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Available online at [Link]

Borsa _Istanbul Review

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Borsa Istanbul Review xxx (xxxx) xxx
[Link]

Intellectual capital efficiency and bank performance: Evidence from islamic

banks
Aziz Ur Rehman a, Ejaz Aslam b,*, Anam Iqbal a
a
IIUM Institute of Islamic Banking and Finance (IIiBF), IIUM, Jalan Gombak, 53100, Malaysia
b
School of Islamic Economics, Banking & Finance, Minhaj University, Minhaj Ul Quran University Rd, Township Twp Commercial Area Lahore, Punjab, 54770,
Pakistan
Received 3 February 2020; revised 12 February 2021; accepted 16 February 2021
Available online ▪ ▪ ▪

Abstract

The purpose of this study is to shed light on the extent of intellectual capital efficiency (ICE) and the relationship of its three components
(human capital efficiency, structural capital efficiency, and relational capital efficiency) with Islamic banking performance (in terms of return on
assets, return on equity, and Tobin's q) in Muslim countries. We develop hypotheses on this relationship drawing on the resource-based theory.
The study employs a two-step system generalized method of moments (2SYS-GMM) estimator to analyze the data collected from 129 Islamic
banks in 29 Muslim countries over the period from 2008 to 2017. The study provides evidence that the performance of Islamic banks (IBs) is
driven primarily by investment in ICE. The results indicate that structural capital efficiency (SCE) and relational capital efficiency (RCE) are the
essential drivers of value in achieving high performance at Islamic banks. The results reveal that human capital efficiency (HCE) negatively
affects the performance of IBs. Bank size and foreign ownership are also identified as significant drivers of IBs performance. This study helps
IBs to maintain their ICE assets because they are the main drivers for sustaining competitive advantage as well as raising bank productivity. Our
findings can help stakeholders and policymakers to recognize the significant components of ICE and a reasonable allocation among them for
improving bank performance. To the best of our knowledge, this is the first empirical study to evaluate ICE and its relationship with Islamic
banking performance in 29 Muslim countries across the Middle East, South Asia, and Southeast Asia.
_
Copyright © 2021, Borsa Istanbul Anonim Şirketi. Production and hosting by Elsevier B.V. This is an open access article under the CC BY-NC-
ND license ([Link]

Keywords: Bank performance; Intellectual capital efficiency; Muslim countries; 2SYS-GMM

1. Introduction banks to develop their IC in order to enhance their value

(Alhassan & Asare, 2016). IC has become one of the main
Greater globalization has transformed international banking factors of banking performance (Hamdan, 2018), and this
into a knowledge industry (Oppong & Pattanayak, 2019), an phenomenon has made the concept of IC popular in Islamic
industry that has progressively acknowledged intellectual banking. According to the resource-based view (RBV), human
capital (IC) as a vital component of achieving corporate capital, structural capital, and relational capital are the main
competitiveness and financial sustainability (Xu & Wang, sources of IC (Oppong & Pattanayak, 2019).
2018). The driver of this awareness is a series of challenges Islamic banking is the fastest-growing segment in the
in knowledge-based corporate settings that have persuaded global financial industry. According to the Islamic Finance
Development Report (2020), Islamic banking and finance grew
at a rate of 14e20 percent during the period of 2010e2018,
* Corresponding author. and at the end of 2019 total assets held by Islamic banks (IBs)
E-mail addresses: [Link]@[Link] (A. Ur Rehman), increased to US$2.88 trillion. In addition to this significant
ejazaslam95@[Link] (E. Aslam), iqbalanam833@[Link] (A. Iqbal). growth, Islamic banking has a competitive environment, which
_
Peer review under responsibility of Borsa Istanbul Anonim Şirketi.

