Intellectual Capital and Financial Performance: An Empirical Investigation Between Islamic and Conventional Banks in GCC Countries

Abstract

<p>With the ascendancy of the knowledge-based economy in the twenty-first century, intellectual capital (IC) has become recognised in the recent literature as a vital source in creating and maintaining firms’ competitive advantage and shareholder value. This is particularly relevant to knowledge-based firms in the banking sector. IC is an intangible capital and resource that positively contributes to the financial performance of a firm. Efficient and effective management of IC resources will determine the winners and losers in global business in the twenty-first century and beyond.</p> <p>The purpose of this dissertation is to explore the association between IC and the financial performance of Islamic and conventional listed banks in the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) from a comparative perspective. The GCC countries are the most dynamic and vibrant economies in the Middle East and North Africa (MENA), where the banking sector plays a central role in economic growth and is the key driver of nonoil and gas-based gross domestic product (GDP) growth. The GCC countries have some common economic, laws, cultural and political aspects; therefore, a comparative analysis can be conducted between the Islamic and conventional listed banks operating in the GCC countries.</p> <p>This study analyses a sample of 68 GCC listed banks (26 Islamic banks and 42 conventional banks) during the period 2009–2016 to investigate the effect of IC — as measured by the Value Added Intellectual Coefficient (VAIC^TM) and the Modified Value Added Intellectual Coefficient (M-VAIC) and their individual components — on financial performance, both accounting-based and market-based, after controlling for corporate governance and other macroeconomic aspects. This study relies on the framework provided by the resource-based view (RBV) theory, intellectual capital–based view (ICV) theory, knowledge-based view (KBV) theory, resource dependency (RD) theory and agency theory to develop a set of hypotheses for empirical testing. To examine the relationship between IC and financial performance, and to test the hypotheses, this study uses three econometric methods: an ordinary least squares (OLS) regression and then a panel model generalised least squares (GLS) regression to control for unobserved heterogeneity, followed by a generalised method of moments (GMM) regression to control for endogeneity/causality issues.</p> <p>The findings of the relationship between IC (VAIC and M-VAIC) and the financial performance of the GCC banks, as estimated by the system GMM approach, show that, for the combined sample of Islamic and conventional banks, both VAIC and M-VAIC have a significant effect on the performance measures of banks. In particular, the results reveal that VAIC has a significant positive relation with accounting-based performance measures return on assets (ROA), return on equity (ROE) and return on invested capital (ROIC). In contrast, M-VAIC is significant and positively contributes to all accounting based performance (ROA, ROE, ROIC and earnings per share [EPS]). Neither VAIC nor M-VAIC have a significant relation with the market-based performance measure Tobin’s Q (TQ).</p> <p>With regard to the sample of Islamic banks, the system GMM results show that VAIC and M-VAIC significantly affect Islamic banks’ performance. In particular, the results show that VAIC has a significant positive association with ROE, ROIC, EPS and TQ, whereas M-VAIC has a positive association with ROE and ROIC. In contrast, for the sample of conventional banks, the system GMM results indicate that both VAIC and M-VAIC have a significant positive relationship with ROA, ROE and ROIC, but no relationship with TQ. From a comparative perspective, the results suggest that Islamic banks perform better than conventional banks in terms of VAIC in both accounting- and market-based financial performance measures; however, conventional banks outperform Islamic banks in terms of M-VAIC in accounting-based financial performance measures. For both types of banks in the GCC countries, these findings conclude that there is room for improvement through better utilisation of IC resources in conjunction with a strong corporate governance system to ensure firms’ sustainable existence and competitiveness in the banking sector.</p> <p>This study contributes to the growing body of literature on the relationship between IC and bank performance in an emerging market context — particularly in GCC markets. The results of this study have potential implications for policy-makers, executives, investors and other stakeholders aiming to effectively manage and efficiently exploit IC resources in the GCC countries.</p>