This document summarizes a research study that compares liquidity risk management between conventional and Islamic banks in Pakistan. The study uses data from 12 banks (6 conventional, 6 Islamic) over 2006-2009. It finds that size of bank and networking capital are positively but insignificantly related to liquidity risk in both models. Capital adequacy ratio is positively significant for conventional banks, while return on assets is positively significant for Islamic banks. The results indicate some differences in factors impacting liquidity risk between conventional and Islamic banking models in Pakistan.
Interest rate risk management for banks under Basel II, presentation by Christine Brown, Department of Finance , The University of Melbourne, Shanghai, December 8-12, 2008
Liquidity Risk is normally a crucial issue in a banking crisis, however, during the 2007-2010 period, Liquidity has not been as difficult for us as we may have thought. There are many reasons for this, but number one is the fact that today’s community bankers simply have a better understanding of the various techniques for raising both retail deposits and wholesale funds. What does make this crisis a bit different is the relative pricing efficiencies in the wholesale or non-core funding arena these days and our session will focus on how bankers can avoid those difficult examiner discussions about the use of FHLB Advances and Brokered Deposits. It’s all about process and we will provide guidance on what needs to be in your ALCO Policy as it relates to wholesale funding. We will also explore the April 2010 Liquidity and Funds Management Guidance to ensure your bank is up to speed on those requirements. Finally, we will provide specific guidance on both Ratio Analysis and creating your Contingency Funding Plan and will review a sample CFP.
Smooth functioning a bank depends on the stability of stream of returns that it gets from its financing decision. This study is an attempt to showcase the reason for idling or shortage of funds and the factors for the case of Islamic banking. This effort will determine the strategy which can boost the financing in the economy, for this, this study has used the panel data of full-fledged Islamic banks from countries Pakistan and Malaysia, spanning to several years and based on several banks. Based on the analysis of internal and external factors of Islamic banks, it can be seen that increase in the market rate leads to decrease in demand of financing while the increase in deposits and equity do not show a proportional increase in financing which hints that there is excess liquidity available in the Islamic banks. On the positive side, it is evident that increase in the economic activity boosts the demand for Islamic financing.
Interest rate risk management for banks under Basel II, presentation by Christine Brown, Department of Finance , The University of Melbourne, Shanghai, December 8-12, 2008
Liquidity Risk is normally a crucial issue in a banking crisis, however, during the 2007-2010 period, Liquidity has not been as difficult for us as we may have thought. There are many reasons for this, but number one is the fact that today’s community bankers simply have a better understanding of the various techniques for raising both retail deposits and wholesale funds. What does make this crisis a bit different is the relative pricing efficiencies in the wholesale or non-core funding arena these days and our session will focus on how bankers can avoid those difficult examiner discussions about the use of FHLB Advances and Brokered Deposits. It’s all about process and we will provide guidance on what needs to be in your ALCO Policy as it relates to wholesale funding. We will also explore the April 2010 Liquidity and Funds Management Guidance to ensure your bank is up to speed on those requirements. Finally, we will provide specific guidance on both Ratio Analysis and creating your Contingency Funding Plan and will review a sample CFP.
Smooth functioning a bank depends on the stability of stream of returns that it gets from its financing decision. This study is an attempt to showcase the reason for idling or shortage of funds and the factors for the case of Islamic banking. This effort will determine the strategy which can boost the financing in the economy, for this, this study has used the panel data of full-fledged Islamic banks from countries Pakistan and Malaysia, spanning to several years and based on several banks. Based on the analysis of internal and external factors of Islamic banks, it can be seen that increase in the market rate leads to decrease in demand of financing while the increase in deposits and equity do not show a proportional increase in financing which hints that there is excess liquidity available in the Islamic banks. On the positive side, it is evident that increase in the economic activity boosts the demand for Islamic financing.
Interaction of islamic banking sector with indonesian economic growth for 200...An Nisbah
Abstract: This paper aims to analyze the dinamics interaction of islamic banking sector with Indonesian economic growth for 2000-2010. The methode of analyze used in this research is granger causality and Vector Error Correction Model (VECM). Besides that we use stationary test to chek wether the data have unit root or not. We use time series data of total islamic bank fnancing, fxed invesstment, trade and gross
domestic product. We found that in the short run there is evidence of
bidirectional relationship between fnancing of islamic bank, fxed
investment, trade and economi growth. Where as in the long run
there is relationship between islamic banking with economic growth
on Indonesian economy. To improve the role of islamic banking on
Indonesian economy, Bank Indonesia must push islamic banking to
expand their activity on riil sector and rural area.
