Global Economy and Finance Journal

Vol. 8. No. 2. September 2015. Pp. 95 – 111

Liquidity Risk and Performance: The Case of Bahrain and

Malaysian Banks

Norazwa Ahmad Zolkifli*, Mohamad Abdul Hamid**and Hawati Janor***

This paper presents the determinants of liquidity risk

and performance in conventional and Islamic bank.
The data have collected from 2008 to 2014 and
panel data analysis was used. The results revealed
that the most significant factor is the capitalization.
Capitalization also has a strong relationship with
performance using parsimonious model. The best
model from the result is Bahrain conventional bank.
Based on finding, problem of liquidity risk related to
regulatory requirement will decrease and this will
gives banks to increase their profitability and improve
their financial performance.

JEL Classification: G20, G32

Keywords: Liquidity Risk, Performance, Risk Management, Islamic Bank, Conventional

Bank

1. Introduction
Liquidity becomes a major risk in banking and the liquidity management should give
priority for bank management and regulators to manage this issue. In the modern theory of
financial intermediation, banks exits in economy because of the important role in creating
liquidity and transform their risk. The existence of non-money market tends to make the
problem becomes even more critical. In the 2008, financial crisis in U.S and others
countries encountered specific liquidity problems in the market that created solvency
problems. During this crisis many banks struggled to maintain their liquidity even with such
extensive supports. The fundamental role of banking makes inherently vulnerable to
liquidity risk. During the financial crisis, many banks experienced difficulties because they
did not manage their liquidity in a prudent manner. Failure of risk management is one of
the main causes of the financial crisis (Bank for International Settlements 2009; KPMG
International 2009; Sabato 2010; Holland 2010). Liquidity risk in banking is one of the risks
that need to be addressed by the bank beside credit and market risk. According to Vento
and Ganga (2009), liquidity symbolized the ability of banks to compare during the balance
of inflow and outflows over time. With the existence of liquidity risk, banks need to be
cautious with the cash flow that happen to bank profits can be maintained without being
affected by liquidity risk. Therefore, the objective of this study is to identify factors that
influence liquidity risk and performance because when global financial crisis occurs, failure
of risk management will not affect the performance of the banking system.

*Mrs Norazwa Ahmad Zolkifli, Institute of Malaysian and International Studies (IKMAS), Malaysia National
University, Malaysia. Email : norazwa76@gmail.com. (Coressponding Author)
**Prof Dr Mohamad Abd Hamid, Malaysia IslamicUniversity, Malaysia. Email: drmohdhamid@gmail.com
***Associate Prof Dr Hawati Janor, Faculty of Economics and Management, Malaysia National University,
Malaysia. Email: Hawati@ukm.edu.my
 Zolkifli, Hamid & Janor

Previous study related liquidity risk in comparative analysis between Islamic and
conventional bank (Islam & Chowdhury 2007; Loghod 2010; Akhtar, Ali & Sadaqat 2011;
Ika & Abdullah 2011; Iqbal 2012) but previous studies were not discuss the factors are
affected liquidity risk between Malaysia and Bahrain. Earlier literature also has not
investigated the determinants liquidity risk factors that can affect performance in Islamic
and conventional banks. However the past studies regarding performance in Islamic and
conventional bank were conducted by Hanif et al. 2012, Kithinji 2010, Jaffar & Manarvi
2011 and Kaaya & Pastory 2013. Therefore this research attempts to close the gap by
investigate the factors are affected liquidity risk and performance between Malaysia and
Bahrain.

Besides that, this study will make a comparative analysis between Malaysia and Bahrain.
The selection of the countries are based on the similarity that the two countries have
where banking system are running the exercise of the Islamic banking system and
conventional banking system (Akkizidis & Khandelwal 2008). As a largest consumer bank
in Malaysia, Islamic banking operates in a very good perspective in the Islamic banking
industry. This makes Malaysia is famous for its Islamic banking system that is trusted by
society. Bahrain also is one of the country in GCC and the most actively promoting Islamic
finance and make them survive in the banking industry despite the global financial crisis
has hit in 2008. This paper is the first study to determine the liquidity risk factors that can
affect performance in Islamic and conventional banks in Malaysia and Bahrain. The
comparative analysis between Malaysia and Bahrain can strengthen the Islamic banking
system in their respective countries and to contribute to other countries that practice the
dual banking. This result also can give the ideas to policymakers, investors and
practitioners to mitigate the financial risk especially liquidity risk by redesigning the risk
management framework and supervision to argue the regulatory structure should be fit the
stage of economic development of the countries.

