Dated: 27th February 2013

RESEARCH METHODS

Topic
INTELLECTUAL CAPITAL PERFORMANCE IN THE BANKING SECTOR Presented to the Faculty of the Department of Management Sciences In the fulfillment of the course (Research methods)

SUBMITTED TO TEHSEEN JAVAID By

HIRA ASHRAF (6458) HIRA PERVEEN (6632) Madiha sarfaraz (6224) Syed Hasan nemat (6243)

Topic: Intellectual Capital Performance in banking sector of Pakistan

INTRODUCTION: Intellectual capital is a strategic intangible business asset, although measuring it is a very subjective task. Firms spend a huge amount annually to train their employees in business-specific topics thus increasing the competency of the staff. This capital employed provides a high return to the company, thus increasing the worth of a business. IC performance measurement and management have became more important when service sectors are playing a major role in economic growth around the globe, thus can helpful in increasing the GDP. In case of inefficient functioning of financial sector no economy can grow and improve the living standards of its Population. To measure the performance of intellectual capital in organization becomes a major step to identify the reasons for low or high performance of workers. Hence the measurement of corporate performance needs to include the firms total resources (physical and intellectual), a company not only focuses on physical capital, but also focuses on intellectual capital in order to compete. Company can get a competitive advantage and earn profit if it has efficient and effective intellectual capital. A company will grow up if a growing number of physical capitals in the same line with a growing number of intellectual capitals. Increasing attention on the major role played by intellectual capital in value creation process has leads to more than 20 methods of measuring intellectual capital Pakistans financial system has grown in recent years but continues to have an enormous growth potential. The system remains relatively small in relation to the economy, when compared with other emerging countries in Asia and around the world. Given that a dynamic and growing financial system is central to a growing economy, the small size (lack of depth) of Pakistans financial sector implies that many financing needs cannot be met and that much of the countrys economic potential remains unfulfilled. Banks happen to be one service sector that uses a huge amount of human capital and customer capital for its survival. Banks in Pakistan account for 95 percent of the financial sector and hence good health of banks is directly related to economic growth and development of Pakistan. The banking sector offers an ideal area of intellectual capital research for mainly three reasons. First there are reliable data available in form of published accounts (balance sheets, P/ L). Secondly the business nature of the banking sector is

intellectually (or personnel) intensive. Thirdly the staff is (intellectually) more homogenous than in other economy sectors. The aim of this paper is to measure the intellectual capital performance of Pakistani banking sector. Though physical capital is essential for banks to operate, it is the intellectual capital that determines the quality of services provided to customers. This paper determines the banks efficiencies in utilizing their intellectual capitals. This paper is therefore a contribution to the existing literature on Pakistani banks and intellectual capital as its objective is to add a new dimension to measure and evaluate value-based performance efficiency of firms in service sector, especially banks in Pakistan.

LITERATURE REVIEW:
Cheng, Lin, Hsaio and W.Lin (2010) investigate invested resource, competitive intellectual and corporate performance by using time- series data from 2002- 2005, variables are innovative capacity, maintainable customer relationship, human value added, efficient operating process and firms performance. Structural path model have been used. Results shows that firms can improve their performance by improving innovative capacity and process reformation, thus it is followed by value- added human capital. It is recommended that those managers who wish to produce immediate improvement in corporate value should consider innovative capacity and efficient operating processes. Future research can divide performance measure into two segments market and financial performance and investigate their relationship. Mauridis and kyrmizoglou (2005) investigate intellectual capital performance in the Greek banking sector by using time series data from 1996- 1999 of the 17 biggest Greek banks, variables are branches, employees, equity, Rev (out), Exp (in) Value- added (VA), Physical capital (CA), Human capital (HC), structural capital (SC= VA-SC) . Regressionanalysis has been used. Results shows that there is a strong positive correlation between value added and physical capital but especially with HC, similarly same kind of relationship found between value added and variable Out ,In, Gross Profit, braches, Employees and Equity. However the relationship between BPI and above written variable have insignificant, slight negative and weak correlation, so it is very clear that best performing banks have shown a positive result of Using HC and less

