How Competitive Advantage mediates the impact of use of Artificial Intelligence on

Operational and Financial Performance of the Pakistani Banks

Introduction:

In the economy, banks are essential. They manage public savings and provide funding for trade

and corporate expansion. In addition, some research suggests that the effectiveness of financial

intermediation affects economic growth, additional research demonstrate that financial institution

defaults can trigger systemic financial crises that have an adverse effect on the economic system

overall.

Stakeholders consists of regulators, investors, consumers, and the general public, have a keen

interest in how banks are performing. Although financial ratios have historically been used to

assess bank performance, improvements in technology, particularly in the area of artificial

intelligence (A.I.), have led to a move toward these quantitative methodologies.

For the past 20 years, technological innovation has been steadily changing several businesses in

various ways. But one of the most important areas of technical advancement over the last ten

years has been the development of artificial intelligence (Newman Citation 2019; Kaplan

Citation 2016). The speed at which technology is advancing and how it affects banks is

concerningly quick. Because of this, businesses looking to become more competitive are making

large investments in digital technologies like artificial intelligence to stay current. Artificial

intelligence has been embraced by the banking sector early on. The workforce in the banking

sector has experienced rapid technological transformation. In 2020, Richard Baskervilk asserted

that banks need to go through a digital revolution to stay competitive in a rapidly evolving

financial landscape. Nonetheless, they do caution banks and suggest that they recognize the

challenges posed by the digital revolution and work to address them through effective regulatory
compliance, data security protocols, and cultural shifts. The authors suggest that banks prioritize

customer experience and invest in new technology in order to stay ahead of the curve in the

digital age.

According to Manthoulis et al. (2020), there is a growing trend in the application of AI

approaches to banking problems, indicating their significance and applicability to this industry

are growing. A measure of a bank's effectiveness in generating value from its intangible assets,

or intellectual capital (IC), is called Value Added Intellectual Capital (VAIC). IC has three

primary domains: human capital, which comprises the expertise, abilities, and experience of the

bank's staff members. Structural Capital: The technology, methods, and procedures that the bank

employs. Customer capital refers to the bank's reputation and ties with its clients; it is sometimes

combined with relational capital. The knowledge economy makes less sense for the conventional

emphasis on tangible capital. Banks compete with one another based on their capacity for

innovation, risk management, and first-rate customer care. These capabilities all stem from

strong intellectual capital. The use of Artificial intelligence in banks relates to the structural

capital of value added intellectual capital part that ultimately affects the performance of banks.

Problem Statement:

According to Zopounidis et al. (2015), the banking industry plays a significant role in financial
markets as an intermediary, hence evaluating the many financial elements of banks is important
and deserves a place in educational literature. Studies in this field of artificial intelligence (AI)
have shown that there is a growing need to employ increasingly complex techniques in banking
research. Al is accelerating the rate of change in the financial industry, claims Dr. Navleen Kaur
(2020). operational performance, analytics, and core banking. and client support are just a couple
of the banking industries that employ AI technology. Banking is now more broadly defined by
artificial intelligence than it was by traditional brick-and-mortar establishments. The banking
industry is developing and growing as a result of the new financial services that contemporary
banks are offering. Resources can be used more effectively thanks to technology. the availability
of financial services and the ease of low-value transactions. Utilizing technology wisely can help
banks advance more quickly and grow their operations. Cristina Gallego-Gomez (2020) asserts
that enterprises nowadays deal with challenging problems including handling enormous volumes
of information and needing to react fast to stakeholders, consumers, etc. People search for more.
Artificial intelligence techniques offer a more humanized experience, as they combine mass
customization and technology. It is more crucial than ever to invest in enhancing crucial
elements that can provide businesses a competitive edge, given the aforementioned
considerations, the restructuring of the banking sector, and the adoption of laws meant to bring
banks closer to their clients. For banking organizations to become more efficient, artificial
intelligence is consequently required. Dr. Shivraj Singh (2019) claims that a lot of businesses,
including banking, are currently seeing a digital boom, particularly in the wake of
demonetization. Modern technologies like artificial intelligence (Al), cloud computing
(CLOUD), and block chain are just a few of the ways traditional banks are reducing costs and
increasing efficiency. Even though AI is still in its early stages of development, the financial
sector is poised for a revolution. As the AI industry expands and evolves, productivity will rise at
a lower cost. It will be necessary for managers across all industries to invest more time and
money in training and development. There is no denying that the current push for digitalization is
having a significant impact on traditional banking procedures. However, it has also increased the
institutions' exposure to the most current developments and innovations that have fueled
industrial and economic growth.

