Liquidity Copiousness in Pakistani Islamic Banks: What can Banks Excess Liquid Assets Tell us?

Abstract

This paper investigates Excess Liquidity problem faced by the Islamic Banking Industry of Pakistan because the Shariah Compliant Money and Capital Markets are in infancy stage in Pakistan. Demand for Shariah Compliant Sovereign Securities is very high, while the supply is very restricted compared to Sovereign Securities available to Conventional Banks in Pakistan. The purpose of this research is to review the impact of Excess Liquidity on Profitability of Islamic Banks vs. Conventional Banks in Pakistan. The research is based on secondary data of Islamic & Conventional Banks for a period of 10 years ranging from 2008 to 2017. The study uses Descriptive and Inferential Statistics based on Independent t-test & GLM Mediation Model analysis. The findings of this research is that Islamic Banks in Pakistan have positive Excess Liquidity while Conventional Banks have negative Excess Liquidity. Profitability of Islamic Banks in Pakistan is low as compared to their Conventional Counterpart. The Solvency, measured through Total Asset to Total Equity (TATER) is found to differ significantly for Islamic Banks than Conventional Banks. Based on Mediation Analysis, it may be concluded that: (1) The liquidity copiousness in Pakistani Islamic Banks in the shape of Excess Liquidity does have a direct impact on the Profitability of Islamic Banks; whereas in case of Conventional Bank of Pakistan the comparable Liquidity does have direct impact on their Profitability; (2) In Islamic Bank, the Solvency mediates the relationship between Excess Liquidity & Profitability. The Solvency in conventional banks also mediates the relationship between comparable Liquidity and Profitability