A Systematic Literature Review on Liquidity Risk Management and the Financial Performance of Banks
Areen Zuhair Alta’ani1*, Nuradli Ridzwan Shah Mohd Dali1
1 Fa culty of Economics a nd Mua mala t , Universiti Sa ins Isla m Ma la ysia , Nila i, Ma la ysia
*Corresponding Author: a lta a [email protected]
Accepted: 15 April 2021 | Published: 1 Ma y 2021
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Abstract: This paper aims to systematically review the existing studies on the relationship between liquidity risk management (LRM) and the financial performance of banks. 36 empirical papers published in Scopus, EBSCO host, and Google scholar were selected for analysis and review. This study suggests that the impact of LRM on the financial performance of banks still needs more empirical analyses using alternative methods and measures. Furthermore there is a need for more empirical studies to compare the quality of LRM between Islamic and conventional banks, this would help Islamic banks to know the gap in their practices, and thus will help in enhancing their performance, hence value creation. Besides that, these studies should take into account other types of banks not just listed and non-listed banks. Moreover, this study was restricted in the databases sources, the choice of number and type of keywords, language, sectors, the resulting selection of studies, and focused only on the financial and accounting indicators.
Keywords: bank performance, liquidity risk management, Jordan, Amman stock exchange, Islamic banks, conventional banks, Risk management, systematic literature review, Islamic finance
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1. Introduction
Banks accept deposits from business and individuals for productive purposes in the economic world (Salim & Zaroug, 2016), they depend on assets markets, where liquidity reallocated from bank and non- bank participants with surplus liquidity to those with liquidity needs (financial services authority, 2007). Furthermore, banks take deposits that have less maturity than the financing contracts they sell or that are callable on demand. While, transferring maturity supplies depositors with worthy liquidity insurance, it simultaneously raises the bank’s exposure to liquidity risk (Abdel Megeid, 2017). They are absolutely accountable to make funds available when requested by the depositors or conversion of its balance sheet financial assets into liquid funds to meet their obligations (Salim & Zaroug, 2016). So, effective liquidity risk management is critical for continuing the profitability of banks and sustaining business growth, and adopting a balanced return-risk profile is significant in striving for continuing enhancement of shareholder’s value.
Thus banks should keep up sufficient amounts of liquidity and capital resources to make sure that they can meet their liabilities when they come due (Abdel Megeid, 2017). Although the volume of the literature body on the factors of liquidity risk management in banks has been increasing in the recent years, it is still fragmented, and based on the researcher knowledge no systematic review has yet been conducted on this topic. Such a review would be valuable
because systematic reviews integrate existing researches from several fields (in our case, Islamic banks, Conventional banks, and liquidity risk management) and present a synthesized knowledge as a base for building future researches. Thus, the non-existence of systematic review of liquidity risk management in banks particularly for Arab countries may be regarded as a gap, which the present paper aims to introduce. Therefore, this research presents an overview of the state of the literature that related to liquidity risk management in conventional and Islamic banks around the world.
2. Methodology
Given the objective of this article, the matter that has taken into consideration for the following systematic literature review is the relationship between liquidity risk management mechanisms, the financial performance of conventional and Islamic banks. The selected methodolgy in this article for systematic literature review inspired from the previous studies (e.g. E-Vahdati et al., 2019; Le et al., 2019).
2.1 Information Sources and Period
The systematic literature review was conducted for the relevant paper of this topic on 3 data bases; Scopus, EBSCOhost, and Googlescholar, during the period 2008 to 2018 in English. The researchers excluded studies related to medical sciences, arts, engineering, but restricted research in the fields of accounting, finance, and administrative sciences.
2.2 Search Strategy
To conduct the search, related key terms were used as shown in Table 1, during the first stage of the systematic literature review; a comparative survey was conducted over the several articles in the 3 databases involved in the search. The investigator found many papers studied performance largely, then found big declining in the number of articles in the keyword bank performance. Furthermore, a strong structural decline in the number of articles using the key word risk management, the cut off point was when the authors combined of the keywords representing dependent (Bank performance) and independent (Liquidity risk management) in the search field. In addition, they add some terms related to the search such as country (Jordan and GCC countries) and bank type (Islamic banks and conventional banks).
