CHAPTER ONE

INTRODUCTION
 1.1 Background
1.2 Overview of the Issues
1.3 Development of Islamic Banking and Finance Sudan against Bahrain
1.4 Purpose of the Study
1.5 Significance of the Study
1.6 Research Questions
1.7 Assumptions
1.8 Definitions of Key Terms
1.9 Limitations of the Study
CHAPTER 1 INTRODUCTION

1.1 Background

In late 1970s/early 1980s, Sudan embarked on the process of converting its

financial systems to Islamic ones. This implied that starting from a predetermined

date; all banks and financial institutions were to use only Shariah-compliant methods

of financing in their work. In addition, Sudan introduced a new obligatory state tax

zakat. However, the takaful sector was left virtually untouched by the reforms. By the

start of the new millennium it became apparent that Sudan was the only country that

managed to successfully complete the project of Islamizing its entire financial sector.

Sudans Islamic economic system has proved to be effective as it has been

developing continuously since the establishment of the countrys first Shariah-

compliant bank in 1977. But at present Sudan-based financial institutions concentrate

on the local market and their expansion abroad is unlikely. Moreover, the domestic

growth of Islamic banking is being tapered.

The deficiency of competition from conventional counterparts adversely

affects the process of introducing innovations to the marketplace as Sudanese banks

drastically lack creativity and innovation. (NEWHORIZON AprilJune 2009)1

1.2 Overview of the Issues

Islamic banks in Sudan are facing huge competition in the global

marketplace and without full understanding on the importance of how to

implement TQM approaches and innovation, banking sector in Sudan would freeze

Sudan: forgotten centre of Islamic finance Renat Bekkin, PhD in Law, 1

from the Institute for African Studies at the Russian Academy of Sciences
and stagnate in a rapidly changing world. A frozen and stagnating financial system

would be condemned to fall behind rival financial systems that evolve together with

the ever advancing world (Dr. Murat izaka 2014 ) 2.

There is a strong need for Islamic Finance institutes in Sudan to differentiate

itself through new and innovative products and process. The financial products must

be able to integrate Shariah, Islamic economics and modern day finance to truly

represent what an Islamic financial product should be (Kulsanofer Syed Thajudee

2012)3

The Products and process should be under the Islamic religious beliefs and

addressing consumer demands. It is not sufficient to take conventional products and

just change a few terms and conditions. The ultimate aim should be to come up with

truly Shariah based products. In addition, the different demands of the various

customer segments have to be considered.4

1.3 Development of Islamic Banking and Finance Sudan against Bahrain

Sudan was a leader in the Transformation of the entire internal financial system

to Islamic but through the years Bahrain that Embrace Islamic banking as a national

policy concurrently with conventional banking and finance (dual track banking)

Dr. Murat izaka, CAN THERE BE INNOVATION IN ISLAMIC FINANCE? CASE STUDY: ESHAM ,INCEIF 2
University Kuala Lumpur , May 20th, 2014

Kulsanofer Syed Thajudeen, A Critical Assessment on Product Development & Innovation 3

within the Islamic Financial Services Industry ,International Centre for Education in Islamic
Finance (INCEIF), Malaysia18 November 2012

Kulsanofer Syed Thajudeen, A Critical Assessment on Product Development & Innovation 4

within the Islamic Financial Services Industry ,International Centre for Education in Islamic
Finance (INCEIF), Malaysia18 November 2012
gained a better status and being classified as the seconded leader in the Islamic

Banking sector.

Sudan status 5

In 1977 (Sudan) Faisal Islamic Bank of Sudan was established

In 1984, the whole banking system in Sudan was made totally

Shariah-based

The Sudanese Court of Appeal, in 1984, held that the charging of

interest is subject to criminal prosecution

The Islamic banking sector in Sudan has witnessed encouraging

growth

Most of the Islamic banks have been established in cooperation with

foreign capital

Some Islamic financial institutions operating in Sudan include

Tadamon Islamic Bank, Al Shamal Islamic Bank, Faysal Islamic Bank

Sudan, Sudanese Islamic Bank, Al Baraka Bank Sudan and Al Salam

Bank

To enhance corporate governance, Sudanese authorities have enforced

Basel requirements, implemented AAOIFI disclosure standards and

revised the onsite inspection manual.

