniel Kahneman, pyschologists in the early 1980s who explain the underlying factors of intuitive judgments. In psychology, heuristics are the efficient rules by which people often form judgments (which in our case is perception about distance) and making decisions. These snap judgments


made possible by heuristics are sometimes identified as intuition. Intuition is an instinctive knowing mainly without the use of rational processes whereas stimuli is that which acts to arouse action. Daniel Kahneman affirmed pertinently that “the illusion that we understand the past fosters the overconfidence that we understand the future.” Therefore, the understanding of heuristics is used in a measure of perception in this paper. What we must seek to find is how intuition is used in decision making and its effect on the perception of distance on the new market by the firm. We consider intuition and its link with perception of psychic distance and the decision making of firms. Our assertions are rooted in the assumption by some researchers Dichtl et al. (1984, 1990) who demonstrated that people are tempted to create subjective mental maps of space and distance which are not always a reflection of reality. Based on the ideas of Gestalt psychology, these discrepancies are not viewed as an incorrect reproduction of reality, but as a valuable expression of individual motives and needs (Müller, 1991). Tversky and Kahneman (1982) identified three main types of heuristics: the first is the availability heuristic in which a mental shortcut helps us to make a decision based on how easy it is to bring something to mind. The question of ordinary people and experts who evaluate the probabilities of uncertain events has attracted considerable research interest. (Einhorn & Hogarth, 1981; Kahneman,Slovic, & Tversky, 1982; Nisbett & Ross, 1980). The Base-Rate is another type of heuristics is a mental shortcut that helps us make a decision based on probability. This type of shortcut helps us make decisions by comparing information to our mental prototypes.

Conclusion

Hopefully, a major contribution of this paper is to illustrate the usefulness of an intuitive explanation as a tool in better understanding of the psychic distance concept. The review of existing literature related to that topic revealed that little research has dealt with the subjective aspects or factors that affect the perception of distance by decision makers on the internationalization of firms. Rather, most of them dealt with the cognitive impact of perception in decision making of targeted markets. Further, it is hoped that an intuitive approach to understanding decision-making in internationalisation processes will help demonstrate that beyond the rational or factual and objective factors and subjective cognitive reflexes, some

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managers may rely on their intuitive instincts or heuristics to choose psychically distant markets for internationalisation. To the best of our knowledge, many studies have focused on the objective aspect. The subjective aspects are now gaining grounds in the research community (Dow et Karunaratna, 2006 ; Prime et Obadia et Vida ,2009); Dow and Karunaratna (2006), Dichtl, Leibold, Köglmayr et Müller (1984) et Dichtl, Köglmayr et al. (1990). Empirical research could help validate, or at least further develop, the theoretical position taken by this paper. There is also the need to consider the direct link between the perception of subjective factors like organizational culture and the perception about distance. In addition to that, questions related to the outcome of heuristics and decision making could be areas for future research.

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Dow, D., & Karunaratna, A. (2006). Developing a multidimensional instrument to measure psychic distance stimuli. Journal of International Business Studies, 37, 578–602.

Drogendijk, R.; Slangen, A. (2006). « Hofstede, Schwartz, or managerial perceptions? The effects of different cultural distance measures on establishment mode choices by multinational enterprises », International Business Review, Vol. 15, n° 4, p. 361-380.

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Poverty Alleviation Through Islamic Microfinance: Case Study Of Ghana

Isaac Afram, Horizons University

Abstract: Poverty is a concept that applies to all humans and more seriously to people living in developing countries. This paper recognizes the potential of Islamic micro-finance as an important component in poverty alleviation strategies, and asserts that micro financing and asset-based lending can play an important role in poverty reduction through the creation a gainful employment opportunities. I further discuss the benefits of Islamic microfinance in poverty alleviation efforts in Ghana and how this role can be enhanced. It was intended to establish and recommend Islamic microfinance and its principles that could raise poverty reduction and economic development in Ghana and in West Africa as a whole.

