Mohammad Ashraful Mobin Liquidity Risk Management of Islamic Banks: A Panel Approach to Malaysian Market   Mohammad Ashraful Mobin Graduate Student INCEIF, The Global University of Islamic Finance Lorong Universiti A, 59100 Kuala Lumpur, Malaysia & Dr. Abu Umar Faruq Ahmad Senior Researcher, International Shari`ah Research Academy for Islamic Finance (ISRA) Associate Professor, INCEIF, The Global University of Islamic Finance Lorong Universiti A, 59100 Kuala Lumpur, Malaysia

The present research is designed:   Liquidity Risk Management of Islamic Banks: A Panel Approach to Malaysian Market The present research is designed: To analyze the management of liquidity risk in Islamic banks This study examines the significance of different key variables on banks’ liquidity size of the firm capitalization bank specialization and loan performance

Background of the Study   Liquidity Risk Management of Islamic Banks: A Panel Approach to Malaysian Market Background of the Study The robust and sound liquidity management could raise funds to meet the demands of depositors and borrowers at any time with a satisfactory price. The concept of liquidity in finance principally lies in two areas: (a) the liquidity of financial instruments in the financial market, and (b) the liquidity related to solvency. Islamic banks minimize the liquidity risk from both internal and external perspectives. To measure and monitor liquidity risk, Islamic banks have to continuously measure the cash inflows of the business/projects being financed and the cash outflows of deposit withdrawals. Extra liquidity with Islamic banks cannot be straightforwardly relocated to conventional banks as the Islamic banks do not recognize interest. This paper attempts to examine the banks liquidity in growing region Malaysian Islamic banking industry.

Liquidity Risk Management of Islamic Banks: A Panel Approach to Malaysian Market BASEL committee definition of liquidity in the banking institutions Liquidity is the ability of a bank to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses.   The fundamental role of banks in the maturity transformation of short-term deposits into long-term loans makes banks inherently vulnerable to liquidity risk, both of an institution-specific nature and that which affects markets as a whole. Virtually every financial transaction or commitment has implications for a bank’s liquidity. Effective liquidity risk management helps ensure a bank's ability to meet cash flow obligations, which are uncertain as they are affected by external events and other agents' behaviour.

Liquidity Risk Management of Islamic Banks: A Panel Approach to Malaysian Market IFSB Guidelines IFSB, as the international standard-setting organization, has published two references (i) The Guiding Principles of Risk Management for Institutions Offering Only Islamic Financial Services (December 2005) and (ii) The Technical Note on Issues in Strengthening.

Liquidity management Issues Islamic banks Liquidity Risk Management of Islamic Banks: A Panel Approach to Malaysian Market Liquidity management Issues Islamic banks While majority of Islamic banks experience excess liquidity Some have also faced liquidity crisis Many different risks culminate in liquidity risk

A panel of 15 banks active in Malaysia Liquidity Risk Management of Islamic Banks: A Panel Approach to Malaysian Market Data and Methodology The sources of data is BANKSCOPE and International Financial Statistics ( IFS). A panel of 15 banks active in Malaysia Panel Techniques such as fixed effect model as well as random effect model has been employed.

Liquidity Risk Management of Islamic Banks: A Panel Approach to Malaysian Market DATA AND METHODOLOGY The initial sample was composed of 15 Malaysian Islamic banks. The author’s choice to focus only on the Malaysia market is dictated by the desire for as homogeneous a sample as possible in terms of bank characteristics and the territory in which they operate. The dependent variables used in the empirical analysis concern liquidity risk and it’s based on previous study The difficulty of including all terms required by the Basel Committee, which entails a precise calculation, is a main limitation of this method. However, the use of these two measures instead of the balance sheet indices usually used in literature can more effectively indicate bank liquidity risk.

Liquidity Risk Management of Islamic Banks: A Panel Approach to Malaysian Market Variables Bank capitalization measured with the ratio between equity and total assets. Bank size measured with the natural logarithm of total assets (SIZE) and frequently used in literature. Bank specialization (SPEC) that measures to what extent a bank is specialized in lending, considering net loans as a percentage of total assets. Loan Loss Reserve Ratio (LLRR): this ratio is part of 'Asset Quality' ratios of the bank and deter-mines the quality of bank loans. Return on Average equity ( ROAE)

Descriptive Statistics

Result & Analysis : Fixed Effect Model

Result & Analysis: Random Effect Model

Fixed Effect or Random Effect ? Liquidity Risk Management of Islamic Banks: A Panel Approach to Malaysian Market Fixed Effect or Random Effect ? The Hausman test tests the Null Hypothesis that the coefficients estimated by the efficient RE estimator are the same as the ones estimated by the consistent FE estimator. As there is (insignificant p-value, Prob>chi2 larger than .05) , it is safe to use RE.

Fixed Effect Model :Robustness Check

Banks’ liquidity has significant relationship with Liquidity Risk Management of Islamic Banks: A Panel Approach to Malaysian Market Statistical Findings Banks’ liquidity has significant relationship with Bank Size Bank specialization

Analysis The research shows that bigger banks more specialized in the lending activity are more likely to have a higher liquidity. More capitalized banks show a better liquidity on long horizon, while banks with a better assets quality are more likely to manage liquidity on short horizon.

Future Research Agenda Liquidity Risk Management of Islamic Banks: A Panel Approach to Malaysian Market Future Research Agenda Study can be conducted by increasing sample size. Study can be done in cross country Study can be done comparatively both in conventional and Islamic

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