The Efficiency of Human Resources Management During the Disruption and Pandemic Era: An Empirical Study of Indonesian Islamic Banks

Abstract

Human resources are the main factor ensuring the efficiency of the company, especially in the middle of the disruption era and the Covid-19 pandemic. This research adopts the human resource efficiency approach to measure the performance of Indonesian Islamic banks that interact with each other within contextual issues of mega-merger policy in 2020. Samples were taken from twelve full-fledged Indonesian Islamic Banks from 2014 to 2019. The efficiency frontier analysis results show that most Islamic banks within the period of research are operating more on variable returns to scale basis, and only one bank has consistently been able to increase the output of financial intermediation performance proportionally for each additional input of human resources cost. The pooled regression test results on the three bank performance models show that allocation of human resource funds in Islamic banks tends to have more effect on increasing operational profits rather than the distribution of funds to the public through financing mechanisms or investment in Islamic securities. Based on verified models, more innovation in training employees and investing in training costs are needed for employees to have a deeper understanding of the nature of risk-profit of financing and investment activities of Sharia/Islamic banks. Highly skilled employees ensure the future promising performance of Islamic banks to deal with new global-normal.

1. Introduction

Disruption brings drastic changes in the world of doing business and finance, it is newborn aspects for dynamic humanly financial life skill, ways that may overtly be applied in the future but forcedly should be started into practice for the present (Motlokoa et al., 2018; Tahir & Sajjad, 2013). Extraordinary changes caused by COVID-19 have enforced companies around the globe to accelerate the transition to digital business processes. Human resource management is at the heart of these transformations helping organizations to navigate in the vague present and unforeseeable future. HRM needs to manage people in companies during the crisis to enable business continuity and ensure work-life balance. Humans have always been complex and having to manage people has always been tricky. Now, the digital age has added even more complexity to human resource management, like the transparency of social media, the persistence of software updates, and the remoteness of international teams (Joshi et al., 2013; Muafi et al., 2017; Ozkan et al., 2017; Tampubolon, 2015; Yalama, 2013).

Asri (2017) stated that the competency of human resources in managing the Islamic banking Islamic business in Indonesia is still low. This means that the recruitment of employees adds cost to companies compared to the results obtained. of Islamic Banking. Thus to increase the scale of the Islamic banking business in Indonesia, the recruitment of new employees should be accompanied by an increase in the cost of training and education per worker. Training and education lead to improved profitability and/or more positive attitudes toward profit orientation, improves job knowledge and skills at all levels of the organization, improves the morale of the workforce, and helps the employees identify with organizational goals. Islamic banking needs to conceptually deconstruct human resource quality by seizing new methods to dealing with conditions (Miah & Uddin, 2017). The Islamic banking industry needs qualified human resources who have multi-knowledge and multi-skills. Qualified human resources are needed by the Islamic banking industry to manage the banks to improve the profit of the Islamic banking industry (Yusuf, 2015). For banking, the importance of human resource management has grown manifold because of the nature of the banking industry, which is mainly service-based. The management of people in the organization along with handling the financial and economic risks at the wider level is the most potent challenge in front of the Islamic banking industry in any given time frame.

Joshi et al. (2013), Poh et al. (2018), and Sharma and Mani (2012) stated that the role of financial and physical assets owned by a firm is losing its importance in an economy that is dominated by the service sector. Intangible assets that create value for the firm are quickly gaining importance. As a result every organization now finds logic in measuring, valuing, and reporting its intangibles, as they also have become one of the important performance indicators and a strategy to gain competitive advantage. Globalization, deregulation, and advances in information technology during the last 15 years have brought about significant changes in the operating environment for the banks (Khaldi & Hamdouni, 2011; Yalama, 2013). Zuhroh et al. (2015) stated that human capital is getting very much importance in this knowledge era. The banking sector, in general, offers an ideal area of intellectual capital research because the business nature of the banking sector is intellectually intensive. The share of intangibles as a proportion of the total assets showed a tremendous increase in recent years (Octrina & Mariam, 2021). Furthermore, Albertazzi and Gambacorta (2009) stated that efficient human resource cost management has a positive relationship with workers’ ability to carry out the bank function. Banks need to increase the amount of capital accompanied by efforts to enrich human resource capacity (Bhuiyan et al., 2017; Elahi & Shahaei, 2010; Khan, 2013; Nienhaus, 2013).