Second stage, the duplicates were eliminated and store literature as per their respective keywords in abstracts and titles introducing restrictions that would limit the search only t he relevant fields for instance language and years. Third, the collected papers’ contents also were fully reviewed, and only the papers that used the main variables that related to liquidity risk management (current ratio, loan to deposit ratio, loan to assets ratio, cash to deposit ratio, and leverage ratio) were selected for the final analysis. Based on the additional filtering in this step 36 papers were selected.
Ta ble 1: Systema tic Sea rch Result of Liquidity Risk Ma na gement
Data bases Scopus EBSCOhost Google scholar
Performance 1,575,713 3,859 774,000
BP 3,450 42 1,760,000
Risk management 53 90 18,100
BP and risk management 11 3 9
BP and LRM - - 3
BP and LRM in GCC countries - - 3
BP and LRM in IBs and CBs 5 2 2
“BP: Bank performance, LRM: liquidity risk management, IBs: Islamic banks, CBs: conventional banks, GCC:
Gulf Cooperation council”.
3. Review and Survey Articles
Most of the empirical studies on liquidity risk examined the impact of liquidity risk management on the financial performance of banks (Alzorqan, 2014; Arif & Anees, 2013; and Smaoui & Salah, 2012), and on Islamic banks before and during financial crises (Zarrouk, 2014;
Ariffin, 2012).
Nevertheless, literature shows that some empirical studies have been conducted to compare the financial performance between conventional and Islamic banks(Al-rdaydeh et al., 2017; Abdel Megeid, 2017; and Khan et al., 2016) as presented in Table 2.
Table 2: Review on Liquidity Risk Management
Authors, Year of Publication No Vol Journal name Data Base
(Al-rdaydeh et al., 2017) 12 7 International Journal of Academic Research in Business and Social Sciences
Google Schola r (Berríos, 2013) 3 7 The International Journal of Business and Finance
Research Google Schola r
(Alzorqan, 2014) 12 5 Research Journal of Finance and Accounting Google Schola r (Warrad, 2017) 9 7 International Journal of Academic Research in Business
and Social Sciences Google Schola r
(Maaka, 2013) 1 2 Journal of Business Administration and Management
Sciences Research Google Schola r
(Ali et al., 2011) 2 6 International Journal of Business and Social Science Google Schola r (Ariffin, 2012) 2 1 International Journal of Social Science Google Schola r (Farooq et al., 2015) 2 17 Journal of Business and Management Google Schola r (Arif & Anees, 2013) 2 20 Journal of Financial Regulation and Compliance Google Schola r (Hanif et al., 2012) 83 International Research Journal of Finance & Economics Scopus (Abdel Megeid, 2017) 1 8 Journal of Islamic Accounting and Business Research Scopus (Khan et al., 2016) 3 10 International Journal of Islamic and Middle Eastern
Finance and Management Scopus
(Salim & Zaroug, 2016) 1 4 International Journal of Applied Business and Economic Research
Scopus
(Noman et al., 2015) 21 11 Asian Social Science Scopus
(Zarrouk, 2014) 95 Contemporary Studies in Economic and Financial
Analysis Scopus
(Chazi, 2010) 4 3 International Journal of Islamic and MIiddle Eastern
Finance and Management Scopus
(Bougatef & Korbi, 2018) 6 44 Managerial Finance Scopus
(Siddiqui, 2008) 10 34 Managerial Finance Scopus
(Nu et al., 2014) 1 International Business Management Scopus (Sharma et al., 2018) 1 50 The Journal of Developing Areas EBSCO host (Rosa & Gartner, 2017) 77 29 The National Association for Post Graduate Studies and
Research in Business Administration EBSCO host (Almumani, 2013) 3 3 International Journal of Academic Research in
Accounting, Finance and Management Sciences Google Schola r (Smaoui & Salah, 2012) 1 5 Global Economy and Finance Journal Google Schola r (Almazari, 2014) 1 4 Journal Applied Finance and Banking Google Schola r
(Abu Loghod, 2010) 3 7 Journal of Management Google Schola r
(Tai, 2014) 2 9 Middle East Journal of Business Google Schola r (Ben Khediri et al., 2015) 33 Research in International Business and Finance Google Schola r (Fayed, 2013) 2 3 Journal of Applied Finance & Banking Google Schola r (Ramadan, 2011) 6 3 International Journal of Academic Research Google Schola r (Al-jarrah, 2012) 48 48 European Journal of Economics, Finance and
Administrative Sciences
Google Schola r
(Noman et al., 2015) 21 11 Asian Social Science Scopus
(Thiagarajan, 2015) Journal of finance and bank management Scopus (Hapsari, 2018) 5 231 Advances in Social Science, Education and Humanities
Research Google Schola r
(Sufian et al., 2012) 1 13 Global Business Review Scopus
(Akinwumi et al., 2017) 6 5 Issues in Business Management and Economics Google Schola r (Hussain et al., 2016) 6 11 International Journal of Business & Management Google Schola r
In order to provide a wide view regarding the impact of liquidity risk management on the financial performance of banks (conventional and Islamic banks), this section discuss these studies in the following parts.
