Managing Liquidity and Profitability in Islamic Banks in Iraq - Case Study of the National Islamic Bank for the period 2010-2017

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1. )2020( ‫أيلول‬ )35 ‫ العدد‬9 ‫(المجلد‬ ‫مجلة اإلدارة واإلقتصاد‬ Managing Liquidity and Profitability in Islamic Banks in Iraq - Case Study of the National Islamic Bank for the period 2010-2017 ‫د علي عبد األمري فليفل‬.‫م‬ Lecturer DrAli Abdel-Amir Fleifel ‫جامعة الكوفة‬ University of Kufa ‫د زينب هادي معيوف الشريفي‬.‫م‬.‫ا‬ Mayouf Profr. Zeinab Hadi ‫جامعة الكوفة‬ University of Kufa ‫د سندس محيد موسى‬.‫م‬.‫ا‬ Assist. Prof. Sondos Hameed Musa ‫جامعة الكوفة‬ University of Kufa Abstract The purpose of this research is to clarify the concepts of liquidity and profitability of Islamic banks and how to manage liquidity to influence the ability of banks to achieve profits. Therefore, after the presentation of the theoretical side of the research, study the case of the National Islamic Bank in Iraq and conduct the appropriate statistical tests to indicate whether there is a relationship between (ROA, ROE, ROD). Based on the published bank data and using the SPSS program, a number of results were reached. The most important of these results is that good liquidity management will inevitably lead to better profitability. On the other hand, we note the negative relationship between the liquidity and profitability of the National Islamic Bank and the absence of significant relationship between the liquidity of this bank and profitability for the period 2010-2017 despite the high liquidity ratios in general and low rate of return on assets. Keywords Iraq, Islamic Bank, National, Liquidity, Profitability, Deposits, Assets, Murabaha, Musharaka, Mudaraba, current, quick, ratio, return, ownership, management, QR, CR, CUR, ROA, ROE, ROD ‫امللخص‬ ‫الغرض من هذا البحث هو توضيح مفاهيم السيولة والربحية للمصارف اإلسالمية وكيفية إدارة السيولة للتأثير على قدرة‬ ‫ لذلك وبعد عرض الجانب النظري للبحث يتم دراسة حالة البنك الوطني االسالمي في العراق‬.‫البنوك على تحقيق األرباح‬ ‫( واجراء االختبارات االحصائية المناسبة لبيان ما اذا كانت هناك عالقة بين‬ROA ،ROE ،ROD). ‫بناء على البيانات‬ ً ‫ البنكية المنشورة وباستخدام برنامج‬SPSS ‫ وأهم هذه النتائج أن اإلدارة الجيدة للسيولة‬.‫تم التوصل إلى عدد من النتائج‬ ‫ نالحظ العالقة السلبية بين السيولة والربحية للبنك األهلي اإلسالمي‬، ‫ ومن ناحية أخرى‬.‫ستؤدي حتماً إلى ربحية أفضل‬ ‫ بالرغم من ارتفاع معدالت السيولة بشكل‬2017-2010 ‫وعدم وجود عالقة كبيرة بين السيولة لهذا البنك و الربحية للفترة‬ ‫عام وانخفاض معدل العائد على األصول‬. Introduction Islamic banks are institutions of finance, investment, business and not institutions operating in debt and credit, and their work within the standards and controls derived from Islamic law, a recent experience and faced many challenges in terms of finding suitable 230
2. )2020( ‫أيلول‬ )35 ‫ العدد‬9 ‫(المجلد‬ ‫مجلة اإلدارة واإلقتصاد‬ investment formulas for their deposits in line with the forms of Islamic investment, (such as speculation and participation) and the possibility of achieving an appropriate return. Islamic banks face more liquidity risks than their conventional counterparts because their sources of liquidity are less abundant than traditional banks, due to the nature of Islamic banking. Research problem Islamic banks have a distinct structure in conducting their liquidity and profitability management. This distinction must be taken into consideration when analyzing their financial performance, especially with regard to the ability of these banks to manage their liquidity, as well as how they can influence their profitability activities. The main idea of this research is to understand the liquidity management system in Islamic banks in Iraq and to understand the relationship between liquidity and profitability. Therefore, the problem can be formulated according to the following questions: 1. What is the relationship between the liquidity and profitability management of National Islamic Bank during the research period? 2. How can this relationship be used to understand the performance of Islamic banks and improve their liquidity management activities to achieve the best level of profits? Research importance The importance of this research is derived from its focus on Islamic banks, which became more vital in the modern financial system, and also focuses on this research on the oldest Islamic banks in Iraq, the National Islamic Bank. The importance of the research is the integration of analysis of financial ratios and the possibility of managing liquidity by the National Islamic Bank and the extent of success in achieving the highest profits for the period studied. Furthermore, this study clarifies the imbalances in the bank's management of financial affairs and how to address that imbalance. Research Objectives: This research aims to: 1. achieve the following objectives. (To introduce the liquidity management concept and the importance in Islamic banks.) 2. To clarify the concept of profitability and its indicators in Islamic banks. 3. To clarify the role of liquidity management in the National Islamic Bank to achieve the highest level of profits. Hypothesis There is no significant correlation between liquidity management of the National Islamic Bank and profitability. Chapter One Theoretical Background In this regard, a theoretical framework will be presented for both liquidity and profitability in Islamic banks with an attempt to provide some necessary measures in this area to understand the relationship between liquidity and profitability, as follows: First: The concept of liquidity and its importance Liquidity is the originality of its ability to convert into a liquid asset without any loss of value. Bank liquidity can be seen as the Bank's ability to meet its obligations by meeting withdrawal requests from deposits and meeting daily drawdown requests by depositors, ie, banks retain sufficient liquid assets that can cover their short-term obligations. As the inability to meet withdrawal requests will lead to a state of financial difficulty at the banks (Sundus, 2012: 8). Therefore, liquidity is of importance to Islamic or conventional banks, which requires balanced and appropriate management by all types of banks, especially Islamic banks, because 231
