LIQUIDITY RISK AND FACTORS DETERMINANT: A CASE STUDY ON ISLAMIC RURAL BANKING IN INDONESIA

Abstract

To maintain public trust, a bank should hold a liquidity risk. The study aims to analyze the internal factors that affect liquidity risk in Islamic rural banks in Indonesia. The banks have a more complicated liquidity management than conventional banks due to the application of sharia law in the banks. Islamic rural bank liquidity risk is measured by the financing-to-deposit ratio. The internal factors are the capital adequacy ratio, non-performing financing, return on assets, operating expenses to income ratio, third-party funds, and the type of financing consisting of profit margin financing and profit-sharing financing. This study uses 100 Islamic rural banks as a sample. The data span from 2018Q1 to 2021Q4. The analysis was conducted by estimating and testing panel regression models. The estimation results of the chosen fixed-effect model show a positive effect of profit margin financing and negative effects of capital adequacy ratio, non-performing financing, and profit-sharing financing on the dependent variable. It also finds that return on assets, operating expenses to income ratio, and third-party funds have no significant impact on the dependent variable. Recall that the cost is the difference between return and profit. The novelty of this paper is as follows. With the significance of profit margin and the insignificance of return, it can be inferred the cost of bank operation matter for the bank liquidity risk. With the significance of profit sharing financing and the accompanied non-performing financing, the study also suggests that shariah principles in the bank operation matter for the bank’s liquidity risk. Keywords: Liquidity Risk, Islamic Rural Bank, Financing-to-Deposit Ratio DOI： https://doi.org/10.35741/issn.0258-2724.58.1.27