Al Baraka Islamic BankAl Baraka Islamic Bank is one the subsidiary banking units of Al Baraka Banking Group. Al Baraka Banking Group is a Bahrain Joint Stock Company listed on Bahrain and NASDAQ Dubai stock exchanges. It is a leading international Islamic bank with Standard & Poor's long and short-term credit ratings of BBB- and A-3 respectively. Al Baraka Banking Group offers retail, corporate and investment banking and treasury services strictly in accordance with the principles of the Islamic Shari'a. The authorised capital of Al Baraka Banking Group is US$1.5 billion, while total equity amounts to about US$ 1.7 billion. The Group has a wide geographical presence in the form of subsidiary banking Units and representative offices in twelve countries, which in turn provide their services through more than 300 branches. These banking Units are Jordan Islamic Bank, Jordan;
Impact of external environment on an organization and relate to its strategies:
Islamic banks operate exclusively in large cities with some now venturing into secondary cities but they are absent from rural areas where there is great potential for business growth. The large global financial players have been instrumental in fostering linkages and product innovation. This is largely because the investor community worldwide is being attracted by the 'risk-return' and other innovative features of Islamic products, the product range IF offers, and the ethical investment philosophy and governance structure it promotes. Worldwide demand for Islamic financing is also gaining momentum as IF conforms itself to conventional finance by adopting proper regulatory and supervisory frameworks. Recognizing the implications of financial globalization on IF and IF's implications for global finance, Multilateral Development Institutions have been supporting the Islamic Financial Services Board (IFSB) to ensure effective alignment in the regulatory
frameworks, while accommodating modifications and refinements of the special features and modalities of IF.
Critical evaluation of use PESTEL:
PESTEL (Political, Legal, Economic, Social, Enviromental and Technological) is a framework of macro-environmental factors used in the environmental scanning component of strategic management
Political and Legal Environment:
The political environment of any country in which a company operates is very important and essential to understand in order asses the strategic position of that organization. Albaraka Islamic bank is operating in Pakistan, a country where
Pakistan has always been struggling for political stability since its creation. Government has been changing in Pakistan many times due to multiple reasons and most of the times Military has taken the charge of the government. So, there are significant political risks in Pakistan. Successive military and civilian regimes have failed to implement and formulate sound policies for long terms. Standard & Poor's has rated Pakistan as high instable political environment. Pakistan has also suffered from a long periods of poor governance. (Liew 2003)
Each Government started his ruling with a different slogan. Zia-Ul-Haq gave a slogan of Islamization and in his times it was proposed that whole financial system of the country must be under Islamic laws. Without going into details of this there has been a lot of ups and downs in policies. State bank of Pakistan has also been influenced by the ruling party as it was under the control of Ministry of finance. Religious groups have also great pressure on the government in policy making as people of the area are very sensitive in the matters of religion. Each ruling party is found involved in corruption. So, these political instabilities and problems like corruption is a very big hurdle for any sector to grow properly including Islamic banking.
But the positive aspect is that State bank of Pakistan has been given sovereignty and it is now an autonomous body in making its decisions. This factor has brought some stability in the policies of the State Bank of Pakistan for banking sector as the change of government has no concerns with them. So, banking sector is enjoying some long-term policies now. SBP has played a vital role in reforming banking sector and has provided guidelines for implementing Islamic banking as well. From this perspective environment becomes suitable and favorable for Islamic banking in the region as banking policies are being formed for long times and religious pressure groups are also in favor of this sector. Islamic banks can make their strategies accordingly as there is no chance for any major change of policies in near future. Legislation is not fully implemented but it is progressing slowly and going in right direction. Regulatory framework given by SBP for banking sector has defined the parameters for their operations. These parameters are flexible and are providing banking sector a fair market without conflicts. SBP has promoted Islamic banking as it has banned issuance of new licenses for conventional
banks but Islamic banks are still being granted. So, such legislation is going in favor for Islamic banking sector in Pakistan.
Economical:
Economy of a country plays a major role in the profitability and success of any sector and organization. Economic environment consists of factors that affect consumer purchasing power and spending patterns. Nearly all companies examine the economic environment before strategic planning. (Jain 1999 , p.140)
It can be analyzed from those statistics that Pakistani economy is good for foreign investments and it is also good for Islamic banking sector of Pakistan.
Pakistan's economy was a model economy for developing countries in 1960. But inconsistency in policies, wars with India and may other factors accounted bad for it.
But the wide-range structural reforms which were implemented over the past few years have helped the economy in stabilizing itself. These reforms include trade liberalization, energy-sector deregulation, restructuring of banking sector and tax reforms etc. So, the economy is now less vulnerable to shocks. (Liew 2003)
GDP rate of Pakistan is showing a consistency in upward direction and per capita income has increased as compared to past. FDI is increasing every year. Home economy is in recovery phase but it is showing good indicators for banking sector. Some transactions of Islamic banking like modaraba have been promoted by giving incentives. As Pakistani economy is showing some level of stability and consistency from last couple of years, so it's good sign Islamic banking as well.
