Financing Structure and Liquidity Risk: Lesson from Malaysian Experience

Abstract

This study examines the relationship between financing structure and bank liquidity risk. We compare the findings between Islamic and conventional banks for the case of Malaysia. We adopt four measures to represent financing structure; namely 1) real estate financing, 2) financing concentration, 3) stability of short-term financing structure and 4) stability of medium-term financing structure. Two BASEL III liquidity risk measures are tested; namely, liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) to measure short-and long-term liquidity risk, respectively. Based on panel data regression comprising 27 conventional and 17 Islamic banks from 1994 to 2014, our findings show that real estate financing and stability of short-term financing structure for Islamic banks are positively related to both liquidity risk measures. This implies that an increasing number of real estate financing and a stable short-term financing structure may increase Islamic banks' short-and long-term liquidity risks. However, although real estate financing does not affect conventional banks' liquidity risks, a stable short-term financing structure and increasing financing concentration can positively influence bank long-term liquidity risk. Our findings shed light crucial policy implications for regulatory bodies and market players in the context of liquidity risk management framework as well as the need to develop a separate framework between conventional and Islamic banking institutions.

Exploring financial inclusion in MENA countries: an entropy weight approach

“…Low FI in Islamic countries in the MENA region is partly due to Islamic Law, such as the Sharia Law, which prohibits Muslims from paying RIBA (interest) on borrowed money (Pearce, 2011). As a substitute for interest, Islamic banks practice “profit and loss sharing”, which is allowed (Abdul-Rahman and Nor, 2016). According to the Global Findex database, in MENA countries, 10.4% (double the percentage in the rest of the world) of financially excluded adults cite “religious reasons” as a barrier to FI.…”

The effects of efficiency on banks’ market risk: Empirical evidence from China

“…The importance of managing banks' risk in particular after a series of the financial crisis has attracted increasing research interest on the banks' risk determinants (Mohd Amin & Abdul-Rahman, 2020;Abdul-Rahman et al, 2019;Othman et al, 2018;Abdul-Rahman et al, 2018a;Tamadonnejad et al, 2017;2016;Abdul-Rahman et al, 2017;Yaakub et al, 2017;Mohd Pauzi et al, 2017). Over the decade since the 2008 financial crisis, the literature on banking and finance has seen renewed interest in many areas, including the finance-loan growth nexus, effectiveness of supervision, development of risk indicators and efficiency of banks.…”

Leverage Ratio and its Potential For Enhancing the Effectiveness of Capital Regulation

“…On the contrary, in a time of prolonged recession when exposures fail to a larger extent, the PD will rather be overvalued as compared to the long-term average, and for this reason the level of the risk weights shall also be overvalued as compared to the long-term average. 1 It can generally be stated that procyclicality of the IRB approach is increased by inclusion of a shorter cycle length (through-the-cycle method) in a situation where the amplitude of the financial cycle is longer in the given economy. Borio (2014) document that the average duration of financial cycles that peaked after 1998 is nearly 20 years.…”