From Transformational Leadership to Digital Transformation: The Role of Employee Engagement in Islamic Banking

Abstract

The changing landscape of financial services driven by customer expectations, financial technologies, regulations, and competition has made digital transformation a strategic priority for banks. This study examines whether transformational leadership facilitates digital transformation in Pakistan’s Islamic banking sector and whether employee engagement explains this relationship. Based on the Transformational Leadership Theory and the Social Exchange Theory, the researchers suggest that leaders who present a clear vision, catalyze thinking, show caring behavior, and provide personalized attention can increase employees' commitment to and involvement in technology-mediated organizational change. The study adopted a quantitative, cross sectional survey design and the data were collected from employees of Islamic banking institutions in Pakistan. The collected data was analyzed using partial least squares structural equation modeling (PLS-SEM) in Smart-PLS 4 by employing bootstrapping for testing direct and indirect effects. The findings show that transformational leadership has a positive and significant effect on employee engagement (? = 0.569, p < 0.001) and digital transformation (? = 0.354, p < 0.001). The indirect effect of transformational leadership on digital transformation through employee engagement is also positive and significant (? = 0.276, p = 0.004), indicating that employee engagement represents an important mechanism through which leadership contributes to digital change. The model explains 32.3% of the variance in employee engagement and 17.3% of the variance in digital transformation. The findings of the study contribute to the literature by combining leadership, engagement, and digital transformation in a not well-studied context of Islamic banking, and it emphasizes that banks should go beyond investing in technologies to ensure that leadership development, employee engagement, communication, learning opportunities, and organizational support are all in place throughout a digital transformation journey.