INTELLECTUAL CAPITAL AND BANKING FINANCIAL PERFORMANCE IN INDONESIA

. The purposes of the research were to analyze the impact of intellectual capital on banking financial performance. Intellectual capital in this study was measured with the method of Value-Added Intellectual Capital (VAIC). The banking financial performance was measured with the indicator of profitability ratio and capital ratio. The hand of profitability ratio is Return on Asset (ROA) and Net Interest Margin (NIM), While the indicator used to measure the capital ratio is Capital Adequacy Ratio. The sample used in this study is 125 observed data of 25 banks listed on the Indonesia Stock Exchange for 2016-2020, which met the criteria determined. Data were analyzed using WarpPLS 7.0 software. This study shows that overall intellectual capital, which VAIC measures, has a positive and significant impact on ROA. Still, it does not substantially impact NIM and does not affect CAR. However, one of the components of intellectual capital, HCE and SCE, partially has the most significant impact on forming VAIC and has a positive and significant effect on ROA and NIM. This IC component is believed to be able to improve the company's performance in the current era of rapid technological development


Introduction
The coronavirus (COVID-19) pandemic has become a severe social and economic shock and challenge and has affected almost all countries worldwide.These challenges have driven organizations to respond quickly and operate in new ways to continue to do business, managing their supply chains -from source to the point of consumption -effectively and efficiently.Therefore, intense competition in the era of globalization and a pandemic has forced companies to change how they run their business from resource-based businesses to knowledge-based ones.
The concept of a knowledge-based economy has an essential role in strategic management and intellectual capital development.
Knowledge-based strategy formulation must start with "the primary intangible resource", intellectual capital or human competence.People can use their competencies to create value in two directions by transferring and transforming knowledge externally from or internally to their organizations.One of the highly knowledge-based industries is the banking sector, so industry players need to continue to increase competition and company performance through their intellectual capital.Intellectual capital, which has a role in improving company performance, triggers banking industry players to invest, one of which is making programs to enhance the quality of their human resources.Employees as Human Capital can be measured by their competence, ideas, creativity, and productivity.One of the ways to improve Human Capital is through employee development training programs.
In Indonesia, banking is one of the main drivers of the Indonesian economy.Because of the importance of banking, strong and healthy banking is very much needed to continue economic development in Indonesia.This banking condition encourages the parties involved to conduct an assessment of the bank's soundness.One of the parties who need to know a bank's performance is the shareholders because the better the performance of a bank, the greater the security of the funds invested.Financial performance is a subjective measure of how well a company can use the assets of its primary mode of business and generate revenue.Bank financial performance can be known by using financial ratios.Financial ratio analysis requires specific standards.In Indonesia, these standards have been set by the Financial Services Authority (OJK).The Financial Services Authority (OJK) is a state institution established by the government based on Law Number 21 of 2011, which functions to organize an integrated regulatory and supervisory system for all activities in the financial services sector, one of which has been in the banking sector since December 31, 2013.Based on the Financial Services Authority Regulation Number 4/POJK.03/2016concerning the Assessment of the Soundness of Commercial Banks, banking performance is reflected in the bank's health.The assessment of the soundness of a bank is measured by a Risk-based Bank Rating that assesses several factors, such as risk profile, Good Corporate Governance (GCG), profitability (earnings), and capital.
In this study, the authors measure the soundness of the bank by using two factors in the Risk-based Bank Rating, namely the profitability factor and the capital factor.Profitability factor is the ability of banks to generate profits as measured by the ratio of Return on Assets (ROA) and Net Interest Margin (NIM).While the capital factor is the bank's ability to maintain existing capital to cover possible losses as measured by the Capital Adequacy Ratio (CAR).The following is a sample of performance data for Conventional Commercial Banks for 2017 -2019: Based on the data in Table 1.above, it shows that the percentage of Capital Adequacy Ratio (CAR) and Return on Assets (ROA) from 2017 to 2019 fluctuated every year, while the Net Interest Margin (NIM) decreased every year.The greater the Capital Adequacy Ratio (CAR), the greater the resilience of the bank concerned in dealing with the depreciation of bank assets that arise due to non-performing assets.The higher the ROA of a company, the better the company's performance in generating net income.Meanwhile, the NIM of conventional commercial banks continued to decline due to the decline in bank interest income.The decline in banking NIMs was due to a faster and higher increase in the funding rate compared to the slower and lower lending rate increase.This situation became even more widespread during the 2020 pandemic.In Indonesia, many banks have experienced a decline in their Net Interest Margin (NIM).As a result of the government cutting interest rates, the NIM became more compressed, and led to a decline in profitability.Therefore, this phenomenon becomes important to be investigated further.

