The Effect of liquidity and rate of return risks on the profitability of Islamic and Conventional Banks in GCC Countries

Abstract

The objective of this research is to study the effect of liquidity risk and rate of return risk on bank’s profitability. The empirical study covers a sample of 15 conventional and 15 Islamic banks in GCC countries over the period 2008-2017. The banks’ profitability is measured by return on equity (ROE) and return on asset (ROA). The liquidity risk is measured by two liquidity ratios; one is liquid assets over total assets and the other one is liquid assets over total liabilities. Rate of return risk is measured by spread. Moreover, this research considers the impact of the financial crises on GCC countries’ banking sector. The quantitative analysis using Ordinary Least Square (OLS) regression model concludes that there is a significant relationship between the liquidity risk, rate of return risk and bank’s profitability. In addition, a positive and significant relationship between liquidity risk and conventional bank’s profitability. On the other hand, a negative and significant relationship appears in Islamic banks. Spread has a positive and significant relationship with the Islamic and conventional bank’s profitability. Furthermore, this study contributes to the literature by analyzing the ROA and ROE, as the profitability measurements along with the liquidity risk and rate of return risk in 15 Islamic and 15 conventional banks located in GCC region.