Liquidity Risk Management Practices: A comparative study between Islamic and Conventional Banks in Palestine

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Al-Ashqar, Raghad
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جامعة النجاح الوطنية
Banks face numerous kinds of risks including liquidity risk. The issue of liquidity is the most important issue in the banking sector (conventional and Islamic), where the bank may lose customers as a result of the lack of sufficient liquidity, or the inability to meet their withdrawals in a timely manner. Moreover, banks are accountable toward the supervisory authorities, which affects the reputation of the financial institution in case of liquidity shortage. On the other hand, the bank may maintain more liquidity than it needs, resulting in a situation of inefficient use of available resources. Therefore the existence of proper liquidity management increases the confidence of the supervisory authorities and depositors. With the financial institutions, conventional banks can utilize numerous devices to manage this sort of hazard. Islamic banks, however, are constrained in utilizing portion of these instruments. In this manner, it is critical to comprehend the idea of liquidity risk in Islamic and conventional banks and what variables can influence it. A mixed research approach methodology was used in this thesis. The qualitative approach was conducted with a sample of 3 Islamic banks and 3 conventional banks. Open questions were used to collect data from Islamic and conventional bankers. A quantitative research methodology was used to model the liquidity risk in Islamic and conventional banks of Palestine. Capital adequacy ratio (CAR), return on equity (ROE), deposits to assets (DA), bank size (BS), and bank nationality has been used to test their impact on liquidity risk for both Islamic and conventional banks over the period 2009-2018. The finding of this thesis has revealed that there is a positive relation between deposits to assets and liquidity risk, a negative and significant relation between capital adequacy ratio and liquidity risk for the banks in Palestine. While the effect of interaction variable “Islamic bank” on the effect of DA, ROE and CAR on liquidity were found to be significant. Findings of this paper will help banks' management to decrease liquidity risk and keep their banks at a better liquidity position. Banks managers should be increasingly cautious when financing their customers as expanding financing can deteriorate liquidity. Some recommendations of this thesis involve that banks should have integrated liquidity management framework and increase their investment portfolio because the existence of the liquidity issue with banks means not to fully employ the sources of funds. Moreover, banks should have a specialized liquidity division. Furthermore, Palestine Monetary Authority, though stand prepared to help and bailout any bank confronting liquidity issues, should enforce Israeli side to remit the Shekel currency; hence, it must review the current relationships with Israeli banks and find a new sustainable mechanism that serves the interests of the Palestinian banking