3. )2020( ‫أيلول‬ )35 ‫ العدد‬9 ‫(المجلد‬ ‫مجلة اإلدارة واإلقتصاد‬ they face liquidity risks more than their conventional counterparties because liquidity sources are more abundant than Islamic banks (Ali, 2004: 2) Liquidity is one of the most important indicators on which customers rely on banks' assessment and differentiation as the mainstay of preventing the bank from risk of bankruptcy. This is what distinguishes banks from the rest of financial institutions. They cannot postpone the payment of a drawn check or postpone payment of a deposit payable, nor can they claim debtors to pay their loans unless they are due. On the other hand, it is difficult to predict the size and timing of the movement of money from the bank, which makes it very difficult for the banks to determine the optimal liquidity. The importance of liquidity can be seen through the following: (Al-Ribati and Haddad, 2015: 9) 1. Liquidity is a vital indicator for depositors, management, capital markets and analysts. 2. Boost the confidence of depositors, borrowers and shareholders through the Bank's ability to respond quickly to their requirements. 3. The presence of liquidity enables the bank not to have to borrow from banks or the central bank or having to sell assets at inappropriate prices. 4. Avoid paying a higher cost of money (Al-Manshid and Al-Saffar, 2017: 19) Therefore, note the importance of liquidity to enable the bank to perform various operations and enhance its ability to meet its obligations, taking into account that high liquidity ratios of the required ratios result in loss of profit opportunities that could be obtained if the investment of these funds, as well as the impact of monetary inflation Which causes the decline in the value of money as well as these surpluses in liquidity indicate the inefficiency of cash management in banks in general, which harms its reputation. On the other hand, when a liquidity deficit exceeds the required ratio, the institution is forced to liquidate existing projects prior to its occurrence and the loss of what harms the reputation of the financial institution (Al- Qara Daghi, 2010: 68). Second: Liquidity problem in Islamic banks Liquidity is of great importance to Islamic banks in order to preserve the reputation of the Bank and the confidence of its members. A deficit may expose the Bank to problems. Moreover, the existence of a cash surplus that should be retained may indicate freezing of funds and the absence of a clear investment program. In both cases, the bank may be exposed to a loss of trust by investors or deposit holders. Islamic banks are more exposed to liquidity risk than their traditional counterparties because of the specificity of these banks and their philosophy of not dealing with the interest rate and therefore cannot take advantage of the lender's recent lender advantage to maintain high liquidity rates (El-Gari, 2003: 8). The sources of liquidity in Islamic banks are more abundant than traditional banks. This is due to the nature of the Islamic banking business, which is determined within the framework of the Islamic Sharia, and the liquidity is very high in Islamic banks. For example, Islamic law grants bank customers the right to cancel the Murabaha contract Before the transfer of ownership is completed even if the bank has bought the item. Which results from the sale of these assets in a hasty and inappropriate prices (Tahrawi, bin Habib, 2015: 68). The Islamic Bank operates in accordance with Islamic Sharia'a compliant investment formulas. It carries out banking services and activities that require cash at irregular intervals, which the bank is responsible for providing within the specified time limits, as well as the difficulty in predicting the returns of investment operations, In managing its liquidity well within the framework of investment plans and achieving returns in accordance with the provisions of the Islamic Shariah (Darubi, 2007: 18). The elements of liquidity in Islamic banks are: 232
4. )2020( ‫أيلول‬ )35 ‫ العدد‬9 ‫(المجلد‬ ‫مجلة اإلدارة واإلقتصاد‬ 1. Liquid assets in full, which are cash in the Fund, whether local currency or foreign currency, or cash with local banks or the Central Bank as well as cash with foreign banks and deposits with the Central Bank. These sources are expressed in cash. 2. Assets that the Islamic Bank can convert into cash with minimal losses. These are the shares and the guaranteed dues of some customers and the negotiable certificates issued by the Islamic Bank and the government papers and which are expressed or expressed as cash equivalents. The problem may be with Islamic banks when the bank is unable to cope with expected and unexpected cash flows efficiently. And the impact on banking operations or financial position of the bank. Sometimes it may be difficult for him to obtain cash at an acceptable cost on time by selling or mortgaging the money and prevailing market price rates that may result in undesirable losses, exposing the bank to critical risks. In spite of the Islamic Bank's ability to invest short-term money as a Murabaha formula for secured goods, it does not have a suitable and efficient liquidity mechanism at present, as well as limited monetary market instruments that are in line with Sharia law. The latest lender facilities (Ben Arab & Elmelri, 2008: 16). More complicated liquidity problems are some features of Islamic contracts. For example, Murabaha and Al Rajhi have fixed payment