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Introduction
The field of leadership is one area of academic research that has evolved and fundamentally shifted its paradigm. The understanding of effective leadership has progressed from the orthodox transactional epoch point of trait, behavioral and contingency theories towards the existing leadership paradigms of charismatic and transformational leadership. This report tries to explicate the degree of diffusion of transformational and transactional leadership across the banking sector in Pakistan and its subsequent impact on innovation and organizational citizenship behavior that entails ramifications on employee perception of organizational commitment.
Pakistani Financial Sector: An Overview
Financial Sector in Pakistan contains a wide range of financial institutions. They include Commercial banks, specialized banks, national savings schemes, and insurance companies. They also include development finance institutions and investment banks as well as stock exchanges. The corporate brokerage houses and leasing companies are part of them. In addition to them, the discount houses and micro-finance institutions, and Islamic banks also constitute part of banking organizations in Pakistan. They offer a whole range of products and services both on the assets and liabilities side. Financial deepening has intensified during the last several years but the commercial banks are by far the predominant players accounting for 90 percent of the total financial assets of the system.
The aggression shown in the sector of banking development in Pakistan has, perhaps very few parallels in the world. Starting virtually from scratch in 1947, the country today possesses a full range of banking and financial institutions to cope with the multifarious needs of a growing economy. At the time of partition, the total number of commercial banks in Pakistan was 38. Out of these, the Pakistani banks were 2, Indian banks 29, and exchange bank 7. Since 1990 the Government of Pakistan (GOP) has introduced various reforms in the financial services sector enhancing the level of autonomy enjoyed by the SBP. The number of banks operating in Pakistan has increased, which in turn has resulted in increased competition. The banking sector, in general, has shown good progress during the last few years. During the previous five years, the combined total assets of domestic banks, showed an average annual increase of 22 percent, while combined deposits have recorded an increase of 27 percent per annum.
Twenty-one foreign banks operating in Pakistan are playing a significant role by incorporating new technologies and providing better quality services. Policies of privatization, foreign exchange reforms, and structural adjustments, have increased the inflow of foreign resources through direct and portfolio investment. Most foreign banks in Pakistan have branches only in big commercial/industrial centers, unlike local banks, which also operate in small towns.
In trade financing, the role of foreign banks is even more significant, as approximately 30 percent of the total trade of the country is transacted through them. A major portion of the trade financing is for importers to establish letters of credit.
Pakistan is a developing country and having a relatively low level of income, is required growth rate is low as there is hardly any savings. The standard of living along with the quality of life is the newer concept in Pakistan, which emphasizes individual aspects of human nature. These have led to foreign aids, which has been the holding force to bridge the gap for us between our savings and investments. Nevertheless, these aids have become the drowning force for our country. By being a member of the most western aid consortium, the famous IMF occupies a pivotal role in our economic sphere by influencing our international financial transactions and creates the pace of our development policies. IMFs main objective for Pakistan is to maintain stable exchange rates, a multilateral credit system, and international liquidity to recover the country from its worst economic crisis. However, Pakistans economic problem can mainly be aspired by internal development and avoidance of any major international role.
The structure of the Pakistani banking sector has substantially changed in the last decade, particularly following the privatization of the state-owned banks. In 1990, the banking system was dominated by five commercial banks, which were all state-owned. The structure of the Pakistani banking sector has substantially changed in the last decade, particularly following the privatization of the state-owned banks. In 1990, the banking system was dominated by five commercial banks, which were all state-owned. Amendments done in 1990 to the Banking Companies Ordinance launched the process of financial sector reforms by allowing privatization of the state-owned banks.
The privatization of state-owned banks has been accompanied by the liberalization of the financial system and the openness to domestic and foreign competition. The number of commercial banks and various nonbank institutions grew rapidly in the early 1990s (the number of commercial banks increased to more than 40 by thenyeart1995). Worried by the health and soundness of the newly entering smaller banks, the authorities imposed a moratorium on the starting of banks in 1995, until they sought to consolidate banking by a certain capital from 2001. While the ownership and management of the banks by a private sector are one pillar of the reforms, the other pillar is a strong regulatory environment. The Central Bank in Pakistan has strengthened its capacity by acquiring new skills, upgrading the quality of the existing human resources base, adopting technology, and re-engineering business processes.
Pakistans Banking Sector can be classified under the following broad categories:
Overview
Leaders are seen as visionaries who stir motivation in cohorts elating performance echelons subsequently accomplishing the strategic corporate goals. Companies rely on leaders to steer businesses and instill growth and profitability. Globalization has brought along an era of fierce competition marking a shift from transactional paradigms to transformational paradigms to cope with market volatility and to grasp consumer perspectives.
Aims and Objectives
This research study aims to explore the subjective meaning practitioners ascribe to leadership in Pakistans banking sector and how it impacts innovation and organizational citizenship behaviors subsequently influencing organizational commitment.
