THE IMPACT OF INTELLECTUAL CAPITAL ON PROFITABILITY OF LISTED DEPOSIT MONEY BANKS IN NIGERIA (A CASE STUDY OF SELECTED LISTED DEPOSIT MONEY BANKS, KANO STATE)

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

A sound and healthy financial system is essential for an economy to operate and grow. Within a financial system, the banking sector is widely regarded as the most influential sector (Tan 2016). In most companies today, intellectual capital (IC), rather than the traditional assets of land and equipment, forms the greater part of market value of firms. Over the years, physical capitals such as land, plant and equipment, etc have been seen as the major determinants of a firm‘s economic performance. However, with the emergence of science and technology as well as the latest globalisation, the ways these systems are run today have significantly been altered. The new system is driven by this newly discovered capitals- the intellectual capital. Under the new dispensation, knowledge, ability, skills, experience and attitude of workers, organizations use intellectual capital as a critical resource to enhance their performances. While companies in software manufacturing, finance, pharmaceutical, etc depend on their level of intellectual capital to earn revenue, production or manufacturing companies use Intellectual Capital with their physical assets to sharpen their competitive edge (Ahangar, 2011). Bornemann et al. (2013) also discovers that enterprises which have managed their intellectual capital better, had achieved stronger competitive advantage than the general enterprises. Also they reported that companies which had strengthened their own intellectual capital management compared to the others had performed better. Brennan and Connell (2011) also claim that intellectual capital management played an important role in the long-term business performance of an enterprise. Furthermore, it is argued that the inability of financial statements in explaining firm value is due to the fact that the source of economic value is no longer the production of material goods, but the creation of intellectual capital. Intellectual capital is defined as the possession of knowledge, experience, skills, good relationships, and technological capacities, which give organizations competitive advantage (Ahangar, 2011). Intellectual capital includes human capital and structural capital comprising customers, processes, databases, brands, and systems (Edvinsson & Malone, 2014). Intellectual capital has also been a subject of intense research in recent years in the developed world; the main focus of which is on specific industries. However, only a handful number of studies have focused on emerging economies like India, Nigeria, etc in evaluating the implications of intellectual capital in specific industries. The implications of intellectual capital are more prominent in the emerging economies as they have abundant human capital at their disposal (Kamath, 2007). With that in mind and considering the importance and the contributions of developing economies in the global economy, it is important to establish the impact of intellectual capital in a different socio-political and economic setting. In particular, this study will explore whether intellectual capital is efficiently utilized by banks in Nigeria to their advantage in enhancing their profitability. The banking sector, in any country plays a pivotal role in setting the economy in motion and helps immensely in its development process. Banks promote growth and success of businesses in both developed and developing countries. According to Kamath (2007), the banking sector is an ideal area for IC research because the banking sector is ―intellectually intensive and its employees are (intellectually) more homogeneous than those in other economic sectors. The understanding and development of intellectual capital (IC) concepts in emerging economies is still at its infant stage (Firer & Williams, 2011) and because emerging economies contribute significantly to the prosperity and stability of the world economy, there is a need to establish evidence of the development of intellectual capital in these economies through empirical evidence. Intellectual capital can be thought of as a form of ‘unaccounted capital’ in the traditional accounting system in a firm. Although recognition is given to some intellectual capital under the heading ‘goodwill’ the traditional accounting system looks largely at separable assets (Davies & Waddington, 2013).There is a global trend and demand for more useful and comprehensive non-financial information about the operating activities of firms (Anderson & Epstein, 2008). Besides that, the evaluation of the performance of banks, for example, usually employs financial indices, providing a simple description about the bank‘s financial performance in comparison to previous periods, (Chen, 2014). By focusing only on financial aspects is not enough for management to deal with the changing business environment.