Keywords: Islamic Banking sector, Financial Intermediary, Economic
Growth, Vector Error Corrrection Model
Financial Risk, Capital Adequacy and Liquidity Performance of Deposit Money B...ijtsrd
The objective of this study was to examine the effect of financial risk on liquidity performance of Deposit Money Banks DMBs in Nigeria, with capital adequacy as a moderator. The study specifically examined the mediating role of capital adequacy on the effect of operational risk, market risk and credit risk on liquidity performance. The study adopted the ex post facto research design as the goal was not to manipulate any variable but rather to establish effect and mediation. The population comprised listed Deposit Money Banks and the sample restricted to a purposive sample of ten 10 banks whose annual reports were accessible for the period of 13 years from 2010 2022 which was the time scope of this study. The data were analysed using structural equation model. The study found that capital adequacy does not significantly mediate the effect of operational, market and credit risks on liquidity performance. Based on these findings, the study recommended that Banks need to create a capital adequacy mechanism necessary for hedging against operating risks inherent in the financial market Banks need to develop a capital adequacy framework to guide them to optimally disclose their market risks, enhance the quality of their disclosure practices, improve the quality of their financial reports and more efficiently manage their liquidity The Nigerian Central Bank need to develop a statutory requirement that will demand a certain level of capital adequacy by the banks before granting a certain level of credit. Odinaka Frank Igbojindu | Gloria Ogochukwu Okafor | Chinedu Jonathan Ndubuisi "Financial Risk, Capital Adequacy and Liquidity Performance of Deposit Money Banks in Nigeria" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-8 | Issue-1 , February 2024, URL: https://www.ijtsrd.com/papers/ijtsrd61356.pdf Paper Url: https://www.ijtsrd.com/management/accounting-and-finance/61356/financial-risk-capital-adequacy-and-liquidity-performance-of-deposit-money-banks-in-nigeria/odinaka-frank-igbojindu
Assessment of Credit Risk Management System in Ethiopian Bankinginventionjournals
The main objective of this study is to assess credit risk management system in Ethiopian banking industry of some private and government commercial banks. Selection of banks for the study was done based on two criteria; it involves only government and private commercial banks and two those banks that operate during the period 1999-2014. Seven commercial banks out of eighteen banks operating at 2000 G.C are selected. These banks are Commercial Bank of Ethiopia, Awash International Bank S.C, Dashen Bank S.C, Bank of Abyssinia S.C, Wegagen Bank S.C, United Bank S.C and NIB International Bank S.C. From these seven commercial banks with so many branches nationwide, it can be difficult to be managed by the researcher due to time and resource constraints. Therefore, the researcher purposely limits in selecting banks at the head office. In this study, the researcher will utilize purposive sampling technique in order to select participants of the study. For the purpose of this study, both primary and secondary data is used. Primary data is collected through questionnaires distributed to respondents that involve professional working in the banks such as Department Managers and Senior Officers working on loan processing. Finding of this study will assist in forwarding recommendations to improve the problems the present credit management situation prevailing in the banking sector in Ethiopia by assessing commercial banks credit management activity. In addition to this, based on the implication of the research findings, the research also recommended areas for future research.
Assessment of Credit Risk Management System in Ethiopian Bankinginventionjournals
The main objective of this study is to assess credit risk management system in Ethiopian banking industry of some private and government commercial banks. Selection of banks for the study was done based on two criteria; it involves only government and private commercial banks and two those banks that operate during the period 1999-2014. Seven commercial banks out of eighteen banks operating at 2000 G.C are selected. These banks are Commercial Bank of Ethiopia, Awash International Bank S.C, Dashen Bank S.C, Bank of Abyssinia S.C, Wegagen Bank S.C, United Bank S.C and NIB International Bank S.C. From these seven commercial banks with so many branches nationwide, it can be difficult to be managed by the researcher due to time and resource constraints. Therefore, the researcher purposely limits in selecting banks at the head office. In this study, the researcher will utilize purposive sampling technique in order to select participants of the study. For the purpose of this study, both primary and secondary data is used. Primary data is collected through questionnaires distributed to respondents that involve professional working in the banks such as Department Managers and Senior Officers working on loan processing. Finding of this study will assist in forwarding recommendations to improve the problems the present credit management situation prevailing in the banking sector in Ethiopia by assessing commercial banks credit management activity. In addition to this, based on the implication of the research findings, the research also recommended areas for future research.
