The Effects of Intellectual Capital on Financial Performance; an Evidence on Ethiopia commercial banks

Abstract This study explores the impact of intellectual capital on the financial performance of commercial banks in Ethiopia, employing random effect panel data regression analysis for the period from 2010/2011 to 2022/23. Two models were analysed: the first assessed the effects of value-added intellectual capital (VAIC™), bank size, ownership structure, asset tangibility, and leverage on financial performance, measured by return on assets (ROA). The second model focused on the components of VAIC™—human capital efficiency (HCE), structural capital efficiency (SCE), relational capital efficiency (RCE), and capital employed efficiency (CEE). The findings reveal a positive relationship between VAIC™ and ROA,emphasizing the importance of intellectual capital in the Ethiopian banking sector. Additionally, larger banks experienced a negative impact on performance, suggesting complexities in effectively leveraging economies of scale. Ownership structure showed no significant effect, while increased asset tangibility adversely affected performance due to fixed costs and liquidity challenges. Importantly, relational capital efficiency also exhibited a negative impact, underscoring the need for better relationship management. Conversely, HCE was positively related to financial performance, although SCE was statistically insignificant. The study recommends that Ethiopian banks improve their intellectual capital, optimize asset portfolios, and invest in employee development to enhance financial outcomes and contribute to sector stability and growth.