Chan (2009) stated that there is a significant impact of intellectual capital on the performance of a particular organization. El-Seoudi et al. (2012) Islamic HRM suggests that employees are not just a servant, they are valuable assets, and they should be considered as a source of powerful and dynamic workforce assets. Indeed, Islamic human resources management practices emphases on the development of employee’s individual skills, abilities, attitudes, and job knowledge to contribute to accomplishing organizational objectives (Masum et al., 2016). Dewa and Zakaria (2012) and Nabi et al. (2017) conveyed that training is another vital for the employees’ motivation human resources management aspect. Islamic banks that promote quality, training and development programs must be planned, have a broad application, be group-oriented, and must place emphasis on the quality of work-life rather than only on productivity issues. Islamic banks that want to promote a culture of continuous improvement need to invest heavily in training and education. A cultural change is something difficult and not something that takes place overnight. (Aktar et al., 2012; Al-Tamimi, 2018; Amin et al., 2019; Iqbal, 2013). Regular training would improve the quality of human capital (Imran & Tanveer, 2015; Muafi et al., 2017; Rowland et al., 2017).

Abusharbeh and Nazzal (2018) stated motivation aims to empower and liberalize people to enhance their entrepreneurial abilities to recognize the interactions between humans and their abilities to work. (Almahdi, 2017; Olubusayo et al., 2014). Shantha (2019) stated that every organization considers employees as a valuable asset for the organization. Employees play a major and valuable role in a company’s success. Today’s business world is very competitive in nature. It changes suddenly and makes more changes to organizations. Therefore, the organization should have well-performed employees to face those challenges in the competitive business world. To achieve this purpose, the organization should have to give effective training to their employees. Employees can enhance their knowledge, skills, and attitudes through effective training. (Motlokoa et al., 2018; Tahir & Sajjad, 2013).

Based on those various research findings and the phenomenon of open competition among Islamic banks and conventional banks for such disruption era and early pandemic strikes, this study aims to analyze the efficiency of input and output variables of Islamic banking human capital cost that might boost the performance of the intermediary function.

2. Literature Review

Human capital management is a set of practices related to people resource management. These practices are focused on the organizational need to provide specific competencies and are implemented in three categories: workforce acquisition, workforce management, and workforce optimization. (Hall, 2015; Mestieri et al., 2017; Ngwakwe & Masuluke, 2018). Macky and Johnson (2000) stated that business owners need employees that are able to get the job done because employee performance is critical to the overall success of the company. Business leaders need to understand the key benefits of employee performance so that they can develop consistent and objective methods for evaluating employees (Sillup & Klimberg, 2010). To keep employees satisfied, boost morale, and remain competitive, employers need to be aware of the need for continual employee training and education. One of the most important reasons to offer further training and education to employees is to ensure that work skills stay current (Cermeli, 2004; Kreitner et al., 2007).

Prajogo and Oke (2016) examine the effect of human capital (HC) on service innovation advantage (SIA) and business performance (BP) in service sector firms, and how external environmental factors influence these relationships. The overall findings of this study show that HC is positively related to the creation of value or SIA which in turn results in rent generation for firms. The results further show that the effect of SIA on BP is influenced by environmental dynamism and competitiveness with dynamic environments enhancing the effect while competitive environments weakening it. Mestieri et al. (2017) conveyed that it is crucial for Islamic banking to combine the education, experience, and talents of employees to produce effective and efficient performance (Isnurhadi et al., 2021; Obeidat, 2016). Human capital is not solely the people in organizations— it is what those people bring and contribute to organizational success. Human capital is the collective value of the capabilities, knowledge, skills, life experiences, and motivation of an organizational workforce. Sometimes human capital is called intellectual capital to reflect the thinking, knowledge, creativity, and decision-making that people in organizations contribute. (Abosede et al., 2018; Sowunmi et al., 2015).

