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Article
Publication date: 5 April 2013

Simplice A. Asongu

The purpose of this paper is to investigate post‐crisis measures banks have adopted in a bid to manage liquidity risk. It is based on the fact that the financial liquidity

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2946

Abstract

Purpose

The purpose of this paper is to investigate post‐crisis measures banks have adopted in a bid to manage liquidity risk. It is based on the fact that the financial liquidity market was greatly affected during the recent economic turmoil and financial meltdown. During the crisis, liquidity risk management disclosure was crucial for confidence building in market participants.

Design/methodology/approach

The study investigates if Basel II pillar 3 disclosures on liquidity risk management are applied by 20 of top 33 world banks. Bank selection is based on information availability, geographic balance and comprehensiveness of the language in which information is provided. This information is searched from the World Wide Web, with a minimum of one hour allocated to “content search”, and indefinite time for “content analyses”. Such content scrutiny is guided by 16 disclosure principles classified in four main categories.

Findings

Only 25 per cent of sampled banks provide publicly accessible liquidity risk management information, a clear indication that in the post‐crisis era, many top ranking banks still do not take Basel disclosure norms seriously, especially the February 2008 pre‐crisis warning by the Basel Committee on Banking Supervision.

Research limitations/implications

Bank stakeholders should easily have access to information on liquidity risk management. Banks falling‐short of making such information available might not inspire confidence in market participants in events of financial panic and turmoil. As in the run‐up to the previous financial crisis, if banks are not compelled to explicitly and expressly disclose what measures they adopt in a bid to guarantee stakeholder liquidity, the onset of any financial shake‐up would only precipitate a meltdown. The main limitation of this study is the use of the World Wide Web as the only source of information available to bank stakeholders and/or market participants.

Originality/value

The contribution of this paper to literature can be viewed from the role it plays in investigating post‐crisis measures banks have adopted in a bid to inform stakeholders on their management of liquidity risk.

Details

Qualitative Research in Financial Markets, vol. 5 no. 1
Type: Research Article
ISSN: 1755-4179

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Article
Publication date: 13 February 2017

Nevine Sobhy Abdel Megeid

This research aims to analyze and compare the effectiveness of liquidity risk management of Islamic and conventional banking in Egypt to ascertain which of the two banking…

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3682

Abstract

Purpose

This research aims to analyze and compare the effectiveness of liquidity risk management of Islamic and conventional banking in Egypt to ascertain which of the two banking systems are performing better.

Design/methodology/approach

A sample of six conventional banks (CBs) and two Islamic banks (IBs) in Egypt was selected. Using the liquidity ratios, the investigation involves analyzing the financial statements for the period of 2004-2011. The data were obtained from Bank scope database.

Findings

The research found that in Egypt, CBs perform better in terms of liquidity risk management than IBs. The liquidity risk management significant differences between IBs and CBs could be attributed more cash availability to CBs than to IBs, in addition, Egyptian Central Bank regulations on capital and liquidity requirements for IBs disconcert IBs’ performance.

Practical implications

This research facilitates the bankers, academician, scholars and bankers to have an alluded picture about Egyptian banking developments in liquidity risk management. The results can be used by bankers’ policy decision-makers to improve and enhance their consideration for liquidity risk management.

Originality/value

This research covers a period and a country that compares CBs’ and IBs’ liquidity risk management. Its value is attributed to the increasing differentiation between CBs and IBs.

Details

Journal of Islamic Accounting and Business Research, vol. 8 no. 1
Type: Research Article
ISSN: 1759-0817

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Article
Publication date: 23 February 2010

Rifki Ismal

The purpose of this paper is to analyze and evaluate the present liquidity management in the Indonesian Islamic banking industry. It also proposes an integrated and…

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7210

Abstract

Purpose

The purpose of this paper is to analyze and evaluate the present liquidity management in the Indonesian Islamic banking industry. It also proposes an integrated and comprehensive program of liquidity risk management which captures and assimilates the whole aspects of the issue and brings the industry into a better way of managing liquidity risk based on sharia principles.

Design/methodology/approach

The paper first examines the organizational structure of Islamic banks and Islamic windows in managing liquidity. Second, it investigates the characteristics of the depositors, their investment behaviors and expectations followed by the banks efforts and policies to manage the liquidity. Then, it identifies the potential liquidity problems and Islamic liquid instruments. Finally, it proposes an integrated and comprehensive program for managing liquidity.