Islamic Banking and Finance: History Development, University of Bahrain 5

[Link]/files/611226596_files/[Link]
 Bahrain status

Bahrain Monetary Agency (BMA) is the first central bank to develop

and issue prudential regulations for Islamic banks

Bahrain has highest concentration of Islamic financial institutions (28

Islamic banks, 16 takaful operators)

2/3 of Islamic financial institutions operating in GCC countries are

based in Bahrain

Rapid growth from Total assets of UDS 1.9 billion (2000) to 45% (in

2003) with total asset base reaching USD4.2 billion to USD 10.3

billion (2006)- an increase of 400 percent.

Poised to become centre for development of software tailored for

Islamic banking, collaborations with Microsoft

Appears oversupplied with Islamic banks, mergers are likely in the

future

Proposed setting up of an international Islamic stock exchange

Proposed establishment of an Islamic rating agency

Time line of Islamic Banking and Finance in Bahrain

Year Key Milestone

1973 Since its establishment, Bahrain Monetary Agency, has been promoting

the country as an International Financial Centre and encouraging major

international financial institutions as their regional base.

1979 Bahrain Islamic Bank was established to provide commercial banking

services.

1981-1982 Dar- Almal, a holding company ,was established in Switzerland and

owning a group of banks in some Muslim countries which they then

established Shamil Bank of Bahrain in 1982 ( former Faisal Islamic bank)

1983 Al- Baraka Islamic Bank followed suit. Established Islamic Banks in

many countries.

1990s Turning point in the development of Islamic Banking in Bahrain.

The BMA, issued a total of 8 banking licenses to diverse group of

Institutions to enable them to pursue Islamic Banking services.

Today Bahrain has the highest concentration of IFIS. 2/3 of Islamic Financial

Institutions operating in GCC countries are based in Bahrain

Table 1: Time line of Islamic Banking and Finance in Bahrain

1.4 Purpose of the Study

When discussing Islamic economics, specialists usually cite Malaysia,

Bahrain, the UAE, Iran and, of late, the UK, as evident examples. But such a country
as Sudan is either not brought up at all or mentioned in passing. Meanwhile, Sudan is

the only country in the world that has a wholly Islamic financial sector, (argues Renat

Bekkin, PhD in Law, senior researcher at the Institute for African Studies at the

Russian Academy of Sciences).

The concept of KM is gaining more attention from researchers and

practitioners they have recognized the importance of the relationships between KM

and innovation performance (Davenport & Prusak, 1998;6 Hall & Andriani, 2003;

Nonaka & Takeuchi, 1995), while some researchers have suggested a relationship

between KM and TQM (Hsu & Shen, 2005). Nonetheless, few studies have examined

the relationships among KM, TQM, and organization innovation performance.

The ultimate purpose of this study is to

Investigate the relationships among KM, TQM, and innovation within Islamic

banks taking Bahrain as a benchmark (as it is the second leader after Malaysia

in the Islamic banking sector),

Provide a deeper understanding and determining the role of KM implemented

through TQM in Islamic banks sector innovation performance in Sudan by

comparing the Knowledge management factors that affect the applicability of

TQM in Sudan and Bahrain Islamic banks

Help Sudanese banking sector to stand again as a leader in the Islamic finance

through positive affect in the innovation, creativity and growth.

1.5 Significance of the Study

The Islamic finance industry operates within a financial environment that

demands it to adapt to constant changes. Within this framework survival demands

innovation and advancement that will both strengthen the very core of the industry as

well as always keep it steps ahead of the curve. There are limited researches and
papers on the topic of Perceived Relationships among Knowledge Management, Total

Quality Management, and Organization Innovation Performance in Islamic Finance

and there is no researches about Sudan at a in this context . Innovation allows the IFIs

product differentiation to ensure comparative advantage among IFIs.

Innovation plays a critical role in maintaining sustainable competitive

advantage hence, in order to compete in an ever-changing environment, Sudanese

banks must create new products, services, and processes and adopt innovation as a

way of life (Breznitz, 2006; Tushman & Nadler, 1986).

