Liquidity Risk in the Mena Region Banking Sector: Does Bank Type Make a Difference?

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The Journal of Developing Areas

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Liquidity risk is a challenge facing banks in their efforts to maintain financial stability. Islamic banks are under added pressure with the constraint of having to adhere to Sharia'h principles. The goal of this paper is to investigate the determinants of liquidity risk in Islamic and conventional banks in the Middle East North Africa (MENA) region. The generalized, least squares model is utilized to estimate the determinants of liquidity risk in 257 banks (90 Islamic and 167 Conventional) over the period 2009–2016, in which the struggles of both types of banks to mitigate the impacts of the global financial crisis were observed. A dummy variable representing the bank type is included to allow for comparison between liquidity risk determinants in both types of banks. The model investigated the impact of four bank specific variables and a macroeconomic one on bank liquidity represented by five alterative ratios. The results show a positive effect of bank size on liquidity risk of all sample banks, thus demonstrating that both bank types follow the "too big to fail" rule. Capital adequacy has a positive impact on the liquidity risk of all sample banks irrespective of bank type. Return on assets has no significant effect while credit risk has a negative impact on liquidity risk of both bank types. That is, higher credit risk encourages a more conservative liquidity management policy in both bank types, despite the theoretical fact that Islamic banks have higher credit risk due to the "risk sharing principle". Similarly, real per capita GDP has a positive impact on liquidity risk of conventional and Islamic banks, reflecting their procyclical lending behaviour. Evidently, bank type in the MENA region does not affect the determinants of a bank's liquidity risk; Islamic and conventional banks use different terms for their practices, but in reality mobilize funds the same way. This is due to the fact that both banks operate under the same micro- and macroeconomic conditions and are both influenced by the same domestic and international liquidity regulations. Introducing more efficient financial products and having a unified regulatory and supervisory framework can offer Islamic banks better opportunities.




Tennessee State University College of Business





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Liquidity risk, Liquidity ratio, Islamic banks, MENA region, Islamic finance, Bank size, Capital adequacy, ROAA, Credit risk

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