POVERTY REMAINS one of the most significant social problems of the modern age. Despite successful efforts to reduce the number of people who experience scarcity of resources, over 10 percent of the world’s population live on less than $1.90 (US) per day according to the World Bank (2016). Additionally, problems related to poverty—such as unemployment, crime, malnutrition, and disease—continue to diminish the quality of life of cultures across the globe as they struggle with social unrest, instability, and, in some cases that anarchy that prevails in many developing countries. For impoverished populations, access to crucial financial services are often limited. The ability to plan for life events, obtain credit for business opportunities, facilitate transfer of funds to family members at distances, provide for health care, and other essential needs are frequently beyond the reach of poverty-level families. The United Nations Millennium Development Goals (MDGs) include reducing poverty, increasing education, raising nutritional standards, and requiring financial systems that do not exclude the poor, who have not access to formal financial services. These goals necessitate the need for financial systems, a new vision for microfinance that is attractive to donors and financial institutions that interest to help the poor alike.

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Unfortunately, conventional microfinance services do not meet the needs of the majority of Muslim population in developing countries like Ghana. The reason is that conventional microfinance institutions charge interest on their loans provided to small and medium enterprises as well as to women entrepreneurs. In addition, a vast majority of the Muslim population refrains from availing conventional microfinance services due to the element of interest that run contrary to Shari’ah laws. This presents an inherent problem for the conventional banking systems whose objectives are to provide service to individuals with specific financial needs.

Islamic Microfinance

Microfinance refers to provision of financial services to the poor, including small lending, savings, as well as micro insurance with the aim being a development tool for its clients (Armendariz and Morduch, 2010: 15; Ledgerwood, 2000: 1). The microfiance system initiated by Grameen Bank in Bangladesh, has achieved some success; however, it has also been criticized since it tends to raise cost and plunge borrowers further into debt (Armendariz and Morduch, 2010). Moreover, Islam disapproves of fixed high interest rates charge that get the poor into debt and related difficulties (Obaidullah, 2008b: 10), especially in cases when the poor may suffer the loss of their lands (Ahmed, 2002: 30). Islamic microfinance, on the other hand, offers a more feasible solution by offering an assets-based, rather than debt-based, approaced, to the lending process. Given specific considerations derived from the Quran and hadiths (saying of the Prophet), Islamic microfinance is a provision of financial and non financial services based on Islamic values and thus more adptly addresses the special needs of the poor. Although Islam permits debt, it can be allowed only as the last source of funding (Quran, 7:31; 17: 26-27); the Prophet advises against the dangers of deep debt and also strongly encourages full and on time repayment (Obaidullah, 2008b: 17). Shar’iah commands mutual cooperation and unity as fundamental rule (Quran verse 5:2). On this basis, group based financing and mutual guarantee within the group are acceptable within Shar’iah-compliant financial contexts (Obaidullah, 2008b. Additionally, business contracts formed under Shar’iah law must be free from riba and gharar (Obaidullah, 2008b: 19-22). Basically, there is no primary opposition in the global microfinance ‘best practices’ and the Islamic approach to poverty elimination (Obaidullah, 2008b: 22). In comparison between Islamic


microfinance and the conventional counterpart, both have similarities in terms of their focus on economic development and social objectives, their aim to create a better life for all people, their ability to support additional income, and their promotion of entrepreneurship (Obaidullah, 2008b). Also, both are expected to rely on providing wider access to the poor, be a sustainable institution which can achieve “market based for profit approach”, supported by efficient system and transparency reporting, with the focus on capacity building, combine with integration between microfinance and the official financial system (Obaidullah, 2008b: 9-10). The role of microfinance in fulfilling social and development requirements is essential. Asutay (2010: 29) argues that, as part of the whole financial system, Islamic Banking and Finance (IBF) has a unique character and it should apply the Islamic values contained in the Islamic Moral Economy (IME). The intention of the IBF should be to achieve both economic and social objectives, and these social objectives cannot be separated from IBF due to its obligation to implement the IME, to achieve “humancentered economic development” (Asutay, 2010: 29). On the other hand, the criticism that IBF is operating in an environment similar to conventional banking and failing to realise its social responsibility cannot be ignored (Asutay, 2010). However, as the objective function of microfinance - to act as a development tool through capacity-building - is aligned with Islamic values, Asutay (2010: 29) suggests that the most suitable method of implementing IME is by conducting social banking and Islamic microfinance, which is considered as a fundamental part of IME and IBF due to its ability to implement the values of IME. This, in reality, brings the idea of development into existence, taking steps to avoid the pitfalls of conventional microfinance, such as its likelihood of charging clients high interest rates, a characteristic of the debt-based approach, (Asutay, 2010: 26). Islamic finance, hence, offers a moral approach through a profit and loss-sharing approach in the form of musharakah and mudarabah modes of financing (Asutay, 2010: 26) to prevent individual borrowers to be dragged into further debt. As IMF is based on asset-based approach as opposed to a debt-based approach, it is more appropriate for the needs of microenterprises, since their profits from their businesses can be hard to predict. Providers of Islamic microfinance at the micro level can be categorised as: (i) informal (individual such as friends, relatives, neighbours, moneylenders, saving collectors, pawnbrokers, traders, processors and input suppliers and groups (ROSCAs), (ii) member based-organisations, (iii) Non-governmental organisations (NGOs),