Findings

The paper suggests institutional deepening; restructuring the liquidity management on the liability and asset sides; and revitalizing the usage of the Islamic liquid instruments, in the integrated program.

Originality/value

This is believed to be the first paper to propose a liquidity management improvement program in the Indonesian Islamic banking industry.

Details

Humanomics, vol. 26 no. 1
Type: Research Article
ISSN: 0828-8666

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Article
Publication date: 22 June 2010

Rifki Ismal

The purpose of this paper is to assess liquidity risk management (LRM) practices in Indonesian Islamic banking industry during the period 2000‐2007.

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5841

Abstract

Purpose

The purpose of this paper is to assess liquidity risk management (LRM) practices in Indonesian Islamic banking industry during the period 2000‐2007.

Design/methodology/approach

The paper constructs the LRM index (100 scale) which is composed of individual index of asset side; liability side; LRM policies; and the overall LRM index.

Findings

The index produces a “good” grade for the liquidity management practices in the Indonesian Islamic banking industry, represented by three Islamic banks which capture 82 percent of the total market share of the industry. However, the breakdown of the index of every Islamic bank suggests various achievements.

Research limitations/implications

It is found that the practices of LRM are not optimal yet based on some considerations explained in this paper. Further progressive actions have to be taken by the regulators and all industry's players to improve the LRM practices.

Originality/value

To the best of the author's knowledge, this is the first paper trying to assess how good the LRM in Indonesian Islamic banking is.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 3 no. 2
Type: Research Article
ISSN: 1753-8394

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Article
Publication date: 19 November 2018

Shaista Wasiuzzaman

The management of liquidity has always been seen as a critical but often ignored issue in finance. Despite the abundance of studies on liquidity management, these studies…

Abstract

Purpose

The management of liquidity has always been seen as a critical but often ignored issue in finance. Despite the abundance of studies on liquidity management, these studies mainly focus on developed countries and on large firms. Liquidity is critical for the small firm but studies on liquidity management in small and medium enterprises (SMEs) are lacking. The purpose of this paper is to examine the firm-level determinants of liquidity of SMEs in Malaysia.

Design/methodology/approach

Data are collected for a total of 986 small firms in Malaysia from 2011 to 2014, resulting in a total of 2,683 observations. Firm-specific variables and the effect of the economy are considered as the possible determinants of liquidity. Ordinary least squares (OLS) regression analysis with standard errors adjusted for firm-level clustering and quantile regression analysis are used for this purpose.

Findings

Analysis using OLS regression technique indicates that a firm’s profitability, its growth, asset tangibility, size, age and firm status are significant factors in influencing its liquidity decision. Leverage and economic condition are not found to have any significant influence on liquidity. However, quantile regression analysis provides a different picture especially for SMEs with liquidity at the quantile levels of θ=0.10 and 0.90. At θ=0.10, only profitability, tangibility and firm status are significant, while at θ=0.90, tangibility, size, firm status and, to some extent, age are significant in influencing liquidity levels.

Originality/value

To the author’s knowledge, this is the first study analyzing the liquidity decision of SMEs in an emerging market such as Malaysia. Most studies on liquidity management of SMEs are focused on developed countries due to data availability but these studies are also only a handful. Additionally, this study uses quantile regression analysis which highlights the need to analyze financial decisions at different levels rather than at the aggregate level as done in OLS regression analysis.

Details

International Journal of Productivity and Performance Management, vol. 67 no. 9
Type: Research Article
ISSN: 1741-0401

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Article
Publication date: 18 April 2017

Ahmed Taha Al Ajlouni

This paper aims to develop an instrument that helps in managing liquidity. Liquidity is one of the most critical issues to be considered by the financial management of the…

Abstract

Purpose

This paper aims to develop an instrument that helps in managing liquidity. Liquidity is one of the most critical issues to be considered by the financial management of the business firms to meet its financial obligations. It is more vital for banks because of the liquid nature of its assets and liabilities, along with the fact that the confidence in the bank and degree of risk depends heavily on liquidity as an indicator of its wellbeing. Islamic banks (IBs) look at the liquidity issue from the same side as the traditional banks. IBs – the most apparent Islamic financial institution – suffered from the problem of not benefiting from the lender of last resort that Central Banks (CBs) offer to traditional banks because IBs cannot borrow from the CBs at interest. The experience of Institution(s) offering Islamic Financial Services[1] (IIFS) regarding the establishment of Islamic money markets did not show a tangible success instead of the early studies done by some scholars. In spite of the rich experience of some countries in creating new money market instruments or configuration of the interest-based ones according to Islamic - Sharī’ah[2], the designs of these instruments have many limitations in terms of their tradability and flexibility, restricting their use for open-market operations by CBs.