[Link]
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2214-8450/Copyright © 2021, Borsa Istanbul Anonim Şirketi. Production and hosting by Elsevier B.V. This is an open access article under the CC BY-NC-ND
license ([Link]
Please cite this article as: A. Ur Rehman, E. Aslam and A. Iqbal, Intellectual capital efficiency and bank performance: Evidence from islamic banks, Borsa
_
Istanbul Review, [Link]
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forces IBs to be more knowledge intensive, and this, in turn, 2. Literature review and hypothesis development
means leads to greater use of intellectual capital (Amina,
Mohammed, Sameh, Sherine, & Araby, 2020). In Muslim IC is a dynamic set of resources that create a competitive
countries, IBs are more concerned about operating in a way advantage for a firm to improve its performance (Xu & Wang,
that adheres to Shariah (Islamic) law, rather than about 2018). The components of IC efficiency were first developed
achieving real financial outcomes (Aslam, Ahmad, Amin, by Edvinsson and Malone (1997) in the Skandia model. This
Usman, & Arif, 2018). As financial intermediaries, IBs play model consists of four main elements; human, process,
an essential role in the redistribution of assets from those customer, and development (Abdul Rashid, Kamil Ibrahim,
with a surplus to those in deficit (Hamdan, 2018). Hence, Othman, & Fong See, 2012). Later on, it was divided further
bank tasks rely on creativity, offering edge products and into investors, suppliers, and locations as external factors for
providing exceptional services that demand unique intellec- capital (Pearse, 2009). In early studies, human capital and
tual resources in the competitive banking environment structural capital received attention as part of creating firm
(Aslam & Haron, 2020c). value (Alhassan & Asare, 2016; Rehman, Usman & Asghar,
Several empirical studies have found evidence that IC is a 2012; Syah & Kurniasih, 2015). Over the past two decades,
significant factor in organizational production, performance, scholars reached a consensus that human capital efficiency
and efficiency (Alhassan & Asare, 2016; Aslam et al., 2018; (HCE), structural capital efficiency (SCE), and relational
Birindelli, Ferretti, & Chiappini, 2019; Jetmiko, 2018). In capital efficiency (RCE) are the main components of IC
addition, IC creates competitive advantages in the banking (Aslam et al., 2018; Haris et al., 2019; Jamei, 2017; Jetmiko,
industry (Mondal & Ghosh, 2012). Despite the theoretical and 2018; Khairiyansyah & Vebtasvili, 2018; Nawaz, 2019;
empirical links between IC and performance (Aslam et al., Rehman et al., 2012; Rochmadhona, Suganda, & Cahyadi,
2018; Hamdan, 2018; Singh & Narwal, 2015), to the best of 2018; Singh & Narwal, 2015; Tahir, Shah, Khan & Afridi,
our knowledge, few studies have explored the link between IC 2018; Widowati & Pradono, 2017).
and bank productivity (Haris, Yao, Tariq, Malik, & Javaid,
2019; Nawaz, 2017), especially in IBs. As banks offer 2.1. Human capital efficiency (HCE)
ethical/cooperative financial services to the community, they
are expected to be more innovative in providing banking so- Human capital efficiency is the primary component of IC
lutions, which can drive the industry to greater progress and efficiency and helps organizations to sustain their competitive
expansion. Therefore, it is important to study IC at IBs advantage (Alhassan & Asare, 2016; Bontis & Serenko, 2009;
because they are considered highly knowledge-intensive Duho & Onumah, 2019). Zeghal and Maaloul (2010) state that
financial organizations. HCE represents knowledge, experience, education, and the
Given this background, this study contributes to the skills of employees, which they take with them when they
literature as follows. First, we provide evidence on the leave a firm. Several economists have acknowledged that HCE
relationship between IC and performance by IBs in Muslim is a significant part of national wealth, and the quality of work
countries in the Middle East, South Asia, and Southeast Asia. can be improved by investing in human capital because it is
Most prior studies focus on nonfinancial industries in the most vital source of economic growth (Alamanda, 2019;
developed countries. Thus, our findings extend understanding Al-Musali & Ku Ismail, 2015; Hamdan, 2018).
of IC in value creation in the Islamic banking industry. According to the Organization for Economic Cooperation
Second, we introduce relational capital (RC) to our research and Development (OECD) (1996), HCE is the primary driver
model, which has been neglected in most previous IC studies. of national economic activity, competitiveness, and prosperity.
Third, this study employs a 2SYS-GMM estimation tech- Moreover, Dotzel et al. (2013) believe that it corresponds
nique to account for unobserved heteroskedasticity and directly to the propensity for service innovativeness to satisfy
endogeneity in the panel data. Moreover, this study uses customer needs and improve firm value. Therefore, Alhassan
hierarchical estimation in which IC variables are added to the and Asare (2016) find that productivity and creativity can be
model sequentially to help shed light on the importance of enhanced by investing in employee training. Several prior
investment in bank IC in order to raise bank productivity. studies consider HCE a primary source of organizational
Finally, our analysis aims to enhance the role of IC in growth (Haris et al., 2019; Nawaz, 2019; Oppong &
improving IB productivity and provide useful guidance for Pattanayak, 2019; Syah & Kurniasih, 2015; Widowati &
bank managers on how to use IC resources effectively and Pradono, 2017). A positive relationship is found between
efficiently in Muslim countries. HCE and firm performance in Malaysia by Hashim et al.
The remainder of this study proceeds as follows. Section 2 (2018) and Jetmiko (2018), in Indonesia by Widowati and
reviews the literature and develops our hypotheses. The Pradono (2017), in Pakistan by Rehman et al. (2012), in
methods adopted in carrying out the research are presented in Africa by Alhassan and Asare (2016), in Saudi Arabia by
Section 3. The results are reported and discussed in Section 4, Hamdan et al. (2017), in Australia by Aslam et al. (2018), and
and Section 5 concludes the study. in India by Singh and Narwal (2015). Furthermore, Widowati

