ABSTRACT
The study examines the effect of intellectual capital on the performance of Nigeria banks. Using an ex-post- facto research design, secondary source of data and regression method of analysis; the study used a sample size of 5banks randomly selected from a populations of 44 quoted banks listed in Nigeria stock exchange. The study findingsshowed that intellectual capital is a good indicator banking performance in Nigeria. The findings showed that intellectual asset of the banks contributed to the banks book value, market price per share, earnings per share and per share free cash flow of the financial institutions(Nigeria banks)and ins invariably contributed to the level of the banks performance over the period being studied.. The findings also indicated that the variable used in the model specification in measuring the performance of intellectual capital on the performance of banks in Nigeria are significant indicator of a firms performance and at P<0.05 level, the finding were observed to be significant. Based on this, it is recommended in that study that Banks in Nigeria should invest on intellectual capital asset of their firm to ensure better performance; intellectual capital being part of intangible asset of any firm should not be over looked by the management of the organization and provision should be made in reporting the contribution of intellectual capitals in financial statement of banking organizations in Nigeria
CHAPTER ONE
INTRODUCTION
1.1 Background tothe Study
With the gradual shift of global business world into the knowledge economy, it is becoming increasinglyimportant and obvious to business organisations that to survive in business in this complex and dynamic world,adequate attention must be paid to the intellectual capital base of the firm. Gone are the days when firms focusonly on their physical capital with little or no attention to their intellectual capitals and still post huge profits.
Competition in business today has become so intense that managers utilize every resource at their disposal toedge others out of business. Intellectual capital has also become an important business resource thatorganisations can leverage on to gain competitive advantage. Bornemannet al. (1999) discover that enterprises,which have managed their intellectual capital better, had achieved stronger competitive advantage than the otherenterprises. Iswati and Anshori (2007) opine that human being has become the central attention in the twentiethcentury hence intellectual capital research now is not only paramount but also timely. Furthermore, according to OECD(2001) human capital, which is an integral part of intellectual capital, has been recognized as oneof the key determinants of growth in any business enterprise.
According toBornemannet al. (1999) companies which strengthen their own intellectual capital management as compared to others performs better. Intellectual capital is one of the main factors related to the performance and long-termprofitability of knowledge-based economy (Huu and Fang, 2008).
Following from the above, the banking sector in Nigeria has recognized this fact and has taken some drasticaction with respect to enhancing its intellectual capital base. For example, banks in Nigeria nowadays engagemostly university graduates, who possess a minimum of second class honours degree (upper division) in theiremployment policies, thereby giving credence to the fact that intellectual capital significantly affects theirperformance. This action has really paid off as the Nigeria banking sector has witnessed huge transformation inthe last few years. Customers of banks now receive quick and improved services from their banks. Also, the useof automated teller machines (ATMs) and internet banking facilities have decongested the banking halls of mostbanks in Nigeria thereby saving a lot of man hours. Furthermore, customers can also obtain bank services fromthe comfort of their homes. In addition to the above, the banking sector has for so many years dominated trading at the Nigeria stock exchange.
Also, before the year 2000, the three strongest and most popular banks in Nigeria were: the First bank of Nigeria (FBN), Union bank of Nigeria (UBN) and United Bank for Africa (UBA). The volume of their transactions as well as their assets and customer bases were not only very high but also very strong. With the emergence and introduction of modern technologies in banking, which depended heavily on their intellectual capital base, these trio were generally classified as old generation banks while the banks that immediately embraced the modern technologies, such as Zenith bank Plc, Eco bank Plc, Diamond bank Plc, etc., were classified as the new generation banks. Even then, the new generation banks could only make minor impact in the economy and at the Nigeria Stock Exchange as these older banks dominated trading and other activities at the exchange. Most people then preferred to bank and carry out their transactions with these old generation banks because of these attributes. Today, with the coming of these new technologies, the trend has been altered. While some of the old generation banks still record higher book values of their physical assets, most of the new generation banks post higher and better financial performance figures and better services than the old generation banks owing to the intellectually based innovations introduced by these new generation banks. Consequently, people now prefer to bank with the new generation banks and as a result, the customer bases of the older banks have droppedsignificantly. Furthermore, even at the Nigeria Stock Exchange (NSE), the rate of stock turnover of these newgeneration banks as well as their market prices has consistently been higher than those of the old generationbanks.
It is also recognised that intellectual capital (IC) is embraced in every facets of economic, sociological, political and managerial development ‘in a manner previously unknown and largely unforeseen’ (Petty and Guthrie, 2000). This has turn intellectual capital into a prominent business research topic (Bontis, 1999; Serenko and Bontis, 2004) which organizations must pay attention towards the attainment of their objectives. Intellectual Capital has been defined in various ways in the literature (Bontis, 1996; Brooking, 1996; Roos and Ross, 1997). One of the most concise definitions of intellectual capital is given by Stewart (1997) as “packaged useful knowledge.” He explains that this includes an organization’s processes, technologies, patents, employees’ skills, and information about customers, suppliers, and stakeholders. Various other definitions use concepts such as ability, skill, expertise, and other forms of knowledge that are useful in organizations.
