Liquidity in the UAE Islamic banks

Abstract

Purpose

The purpose of this study is to investigate the main factors that affect liquidity risk in the UAE Islamic banks.

Design/methodology/approach

The study examines the annual data of the seven UAE Islamic banks over the period 2008-2014. Random effects panel data model is used to estimate the impact of four bank-specific variables and two macroeconomic ones on the liquidity risk of the UAE Islamic banks via their impact on five alternative liquidity ratios.

Findings

The paper finds that bank size has a negative impact on liquidity risk according to two liquidity ratios only, and an insignificant impact according to the other three. Both capital adequacy and London interbank offered rate have significant negative impacts on liquidity risk for three liquidity ratios, and insignificant impacts on two. The effect of credit risk is negative for all adopted ratios, while that of return on assets is negative for one ratio only. Finally, real GDP has a positive effect on two ratios and an insignificant one on the others.

Research limitations/implications

The study provides insights for policymakers and practitioners to choose appropriate liquidity management procedures. It emphasizes that identifying efficient procedures or policies depends on the liquidity ratio that is used as a proxy of liquidity risk and its definition, in addition to the correlation between the liquidity ratio and liquidity risk. The study also provides some guidance to Islamic banks in the UAE concerning the main factors impacting their liquidity, which can eventually enable them to support their liquidity management policies, in a way that would expand their customer base according to profitability aspects, and not only religious ones.

Originality/value

The paper adds to the relatively limited literature on liquidity risk in Islamic banks. It also is the first study that investigates the determinants of liquidity risk facing Islamic banks in the UAE using five alternative liquidity ratios.

Citation

ElMassah, S., AlSayed, O. and Bacheer, S.M. (2019), "Liquidity in the UAE Islamic banks", Journal of Islamic Accounting and Business Research, Vol. 10 No. 5, pp. 679-694. https://doi.org/10.1108/JIABR-02-2017-0018