Determinants of Bank Liquidity in Syria: A Comparative Study Between Islamic and Conventional Banks

Transcription

1. Volume : 5 Issues: 26 [March, 2020] pp. 33 -49] International Journal of Accounting, Finance and Business (IJAFB) eISSN: 0128-1844 Journal website: www.ijafb.com DETERMINANTS OF BANK LIQUIDITY IN SYRIA: A COMPARATIVE STUDY BETWEEN ISLAMIC AND CONVENTIONAL BANKS Khaled Nour Aldeen1, Eko Siswahto2, Sri Herianingrum3 and Ziad Mhmmd Wafik Al Agawany4 Faculty of Economics and Business –Islamic Economics Department- Airlangga University Surabaya-Indonesia (BPS - Statistics Indonesia) Jakarta-Indonesia 3 Faculty of Economics and Business –Islamic Economics Department- Airlangga University Surabaya-Indonesia 4 Damascus university- faculty of economics Damascus-Syria 1 2 Article history Received date Revised date Accepted date Published date : : : : 14-11-2019 2-12-2019 9-3-2020 17-3-2020 To cite this document: Aldeen, K., Siswahto, E., Herianingrum, S., & Wafik Al Agawany M. (2020) Determinants Of Bank Liquidity In Syria: A Comparative Study Between Islamic And Conventional Banks. International Journal of Accounting, Finance and Business (IJAFB), 5 (26), 33 - 49. __________________________________________________________________________________________ Abstract: Most of the studies have excluded Syrian banks from their samples due to the violent conflict in the country, which will affect their results. The main objective of this research is to evaluate liquidity risk through a comparative analysis between Islamic and conventional banks of Syria. We employed paired sampled t-test and regression with OLS estimation. Secondary data were collected spanning 2011-2017, for the entire private banking sector in Syria. This study investigates the significance of size of the bank and several financial ratios on the banks’ liquidity. Our finding manifested that an insignificant difference exists between Islamic and conventional banks in terms of liquidity. Furthermore, Islamic banks liquidity risk management predictors were significant and nonperforming finance ratio (NPF) and bank size at 10% level. Whereas in its counterparts all the variables selected in our model were significant predictors at 5%. Our results show different factors in different significant level affect liquidity risk in each bank. This study provides an alluded picture about Syrian private banking sectors, particularly liquidity risk management. Which might help the authorities to set future prospects. Keywords: Syria; conventional banks; Islamic Banks; liquidity ratio ___________________________________________________________________________ Introduction The banking sector is considered to be an essential source of financing for most businesses. Now the most common region of risk with conventional and Islamic banks is liquidity risk. Liquidity risk is the outcome of the difference involving the maturities of the two sides of the balance sheet. This disparity either results in an overabundance of cash that wishes to be invested or result in a lack of cash that wishes to be funded. 33
2. Volume : 5 Issues: 26 [March, 2020] pp. 33 -49] International Journal of Accounting, Finance and Business (IJAFB) eISSN: 0128-1844 Journal website: www.ijafb.com Syria is among the countries that have established full-fledged Islamic banks beside the interest-based one (Aljashy, 2015). Bank act as a financial intermediary where it connects parties, which are in excess of money and other parties, which are in need of money. As a business institution, that financial intermediation process must be run efficiently to ensure more profits for shareholders despite the expansion of the economy. The more profit created by a bank would lead to more improvement for banks' performance (Sukmana & Suryaningtyas, 2016). Furthermore, the expansion of the economy would increase demand for banking services as well. Hence, a bank failure will cause a domino effect on the entire banking system; one bank failure in a country can be extended to the whole banking system in a country. Islamic banks operate the same basic functions as banks working under the conventional system. But, Islamic banking refers to the banking system which works according to Sharia'h, which prohibits charging any extra money for money that is borrowed (Riba) (Kamarulzaman & Madun, 2013; Aldeen et al., 2019). Banks take deposits that are callable on-demand or, on average, have less maturity than that of the financing contracts they sell. While transferring maturity provides depositors with valuable liquidity insurance, it simultaneously increases the banks’ exposure to liquidity risk (Syed, 2004). Liquidity is the banks' ability to offer fund to whom who ask about it and at the same time facing the obligations as they come due, avoiding any predictable losses (Sukmana & Kholid, 2013). Nowadays, Islamic banks have become an indispensable part of the entire financial system and regarded as a competitor to conventional banks (Nevine, 2017). At the same time, they are considered complementary to conventional banks offer a bunch of services and products that fit with a certain type of customers that do not accept to