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Advances in Social Sciences Research Journal – Vol. 10, No. 1

Publication Date: January 25, 2023

DOI:10.14738/assrj.101.13853.

Ofurum, C. O., Oyintonefie, E., Fubara, S., & Azuike, N. (2023). The Effect of Intellectual Capital on the Financial Performance of

Deposit Money Banks in Nigeria. Advances in Social Sciences Research Journal, Vol - 10(1). 312-328.

Services for Science and Education – United Kingdom

The Effect of Intellectual Capital on the Financial

Performance of Deposit Money Banks in Nigeria.

Clifford Obiyo Ofurum

Department of Accounting, University of Port Harcourt

Etonye Oyintonefie

Department of Accounting, University of Port Harcourt, Nigeria

Siminalayi Fubara

Ministry of Finance, Rivers State Secretariate, Port Harcourt

Ngozi Azuike

Department of Accounting,

Ignatius Ajuru University of Education, Port Harcourt

ABSTRACT

This study evaluates the relationship between intellectual capital and Nigerian

deposit money banks' financial performance. Specifically, it aims to establish nexus

between two proxies of intellectual capital, structural and human capital, and two

facets of financial performance, return on assets and earnings per share. All the

deposit money banks registered in the Nigerian stock exchange constitute the study

population; however, only eight banks that published the required data between

2012 and 2020 were sampled. The study adopted Pulic's (2004) method of

measuring intellectual capital and Hamdan's (2018) and Ozkan et al. (2016) model

specifications. The model and collected data were analysed using simple regression

analysis. The research revealed a significant relationship between structural

capital and return on asset (ROA). It also found a significant association between

human capital and earnings per share (EPS). Based on the result, we recommend

that Nigerian bank managers and policymakers integrate intellectual capital into

their decision-making process and pay more attention to this alternative source of

capital to enhance their financial performance. Also, the management of banks

should provide a conducive work environment, improve the welfare packages of

their staff and ensure an excellent in-house training program.

Keywords: Value Added Intellectual Capital, Intellectual Capital; Financial Performance,

Structural Capital Efficiency and Human Capital Efficiency

INTRODUCTION

Intellectual capital is the knowledge, experience, skills, and good relationships that give

businesses a competitive advantage (Zehri et al., 2012). Because intellectual capital is both

intangible and intangible, traditional metrics cannot adequately measure its worth (Rastogi,

2000; Erickson & Rothberg, 2009). Intellectual capital includes human and structural capital.

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Ofurum, C. O., Oyintonefie, E., Fubara, S. & Azuike, N. (2023). The Effect of Intellectual Capital on the Financial Performance of Deposit Money Banks

in Nigeria. Advances in Social Sciences Research Journal, Vol - 10(1). 312-328.

URL: http://dx.doi.org/10.14738/assrj.101.13853

Customers, processes, databases, brands, and systems constitute structural capital (Nafukho et

al., 2004). According to Nadeem et al. (2017), Intellectual capital improves firms' financial

performance regardless of geographical location. The organisation's knowledge becomes a

competitive advantage that distinguishes it from rivals. Consequently, numerous organisations

are now aware of a fundamental truth: their actual worth is reflected in their physical and

intellectual capital. This intellectual capital includes patents, customer relations, workers'

innovations, skills, and the organisation's mastery. On the other hand, the rapid change and

development of the modern environment necessitate constant innovation in all aspects of

economic, social, and technological life (Duho & Onumah, 2019). Therefore, innovation as a

strategic input into the work and activities of the organisation at all levels has become essential.

Due to the urgent need for increased performance and innovation, businesses are shifting their

attention to their intangible assets, such as intellectual capital. According to Petty and Guthrie

(2000), developing two primary knowledge management missions is underway. They

represent an ongoing effort to establish a more effective system for creating, capturing, and

disseminating organisational knowledge. The second is that an increasing number of people

recognise that expertise significantly increases the value of a business and, in most cases, is the

entirety of that value.

