Modern businesses are characterized by innovation, technological advancement, skills and knowledge management. Successful firms tend to be those that continually innovate, rely on new technologies and emphasize on skills and knowledge of their employees rather than physical assets such as plant or machinery to improve performance. Knowledge has become the new frontier in corporate management because value can be generated through intangible assets not often reflected in the financial statements. Firms should realize that this is an integral part in complete understanding of firm performance. The financial sector in Kenya today is highly competitive, with each player striving to create its own niche. Yet, to succeed in such an environment, creativity, innovation and skills management is imperative. Although these intangibles relate strictly with intellectual capital that is difficult to measure, they are critical in the successful management of modern corporate entities. It is apparent that most business enterprises still choose to invest more in physical assets rather than intangible assets to drive their profitability. This study investigated the impact of value added intellectual capital (VAICTM) on financial performance of listed commercial banks at the Nairobi securities exchange for the period 2010 to 2014. The study focused on capital employed efficiency, human capital efficiency and structural capital efficiency as predictor variables while the Net interest Margin was the response variable. Regression analysis was used. The findings showed that Capital employed efficiency had a significant effect on firm performance measured by net interest margin. Except for cooperative bank with HCE coefficient of 0.96, all other banks returned zero coefficients for HCE. Similarly, except for cooperative bank with SCE coefficient of Zero, all other banks returned a negative SCE coefficient. However, HCE coefficient was higher than SCE coefficient for all banks listed at the NSE. Capital employed efficiency (CEE) had the greatest impact of financial performance of commercial banks. Banks should recognize that human capital, and ultimately human capital efficiency is critical to realization of their corporate objectives. Financial institutions should adopt value added financial reporting so as to establish the impact of intellectual capital on their business. The ranking of the banks in terms of VAICTM showed Standard chartered bank as the most efficient in utilizing its intellectual capital. Banks in Kenya should continue investing in their structural capital; information technology, databases and other satellite services such as agency banking, mobile phone banking and internet banking to improve their performance. The productivity of physical and financial assets of banks can be enhanced by investment in human capital efficiency.
Intellectual capital, financial performance, innovation
