Leadership in Banking: The Required Approach

April 25, 2020

Leadership in Banking: The Required Approach

(Published in the Anniversary Issue of the Financial Express)  

Dr. Shah Md Ahsan Habib[1]

Leadership is an extremely complex and broad subject which can be tagged with a country, community, society or business entity. Leadership focuses on human qualities involving creation, imagination, expression, communication etc. that are expected in a person to lead or perform a job efficiently in a situation or position.  Business of banking or commercial banking is different from all other types of businesses in terms of ownership pattern, agency arrangement, and governance structure; and thus leadership should be perceived differently. Moreover, the performance yardsticks for banking, a highly regulated and supervised industry, are clearly different and associated with wide array of financial, economic, and social criteria. 

The importance of leadership approach received renewed focus in the context of the bank failures during the most recent global financial and economic crisis; and the relevant literature especially emphasizes on the need for change, and the need for willingness to create change.  Considering the changing need in the banking business to ensure competitive advantage, customer behaviour, technology and competition are rapidly evolving; therefore, bank leaders must be ready for challenges and should start viewing change as a norm rather than an exception. In this context, identifying leadership approach is a key area to address that can be perceived from different dimensions. From the available published literature, the broad leadership approaches may be distinguished into: Transactional Approach; Transformational Approach; and   Laissez-faire Approach. All approaches have their own distinctive features, advantages, and disadvantages. Several studies point to the fact that a single approach cannot work at all times and in all situations. There is no leadership style that would be ideal for every situation; and thus it would be inconsiderate to blindly adopt tools and actions that were successful in one setting to another one. With the time, the broad leadership approach of a bank should be changed in line with the changes in external and internal business environment. Moreover, more than one approach might be relevant at a certain time or in a certain situation in any institution or bank. In line with the experiences of the most recent financial crisis, to address future challenges of the banking industry, the need for change and innovative mind-set are recognized as integral parts of leadership approach. Today banks should not ignore the need for innovation and change; and should mainly rely on participative approach. A good number of banks fall prey of the financial and economic crises of 2007-2009, and governments had to undertake bail-out packages to save many of these. However, a few banks performed brave jobs and recovered from the fall of the businesses mainly because of their leadership approaches and dynamic roles of the boards; where as in some cases, leadership failed and there was no way but to intervene to save banks. The key findings of several studies show that an autocratic leadership style in banking has a destructive effect on a bank and its business. Furthermore, it has been established that there is no one best leadership approach which can be generalized for the whole banking industry, and to select the best practice, it is recommended to analyze the situation of the business. In the context of the banking industry, emotional intelligence is a crucial requirement.  Emotional intelligence is particularly contributory in ‘group leadership’ where a collective contribution of a group of co-workers is critical like in banking business.  It is associated with job satisfaction and efficient service delivery. Job satisfaction is associated with emotional experience which is defined as a positive or desirable emotional state resulted from the employee’s job experience.  Several studies showed that a higher level of bank employee emotional intelligence has a positive effect on customer service irrespective of the location of the bank.

Banking is a highly regulated and sensitive industry where leadership approach should be seen differently.  To guide banking industry, bank boards, and top and senior executives must deliver performance while complying with firm regulations and addressing risks.  Of all the businesses, banks and financial institutions became very sensitive and turbulent in the changing unpredictable business cycles. In spite of several similarities, the leadership approach demand seeing from the perspective of banking core fundamentals that are clearly different from most businesses.

‘Shareholders are the owners’- a core business fundamental attribute. Shareholders take entrepreneurial risks, and deserve the right and authority to decide on the policy and strategic issues of a business entity. It is really possible to relate this concept with banking industry completely? It is true that a bank is set up as an entrepreneurship activity. However, when a bank is established, it became part and parcel of an economy and numerous depositors became the major risk takers. Thus, banks are highly regulated. As crucial government machinery, Central Banks regulate and supervise banks mainly to protect the interest of the depositors and to restrict banks from undertaking excessive risks. Management of a bank practically performs the role of agents in the process of running the banks. The shareholders and the minority risk takers have the scope to play role in the banks’ board and thus protect their interests. In such an ownership and governance structure, depositors are the true risk takers, and the Central Banks represent them. For successful running of the banks, one key objective of the Central Bank is to ensure sound corporate governance practices by maintaining a line between the bank management and the board.  It means, for sound and secured operation of a bank, it is crucial to play a role of leadership network by the top management and board, and at the same time must not violate the thin line between them. It is obvious that bank management, employees, and board members must show their due accountability towards the depositors in the process of undertaking any decisions and guiding or running the banks.  Motivating employees on this pursuit would work in forming right perception of the bank employees towards the depositors- the true owners and risk takers of the banks.

