Effect of Intellectual Capital Performance on Profitability of Conventional and Islamic Banks in Pakistan: A Comparative Analysis Based on Value Added Intellectual Coefficient (VAIC)

Abstract

The purpose of the study was to compare and analyze the impact of intellectual capital (IC) performance on the financial performance of the conventional and Islamic banks in Pakistan. The study collected data from a sample of 10 banks in total and among them 5 banks were conventional and 5 were Islamic banks from 2009 to 2018. Intellectual Capital was calculated using Value added intellectual coefficient (VAIC) methodology for each bank and for each year. Intellectual capital and it's three sub-dimensions that depict Value Added efficiency of 1. Capital employed (CEE), 2. Human capital (HCE), and 3. Structural capital (SCE) were later combined into Islamic banks and conventional bank group and used as regressors to find their effect on each group profitability. All four IC measures of these groups were also compared using ANOVA. Results showed that Islamic banks have significantly more intellectual capital as compared to conventional banks. This is also valid also for structural as well as human capital. A high degree of positive correlation was witnessed between human capital and VAIC. Whereas, size, ROA, and SCE were inversely correlated to VAIC. Regression results showed that VAIC seems to have a significant negative effect on ROA, in both Islamic as well as conventional banks. Similarly, human capital also seems to affect ROA inversely. However, CEE has a positive effect on ROA. Interestingly, bank size has a negative effect on Islamic banks whereas a positive effect on conventional banks. The findings imply that banks are not able to realize the full potential IC elements (i.e. human and structural capitals) to maximize the stakeholder’s benefit.