3.1 The impact of liquidity risk management on the financial performance of banks Cross-sectional study carried out by Alzorqan (2014) that found significant relationship between loan to deposit ratio and the performance of banks. In addition Farooq et al. (2015) found a significant relationship between current ratio, loan to deposit ratio and bank performance. While, Warrad (2017) defined cash to deposit ratio as “the total balance of cash in hand, and it evaluates how much fund the bank has available for borrowing.” He found no significant relationship between cash to deposit ratio and return on investment (ROI) in Jordanian Islamic banks.
Arif and Anees (2013), analyzed the effect of financial risk, particularly liquidity risk, on the performance of banks. They found a significant relationship between liquidity risk and the performance of banks; however, this liquidity risk may be mitigated by raising deposit base, decreasing the liquidity gap and NPLs, and maintaining sufficient cash reserves.
The association between expected risks and the financial strength of banks was widely investigated by Sharma et al. (2018), they found a significant relationship between the expected risks and losses and financial strength indicators (leverage ratio, ROA, ROE, and liquidity) in Russian banks from 2000 to 2010.
Smaoui and Salah (2012) analyzed the effects of bank characteristics and macroeconomic variables on the profitability of Islamic banks from 1995 to 2009. They found a non-significant relationship between loan to asset ratio and ROA; a negative but non-significant correlation between loan to asset ratio and ROE; and a negative and significant relationship between loan to asset ratio and non-interest margin (NIM).
In their surveys, Sufian et al. (2012) and Almumani (2013) examine the controllable factors that affect on the profitability of banks, they found that loan to asset ratio negatively relates to the profitability of banks. Specifically, Sufian et al. (2012) found a significant correlation between both constructs, while Almumani (2013) concluded a non-significant relationship between ROA and loan to asset ratio.
Faroug et al. (2016) used a sample of commercial banks in Oman and examining the relationship between loan to asset ratio, as a proxy for liquidity position and bank performance.
They noted a positive and significant relationship between loan to asset ratio and ROA, but it has a non-significant negative correlation with ROE.
A comparative study between large and small banks conducted by Hussain et al. (2016) found a negative and significant relationship between the ROE of large commercial banks in Pakistan and the banks’ loan to deposit ratio. It also found the negative and non-significant impact of loan to deposit ratio on the ROE of small banks.
Rosa and Gartner (2017) evaluated the disclosure practices in Brazil and proposed a warning model to predict financial distress in financial institutions. They found a negative and significant relationship between liquidity and bank profitability, and between liquidity and financial distress probability. Akinwumi et al. (2017) found a significant relationship between bank performance and current ratio.
Another comparative study developed by Almazari (2014) compared between Jordanian and Saudi banks from 2005 to 2011 and found that the profitability of the latter is higher than that of the latter. They noted a significant negative relationship between loan to deposit ratio and the profitability of Saudi banks, and a significant positive relationship between loan to deposit ratio and the profitability of Jordanian banks.
Hapsari (2018) said loan to deposit ratio can be used as a success or vulnerability indicator to balance the banks’ loans and withdrawals because banks gain profit from the difference between the loan interest and deposit interest.
Thiagarajan (2015) found a negative and significant relationship between cash to deposit ratio and the financial performance of banks.