With the new normal of the pandemic strike, banking should place the safety and health of employees above business interests. Banks need to prepare a workplace setting that meets health protocol standards and rearrange job functions that can be done remotely or even transferred to third parties. Ideally, banks also provide reminders to employees to always pay attention to and follow standard health protocol procedures at work and personal activities outside the company (Srairi, 2010). Within talented human resources, banking performance will be better off. To improve banking efficiency, human development is also necessary. It is hoped that the improvement of the quality of human capital will also contribute to the efficiency of Islamic banking

Majeed and Zanib (2016) explain that optimal and efficient resource management affects Islamic banking’s efficiency (Tampubolon, 2015). Obeidat (2016) explained that competency development and training aim to increase employee knowledge, skills, and professionalism. Development is not limited to operational factors and product innovation but also emphasizes moral values to carrying out the intermediation function based on Sharia principles. Saruchi et al. (2019) stated that Islamic banking’s financial performance in South Asia, Southeast Asia, North Europe, South Africa, and the Middle East is very dependent on the level of human resource efficiency. Therefore, managers improve employee capabilities through training, education, and participation in competency tests. Shawtari et al. (2015) believed that efficiency is a condition that needs to be achieved by every financial institution.

The measurement of efficiency in this research was introduced by Fitzsimons (2015), it is adopted from the theory of financial intermediation developed by Gurley and Shaw (1955). The theory stated that to improve the performance of financial intermediaries, management must provide a sufficient budget to have the necessary training and income compensation for the employee. Iimi (2003) stated that cost efficiency is an indication that banks are experiencing growth; the balance between input and output will encourage banks to achieve efficient financial management (Gurley & Shaw, 1955; Zuhroh et al., 2015). In other words, Islamic banking as a financial intermediation institution must be able to manage cost allocations efficiently and generate optimal profits through proper monetary transactions in the form of financing and securities investment (Allen & Santomero, 1998). The following are the theoretical frameworks in this study described in Figure 1.

Figure 1: Theoretical Framework Intermediation Approach on Efficiency of Human Resource Cost

As an institution that maintains economic stability, banks are expected to manage input and output efficiently to be able to withstand shocks arising from the economic crisis. If banks do not have an adequate level of flexibility, then small shocks that arise will significantly affect bank stability in maintaining the return rate on financing (Adjei-Frimpong et al., 2015; Cevik et al., 2016; Diallo, 2018).

3. Research Methods and Materials

The efficiency analysis approach introduced by Debreu (1951) and Koopmans (1951) is used in this research. Efficiency is one of the banking performance benchmarks based on the description of the ratio of input and output (Le, 2020; Shadkam & Bijari, 2015; Zeitun et al., 2013). Data envelop analysis (DEA) aims to identify the most efficient unit by measuring the value of the Decision- Making Unit (DMU). DEA analysis was carried out based on input orientation through an intermediation approach by considering the constant returns to scale (CRS) model within the concept of technical efficiency (TE) developed by Banker et al. (1984). This study also calculated the variable returns to scale (VRS) model along with the concept of pure technical efficiency (PTE) introduced by Banker et al. (1984). This researcher also considers the concept of scale efficiency (SE) to test the average productivity level to reach the optimal scale (Novickytė & Droždz, 2018; Taib et al., 2018). This study also confirms the relationship of all input variables to each output variable through the panel data regression. The following is the panel data regression equation model:

Model 1:

LOG_F_it = β₀ + β₁ LOG_TC_it + β₂ LOG_LC_it + β₃ LOG_EAC_it + ε_it        (1)

Model 2:

LOG_I_it = β₀ + β₁ LOG_TC_it + β₂ LOG_LC_it + β₃ LOG_EAC_it + ε_it        (2)

Model 3:

LOG_OI_it = β₀ + β LOG_TC_it + β₂ LOG_LC_it + β₃ LOG_EAC_it + ε_it        (3)

Where i is banking, t is time, LOG_F is financing, LOG_I is an investment, LOG_OI is operating income, LOG_TC is training cost, LOG_LC is labor cost, and LOG_EAC is expansion allowance cost. This study involved twelve full fledged Islamic banks across Indonesia year 2014–2019.

