challenging issues for developed countries and developing countries

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It was, still is, and will remain the subject of human resources of the most important and urgent issues for strategic planners, practitioners, and administrators at the level of administrative organizations or communities. It could even say that this subject today is the most challenging issues for developed countries and developing countries, in terms of preparation, training or investment.

Knowledge that available to the organization has become a competitive advantage to distinguish it from other organizations, and is defined in the availability of individuals who have information, stored knowledge, and different techniques.

As a result, the successful organizations are those organizations that are attracting, selecting and developing of its employees who can lead these organizations. Successful organizations which concerned with customers and their needs, desires, and exploit opportunities for different technologies in the environment surrounding them, and therefore the main challenge for organizations today is to ensure the availability of skilled personnel, outstanding training, development and develop their skills (Fred D., 2008).

Intellect is the ability to understand and to think in an intelligent way, or the ability to do these things to a high level. However, intellectual capital is knowledge that can be exploited for some money-making or other useful purpose. The term combines the idea of the intellect or brain-power with the economic concept of capital, the saving of entitled benefits so that they can be invested in producing more goods and services.

Stewart viewed intellectual capital as knowledge, information, intellectual property and experience that can be put to use to create wealth (Stewart, 1997). Edvinsson (in Bontis, 2000) explained intellectual capital as applied experience, organizational technology, customer relationships and professional skills that provide a firm with a competitive advantage in the market.

The intellectual capital is the most valuable assets in the twenty-century; because it represents the forces of science able to introduce change everything in the work of their organizations, as well as the consecutive innovations. The increasing importance of intangibles in value creation in companies has become critical when it comes to the area of corporate finance and capital markets (Holland 2002). As the intangible assets are strategically more important now to wealth creation than they ever were in the past (Bontis 2002), significant changes in the role of knowledge in company value creation have altered and increased the existing information asymmetry, i.e. the information gap between the company providers and the external users of such information.

There is a major dilemma to the Palestinian institutions when conducting training and qualification of human resources. The focus is on general set of human resources, which proved unsuccessful in resolving the problem of manpower in Palestine. The considering focuses on the rehabilitation of quality manpower that provide knowledge, creativity and innovative ideas to the institution and that contribute to in achieving competitive advantage.

Problem Statement

Banking sector is a knowledge intensive sector (Mavridis, 2004; Firer, 2003). It is a perfect sector for research on intellectual capital. Banking sector is one of the sectors, utilizing intensive intellectual capital (Goh, 2005).

The activity of the banking system based on mediation between those who have surplus funds and those who are in need of these funds, therefore, its performance depends primarily on its ability to withdraw cash from circulation by the attracting of depositors by promises to maximize the benefit of time for their financial deposits. Then, re-pumping in the form of facilities, loans and investments to attracting investors, for the completion of such mediation and the achievement of the objectives of the banking system, they have to upgrading the level of service quality. On the basis of the relationship between banking activities and intellectual capital is expected to be for this resource a distinct role in the performance of banks and the value of intangible.

The main difficulties faced by the intellectual capital in the Arab world are the waste of human capital, low employment opportunities if compared with population growth, low skills, and lack of training opportunities. The difficulty of measuring and evaluating the intellectual capital, as a result of the adoption of traditional accounting.

With all the positive developments in the years since starting to build the Palestinian banking sector, it is still unable to play the role of financial intermediation and the transfer of national savings to the development investments (PMA, Annual Report 2007).

The intellectual capital concept is new relatively, not only in Palestine but in global business environment. Despite the growing interest in this field, the study of intellectual capital disclosure practices is still limited in developing countries. With regards to bank performance and intellectual capital, there are some researches that study the role of intellectual capital on banks' performance.

In such important issues related to the intellectual capital this study attempts to investigate the determinants of intellectual capital performance of commercial banks in Palestine, and providing further evidences on the factors of intellectual capital. This study extends the previous studies by focusing on the developing countries such as Palestine which is special case of economy and political statuses.

Research Questions

Overall, this study seeks for explanation on how banking regulators in Palestine issuing their intellectual capital performance. Specifically, the following research questions would be addressed in this study:

How much is the pragmatic concept of intellectual capital in Palestine?

What are the factors that determine the intellectual capital performance in banks?

How to measure intellectual capital performance by using the value added intellectual capital (VAIC) method?

Research Objectives

The main purpose of this scheme is to empirically observe whither there is a relationship between the value creation efficiency and firms' financial performance among banking sector in Palestine. Specifically, the study also tries to achieve the following objectives:

Identify the pragmatic concept of intellectual capital.

Identify the factors that determine the IC performance among working banks in Palestine.

To measure intellectual capital performance by using the value added intellectual capital (VAIC) method.

