The Effect of Adopting Balanced Scorecard (BSC) as Strategic Planning Tool on Financial Performance of Banks Operating in Palestine

Abstract

This research investigates the effect of BSC on the financial performance of banks operating in Palestine, across BSC’s four perspectives: financial; customers; internal business processes; innovation, growth and learning. It seeks to identify the relationship between BSC and the financial performance of banks operating in Palestine.
 
 For this purpose, the research population comprises all 14 banks operating in Palestine. As a result of the small size of the population, the ‘complete census’ method has been used: the sample is the whole population. The questionnaire was distributed to 130 respondents (employees) at banks: branch managers, heads of departments, directors of departments and financial controllers. Financial performance was used as a dependent variable, while the following four independent variables served as hypothesized determinants: (i) financial perspective, (ii) customers’ perspective, (iii) internal business processes perspective, and (iv) innovation, growth and learning perspective. The Multiple Linear Regression test at 95% confidence was used, resulting in three significant variables: financial perspective; internal business processes perspective; and innovation, growth and learning perspective. Overall, the adjusted R2 = 0.62. This measure is acceptable, and reveals that the resulting model interprets 62% of the determinants of financial performance.
 
 The most important results of this study are: (1) the BSC model can be used to enhance the financial performance of banks operating in Palestine, and (2) the customers’ perspective in the BSC model did not have the same effect as other perspectives. Moreover, (3) in their measurement of performance, banks operating in Palestine apply clear strategic performance measures, including traditional financial and non-financial measures, while noting that their use of these measures does not mean that they apply them under the remit of a BSC model. These measures can be reclassified within the four perspectives of the BSC model.
 
 The main recommendations are that (1) banks operating in Palestine should implement BSC as an integrated system for strategic management, and as a means for decision-making by management. Its application achieves many advantages that enhance the competitive position and financial performance of banks. Furthermore, (2) banks operating in Palestine need to pay more attention to strategy, and measurements that are included in the customers’ perspective of BSC. There is also a need to (3) conduct training courses for bank employees on BSC and how it can be used. Finally, there is a need to (4) conduct further investigation of the effect of adopting BSC as a strategic planning tool on the financial performance of banks operating in Palestine, as well as (5) a study of the effect of BSC when taking into consideration the type of bank - Islamic or commercial, local or foreign.