This study concerns on the factors that affect the liquidity risk in banking system especially
Islamic and conventional bank. Hence, the objective of this paper to examine the
relationship between factors that affect liquidity risk. This also can determine the factors
that can affect performance in conventional and Islamic banks. Section 1 is introduction
and follows by section 2 deals with previous studies about determinants of liquidity risk
and performance. This section was inclusive of explanations of the hypotheses. Section 3
highlights the methodology and data used. Section 4 is about the analysis and result of the
paper. Finally section 5 concluded the paper with the contribution of the study.

2. Literature Review

Most of the banks that converts an asset to liquidity will be exposed to the funding liquidity
risk although only occurred in the little number. According to Indriani (2008) value of
assets between banks (total deposits with banks less with total liabilities of the bank) is an
indication of the size of the impairment of assets between a banks. Interbank ratio (IR) is
the interest rate charged on short-term loans made between banks. The bank will provide
loans and at the same time borrowing money in the interbank market to manage cash and
meet the conditions prescribed. If the bank is unable to meet the needs of liquidity, the
bank will need to borrow money in the interbank market to cover the shortage. From here,
liquidity risk exists. The rate depends on the existence of money in the market also
depends on the conditions of the specific contract. For example is a long term contract.
Thus the bank must hold a total number of liquid assets sufficient to deal with any

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withdrawal from potential clients. Study by Hassan and Bashir (2002), if the interbank ratio
has a high level, it will increase the bank risk. This explains again that interbank ratio used
to evaluate a bank that depends on the financing obtained from the institution or from other
banks. This study will find the answered that with a high level of IR ratio, it will decrease
the liquidity risk. Thus the liquidity risk must have a negative relationship with interbank
ratio. Hence,

H1: Liquidity risk has a negative significant relationship with the interbank ratio

Liquidity problem occurs when there is a lack of commitment given by borrower to

withdraw deposit. According to How, Karim & Verhoeven (2005) studies on three types of
bank risks that affect the Islamic finance revealed that high deposit volatility (DEPVOL) will
expose to liquidity risk. Therefore, high uncertainty deposit will reduce the ability of the
bank to make a withdrawal. Aldoseri (2012) also found that Islamic bank with high
DEPVOL will reduce the liquidity of bank and lead to increase in liquidity risk. This decision
contradicts with Indriani (2008) who found the DEPVOL has a negative relationship with
the liquidity risk in Indonesian conventional bank. However, the past researchers did not
give much answered regarding the deposit volatility and liquidity risk in Islamic and
conventional banks. Therefore, this study expects,

H2: Liquidity risk has a negative significant relationship with volatility deposit

Normally, long term profit always influenced by long term loans. Thus, high loan volatility
(LVOL) will increase the liquidity risk that can cause unexpected loan. Higher uncertainty
in financing or loan will reduce the ability of the bank to make a loan request excessive.
According to Indriani (2008), LVOL have a positive relationship with liquidity risk in Islamic
and conventional bank. While How, Karim & Verhoeven (2005) has the same opinion
where the higher the loan is identified, the higher liquidity risk will appear. This shows that
LVOL must have a direct relationship with liquidity to make sure the risk will decrease.
Hence;

H3: Liquidity risk has a positive significant relationship with volatility loan

Another factor that influences liquidity risk is the bank capitalization (CAP). The bank
capitalization represents the net worth of the bank or the value to investors. To have a
capital standard bank must hold capital commensurate with the amount of credit risk which
is the capital of that influence the size of the loan portfolio. But according to How, Karim &
Verhoeven (2005) capital in the banking system increased the trust of depositors and
indirectly reduces the liquidity risk. It also shows that the increase of the bank’s capital will
reduce the problem in the loan portfolio and thus will raise loan to deposit ratio. Indriani
(2008) also stated that if depositors have to insure their loans where they are the majority
of depositors who can influence the changes in a level of the capital. This is an effect of
the loan portfolio capital dominated by extensive number of depositors. This statement
indicated that the bank’s capital has a positive relationship with liquidity risk. Since the
previous study was found CAP is positive relationship with liquidity risk, this study will
postulate the hypothesis whereas;

H4: Liquidity risk has a positive significant relationship with bank capitalization