Significance of the Study

Topics of intellectual capital that have not received adequate attention by researchers, both in the Arab world, or Palestine, it is possible that the outcome of the study to clarify the importance of recognizing the intellectual capital and how to develop it. Furthermore, the study provides the banking regulators with significant determinants of intellectual capital in order to addressing the factors affecting intellectual capital performance to take actions towards developing their performance and in turn maximize their value creation.

Scope, Limitations, and Assumption of the Study

The subjects of this study are based on annual reports for the period 2002 to 2007 of commercial banks in Palestine. Based on this study, the number is 20 of working banks in Palestine. So each bank of this samples have to be according to conditions of this study; the condition like availability of information about intangible assets for each sample to be collected. Another condition is the bank to be chosen has to be traded in Palestinian territories for at least three years to ensure that no other aspects affect the intellectual capital performance of the bank except manipulating factors under research.

Some limitations could rise during practical part of the study. However, gathering data will be from the banks' annual reports so the results of this investigation are accurate for banks in the Palestinian circumstances. Common terminations of the understanding of intellectual capital and corporate performance have to be assessed in worldwide surroundings. In addition, the adoption of traditional accounting could be another limitation facing this study. Finally, intellectual capital disclosure practices is still limited in developing countries, therefore it is big challenge to get enough information of Intellectual capital.

The Study assumed that all banks are assumed to know well of their respective human capital for improving their intellectual capital performance. Measuring the intellectual capital performance is based on the assumptions that the existence of the physical capital is essential to allow the human capital to contribute to creating added value. Furthermore, all banks are assumed to be ready for economic and political mutations. In addition, all banks are assumed to disclose of all financial and non-financial data in the annual reports for utilizing of external users.



Definition of intellectual capital and its components

There are several definitions for intellectual capital since the beginning of its research in the lately 1980s. Itami, the pioneers who published works on intellectual capital, defined intellectual capital as intangible assets which includes particular technology, customer information, brand name, reputation and corporate culture that are invaluable to a firm's competitive power (Itami, 1987). Stewart viewed intellectual capital as knowledge, information, intellectual property and experience that can be put to use to create wealth (Stewart, 1997). Edvinsson (in Bontis, 2000) explained intellectual capital as applied experience, organizational technology, customer relationships and professional skills that provide a firm with a competitive advantage in the market.

There are a few major components of intellectual capital have been addressed in the literature. There is no agreement among researchers about the concept of a specific intellectual capital, but they agree on one major point in their definition of intellectual capital is that this resource is associated mainly with the knowledge that could lead to create value. (Agndal et al, 2006.)

Also notes the three elements are closely linked with all the definitions are: It's a resource that is tangible, it is erecting knowledge of value, and reflecting the effects of accumulated experience.

There are three trends in the classification of intellectual capital, the first trend classify intellectual capital under the human capital and structural capital, while the second trend is taking the same first direction with little change, as proponents of this trend are divided capital to organizational capital and customer capital. The third trend which is seeing (Sveiby, 1998) dividing the intellectual capital to the skills of individual and internal structures reflect the flow of knowledge across the organization and other external reflect the flow of knowledge across external stakeholders, such as relations with customers and suppliers.

This study will adopt these classifications of intellectual capital (IC): (human capital and structural capital) and the content of these two components as follows:

Human capital: human capital is an important element in intellectual capital because it is the engine of creativity and critical resource for the value of the intangible at the age of knowledge. So it is in the labor force that has the ability, thinking and innovation, and by the tacit knowledge inherent in the minds of workers. From the perspective of the organization, a source of human capital is for innovation and strategy for renewal, in addition to efficiency, intelligence, social ability for interaction and association with others in performance and excellence. According to (Ashton, 2005), human capital in the organization are knowledge, skills and accumulated experience among workers, which creates leadership skills, ability to solve problems, make informed decisions and dealing with risks. Moreover, it reflects the effectiveness of the organization in managing its tangible and intangible resource to get the experience, and knowledge that necessary to achieve competitive advantage and create value.

Structural capital: according to (Solitander, 2006) structural capital consists of organizational capital and customer capital. Organizational capital reflects an organization's ability to meet the challenges of internal infrastructure in supporting of workers, which include the organization's philosophy and systems for their ability to lift productivity, operational capital and creational capital. The customer capital thus expressed knowledge of the owners of interests, especially customers influential on the lives of the Organization. Therefore, the essence of this component in the existing knowledge of customers that must be acquired to ensure their continued loyalty to the organization and gain new customers. Thus, the literature reflects the full force of human capital and structural relations with the direction to achieve customer satisfaction and loyalty through the identification of the knowledge required to meet their needs. Creating a network of strategic alliances with the environment in order to get customers' approbation and push towards strong relationships with customers.