Agency problem might cause failure if not addressed. Bank executives perform banking activities as the agents and principal-agent is one of the key operational and governance challenge of the banking industry. Behaviors of principles and agents vary at the time of taking critical decisions in banks like borrower selection and using risk management tools. Seriousness of a bank manager on loan allocations and recovery efforts depends strongly upon the feeling of ownership of the bank and the fund.  It is true that agent can never behave like a principle, but a motivated agent having ethical value may perform to attain the desired goals or at least close to it. Ownership feeling for banks and funds motivate a banker for following due and objective oriented risk management in the process of addressing credit risk. Nature of banker-customer relationship is also an issue in this context. Bankers are expected to work to build relationship between a bank and the customers. Customers have to be a bank’s client, may also be a banker’s. This objective may be struggled in an industry where decentralized banking decision making process is in operation. Centralized and decentralized models differ in terms of the cost efficiency related to the screening of potential borrowers; coordination issues; and effective diversification of portfolios. Both have their own advantages and disadvantages. Most of the recent studies however favour centralized banking in the sense that the client targeting is more efficient, the expected profit larger and risks lower, compared with decentralized banking. In addition, centralized banking offers greater incentive to form relationship between a client and a bank (in place of a bank and a banker).

International standard setting bodies and Regulatory and supervisory authority of banks have been contributing for developing ‘board leadership’ and sound management practices by guiding, supervising and enforcing compliance requirements. Prudential norms have always been critical in guiding banks and the following risk management practices. Restraining excessive risks and rational expansion are always critical for the sound leadership and governance approach in banks.  Moreover, regulatory and supervisory authority or central bank is expected to contribute in creating the environment so that bank management may come up with due changes and innovations for sustainability. These leadership development roles may include enactment and enforcement of supportive rules and regulations; incentivizing innovation and modernizations; ensuring customers right and transparency; moral suasion for responsible and normative approach; pushing for the development of sound corporate governance practices etc. 

The global financial crisis and the credit crunch that followed put credit risk management into the regulatory attention, and regulators are now expecting more transparency in credit operation, thorough knowledge of customers, and even greater regulatory compliance under Basel regulation. Growing financial crimes and money laundering have become a key concern to the policy makers and regulators throughout the globe. A huge bunch of regulations and compliance requirements came up as part of strategy of addressing growing financial crime and money laundering concerns. Central banks and global financial regulatory setup have imposed considerably huge and stringent regulations and compliance requirements in recent years on the ground of enforcing anti-money laundering framework. Probably, compliance risk is the most critical risk the banking is facing today. The growing regulatory load and greater compliance imposed considerable cost burden to the banks. In such a scenario, bank shareholders and boards may need to accept lower returns, as profit growth is reduced by harder regulation and rising charges for bad loans. In an institution like banks, board and top management may have little incentive in the short-term to undertake major cost incurring venture to address such vulnerabilities. Practically, situation demands proactive and long-term strategy and leadership role of boards and top management for the sustainability of the banking industry.

In banks, group leaderships and motivations are crucial to attain the common goals. Even in a centralized decision making system, lack of emotional intelligence might affect group outcomes at different places and thus the central goal and sustainability might be at stake. The board and top management should create an environment so that many of such failures can be transformed positively and thus ensures psychological safety to the employees. In such a scenario, employees expect emotional support and courage to overcome blow or shocks that makes a significant difference. In many instances such support helps colleagues or employees to undertake risk and initiatives for the betterment of the institution. A confidence on the leader offers the employees and colleague with huge motivation that my leader would support me in case of my failure and ensure the required environment to take me out of the trouble if any. Such belief and confidence induce motivation and encouragement amongst the colleagues to perform better.  It is the sound leadership that can create such environment and mutual trust. On the way to develop leadership skills amongst managers and other executives, some soft skill capacity development needs are crucial. It is important have capacity in the branch managers to encourage and charge up co-workers by appreciation. Actually, people need criticism and praise, and both types of feedback are extremely necessary.  Nobody should demand zero mistakes from the colleagues and at the same time one must admit mistake in front of them, as a true leader learns from mistakes and encourages colleagues to learn from the mistakes. For the group works, leaders must have the courage and open mind to take responsibility for his or her colleagues in line with the wonderful remark of Arnold Glasow ‘ A good leader takes a little more than his share of the blame, a little less than his share of the credit.’ For developing such leadership qualities amongst bank managers and employees, it is important to make them understand the essence of considering emotions of the co-workers in pursuing the group jobs at all levels. Practically, it is the blend of technical abilities and soft skills like emotional intelligence that contribute effectively in the professional banking. Thus, leadership network is expected to allocate due attention for capacity development on the issues.   