4. Results and Discussion

The results of testing the level of efficiency are shown in Table 1. Based on the TE approach’s average value results, it is known that most of the samples have a high inefficiency value, fluctuates around 0.76–0.87. Meanwhile, through the PTE and SE approaches, it is known that the inefficiency values reach 0.88–0.97 and 0.85–0.92. Then, based on the individual interbank approach through the concept of TE, PTE, and SE, it is seen that only one bank (B7) was able to manage funds consistently and efficiently during the 2014–2019 period, followed by B11 (2014–2018), B3 (2016–2019), B9 (2014–2016 and 2019), B2 (2014– 2016 and 2018–2019), B10 (2015–2016 and 2019), B8 (2018–2019), B1 (2014) and B12 (2016).

Table 1: Efficiency Scale

Majeed and Zanib (2016) stated that the efficiency frontier estimation aims to explain the operating system’s efficiency. If the bank is estimated to operate on a CRS basis, there will be an increase in output proportionally with the addition of input. If the bank is estimated to operate on a VRS basis, this indicates Islamic banks may operate with an increase of output, which is greater than the addition of input, which is called increasing return to scale (IRS), or Islamic banks may operate based on an increase of output that is less than the addition of input, which is called decreasing return to scale (DRS) (Sufian et al., 2014).

The following is the analysis of the efficiency frontier’s estimation as described in Table 2. Islamic banks operated more on VRS (DRS or IRS) than the CRS basis. The only bank that is consistent on a CRS basis is B7. However, there was a significant change in 2016, shifting is obvious on the average Islamic bank operating to more like on CRS. Furthermore, in the emerging disruption era 2017–2019, the efficiency frontier estimation shows that most Islamic banks returned to their DRS and IRS (VRS) operations and only four banks stay on CRS operation in the early strikes of pandemic (in 2019). This means that most Islamic banks have not been able to increase output proportionally with the addition of input. Sufian et al. (2014) explained that a bank that operates efficiently is an institution that makes significant cost savings but still optimizes profits. The growth of the Islamic banking industry might be followed by the increase of various cost components, and competition might require additional costs to overcome various kinds of shortcomings or digitalizing, causing Islamic banks to operate in a DRS manner. Employees of the bank should be able to develop their digital skills, because the disruption era forces Islamic banks to be highly digitalized, for which Islamic banks need more skillful employees, otherwise threaten employees would be laid off due to the crisis related to the pandemic.

Table 2: Estimation of Efficiency Frontier

This study also tested the efficiency of the input variables’ influence on each output variable by using three measurement models based on panel data regression. The testing results in the first stage of the three models are described in Table 3. The test results of the chow test show that the three models used in the study have insignificant effects within the probability values of 0.8522 (Model 1), 0.0726 (Model 2), and 0.9982 (Model 3. Furthermore, the test results of the Hausman test show that there is an insignificant effect on the three models used through the probability level of 0.4464 (Model 1), 0.4716 (Model 2), and 0.9763 (Model 3). The random effect is assumed to be the second approach. Based on Baltagi (2005), the Lagrange multiplier test was carried out to decide the best approach among the common effects or random effects used in the three models’ equation. The results of the Lagrange multiplier test are based on the probability level and the significance value of 0.0000 (Model 1), 0.0037 (Model 2), and 0.0000 (Model 3). Base on the results, the random effect is the best approach used in the three equation models.

Table 3: Estimation Model Determination

In the next stage, correlation matrix testing is carried out to show the multicollinearity value of the independent variables, and the correlation tolerance limit <0.8 (Abdul- Rahman et al., 2017). The results of the correlation matrix test are shown in Table 4. Based on the results it shows that all independent variables have a correlation value <0.8, hence, all equations used in this study do not have a multicollinearity relationship.