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Loans to deposit ratio (LD) is also one of the determinant of liquidity risk. If LD ratio is low,
this indicates that bank has less the resource of fund and the deposit for funding or loans
also shows a lower liquidity risk. According to Golin (2001) if LD increased, exposure to
the larger deposit could not be fulfill. This results also supported by Indriani (2008) who
found that low LD will guarantee the bank to meet the large withdrawal by depositors as
well as unexpected loans. Thus, LD has a positive relationship with liquidity risk and this
hypothesis is;

H5: Liquidity risk has a positive/negative and significant relationship with loan to deposit

To maintain a high level of growth, bank should have a high growth of total asset (GTA).
This is another one of the determinants factors which indicate the situation of liquidity in
banking system. The banking is considered safe when GTA are at a high level. According
to Indriani (2008), any increasing in GTA was directly to increase an expected income and
reduction in estimated of financial cost. Aldoseri (2012) found that GTA and liquidity risk
has a positive relationship. Thus,

H6: Liquidity risk has a positive significant relationship with growth of total asset

On the other hand, result is different for management efficiency (MGT) whereas the
relationship with liquidity risk found to be negative. The efficiency of the bank management
will achieve a balance of liquidity funds to invest and obtain the high returns to meet the
requirements of the deposit. This implies that if MGT is at a high level, liquidity risk can be
avoided. There is no previous study will found that any relationship between management
efficiency with liquidity. Thus for the next hypothesis is,

H7: Liquidity risk has a negative significant relationship with management efficiency

Bank size and liquidity risk has been much discussed by the previous researchers.
Sawada (2010) has been research in connection with liquidity and reduction of bank
portfolio in the financial system without deposit insurance in Japan. That research found
that there was positive relationship between the size of banks and liquidity. This shows
that banks are typically sized to hold more loans and have a larger gap of financing and
this is one of the problems of liquidity in banking. This study supported by Akhtar, Ali &
Sadaqat (2011) and found that liquidity risk management different between Islamic and
conventional banks in Pakistan. They found size of the bank and liquidity has a positive
relationship. Isshaq, Bokpin & Mensah (2009) also found that this variable have direct
relationship on companies listed in Ghana Stock Exchange (GSE). Ramzan & Zafar
(2014), Vodova (2011), How, Karim & Verhoeven (2005) and Ahmed, Akhtar & Usman
(2011) also found size of the bank and liquidity have a positive relationship. While the
study by Aldoseri (2012) and Anam et al. (2012) found a negative relationship between
size and liquidity. In this study, it is expected that,

H8: Liquidity risk has a positive/negative significant relationship with size

Previous studies that mention before are only focus on others country but this paper is
focus on comparison between Malaysia and Bahrain in banking system because both
countries are operate the conventional and Islamic banking parallel.

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3. Methodology
3.1 Data Sample

Sample of this study was selected from 2008 to 2014. The period was selected because of
establishment of Islamic banking in Malaysia and Bahrain began in 2008. Whereas, before
2008 most of Islamic banking in this two countries does not have full data needed to test
the variables. This country was chosen because both have in common with conventional
banking practice and in the same time interest-free banking practices that also help ensure
the success of the banking industry. In addition, Bahrain and Malaysia is a country that
actively promotes Islamic finance worldwide by constantly introducing and updating
products and services based on sharia. With the advent of Islamic banking has opened the
eyes of the entire world community to the potential and success of the Islamic banking
system in Malaysia and particularly in the Middle East because Malaysia is one of the
earliest countries in pioneering Islamic banking system in the world. The growth of Islamic
financial institutions in the Middle East has become a rare case where Bahrain is one of
the global leaders in Islamic finance and Islamic securities producer in the world (Central
Bank of Bahrain, 2011). The Islamic banking system continued to grow strongly in
strengthening the structures and products offered to customers. The report issued by Bank
Negara Malaysia (2013), the total assets of Islamic banking in Malaysia has reached
RM500 billion and has made Malaysia is a world leader in the Islamic financial system in
third after Iran and Saudi Arabia. The catalyst for the growth of the Islamic financial
markets in Malaysia have been donated by the sukuk market, which accounts for more
than half of the world's sukuk market since 2007. It shows that Islamic banking has
become a world community, particularly people in Asia who believe that rapid development
has made famous Islamic banking worldwide.

Data for this study were obtained from the financial statement for each bank from website,
Bankscope, Central Bank of Malaysia, Central Bank of Bahrain and information centre.
The financial statement and annual report for each bank selected bank is the main source
for this study. This study is a combination of time series and cross section.

