THE POWER OF ISLAMIC WHOLESALE BANKING

Islamic banking, guided by the principles of Sharia law, often provides advantages over traditional wholesale banking, according to a considerable number of non-Gulf C-suite executives and senior managers from Fortune Global 500 and Forbes Global 2000 companies who participated in an in-depth study on the reputations of wholesale banks operating in the Gulf region.

My research participants noted that Islamic banking practices and instruments foster shared risk-taking, promoting a ‘we're all in this together’-mentality between bank and client. This encourages prudent financial decision-making, alignment of interests, and deeper engagement, mitigating the risk of financial instability caused by the excessive debt prevalent in traditional wholesale banking. Additionally, Islamic finance's emphasis on ethical investments, avoiding sectors like gambling or alcohol, appeals to many Western and Eastern executives with similar concerns. This focus on social responsibility is further reflected in the growing popularity of Islamic bonds. But there are more advantages, said my research participants. For example, asset-backed financing is common in Islamic wholesale banking, reducing speculative practices due to the straightforward links between financing and real/productive economic activity, for more details on this topic, see for example www.pieterklaasjagersma.com/leasing-and-marketing.

Thus, while most traditional Western and Eastern banks focus on debt and credit, Islamic banks prioritize partnerships and shared outcomes — a partnership-driven approach rather than a purely transaction-driven model. The focus on real assets and shared risk is particularly beneficial in volatile economic environments, which are a hallmark of our current economic era.

The emphasis on intense collaboration, risk/return-sharing, ethical investment, and financial stability makes Islamic wholesale banking increasingly attractive for businesses worldwide. As one CEO put it, Islamic banking is "a mature and competitive alternative to the transaction-driven, interest-based model of wholesale banking practices of Western and Eastern banks."

As global demand for sustainable and responsible banking grows, Islamic wholesale banking is poised to play a pivotal role in shaping a more contemporary financial system. This makes Islamic finance appealing to businesses and a compelling option for governments seeking innovative and principled long-term financial solutions.

MASTERING THE ART OF TALENT DEVELOPMENT: LESSONS FROM BAIN & COMPANY

The best professional service firms (PSFs), like Bain & Company, are the world’s most successful human-capital supply chain firms.

PSFs need to reinvent the ‘people side’ of the organization continuously — talent development should be the firm’s largest single non-client investment. Advanced people and talent management systems and processes — performance appraisal, remuneration, hiring and firing, training, development, and promotion — are the body and soul of PSFs, shaping how people behave as they go about their work.

The objective of talent development is to close the gap between the current and desired ways of doing things. This requires understanding the nature and size of the gap to target the most important people skills for development. Many PSFs find that their HR, training, and development systems do not address these challenges effectively. Bain & Company seemingly discovered the Rosetta Stone.

Five distinctive characteristics of people development at Bain are:

☐ People development is the firm’s core management process. The ability to mobilize the right people for client projects stems from the large amount of time Bain spends recruiting, developing, evaluating, and managing the best of the best.

☐ There is a strong belief in enabling employees to grow. PSFs must provide the best platform for ‘organic’ growth, i.e., growth through people development.

☐ The ‘star system’ is discouraged. By hiring individual stars and rewarding them hugely, PSFs create divided, unstable organizations. PSFs cannot gain an enduring competitive advantage by hiring stars from outside the firm. Studying individual stars at PSFs for many years, I found that when they hire an outside star, his/her performance plunges, there is a performance decline in the team that the star works with, and the firm’s reputation — its most important asset — deteriorates.

☐ The recruitment and development process is primarily driven by the line, with relatively limited support. The best PSFs excel as ‘talent-catching machines’, thanks to their esteemed ‘war zone’ professionals.

☐ The people development process is characterized by a strong people ethos with a relatively informal atmosphere and a high degree of individual freedom.

There are many reasons to become great at talent development: [1] better relationship management skills, [2] a stronger firm (If you help people develop, they tend to develop the firm, too), and [3] more fun (People working in a development-intensive environment tend to enjoy themselves more, and good people who have fun attract other good people who also want to have fun).