Objectives
In this study, the authors measure the bank's soundness by using two factors in the Risk-based Bank Rating, namely the profitability factor and the capital factor.In general, the banking sector offers an ideal field of intellectual capital research for several reasons.The data is available in publishable accounts, making it reliable.The banking sector is intellectually intensive in terms of business characteristics.The entire staff is more intellectually homogeneous than in other sectors of the economy (Kubo & Saka, 2002).
The profitability factor is the ability of banks to generate profits as measured by the ratio of Return on Assets (ROA) and Net Interest Margin (NIM).At the same time, the capital factor is the bank's ability to maintain existing capital to cover possible losses as measured by the Capital Adequacy Ratio (CAR).The previous research by Al-Musali (2016) showed that VAIC has a significant positive effect on ROA, but partially, CEE has the most critical role in forming VAIC.This finding contradicts the study conducted by (Meles et al., 2016), which shows a significant positive relationship between VAIC and banking ROA in the United States.Still, HCE has the most important role in forming VAIC (Mensah Onumah & Tornam Duho, 2019; Ozkan et al., 2017).The impact of intellectual capital on banking financial performance by several researchers with varying outputs is interesting for researchers to re-examine the problem to know the results of the latest research using conventional banking samples listed on the Indonesia Stock Exchange in the 2016-2020 period.
The problem examined in this study is whether intellectual capital, as measured by Intellectual Capital and its components, namely HCE, SCE, and CEE, affects financial performance, as measured by ROA, NIM, and CAR, in the banking sector in Indonesia.The independent variables in this study were HCE, SCE, and CEE.The dependent variables were ROA, NIM, and CAR.Based on the literature review, previous research, and the development of the hypotheses that have been stated above, the following framework can be described: Globalization and the development of science have become the main drivers in developing the world's economy, which is currently overgrowing.Rapid growth has put knowledge into a new engine in business development so that the competitive ability of a company lies not only in the number of tangible assets it has but also in the company's ability to innovate, develop information systems, manage organizations, and manage human resources owned (Bhatti & Zaheer, 2014;Rashid et al., 2020).Innovation forms the basis of sustainable competitive advantage driven mainly by investments in various forms of knowledge-based capital.Investment in intangible assets increases even more than investment in physical capital (machinery and equipment) in some OECD countries.
Intellectual capital is a crucial driver in creating added value into the resources that enable a company to increase its profitability, productivity, and market value.The  (Stewart, 2010).
The banking industry is a knowledge-intensive industry that involves the exchange of services (knowledge) rather than the exchange of products, a competitive foundation that creates profits for companies and banks.Banking has elements that are highly regulated, risky, volatile, and sensitive to market and management, such as management team selection, professional skills of employees, employee creativity, ability to innovate, filtering customer groups, customer loyalty management, and managing trademarks and the brand to be developed and the management of strategic partners is knowledge contained in banking and provides added value for the bank (Shih et al., 2010).

Resource-Based Theory
The resource-based view (RBV) states that performance is driven by unique resources owned by a company, both tangible and intangible resources.However, companies in the knowledge economy era must pay more attention to intangible resources.When developing a competitive advantage from a resource perspective.RBV is a concept that states that a company can only achieve sustainable competitive advantage when a company can put potentially valuable resources for productive use (Assensoh-Kodua, 2019).
In the context of explaining this research, Resources Based Theory can explain that companies that can manage intellectual capital optimally, in this case, are all the resources owned by the company, both employees (human capital) and physical assets (physical capital), and structural capital.Suppose all intellectual resources owned by the company can be managed and utilized correctly.In that case, it will create added value for the company to improve the company's financial performance.

Intellectual Capital
Intellectual capital (IC) is one of the resources owned by the company.Intellectual capital is an intangible asset that cannot be seen explicitly on the balance sheet but has value and an important role in the company (Sardo et al., 2018).From this point of view, intellectual capital includes all the intangible resources available to the firm to provide an advantage in the marketplace, which can generate future benefits in combination with other advantages.It implies that IC can help maximize the benefits of a firm's financial performance (Mondal & Ghosh, 2012;Ozkan et al., 2017).Of course, the company will have a greater chance of survival with adequate IC.

