Intellectual Capital and Financial Performance in Sri Lankan Banks

Abstract

The purpose of this paper is to examine the impact of Intellectual Capital (IC) on financial performance of Sri Lankan banks. This analysis is about the level of intellectual capital, level of financial performance and the impact of IC on financial performance of Sri Lankan banks. The Value Added Intellectual Capital coefficient (VAIC) approach developed by Pulic (2000) is used to determine the IC performance. Accordingly human capital, structural capital and capital employed efficiency are used as intellectual capital constituents of this research. Return on Equity (RoE) and Market to Book Value Ratio (M/B) are used to measure the financial performance and value creating competency of selected banks. The data obtained from corporate annual reports are regressed to measure the impact of intellectual capital constituents on financial performance. Findings of this research indicates that, Sri Lankan banks, in general, have relatively lower human capital and structural capital efficiency compared to capital employed efficiency. So the results depict a greater impact of capital employed efficiency on financial performance compared to other intellectual capital constituents. Further these findings would be both conceptually and practically appealing for bankers to apply knowledge management practice in their institutions. Also this study would provide some information to the stakeholders and potential investors to assess the value creating capabilities of selected banks. Findings of this study help decision makers be aware of the importance of intellectual capital as a key factor that can enhance a firm’s ability to maintain their competitive position.