Does liquidity influence profitability in Islamic banks of Bahrain: An empirical study?

Abstract

This study examines the impact of liquidity on Islamic banks' profitability during the years from 2010 to 2015. The study extracted its data from the annual reports of six Islamic banks in Bahrain that have been in operations on or before 2010 to 2015. The liquidity model is built from four liquidity variables namely cash & due from banks to total assets (CDTA), cash & due from banks to total deposits (CDTD), investment to total assets (INVSTA) and investment to total deposits (INVSTD). According to adjusted R squares profitability variables return on assets (ROA), return on equity (ROE) and return on deposits (ROD) are respectively 16.2%, 3.1% and 21.3% dependent on liquidity variables. The results of the study show that CDTD and INVSTD are correlated positively with ROE. In addition, CDTD, INVSTA indicate a negative correlation with ROE. Thus, only INVSTA and INVSTD found to be significant with ROE at 0.05 significant level. Durbin-Watson test shows that the residuals are uncorrelated since its value is approximately very close to 2. However, according to the P-value, the overall liquidity model (Model 2) is not significantly related with ROE. Thus, the null hypothesis (H0) is accepted and the alternative hypothesis is rejected for the ROE. Furthermore, the results in the table show that CDTA and INVSTD are positively correlated with ROD, and negatively with CDTA and INVSTA, and CDTA is the only insignificant variable. CDTD is significantly related with ROD at 10%. Durbin-Watson test shows that the residuals are positive auto - correlated since its value is approximately very close to 1. However, according to the P-value, the overall liquidity model (Model 3), is significantly related with ROD at 1% level. The researcher recommended for further studies to add more liquidity variables to the model so as to enhance and enrich Islamic banks outlook.