The State of Liquidity Risk Management of Islamic Banks in Bangladesh: A Comparative Study with Conventional Banks

Abstract

This paper aims to analyze the current state of liquidity and liquidity risk management of Islamic banks, the historical trend of the liquidity position, and provides a comparison with the liquidity position of conventional banks in Bangladesh. The paper utilizes liquidity ratio, deployment ratio, profit sharing investment account (PSIA) to total deposits ratio, liquidity gap over a specific time period, net stable funding ratio (NSFR), and liquidity coverage ratio (LCR), to discuss the state of liquidity and the trend of liquidity of Islamic banks. Five Islamic banks and five private commercial conventional banks, which do not have any Islamic banking branches, or windows, are chosen as samples. The data is collected from the annual reports published by selected commercial banks. Simple descriptive statistics such as mean and standard deviations are used to analyze the data. This study finds that the liquidity ratio and deployment ratios for Islamic banks are in a downward trend, although by a small percentage. Islamic banks have a negative short-term liquidity gap, although by a small percentage and the variations of liquidity gap are much higher, and the gap is in a declining trend towards being positive. Conventional banks have a positive short-term liquidity gap. Profit sharing investment accounts are experiencing an increasing trend and occupy the major portion of deposits. Liquidity ratio and deployment ratio remain higher for Islamic banks than conventional banks. For the past two years, both types of banks have maintained an adequate ratio as required in Basel III.