This paper examined the bank-specific determinants for commercial bank’s liquidity in Namibia. The
study was based on quarterly data covering the period 2001:Q1 to 2014:Q2, utilizing the technique of unit root and
ordinary least squares. The results of the unit root test showed that all variable were stationary in levels and thus,
the ordinary least squares technique was used to conduct the estimation. The results revealed a statistical
insignificant negative relationship between commercial bank’s liquidity and return on equity as a measure of
commercial bank’s profitability. Furthermore, the results also showed a positive relationship between commercial
bank’s liquidity and capital adequacy as well as between commercial bank’s liquidity and non-performing loans
though statistical insignificant.
Volume of Deposits, A determinant of Total Long-term Loans Advanced by Commer...iosrjce
Commercial banks have exponentially increased their total loans advanced over the period 2002-
2013. However commercial banks in Kenya have shown varying long term lending behavior. The main objective
of this study was to establish the effect of determinants of long term lending in the Kenyan banking industry, a
case of Bungoma County. This study was guided by the following specific objective; to determine the effect of
volume of deposit on total loan advanced, of selected commercial banks in Kenya. The target population
comprised 13 commercial banks in Bungoma County with a sample size of 52 respondents. From the findings,
for every unit increase in volume of deposits, a 10.9%, unit increase in total loans advanced is predicted. The
model hypothesizes that there is functional relationship between the dependent variable and the independent
variable. The study then recommends that commercial banks should focus on mobilizing more deposits as this
will enhance their lending performance.
The aim of this paper is to analyze the liquidity levels of various banks in the UAE for the period 2005-2009. To understand the behavior of liquidity indicators especially during the financial crisis, the researcher will analyze the four liquidity indicators over the years 2005 to 2009. The findings highlight how the banks in question have been impacted by the 2007-2008 crisis. This can most obviously be seen in the notable decline of each of the banks liquidity level in 2009. The effect of loans to total assets, loans to customers’ deposit, and investment to total assets ratios for the five banks was most notable in 2009. Two liquidity ratios were analyzed in order to determine the banks’ ability to honor its debt obligations, these being loans to total assets and loans to customers respectively. The third ratio was the total equity to total assets to assess the liquidity level in the capital structure, while the fourth ratio was the investment to total assets to measure the managing of liquidity. While Bank liquidity was affected by the crisis, bank performance remained relatively stable, as measured by coefficient of variation, since these banks were able to yield more control over cash flows in comparison to revenues and costs.
The main purpose of this research is to study and highlight that central bank of Jordan (CBJ) plays an important role in economic development. The objective of the financial organization shall be to keep up financial and money stability, to confirm the interchangeability of the Dinar, and to contribute in achieving the banking and money stability within the Kingdom likewise as promoting sustained economic process in accordance with the overall economic policies of the government. To achieve the above- mentioned objectives, CBJ assumes many tasks portrayed in drawing and implementing the financial policy within the Kingdom through an integrated system of monetary policy instruments, setting a evaluation policy of the Dinar compatible with the Jordanian economy, maintaining and managing the Kingdom’s reserves of gold and foreign currencies, regulation credit within the Jordanian economy so as to realize financial and money stability likewise as comprehensive economic process, and issue and regulation bank notes and coins. Subsequently, the central bank plays necessary role within the economic resource allocation of the country. The banking industry may be a major issue that affects the organization of social and economic life cycle within the economies of the planet. it is thought about as associate degree indicator of economic and social growing.. Also, developed financial set up ought to be characterized by the existence of a contemporary and complicated banking industry that contributes to achieving economic balance. It conjointly encourages domestic and foreign investment through the banking system’s ability to states. The aim of the banking industry is to draw in savings domestically and abroad, and direct those savings into productive investment. As a result, this contributes to the accomplishment of economic and social development method, and conjointly facilitates investment activity.
mpact of Foreign Shares to Profitability in Turkish Participation Banksinventionjournals
Covering the period 2006 to 2015, this paper aims at empirically studying the impact of foreign shares on the profitability of participation banks. Several econometrical models have been implemented to reveal this relation among variables. There is no co-integration result between profitability on the one hand, and foreign shares, deposits, loans and equity on the other hand. According to the Granger causality test lag 1, a bidirectional relationship exists between deposits and loans. Meanwhile, a unidirectional relationship exists between profitability and foreign shares.
