The Determinants of Liquidity Risk in Islamic Banks: A Case of Sudanese Banking Sector
Keywords:
Islamic Banking, Liquidity Risk, Risk Management, Short-term Securities, Sudanese Banks.
Abstract
Liquidity risk either due to a surplus or serious shortage in liquidity has a significant impact to the performance and sustainability of Islamic banks. Nevertheless, there are still no common agreement on specific factors that determine the liquidity risk in Islamic banking. This study investigates the determinant factors that affect the liquidity risk of Sudanese Islamic banks. A sample of 11 banks has been selected for a period of 7 years (2012 – 2018). The study is based on secondary data that analysed using Pearson correlation and multiple regression analysis for hypotheses tests. It investigated the explanatory variables of the bank’s cash position (CASH), investment in short-term securities (SECA), degree of financing the assets from customers’ deposits (DPAS) and bad financing and credit risk (NPL) as representatives of banks’ specific factors plus one microeconomic factor which is Gross Domestic Product (GDP). The analysis found a significant and negative relation of CASH and SECA with the liquidity risk in Islamic banks. On the other hand, the results reveal that the DPAS and NPL variables have a positive relation and significant, while the GDP seen to be irrelevant to liquidity risk in Islamic bank. The importance of the study is that it touches the most significant type of risk that most of Sudanese Islamic banks face, and the data analysed covers a relatively longer period of time than similar studies for a single country. We target that the study contributes in providing decision-makers with reasonable ground for prediction and managing the liquidity risk.
JEL Classification: G21, G17, G32.
References
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Basel Committee on Banking Supervision. (2013). Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools”, Basel, Switzerland. Retrieved from https://www.bis.org/publ/bcbs238.pdf.
Basel Committee on Banking Supervision. (2014). Basel III: the net stable funding ratio, BCBS, Basel, Switzerland. Retrieved from https://www.bis.org/bcbs/publ/d295.pdf.
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Effendi, K. A., & Disman, D. (2017). Liquidity Risk: Comparison between Islamic and Conventional Banking. European Research Studies, 20(2), 308-318.
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İncekara, A., & Çetinkaya, H. (2019). Liquidity Risk Management: A Comparative Analysis of Panel Data Between Islamic and Conventional Banking in Turkey. Procedia Computer Science, 158, 955-963.
International Organization of Securities Commissions. (2002). Sound Practices for the Management of Liquidity Risk at Securities Firms”, Technical Committee Report,1-31.
Iqbal. A. (2012). Liquidity Risk Management: A Comparative Study between Conventional and Islamic of Pakistan, Global Journal of Management and Business Research, 12(5),54-64.
Islam. A., Farooq. M., and Ahmad. A. (2017). Factors Affecting Liquidity Position of Islamic Banks, City University Research Journal, Special Issue: AIC, Malaysia, 27-36.
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Jedidia, K. B., & Hamza, H. (2015). Determinants of liquidity risk in Islamic banks: A panel study. Islamic Management and Business, 2(2), 137-146.
Kumar, M., & Yadav, G. C. (2013). Liquidity risk management in bank: a conceptual framework. AIMA journal of management & research, 7(2), 2-12.
Majid, A. (2003). Development of Liquidity Management Instruments: Challenges and opportunities, International Conference on Islamic Banking: Risk Management, Regulation and Supervision, Jakarta–Indonesia. Sept 30 - to October 3, 2003, 1-24.
Milošević-Avdalović, S., & Kalaš, B. (2016). Determinants of deposit potential as inverse liquidity indicator of commercial banks in Serbia. Industrija, 44(3), 61-76.
Mohammed. S. (2015). Liquidity Risk Management in Islamic Banks: A Survey, Afro Eurasian Studies,1(2),215-230.
Muharam. H. (2013). The Influence of Fundamental Factors to Liquidity Risk on Banking Industry: Comparative Study between Islamic Bank and Conventional Bank in Indonesia” (October 12, 2013). Conference in Business, Accounting and Management (Cbam) 2012 1 (2), 359-368, Unissula, Semarang Indonesia.
Nikolaou. K. (2009). Liquidity (risk) concepts definitions and interactions, working paper series no. 1008, 1-70, European Central Bank. Retrieved from http://ssrn.com/abstract_id=1333568.
Onour. I. A. & Abdo. M. M. (2018). Liquidity Risk Management in Islamic Banks: Evidence from Sudan. Retrieved from https://www.researchgate.net/publication/328306071.
Ramzan. M. & Zafar. M. I. Z. (2014). Liquidity Risk Management in Islamic Banks: A Study of Islamic Banks of Pakistan, Interdisciplinary Journal of Contemporary Research in Business, 5(12),199-216.
Rizkiah, S. K. (2018). Liquidity Management in Islamic Banking: Issues and Challenges, Tazkia Islamic Finance and Business Review,12(2),131-152.