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and (iv) formal institutions (Obaidullah and Khan, 2008c: 23-24). Islamic banks fall under category of formal institutions, having the most potential to provide inclusive financial system. The operation of individual informal sector should follow Shar’iah rules stipulating the repayment of the original loan amount (qard hasan), fees (ujrat), and Shar’iah compliant pawn brokering (al-rahn) (Obaidullah and Khan, 2008c: 23). There are some disadvantages to this approach, such as: very high-pricing, inflexiblability, and high risk assumption related to corruption, mismanagement and environmental catastrophes (Obaidullah and Khan, 2008c). While member based organisation might include village bank, self-help groups (SHG), credit union, and finance cooperatives, Islamic NGOs might include zakah and sadaqah (charity) based organisation with deeper social objective.

Challenges of Micro Finance

Despite the good intentions underlying microfinancing processes, there are some inherent problems as well. For example, microfinanced customers who cannot afford to repay their debts end up relying on their friends and relatives to pay off their debts to microfinance institutions. In other cases, collateral may be auctioned to clear off debts. Others are harassed by microfinance officers and even taken to court. All these incidents leave clients and non-clients with negative impression of microfinance institutions. The root cause to this problem is financing methodology which is an impetus for diversion of funds and non-productivity. There is therefore a need to adopt or employ asset financing that would allow clients become productive and prevent a possibility of diverting funds into consumption domain. Unfortunately, cash financing is the dominant financing methodology employed by various financial institutions in Ghana. Some researchers believe that lower interest rates can enable people to safely join microfinance agreements, but this conviction overlooks the problem with cash financing as method of credit, especially for the poor people. There is a potential of cash loans to lead to the danger of a debt spiral where borrowers get deeper and deeper into debt. This methodology hits the poorest and the vulnerable the hardest, increasing poverty and undermining the foundations of the microfinance intervention. Consequently, this situation leads to the problem of creating a negative image of microfinance institutions, hence reducing the number of clients joining microfinance arrangements. Second, cash financing in the form of credit is not usually appropriate for lower-income borrowers. Loans to asset-strapped borrowers may in fact


