Determinants of liquidity risk: Do corporate governance practices have an impact? An empirical study of emerging markets

Abstract

Most banks are concerned about how liquidity risk affects their performance. Managing liquidity risk is critical since failing to do so will result in a bank’s insolvency. This study aims to investigate systematic and unsystematic factors that affect the liquidity risk of Egyptian banks during the period 2000–2022. A dynamic panel data and generalized method of moments (GMM) estimator is used. Results revealed that systematic factors have no impact on the liquidity risk of Islamic banks and are more exposed to unsystematic factors. Since corporate governance practices have an impact on banks performance we assume corporate governance practices have an impact on liquidity risk determinants as well. Therefore, applying good corporate governance practices will mitigate the liquidity risk of Egyptian banks. The second part of this study examines which banking system applies corporate governance practices more effectively, and if it has an impact on factors that most affect liquidity risk. Traditional banks and traditional banks with Islamic windows have governance practices more effectively to mitigate the impact of systemic and unsystematic risks on a bank’s liquidity risk. Islamic banks apply governance practices less effectively. This is attributed to the presence of a Sharia Committee as an alternative to applying governance practices.