The impact of liquidity risk determinants on profitability: An empirical study on islamic banks in the Kingdom of Bahrain

Abstract

The sustainability of the banking system depends on the profitability and capital adequacy. Practically, profitability and liquidity are effective indicators of the corporate health and performance of not only the Islamic commercial banks but all profit-oriented ventures. Therefore, liquidity risk is considered as one of the serious concerns and challenges for modern era banks. As the global financial crisis spread, Islamic banks in Kingdom of Bahrain began to be affected; all of a sudden, some of the biggest Islamic banks, such as the Bahrain Islamic Bank, the Gulf Finance House and the Ithmar Bank, ended up with net losses. The aim of this study is to investigate the impact of the significant determinants of liquidity risk on the profitability of Islamic commercial banks in Bahrain during the 2007-2013 periods as well as to assess the impact of the global financial crisis on the profitability of these banks during the recovery period. Multiple regressions analysis was applied. By using Ordinary Least Squares (OLS) the results revealed that all the independent variables are significant with both models ROA and ROE except financial leverage and deposits have a statistically insignificant impact on ROA- Capital adequacy, financial leverage, deposits and GDP have a positive and significant impact; whereas bank size and the global financial crisis have a negative impact and are statistically significant. From these results, it is recommended that these banks control and manage properly these variables in order to create a high level of liquidity in the banks which would achieve a good profitability, leading to the sustainability of the financial banking syste

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