Role of knowledge management in banking sector

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Role of knowledge management in banking sector

  1. 1. Role of Knowledge Management in Banking Sector
  2. 2. Abstract This paper reviews the prevailing literature on Knowledge Management in banking industries. The purpose of KM is to give value to the information which resides in organizations resulting in value addition to their tasks and ultimately to approach competitive advantage. Most common KM applications identified in the banking industries are risk management. Customer Relationship Management/ Marketing (CRM), performance evaluation etc, Decision Support Systems (DSS), data where houses and data mining are rapidly growing techniques in this particular sector. However, most banks around the world do not use comprehensive knowledge management systems while other financial organizations in the same disciplines do.
  3. 3. Introduction Knowledge Management is one of the hottest topics today in both the industry world and information research world. In our daily life, we deal with huge amount of data and information. Data and information is not knowledge until we know how to dig the value out of it. This is the reason we need knowledge management. What is knowledge management? Knowledge Management, (KM) is a concept and a term that arose approximately two decades ago, roughly in 1990. Quite simply one might say that it means organizing an organization's information and knowledge holistically, but that sounds a bit wooly, and surprisingly enough, even though it sounds overbroad, it is not the whole picture. Very early on in the KM movement, Davenport (1994) offered the still widely quoted definition: "Knowledge management is the process of capturing, distributing, and effectively using knowledge." This definition has the virtue of being simple, stark, and to the point. A few years later, the Gartner Group created another second definition of KM, which is perhaps the most frequently cited one (Duhon, 1998): "Knowledge management is a discipline that promotes an integrated approach to identifying, capturing, evaluating, retrieving, and sharing all of an enterprise's information assets. These assets may include databases, documents, policies, procedures, and previously un-captured expertise and experience in individual workers."
  4. 4. Both definitions share a very organizational, a very corporate orientation. KM, historically at least, is primarily about managing the knowledge of and in organizations. The operational origin of KM, as the term is understood today, arose within the consulting community and from there the principles of KM were rather rapidly spread by the consulting organizations to other disciplines. The consulting firms quickly realized the potential of the Intranet flavor of the Internet for linking together their own geographically dispersed and knowledge-based organizations. Once having gained expertise in how to take advantage of intranets to connect across their organizations and to share and manage information and knowledge, they then understood that the expertise they had gained was a product that could be sold to other organizations. A new product of course needed a name, and the name chosen, or at least arrived at, was Knowledge Management. The timing was propitious, as the enthusiasm for intellectual capital in the 1980s, had primed the pump for the recognition of information and knowledge as essential assets for any organization. Perhaps the most central thrust in KM is to capture and make available, so it can be used by others in the organization, the information and knowledge that is in people's heads as it were, and that has never been explicitly set down. Knowledge management in banking system Every nation, every state, every corporate,every society, and every individual (adult, youth and child) seemto be on the run. They are either pursuing stifftargets or are being chased by their bosses to achieve stiff targets. They are
  5. 5. required to be constantly on the fast track. They are running against time. Everyone is up to achieving something extraordinary. Whether the mad rush at the end of the day is good for the individual, corporate, or nation is a matter of debate. There is no doubt that it is becoming a question of survival of the fittest and, therefore, knowledge management will also have to address the various issues and also find solution in energizing theworkforce, while ensuringthat no biological-clock disorder takes place especially in the younger generation. Bankers are also finding themselves on the hot seat. Theyare also under pressure to deliver. While they are aware ofthe enormous amount of responsibility cast upon them, theyappear to be under the grip of fear in taking decisions havinglarger financial implications.Knowledge management must be able to address such issues in finding solutions to encourage decisions and redefine staff lapses and accountability, to be more objectivewithout being too much subjective. Knowledge management is becoming very important in almost all Banks since it simplifies the delivery of timely and effective information that are used in all the organization's processes from planning, controlling, decision making and evaluation. It helps managers in formulating strategic, tactical and operational activities in a best ways in order to achieve the organization's desired objectives. Nowadays Modern banks investigate the importance of the value of knowledge Management in the banks business practices. The knowledge covers the range from the bank organizations' own internal intellectual capital, to the
  6. 6. wealth of data heel on any customer's transaction. (Jayasundara, 2008) The banking sector is always targeted to improve their customer satisfaction that will result in revenue increasing. The process of Knowledge creation, storage and dispersion becomes essential and banks assign specialized personnel to watch over and manage these critical processes. The most common fields of knowledge management applications in a bank are risk management, marketing management, customer relationship management and performance measurement especially for the benefit of its stakeholders. Usually, in major banks investments in Knowledge Management systems such as Decision Support Systems, Data Warehouses and Data Mining are rapidly growing. (Jayasundara, 2008) Nowadays, bank managers use computerized support system as a personal support in decisions making. Knowledge Management System in banks ensures better and more efficient results in decision making. Literature Review Many authors and researchers define KM in several ways. In general term, Liebowitz (2000) defined KM as the process of creating value from an organization‟s tangible assets . Siemieniuch and Sinclair (2004) obviously defined Knowledge Management as a pillar in the seven bases of organizational effectiveness; Thus KM can lead to many organizational benefits like better problem solving and decision making, improved customer services, increasing
  7. 7. profits, better stuff attraction, more innovation and greater creativity. KM helps organizations find, select, organize, disseminate, and transfer important information and expertise necessary for activities such as problem solving, dynamic learning, strategic planning and decision-making (Gupta et al., 2000). Other mentioned the main key components of successful KM S. Drew (1999) whichdetermined that culture, technology, organization, and people as the main key components. In modem banks there is no debate about the value of Knowledge Management as a business practice. Banks and all other players in the competitive financial service sector have recognized that knowledge is power (Sorrentino, 1999). The knowledge covers the range from the bank organizations' own internal intellectual capital, to the wealth of data heel on any customer's transaction. (Jayasundara, 2008) The overall aim of the banking sector is to enhance their customer satisfaction and increase revenue as a result, thus skill at knowledge management has become a critical competency for banking sector survival in the 2lst century. Also it becomes essential to assign a person or persons to watch over and manage the creation, storage and dispersion of knowledge (Sorrentino, 1999). These personnel should also be responsible for the creation and implementation of strategy that generates value from organizational knowledge. (Jayasundara, 2008) Samir baruh talked about the orientation of km with banks and contemporary HR issues in banking. He quoted that
  8. 8. Banking is both 'theory' and'practice'. While knowledge is veryessential, the positive application ofknowledge is most essential. He discussed about the contemporary HR issues that banking sector faces in day to day life. He found out that there was apparently a situation of experience and knowledge gap and thus arises a need of knowledge management to guide the future course of banks at crucial junctures. As quoted by him “With the requirement of a massive expansion in businessactivity encompassing both the internal and international market, banking personnel are expected to have a greaterunderstanding and knowledge of their extended role functionand priorities before them. Managing knowledge andmanaging risk is the requirement of the day. Banks arerequired to develop capabilities for identifying, managingand mitigating risks more efficiently.” Jayasundara, ChamindaChiranreviewed the prevailing literature on Knowledge Management in banking industries. He identified that most common KM applications in the banking industries were risk management, Customer Relationship, Management/Marketing (CRM), performance evaluation etc, He also came to know that Decision Support Systems (DSS), data where houses and data mining were rapidly growing techniques in this particular sector. Namita Rajput in her research paper discussed about consistent work Indian banking industry has been doing towards the development of technological changes and its usage in the banking operations for the improvement of
  9. 9. their efficiency. In her research, she said that to get the benefits of enhanced technologies, Indian banks are continuously encouraging the investment in informationtechnology (IT), i.e. ATMs, e-banking or netbanking,mobile and telebanking, CRM,computerization in the banks, increasing use ofplastic money, establishment of call centers, etc.RBI has also adopted IT in endorsing thepayment system‟s functionality andmodernization on an ongoing basis by thedevelopment of Electronic Clearing Services(ECS), Electronic Funds Transfer (EFT), IndianFinancial Network (INFINET), a RealTime GrossSettlement (RTGS) System, Centralized FundsManagement System (CFMS), NegotiatedDealing System (NDS), Electronic PaymentSystems with the „Vision Document‟, theStructured Financial Messaging System (SFMS)and India Card – a domestic card initiative,implemented recently (2011). IT improvements are significantly useful to reduce the cost and improve the efficiency of the banks. Technological efficiency can result in lower transaction costs and increased revenues forbanks (Rishi and Saxena, 2004). In her study, she found out that Transactions through technology channels cost much less to the banks than the customers reaching the bank and doing the transaction. Zainab Abdul shaheed Mohsen,Mai Aliand Akram Jalal together conducted a study on the topic “The Significance of Knowledge Management Systems at Financial Decision Making Process”. From their research they discussed about the present usage of information and knowledge which has increased in all types of organizations in order to simplify all the
  10. 10. activities and enhance the decisions making process. Acc. To them, the importance of managing the organizations' information and knowledge becomes a vital role that encourages the company's entire manager to invest more money, times and effort to manage such information and knowledge. Knowledge management is an organization strategic effort that used to capture information and experience of employees and customers which is stored in database, paper or in peoples' intellect then distributes this knowledge to gain more benefit. Knowledge management consists of several steps that allow the flows of knowledge among all interest users in the organization. The first step is knowledge creation that means the entering of the knowledge in the system . Second step is maintains the knowledge by remaining it in the system which is refer to Knowledge Retention, the flow of knowledge from one part to another within the system (Knowledge Transfer) and finally implementing the knowledge in the organization decision making and any business process which is refers to Knowledge utilization. They summarized their objective as: 1) To examine the value of KMS in supporting decision making process. 2) To develop a contextual profile of use of KMS, including the Availability of required technologies (Hardware and software) individuals' capabilities and awareness in using KMS, department coordination, decision maker acceptance and trust of the system.
  11. 11. In their research paper, they discussed that Knowledge can be classified into three main categories: explicit knowledge, implicit knowledge and tacit knowledge. Explicit knowledge can be transferred easily through books and reports so it‟s a tangible form of knowledge. Implicit knowledge, is not explicitly captured, but can be simply reported explicitly in to papers such as the working experience. Tacit knowledge is an intangible form of knowledge such as values and beliefs. For the organization the tacit knowledge is the most important type so it is rarely recorded and transferred. Knowledge management is becoming very important in almost all Banks since it simplifies the delivery of timely and effective information that are used in all the organization's processes from planning, controlling, decision making and evaluation. It helps managers in formulating strategic, tactical and operational activities in a best ways in order to achieve the organization's desired objectives. In their research they concluded that KMS help banks ensure better and more efficient results in decision-making and the banks top management has to give their employees all appropriate and suitable technologies to share knowledge . Furthermore, they have offer the appropriate atmosphere for using KMS and encourage their employees to share knowledge. So, KMS is support and assist the coordination, communication, content sharing between all banks employees. Manoj K. Chaudhary studied his research paper under the title “Practice of Knowledge Management Strategy by
  12. 12. Banking Industry of Nepal”. He conducted the research with the view that Nepalese banks with a knowledge management capability will also use resources more efficiently. Therefore, a firm's KM strategy relates to its strategic arrangements in building and management knowledge stock through the effective process of creating, transferring and distributing knowledge. His research result indicated that a fit between business and knowledge management strategy are significantly related to betterorganizational performance through effective management of Human Resource Strategy in organizations. His paper also concluded that Nepalese banks‟ effectively management knowledge are more innovative and have better performance than the banks do not takes this factor into account. Objectives To assess the role of knowledge management in banking sector. To know about knowledge management and its applications. To know about the banking scenario in various regions before and after implementation of knowledge management. To know the about impact of knowledge management in reducing the cost as well as customer satisfaction. To know the advantages of knowledge management for banks as well as their customers. To know how the banks can achieve good knowledgemanagementpractices?
  13. 13. To analysis the role of Information Technology and its relevancy in Indian banks in the recent era. To measure the performance of the each bank group towards the elements of IT. Methodology There are various methodology used in the various research papers studied for this case study of role of knowledge management in banking sector. In the paper “IMPLEMENTATION OF TACIT KNOWLEDGE MANAGEMENT IN A PARTICIPATION BANK : EVALUATING THE IMPACTS OF TACIT KNOWLEDGE ON ORGANIZATIONAL PERFORMANCE”, the survey instrument is composed of questions relating to the level of tacit knowledge and non-financial organizational performance. The questionnaire was prepared by the authors. The questionnaire was finalized after discussions with a panel of experts and academicians. Each item was rated on a five-point Likert Scale anchored at the numeral 1 with the verbal statement “strongly agree” and at the numeral 5 with the verbal statement “strongly disagree”. In the paper “Impact Of IT On Indian Commercial Banking Industry: DEA Analysis” the focus of the paper was to evaluate the efficiency scores and relative productivity as regards IT related factors using DEA analysis. There were two important aspects of DEA, following which it was preferable to study the population of banks. Firstly, it was sample specific, thus implying that results obtained for the sample couldn‟t be generalized for the entire population.