patronize conventional banks' services (Nevine, 2017). In essence, conventional banks based on debt instruments while their counterparts based on real business transactions (asset-based) which are the core of Islamic banking and both industries deal with the business partners. Syrian banks suffer from the current conditions that the country has been through since 2011, which affects their profits, work, and results. The banking sector in Syria has been through fluctuated history, extending from the Ottoman occupation and until now, mechanisms of management and other aspects have been changing drastically (Horani & Hassani, 2011). This long period witnessed the transition from the dominance of foreign banks to the banking business in the pre-independence period to the stage of the presence of private national and Arab banks in the post-independence phase (Horani & Hassani, 2011). After a long period of absence of the private banking from the Syrian banking system, and after the conviction of the inability of public banks to meet the financial and financial needs of the state, institutions, and citizens. Legislative Decree has been declared in 2001 allowing private banks to function in Syria, followed by another declare allowing the Islamic banks to start up in 2005 (central bank of Syria official website). Islamic banking and finance institutions might help in integrating the Syrian financial market with mainstream Islamic finance and banking systems, which are swiftly expanding across the Middle East region (Khan & Bhatti, 2008). Aldeen, et al., (2019) stated that conventional banks in Syria enjoying a higher reputation comparing to its counterparts, however, Syria is a Muslim majority country. 34
3. Volume : 5 Issues: 26 [March, 2020] pp. 33 -49] International Journal of Accounting, Finance and Business (IJAFB) eISSN: 0128-1844 Journal website: www.ijafb.com Effective risk management in a bank is crucial to support bank growth and the sustainable profitability rate of banks, be they Islamic or conventional. Giving the current challenging political and economic environment in Syria. Trying to strive against the crisis consequences (Aljashy, 2015). Banks must keep a particular amount of capital as liquid resources to confirm that they can meet their obligations (Tiwari, 2009). Liquidity: refer to the ability of a bank to meet obligations and finance the increase in assets, without being forced to liquidate assets at unfair prices or turning to costly sources of funds. The liquidity ratio should not be less than 30%, calculated by dividing the ready and readymade funds by deposits and other liabilities. (Central bank of Syria, 2019). The liquidity ratio is calculated daily for both conventional and Islamic banks and should be reported monthly to Central Bank of Syria to make sure that the entire bank system commits to liquidity requirements. In case a bank violates the liquidity ratio, it must send the forms daily until it is confirmed The Bank's commitment to the prescribed minimum limits. Moreover, a bank will be penalized to pay 1/3650 out of the total violated amount, with a minimum amount of 100,000 S.P (Central bank of Syria, 2019). After two decades at the establishment of conventional and Islamic private banks, noted that it is high time that liquidity risk management for both types of banks should be evaluated, and examined as a new experience in the country. Furthermore, stay aware of the factors that have an impact on banks’ liquidity in Syria. This study stresses giving a real picture of risk management for the private banking sector operating in Syria. taking into account all the classical assumptions. After intensive research in the literature, we found x research addresses the Syrian context. This paper organized as follows: the next section will be brief literature on the subject matter, followed by a comparison between conventional and Islamic banks' risk management, then the policies and strategies related to liquidity risk management in both banking systems. Then, the methods used in this research and data analysis. The conclusion presented in the last section. Literature Review There are numerous studies that direct to liquidity determinants for both conventional and Islamic banks. This literature focuses on theoretical and empirical studies, starting with studies concerning the differences between Islamic and conventional banks ending with banks' liquidity determinants. Comparison of the liquidity in both Islamic and conventional banks There are various methods to face liquidity risk patronized by both Islamic and conventional banks. For instance, holding reserves in terms of assets (placement with the central bank, placement with other banks, cash), issued securities to suppress the liquidity risk. Other instruments to overcome liquidity risk on the liability side by employing the inter-bank supporting liquidity from the central bank as lender of the last resort which in position to offer liquidity to the banks to avoid any domino effects on the entire banking system (Sukmana & Suryaningtyas 2016). Conventional and Islamic banks have different ways to overcome liquidity risk, mainly resulted from the essential difference between two types of banks’ contracts in which the Islamic liquidity instruments based on capital, whereas in the conventional banks based on debt (Hassan et al., 2013). In Islamic banks, liquidity risk is more 35
