Maturity transformation risk factors in Islamic banking: Implication of Basel III liquidity regulations

Abstract

Purpose

Maturity transformation risk is one of the leading causes of the global financial crisis. While endorsing the new Basel III liquidity reforms, the Islamic Financial Services Board has suggested a modified NSFR ratio as a structural measure for the maturity transformation function of Islamic banks, allowing for their unique balance sheet structure. The purpose of this paper is to analyze various firm-specific and macroeconomic factors that may significantly affect the maturity transformation risk of these banks.

Design/methodology/approach

Using an annual data set of 55 full-fledged Islamic banks from 11 different countries over a period from 2006-2015, this study utilizes a two-step system generalized method of moments estimation technique on an unbalanced panel data.

Findings

The empirical results reveal bank size, capital, less-risky liquid assets, risky liquid assets, external funding dependence and market power as significant bank-specific factors in determining maturity transformation risk. However, the authors find no evidence for the effect of bank credit risk on maturity transformation risk in Islamic banking system.

Originality/value

This is the first study that focuses on the measurement of maturity transformation risk and its determinants in Islamic banks in a cross-country context, with regards to new liquidity regulatory requirements as proposed by Islamic Financial Services Board (IFSB) in conjunction with Basel III.

Citation

Mahmood, H., Gan, C. and Nguyen, C. (2018), "Maturity transformation risk factors in Islamic banking: Implication of Basel III liquidity regulations", Managerial Finance, Vol. 44 No. 6, pp. 787-808. https://doi.org/10.1108/MF-07-2017-0259