  14. 14. Secondly, it gave the relative efficiency scores and not the absolute efficiency scores. In the research paper “Practice of Knowledge Management Strategy by Banking Industry of Nepal”, the Companies involved were mainly Nepalese Banking Sectors. Primary data was used for the study and information collected from structured questionnaire. The survey involved comparison of two major Banking Sectors (I) Public Banks and (ii) Private Banks each sector firms randomly selected. In total, 3 in public bank and 11 in private banks were taken as the sample. Thus, selected Nepalese bank was considered to be representative of entire Nepalese banking sector. This survey instruments were organized into two domains and four factors (I) KM strategy i.e. codification and personalization, (II) Corporate Strategy i.e. Cost Leadership and personalization strategy. In the research paper “Customer Knowledge Management in the Iranian Banks: An Empirical Research”, A quantitative research methodology based on a survey using a questionnaire was used. The questionnaire developed by Patrick & Sonia (2009), was used with addition of questions related with gathering of data for the knowledge management systems. This modified questionnaire was pilot tested in one of the commercial banks. The questionnaire was sent to 200 officials of 6 commercial banks in Iran. Out of 150 received questionnaires, 90 were found complete and thus used for analysis.
  15. 15. The study with title “Impact Of IT On Indian Commercial Banking Industry: DEA Analysis” has measured the efficiency level of all the scheduled commercial banks (SCBs) operating in India during the study period of five years (2006- 2010). In the year 2009-10, there are 28 Public banks, 22 Private Banks and 27 foreign banks under the heading of SCBs of India (RBI reports and publications, 2010). Therefore, the study has the data of 86 banks (some were absent from the study) for the study period. Data for few banks could not be included either they were closed down or merged with some other bank during the study period. The focus of the paper is to evaluate the efficiency scores and relative productivity as regards IT related factors using DEA analysis. There are two important aspects of DEA, following which it is preferable to study the population of banks. Firstly, it is sample specific, thus implying that results obtained for the sample cannot be generalized for the entire population. Secondly, it gives the relative efficiency scores and not the absolute efficiency scores. This means that the best performing DMU out of the group will be shown as 100 per cent efficient. The rest of the DMUs will be benchmarked against this one. In case of DEA, the sample size should be generally larger than the product of the number of inputs and outputs (Dyson et al. 1998). Thus in this study, the sample size of 86 is sufficiently large to take care of the constraints imposed by the requirement of the DEA model. The data used in this study is financial information
  16. 16. available in the Annual reports of the banks and RBI publications. The survey instrument is composed of questions relating to the level of tacit knowledge and nonfinancial organizational performance. The questionnaire was prepared by the authors. Nevertheless, while selecting the questions, a comprehensive literature review which contained pretested and approved surveys in this field were taken into consideration. The questionnaire was finalized after discussions with a panel of experts and academicians. Each item was rated on a five-point Likert Scale anchored at the numeral 1 with the verbal statement “strongly agree” and at the numeral 5 with the verbal statement “strongly disagree”. Findings Empirical results shows that, A firm‟s KM Strategy relates to its strategic arrangement in building and managing knowledge stock through the effective process of creating transferring and distributing knowledge, which helps organization to sustain and obtain competitive advantage over time. This result seems to be consistent with organizations have always realized that access to quality information and knowledge will help them remain competitive. Using the SPSS a correlation analysis was conducted among the dependent variable i.e. performance (DEP) with each processes of the knowledge management. The knowledge management processes namely are knowledge acquisition (KA), knowledge creation (KC), knowledge storage (KS), knowledge distribution (KD)
  17. 17. and the knowledge utilization (UD). From table (2) knowledge utilization has shown a correlation of 0.58, whereas knowledge acquisition and knowledge distribution has shown a very weak correlation. The knowledge creation and storage has shown a negative correlation. However, both banks used various technologies for knowledge management. Among these technologies, databases and webpages are the most common types of technologies used followed by e-mail. Through these technologies, knowledge, both explicit and tacit, are created and retained in databases. With these facilities, knowledge are accessible and can easily be shared among employees and customers. Based on May bank and Am Bank experience, it could be said that banks which apply knowledge management can enjoy the benefits of having more knowledgeable workers and greater knowledge sharing. This would contribute to greater efficiency and bank performance improvement. There is an increasing trend in performance of Indian banks caused by IT innovation and enlarged investment in new information technology during the recent time period. The banks were left with no option but to improve their functional attitude, strategies and policies, efficiently allocating the IT elements with proper guidelines to use them in the presence of required trained staff. Introduction of new technologybased services to their customers, for e.g. e-banking, mobile banking, ATM facility and card based funds transactions, etc. became a part of their functional
