Profit- and loss-sharing impact on Islamic bank liquidity in GCC countries

Abstract

Purpose

The purpose of this paper is to empirically assess the impact of the principle of profit- and loss-sharing (PLS) on the exposure to liquidity risk of Islamic banks in Gulf Corporation Council (GCC) countries. The Islamic bank activity is distinguished by a PLS principle, which is likely to involve specificities in the bank liquidity issue.

Design/methodology/approach

This paper investigates the determinants of Islamic bank liquidity over the period 2005–2016 using a panel of 23 Islamic banks in GCC. The system of generalized method of moment estimators is applied.

Findings

The findings reveal that while profit-sharing investment accounts (PSIAs) are inversely proportional to Islamic bank liquidity, the PLS investment does not seem to act as a determinant of the bank liquidity. The fact that PSIAs are globally short-run accounts, but finance long-run projects leads to a substantial maturity mismatches, which limits the availability of liquidity buffer and exacerbates the bank’s exposure to liquidity risk. Moreover, capital adequacy ratio has significant and positive association with bank liquidity, as a strong capital ratio helps to strengthen the liquidity control. However, return on assets has a negative significant impact on bank liquidity. For instance, if the bank holds more cash, it deprives itself from placing funds and earning returns, which causes its profitability to decline.

Practical implications

This paper gives further insights to better improve the liquidity risk management in a context of scarcity of Shariah-compliant instruments. Islamic bank needs to determine the PLS purpose and goals to be consistent with the “bank’s financing policy” and convince its depositors to use their deposits for medium and long-run investments.

Originality/value

Unlike previous empirical research, this investigation tries to better grasp the Islamic bank liquidity issue by focusing on the PLS impact on liquidity risk. It aims to fill in the gap in the empirical literature on this topic.

Citation

Ben Jedidia, K. (2020), "Profit- and loss-sharing impact on Islamic bank liquidity in GCC countries", Journal of Islamic Accounting and Business Research, Vol. 11 No. 9, pp. 1791-1806. https://doi.org/10.1108/JIABR-10-2018-0157