The Impact of Bank’s Determinants on Liquidity Risk: Evidence from Islamic Banks in Bahrain


  • Ghanim Shamas Salalah College of Technology, Salalah, Oman
  • Zairani Zainol Islamic Business School (IBS), Universiti Utara Malaysia (UUM), Malaysia
  • Zairy Zainol Islamic Business School (IBS), Universiti Utara Malaysia (UUM), Malaysia



Panel Data Analysis, Bahraini Islamic Banks, Liquidity Risk


The current decline in oil prices has had a negative impact on the banking industry across Gulf Cooperation Council (GCC) countries and Bahrain is no exception. Over the last three years, Bahrain has been going through significant liquidity pressure, leading to the shrinking of bank liquidity, thus inducing liquidity risk in Bahraini banks. Therefore, the aim of this paper is to identify the association between liquidity risk proxied by cash to total assets and specific determinants in Bahraini Islamic Banks (IBs) in order to better mitigate and manage this critical financial risk. Panel data analysis was used on a sample of seven Bahraini IBs, which represent the Bahraini Islamic banking sector over the period of 2007 to 2011. The econometric results illustrate that the liquidity risk ofBahraini IBs is dependent on idiosyncratic factors.We found that liquidity risk is positively related toreturn on average assets (ROAA). On the other hand, non-performing loans (NPLs) and capital adequacy ratio (CAR) affect liquidity risk negatively and significantly. Lastly, bank size and the financial crisis show a negative and insignificant association with liquidity risk.


The main limitation of this study is the bank’s specific factors, covering one country and IBs only. Therefore, it is recommended that future studies should expand the sample by considering IBs from other GCC countries and also include conventional banks and macroeconomic factors. Finally,since NPLs (credit risk) and CAR have a significant impact on liquidity risk, it is recommended that the relationship between liquidity risk and credit risk in Bahrain and in the GCC environment be further investigated. Future studies should also consider examining the impact of the two new ratios suggested by the Basel Committee on liquidity risk in the GCC banking industry.


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