The effect of liquidity risk on financial performance of Islamic Banks

Abstract

This study investigates the effect of liquidity risk on the financial performance of Islamic banks in the GCCs between 2007 and 2013. The study carried out on ten selected Islamic banks across the GCCs. The liquidity ratio was calculated for each year as an indicator for liquidity risk and also two financial ratios were calculated as an indicator for the profitability of the banks. Regression analysis was done to analyze the effect of the liquidity risk on the bank’s financial performance. The study primarily used data extracted from the annual reports published by the banks in their websites which was transformed to percentage. Finding reject the hypothesis that liquidity ratio (LR) has influence on the financial performance of Islamic banks. The study recommends to do further studies on this relationship by doing comparative study of the impact of the liquidity ratio on the financial performance in commercial and Islamic banks, do a study of determinants of liquidity risk in Islamic banks, disclosure and transparency for liquidity risk management in the annual reports of banks and how can inventing a new Sharia compliant product for supplying liquidity