How informal risk capital investors manage asymmetric information in profit/loss-sharing contracts

Abalkhail, Mohammad; Presley, John R.

doi:10.4337/1840647876.00013

Cited by 2 publications

(2 citation statements)

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“…As suggested by Oldfield and Santamero (1997), if liabilities have a shorter tenor than assets, the liquidity risk arises from the maturity mismatches. We have previously noted that the maturity transformation constitutes the important element of Islamic financial intermediation (Abalkhail and Presley, 2002). The recent study of Adewale and Archer (2019) highlighted that "a large portion" of Islamic bank deposits (including unrestricted PSIA) have short maturities.…”

Section: Estimation Results and Discussionmentioning

confidence: 99%

“…As the Islamic bank often uses short-term time deposits to allow long-term financing of musharakah and mudarabah, the maturity transformation leads to a greater exposure to liquidity risks (Ben Jedidia and Hamza, 2014). The maturity transformation is indeed the important element of Islamic banks financial intermediation (Abalkhail and Presley, 2002). However, Ali (2013) argues that with PLS, no liquidity risks emerge from the liability side, as no fixed returns are required from depositors in normal circumstances.…”

Section: Profit-and Loss-sharing Intermediation and Determinants Of I...mentioning

confidence: 99%

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Profit- and loss-sharing impact on Islamic bank liquidity in GCC countries

Jedidia¹

2020

JIABR

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Purpose The purpose of this paper is to empirically assess the impact of the principle of profit- and loss-sharing (PLS) on the exposure to liquidity risk of Islamic banks in Gulf Corporation Council (GCC) countries. The Islamic bank activity is distinguished by a PLS principle, which is likely to involve specificities in the bank liquidity issue. Design/methodology/approach This paper investigates the determinants of Islamic bank liquidity over the period 2005–2016 using a panel of 23 Islamic banks in GCC. The system of generalized method of moment estimators is applied. Findings The findings reveal that while profit-sharing investment accounts (PSIAs) are inversely proportional to Islamic bank liquidity, the PLS investment does not seem to act as a determinant of the bank liquidity. The fact that PSIAs are globally short-run accounts, but finance long-run projects leads to a substantial maturity mismatches, which limits the availability of liquidity buffer and exacerbates the bank’s exposure to liquidity risk. Moreover, capital adequacy ratio has significant and positive association with bank liquidity, as a strong capital ratio helps to strengthen the liquidity control. However, return on assets has a negative significant impact on bank liquidity. For instance, if the bank holds more cash, it deprives itself from placing funds and earning returns, which causes its profitability to decline. Practical implications This paper gives further insights to better improve the liquidity risk management in a context of scarcity of Shariah-compliant instruments. Islamic bank needs to determine the PLS purpose and goals to be consistent with the “bank’s financing policy” and convince its depositors to use their deposits for medium and long-run investments. Originality/value Unlike previous empirical research, this investigation tries to better grasp the Islamic bank liquidity issue by focusing on the PLS impact on liquidity risk. It aims to fill in the gap in the empirical literature on this topic.