The Intellectual Capital Performance of Kuwaiti Banks : An Application of VAIC TM 1 Model

The paper uses the Value Added Intellectual Coefficient VAIC model, a widely used model, to measure the Intellectual Capital efficiency of the Kuwaiti Banks using a ten years period data set from 1996 to 2006. Three value efficiency indicators, Human Capital Efficiency (HCE), Capital Employed Efficiency (CEE) and VAIC, where used in the analysis. The data set was divided into commercial and no-commercial banks. The non commercial banks were outperformed by almost all the commercial banks in the last 3 years; 2004-2006. The results of the rankings of the banks for the last year (2006) showed that for VAIC the top two performers in the study were The Commercial Bank of Kuwait followed by the Gulf bank while the worst performer was Kuwait Real Estate Bank. And the results of ranking based on Human Capital Efficiency (HCE), showed similar results as that of VAIC. However, the ranking results based on Capital Employed Efficiency (CEE) showed the top two performers to be National Bank of Kuwait followed by the Gulf Bank and the worst performer was still the Kuwait Real Estate Bank.


Introduction
Despite the fact that intangible assets, such as knowledge assets and customer relations, are the driving force behind business success in today's knowledge economy and global, dynamic and complex business environment, measuring the efficiency of these assets (the Intellectual Capital ) remains a challenge at both macro and micro level of economy.It is also a challenge for government which are or becoming less efficient, for corporations which have no reliable indicators for their business success and for the employees who are unaware of their significant role in the value creation process [1].Unfortunately, the current conventional accounting and performance measurement systems do not provide much help in this matter as they are heavily inclined towards financial and physical resources and lack relevant information on the performance of Intellectual Capital (IC) resources [2].
The Intellectual Capital (IC) of a company consists of all employees, their organization and their ability to create value, which is evaluated at the market.As such, it is not enough to monitor the capital employed but also the intellectual capital efficiency.A company can have the best qualification structure, i.e. intellectual potential, but if it creates little value with regard to its resources, its intellectual ability is low [1].Therefore, the challenge of today's knowledge economy is the efficient management of knowledge, and its relevant form in economy, the intellectual capital (IC).And as such, IC becomes the key factor of value creation.
Although intellectual capital is recognized as a major corporate asset capable of generating sustainable competitive advantages and superior financial performance [3], finding an appropriate measure for IC is still difficult.However, measuring the efficiency of applying knowledge in value creation [1] is possible.A very widely used management tool or model for intellectual capital (IC) performance that has been extensively reported in the literature is VAIC TM .VAIC TM was developed, refined, and applied by Ante Pulic and his colleagues at the Austrian Intellectual Capital Research Centre [4][5][6][7][8].VAIC TM indicates to business mangers and to policy makers how well they are converting intellectual resources into financial wealth and whether their conversion performance is improving or deteriorating [9].
Justifications for using VAIC TM in this study, which were adopted from [10,12,19,22,34,35,] are summarized as follows: • "It produces quantifiable, objective and quantitative measurements without the requirement of any subjective grading.
• It provides indicators that are relevant, useful and informative to all stakeholders, but not just shareholders, and with which they may also identify and compare the key components of IC in order to assess company performance.
• It uses financially oriented measures so that any indicators, relations or ratios computed may be used for comparison along with traditional financial indicators commonly found in business, which are based on monetarily derived units or measures.
• It uses relatively simple and straightforward procedures in the computation of the necessary indexes and coefficients, which may be simple to understand, especially for management and business people who are accustomed to traditional accounting information.
• It produces a form of standardized measurement.The indicators or indexes computed may be consistently applied to and used for comparison across divisional, company, industry and national level.In other words, benchmarking may therefore be possible.
• It makes use of public or published financial data so that it may enhance the reliability of the measurement, and improve data availability.
• It provides an IC measurement system that is consistent with the stakeholder view and resource-based view by using a value added approach.
• It treats human capital or employees as the most important source of IC, which is consistent with all major IC definitions found in the literature.
• It has a track record in deployment and application in IC research of listed companies in many countries, to which researchers may refer in reviewing published papers.Furthermore, the availability of prior studies in other places in the Asian region comparable with Hong Kong, such as Taiwan, Malaysia and Singapore, add further credibility to the methodology." Despite the large number of research studies in the area of Intellectual Capital (IC) around the world during the last two decades, and despite the significant number of VAIC TM applications, no study has been reported, to the knowledge of the authors and based on the current review of literature, that investigate the IC situation in general or the application of VAIC TM in Kuwait or in the GCC region as a whole.As such the contribution of our current study, in addition to being the first investigation of its kind, is to motivate IC research in general and to further apply VAIC TM in other sectors of the Kuwaiti economy and the Gulf Cooperative Council (GCC) region.
This study is an application of VAIC TM for measuring the Capital Intelligent efficiency of Kuwaiti banks.We have chosen banks as the subject of our study because banking sector in general provides a rich environment for conducting Intellectual Capital research and because of the availability of reliable data in the form of published accounts (balance sheets, P/L).Banking sector is "intellectually" intensive or knowledge-intensive and its staff are (intellectually) more homogeneous than in other sectors [10,36].Kuwaiti banking sector is also the most sophisticated sector in terms of the quality of human resources employed, their organization, the quality of training these employees received and the manner in which the sector utilizes the human resources in generating banking services to satisfy their customers.
The rest of the paper is organized as follows: Section 2 covers the methodology, including the VAIC TM model and the data collection.Section 3 the analysis and results and Section 4 covers the conclusion and future research.