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and Pradono (2017) suggested that bankers who control their Hypothesis 3. Islamic banks with greater RCE tend to have
skills and capabilities in terms of business can increase bank higher performance.
value. Based on the relationship between HCE and perfor-
mance, we formulate the following hypothesis:
3. Research methodology
Hypothesis 1. Islamic banks with greater HCE tend to have
higher performance. 3.1. Study sample and data collection

The purpose of this study is to examine the relationship

2.2. Structural capital efficiency (SCE)
between intellectual capital efficiency (HCE, SCE, RCE) and
performance (ROA, ROE, TQ) at 129 Islamic banks in 29
SCE is knowledge that remains with a firm even after an
Islamic countries in the Middle East, South Asia, and South-
employee has left it (Poh, Kilicman, & Ibrahim, 2018). Aslam
east Asia, and the results are shown in Supplementary Table
and Haron (2020c) state that SCE is the result of past
S1, available online. The sample period of the study is
performance by human capital. Hence, Nawaz (2017)
2008e2017, which was selected based on the initiation of IBs
determines that SCE is nonhuman knowledge, which in-
in most Muslim countries. The data come only from
cludes organizational charts, databases, process manuals,
full-fledged Islamic banks and Islamic windows that provided
routines, strategies, and other things with a value that exceeds
complete information about their intellectual capital and
its material value. A study by Aslam et al. (2018) on
financial output during the sample period, not banks that
Australian banks finds that SCE is less influential than the
opened after 2010 or closed during the sample period.
other determinants of ICE. In contrast, Joshi, Cahill, & Sidhu
The financial data related to ICE and performance were
(2010) observe that SCE is positively related to financial,
obtained from Bankscope, with any missing data collected
operational, and stock returns. Several prominent studies also
from annual reports, balance sheets, income statements, and
find that SCE is significantly related to performance (Haris
cash-flow statements from the respective IB. All the annual
et al., 2019; Jetmiko, 2018; Khalique et al., 2011; Nawaz,
statements were available on the banks’ official websites from
2017; Poh et al., 2018; Rochmadhona et al., 2018). Based
2008 to 2017. Moreover, all the data are measured in millions
on the results in various studies, as discussed above, we
of US dollars. Several prior studies have used similar data for
formulate the following hypothesis:
this type of research (Aslam et al., 2016; Mahmood, Khan,
Hypothesis 2. Islamic banks with greater SCE tend to have Ijaz & Aslam, 2014; Nawaz, 2019; Shabbir et al., 2020).
higher performance.
3.2. Variable description
2.3. Relational capital efficiency (RCE)
Table 1 describes the key research variables in our exami-
RCE provides the infrastructure and necessary resources for nation. Performance of the IBs was measured through the
HCE and SCE to make the best use of resources in order to return on assets (ROA) for operational performance, return on
increase overall firm performance (Widowati & Pradono, equity (ROE) for financial performance, and Tobin's q for
2017). Moreover, organizations create the highest value market performance (Aslam et al., 2019; Aslam & Haron,
through the best combination of HCE, SCE, and RCE 2020b). ICE consists of HCE, SCE, and RCE is examined
(Basyith, 2016). Nowadays, the banking industry relies largely with a set of bank-specific and country-specific control
on stable and long-lasting relationships with their clients, variables (Aslam & Haron, 2020b). The control variables were
which is enabled by having a large number of employees at a used to isolate the effects of other factors that have a
firm (Rochmadhona et al., 2018). predictable influence on the performance of IBs. Bank size
RCE is the knowledge embedded in relationships with (BSIZE) is calculated as the natural logarithm of total bank
shareholders, stakeholders, suppliers, and industry associa- assets and is likely to have a positive impact on bank
tions that influences the firm directly and indirectly to create performance because of the scale difference in the cost of
value in the market (Oppong & Pattanayak, 2019). Basyith compliance, regulations, and operations (Alamanda, 2019;
(2016) finds that at Iranian companies SCE is not signifi- Nawaz, 2019). Leverage is calculated as the ratio of debt over
cantly related to financial performance. Many other studies, equity. The leverage ratio is significant for financing and
however, observe that RCE is the most influential element of operations, and it provides a better signal of a bank's solvency,
ICE and helps to create high firm value in a competitive the ability to repay its debts (Aslam et al., 2020).
environment (Aslam et al., 2018; Rochmadhona et al., 2018; The ratio of nonperforming loans ratio (NPLR) is used to
Singh & Narwal, 2015). Furthermore, Rochmadhona et al. forecast a bank's likelihood of credit risk. Market share (MKS)
(2018) indicate that the survival of a firm depends on its is measured as the share of assets at each IBs to total bank
ability to innovate and obtain customer service and organiza- assets. Foreign ownership (FOWN) is calculated as follows:
tional intelligence. Based on the discussion above, we ownership by a foreign firm in an IB takes a value of one and
formulate the following hypothesis: zero otherwise. FOWN is likely to have a positive impact on

