Investigating the effects of using the balanced scorecard on Islamic banks' performance

Background: Islamic Banking follows the principles and rules of Islamic dealings; it is also governed by Sharia Law and thus adheres to stringent Sharia rules and principles. The operations of such banks are in conjunction with Islamic teachings and therefore it is compulsory that they be in harmony with the Sharia agreements. Over the last three decades, Islamic Banking has experienced global growth and now covers almost all business areas in the banking industry. On the other hand, conventional banking relies on the principle of the debtor-creditor relationship. The first relationship is between the depositors and the bank, while the second relationship exists between the borrowers and the bank. Interest is the price of credit, which reflects the opportunity cost of money. Unlike Islamic banking, conventional banks have been intensively researched by scholars from different fields, including planning, performance, modelling and economic conditions. Aims and Objectives: The aim of the present study was to establish the impact of strategic planning on the performance of Islamic Banking. More specficically, the main purpose of this study was to examine the effect of implementing the Balanced Scorecard model on the performance of Islamic banks in Bahrain. The research covered the impact of articulating the vision and the mission of Islamic banks on their performance, and also looked at the effect of communicating the vision and mission to all stakeholders on the banks' performance. Finally, the research also assessed the impact of setting strategic goals and objectives and developing strategic implementation and feedback mechanisms on the performance of Islamic banks. Methodology: With a view to achieving the above-mentioned objectives, the study involved a detailed review of available literature on strategic management performance tools. This review considered the pros and cons of available models, and concluded that the Balanced Scorecard is the most suitable model with which to measure strategic performance for many industries and organisations, including those from the banking sector. The literature also included a review of Bahrain's economic climate, its banking industry, and the growth of Islamic banking in Bahrain and elsewhere. The review clearly revealed that the performance targets of Islamic banks in Bahrain can be split into five dimensions (Enhancing Capital Efficiency, Reducing Cost, Enhancing Customer Service, Capturing New Opportunities, and Sharia Compliance). This is significantly correlated with the four core dimensions of the Balanace Scorecard model. As far as the research paradigm is concerned, this study utilised the positivsm research philosophy due to the fact that it uses an agreed-upon and ground theory model, i.e. BSC. However, when it came to interpreting the results, the present study also benefited from the knowledge of the researcher, who has more than 30 years' banking experience at senior management level. This resulted in a mixed use of the positivsion and interpretivsim paradigms. The study essenetially followed a descriptive research method based on the deductive approach. The aim was to prove the hypothesis, which stated that the BSC affects the performance of Islamic banks in Bahrain. The main data gathering tool used in this research was that of semi-structured interview with a sample of 21 top senior bankers and professionals working in 15 Islamic banks and 2 regulatory bodies in Bahrain. The interview responses were coded based on a 10-point scale, following which these responses were analysed using descriptive and inferential statistics to test the research hypothesis. The study also used a particular tool for qualitative and narative analysis. In order to ensure reliability and validity, the researcher conducted pilot interviews prior to the actual study. During the pilot test, the researcher used methodoligical triangulation, which involved mixing different methods at different stages of the research, including positivism and interpretivsion, descriptive and exploratory, deductive and inductive, and qualitative and quantitative. Results and Conclusion: The analysis from the interviews indicated that there is a positive correlation between the implementation of strategic management tools (BSC) and Islamic banking performance in Bahrain. The study also revealed that clear and strong strategy communication from top management to lower staff level enhances the success of strategic management tools implementation, which is thus reflected in the banks’ performance. Furthermore, the results revealed that all four dimensions of the BSC are equally important. However, the analysis did uncover a new dimension which must be included in future studies: the Sharia Advisory Board. Finally, the results of this study indicated that despite significant differences between conventional banks and Islamic banks, the implementation of the BSC for both systems is almost identical. This finding, which relates specifically to Bahrain Banks, is in keeping with the findings from the literature review, which confirmed the same results for banking in general.