Intellectual Capital and Profitability
The influence of intellectual capital on bank profitability is also influenced by knowledge management strategies, where Return on Assets and Net Interest Margin are measured by tangible assets and financial risk profile ratios and intangible assets from the aspect of knowledge resources humans in banking itself.The measurement indicator chosen to assess the knowledge asset is intellectual capital.It follows the view of the resourcebased theory, which discusses the resources owned by the company and how the company can manage and utilize its resources to improve financial performance.
Many studies in the literature state a positive relationship between VAIC and financial performance indicators, such as ROA, ROE, ATO, CTA, and NIM.However, there is an ongoing debate regarding the components of VAIC that enhance the performance of financ modified by adding an element (Relational Capital) based on the work of Ulum et al. ( 2014) to measure and compare the efficiency of IC technology listed companies across ASEAN countries on the performance of companies (Nimtrakoon, 2015).The results show that CEE and HCE are the most important drivers of market value (ratio market-to-book value) and financial performance (ROA and margin ratio).In addition, the proportion of total IC is also not much different in Indonesia, Malaysia, the Philippines, Singapore, and Thailand.Several studies show that the most important component of VAIC that has a positive impact on performance is HCE (Chen In the research conducted by (Ikapel, 2016), intellectual capital significantly influences the Net Interest Margin (NIM).Intellectual capital has a wholly positive and significant impact on NIM.However, one component of intellectual capital, namely SCE, has a negative effect on banking financial performance as measured by NIM.Intellectual capital created from routines and structures that support employee efforts can improve the company's economic performance.It happens because the company has a company operational system, organizational structure, and good organizational culture, and can perform policies that support its progress and innovation.These results support the research conducted by (Tran & Vo, 2018), which states that the CEE component has the most significant influence on increasing intellectual capital.Based on this description, the authors propose the following hypothesis.H1: Intellectual Capital has significant effect on ROA H2: Intellectual Capital has significant effect on NIM.

Intellectual Capital and CAR
Capital Adequacy Ratio (CAR) is a ratio related to bank capital factors to measure the adequacy of capital owned by a bank to support assets that contain risk (Amalia & Nugraha, 2021).The influence of intellectual capital on banking capital is also influenced by the knowledge management strategy, where the ability of the bank to bear the risk of any risky credit/productive assets depends on the management's ability to manage it.In other words, human resources are essential things to consider.CAR consists of its capital compared to RWA (Risk-Weighted Asset).RWA is a calculation of the risk of assets and credit.If the RWA decreases, the risk contained in the credit is low, and the credit is smooth.Current loans generate interest income which increases bank profits.Based on this description, the authors propose the following hypothesis: H3: Intellectual Capital has significant effect on CAR 3 Methods

Population and Samples
The population for this study is banking companies listed on the Indonesia Stock Exchange (IDX) from 2016-2020.The data source used is secondary data, namely financial reports and annual reports of banking companies listed on the (IDX) for 2016-2020, which are taken from the official website of the Indonesia Stock Exchange (www.idx.co.id).The sample was determined using the purposive sampling method with several criteria.Based on the predetermined criteria, the sample data obtained are:

Measures
This study uses some of the variable measurements listed in Table 3.

Data Analysis
This study uses the quantitative data analysis method.In the data analysis stage, the hypothesis will be tested using the regression analysis method with statistical software WarpPLS version 7.0.

Descriptive Analysis
The data obtained from the research sample companies were collected, and then descriptive statistical tests were carried out to determine the mean, minimum, maximum, and standard deviation of data.The following are the results of descriptive statistical tests from the sample data that have been obtained: Table 4 shows that the average distance between the data values for each variable is different.Data with an average number lower than the standard deviation means that the data is spread over an extensive range of values.The variables are HCE, SCE, ROA, NIM, CAR, SIZE and LOANTA.

Outlier Model
Analysis of this measurement model tries to evaluate the relationship of latent variables and their indicators through reliability and convergent validity tests.There are two criteria to assess whether the outer model meets the requirements of convergent validity for reflective constructs namely (1) loadings must be above 0.70 and (2) the p-value is significant (<0.05) (Benitez et al., 2020;Hair et al., 2010).The results of the analysis with the first and second iterations, SCE has factor loadings of 0.524, CAR has factor loadings of -0.388.So, the indicator is considered invalid and removed from the measurement.For convergent validity, the accepted measurement model shows that the AVE is equal to or greater than 0.50 (Kock & Lynn, 2012).Composite reliability is a measure of internal consistency in scale items.Cronbach's alpha can be considered equal to the total variance of the accurate scores relative to the total variance of the scale scores.The limit value of AVE is 0.50, and the composite reliability is 0.70.Table 5. shows the AVE in each variable acceptable to the model.Discriminant validity is an analysis to check the relationship between the same latent variables that should not be related.Otherwise, it will cause multicollinearity.The following criterion for this analysis is that the square root of the extracted mean-variance must be higher than any correlation involving the latent variable (Kock & Lynn, 2012).Therefore, this study accepts a valid and reliable measurement model.

Outer Model
Practically, the inner model test evaluates the structure of a given model, which is the effect of intellectual capital on financial performance.In table 4.6, the Adjusted R Square value of 0.721 indicates a high level of predictive accuracy because it is close to one.This result means that the independent variable affects the dependent variable by 72%, while other variables influence the remaining 28%.In addition, a model with predictive validity.Based on these considerations, this study accepts the structural model.R Square on the endogenous construct.The value of R Square is the coefficient of determination on the endogenous construct.(Ghozali, 2018) R square values are 0.67 (strong), 0.33 (moderate) and 0.19 (weak).The study concluded that there is a strong relationship.

Goodness of Fit
The purpose of the goodness of fit is to find out whether one model has a better model according to the original data than the other as a measure related to the quality of the model.There are ten global model fit and quality indexes provided by the software, but this study only analyzed four fit models related to the study.Table 8. shows that there are some rules about the model (Kock, 2015).First, the p-values for APC, ARS, and AARS are all equal to or lower than 0.05.Second, APC and AARS are generally lower than ARS because, for APC, the path coefficient associated with the variable will be low.Third, to measure multicollinearity, AVIF can only be accepted if it is lower than five or ideally lower than 3.3.Therefore, the test results show the model conforms to the above rules.The results of data processing can be concluded in table 9. Panel A estimates the results for the direct effect of the intellectual capital model on financial performance, while panel B estimates the indirect effect of the model.The significant relationship between Intellectual Capital and Return on Assets proves that intellectual capital has a role in creating firm value and improving financial performance.These results are consistent with previous studies (Chen et al., 2005;Mondal & Ghosh, 2012;Nimtrakoon, 2015;Ozkan et al., 2017;Soewarno & Tjahjadi, 2020).The findings in this study describe that among the components of intellectual capital, HCE and SCE are the key elements that drive profitability.On the other hand, CEE does not affect financial performance because the measurement model analysis is not feasible.The results of this study also show that intellectual capital has an effect on banking performance in Indonesia.The VAIC value is a measurement of the company's efficiency level which will create more value for the company.The higher the VAIC, the better the company's efficiency level.When VAIC decreases, firm efficiency will worsen firm value (Razak et al., 2016).

Multiple Regression Test Result
Research shows that HCE with its indicators is salary costs, employee training costs, employee education costs, and other costs incurred by the company in managing human resources to support the quality of its employees.Good quality human resources in the company increase employee productivity, and increased employee productivity results in increased company profits.In addition, SCE has a positive effect on ROA, indicating that the company can fulfill routine processes and structures supporting overall performance, such as improving operational systems, management philosophy and company organizational culture.Increasing IT in the banking industry is increasingly needed because bank operations will be more efficient and increase competitiveness.It will affect profits for the company.Organizations with a firm structure will have a culture of supporting employees to try new things and develop employee abilities.It will result in a competitive advantage that will relatively increase profitability for the company.Therefore, the focus on HCE and SCE needs to be an essential concern.It is evidenced by Bank Mandiri, which won The Best Overall for Corporate in Human Capital 2020 (Wholesale Banking) at the prestigious Digital Marketing & Human Capital (DMHC) Award 2020 after receiving the best score from the jury for its success in transforming in the digital field.SCE can be improved by implementing various internal control processes through the implementation of corporate governance best practices (Mensah Onumah & Tornam Duho, 2019) The significant relationship between Intellectual Capital and Net Interest Margin proves that intellectual capital has a role in creating firm value and improving financial performance.These results are consistent with previous research conducted by (Ikapel, 2016).The Net Interest Margin ratio is used to measure the ability of bank management to manage their productive assets to generate net interest income.The larger this ratio indicates the increasing interest income on earning assets managed by the bank.The productive asset with the most significant proportion is credit.Credit distribution to customers affects interest income through the size of the loan disbursed by the bank and the interest rate.
This research shows that HCE, with its indicators, is the cost incurred by the company to develop human resources and get a secure position in increasingly fierce market competition.Banks with reliable human resources and good management will support an increase in net interest income.The increase in Net Interest Margin boosted the rise in bank profits.Meanwhile, in terms of SCE with indicators of IT system, organizational culture, management philosophy, and all forms of intellectual property owned by the company.An individual can have a high intellectual level.Still, if the organization has poor systems and procedures, the intellectual capital cannot achieve optimal performance, and the potential is not utilized optimally.Therefore, focusing on SCE is equally essential.The IT system has been proven to support the increase in the bank's net interest margin and improve service quality because competent management resources support the ability to manage productive assets.More banking transactions also affect the increase in bank income.One of the causes of this increase is the convenience of customers using the service facilities provided by the banking sector.It is in line with the research results that have been done where the HCE and SCE values show a significant value.