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 A. Ur Rehman, E. Aslam and A. Iqbal
Table 1
Description of the variables.
Numbers Variables Codes Definition References Data Source
1 Bank Profitability Indicators
Return on Assets ROA Ratio of operating income over assets (Aslam, E., Haron, R. (2020a); Nawaz, 2017) Bankscope
Return on Equity ROE Ratio of operating income over equity (Mahmood et al., 2014) Bankscope
Tobin's q TQ Ratio of the market value of a company divided by its assets (Aslam et al., 2019; Amina et al., 2020) Bankscope
2 Intellectual Capital (Independent)
Human Capital Efficiency HCE Ratio of value-added divided by human capital. Where: (Aslam & Haron, 2020b; Rochmadhona et al., 2018) Bankscope &Annual
the value added ¼ gross income- operating expenses. statement
Where the human capital ¼ total expenses related to employees
Structural Capital Efficiency SCE Ratio of value-added divided by structural capital. Where: the (Oppong & Pattanayak, 2019; Rochmadhona et al., 2018) Bankscope &Annual
value added ¼ gross income- operating expenses. statement
Where the structural capital ¼ total expenses related to research

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Bankscope &Annual
4

Relational Capital Efficiency RCE Ratio of value-added divided by relational capital. Where: (Nawaz, 2019; Rochmadhona et al., 2018)
the value added ¼ gross income- operating expenses. statement
Where the relational capital ¼ total expenses related to marketing
3 Bank Characteristics (Controls)
Bank Size LNTA Natural log of total corporate assets (Aslam, Azam, & Iqbal, 2020; Tahir, H., Hussain, S., Bankscope
Iqbal, A., Aslam, E., & Masri, R. (2020))
Total debt to Equity DE The proportion of total debt over equity (Hamdan, 2018; Jetmiko, 2018) Bankscope
Non-performing Loan NPLR Ratio of non-performing loan to net loans Aslam and Haron (2020c) Bankscope
Market Share MKS It is the share of assets of each bank to total banks assets (Hashim et al., 2017; Jetmiko, 2018) Bankscope
Foreign Ownership FOWN Dummy variable: One if foreign organizations have an (Aslam & Haron, 2020a,b) Bankscope
ownership in the local
Islamic bank and zero otherwise.
Year Dummy YDUM One for each of the 10 years from 2008 to 2017. Aslam and Haron (2020c) Self
4 Macro-Economic (Controls)
(Alhassan & Asare, 2016; Hamdan, 2018)

Borsa Istanbul
Inflation CPI Natural log of a consumer price index World bank indicator
Country Growth GDP Natural log of total gross domestic product (Haris et al., 2019; Mahmood et al., 2014) World bank indicator

