of  

or
Sign in to continue reading...

Analysis of Macroeconomic and Bank-level Determinants of Liquidity of Islamic Banks in Malaysia

Mohammad Alfurqan Dabiri
By Mohammad Alfurqan Dabiri
4 years ago
Analysis of Macroeconomic and Bank-level Determinants of Liquidity of Islamic Banks in Malaysia


Create FREE account or Login to add your comment
Comments (0)


Transcription

  1. Journal of Global Business and Social Entrepreneurship (GBSE) Vol. 5: No. 14 (March 2019) page 49-60 | www.gbse.com.my | eISSN : 24621714 ANALYSIS OF MACROECONOMIC AND BANKLEVEL DETERMINANTS OF LIQUIDITY OF ISLAMIC BANKS IN MALAYSIA Mohammad Alfurqan Dabiri (Corresponding Author) College of Business and Finance, Crescent University, Abeokuta, Nigeria PhD Candidate Islamic Business School, Universiti Utara Malaysia +447405436884 mdabiri69@gmail.com Rosylin Mohd Yusof Islamic Business School, Universiti Utara Malaysia rosylin@uum.edu.my Norazlina Abd Wahab Islamic Business School, Universiti Utara Malaysia norazlina.aw@uum.edu.my Abstract: Islamic banks play a significant role in the economy of Malaysia. For the Islamic bank to operate successfully it must have a healthy relationship with stakeholders and manage its supply and demand for liquidity. This study seeks to investigate the macroeconomic and bank-level determinants of liquidity in Islamic banks in Malaysia. For this purpose, liquidity is used as dependent variable while capital adequacy, bank performance, bank size, economic growth, price level and cost of capital are independent variables. The result indicates that in the short run capital adequacy and bank size has no significant while performance affects liquidity and in the long run cost of capital and price level are found to have negative and significant effect on liquidity in Islamic banks in Malaysia Keywords: Liquidity, Performance, Bank size, ARDL, Capital Adequacy, Cost of capital. 2019 JGBSE 1.0 INTRODUCTION Historically, studies on determinants of liquidity have largely focused on bank variables, especially profitability of banks, and financial crisis. Nevertheless, given recent happenings and the pronounced impact of the macroeconomic environment, researchers and practitioners are now interested in the broad determinants of liquidity of banks, especially Islamic banks. However, there is still paucity of empirical literature in this area, specifically in Malaysia, and the available literatures are faced with inconclusiveness. For instance, some found positive impacts of the determinants of liquidity, some negative impacts while others found no significant relationship. These findings lead to the gap in research which this study seeks to fill. The broad objective of this study is to investigate the determinants of liquidity (captured as the ratio of liquid assets to the sum of deposits and short term funding, LQD) of Islamic 49
  2. Journal of Global Business and Social Entrepreneurship (GBSE) Vol. 5: No. 14 (March 2019) page 49-60 | www.gbse.com.my | eISSN : 24621714 banks in Malaysia, using fourteen banks as a case study. The study also investigates the causal relationship between bank-level variables and liquidity as well as between macroeconomic variables and liquidity. 2.0 LITERATURE REVIEW Adrian & Shin (2008) states that during financial crisis liquidity change affects the bank reserve. Aikaeli (2006) found that credit risk, adequate level of funding, preference of cash, volatility of deposits is critical for surplus liquidity. Bank viability strong depends on the level of liquidity (Basel Committee, 2009). The study of Vodova (2011) proposes that bank-specific and macroeconomic variables are determinants of bank liquidity. Valla & SaerEscorbia (2006) investigated liquidity measures of banks in France and found that profitability, credit growth, GDP, monetary policy and interest rate have negative effect on liquidity. Rauch et.al (2010) studied the determinants of bank liquidity and found that bank size, profitability and interest rate of monetary policy are negatively associated with liquidity, while the value of delayed liquidity is positively associated with bank liquidity. Furthermore Saxegard (2006) investigated the pattern of excess liquidity in sub-Saharan Africa utilizing Structured Vector Auto Regression (SVAR) and the results indicates that excess liquidity alters the transmission of monetary policy such that monetary authority could not control the demand for currency. Berger and Bouwman (2009) showed two assumptions related to the motivation of the bank’s capital to create liquidity: Capital increase improves the ability of the bank to create liquidity. Diamond & Ragan (2001) Hypothesis of financial fragility increase in capital reduces liquidity creation. Hovarth et .al (2012) examined Czech banks between 2000 – 2010 and observed negative relationship between creation of liquidity and bank capital, Basel III reduced liquidity creation but creation of high liquidity can reduce bank solvency. Choon et. al (2013) studied the determinants of 15 commercial banks in Malaysia between the periods (2003 – 2012). The study used specific factors (size of bank, capital adequacy, profitability and credit) and macroeconomic factors (GDP, Interbank rate, Financial crisis). They used panel data (fixed effect model with data). The result indicates that all factors included are significant except interbank rate the positive factors are non-performing loans, profitability, GDP while bank size, capital adequacy and financial crisis negative effects on liquidity. Kamau et. al (2013) found that 42.2% of variation in the liquidity of 27 commercial banks in Kenya is explained by several factors such as profitability, obligation, policy management, credit rating, monetary policy while 57.8% is explained by other factors. Lei and Song (2013) studied performance of bank and the creation of liquidity are negatively related in large banks in china, while they are positively related in small banks a decrease in the flow money in proportion to deposits of the banking sector lead to decrease of the ratio of loans to deposit. 3.0 RESEARCH HYPOTHESES H01: Bank-level variables have no significant impacts on liquidity of Islamic banks in Malaysia. H02: Macroeconomic variables have no significant impacts on liquidity of Islamic banks in Malaysia. H03: No causal relationship between bank-level variables and liquidity of Islamic banks in Malaysia. 50
  3. Journal of Global Business and Social Entrepreneurship (GBSE) Vol. 5: No. 14 (March 2019) page 49-60 | www.gbse.com.my | eISSN : 24621714 H04: No causal relationship between macroeconomic variables and liquidity of Islamic banks in Malaysia 4.0 METHODOLOGY From the reviewed literature, it is evident that banks’ liquidity can be affected by both bankspecific (micro or internal) factors and macro or external factors. A simple functional relationship to capture this can be given in Equation (1) below: