Liquidity Risk Management and Financial Performance of Islamic Banks: Empirical Evidence from Global Islamic Banks

Abstract

There are two parallel pillars in banking industry i.e. Islamic Banking and Conventional banking. Conventional banks are interest based while Islamic banks are interest free banking. Islamic banking is key area for all Muslims, and grasps their attention for deposit purposes now a days. This study aims to examine the impact of different liquidity ratios on Islamic bank’s performance. The study selected 25 international Islamic banks for the period of 10 years; as from 2006 to 2015. Eight differently composed liquidity ratios from balances sheet’s current items, were used in study; quick ratio (QR), cash and due from bank to asset ratio (CDA), current ratio (CR), liquid to asset ratio (LA), investment to asset ratio (IT), cash and due from banks to deposit ratio (CDD), investment to deposit ratio (IDR) and cash deposit ratio (CD) as independent variables. Whereas return on asset (ROA) and return on investment (ROI) used as dependent variable. The age (AG) and size (LTA) of bank are used as control variables. Different analysis technique used to analyze results. Two models were incorporated in study. Results shows LA, QR, CDA, IT and CDD contribute in explaining ROA and ROI. Whereas, the IDR, CD, AG, LTA impact the financial performance but not as strong as the above mentioned because they are not explain all the financial performance indicators. Overall it is concluded that financial performance is impacted by the independent variables of study. The financial performance of Islamic banks improved by maintain liquidity at good level, and holding liquidity further which can cause inverse impact on the financial performance of Islamic banks. The study incorporates some few control variables which has impact on relationship.