A cross sectional study conducted by Ramadan (2011) investigated the impact of internal and external factors on the profitability of Jordanian listed banks during the period 2001 to 2010.
Results showed high Jordanian bank profitability tends to be associated with low credit risk, high lending activities, and well capitalized banks. Furthermore, there is a positive and significant relationship between return on assets (ROA) and loan to assets ratio, but positive and insignificant relationship with return on equity (ROE), which means increasing the lending activities significantly will maximize the ROA.
A comprehensive research by Al-jarrah (2012) investigated the systematic and non- systematic risk in the Jordanian banking sector over the period 2001 to 2009. The total risk is measured by the annualized standard deviation of the banks daily stock returns. The results showed the measure of liquidity risk (the coefficient of variation of short term and customer fund) are significantly related to total risk and systematic risk.
Recent evidence from Berríos (2013) indicated that higher loan to deposit ratio lead to lower liquidity as a result of the greater amount of cash disbursements to bank borrower; which will diminish the flexibility of banks to fulfill their cash obligations when due, but that lead to higher interest revenue and higher profitability.
Maaka (2013) said that banks have liquidity problems may experience difficulties in meeting the demand of depositors, not to mention if these problems unchecked will adversely affect on the profitability and capital of banks, and can mitigate the liquidity risk by decreasing the liquidity gap, nonperforming loans, raising deposit base, and maintaining sufficient cash reserves.
In thier paper Salim & Zaroug (2016) examined the liquidity position and its affect on the financial performance, that showed there is insignificant relationship between Omani banks liquidity position and net interest margin.
In a relevent study Nu et al (2014) aims to investigate the liquidity and operational risk information disclosure practices of the listed banks in Malaysia. That indicated liquidity risk disclosure is not much transparent, and the regulators should relook the disclosure quality on risk exposure.
3.2 Comparative studies between Islamic banks and conventional banks
A considerable amount of of literature have compared between conventional and Islamic banks such as ; Al-rdaydeh et al. (2017) found a significant negative relationship between loan to
deposit ratio and ROA, while there is no relationship between loan to deposit ratio and ROE in conventional and Islamic banks in Jordan.
While, Hanif et al. (2012) divided the key performance indicators into internal and external factors, internal factor analysis includes solvency, credit and liquidit y risk, while external factors include perception about conventional and Islamic banks and customer behavior. The results showed that Islamic banks have a higher loan to asset ratio than conventional banks, and indicated that a higher loan to deposit ratio would lead to a higher chance of liquidity risks in banks.
Abdel Megeid (2017) have examined the performance of Islamic and conventional banks and found that loan to asset ratio is higher for conventional banks than Islamic banks. This finding shows that Islamic banks have a better level of liquidity, which is clear evidence that Islamic banks try to maximize the benefits of the committed funds.
Another study on the same context is conducted by Khan et al. (2016) found that the LRM and profitability of IBs are better compared to CBs, while they found that loan to deposit ratio is higher in conventional banks, suggesting that these banks have better asset quality. Noman et al. (2015) found that loan to asset ratio has a positive impact on the profitability of Islamic banks in Bangladesh. The banks have low liquidity, signifying that the loan disbursement of Islamic banks is higher than that of conventional banks.
Two studies were conducted by Tai (2014) and Abu Loghod (2010) found that conventional banks are more liquid and solvent than Islamic banks in GCC countries, and they noted that Islamic banks have a higher loan to deposit ratio.
Fayed (2013), and Ben Khediri et al. (2015) examined the financial performance of Islamic and conventional banks by analyzing the loan to deposit ratio. They found that loan to deposit ratio is higher in conventional banks, suggesting that these banks have better asset quality, and that Islamic banks face more liquidity risk.
The factors that affect the intermediation margin of Islamic and conventional banks were widely investigated by Bougatef and Korbi (2018). The authors noted a significant and negative relationship between loan to asset ratio and the intermediation margin of conventional banks.
This shows that the banks focus on lending activities, which may lead to effective evaluation of credit quality of borrowers. They also reported lower intermediation cost while finding no significant relationship between the loan to asset ratio and net profit margin of Islamic banks.
