Liquidity Risk Management of Islamic Banks in Bangladesh

Abstract

The banking sector is the lifeblood of the economy. Today, most banks either conventional or Islamic banks face many types of risks. One of the risks is liquidity risk. One of the prime functions of the bank is to collect short-term deposits from depositors in order to finance long-term loans and advances. Failing to fulfil the condition creates a situation for banks where the banks face liquidity risk. Liquidity risk is the risk where an organization is unable to meet their obligations to depositors. The liquidity risk arises from management weakness of proper forecasting of needs of funds in future. As Islamic banking is gaining popularity, Islamic banks are also facing liquidity risk. This study was conducted to investigate the relationship between sizes of the bank, nonperforming loan (NPL), return on asset (ROA), return on equity (ROE), capital adequacy ratio (CAR), and investment to deposit ratio (ITD) with liquidity risk of 6 Islamic Banks from 2012 to 2016. Secondary data are being used in this study. This study found a relationship between the size of the bank, the NPL, ROA, ROE, CAR, and ITD with liquidity risk by rejecting the null hypothesis. The study also found that size and NPL have a negative relation to liquidity risk and ROA, ROE, CAR, and Investment to deposit ratio has a positive relationship with liquidity risk.