Analysis of the financial statements of the selected banks in the Gulf Cooperation Council (GCC)


This empirical research will adopt a method referred to as methodological triangulation by Easterby –Smith et al., (1991) and involves both quantitative and qualitative methods of data collection. This methodology therefore, allows for a combination of techniques, making a convergence of results possible, since no single research method can ever capture all changing features in the financial world under study. Qualitative interpretive research helps the researcher organize and describe subjective data in a systematic way (Bowen, 2003), while quantitative positivist mode guides the researcher on a quest for certainty and absolute truth and insist on objectivity (Blaike, 1991). The basic premise of this methodology is that such integration permits a more complete and synergistic utilization of data than do separate quantitative and qualitative data collection and analysis. Therefore, using a combination of qualitative and quantitative data can improve an evaluation by ensuring that the limitations of one type of data are balanced by the strengths of another. This will ensure that understanding is improved by integrating different ways of knowing.

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Research design

Research design refers to the structure of an enquiry. According to Yin (1989) research design deals with a logical problem and not a logistical problem. It has been argued that the central role of research design is to minimize the chance of drawing incorrect causal inferences from data. Vogt (1993), documents that it is the science of planning procedures for conducting studies so as to get the most valid finding. It contains the work plan or the blue print of the study to be undertaken, and provide a chronological explanation of the steps or phases to be followed in the research process (Mputon, 2001). The research design for this study will be developed so as to achieve the aim and objective of the study, and will therefore be divided into distinct sections all cumulating to the achievement of the specific goals.

Empirical Research

This empirical research will be divided into two parts. First will be an analysis of the financial statements (Income statement, balance sheet (statement of financial position) of the selected banks in the Gulf Cooperation Council (GCC). This will be aimed at achieving the first research objective which is to investigate the impact of the measured intellectual capital (IC) on the financial performance of shariah compliant banks in the Gulf Cooperative Council (GCC) as discussed in section ………………….The second will be questionnaire- oriented survey from senior and top managers to determine the relationship between the perceived IC and financial performance of shariah compliant banks in the Gulf Cooporation Council (GCC).

Analytical research

This is a research based on secondary resources that already exist (Jennings, 2001). The analytical research aspect of this study will be based on the shariah compliant banks listed and active on the various stock exchanges of the GCC countries. Accounting data will be collected from annual financial statements of these banks to empirically test IC usage and the financial performance of shariah compliant banks.

The Value Added Intellectual Coefficient (VAIC)

Because intellectual capital itself is not directly observable, prior studies have used a proxy; the value added intellectual coefficient (VAIC) developed by Pulic (1997), to identify both the size and efficiency of intellectual capital using data from the organization’s financial reports. Among the various methods, the VAIC methodology is the widely used model (sveiby, 2010). Nazari and Herremans (2007) document that using the VAIC method to measure the level of intellectual capital usage is more appropriate for statistical analysis.

In this study, IC will be measured using the VAIC in consistent with (Chen et al., (2005). The VAIC model measures the overall value creation efficiency of an organization (Pulic, 1997. The organization’s total value (VA) created is the difference between what it produces (output) and what it uses for production (input). The intellectual capital portion of the total value creation is the total contributions from human capital (HC) and structural capital (SC). Below is functional definition of the model and some of the variables to be used in this study:

To be able to calculate VAIC, the VA which is the net value created by the organization during the year (Chen et al., 2005) must be ascertained

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Value added (VA)

VA = Output – Input

Output is the income from all products and services, while Input is the total costs and expenses but excluding labour expenses.

Structural Capital: This is result of human capital past performance. Structural Capital (SC) includes IC items such as strategy, organisational networks, patents, and brand names. Pulic (1998)

SC = VA - HC

Human Capital (HC) is the overall employees’ compensations and all related expenses for their training and development

Human Capital Efficiency (HCE): an indicator which shows how much VA is created on each monetary unit invested in HC.


Structural Capital Efficiency (SCE): an indicator that shows the share of SC in value creation.


Intellectual Capital Efficiency (ICE): an indicator which shows how efficiently IC has created value.


Capital Employed Efficiency (CEE): an indicator that shows how much VA is created on each monetary unit invested in CE.


The VAIC model consists of four intellectual capital main elements on human, customer, process, and renewal/development (Skandia, 1999). VAIC compiles the three efficiency measures into one index: VAIC = HCE + SCE + CEE

Financial Performance

Return on assets (ROA) is an indicator of the performance of an organization. ROA = net income / total assets. ROA indicates how profitable the organization is, and can be used to make comparison with organizations in the same industry. Return on assets is commonly used to compare the performance of banks, because most of the assets have a carrying value close to actual market value (Bektas & Kaymak, 2009; Makni, Francoeur, & Bellavance, 2009).

Population and sample size

The population is all the listed and active Islamic-compliant banks on the Stock Exchanges of the six GCC countries. Targeting all the listed Islamic compliant banks will ensure statistical power in the tests and will also ensure maximum data availability..