Shamas, G. S., Zairani. Z., & Zairy. Z. (2018). The Impact of Bank’s Determinants on Liquidity Risk: Evidence from Islamic Banks in Bahrain, Journal of Business & Management, 6(1),1-22.
Shaikh. S. A. (2015). Panel Data Estimation of Liquidity Risk Determinants in Islamic Banks: A Case Study of Pakistan, MPRA Paper 68749,1-12, University Library of Munich, Germany.
Thomson Reuters. (2018). Islamic Finance Development Report 2018 – Building Momentum report. Retrieved from https//ceif.iba.edu.pk/pdf/Reuters-Islamic-finance-development-report2018.pdf.
Van Greuning, H., & Iqbal, Z. (2008). Risk Analysis for Islamic Banks, The International Bank for Reconstruction and Development, The World Bank, 1818 H Street NW, Washington, DC.
Wahyudi. I., Rosmanita. F., Prasetyo. M. B., Putri. N. I. S., (2015). Risk Management for Islamic Banks: Recent Developments from Asia and Middle East, Published by John Wiley & Sons Singapore Pte. Ltd.
Zaghdoudi. K. & Hakimi. A. (2017). The Determinants of Liquidity Risk: Evidence from Tunisian Banks, Journal of Applied finance and Banking, 7(2),71-81.
Akhtar, M. F., Ali, K., & Sadaqat, S. (2011). Liquidity risk management: a comparative study between conventional and Islamic banks of Pakistan. Interdisciplinary journal of research in business, 1(1), 35-44.
Ali, S. S. (2004, February). Islamic modes of finance and associated liquidity risks. In conference on Monetary Sector in Iran: Structure, Performance & Challenging Issues, February, Tehran, Iran.
Alzoubi, T. (2017). Determinants of liquidity risk in Islamic banks. Banks and Bank Systems, 12(3), 142-147.
Ariffin, N. M., Archer, S., & Karim, R. A. A. (2009). Risks in Islamic banks: Evidence from empirical research. Journal of Banking Regulation, 10(2), 153-163.
Ayub, M. (2017). Liquidity Management by Islamic Banks: An Issue or a Contrivance for Risk-Free Returns, Journal of Islamic Business & Management, 7(1),1-10.
Basel Committee on Banking Supervision. (2000). Sound Practices for Managing Liquidity in Banking Organisations, Basel, Switzerland. Retrieved from https://www.bis.org/publ/bcbs69.pdf.
Basel Committee on Banking Supervision-principles. (2008). Principles for Sound Liquidity Risk Management & Supervision- Basel, Switzerland. Retrieved from https://www.bis.org/publ/bcbs144.pdf.
Basel Committee on Banking Supervision. (2013). Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools”, Basel, Switzerland. Retrieved from https://www.bis.org/publ/bcbs238.pdf.
Basel Committee on Banking Supervision. (2014). Basel III: the net stable funding ratio, BCBS, Basel, Switzerland. Retrieved from https://www.bis.org/bcbs/publ/d295.pdf.
Bello, N., Hasan, A., & Saiti, B. (2017). The mitigation of liquidity risk in Islamic banking operations. Banks & bank systems, 12(3),154-165.
Central bank of Sudan. (2018). Annual Report, 58. Retrieved from https://cbos.gov.sd/en/content/ annual-report-2018.
Chowdhury, M. M., Zaman, S. & Alam, M. A. (2019). Liquidity Risk Management of Islamic Banks in Bangladesh, International Journal of Business and Technopreneurship, 9(1),37-48.
Diamond, D. W., & Rajan, R. G. (2011). Fear of fire sales, illiquidity seeking, and credit freezes. The Quarterly Journal of Economics, 126(2), 557-591.
Effendi, K. A., & Disman, D. (2017). Liquidity Risk: Comparison between Islamic and Conventional Banking. European Research Studies, 20(2), 308-318.
Gafrej. O. & Abbes. M. B. (2017). Liquidity Determinants of Islamic and Conventional Banks. Journal of Islamic Banking and Finance, 34(2),44-61.
Hair Jr. J. F., Black. W. C., Babin. B. J. & Anderson. R. E. (2014). Multivariate Data Analysis), 7th ed. Pearson Education Limited 2014, UK. London. Retrieved from www.pearsoned.co.uk.
İncekara, A., & Çetinkaya, H. (2019). Liquidity Risk Management: A Comparative Analysis of Panel Data Between Islamic and Conventional Banking in Turkey. Procedia Computer Science, 158, 955-963.
International Organization of Securities Commissions. (2002). Sound Practices for the Management of Liquidity Risk at Securities Firms”, Technical Committee Report,1-31.
Iqbal. A. (2012). Liquidity Risk Management: A Comparative Study between Conventional and Islamic of Pakistan, Global Journal of Management and Business Research, 12(5),54-64.
Islam. A., Farooq. M., and Ahmad. A. (2017). Factors Affecting Liquidity Position of Islamic Banks, City University Research Journal, Special Issue: AIC, Malaysia, 27-36.