Intellectual Capital

Human Capital

Structural Capital

Customer Capital

Organizational Capital

Figure 1: Classification of intellectual capital according to Skandia's value scheme

The role of intellectual capital in creating value from the perspective of the organization's strategy

From a strategic perspective, the intellectual capital describing as the resource that is used to create and apply knowledge to enhance the value of the organization, thus the rationale upon which is its ability to create value. Because the value creation is the heart of the strategic management, therefore intellectual capital has become a one of the considerations which should be addressed when formulating strategy.

It's one of the basic parameters that must be appreciated on the organization, so the organizations need to understand that the formulation of the strategy is not only based on consistency with the opportunities and threats, but the organization's capacity and resources, based on this concept emerged from the entrance to the resource base, the understanding of the relationship between intellectual capital and competitive advantage and value creation is the key to the formulation of the strategy. (Rouse & Dallenbach, 2002)

The ability of the organization in achieving its objectives towards competitive advantage and value creation, based primarily on the excellent performance of the components of intellectual capital in achieving customer strategic methods. The literature has shown that characterized each area of the components of intellectual capital in achieving the proposed value for their customers. With respect to the areas marked by human capital is to develop a learning strategy of the organization that is the cornerstone of the increase expertise, skills, and abilities that leads to the achievement of internal processes efficiently. Furthermore to achieve the value proposition to customers, then achieving the financial targets of the added value and the rate of return on investment. (Uliana et al, 2005)

The sequential review of significant contributions on the intellectual capital

The development of intellectual capital reports, for instance, can be traced back to the desire for individuals working with or within businesses to improve their understanding of what comprised the value of the business so as to manage better those things that generate value (Sveiby, 1997). A general timeline of main intellectual capital practice and research landmarks are represent in Table II.



Early 1980s

General notion of intangible value (often generically, labeled ``goodwill'')


The "information age" takes hold and the gap between book value and market value widens noticeably for many companies

Late 1980s

Early attempts by practitioner consultants to construct statements/accounts that measure intellectual capital (Sveiby, 1988)

Early 1990s

Initiatives systematically to measure and report on company stocks of intellectual capital to external parties (e.g. Celemi and Skandia; SCSI, 1995) Kaplan and Norton introduce the concept of a balanced scorecard (1992). The scorecard evolved around the premise that "what you measure is what you get"

Late 1990s

Nonaka and Takeuchi (1995) present their highly influential work on "the knowledge creating company". Although the book concentrates on "knowledge", the distinction between knowledge and intellectual capital is sufficiently fine as to make the book relevant to those with a pure focus on intellectual capital. Pioneers of the intellectual capital movement publish bestselling books on the topic (Edvinsson and Malone, 1997; Sveiby 1997). Edvinsson and Malone's work, in particular, is very much about the process and the ``how'' of measuring intellectual capital

Early 2000s

Intellectual capital becomes a popular topic with researchers and academic conferences, working papers, and other publications find an audience

Table I: landmarks - a sequential review of significant contributions to the identification, measurement and reporting of intellectual capital



Research Model

The research model presented associated to answer the research questions mentioned in the research questions part. The model demonstrates the connection and relationship among the aspects in the regression models. All the Three different kinds of regression variables in the research model used in the regression models are explained in the part of theories related models that would be used in this project. The kinds of models that will be used in this project are; of human capital efficiency (HCE), structural capital efficiency (SCE) and capital employed efficiency (CEE).

The first research question is the observation of the concept of intellectual capital in one of massive sectors such as banking at one of developing country. The second point up what indicators of intellectual capital that could find in Palestine specially banking sector. Furthermore, the third research question is set to explain intellectual capital and its components influence on value creation of the firm. The framework is demonstrated in the Figure 2.

Investment in Information Technology System (IITS)

Bank Profitability (BP)

The Staff Costs Ratio (SCR)

Independent variables

Intellectual Capital Performance (ICP)

Dependent variable

Figure 2: Framework of the study

Formulation of hypotheses

In the banking literature, some factors which can be considered as determinants of intellectual capital performance are: investment in information technology systems (IITS), bank profitability (BP), and the staff costs ratio (SCR).

Staff Costs Ratio (SCR)

It can be argued that human capital plays an important role in lowering the production cost of the bank (giving a cost advantage) and differentiates its products which should be reflected in increasing the market share of the bank through attracting more customers. This situation might lead in turn to motivate the bank's staff.

Based on the above discussion, the first hypothesis is:

H1. There is a positive relationship between the staff costs ratio and intellectual capital performance.