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bank performance because the presence of foreign-owned TQ is Tobin's q, ICE is intellectual efficiency measured by
banks creates more avenues for investment and making three proxies (HCE, SCE, RCE), X is a set of control variables
profits (Ejaz & Razali, 2020a). Country growth is measured in consisting of six proxies (TA, DE, NPLR, MKS, FOWN, INF,
terms of the gross domestic product (GDP). A high rate of GDP, and YEAR and COUNTRY dummy), and ε is the error
GDP growth indicates that the economy is strong and low term.
GDP growth indicates a weak economy. High GDP growth
shows that firm performance is extraordinary (Jetmiko, 2018). 3.4. Description of the data
Inflation is measured as changes in the average consumer price
index (CPI). Increases in the CPI reduces consumer purchas- Supplementary Table S2, available online, reports the
ing power, which has a direct impact on bank performance descriptive statistics of the full sample, which consists of 1290
(Aslam & Haron, 2020b). In addition, we add dummy observations. The results show that the mean of ROA is 5.1
variables to control for time and industry effects. This study percent, which is higher than the results for IBs found by
used year and country as dummy variables to reflect macro- Almutairi and Quttainah (2017) and Khan, Khan, & Tahir
economic conditions, such as the business cycle and market (2017). The standard deviation (SD) of ROA is 5.8 percent,
fluctuations (Misman & Bhatti, 2020). the minimum is 20 percent, and the maximum is 112
percent. The mean of ROE is 34.4 percent, which is slightly
3.3. Model specification and econometric tool lower than 44 percent as found by Khan et al. (2017). The SD
of ROE is 39 percent, and the minimum and maximum are
We employed a 2SYS-GMM estimator, constructed to 22 percent and 330 percent, respectively. The mean of TQ is
measure the sensitivity of bank performance. We applied this 65.4 percent, which is lower than 98 percent as found by
technique, developed by Blundell and Bond (1998), for several Amina et al. (2020). The SD of TQ is 16 percent, and the
reasons. First, the ordinary least squares method ignores the minimum and maximum are 32 percent and 189 percent,
panel structure of the data (Aslam et al., 2019). Second, a respectively.
time-invariant parameter cannot be estimated with fixed-effect Among the ICE variables, the mean of HCE is 1.03, the SD
methods. Third, this method is suitable because it reduces the is 2.67, the minimum is 1.91, and the maximum is 23.47.
effect of the high persistence of corporate governance The mean of SCE is 2.09, the SD is 5.21, and the minimum
attributes and controls for endogeneity bias by including the and maximum are 1.17 and 14.76, respectively. The mean of
lagged value of regressors and addresses potential hetero- RCE is 0.543, the SD is 1.547, and the minimum and
skedasticity problems (Aslam & Haron, 2020a; Mollah, maximum are 3.49 and 23.47, respectively. Overall, the
Hassan, Al Farooque, & Mobarek, 2017; Nomran, Haron, & mean shows that IBs prefer to invest more in their structure.
Hassan, 2018). In addition, for each coefficient, we conduct- Among the control variables, the mean of the log of total
ed a Hansen test of the instrument's validity and first- and assets is 6.89, and the minimum and maximum are 3.54 and
second-order serial correlation tests. The null hypothesis of the 11.42, respectively. The average value of the ratio of debt to
Hansen test is that the instruments are valid, and the error term equity (DE) is 7.35, the SD is 7.41, and the minimum and
is different for all models. Additionally, the high p-value of maximum are 2.867 and 24.70, respectively. These results
AR (1) and AR (2) show that the disturbances are not serially show that IBs have a high DE ratio. The mean of IBs’ market
correlated in all the models. Furthermore, we used a hierar- share is 5 percent, and the minimum and maximum market
chical estimation procedure in which (HCE, SCE, RCE) share are 0.7 percent and 62 percent, respectively. Hence, the
variables were added to the model sequentially. This method average mean of nonperforming loans (NPLR) is 1.7, and the
enabled us to identify the individual impact of ICE minimum and maximum are 0.25 and 316, respectively. The
components as well as their collective impact on IBs perfor- mean foreign ownership of IBs is 20.9 percent, and minimum
mance. To examine the effect of corporate governance on IBs and maximum are 0 and 1 percent, respectively. With respect
performance (H1eH3), we constructed the following regres- to the macroeconomic variables, the average mean of inflation
sion models. is 4.74, the SD is 0.26, and the maximum is 5.97. The average
GDP is 27.91, the SD is 3.81, and the minimum and maximum
X
3 X
8
are 22.87 and 36.83, respectively.
ROAit ¼ a þ ROAit1 þ B1 ICEit þ B2 Xit þ εit ð1Þ
k L
3.5. Correlation matrix and multicollinearity
X
3 X
8
ROEit ¼ a þ ROEit1 þ B1 ICEit þ B2 Xit þ εit ð2Þ Supplementary Table S3, available online, displays the
k L correlation matrix, which illustrates the patterns of association
between the explanatory variables defined in Equations
X
3 X
8
(1)e(3). The highest correlation is found between SCE and
TQit ¼ a þ TQit1 þ B1 ICEit þ B2 Xit þ εit ð3Þ
k L
HCE (0.7555), and the lowest association between the market
share and nonperforming loans (0.0006). As mentioned by
where a is the intercept, i and t are IB and years, respectively. Gujarati (2009), no concern arise concerning collinearity
ROA is the return on assets, ROE is the return on equity, and among the correlation coefficients because all the coefficients
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 A. Ur Rehman, E. Aslam and A. Iqbal
Table 2
2SYS-GMM estimation.
Variable Model ROA Model ROE Model TQ
1 2 3 4 1 2 3 4 1 2 3 4
L1. Return on asset 0.1332*** 0.1435*** 0.1297*** 0.1522***
L1. Return on equity 0.9526*** 0.8452*** 1.0231*** 1.05313***
L1. Tobin's q 0.0231*** 0.0341*** 0.0309*** 0.0276***
Human capital efficiency 0.0026*** 0.0105*** 0.0331*** 0.0492*** 0.00245*** 0.0231
Structural capital efficiency 0.0035*** 0.0035*** 0.0512*** 0.03448*** 0.0129*** 0.0025***
Relational capital efficiency 0.0042*** 0.0051*** 0.0143*** 0.0065*** 0.0169*** 0.0132***
log of total assets 0.0015*** 0.0018*** 0.0014*** 0.0019*** 0.0046*** 0.0042** 0.0038*** 0.0016* 0.0004 0.0004 0.0014** 0.0001
leverage 0.0017*** 0.0018*** 0.0019*** 0.0014*** 0.0077*** 0.0109*** 0.0027*** 0.0025*** 0.0003* 0.0005*** 0.0007*** 0.0001

