FEB 18 — In this age, which believes that there is a short cut to everything, the greatest lesson to be learned is that the most difficult way is, in the long run, the easiest. — Henry Miller
Of all the sports I play — basketball, tennis, football, biking, running and hiking — hiking provides a number of lessons for Islamic finance and the halal industry.
The metaphor is applicable to many economic sectors, industries and companies, but more so in these two inter-related yet mutually ignored movements.
A misstep can be game over for a hiker, as a misstep can be disaster for an Islamic bank. The public trust and confidence, DNA on the balance sheet, are the foundations of Islamic or halal.
It starts out with one’s medical examination and appropriate equipment; one has to be/become “fit” to climb, otherwise have the ambulance on speed dial.
You and I may not have the stamina of a trekking Sherpa in Nepal, but hiring a professional trainer, and time and miles on a treadmill on incline, stepper and elliptical will do the trick.
Is the Islamic bank public ready? Who is on the shariah board? Is it appropriately capitalised, qualified human assets in place, vetted marketing materials, public inter-facing staff properly trained, strategy, tactics and execution in place with timelines and refinement feedback, customer service sharp and responsive, etc., as unexpected challenges will rise internally/externally.
Finally, what is the background of the CEO and is there confidence by the senior leadership team (SLT) and rank and file, as his vision must ultimately be executed with driven motivation.
First step out
One must start out with a hill before embarking on a mountain. For example, it makes sense to practise climbing the nearly 300 hills in Malaysia before embarking on Kilimanjaro (Kenya), K-2 (Pakistan), Mt Olympia (the US) or Mt Everest.
Most (serious) hikers aim to climb the highest peak in their country first. The initial success builds confidence and motivation to do a few more runs with, say, weighted vests, and then move forward to the next climb-cum-summit.
It’s not advisable to listen to music while hiking, as the hearing sense picks up what the eye misses due to dense foliage, fog, darkness, animals, focus on terrain, etc.
Similarily, the Islamic bank cannot put on blinkers as it will miss opportunities and will not be able to react to a (reacting) competitor. Thus, the body and the bank need to have all the senses available for optimal operations.
For a bank, a province of a country (location) is the lower hanging fruit, otherwise resources are spread thinly and depleted fast with exit results.
When a retail Islamic bank closes shop, it provides a greater chill, a run on deposits, in the marketplace than a conventional counterpart (sized) bank closure.
Studies typically suggest targeting the margin yielding bankable in major cities, KL or Jakarta, before embarking on outer regions. For example, Saudi Arabia’s Al Rajhi and Kuwait’s Kuwait Finance House established a beach-head presence initially in Kuala Lumpur. Yes, it’s crowded and competitive, but better than sparse and secluded, as cost of customer acquisition requires a longer break-even time frame.
(Islamic banks today are a national phenomenon as a sprinkling of branches in another country is, by definition, not international. The foreign operations may be for trade finance funding and corporate banking for company operations from the home country.)
Next, the right equipment is a must, as jogging sneakers, shorts, T-shirts and water bottle work well in a gym or around the KLCC park but will be inadequate if the hiker attempts to climb from the base to a few hundred metres with such ware. Thus, climbing boots, dri-fit shirts, trail mix and food in a backpack, climbing pole, ropes, etc, are the necessary tools for success.
It is an immense challenge for a new bank to enter into an already crowded space of dedicated Islamic banks, windows and subsidiaries, and consumer finance companies. Additionally, the success formula in conventional banking, be it marketing, PR, staff training, and even the CEO, does not translate well into the Islamic finance space, as the question “what’s the difference” has to be answered.
Some of the questions requiring answers include: has the bank identified, via primary studies, target customer segmentation, product differentiation and price competitiveness, PR and marketing including premiums, etc. Thus, the offering must overcome (1) approach of what worked for others will work for us and (2) “me too” perception by the market place.
A hiker will initially take an established (worn out) path, and will not follow the foot imprints deviating from the path. An Islamic bank needs to fit in (shariah adherence — “path to the watering hole”) and stand out (pricing, products, customer service, etc.). As every hiker is different, so is every Islamic bank.
Now that we are “fit for purpose” ready, the decision of which trail — beginners to advanced — corresponds to training and equipment, and, for a bank, where should the first branch be located, maybe within headquarters?
As the climb begins, the external environment is not predictable as the hiker has to deal with different terrain, varying steepness, low hanging tree branches (at lower altitude), rock outcropping, water flow, mud, creepy crawlies, weather, etc. After a period of time, few weeks, the same climb eventually becomes more efficient, hence, better timing and pacing, supply carrying and reading the environment.
After the ribbon-cutting ceremonies are over, red carpet rolled up, and VIPs and media have left, now the job starts of attracting depositors, investors, corporate, selling cards, etc. The people/corporate, much like the terrain, vary in needs and demands. The challenges will come from both within i.e. cards not working, delays in approvals, customer service not efficient, etc., and without, competition.
Competition may send mystery clients to check out the new bank, they may under-price offerings, they may subtly question the compliance of offerings in the marketplace, etc.
After a passage of time, the growing pains become less and a routine develops with the bank and customers. There may be a “blow-up”, product’s shariah authenticity questioned in market place, much like a climber stumbling and injuring or twisting an ankle, and, in both cases, damage control (shariah advisory board comment to updated medical kit) needs to be in place.
The first view
After the compass or measurement shows an achievement of, say, 50 per cent on the first climb, the climber will look back and marvel with a sense of accomplishment, but will also look upwards and examine how much more until the summit. The benchmark on the trail to the summit, be it a tree, rock, etc., becomes faster and easier to achieve over time.
The bank branch will have a dashboard of key performance indicators, KPI, concerning deposits, loans, cards, non-performing loans, concentration risk, treasury placement profits, etc, over time intervals. The bandwidth of volatility will narrow over time as products get added/removed, refinement of marketing mix, etc.
Thus, the time to close leads narrows, threatened customers are retained without price compression, staff turnover reduced, back-office bugs reduced, etc. The bottom line is the first set of actual numbers (“how much/far” we have trekked) and becomes the benchmark to improve upon over time.
By the way, the climber will use a stick to climb and meet people on the way up and down. They will give advice on terrain conditions, different trails to take, and heeding such advice results in better climbs. Similarly, the bank will get advice from consultants, feedback from customer service and suggestion boxes for more efficient operations.
The view from the top is magnificent and different on each climb, depending on the time of day. The success builds the confidence to seek a more difficult mountain to hike. If the hiker happens to enter contests and wins the gold medal, he/she will impose self-pressure to repeat, then “three-peat”, and so on.
The magical one-year anniversary implies that the bank not only survived, but met KPIs, hence, a sense of achievement in a competitive and crowded market. It builds the foundation for opening another branch, and so on. If the bank wins an award, the CEO will be under pressure to replicate performance.
Finally, the climb down is equally challenging as one has to pace oneself, footing has to be exact or else you can blow a knee, etc. Once the bank (branch) has meet the KPIs, the two biggest challenges are complacency and inability to continually reinvent as competition is dynamic.
The lesson for Islamic finance from hiking is “previous preparation prevents poor performance”, and “continued commitment confuses complacency”.
* This is the personal opinion of the columnist.