The association between intellectual capital and financial performance in the Islamic banking industry

A.A Ousama,Mustafa Abdulkarim,Helmi Hammami

doi:10.1108/imefm-05-2016-0073

Abstract

PurposeThe purpose of this study is to empirically investigate the impact of intellectual capital (IC) on the financial performance of Islamic banks operating in the Gulf Cooperation Council (GCC) countries.Design/methodology/approachThe study measures IC by the value added intellectual coefficient model. A regression analysis was used to assess the impact of IC on financial performance. The research sample consisted of Islamic banks operating in the GCC countries during the years 2011, 2012 and 2013. Data originated from the annual reports of Islamic banks.FindingsThe results support the thesis that IC has a positive impact on the financial performance of Islamic banks. Even though the average IC is lower than that reported in other studies, the positive effect on financial performance is obvious. The findings also show that human capital (HC) is higher than capital employed (CE) and structural capital (SC). The study reveals that SC has an insignificant impact on the financial performance of the Islamic banks compared to CE and HC.Practical implicationsThe findings provide empirical evidence that IC affects the Islamic banks’ financial performance. It helps Islamic banks in the GCC countries to understand how to use their IC efficiently, especially SC as it is yet to be used efficiently. Also, the findings benefit the relevant authorities (e.g. legislators and central banks) who could use them to emphasise strategic policy reforms whenever required.Originality/valueThe current research adds to the empirical studies in the GCC countries as it views the region as a collective as opposed to individual countries. It also extends the IC and performance measurement literature of Islamic banks in the GCC countries. Moreover, the current study enriches the limited literature on IC in the context of Islamic banking.

Highlights

Today’s economy is changing with greater emphasis on intangibles such as intellectual capital (IC)
The VAIC mean for Islamic banks operating in the Gulf Cooperation Council (GCC) countries is 4.398
The explanatory powers of the models (Models 2 and 3) are high. These results suggest that using the capital efficiently and combined with the efficient use of human capital (HC) in Islamic banks have a positive influence on their financial performance

Summary

Introduction

Today’s economy is changing with greater emphasis on intangibles such as intellectual capital (IC). IC is an intangible capital and resource (e.g. knowledge, experience, management philosophy, brands, systems and human resources) that supports the creation of firm value (Brooking, 1996; Edvinsson and Malone, 1997; Stewart, 1997) It is valuable leverage for corporate wealth creation and a profit booster when valued properly (Stewart, 1997; Sullivan, 2000). The Institute of Management Accountants in a 2010 report entitled “Unrecognised Intangible Assets: Identification, Management and Reporting” called for renewed attention to the growing unrecognised proportion of these intangible assets for financial reporting purposes (Institute of Management Accountants – IMA, 2010) It emphasised that: These items have grown to become a major source of value to public corporations. They contribute to competitive capacity, and they form a critical aspect of an organisation’s sustainability in the future. (Institute of Management Accountants – IMA, 2010: p. 1)

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