Methodology
As stated above, the objective of this paper is to assess and analyze the efficiency in which the Kuwaiti banks utilize their intellectual capital using the widely use VAIC TM covering a period of 10 years.The methodology used is similar to the one used in many of the VAIC TM banking applications cited above in the introduction.In the following two subsections the important variables, indicators and coefficients within the VAIC TM Model are operationally defined followed by the data collection subsection.

VAIC TM Model
The operation definitions of variables, indicators and coefficients for calculating Value Creation Efficiency Index or Value Added Intellectual Coefficient (VAIC TM ) which are covered in [1,37].For detail coverage of • Value added (VA): Newly created value, calculated for an institution during a particular fiscal year as:

VA OUTPUT INPUT 
where OUTPUT = total income from all products and services sold during the particular fiscal year.And IN-PUT = The total costs and expenses that incurred by the firm during that particular fiscal year (excluding labor expenses, which are employees' compensation and all expenses that are related to their training and development.In this analysis, labor expenses is considered an investment and not cost.
a In 2007 it has been renamed to Kuwait International Bank to exercise its business as an Islamic commercial bank.
The data set covers annual data for four main variables for a period of ten years, from 1997 to 2006.These four main variables are as follows: • Structural Capital (SC): result of Human Capital's past performance (organization, licenses, patents, image, standards, relationship with customers), and it is calculated as: • INPUT: the total costs and expenses excluding labor expenses, which are employees' compensations and all expenses that are related to their training and development.In this analysis, labor expenses are considered investment and not cost.

SC
VA HC  where HC(Human Capital) = overall employees' compensations and all expenses that are related to their training and development.
• OUTPUT: the total revenue during a fiscal year for each bank.
• Human Capital Efficiency (HCE): an indicator which shows how much VA is created on each monetary unit invested in HC.
• Human Capital (HC): overall employees' compensation and all expenses that is related to their training and development.

HCE VA HC 
• Structural Capital Efficiency (SCE): an indicator that shows the share of SC in value creation.
• Capital Employed (CE): physical and Financial assets for each bank.

SCE SC VA
 Since our analysis spans a period of 10 years, from 1997 to 2006, Boubyan Bank was excluded from the analysis because it was established in 2004.Furthermore, the Human Capital (HC) data for Kuwait Finance House for the years 1997 to 2004 were missing in the data set provided.Thus, Kuwait Finance House was excluded from our study as well.As such, our study uses data for only 8 Kuwaiti banks categorized as commercial and non-commercial.Six of these banks are commercial and two are non-commercial.Two Islamic banks were also excluded from our study because they had incomplete data.
• Intellectual Capital Efficiency (ICE): an indicator which shows how efficiently IC has created value.

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

CEE VA CE 
where CE(Capital Employed) = Physical and Financial assets.
• Value Added Intellectual Coefficient (VAIC TM ): it indicates the value creation efficiency of all resources (sum of the previous indicators).It expresses the intellectual ability of a company, a region or a national economy as a whole.