Table 4: Correlation Matrix

Furthermore, to avoid heteroscedasticity of the equations, panel data regression testing was carried out by interpreting cross-section weights on the three models used (Gujarati & Porter, 2009), as shown in Table 5. The test results in Model 1 show that partially the LOG_EAC variable has a significant negative effect on LOG_F with a probability level of 0.0094, then the LOG_LC variable partially indicates a significant relationship to LOG_F with a probability of 0.0000.

Table 5: Panel Data Regression of Random Effect

The simultaneous test results show that the three independent variables in the Model 1 equation have a significant effect of 0.0000 with an R-Squared value of 0.7556, meaning that the allocation of human resource costs to Islamic banking financing has a significant effect of 75.5%. The attention of Islamic bank management to provide more training, workshops, and incentives continuously change the mindset of employees. Good financing performance does not only gives benefit for the company but also has a positive impact on the sense of employees’ belonging to the company. It directly empowers the ability of employees to achieve targets (Almahdi, 2017; Joshi et al., 2013; Muafi et al., 2017; Ozkan et al., 2017).

Equation Model 2 shows that partially only the LOG_LC variable significantly affects LOG_I with a probability level of 0.0000. Besides, it is known that all independent variables together significantly affect the LOG_I variable of 0.0000 with an R-Squared value of 0.5550, meaning that all input variables used in this study affect 55.5% performance of investment activities. Providing regular training will increase Intellectual capital for all employees. Management of Islamic investment instruments requires good quality of human resources. Also, Bhuiyan et al. (2017) stated that human resource investment has an essential role in the performance of return on investment. This is reflected in almost all investment companies that focus on allocating their funds to human capital rather than physical capital (Joshi et al., 2013).

Based on the test results in Model 3, the variables LOG_LC and LOG_TC have a partially significant effect on LOG_OI with a probability level of 0.0000 and 0.0000. Furthermore, the simultaneous test results show that all independent variables in Model 3 have a significant effect of 0.0000 with an R-Squared value of 0.9271. All input variables have a strong influence, with a significance level of 92.7% on Islamic banking’s operating income. Consistently, training for the employee has a significant influence on the profitability of the bank. Giving rewards through incentives and providing opportunities for employees to develop themselves is the most appropriate and safe step to gradually increase profits. The better, the company’s intellectual capital, the better employee performance will be (Kulchmanov & Kaliannan, 2014).

The test results on the three models indicate that all input variables have the closest relationship towards operating income (Model 3), meaning that the allocation of human resource funds in Islamic banks tends to have more effect on increasing operational profits rather than the distribution of financing or placement of investment in Islamic securities. Operating income is part of an intermediary function of the banks that gives direct benefits for the banks and customers (Jiang & He, 2018).

Human resources in Islamic banking must also have digital banking capabilities, innovation, creativity, mentoring, and business consulting (Roziq et al., 2019). Products and services must convert into digital banking. The process should be gradual and carried out continuously (Roziq et al., 2019). However, not all products and services are adequate for digitalization. There are core businesses that still require a human element. Several functions involve a human element, and their existence cannot be replaced by digital banking.

5. Conclusion

The competency of human resources in managing the Islamic banking Islamic business in Indonesia is still low. This means that the recruitment of employees adds cost to companies compared to the results obtained. Individually in 2014–2019, there was only one Islamic bank that consistently achieved efficient values. The proportional increase of output along with the increase in input is still not happening for Islamic banks since the emergence of the disruption era and especially in the early strikes of the pandemic in 2019 - the year when the Indonesian banking policy of mega-merger took place. The test results on the three models show that all input variables in the form of labor cost, training cost & expense allowances cost have the most vital relationship to operating income (Model 3) rather than to financing or investment activities. The pooled regression test results on the three bank performance models show that allocation of human resource funds in Islamic banks tends to have more effect on increasing operational profits rather than the distribution of funds to the public through financing mechanisms or investment in Islamic securities. Finding skillful employees for the disruption era is a cost burden. Based on verified models, more innovation in training employees and investing in training costs are needed for employees to have a deeper understanding of the nature of risk-profit of financing and investment activities of Sharia/Islamic banks. Highly skilled employees ensure the future promising performance of Islamic banks to deal with new global-normal.