Liquidity Risk Management in Islamic Banks: Evidences from Malaysia

Abstract

The factors that affect liquidity risk management of Islamic banks in Malaysia are studied in this chapter by assessing the short-term and long-term determinants of these banks’ liquidity holdings. Monthly data is employed over the period of 2007–2015 based on the Autoregressive Distributed Lag (ARDL) model that incorporates Sukuk, interbank market rate, required reserves, inflation rate, and credit default swap rate. The ARDL cointegration test reveals that total assets, deposits, inflation, government bonds, capital adequacy, and interbank interest rate show positive significant relations with liquidity. However, it is found that the CDS rate of the country, statutory reserves, and Sukuk stocks show negative significant relations with the liquidity. These results are consistent with previous studies’ findings. Furthermore, the Granger causality tests reveal that Malaysian Islamic banks’ liquidity is related to interbank rate which signs that the change in government bond rate has causal effect on liquidity of Islamic banks. Moreover, total assets are related to liquidity and deposits, CDS, required reserves, and capital. As well as total assets, liquidity has causal effect on credit, deposit, CDS, and interbank rate. The main result is that market liquidity influences banks’ liquidity, and banks’ liquidity responds to the profitability of Islamic banks. Granger analysis and impulse response analysis show that these banks’ liquidity management has a direct causal relation with market liquidity and indirect causal relation with funding liquidity.