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Seminar: Gender Board Diversity through Ownership NetworksGRAPE
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Abhay Bhutada Leads Poonawalla Fincorp To Record Low NPA And Unprecedented Gr...Vighnesh Shashtri
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1. Elemental Economics - Introduction to mining.pdfNeal Brewster
After this first you should: Understand the nature of mining; have an awareness of the industry’s boundaries, corporate structure and size; appreciation the complex motivations and objectives of the industries’ various participants; know how mineral reserves are defined and estimated, and how they evolve over time.
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Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
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Understanding how timely GST payments influence a lender's decision to approve loans, this topic explores the correlation between GST compliance and creditworthiness. It highlights how consistent GST payments can enhance a business's financial credibility, potentially leading to higher chances of loan approval.
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liquidity risk management
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Liquidity Risk Management: A comparative study between Conventional and Islamic Banks of Pakistan
Muhammad Farhan Akhtar, Khizer Ali, Shama Sadaqat
Hailey College of Commerce, University of the Punjab, Lahore, Pakistan.
ABSTRACT
The role of Bank is diversified into financial intermediaries, facilitator and supporter. Yet the banks place themselves as a trusted body for the depositors, business associates and investors. Liquidity risk may arise from these diverse operations, as they are fully liable to make available, liquidity when stipulated by the third party. Additional efforts are required by Islamic banks for scaling liquidity management due to their unique characteristics and conformity with sharia principles. The objective of this study is to look into the liquidity risk associated with the solvency of a financial institution, with a purpose to evaluate liquidity risk management (LRM) through a comparative analysis between conventional and Islamic banks of Pakistan. This paper investigates the significance of Size of the firm, Networking Capital, Return on Equity, Capital Adequacy and Return on Assets (ROA), with liquidity Risk Management in conventional and Islamic banks of Pakistan. The study is based on secondary data, that covers a period of four years, i.e. 2006-2009. The study found positive but insignificant relationship of size of the bank and net-working capital to net assets with liquidity risk in both models. In addition Capital adequacy ratio in conventional banks and return on assets in islamic banks is found to be positive and significant at 10% significance level.
Keywords: Liquidity risk, Conventional Banks, Islamic Banks, Pakistan.
1. 0 INTRODUCTION
The banking sector is considered to be an important source of financing for most businesses. Today the most familiar region of risk with conventional and Islamic banks is liquidity risk. Liquidity risk is the outcome from the disparity involving the maturities of the two sides of the balance sheet. This disparity either results in an excess of cash that wishes to be invested or result in a deficiency of cash that wishes to be funded. Also liquidity risk surfaces from complexities in acquiring cash at logical cost. As loans that are based on interest are forbidden in Islamic banks, cannot make use of such funds to congregate liquidity obligations in need. In addition the vending of debt is not permitted (Anas & Mounira, 2008). Extra liquidity with Islamic banks cannot be straightforwardly relocated to conventional banks as the Islamic banks do not recognize interest. Conversely the larger the quantity of Islamic banks and broad their functions, the better will be the capacity of assistance in this area.
Banks are motivated by various reasons to hold certain amount of liquid balances. Liquidity refers to the ability of the bank to meet up deposit withdrawals, maturing loan request and liabilities without setback1. Banks defends its customers aligned with troubles of liquidity by captivating in financial liabilities that can be drained on demand, on the added side of the balance sheet, offering dedicated lending services. The arrangement of balance sheets of banks usually illiquid loans are financed by extremely liquid deposits2.
Liquidity in financial markets has multiple connotations. Liquidity signifies the aptitude of a financial firm to keep up all the time a balance between the financial inflow and outflow over time (Vento & Ganga, 2009). Likewise in the preceding decade worldwide growth rates of 10% to 15% per annum has been experienced by Islamic banking. In addition with their presence in over 51 countries shows increasing pace of Islamic banking system moving into conventional financial system (Sole, 2007).
1Metwally, M. (1997)."Differences between the financial characteristics of interest-free banks and conventional banks". European Business Review , pp: 94
2Clementi, D. (2001). "FINANCIAL MARKETS: IMPLICATIONS FOR FINANCIAL STABILITY". Balance Sheet, 9 (3), pp: 9
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At present a lot of countries around the world currently having twofold banking system, as interest free banks are functioning parallel to conventional banks. United Arab Emirates was the pioneer country which leads the way to twofold banking system. In 1973 with a paid-up capital of US$14 million, Dubai Islamic Bank was established. Following Dubai Islamic Bank various interest free banks started operating in different regions of the world. At present over 100 interest-free banks are functioning in 45 countries (Metwally, "Differences between the financial characteristics of interest-free banks and conventional banks", 1997). Recent transformations in financial markets have implicated the payment scheme and the banking procedures openly devoted to short term forecasting (Gabbi, 2004). This paper, thus emphasize the significant factors to take into study while putting into action an successful liquidity risk management, to accomplish a more incorporated structure for financial markets.