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To garner an understanding of the leadership concept.
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To understand the transformational leadership ideology in the context of the unique national and organizational cultures in the banking sector of Pakistan.
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To identify challenges that may exist in institutionalizing transformational leadership in the Pakistani banking sector.
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To develop a framework that represents the varied aspects of leadership that entail transactional and transformational traits.
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To analyze critically the empirical findings of transformational leadership and compare them with existing theoretical models of transformational and transactional leadership.
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To study the impact of leadership style on innovation and organizational citizenship behaviors in the context of the banking industry.
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To explicate the influence of varied traits of leadership on employee perception of organizational commitment.
Scope of Study: The scope of the study is to review the present influence of western leadership theories on Pakistans banking sector. In addition to that, the applicability of the transformational leadership style on the future of the Pakistani banking sector also finds a place in the discussion.
Research Questions
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To what extent the presence of foreign banks influenced the working style of local banks in Pakistan?
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What are the influence of openness and democratic working style of Western banks on Pakistani local banks?
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Is there any change in leadership style that is being followed in local banks in Pakistan due to the influence of Western banks?
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What is the future of Pakistans banking industry if it learns from foreign banks in the country?
Literature Review
Leadership Definitions
Successful leaders inspire ordinary people to achieve extraordinarily. Christopher Rodrigues Group Chief Executive, Bradford and Bingley Building Society
Leadership has been defined in terms of individual traits, behavior, influence over other people, interaction patterns, role relationships, occupation of an administrative position, and perception by others regarding the legitimacy of influence(Yukl, 2006).
Martin Luther King, while defining leadership said People are often led to causes and often become committed to great ideas through persons who personify those ideas. They have to find the embodiment of the idea in flesh and blood to commit themselves to it.
Leadership is a particular type of power relationship characterized by a group members perception that another group member has the right to prescribe behavior patterns for the former regarding his activity as a group member. (Janda, 1960, p. 358). Leadership is the process of influencing the activities of an organized group toward goal achievement. (Roach & Behling 1984, p.46). Leadership is interpersonal influence, exercised in a situation, and directed through the communication process, toward the attainment of a specific goal or goals. (Tannenbaum et al., 1961, p. 24)
(Table of definitions from leadership enhancing the lessons of experience by Hughes, Ginnett and Curphy, pp. 7).
Leadership Vs Management. (TABLE from the tools of leadership ).
Managers do the right thing; leaders do things right (Bennis, 1989 as cited in Hughes, Ginnett and Curphy, pp. 9, 2006)
Remember the difference between a boss and a leader: a boss says, Go! and a leader says, Lets go! & (E.M.Kelly as cited in leadership enhancing the lessons of experience by Hughes, Ginnett and Curphy, pp. 6).
Thus there is a difference between asking to do and doing along with the group members. That difference can be termed as leadership and thus there exist some factors that affect it.
Factors Determining Leadership Style (No Single Recipe for effective leadership)
To remain at the cutting edge leaders are moving towards organic forms creating new paradigms that incorporate the essential radical changes from hierarchies to linear forms, from rigid mindsets to innovativeness, from power struggle to team building, from quantitative results to performance, and from centralization to collaborative attributes. Leaders are trying to inculcate the values and character of organic forms in the very core of organizational culture.
To garner an understanding of this shift we take a look at IBM a multinational computer technology and IT consulting corporation founded in the late 19th century that currently employees 388,000 people, a market giant that adhered to an orthodox style of leadership with rigid culture. But to keep pace with the fiercely intense competition and global dynamics IBM brought about radical changes in the orthodox way of doing things to gain strategic competitiveness in the global economy. The company underwent a cultural shift to stimulate innovation to maintain steady growth (Business Week, 2002). With the feudal style of leadership and bureaucratic culture, IBM was losing its competitive position in the market with $ 8 billion lost in one year it was time to shake the company from top to bottom. And thats where IBM brought in Louis V. Gerstner Jr. a visionary leader and a strategist as CEO of the company in 1993 who with a striking speed was able to reduce costs while keeping the company intact (Lohr, 2002). Gerstner revitalized the dysfunctional culture of IBM. He realized that to remain at the cutting edge it is vital to incorporate collaborative behaviors, an informal and supportive environment where people enhance their creativity and foster team building.
Researchers assert that it has to be a combination of traits and characteristics taken from all different styles of leadership prevalent to determine effective leadership style. The following table adapted from Randeree and Chaudhry (2007) highlights a few types of research that focused on the determining factors of the preferred leadership style in an organization.