Socio-Culture and Environmental Factors:
Deep study of local culture and social setups is also one of the major factors which account much in successful strategy formation. Varying types of consumer behaviors are found in different cultures. According to Kotler, culture is "the set of basic values, perceptions, wants and behaviors learned by a member of society from family and other important institutions." (Kotler et al. 2004)
Pakistan is situated at very important geographically location and it has a diverse culture. Islam is the religion of majority of the population and Islam has deep and ever lasting influences upon the culture of the people of the area. So, the life style of people and attitudes of consumers is favorable for Islamic banking as people are religious and they want to deal in Islamic finances. Pakistani people have a respect for their religious and cultural celebrations. Islamic banking is taking an advantage of this socio-cultural environment of Pakistan. Pakistan is the 6th populous nation in the world. So it is a big market for any sector.
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Technological:
Technological environment can act as the most dramatic force in changing the working style and destiny of the firms. Technology is changing rapidly and every new technology replaces an older one. Marketers need to understand the new technologies and the ways that how these technologies can be helpful to serve customers. (Kotler 1999, p.185)
Technology has reshaped the businesses and services as well. Technology has also brought a great change in banking sector. A lot of facilities are being provided to the customers by the banks which were not possible without it. In the world of technology, IT sector is the leading one which has revolutionized the world. There is lack of proper infrastructure in Pakistan, for that reason different sectors are not becoming able to cope with the technology. Banking sector has introduced a lot of innovative services with the help of technology. Islamic banking is also on its way but it is expanding slowly as compared with potential demand of Islamic banking.
Determinant of national advantage using Porter's Diamond:
Classical theories of international trade propose that comparative advantage resides in the factor endowments that a country may be fortunate enough to inherit. Factor endowments include land, natural resources, labor, and the size of the local population.
Michael E. Porter argued that a nation can create new advanced factor endowments such as skilled labor, a strong technology and knowledge base, government support, and culture. Porter used a diamond shaped diagram as the basis of a framework to illustrate the determinants of national advantage. This diamond represents the national playing field that countries establish for their industries.
The individual points on the diamond and the diamond as a whole affect four ingredients that lead to a national comparative advantage. These ingredients are:
the availability of resources and skills,
information that firms use to decide which opportunities to pursue with those resources and skills,
the goals of individuals in companies,
the pressure on companies to innovate and invest.
Evaluation of the purpose and attributes of SWOT analysis:
SWOT analysis
S : religious appeal, Zakat, Innovative aspect, all bigger banks carry a Islamic portfolio because of its success.
W : Lack of standardization, There are differences in theory and practice, Misinterpretation of Islam
O : fastest growing religion in the world, Traditional interest based banking losing its value, New markets have been emerged in non Islamic regions.
T : loopholes are present in its proper implementation, Research in products, Environment for Islamic banking in west has been declined after 9/11
Matching of SWOT to organization competences in order to generate strategic options for organizations:
Govt. has provided a framework regarding legislative which helped in reducing the difficulties and time delays in recovery of defaulted loans. (Khan 1999) Although the risk involved in doing Islamic banking transactions is very high but this framework will considerably reduce the risks.
Now Islamic banks have more opportunity to do business in Pakistan because Govt. has reduced the tax on banks from 58% to 41%. Govt. has also stopped giving licenses to conventional banks and promoting Islamic banking in Pakistan which will help Islamic banks gaining more market share in coming years.
Growing GDP rate and increase in per capita income reflects that economy of Pakistan is improving. FDI is also increasing in Pakistan and one of the major attractive sectors for foreign investors is financial business. Living standard of common population is increasing and as a result consumer power has increased. An expanding economy and increase of consuming power can act as a fueling demand for Islamic loans and investments from consumers and companies. (Nambiar 2005)
Although the literacy rate of Pakistan is low but it is increasing. There are more educated persons in the market who have brilliant ideas but don't have the
sufficient investment to start new business or study abroad for higher education. Islami
banking can give more loans and by introducing new transactions for these young people
can really enjoy more market share and also it will help in the reducing unemployment in
Pakistan. (Saleem 2007)
Micro financing is one of the major businesses of Islamic banks and it is also the largest sector in Pakistan in terms of potential clients. So Islamic banks have great opportunity to invest heavily in this sector and earn profit.
There is much space and potential available in housing and real estate sector for investors in Pakistan. So, Islamic banks can invest in this sector as a demand of housing in urban areas of Pakistan is increasing at the rate of 8%.