A comprehensive research by Siddiqui (2008) analyzed cash to deposit ratio and other liquidity ratios for two Islamic banks in Pakistan. The author found that Islamic banks have maintained larger cash balances than conventional banks.
Chazi (2010) found that the leverage ratio in conventional banks is lower than that in Islamic banks, and Islamic banks had a better ratio from 2005 to 2008. In contrast to Ali et al (2011) found conventional banks have a superior performance that related to elements of assets and returns and better liquidity risk management and profitability than Islamic banks.
3.3 The impact of the financial crises
A cross sectional study developed by Zarrouk (2014) investigated the effect of the global financial crisis on Islamic banks in MENA from 2005 to 2010 and compared the soundness in risk management between Islamic banks in GCC and non-GCC countries. The results showed
Islamic banks in non GCC countries were more profitable and efficient compared to GCC countries, and the financial crises negatively affected on the financial performance of Islamic banks. Furthermore, most assets of Islamic banks are financed by debt rather than equity.
Ariffin (2012) examined the impact of the global financial crises on the Islamic bank’s financial performance and liquidity risk in Malaysia during the period from 2006 to 2008. The results showed the financial crises have a little impact on the liquidity risk of Islamic banks; moreover Islamic banks during the financial crises have cheap fund, larger gap, and lack stable, raise the cost of funding in banks, and consequently decreases their profitability; thus have to use much external funding and liquid assets to meet the demand of fund. In addition, there is a positive relationship between liquidity risk and ROA in 2006, but negative relationship in 2007; thus the relationship between financial performance and liquidity risk is not always predicted by the conventional financial theory of (high risk- high return).
4. Recommendation
In light of the above discussion, there are some significant points that can be recommended for future research on the relationship between liquidity risk management and the financial performance of banks. These points are related to the liquidity risk management factors, analytical methods, issues, variables, and measurements of variables.
The body of knowledge is in dire need for more empirical evidence on how LRM can affect the performance of Islamic and conventional banks. In addition, the question of how LRM can affect the financial performance of conventional and Islamic banks during the crises and non- crises periods.
Future studies may employ structural equation modelling (SEM) in the risk management and bank performance studies in general. This method allows the inclusion of unobserved affect in the model through unobservable/ latent variables which can be measured using many observed variables.
5. Conclusions and Further Research Avenues
The aim of this paper is to determine the literature gap in the study of LRM, and its impact on the financial performance of banks. Through, a systematic literature review, 36 papers were selected and analyzed. It was found although many studies have been conducted on the LRM in banks, but all of these studies are empirical, and they have been carried out to determine the impact of LRM on the financial performance particularly in the developed countries. In contrast, the theoretical studies are limited in general.
However, the existing research studies suffer from some limitations and that need more theoretical and empirical analysis. As a result of these limitations, the literature cannot add relevant and meaningful suggestions to the related parties for developing the LRM practices.
Therefore, this paper suggests that future research should empirically examine how the LRM practices affect on the financial performance of banks particularly in the developing countries such as (Iraq, Syria, Jordan, and GCC countries).
There is a need for more empirical studies to compare the quality of LRM between Islamic and conventional banks, this would help Islamic banks to know the gap in their practices, and thus will help in enhancing their performance, hence value creation, and adding more comprehensive view by comparing it between GCC countries and other developing countries such as Jordan, Palestine, and Syria, and so on. The results from developing other studies will contribute to
better understanding of effective management of liquidity risk in relation to bank performance.
Furthermore, future studies can expand this scope to include cooperative banks, development banks, and insurance firms.
In terms of the analytical methods, most literature used panel data approach; future research should use other approaches, such as questionnaire or interview to examine this issue from other perspectives, in addition developing a case study to focus on the view point of risk management committee members.
6. Limitations
Firstly, it was restricted in the databases sources, the choice of number and type of keywords, language, sectors, and the resulting selection of studies. Secondly, the review was limited to the peer-reviewed and working papers, meaning other materials such as magazines and books were excluded.
Thirdly, rapid progress in this area needs a periodic survey. Finally, this paper focused on the financial and accounting indicators, this type of literature only reflect the research response to the direction taken by the researchers and do not always reflect the reality of the business environment.
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