Cash holding in Islamic rural banks

Abstract

Purpose

This paper aims to investigate the importance of profitability and bank soundness as determinants of cash holdings by Islamic Rural Bank (IRB) in Indonesia.

Design/methodology/approach

The study covers 134 IRB during 2012–2016. The authors apply pooled regression and panel data method. The best model is used for further analysis.

Findings

The maximum cash holding is 22.21%, meaning the bank retains 22.21% of its liabilities in the cash vault. Cash holding is positively related to higher credit risk (LLR), soundness and profitability (ROA) and negatively to asset composition (PATA) and size (LASSET) for Model I. Soundness, asset composition (PATA), higher credit risk (LLR) and profitability (ROA) are negatively related to size. Larger IRB hold less cash as it has a better reputation in the market. The intermediation level (financing deposit ratio) is positive and significant for Model 1 but negative and not significant for Model 2. Different measures of liquidity ratio – cash to liabilities (CR) or cash to capital ratio (CCR) – produce different results. Evidence from multivariate analysis reports that the results from both models are mostly in the opposite direction.

Originality/value

To the best of the authors’ knowledge, this paper is the first attempt to look at cash holding in the IRB in Indonesia.

Citation

Mongid, A., Muazaroh, Anggraeni, Hidayat, S.E. and Ghalib, S. (2024), "Cash holding in Islamic rural banks", Journal of Islamic Accounting and Business Research, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JIABR-07-2023-0209