EXPORING THE EFFECT OF INTELLECTUAL CAPITAL ON THE FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Zehri et al. (2022) define intellectual capital as the knowledge, experience, abilities, and positive relationships that provide a competitive edge to organisations. The valuation of intellectual capital is not sufficiently captured by conventional metrics due to its intangible nature (Rastogi, 2020; Erickson & Rothberg, 2019). Human and structural capital are components of intellectual capital. 

Structural capital consists of customers, processes, databases, trademarks, and systems, according to Nafukho et al. (2018). Intellectual capital, according to Nadeem et al. (2019), enhances the financial performance of businesses regardless of location. Knowledge acquired by the organisation becomes a competitive advantage that sets it apart from its adversaries. As a result, a considerable number of organisations have come to recognise a fundamental truth: their physical and intellectual capital accurately reflect their true value. This intellectual capital consists of patents, customer relations, the innovations and expertise of employees, and the organisation itself. Conversely, in order to adapt to the ever-evolving and progressive realm of contemporary society, continuous innovation is required across economic, social, and technological spheres (Duho & Onumah, 2019). Consequently, innovation as a strategic input into the operations and endeavours of the entire organisation has become indispensable. 

In light of the pressing demand for enhanced performance and innovation, enterprises are redirecting their focus towards intangible assets, including intellectual capital. Petty and Guthrie (2020) state that the formulation of two fundamental knowledge management objectives is in progress. These initiatives symbolise a continuous endeavour to develop a more efficient framework for generating, archiving, and distributing knowledge within an organisation. The second is that a growing number of individuals are cognizant of the fact that expertise substantially augments the worth of an organisation and, in the majority of instances, comprises the totality of that worth. 

The purpose of the intellectual capital concept is to generate novel models capable of quantifying, documenting, and communicating the worth of intellectual capital. In finance and management, conventional accounting practices must now conform to the new paradigm. According to the Organisation for Economic Cooperation and Development (OECD 2020), the emergence of the information and knowledge-driven new economy is responsible for the rise of intellectual capital as a business and research subject. Regarding the utilisation of intellectual capital by enterprises, little agreement seems to exist (Guthrie, 2021). However, intellectual capital has emerged as a significant factor in recent sociological, technological, managerial, and economic developments in ways that were not previously expected or anticipated in their entirety. The emergence of the information economy and the modern organisation resulted in the creation of novel intangible assets based on knowledge, organisational structures and procedures, expertise, and cognitive and problem-solving capabilities (Petty & Guthrie, 2020). Management seeks survival strategies in a business environment marked by global competition, strategic adaptation, rising consumer demand, and the explosion of the service sector. Although not a new concept in the field of business management, intellectual capital has acquired an unprecedented level of importance. Over the past few years, there has been a growing recognition that the inventory of intangible assets held by a company significantly influences its capacity to maintain a competitive edge. Significantly, the importance of knowledge-based intangibles in value creation is acknowledged. An increasing number of scholars are employing the term "intellectual capital" to differentiate these intangible assets from financial capital, the conventional foundation upon which wealth has been built throughout history. Intellectual capital comprises a significantly wider array of resources than those conventionally classified as intangible, including reputation, brands, and benevolence. Accounting principles are necessary in order to clarify the latent value that intellectual capital is assigned by capital markets. Accounting principles ascertain the discrepancy that exists between the book value and market value of an entity's assets. It is imperative to establish a distinct differentiation between intellectual capital and intangible assets to prevent the necessity of adjusting the accounting treatments for intangible assets to account for intellectual capital. 

