Impact of Intellectual Capital and Total Risk Management on Bank Performance

Introduction

In the modern era, complexity of the environment in the areas of business competition, rising customer expectations of corporate performance, the need to be aware of the strengths and weaknesses of the organization and key performance indicators to continuous improvement is more evident. Throughout history our societies have observed four different socio-economic phases which include primitive society, agricultural society, industrial society, and information society in which we presently live. The resources of production diversify from one organization to another of this period. Before emerging the information society, the traditional factors such as land, labor, capital, natural resources, and entrepreneurship were crucial factors but after emerging the information society another three factors knowledge, information technologies and intellectual capital added with traditional factors (Kandemir, 2008; Kayacan & Alkan, 2005; Yalama, 2013).

In the new economic era, Intellectual Capital (IC) plays a vital role in financial performance of an organization. It is widely accepted that with the advent of solid knowledge based economy, the conventional bases sources of competitive advantage that depends on tangible assets in creating firm value and sustaining competitive advantage begun to erode (Maditinos, Chatzoudes, Tsairidis, & Theriou, 2011; Ordonez de Pablos, 2002; Shih, Chang, & Lin, 2010).

Accordingly, the potential for creating competitive advantage and long-term value lies more importantly in the efficient management of IC than in tangible assets. In knowledge-based industry like banking industry non-tangible and intellectual resources are highly focused (Shih et al., 2010). According to Ahuja and Ahuja (2012), an efficient utilization of IC is more crucial for accomplishing success in banking than other industries, asserting that delivering of high quality services by a bank depends on its investment in items related to IC such as its human resources, brand building, systems and processes. Al-Musalli and Ismail (2012), assert that “though physical capital is essential for banks to operate, it is the intellectual capital that determines the quality of services provided to customers.” Therefore, it becomes necessary for banks to manage their IC as efficiently as possible.

The chance of unfavorable outcomes may occur in an investment’s of an organization traded as a risk. Risk can also be defined as the intentional interaction with uncertainty. Risk management is courses of action by which firms identify determine, prioritize and alleviate the adverse effect of uncertainties (Chapman & Ward, 2003). Accordingly, risk management is a systematic approach to mitigate negative effect of any specific phenomenon. The approach that defines risk from only down perspective could leads to risk aversion. Risk aversion can be an individualistic behavior but in business it is impossible to avoid all kinds of risk. Most risk taking activities associated with opportunities. Hence, companies need to be intelligent enough in managing their risks not only to grab the benefit out of it but also to survive in business.

This study contributes significantly in that it provides Bangladeshi banks with a simple method in understanding and evaluating performance, as well as enhancing the management of Intellectual Capital and Total Risk. The IC and TRM literature will also help in deciding the potential role of IC efficiency in the financial performance of banks in Bangladesh, an emerging country which lacks such research. This paper is organized as follows. The second section presents the literature related to the study and hypotheses development. In the third section, we discuss the research methodology and data employed in the study. The fourth section presents the results of the study. Finally, we conclude the paper in the fifth section.