  18. 18. norms. The SCBs made heavy investment in technology and computerization of branches from last few years, introduced new services and facilities to the customers which helped the banks to survive in the long run. Recommendations And Limitations This research work has mainly used two basic competitive strategies (i.e. Cost leadership strategy and differentiation strategy) to explain the relationship between KM strategy and business strategy in Nepalese banking industries. The results may be different if additional business strategies and HR strategies are examined. Applying this to the measurement model could give further insights. Some important recommendations from our research are presentable as follows. The future researchers can cover these issues in their paper: 1.Larger sample size should be taken. 2.Other KMS technologies could be used to explore the role of KM. 3. KM models could be used to understand the situation of KM. 4. KM diagnostic models should be used to evaluate the situation for KM. 5. Other organizations should be explored.
  19. 19. For Banks it is highly recommended that: 1)More expenditure should be allocated by organizations for the improvement of MIS and KM projects. 2) A continuous educating of banks employees of the importance of Knowledge Management and the benefits related to it. 3) Workshops, seminars, training courses, and training sessions should be prepared to increase awareness for KM. 4) To discuss the achievements of each department resulting from using KMS, the banks should held annual meeting to build future strategy based on the previous achievement Every study, no matter how well it is conducted, has somelimitations. According to this fact, we have somelimitations in this research too such as: 1. Employees of banks in Iran are mostly unaware between the difference of KMS and information systems. 2. Due to the questions format seem to be lengthy 3. Return rate is less and the sample size is small. 4. Due to time constraint the generalization could not beestablished. Conclusion Based on the results and analysis of the questionnaire it is concluded that: 1) The availability of Knowledge management technique can be of great benefit in the practice of bank
  20. 20. development through improving the efficiency of different operating activities. 2) As a result of importance of employees' capabilities and awareness in enhancing the decision making, there has been a significant interest in a system that includes information with easy retrieval process. 3) Acceptance and trust of decision makers in the knowledge, information, and opinion they provide represent a main part in the success of KMS. 4) The banks must, through a process of mass communication in all forms, sensitize its human resources individual with inner strength and inner happiness. Such and raise the knowledge level of its workforce manifold to meet the ever-growing emerging challenges confronting thebanking industry. 5) It could be attributed to the fact that information technology is used and there is some form of knowledge being acquired and distributed. But the results for knowledge creating and storing knowledge clearly indicate that there is no relationship in terms of knowledge management perspective. It can assumed that there is no specific knowledge management processes established for this purpose and the indication of relationship could be due to the role of information systems which are in some form used for knowledge management also. The results for the knowledge management systemsindicate that they have no relationship with the performance of the banks. However they are usedwhichthe statistical results have indicted but for the specific purpose for
  21. 21. knowledge management is not clear among theemployees. The literature suggests that KM tools have a competitive advantage and above all improve itsoverall organizational performance. However, in this research it contradicts with the literature. 6) The contribution of this paper is firstly, presenting the extent of the application of knowledge management in two Malaysian commercial banks based on theBanking Knowledge Management Model (BKMM). Secondly, creating awareness of the benefits of knowledge management integration. Thirdly, BKMM serves as an initial conceptual framework for bankers to integrate knowledge management in their banks. The applicability of the model is demonstrated by the experience of the two banks. Since our study only covers two banks, we suggest that a morecomprehensive research be conducted on a large number of banks to optimize the benefits of knowledge management integration in the banking sector. 7) For the IKM Emergent programmed, innovation in M&E for KM4D lies along the research agenda recommended in Section 5.6b. In particular, more consumer-driven M&E tools are recommended, such as LSS and other mutual learning tools, local contextualization of good practices and other knowledge developed elsewhere, convenient and practice-based community-level SD Scorecard, and tools for more accurate gauging of community preferences and community satisfaction not only for M&E but also for project identification and project design in the earlier stages of the project cycle.