4. Volume : 5 Issues: 26 [March, 2020] pp. 33 -49] International Journal of Accounting, Finance and Business (IJAFB) eISSN: 0128-1844 Journal website: www.ijafb.com important compared to operational and return rate risk for bank sustainability (Khan & Ahmed, 2001). Amr El Tiby (2010) and Sulaiman (2013) stated that Islamic banks' liquidity risks resulted from many factors: first, the lake of Sharia'h-compliant instruments of the interbank money market. Moreover, the prohibition of interest rate in Sharia'h. In addition to the undeveloped Sharia'h secondary market contributed to the problem. Secondly, the limitation of the Islamic financial instruments listed on the Islamic secondary market is limited and not sufficient; Furthermore, Sharia'h has set several preconditions such as involving real assets. Hence, the need authorities to develop Islamic securities (assets-based) arise (RifkiIsmal, 2008). Third, the instruments used conventional banks' liquidity management. For instance, the secondary market and interbank market have been enjoying the long experience, but the problem is that’s those instruments based on Riba, which is inflexibly prohibited in Sharia'h. Conventional banks have access to considerable short-term debt from overnight up to one year. However, efficient and advanced interbank market. Due to the lack of availability of Sharia'h compliant products, Islamic banks cannot enjoy the same funds that are used by conventional banks. The absence of the Islamic financial instruments market differentiates the problem, particularly for assets liability management. Iqbal (2012) attempted to compare the liquidity risk between conventional and Islamic banks in Pakistan, using several financial ratios spanning 2007-2010. The main findings of this study that there is a negative and significant relationship between liquidity and Non-performing loan ratio (NPL), whereas a significant positive relationship between liquidity risk and return on assets (ROA), return on equity (ROE), capital adequacy ratio (CAR). The additional study addresses the case of Pakistan by (Akhtar et al., 2011); they aimed to compare the liquidity risk management between Islamic and conventional banks as well, over the period 2006-2009. They found there is a positive but insignificant relationship between networking capital to net assets and the size of the bank with liquidity risk in both Islamic and conventional banks alike. Whereas Capital adequacy ratio in conventional banks and return on assets in Islamic banks is found to be positive and significant. Moreover, conventional banks performing better in terms of liquidity risk management than Islamic banks. In the case of MENA region, Ghenimi & Omri (2015) attempted to examine the factors affect the liquidity risk for both Islamic and conventional banks in MENA region over the period 2006-2013. It is found that inflation rate, capital adequacy, interest margin and return on equity have a positive impact on liquidity risk in Islamic banks, whereas in conventional banks GDP growth, return on assets and non- performing loan has a negative impact. On the other hand, in conventional banks, size, return on Equity, Net Interest Margin, Capital Adequacy Ratio, GDP growth, and inflation rate have a positive impact, whereas the Return on Assets, NonPerforming Loan have a negative impact on liquidity risk. An additional study in MENA region Al-Gazzar (2014) used various financial ratios to evaluate the performance of conventional and Islamic banks with macroeconomics determinants (inflation and GDP) on a sample of 45 banks including 10 Islamic. He found Islamic banks performing better in terms of capital adequacy, assets quality, management quality, and profitability while its counterparts were performing better in terms of liquidity due to the lack of liquidity sources. Moin (2008) attempted to compare the performance of the number one Islamic bank in Pakistan with five conventional ones over the period 2003-2007, using 12 financial ratios. Major 36
5. Volume : 5 Issues: 26 [March, 2020] pp. 33 -49] International Journal of Accounting, Finance and Business (IJAFB) eISSN: 0128-1844 Journal website: www.ijafb.com findings were conventional banks were significantly better in terms of profitability. Whereas there is not any significant difference in terms of liquidity. The revealed that conventional banks’ risk tendency was higher than the Islamic ones, which attributes the high profitability of conventional banks. Ismal (2010) discussed risk management in terms of liquidity for both conventional and Islamic in the case of Indonesia. Their results show that Islamic banks reduce the liquidity risk from both internal and external sources. That is attributed to the Sharia'h values and principles followed by Islamic banks. Tariq et al., (2012) attempted to evaluate the performance of Islamic and conventional banks in Pakistan for profitability and liquidity of banks compared using