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Non-performing loans 0.0001*** 0.0000*** 0.0000*** 0.0000*** 0.0001*** 0.0001*** 0.0001*** 0.0001*** 0.0000*** 0.0000*** 0.0000*** 0.0000***

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Market share 0.0121*** 0.0145*** 0.0055** 0.0135*** 0.0550*** 0.0491** 0.0877*** 0.1264*** 0.0070*** 0.0076*** 0.0263*** 0.0174***
Foreign ownership 0.0040*** 0.0047*** 0.0082*** 0.0067*** 0.0185*** 0.0295*** 0.0195*** 0.0251*** 0.0103*** 0.0088*** 0.0041 0.0067***
inflation 0.0223*** 0.0214*** 0.0173*** 0.0279*** 0.0076 0.0242** 0.0218 0.0169** 0.0052* 0.0052* 0.0159*** 0.0043***
Gross domestic product 0.0007*** 0.0008*** 0.0012*** 0.0008*** 0.0007* 0.001 0.001 0.0005 0.0010*** 0.0010*** 0.0003 0.0002***
Constant 0.0492*** 0.0578*** 0.0133* 0.0929*** 0.0341** 0.0925*** 0.1251* 0.0423*** 0.0235* 0.0543*** 0.0133** 0.0426***
Country dummy Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Country dummy Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
N. of observations 1104 1080 1080 1077 1077 1080 1011 1011 1101 1104 1065 1045
AR (1) test statistics (p-value) 0.2835 0.288 0.2838 0.2859 0.0045 0.0034 0.0056 0.0063 0.0552 0.0947 0.0655 0.0398
AR (2) test statistics (p-value) 0.2617 0.3432 0.3257 0.2811 0.4778 0.5196 0.3415 0.3473 0.9862 0.3046 0.333 0.7593
Hansen test (p-value) 0.18281 0.0053 0.199 0.1689 0.3224 0.2004 0.3172 0.148 0.345 0.129 0.4629 0.2326
Note: *, **, ***denote statistical significance at the 0.1, 0.05, and 0.001.