Conclusion
The development of banking which has begun to enter the era of digitalization requires banks to innovate and compete to get attention.Intellectual capital is no longer seen as a routine expense that does not have a direct impact on the company.IC is considered as part of the company's investment toward corporate sustainability.Human capital represents the individual knowledge stock of an organization represented by its employees and is a combination of education, experience, and attitude about life and business.Human capital includes human resources within the organization (employees) and external resources related to the organization, such as consumers and suppliers.In addition, it is necessary to support the technology system prepared by the company in creating a competitive advantage with other banks and banks also need to create good relations with stakeholders to create trust in building marketing channels and customer relationships.This IC component is believed to be able to improve the company's performance in the current era of rapid technological development.This study investigates the effect of intellectual capital (HCE, SCE, and CEE) measured by Pulic's VAIC (2008) model on financial performance (ROA, NIM, and CAR).This study analyzes 125 data from 25 Indonesian banks listed on the IDX for 2016-2020 with a purposive sampling method and processed with WarpPLS 7.0 software used to run the data.The results are summarized into four important points; namely, Intellectual Capital has a positive effect on Return On Assets and Net Interest Margin, but Intellectual Capital does not affect CAR because the value of the CAR coefficient statistically does not meet the requirements of reliability and convergent validity to maintain the variable.This research encourages banking companies in Indonesia to pay more attention to intellectual capital, specifically HCE and SCE.Because of the competent resources owned by the company, the company can achieve financial benefits and maintain the company in the long term.Precisely, human capital efficiency (HCE) consists of skills, experience, productivity, knowledge, and the suitability of employees to their workplace.Meanwhile, Structural capital efficiency (SCE) includes intellectual capital items such as corporate culture, IT, strategy, organizational network, patents, and brand names.The company's success is based on the company's strength to create good relationships with employees and also with external parties of the company.The implication of this research is that a company should focus more on intellectual capital rather than tangible assets.In this case, maximizing HCE and SCE will create a competitive advantage that results in better financial performance.In addition, for investors this research is expected to be a consideration for investors in investing their capital in a bank, making it easier for the bank to provide credit.The limitation of this research is the research object only focuses on banking companies with quite a few positive profits in a pandemic, this study only uses Pulic's VAIC (2008) model to measure intellectual capital.For future research, the measurement of human capital in this research is still very simple, namely only using the salary cost figure as an indicator.Whereas conceptually, human capital includes skills, experience, productivity, knowledge, and compatibility between employees and their workplace.

Figure 2 and
Figure 2 and Figure 3 represent the results of WarpPLS 7.0 model, referring to the previously mentioned two steps of hypothesis testing.

Table 2 .
Research Sample Selection

Table 5 .
Convergent Reliability and Validity Test Results

Table 5 .
shows that the SCE analysis has factor loadings of 0.524, and CAR has factor loadings of -0.388.So that the indicator is considered invalid and removed from the measurement because deletion increases the value of composite reliability and AVE.In addition, another consideration in removing the construct is its impact on the content validity of the construct.Indicators with a small AVE, namely financial performance, are maintained because they contribute to constructing content validity.

Table 6 .
Discriminant Validity Test Results

Table 7 .
Inner Model Test Result

Table 8 .
Discriminant Validity Test Results

Table 9 .
Hypothesis Test Result