Intellectual Capital and Bank Stability in Saudi Arabia: Navigating the Dynamics in a Transforming Economy

Abstract

This research investigates the influence of intellectual capital on the stability of banks in the evolving context of Saudi Arabia’s banking sector. Against the backdrop of rapid economic reforms under Vision 2030 and the challenges imposed by the COVID-19 pandemic, this research incorporates specific metrics related to these contexts and provides a nuanced analysis of how intellectual capital and its components (human capital efficiency (HCE), structural capital efficiency (SCE), and capital employed efficiency (CEE)) affect the financial stability of Saudi banks. This research analyzes a decade-long panel dataset for ten major Saudi banks from 2012 to 2022, utilizing both fixed-effects and cross-section random-effects models to discern the impact of intellectual capital on bank stability. The findings reveal a positive overall influence of intellectual capital on bank stability; however, individual components present a complex relationship, with CEE showing a positive association and HCE and SCE demonstrating unexpected negative correlations with bank stability. The research identifies leverage (LEV) as a significant factor negatively impacting stability. Operational efficiency (OPEF) and size (SIZE) also negatively affect stability. Surprisingly, macroeconomic indicators and bank size exhibit non-significant effects on bank stability. Similarly, the direct impact of the COVID-19 pandemic was found to be non-significant, suggesting a resilient banking environment or the presence of effective mitigating strategies. As Saudi Arabia continues its ambitious economic transformation, this research underscores the critical role of effectively managed intellectual capital in ensuring the banking sector’s stability. It provides a foundation for ongoing research in this vital area.