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.
