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Intellectual Capital Efficiency: Study on MalaysianBanking Sectors

NORSALIZA ABU BAKAR and HASLENDA YUSOP

Abstract

Intellectual capital becomes the integral part in the developmentof successful organization lately. Most of the organizations inMalaysia are started to shift in practising intellectual capital sinceknowing the important of it. Intellectual capital is defined asintangible assets that include technology, customer information,brand name, reputation and corporate culture that are invaluableto a firms competitive power (Low and Kalafut, 2002). Ingeneral, intellectual capital covers so many things includingknowledge since knowledge being the new engine of corporatedevelopment and become one of the great clichs of recent

years (Maheran and Khairu, 2009). Knowledge-basedorganization assists lots not only in utilizing its assets, but inimprovising the quality of subordinates as well. Intellectualcapital is considering the efficiency of human capital, structuralcapital and capital employed. Therefore, the purpose of thisstudy is to investigate the efficiency of intellectual capital amongbanking sectors in Malaysia. Time duration is about 10 years thatcovers from 2000 to 2010 and data are collected from financialstatements for every company. Model that will be used for thisstudy are taken by Pulic (1998) which proposed Value AddedIntellectual Coefficient (VAIC) as an indirect measure ofefficiency of value added by corporate Intellectual Capital. As aresult it was found that banking sectors in Malaysia haverelatively higher intellectual capital efficiency.

Keywords: Intellectual capital, Efficiency, Human capital, Structural capital,Capital employed

____________________________________Norsaliza Abu Bakar, Faculty of Business Management, UiTM Johor, Malaysia.Haslenda Yusop, Faculty of Science and Mathematic, UiTM Johor, Malaysia


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perspective. Therefore the examination ofthe efficiency of intellectual capital amongbanking sectors in Malaysia could be thecrucial aspect to be determined with theidentification of a higher efficiency level in

the banking sector. The Value AddedIntellectual Capital (VAIC) model by Pulichas been adopted to identify the bestcompany that has added a value in itsintellectual capital. The best VAIC isdetermined by greater value of VAIC ofeach company.

2.0 PREVIOUS STUDY

2.1 Intellectual CapitalThere are many interpretations forintellectual capital since the beginning ofthe research was in the early 1980s.According to the pioneer in the field ofstudying and researching IC, Itami (1987)defined it as a form of corporateintangible assets which include itemssuch as intellectual property, a firmsexperience, customer relationship andreputation. Other researchers Low andKalafut (2002), who published works onintellectual capital, defined IC asintangible assets which include particulartechnology, customer information, brandname, reputation and corporate culturethat are invaluable to a firms competitivepower. Intellectual capital includes allemployees, organizational knowledgeand their abilities to create value addedand led to sustainable competitiveadvantage. Intellectual capital has beenidentified as a set of intangibles(resources, capabilities andcompetences) that drives theorganizational performance and valuecreation (Bontis, 1998). The samedescription explained by Pulic (2001)where agreed IC includes all employees,their organization and their abilities tocreate value added that is evaluated onmarket into intellectual capital.

2.2 Human CapitalThe term human capital is recognitionthat people in organisations andbusinesses are important and essential

assets who contribute to developmentand growth, in a similar way as physicalassets such as machines and money.The collective attitudes, skills and abilitiesof people contribute to organisationalperformance and productivity. Anyexpenditure in training, development,health and support is an investment, not

just an expense (Derek. S). According toStewart (1997) and Edvinsson andMalone (1997), human capital is definedas the knowledge, qualifications and skillsof employees and the fact that companiescannot own or prevent those employeesfrom going home at night. In the otherwords, human capital is a value that onlyown and posses by individual in theorganization which normally brings valueadded to the company with uniqueattitude and character.

In essence, continuous strengthening ofintellectual resources and capabilitiesmust be made to create a larger pool oftalents and high caliber professionals inthe banking and finance industry (Zeti,2005). Financial sector in particular,needs a new generation of professionalexecutives who are more customer-centric, technology-savvy, more highlyqualified, flexible and agile with skill setsthat are now more comprehensive thanpreviously. In the context of globalization,high class human capital today hasbecome a necessity and not merelyopulence (Nik Muhammad, N.K et. al,2007).

2.3 Structural CapitalOne of the three types of intellectualcapital is structural capital (the other twoare 'customer capital' and 'human


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capital'), which it does not reside in theheads of the employees and remains withthe organization even when they leave.Structural capital has been explained invarious ways. According to Andrew Kok

(2007), structural capital (ororganisational capital) which includes thesystems, networks, policies, culture,distribution channels, and other"organisational capabilities" developed tomeet market requirements as well asintellectual property. It is synonyms withwww.businessdictionary.com whichexplains structural capital as competitiveintelligence, formulas, informationsystems, patents, policies, processes,etc., that result from the products orsystems the firm has created over time.