The task of measuring the performance of intellectual capital in organization becomes a major step to investigating the reasons for low or high performance of workers. Hence the measurement of corporate performance needs to include the firm’s total resources (physical and intellectual). Business performance is an important concept that relates to the way and manner in which financial resources available to an organization are judiciously used to achieve the overall corporate objective of an organization. It is therefore important that organization’s performance be measured on a regular basis in order to ensure sustainability.
Intellectual capital research has been conducted in a variety of international settings including the United Kingdom (Rooset al., 1997), Australia (Sveiby, 1997), Canada (Bontis, 1996; 1998; 1999), Austria (Bornemann, 1999), the U.S. (Stewart, 1997; Bassi and Van Buren, 1999), Malaysia (Bontiset al., 2000), Hong Kong ( Chu et al., 2011), South Africa (Firer and Stainbank, 2003), and Sub-Sahara Africa (Kwasi and Kwesi, 2011). However, there appears to be dearth of literature on Intellectual Capital research in Nigeria.
However, despite an increasing recognition of the importance of intellectual capital in the knowledge based economy, little research attention has been devoted to understanding the link between intellectual capital and organizational performance in Nigeria. Much of the studies on intellectual capital has focused on Western countries (particularly North America and Europe). To date, few scholars have focused on the effect of intellectual capital on organizational performance in the Nigerian banking sector. This is surprising given that many scholars (e.g.Ruta, 2009, Yang & Lin, 2009) argue that intellectual capital development is the hidden value that is not reflected in organizational financial statements but has the potential to contribute to organizational profitability and competitive advantage. The Nigerian banking sector offers a rich avenue for research on intellectual capital given that the majority of individuals that work in banks are knowledge workers. It is on this note that this research sets toexamine the effect of intellectual capital on the performance of Nigerian Banks.
1.2 Statement of the problem
In a knowledge-based and an increasingly more competitive economy, a company’s Intellectual Capital (IC) is a fundamental determinant of its success. Intellectual capital as acombination of knowledge-based assets and intangible assets of a company includes itspatents, brand names, employee’s skills, trade secret, technologies and information aboutconsumers and suppliers that has been utilised in order to create wealth by producing a highervalue asset (Stewart, 1997). In the last two and half decades, the importance of intellectualcapital has increased tremendously specifically in the developed countries. This is becausethe world at large has experienced a drastic change in the form of emerging wealthybusinesses and nations (Arenas and Lavanderos, 2008). Both companies and governmentsshifted their focuses from tangible assets to intellectual capital (IC) as differentiators for thesustainable competitive advantage of businesses and nations (Sarmadi, 2013). The reason forparadigm shift is that intellectual capital assets contribute to shareholder value more that tangible assets(Salman, Tayib and Mansor, 2013).However, traditional financial statements of companies do not reflect true disclosureof intellectual capital. In few instances, traditional intangible assets (e. g. research anddevelopment, good will and other internally developed assets) are recognised in the annualaccounts of companies, but these assets are defined narrowly (Gallego and Rodriguez, 2005).While on the other hand, modern intangible assets (intellectual capital) are not disclosed in companies’annual financial statement thereby making the role of intellectual capital in business to be insufficientlyunderstood. Obviously, stakeholders (investors, creditors and financial analysts) will not besatisfied with non-disclosure of intellectual capital as this will lead to investors’ difficulty of making rationalinvestment decisions (Okwy and Christopher, 2010). Again,one of the challenges of non-disclosure of intellectual capital in companies’ annual statements reduces the value of their shares in the capital market.Therefore, it is imperative for companies to measure and report (disclose) their intellectual capital activitiesin their financial statement in order to enhance their performance.The biggest challenge faced by companies in the knowledge-based era is how tomeasure its intellectual resources (Salman and Tayib, 2012) and view company intellectual capital as the onlysustainable source of competitive advantage in business (Salman et al. 2012a; Makki, Lodhiand Rohra, 2009). This shift from traditional measure of company’s performance toknowledge-based economy requires companies to maximize value creation from its intellectual capital to succeed, by making use of its strength, weakness, opportunity and threat (SWOT) (Makki and Lodhi, 2009; Rooset al., 2005). This competitive edge is gainedthrough enhancing value creation efficiency from intellectual capital components (human creativity,experiences, ability, skill, operational structure, customer and supplier relation channels(Salman, et al. 2013, Ahangar, 2011, Salman, et al. 2012b; Lev, 2001; Edvinsson and Malone,1997). It is against this backdrop, that this research work is embarked upon to investigate the effect of intellectual capital on the performance of Nigerian Banks.
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