Archive | 2019
Liquidity creation and bank performance: evidence from MENA
Abstract
Purpose \n \n \n \n \nFirst, this paper aims to investigate the liquidity creation of conventional and Islamic banks in MENA between 2011 and 2016. Second, this work tests the relationship between the liquidity creation and performance of these banks. \n \n \n \n \nDesign/methodology/approach \n \n \n \n \nIt uses the data of 491 commercial banks across 18 MENA countries between 2011 and 2016. The analysis is based on panel data techniques. \n \n \n \n \nFindings \n \n \n \n \nThe banks created US$5.281 trillion of liquidity, about 28.4 per cent of total assets. Conventional banks created more liquidity compared with Islamic banks. Nevertheless, Islamic banks created more liquidity per asset compared with conventional banks. The regression analysis, which revealed a significant and negative correlation between the liquidity creation and performance of banks, using return on average equity measure. However, no significant relationship is observed between the liquidity creation and return on average assets of MENA banks. Moreover, there is no difference between Islamic and conventional banks on the relation between liquidity creation and bank performance. \n \n \n \n \nResearch limitations/implications \n \n \n \n \nThe data are limited to the period 2011-2016; the period of this study was selected based on yearly data availability from the data source. Accounting measures were used to study the effect of liquidity creation on bank profitability, and the market-based measures were excluded, as there is no uniform sources in these countries that can be used to collect market-based data. \n \n \n \n \nPractical implications \n \n \n \n \nBank managers must reach a trade-off between the advantages and disadvantages of liquidity creation, as well as consider the negative relationship between liquidity creation and bank performance when making their decisions. \n \n \n \n \nOriginality/value \n \n \n \n \nFirst, to the best of the authors’ knowledge, this work is the first to analyse the relationship between the liquidity creation and performance of conventional and Islamic banks in MENA. Second, this study uses a sample of Islamic and conventional banks in MENA that have detailed information on the Orbis Bank Focus dataset, which is the most comprehensive database of commercial banks in the MENA region.