One third population of Pakistan lives in rural areas and most of them are engaged with agricultural activities in anyway. There are not available any considerable financial institutes to provide services in this sector. So, Islamic banking has an opportunity to take advantage of low competition within this sector. (madden 2007)
According to Hofstede, there is a collectivism culture in Pakistan, in which people are more associated with their families and try to support them financially as well. Hofstede also rated Pakistani culture as uncertainty avoidance culture because people have strong religious believes. So Islamic banks can take advantage of these factors by introducing different financial schemes which could support local culture.
Islamic banking has started their business in the 21st century which is the era of IT. They have more opportunities in electronic banking and online banking. IT and communication sector is increasing in Pakistan, Islamic banks can take advantage from this by facilitating their customers through different forms of IT and telecom.
Pakistan is a Muslim country and 97% of its population is Muslim. Most of the people were not doing business with the banks because of their strong believes against interest based banking. Only six full fledge Islamic banks are working in Pakistan and they have big pool of clients interested in dealing with Islamic banking.
There is a relationship between political insatiability and per capita GDP growth, political instability has adverse effects on economic growth as the long term policies are not implemented affectively. (Swagel et al. 1996) There has been political instability in Pakistan as Governments have been changing frequently. Every new Govt. starts with a new set of policies and old policies are terminated often. This is a major threat for new growing Islamic banking sector as they have to face problems in implementing long term policies.
Corruption and bribery has its deep roots in Pakistani business culture. The motivational factor behind this can be a combination of economic, social and cultural factors. (Daniele 2006) Our empirical findings show that even top officials and bank executives have been found involved in corruption cases. It has been common practice in Pakistan that some people of influential groups and bureaucracy take loans from the banks and don't pay back their loans. They make their loans adjusted by using their different political links or using bribery.
Our empirical findings show that increase in oil and food prices in the world has caused rise in inflation rate in Pakistan. Inflation rate rose to 7.8% in 2006-07. Although SBP is trying to control it by tightening its monitoring policy but it is a major threat for businesses and investors as the price of products increases and value of money decreases.
Our empirical findings show that there is a poor physical infrastructure in Pakistan. So Islamic banks have to face problems in managing their business activities on remote locations which on the other end can be a good market place for Islamic banks.
People of Pakistan come in the category of uncertainty avoidance group according to Hofstede. People believe on rumors with out any confirmation and justification. A large number of people in Pakistani are doubted about the Islamic banks whether these banks are Islamic or they are just using name of Islam and doing the same thing as conventional banks.
Impact of turbulence of environment change and the impact on strategic dynamics:
Islamic banking is now operating in Muslim as well as many non-Muslim countries. JAK bank in Sweden and Denmark (Douthwaite 2002) and number of banks in other European countries are good example of this. It means Islamic banking has more opportunities as it is being accepted by non Muslims as well. It was also accepted by World Bank and other banking associations. Money market is the problem in Islamic banking in Pakistan. But with the popularity of Islamic market there would be larger pool of money market available and it will help in the progress of Islamic banking.
By the growth of Islamic banking in Pakistan, conventional banks have now started Islamic banking branches. It means they have accepted that there is growth in Islamic banking sector. They are now opening new branches thus utilizing more capital and also spending lot of money on advertising and marketing. This situation has lowered their profit margins.
The following are key area where an organization like Al Baraka Islamic should continuously update itself and develop in order to fully exploit the changing circumstance.
Product Innovation- Ensuring innovative Shariah compliant products.
Service and product Differentiation.
Top quality service to ensure that service standards of IB Institutions is at par with conventional.
Aggressive Marketing to ensure that Islamic Banking reaches the tipping point in quickest possible time.
To remove conflicting confusions and doubts from the mind of a general customer
Conclusion:
In Pakistan, both Islamic and conventional banks are doing their businesses. Lot of conventional banks, both local and foreign, are opening new Islamic banking branches that's why competition is very intense. And one important thing is that although Islamic banking share to the total banking industry is increasing but it's just 3.8% of total industry and conventional banks are enjoying the remaining industry share.
Pakistan, in light of its past experience, is launching a gradual and steady approach to Islamic banking. Despite rapid expansion in industry, the share of Islamic banking in the total banking system is a modest 3.2%. Moreover, it only caters for around 23,000 borrowers through around 170 branches relative to the country-wide 5 million borrowers (or 4.8 million excluding microfinance borrowers)tapped through 7,700 branches by conventional banks. Financing and investment levels of Islamic banks barely range around Rs77 billion, which is below 3% of the total banking system's advances6. On the product side, Islamic banks so far offer about 75% of products currently available in conventional banking while clean lending for consumer financing products, like personal loans and credit cards, still pose a challenge.
Islamic Banking is growing rapidly in Pak it has been expected that by 2012 total share in Banking sector will be 12%.
