Liquidity risk determinants: are Islamic banks different from conventional banks?

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This research examines comparatively the impact of cost efficiency and other relevant determinants of liquidity risk of Islamic banks and conventional banks in 16 OIC countries from 1999 to 2013. The study employs three-stage empirical approaches to analyse the data. First, cost efficiency is estimated using DEA with the input output specifications based on intermediation approach and value added approach for traditional versus non-traditional banking activities. Second, liquidity risk determinants model is analysed using panel static (LSDV) and panel dynamic model (system GMM). However given the limitations of static panel and the superiority of dynamic GMM, the second approach is expected to generate more reliable results and therefore, serve as the main findings. Third, the one-step and two-step system GMM estimator is applied to establish the dynamic relationship between efficiency and liquidity risk and uses Wald test to conclude on the Granger causality relationship. The findings suggest that cost efficiency is positively related to liquidity risk and, the relationship is sensitive to the choice of input output mixes. Other significant factors include capital, bank specialisation, credit risk, profitability, size, and inflation whereas market concentration is not significant. The study found weak evidence on the important effect of GDP growth and the higher level of liquidity risk of Islamic banks than conventional banks. The findings imply the importance of money market to provide liquidity as indicated by the lower liquidity risk of banks in Malaysia as compared to other countries that are devoid of such facility. The most important factor affecting liquidity risk in Islamic banks is cost efficiency while for conventional banks, it is bank specialisation. Finally, regulation on asset restriction restrains liquidity risk in banking.
Bank liquidity , Risk management , Islamic banking
Mohd Amin, S. I. (2016). Liquidity risk determinants: are Islamic banks different from conventional banks? (Doctoral dissertation). INCEIF, Kuala Lumpur. Retrieved from

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