in usage of CA. it is recommended that intellectual capitalist or knowledge workers provides a positive impact on corporate success also its value addition. Mavridis (2004) investigate the intellectual capital performance of the Japanese banking sector by using cross- sectional date for the financial period 1st April 2000 31st March 2001. Variables are value- added (dependent) while HC and CA is independent variables. Regression analysis has been used. Results shows that that the VA variable have a normal, strong and significant positive relationship with CA but not with HC both of these helpful in BPI performance in different ways as HC is highly contributing in BPI performance so it is concluded that BPI bank have less in usage of CA while shown a positive result in the usage of HC. It is recommended that further research should be continued with a longer time period (almost 50 years) to highlight the fact that intellectual capital or knowledge workers provides a strong contribution to corporate performance. Ting and Lean (2009) investigate the intellectual capital performance of financial institution in Malaysia by using time series data from 1999- 2007. Variables are ROA (dependent) and independent variables are components of VAIC which includes Human capital efficiency (HCE), Structural capital efficiency (SCE) and capital employed efficiency (CEE). To analyze the performance they divide the financial institution into banks and non- banks institutions. Regression analysis has been used. Results show that that there is a significant positive correlation found between VAIC components and ROA as HCE and CEE has a strong impact on profitability while SCE has not. It I concluded that in order to maximize the firms profit, there should a proper or maximum utilization of resources, therefore management can be able to increase the potential of a firm IC thus maximize the benefits of stake holders too. It is recommended that future study should be on many public listed financial institutions, which cover all companies in the sector, however also suggest that in order to examine the value creation efficiency in financial institution for long-term objective of shareholders wealth. Swartz and firer (2005) investigate the board structure and intellectual capital in South Africa by using cross- sectional data of 2003. Dependent variable is VAIC and independent variables are Perethnic and pergender. Multiple regression models are developed by using linear regression analysis. The result shows that there is a positive correlation bwtween the percentage of ethnic member of companies BOD and IC performance, thus it is suggested that south African public

listed companies may be able to improve or to increase the IC performance by using an ethnically diverse BOD therefore the company business has become successfully progressed thus increase company performance. It is recommended that this study further extended by considering nation with different corporate structure. Stevo Pucar (2012) analyzed the impact of intellectual capital (IC) on export performance of firms and industries by using financial statements of 134 countries of Bosnia and Herzegovina from 2004 to 2007. The intellectual capital as an independent variable and an export performance as a dependent variable were measured as growth of exports. Value added intellectual coefficient (VAIC) is one of the most often used methods of intellectual capital measurement. The results show that influence of intellectual capital on export performance really indicates competitive advantage of sectors within the economy of one country. It is recommended that future research can also be done goal to determine which types of production and products have the largest influence of the human and intellectual capital on the export performance. Sharabati, Jawad and Bontis (2010) was to empirically test the relationship between intellectual capital (i.e. human capital, structural capital, relational capital) and business performance within the pharmaceutical sector of Jordan by using data of 15 organizations that were registered in the Jordanian Association of Pharmaceutical Manufacturers (JAPM) in 2007. A valid research instrument was utilized to conduct a survey of 132 top- and middle-level managers from all 15 members of the Jordanian Association of Pharmaceutical Manufacturers. The results of this study have shown that there is in fact strong and positive evidence that pharmaceutical firms in Jordan are managing intellectual capital effectively and that in turn is influencing business performance positively. It is recommended that data should be considered front-line employees as well as from the boards of directors and other variables can also be considered. Wang and Chang (2005) investigated the impact of intellectual capital elements on business performance, as well as the relationship among intellectual capital elements from a cause-effect perspective in Taiwans IT industry, provides some implications for management in the IT industry. The variables were used human capital, innovation capital, process capital, and customer capital. The partial least squares approach is used to examine the information technology (IT) industry in Taiwan. The results found that the cause-effect relationship between elements of intellectual capital and business performance intellectual capital elements directly