Design/methodology/approach

The purpose of calculating the time weighted debt units (TWDUs) is to find the equivalent amount of money that the supplier can borrow to the lender in the future for a maturity that differs from the first credit contract. It is a swap between an amount of credit for a particular period of time and another amount for another period. The scheme are called traditionally as reciprocal (mutual) loans, reciprocal (mutual) deposits, swapped conditional loans and “I lend you, provided you lend me” (Hammad, 2010). It is also well known in Pakistan as time multiple counter loan (TMCL), and known within some Arabic IBs as specks (Nomar = numbers) system. This contract will be called the reciprocal loans in the current paper.

Findings

The current paper represents a blue print of suggested money market instrument (scheme) that is based on the idea of Al Qardh El Hasan (interest-free loan) – called TWDUs. This instrument does not promise any revenue for the supplier and no charge for the lender.

Research limitations/implications

The suggested model is known in traditional and contemporary writings of Islamic economists and - Sharī’ah scholars. It is accepted by many - Sharī’ah Boards in IBs (Merah, 2011) and was accepted by the Council of Islamic Ideology in Pakistan in 1980 through the TMCL. Despite that, it is still not discussed in depth by international - Sharī’ah boards as the International Islamic Fiqh Academy – in addition to the wide spread of opponent viewpoint that considers this contract as a kind of riba.

Originality/value

TWDUs is presumed to help IBs and other IIFS to add more flexibility in liquidity management in the side of risk management[3] (represented by the potential loss to IIFS arising from their inability either to meet their obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses) in addition to avoiding the case of hoarding surplus funds in the short term. Also, the suggested instrument will not be exclusive to IBs or IIFS; it can be developed to be used at a later stage by them as a mean of overdraft between IBs and their clients. Moreover, beside its viability to help in liquidity management for other firms in business sector (non-financial) or government agencies in liquidity management, TWDUs look for Islamic financial theory as an alternative to the traditional financial theory that is based on interest. Moreover, TWDUs is expected to play an important role in monetary policy in a totally Islamic financial system or even in a mixed one (Islamic and capitalistic).

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 10 no. 1
Type: Research Article
ISSN: 1753-8394

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Article
Publication date: 6 July 2020

Mazin A.M. Al Janabi

This study aims to examine the theoretical foundations for multivariate portfolio optimization algorithms under illiquid market conditions. In this study, special emphasis…

Abstract

Purpose

This study aims to examine the theoretical foundations for multivariate portfolio optimization algorithms under illiquid market conditions. In this study, special emphasis is devoted to the application of a risk-engine, which is based on the contemporary concept of liquidity-adjusted value-at-risk (LVaR), to multivariate optimization of investment portfolios.

Design/methodology/approach

This paper examines the modeling parameters of LVaR technique under event market settings and discusses how to integrate asset liquidity risk into LVaR models. Finally, the authors discuss scenario optimization algorithms for the assessment of structured investment portfolios and present a detailed operational methodology for computer programming purposes and prospective research design with the backing of a graphical flowchart.

Findings

To that end, the portfolio/risk manager can specify different closeout horizons and dependence measures and calculate the necessary LVaR and resulting investable portfolios. In addition, portfolio managers can compare the return/risk ratio and asset allocation of obtained investable portfolios with different liquidation horizons in relation to the conventional Markowitz´s mean-variance approach.

Practical implications

The examined optimization algorithms and modeling techniques have important practical applications for portfolio management and risk assessment, and can have many uses within machine learning and artificial intelligence, expert systems and smart financial applications, financial technology (FinTech), and within big data environments. In addition, it provide key real-world implications for portfolio/risk managers, treasury directors, risk management executives, policymakers and financial regulators to comply with the requirements of Basel III best practices on liquidly risk.

Originality/value

The proposed optimization algorithms can aid in advancing portfolios selection and management in financial markets by assessing investable portfolios subject to meaningful operational and financial constraints. Furthermore, the robust risk-algorithms and portfolio optimization techniques can aid in solving some real-world dilemmas under stressed and adverse market conditions, such as the effect of liquidity when it dries up in financial and commodity markets, the impact of correlations factors when there is a switching in their signs and the integration of the influence of the nonlinear and non-normal distribution of assets’ returns in portfolio optimization and management.