Islamic Financial Services Board – IFSB – 1. (2005). Guiding principles of Risk Management for Institutions (Other than Insurance Institutions) Offering Only Islamic Financial Services. Kuala Lumpur, Malaysia. Retrieved from https://www.ifsb.org/published.php.
Islamic Financial Services Board – IFSB – 12. (2012). Guiding Principles on Liquidity Risk Management for Institutions Offering Islamic Finance (Excluding Islamic Insurance (Takaful) Institutions and Islamic Collective Investment Schemes), Kuala Lumpur, Malaysia. Retrieved from https://www.ifsb.org/published.php.
Islamic Financial Services Board – GN6 (2015). Guiding Note on Quantitative Measures for Liquidity Risk Management for Institutions Offering Islamic Finance (Excluding Islamic Insurance (Takaful) Institutions and Islamic Collective Investment Schemes), Kuala Lumpur, Malaysia. Retrieved from https://www.ifsb.org/published.php#GN.
Jedidia, K. B., & Hamza, H. (2015). Determinants of liquidity risk in Islamic banks: A panel study. Islamic Management and Business, 2(2), 137-146.
Kumar, M., & Yadav, G. C. (2013). Liquidity risk management in bank: a conceptual framework. AIMA journal of management & research, 7(2), 2-12.
Majid, A. (2003). Development of Liquidity Management Instruments: Challenges and opportunities, International Conference on Islamic Banking: Risk Management, Regulation and Supervision, Jakarta–Indonesia. Sept 30 - to October 3, 2003, 1-24.
Milošević-Avdalović, S., & Kalaš, B. (2016). Determinants of deposit potential as inverse liquidity indicator of commercial banks in Serbia. Industrija, 44(3), 61-76.
Mohammed. S. (2015). Liquidity Risk Management in Islamic Banks: A Survey, Afro Eurasian Studies,1(2),215-230.
Muharam. H. (2013). The Influence of Fundamental Factors to Liquidity Risk on Banking Industry: Comparative Study between Islamic Bank and Conventional Bank in Indonesia” (October 12, 2013). Conference in Business, Accounting and Management (Cbam) 2012 1 (2), 359-368, Unissula, Semarang Indonesia.
Nikolaou. K. (2009). Liquidity (risk) concepts definitions and interactions, working paper series no. 1008, 1-70, European Central Bank. Retrieved from http://ssrn.com/abstract_id=1333568.
Onour. I. A. & Abdo. M. M. (2018). Liquidity Risk Management in Islamic Banks: Evidence from Sudan. Retrieved from https://www.researchgate.net/publication/328306071.
Ramzan. M. & Zafar. M. I. Z. (2014). Liquidity Risk Management in Islamic Banks: A Study of Islamic Banks of Pakistan, Interdisciplinary Journal of Contemporary Research in Business, 5(12),199-216.
Rizkiah, S. K. (2018). Liquidity Management in Islamic Banking: Issues and Challenges, Tazkia Islamic Finance and Business Review,12(2),131-152.
Shamas, G. S., Zairani. Z., & Zairy. Z. (2018). The Impact of Bank’s Determinants on Liquidity Risk: Evidence from Islamic Banks in Bahrain, Journal of Business & Management, 6(1),1-22.
Shaikh. S. A. (2015). Panel Data Estimation of Liquidity Risk Determinants in Islamic Banks: A Case Study of Pakistan, MPRA Paper 68749,1-12, University Library of Munich, Germany.
Thomson Reuters. (2018). Islamic Finance Development Report 2018 – Building Momentum report. Retrieved from https//ceif.iba.edu.pk/pdf/Reuters-Islamic-finance-development-report2018.pdf.
Van Greuning, H., & Iqbal, Z. (2008). Risk Analysis for Islamic Banks, The International Bank for Reconstruction and Development, The World Bank, 1818 H Street NW, Washington, DC.
Wahyudi. I., Rosmanita. F., Prasetyo. M. B., Putri. N. I. S., (2015). Risk Management for Islamic Banks: Recent Developments from Asia and Middle East, Published by John Wiley & Sons Singapore Pte. Ltd.
Zaghdoudi. K. & Hakimi. A. (2017). The Determinants of Liquidity Risk: Evidence from Tunisian Banks, Journal of Applied finance and Banking, 7(2),71-81.
Published
2020-04-10
How to Cite
Mennawi, A. N. A., & Ahmed, A. A. (2020). The Determinants of Liquidity Risk in Islamic Banks: A Case of Sudanese Banking Sector. International Journal of Islamic Banking and Finance Research, 4(1), 38-49. https://doi.org/10.46281/ijibfr.v4i1.542
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
Copyright (c) 2020 Ahmed Nourrein Ahmed Mennawi, Ahmed Ali Ahmed
This work is licensed under a Creative Commons Attribution 4.0 International License.