Often, firms like Bain remain something of an enigma. But there is at least one thing that they have in common, namely a formidable talent development approach.

THE GULF COOPERATION COUNCIL (GCC): CULTURE FUELS OPPORTUNITY

Culture is essential to enhancing a region's reputation, serving as a ‘promotional gift’ and a cornerstone of its identity. The Gulf region — encompassing the member states of the Gulf Cooperation Council (GCC) — offers a wealth of cultural richness.

Foreign executives are often impressed by the unique cultural heritage of the Gulf region — its ‘inherent regional equity’. The GCC can leverage this heritage to enhance its global appeal — it is perfectly positioned for success, equipped with all the critical ingredients: a rich cultural heritage with powerful narratives, proactive royal and other influential families ensuring swift decision-making, and substantial funding opportunities.

A recent multi-year study on the corporate reputations of GCC financial institutions, which surveyed over 3,000 C-suite executives and senior managers from Fortune Global 500 and Forbes Global 2000 companies, revealed that foreign decision-makers believe the Gulf region needs to articulate (much) better (CEO quote) “the interesting stories behind the GCC countries”. As one executive noted (quote), “the GCC countries offer a more positive experience in practice than is commonly perceived” — a sentiment echoed by dozens of executives and senior managers regarding living and doing business in the Gulf region.

As reputations serve as the primary channel of communication for national and regional identity, it becomes increasingly vital to carefully manage international perceptions, especially in a world where news — and subsequent perceptions — travels at the speed of light, whether offline or online. The unique culture of GCC countries offers a genuine, non-commercial narrative bridging their past and promising future. In an age of misinformation, this authenticity showcases the true qualities of the Gulf region's people and institutions — in addition to the financial wealth that enables the GCC to punch above its weight in global affairs.

I was surprised by the gap between the (mostly) positive perceptions, opinions, and experiences of foreign executives and senior managers and the lack of effective storytelling about the true narratives of the GCC countries, particularly regarding their ‘soft’ edge (culture). The GCC possesses the essential ingredients for a distinctive reputation built on strong, authentic narratives. Beyond natural (oil and gas) and financial resources, the GCC undeniably possesses a mature and authentic ‘cultural pulling power’.

Building a strong and positive national and regional reputation is increasingly crucial for securing a place in the 'mental decision-making space' of executives and senior managers — and, ultimately, for attracting foreign businesses.

HERDING IN INVESTMENT BANKING

‘Herding’ eliminates differences among investment banks’ product/service offerings, client strategies, pricing/fee models, innovation strategies, marketing (relationship management) approaches, and more. When investment banks in a ‘strategic group’ — full-service investment banks, boutique banks, financial conglomerates, or universal banks — begin to herd around a single strategy, declining margins are bound to follow. But it is change over the longer term that establishes whether herding has taken place. A decline in differentiation and uniqueness demonstrates that firms are engaged in strategic herding. Since the global financial crisis, this trend has negatively impacted investment banks, as observed by myself and other clients, leading to a decline in reputation, employee appeal, client loyalty, and financial performance.

Strategic herding has destroyed margins in many industries. For example, in the 1990s, the Federal Reserve Bank of Boston examined the degree of ‘strategic differentiation’ and its effect on the margins of the biggest companies that accounted for 98 percent of the PC market from the mid-1970s to the late 1980s. During that period, the PC industry’s ‘strategic differentiation index’ declined by more than 35 percent as firms clustered around the then dominant ‘IBM-clone’ PC model. As a result of this decline in uniqueness, margins fell during the same period by more than 50 percent, representing $3 billion in destroyed margins by the end of the 1980s. Interestingly, the study’s most distinctive firm, Apple Computers, became a true icon — many years later.

The solution for the investment banking industry? Look for ‘white spots’ — unexplored areas on the client landscape. ‘White spots’ can take the form of new product niches, value-added services, sales/market/relationship management, etc. strategies, as well as unexploited fee/price structures. Don't forget people with unique backgrounds (e.g., experienced hires from other industries).

The number of ‘white spots’ — business opportunities — in the investment banking industry is almost unlimited, with opportunities ranging across many dimensions. Message: in the long run, failure to (re)invent products, services, client approaches, people acquisition strategies, and so forth to ensure ongoing strategic differentiation will lead to a steady decline in performance. Herding, today’s dominant investment banking logic, ultimately undermines the reputation and status of individual investment banks.

BLACKSTONE'S WINNING FORMULA — STICKING TO ITS CORE

A few years ago, I authored a book on elite professional service firms (PSFs) like Blackstone. Among the many success stories, Blackstone’s meteoric rise stands out as particularly remarkable. What truly sets them apart, however, is something surprisingly simple yet profoundly impactful: an unwavering commitment to their original mission — a value proposition crafted decades ago that still drives their success. The foundation? Institutional skills focused on investment performance and clients.

Clarifying a PSF’s value proposition is the starting point for building effective firm-wide or ‘institutional’ skills — Blackstone’s hallmark asset. A value proposition is a statement of the benefits clients will receive. Therefore, a clear understanding of client needs is essential for defining the firm’s value proposition. Ultimately, a competitive edge lies in delivering superior client value to create wealth for all parties involved. It also requires a keen understanding of why clients choose one firm over another — why Blackstone? Consequently, leading firms prioritize client value over a purely product- or service-centric approach.

I always use the following questions to assess whether a PSF — a potential investment — has a well-defined and compelling value proposition: [1] What services do their clients want, and are they willing to pay for them?; [2] Does the firm’s ‘statement of benefits’ include evidence-backed reasons why clients would choose this value proposition over alternatives?; [3] Does analysis support the value proposition’s potential for generating above-average returns?; and [4] How does the firm’s value proposition compare to those of its rivals? Is it more attractive?

For PSFs, being explicit about the institutional skills required to fulfill their value proposition is essential. These skills must be clearly defined and consistently applied in a way that outperforms the competition. This approach was precisely what Schwarzman and Peterson envisioned when they founded Blackstone in 1985.

Successfully building and leveraging institutional skills involves identifying the pivotal individual roles — including designing the right systems and management style to support and empower them — that must be performed excellently. Individual skills articulate the actions that individuals must perform well for the firm to build superior institutional skills. The list of individual skills should summarize the capabilities that contribute to institutional skills.

Schwarzman, the late Peterson, and exceptional colleagues like Jonathan Gray exemplify a crucial principle of building great businesses: unwavering consistency in mission and purpose — paired with a healthy dose of restlessness — is essential for expanding a firm beyond the limits of markets, countries, or industries. Happy shareholder, over here — mission accomplished.

THE GOLIATH SYNDROME IN INVESTMENT BANKING

Most rivalries are hard-fought, drawn-out battles. But there are exceptions — blitzkriegs in which market shares trade hands with spectacular speed and redoubtable industry leaders are worsted by underdog rivals almost overnight. Think of Tesla in the car industry and boutique banks in investment banking.

What causes this David and Goliath phenomenon? Are the Goliaths stupid, or prone to be caught napping? Of course not. It was their very excellence that left them open to successful competitive attack. This mastery — and the skill and asset commitments necessary to achieve it — makes leaders vulnerable to attack from rivals shrewd enough to aim at a chink in Goliath’s armor.

Usually, established leaders — focused on maintaining internal consistency and maximizing economies of scale and scope — have used the same overall business approach to serve client segments with divergent product requirements. However, when the client segment-to-segment differences are sufficiently great, this strategy is dangerous. It invites rivals to move in with differentiated approaches tailored to the needs of particular segments — hence the rise of boutique banks in M&A.

With less costly business models, more time for clients due to less red tape, and by tailoring their service to the needs of their target client segments with a razor-sharp focus on M&A, boutique investment banks have grabbed a sizable share of the market. Meanwhile, the business model commitments of leaders are so interlocked that it takes them years to marshal their forces when challenged by new competition. Apart from the fossilization of their erstwhile winning business approach, fundamental changes in regulation undermine those winning formulas, too. Vested interests and other roadblocks to change take shape.