Details

Journal of Modelling in Management, vol. 16 no. 1
Type: Research Article
ISSN: 1746-5664

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Article
Publication date: 31 May 2004

Abuzar M.A. Eljelly

This study empirically examines the relation between profitability and liquidity, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint…

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7804

Abstract

This study empirically examines the relation between profitability and liquidity, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia. Using correlation and regression analysis the study found significant negative relation between the firm’s profitability and its liquidity level, as measured by current ratio. This relationship is more evident in firms with high current ratios and longer cash conversion cycles. At the industry level, however, the study found that the cash conversion cycle or the cash gap is of more importance as a measure of liquidity than current ratio that affects profitability. The size variable is also found to have significant effect on profitability at the industry level. Finally, the results are stable over the period under study.

Details

International Journal of Commerce and Management, vol. 14 no. 2
Type: Research Article
ISSN: 1056-9219

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Article
Publication date: 12 May 2021

Mazin A.M. Al Janabi

This paper aims to examine from commodity portfolio managers’ perspective the performance of liquidity adjusted risk modeling in assessing the market risk parameters of a…

Abstract

Purpose

This paper aims to examine from commodity portfolio managers’ perspective the performance of liquidity adjusted risk modeling in assessing the market risk parameters of a large commodity portfolio and in obtaining efficient and coherent portfolios under different market circumstances.

Design/methodology/approach

The implemented market risk modeling algorithm and investment portfolio analytics using reinforcement machine learning techniques can simultaneously handle risk-return characteristics of commodity investments under regular and crisis market settings besides considering the particular effects of the time-varying liquidity constraints of the multiple-asset commodity portfolios.

Findings

In particular, the paper implements a robust machine learning method to commodity optimal portfolio selection and within a liquidity-adjusted value-at-risk (LVaR) framework. In addition, the paper explains how the adapted LVaR modeling algorithms can be used by a commodity trading unit in a dynamic asset allocation framework for estimating risk exposure, assessing risk reduction alternates and creating efficient and coherent market portfolios.

Originality/value

The optimization parameters subject to meaningful operational and financial constraints, investment portfolio analytics and empirical results can have important practical uses and applications for commodity portfolio managers particularly in the wake of the 2007–2009 global financial crisis. In addition, the recommended reinforcement machine learning optimization algorithms can aid in solving some real-world dilemmas under stressed and adverse market conditions (e.g. illiquidity, switching in correlations factors signs, nonlinear and non-normal distribution of assets’ returns) and can have key applications in machine learning, expert systems, smart financial functions, internet of things (IoT) and financial technology (FinTech) in big data ecosystems.

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Book part
Publication date: 29 December 2016

Mazin A. M. Al Janabi

Given the rising need for measuring and controlling of financial risk as proposed in Basel II and Basel III Capital Adequacy Accords, trading risk assessment under…

Abstract

Given the rising need for measuring and controlling of financial risk as proposed in Basel II and Basel III Capital Adequacy Accords, trading risk assessment under illiquid market conditions plays an increasing role in banking and financial sectors, particularly in emerging financial markets. The purpose of this chapter is to investigate asset liquidity risk and to obtain a Liquidity-Adjusted Value at Risk (L-VaR) estimation for various equity portfolios. The assessment of L-VaR is performed by implementing three different asset liquidity models within a multivariate context along with GARCH-M method (to estimate expected returns and conditional volatility) and by applying meaningful financial and operational constraints. Using more than six years of daily return dataset of emerging Gulf Cooperation Council (GCC) stock markets, we find that under certain trading strategies, such as short selling of stocks, the sensitivity of L-VaR statistics are rather critical to the selected internal liquidity model in addition to the degree of correlation factors among trading assets. As such, the effects of extreme correlations (plus or minus unity) are crucial aspects to consider in selecting the most adequate internal liquidity model for economic capital allocation, especially under crisis condition and/or when correlations tend to switch sings. This chapter bridges the gap in risk management literatures by providing real-world asset allocation tactics that can be used for trading portfolios under adverse markets’ conditions. The approach to computing L-VaR has been arrived at through the application of three distinct liquidity models and the obtained results are used to draw conclusions about the relative liquidity of the diverse equity portfolios.

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