3.2 Model and Variable

Liquidity risk models that used in this study was based on a study made by How et al.
(2005), Indriani (2008), Sawada (2010) and Aldoseri (2012). The dependent variable is
change in current asset to current liability as measure for liquidity risk. The estimated risk
determinants included of eight variables such as interbank ratio (IR), deposit volatility
(DEPVOL), loan volatility (LVOL), bank capitalization (CAP), growth of total asset (GTA),
management efficiency (MGT), size bank (SIZE) and loan to deposit ratio (LD). The
increasing of liquidity means that the liquidity risk determinants will decrease. The
research model is as follows:

Hassan and Bashir (2002) and Indriani (2008) argue that interbank ratio is used to assess
a bank that relies on funding from other banks. IR as measured by money lend to others
bank divided by money lend from others bank. DEPVOL is calculate by standard deviation
of deposit divided by average of total asset and Aldoseri (2012 ) found DEPVOL in Islamic
banking which will reduce the liquidity of banks and lead to increased liquidity risk. This
suggests that the high volatility of deposits will increase the risk of bank liquidity which

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states that higher deposit movements indicate that the deposit is within this instability and
uncertainty associated with the ability of banks to provide production services to
customers. These results contradict the Indriani (2008) who found DEPVOL have a
negative correlation with the liquidity in the conventional banking. LVOL is measured by
standard deviation of loan divided by average of total asset. Liquidity problems occur by a
lack of commitment given by the borrower to deposit withdrawals. Long-term profitability of
banks can affected long-term loans made by the customer. With the high volatility loan will
increase the risk that can cause unexpected loan. This is supported by Indriani (2008) and
How et al. (2005). According to How et al. (2005) and Indriani (2008), bank capitalization
(CAP) as measured by book value of equity to total asset. Therefore, the positive sign for
this determinant is expected with the liquidity risk. Aldoseri (2012) and Indriani (2008)
prove that this variable is positive significant with liquidity risk. Hence, positively sign is
expected for this variable. Total earning asset to total assets is a proxy for management
efficiency (MGT). Aldoseri (2012) emphasize that MGT will increase a balance of liquidity
fund to obtain a high level of returns. Following this paper, a negative sign is expected for
MGT. Natural log of total asset is a proxy for bank size (SIZE). This shows that banks size
can give impact to liquidity risk at a certain degree. Ramzan & Zafar (2014), Vodova
(2011), How, Karim & Verhoeven (2005) and Ahmed, Akhtar & Usman (2011) argue that
bank size and liquidity have positive significant. However, Aldoseri (2012) and Anam et al.
(2012) contradict with that argument. Therefore, either positive or negative sign could
appear. Loan to deposit as measured by total loan to total deposit bank indicates that
deposit for funding can give an impact to liquidity risk. Golin (2001) and Indriani (2008)
prove that this variable is negatively relationship with liquidity risk.

Result from liquidity risk was used to determine the factors that can affect performance.
Based on previous studies by Hanif et al. (2012), Kithinji (2010), Jaffar & Manarvi (2011)
and Kaaya & Pastory (2013), performance model will developed to investigate which
factors are significant with performance. Dependent variable for this equation is return on
equity (ROE) as measured by net income to equity.

ROEit = β0 + (significant liquidity risk) + Ɛit

4. Empirical Result
This section presents the descriptive analysis, multicollinearity test and regression model
for relationship between liquidity risk and performance with factors that affected risk in
conventional and Islamic bank.

4.1 Descriptive Statistic

Table 1 presents the results of liquidity risk determinants for descriptive statistics of the
Malaysia and Bahrain banks. For the liquidity risk level, Islamic bank in Bahrain recorded
the highest liquidity risk of 26.25 over the study period. The second highest liquidity risk is
conventional bank in Bahrain (1.3) followed by conventional bank in Malaysian (1.16) and
the lowest liquidity is from Islamic bank in Malaysia (1.07). The sample data are not
normally distributed based on the result.

4.2 Tests of Multicollinearity

Table 2 shows the variance inflation factor test to investigate the multicollinearity problem.
In this study all independent variables do not have multicollinearity. In fact, this variety is

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alternately analyzed in the regression estimation because of the VIF results show that the
entire variable is not more than 10. This proves that all variables are very important
element of liquidity risk in conventional and Islamic banks. In the case of inconsistency
result, greater emphasis is given to the regression analysis that excludes the variable with
a higher VIF value. Gujarati (2008) sets the rules of thumb of 10 for VIF. The larger of VIF
will show the variable to be a highly collinear. The existence of multicollinearity can
produce a high R2, small t value and large standard error. Pearson’s correlation test is
used to investigate this problem. The result shows in table 3 to 6 for both countries.
Considering the relationship among the independent variables, there is no severe
correlation for this equation, thus all independent variables are included in the regression
estimation.

