Transactional or transformational leadership?: Analysis in the context of UAE Banking Sector

Executive Summary

There has been a strong relationship between a country’s culture and its leadership style. Leadership approaches vary across the culture due to the differences in cultural characteristics such as language, beliefs, values, religion and social organization. This assignment has analyzed two leadership styles including transactional and transformational in the context of UAE banking sector and identified how the cultural factors is associated with the preferred leadership style.

1.0 Introduction

The strong relationship between a country’s culture and its leadership style has been highlighted in literature (Ayman, 1993; Smith & Peterson, 1988). It is believed that leadership approaches vary across the culture due to the differences in cultural characteristics such as language, beliefs, values, religion and social organization (Hofstede, 1993; Jackofsky, Slocum & McQuaid, 1988; Ronen & Shenkar, 1985; Triandis, 1993a). For example, US leadership theories are found to be slightly applicable for different cultures (Adler, 1991; Hofstede, 1980, 1993; Smith & Peterson, 1988; Triandis, 1993b). Researchers (Bass & Avolio, 1993; Dorfman & Ronen, 1991; Fahr, Podsakoff, & Cheng, 1987) have proved that the effectiveness of leadership activities is determined the various situational factors (Figure 1, Appendix). The present assignment identified two leadership styles including transactional and transformational. Since, both these styles were reviewed critically in western and Asian culture; an attempt was made to understand these specific styles from UAE perspective. Further, an attempt was made to compare the sector’s leadership style with UAE overall culture and in turn towards Western Leadership style. The case study model was chosen for this study.

1.1 The UAE banking sector

The UAE banking system is highly congested. Though the overall UAE population is only three million, it has a large number of banks and bank branches. At present, there are 49 national and foreign banks in the UAE. On an average each national bank has 12 branches which make up the total count of national bank branches into 263. Additionally, there are 106 foreign bank branches in the UAE. Recently, foreign banks have also been encouraged to establish more branches within the emirate. This congestion makes the UAE banking sector to differ from other banking systems of the Arab and non-Arab countries.

1.2 Transformational and Transactional Leadership

In general, transactional leaders administer rewards and sanctions. This leadership style will reward the desired follower behaviors through salary hike, promotions and draw out punishment for undesirable activities through pay cuts, demotions, and terminations. Contingent rewards and management-by-exception are the two components of transactional leadership (Bass, 1995). If there is a mutual understanding on the consequences of performance and non- performance contingent rewards will take place. In this scenario, the employee has to perform well in the tasks those have been assigned based on his previous performance/expectations. In Management-by-Exception, the leader will take action only if he observes major deviations from plans.

On the other hand, transformational leaders will attempt to bring out the remarkable levels of performance from the followers. These leaders will engage the employees by appealing to their upper level needs (e.g. self actualization) which in turn will enhance their performance, satisfaction and commitment towards the organzation (Bass, 2000; Bryman; 1992; Shin & Zhou; 2003) and teams (Bass, Avolio, Jung & Berson, 2003; Pillai & Williams, 2004; Fernandes & Awamleh, 2004). As stated by Bass transformational leadership focuses more on developing followers to their fullest potential (Bass & Avolio, 1990), whereas transactional leadership is concerned with basic follower needs (Figure2 & Table 1, Appendix)

1.3 Transformational leadership in UAE banking sector

In a recent study Awamleh, Evans and Mahate (2005) proved that there has been a positive relationship between transformational leadership style of bank managers and job satisfaction and performance of the bank employees. It is also reported that the bank managers could boost up the staff’s performance through inspiration and individualized consideration. This transformational leadership quality is found to motivate the followers and develop the feelings of satisfaction among the bank employees of the UAE (Bass & Avolio, 1990). The Individual consideration given by the bank managers would enhance the positive attitude towards work, job satisfaction and in turn boost up the employee’s performance. As the banking employees feel that their working culture can be balanced by a leadership style which supports flexibility in the process, they respond positively to transformational leadership.

1.4 Transactional leadership in UAE banking sector

Researchers have shown that transactional leadership style is not suitable for the UAE banking sector (Awamleh, Evans & Mahate, 2005). This is because, bank employees in the UAE are extremely interested to work in an environment which exactly defines their tasks as well as performance targets and demands thereby supporting performance- reward linkages. Such environment is not possible with transcriptional leadership. In addition, the banking environment operations in the UAE are highly standardized and routine. In such environment employees will obviously look for space and flexibility while performing their tasks. Transformational style can support these expectations and enhance the employee performance. UAE culture supports authoritative style of decision making by managers (Dahhan, 1988) in which transactional leadership has no role. In addition, the banking operations are specialized and standardized and the banking environment has a well controlled structure with which transactional leadership can do a little.

1.5 Conclusion

There have been various differences between the leadership styles of UAE and that of western leadership style. Cultural factors (religion, language, rules of behavior) and authoritative approach of the UAE managers are responsible for these differences. In general, there are too many management directives in the UAE. Particularly, the UAE banking sector has a well controlled structure and standardized operations and thus transformational leadership is found to be best suitable for enhancing the performance of the banking staffs in such well organized environment.

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Appendix I

Table 1: Comparison of Transactional and transformational Leadership (Covey, 1992)