make the poor poorer if they lack opportunities to earn the cash flow necessary to repay loans. Basic requirements like food, shelter, school fee are often more urgently needed than financial services and should be appropriately funded. What is required from microfinance institutions is the provision of services that may enable the person concerned to become self-earning unit. Therefore, Islamic microfinance institutions have inherent characteristics that can mitigate the problem related to cash interest-based micro loans. Islamic microfinance involves real transactions instead of cash being given out as practiced by conventional microfinance institutions therefore; asset financing method does help to control the problem of diverting funds into non-productive activities and to this effect creating repayment capability on the part of micro borrowers, projecting a positive image of microfinance for others. Ghana. The Republic of Ghana is considered one of the more stable countries in West Africa since its transition to multiparty democracy in 1992. Formerly known as the Gold Coast, Ghana gained independence from Britain in 1957, becoming the first sub-Saharan nation to break free from colonial rule. Gold, cocoa and more recently oil form the cornerstone of Ghana’s economy and helped fuel an economic boom. In the middle of the 1500s, Muslim traders from Begho played a major part in bringing Islam to the Gonja, the northern states of Ghana. According to traditional historic accounts, a group of Bambara warriors from the middle region of Niger conquered the people in the Gonja region and established the state of Gonja. The Hausa Muslims brought Islam to northern Ghana, as well. They were different and less tolerant Muslims. The Hausa lived from northern Nigeria through Salaga. Ironically, the Hausa themselves were brought under the influence of Islam through Dyula-Wangara traders who crossed all the way east, through modern Ghana, to Hausaland in the fourteenth century. The influence of the Hausa as keen traders, shrewd business people and extremely skilled artisans is noteworthy. Today, Muslims represent approximately 17% of the nation’s population, concentrated primarily in the northern part of the country (Ghana Embassy, 2017), creating an environment ripe for Islam-based banking institutions and laws. In the case of Ghana, the main concerns that arise as Islamic finance emerges within the conventional system, is how to embed Islamic financial contracts into existing juridical and supervisory framework. There are two aspects to consider: the legal aspect of Islamic contracts, and the regulatory aspect of Islamic financial transactions. From a legal perspective, there is a problem of multiple taxes of Sharia-compliant products and arrangement. Existing laws,

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regulations and practices often result in double taxation of asset financing products. For instance, value added tax (VAT) is imposed in two situations in murabaha undertakings; first is when the Islamic financial institution buys goods from the vendor and second is when the client buys from the institution. This implies that Islamic financial institutions must experience stiff and unfair competition from conventional financial institutions. Normally conventional loans are cheaper than Islamic loans through asset-backed financing. Asset-backed financing is defined as selling transaction with tax affect. The financial institution offering this type of loan must include the amount of VAT in the profit margin and income tax in result products offered through murabaha become dearer than it would have been in conventional arrangement. Murabaha is commonly used as a substitute for a conventional loan to finance customers; hence both must be equally treated for tax purposes. In both transactions the principal amount is the same; in practice the profit rate of the murabaha amount is the same as the interest rate on a conventional loan. Further, the amortization schedule on the repayment of the deferred murabaha sale payment is identical to the amortization schedule on the conventional loan. There is no point to provide conventional financial institutions with benefits and impose burden to Islamic financial institutions simply by using different arrangement with similar effect. After murabaha the most frequently used Sharia-compliant financing arrangement is ijarah (leasing). In this arrangement the Islamic financial institution owns the asset and leases it to the customer in a way the client ultimately acquires ownership of that asset after paying rent. The rent amount paid in this facility is equal to the principal and interest in conventional loan. On the other hand, from a tax perspective, ijarah transactions attract significantly more tax than its conventional loan equivalent facility. First, the Islamic financial institution purchases the asset and then leases it before transferring the ownership of that asset to the customer. VAT will be payable on three transactions in ijarah whereas payment for tax purposes will be made once in the transfer of ownership to the clients which may lead to higher prices of the products, with a conventional loan equivalent arrangement. Second, there will be additional stamp duty payable on the ijarah due to the additional documentation. The third area is the amount of the basic rent will be taxable, even though the rent is really a composite of principal and profit. Thus, there is income tax on the principal component whereas in the conventional loan, there is tax only on the interest component. Another mode of finance that is appropriate to use is diminishing