Bank Profitability (BP)

In general, the financial results of any company can be classified positive results, which are making profits, and negative results, which is making loss. Losses might require time to be spent by the directors of the company to investigate the reasons for them. Losses can be considered unusual financial results and hence the directors need to be cautious when dealing with them. On the other hand, making profits can be considered as the usual financial results and leave the directors to undertake other useful activities for the company such as encouraging staff to innovate which might increase profits. Therefore, a positive association between bank profitability and human capital performance is expected.

The individual bank i annual net profit before taxation divided by shareholders equity in year t will be used to represent the bank profitability.

Based on the above discussion, the second hypothesis is:

H2. There is a positive relationship between bank profitability and intellectual capital performance.

Investment in Information Technology System (IITS)

Generally, IT systems can be classified into two groups:

IT systems for internal use which can be defined as the IT resources allocated mainly to serve the purposes of the management of the company such as different types of computers and their related software.

IT Systems for external use which can be defined as the IT resources allocated to serve customers of the bank such as electronic distribution channels including ATMs and online banking.

These two groups of IT systems can be considered as a threat to the employees, specially the unskilled ones and hence, it can be argued that there is a negative impact of investment in IT systems on the employees because it reflects the intention of the management to fire a number of staff. The published data on computing cost will be used as a measure of investment in information technology systems.

The logarithm of the computing cost for bank i's in year t (LOGITINVit), will be used to represent the level of bank i's investment in IT in year t.

Based on the above discussion, the third hypothesis is:

H3. There is a negative relationship between the levels of investment in information technology and intellectual capital performance.

Measurement of intellectual capital performance

This study will measure the intellectual capital performance (Dependent Variable) of commercial banks in Palestine for the period 2002 to 2007, using efficiency coefficient called the value added intellectual capital (VAICTM) developed by Ante Pulic.

On other hand this study will deal with independent variables by the value added intellectual capital (VAICTM) indicator that has developed by Ante Pulic through several years. Ranking of banks according to VAICTM was then compared with the traditional way of ranking, which was based on asset, net profit and shareholder equity. By comparing with the traditional way of ranking, one could see if banks that have good performance according to traditional accounting measures are also banks that are efficient in utilizing capitals.

The VAICTM method will be used to measure the intellectual capital performance because it is more convenient than others. The VAICTM method which will used in this study was developed by Pulic (1997, 1998, 2001, 2002a, b). It has also been used in studies in Austria, Croatia and Japan. The formulae are as follows:

Output = Gross income.

Input = Operating expenses (excluding personal costs).

Value added (VA) = Output - Input.

HC = personal cost (considered as an investment).

CA = Capital employed (both physical and financial capital).

VA of human capital (VAHC) = VA ÷ HC.

VA of physical capital (VACA) = VA ÷ CA

VA intellectual capital (VAIC) = VAHC + VACA

Data Collection


In this study, the population frame will include all the working banks in Palestine. According to Palestine Monetary Authority (PMA), there were 20 banks listed as working banks at July, 2007. Therefore, the population frame of this study will be based on all the listed 20 banks.

Sample Selection

A sample was selected of all the working banks in Palestine which were 20 banks due to the small sample size. All the banks have been categorized into two groups as domestic banks which were 12 banks, and as foreign banks which were 8 banks.


In this study, data required to calculate human capital, structural capital and capital employed efficiencies were obtained from annual reports. The data will collect through secondary data, where the data will be taken from the existing sources such as the websites of the banks, annual reports, articles, internet, newspaper, government publications. While seeking for secondary data, it will save time and costs of acquiring information. These sources of secondary data provide a lot of information for research and problem solving. Regression analysis will use to test the relationship between the intellectual capital performance as a dependent variable and certain independent variables.

Pilot Study

Reliability method is about how exact the researches are and which it involves of factual and consistent in sequence of information and knowledge. It instrument to provide how the consequence was affected by chances and specific of determining and measuring. (Andersen, 1998).

Collection data from sources such as Palestinian banks' annual reports encouraging the accomplishing of Reliability .It is important that one take the essential protection with gathering the data. Dissimilar people will be contacted to ensure the data is reliable and truthful (Franks & Mayer, 1994). Towards the individual error, remove by examination for all variables for every year. In the case of the sample selection procedure the research chose variables that were frequently used in various distinguished piece of writing with reliability. For ensuring the reliability of regression consequence besides that has tested and checked for multi-corporation linearity between variables.

The objective of validity is measuring how healthy the experiential consequences equivalent and connected with the theory and if it is applicable in the framework Andersen, (1998). The consequences achieved both similar and different in comparing with consequences achieved with other investigations and findings relating to Palestinian circumstances. Overall, this research considered the reliability and validity of investigation to increase its autonomously. During revise the research employ quoted studies and researches models shaped by familiar researchers.