the liquidity loan/asset ratio, loan/deposits, and borrowing ratio and liquid assets/deposits ratio. They found the conventional ones are more dominant in liquidity management. Wasiuzzaman and Gunasegavan (2013) compared both Islamic and conventional banks’performance for using financial ratios for the period 2005-2009. They found higher capital adequacy, assets quality, liquidity, operational efficiency significantly in Islamic banks and higher ROA in their counterparts. Mahdi & Abbes, (2018) and Al-Gazzar (2014) found that conventional banks are better than Islamic banks in terms of liquidity in the MENA region, they attributed this result to the difficulties that Islamic banks face to liquid assets. Another study done by Sobhy & Megeid (2017) analyzed liquidity effectiveness for both conventional and Islamic banks in Egypt; they found that conventional banks were better in liquidity. Moreover, Egyptian Central Bank regulations on capital and liquidity requirements for Islamic banks affects its performance negatively. Whereas, Moin (2008) and Adewole & Patrick (2019) could not find any significant difference between Islamic and conventional banks in liquidity regards. Sukmana & Febriyati (2016) found that Islamic banks have a higher liquidity ratio than conventional banks; they attributed these findings to the reserve requirement imposed by the central banks of Indonesia. Besides, they considered reserves requirements as a tax because the bank might be able to attract more deposits but cannot work successfully as a bridge between parties. Internal determinants of a bank liquidity Considerable literature debated the relationship between bank size and liquidity risk, size of a bank, based on the “too big to fail” hypothesis, size of a bank might influence liquidity negatively, big banks considered themselves too big to fail, so they hold less liquid assets. One the other hand, some banks rely on the financial assistance offered by the central bank or other sources, based on their consideration that the government will protect them, as big bank fail will affect the entire financial system (Lucchetta, 2007). Assets quality is mainly the quality of bank loans; it is relatedto the first internal determinant that may affect the liquidity of banks. (El-Chaarani, 2019). Increasing the Level of assets quality ratio will decrease the depositor’s confidence, subsequently, enlarge the level of withdrawals and influence the liquidity problem negatively (Bloem & Gorter, 2001). Roman and Sargu, (2015) detected a significant positive association between asset quality and bank liquidity in the Czech Republic, Romania Lithuania, and Czech Republic. They also reported that the supervisory bodies of certain countries have obliged banks to increase their liquidity ratios throughout a financial crisis. Capital adequacy ratio indicates the equity level in the banking sector. A good indicator to evaluate bank stability and its liquidity is the capitalization level (Menicucci & Paolucci, 2016). While, Chagwiza, 2014 and Moussa, (2015) illustrated that there is a significant negative 37
6. Volume : 5 Issues: 26 [March, 2020] pp. 33 -49] International Journal of Accounting, Finance and Business (IJAFB) eISSN: 0128-1844 Journal website: www.ijafb.com relationship between liquidity and capital adequacy because high CAR might impede liquidity creation by making the capital structure of banks fragile. An additional subjective indicator is assets performance represented by ROA; it is generally used to measure an overall entity performance over a specific time (Greenwood and Jovanovic, 1990). High asset performance has a negative impact on a bank's liquidity ratio; more finance will lead to less liquidity (Deléchat et al., 2012). Loan to deposit ratio, this ratio will reflect the amount of given finance to total deposits. A higher LDR/FDR will have a positive impact on bank liquidity due to the given finance Sukmana & Febriyati, 2016). Table.2 Research hypothesis Independe nt variables literature Related results Sukmana & Febriyati (2016); Mahdi There is a significant difference & Abbes, (2018) & Al-Gazzar (2014) between Islamic and conventional banks liquidity Vodová (2013): Cucinelli (2013); Size of the A high size of a bank has a negative Hackethal et al. (2010); Bunda & bank impact on a bank's liquidity. Desquilbet (2008) A high non-performing loans ratio Nonperforming Bloem & Gorter (2001);Growe et al., has a negative impact on a bank loans/finance (2014);Roman and Sargu (2015) liquidity. LR difference A high capital adequacy ratio has a Menicucci & Paolucci (2016); El positive impact on a bank liquidity. Khoury (2015); Repullo, (2004) Capital adequacy Loan/finance to deposits Return assets on Sukmana & Febriyati, 2016); A high given finance has a negative Sukmana & impact on a bank liquidity. Suryaningtyas, (2016); Khediri et al, (2015) Deléchat et al., (2012); Moussa, A high assets performance has a (2015);Melese & Laximikantham, negative impact on a bank liquidity. (2015); Vodavá, (2011) H1: there is a significant difference between Islamic and conventional banks liquidity H2: A high size of a bank has a negative impact on a bank's liquidity. H3: A high non-performing loans ratio has a negative impact on a bank liquidity. H4: A high capital adequacy ratio has a positive impact on a bank liquidity. H5: A high given finance has a negative impact on a bank liquidity. H6: A high assets performance has a negative impact on a bank liquidity. 38