affect business performance, with the exception of human capital. Human capital indirectly affects. Roslender and Fincham, (2004) discussed some of the findings of a recently completed field study of intellectual capital accounting developments in the UK, funded by one of the professional accountancy bodies through a series of interviews with senior managers in six organizations conducted between May 2001 and March 2002. Reports from a number of Australian, Canadian and European enquiries have added to the momentum of the intellectual capital accounting project, whilst affirming its links with contemporary debates about the information society, intangibles, knowledge management and business reporting. Companies will
evidence little interest in intellectual capital, and that its presence is largely unsystematic in nature and closely linked with the interests of individuals.

Tovstiga and Tulugurova (2007) investigated the impact of intellectual capital practices on enterprise performance in small innovative enterprises (SIEs) in the St Petersburg, Russia region. Research fieldwork used a survey questionnaire focusing on technology-intensive SIEs in the St Petersburg region, supported by a select number of follow-up interviews. The research analysis is based on quantitative statistical evaluation of the research data. The research reported in this paper is limited by the relatively small sample size of firms surveyed; the quantitative research is based on perceptions of managers. Intellectual capital, particularly structural and human capital, is perceived by Russian managers of SIEs to be a primary determinant of enterprise performance, thereby substantiating the importance of the resource-based view for enterprise performance even in the transitional economy of Russia. Yalama and Coskuni (2007) studied the intellectual capital performance of quoted banks on the Istanbul Stock Exchange markets by using the time- series data for the period 1995-2004. Variables are input and output variables which are tangible assets, intangible assets and financial effects on profitability (ROA, ROE and LDR). VAIC method and DEA were performed by using the efficiency measurement system (EMS) software. The result shows that for banks physical capital become less important than that of intellectual capital also intellectual capital is important for investors too and it creates value addition by increasing productivity level thus it is necessary for banks to efficiently manage their intangible assets. It is recommended that further research shows all the banks.

Goh (2005) studied the intellectual capital performance of commercial banks in Malaysia by using the time series data for the period 2001 2003. Variables are HCE, CEE and SCE, the sum of these is VAIC. VAIC method is used. The results show that in order to create value in the efficiency of Human capital, physical capital and structural capital, Intellectual capital acts as a key resource factor. It is found that HCE plays a major role in value creation than that of Physical and Structural capital thus investment in HCE results in an increase returns so it improves value creation capability and efficiency. It is recommended that for future study, one should consider all of the banks in Malaysia before and after 2001. Haji and Mubarak (2012) investigate trends of IC disclosure; evidence for the Nigerian banks sector by using the time series data for the period of 2006 2009. Variable are Intellectual capital, human capital and external capital. Different techniques are used like Friedman test, Wilkinson signed ranks or sample t- test and Kreskas Walks test were performed. The results show that with the passage of time IC disclosure of the banks significantly important at a significant interval. However internal capital shows only intellectual capital disclosure shows increasing trends. It is recommended that future studies examine the IC disclosure of the banks and are also incorporate others companies having same regulatory challenges. Kamath (2007) investigate the Intellectual capital performance of Indian banking sector by using the time-series data for the year 2000 - -2004. Variables are Value added, physical capital and human capital, two regression models are run, VA acts as dependent variables in both models and capital employed as independent variables in one while HC is independent in others. The results shows that foreign banks have good HCE that that of domestic banks therefore creating more value addition while the domestic bank have not efficient workforce thus foreign banks are highly efficient in performance than that of domestic banks. It is recommended that same study can further be analyzed in the other sector and can be considered as a bench mark. Caliser, Cigdem, Bayraktaroglu and Deniz (2010) investigates that how to apply Value Added Intellectual Coefficient ( VAIC) of public to compare quoted information technology & communication companies on the Istanbul Stock Exchange (ISE) & it also has the VAIC & its components impact on performance of the company by using the primary data from the year 2005-2007.Market valuation, Profitability, Productivity, Return on equity, Firm leverage, Firm size, VAIC,HCE,CEE & SCE variables are considered. The Multiple regression analysis

