“Intellectual capital and financial performance of Sharia-compliant banks in Saudi Arabia”

The current study is aimed at analyzing the impact of intellectual capital on the performance of Sharia-compliant banks in Saudi Arabia for the period 2013–2018. The intellectual capital efficiency has been measured by applying a widely-used proxy to intellectual capital, i.e., Value Added Intellectual Coefficient (VAIC). A multiple linear regression method, based on panel data using the pooled Ordinary Least Squares (OLS), was exerted. Regression equations were obtained to determine the impact of VAIC and its components (Human Capital Efficiency (HCE), Structural Capital Efficiency (SCE), and Capital Employed Efficiency (CEE)) on the financial performance of banks, designated as Return on Assets (ROA) and Return on Equity (ROE). The study has found out that VAIC has a statistically significant impact on the financial performance of Sharia-compliant banks in Saudi Arabia. But VAIC components fail to have a significant impact on ROE. However, these components significantly affect ROA. The study concludes that Sharia-compliant banks in the Kingdom of Saudi Arabia should pay particular attention to Intellectual Capital (IC) in general and Human Capital (HC), Structural Capital (SC), and Employed Capital (EC) in particular to increase Return on Assets and financial performance as a whole.


INTRODUCTION
The roots of the conventional banking system can be traced back centuries (Cerović et al., 2017).The conventional banking system was based solely on the interest-based banking system.In contrast to the interest-based banking system (conventional), there is a non-interest based banking system called the Islamic banking system.It fully complies with banking principles referred to in Sharia law, also known as the Sharia-compliant banking system.The Sharia banking system arose at the dawn of Islam (Ali, 2015;Chachi, 2005).The basis of the Sharia-compliant banks lies on three important pillars, i.e.: a) prohibition of Ribaa' (interest); b) prevention of speculative activities (gharar); c) proscription of financing the illegal (haram) business activities (Chachi, 2005;Nawaz & Haniffa, 2017).
The Kingdom of Saudi Arabia (KSA), which is one of the largest Muslim countries, does not exclude the presence of the Islamic banking.There are currently four full-fledged Sharia-compliant banks in

LITERATURE REVIEW
Numerous studies have shown the impact of intangible assets on a firm's financial performance (Chareonsuk & Chansa-ngavej, 2008;Haji & Ghazali, 2018;Moeller, 2009;Sriram, 2008).It is important to note that measurements of intangible assets in the literature are in the form of intellectual capital (IC).However, researchers do not seem to have a unified view of the definition of intellectual capital.According to Edvinsson and Malone (1997), intellectual capital is considered as the excess of a firm's market value over its book value.
According to Edvinsson and Sullivan (1996), IC is knowledge that can be transformed into values.However, intellectual capital is not limited only to knowledge, but is a combination of information, Intellectual Property Rights (IPR), knowledge and experience (Stewart & Ruckdeschel, 1998 .This study will be aimed at validating the applicability, effectiveness and reliability of VAIC for Sharia-compliant banks in the banking sector of Saudi Arabia.

Research hypotheses
Therefore, the following hypotheses can be stated for the current study:

Dependent variables
The financial performance of banks has been considered as a dependent variable.The widely-used proxies for financial performance in the literature are Return on Assets (ROA) and Return on Equity (ROE).The combination of these two represents the overall financial health of the organization.The value of ROA can be obtained by dividing total income by total assets.While ROE value is obtained by dividing net income by average value of shareholder's equity.These values were calculated for each financial year.

Control variables
The regression model emerged for the estimation by regressing the dependent and independent variables and is controlled by two variables, namely, SIZE and LEVERAGE (LEVRG).The value for SIZE is obtained as the log value of total assets of banks in the financial year.While the value for LEVERAGE is obtained by dividing total debts by total assets of a bank in the financial year.

Empirical models
Having gathered all the variables together, the following two empirical models were obtained with one additional equation for each: Model , , , . i , , , , where i denotes a bank (i = 1, 2, 3, 4), t is the time (t = (2013-2018)), and μ i,t is the error term.
Before investigating the relative impact of VAIC and its components on profitability using regression analysis, a Pearson correlation has been carried out.The VA IC is found to have a statistically significant correlation with ROA and ROE (r = 0.849, p < 0.001) and (r = 0.459, p < 0.005), respectively.Among the components of VA IC , i.e., HCE, SCE and CEE, there are those that significantly correlate with ROA, i.e. (r = 0.849, p < 0.001), (r = 0.459, p < 0.005) and (r = 0.459, p < 0.005), respectively.While there is no or low level of significant relationship between the components of VA IC and ROE, i.e. (r = 0.461, p < 0.005), (r = 0) and (r = 0.559, p < 0.001).Table 1 provides the correlation results in detail.

Regression results
To develop the impact of IC on the performance of Sharia-compliant banks, a multiple linear regression equation based on panel data is estimated using the pooled OLS method.

CONCLUSION
The effect of IC on the financial performance of conventional banks in Saudi Arabia and other countries of the world is investigated by many researchers.In the literature on banking and IC, a sufficient amount of studies has shown a positive impact of IC on the profitability and overall financial performance of conventional banks.However, Sharia-compliant banks, which differ from conventional banks in the basic principles of banking, require proper consideration.The conventional Sharia banks perform well enough in value creation, human capital and general intellectual capital.Conversely, Sharia banks lack the attention of academics on IC fronts.This study establishes the IC efficiency and its impact on the financial performance of four Sharia-compliant banks between 2013 and 2018 in Saudi Arabia.IC efficiency was calculated using the Value Added Intellectual Coefficient (VAIC) and financial performance represented by ROA and ROE.A multiple linear regression method, based on panel data using the pooled Ordinary Least Squares (OLS), was used to show the impact of IC on the financial performance of the banks.The study confirmed that there is a positive statistically significant relationship between VAIC and the financial performance indicators (ROA and ROE).But there is no statistically significant relationship among VAIC components, namely HCE, SCE & CEE and ROE.The findings obtained mean that VAIC as a whole has a significant impact on the profitability and overall financial performance of Shariacompliant banks, but its individual components do not influence the return on equity.
The study provides substantial inputs to the current banking and IC literature, which includes findings about Sharia banks with the range of conventional banks.However, a comparative study is needed to compare Sharia and conventional banks.The study is limited in scope since it uses only one method of measuring IC, though there are other methods of IC measurement such as Tobin's Q, Skandia IC Navigator, Balance scorecard and Calculated Intangible Value (CIV), etc.However, the results of the study can be confirmed by extending to Sharia-compliant banks in GCC and other parts of the world.