Banking Sector in Pakistan
Radical changes have been observed in banking sector of Pakistan over a phase of 62 years. Originally it undergoes lack of capital and indecision due to established political and socioeconomic calamity. Ensuing amendments were made to amount the power and function of SBP from side to side State Bank of Pakistan Act 1956 which motivated the private sector to set up financial institutions and banks. In addition privatization developments of banking sector which begin in 1992 provoked local investors and motivated foreign banks (Ahmad, Malik, & Humayoun, 2010). Network of banking system in Pakistan amounted to Rs. 638 billion in 2008-2009, which was Rs. 131 billion in 2003-2004. While total assets for the banking sector amounted to Rs. 5595 billion in 2008-2009, which were Rs. 3003 billion in 2003-20043. At present 5 Islamic banks and 24 conventional banks are participating in extremely competitive atmosphere4.
Does Islamic banking risk differ from the conventional bank risk?
The risk summary of Islamic banks is more or less parallel to the conventional (interest-based) banks. On the other hand, the risk faced by Islamic banks is categorized in two dimensions. The first dimensions of practice which are alike to conventional structure, and not in disagreement with the Islamic finance principles, and the second dimension of practices which are new-fangled or tailored and are believed to congregate the Islamic law and principles. One such scenario is of the termination of the Murabahah agreement that boosts the possibility for liquidity troubles (Anas & Mounira, 2008). Discovering, gauging, managing and scrutinizing a variety of risk contacts are the major fundamentals of risk management process.
Hence, this study is structured as follows: the next section subsequent the introduction, highlights the important literature. The third section defines the methodology of this study. Statistical results and analysis is illustrated in fourth section. The fifth section gives the major conclusions.
2.0 LITERATURE REVIEW
To estimate loss rates and scheming quality of portfolio, a simple statistical tool by means of risk index was developed for risk measurement (Smith, "Measuring Risk on Consumer Instalemnt Credit", 1964). Modigliani and Pogue (1974) presented two measure of risk; relative measure denoted by beta and measure of total risk denoted by standard deviation. Relying on monthly rate of return between 1945 to 1970 they established beta measure to be more significant for securities’ pricing and predictable for great portfolios. Doherty (1975) presented a model based on loss probabilities to show how the scope and level of interdependence connecting unusual ways of treating risk rely on the composition of quality in risk management.
Ratti (1980) found that dissimilarities in environment can cause positive (negative) income affect that show the way to fewer (extra) risk taking by banks. Kim and Santomero (1988) found capital ratios fruitless mean to limit bank’s insolvency risk. Deakins and Hussain (1994) argued that method of risk estimation has very important inferences for banker and business relationships and highlighted on investing both in time and resources through risk assessment process, Metwally (1997) found that while financing loans interest-free banks depend deeply on their equity, face extra complexity, and inclined to be fairly additional conservative in utilizing their loan able resources than conventional banks.Clementi (2001) presented an outline of the tendency in consolidation of the market, prior to
3Askari Bank Limited: Annual Report 2009, pp: 2
4State Bank of Pakistan: Retrieved November 13, 2010, from http://www.sbp.org.pk/f_links/index.asp
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reviewing present suggestions on new Basel Accord and on the bank’s capital adequacy. The study highlighted the returning difficulty of liquidity and then presented some examination of fresh developments, predominantly in risk transfer method. The study stressed that modernism must be handled with some care, and found risk management as significant goal of financial system.
Ghannadian and Goswami (2004) observed the performance of an Islamic banks and how Islamic banking scheme can offer liquidity and support in the process of money creation from side to side contribution transactions accounts and found that in all developing economies investing funds on basis of profits and losses is an attractive choice for the banks. Gabbi (2004) emphasized about the reliance of risks on organization’s place in the market. The study explained that liquidity risk can be controlled in the course of practices that are severely connected to the scale and scope of financial measures, seeing as large banks are capable both to manage additional market information and to influence monetary policy functions. Zheng (2006) found that short-term yield spreads are dominated by liquidity risk. Franck and Krausz (2007) found that securities market matter more in supporting bank for likely liquidity deficiency while studying the function of stock exchange as a similar function of and lender of last resort. Many dealers assert that extra liquid markets are superior to fewer liquid markets (Mainelli, 2008) and found uniqueness of liquid markets are flexibility deepness and tightness.