Leadership Styles (Anatomy of leadership&The tools of leadership by Max Landsberg)
Early researchers believed that leaders have inherent qualities that differentiate them from the rest paving way for trait theories as Banner and Blasingame(1988) assert that leaders are born not made. Robbins et al (2004) highlighted people like The Virgin Group CEO Sir Richard Branson and Woolworths CEO Roger Corbett as charismatic and enthusiastic leaders. In the 1940s academics started looking for unique behaviors among leaders, and this led to behavioral theories of leadership. This school of thought implied that people can acquire traits; they emerge over time (Banner and Blasingane, 1988). Researchers found no consistent pattern of character and behaviors in leaders but some studies exhibited six unique rhetoric attributes that people admired in leaders; honesty, forward-looking, inspiring, competent, fair-minded, and supportive (Kouzes and Posner 1993, cited in Cacioppo 1997).
As times changed researchers proposed another theory called Contingency Theory bringing to fore the argument that certain situations and circumstances help people evolve as leaders widely known as Situational theory. Various authors wrote about leadership development concerning contingent environments. Fiedlers contingency model proposed that the degree of optimal performance depends upon the balance between the leaders style and the degree to which the situation gives control to the leader (Roskin, 1983). Another approach that gained popularity among researchers in various fields was path-goal theory classifying leadership behaviors into four categories (Yiing, 2009). The first one is Directive leadership associated with traits like initiating, structure, and task-oriented where leaders communicate that is required of subordinates. The second one is Supportive leadership where a leader is seen as considerate and people-oriented. The third one is Participative leadership requiring subordinates to be interactive in decision making. And the fourth one is Achievement-oriented leadership that delegates challenging goals. The following table gives a comparison of all the above-mentioned theories.
Transformational Vs Transactional Leadership
Transactional forms prevailed till information technology revolutionized the business paving way for organic forms. Historically organizations carried hierarchies, rigid cultures and leaders behaved as dictators converging profitability with success. Transactional leadership scholars have focused on command, coordination, delegation, and resource acquisition (Zhu et al, 2005).
In the words of Zhang and Coleman, 2000, Transactional leadership occurs when the leader rewards or disciplines the follower, depending on the adequacy of the followers performance. (Zhang and Coleman, 2000: 369; as cited in Bass and Riggio, 2006)
Characteristics of Transformational and Transactional Leaders: Bass B. M pg. 22. (From Transactional to Transformational leadership: learning to share the vision).
The response of organizations is to keep up with the radical changes that are taking place. The response was in the form of changing orthodox cultures and by integrating linear structures. The supportive cultures that were brought as a substitute for orthodox ones encouraged collaborative teams, which can show innovation in working. Leaders remained at the forefront in inculcating these values at the very core of the organizational philosophy. Transformational leadership focuses on the broader spectrum in terms of organizational strategic goals. Followers rise beyond personal goals and vested interests to convene towards team building, organizational and environmental convergence (Cacioppe, 1997).
Bass (1990 ??) emphasize that transformational leaders not only influence employees and stakeholders within an organization but also have implications for corporate image:
A firm that is permeated with transformational leadership from top to bottom conveys to its personnel as well as to customers, suppliers, financial backers, and the community at large that it has eyes on the future; is confident; has personnel who are pulling together for the common good; and places a premium on its intellectual resources and flexibility and development of its people.
(Bass, 1990: 25)
Avolio and Bass (1991, as cited in Bass, 1999& 2 decades of research and development in transformational leadership) deduced that every leader exhibits factors of both transactional and transformational leadership as quantified through Multifactor Leadership Questionnaire (MLQ) with the difference that each leader profile display more of one and less of other. Their empirical study manifested that more effective leaders are more transformational and less transactional. Bass (1990..) also believes that transformational leadership traits and values can be inculcated across all management levels through effective organizational and human resource policies.
Researchers also have a consensus that there is a correlation between transformational leadership, transactional leadership, organizational commitment, job satisfaction, and job performance. The extent of correlation can be tested by reviewing the leadership theories in contemporary times (Bass, 1985; Bass et al., 1987; Savery, 1991; Yammarino and bass, 1990).
Leadership in Contemporary Times
With globalization, the field of leadership evolved and transformed in a fundamental way ensuring that leaders must have the essential adroitness to tap into ever-changing facets of organizations by being visionaries, charismatic, and innovative. The paradigm has shifted to inculcate these changing environments towards transformational leadership. Contemporaries advocate
&transformational leadership is about change, innovation and entrepreneurship&we see the corporate transformation as a drama that can be thought about in terms of a three-act play: Act I revitalization recognizing the need for change; Act II creating a new vision; Act III Institualizing the change.
(Tichy and Devvana, 1986, as cited in Banner 1995, pp 58).
In recent times scholars have written numerous pieces on rhetorical traits and attributes of transformed leaders. Sankar (2003) explicitly writes organizational values and character must be delegated along with a well-formulated vision by a leader within the organizational realm. He continues to write that these values evolve and develop through a value-based relationship, a relationship between leader and follower based on shared and institutionalized values that are not just advocated by a leader but also acted upon (Sankar, 2003).