technique was used. The result shows that the human capital efficiency had the positive effect on both profitability & return on the equity. The firms leverage & size was also found to be significant predictors of profitability & The human capital had the highest impact on profitability. Human capital & capital employed efficiencies have the positive effect on the return on equity. The market valuation has been explained by the firm size. Kamukama, Ahiauzu and Ntyani (2010) investigates the interaction effect of the intellectual capital elements & how they fuse to affect financial performance in microfinance institutes &

to explore the appropriate blend or mix of the intellectual capital elements by using primary data from the year 1995 to 2010. Structural capital, Human capital, Relational capital & Performance variables are considered & the technique used is Regression Analysis. The result shows that the interactive terms boosts the predictive power of the main effects to explain variance in financial performance. The effects of human capital on financial performance depend on the different level of relational capital. The positive & significant relationship exists between the Human capital, Structural & relational capital & financial performance in micro finance industry & It is recommended that the further research should be undertaken to examine the multiplicative effects studied in the paper across the time. Guthrie & Abhayawansa (2010) investigates to review & synthesis current knowledge on the importance of intellectual capital information to the capital market by using primary data from the year 1977 to 2001.The variables used are customers, external, human, internal, organizational, R&D and strategy by using VPA technique. Result shows that IC is more important to the analysts but there is much variation in the result. It is recommended that the more research is possible to refine the current understanding of the importance of IC to the capital market. Bannany (2012) investigates the determinants of the intellectual capital performance of UAE banks by using primary data from 2004 to 2010.VAIC, GFC, CR2DEP, FATA, LGIT, LGRESV, LGASS, ROA, LGAGE & LGLSAG are the considered variables. Multiple regression analysis has been used. The result shows that the model is significant & explains 78 percent of relationship. There is significant relationship between the GFC & market structured .Its recommended to do further research for corporate governance & financial leverage.

Mondal and Ghosh (2012) studied the relationship between Intellectual capital and financial performance by using the time series data for the period 1999 2008. Variables are ROA, ROE, VAIC, LTA, DE, HCE, SCE, CEE AND ATO. Multiple regression analysis has been used. The result shows that IC plays a major role in increasing profitability and productivity in the banking sector. However, if human capital is efficient i.e. Efficient workforce also increasing the Banks return. However, the roles and attributes of SC for promoting financial performance are subject to future research. The findings of the study also suggest that bank can enhance its productivity by means of managing its intellectual ability in an appropriate manner. Sten, Pirjo & Aho investigates the validity of the value added intellectual coefficient (VAIC)method as an indicator of intellectual capital by using primary data from the year 2006 to 2008.VAIC,ICE,CEE,HCE,SCE,VA,HC,CE & SC variables are considered. Regression Analysis & Correlation coefficient technique are used.The result shows the weak positive correlation between VAIC & company performance. The calculation method uses overlapping variables & also has other serious validity problems. No linkages of IC concepts are needed or adequate. BIBILIOGRAPHY [1] Meng-Yuh Cheng, Jer-Yan Lin, Tzy-Yih Hsiao, Thomas W. Lin, (2010),"Invested resource, competitive intellectual capital, and corporate performance", Journal of Intellectual Capital, Vol. 11 Iss: 4 pp. 433 450 [2] Dimitrios G. Mavridis, Pantelis Kyrmizoglou, (2005),"Intellectual capital performance drivers in the Greek banking sector", Management Research News, Vol. 28 Iss: 5 pp. 43 62 [3] Dimitrios G. Mavridis, (2004),"The intellectual capital performance of the Japanese banking sector, Journal of Intellectual Capital, Vol. 5 Iss: 1 pp. 92 - 115 [4] Irene Wei Kiong Ting, Hooi Lean, (2009), The intellectual capital performance of financial institutions in Malaysia, Journal of Intellectual Capital, Vol. 10 No. 4, 2009 pp. 588599 [5] N-P. Swartz, S. Firer, (2005),"Board structure and intellectual capital performance in South Africa", Meditari Accountancy Research, Vol. 13 Iss: 2 pp. 145 - 166 [6] Stevo Pucar, (2012),"The influence of intellectual capital on export performance", Journal of Intellectual Capital, Vol. 13 Iss: 2 pp. 248 261