Zheng and Shen (2008) stated that in the presence of liquidity risk more realistic loss can be estimated by liquidity adjusted conditional value at risk which provides a better measure for risk. And also suggested efficient Monte Carlo method: which applies to portfolio of securities or single securities, and finds approximate conditional value at risk and risk at value of all percentiles from the loss distribution with in single set of samples. Anas and Mounira (2008) suggests that Islamic banks should strengthen their risk management practices such as, to enhance secondary market they need price transparency and liquidity. Moreover, they can trade Sukuks and Financial Takaful (insurance) as a medium of risk-hedging. Hassan (2009) argues that three types of risks are being faced by Islamic banks in Brunei Darussalam such as, credit risk, foreign-exchange risk and operating risk, and they are managing those risks very efficiently with the help of risk management practices, which includes risk identification (RI) and risk assessment and analysis (RAA). Dinger (2009) proposed that in emerging economies, due to the existence of transnational banks aggregate liquidity shortage risk has been reduced, as in normal circumstances they are holding low liquidity assets but in crises they holds higher liquid assets as compared to single market banks.
Vaihekoskia (2009) investigated that in the period of systematic liquidity risk (illiquidity) of those stocks which provides high rate of return were negatively related to the price of liquidity risk. Therefore, systematic liquidity risk is not priced as an asset-specific risk but as market-wide systematic risk as it is enough to occupy all liquidity related risks. Uddin (2009) identified that there exists the negative relationship between liquidity and stock return, as stock become more illiquid the liquidity risk increases more than the relative rate, also indicate that return is not affected by the fluctuations in the relative stock liquidity. Ismal (2010) indicate that with respect to liquidity management, the Islamic banks in Indonesia are evaluating themselves on the basis of three factors such as, banks liquidity management policy, liability side and asset side, and they stands in the index of ―good‖ grade. Ismal (2010) suggested that Islamic banks should improve their policies to balance liability and asset, communicate their operations and principles to public to deepen their understanding towards Islamic banks and restructure management of liquidity on asset and liability side in order to improve and strengthen their liquidity management.
Sawada (2010) investigated that in the times of crises, due to the liquidity shock persuaded by the depositors, banks increase their cash holdings by selling their securities in the financial market, not by liquidating their loans. As they adjust their portfolio dynamically through selling and buying their securities in financial market. Ojo (2010) emphasized on the significance of risks all the way through a position to the vital role engaged by capital adequacy. On the basis of Accord principles the study observed that beside substantial development, a lot work is yet to be done specifically relative to liquidity risk.
3.0 RESEARCH METHODOLOGY
3.1 Sample & Data Collection:
To attain the abovementioned research objectives, this paper uses a sample of 12 banks, of which 6 are conventional and 6 are Islamic banks. Data was collected from the bank’s annual reports over the period 2006-2009. Financial
4. Interdisciplinary Journal of Research in Business Vol. 1, Issue. 1, January 2011(pp.35-44)
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Liquidity
Risk
Size of the
Bank
Networking
Capital
Return on
Equity
Capital
Adequacy
Ratio
Return on
Assets
data from these annual reports is used to calculate and to evaluate the liquidity risk management in conventional and Islamic banks of Pakistan. The total sample contained of 48 bank-year observations.
3.3 Research Model
Y1 = α + β1X1+ β2X2+ β3X3+ β4X4+ β5X5+ €
Liquidity risk is the dependent variable of this study. Explanation of dependent and independent variables along with their proxies are specified in Table 3.3.1.In addition, list of Islamic and conventional banks that are considered for this study is specified in Table 3.3.2. Descriptive, correlations and regression analysis is applied to study and compare the affect of independent variables on the dependent variable. SPSS is used in investigating, measuring and comparing the liquidity risk for conventional and Islamic banks according to their diverse individuality.
4.0 STATISTICAL RESULTS AND ANALYSIS
The statistical analysis of secondary data has been divided into three dimensions, i.e. descriptive, correlated and regression. Table 4.1 exhibit descriptive statistics of the explanatory variables. The analyzed statistics figures show the mean, standard deviation, maximum and minimum values of conventional and Islamic banks. The correlation coefficients are stated in Table 4.2. This gives information on the degree of correlation between the explanatory variables. The opportunity has been tested with the Pearson correlation coefficients test. The matrix explains that in general the correlation between the explanatory variables is not well-built that multicollinearity problems are not severe. Kennedy (2008) identified that multicollinearity is a problem when the correlation is above 0.705.
