Exposure to Interbank Investment and Financing Risk by Islamic Banks: A Dynamic Panel Analysis of Malaysia

Abstract

The government of Malaysia has developed an Islamic Interbank Money Market (IIMM) since January 1994 with the objective to facilitate funding for the Islamic banking sector in the country. This platform also enables Islamic banks to obtain Shariah-compliant funds from other Islamic banks. This article examines the effects of interbank investment and financing risk on the financing decisions of Malaysia's Islamic bank between 1994 The financing decisions are used as financing measures to determine the effect of investing in the interbank market and financing risk indicators on financing. Research methodologies are the descriptive, correlation and dynamic panel analysis results are derived with the help of Limdep 9.0 software. The study found a negative relationship between the interbank investment variable with the financing decisions of Islamic banks. This reflects that an increase in interbank investment leads Islamic banks to reduce their level of financing. These findings prove the investment activities between Islamic banks had a "substitution effect" and decreased their capability of financing because of their tendency to maintain liquidity. Islamic banks are confident that they will generate higher profits in the coming financial year. The economic conditions of Malaysia do not influence Islamic banks' financing decisions, whereas Islamic banks in this study are more dependent on the balance sheet indicators.

Basel III standards and liquidity determinants in Vietnamese commercial bank

“…Regarding liquidity measurements, simple measures have been used in previous studies to analyze the impact of different factors on bank liquidity, such as the ratio of total deposits to total assets (Mohamad et al 2013;Abdul-Rahman et al 2018), the ratio of cash to total assets (Akhtar et al 2011;Abdullah & Khan 2012;Ramzan & Zafar 2014;Abdul-Rahman et al 2017), the liquidity asset to total asset ratio (Aspachs et al 2005;Praet & Herzberg 2008;Rychtárik 2009). On the regulatory side, Horrath et al (2012), Cucinelli (2013), Ramzan &Zafar (2014), andBrůna &Blahová (2016) applied the up-to-date Basel III standard measures, such as the net stability fund ratio (NSFR) or liquidity coverage ratio (LCR) to measure short-term and long-term liquidity, respectively.…”

“…Many empirical studies used simple measurements to calculate liquidity (Abdullah & Khan 2012;Mohamad et al 2013;Ramzan & Zafar 2014;etc.). The dynamic structure and complex nature of the market environment in which banks operate, however, makes for different liquidity measures.…”

Investigating the linkage between Shariah board size, liquidity risk and bank stability through an asymmetric lens

“…The ratio of the total deposits-to-total assets for each bank and year is a proxy for LR (Mohamad et al , 2013; Khan et al , 2017 and Alzoubi, 2017). This ratio measures the share of assets financed by deposits, so it assesses the degree of dependence of the bank on deposits.…”

Determinants of Systematic and Unsystematic Liquidity Risk in Islamic Banks

“…For the sustainability and growth of IBs, liquidity risk management is relatively more important than managing operational risk or the risk of rate of return (Khan & Ahmed, 2001). According to El Tiby (2010) and Mohamad, Mohamad & Samsudin (2013), IBs face liquidity risks because of of limited number of Sharia-compliant instruments in the money market and Islamic financial instruments traded on the secondary market. According to Hassan, Razzaque & Tahir (2013), the Islamic financial system promotes equity-based instead debt-based instruments, which has not been fully reflected in practices.…”

“…Improper liquidity management also can result in insolvency risks because, in severe scenarios, banks have to fire-sell their assets for fulfilling their obligations. Whereas effective management of liquidity risk ensures that banks will be able to fulfill their cash flow obligations and other necessary requirements (Mohamad, Mohamad & Samsudin, 2013). According to the theory of financial intermediation, it is crucial to manage liquidity risk as banks are considered the main source of creating liquidity in the economy (Allen & Santomero, 1997).…”