Determinants of Liquidity Risk in Islamic Banks: A Panel Study

Abstract

This paper investigates  the determinants of  Islamic bank liquidity using a panel of 60 Islamic banks in MENA and Southeastern Asian countries. The period of study considers the subprime crisis insofar it ranges from 2004 to 2012. The analysis illustrates that liquidity risk depends on idiosyncratic factors such as bank profitability, capital adequacy ratio and investment ratio. While the profitability bank indicator (Return on Assets : ROA) positively affects the exposure to liquidity shortage, the capital adequacy ratio (CAR) and  the ratio of bank’s investment have statistically significant negatively relationships with the liquidity risk  measure. Nevertheless, the bank size does not matter probably because both small and large Islamic have difficulties to manage their liquidity risk. The real growth rate of Gross domestic product has negative but irrelevant association with liquidity risk.

Islamic bank should improve their Profits and Losses Sharing investment in order to reduce their liquidity risk. Moreover, it is critical to reinforce instruments of liquidity risk management.

Keywords: Islamic bank, Investment, Liquidity risk, Management, Return on Assets, Capital ratio