Results
Prior to getting results from the data it was necessary to check the reliability of the data.Thus, regression models were applied, using the Value Added (VA) as a dependent variable, and each of Capital Employed (CE) and Human Capital (HC) as independent variables.Table 3 shows the results for each model for all years from 1997 to 2006.The coefficient of determination (R2) is high and considered to be very strong in all years for both models; 1) VA dependent and CE independent, and 2) VA dependent and HC independent.In fact, R2 is in the upper 90s (between .94 and .98),except for the first couple of years where it is .91 and .92,which is also very strong.
The same regression models were reapplied by adding a dummy variable to take control for any difference be tween commercial and non commercial banks.The dummy variable (NonComm) takes the value one for a non commercial bank and zero for a commercial bank.Table 4 shows the results for such models which includes the dummy variable (NonComm) for all years from 1997 to 2006.The coefficient of determination (R2) is also extremely high and considered to be very strong in all years for both models; 1) VA dependent and CE independent, and 2) VA dependent and HC independent.The value of R2 is between .93 and .99 for both models for all the years, which affirms the reliability of the data in hand.
The results of the rankings of the banks based on the Value Added Intellectual Coefficient (VAIC TM ) for the last year (2006) are presented in the upper part of Table 5.The non-commercial banks were outperformed by the almost all the commercial banks in the last 3 year; 2004-2006.The top two performers of the survey are: • The Commercial Bank of Kuwait • The Gulf bank while the worst performer is: • Kuwait Real Estate Bank Furthermore, the results of the rankings of the banks based on the Human Capital Efficiency (HCE) and Capital Employed Efficiency(CEE) for the last year ( 2006) is presented in the bottom part of Table 5.
Based on the HCE, the non commercial banks were  • The Industrial Bank.
• The Commercial Bank of Kuwait.while the worst performer is still: • Kuwait Real Estate Bank.Table 6 summarizes the overall rankings for the past 2 years for all three variables.

Conclusions
The paper uses VAIC TM model to measure the Intellectual Capital efficiency of the Kuwaiti Banks.Three value efficiencies, HCE, CEE and VAIC TM indicators were used in the analysis using a data set related to Kuwaiti Banks covering a ten years period from 1996 to 2006.For our analysis, the data set was divided into commercial and no-commercial banks.The results of the rankings of the banks for the last year (2006) showed that for VAIC TM , which expresses the intellectual ability and indicates the value creation efficiency of all resources (the sum Capital Employed Efficiency indicator and Intellectual Capital Efficiency), the top two performers in the study were The Commercial Bank of Kuwait followed by The Gulf bank while the worst performer was Kuwait Real Estate Bank.And the results of ranking based on Human Capital Efficiency (HCE), an indicator which measures how much VA is created on each monetary unit invested in HC, showed similar results as that of VAIC TM .However, the ranking results based on Capital Employed Efficiency (CEE), an indicator which shows how much VA is created on each monetary unit invested in Capital Employed ( Physical and Financial), showed the top two performer to be National Bank of Kuwait followed by the Gulf Bank and the worse performer still to be the Kuwait Real Estate Bank.And the non commercial banks were outperformed by almost all the commercial banks in the last 3 year; 2004-2006.

Future Research
According to the authors knowledge this is the first study in Kuwait applying VAIC TM to investigating the intellectual Capital performance of the banking sector in Kuwait.And as such this pioneering study might serve as a platform for further study on IC research in Kuwait and other GCC countries or the region as a whole.One area of future research could be to extend this study to draw comparison between GCC banks.Another one is to apply VAIC TM on other sectors within Kuwait Stock Market (KSE) and further apply the same to other sectors within the GCC.A third area of future research could be to apply VAIC TM on the national level and draw comparison between GCC countries.The development of a VAIC TM based Decision Support System for Intellectual Capital performance is also underway.

Figure 1 .
Similarly, Table 2 also shows Human Capital Efficiency (HCE) for Kuwaiti banks; commercial, non commercial and overall from 1997 until 2006.The mean HCE for commercial banks was 3.656 and 3.068 in 1997 and 1998, respectively, with a positive trend until 2006 reaching 6.365.As for non commercial banks, if the year 1997 was excluded, the mean would be stable, with no trend, with an average of 3.750 in 1998 and 3.593 in 2006.This anomaly can be clearly observed in Figure 2.

Figure 1 .
Figure 1.Averages of Value Added Intellectual Coefficient (VAIC) for commercial and non commercial banks for the years 1997 to 2006.

Figure 2 .Figure 3 .
Figure 2. Averages of Human Capital Efficiency (HCE) for commercial and non-commercial banks for the years 1997 to 2006.

Table 2 . The mean of VAIC, HCE and CEE, for commercial, non commercial banks and as well as overall mean, for the year 1997 to 2006.
was excluded, the mean would be stable, with no trend, with an average of 4.368 in 1998 and 4.308 in 2006.This anomaly can be clearly observed in