[7] Abdel-Aziz Ahmad Sharabati, Shawqi Naji Jawad, Nick Bontis, (2010),"Intellectual capital and business performance in the pharmaceutical sector of Jordan", Management Decision, Vol. 48 Iss: 1 pp. 105 131 [8] Wen-Ying Wang, Chingfu Chang, (2005),"Intellectual capital and performance in causal models: Evidence from the information technology industry in Taiwan", Journal of Intellectual Capital, Vol. 6 Iss: 2 pp. 222 236 [9] Robin Roslender, Robin Fincham, (2004),"Intellectual capital accounting in the UK: A field study perspective", Accounting, Auditing & Accountability Journal, Vol. 17 Iss: 2 pp. 178 209 [10] George Tovstiga, Ekaterina Tulugurova, (2007),"Intellectual capital practices and performance in Russian enterprises", Journal of Intellectual Capital, Vol. 8 Iss: 4 pp. 695 707 [11] Abdullah Yalama and Metin Coskun (2007), Intellectual capital performance of quoted banks on the Istanbul Stock exchange market, [12] Pek Chen Goh (2005), Intellectual capital performance of commercial banks in Malaysia, Journal of Intellectual capital, Vol. 6 Iss: 3, pp. 385 396. [13] Abdifatah Ahmed Haji and Sanni Mubarak (2012), Trends of Intellectual capital disclosure; evidence from the Nigerian bank sector, Journal of Human resource costing and Accounting, Vol. 16 Iss: 3 pp. 184-209. [14] G. Barathi Kamath (2007), Intellectual capital performance of the Indian banking sector, Journal of Intellectual capital, Vol. 8 Iss: 1 pp. 96 - 123 [15] Fethi Calisir, Cigdem Altin Gumussoy, A. Elvan Bayraktaroglu and Ece Deniz (2010), Intellectual capital in the quoted Turkish ITC sector, Journal of Intellectual Capital, Vol. 11 Iss: 4, 2010 pp. 537-553 [16] Nixon Kamukama, Augustine Ahiauzu and Joseph M.Ntyani (2010), Intellectual capital and performance: testing interaction effects, Journal of Intellectual Capital Vol. 11 Iss: 4, 2010 pp. 554-574 [17] Subhash Abhayawansa and James Guthrie (2010), Intellectual capital and the capital market: a review and synthesis, Journal of Human Resource Costing & Accounting, Vol. 14 Iss: 3, pp. 196-226

[18] Magdi El-Bannany (2012), Global financial crisis and the intellectual capital performance of UAE banks, Journal of Human Resource Costing & Accounting Vol. 16 Iss: 1, pp. 20-36 [19] Amitava Mondal and Santanu Kumar Ghosh (2012), Intellectual capital and financial performance of Indian banks,, Journal of Intellectual Capital, Vol. 13 Iss: 4,pp. 515-530 [20) Pirjo Stahle, Sten Stahle and Samuli Aho (2011), Value added intellectual coefficient (VAIC): a critical analysis, Journal of Intellectual Capital Vol. 12 Iss: 4, 2011 pp. 531-551