7. Volume : 5 Issues: 26 [March, 2020] pp. 33 -49] International Journal of Accounting, Finance and Business (IJAFB) eISSN: 0128-1844 Journal website: www.ijafb.com The reviewed literature above recommends that liquidity risk does not depend upon every variable for instance, capital adequacy ratio, return on assets. The in-hand paper focuses on liquidity determinants of Islamic and conventional banks in Syria. To the best of our knowledge, this study is a pioneering attempt in the Syrian context particularly during conflict spanning 2011-2017. Furthermore, some studies focused on the middle eastern country has excluded Syria from their sample due to the violent conflict and its impact on the banking sector (El-Chaarani, 2019). Moreover, Ghenimi & Omri, (2015) and Mahdi, & Abbes (2018) excluded Syria from their studies. Hence, this paper will have a significant contribution to Islamic banking literature. Research Methodology This study looks at the particular financial ratios of both islamic and conventional banks to evaluate and examine both types of bank liquidity risk management. We have used Return On Assets ROA to measure the banks’ Profitability; Capital Adequacy Ratio CAR; Loan to deposit ratio LDR and Financing to deposit Ratio FDR; Non-Performing Loans NPL and NonPerforming Finance NPF and Quick ratio (marketable securities, account receivable and (cash and cash equivalent)/current liabilities). Those ratios considered sufficient to examine and evaluate banks' liquidity management (Rahman, & Banna, 2015); (Sukmana & Suryaningtyas, 2016), (Akhtar et al., 2011) and (El-Chaarani, 2019). in this study total assets used to represent banks’ sizes, data run as the logarithm to SPSS to avoid this tremendous number gap. ROA ratios, to overcome the shortcoming, the denominator needs to be representative of all of the moments during the year; it is common to use the average of two balance sheet amounts in the denominator. Annual data were the subject of this study, spanning from 2011 to 2017, which is considered advisable to not include data before 2011 because Syrian banks freshly established in the country (see Table.1). The used samples of this research cover the entire private banking sector in Syria, which is, comprises of 11 conventional and 3 Islamic, considering taking the entire banking system into account will help us to anticipate accurate outputs to the max. The secondary source of data is collected for the official websites of each bank, the Syrian Commission on Financial Markets and Securities, Damascus security exchange and Central Bank of Syria. Different statistics used to achieve the purpose of this study, the statistical analysis has been divided into four dimensions paired sampled t-test, descriptive statistics, correlation, and multiple regression. We employed SPSS to run our data. Regression model In this study liquidity risk is considered as a dependent variable, the rest of the variables are considered as independent ones (see Figure.1). Multiple regression analysis is applied in this research to examine the effect of the independent variables on the dependent one considering the classical assumptions. Determining independent variables, which influence liquidity risk in both Islamic and conventional banks alike. 39
8. Volume : 5 Issues: 26 [March, 2020] pp. 33 -49] International Journal of Accounting, Finance and Business (IJAFB) eISSN: 0128-1844 Journal website: www.ijafb.com The following is the regression formula: Yit = α + β1log (Total Assets) it + β2(NPF / NPL)it + β3(CAR)it + β4(FDR or LDR)it + β5(ROA)it+ εit i: Banks’ classification (Islamic or conventional banks). t: Time reference. The above-mentioned formula has been applied separately for Islamic and convention banks. To examine the predictors of each bank. Table.3 variables and their proxies Symbol Variables Proxies Y1 X1 X2 Liquidity risk Size of the bank Non-performing loans/finance X3 Capital adequacy Cash /current liabilities Logarithm total assets Non-performing (loans/finance) / total amount of outstanding loans in the bank's portfolio (Tier 1 capital + Tier 2 capital) / risk weighted asset X4 X5 Loan/finance to deposits Return on assets Total loans/finance to deposits Net income / Total asset Notes: organized by authors Results and Discussion This section discusses the result of the applied tests starting with descriptive analysis t-test followed by the correlation test and lastly regression: Descriptive statistics and t-test Taple.4 Paired Sampled Statistics Pair 1 LR_ Islamic banks LR_ conventional banks Mean N 47.2386 31.1800 N Std. Deviation Std. Error Mean 7 23.13103 8.74271 7 6.74667 2.55000 Table. 5 Paired Sampled Test 95% Confidence Interval of the Difference Pair 1 LR_ Islamic conventional –LR Mean Std. Deviation Lower Upper t df pValue 16.06 26.20 -8.18 40.29 1.62 6 0.156 The results above-mentioned show an insignificant statistic difference between conventional and Islamic banks' liquidity ratio t-test recorded p-value at 0.156, in other words, the mean of Islamic banks at 47.2386 % is insignificantly higher than its counterparts’ mean at 31.1800 (Table.4). 40
