Determinants of Bank Liquidity: Evidence from Local, Foreign and Islamic Commercial Banks in Pakistan

• Main Authors: Nadeem Ahmed Sheikh, Zubair Ahmad, Muhammad Sajid
• Format: Article
• Language: Arabic
• Published: Bahauddin Zakariya University 2019-12-01
• Series: Pakistan Journal of Islamic Research
• Subjects: islamic banks; foreign banks; local banks; liquidity
• Online Access: http://pjir.bzu.edu.pk/upload/Vol%2020,%20Issue%202_05%20eng%20Nadeem%20Ahmad%20Sheikh%2024-05-2018_49.pdf
• ISSN: 2070-0326; 2618-0820

The purpose of this paper is to investigate the effects of bank-specific variables (i.e. bank size, profitability, deposits, cost of funds and capital ratio) on liquidity of local, foreign and Islamic commercial banks in Pakistan. Data was obtained from the publications of SBP titled ‘Financial Statement Analysis of Financial Firms’. Data of 26 banks found completed during 2007-2015 (i.e. 19 local banks, 02 foreign banks and 05 Islamic banks). Pooled OLS method used to analyze the effects of internal variables on liquidity. Descriptive statistics show that foreign banks are far better than local and Islamic commercial banks in terms of profitability and liquid assets. Alternatively, Islamic banks are in a better position than local conventional banks in terms of liquid assets, deposit ratio and capital ratio. In contrast, local conventional banks are better than Islamic banks in terms of size and profitability. More importantly, Islamic commercial banks are younger than local conventional banks but amazingly having higher deposit ratio due to strong equity-base and sufficient liquid assets. Notably, the trend toward Islamic banking is increasing day-by-day which posed threats to the conventional commercial banks, and resultantly a number of conventional banks have either introduced the ‘window’ of Islamic banking or completely started the Islamic banking operations. Regression results indicate that profitability is positively while bank size, deposits, cost of fund and capital ratio is negatively related to liquidity in a sample of all banks. Deposits are positively while cost of fund is negatively linked to liquidity in a sample of local banks. Finally, bank size is the only variable that is negatively linked to liquidity of foreign and Islamic commercial banks.