Net Stable Funding and Liquidity Coverage Influence on Islamic Bank Financial Stability: Evidence from Malaysian Islamic Banking
DOI:
https://doi.org/10.31436/ijema.v31i1.1135Keywords:
Net stable funding ratio, Liquidity coverage ratio, Financial stability, Banks liquidity, Islamic banksAbstract
The Islamic Financial Services Board (IFSB) endorsed Basel III liquidity guidelines by modifying the criteria to cater to the unique aspects of the Islamic banking industry. This paper adopted the IFSB-modified guidelines to calculate the Net Stable Funding Ratio (NSFR) and Liquidity Coverage Ratio (LCR) of 15 Malaysian Islamic banks from 2009 to 2020. We examined the NSFR and LCR impact on financial stability (Z-score) and profitability (return on assets) of Malaysian Islamic banks, after controlling for bank-specific and macro-level variables. The results from Panel Corrected Standard Errors (PCSE) estimation indicate that NSFR has a positive significant impact on stability and profitability, suggesting that NSFR not only achieves its desired objective of long-term liquidity management by reducing assets and liabilities mismatches but also improves Islamic bank profitability. The impact of LCR, however, is negative both on financial stability (but insignificant) and profitability, implying that LCR requirements do not help financial stability and discourage Islamic bank profitability. Given this finding, it can be claimed that because of liquidity constraints and a shortage of quality money market instruments, Islamic banks are forced to keep an important share of their assets idle to satisfy liquidity requirements, which in turn reduces their profitability. Considering these findings, we recommend policy makers revise and reform existing LCR guidelines for Islamic banks. We also encourage Islamic banks to establish liquidity-resilient and sustainable plans as part of an overall strategic plan, to improve on liquidity and profitability.
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