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Table 1: Descriptive statistic for the conventional and Islamic banks

Conventional bank Islamic bank
Malaysia Bahrain Malaysia Bahrain
Variable Mean Median Standard Mean Median Standard Mean Median Standard Mean Median Standard
Deviation Deviation Deviation Deviation
LR 1.1569 1.0940 0.2684 1.3000 0.0993 0.1265 1.0692 1.0681 0.1323 26.2487 3.3311 79.3282
IR 0.3793 0.2431 0.7745 0.7796 0.8126 0.7004 0.3054 0.0000 1.2034 5.3035 0.1962 29.2003
DEPVOL 0.3890 0.4543 0.1670 0.5875 0.7083 0.3416 0.4397 0.4580 0.2416 0.3218 0.1602 0.3422
LVOL 0.0678 0.0738 0.0311 0.1727 0.2036 0.1255 0.1373 0.1231 0.0734 0.1204 0.0566 0.1504
CAP 0.1116 0.0921 0.0569 0.1677 0.1202 0.1327 0.0860 0.0760 0.0414 0.4904 0.3089 0.3590
GTA -0.0905 -0.0681 0.1955 -0.0217 -0.0014 0.1833 -0.1994 -0.1605 0.2294 -0.0265 0.0000 0.3018
MGT 0.4312 0.3593 0.1795 0.7528 0.9102 0.3434 0.4501 0.4155 0.1738 0.7793 0.8497 0.2585
SIZE 7.3933 7.6055 0.6733 0.4288 0.5001 0.2242 7.1525 7.0768 1.0297 0.4009 0.4728 0.1712
LD 0.6554 0.7103 0.3504 0.5434 0.5673 0.4855 0.8891 0.7881 0.7322 0.2703 0.0295 0.3211

Table 2: Result of Variance Inflation Factor (VIF)

Malaysia Bahrain
Variable Conventional Islamic Conventional Islamic
bank bank bank bank
IR 1.0861 1.2229 2.3529 1.0671
DEPVOL 3.2553 1.8120 2.5645 2.8033
LVOL 5.1325 1.0851 3.3096 2.7039
CAP 3.1920 1.4980 1.9001 4.1888
GTA 1.2858 1.6930 1.0830 1.0668
MGT 5.8954 1.4469 2.2828 5.0068
SIZE 5.5590 1.3461 2.5001 4.8963
LD 4.4373 2.1974 2.5199 3.1162

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Table 3: Pearson Correlation for Conventional bank (Malaysia)

LR IR DEPVOL LVOL CAP GTA MGT SIZE LD
LR 1.0000
IR -0.0836 1.0000
DEPVOL -0.5760 0.1817 1.0000
LVOL -0.0168* -0.0377* 0.4607 1.0000
CAP 0.4052 -0.1482 -0.5024 -0.2695 1.0000
GTA 0.1497 0.0970 -0.0024** -0.1335 0.0642 1.0000
MGT 0.0482* -0.0366* -0.4911 -0.7900 0.4967 -0.0370* 1.0000
SIZE -0.4045 0.1342 0.6873 0.3053 -0.8001 -0.0074** -0.5806 1.0000
LD 0.4315 -0.0101* 0.1568 0.7855 -0.2115 0.0008** -0.7742 0.2369 1.0000
Note: *Correlation is significant at 0.05 level (2-tailed)
**Correlation is significant at 0.01 level (2 tailed)

Table 4: Pearson Correlation for Islamic bank (Malaysia)

LR IR DEPVOL LVOL CAP GTA MGT SIZE LD
LR 1.0000
IR -0.0114* 1.0000
DEPVOL -0.0139* 0.1973 1.0000
LVOL 0.2367 -0.0387* 0.1819 1.0000
CAP 0.5659 -0.0798 -0.4174 0.2128 1.0000
GTA -0.0145* 0.0634 -0.0280* -0.2020 0.1862 1.0000
MGT 0.3066 0.3823 0.0647 -0.2581 0.0760 -0.0009** 1.0000
SIZE 0.8080 0.0280* 0.0091** 0.0717 0.3751 -0.1309 0.3524 1.0000
LD 0.0881 -0.0279* 0.3700 0.0827 -0.0470* 0.0729* -0.1935 0.0429* 1.0000
Note: *Correlation is significant at 0.05 level (2-tailed)
**Correlation is significant at 0.01 level (2 tailed)