Structural capital is structured from thetangible parts such as trademarks,symbols, patents and databases until itcompleted into intangible parts likeculture, transparency and trust amongemployees. Therefore, it could beinterpreted as something that has beencreated by the employees like system orproducts will remain belonging to the firmeven though the employees leave the firmone day. Thus, organizations thatpossess strong structural capital will havea supportive culture that permits theiremployees to try new things, to learn andto practice those (Bontis et al., 2000).

2.4 Capital EmployedCapital employed is defined as allresources linked to the externalrelationships of the firm with customers,suppliers or partners in research anddevelopment. It comprises part of humanand structural capital involved with acompanys relations with stakeholders(investors, creditors, customers,suppliers), plus the perceptions that theyhold about the company (Belkaoui, 2003).Examples of this are image, customer

loyalty, customer satisfaction, links withsuppliers, commercial power, negotiatingcapacity with financial entities andenvironmental activities.

On the other hand, according to NikMuhamad N.M. et al. (2007), capitalemployed is defined as total capitalharnessed in a firms fixed and currentassets. Viewed from the funding side, itequals to stockholders funds (equitycapital) plus long-term liabilities (loancapital). However, if it is viewed from theasset side, it equals to fixed assets plusworking capital.

3.0 METHODOLOGY

Stewart (1997) defines intellectual capitalas the intellectual material knowledge,information, intellectual property,experience that can be put to use tocreate wealth. Conjunction to these, thisstudy is to measure the efficiency ofintellectual capital in order to appraise thegood intangible asset managementespecially in Malaysia banking sector.Intellectual capital can be determined ashuman capital, structural capital andcapital employed as was suggested byPulic (1998). Hence, Pulics (1998) wasintroduced Value Added IntellectualCoefficient (VAICTM) to measure theintellectual capital efficiency. VAICTMmethod used financial statements of afirm to calculate the efficiency coefficienton three types of capital.

Furthermore, the empirical studies ofintellectual capital have conducted suchas by Bontis (1998), Youndt (1998),Bontis et al. (2001), Shook (2002) andHayton (2002), provide some generalevidence that intellectual capital or acomponent of intellectual capital ispositively associated with measures ofvarious organizational performance.
http://www.businessdictionary/http://www.businessdictionary/


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Hence, Multiple Regression Models wasused as a tool to examine therelationships between intellectual capitaland firms performance. Firmsperformance for this study considers on

the Return on Asset value (ROA) whichmeasure the companys profitability.

Generally, there are two analysesaddress the research question in thisstudy. First, an analysis of efficiencyusing VAICTM model which evaluateintellectual capitals level Malaysiabanking sector. Second, investigatingintellectual capitals potential related tobusiness performance will indicateintellectual assets relative importance forperforming well in the banking sector.

VAICTM method was used in a first part ofanalyze the efficiency of companiesunder banking sector in Malaysia. Thehighest VAICTM is much preferable as itindicates the most efficiency of banks.VAICTM of companies can be calculatedusing the following steps.

3.1 Intellectual Capital EfficiencyThe first step, one should calculatevalue added, VAit of all resources of thefirm during period of time. The VAit iscalculated as follows;VAit= OUTPUTit - INPUTit (1)

Where,OUTPUTit = the total income from all theresources of the firm during period oftime

INPUTit = include all expenses(exception labor, interest, dividends,depreciation) incurred by firm at time .

VAit = is difference of output and input offirm at time . (Donaldson and Preston,1995).

On the other hand, Riahi-Belkaoui (2003)was suggested that value added can becalculated by (2)

Where: net sales revenueB = cost of goods sold (except labor,taxation, interest, dividends, depreciation)DP depreciation expenses employees salaries and wagesI interest expensesD dividend paidT taxes retain earnings

Then, substitute (2) into (1)

VAit=DPit + Wit + Iit + Dit + Tit + Rit(3)

Therefore, value added of firm at time can be considered as in (3).

Second step is one should calculatevalue added capital employed coefficient(VACAit),

(4)

Where CAit = Physical Assets + FinancialAssets

Third step is to calculate value addedhuman capital coefficient (VAHCit),

(5)

Where HCit = Investment in humancapital/total salary/wages including allincentives

Fourth step is to calculate value addedstructural capital coefficient (STVAit),

(6)

Where SCit = VAit - HCit

Fifth step is to calculate Value AddedIntellectual Coefficient (VAICit) as awhole,


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(7)

4.0 FINDINGS AND ANALYSIS

Based on the data collected from 13financial companys annual reports listedin Bursa Malaysia for the year 2010,frequency analysis was done on thecompanys efficiency. The variables ofhuman capital, structural capital andcapital employed are identified to providethe VAIC for each company. Thecompanies then will be ranked with thehighest value accordingly. The greatervalue of VAIC presented the bestcompanies of efficiency. These resultsmight influence the findings of the currentstudy in terms of their intellectual capitalefficiency and its relation to firmsperformance.