In a recent study done by ICD Thomson Reuters Sudan comes number

eleventh within the Islamic banking countries while it was one of first countries that

implement Islamic financing (by measuring development by combining data of the

different elements of the industry into a singular composite Indicator).

So the importance of this study will be to attain the followings objectives:

1. Highlighting the importance of knowledge management as appreciates

the concept of total quality management and the reality of its

application in Sudan.
2. Increase the awareness within the Managers, decision makers and staff

of the importance of the application methodology integrative to total

quality management and knowledge management, especially in light of

the growing rivalry, and a step to strengthen the effort in providing

services to suit the needs and expectations of the Islamic Banking

market.
3. To assist Sudanese banks to be more innovative and therefore more

competitive and successful.

 4. To introduce a relevant recommendations and proposals in the light of

the results to the decision makers, that are believed to contribute the

enhancement, and correct their application of integrative approach

between the TQM and KM.

1.6 Research Questions

This study addresses the following research questions:

1. Are there positive relationships among KM initiatives, TQM, and

organization innovation performance?

2. To what extent do KM initiatives implemented through TQM

improve an organization innovation performance?

1.7 Assumptions

The assumptions of this study are:

1. Organization innovation performance is measurable through employee

perception.

2. The respondents are the most knowledgeable about business strategies

practiced in the organization.

1.8 Definitions of Key Terms

The following terms used in this study are defined in this section.

Knowledge
 Knowledge is defined as: relates to all the capital owned by people and staff

of a company: know-how and expertise, competencies, market experiences,

contextual information, and expert insight that provides a framework for evaluating

and incorporating new experiences and information. It originates in and is applied in

the minds of knowers. In organization, it often becomes embedded not only in

documents or repositories but also in organizational routines, processes, practices, and

norms. (Davenport & Prusak, 1998, p.5)

Knowledge Management (KM)

Islamic Finance Knowledge Management (IFKM) could be defined as a

practice or systematic and integrative process that aims to identify find, select,

organize, distribute, transfer important information and build Shariaa and business

knowledge resources within the institution to enable and empower capabilities and

competencies to excel in conducting Shariaa-compliant business and realize business

objectives, problem solving, dynamic learning, strategic planning, and decision-

making to achieve the organization goals (Gupta et al., 2000; Lawson, 2003).

Knowledge management processes include organization-wide activities of

knowledge acquisition and creation, knowledge capturing and storage, knowledge

dissemination and transfer, and knowledge application by individuals and groups to

pursue the major organizational goals (Lawson, 2003; Rastogi,

Innovation Performance
 Innovation can be defined as new or improved products, processes, services,

and operations emerging from the implementation and adaptation of knowledge and

practice that create added value to both customer and organization and differentiate

the organization from others (Gloet & Terziovski, 2004). Devlin (1995) refers to the

term innovation in the delivery system of financial services as an opportunity to gain

competitive advantage which would give, say, a retail banking service provider the

basis for differentiation.

The adoption of innovation is generally intended to contribute to organization

performance (Damanpour, 1991). Therefore, organization innovation performance is

associated with the way organizations adopt and adapt to changes in markets,

technology, and competition (Dougherty & Hardy, 1996).

Innovation is a complete process that starts with the identification of

opportunities or problems, followed by the discovery and development of solutions,

taking the shape of products or services (or capabilities) which are then

implemented or applied to the market.6

Total Quality Management (TQM)

TQM is an integrative management philosophy aimed at continuously

improving the performance of products, processes and services to achieve and exceed

customer expectations (Antony, Leung, Knowles, & Gosh, 2002, p. 551).

1.9 The limits of the study:

The limitations of this study include:

6 Dr. Jamil Jaroudi ,THE CHALLENGE OF THE CHALLENGE OF INNOVATION

INNOVATION IN IN ISLAMIC BANKING ISLAMIC BANKING November 24, 2008
1. The original measurement instrument was designed according to a

western context and in the English language.

2. The respondents were limited to managers that reached through

known person connection.

3. The results from the survey were limited to the respondents perceptions

only and thus are subject to sole source error.

4. The study comprised only five banks from each country.