musharaka. Diminishing musharaka is an equivalent arrangement to a conventional loan of home finance. In this regard, it seems intuitive that the two must be treated equally with respect to regulatory provisions and tax purposes, but such is often not the case. At present time, if diminishing musharaka is applied it seems likely that asset to be acquired through this facility becomes expensive than in conventional equivalent arrangement due to additional amount of taxes. The amount of equity sales will attract VAT and income tax, whereas in conventional finance only interest is to be taxed. The rent paid in diminishing musharaka consists of principal and profit which would be interest in conventional. In addition, the amount of equity to be sold to the customer does also attract VAT which again makes the asset under this financial scheme more expensive. It is therefore important on the ground of fairness to have tax on the profit embodied in the rent and tax free equity sales. Conversely, there are no restrictive and injunctive regulations to govern Islamic financial structures. The Islamic financial institutions in Ghana operate in unclear regulatory landscape. The framework for Islamic finance regulations needs to be designed to reflect the specific characteristics of Islamic financial sector. The regulatory standards applied to conventional finance would therefore, be insufficient to provide the necessary safeguards for Islamic financial institutions. The peculiarities of the Islamic financial sector necessitate either a dedicated law for the sector, or that the peculiarities are addressed adequately under other legislation that can be applied to regulate the sector. A final critical challenge in the growth and development of Islamic microfinance is a lack of human resource. Shortage of trained and certified experts in Islamic finance may limit the ability of Islamic financial institutions to expand their activities. A large majority of the human resource force working in Islamic finance industry comes from the conventional side and hence does not have adequate understanding of Islamic finance which affects their ability to deal with their current and potential clientele. Yet, the performances of Islamic microfinance in general are quite promising. Evidences from the impacts studies also provide good results on how Islamic microfinance can improve economic and social well being of the clients, although in certain areas improvement is still required, particularly dealing with improvement of regulation and provision of trainings in social development both for institution’s employees and borrowers. Finally, to mitigate the danger of creating more poverty and rescue the image of microfinance institutions, asset-backed financing is appropriate and relevant for poor clients. This financing methodology has potential to prevent

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diversion of funds into consumption domain and help microfinance clients become productive, and therefore able to create positive image of microfinance institutions. In this respect, the methodology of financing for poor people matters a lot than just lowering interest rates. Asset-based financing does not easily provide room to divert funds into non-productive domain.

Conclusions and Recommendations

As this discussion indicates, it is important to provide regulatory framework that takes into account the uniqueness of Islamic finance. The structure of financial regulatory framework does not include Islamic finance as a component of financial system; likewise Islamic finance is not defined and regulated within financial laws and regulations. Therefore, there is a need for clearly defined regulatory provisions for Islamic microfinance institutions to operate in the financial market effectively and competitively. It is probably appropriate for Bank of Ghana which is vested with the power of regulating financial sector generally to implement the relevant legal, supervisory and regulatory provisions through the issuance of new regulations or guidance or even through new legislation. Islamic microfinance, as a relatively young industry, provides services particularly to meet the demand of a specific market whose members cannot accept the conventional financing product due to their adherence to Islamic principles. Thus, Islamic Micro Finance should be considered a contribution to poverty alleviation, financial development, and financial inclusion because it offers unique characteristics with rich of values and human oriented. In practice, it has an interest-free approach; hence, it avoids dragging borrowers into a debt trap with its related consequences. Moreover, microfinance institutions do need to develop strategy for the deprived persons access finance for their needs and become productive. So it is imperative not to simply extend credit on cash terms. It is more advisable to provide loans in the form of asset that can help to break the cycle of poverty when it is invested in an economic activity that generates increased earnings. It is important for microfinance clients to be provided with essential tools for which they can employ themselves and generate income that would be appropriate methodology for poor clients and microfinance reputation. Therefore, asset-based financing is a relevant methodology to overcome the problem of diversion of funds into non-productive purposes. In this case it is worth to note as well that the negative impression associated with conventional microfinance as the result of cash financing is removed. The successful implementation of Islamic


microfinance in a political economy such as Ghana may be contingent upon the adoption of tax policies that eliminate multiple taxes on Islamic financial products. The Ministry should ensure that Islamic financial institutions are entitled to the same deductions, tax benefits and burdens and tax treatment in respect of equivalent arrangements to conventional loans.

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Asutay, M., 2010. Islamic Microfinance: Fulfilling Social and Developmental Expectation. In: Bloombury Collection, ed., Islamic Finance Institution and Market. London: Bloombury. pp. 25- 29.

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Obaidullah, M., 2008a. Role of Microfinance in Poverty Alleviation. Jeddah: IRTI, Islamic Development Bank.

Obaidullah, M., 2008b. Introduction to Islamic Microfinance. New Delhi: International Institute of Islamic Business and Finance.

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Zarka, M. A., 2012. Leveraging Philanthropy: Monetary Waqf for Microfinance. In N. Ali, ed., http://www.ghanaembassy.org/index.php?page=language-and-religion

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