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Sanaullah Ansari
Shaheed Zulfikar Ali Bhutto Institute of Science and Technology (SZABIST), Islamabad, Pakistan
Literature Review
Ahmad, H. and Khan, Tariqullah (2007) Akkizidis, I and Khandelwal, S. K. (2008) Askari et al (2009) Ayub, M. (2007) Chapra, M. U. (2008) Hassan, A. (2009) Ismail, R. (2008) Kahf, M. (2000) Siddiquie, A. (2008) Karim, A. A. (2006) Zhu, H. (2001)
Sample
The quarterly data of 5 Islamic banks in Pakistan has been obtained from their financial statements from the period of 2005 to 2011.
Method
Capital / Total Assets have been used as proxy to measure the liquidity risk of Islamic banking industry, and following has been used as independent variables.
Debt Equity Ratio (D/E) Non-Performing Loans Ratio (NPL) Earning on Assets (EOA) Capital Adequacy Ratio (CAR)
Major Findings
Descriptive Statistics Descriptive statistics show the mean and standard deviation of the results. Liquidity ratio has been used as dependent variable and its mean is compared with the means of other independent variables. The mean of Debt/Equity Ratio and Capital Adequacy ratio is greater than the mean of Liquidity Risk which means that that these 2 ratios are negatively impacting liquidity risk. The mean of Earning on Assets and Non-Performing Loans Ratio is less than the mean of Liquidity Risk. It means that that these 2 ratios are positively impacting Liquidity Risk.
Major Findings
Correlation Correlation among all independent variables is not more than 0.60 which means that all independent variables have no positive and significant relationship with each other which could impact liquidity risk. It shows that all independent variables have their independent impacts on liquidity risk management by Islamic banking industry in Pakistan.
Major Findings
Regression The value of adjusted R-square shows that about 64.3 percent change in liquidity risk can be observed with independent variables under this study. The relationship of debt equity ratio and capital adequacy ratio is found to have significant and negative relationship with liquidity risk at 1% and 10% level respectively. The earning on assets ratio established the positive and significant relationship with liquidity risk at 5% significance level. The relationship of NPLs ratio with liquidity risk is statistically insignificant.
Conclusion
It has been concluded that debt equity ratio and capital adequacy ratio has significant and negative relation with liquidity risk which means that these two ratios are not much impacting liquidity risk management by Islamic banking industry. Whereas, earning on assets ratio has very strong and positive relationship with liquidity risk which shows that this ratio has a major impact on liquidity risk management. Similarly, non-performing loans ratio has no relationship with liquidity risk which means that non-performing loans are not having an impact on liquidity risk management by Islamic banking industry in Pakistan.
Conclusion
Therefore, In the light of the results, it is suggested that Islamic banks should increase their equity to reduce their liquidity risk. Secondly, Islamic banks should maintain proper relationship between assets and the capital of respective firm to reduce the liquidity risk. Islamic banks should also diversify their investments to maintain their financial performance and reduce the liquidity risk. By these taking these steps, Islamic banking industry can overcome the problem of liquidity risk and can improve its financial performance in future.
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