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

Abstract

<jats:sec> <jats:title content-type="abstract-subheading">Purpose</jats:title> <jats:p>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.</jats:p> </jats:sec> <jats:sec> <jats:title content-type="abstract-subheading">Design/methodology/approach</jats:title> <jats:p>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.</jats:p> </jats:sec> <jats:sec> <jats:title content-type="abstract-subheading">Findings</jats:title> <jats:p>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.</jats:p> </jats:sec> <jats:sec> <jats:title content-type="abstract-subheading">Practical implications</jats:title> <jats:p>This paper gives further insights to better improve the liquidity risk management in a context of scarcity of <jats:italic>Shariah</jats:italic>-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.</jats:p> </jats:sec> <jats:sec> <jats:title content-type="abstract-subheading">Originality/value</jats:title> <jats:p>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.</jats:p> </jats:sec>

Investigating the linkage between Shariah board size, liquidity risk and bank stability through an asymmetric lens

“…Likewise, it can also emanate from an unanticipated recall of deposits (liability side). In addition to these possible LR sources, IBs may be exposed to the LR owing to the nature of their business and to contractual forms (the PLS principle) they rely on when conducting their transactions, which makes them more prone to LR (Hassan et al , 2019; Ben Jedidia, 2020). When bank assets are dominantly made up of illiquid receivables, while its liabilities predominantly comprise liquid deposits, LR may arise during periods of an extremely high stress (i.e.…”

Liquidity Potential Analysis of Sharia Banks Using Stock-Based and Flow-Based Methods

“…Greuning and Iqbal state that liquidity risk is classified into two types: (1) funding liquidity risk, such as lack of access to funding arising from cash flows and expected and unexpected current and future collateral needs; and (2) market liquidity risk, if the bank cannot easily offset or eliminate positions at market prices due to lack of liquidity in the market (Ben Jedidia, 2020).…”

“…One of the causes is the failure to maintain existing liquidity even though the bank has good quality assets or sufficient income and capital. Islamic banks are required to make additional efforts in managing their liquidity risk (Ben Jedidia, 2020). (Anam, 2013).…”

Mevduat ve Katılım Bankalarının Likidite Faktörleri

“…Further, the banks have to wait until the end of the production process to take payments in some financing credits. Because of short-term deposit structure, debt-based contracts and leasing agreements, uncertain earnings/ losses makes the Islamic banks more fragile to the liquidity risk in compare of the conventional banks (Çanakcı and Tunalı, 2018;Jedidia, 2020).…”