Today, banks cannot solely rely on the risk management or auditing functions to identify the risks. Capable managers/executives having leadership qualities must be placed in key roles that involve risk management responsibilities. Focusing on compliance is not good enough; the Chief Risk Officer must have a voice to drive.  Executives heading different departments and lines especially in the areas of risk management, compliance, credit review and internal audit must demonstrate similar sense of leadership. Network leadership in banks must act to handle uncomfortable business situation and difficult environment and there is danger to move on with the status quo.  It is over-optimism that causes barriers to the leadership approach in risk management.  By contrast, good leaders welcome different points of views and are aware of potential risks and have the ability to make more informed decisions. The global financial crisis came up with the warning of irrational profit targets and irrational financial benefits of top management. Such aggressive behaviors caused collapse of so many banks during the crisis. However, it does not offer lessons to push down the profit targets and reducing the salaries and packages. It is not about slowing down and applying conservative approach in all situations. It mainly offers lessons on following more conscious approach on risk management and transparency; finding rationality in fixing profit targets and employee benefits; focusing on core banking businesses; having flexibility on conservative and dynamic banking approach in line with the business and economic situation.

Probably adaptation with the changing needs and customized innovation for a bank is the biggest challenge to survive. For example, a bank’s competitive advantage might be severely hampered without adopting the require technology to provide stake-of-the art services to the customers which should bring ultimate results in the form of better customer service, low cost and quick delivery. Recent literature identified the three biggest challenges to banking today as regulations, legacy and culture. The three barriers are intertwined in a vicious circle:  regulations stop banks from innovating; legacy systems stop banks from innovating; a risk averse culture stops banks from innovating.  The study opines that three things work together to wrap the bank in ropes of stagnation:  management is unwilling to change systems because it is too risky; management is unwilling to place systems in the cloud because it is too risky;  management is so focused upon regulation, that innovation takes a back seat. Practically a courageous leadership takes the lead to change and innovate by convincing regulator for due supports.

Banking industry of Bangladesh achieved remarkable momentum over the years and brought in several positive changes in terms of expansion, modernization, quality of assets, application of international standards, technology adaptation, capacity development efforts, corporate governance, and improved regulatory and supervisory environment. And, the development is not uniform for all banks, as anticipated. Fortunately, the industry did not face severe hardship in response to the most recent global financial crisis. However, not different from other global economies, the industry is becoming exposed to newer challenges, financial crimes, and competitions. Though there are several instances and successful efforts of bank leaderships to address the changing needs, all banks require finding their customized path to sustain on a continuous process. Effective leadership, sound governance framework, and soft tools like emotional intelligence are tools for tomorrow’s banks to survive. 

Bangladesh Bank has undertaken remarkable regulatory and supervisory initiatives over the years in line with the internationally accepted standards and compliance requirements. Banking sector of the country is now having risk management guidelines and compliance requirements for all the key areas of banking; and prudential and capital standards are duly in place.  Adoption of technology has brought in remarkable efficiency in the supervisory arrangement of Bangladesh Bank.  The central bank has created platform for modernization of banking, payment system and financial service delivery by the formulation of rules, guidelines and supportive arrangements. Notable initiatives have been taken place for effective oversight of risk management, internal controls and customer interest protections. It is good to observe that the central bank has responded with due supports on the technology driven initiatives by the scheduled banks. In response to the global development and BIS guideline, Bangladesh Bank updated and enforced circulars for improving corporate governance practices of the banking industry. It has circulars on fit and proper test for selecting board of directors. A major circular issued in 2013 defines formation of board of the banking companies and their duties and responsibilities. Several relevant circulars were issues for installing good board practices: prohibition on outsiders/non-member’s presence at the board meeting and giving extra payment and benefits other than the stipulated benefits’; restriction on the payment of honorarium of the directors in the board meeting and travel expenses of directors etc. The central bank issued guidelines on Internal Control and Compliance in 2016 incorporating corporate governance issues elaborately. In addition to that commercial banks of the country are required to follow the guidelines applicable for listed companies issued by the Bangladesh Securities and Exchange Commission (BSEC) covering several corporate governance and transparency issues. Enforcement of these improved and internationally accepted standards brought visible changes in the governance structure of the banking industry.