However, the literature has shown numerous advantages of AI applications, including cost-
effectiveness and improved customer service (Crosman, 2018), there has been relatively little
research on AI adoption. Previous research in this area ignored the intellectual perspective of
artificial intelligence in favor of focusing on methods and applications (Walczak, 2016).

So, research needed on artificial intelligence disclosure and firm performance with mediation
effect of intellectual capital. According to According to the Pramestiningrum (2013), intellectual
capital is an intangible resource of knowledge that can influence a firm's performance in making
decisions for both immediate and long-term advantages. In actuality, a manager's efforts made in
support of knowledge constitute their intellectual capital. These initiatives are connected to the
growth of marketing initiatives, organizational restructuring, personnel development, and
technology innovation (Ulum, 2015). In order to better understand how the implementation of AI
disclosure in financial services impacts firm performance, this paper will highlight the
significance of this technology as well as its obstacles.

Significance of Study:

AI offers a range of innovative possibilities for data collecting, analysis, security, and process

optimization. It presents an enormous number of risks for established banks as well. The banking

industry's officials may solve the obstacles to implementing AI in banking with the help of this

study, which offers essential perspectives. Given the information, policymakers can develop their

own plans to increase the adoption of AI and AI disclosure.

Research Methodology:

Research method is a mix method i.e. qualitative and quantitative. Artificial Intelligence usage

will be measured qualitatively from the annual financial statements of banks whereas

Competitive Advantage, Operational Performance and Financial Performance will be measure

quantitatively

Financial Performance:

In a resource view of business benefits are measured considering both tangible and intangible assets

(Canibano et al., 2000). However, measuring financial performance remains the most popular model in

examining business performance. Financial indicators are considered to reflect the fulfillment of

economic goals of a business entity and this characteristic of financial indicators made it a 519 Financial

performance of Indian banks component of business performance indicators (Venkatraman and

Ramanujam, 1986). A number of accounting- and market-based measures have been utilized by the

researchers as proxy measures of financial performance indicators, namely, profitability (ROA, ROE),
productivity (ATO) and market to book ratio (Firer and Stainbank, 2003; Firer and Williams, 2003; Chen

et al., 2005). For the purpose of conducting the analysis in the present study, three dependent variables,

namely, ROA, ROE and ATO have been used separately. At the moment, there is no specific theoretical

perspective or adequate empirical evidence that supports the superiority of any specific proxy measure

over the others. It is, therefore, decided that for the purposes of the present study, the commonly used

proxy measures will be applied. Consequently, the proxy measures for each dependent variable are

defined as follows: (1) ROA: ROA measured as the ratio of the net income (less preference dividends)

divided by the book value of total assets, shows the degree to which a firm’s revenues exceed over cost

(Firer and Williams, 2003; Chen et al., 2005). (2) ROE: measured as the ratio between the net incomes

(less preference dividends) divided by the book value of total equity, it shows the earnings available to

the equity shareholders and is generally considered an important financial indicator for investors

(Najibullah, 2005). (3) ATO: this is used to measure the productivity of banks which is computed by

dividing income of banks by total funds employed. It is not a valid measure of productivity of banks.

However, the measure is comparable between different empirical studies.

Operational Performance:
 Operational
Performance

Artificial Competitive
Intelligence Advantage
Disclosure

Financial
Performance