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Determinants of financial performance of Islamic banks: an intellectual capital perspective

Tasawar Nawaz (Department of Accounting and Finance, Plymouth Business School, Drake Circus, Plymouth, UK)
Roszaini Haniffa (Department of Accounting and Finance, Heriot-Watt University, Riccarton, Edinburgh, UK)

Journal of Islamic Accounting and Business Research

ISSN: 1759-0817

Article publication date: 10 April 2017

3208

Abstract

Purpose

The purpose of this paper is to empirically examine the effect of intangible resources, i.e. intellectual capital (IC) on financial performance of 64 Islamic financial institutions (IFIs) operating in 18 different countries for the period 2007-2011, while controlling for firm-specific variables, namely, bank size, level of risk, listing status, and firm complexity.

Design/methodology/approach

The required data to calculate different constituents of IC are derived from Bankscope database. Value Added Intellectual Coefficient (VAIC) methodology devised by Pulic is used to determine the impact of IC on financial performance of IFIs.

Findings

Results indicate a significant positive relationship between VAIC and accounting performance based on return on assets (ROA). The results further indicate a significant positive relationship between accounting performance and capital employed efficiency (CEE) and human capital efficiency (HCE), but no significant relationship with regards to structural capital efficiency. Overall, the results suggest that value creation capability of IFIs is highly influenced by HCE and CEE.

Research limitations/implications

The main limitation of the present study lies in its methodological tool, the VAIC methodology, which has been criticized by some researchers as not really measuring IC. Despite the inherent limitation of the VAIC methodology which relies on secondary data published in annual reports, it is still considered by some researchers as one of the best available tool to measure firms’ IC in the absence of access to detailed internal information on IC.

Practical implications

The findings may serve as a useful input for Islamic bankers in managing their investments in IC within their institutions.

Originality/value

The main contribution of this paper is to use a previously little-studied area, Islamic banking and finance, to identify the effect of intellectual capital on performance.

Keywords

Citation

Nawaz, T. and Haniffa, R. (2017), "Determinants of financial performance of Islamic banks: an intellectual capital perspective", Journal of Islamic Accounting and Business Research, Vol. 8 No. 2, pp. 130-142. https://doi.org/10.1108/JIABR-06-2016-0071

Publisher

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Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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