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Table 5: Pearson Correlation for Conventional bank (Bahrain)

RKC IR DEPVOL LVOL CAP GTA MGT SIZE LD
RKC 1.0000
IR -0.2203 1.0000
DEPVOL -0.2442 0.6275** 1.0000
LVOL -0.1316 0.4367** 0.6374** 1.0000
CAP 0.8251** -0.2801* -0.0945 -0.0341 1.0000
GTA 0.1890 -0.1978 -0.1911 -0.1138 0.0159 1.0000
MGT 0.3145* 0.4562** 0.5322** 0.4631** 0.3095* -0.0635 100000
SIZE 0.1777 0.5357** 0.6056** 0.5030** 0.2140 -0.0336 0.6706** 1.0000
LD 0.1146 0.0534 0.3078* 0.6600** 0.3449** -0.0253 0.3227* 0.3651** 1.0000
Note: *Correlation is significant at 0.05 level (2-tailed)
**Correlation is significant at 0.01 level (2 tailed)

Table 6: Pearson Correlation for Islamic bank (Bahrain)

RKC IR DEPVOL LVOL CAP GTA MGT SIZE LD
RKC 1.0000
IR -0.0211 1.0000
DEPVOL -0.2906** -0.0992 1.0000
LVOL 0.0891 -0.0982 0.2764** 1.0000
CAP 0.4226** 0.1685 -0.5790** -0.1843 1.0000
GTA 0.0875 0.0737 -0.1812 -0.0437 0.0695 1.0000
MGT 0.2069 0.0068 0.2216* 0.4096** 0.3816** -0.0206 1.0000
SIZE -0.1997 0.0125 0.6486** 0.1120 -0.2445* -0.1512 0.5543** 1.0000
LD -0.2495* -0.0920 0.5678** 0.5122** -0.5364** -0.0869 0.2619* 0.5981** 1.0000
Note: *Correlation is significant at 0.05 level (2-tailed)
**Correlation is significant at 0.01 level (2 tailed)

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4.3 Regression Analysis on Determinants of Liquidity Risk

This section presents the regression analysis for relationship between liquidity risk and
factor that affected risk in banking system. Generalized Least Square (GLS) method was
used in this study. According to Gujarati (2008) GLS estimation will help to tackle the issue
of non-normality distribution of the variable, which may be due to the presence of
heteroscedasticity. This method was more efficient than Ordinary Least Square (OLS)
(Wooldridge 2002).

The result in table 7 shows the important liquidity risk determinants for both countries.
This finding found that only DEPVOL, CAP, GTA, MGT, SIZE and LD are important to
liquidity risk. DEPVOL and liquidity risk was found to have a significant and negative
relationship for banks in Bahrain only. It means that bank with higher volatility on deposit
will have a lower liquidity and it increases a liquidity risk exposure. This finding is
consistent with study from Aldoseri (2012) and Indriani (2008). This shows that there is a
difference between Malaysia and Bahrain in terms of the rules giving deposits to
customers. Even Malaysia and Bahrain use the same rules as AAOFI, IFSB and BCBS but
still there are differences caused by national regulation adopted by their respective
countries. However, there was no difference in terms of Islamic banking and conventional
banking because both banks in Bahrain have a negative correlation with the liquidity risk.
This suggests that the high deposit mobilization in the banking system will be able to
reduce liquidity risk. This contradicts the theory that DEPVOL and liquidity risks have to
have a positive relationship to liquidity risk can be reduced. From this finding, this study
will accept the H2

Result also found that coefficient of bank capitalization (CAP) is positive and significant
correlation with the liquidity risk for all banks. It means that higher CAP will lead to higher
liquidity risk. This result is consistent with Aldoseri (2012), where they argued that higher
capital will increase the bank exposure to liquidity risks, where they found that bank with
high capital will give a lower liquidity in commercial banks. When the CAP in the banking
system increased, it also increased the confidence of depositors indirectly at the same
time liquidity risk can be reduced. The results also show that there was no significant
difference between the CAP in both countries and all coefficients have the same value.
This study will accept the H4

The results of regression analysis found that only conventional banking is significant
relationship between LD and liquidity risk. Malaysia has a positive and Bahrain has a
negative relationship. Bank with higher loan to deposit ratio will lead to lower ratio of
liquidity risk in conventional bank and it will give a lower withdrawal by depositors. This
result was similar with Indriani (2008) and Golin (2001).This shows the two countries have
different LD and the ratio of loans to deposits varies even from conventional banking. This
is due to the financial regulations are complied with by each country although Bahrain and
Malaysia to comply with banking regulations set by the Basel Committee on Banking
Supervisory (BCBS). This study will accept the H5.