ROE is found to be correlated with ROA in Islamic Banking (Model II). Whereas in conventional banks these variables are perfectly independent, as suggested by Pearson correlation coefficients. Hence the critically developed models reflects on the outcome of size of the bank, net-working capital, return on equity, capital adequacy ratio and return on assets in both models, i.e. conventional banks (Model I), and Islamic banking (Model II).
According to the regression results as specified in table 4.3, size is positive correlated but found insignificant with liquidity risk in both conventional and Islamic banks as the confidence level is approximately 63% and 85% respectively. Net-working capital ratio is positive and highly insignificant with dependent variable. The relation of return on equity (ROE) with exploratory variable is negative but insignificant in Model I and significant in Model II with 95% confidence level. Capital adequacy ratio found to be positively related and significant in model I with approximately 95% confidence level and insignificant in model II. The dependent variable is positively associated with return on assets (ROA) but insignificant in model I and significant in model II approximately 92% confidence
5Kennedy P. (2008), a Guide to Econometrics. Malden, Massachusetts: BlackWell Publishing.
5. Interdisciplinary Journal of Research in Business Vol. 1, Issue. 1, January 2011(pp.35-44)
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level. The model adopted has a fixed effect specification (within group estimator). *Significant at the 10%, 5% & 1% level. Beta (β1, β2, β3, β4 & β5) values represent the proportionate change in liquidity risk due to explanatory variables, remaining change is due to unknown factors that are included in error (€) term. In addition Table 4.4 recapitulates the sign of coefficients for all independent variables.
The regression highlights the size of the bank is positively related. Isshaq and Bokpin (2009) found positive association between size of the bank and liquidity. The result of this study is accordance with the previous studies as found by (Sawada, 2010), this research authenticate that the size of the bank is positive and insignificant while the cash-to-asset ratio is uses as dependent variable.Net-working capital ratio is positive but insignificant in both models. Networking capital ratio is positively related in both models, this results are supported by (Isshaq and Bokpin, 2009). Ojo (2010) described the value of capital adequacy ratio as defined in the Basel II accord as a measure to reduce risk. This study found capital adequacy ratio to be positive but statistically significant in conventional banks (Model I), supported by (Sensarma & Jayadev, 2009). However capital adequacy ratio is insignificant in case of Islamic banks. (Tarawneh, "A Comparison of Financial Performance in the Banking Sector: Some Evidence from Omani Commercial Banks", 2006) used return on equity as gauge for performance. Though, results of this pragmatic study are in line with that of (Rosly & Zaini, 2008) who found that return on equity do not imitate risk-taking features. This paper shows positive ad significant relation with Islamic banks but positive and insignificant with conventional banks. These results are in accordance with the findings of (Siddiqui, 2008). This establish that superior performance in elements of assets and return confirmed they had better profitability than conventional banks.
5.0 CONCLUSION
This study examines liquidity risk management through a comparative study between Conventional and Islamic banks of Pakistan. This study employed 12 banks from conventional and Islamic banks of Pakistan. Descriptive, correlation and regression analysis is used. The data for the period 2006-09 is collected from the websites of banks, website of State Bank of Pakistan and from the Lahore stock exchange. The above results show the fitness of the both models I & II at F-statistic of 13.467and 4.728 at 0% level of significance respectively. This points out that both models are good fit. Independent variables that have positive but insignificant relation are; size of the bank and net-working capital to net assets in both models. Capital adequacy ratio in conventional banks and return on assets in islamic banks are positive and significant at 10% significance level.In addition relation of return on assets in conventional banks and capital adequacy ratio in Islamic banks found to be positive but insignificant. We found that conventional banks in Pakistan were more tend on the way toconsidering projects with long-term financing. In additionthe study found that superior performance in elements of assets and return confirmed that theyhad better profitability and liquidity risk management than Islamic banks.This study reveals an efficient image of banking sector of Pakistan ever since its conception. It facilitates the academician, scholars and bankers to have a picture about banking developments in managing liquidity risk as the journey offers the study of conventional banking to Islamic banking to improve their consideration for liquidity risk management.
