Banks face a multitude of risks that are inherent to their business models. One of the major financial risk is liquidity risk. Islamic Banks becomes a major player of providing banking services in many countries. These banks operate under the Shari’ah roles and principles, which create new landscape of opportunities and exposes them to new array of risks. This paper investigates whether liquidity risk management in Conventional banks is similar to that of Islamic Banks. Using a panel data of fourteen banks (11 conventional and 3 Islamic) operating in Palestine over the period from 2009 to 2018 and random effects regression after adjusting standard error using Driscoll-Kraay standard errors resistant estimator, we find that the liquidity risk practices differ substantially between Islamic and conventional banks. In terms of the four variables studied, all the variables show symmetrical response except of deposits-to-assets ratio that shows positive relationship with liquidity risk for conventional banks and a negative relationship for Islamic banks. This result can be attributed to the supposed fundamental differences in the business models of the two groups of banks where deposits in Islamic banks have investment component therefore of medium to long-term nature. In addition, two of the variables (ROE and capital adequacy ratio) are negatively related to liquidity risk, but they are significant at 5% level of significance for Islamic banks and insignificant for conventional banks. Our research provides empirical evidence that shows that Islamic banks and conventional banks needs to be treated differently with respect to their risk management activities.

Conference Title

The third refereed conference of the Faculty of Economics and Social Sciences

Conference Country

Palestine

Conference Date

April 11, 2021 - April 11, 2021

Conference Sponsor

ِجامعة النجاح الوطنيه

Additional Info

Conference Website