Abstract
In the current highly competitive finance industry, it is important that any financial institution to develop a proper strategy to compete in the market. More specifically, the finance managers need to have an appropriate liquidity and stability strategy during the peak season where their customers have a high demand of cash. Finding such a strategy is challenging for micro finance institution due to their limited resources, in terms of finance and human resources. This study is aimed to (1) analyze the impact of liquidity risk to the stability of micro finance institutions and to (2) assess the relationship between liquidity risk and credit risk in the period of peak season by using Generalized Moments Method. The focus of this study is Islamic micro finance institutions in West Java for the period 2012-2017. Using monthly data, this study reveals that the risk of liquidity has a negative effect on the level of stability of micro finance institutions at peak season and has a positive influence on the level of stability at off peak season. Further, the study finds that the relationship between liquidity risk and credit risk is significant during the period of peak season and off peak season period. Therefore, it can be concluded that in general credit risk impacts on liquidity risk. The findings of this study provide significant contributions in terms of enlarging our understanding on the management behavior related to institution liquidity and stability during the peak and non-peak season. From managerial perspective, this study helps the Islamic micro finance institution to remain stable and competitive during the peak season.
Highlights
Islamic Micro Finance Institution (IMFI) liquidity can be well maintained at the level of "health" if the IMFI can carry out its two main functions of creating liquidity and transforming risk [4]
Based on the results obtained, liquidity risk significantly affects the stability of an IMFI during the peak season period in all models combined [18]
Consistency in this case is that every model added with peak season variable has an average value of IMFI liquidity risk that is not so good value
Summary
Peak Season in this case is the peak period where people flock to attract savings / savings for seasonal consumption purposes, namely the Iedul Fitr session and the session to attend children's school This period is expected to cause IMFI to be vulnerable to financial distress or unstable. Based on the assumptions and results obtained from previous findings, this paper has more value by combining the previous assumptions in the Peak Season period This is because the results found by Elgari [8] indicate the stability and resilience of IMFI in the long run if due to high growth compared to conventional financial institutions, while according to Sulung and Wahyudi [9] Liquidity risk significantly affects the IMFI stability level.
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