Leadership on Litmus Test

  11 min 59 sec to read
Leadership on Litmus Test

After the implementation of the liberalisation policy, the number of Banking and Financial Institutions (BFIs) in Nepal saw a significant increase, reaching a peak of 220 at one point. During this period, there were a total of 32 commercial banks, 88 development banks, 50 finance companies, and 100 microfinance institutions in the country. However, as of mid-July of the last fiscal year, the count of BFIs had reduced to 111. This reduction can be attributed to the frequent mergers and acquisitions undertaken by BFIs to comply with core capital-related regulatory guidelines and to withstand the threats posed by economic shocks and the downturn of our economy which has limited business opportunities. It is anticipated that the number of BFIs will continue to decrease in the coming years.

While mergers offer growth opportunities, they also present several management challenges, especially when dealing with a larger workforce. One notable issue is the lack of emphasis on addressing human resources (HR) issues with the necessary sensitivity by implementing Organisational Behaviour (OB) and HR theories during the merger process of BFIs in Nepal. The successful completion of a merger mission hinges on promoting cultural integration, boosting morale and retention, streamlining change management processes, resolving conflicts, improving communication, adjusting leadership styles, intensifying training and development initiatives, and ultimately prioritising employees' welfare.

Dealing with Human Psychology 

It has become imperative to carefully integrate the workforce, which entails the adjustment of senior leadership and strategically repositioning staff within the unified system to achieve synergy through a merger. Taking care of a diverse workforce, ensuring legal compliances; maintaining employee industrial relations, and timely recruitment are all complicated aspects of HR management. Performance reviews, change management, attempts to promote diversities and equities, inclusions, as well as technological adaptations, are some of the crucial tasks of leadership.

Leadership must plan for employees' needs, communicate effectively, map competency, stay updated on business shifts, and handle dilemmas and worries. Despite the difficulties, efficient HR management is essential for developing a pleasant workplace, and a collaborative working culture, and guaranteeing the long-term survival of an organisation that coheres with the unique characteristics of the Nepali financial sector. A merger would be regarded as successful and fully accomplished only if it produces benefits for all parties concerned and delivers the strategic goals. These synergistic outcomes can only be realised through the seamless integration of employees of merged entities.

Culture Building Process

A robust and resilient unified corporate culture that can effectively balance and integrate diverse cultures, values, and philosophies is a crucial element for the success of merged BFIs. Consistency in policies, activities that promote long-term viability, employee commitment, effective and participatory leadership, adaptability to change, and process adjustments are all essential components for a functional culture. Building an organisation's culture through HR development, recruitment, and ongoing reinforcement takes time. Culture building that endures and grows over time needs constant and relentless efforts.

A well-cultivated culture across all levels of operations streamlines integration, harmonises processes, and provides customers with reliable service. An adaptable culture fosters leadership development, competition and innovation, and leads to ethical standards as well as helps BFIs to navigate the ever-changing banking landscape.

The Job Characteristics Model, developed by Hackman and Oldham, identifies five essential job characteristics: skill variety, task identity, task relevance, autonomy, and feedback. Merged institutions can create a workplace culture that promotes employee motivation and engagement by designing roles that encompass these elements. Similarly, Albert Bandura's Social Learning Theory offers insights into how people learn by observing and imitating skilled and efficient employees making it a relevant theory for merged BFIs seeking to build a progressive culture.

Two effective methods for managing cultural diversity in financial institutions are the Salad Bowl Approach and the Melting Pot Approach. Each approach provides a unique perspective on handling cultural differences and their impacts. However, both approaches can be applied simultaneously, considering the specific circumstances and cultural differences of the merged BFIs.

The Melting Pot concept, proposed by British-American writer Israel Zangwill in 1908, aims to integrate and assimilate cultures. Carl Degler's Salad Bowl Approach, dating back to 1959, suggests that it can be preferable to integrate various cultures of merged BFIs while preserving their unique identities. Terms like ‘Tossed Salad’ and ‘Cultural Mosaic’' are also used to describe this approach. This approach suggests that several cultures and values are mixed like salad ingredients. While the Melting Pot strategy focuses on complete absorption and may sacrifice the distinct identities of pre-merger entities for uniformity, the Salad Bowl Approach preserves diversity within unity. Adopting the Salad Bowl Approach appears to be the preferred method when shaping and building a post-merger culture that incorporates the best aspects of both worlds and offers long-lasting benefits to the merged institution.