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Table 3.3.1 Variables and their proxies
Symbol Variable Proxies
Α
Value of the Intercept
Y1
Liquidity Risk
Cash to Total Assets
X1
Size of the Bank
Logarithm of total assets
X2
Networking capital
Ratio of short-term claims less short-term debt to net assets
X3
Return on Equity
Earnings Available for common stockholders/Common Stock Equity
X4
Capital Adequacy Ratio
Tier 1 Capital + Tier 2 Capital / Risk Weighted Assets
X5
Return on Assets
Asset Utilization Ratio = Operating Income/Total Assets
€
Error Term
Table 3.3.2 List of Banks included in the study Sr. No. Conventional Banks Sr. No. Islamic Banks
1
National Bank of Pakistan
1
BankIslami Pakistan Limited
2
The Bank of Khyber
2
Dawood Islamic Bank Limited
3
Allied Bank Limited
3
Dubai Islamic Bank Pakistan Limited
4
United Bank Limited
4
AlBaraka Bank (Pakistan) Limited
5
MCB Bank Limited
5
Meezan Bank Limited
6
Habib Bank Limited
6
Emirates Global Islamic Bank
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Table 4.1: Summary Statistics Descriptive Statistics (Conventional Banks) Minimum Maximum Mean Std. Deviation
Liquidity Risk
0.0397
0.8161
0.1185
0.1508
Size
7.4344
8.9758
8.5178
0.4871
NWC
1.2219
12.1081
3.3161
2.2180
ROE
-0.0669
1.5016
0.3709
0.3027
CAR
0.0996
0.3564
0.1565
.05411
ROA
-0.0103
0.0680
0.0308
0.0190 Descriptive Statistics (Islamic Banks) Minimum Maximum Mean Std. Deviation
Liquidity Risk
0
0.1577
0.0874
0.0371
Size
6.4306
8.0941
7.3098
0.4108
NWC
0.4951
8.0357
3.0016
2.8802
ROE
-0.2898
0.3080
0.0058
0.1582
CAR
0
0.6183
0.2645
0.1697
ROA
-0.0512
0.0243
-0.0039
0.0216
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Table 4.2: Pearson Correlation Coefficients Pearson Correlation Coefficients (Conventional Banks) Size NWC ROE CAR ROA
Size
1
0.241
0.469
-0.526
0.518
NWC
1
0.0564
-0.391
-0.122
ROE
1
-0.224
0.381
CAR
1
-0.071
ROA
1 Pearson Correlation Coefficients (Islamic Banks) Size NWC ROE CAR ROA
Size
1
0.652
0.343
-0.545
0.141
NWC
1
0.617
-0.613
0.520
ROE
1
-0.271
0.931
CAR
1
-0.131
ROA
1
Correlation is significant at the 0.01 level (2-tailed).
Correlation is significant at the 0.05 level (2-tailed).
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Table 4.3: Regression Results for Liquidity Risk Coefficients-Model I (Conventional Banks)6 Un-standardized Coefficients Standardized Coefficients T Sig.
B
Std. Error
Beta
(Constant)
-0.6098
0.4376
-1.3935
0.1804
Size
0.0460
0.0504
0.1485
0.9115
0.3741
NWC
0.0638
0.0082
0.9386
7.7576
0.0000
ROE
-0.0419
0.0621
-0.0842
-0.6755
0.5079
CAR
0.7748
0.3821
0.2781
2.0277
0.05766
ROA
0.6369
1.0885
0.0804
0.5851
0.5657
R-squared
Adjusted R-squared
Sum squared resid
Durbin-Watson stat
0.789
0.730
0.110
2.615
Mean dependent var
S.D. dependent var
F-statistic
Prob(F-statistic)
0.11856
0.13393
13.4670
0.00000 Coefficients-Model II (Islamic Banks)6 Un-standardized Coefficients Standardized Coefficients T Sig.
B
Std. Error
Beta
(Constant)
-0.2373
0.1953
-1.2151
0.24309
Size
0.0411
0.0275
0.4550
1.4962
0.1553
NWC
0.0067
0.0045
0.5193
1.4756
0.1607
ROE
-0.3210
0.1573
-1.3668
-2.0407
0.0593
CAR
0.0506
0.0569
0.2350
0.8888
0.3881
ROA
2.0588
1.1232
1.1966
1.8329
0.08674
R-squared
Adjusted R-squared
Sum squared resid
Durbin-Watson stat
0.582
0.459
0.017
2.102
Mean dependent var
S.D. dependent var
F-statistic
Prob (F-statistic)
0.07986
0.03319
4.728
0.007
Table 4.4: Signs of Coefficients for Independent Variables
Sign Variables
Positive
Size, NWC, CAR, ROA
Negative
ROE
6Dependent Variable: LiquidityRisk