Exploring the dynamics of bank liquidity holding in Islamic and conventional banks
International Journal of Islamic and Middle Eastern Finance and Management
ISSN: 1753-8394
Article publication date: 7 November 2022
Issue publication date: 14 April 2023
Abstract
Purpose
This study aims to address how Islamic banks (IBs) and conventional banks (CBs) manage their liquidity and their speed of adjusting liquidity holdings both in the short- and long term.
Design/methodology/approach
This study uses the partial adjustment model (PAM) on a sample of 445 banks from 17 Organisation of Islamic Cooperation countries over the period 2010–2018.
Findings
Results reveal that despite IBs’ placement of higher short-term liquidity buffer, they experience lower net stable fund ratio (NSFR) in the long term, relative to CBs. This study’s results also reveal that IBs enjoy higher and lower speed of adjustment (SOA) for NSFR in the long- and short term, respectively. Furthermore, the results suggest that bank-specific and macroeconomic factors weaken the liquidity SOA.
Practical implications
This study sheds light on the importance of the adjusting speed of bank liquidity in a bid to provide regulators with insights for enhancing liquidity holdings and emphasising the regulation of banks’ reaction pace to attain the target buffers.
Originality/value
This study estimates the liquidity adjustment speed of IBs and CBs by providing a comprehensive discussion and empirical evidence across countries. To the best of the authors’ knowledge, this study is the first to use PAM for the assessment of liquidity holdings in IBs and the first to examine SOA of short-term liquidity holdings in the banking sector.
Keywords
Acknowledgements
Special thanks are due to the Editor-in-Chief (Prof. M. Kabir Hassan), and anonymous referees for their constructive comments and suggestions. We believe that the quality of the paper has substantially improved after addressing the comments and suggestions. We wish to acknowledge the grant FRGS/1/2019/SS01/UM/02/6. All remaining errors are our own. The usual caveats apply.
Citation
Abdo, K.Y.M., Noman, A.H.M. and Hanifa, M.H. (2023), "Exploring the dynamics of bank liquidity holding in Islamic and conventional banks", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 16 No. 3, pp. 557-575. https://doi.org/10.1108/IMEFM-02-2021-0068
Publisher
:Emerald Publishing Limited
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