The concept of intellectual capital is to develop new models that can measure, record, and

report intellectual capital's value. Traditional accounting practices in finance and management

must now conform to the new paradigm. The Organisation for Economic Cooperation and

Development (OECD) (2000) attributes the rise of intellectual capital as a business and

research topic to the emergence of the new economy, which is driven by information and

knowledge. There appears to be little consensus regarding how businesses utilise intellectual

capital (Guthrie, 2001). However, intellectual capital, in one form or another, is involved in

recent economic, managerial, technological, and sociological development in a previously

unanticipated and largely unanticipated manner. The rise of the modern organisation and the

information economy led to the development of new knowledge-based intangibles,

organisational structures and processes, know-how, and intellectual and problem-solving skills

(Petty & Guthrie, 2000). In a business environment characterised by global competition,

strategic adaptation, rising customer demand, and the explosion of the service industry,

management seeks survival strategies. Intellectual capital is not a novel concept in business

management, but it has taken on an unprecedented new significance. In recent years, it has

become increasingly apparent that a company's inventory of intangible assets contributes to its

ability to sustain a competitive advantage. Notably, it is recognised that knowledge-based

intangibles are essential to value creation. The term "intellectual capital" is increasingly used

to distinguish these intangible assets from financial capital, which has historically served as the

basis for wealth creation. Intellectual capital encompasses a much broader range of assets than

those typically categorised as intangible, such as goodwill, brands, and company reputation.

Accounting principles are required to elucidate the hidden value that capital markets place on

intellectual capital. The difference between the market value and book value of an

organisation's assets is determined by accounting standards. Intellectual capital and intangible

assets must be clearly distinguished so that the accounting treatments for intangible assets do

not need to be modified to accommodate intellectual capital.

Intellectual capital now accounts for the majority of a company's market value rather than

traditional land and equipment. Physical capital, such as land, buildings, and equipment, has

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Advances in Social Sciences Research Journal (ASSRJ) Vol. 10, Issue 1, January-2023

Services for Science and Education – United Kingdom

been regarded as the most influential factor in a company's long-term economic performance.

However, with the emergence of science, technology, and globalisation, this conventional way

of thinking is undergoing a substantial transformation. This new emphasis on intellectual

capital is the impetus for developing this theory. Under the new system, the knowledge,

abilities, skills, experience, and attitudes of employees are intellectual capital and vital

resources for enhancing the performance of businesses. While software, financial, and

pharmaceutical companies rely on their intellectual capital to generate revenue, production or

manufacturing companies combine intellectual capital with physical assets to gain a

competitive advantage (Taje, 2014). According to Bornemann and Alwert (2007), organisations

that effectively manage their intellectual capital have a greater competitive advantage than

those that do not. Their findings suggest that companies that improved their intellectual capital

management outperformed those that did not. Brennan and Connell (2000) assert that the

management of an organisation's intellectual capital is essential to its long-term business

performance. Additionally, it is argued that the inability of financial statements to explain firm

value is due to the fact that monetary value is no longer dependent solely on the production of

physical goods but also on the creation of intellectual capital. Developed nations have also

conducted extensive research on intellectual capital in recent years, particularly in specific

industries. Given the significance of intellectual capital to a company's ability to create value,

accountants must ensure that every business report contains accurate information about the

intellectual capital stock of a company.

The recent global financial crisis and numerous local and international financial scandals have

reignited concerns and sparked debates regarding the connection between intellectual capital

and the performance of deposit money banks. The value of an organisation's intellectual capital

and the role of financial accounting/reporting in corporate governance are additional

arguments and concerns. Globalisation, strategic coalitions, alliances between multinational

corporations, and the transition to a knowledge-based economy have sparked this debate.

Despite the fact that numerous studies have been conducted on the subject, there is a lack of

data describing how intellectual capital components influence the financial performance of

banks in Nigeria during the period under consideration. Scholars of financial and corporate

reporting have theoretically and empirically investigated the impact of intellectual capital on

the valuation of businesses in various studies. Instead of resolving the issues, the results have

been inconsistent and contradictory, prompting this investigation.

The following null hypotheses were developed as guidelines for the research:

H-01: There is no correlation between Nigerian deposit money banks' structural capital and

their return on assets.

H-02: There is no correlation between human capital and earnings per share of deposit money

banks in Nigeria.

The research establishes the following criteria for accepting and rejecting null hypotheses: the

null hypothesis is accepted if the standard error of 1 [S (1) > 1/2 1]. We acknowledge that the

estimate is not statistically significant at a significance level of 5% (0.05). The null hypothesis

is rejected if the standard error is greater than half of 1. We accept that the estimate is