Data collection

Accounting data will be collected from the annual financial reports of the listed sharia (Islamic) compliant banks from 2009 to 2013 which are publicly available. The process will involve an examination of financial statements to identify the required data

The study will use financial data collected from annual reports to empirically test the various indicators. Descriptive statistics will be computed to profile data. This will be followed by computing the VAIC (independent variable) as postulated by Pulic (1997), inconsistent with previous studies (see Al-Musali and Ku Ismail, 2012; Abdulsalam et al., 2011; Joshi, Cahill,and Sidhu, 2010). The independent variable; Return on asset (ROA) will also be computed. Statistical correlation and regression analysis will be part of the inferential statistics to analyze the relationship between the measured intellectual capital usage and the financial performance of the GCC Islamic compliant-banks. In consistent with prior studies and to minimize its interaction with the dependent variables, bank size; measured as the total assets(Firer & Williams, 2003), leverage (Firer & Williams, 2003; Shiu, 2006a) will be included in the regression model as control variables. The latest edition of SPSS will be used for all statistical analysis.

Validity and Reliability

Validity is the strength of our conclusion. It is concern with whether the measuring instrument measures what it is suppose to measure (Leedy and Ormrod, 2001). To ensure validity tested instruments used in similar studies will be adopted in this research. Babbie (1995) describe reliability as a condition in which the same result will be achieved whenever the same technique is repeated to the same study. To achieve reliability models used by previous researches will be adopted.

Questionnaire survey

The second method of data collection is through questionnaire survey. Questionnaire is a research instrument consisting of a series of questions or statements for the purpose of gathering information from respondents (Biemer and Lyberg, 2003). The questions or statements should be both understandable and relevant to the purpose of the research (Biemer et al. 2003).

The second research objective, the second and the forth hypotheses which are geared toward developing a framework to recognize and encourage efficient utilization of IC (human, relational and structural) lend themselves well to a questionnaire survey. The aim is to determine the level of perception and appreciation of the contribution of IC to financial performance by the operators and managers of Islamic compliant-banks. A questionnaire survey methodology was selected due to its various advantages. According to Moser and Kalton (1979); firstly, it is a quick, inexpensive and convenient way of obtaining information from a large number of people. Secondly, respondents can complete the questionnaire anonymously. Thirdly, it facilitates comparison and analysis of views from a wide range of respondents.

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Description of measurement instrument to be used in the study: The Likert scale

The Likert Scale is an ordered, one-dimensional scale from which respondents choose one option that best aligns with their view (Uebersax, 2006). A common form is an assertion, with which the person may agree or disagree to varying degrees. In scoring, numbers are usually assigned to each option (such as 1 to 5). Scaling can capture quantitative data in survey research such as the strength, trend, rank, or importance of a variable.

Questionnaire design

The questionnaire will be structured around statements about intellectual capital (IC), especially on human capital, relational capital and organizational capital, with five agreement-disagreement levels for each statement. The levels on which respondents have to decide are ‘strongly disagree’, ‘disagree’, ‘neither agree nor disagree ‘agree’ and ‘strongly agree’ statements.

Jennings (2001) defines population as “all the study subjects or study units that are the focus of the research project”. In this study the target population consists of all managers and top management of the identified banks. The sample will be selected using purposeful sampling technique whereby a researcher deliberately selects the participants in a study to ensure that the respondents are knowledgeable (Creswell 2003).

A Likert scale questionnaire survey will be the main instrument providing quantitative data designed around opinion statements as a means of exploring respondents’ perception of a wide range of intellectual capital issues.

The responses will be appropriately coded accordingly: Strongly disagree = 1, disagree = 2, neither agree nor disagree = 3, agree = 4, strongly agree = 5. Descriptive statistics will be computed to profile data. Medians as opposed to means shall be employed because of the ordinal nature of a Likert scale. Ordinal data are categorical data where there is a logical ordering to the categories (Cliff and Keats, 2003). Statistical correlation and regression analysis will be part of the inferential statistics to analyze the relationship between the perceived capital usage and the financial performance of the GCC Islamic compliant banks.

Validity and Reliability

An instrument data collection process is valid and reliable when the procedure is dependable, consistent, trustworthy, and predictable in evaluating the same topic more than once, and if the evaluation produces the same outcomes consistently (Creswell, 2008).To ensure validity and reliability, the questionnaire will be adapted from previous studies where it was used successfully. The anonymity and the confidentiality will be ensured so that they would be able to provide information strictly for the use of this study. In addition, a telephonic follow-up will be made to increase the response rate and limit the possibility of a non-response bias associated with questionnaire surveys. The reliability of data will also be measured using Cronbach’s Alpha coefficient, a statistical measure that could indicate whether several items that were supposed to measure the same thing are correlated. A normality test will also be carried out using Kolmogorov-Smirnov technique, to ensure that the data follow statistical normrmal distribution. Yazici and Yolacan (2007) suggested using Kolmogorov-Smirnov test of normality for symmetric distributions with small sample size.