9. Volume : 5 Issues: 26 [March, 2020] pp. 33 -49] International Journal of Accounting, Finance and Business (IJAFB) eISSN: 0128-1844 Journal website: www.ijafb.com These results seem to be consistent with Moin (2008) and Adewole & Patrick (2019) findings, our results show that Islamic banks considered the liquidity risk by holding higher liquid assets compared to the conventional ones, might be because having different contracts. Furthermore, Islamic banks' liquidity sources are limited compared to conventional banks, supported, by (Sulaiman, 2013; Mahdi & Abbes, 2018; and Al-Gazzar, 2014), that might have prompted Islamic banks to hold more liquid assets. Having a lower LR ratio means that conventional banks work successfully as a bridge between parties comparing to the Islamic banks. On the other hand, less liquid assets to face unforeseen liquidity demand. While Islamic banks having higher LR means that Islamic banks giving less finance, subsequently having in-hand liquid assets and having a higher ability to face liquidity demands comparing to the conventional banks in Syria. During 2011 Islamic banks were better in terms of investing, but during 2012 and 2013, the performance of conventional banks improved further. That indicates an increase in Islamic bank deposits without a relative increase in financing. That can also be seen from the profitability ratios (see table.7) in favor of conventional banks, which indicate more financing given by conventional banks, subsequently, less liquid assets. Moreover, conventional banks enjoy a higher reputation comparing to Islamic banks, which support the higher profitability of conventional banks (Aldeen et al., (2019). Overall, it seems advisable that Islamic banks might be trying to avoid and domino effects because when Islamic banks lack liquidity has fewer options comparing to the conventional ones (Sukmana & Suryaningtyas, 2016), especially if it is associated with the risk-related crisis. Besides, having higher liquid assets in Islamic banks could be ascribed to the type of banks’ contracts, when it is mainly based on debt in conventional banks while it is assets-backed in the Islamic ones (Hassan et al., 2013). Overall, all the private banking sector functioning in Syria committed to the ratio obliged by the central bank of Syria and in some cases, this ratio exceeds the requirements, it could be attributed to the investing condition in the country during the study period. Table.6 Testing hypothesis summary t-test Hypothesis H1 Expected relationship Significant difference Actual relationship Insignificant difference Validation of the research hypothesis Not Validated Descriptive statistics Table.7 Descriptive outputs LR CAR ROA NPL/NPF Size Mean Islamic banks 47.2386 35.9829 2.8686 22.7386 10.7643 Std. Deviation Islamic banks 23.13103 11.01519 2.46262 13.35453 .39191 Mean conventional 31.1800 25.2229 3.7986 34.8300 11.5643 41 Std. Deviation banks 6.74667 5.37137 5.33956 14.13594 .13290 conventional N 7 7 7 7 7
10. Volume : 5 Issues: 26 [March, 2020] pp. 33 -49] International Journal of Accounting, Finance and Business (IJAFB) eISSN: 0128-1844 Journal website: www.ijafb.com Table.7, we can see differences among variables mean and standard deviation for both Islamic and conventional banks. We can identify that LR and CAR are higher in Islamic banks while ROA and banks’ size were in favor so conventional banks, even though having a higher NPL ration indicate higher non-performing loans/finance which is higher in conventional ones as well. The standard deviation of Islamic banks’ in LR, CAR, and Size) whereas ROA and NPL higher in conventional ones. Classical assumption test: Person Correlation can test and measure the degree of strength (absolute value) of the relationship between Y and X. based on the correlation matrix allows us to detect the existence of collinearity in multi-variable data. Correlation can also be used to determine the type of relationship or the direction of the figure, whether it is moving from left to right or the other way round. Thus, a relatively high correlation value between the two independent variables indicates the possibility of a Multicollinearity happening. To be mentioned, after running a person correlation with five selected independent variables, it has been seen wise to exclude NPF/NPL as independent from our model to avoid Multicollinearity in the regression test. That has not been considered by the previous researches, which is crucial to assure that the regression estimation concerning the classical assumptions. However, it has been ignored by previous studies done by (Rahman, & Banna, 2015); (Akhtar et al., 2011). Subsequently, the formula has been adjusted as the following: Yit = α + β1log (Total Assets) it + β2(NPF /NPL) it + β3(CAR)it + β5(ROA)it + εit Table.8 Pearson Correlation (Islamic banks) Correlations Pearson LR_ Islamic Correlation CAR_ Islamic ROA_ Islamic NPF_ Islamic Size_ Islamic LR_ Islamic 1.000 .300 -.372 -.722 -.512 CAR_ Islamic .300 1.000 .014 -.144 -.885 ROA_ Islamic -.372 .014 1.000 .236 .215 NPL_ Islamic -.722** -.144 .236 1.000 .085 Size_ Islamic -.512 -.855* .215 .085 1.000 *Correlation insignificant at the 0.01 level. **Correlation insignificant at the 0.05 level. Table.9 Pearson Correlation (conventional banks) Correlations Pearson Correlation LR_ Conv CAR_ Conv ROA_ Conv NPL_ Conv Size_ Conv LR_Conv CAR_Conv ROA_Conv NPL_Conv Size_Conv 1.000 .153 -.727 .155 .093 .153 1.000 .188 .320 .846 -.727** .188 1.000 .374 .180 .155 .320 .374 1.000 .623 .093 .826* .180 .623 1.000 **Correlation insignificant at the 0.01 level. *Correlation insignificant at the 0.05 level. Table.8 & 9 below state the correlation efficient. This gives a piece of information on the level of the correlation between the selected variables. This was tested with the person correlation coefficient test. Matrixes show that in general the correlation between the explanatory variables is well built that the Multicollinerarity problem is addressed. 42
11. Volume : 5 Issues: 26 [March, 2020] pp. 33 -49] International Journal of Accounting, Finance and Business (IJAFB) eISSN: 0128-1844 Journal website: www.ijafb.com Refer to the homoscedasticity assumption The White test results in testing the homoscedasticity assumption in both Islamic and conventional banks models show that statistically, the prob > chi2 produced is greater than the 5% confidence level. The result for both Islamic and conventional banks are 0.2048 and 0.3948 respectively. Hence, the Ho hypothesis (constant variance/homoscedasticity) is not rejected. To run autocorrelation testing, we used the Breusch-Godfrey LM test with the Hypothesis of Ho there was no serial correlation in the model. The results manifested prob> chi2 value for both Islamic and conventional banks at 0. 302 and 0.345 respectively (greater than the level of confidence) so that Ho is not rejected, thus the assumption of non-Autocorrelation is fulfilled. Linear Regression statistics: Multiple regressions were applied for this study. Multiple regression statistics will indicate whether which variable acts as a predictor for liquidity ratio. Considering LR (liquidity ratio) as an independent variable, on the other hand, CAR (capital adequacy), ROA (return on assets), NPF/NPL (non-performing loan/ finance) log (total assets) as dependent variables. Table.10 Coefficients (Islamic banks) Model 1 (Constant) CAR_ Islamic ROA_ Islamic NPF_ Islamic Size_Islamic Unstandardized Coefficients Std. B Error 1075.911 333.201 -2.301 .984 1.324 2.127 Standardized Coefficients Beta -1.096 .141 t 3.229 -2.337 .622 Sig. .084* .144*** .597 Collinearity Statistics Toler ance VIF .158 .678 6.319 1.475 -1.370 .347 -.791 -3.945 .059* .865 1.156 -85.331 28.016 -1.446 -3.046 .093* .154 6.479 *significant at the 0.1 level. ***significant at the 0.15 level. Table. 11 Coefficients (conventional banks) Model 2 (Constant) CAR_Conv ROA_Conv NPL_Conv Size_Conv Unstandardized Coefficients Std. B Error 744.909 76.553 1.422 .142 -1.368 .072 .480 .039 -65.816 6.972 Standardized Coefficients Beta 1.132 -1.083 1.006 -1.296 Collinearity Statistics t 9.731 9.982 -19.096 12.265 -9.440 Sig. .010** .010** .003* .007* .011** Tolerance VIF .196 .782 .374 .133 5.110 1.278 2.674 7.495 * Significant at the 0.01 level. **Significant at the 0.05 level. The regression associated with conventional banks revealed 99.5% R_Square which means 99.5% of changes in liquidity ratio can be explained by the regression model. On the other hand, R-square for Islamic banks at 93%. The result of CAR in conventional banks concludes an extension of equity level will make the banks capable to act as lend due to the availability of cash regardless of the size of the deposits moreover, capital will lead banks to increase the liquidity level and absorb liquidity risk. Which 43
12. Volume : 5 Issues: 26 [March, 2020] pp. 33 -49] International Journal of Accounting, Finance and Business (IJAFB) eISSN: 0128-1844 Journal website: www.ijafb.com confirm the studies of (Menicucci & Paolucci (2016); Repullo, (2004); El Khoury (2015). On the other hand, it has a negative significant impact on the Islamic banks, which confirm Chagwiza, 2014; Moussa, (2015) results, since high capitalization level will discourage liquidity creation by making the structure of the capital fragile. NPL/NPF in both types of banks has a significant impact on bank liquidity. The negative impact on the liquidity in Islamic banks by reducing the level of confidence among the depositors (El-Chaarani, 2019). Positive impact in conventional banks could be attributed to the fact that banks will be more reluctant to finance particularly in the current crisis the country passing through. Less finance will lead to less nonperforming loans subsequently a high liquidity ratio. It appears that the banks’ size has a significant negative impact on both types of banks. Crucial on the liquidity level in both types of banks, this finding could be attributed to the support given from the central bank during the current crisis. They might consider that the central bank of Syria will keep supporting the banking