So, how can established players navigate this situation? Sticking to the status quo risks suffering the same fate as Goliath. The secret is to seed new forests while harvesting the old — a strategy Morgan Stanley implemented effectively and timely (Blackrock is pursuing a similar strategy of entering the private lending market, exemplified by its recent acquisition of HPS, part of Blackrock’s near $30 billion private markets M&A spree in 2024). This intricate process takes foresight and courage. Goldman Sachs’ foray into consumer banking serves as a cautionary tale — courage without foresight.

In real life, Goliath can win, but letting no assumption go unchallenged is crucial. Key success factors are [1] courage (the willingness to embrace new opportunities), [2] foresight (where in-depth analytics meets world-class intuition), [3] synergy (regarding established capabilities and reputations), [4] enough time (transformation takes time), and [5] comprehensive analyses (it is essential to step back and take a long and analytical look at the forces that drive future client needs, priorities, and expectations).

WHAT I’VE LEARNED ABOUT INVESTMENT BANKS AND CLIENTS — AS A CLIENT

Throughout my decades-long career as a hedge fund manager (of a family office), C-suite executive, and counselor to PE firms, I have worked with a wide range of investment banks — from renowned bulge-bracket firms to small boutique banks, and from major U.S. institutions to smaller, lesser-known firms based in Europe, Asia, and the Middle East.

Ten things I’ve learned about investment banks and clients — as a client:

☐ Paying attention is not enough. Putting yourself into the fabric of the client isn’t an easy feat. For example, knowing executives on an informal basis is one of the most important elements in client relations. However, there is no way to teach this kind of informal work other than to fail a few times. The hurdle everyone faces isn't simply getting noticed but getting believed. Having said that, anything you do repeatedly will get you there. 

☐ Clients prefer teams. Clients consider the teams serving them as direct windows into the capabilities across the bank. The era of the individual virtuoso is declining. This is obvious, but some investment banks don’t seem to get it. Individual heroes should be anonymous. There is no 'I' in a team.

☐ Clients ‘like’ quality work, but they ‘love’ impact. The work of banks should be better than clients expect but not more or less than the situation calls for. Be impossible to ignore. Clients cannot reward those they cannot remember.

☐ Investment banks must never confuse success with excellence. Many banks have enjoyed a lot of the former. Most do not have enough of the latter (Don’t confuse awards with achievement). You can’t argue with excellence. Become bullish on skills, not bonuses.

☐ Clients are human beings, they need stroking and affection. It isn’t necessarily part of the service investment banks offer, but a thoughtfully developed and regular personal dialogue with clients can put a useful, highly positive frame of reference around the work bankers do with them.

☐ Outstanding work is remembered for a year, poor work lingers on for a decade. Message: relatively small client projects are key in terms of reputational impact. It's not the big things that will kill you — it's the accumulation of little things. The essence of investment banking seen through the lens of bankers? Creating ‘referral value’.

☐ Clients admire the ability to mobilize the best of the best. They expect investment banks to be intellectually vibrant, professionally proactive, and continually innovative. Don't spin a story — be a story.

☐ Quite often, the most valuable contributions to clients are not analytically based. The best advice I receive is usually heavily judgmental — and subjective — by nature. Occasionally, they are contributions made simply by asking the insightful question at the right moment. Having all the answers is less important than knowing what to ask. That’s when professionals really shine.

☐ Investment bankers must tell clients the truth. William Blake, the English poet, said it best, “When I tell any truth, it is not just for the sake of convincing those who do not know it, but for the sake of defending those who do.” Make the truth as interesting as it can be.

☐ Investment banks are all about clients, people, and ideas tied together by a collaborative mindset. They have to continually make investments along these four dimensions (echo: all four dimensions). Otherwise, it’s ‘game over’ — fast.