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are less than 0.80. In addition, we calculated the variance banks that aim to improve efficiency. Thus, our results infer
inflation factor (VIF) to detect the presence of multi- that RCE enhances IB profitability because the banks are still
collinearity. If an independent variable in a model has a VIF at an introductory stage, so they need to invest more in rela-
that is more than or equal to 10, it indicates the presence of tional capital in order to build strong relationships in the
multicollinearity in the model (Wooldridge, 2005). As shown market and society. As a result, when people understand more
in Table 3, the VIF of all variables is less than ten, so this about Islamic banking and its Shariah compliance, then they
study has no multicollinearity problems. will be more inclined to use it. So, RCE directly boosts the
value of IBs.
4. Results and discussion Among the control variables, bank size has a positive and
significant relationship with bank performance, consistent
Table 2 lists the results of our 2SYS-GMM estimation for with the findings of Alhassan and Asare (2016). Bank
the ROA, ROE, and TQ models. We employed a hierarchical leverage has a negative and significant relationship with
estimation technique in which the ICE variables are included ROA and TQ, but it has a positive and significant relationship
in the model consecutively. Columns 1 to 3 report the results with ROE. Our results are similar to those of Aslam and
with one variable for ICE, and the last column indicates the Haron (2020c), who state that higher debt has a detri-
results with all the ICE variables. The signs of the coefficient mental effect on the profitability of IBs. NPLR have a
of lagged ROA, ROE, and TQ have a positive and statistically negative and significant relationship with IB performance.
significant relationship with current performance in terms of Our results indicate that higher NPLR have a detrimental
ROA, ROE, and TQ of IBs in all the models. The results are effect on bank performance. Market share has a positive and
consistent with the findings of Aslam and Haron (2020a), significant relationship with all IB performance variables.
which indicate that current profitability significantly depends These results support the findings of Aslam and Haron
on the profitability of IBs in the prior year. The null hypothesis (2020a) in Organization of Islamic Cooperation member
is rejected in the Hansen test for all the models, which means countries, which means that a larger IB market share helps to
that the instruments are valid. Additionally, AR (2) indicates enhance bank performance. Foreign ownership has a positive
the absence of autocorrelation problems in all the models. and significant relationship with ROA but a negative and
With respect to the ICE variables, the results in column 1 of significant relationship with ROE and TQ. These results
all the models show that HCE has a positive and significant indicate that foreign ownership of IBs plays a decisive role in
relationship with ROA, ROE, and TQ. The results support the raising their profitability. Moreover, inflation has a positive
arguments of Haris et al. (2019), Jetmiko (2018) and Nawaz and significant impact on ROA and TQ, indicating that a high
(2017), who believe that HCE is a significant factor in rate of inflation enhances IBs' operational and market per-
enhancing IB performance. In contrast, the results in column 4 formance. Furthermore, GDP has a positive and significant
indicate that HCE has a negative and significant relationship relationship with ROA and TQ, as in the findings of Mollah
with IB performance in terms of ROA and ROE. This result is et al. (2017). This result implies that high GDP indicates
consistent with Alhassan and Asare (2016) and Deep and Pal higher growth in the country, and this helps to enhance IBs’
Narwal (2014), who argue that HCE has a negative effect on operational and market performance.
firm performance. This negative relationship suggests that IB
employees lack the skills and capabilities to perform their 5. Conclusion
duties in a way that will generate higher profit.
The results in column 2 demonstrate that SCE is positive This study examines the impact of ICE on performance in
and has a significant relationship with ROA and TQ, but it has Islamic banking. To accomplish its objective, this study uses
a negative and significant relationship with ROE. Hence, in ICE and bank-specific variables, with an extensive data set on
column 4, SCE remains positive and has a significant 129 IBs in 29 Muslim countries in the Middle East, South
relationship with all IB performance indicators in terms of Asia, and Southeast Asia. Panel data were collected from Bank
ROA, ROE, and TQ. This result is consistent with Alhassan Scope and annual reports over ten years (2008e2017). The
and Asare (2016), Hamdan (2018), and Jetmiko (2018), who focus is on ICE measures such as HCE, SCE, and RCE. The
argue that SCE has a significant impact on firm performance. study adopts a hierarchical 2SYS-GMM estimation technique
Hence, these results suggest that if IBs invest more in their to analyze the impact of ICE on various measures of perfor-
hierarchy and structure in a way that enhances innovation and mance, including ROA as operational performance, ROE as
development, it will play a significant role in boosting bank financial performance, and TQ as market performance.
profitability. First, we analyze the individual influence of all the ICE
The results in column 3 show that RCE has a positive and components on bank performance. The study finds that all
significant relationship with ROA and TQ, but a negative and three components of ICE have a meaningful impact on the
significant relationship with ROE. However, column 4 clearly operational and market performance of Islamic banks. This
shows the positive and significant relationship with all IB result shows the significance of ICE in improving the perfor-
performance variables. The results are in line with the findings mance of IBs, consistent with the findings of Alhassan and
of Hashim, Osman, & Alhabshi (2017) and Khalique, Shaari & Asare (2016) and Jetmiko (2018). In shedding light on the
Isa (2011). They state that RCE is an important factor for influence of all IC components on IBs’ performance, it is
7
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A. Ur Rehman, E. Aslam and A. Iqbal _