STATEMENT OF THE PROBLEM

Over the last two decades, financial sector reforms, technological advancement and globalization have led to significant transformation of the banking industry in Nigeria. The banking industry has experienced impressive performance coupled with unprecedented growth over the same period. The industry has remained largely profitable inspite of the economy performing poorly in some years and facing adverse effects of the global financial crisis in 2008. Since Nigerian got its independence in 1960, the Nigerian banking sector has experienced daunting challenges and several regime changes. The lack of human and financial resources, political interference, and political instability has hindered industry growth in the past. The banking market is segmented and constrained with few credit lines. Large banks preferably lend and borrow from each other in the interbank market and will not do so with small banks because of perceived risk or non-existence of credit lines. The existing structures may thus have an impact on the performance, price setting and efficiency with which Nigerian banks carry out their business, as well as how they respond to policy directives from the regulator, Anne and Maureen, (2013). Many performance measures have been based on financial aspects, omitting important non-financial aspects including the importance of dynamic capability through accumulating research and development as well as marketing capability over time, to further enhance firm performance traditionally (Hsu & Wang, 2010). Besides that, the evaluation of the performance of banks, for example, usually employs financial indices, providing a simple description about the bank‘s financial performance in comparison to previous periods, (Chen, 2014). By focusing only on financial aspects is not enough for management to deal with the changing business environment. There exists little or no literature on the effects of intellectual capital on profitability of listed deposit money banks in Nigeria.

AIMS AND OBJECTIVES OF THE STUDY

The major aim of the study is to examine the impact of intellectual capital on profitability of listed deposit money banks in Nigeria. Other specific objectives of the study include;

1. To examine how human capital affect deposit money banks profitability.
2. To assess if structural capital affect deposit money banks profitability.
3. To examine the impact of intellectual capital on the profitability of deposit money banks.
4. To find out how relational capital influence deposit money banks profitability.
5. To examine the relationship between intellectual capital and profitability of deposit money banks.
6. To recommend policies and procedures that will improve profits, reduce the risk of corporate failure and Management in deposit money banks.

RESEARCH QUESTIONS

1. In what way does human capital affect deposit money banks profitability?
2. In what way does structural capital affect deposit money banks profitability?
3. What is the impact of intellectual capital on the profitability of deposit money banks?
4. How does relational capital influence deposit money banks profitability?
5. What is the relationship between intellectual capital and profitability of deposit money banks?
6. What are the recommended policies and procedures that will improve profits reduce the risk of corporate failure and Management deposit money banks?

RESEARCH HYPOTHESES

HYPOTHESIS 1

1. There is no significant impact of intellectual capital on the profitability of deposit money banks.

H1: There is a significant impact of intellectual capital on the profitability of deposit money banks.

HYPOTHESIS 2

H0: There is no significant relationship between intellectual capital and profitability of deposit money banks

H1: There is a significant relationship between intellectual capital and profitability of deposit money banks

SIGNIFICANCE OF THE STUDY

The importance of this study may have implications for other sectors apart from deposit money banks in Nigeria who are trying to make decisions regarding intellectual capital management and further finding of study would help to develop an understanding in the advantages and disadvantages of financial practices and techniques of managing intellectual capital in deposit money banks and globally. The research will be beneficial to all deposit money banks and their staff as it emphasized the need and encourage the establishment of policy guidelines on the efficient and effective intellectual capital management. It will help managers of various organizations to generate ideas and solution to problems based on the best way to run intellectual capital in their organization in order to achieve desired goals and objectives. It will equally be useful to small scale business, large corporations and to the government. It will also help researchers to know more about intellectual capital as a tool for improving organizational and financial performance of a firm. Finally, it will be of great value to students as a point of reference and will equally form the basis for further research study.

SCOPE AND LIMITATION OF THE STUDY

The study is restricted to the impact of intellectual capital on profitability of listed deposit money banks in Nigeria, a case study of selected listed deposit money banks, Kano state.

LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1. DEFINITION OF TERMS

Profitability: Is one of four building blocks for analyzing financial statements and company performance as a whole. The other three are efficiency, solvency, and market prospects. Investors, creditors, and managers use these key concepts to analyze how well a company is doing and the future potential it could have if operations were managed properly.

Intellectual Capital: The aggregate of workers‟ output in an organisation.

Human Capital: Human capital is the totality of all remunerations and rewards paid to the worker. It also essentially includes training and development costs.

Structural Capital: Structural capital consists of all supportive infrastructures in the form of trademarks, patents, formulas and so on, which is left with the organisation even when the worker leaves the workplace.

Relational Capital: This is the much inclination customers have over the goods and services of an organisation. It is the preference and loyalty that customers have over a company’s brand over other products and services.

Tangible Assets: Assets which are used for further production of goods and services. They are relatively permanent in nature and can be felt physically. Their usefulness usually last beyond one accounting year i.e. motor vehicles, lands and buildings and so on.

Intangible Assets: Assets that do not possess any physical elements in themselves such as intellectual capital and other similar items.