In banking, GTA and liquidity risks have a positive relationship because the banks need to
have a high growth of fixed assets so the liquidity condition in the banking system is in
good condition. It explains that the reduction in GTA will reduce liquidity risk. The decision
found that only conventional banking in Bahrain who has a significant and positive, while
conventional banks in Malaysia have negative relationship. This proves that there are

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differences between the two countries in terms of growth in total assets and also different
between Islamic and conventional banks. This study will accept the H 6. Management
efficiency (MGT) is one of the determinants of liquidity risk which indicated that the
management system of higher liquidity risk can be reduced. This finding found that
management efficiency (MGT) is positive related with liquidity risk at 0.1 and 0.05
significant levels in Bahrain banks. This shows that efficiency of management in banking
will strike a balance through investing liquid funds to earn a higher return. These results
also clearly show that with good management efficiency, liquidity risk will still happen in
banking. The banking system in Bahrain needs to improve the management efficiency to
reduce the liquidity. This study will reject the H7.

In banking system, the relationship between size and liquidity risks have a positive
relationship with a large bank will hold more loans and financing which may cause high
liquidity risk. This study found that banking in Malaysia has a positive and significant
correlation with the liquidity risk at one percent levels. While the size of the banking sector
in Bahrain does not have a significant correlation with the liquidity risk. This shows that
large bank will hold more loans and have a larger financing thus it will give a high liquidity.
Finding also found that conventional banking and Islamic banking in Malaysia is related to
the bank’s liquidity risk. This study will accept the H8. For both variable IR and LVOL are
not significant with liquidity risk and therefore the study will reject the H 1 and H3.

Table 7: Regression results for liquidity risk determinants

Malaysia Bahrain
Variable Conventional Islamic Conventional Islamic
Constant -1.1486 0.6571 0.0058 -8.1106
(0.2977)*** (0.0549)*** (0.0197) (4.3238)*
IR -0.0058 -0.0012 0.0185 0.0404
(0.0038) (0.0020) (0.0162) (0.0270)
DEPVOL -0.0054 0.0306 -0.1253 -11.7243
(0.0309) (0.0220) (0.0347)*** (5.9855)*
LVOL -0.0175 0.0004 0.1333 -5.5454
(0.1416) (0.0006) (0.1073) (17.8096)
CAP 0.6813 1.6989 0.7996 50.0436
(0.0835)*** (0.2345)*** (0.0769)*** (9.2795)***
GTA -0.0361 0.0059 0.1058 0.0651
(0.0155)** (0.0068) (0.0420)** (4.5782)
MGT 0.0322 0.0484 0.0648 29.2415
(0.0268) (0.0320) (0.0326)* (11.3082)**
SIZE 1.2368 0.0461 0.0311 -17.8015
(0.3381)*** (0.0091)*** (0.0523) (19.7841)
LD 0.0953 -0.0044 -0.0616 -5.9571
(0.0221)*** (0.0072) (0.0242)** (8.9204)
N 147 112 84 126
R2 0.9285 0.7945 0.8021 0.8550
Adj. R2 0.9021 0.7102 0.7710 0.7983
F 35.2268 9.4155 25.8336 15.0923
P 0.0000 0.0000 0.0000 0.0000
DW 1.8212 1.7596 1.1919 1.7571
Note:
Figure in parentheses is standard error value of the regression coefficient
***, **, * denotes significant level at 1%, 5% and 10% confidence level.

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4.4 Robustness Analysis on Performance Determinants

