Liquidity Risk Management: A Comparative Study Between Conventional Andislamic Banks Of Bangladesh

Abstract

Banks conventionally fulfill the supreme responsibility of being a financial intermediary between the deficit and surplus unit of the economy. Liquidity risk refers to the excessive transaction cost, excessive loss of value and excessive exertion of time that banks have to face at the time of allocating liquidity to the third party when stipulated. Because of the unique constitutional features and regulatory conformity with the Shariah principle – Islamic banks have to exert much more to manage liquidity. The core objective of this very research is to assess the extent of liquidity risk associated with financial institutions – especially banks and to evaluate the concurrent liquidity risk management (LRM) along with a comparative analysis between conventional and Islamic banks of Bangladesh. The researcher has tried to investigate the significance of firm’s size, net working capital, return on equity, capital adequacy and return on assets on liquidity Risk Management in case of Conventional and Islamic banks of Bangladesh. Secondary data had been the major stimulus of the research covering five year - 2006-2010. For Islamic banks, a model estimation to predict the liquidity risk level was proven to be successful but the module failed to generate the desired result in case of the conventional banks. Moreover, net working capital in case of Conventional banks and size of the business in case of Islamic banks was found to be positive and significant at 5% significance level.