HR: A Critical Component for Organisational Success

HR is no longer just seen as a means of production but rather as a strategic partner who makes numerous positive contributions to an organisation's success. It is extremely important to contemplate that the vast field of Organisational Behaviour and HR theory frequently overlap and complement one another. Merged BFIs should understand the applicability of the spirit of some below-mentioned Theories for people management, positive attitude cultivation, skill development, and fostering a happy work environment. 

Human Capital Theory - This theory places a strong emphasis on spending money on employees' training, education, and development. It has the notion that an employee's knowledge and abilities increase their productivity and contribute to the overall benefit of the company and its stakeholders. 

Talent Management Theory- According to this theory, a company's high-potential employees should be identified, and a proper plan must be crafted to develop their capabilities. It discusses ideas about finding, developing, and retaining talents. Recognising and appreciating employees with special skills and abilities is a common component of talent management techniques.

Positive Organisational Psychology – This concept focuses on building a pleasant work environment that improves employee engagement and performance. This idea emphasises the significance of positive feelings and overall general positivity. 

Growth Mindset Theory - This Theory designed by Carol Dweck is pertinent to merging BFIs’s behaviour, even if it is not just for HR. It emphasises how crucial it is to implant a growth mindset in workers to encourage flexibility, learning, and resilience. The idea of cultivating a professional attitude is an important aspect of this theory.

Total Quality Management (TQM) - Total Quality Management is a management philosophy that demands an emphasis on quality enhancement and continuous improvement across all areas of businesses and operations of merged BFIs. TQM is not just an HR theory, but it indirectly influences HR practices by fostering a culture of excellence and quality.

Morale and Motivation both play critical roles in determining employee behaviour, job satisfaction, and overall organisational performance, especially in a developing country like Nepal. Many Managers and Leaders are not aware of these established theories and approaches and hence find themselves at a loss when it comes to the development of work cultures that foster motivation, engagement, and strong morale.

Maslow's Hierarchy of Needs advises meeting employees' basic needs first while gradually attending to higher-level requirements in tandem with an individual’s progress in life. According to Herzberg's Two-Factor Theory, motivating employees can be achieved by creating a positive work environment and offering possibilities for advancement and recognition. To increase motivation, Expectancy Theory emphasises openly tying together performance and rewards. By utilising the Goal-Setting Theory, the BFIs can establish desired objectives that are consistent with their vision and mission. Merged BFIs can use the Self-Determination Theory by giving employees a required level of autonomy and respect for their various values and ideologies.

Creating a workplace that recognises people as individuals and attends to their emotional well-being is part of compassionate HR. Compassionate HR emphasises understanding employees' feelings and needs, promoting work-life balance, providing mental health care, recognising contributions, and cultivating diversity and inclusion. It is based on theories like Maslow's Humanistic Management Theory and its benefits of demonstrating empathy. This strategy improves morale, productivity, and employee retention. 

Halo & Horn Effects and the Importance of Emotional Intelligence

Leadership in a merged bank must dispel any misconceptions they may have about employees from the merging BFIs. Changing perceptions also fosters trust, improves the bank's standing, and upholds moral and legal obligations. The long-term success of the merged BFIs depends largely on changing views about employees coming from merging financially weaker BFIs.

Cognitive biases known as the Halo effect and Horn effect on merged BFIS influence how leaders and managers view people based on outward features or attributes, which might result in generalisations that are not always accurate or fair.

Halo Effect- This happens when a person's positive perception in one area results in an overall favourable assessment of that person. In other words, even though two parts of a person's personality or abilities are not necessarily related, if these are noticeable or favourable traits, this good perception might radiate to other qualities. For instance, even though we have no proof of our assumptions, we might automatically believe someone is educated or nice if they are visually attractive.

