Relationship Between Immaterial Capital and Performance of Islamic Banks: Empirical Study of Listed Banks in Bahrein and United Arab Emirates

The aim of this study is to investigate the relationship between immaterial capital and financial performance of eighteen listed Islamic and conventional banks in Bahrein and United Arab Emirates for the year 2018. Data is obtained from annual reports of banks. The approach used to analyze the efficiency of banks is Value added intellectual coefficient (VAIC). The financial performance of the selected banks for this study is evaluated by ROA and ROE measures. The immaterial capital (and its components human capital and structural capital) of banks have been analyzed and their impact on financial performance has been estimated using multiple regression technique. The results show that the VAIC value is the same for Islamic banks and conventional banks. The findings show that VAIC is positively associated with ROA while the three components of VAIC showed mix results on banks’ performance. In the context of knowledge economy, the VAIC approach may be convenient for the banks and policy makers to integrate the immaterial capital in the decision-making process. A future study including listed banks in all countries of Gulf Cooperation Council (GCC) could provide a better evaluation of the impact of immaterial capital on financial performance for the banking sector, especially Islamic banking. performance of the banks. The results show that VAIC score of conventional banks is higher compared Islamic banks. HCE is the main predictor of the intellectual capital performance of banks operating in Pakistan. The results affirm a positive relationship between VAIC and performance evaluated by ROA while components of VAIC presented mix results on banks’ performance.

banks in Bahrein and United Arab Emirates for the year 2018. The hypothesis to verify are: H1: Immaterial capital impact positively on return on asset (ROA) H2: Immaterial capital impact positively on return on equity (ROE) The sample of our study consists of listed banks in Bahrein and United Arab Emirates (UAE) which are eighteen banks ten in UAE and eight in Bahrein. Data is collected from annual reports of selected banks. Union National Bank (UNB) First Abu Dhabi Bank (FAB) Sharjah Islamic Bank (SIB) The immaterial capital (IC) performance of banks is measured through the value-added intellectual coefficient (VAIC) methodology of Public (1998Public ( , 2000. The VAIC is calculated as follows: VAIC= HCE+SCE+ CEE (1) The financial performance of the selected banks for this study is evaluated by two measures namely Return on Asset (ROA) and Return on Equity (ROE). This study uses the model presented in Figure 1 to examine the impact of intellectual capital on financial performance using multiple regression.  Dependent variables Previous studies have used Return on Asset (ROA) or/and Return on Equity (ROE) to assess the financial performance of banks (Chen et al., 2005;Suroso et al., 2017, Taha et al.,?). This study uses both measures of financial performance defined as follows: Return on Assets (ROA) = Net Income / Total Assets (2) Return on Equity (ROE) = Net Income / Total Equity (3)  Independent variables VAIC and its components, HCE, SCE, and CEE, are independent variables of this study. VAIC is evaluated through the measure of value added (VA) which can be expressed as follow: VA = Output -Input (Except salaries) (4) Human Capital Efficiency: Human Capital (HC) is defined as personnel costs (Public, 1998(Public, , 2000. It is measured by the following formula: HCE = VA / HC (5) Structural Capital Efficiency: Structural capital (SC) includes immaterial capital items such as strategy, organizational networks (Public, 1998(Public, , 2000. SC and SCE are calculated as follow: SCE = SC/VA (6) SC = VA -HC Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.11, No.6, 2020 66 Capital Employed Efficiency: Public (1998Public ( , 2000 argues that IC cannot create value on its own, thus it must be associated with capital (physical and financial) employed (CE). CEE is calculated by the formula above: CEE = VA / CE (8) Value Added Intellectual Coefficient (VAIC): The three components of intellectual capital are therefore combined to measure VAIC: VAIC = HCE + SCE + CEE (9)  Control Variable Size is included, as a control variable, in the current measurement model to minimize the impact of another variable that explains observed relationships with banks performance.
Size (Sz) = Logged Total Assets (10)  Empirical Models Following Public (2000), models of this study are formulated as follow:

Finding and Discussion
This section begins with descriptive statistics followed by a correlation analysis and conclude with regression analysis for the full sample of banks and also for Islamic and conventional banks separated.