Borsa Istanbul Review xxx (xxxx) xxx

evident that SCE and RCE are the main factors in improving corporate social responsibility disclosure. Pakistan Journal of Commerce
this performance. This provides evidence that, to improve their and Social Sciences (PJCSS), 12(1), 283e308.
Aslam, E., Azam, K. M., & Iqbal, A. (2020). The risk analysis of Sukuk: An
performance, IBs in Muslim countries need to invest more in empirical evidence from pakistan. JKAU: Islamic Economics, ˙ 34(1),
structural capital and relational capital. Hence the results are 25e43.
in line with the principles of the resource-based view, that is, Aslam, E., & Haron, R. (2020a). Does corporate governance affect the per-
unique resources, and strong relations help to build competi- formance of islamic banks? New insight into islamic countries. Corporate
tive advantage and generate high value for the banks. Governance: The Intertnational Journal of Business in Society, 20(6),
1073e1090.
This study is beneficial for managers of IBs by showing Aslam, E., & Haron, R. (2020b). The influence of corporate governance
that they need to maintain ICE resources because they are the on intellectual capital efficiency: Evidence from islamic banks of
main drivers of competitive advantage as well as improvement OIC countries. Asian Journal of Accounting Research, 5(2),
in bank productivity. Furthermore, our findings might help the 195e208.
IBs recognize the significant components of ICE and their Aslam, E., & Haron, E. (2020c). Corporate governance and banking perfor-
mance: The mediating role of intellectual capital among OIC countries.
reasonable allocation so that they can improve bank perfor- Corporate Governance: The International Journal of Business in Society,
mance. In addition, the negative impact of HCE should 21(1), 111e136.
encourage corporate managers to appoint well-trained Aslam, E., Haron, R., & Ahmad, S. (2020). A comparative analysis of the
employees and develop the right management control performance of islamic and conventional banks: Does corporate gover-
systems to support banks' internal operations. Moreover, RC nance matter? Int. J. Business Excellence, 20(3) (early cite).
Aslam, E., Ijaz, F., & Iqbal, A. (2016). Does working capital and financial
has an enormous influence on IBs’ performance. Therefore, structure impact profitability of islamic and conventional banks differ-
IBs should maintain close ties with their depositors and ently? Islamic Banking and Finance Review, 3(1), 50e67.
creditors to establish a good corporate reputation and hold on Aslam, E., Kalim, R., & Fizza, S. (2019). Do cash holding and corporate
to consumer loyalty. governance structure matter for the performance of firms? Evidence from
This study has some limitations. First, it focuses only on KMI 30-and KSE 100-indexed firms in Pakistan. Global Business Review,
20(2), 313e330.
listed IBs in Muslim countries. Future studies could examine Basyith, A. (2016). Corporate governance, intellectual capital and firm per-
other financial institutions as well as conventional banks for formance. Research in Applied Economics, 8(1), 17e41.
comparisons in different regions. Second, this study evaluates Birindelli, G., Ferretti, P., & Chiappini, H. (2019). Intellectual capital
the relationship between ICE and IBs’ performance. Future disclosure: Evidence from the Italian systemically important banks. In
studies could add more variables in this relationship, such as Socially responsible investments (pp. 37e59). Springer.
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions
corporate governance as well as other components of pro- in dynamic panel data models. Journal of Econometrics, 87(1),
ductivity in ICE. 115e143.
Bontis, N., & Serenko, A. (2009). A causal model of human capital ante-
cedents and consequents in the financial services industry. Journal of In-
Appendix A. Supplementary data tellectual Capital, 10(1), 53e69.
Deep, R., & Pal Narwal, K. (2014). Intellectual capital and its association with
Supplementary data to this article can be found online at financial performance: A study of Indian textile sector. International
[Link] Journal of Management and Business Research, 4(1), 43e54.
Dotzel, T., Shankar, V., & Berry, L. L. (2013). Service innovativeness and firm
value. Journal of Marketing Research, 50(2), 259e276.
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