  22. 22. 8) As the results show, there is an increasing trend in performance of Indian banks caused by IT innovation and enlarged investment in new information technology during the recent time period (2005-06 to 2009-10). The banks were left with no option but to improve their functional attitude, strategies and policies, efficiently allocating the IT elements with proper guidelines to use them in the presence of required trained staff. Introduction of new technologybased services to their customers, for e.g. e-banking, mobile banking, ATM facility and card based funds transactions, etc. became a part of their functional norms. The SCBs made heavy investment in technology and computerization of branches from last few years, introduced new services and facilities to the customers which helped the banks to survive in the long run, i.e. to retain their existing customers and attract new ones (RBI, 2010). Taking the whole view, the most efficient banks group is FBs followed by both groups. There is not so much difference in PSBs and PrSBs but as compare in both PrSBs are the best. Hence, Indian commercial banks have improved efficiency and performance after the advent of IT in recent era. 9) Despite the fact that tacit knowledge is seen as a strategic valuable resource for organizations that has the potential to lead sustainable competitive advantage and superior performance there is less empirical evidences and research studies that can establish a causal relationship between the level of tacit knowledge and organizational performance. Thus, the findings of this study confirm a positive linear
  23. 23. correlation between the level of tacit knowledge items and non-financial organizational performance. Level of tacit knowledge was divided into three factors, namely task knowledge, expertise knowledge, and level of training. Among these three factors task knowledge appeared to be the most influential factor on the organizations‟ performances fallowed by expertise knowledge. The findings show that level of training have comparatively less impact on the non- financial organizational performance.
  24. 24. Reference 1.Jayasundara, ChamindaChiran. (2008). Knowledge Management in Banking Industries: uses and opportunities. Journal of the University Librarians Association of Sri Lanka, Vol. 12, PP.68-79. 2. Namita Rajput (2011), “Impact Of IT On Indian Commercial Banking Industry: DEA Analysis”, Global Journal of Enterprise Information System, Volume-3 IssueI. 3. Jayasundara, ChamindaChiran (2008), “Knowledge Management in Banking Industries: uses and opportunities”, Journal of the University Librarians Association of Sri Lanka. Vol. 12. 2008. 4.Manoj K. Chaudhary (2012), “Practice of Knowledge Management Strategy by Banking Industry of Nepal”, International Conference on Management, Humanity and Economics (ICMHE'2012) August 11-12, 2012 Phuket (Thailand) 5.SelimZaim&HalilZaim, FatihUniversity,TURKEY (2008), “IMPLEMENTATION OF TACIT KNOWLEDGE MANAGEMENT IN A PARTICIPATION BANK : EVALUATING THE IMPACTS OF TACIT KNOWLEDGE ON ORGANIZATIONAL PERFORMANCE” 6.Samir Baruah (2008), “Managing knowledge in banks: An Introspection Based on Experience” 7. Project guru (2011), “Transformational phases in Indian banking sector”
  25. 25. 8. ZainabAbdulshaheed Mohsen, Mai Ali, Akram Jalal (2011), “The Significance of Knowledge Management Systems at Financial Decision Making Process”, International Journal of Business and Management, Vol. 6, No. 8; August 2011. 9. AzhdarKarami, EbrahimGharleghi, FatemehNikbakht, SamanehMirasadi (2010), “Customer Knowledge Management in the Iranian Banks: An Empirical Research”, ISSN: 1451-243X Issue 9 (2010). 10. http://www.kmworld.com/Articles/Editorial/What-Is.../What-is-KM-Knowledge-Management-Explained82405.aspx

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