Building Trust through Ethical Leadership: Its Effect on Employee Innovation Behavior in Islamic Financial Institutions

Abstract

This qualitative study explores the role of ethical leadership in building organizational trust and its subsequent impact on employee innovation behavior within Islamic Financial Institutions (IFIs) in Indonesia. Data were collected through in-depth interviews with 25 employees and middle managers from three different IFIs. Thematic analysis was employed to identify key patterns. The findings reveal that ethical leadership, characterized by justice, honesty, and care for subordinates, is a significant antecedent of trust in leadership. This trust, in turn, creates a psychologically safe environment that encourages employees to engage in innovative behaviors, such as generating new ideas, seeking improved work processes, and championing change. However, the study also identifies contextual barriers, such as rigid hierarchical structures and a strong compliance culture, that can moderate this relationship. The research contributes to the existing literature by integrating ethical leadership theory with the context of Islamic finance, highlighting the unique socio-cultural mechanisms that drive innovation. Practical implications suggest that IFIs should invest in ethical leadership development programs to foster a culture of trust and sustained innovation