It means that the transformational leadership activities include implementation along with advocating a principle. This aspect of considering the actions as well as proposals of a leader constitutes a significant difference between transformational and transactional leadership. One can term motivation and enabling the team members to reach the goals as one important aspect of a transformational leader. Avolio, B. J. & Bass, B. M. (Eds) (2002, p.12) explicitly state that the leaders who motivate and enable the group members strive to create a sense of alignment. They also provide a direction that can be shared by colleagues as well as the followers. Regarding this, they quote the example of Southwest Airlines that has shown the best results in the US airline industry. Avolio et al., (Eds) (2002, p.13) attribute that credit to CEO and founder Herb Kelleher, who emphasized humor in the organization.
The authors further appreciate Kellehers business strategy based on simplicity, efficiency, and effectiveness that made employees of the airlines helpful to one another. In this regard, Avolio et al. tried to show the difference between southwest airlines and its competitors that also made profits. They explain that just making use of deregulation by the governments may not result in the sustenance of an organization. In this regard, they cite the example of Eastern airlines, which took advantage of deregulation in the 1980s but out of business in the time being. However, that is not the case with southwest airlines, and it slowly moved towards increasing levels of profitability over time. Explaining this, Avolio et al (2002) cite the way the CEO Kelleher and his employees attribute the credit to each other. This aspect of attributing credit of success to followers by the leader and vice versa could be an example of the atmosphere that a transformational leader can create (Avolio, B. J. & Bass, B. M, 2002). The type of leadership exhibited by Kelleher can also revitalize the strategy of a company and enables it to survive in the market. The case of Timmers success in Phillips is the best example of that type.
Karsten et al (2009) wrote how the president of Phillips Jan Timmer announced a total revitalization strategy to survive and made a comeback in the market. Timmers success was attributed not just to his style but also to his effort to connect to views and visions embedded in Phillips practices. Most of the scholars have consensus over the fact that the role of leaders has changed from the directive and prescriptive style to one of the power delegations empowering; that has taken organizations toward linear structures, flexibility, and team working (King, 1994).
&Transformational leadership occurs when leaders broaden and elevate the interests of their employees when they generate awareness and acceptance of the purposes and mission of the group, and when they stir their employees to look beyond their self-interest for the good of the group. (Bass 2001, pp 21)
Various studies have been conducted to understand the concepts behind the effectiveness of transformational leadership on variables like job satisfaction, commitment, motivation, and organizational behaviors within the realm of an organization. To understand the relationship of leaders various attributes and their subsequent impact on followers, Bass (1990 as cited in Senior and Fleming, 2006) proposed the model 2.3.1.
Different styles of transformational leadership
The aspects of transformational leadership discussed until now brings to fore the culture of an organization. It does not only substantiate the cohesion of an organization but also depicts the prevailing leadership style and attitude. However, it does not mean that the organizational culture always develops the leader. At times, the leadership is so influential that it changes the culture of an organization. This is the basic trait of a transformational leader. Where transactional leaders set their functional parameters within the laid down standard operating procedures of the existing culture, transformational leaders believe in the cultural building by creating a vision for the organization that is based on strategic thinking, which is constituted on 4 Is; idealized influence, inspirational motivation, intellectual stimulation, and individualized consideration. These 4 Is help the transformational leaders in ensuring that the employees perform beyond expected levels of their performances. One of the the4 I s, idealized influence can be understood in the context of knowledge creation within the organizations.
The increase of sway of knowledge in an organization could result in open-mindedness norms as well as leader-member exchange. Regarding this, M Tse, H. H., & Mitchell, R. J (2010, p.1) cited Mc Fadyen & Cannella, Jr (2004) and Un & Cuervo-Cazurra (2004) about the influence that knowledge can create and also do upsurge the interest of exploring factors. They opine that knowledge creation should be characterized as a product. By doing so, the organization can enrich the function of social capital. This enhancement of social capital is crucial to organizational development. This can also increase the effectiveness of the employees. To know the effect of transformational leadership in the way of idealized influence, organizational learning, as well as creativity, is necessary. Learning and creativity arise from the knowledge and vice versa. Regarding the confluence of knowledge and idealized influence, the authors cite Troukas (1996) and Berson et al (2006) about the distribution of knowledge systems in an organization. They explain that the knowledge systems are the ones that are constituted by individuals, who are capable of creating knowledge using the relationships between them. The relationships between individuals result in social interactions when the organization deals with a larger social collective network which needs idealized influence also (M Tse, H. H., & Mitchell, R. J 2010).
Proposition
The presence of Western banks can also diversify banking activities in Pakistan. For example, investment banking activiti
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