Table 8 shows the results of determinants of liquidity risks and performance for banks in
Malaysia and Bahrain. These results are new to the body of knowledge and it also
answered the research question that the liquidity risk has a relationship with performance
and it different from each country in this result. DEPVOL have a significant positive
relationship with performance at the level of 1% in the banking Bahrain only. CAP shows
negative correlation to all banking for both countries except conventional banking in
Malaysia. This indicates that low CAP will improve banking performance. GTA is one
factor that indicates the liquidity situation in the banking system. The banking system is
considered safe when GTA is at a high level in the event of loss or dissolution. Results
from table found that GTA have found a negative correlation with the performance of
conventional banking in Bahrain at the level of 1%. The results also found that MGT has a
positive relationship with performance in Bahrain where conventional banking on the level
of 1% and Islamic banking at the level of 5%. It explains that high MGT will improve the
performance of banking system. While size of the liquidity risk was only significant in
Malaysia and conventional banks have the level of 1% and Islamic banking at the level of
10%. These results clearly demonstrate that large size will also affect the performance of
each bank. When LD is low, it shows that bank less efficient in managing funds on deposit
and indirect liquidity risk will be reduced. When this happens the bank can improve
performance. From the table only found that conventional bank has a significant
relationship with performance. Result shows that Bahrain conventional bank have a lowest
AIC and this bank are the most significant and has a high performance rather than banking
in Malaysia. This result extends the study by Hanif et al. 2012, Kithinji 2010, Jaffar &
Manarvi 2011 and Kaaya & Pastory 2013 that the liquidity risk is a very important factor
that can affect performance in banking.

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Table 8: Result for performance determinants using Parsimonious Model

Malaysia Bahrain
Variable Conventional Islamic Conventional Islamic
Constant -2.9760 0.9743 0.0015 0.0289
(0.6272)*** (0.0391)*** (0.0171) (0.0316)
IR - - - -
DEPVOL - - 0.1206 0.1802
(0.0296)*** (0.0462)***
LVOL - - - -
CAP -0.5533 -4.6020 -0.2605 -0.0880
(0.4436) (0.0047)*** (0.0728)*** (0.0437)**
GTA -0.0805 - -0.2417 -
(0.0807) (0.0703)***
MGT - - 0.1052 0.0999
(0.0289)*** (0.0502)**
SIZE 4.0414 0.0091 - -
(0.6717)*** (0.0047)*
LD 0.0825 - 0.1319 -
(0.0370)** (0.0185)***
N 147 112 84 126
R2 0.5673 0.4793 0.4785 0.3064
Rw2 0.7691 0.7508 0.8196 0.5622
AIC 86.8009 66.2153 50.5494 75.5532
P 0.0000 0.0000 0.0000 0.0000
Note:
Figure in parentheses is standard error value of the regression coefficient
***, **, * denotes significant level at 1%, 5% and 10% confidence level.

5. Conclusion
This paper investigated liquidity risk determinant and performance across two countries in
banking system to fill the gap by examining the factors affecting liquidity risk in Islamic and
conventional bank in Malaysia and Bahrain. The result shows that liquidity risk is an
important factor for banking in managing risk. This paper used a regression and
parsimonious model for examining the research question. This model shows that there is a
significant positive relationship between growth of total asset, loan to deposit, bank size
with liquidity risk and negative significant relationship between deposit volatility and bank
capitalization. Hence we accept this hypothesis. We reject the hypotheses for interbank
ratio and loan volatility because they are not significant and related with liquidity asset.
Management efficiency also found is inconsistent with the expected result. Result also
found that conventional bank in Bahrain has a high performance in banking system from
these two countries because the AIC are the lowest. This result is contradicts with Beck,
Demirgüç-Kunt & Merrouche 2013 found that Islamic banking has a high capital and
liquidity than a conventional banks. This study compares the performance of conventional
banking and Islamic banking during the global financial crisis with the impact of the crisis
on the basis of business carried out by types of banks, banking efficiency, asset quality
and stability of banks.

From the finding, it suggests that the implementation of successful liquidity risk
management system bank will give an impact on performance of the banks. Basel
Committee on Banking Supervision (BCBS) published the principles for sound liquidity risk

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management and supervision, which provide detailed guideline on the risk management
and supervision of funding liquidity risk. For this reason banks should have and follow this
regulation to achieve their objective. The risks are very difficult to judge and quantify based
on the analysis particular situation. For this reason bank should have a stringent regulatory
requirement. With this policy, the problem of liquidity risk regarding the regulatory will
decrease and loss will be complete or partial can and arise in a number of circumstances.
In addition, the effectiveness of liquidity risk management is very important in the banking
system and improves their profitability and bank financial performance. Establishment of a
comprehensive liquidity risk management system in both banking system should be a
prerequisite as it contributes to the overall risk management system of the bank.

Islamic bank are establish after 2008, this research are only used a data from 2008 until
2014 for both countries. These papers only focus on this two countries and in future
research this area should broad to Asian country include the external factor that can affect
bank liquidity risk and performance. Hence, further exploration regarding this aspect
should need urgently by using dynamic panel data.

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