The State of Liquidity Risk Management of Islamic Banks in Bangladesh: A Comparative Study with Conventional Banks
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.
Ali, S. S. (2004). Islamic Modes of Finance & Associated Liquidty Risks. Tehran.
Ali, S. S. (2013). State of Liquidity Management in Islamic Financial Institutions. Islamic Economic Studies , 21 (1), 63-98.
Ayub, M. (2007). Understanding Islamic Finance. West Sussex: John Wiley & Sons Ltd.
Bangladesh Bank. (2017). Annual Report 2015-2016. Dhaka: Bangladesh Bank.
Bangladesh Bank. (2017). Developments of Islamic Banking in Bangladesh July-September. Dhaka: Research Department, Bangladesh Bank.
Bangladesh Bank. (2017). Financial Stability Report 2016. Dhaka: Bangladesh Bank.
Basel Committe on Banking Supervvision. (2010). Basel III: International Framework for Liquidity Risk Measurement, Standards, and Monitoring. Switzerland: Bank for International Settlements.
Dragan, O. R., Batrancea, I., & Bechis, L. (2013). Systematic Risk in Banking Sector. The USV Annals of Economics and Public Administration , 13 (1), 177-182.
Greuning, H. V., & Iqbal, Z. (2008). Risk Analysis for Islamic Banks (1st ed.). Washington: The World Bank.
Hudgins, P. S. (2013). Bank Management & Financial Services (International Edition ed.). Singapore: McGraw Hill.
Islam, M. m., & Chowdhury, H. A. (2009). A Comparative Study of Liquidity Management of an Islamic Bank and a Conventional Bank: The Evidence from Bangladesh. Journal of Islamic Economics, Banking & Finance , 5 (1), 89-108.
Md. Zahangir Alam, M. M. (2011). Risk Management Practices: A Critical Diagnosis of Some Selected Commercial Banks in Bangladesh. Journal of Business and Technology , VI (1), 15-35.
Muhammad Farhan Akhtar, K. A. (2011). Liquidity Risk Management: A Comparative Study between Conventional and Islamic Banks of Pakistan. Interdisciplinary Journal of Research in Business , 1 (1), 35-44.
Obaidullah, M. (1997). Capital Adequacy Norms for Islamic Financial Institutions. Islamic Economic Studies , 5 (1), 37-55.
Rahman, M. L., & Banna, S. H. (2015). Liquidity Risk Management: A Comparative Study between Conventional and Islamic Banks in Bangladesh. Journal of Business and Technology , X (2), 19-35.
Saunders, A., & Cornett, M. M. (2013). Financial Institutions Management: A Risk Management Approach (7th ed.). New Delhi: McGraw Hill Education (India) Private Limited.
Usmani, M. T. (1998). An Introduction to Islamic Finance. Karachi.