Optimizing Banking Efficiency Through Intellectual Capital in Emerging Markets: Fresh Evidence From Ethiopia

ABSTRACT The issues of intellectual capital (IC) and efficiency in developing countries' banking literature are contemporary. Scant empirical research is available that establishes the associations between these items. Thus, the present study explores the linkages between IC and banking efficiency in Ethiopia for the study of 2011–2022. The study applied a two‐step system generalized method of moments (2SYS‐GMM) to determine how IC affects the firm efficiency. To measure IC, the modified value‐added intellectual coefficient (M‐VAIC) and its three parts—human capital efficiency (HCE), structural capital efficiency (SCE), and relational capital efficiency (RCE)—were employed. The study used the data envelopment analysis (DEA) model to evaluate banks' technical, allocative, and cost‐efficiency scores from 2011 to 2022. The study's findings show that Ethiopian commercial banks' overall mean technical, allocative, and cost efficiency is 89.1%, 75.7%, and 68%, respectively. The 2SYS‐GMM regression results show that the overall IC, as measured by M‐VAIC, has a strong positive contribution towards technical, allocative, and cost‐efficiency scores. The SCE positively affects technical and cost efficiency. Moreover, RCE significantly improves allocative efficiency and cost efficiency but doesn't substantially affect banks' technical efficiency. Surprisingly, HCE hasn't made a substantial contribution to the efficiency of banks in Ethiopia. Theoretically, the results of this study support the resource‐based theory perspective of utilizing bank IC as an intangible resource to enhance efficiency. Consequently, the findings of this paper might be helpful for policymakers, investors, practitioners, and researchers in putting in place a sound investment, measurement, and management of tangible and intangible assets that enhance intellectual capabilities and banks' efficiency.