The predominant component of a firm's market value is presently intellectual capital, as opposed to conventional land and equipment. It has been determined that physical capital, including land, structures, and equipment, has the greatest impact on the long-term economic performance of a business. On the contrary, this traditional mode of thinking is experiencing a significant paradigm shift due to the advent of science, technology, and global progress. This renewed emphasis on intellectual capital motivates the construction of this theory. The knowledge, abilities, skills, experience, and attitudes of employees are considered intellectual capital and critical resources for improving business performance under the new system. Production, manufacturing, and financial institutions derive revenue from their intellectual capital, whereas software, financial, and pharmaceutical firms integrate intellectual capital with physical assets to attain a competitive edge (Taje, 2022). Bornemann and Alwert (2019) posit that organisations that execute intellectual capital management effectively enjoy a significant competitive edge over those that fail to do so. Their findings indicate that organisations whose intellectual capital management was enhanced performed better than those that did not. The management of an organization's intellectual capital, according to Brennan and Connell (2020), is crucial to its long-term business performance. Furthermore, one could contend that the incapability of financial statements to elucidate the value of a company is attributable to the fact that monetary value is contingent not only on the production of tangible assets but also on the development of intellectual property. In recent years, developed countries have also undertaken substantial research on intellectual capital, with a particular focus on distinct industries. In light of the critical nature of intellectual capital in relation to a firm's value creation capabilities, it is incumbent upon accountants to ensure the inclusion of precise data regarding the intellectual capital stock of a company in each business report. 

1.2 Statement of the Problem

The ongoing global financial crisis, in addition to various domestic and international financial controversies, have rekindled apprehensions and initiated discussions concerning the correlation between deposit money banks' performance and intellectual capital. Further arguments and concerns pertain to the significance of financial accounting and reporting in corporate governance and the worth of an organization's intellectual capital. This debate was triggered by globalisation, strategic coalitions, alliances among multinational corporations, and the transition to a knowledge-based economy. Notwithstanding the abundance of research undertaken in this area, empirical evidence pertaining to the impact of intellectual capital components on the financial performance of Nigerian institutions throughout the analysed time period is scarce. In numerous studies, scholars specialising in financial and corporate reporting have examined the influence of intellectual capital on the valuation of businesses through both theoretical and empirical means. The inconsistency and contradiction of the results, which have not been resolved, have prompted this investigation. 

1.3 Objectives of the Study

The broad objective of the study is to examine the effect of intellectual capital on the financial performance of deposit money banks in Nigeria. Specifically, the study will;

Determine whether Human capital have a significant impact on return on asset of Deposit Money Banks in Nigeria.

Determine whether Structural capital have a significant impact on return on asset of Deposit Money Banks in Nigeria.

Determine whether Capital employed have a significant impact on return on asset of Deposit Money Banks in Nigeria.

1.4 Research Questions

The study will provide answers to the following questions; 

Does Human capital have a significant impact on return on asset of Deposit Money Banks in Nigeria?

Does Structural capital have a significant impact on return on asset of Deposit Money Banks in Nigeria?

Does Capital employed have a significant impact on return on asset of Deposit Money Banks in Nigeria?

1.5 Research Hypothesis 

H01: Human capital has no significant impact on return on asset of Deposit Money Banks in Nigeria.

H02: Structural capital has no significant impact on return on asset of Deposit Money Banks in Nigeria.

H03: Capital employed has no significant impact on return on asset of Deposit Money Banks in Nigeria.

1.6  Significance Of The Study

This research is critical for Nigerian listed companies because it is a way of enhancing financial performance in corporate entities including listed DMBs in Nigeria as it translates to higher quality organizational processes, products, services, and social effectiveness. When management service quality improves, it has an impact on the citizens who benefit from the services as a whole.

1.7 Scope Of The Study

The study generally focus on assessing the effect of intellectual capital on the financial performance of deposit money banks in Nigeria. The study will cover a period of 10year, counting from 2010 to 20119. Data will be obtained from secondary sources.

1.8 Limitations of the Study

Like in every human endeavour, the researchers encountered slight constraints while carrying out the study. The significant constraint was the scanty literature on the subject owing to the nature of the discourse thus the researcher incurred more financial expenses and much time was required in sourcing for the relevant materials, literature, or information and in the process of data collection.

1.9 Definition of Terms 

Human Capital: This represents the Human Resources of an organization. 

Value Added Human Capital: This is the contribution generated by each Naira invested in capital in the form of human resources to add value to the company.

Structural Capital Value Added: This measures the amount of Structural Capital (SC) needed to generate one naira (NI) of value added and is an indication of how structural capital success creates value for the company

Capital Employed: It generally refers to the capital utilized by the company to generate profits. The figure is commonly used in the Return on Capital Employed (ROCE) ratio to measure a company's profitability and efficiency of capital use. 

Financial Performance (FP): Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. The term is also used as a general measure of a firm's overall financial health over a given period.