Examining the Impact of Intellectual Capital Performance on Financial Performance in Islamic Banks

Abstract This study explores the intellectual capital (IC) performance of Islamic banks (IBs) and examines the impact of intellectual capital on financial performance in terms of profitability and productivity in IBs. The IC features are also examined individually to identify the primary driver of IC performance and their individual impact on the IBs’ financial performance. A quantitative method using multi regression analysis is utilised to examine the nexus between IC and the IBs’ financial performance indicators. The measurement of IC uses Modified Value-Added Intellectual Coefficient (MVAIC™) which is an extended model of VAIC™. The data were drawn from 49 IBs from 2014 to 2018. The empirical findings indicate that IC is positively significant in impacting IBs’ financial performance measures, especially profitability, but inconclusively related to productivity. Furthermore, when the components were analysed separately, the nexus between these components and IBs’ financial performance indicators show lesser uniform results. Capital employed efficiency and human capital efficiency are found to be the most influential features of IC in this study, while structural capital efficiency does not show an impact on financial performance. Evidence also demonstrates that all IC components are not significantly related to IBs’ productivity indicator. The study offers an extended understanding of IC and its role in IBs and may provide guidance to different stakeholders including regulators and management of IBs to formulate and structure relevant strategies to create, utilize, and maintain IC for the more resilient banking sector, as extensive practical implications are provided for this purpose.