4.1 Intellectual Capital EfficiencyIn the earliest part for this research,determination of the most efficiencybanks in Malaysia can be measured bylooking at the highest VAIC. Inaccordance with that, the study showsthat MAA Holdings is the highestefficiency ranking of 20.86 followed byMBSB of 16.48 and AMMB of 13.85 aspresented in Table 1. With VAIC of 20.86,for every RM1 invested by MAA Holdings,RM20.86 is generated. Meanwhile, theleast efficient bank is Alliance with a VAICof 6.31, followed by BIMB and PublicBank.

MAA Holding appears the highestintellectual coefficient or VAICTM

represent the most efficient company inbanking sector. However, being efficientalone is not sufficient; bank must alsoshow that they have the capability tocreate value (Pek Chen Goh, 2005). The

value added that has been created byMAA Holding only RM1.7 billion which isranked at nine out of thirteen.Nevertheless, Maybank is at the fifth rankof efficiency became the largest bank in

terms of asset, net profit and shareholderequity, represented the highest valueadded of RM8 million, did not utilize itscapitals as efficiently as MAA Holding.This finding has also been shown instudies conducted by Pek Chen Goh(2005) and Pulic in Austria and Croatia(1997, 2001). The second ranked of valueadded was CIMB Bank created RM6million relatively with low efficiency levelof 7.55 and the third largest amount ofvalue was Public Bank created RM4million represented the last third rankedof efficiency.

VAICRAN

KBANK VAIC VA (RM) VA

RANK

1MAA

HOLDING20.86

1,764,022.18

8

2 MBSB 16.48 319,452.18 13

3 AMMB 13.854,024,129.3

64

4HONGLEONGBANK

8.792,097,023.7

37

5 MAYBANK 8.398,606,284.8

21

6AFFINBANK

8.251,696,301.5

59

7 CIMB 7.556,541,454.2

72

8 RHB CAP 7.443,663,451.0

95

9HL FNCL

GRP7.27

2,412,960.64

6

10 EON BANK 6.831,579,999.0

010

11PUBLIC

BANK6.57

4,086,821.3

63

12 BIMB 6.51 905,095.27 12

13ALLIANCE

BANK6.31

1,113,150.78

11

Table 1: Ranking of Banks in Banking Sectors

Differ from research did by Nik Maheranet al, she found that Public Bank has agreatest efficiency followed by Maybank,


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Affin Holdings Berhad and AMMBHoldings Berhad. Nevertheless, AMMBHoldings Berhad maintained at the thirdrank parallel with this research.Meanwhile the least efficient bank is

Malaysia Plt with VAIC of 3.47.

On the other hand, according to researchthat has been conducted by Pek ChenGoh (2005), the highest VAIC is earnedby Hong Leong Bank with 11.36 points,followed by Maybank with 8.81, PublicBank with 8.41 and Southern with 7.53points. These four banks were the mostefficient domestic banks in the year 2003.

5.0 CONCLUSION ANDRECOMMENDATION

From the research, it shows that theposition of banks in Malaysia are remainchanges year by year and did not holdthe same position of VAIC. This is may bedue to performance achievement bybanks that varies each year.Nevertheless, some banks like HongLeong, Maybanks and AMMB HoldingsBerhad, which are normally leads theranking keep maintain in the top fivepositions.

In investigating the firms efficiency basedon the value added, it can be concludedthat MAA Holding was at the top rank andthe most efficient bank. MBSB is thesecond place while the third is AMMB.Among thirteen banks under research,Public Bank, BIMB Bank and AllianceBank were at the bottom ranks.

Intellectual capital has become theimportant elements of value creation.Investors nowadays are more observantand attentive to the performance of theirpotential companies listed. Investorsneed non-financial disclosure besides the

traditional financial measures to assistthem in their investment decision-making.In other word, companies need to investin IC to stand for the gain. The financefunction has a key role to play in

managing knowledge assets andappreciating the source of firms value(Irene W.K.T and Hooi H.L, 2009)

REFERENCES

Books

Naresh K.Malhotra (2004) Marketingesearch: An Applied Orientation,Fourth Edition, Pearson Prentice Hall.

Journals

Abdul Latif, S. and Fauziah, S. (2007),Intellectual capital management inMalaysian public listed companies,International Review of BusinessResearch Paper, Vol. 3 No. 1, March,pp. 266-78.

Belkaoui, A.. (2003), Intellectual capitaland firm performance of USmultinational firms, Journal ofIntellectual Capital, Vol. 4 No. 2, pp.215-26.

Bontis, N. (1998), Intellectual capital: anexploratory study that developsmeasures and models, ManagementDecision, Vol. 36 No. 2, pp. 63-76.

