Risk Management in Islamic Banking

Aceh International Journal of Social Sciences, 1 (2): 68-75 August 2012 ISSN: 2088-9976

RESEARCH PAPER

Liquidity Risk Management And Financial Performance In Malaysia: Empirical Evidence From Islamic Banks
Noraini Mohd Ariffin
Assistant Professor at the Department of Accounting, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia. The author would like to thank Associate Professor Dr. Salina Kassim from International Islamic University Malaysia for giving valuable comments in completing the paper.

Abstract - Liquidity risk arises from maturity mismatches where liabilities have a shorter tenor than assets. A sudden rise in the borrowers‟ demands above the expected level can lead to shortages of cash or liquid marketable assets (Oldfield and Santamero, 1997). This paper aims to analyse the liquidity risks and disclosure as well as to draw the relationship between liquidity risks and financial performance measures using return on assets (ROA) and return of equity (ROE) of the Islamic banks. Based on selected Islamic banks in Malaysia over the period from 2006 to 2008, the study also attempts to determine the impact of the global financial crisis on the Islamic banks‟ liquidity risks and financial performance. Findings of the study contribute towards enriching the literature on the risk management of the Islamic banks by providing deeper understanding on issues relating to liquidity risk management by the Islamic banks. Keywords: Liquidity risk, Islamic banks, risk management, financial performance

Introduction

Managing liquidity is one of the top priorities of a financial institution‟s assets and liabilities management. In the context of banking, liquidity, or the ability to fund increases in assets and meet obligations as they come due, is critical to the ongoing viability of the banking institution. Since there is a close association between liquidity and solvency of banks, sound liquidity management reduces the

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