Horn Effect- This happens when a person's reputation is damaged in one way, and this causes people to judge them generally in a negative way. Regardless of their actual skill, our perceptions of their traits may change if they exhibit a weakness or bad trait. For instance, we might unconsciously infer someone is unreliable or deficient in other talents if they make a mistake in just one of their daily activities.

Leaders of merged BFIs must accept that inaccurate assessments of individuals inside a merged bank may result from both the Halo Effect and the Horn Effect. These prejudices can have an impact on a variety of life decisions. Understanding and acknowledging these biases can help people judge others more fairly and objectively, taking into account all of a person's traits and actions rather than one’s judgments and biases toward others.

A possible solution to dispelling biases and prejudices that are so common to human nature is through integration of the principle of Emotional Intelligence (EI) which can produce creative solutions and advantages for a merged BFI across many areas along with the advantage of providing objectivity in judgement. In 1990, Peter Salavoy and John Mayer used this idea for the first time. Likewise, Danial Goleman later famously explained it in more analytical ways. Self-awareness, Self-Management, Social Awareness, and Relationship Management are the four domains of EI. By understanding and resolving emotional reactions, leaders and managers with strong EI skills can successfully traverse the intricacies of culture blend, increase employee engagement, and efficiently manage change. This promotes enhanced teamwork, innovation, and unique ideas and explores creative and distinct thought.

Demonstration of Suitable Leadership Style 

A proper leadership style, which best fits with several internalities, is crucial for managing and combating Nepal's economic situation. Transformational Leadership Approach might foster unity by advancing a common goal. On the other hand, a Cooperative Strategy might be crucial for using the various skill sets of the combined workforce. To solve employee issues, build trust, and guarantee the team members' overall development, a Servant Leadership Approach may be helpful. Using a Democratic Procedure to involve staff members in decision-making may help to reach a consensus. Additionally, throughout the change, an Adaptable Leadership Approach that dispels mystery and promotes creative thinking may be beneficial. In situations when prompt decision-making and clarity are essential, an Authoritative Style may be invaluable. An approach to leadership that is likely to be successful is the combination of these approaches, supported by open communication, flexibility, empathy, and the building of trust among employees. As the merger moves forward, it is crucial to continuously assess and modify the selected leadership style with dexterity and vision.

On the contrary, an Autocratic Leadership Style poses serious risks for merged BFIs whether in Nepal or elsewhere. It can make it harder for diverse teams to work together, and lower employee morale during transition times. This style prevents the innovation and adaptation needed to shift financial landscapes, creates resistance to necessary changes, and sacrifices long-term sustainability for immediate gains. A more inclusive, Participatory Leadership Style that encourages teamwork, flexibility, and employee participation is essential to guaranteeing a successful merger and long-term growth, especially in our country. 

Onus on Leadership

To successfully manage a merged BFI, astute leadership is required to address the numerous difficulties involved. Since senior executives, including the CEOs of BFIs, are moving from managing smaller institutions to one large organisation with a combined workforce and a significantly huge balance sheet, they must exhibit shrewd leadership and strategic acumen. 

Transparent communication, seamless cultural blending, fostering teamwork, talent identification and retention, encouraging innovation, and upholding ethical standards are essential demonstrations desirable from a good leader. If these deliverables fail to materialise, the merger of BFIs may not fructify the expected positive results. 


Without paying attention to crucial HR elements, the merger mission would not be deemed successful, and the organisation might have a difficult time accomplishing its objectives. It might also result in a noxious work environment, lower employee confidence, and may lead to significant long-term harm to the organisation's performance and reputation. The likelihood of a successful HR integration will be increased only when Leaders of merged BFIs prioritise and address HR issues promptly.

The Board of Directors, Nepal Rastra Bank, other regulatory authorities, as well as stakeholders, should keep an eye on the merged banks' adherence to critical HR elements. The Board should uphold vigilance over strategic decision-making, encourage open channels of communication, and tackle issues from a long-term strategic viewpoint. All the stakeholders should play an instrumental role and contribute to a successful merger. 

(Ghimire is the Deputy CEO of NMB Bank Ltd)

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