Bontis, N., Keow, W.C.C. andRichardson, S. (2000), Intellectualcapital and business performance inMalaysian industries, Journal ofIntellectual Capital, Vol. 1 No. 1, pp.85-100.


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Derek S., Human capital concept -definition and explanation, available atwww.citehr.com

Edvinsson, L. and Malone, M. (1997),

Intellectual Capital: Realizing yourCompanys True Value by Finding itsHidden Brainpower, Harper Collins,New York, NY.

Firer, S and Williams, M. (2003),Intellectual capital and traditionalmeasures of corporate Performance,Journal of Intellectual Capital Vol 4, No3, 348-60

Itami, H. (1987), Mobilizing InvisibleAssets, Harvard University Press,London.

Irene W.K.T and Hooi H.L (2009),Intellectual Capital Performance ofFinancial Instituitions in Malaysia,Journal of Intellectual Capital, Vol 10No 4

Kin Gan and Zakiah S. (2008), IntellectualCapital and Corporate Performance ofTechnology-Intensive Companies:Malaysia Evidence, Asian Journal ofBusiness and Accounting, 1(1), 113-130, ISSN 1985-4064

Kok, A (2007) Intellectual CapitalManagement as Part of KnowledgeManagement Initiatives at Institutionsof Higher Learning The ElectronicJournal of Knowledge ManagementVolume 5 Issue 2, pp 181 - 192 ,available online at www.ejkm.com

Low, J. and Kalafut, P.C. (2002), InvisibleAdvantage - How Intangibles areDriving Business Performance,Perseus Publishing, Cambridge.

Mavridis, D.G. (2004), The intellectualcapital performance of the Japanesebanking sector, Journal of IntellectualCapital, Vol. 5 No. 1, pp. 92-115.

Nik Muhammad, N.K and Amin Ismail,M.K. (2009), Intellectual CapitalEfficiency and Firms performance:Study on Malaysian Financial Sectors,International Journal of Economics andFinance, Vol 1, No 2

Nik Muhammad, N.K., Nik Ismail, N.Rand Md Isa, F. (2007), IntellectualCapital Efficiency Level of MalaysianFinancial Sector: Panel Data Analysis(2002-2006),

Pulic, A. (1998), Measuring theperformance of intellectual potential inknowledge economy

Pulic, A. (2001), Value creation efficiencyanalysis of Croatian banks 1996-2000,available online at www.vaic-on.net(accessed 8 June 2004).

Pulic, A. (2002a), National IC-efficiencyreport of Croatian economy, availableat: www.vaic-on. net (accessed 8 June2004).

Pulic, A. (2002b), Do we know if wecreate or destroy value? available at:www.vaic-on.net (accessed 8 June2004).

Shiu, H, (2006), The Application of theValue Added Intellectual Coefficient tomeasure Corporate Performance:Evidence from Technological Firms,International Journal of Management,Vol 23, No 2, 356-365

Stewart, T.A. (1997), Intellectual Capital:The New Wealth of Organisation,Nicholas Brealey, London.


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Youndt, M.A et. al. (2004), IntellectualCapital Profiles: An Examination ofInvestments and eturns, Journals ofManagement Studies, Vol 41 No 2, pp.

335-61

Websites

http://www.bursamalaysia.com.my

http://www.businessdictionary.com

http://www.mida.gov.my/en_v2/index.php?page=banking-system

http://www.vaic-on.net

APPENDIX

Table 2: Result from the analyzing using VAICTM

VAICRANK

BANK VAIC VACA VAHC STVA VAVARAN

1MAA

HOLDING

20.86

0.283417449 20.170409 0.947912

1,764,022.18 8

2 MBSB 16.48 0.13986 15.41751 0.92178 319,452.18 13

3 AMMB 13.85 0.07862 12.78981 0.98253 4,024,129.36 4

4HONGLEONGBANK

8.79 0.04368 7.87705 0.86636 2,097,023.73 7

5 MAYBANK 8.39 0.05184 7.41061 0.92312 8,606,284.82 1

6 AFFIN BANK 8.25 0.05977 7.27168 0.92289 1,696,301.55 9

7 CIMB 7.55 0.05655 6.59086 0.90563 6,541,454.27 2

8 RHB CAP 7.44 0.04696 6.55306 0.83571 3,663,451.09 5

9

HL FNCL

GRP 7.27 0.04791 6.38709 0.84159 2,412,960.64 610 EON BANK 6.83 0.04126 5.96294 0.82548 1,579,999.00 10

11PUBLICBANK

6.57 0.04205 5.71191 0.81922 4,086,821.36 3

12 BIMB 6.51 0.05613 5.60045 0.85567 905,095.27 12

13ALLIANCE

BANK6.31 0.04828 5.46045 0.80399 1,113,150.78 11

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