Descriptive Statistics
Results related to descriptive statistics of chosen sample are given in Table 1. Financial performance is evaluated by ROA and ROE that are considered as dependent variables in the empirical models of intellectual capital. The results in table 2 show that standard deviation is low for both ROA and ROE, which state a similar profitability setting for studied banks. Then, the impact of intellectual capital on the financial performance of the banks is analyzed within a homogeneous profitability situation. By all of the VAIC components, HCE has the highest standard deviation score indicating a difference in human capital efficiency over the selected banks.   Table 4 gives the regression results of all eighteen banks for the year 2018. The empirical results show that independent variables in Model 1 collectively explain 67.5 and 60 percent of the variance in ROA and ROE respectively. The lower value of the adjusted R2 can be explained by the non-significant correlations among few variables as explained previously. It may be observed, in table 4, that VAIC has a significant positive influence on bank's profitability while measuring by ROA. The control variable Size was found to have a significant positive impact on profitability measured both by ROA and ROE.

Regression Analysis
The relationship between components of VAIC and profitability has been measured in model 2. The empirical results affirm that SCE and banks profitability as measured by ROA and ROE are significantly and positively correlated. The control variable Size has no a significant association with ROA and ROE in model 2. Additionally, the empirical model is examined for Islamic and conventional banks separately to explore any difference in the results that might emerge from the difference in their activities. The regression results of eight Islamic banks for the year 2018 are given in table 5. In model 1, the impact of VAIC on Islamic banks performance as measured by ROA is found to be positive. VAIC with control variable is found to explain 88.9 and 85.5 percent of the variation in ROA and ROE respectively. In model 2, HCE, SCE and CEE have a nonsignificant influence on both measures of performance ROA and ROE for Islamic banks while SCE had a positive influence on both measures of profitability for the total sample. Regression analysis is conducted on the teen conventional banks as well. Table 6, indicates some differences in the results as compared to the regression results of Table 4 and 5. In model 1, VAIC is found to have a positive relationship with profitability as measured by ROA. The adjusted R2 is lower indicating that VAIC can only explain 47.6 and 27.8 percent of variations in ROA and ROE respectively. VAIC have only significant relationship with ROA, while among the component of VAIC only CEE has a positive association with ROA and ROE. The regression results provided in tables 4, 5 and 6 shows that the model developed based on the Public's Intellectual Capital components are significant for the listed banks in Bahrein and UAE. Value Added Intellectual Coefficient (VAIC) is confirmed to be a durable driver of bank's performance (both conventional and Islamic Banks). VAIC has, in all situations, a significant positive impact on bank's performance measured with ROA which is the same for both Islamic and conventional banks (0.003 for ROA). In other words, an increase in VAIC by one dollar would result in an increase in ROA by 0.003 dollar. As a result, hypothesis 1 is accepted. The results are no statistically significant regarding ROE so hypothesis 2 is rejected.
The VAIC components were empirically tested to explore their impact on bank's performance in selected sample. Mixed results were found from the results showed in tables 4, 5 and 6. The first component of VAIC, HCE, has no significant association with performance measurement. While SCE was found to have a positive influence on each component of performance (0.057 for ROA and 0.317 for ROE) for the full sample, it became insignificant for both Islamic banks and conventional banks. Regression results in tables 4, 5 and 6 indicates that CEE, the third component of VAIC has a significant positive association with profitability only in case of the conventional banks (3.394 for ROA and 2.708 for ROE).

Conclusion
The present study focused on investigating the impact of intellectual capital on performance of listed banks operating in Bahrein and UAE. Hence, Public's VAIC approach was used to measure intellectual capital for banks, and financial performance was measured using ROA and ROE. This work was conducted on data from a sample of all listed banks in Bahrein and UAE, eighteen banks on 2018. Multiple regression analysis between IC measured by VAIC in model 1 and the three components of VAIC in model 2, on the one hand, and bank's performance measured by ROA and ROE, in the other hand. The results indicate that IC is an important determinant of bank's performance. This research is a contribution to the existing literature of intellectual capital and increases the generalizability of Public's Value-Added Intellectual Capital (VAIC) model in the context of a banking industry especially Islamic banking. The results show a significative positive relationship between IC as measured by VAIC and performance of banks measured by ROA (0.003 for ROA). The second component of VAIC namely SCE was found to have a positive influence on each component of performance (0.057 for ROA and 0.317 for ROE) for the full sample. The performance of various components of VAIC and the overall VAIC score differed between conventional and Islamic banks. Efficiency in capital investment measured through CEE was found to be the most significant predictor of profitability for conventional banks. The findings of this research correspond, relatively, to the literature dealing the issue of association between IC using VAIC approach and performance of banks using ROA and ROE measures (see Setianto & Sukmana, 2016;Suroso et al., 2017;Muthia et al., 2017). The main limitation of this study is the sample size. Data including listed banks in all countries of GCC would offer a more rigorous representation of the influence of IC on banks' performance, this will be a perspective of another research in line with this study.