sector and preventing any failure, because the Syrian economy on the edge (Aldeen et al., 2019), Hence, any financial failure will have undesirable consequences on the entire economy. It seems that liquidity risk management independent from assets performance in Islamic banks. However, it has a significant impact on conventional banks because holding over holding liquid assets will create an opportunity cost for a banking line with many previous studies (Deléchat et al., 2012; Melese & Laximikantham, 2015; Vodavá, 2011b; Moussa, 2015). Table.12 Testing hypothesis summary (Islamic banks) Hypothesis H2 H3 H4 H5 H6 variable Size NPF CAR Expected relationship Negative and significant Negative and significant Positive and significant FDR Negative and significant ROA Negative and significant Actual relationship Negative and significant Negative and significant Negative and significant Not considered due to the Multicollinearity Positive and insignificant Validation of the research hypothesis Validated Validated Not validated ____ Not validated Table.13 Testing hypothesis summary (conventional banks) Hypothesis H2 H3 H4 H5 H6 variable Size NPL CAR Expected relationship Negative and significant Negative and significant Positive and significant LDR Negative and significant ROA Negative and significant Actual relationship Negative and significant Positive and significant Positive and significant Not considered due to the Multicollinearity Negative and significant 44 Validation of the research hypothesis Validated Not validated Not validated ____ Not validated
13. Volume : 5 Issues: 26 [March, 2020] pp. 33 -49] International Journal of Accounting, Finance and Business (IJAFB) eISSN: 0128-1844 Journal website: www.ijafb.com Conclusion Management of liquidity risk is essential for Islamic and conventional banks. However, tremendous consideration has been paid to this topic in each country. However, there is a shortage of studies address the Syrian context. Through examine liquidity risk management through a critical comparative examination between Islamic bank’s risk management in the case of Syria. This study shed some light on dimension have not been studied beforehand and helps bankers and government by understanding various factors impact liquidity risk. Annual data spanning 2011-2017 were the subject of this research. We employed paired sampled t-test and multiple regression to meet our purpose. t-test results show that there is a significant difference between Islamic and conventional banks in terms of liquidity ratio. Multiple regression manifested CAR, NPF, and bank size has a significant negative impact on Islamic banks’ liquidity. Whereas in its counterparts ROA and bank size have a significant negative affects bank's liquidity, CAR and NPL have a positive significant impact on conventional banks’ liquidity. Refer to the loan/finance to deposits ratio (FDR/LDR), it appears advisable to exclude these variables from our regression model due to the significant correlation with other independent variables. To fulfill leaner regression classical assumptions. Both Islamic and conventional banks accommodated the central bank’s liquidity requirements but it is insignificantly higher in Islamic banks because conventional banks enjoy a higher reputation in Syria. Moreover, it is confirmed by regression results, ROA has a significant negative impact on the liquidity ratio. The process for managing liquidity risk can be simplified by using the proper guidelines and it is not necessary for banks to develop a risk system procedure by themselves or with others, which lowers related costs. The results obtained from this study are significant in that no other studies on this specific topic exist in literature and the analysis demonstrates bank position in Syria in terms of liquidity management. It is every bank’s worst nightmare not having enough liquid assets on hand to meet daily obligations. Fortunately, this nightmare does not have to happen to a bank if the right steps are implemented to reinforce liquidity risk management planning and practices. Islamic banks should improve their integration in the market to assure a proper profitability ratio. Holding a considerable amount of liquid assets seems advisable, but when it is too high, that will create an opportunity cost for a bank. Subsequently, accelerating economic growth in a country suffering from a violent political crisis for a decade. Moreover, the central bank of Syria should consider a different liquidity requirement for Islamic banks, due to the fact they have different working mechanisms subsequently different liquidity requirements. This study aimed to cover the impact of external variables but due to the non-availability of the data in this regard, for instance, the World Bank database or IMF websites; it could be attributed to the country’s circumstances during the study period. 45
14. Volume : 5 Issues: 26 [March, 2020] pp. 33 -49] International Journal of Accounting, Finance and Business (IJAFB) eISSN: 0128-1844 Journal website: www.ijafb.com Appendices Fiqure.2 Histogram Islamic: Figure.3 Histogram conventional: 46
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