The aim of this study is to investigate the relationship between immaterial capital and financial performance of eighteen listed Islamic and conventional banks in Bahrein and United Arab Emirates for the year 2018. Data is obtained from annual reports of banks. The approach used to analyze the efficiency of banks is Value added intellectual coefficient (VAIC). The financial performance of the selected banks for this study is evaluated by ROA and ROE measures. The immaterial capital (and its components human capital and structural capital) of banks have been analyzed and their impact on financial performance has been estimated using multiple regression technique. The results show that the VAIC value is the same for Islamic banks and conventional banks. The findings show that VAIC is positively associated with ROA while the three components of VAIC showed mix results on banks’ performance. In the context of knowledge economy, the VAIC approach may be convenient for the banks and policy makers to integrate the immaterial capital in the decision-making process. A future study including listed banks in all countries of Gulf Cooperation Council (GCC) could provide a better evaluation of the impact of immaterial capital on financial performance for the banking sector, especially Islamic banking.
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