schedules. Payments cannot be obtained in advance. The Musharaka and Mudaraba contracts are only made in the case of profits. The principal amount is not collected. Except in the case of liquidation, and there are long-term Islamic contracts such as Istisna and peace can not pay the payment until after the harvest of the commodity (Khan, Ahmad, 2003: 65). As a result, Islamic banks are holding large amounts of liquidity that do not generate any return, making the trade-off between liquidity and profitability difficult and complicated. In the case of lack of cash due to increased inflows, the investment opportunities could be lost if liquidity is available. Or delaying the liquidation of existing projects prematurely and may result in losses or reduction of profits expected to be obtained under normal circumstances. However, if the inflow of cash inflows or lack of outflows will result in the freezing of the bank's funds and not benefiting from investments with appropriate financial returns, as well as the decrease in the value of these funds due to monetary inflation, which negatively affects profitability and real value of capital, Able to manage and operate the money efficiently. Excess liquidity can also have undesirable consequences. Liquid funds generally generate low returns. Islamic banks' retention of these assets will cost them the opportunity cost. Therefore, excess liquidity risk can be caused by reduced profits due to loss of alternative opportunities. To invest in those excess assets, which makes the abundance of liquidity more risky than low. Third: Liquidity management of Islamic banks. Islamic banks cannot borrow from the money market for fixed liabilities, so they have the task of managing liquidity to reduce their risk. The development of the various financial transactions, investment formulas and the continuous technological developments in the financial sector are all factors that require liquidity to be managed efficiently. However, the problematic relationship between the Central Bank and Islamic banks necessitates finding a mechanism through which money can be obtained easily and quickly and within the framework of Islamic Sharia, since it cannot consider the Central Bank the last resort for lending. The Central Bank has its own means of providing liquidity to banks when needed, such as bills and commercial paper and interest-bearing lending, which are not dealt with by Islamic banks (Mohammad, 2014: 356). The definition of credit ceilings is one of the tools of the Central Bank's monetary policy to guide economic activity and control over credit. This tool is compatible with the work of commercial banks and is not consistent with the essence and nature of the activity of Islamic 233
5. )2020( ‫أيلول‬ )35 ‫ العدد‬9 ‫(المجلد‬ ‫مجلة اإلدارة واإلقتصاد‬ banking, which is mainly based on real investment operations. Hence, the policy of determining credit is a major obstacle to the essence of banking activity Islamic. Therefore, the central bank's transactions should be flexible in terms of monetary policy instruments, since they are compatible with the nature of traditional banking activity so that the investments and profits of Islamic banks are not affected. It is also better for the Central Bank to meet the liquidity demands of Islamic banks in a manner consistent with the nature of their activities as well as the safety of its financial position. Interest-bearing loans or investment deposits were granted against a profit margin based on the Mudaraba or Musharaka contract. In other words, the interest rate mechanism is the main mechanism for the supply and demand of money (Moussa, 2012: 83). Thus, the central bank must resort to other technical means that allow pumping additional liquidity to Islamic banks so as not to have to accumulate funds at the expense of profits. The need for cash flow planning and balance between liquidity and profitability through effective liquidity management strategies in Islamic banks, including: (Said, 2010: 15-16) 1. Asset liquidity management: ie, maintaining appropriate amounts of cash and cash equivalents compared to investment accounts and current accounts. 2. Liquidity Management: The ability of the Bank to attract money from new customers on an ongoing basis rather than on the liquidity of assets or assets. This strategy depends on the reputation of the bank and the quality of banking services provided, as well as the assessment of the financial situation. Finally, the type of balance required between the management of liquid assets and the management of liquid liabilities taking into account the suitability of generations, that is, the allocation of sources of funds towards uses and according to the ranges and limited rates. Liquidity Indicators: When examining the mechanisms of the liquidity management system, there are some indicators and methods to analyze the liquidity ratio in Islamic banks. These indicators, which are believed to represent well the liquidity position in banks is the current ratio and the percentage of cash readiness and quick liquidity. An appropriate rise in liquidity indicates that the bank is liquid enough to cover a short period and is less likely to retreat in liquidity levels. And the financial ratios without meaning is worthless in the sense of any proportion used should be defined meaning of the purpose behind the statement of the failure or strength of the bank or institution, and the following is a brief description of the ratios of liquidity used in this study : 1. Financial ratios or Current Ratio This percentage reflects the number of times current assets can cover current liabilities. The higher the ratio, the greater the ability of the bank to face the sudden payment of obligations, without the need to liquidate any fixed assets or obtain new borrowing. It can be extracted from the equation :