Bangladesh Bank is promoting developmental banking in line with the country’s priorities. To promote its developmental goals, Bangladesh Bank has upgraded the country’s financial market infrastructure by setting up fully automated nationwide online clearing system and hastening automation in banks. Several incentives like refinance lines from BB and limited interest subsidies have been made available to promote lending to the farmers, small enterprises and poor households. This developmental approach of Bangladesh Bank can be linked with ‘financial and macroeconomic stability of the country’- one of the key goals of the central bank. Though Bangladesh Bank has a specific department ‘Sustainable Finance’ to take care of the key relevant areas of sustainable finance like green Banking and CSR, activities of certain other departments of Bangladesh Bank are clearly associated with the broad definition of ‘sustainable finance’. These include Agricultural credit department, Financial Inclusion department, SME and special Program department Banking Regulation and Policy Department, Department of Off-site supervision, Financial Integrity and Customer Service Department, Payment Systems Department etc. In response to the policy initiatives and support services of the central bank, a good number of commercial banks are leading with innovative initiatives and products in the areas of mobile and agent banking, small and micro enterprise financing, green banking, school banking, and financial inclusion through small deposit mobilization. Though at slower pace, agricultural credit is getting momentum in recent time.

Financial crime, ethical issues, and capacity development are drawing attentions of policy makers. Banking community in recent years especially money laundering concerns brought in remarkable volume of compliance requirements. In response to the developments, Bangladesh Bank and BFIU responded with notable initiatives and ventures in line with global standards. Not different from other countries, unethical conducts on the part of bank executives and other key stakeholders came up as one of the reasons of growing financial crimes in the banking industry.  Occurrence of unethical behavior adversely affects work environments in banks and traditional internal controls hardly prevent unethical behavior because human behavior is influenced by a multitude of factors. To encourage ethical behavior, there is scope to take the necessary time and allocate resources for formulating internal policy and identifying behavioral factors that influence employees’ behavior in the organization. Though banks are generally having a set of Code of Conduct, these are not clearly communicated to the bank employees. Leadership has a great role to play by establishing transparency through structures and processes to foster an ethical organizational climate, which is quite important to ensure customer confidence. Government agencies of Bangladesh and central bank has been working for promoting ethical behavior and integrity issues in response to the growing concerns on the unethical conducts in business and economic arenas. Perception on capacity development need in banks improved over the years, however, focus remained on the technical or hard skills.

On the way to the journey of the banking industry of Bangladesh, a good number of instances were really inspiring in terms of bring remarkable transformation in some institutions. There are cases when leaderships of banks have transformed their institutions remarkably in terms of improved services, processes, and brand images.  It appears that network leadership (with the support of boards and efforts of top leadership) have played remarkable role in transforming these banks and placed these on sound footings. Banking industry of the country has also have experienced/are experiences a number of notable ventures in response to the initiatives of the leadership networks of different banks.  A few banks of the country have been playing leading role in modernizing banking processes, developing new products, and launching technology driven payment and financing services.  Some banks have already come up with their own internet banking apps to provide services. In recent time, agent banking is a remarkable venture.

No different from other banking industries of the Globe, banking industry of Bangladesh moved a long way with un-orderly ups and downs. The sector adapted changes, faced several challenges, and showed resilience on its way. In line with the need of the time, the banking industry needs capacity development or updating efforts for all key stakeholders: boards, top management, and bank employees- a continuous exercise for improved performances and to face newer challenges. In spite of several challenges the banking industry is facing, there is every reason to be optimistic about a more vibrant Bangladesh banking sector in the coming days.  

[1] Professor and Director (Training), BIBM ([email protected]).

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