Liquidity Risk in Conventional and Islamic Banks Literature Review

Banks play a significant role in financing the economy and take on risky financial activities based on information and trust as they specialized companies with their own specificities. This study was propelled to unravel the determinants that affect financial risk (liquidity risk and credit risk) for conventional and Islamic banks. The bank-level data of conventional and Islamic banks in the regions of Middle East, Southeast Asia, and South Asia between 2006 and 2014 were collected from the Bankscope, which is a commercial database produced by the Bureau van Dijk. Thus, for conventional banks the obtained results exhibited significantly positive relationship between regulatory quality towards liquidity risk. Then, the relationship between regulatory quality towards credit risk was negatively significant for conventional banks. Meanwhile, as for Islamic banks, the relationship between government effectiveness and regulatory quality towards financial risk was insignificant. Hence, the regulators or policymakers are able to identify specific mechanism to improve the risk management of these banks as well through this study.

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Liquidity Risk Management: A Comparative Study between Conventional and Islamic Banks in Bangladesh

Journal of Business and Technology (Dhaka) ◽

10.3329/jbt.v10i2.29465 ◽

2016 ◽

Vol 10 (2) ◽

pp. 18-35 ◽

Cited By ~ 3

Author(s):

Md Lutfor Rahman ◽

SM Hasanul Banna

Keyword(s):

Risk Management ◽

Liquidity Risk ◽

Equity Capital ◽

Capital Adequacy ◽

Annual Reports ◽

Islamic Banks ◽

Working Capital ◽

Return On Assets ◽

Conventional Banks ◽

Conventional And Islamic Banks

Liquidity risk may arise from diverse operations of financial intermediaries, facilitators and supporters as they are fully liable to make available liquidity when required by the third party. Incase of Islamic Banks additional efforts are required for scaling liquidity management due to their unique characteristics and conformity with Shariah principles. The objective of this study is to look into the liquidity risk associated with the solvency of the financial institutions, with a purpose to evaluate liquidity risk management (LRM) through a comparative analysis between conventional and Islamic banks of Bangladesh. This paper investigates the significance of Size of the Firm, Net Working Capital, Return on Equity, Capital Adequacy and Return on Assets (ROA), on Liquidity Risk Management in conventional and Islamic banks in Bangladesh. The study has taken six mid-size banks- three conventional and three Islamic banks as samples. It is based on secondary data which are collected from the selected banks annual reports, covering a period of 2007-2011. Independent variables that have positive but insignificant relation are; size of the bank and net working capital to liquidity risk in Islamic banks and in case of conventional banks size of bank is negatively related with the liquidity risk. Only return on assets is positively affecting the liquidity risk at 10% level in case of conventional banks, but in Islamic banks the relationship is insignificant. The other variables are found to be insignificant in affecting the liquidity risk for both the conventional and Islamic banks in BangladeshJournal of Business and Technology (Dhaka) Vol.10(2) 2015; 18-35

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STRESS TESTING OF LIQUIDITY AT A SAMPLE OF SYRIAN PRIVATE BANKS

Vestnik of Kazan state agrarin university ◽

10.12737/article_5d3e173b3dbe24.25208481 ◽

2019 ◽

Vol 14 (2) ◽

pp. 128-131

Author(s):

Каисси Ал ◽

Kaissi Al

Keyword(s):

Stress Testing ◽

Banking Sector ◽

Liquidity Risk ◽

Islamic Banks ◽

Economic Changes ◽

Sudden Drop ◽

Private Banks ◽

Negative Effect ◽

Using Data ◽

Conventional And Islamic Banks

Sustainability tests are considered as a tool for measuring risk, especially with regard to the assessment of possible events in the banking sector as a result of changes in the general economic situation or the occurrence of certain events in the bank. The aim of this study is to test the ability of two Syrian private banks to bear liquidity risk using data for 2018 in accordance with the coefficients set by the Central Bank of Syria. The results of the study showed the ability of banks to resist liquidity risk in case of sudden withdrawal of funds from current deposits and the availability of sufficient funds to meet it. The sudden drop in current deposits in private Syrian banks does not reduce their ability to pay their financial obligations. Both banks successfully passed testing, achieved a positive net inflow, and the liquidity ratio after the test indicates a low liquidity risk. In other words, Syrian private banks are able to cope with liquidity risks. Private banks, whether ordinary or Islamic, are largely dependent on customer deposits, so any sudden negative changes that occur with these deposits have a negative effect on the liquidity of banks. The Syrian banking sector does not suffer from liquidity risk, has high liquidity ratios and is able to cope with economic changes. When adopting banking laws and regulations, Syrian regulators and authorities should take into account the differences between conventional and Islamic banks in terms of liquidity risks.

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Liquidity risk determinants: Islamic vs conventional banks

International Journal of Law and Management ◽

10.1108/ijlma-03-2018-0060 ◽

2020 ◽

Vol 63 (1) ◽

pp. 65-95

Author(s):

Ameni Ghenimi ◽

Hasna Chaibi ◽

Mohamed Ali Brahim Omri

Keyword(s):

Liquidity Risk ◽

Islamic Banks ◽

Mena Region ◽

Macroeconomic Factors ◽

Content Type ◽

Banking Systems ◽

Similarities And Differences ◽

Conventional Banks ◽

Risk Determinants ◽

Conventional And Islamic Banks

Purpose This paper aims to identify and analyze the similarities and differences of the liquidity risk determinants within conventional and Islamic banks. Design/methodology/approach This study uses a dynamic panel data approach to examine the relationship between liquidity risk and a set of bank-specific and macroeconomic factors during 2005–2015, by selecting 27 Islamic banks and 49 conventional ones operating in the MENA region. More specifically, the dynamic two-step generalized method of moment estimator technique introduced by Arellano and Bond (1991) is applied. Findings The results suggest that the set of bank-specific variables influences the liquidity risk of both banking systems, while macroeconomic factors determine the liquidity risk of conventional banks. Islamic banks are not affected by macroeconomic determinants. Practical implications The research facilitates to the academicians, practitioners and bankers to have an alluded picture about liquidity risk determinants and their management. The findings can be used by bankers’ policy decision-makers to improve and enhance their consideration for liquidity risk management in both banking systems. Indeed, the study makes them aware to manage liquidity risk differently between conventional and Islamic banks, as the results reveal different liquidity risk determinants. Originality/value Compared to the abundant studies on the determinants of credit risk, researchers have not sufficiently addressed the factors influencing liquidity risk. Moreover, none of these few research studies has discussed and compared liquidity risk determinants within both banking systems operating in the Middle East and North Africa (MENA) region. This leads us to identify the similarities and differences between conventional and Islamic banks in the MENA region in respect of systematic and unsystematic determinants of the liquidity risk. The value is attributed to the increasing differentiation between Islamic and conventional banks. Islamic banks are characterized with a different liquidity structure distinguishing them from their conventional counterparts.

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THE DIGITAL BANKING PROFITABILITY CHALLENGES: ARE THEY DIFFERENT BETWEEN CONVENTIONAL AND ISLAMIC BANKS?

Jurnal Akuntansi dan Keuangan Indonesia ◽

10.21002/jaki.2021.04 ◽

2021 ◽

Vol 18 (1) ◽

pp. 55-74

Author(s):

Patria Yunita ◽

Keyword(s):

Financial Services ◽

Global Financial Crisis ◽

Structural Break ◽

Liquidity Risk ◽

Binary Logistic Regression ◽

Annual Reports ◽

Islamic Banks ◽

Portfolio Risk ◽

Financial Conditions ◽

Conventional And Islamic Banks

This study aims to analyze the digital banking industry in uncertain global financial conditions. This analysis used binary logistic regression models, to predict the Indonesia commercial digital banking profitability performances in new normal life based on the analysis of digital banking performances in the second wave of global financial crisis 2017. The probability of bank profitability improvement as dependent variable. The Liquidity Risk, Bank Size, Bank Portfolio Risk, and E-Money transactions as independent variables. Fintech and Bank Type are used as control variables. The analysis period is 2015-2019, based on the time when the rapid progress of digital banking technology was adopted in Indonesia. Data obtained from 57 commercial bank annual reports, statistics of Bank Indonesia and The Financial Services Authority. By the Logit Regression Model, it is concluded that Liquidity Risk, Fintech and Bank Type do not statistically significant, while the Bank’s Portfolio Risk, E-Money transactions and Bank Size statistically significant influencing The Digital Banking Profitability Improvements. From the structural break analysis conducted at the level of the digital banking profitability, there is a difference in the time of "shock" between conventional and Islamic banks. The conventional banks was experienced a structural break over global financial conditions two months before Islamic banks.

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Capital and Liquidity Risks and Financial Stability: Pre, During and Post Financial Crisis Between Islamic and Conventional Banks in GCC Countries, in the Light of Oil Prices Decline

International Journal of Financial Research ◽

10.5430/ijfr.v11n1p329 ◽

2019 ◽

Vol 11 (1) ◽

pp. 329

Author(s):

Hamid Abdulkhaleq Hasan Al-Wesabi ◽

Rosylin Mohammed Yusof

Keyword(s):

Financial Crisis ◽

Financial Stability ◽

Liquidity Risk ◽

Oil Prices ◽

Islamic Banks ◽

Independent Variables ◽

Gcc Countries ◽

Long Run ◽

Conventional Banks ◽

Conventional And Islamic Banks

Purpose: The main purpose of this paper is to investigate the impact of capital ratio and liquidity risks and the effects of the Global Financial Crisis (GFC) periods on financial stability of conventional and Islamic banks before, during, and after GFC in the year of 2008 five GCC countries. To examine empirically the comparison between conventional and Islamic banks based on financial stability and soundness, as well as capitalization and liquidity in the light of the adverse effects of GFC and oil prices declining during the period of (2000-2017).Design/methodology/approach: By using time series data, this study employs Pedroni’s panel cointegration analysis to test the long run relationship between financial stability of conventional banks and Islamic banks as a dependent variable and independent variables including financial crisis under three periods; pre (2006-2007), during (2008-2009) and post (2010-2011) crisis. As well as employing Generalized Least Squares (GLS) to examine the effects between independent variables which are GDP, inflation, financial crisis periods, oil prices fluctuations risk, banking competition, financial sector development, liquidity risk and capital adequacy ratio and dependent variable which is financial stability of conventional and Islamic banks in GCC countries before (2000-2006) during (2006-2009) and after (2010-2017) crisis.Findings: The findings of this research suggest that there is a long run relationship between financial stability of conventional and Islamic banks and capital ratios, liquidity risk and other independent variables. As well as study’s findings support some previous studies and it generally concludes that Islamic banks were performed better during the crisis than conventional banks. Whereas Islamic banks were more stable during crisis as their business model helped to limit the adverse effects of crisis in 2008, they were also more capitalized and less exposure to liquidity risk. Nevertheless, decrease in Islamic banks’ liquidity led some Islamic banks in GCC countries to declare significant losses in 2009.Originality/value: The result of the study contributes towards understanding the determinants of financial stability of both Islamic banks and conventional banks during financial crisis periods. It is important for policy ramifications by the Central Banks in GCC in terms of treating both types of banks differently to mitigate against future financial crises.

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