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Intellectual capital and financial stability: a strategic pathway for sustainable growth in Pakistan’s banking sector

M. Farooq,Roshaiza Taha,Muhammad Irfan Javaid,Siti Nurain Binti Muhmad

Published 2025 in Journal of Financial Economic Policy

ABSTRACT

This study aims to evaluate the impact of intellectual capital on financial stability in Pakistan’s banking sector, using dynamic capabilities theory (DCT) and resource-based view theory (RBVT) as conceptual frameworks. DCT and RBVT provide a foundation for understanding how intellectual capital can influence a bank’s governance, resource allocation and overall stability. The sample consists of 22 banks, with a 14-year data set sourced from the Pakistan Stock Exchange in Pakistan. This study uses Ante Pulic’s model to measure intellectual capital (IC) efficiency. Random-effect panel regression is used for analysis, and two-stage least squares (2SLS) regression is applied to address endogeneity issues in the estimation process. The findings reveal that based on the random effect model, IC and its components positively affect financial stability, except structural capital efficiency. In contrast, the 2SLS results show that all variables, including IC and its components, positively affect financial stability. This research provides valuable insights for stakeholders in Pakistan’s banking sector by emphasizing the crucial role of IC in enhancing financial stability. Bank managers can leverage these findings to prioritize investments in human capital, structural capital and relational capital, thereby strengthening the long-term stability of their institutions. Policymakers can also benefit by developing frameworks that promote the efficient utilization of IC in banks, contributing to overall economic stability. Additionally, the results provide guidance for regulators to focus on enhancing IC-related policies, ensuring that banks are better equipped to manage risks and adapt to dynamic financial environments. This paper contributes to the limited literature on the role of IC in enhancing financial stability in the banking sector, particularly in emerging markets like Pakistan. To the best of the authors’ knowledge, only one prior study has examined this relationship in Pakistan and globally, research on the impact of IC on financial stability in banks remains scarce. Therefore, this study provides valuable insights into an underexplored area using a unique data set from Pakistan’s banking sector.

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